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2023 ReportC o m m o n w e a l t h B a n k o f A u s t r a l i a A N N U A L R E P O R T 2 0 1 3 Annual Report 2013 CommonweAlth BAnk oF AuStrAliA | ACn 123 123 124 SCAn the qr Code ABove to downloAd our CommonweAlth BAnk inveStor relAtionS App CBA1421 010912 CBA1421 190813 This page has been intentionally left blank Contents Chairman’s Statement Chief Executive Officer’s Statement Highlights Group Performance Analysis Group Operations and Business Settings 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 2 4 6 10 20 30 34 40 68 70 71 72 73 74 76 78 185 186 188 192 194 195 Annual Report 2013 1 Subject to Chairman’s Review income ratio revenues and productivity improvements; and improved to 45.0% reflecting higher Loan impairment expense decreased 1% to $1,082 million, reflecting the gradual improvement in credit card and home loan arrears, with economic overlays maintained at existing levels. The Group’s assets increased by $35 billion over the prior year, despite subdued underlying credit growth. This was largely driven by an increase in home lending, business and corporate lending balances and higher derivative asset balances. The Group’s funding requirements were mainly generated from deposits, growing by 7% to $405 billion. Customer deposits now make up 63% of total funding. Dividends and Capital The Group’s ability to deliver strong performance and to be one of a handful of global banks which have maintained double A credit ratings, has been underpinned by our decision to retain conservative business settings, particularly with respect to provisioning, liquidity, funding and capital. As far as capital is concerned, global regulators, including our domestic regulator, the Australian Prudential Regulation Authority (APRA), have introduced significant reforms in response to the problems faced by many financial institutions as a result of the Global Financial Crisis. Further capital reforms are expected over the next twelve months and the coming years, including the introduction of the Level 3 conglomerate the in 2014 and implementation of the capital conservation buffer in 2016. reforms The Group adopted III measurement and the Basel monitoring of regulatory capital effective from 1 January 2013, and has taken a conservative and proactive approach to capital management. This is reflected in the overall strength of the Group’s capital position. The CET1 ratio (on an internationally harmonised basis) has increased by nearly 60% since the Global Financial Crisis (June 2007). The Group’s 30 June 2013 internationally harmonised CET1 ratio of 11.0%, places it well above the average of its international peers and comfortably above your Board’s approved target. There has inevitably been a significant cost and investment of management time in relation to implementing increasingly complex regulatory reforms. The Group welcomes the recent announcement by the Basel Committee of Banking Supervision of a review of the Basel capital framework in order to balance risk sensitivity and ensure simplicity and comparability. Last year, I reported that your Board had reviewed the Group’s dividend policy. This revised policy included a target payout ratio of between 70% and 80% of cash earnings and a more even distribution as between the interim and final dividend. I also indicated that the Board would consider minimising the dilutive impacts of the Dividend Reinvestment Plan (“DRP”) through neutralisation initiatives. Consistent with this revised policy the Group has, this year: Increased the total dividend payment by 9% to $3.64, which represents a payout ratio for the year of 75.4% of cash earnings, compared with last year’s ratio of 75.0%; Increased the interim dividend by 20% to $1.64 with the final dividend up 2% on last year’s final to $2.00; and In light of the Group’s strong capital position, neutralised the dilutive impact of the DRP through an on market share purchase for the interim dividend and intends doing the same for the final dividend payable in October 2013. The other major capital initiative for the year was the issue, in October 2012, of $2 billion Perpetual Exchangeable Resalable Listed Securities (PERLS VI), which is a Basel III compliant, Additional Tier One Capital security. The proceeds of this issue were used, to the extent necessary, to refinance PERLS IV and otherwise to fund the Group’s business. Existing holders of CBA ordinary shares and hybrid instruments were given priority in subscribing for PERLS VI. Chairman’s Statement Introduction Over the past twelve months, the global economy (outside Australia) has gradually improved, which is better than our view last year. In particular there has been some positive momentum in the United States. There has however not been similar momentum in Europe, and the structural imbalances between North and South seem as challenging as ever. there appears In China from infrastructure led growth to one driven by consumption with resultant growth prospects settling at a slightly lower level than seen in the past. to have been a shift This combination of conditions has not had a positive impact on the Australian economy where notwithstanding some recent softening, the Australian dollar remains high. The outlook for continued investment in the resources sector has done little to improve consumer and corporate confidence. This in turn has meant that credit growth has remained subdued. On the positive side however, there have been signs of a gradual improvement in demand for housing finance where falling interest rates have encouraged buyers to return to the market. Despite the subdued environment, the Group has delivered another good result, which is a tribute to our continued execution of key strategic and operational initiatives both within Australia and to a lesser extent in our businesses overseas where our capability continues to grow. the In this low growth environment, value has been delivered by recognising financial wellbeing of our customers, by continued investment in technology and through a relentless focus on productivity and process simplification. importance of enhancing the In short, we have focused on quality, both in customer service and business processes. This focus will remain a priority in both the coming and future years. The Group continues to be managed conservatively with strong capital, high levels of liquidity and robust provisioning. The Group remains well funded, which has enabled us to continue supporting our customers, some of whom are finding the current environment challenging. Operating and Financial Results The Group has delivered another good result despite subdued underlying credit growth. Net profit after tax on a cash basis increased 10% on the prior year to $7,819 million. The Group delivered a strong Return on Equity (ROE) performance of 18.4%, again on a cash basis. Key elements of the result were: Net interest income increased 6% to $13,944 million, reflecting 4% growth in average interest earning assets and a four basis point increase in net interest margin; Other banking income increased by 7% to $4,221 million driven by a rebound in Markets trading income and a modest increase in lending fees; increased 10% Funds management to income $2,146 million, driven by a combination of factors, including a 13% increase in Funds Under Administration as investment markets improved, strong net flows into the FirstChoice and Customs Solutions Platforms and higher performance fees received by CFSGAM; Insurance income increased 8% to $1,034 million, driven by 16% average inforce premium growth as strong sales, and favourable claims experience in retail life was partially offset by unfavourable claims experience in wholesale life and increased lapse rates in retail life; Operating expenses increased 4% to $9,605 million, driven by inflation-related salary increases and higher superannuation expenses, higher occupancy and equipment expenses and an increase in information technology costs driven by system enhancements and increased software amortisation. The Group’s cost to 2 Commonwealth Bank of Australia Corporate Governance and Board Performance The Board’s Non-Executive Directors meet at least annually for an open discussion on the Board’s performance and to identify where in Board processes. The review process includes a performance assessment of the Board Committees and each Director. improvements can be made This year the Board again used an independent facilitator for its performance review, which reported on progress against last year’s findings in terms of both collective challenge and individual contributions. It was a positive review, which also endorsed the current Board and Committee processes. The assessment has been considered by the Board and individual Director assessments have been diarised with Directors by the Chairman of the Board. While there were no new Non-Executive Directors appointed to the Board this year, the Board Performance and Renewal Committee continues to look for Board candidates with the capability to contribute to thought processes relating to the business and to challenge effectively and motivate management to achieve sustained, outstanding performance in all respects. In appointing new Non-Executive Directors, the Board Performance and Renewal Committee assesses the skills, experience and personal qualities of candidates. It also takes into consideration other attributes including diversity to ensure the that any appointment decisions adequately reflect aspirations of the Group and the environment in which it operates. The continuing education of Non-Executive Directors is a priority, with the Board providing formal ongoing exposure to a wide range of relevant issues. This program 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. The Group also surveyed some of our individual shareholders and had one-on-one critical presentations from senior fund managers and sell-side analysts. This open and independent exposure of the Board to its stakeholder groups is essential for the Board’s understanding of the Bank’s owners. I would like to thank all of my fellow directors for their hard work and support over the last year. Chairman’s Statement Outlook As I said earlier and looking back on last year’s letter, it would be fair to say that the improvement in the international macro environment has been slightly better than we had anticipated. In particular, the United States economy seems to be on a much sounder footing and looks to have good positive momentum, although there are clearly still longer term structural issues to be resolved. In Europe, volatility seems to have reduced and the outlook is more positive than it was this time last year. Having said that, I still believe it will take some time before the Eurozone returns to a period of sustainable economic growth. In China the political concerns of last year appear to have abated, although economic growth seems to be settling at a slightly lower level than previously. I have no doubt that China will continue to experience some volatility but medium to longer term economic prospects remain positive. So, turning to the prospects for the 2014 financial year, our outlook for the global economy remains similar to six months ago. Our primary areas of economic focus are the level of confidence of Australian business and households, the impact of economic conditions in China on the demand and price for resources, the value of the Australian dollar and the resultant impact on export-sensitive parts of the Australian economy and the stability of funding markets. Indicators relating to all of these factors have been mixed over the past six months, and we expect that to remain the case in the near term. In addition, competition will remain strong in all our businesses, both from traditional financial services competitors and new technology-enabled business models. Overall we believe that the underlying conditions for our business in the 2014 financial year will be similar to those we have experienced in the recently completed year. However, we are well positioned to meet the needs of our customers should the economy rebound more quickly than anticipated. We have a truly excellent management team leading the Group and, in this challenging world, your Board is confident that they will succeed. I would like to thank our customers and shareholders for their continuing support for the Commonwealth Bank of Australia. Finally for all the staff of the Group on whom we depend for our success, thank you. David J Turner Chairman 13 August 2013 Annual Report 2013 3 Chief Executive Officer’s Statement As David Turner has noted in his Chairman’s Statement, the economic environment during the 2013 financial year was mixed. Whilst many indicators around the world economy improved, others deteriorated. Market volatility was generally lower than we had seen the previous year. But in Australia, the lack of a clear global recovery, combined with doubts about the shape of the economy following a reduction in global resources receipts continued to supress confidence. Against that backdrop, our continuing focus on our long term strategy ensured that the Group performed well during the 2013 financial year. The strategy that we announced 18 months ago, which is very similar to the one the Group has been following since 2006, has customer focus as its overarching priority. The underlying belief is that satisfied customers lead to satisfied shareholders. During the 2013 financial year, our multi-year trend of improving customer satisfaction continued. In 2006, CBA lagged all major competitors in customer satisfaction. The gap between CBA and the leading competitor was 12.5%. The Group set a goal of not only reducing that gap, but becoming the leading major bank in retail MFI customer satisfaction as measured by the Roy Morgan survey. In January this year, we achieved that goal. And we have held that position since then. Moreover, the most recent result, June 2013, was the highest in the Group’s history. When combined with leading customer satisfaction positions in our Business and Private Banking, Institutional Banking and Wealth Management businesses, this provides a strong foundation for on-going success. Satisfied customers led to market share growth across many different parts of our retail banking business during the year, particularly in the second half. We also grew lending in our business bank considerably faster than the market. And our Wealth Management business benefited from better in-flows, as well as improved equity markets, with Funds Under Administration up $44 billion and cash NPAT up 9%. Although some of these market share gains were offset to some extent by continuing margin pressure in deposits, revenue growth overall was a robust 7%. Our strategy of customer focus is built around four key capabilities: people, technology, productivity and strength. the I am extremely proud of Of course customer satisfaction depends first and foremost on people. team at Commonwealth Bank. This year I have had the pleasure of visiting our teams in places as different as Albury and Edinburgh. One of the strengths of the Group is that branch managers in Albury and asset managers in Edinburgh share a passion to do their best for the benefit of our customers, and a desire to collaborate across the Group to that end. Our people remain our most important asset and this year’s result is a tribute to their commitment and hard work. All of our internal measures confirm our impressions that our people are highly engaged. Another critical part of our customer focus over many years has been our investment in technology. During the 2013 financial year, we completed our Core Banking Modernisation upgrade. This project involved approximately 1,500 people working full-time for six years. Their work has resulted in industry-leading features for customers, centred around the only true 24 hours a day, seven days a week core banking system among the major banks in Australia (and one of the few in the world for a bank of this scale). With the project now completed, we are focused on continuous innovation for the benefit of our customers. Examples of recent innovations which are directly benefiting our customers include in-branch video conferencing, Everyday Settlements, Commbiz Mobile, Kaching and our new point of sale offerings of Pi, Albert and Leo. We believe we are still only at the start of our long term effort to apply world-leading technology for the benefit of our customers. focus Our systems investment is also an important enabler of our group-wide focus on productivity. Productivity will be a multi- year the initiatives we embarked on during the year have seen us make significant progress in embedding a productivity culture throughout the Group. We believe that this strategy is not about short term for the organisation and 4 Commonwealth Bank of Australia cost cutting, but about sustainable change. We will apply the same level of focus and discipline as we have on customer satisfaction, since the two are closely linked. Our aspiration remains making our business more customer friendly and efficient term expenses to an appropriate level. term, while managing short in the long Through the successful execution of this program over several years, the Group will avoid short term cost cutting initiatives that damage morale and thereby undermine long term value. We have not, and will not, set targets for reduction in people numbers. Nor will we resort to offshoring of Australian jobs. the most significant benefits of Though focus on productivity will likely be felt in the medium term, we already saw early signs of progress in the past financial year. Our cost to income ratio improved by 100 basis points to 45.0%. And importantly, we were able to achieve this improvement while still making $1.2 billion of investments for the long term, and absorbing the significant costs of new regulation. this fourth capability, strength, also Our influenced our performance in the past year. Given the continued uncertainty in the global economy and our cautious view of the prospects for growth in the domestic economy, we retained our conservative mindset throughout the year. As at the end of the financial year, our capital and liquidity positions are as strong as they have ever been. We are well-funded with high levels of liquidity. And we have retained conservative provisioning, alongside a very strong capital position relative to both domestic and international peers. We have also maintained our discipline in lending standards. Given the strength of the Group we have ample capacity to support our customers. Our strategy is built around the application of these four capabilities (people, technology, productivity and strength) to growth opportunities. This starts with our domestic financial services businesses, where we see an opportunity for continued growth by deepening our relationships with our customers. Our “One Commbank” initiative aims to make it easy for our customers to get the products they need, however they choose to do so. This initiative builds on our industry-leading customer reach, our customer-focused technology systems, and above all, customer-focused and collaborative people. One example of how these three areas of advantage can work together is the roll-out of video conferencing, which we now have in all our CBA branches. This makes it easier for our customers to get expert advice and access a much wider range of financial products. Again, though it is a multi-year effort, we have already seen the benefits in the 2013 financial year. We have again seen an increase in products per customer, and have retained our leadership position relative to our peers. We also see an opportunity domestically to keep growing our Business and Institutional Banking businesses as we leverage our technology to grow our Transaction Banking business and look for new opportunities to provide our customers with innovative products and ideas. We have also continued to make small discrete investments, designed to further strengthen our domestic portfolio. In the 2013 financial year, we were pleased to have the opportunity to increase our ownership stake in Aussie Home Loans to 80%. Outside Australia, we have a continuing appetite to apply these capabilities where we believe that we can create long term value for our shareholders. This applies particularly in the Asian region, where we continue to follow a consistent strategy of long term growth. Our retail, institutional and asset management businesses in the region generated cash NPAT in excess of $300 million during the 2013 financial year. Of particular note during the year was the opening of five new County Banks, and the approval for a Beijing branch, in China. Given the Group’s relative strength, we are still frequently asked about our intentions regarding inorganic growth outside Australia. Our position remains exactly as stated during our strategy update 18 months ago: we would only undertake an acquisition where it creates value for shareholders that they could not create for themselves through direct investment in Chief Executive Officer’s Statement the relevant entity. Opportunities to create such value are hard to find. We are committed to having a positive impact on the financial wellbeing of communities. In addition to some of our higher profile partnerships, most notably Cricket Australia and the Australian of the Year Awards, we have a strong multi-year commitment to the Australian youth. During the year we delivered our financial literacy program to more than 280,000 students from primary schools through to TAFE colleges. This is the world’s largest face-to-face financial literacy program of its kind and represents a significant investment by the Group in the future of young people. Our people also awarded over $2 million in grants through our Staff Community Fund, largest and longest running workplace-giving Australia’s program, to more than 240 organisations that are improving the health and wellbeing of Australian youth. The Chairman’s letter makes it clear that while our long term economic view remains positive, lack of consumer and business confidence may continue to weigh on the economy in the near term. We will stick to our strategy. Management’s focus over the next 12 months will be continuing our multi- year investments in the capabilities that underpin customer focus. We are setting ourselves a high bar for improving these capabilities, because we believe that by doing so we can create value for our customers and our shareholders. So during the 2014 financial year, we expect to make significant progress on our One Commbank and productivity initiatives with particular emphasis on delivering simplified and streamlined interactions with our customers, improving the capabilities of our front line staff and continuing to simplify our products and processes. In doing so, we must ultimately be guided by our vision. During the 2013 financial year, we refreshed our vision, which is now “to secure and enhance the financial wellbeing of people, businesses, and communities”. The vision is intended to remind us all of the high level of responsibility we have to more than 10 million personal and business customers, 800,000 households who own our shares directly in addition to the millions more who own our shares through super funds, and the communities in which we operate. Our goal is to ensure that each of our 50,000 employees recognises that responsibility and gives of his or her best, guided by our values of integrity, accountability, service, excellence and collaboration. The challenges of the economy, combined with the high quality of our competitors, mean that we must always strive for higher standards and improved performance if we are to maintain the strong momentum that the Group has developed over many years. Ian M Narev Chief Executive Officer 13 August 2013 Annual Report 2013 5 Highlights Group Performance Highlights Financial Performance Capital III regulatory capital The Group further strengthened its capital position under the new Basel framework. As at 30 June 2013 the Basel III Common Equity Tier One (CET1) ratio as measured on a fully internationally harmonised basis was 11.0%. This places the Group in a strong position, compares favourably to our international and domestic peers, and is well above the regulatory minimum levels. Funding The Group has maintained conservative balance sheet settings, with the majority of the Group’s lending growth funded by growth in customer deposits. Customer deposits constitute 63% of the Group’s funding base at 30 June 2013 up from 62% in the prior year. Wholesale funding levels remained broadly stable over the past 12 months, and while the cost of issuing new long term wholesale funding has decreased, domestic deposit costs remain at elevated levels, maintaining pressure on Group margins over the year. Dividends The final dividend declared was $2.00 per share, bringing the total dividend for the year ended 30 June 2013 to $3.64 per share, an increase of 9% on the prior year. This represents a dividend payout ratio (“cash basis”) of 75.4%. The final dividend payment will be fully franked and paid on 3 October 2013 to owners of ordinary shares at the close of business on 23 August 2013 (record date). Shares will be quoted ex–dividend on 19 August 2013. Outlook The outlook for the global economy remains similar to six months ago. The Group’s primary areas of economic focus are the level of confidence of Australian businesses and households, the impact of economic conditions in China on the demand and price for resources, the value of the Australian dollar and the resultant impact on export-sensitive parts of the domestic economy and stability of funding markets. Indicators relating to all of these factors have been mixed over the past six months, and it is expected that will remain the case in the near term. In addition, competition will remain strong across all of the Group’s businesses, both from traditional financial services competitors and new technology- enabled business models. Overall, the Group believes that the underlying conditions for its business in the 2014 financial year will be similar to those experienced in the recently completed year. However, the Group is well positioned to meet the needs of its customers should the economy rebound more quickly than anticipated. The Group’s net profit after tax (“statutory basis”) for the year ended 30 June 2013 increased 8% on the prior year to $7,677 million. Return on equity (“statutory basis”) was 18.2% and Earnings per share (“statutory basis”) was 477.9 cents, an increase of 6% on the prior year. The Management Discussion and Analysis discloses the net profit after tax on both a statutory and cash basis. The statutory basis is prepared and reviewed 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 the Group’s to present a clear view of underlying operating results, excluding 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 list of items excluded from statutory profit is provided in the reconciliation of the Net profit after tax (“cash basis”) on page 7 and described in greater detail on page 17. The Group has produced another positive financial result amidst mixed economic conditions, including subdued credit growth, higher deposit funding costs, low interest rates, lower marginal costs of raising new wholesale funding and improved equity markets. to focus on securing The Group continues term sustainable competitive advantage through engaged staff collaborating to identify and meet more of our customers’ needs. This long term focus, combined with a diversified business model and a strong risk management culture, has again generated superior returns. long Operating income growth reflected strong momentum across the Retail, Wealth and New Zealand businesses. Business banking revenue remained subdued amid strong competition for domestic deposits. Operating expenses reflect a continued appetite to invest in technology and other growth initiatives, together with the impact of costly regulatory change and compliance initiatives, partly offset by productivity initiatives. Loan impairment expense decreased slightly due to improved home loan and credit card arrears, partly offset by increased commercial loan charges. Asset quality remains sound with continued conservative levels of provisioning and unchanged economic overlays. Net profit after tax (“cash basis”) for the year ended 30 June 2013 to $7,819 million. Cash earnings per share increased 8% to 485.8 cents per share. increased by 10% on the prior year the year ended Return on equity (“cash basis”) 30 June 2013 was 18.4%, a decrease of 20 basis points on the prior year, reflecting strong organic capital generation from higher retained earnings and shareholder reinvestment of the final dividend of the 2012 financial year. for 6 Commonwealth Bank of Australia Jun 13 vsJun 13 vsJun 13 vs 30 Jun 13Jun 12 % 30 Jun 13 30 Jun 12Jun 12 % 30 Jun 13 31 Dec 12Dec 12 %Net profit after tax ($M)7,67787,8197,113104,0393,7807Return on equity (%)18.2(50)bpts18.418.6(20)bpts18.818.170 bptsEarnings per share - basic (cents)477.96485.8449.48250.3235.56Dividends per share (cents)3649364334920016422Full Year EndedFull Year EndedHalf Year Ended("statutory basis")("cash basis")("cash basis") Highlights (1) For purposes of presentation, policyholder tax expense components of corporate tax expense are shown on a net basis (30 June 2013: $112 million; 30 June 2012: $122 million; and for the half years ended 30 June 2013: $28 million and 31 December 2012: $84 million). (2) Non-controlling interests include preference dividends paid to holders of preference shares in ASB Capital Limited and ASB Capital No.2 Limited. (3) Refer to page 17 for details. (4) Comparative information has been restated to reflect changes in the presentation of segment results in the current year. The changes include the reallocation of revenue, expenses and associated customer balances between segments based on where the customer relationship is managed; the allocation of residual earnings on capital across the business segments; and the impact of the Group relinquishing the banking licence held by Bankwest during October 2012. Group Return on Equity Group Return on Assets (1) (1) Comparative information has been restated to conform to presentation in the current year. Annual Report 2013 7 Group Performance30 Jun 1330 Jun 12Jun 13 vs30 Jun 1331 Dec 12Jun 13 vs30 Jun 13Jun 13 vsSummary$M$MJun 12 %$M$MDec 12 %$MJun 12 %Net interest income 13,94413,15767,0826,862313,9346Other banking income 4,2213,92772,0862,135(2)4,2374Total banking income18,16517,08469,1688,997218,1716Funds management income2,1461,957101,1131,03382,16512Insurance income1,034960852950551,218(1)Total operating income21,34520,001710,81010,535321,5546Investment experience15414937084(17)n/an/aTotal income21,49920,150710,88010,619221,5546Operating expenses(9,605)(9,196)4(4,850)(4,755)2(9,680)4Loan impairment expense(1,082)(1,089)(1)(466)(616)(24)(1,146)5Net profit before tax10,8129,865105,5645,248610,7288Corporate tax expense (1)(2,977)(2,736)9(1,517)(1,460)4(3,035)6Non-controlling interests (2)(16)(16)-(8)(8)-(16)-Net profit after tax ("cash basis")7,8197,113104,0393,7807n/an/aHedging and IFRS volatility (3)27124(78)37(10)largen/an/aOther non-cash items (3)(169)(147)15(60)(109)(45)n/an/aNet profit after tax ("statutory basis")7,6777,09084,0163,661107,6778Represented by: (4)Retail Banking Services 3,0542,703131,5481,5063Business and Private Banking 1,4881,513(2)7537352Institutional Banking and Markets 1,2101,098106076031Wealth Management68762993533346New Zealand635541173263096Bankwest561527630325817IFS and Other1841028014935largeNet profit after tax ("cash basis")7,8197,113104,0393,7807Investment experience - after tax(105)(89)18(48)(57)(16)Net profit after tax ("underlying basis")7,7147,024103,9913,7237StatutoryFull Year EndedFull Year EndedHalf Year Ended21.7%20.4%15.8%18.7%19.5%18.6%18.4%2007200820092010201120122013RoE - Cash (%)440488620646668719 7544.54.74.46.16.87.17.81.1%1.1%0.0%0.2%0.4%0.6%0.8%1.0%1.2%02004006008002007200820092010201120122013Total Assets ($bn)Cash NPAT ($bn)RoA - Cash (%) Highlights (1) Comparative information has been reclassified to conform to presentation in the current year. (2) (3) Net operating income represents total operating income less volume related expenses. Includes IFS Asia. 8 Commonwealth Bank of Australia Jun 13 vsJun 13 vsKey Performance Indicators 30 Jun 13 30 Jun 12Jun 12 % 30 Jun 13 31 Dec 12Dec 12 %GroupStatutory net profit after tax ($M)7,6777,09084,0163,66110Cash net profit after tax ($M)7,8197,113104,0393,7807Net interest margin (%) 2. 132. 094 bpts2. 172. 107 bptsAverage interest earning assets ($M) 653,637629,6854657,951649,3941Average interest bearing liabilities ($M) 609,557590,6543613,779605,4081Funds management income to average FUA (%) (1)0. 940. 97(3)bpts0. 940. 95(1)bpt Funds Under Administration (FUA) - average ($M) (1)227,780200,79213239,948215,55411Insurance income to average inforce premiums (%) (1) (2)36. 539. 2(270)bpts36. 836. 620 bptsAverage inforce premiums ($M) (2)2,8342,450162,8982,7366Operating expenses to total operating income (%)45. 046. 0(100)bpts44. 945. 1(20)bptsEffective corporate tax rate (%) 27. 527. 7(20)bpts27. 327. 8(50)bptsRetail Banking ServicesCash net profit after tax ($M) (1)3,0542,703131,5481,5063Operating expenses to total banking income (%) (1)38. 540. 1(160)bpts38. 238. 9(70)bptsBusiness and Private BankingCash net profit after tax ($M) (1)1,4881,513(2)7537352Operating expenses to total banking income (%) (1)36. 135. 740 bpts36. 236. 110 bptsInstitutional Banking and MarketsCash net profit after tax ($M) (1)1,2101,098106076031Operating expenses to total banking income (%) (1)34. 235. 1(90)bpts35. 233. 3190 bptsWealth ManagementCash net profit after tax ($M) (1)68762993533346FUA - average ($M)219,296193,27713231,138207,43711Average inforce premiums ($M) 2,0681,806152,1182,0215Funds management income to average FUA (%)0. 950. 98(3)bpts0. 940. 95(1)bpt Insurance income to average inforce premiums (%)34. 638. 3(370)bpts33. 136. 1(300)bptsOperating expenses to net operating income (%) (3)65. 667. 1(150)bpts64. 766. 5(180)bptsNew ZealandCash net profit after tax ($M) (1)635541173263096FUA - average ($M) (1)8,4847,515138,8108,1179Average inforce premiums ($M)516470105264986Funds management income to average FUA (%) (1)0. 640. 595 bpts0. 660. 615 bptsInsurance income to average inforce premiums (%)47. 948. 3(40)bpts51. 445. 0largeOperating expenses to total operating income (%) (1)46. 548. 3(180)bpts47. 045. 9110 bptsBankwestCash net profit after tax ($M) (1)561527630325817Operating expenses to total banking income (%) (1)47. 251. 0(380)bpts46. 747. 8(110)bptsCapital (Basel III) Common Equity Tier One (Internationally Harmonised %)11. 09. 8120 bpts11. 010. 640 bptsCommon Equity Tier One (APRA %)8. 27. 570 bpts8. 28. 110 bptsFull Year EndedHalf Year Ended (1) Fully diluted EPS and weighted average number of shares are disclosed in Note 7. (1) Prior periods have been restated in line with market updates. (2) As at 31 May 2013. (3) Other household lending market share includes personal loans and margin loans. (4) (5) As at 31 March 2013. In accordance with RBA guidelines, these measures include some products relating to both the retail and corporate segments. Highlights Annual Report 2013 9 Jun 13 vsJun 13 vsShareholder Summary 30 Jun 13 30 Jun 12Jun 12 %30 Jun 13 31 Dec 12Dec 12 %Dividends per share - fully franked (cents) 364334920016422Dividend cover - cash (times)1. 31. 3-1. 21. 4(14)Earnings per share (cents)Statutory basis - basic 477. 9448. 96249. 3228. 69Cash basis - basic485. 8449. 48250. 3235. 56Dividend payout ratio (%)Statutory basis76. 875. 2160 bpts80. 772. 5largeCash basis 75. 475. 040 bpts80. 270. 2largeWeighted average no. of shares ("statutory basis") - basic (M) (1)1,5981,57021,6031,5931Weighted average no. of shares ("cash basis") - basic (M) (1)1,6011,57321,6061,5961Return on equity ("statutory basis") (%)18. 218. 7(50)bpts18. 817. 6120 bptsReturn on equity ("cash basis") (%)18. 418. 6(20)bpts18. 818. 170 bptsFull Year EndedHalf Year Ended30 Jun 1331 Dec 1230 Jun 12Jun 13 vsJun 13 vsMarket Share (1)%%%Dec 12 %Jun 12 %Home loans 25. 325. 125. 220 bpts10 bptsCredit cards - RBA (2)24. 323. 923. 540 bpts80 bptsOther household lending (3)16. 916. 516. 440 bpts50 bptsHousehold deposits 28. 828. 828. 9-(10)bptsRetail deposits (4)25. 425. 325. 410 bpts-Business lending - APRA 19. 119. 319. 3(20)bpts(20)bptsBusiness lending - RBA 17. 917. 717. 720 bpts20 bptsBusiness deposits - APRA 21. 520. 620. 690 bpts90 bptsAsset Finance13. 313. 313. 6-(30)bptsEquities trading 5. 25. 45. 5(20)bpts(30)bptsAustralian Retail - administrator view (5)15. 515. 415. 510 bpts-FirstChoice Platform (5)11. 611. 611. 8-(20)bptsAustralia life insurance (total risk) (5)13. 113. 313. 6(20)bpts(50)bptsAustralia life insurance (individual risk) (5)13. 013. 213. 3(20)bpts(30)bptsNZ lending for housing22. 322. 121. 920 bpts40 bptsNZ retail deposits20. 120. 220. 6(10)bpts(50)bptsNZ lending to business 10. 19. 89. 030 bpts110 bptsNZ retail FUA17. 917. 718. 820 bpts(90)bptsNZ annual inforce premiums 29. 529. 730. 3(20)bpts(80)bptsAs atCredit RatingsLong-termShort-termOutlookFitch RatingsAA- F1+ Stable Moody's Investor ServicesAa2 P-1 Stable Standard & Poor'sAA- A-1+ Stable Group Performance Analysis Financial Performance and Business Review Year Ended June 2013 versus June 2012 Half Year Ended June 2013 versus December 2012 The Group’s net profit after tax (“cash basis”) increased 10% on the prior year to $7,819 million. The Group’s net profit after tax (“cash basis”) increased 7% on the prior half to $4,039 million. Earnings per share (“cash basis”) increased 8% on the prior year to 485.8 cents per share, whilst return on equity (“cash basis”) decreased 20 basis points on the prior year to 18.4%. Earnings per share (“cash basis”) increased 6% on the prior half to 250.3 cents per share, whilst return on equity (“cash basis”) improved 70 basis points to 18.8%. It should be noted when comparing current half financial performance to the prior half that there are three less calendar days impacting revenue in the current half. Key points of note in the result included the following: Net interest income increased 3% to $7,082 million, reflecting a seven basis point increase in net interest margin and 1% growth in average interest earning assets; Other banking income decreased 2% to $2,086 million, income due to the impact of debt buybacks; Funds management to $1,113 million, driven by an 11% increase in average FUA; Insurance income increased 5% to $529 million due to 6% average inforce premium growth, partly offset by unfavourable claims experience in wholesale life; increased 8% Operating expenses increased 2% to $4,850 million, driven by higher IT spend on regulatory reform programs across the Group, additional system support costs and increased software amortisation driven by the CBM initiative; and impairment expense decreased 24% Loan to $466 million due to lower levels of new and increased individual provisioning and increased writebacks on the corporate and commercial portfolios. This was partly offset by the impact of increasing arrears in the unsecured portfolios in Retail Banking Services. The key components of the Group result were: Net interest income increased 6% to $13,944 million, reflecting 4% growth in average interest earning assets and a four basis point increase in net interest margin; Other banking income increased 7% to $4,221 million, due to higher Markets trading income, including a favourable counterparty fair value adjustment; to income Funds management $2,146 million, due to a 13% increase in average Funds Under Administration (FUA) from positive net flows and improved markets; increased 10% Insurance income increased 8% to $1,034 million due to 16% average inforce premium growth and lower claims in wholesale life and higher lapses in retail life; in retail, partly offset by higher claims Operating expenses increased 4% to $9,605 million, driven by higher staff costs from salary increases, higher defined benefit superannuation expenses and higher IT expenses. IT costs increased due to enhancement of system capabilities and compliance with new regulatory obligations impacting the Wealth business, together with increased software amortisation driven by the Core Banking Modernisation (CBM) initiative. This was partly offset by the continued realisation of operational efficiencies from productivity initiatives; and Loan to $1,082 million. Improvement in arrears in Retail Banking Services, particularly in the credit card and home loan portfolios, was partly offset by increased commercial loan impairment expense. impairment expense decreased 1% 10 Commonwealth Bank of Australia Net Interest Income Group Performance Analysis Year Ended June 2013 versus June 2012 Net interest income increased by 6% on the prior year to $13,944 million. The result was driven by growth in average interest earning assets of 4% together with a four basis point increase in net interest margin. Average Interest Earning Assets Average interest earning assets increased by $24 billion on the prior year to $654 billion, reflecting a $21 billion increase in average lending interest earning assets and a $3 billion increase in average non-lending interest earning assets. Home loan average balances increased by $15 billion or 4% on the prior year to $360 billion. The growth in home loan balances was the domestic banking businesses. largely driven by for business and corporate Average balances lending increased by $6 billion on the prior year to $168 billion driven by a combination of business banking and institutional lending. Average non-lending increased $3 billion on the prior year due to higher average levels of liquid assets. interest earning assets Net Interest Margin The Group’s net interest margin increased four basis points on the prior year to 2.13%. The key drivers of the movement were: Asset pricing: Increased margin of 15 basis points, reflecting the repricing of lending portfolios in response to the increase in average funding costs associated with both wholesale and domestic deposit funding. Funding costs: Decreased margin of 21 basis points reflecting higher wholesale funding costs of 10 basis points; an 11 basis points increase in deposits costs from ongoing strong competition and the impact of the falling cash rate environment. Basis risk: Basis risk arises from funding assets which are priced relative to the cash rate with liabilities priced relative to the bank bill swap rate. The margin increased by three basis points as a result of a reduction in the spread between the cash rate and the bank bill swap rate during the year. Portfolio mix: Increased margin of one basis point from strong growth lending portfolios; plus favourable funding mix of two basis points. in higher margin New Zealand Replicating portfolio: Increased margin of three basis points as the replicating portfolio (a portfolio of financial instruments which hedge against interest rate volatility) mitigated the impact on Group earnings falling cash rate environment. Other: Increased margin of one basis point, primarily driven by higher Treasury earnings. from the NIM movement since June 2012 Group NIM (Half Year Ended) Annual Report 11 30 Jun 1330 Jun 12Jun 13 vs 30 Jun 1331 Dec 12Jun 13 vs $M$MJun 12 %$M$MDec 12 %Net interest income ("cash basis") 13,94413,15767,0826,8623Average interest earning assetsHome loans360,319345,5444365,040355,6743Personal loans21,39520,870321,76121,0363Business and corporate loans168,296162,4094167,859168,726(1)Total average lending interest earning assets550,010528,8234554,660545,4362Non-lending interest earning assets 103,627100,8623103,291103,958(1)Total average interest earning assets653,637629,6854657,951649,3941Net interest margin (%)2.132.094 bpts2.172.107 bptsFull Year EndedHalf Year Ended2.17%2.12%2.06%2.10%2.17%1.50%1.70%1.90%2.10%2.30%Jun 11Dec 11Jun 12Dec 12Jun 130.15%0.03%0.03%0.03%0.01%(0.21%)2.09%2.13%1.50%1.70%1.90%2.10%2.30%Jun 12AssetpricingFundingcostsBasisriskPortfoliomixReplicatingportfolio OtherJun 13 competition and environment. the impact of the falling cash rate Basis risk: Margin increased by two basis points as a result of a reduction in the spread between the cash rate and the bank bill swap rate during the current half. Portfolio mix: Increased margin of two basis points reflecting in higher margin favourable unsecured lending and New Zealand lending; plus favourable funding mix of one basis point. from growth lending mix Replicating portfolio: Increased margin of one basis point as the replicating portfolio mitigated the impact on Group earnings from the falling cash rate environment. NIM movement since December 2012 Group Performance Analysis Net Interest Income (continued) Half Year Ended June 2013 versus December 2012 Net interest income increased by 3% on the prior half driven by growth in average interest earning assets of 1% together with a seven basis point improvement in net interest margin to 2.17%. Average Interest Earning Assets Average interest earning assets increased by $9 billion on the prior half to $658 billion, reflecting a $9 billion increase in average lending interest earning assets, partly offset by less than $1 billion decrease in average non-lending interest earning assets. Home loan average balances increased by $9 billion or 3% on the prior half to $365 billion, primarily driven by growth in the domestic banking businesses. Average balances lending decreased by $1 billion on the prior half to $168 billion driven by a decrease in domestic business banking. for business and corporate Average non-lending interest earning assets decreased $1 billion on the prior half. The decrease in available-for-sale investments and liquid assets was partly offset by growth in trading assets. Net Interest Margin The Group’s net interest margin increased seven basis points on the prior half to 2.17%. The key drivers were: Asset pricing: Increase in margin of three basis points due to timing of the repricing of lending portfolios in response to higher funding costs. Funding costs: Decrease in margin of two basis points reflecting the higher cost of deposits as a result of strong _______________________________________________________________________________________________________ Other Banking Income Year Ended June 2013 versus June 2012 Other banking income increased 7% on the prior year to $4,221 million driven by the following revenue items: Commissions were flat on the prior year at $1,990 million. Growth in card volumes was offset by customers shifting into low fee and fee free banking products; increased 6% on Lending fees to $1,053 million. This included growth in undrawn Institutional Lending balances leading to higher commitment fees, and volume growth in personal lending; the prior year Trading income increased 65% on the prior year to $863 million. This was due to the Markets business performance, which included the benefit of favourable counterparty fair value adjustments due to narrowing credit spreads and higher trading income; and Other income decreased 23% on the prior year to $315 million mainly due to timing of gains on asset sales and the impact of debt buybacks in the current year. 12 Commonwealth Bank of Australia 0.03%0.02%0.03%0.01%(0.02%)2.10%2.17%1.50%1.70%1.90%2.10%2.30%Dec 12AssetpricingFundingcostsBasisriskPortfoliomixReplicatingportfolioJun 1330 Jun 1330 Jun 12Jun 13 vs 30 Jun 1331 Dec 12Jun 13 vs $M$MJun 12 %$M$MDec 12 %Commissions1,9901,997-997993-Lending fees1,05399765445097Trading income86352265420443(5)Other income315411(23)125190(34)Other banking income ("cash basis")4,2213,92772,0862,135(2)Full Year EndedHalf Year Ended Other Banking Income (continued) Half Year Ended June 2013 versus December 2012 Group Performance Analysis Net Trading Income ($M) fees Other banking income decreased 2% on the prior half to $2,086 million driven by the following revenue items: Commissions were flat on the prior half at $997 million. Growth in brokerage was offset by customers shifting into low fee and fee free banking products; Lending to increased 7% on $544 million, driven by higher volume in the Institutional Lending and Asset Leasing businesses; Trading income decreased 5% on the prior half to $420 million as a result of decreased trading volumes in the Markets business; and Other the prior half $125 million mainly due to the impact of debt buybacks. income decreased 34% on the prior half to _______________________________________________________________________________________________________ Funds Management Income (1) Colonial First State incorporates the results of all financial planning businesses including Commonwealth Financial Planning. Year Ended June 2013 versus June 2012 Half Year Ended June 2013 versus December 2012 Funds management income increased 10% on the prior year to $2,146 million driven by: Funds management income increased 8% on the prior half to $1,113 million driven by: A 13% increase in average FUA to $228 billion, driven by strong investment performance and net flows in rising equity markets benefiting CFSGAM and Colonial First State; Higher performance fees in CFSGAM, with the majority of funds outperforming benchmark; partly offset by A three basis point decrease in the ratio of funds management income to average FUA, due to changes in mix and the contraction of legacy closed investment portfolios. An 11% increase in average FUA, driven by market momentum and strong net flows in CFSGAM and Colonial First State and favourable foreign exchange movements due to depreciation of the Australian dollar; partly offset by The ratio of funds management income to average FUA decreased by one basis point to 0.94%, due to portfolio mix shifts from retail to wholesale products and legacy product outflows. Annual Report 13 321251267289(43)12012487(37)(90)5244SalesTradingCVAJun 12Dec 12Dec 11Jun 1324128144342030 Jun 1330 Jun 12Jun 13 vs30 Jun 1331 Dec 12Jun 13 vs$M$MJun 12 %$M$MDec 12 %CFS Global Asset Management (CFSGAM)1,0108831452948110Colonial First State (1)91484584694455CommInsure153160(4)807310New Zealand544423292516Other1525(40)69(33)Funds management income ("cash basis")2,1461,957101,1131,0338Full Year EndedHalf Year Ended Group Performance Analysis Insurance Income Year Ended June 2013 versus June 2012 Half Year Ended June 2013 versus December 2012 Insurance income increased by 8% on the prior year to $1,034 million driven by: Insurance income increased by 5% on the prior half to $529 million driven by: An increase in average inforce premiums of 16% to $2,834 million driven by strong new business sales by CommInsure, New Zealand and IFS Asia; and Improved CommInsure claims experience in retail life and general insurance, partly offset by unfavourable claims experience in wholesale life and increased lapse rates in retail life. An increase in average inforce premiums of 6% to $2,898 million driven by new business sales particularly through Retail bank channels; and Improved CommInsure lapse rates in retail life partly offset by unfavourable claims experience in wholesale life. _______________________________________________________________________________________________________ Operating Expenses Year Ended June 2013 versus June 2012 Half Year Ended June 2013 versus December 2012 Operating expenses increased 2% on the prior half to $4,850 million. Staff expenses increased by 1% to $2,584 million, with the increase in superannuation contributions being offset by the ongoing focus on productivity improvements; Occupancy and equipment expenses increased by 2% to $546 million due to higher depreciation expenses on operating lease assets; Information technology services expenses increased by 7% to $672 million, primarily due to additional system support costs and increased software amortisation driven by CBM and other strategic initiatives; Other expenses increased by 2% to $1,048 million, impacted by higher spend on regulatory change programs and higher volume related expenses; and Group expense to income ratio improved 20 basis points on the prior half to 44.9% reflecting higher revenues and productivity initiatives. The banking expense to income ratio improved 10 basis points on the prior half to 40.1%. the further investment Operating expenses increased 4% on the prior year to $9,605 million with realised benefit of productivity initiatives being offset by inflation, higher technology costs, variable operating costs and in the business. Staff expenses increased by 4% to $5,148 million, driven by inflation-related salary increases and higher superannuation expenses; Occupancy and equipment expenses increased by 2% to $1,082 million, largely due to higher depreciation expenses from growth in the Asset Leasing business; Information technology services expenses increased by 12% to $1,299 million, primarily due to system enhancement to drive new capability and satisfy regulatory obligations and increased software amortisation driven by CBM and other strategic initiatives; Other expenses increased by 2% to $2,076 million, impacted by higher spend on regulatory change programs, partly offset by lower volume related expenses; and Group expense to income ratio improved 100 basis points on the prior year to 45.0% reflecting higher revenues and productivity initiatives. The banking expense to income ratio also improved 100 basis points on the prior year to 40.1%. 14 Commonwealth Bank of Australia 30 Jun 1330 Jun 12Jun 13 vs30 Jun 1331 Dec 12Jun 13 vs$M$MJun 12 %$M$MDec 12 %CommInsure 7166914348368(5)New Zealand247227913411319IFS Asia75671238373Other(4)(25)(84)9(13)largeInsurance income ("cash basis")1,03496085295055Full Year EndedHalf Year Ended30 Jun 1330 Jun 12Jun 13 vs30 Jun 1331 Dec 12Jun 13 vs$M$MJun 12 %$M$MDec 12 %Staff expenses5,1484,94742,5842,5641Occupancy and equipment expenses1,0821,05625465362Information technology services expenses1,2991,159126726277Other expenses2,0762,03421,0481,0282Operating expenses ("cash basis")9,6059,19644,8504,7552Operating expenses to total operating income (%)45. 046. 0(100)bpts44. 945. 1(20)bptsBanking expense to operating income (%)40. 141. 1(100)bpts40. 140. 2(10)bptsFull Year EndedHalf Year Ended Group Performance Analysis Operating Expenses (continued) Investment Spend (1) Included within Operating Expense disclosure on page 14. The Group continued to invest strongly in the business with $1,237 million incurred in the full year to 30 June 2013, a decrease of 4% on the prior year. Lower spend on the Core Banking Modernisation (CBM) initiative was partly offset by increased investment in Productivity and Growth initiatives. In addition, spend on risk and compliance projects increased as in satisfying new systems are regulatory obligations, including Stronger Super and Future of Financial Advice (FOFA) reforms. implemented to assist During the year, the Group invested $200 million in the CBM initiative to deliver the final major scope items. Highlights for the year included: The successful delivery of the migration of the remaining large and complex commercial deposit and transaction accounts onto the new CBM platform; and The successful migration of business lending accounts to the new CBM platform, improving the business lending experience for customers and staff. _______________________________________________________________________________________________________ Loan Impairment Expense Year Ended June 2013 versus June 2012 Loan impairment expense decreased 1% on the prior year to $1,082 million. The decrease is driven by: Reduced loan impairment expense in Retail Banking Services following improvements in arrears rates in the credit card and home loan portfolios; partly offset by in Increased expense (Bankwest and Business and Private Banking). the commercial portfolios Annual Report 15 30 Jun 1330 Jun 12Jun 13 vs30 Jun 1331 Dec 12Jun 13 vs$M$MJun 12 %$M$MDec 12 %Expensed investment spend (1)5665021332424234Capitalised investment spend671784(14)331340(3)Investment spend1,2371,286(4)65558213Comprising:Productivity and growth6515861136628528Core Banking Modernisation (CBM)200368(46)63137(54)Risk and compliance2341882412610817Branch refurbishment and other15214461005292Investment spend 1,2371,286(4)65558213Full Year EndedHalf Year Ended30 Jun 1330 Jun 12Jun 13 vs 30 Jun 1331 Dec 12Jun 13 vs $M$MJun 12 %$M$MDec 12 %Retail Banking Services533583(9)28724617Business and Private Banking2802665130150(13)Institutional Banking and Markets154154-5797(41)New Zealand45372223225Bankwest11861933286(63)IFS and Other(48)(12)large (63)15largeLoan impairment expense ("cash basis")1,0821,089(1)466616(24)Full Year EndedHalf Year Ended Group Performance Analysis Loan Impairment Expense (continued) Half Year Loan Impairment Expense (Annualised) as a % of Average Gross Loans and Acceptances (bpts) Half Year Ended June 2013 versus December 2012 Loan impairment expense decreased 24% on the prior half to $466 million mainly driven by: The run off of the pre-acquisition higher risk loan book in Bankwest has resulted in reduced requirements for provisions and associated overlays in the current half; Decreased expense in Business and Private Banking due to the non-recurrence of softening collateral values in a small number of troublesome assets experienced in the first half; Decreased expense in Institutional Banking and Markets following a individual provisioning in requirements; partly offset by reduction Increased loan impairment expense in Retail Banking Services following increased arrears in the unsecured lending portfolios. _______________________________________________________________________________________________________ Taxation Expense Year Ended June 2013 versus June 2012 Half Year Ended June 2013 versus December 2012 Corporate tax expense for the year ended 30 June 2013 increased 9% on the prior year representing a 27.5% effective tax rate. Corporate tax expense for the half year ended 30 June 2013 increased 4% on the prior half representing a 27.3% effective tax rate. The effective tax rate is below the Australian company tax rate of 30% primarily as a result of the profit earned by the offshore banking unit and offshore jurisdictions that have lower corporate tax rates. The effective tax rate is below the Australian company tax rate of 30% primarily as a result of the profit earned by the offshore banking unit and offshore jurisdictions that have lower corporate tax rates. 16 Commonwealth Bank of Australia 282422212022Jun 10Dec 10Jun 11Dec 11Jun 12Dec 12Jun 13402825Flood / earthquake related overlayReview of Bankwestpre-acquisition business book (non-cash items)Provision relating to Bell Group litigation (non-cash items)1730 Jun 1330 Jun 12Jun 13 vs30 Jun 1331 Dec 12Jun 13 vs$M$MJun 12 %$M$MDec 12 %Corporate tax expense ($M)2,9772,73691,5171,4604Effective tax rate (%)27. 527. 7(20)bpts27. 327. 8(50)bptsFull Year EndedHalf Year Ended Non-Cash Items Included in Statutory Profit Group Performance Analysis Foreign exchange hedges relating Zealand earnings. to future New Bell Group litigation 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”) is outlined below and treated consistently with prior year 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 interest rate swaps hedging foreign currency denominated debt issues; and 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. from cash profit since Fair value gains or losses on all of these economic hedges the asymmetric are excluded recognition of the gains or losses does not affect the Group’s performance over the life of the hedge. A $27 million after tax gain was recognised in statutory profit for the year ended 30 June 2013 (30 June 2012: $124 million). Bankwest non-cash items The acquisition of Bankwest resulted in the recognition of assets at fair value, representing certain financial instruments, core deposits and brand name totalling $463 million that are being amortised over their useful lives. This resulted in amortisation charges of $71 million after tax in the year ended 30 June 2013 (30 June 2012: $89 million after tax). These items were not recognised in cash profit as they were not representative of the Group’s expected ongoing financial performance. Count Financial Limited acquisition costs During the prior year, the Group acquired 100% of the issued share capital of Count Financial Limited (Count), an independent, accountant-based financial advice business. As part of the acquisition, the Group incurred retention, advisory and other costs. There were no costs incurred in the year ended 30 June 2013 (30 June 2012: $43 million after tax loss). Treasury shares valuation adjustment in life funds and the managed Under IFRS, Commonwealth Bank of Australia shares held by the Group insurance businesses are defined as treasury shares and are held at cost. Distributions, realised and unrealised gains and losses are recognised in cash profit representing the underlying performance of the asset portfolio attributable to the wealth and life insurance businesses. These distributions, gains and losses are reversed as non-cash items for statutory reporting purposes. A $53 million after tax loss was included in statutory 30 June 2013 the profit (30 June 2012: $15 million). ended year in the consortium of banks Proceedings were brought by the liquidators of the Bell Group of companies against that restructured its facilities on 26 January 1990. The Supreme Court of Western Australia Court of Appeal ruling on 17 August 2012 was adverse for the consortium of banks and resulted in an additional provision being raised by the Group. This is reported as a non-cash item due to its historic and one-off nature. Policyholder tax Policyholder tax is included in the Wealth Management business results for statutory reporting purposes. In the year ended 30 June 2013, tax expense of $112 million (30 June 2012: $122 million tax expense), funds management income of $77 million (30 June 2012: $9 million expense) and insurance income of $35 million (30 June 2012: $131 million income) was recognised. The gross up of these items are excluded from cash profit as they do not reflect the underlying performance of the business which is measured on a net of policyholder tax basis. Investment experience Investment experience primarily includes the returns on shareholder capital invested in the wealth management and insurance businesses as well as the volatility generated through the economically hedged guaranteed annuity portfolio held by the Group’s Wealth Management division. This item is classified separately within cash profit. Annual Report 17 30 Jun 1330 Jun 12Jun 13 vs30 Jun 1331 Dec 12Jun 13 vs$M$MJun 12 %$M$MDec 12 %Hedging and IFRS volatility27124(78)37(10)largeBankwest non-cash items(71)(89)(20)(38)(33)15Count Financial Limited acquisition costs-(43)large---Treasury shares valuation adjustment(53)(15)large(22)(31)(29)Bell Group litigation(45)-large-(45)largeOther non-cash items(169)(147)15(60)(109)(45)Total non-cash items (after tax)(142)(23)large(23)(119)(81)Full Year EndedHalf Year Ended Group Performance Analysis Review of Group Assets and Liabilities (1) The Group has realigned comparative product balances as part of changes in segment allocations to conform to presentation in the current year. (2) Loans, bills discounted and other receivables exclude provisions for impairment which are included in Other assets. (3) Comparative information has been restated to conform to presentation in the current year. Year Ended June 2013 versus June 2012 Other assets Asset growth of $35 billion or 5% on the prior year was due to increased home lending, business and corporate lending and higher derivative asset balances. The Group continued to satisfy a significant portion of its funding requirements from customer deposits. Customer deposits funding (30 June 2012: 62%). represent 63% total now of Home loans Home loan balances increased $20 billion to $373 billion, reflecting a 6% increase on the prior year. This outcome reflected a return to growth above system in Retail Banking Services. The Group continues to maintain its competitive position through a strong focus on delivering excellent customer service. Other assets, including derivative assets, insurance assets and intangibles, increased $6 billion to $81 billion, a 9% increase on the prior year. This increase reflected higher derivative asset balances driven by volatility in foreign exchange and interest rate markets. Interest bearing deposits Interest bearing deposits increased $20 billion to $448 billion, a 5% increase on the prior year. Customer preference for lower risk investments together with targeted campaigns in a highly competitive market resulted in growth of $16 billion in savings deposits, a $7 billion increase in transaction deposits and a $2 billion increase in investment deposits. This was partly offset by a $4 billion decrease in other demand deposits. Personal loans Debt issues Personal loans, including credit cards and margin lending, increased 5% on the prior year to $22 billion. Strong growth in credit card and personal loan balances was driven by successful campaigns and new product offerings. This was partly offset by a decline in margin lending balances reflecting conservative investor sentiment towards equity markets. Debt issues increased $4 billion to $139 billion, a 3% increase on the prior year. While deposits satisfied the majority of the Group’s funding requirements, strong access was maintained to both domestic and international wholesale debt markets. Refer to page 28 for further information on debt programs and issuance for the year ended 30 June 2013. Business and corporate loans Other interest bearing liabilities interest bearing Other loan capital, liabilities, liabilities at fair value through the income statement and amounts due increased $6 billion to $44 billion, a 14% increase on the prior year. institutions, to other including financial Non-interest bearing liabilities Non-interest bearing liabilities, including derivative liabilities and to liabilities, $77 billion, a 1% increase on the prior year. increased $1 billion insurance policy increased $6 billion Business and corporate to loans $172 billion, a 4% increase on the prior year. This was driven by improved momentum in institutional lending balances, together with solid growth in Business and Private Banking. This was partly offset by the continued reduction in higher risk pre-acquisition exposures in Bankwest. Non-lending interest earning assets Non-lending interest earning assets increased $2 billion to $106 billion, reflecting a 2% increase on the prior year. This was driven by higher liquid asset balances held as a result of balance sheet growth and prudent business settings. 18 Commonwealth Bank of Australia 30 Jun 1331 Dec 1230 Jun 12 Jun 13 vsJun 13 vsTotal Group Assets and Liabilities$M$M$MDec 12 %Jun 12 %Interest earning assetsHome loans (1)372,840359,058352,98146Personal loans22,01321,47021,05735Business and corporate loans (1)172,314166,957166,18834Loans, bills discounted and other receivables (2)567,167547,485540,22645Non-lending interest earning assets106,060103,747104,30422Total interest earning assets673,227651,232644,53034Other assets (1) (2) (3)80,64970,97274,329149Total assets753,876722,204718,85945Interest bearing liabilitiesTransaction deposits (1)87,67382,91381,10468Savings deposits (1)106,93599,58591,279717Investment deposits199,397192,302197,13841Other demand deposits 54,47263,17358,852(14)(7)Total interest bearing deposits448,477437,973428,37325Debt issues138,871127,439134,42993Other interest bearing liabilities 44,30640,50238,704914Total interest bearing liabilities631,654605,914601,50645Non-interest bearing liabilities (3)76,73072,99175,78151Total liabilities708,384678,905677,28745As at Review of Group Assets and Liabilities (continued) Half Year Ended June 2013 versus December 2012 Asset growth of $32 billion or 4% on the prior half was driven by increased home lending, business and corporate lending as well as higher derivative asset balances. Continued strong deposits growth allowed the Group to satisfy a significant portion of its funding requirements through customer deposits. Customer deposits made up 63% of total funding as at 30 June 2013 (31 December 2012: 63%). Home loans Home loans experienced steady growth with balances increasing by $14 billion to $373 billion, a 4% increase on the prior half. This outcome reflected a return to growth above system in Retail Banking Services. The Group has maintained its competitive position and continued profitable growth through a strong focus on customer service. Personal loans Personal loans, including credit cards and margin lending, increased 3% on the prior half to $22 billion. Personal loans increased and credit card growth slowed due to deleveraging trends in the broader market, while margin lending remained stable. Business and corporate loans to loans Business and corporate $172 billion. This was largely due to solid business lending growth in both Australia and New Zealand. increased $5 billion Non-lending interest earning assets Non-lending interest earning assets increased $2 billion to $106 billion. This was primarily due to an increase in liquid assets resulting from prudent business settings and balance sheet growth. Other assets Other assets, including derivative assets, insurance assets Group Performance Analysis and intangibles increased 14% on the prior half to $81 billion. This increase reflected higher derivative asset balances driven by volatility in foreign exchange and interest rate markets. Interest bearing deposits Interest bearing deposits increased $11 billion to $448 billion, reflecting a 2% increase on the prior half. Targeted campaigns in a highly competitive market and customer preference for more stable investments resulted in growth of $7 billion in savings deposits, a $7 billion increase in investment deposits and a $5 billion increase in transaction deposits. This was partly offset by a $9 billion decrease in other demand deposits. Debt issues Debt issues increased $11 billion to $139 billion, reflecting a 9% increase on the prior half. Refer to page 28 for further information on debt programs and issuance for the half year ended 30 June 2013. Other interest bearing liabilities interest bearing Other loan capital, liabilities, liabilities at fair value through the income statement and amounts due to other financial institutions, increased 9% on the prior half to $44 billion. including Non-interest bearing liabilities Non-interest bearing liabilities, including derivative liabilities and insurance policy liabilities, increased 5% on the prior half to $77 billion. This was driven predominantly by foreign exchange volatility impacting derivative liabilities hedging term debt. Annual Report 19 Group Operations and Business Settings Loan Impairment Provisions and Credit Quality Provisions for Impairment Year Ended June 2013 versus June 2012 Half Year Ended June 2013 versus December 2012 Total provisions for impairment losses decreased 7% on the prior year to $4,486 million as at 30 June 2013. The movement in the level of provisioning reflects: Total provisions for impairment losses decreased 5% on the prior half to $4,486 million as at 30 June 2013. The movement in the level of provisioning reflects: Reduced individually assessed provisions across all portfolios as a result of the settlement and completion of a number of impaired loans; A reduction of Bankwest collective provisions as pre- acquisition to be refinanced, run-off or move to impaired; and loans continued troublesome Management overlays associated with the Bankwest higher risk loans were used or reduced; partly offset by Increased collective provisioning across Institutional Banking and Markets and Business and Private Banking caused by the deterioration in a small number of accounts, the softening of collateral values in a small number of troublesome assets in the first half, and the update of provisioning factors in the second half; and Economic overlays remain unchanged on the prior year. Reduced individually assessed provisions across all portfolios as a result of the settlement and completion of a number of impaired loans; A reduction in management overlays associated with Bankwest that were either used or reduced as they were no longer required; A reduction of Bankwest collective provisions as pre- to be acquisition refinanced, run-off or move to impaired; partly offset by loans continued troublesome Increased consumer provisions as a result of increasing retail arrears and the modest use of prior overlays; and Increased commercial provisions as a result of the annual review of provisioning models, which was partly offset by a reduction in management overlays. Collective Provisions ($M) Individually Assessed Provisions ($M) 20 Commonwealth Bank of Australia 30 Jun 1331 Dec 1230 Jun 12 Jun 13 vsJun 13 vs$M$M$MDec 12 %Jun 12 %Provisions for impairment lossesCollective provision2,8582,8582,837-1Individually assessed provisions1,6281,8452,008(12)(19)Total provisions for impairment losses4,4864,7034,845(5)(7)Less: Off balance sheet provisions(31)(18)(18)7272Total provisions for loan impairment4,4554,6854,827(5)(8)As at619 643 707898 853 909473 470 419 847 892 823 Jun 12Dec 12Jun 13847 866 812 227 199 157 934 780 659 Jun 12Dec 12Jun 13OverlayBankwestConsumerCommercial2,8372,8582,0081,8452,8581,628 Group Operations and Business Settings Loan Impairment Provisions and Credit Quality (continued) Credit Quality (1) Comparative information has been restated to conform to presentation in the current year. Provision Ratios Provision coverage ratios remain strong. The impaired asset portfolio remains well provisioned with provision coverage of 40.62%. Asset Quality The asset quality ratios show the continued improvement in the quality of the book with both the level of impaired assets and 90 days past due loans which are not impaired continuing to reduce. The credit quality of both the retail and corporate portfolios remained sound. Retail Portfolios – Arrears Rates (1) Retail arrears for home loans and credit card products reduced during the current year, in part driven by reducing interest rates. Home loan arrears reduced over the year, with 30+ day arrears decreasing from 1.83% to 1.44% and 90+ day arrears reducing from 0.90% to 0.62%. Credit card arrears also improved over the year with credit card 30+ days arrears falling from 2.63% to 2.56% and 90+ days arrears reducing from 1.07% to 1.02%. Personal loan arrears increased over the year as a result of some deterioration in the portfolio. 30+ day arrears to 2.95% and increased 90+ days arrears increased from 1.15% to 1.23%. from 2.83% 90+ Days Arrears Ratios (%) (2) (2) Includes retail portfolios of Retail Banking Services, Bankwest and New Zealand. Troublesome and Impaired Assets Commercial troublesome assets reduced 10% during the year to $5.2 billion. Gross impaired assets decreased 8% on the prior year to $4,330 million. Gross impaired assets as a proportion of gross loans and acceptances of 0.76% decreased 10 basis points on the prior year, reflecting the improving quality of the corporate portfolios. 30+ Days Arrears Ratios (%) (2) Troublesome and Impaired Assets ($B) (1) (1) Comparative information has been restated to conform to presentation in the current year. . Annual Report 21 Jun 13 vsJun 13 vsCredit Quality Metrics30 Jun 1330 Jun 12Jun 12 %30 Jun 1331 Dec 12Dec 12 %Gross loans and acceptances (GLAA) ($M)568,821542,0975568,821549,2164Risk weighted assets (RWA) - Basel III ($M)329,158n/an/a329,158n/an/aRisk weighted assets (RWA) - Basel 2.5 ($M)n/a302,787n/an/a301,611n/aCredit risk weighted assets - Basel III ($M)279,674n/an/a279,674n/an/aCredit risk weighted assets - Basel 2.5 ($M)n/a261,429n/an/a258,467n/aGross impaired assets ($M) (1)4,3304,687(8)4,3304,480(3)Net impaired assets ($M) (1)2,5712,55612,5712,5222Provision RatiosCollective provision as a % of credit risk weighted assets - Basel III1. 02n/an/a1. 02n/an/aTotal provision as a % of credit risk weighted assets - Basel III1. 60n/an/a1. 60n/an/aCollective provision as a % of credit risk weighted assets - Basel 2.5n/a1. 09n/an/a1. 11n/aTotal provision as a % of credit risk weighted assets - Basel 2.5n/a1. 85n/an/a1. 82n/aTotal provisions for impaired assets as a % of gross impaired assets (1)40. 6245. 47(485)bpts40. 6243. 71(309)bptsTotal provisions for impairment losses as a % of GLAA's0. 790. 89(10)bpts0. 790. 86(7)bptsAsset quality ratiosGross impaired assets as a % of GLAA's (1)0. 760. 86(10)bpts0. 760. 82(6)bptsLoans 90+ days past due but not impaired as a % of GLAA's (1)0. 410. 53(12)bpts0. 410. 48(7)bptsLoan impairment expense ("cash basis") annualised as a % of average GLAA's0. 200. 21(1)bpt 0. 170. 22(5)bptsFull Year EndedHalf Year Ended1.0%2.0%3.0%4.0%Jun 11Dec 11Jun 12Dec 12Jun 13Personal LoansHome LoansCreditCards0.4%0.9%1.4%Jun 11Dec 11Jun 12Dec 12Jun 13Home LoansPersonal LoansCreditCards8.5 7.7 6.8 6.2 5.8 5.6 5.2 5.4 5.4 5.5 4.9 4.7 4.5 4.3 Jun 10Dec 10Jun 11Dec 11Jun 12Dec 12Jun 13Commercial TroublesomeGroup Impaired10.110.511.112.313.99.513.1 Group Operations and Business Settings The Group’s 30 June 2013 internationally harmonised CET1 ratio of 11.0%, places it well above the average of its international peers (approximately 9.6%). Source: Morgan Stanley - Based on last reported CET1 ratios up to 8 August 2013 assuming Basel III capital reforms fully implemented. Peer group comprises listed commercial banks with total assets in excess of A$400 billion and who have disclosed fully implemented Basel III ratios or provided sufficient disclosure for a Morgan Stanley Equity Research estimate. (1) Domestic peer figures as at March 2013. APRA Capital Requirements As at 30 June 2013 the Group has a CET1 ratio of 8.2% under APRA’s prudential standard version of Basel III, well above the minimum ratio of 4.5%. The differences in the Basel III APRA and the Basel III internationally harmonised CET1 ratios include: Deductions investments APRA requires a full deduction to be taken against CET1 for equity in insurance and funds management operations) and deferred tax assets. On an internationally harmonised basis, such items are concessionally risk weighted if they fall below prescribed thresholds. investments (including Risk Weighted Assets APRA requires capital to be held for Interest Rate Risk in the Banking Book (IRRBB). There is no similar requirement on an internationally harmonised basis; and APRA requires a minimum Loss Given Default (LGD) floor of 20% to be applied to residential mortgages, which is higher than regulatory requirements elsewhere. Capital Basel Regulatory Framework Background The Group adopted III measurement and the Basel monitoring of regulatory capital effective from 1 January 2013. In December 2010, the Basel Committee on Banking Supervision (BCBS) published a discussion paper on banking reforms to address issues which led to the Global Financial Crisis and to position banks for future crises. The objectives of the capital reforms are to increase the quality, consistency and transparency of capital, to enhance the risk coverage framework, and to reduce systemic and pro-cyclical risk. The major reforms are to be phased in between 1 January 2013 to 1 January 2019. In September 2012, the Australian Prudential Regulation Authority (APRA) published final standards relating to the implementation of the Basel III capital reforms in Australia. APRA has adopted a more conservative approach than the minimum standards published by the BCBS and a more accelerated timetable for implementation. The APRA prudential standards require a minimum CET1 ratio of 4.5% effective from 1 January 2013. An additional CET1 capital conservation buffer of 2.5% will be implemented on 1 January 2016, bringing the minimum CET1 requirement to 7%. The BCBS advocates the same minimum requirements, but implementation is to be phased in over an extended timeframe up to 1 January 2019. Internationally Harmonised Capital Position The Board has set a target of holding greater than 9% of CET1, as defined under the internationally harmonised BCBS rules. The Group’s internationally harmonised CET1 ratios are calculated based on full adoption of the Basel III capital reforms, which will not come into effect until 2019 for most banks. target based on Adoption of a CET1 internationally harmonised principles enables a more meaningful comparison of the Group’s capital levels relative to its international peers. The Group is in a strong capital position with CET1 as measured on an internationally harmonised basis of 11.0% as at 30 June 2013. This is well in excess of both the prescribed minimum of 4.5% and the Board approved target. The Group has adopted a conservative and proactive approach to capital management and this is reflected in the overall strength of its capital position. The CET1 ratio (on an internationally harmonised basis) has increased by nearly 60% since the Global Financial Crisis (June 2007). 22 Commonwealth Bank of Australia 6.9%11.0%Jun 07Jun 13Board(>9%)7.7 8.0 8.1 8.2 8.4 8.4 8.5 8.5 8.5 8.6 8.7 9.3 9.3 9.3 9.4 9.4 9.6 9.6 9.7 10.0 10.0 10.0 10.1 10.2 10.3 10.4 10.6 10.6 11.0 11.1 11.2 11.4 12.1 13.2 MizuhoSantanderBarclaysBBVACommerzbankScotiabankRBCToronto DominionWells FargoSumitomo MitsuiRBSCIBCCredit SuisseJP MorganBank of MontrealSocGenBank of AmericaLloydsUniCreditCitiDeutscheNABHSBCINGANZBNP ParibasIntesa SanpaoloStandard CharteredCBAMitsubishi UFJUBSWestpacDNB ASANordea1Peer bank average CET1 ratio (ex. Australian banks) 9.6%11 Group Operations and Business Settings Capital Position The Group maintained a strong capital position with the capital ratios well in excess of regulatory minimum capital adequacy requirements and the Board Approved minimum levels at all times throughout the year ended 30 June 2013. full by participation rate for the DRP was 22.7%; and the on market purchase of shares. The In October 2012, the Group issued $2 billion Perpetual Exchangeable Resaleable Listed Securities (PERLS VI), Basel III compliant, Additional Tier One security. The proceeds of the extent necessary, to refinance the maturing PERLS IV and otherwise to fund the Group’s business. issue were used, this to (1) Represents proforma Basel III capital ratios. Basel III was formally implemented on 1 January 2013. the The Group’s CET1 (internationally harmonised) ratio at 30 June 2013 was 11.0%, representing a 40 basis points increase since III on 1 January 2013. This was primarily driven by capital generated from earnings and the benefit from favourable market movements. This was partially offset by the impact of the December 2012 interim dividend payment in which the dilutive impact of the DRP was neutralised. implementation of Basel During the financial year, the Basel III CET1 (internationally harmonised) increased by 120 basis points. The increase reflected the sustained organic capital generation across the full year combined with the benefit delivered from the Bankwest portfolio moving in December 2012. to advanced status Under APRA’s Basel III methodology, the Group’s CET1 ratio at 30 June 2013 was 8.2% representing a 9% increase since June 2012. Capital Initiatives The following significant initiatives were undertaken during the year to actively manage the Group’s capital: The Dividend Reinvestment Plan (DRP) in respect of the final dividend for the 2011/2012 financial year was satisfied by the allocation of approximately $929 million of ordinary shares. The participation rate for the DRP was 29.6%; The DRP for the 2013 interim dividend was satisfied in Bankwest relinquished (ADI) its Authorised Deposit-taking Bankwest (1 October 2012) and APRA Institution extended Internal Rating based accreditation to include Bankwest’s non retail loans and residential mortgages from 31 December 2012. licence the Group’s Advanced Pillar 3 Disclosures Full details on the market disclosures required under Pillar 3, per prudential standard APS 330 “Public Disclosure”, are provided on the Group’s website. Other Regulatory Changes General and Life Insurers In October 2012, APRA completed its review of the Life and General Insurance Capital (LAGIC) regulatory standards and released the final version of all life insurance and general insurance prudential standards. the majority of the reforms occurred on 1 January 2013. Implementation of Superannuation Funds Management In November 2012, APRA released final prudential standards that introduce new financial requirements for registered requirements were superannuation implemented on 1 July 2013. trustees. The new In November 2011, the Australian Securities and Investments Commission (ASIC) released new financial requirements that apply to Responsible Entities. These new requirements became effective on 1 November 2012. Conglomerate Groups is extending In May 2013 APRA released a discussion paper and draft prudential standards titled “Supervision of Conglomerate Groups” focusing on the requirements of risk management its current and capital adequacy. APRA prudential supervision framework to Conglomerate Groups that have material operations in more than one APRA regulated industry and/or have one or more material unregulated entities. The aims of the Level 3 proposals are to ensure that a Conglomerate Group holds adequate capital to protect the APRA regulated entities from potential contagion and other risks within the Group. APRA is expected to implement these new requirements from 1 January 2014. Annual Report 23 7.5%8.1%8.2%Jun 12Basel IIIDec 12Basel IIIJun 13Basel IIICET1 Ratio (APRA)CET1 Ratio (Internationally harmonised)9.8%(1)10.6%11.0% Group Operations and Business Settings Capital (continued) The APRA Basel III capital standards came into effect on 1 January 2013. The tables below show the APRA Basel III capital adequacy calculation at 30 June 2013 together with a proforma calculation at 1 January 2013. The 30 June 2012 and 31 December 2012 capital calculations reflect the APRA Basel 2.5 capital adequacy calculations in place at that time. A number of items in the prior periods disclosures have been reclassified to allow better comparability to the new APRA Basel III methodology. (1) Represents shares held by the Group's life insurance operations ($130 million) and employee share scheme trusts ($167 million). (2) Asset Revaluation Reserve eligible for inclusion in CET1 under APRA Basel III methodology. (3) Available for Sale Reserve eligible for inclusion in CET1 under APRA Basel III methodology. (4) Reserve balances associated with the Insurance and Funds Management entities and those entities through which securitisation of the Group's assets are conducted. These entities are classified as non-consolidated subsidiaries by APRA and are excluded from the Level 2 Regulatory Consolidated Banking Group. (5) Dividends are only deducted from CET1 when declared under APRA Basel III methodology. Basel II required expected dividends to be deducted from capital. (6) The Dividend Reinvestment Plan (DRP) in respect of the 31 December 2012 interim dividend was satisfied in full by an on market purchase of shares. The DRP in respect of the June 2012 final dividend was satisfied in full by the issue of shares. (7) Cumulative current year profit and retained earnings adjustments for subsidiaries not consolidated for regulatory purposes. (8) Primarily relates to unrealised equity accounted earnings required to be excluded under APRA Basel II methodology. Under APRA Basel III methodology these items are excluded from CET1 through the adjustment for equity investments. (9) Non-controlling interests predominantly comprise ASB Perpetual Preference Shares of NZD550 million issued by a New Zealand subsidiary entity. These are non-redeemable and carry limited voting rights. These are classified as Additional Tier One Capital. 24 Commonwealth Bank of Australia APRA APRA APRA APRA Basel IIIBasel IIIBasel 2.5Basel 2.530 Jun 131 Jan 1331 Dec 1230 Jun 12Risk Weighted Capital Ratios%%%%Common Equity Tier One 8. 28. 18. 37. 8Tier One10. 210. 210. 510. 0Tier Two1. 01. 00. 71. 0Total Capital11. 211. 211. 211. 0APRA APRA APRA APRA Basel IIIBasel IIIBasel 2.5Basel 2.530 Jun 131 Jan 1331 Dec 1230 Jun 12$M$M$M$MOrdinary Share Capital and Treasury SharesOrdinary Share Capital26,32326,12626,12625,175Treasury Shares (1)297301301323Ordinary Share Capital and Treasury Shares26,62026,42726,42725,498ReservesReserves1,3331,2621,2621,571Asset revaluation reserve (2)--(193)(195)Available for sale reserve (3)--(138)-Reserves related to non consolidated subsidiaries (4)56164164171Total Reserves1,3891,4261,0951,547Retained Earnings and Current Period ProfitsRetained earnings and current period profits16,36014,44014,44013,356Expected dividends (APRA Basel II only) (5)--(2,639)(3,137)Dividend reinvestment plan (APRA Basel II only) (6)---784Retained earnings adjustment from non consolidated subsidiaries (7)(345)(239)(239)(126)Equity accounted profits (APRA Basel II only) (8)--(406)(347)Other--(13)(1)Net Retained Earnings16,01514,20111,14310,529Non controlling interestNon controlling interest (9)537532532531ASB perpetual preference shares(505)(505)(505)(505)less other non controlling interests not eligible under Basel III(32)(27)--Minority Interest--2726Common Equity Tier One Capital before regulatory adjustments44,02442,05438,69237,600 Group Operations and Business Settings Capital (continued) (1) Other intangibles (excluding capitalised software costs). Under APRA Basel III methodology the adjustment is net of any associated deferred tax liability. (2) Adjustment to ensure the Group has sufficient provisions and capital to cover credit losses estimated to arise over the full life of individual facilities, as required by APRA Prudential Standard APS 220. (3) Deferred tax assets net of deferred tax liabilities. Under Basel III this is inclusive of deferred tax asset on collective provisions. (4) Cash flow Hedge Reserve and Employee Compensation Reserve balances are ineligible for inclusion in CET1. (5) Represents the Group's non-controlling interest in other entities treated as 100% CET1 deduction under Basel III (Basel II 50% Tier One and Two deduction net of prescribed threshold limits and any unrealised equity accounted profit). (6) Represents the net tangible assets within the non-consolidated subsidiaries (primarily the insurance and funds management businesses operating within the Colonial Group). The adjustment is net of $1,117 million in non-recourse debt (31 December 2012: $1,158 million, 30 June 2012: $1,214 million) and $1,000 million in Colonial Group Subordinated Notes (31 December 2012: $1,000 million, 30 June 2012: $1,000 million). The Group's insurance and funds management companies held $1,344 million of capital in excess of minimum regulatory capital requirements at 30 June 2013. (7) Regulatory Expected Loss (pre-tax) using stressed loss given default assumptions associated with the loan portfolio in excess of eligible credit provisions (pre-tax). Under APRA Basel II the eligible credit provision was based on the after tax balance for collective provisions and general reserve for credit losses and the pre-tax balance for individually assessed provisions. (8) Comprises PERLS VI $2 billion issued in October 2012 (issued costs reclassified to capitalised costs). (9) Represents APRA Basel III non-compliant Additional Tier One Capital Instruments (PERLS III, PERLS V, Trust Preferred Securities (TPS) 03, TPS 06, ASB Perpetual Preference Shares, and Perpetual Exchangeable Floating Rate Note). These instruments are eligible for Basel III transitional relief. (10) Under APRA Basel II, represents the excess of Innovative Capital above the prescribed limit of 15% of Tier One Capital transferred to Tier Two Capital. There is no equivalent limit under APRA Basel III. (11) Includes both perpetual and term instruments subordinated to depositors and general creditors, having an original maturity of at least five years. APRA require these to be included as if they were unhedged. Term instruments are amortised 20% of the original amount during each of the last five years to maturity. These instruments are eligible for Basel III transitional relief. (12) Represents the collective provision and general reserve for credit losses for exposures in the Group which are measured for capital purposes under the Standardised approach to credit risk. (13) Eligible for inclusion in CET1 under APRA Basel III methodology (Basel II 45% of balance eligible for inclusion in Tier Two Capital). Annual Report 25 APRA APRA APRA APRA Basel IIIBasel IIIBasel 2.5Basel 2.530 Jun 131 Jan 1331 Dec 1230 Jun 12$M$M$M$MCommon Equity Tier One regulatory adjustmentsGoodwill(7,723)(7,707)(7,707)(7,705)Other intangibles (excluding software) (1)(682)(705)(828)(876)Capitalised costs (272)(275)(224)(263)Capitalised software(1,923)(1,831)(1,831)(1,700)General reserve for credit losses (2)(208)(197)(197)(209)Deferred tax asset (3)(1,400)(1,234)(393)(548)Cash flow hedge reserve (4)(368)(485)(485)(644)Employee compensation reserve (4)(132)(90)(90)(136)Deferred fee income59122122149Gain due to changes in own credit risk on fair valued liabilities(11)(11)(11)(20)(12,660)(12,413)(11,644)(11,952)Deductions previously applied at 50% of Tier One under Basel IIEquity investments (5)(2,738)(2,363)(614)(612)Equity investments in non consolidated subsidiaries (6)(1,196)(1,264)(632)(629)Shortfall of provisions to expected losses (7)(271)(176)(512)(630)Other(174)(293)(241)(113)(4,379)(4,096)(1,999)(1,984)Common Equity Tier One regulatory adjustments(17,039)(16,509)(13,643)(13,936)Common Equity Tier One26,98525,54525,04923,664Additional Tier One CapitalBasel III Complying Instruments (8)2,0002,0001,977-Basel III non complying instruments net of transitional amortisation (9)4,7204,7205,1806,635Excess /cap applicable under Basel II (10)--(426)-Additional Tier One Capital6,7206,7206,7316,635Tier One Capital33,70532,26531,78030,299Tier Two CapitalBasel III non complying instruments net of transitional amortisation (11)2,9012,9013,2244,084Holding of own Tier Two Capital (15)--(20)Prudential general reserve for credit losses (12)202177124595Excess /cap applicable under Basel II (10)--426-Asset revaluation reserve (13)--8788Other--204176Tier Two Deductions (50% Tier One and Two) - Basel II only --(1,999)(1,984)Total Tier Two Capital3,0883,0782,0662,939Total Capital36,79335,34333,84633,238 Group Operations and Business Settings Capital (continued) (1) Basel III effective 1 January 2013 RWA including additional requirements for counterparty credit risk and changes in methodology for securitisation and equity exposures. Additional requirements for counterparty credit risk include an Asset Value Correlation (AVC) multiplier for large financial institutions and a Credit Valuation Adjustment (CVA) to address the credit worthiness of counterparties involved in mark-to-market transactions. (2) APRA requires RWA amounts that are derived from IRB risk weight functions to be multiplied by a factor of 1.06. 26 Commonwealth Bank of Australia Basel IIIBasel IIIBasel 2.5Basel 2.530 Jun 13 1 Jan 13 (1)31 Dec 1230 Jun 12Risk Weighted Assets $M$M$M$MCredit RiskSubject to Advanced IRB approachCorporate53,46852,84751,85149,331SME Corporate30,83531,12730,83322,319SME Retail4,2034,2224,2224,071Sovereign3,6843,6923,6923,003Bank10,32811,1428,3227,619Residential mortgage66,74163,63763,63754,545Qualifying revolving retail6,6836,4606,4606,703Other retail11,0938,9838,9838,462Impact of the regulatory scaling factor (2)11,22210,92710,6809,363Total risk weighted assets subject to Advanced IRB approach198,257193,037188,680165,416Specialised lending exposures subject to slotting criteria50,39248,37348,39836,141Subject to Standardised approachCorporate3,6843,8943,89410,430SME Corporate5253173176,580SME Retail4,5724,7284,7284,836Sovereign249203203107Bank1761381381,243Residential mortgage2,4322,2572,25725,705Other retail2,2242,2122,2122,559Other assets4,3954,1244,1243,240Total risk weighted assets subject to standardised approach18,25717,87317,87354,700Securitisation5,3735,2901,1192,833Equity exposures--2,3972,339Credit valuation adjustment7,3957,225--Total risk weighted assets for credit risk exposures279,674271,798258,467261,429Traded market risk5,1514,5174,5174,842Interest rate risk in the banking book 16,28910,99610,9969,765Operational risk28,04427,63127,63126,751Total risk weighted assets 329,158314,942301,611302,787Risk Weighted Assets Group Operations and Business Settings Dividends Final Dividend for the Year Ended 30 June 2013 The final dividend declared was $2.00 per share, bringing the total dividend for the year ended 30 June 2013 to $3.64 per share. This represents a dividend payout ratio (“cash basis”) of 75.4% and is 9% above the prior full year dividend. The final dividend will be fully franked and will be paid on 3 October 2013 to owners of ordinary shares at the close of business on 23 August 2013 (record date). Shares will be quoted ex-dividend on 19 August 2013. Full Year Dividend History (cents per share) Dividend Reinvestment Plan (DRP) The DRP will continue to operate but no discount will be applied to shares allocated under the plan for the final dividend. The DRP for the 2013 final dividend is anticipated to be satisfied in full by an on market purchase of shares. Dividend Policy The Group will seek to: Pay cash dividends at strong and sustainable levels; Target a full-year payout ratio of 70% to 80%; and Maximise the use of its franking account by paying fully franked dividends. _______________________________________________________________________________________________________ Liquidity (1) Liquids are reported net of applicable regulatory haircuts. Year Ended June 2013 versus June 2012 Half Year Ended June 2013 versus December 2012 The Group holds a high quality, well diversified liquid asset portfolio to prudently meet Balance Sheet liquidity needs and regulatory requirements. The Group holds a high quality, well diversified liquid asset portfolio to prudently meet Balance Sheet liquidity needs and regulatory requirements. Liquid assets increased $2 billion to $137 billion, a 2% increase on the prior year. The increase was driven by the growth in deposits which increased the regulatory minimum requirement. Liquid assets increased $8 billion to $137 billion, a 7% increase on the prior half. The increase was mainly driven by the growth the regulatory minimum requirement. in deposits which increased Excluding internal Residential Mortgage Backed Securities (RMBS), the Group maintained $79 billion of liquid assets, well above the regulatory minimum requirement of $62 billion. Excluding internal RMBS assets, the Group maintained $79 billion of liquid assets, well above the regulatory minimum requirement of $62 billion. Annual Report 27 25626622829032033436474.2%75.0%78.2%73.9%73.2%75.0%75.4%0%20%40%60%80%100%120%140%-50050100150200250300350400Jun 07Jun 08Jun 09Jun 10Jun 11Jun 12Jun 13DPSPayout Ratio ("cash basis")80%70%Target Range30 Jun 1331 Dec 1230 Jun 12Jun 13 vsJun 13 vs$M$M$MDec 12 %Jun 12 %Internal RMBS57,85257,36257,7301-Bank, NCD, Bills, RMBS, Supra, Covered Bonds29,54031,10932,429(5)(9)Cash, Government and Semi-Government Bonds49,32439,83344,4182411Liquid Assets (1)136,716128,304134,57772As at Group Operations and Business Settings Funding (1) Shareholders’ equity is excluded from this view of funding sources, other than the USD Trust Preferred Securities, which are classified as other equity instruments in the statutory Balance Sheet. (2) Residual maturity of long term wholesale funding included in Debt issues, Loan capital and Share capital – other equity instruments, is the earlier of the next call date or final maturity. Year Ended June 2013 versus June 2012 Half Year Ended June 2013 versus December 2012 Customer Deposits Customer Deposits Customer deposits accounted for 63% of total funding at 30 June 2013, compared to 62% in the prior year. Strong deposit growth has seen the Group satisfy a significant proportion of its funding requirements from retail, business and institutional customer deposits. The remaining 37% of total funding comprised various wholesale debt issuances. Customer deposits accounted for 63% of total funding at 30 June 2013, consistent with the prior half. Strong deposit growth has seen the Group satisfy a significant proportion of its funding requirements from retail, business and institutional customer deposits. The remaining 37% of total funding comprised various wholesale debt issuances. Short Term Wholesale Funding Short Term Wholesale Funding Short term wholesale funding includes debt with an original maturity or call date of less than 12 months, and consists of Certificates of Deposit and Bank Acceptances, as well as debt issued under domestic, Euro and US Commercial paper programs by Commonwealth Bank of Australia and ASB. Short term wholesale funding accounted for 46% of total wholesale funding at 30 June 2013, down from 47% in the prior year. Short term wholesale funding includes debt with an original maturity or call date of less than 12 months, and consists of Certificates of Deposit and Bank Acceptances, as well as debt issued under domestic, Euro and US Commercial paper programs by Commonwealth Bank of Australia and ASB. Short term wholesale funding accounted for 46% of total wholesale funding at 30 June 2013, compared to 47% in the prior half. Long Term Wholesale Funding Long Term Wholesale Funding Long term wholesale debt (including adjustment for IFRS MTM and derivative FX revaluations) accounted for 54% of total wholesale funding at 30 June 2013, compared to 53% in the prior half. the year, Long term wholesale funding includes debt with an original maturity or call date of greater than 12 months. Long term wholesale funding conditions improved during the year compared to the prior year as northern hemisphere central banks provided further support to their economies and banking systems. During issued $25 billion of long term wholesale debt transactions in multiple currencies including AUD, USD, EUR, and GBP. Given improved funding conditions, most issuances were in senior unsecured format, although the Group also used its covered bond program tenor and diversification benefits. The weighted average maturity (WAM) of new long term wholesale debt issued in the June 2013 year was 4.8 years. The WAM of outstanding long term wholesale debt was 3.8 years at 30 June 2013. to provide cost, the Group Long term wholesale debt (including adjustment for IFRS MTM and derivative FX revaluations) accounted for 54% of total wholesale funding at 30 June 2013, compared to 53% in the prior year. For further information on Liquidity and Funding risk, please refer to Note 40. 28 Commonwealth Bank of Australia 30 Jun 1331 Dec 1230 Jun 12Jun 13 vsJun 13 vsGroup Funding (1)$M$M$MDec 12 %Jun 12 %Customer deposits405,377385,879379,29957Short term wholesale funding110,595108,075108,49122Long term wholesale funding - less than one year residual maturity29,12924,57125,7151913Long term wholesale funding - more than one year residual maturity (2)96,611103,031103,638(6)(7)IFRS MTM and derivative FX revaluations1,837(4,267)(5,417)largelargeTotal wholesale funding 238,172231,410232,42732Total funding643,549617,289611,72645As at This page has been intentionally left blank Annual Report 2013 29 Sustainability Introduction For the Group, sustainability means building a successful business today, while creating enduring value for the Group’s customers, people, shareholders and the broader community. Examples of the value created for the Group’s stakeholders during the current financial year include the following: The Group provided finance to more than 2 million home owners, and paid interest to more than 11 million retail savings and transaction account-holders. With more than 51,000 people, the Group’s annual payroll expenditure was more than $5 billion. The Group returned 75% of its profits to more than 800,000 Australians who hold CBA shares directly, and millions more who hold them through superannuation funds. The Group paid more than $2.9 billion in taxes, making it Australia’s fourth largest taxpayer. Building on a long and proud history of supporting local communities, the Group directly helped more than 200 grassroots community organisations make a positive impact on the health and wellbeing of Australian youth. The Group delivered financial literacy programs to more than 280,000 students. In addition, more than 230,000 students participated in School Banking. The Group’s corporate strategy reflects the importance of Environmental, Social and Governance (ESG) considerations in a rapidly changing operating environment. In May 2013, the Group announced its new vision built around a simple objective: to excel at securing and enhancing the financial wellbeing of people, businesses and communities. The Board-endorsed Sustainability Strategic Framework, with its five focus areas, supports this vision. The framework addresses the Group’s key issues and allows it to effectively manage ESG risks and opportunities. The Group’s key initiatives under the Sustainability Strategic Framework include: 1. Sustainable Business Practices Disciplined financial management and a focus on productivity, transparency and accountability help to ensure the long term sustainability of the Group’s business. A Strong Balance Sheet The Group continues to take a disciplined approach to its balance sheet settings across capital, funding and liquidity, so as to deliver sustainable total shareholder returns over the long term. The Group’s ability to maintain a strong balance sheet provides shareholders and other stakeholders with the confidence that the Group can deliver the full range of financial services through the highs and lows of the economic cycle. Focussing on Productivity With a backdrop of increased competition and global financial uncertainty, productivity is critical to the Group’s long term success. During the current financial year, the Group rolled out a number of productivity programs and initiatives that are already having a positive impact on the culture of the organisation staff engagement and ultimately delivering better outcomes for the Group’s customers. in driving efficiencies, increasing Transparent Reporting to The Group is committed to transparent and comprehensive reporting, catering the needs of a wide range of stakeholders. This year, following feedback from a number of internal and external stakeholders, the Group is releasing an online sustainability report at the same time as the Annual Report (available at commbank.com.au/sustainability2013). This will provide stakeholders with a comprehensive view of the financial and non-financial performance of the Group. 30 Commonwealth Bank of Australia 2. Responsible Financial Services The Group to providing takes a responsible approach financial services and products, and remains committed to customer satisfaction. Achieving Number 1 in Customer Satisfaction The Group’s unwavering focus on customer service has helped the Group reach its goal of becoming the number one bank for customer satisfaction across all business areas, while delivering superior shareholder returns. In January 2013, CBA was ranked first amongst the major banks on Retail MFI Customer Satisfaction for the first time since setting its goal in 2006 to be number one. Similarly, the Group has ranked equal or outright first for customer satisfaction among business clients in all four key business segments since November 2011. Colonial First State has also ranked first among platform providers since 2008, with a combined weighted average satisfaction score of 8.32 (out of 10) for FirstChoice and FirstWrap. More information can be found on page 33. Focussing on Technology Innovation Achieving and maintaining a leadership position in technology and innovation is a strategic and operational priority for the Group. This financial year saw the completion of the Core Banking Modernisation program, in 2008. This major launched technological overhaul has created a foundation platform for the Group to realise its customer-centric vision and deliver innovative solutions quickly and cost-effectively. The Group was the first major Australian bank to offer its customers real-time settlement and real-time banking — and during the current financial year, the Group has continued to transform the way Australians manage their money. Recent innovations include: CommBank Kaching for Facebook, Australia’s first social media banking application, giving users a fast and secure payment option integrated into the platform. Smartsign, a service allowing customers to execute loan documents electronically anytime, from anywhere in the world, using the Group’s secure online portal. MyWealth, an online platform allowing self-directed investors to research and invest in a range of financial products using one log in, with investment and banking services in the same convenient online destination. Meanwhile, the Branch of the Future program has continued to improve its front-line customer interface. State-of-the-art features implemented include video conferencing facilities in branches, allowing customers rapidly connect with specialists, even if they are located in rural and remote areas. to Taking a Responsible Approach to Lending The Group’s Risk Appetite Statement continues to govern its approach to risk. In October 2012 the Group rolled out a policy to improve the assessment of the ESG risks for financing in the natural resources sectors of Energy and Utilities, Oil and Gas and Metals and Mining. Supporting Customers in Need Each year the Group supports a number of customer segments with a wide range of fee-free and discounted financial services. In the current financial year, the Group has forgone more than $173 million in revenue to support low income earners and the not-for-profit sector. The Group has more than 100 dedicated staff who work on a one-on-one basis with customers who find themselves in financial difficulty following an unexpected event such as an illness or injury, a change in employment or a natural disaster. The Group also looks to cater to specific customer segments with tailored programs. For example, the Group supports Indigenous Australians building strong and economically sustainable communities through its Community Business Finance Program. This program supports eligible Indigenous Australians who either own existing businesses or seek to start new businesses, and who need extra money to expand Sustainability or invest in new equipment. The program helps them to build a repayment history, making it easier to secure mainstream finance in the future. The Group’s Community Business Finance Program aims to drive deeper engagement with the Group’s customers in under-serviced communities and provide affordable banking solutions to help their local businesses grow. This year saw a number of natural disasters impacting customers, branch staff and the community. Over the course of the financial year, the Group donated more than $600,000 to support the Tasmanian Bushfires and Queensland Flood Appeals. In addition, the Group proactively contacted all affected customers to offer a range of options to assist with their banking, insurance and general financial needs during these difficult times. Providing Leading Banking Solutions to Not-for-Profits The Group has a dedicated Not-for-Profit Sector Banking team focused on listening to the sector and collaborating with it to create financial tools, resources and solutions that increase the strength and sustainability of not-for-profits. The Group was the first bank in Australia to provide an account specifically for not-for-profit organisations and today the Group has more branches in more communities than any other bank. The Group’s long term commitment to its communities means that today we have more not-for-profit customers than any other bank. Adaptable Work Practices and Training The Group continues to invest in Human Resource systems and tools to support its People strategy, with a focus on facilitating more flexible ways of working. The new My HR Anywhere portal provides the Group’s people with access to useful tools and information that help them manage their career, from any location, at any time. A secure, simple and easy HR tool, My HR Anywhere is available to everyone across the Group. In the Group’s annual people and culture survey, 44.5% said that they work flexibly. During the year, the Group also launched CAN Coaching to equip the Group’s leaders with coaching skills to empower their teams and embed a positive and consistent coaching culture across is currently available for Executive General Managers and General Managers. CAN Coaching for Executive Managers will commence in late 2013, and will become available more broadly over the next few years. the Group. CAN Coaching 4. Community Contribution and Action The Group has a proud history of supporting the communities where we live and work. By offering financial literacy programs, partnering with community organisations and supporting the Group’s people in their endeavours, the Group continues to strengthen and extend its involvement, forging lasting relationships with community organisations and those they serve. 3. Engaged and Talented People Building Financial Literacy Skills The Group supports its people by continuing to invest in their development and in programs designed to create a diverse, safe and rewarding workplace. In the current financial year the Group’s people remained highly engaged, as shown by the Group’s recent Employee Engagement score of 80%. In late 2009, the Group announced a commitment to improve the financial literacy of one million children by 2015. Since then, the Commonwealth Bank Foundation’s StartSmart workshop program has had 754,242 students booked to attend a primary or secondary session. Building a Diverse and Inclusive Workplace The Group is committed to providing a workplace, which reflects the diversity and richness of the communities it serves. In October 2012, the Executive Leadership Team endorsed the 2013–14 Diversity and Inclusion Strategy, structured around three pillars: Inclusion and respect; Diversity in leadership; and Adaptable work practices. Cultural diversity and ethnicity, Lesbian, Gay, Bisexual, Transgender and Intersex (LGBTI) are now part of the inclusion and respect pillar, which also continues to focus on disability. Employee networks have been established to bring these agendas closer to the Group’s people and their communities. Members of the Executive Leadership team sponsor each of the diversity and inclusion focus areas, taking proactive and visible steps to build cultural change in the organisation. Spotlight on Gender Diversity The Group views gender equality as an indicator of broader diversity. The Group continues to progress towards its gender diversity target: increasing the representation of women in Executive Manager roles and above to 35% by December 2014. As with any ambitious target, it becomes more challenging over time and the Group is continuing its focus on developing the Group’s internal female talent pipeline to promote from within. Sustained leadership commitment and engagement through initiatives such as Male Champions of Change and Executive Sponsorship, are helping the Group progress towards its aspirations. As at 30 June 2013, 30.3% of Executive Managers and above positions were filled by women, along with 25% of Executive Committee roles and 33% of Board positions. Across the Group there are now 59.8% women employees. In May 2013, the Group lodged its Workplace Profile report with the Workplace Gender Equality Agency. A copy of this report can be found at commbank.com.au/diversity. The Foundation’s latest offering, StartSmart Pathways, brings money management to life for students enrolled in TAFE, Group Training Organisations and other vocational education institutions. Since it was launched in February 2012, 3,819 sessions have been delivered across Australia. Collaborating with Indigenous Australians to Achieve Social, Economic and Financial Inclusion In April 2013, the Group launched its fourth Reconciliation Action Plan (RAP). The 2013 and 2014 RAP highlights the Bank’s achievements over the past two years and looks ahead to the future as the Group continues to collaborate with Indigenous Australians to promote social, economic and financial inclusion. Building on the Group’s recent successes and the lessons learned from past programs, the 2013 and 2014 RAP has four key areas of focus: Delivering outstanding and accessible customer service to the Group’s Indigenous customers, regardless of location. Providing greater employment opportunities and career development for Indigenous people. Indigenous culture across Promoting the broader community, while also delivering opportunities for Group employees to engage with local communities. Providing greater access to educational opportunities for Indigenous youth and adults, particularly in financial literacy. Find out more about the Group’s progress and commitment to Indigenous communities at commbank.com.au/indigenous. Empowering Support of the Community The Group’s Staff Community Fund is Australia’s largest and longest running workplace-giving program. The Group matches its people contributions dollar-for-dollar. In 2013, the Fund will award $2 million to more than 200 grassroots programs focused on improving the health and wellbeing of Australian youth. In addition, the Group’s branch network rallied during April and collected more than $300,000 in donations from its customers and staff to support one of the Group’s key charity partners, the Clown Doctors. The Group encourages volunteering with a range of Annual Report 2013 31 Sustainability partnerships that enable its people to participate through mentoring, team activities and skilled volunteering. In 2013, the Group continued to grow its skilled volunteering programs with new secondments in North East Arnhem Land and on the NSW Central Coast through the Jawun secondment program, as well as long term secondments with other partners, such as Reconciliation Australia. Through these programs, we continue to support the long term sustainable growth of Indigenous enterprises. Supporting Sports, the Arts and Health in Australia The Group is Cricket Australia’s longest standing partner, having supported it for 26 years. After seven years as the naming rights sponsor of the One Day Internationals, the Group announced in May that it would be stepping up its support to become the new naming rights sponsor of the Australian Test Team and Test Series, starting with the Commonwealth Bank Ashes Series in November 2013. As well as Australia’s cricketing elite, the Group supports the growth of community cricket through its Grants for Grassroots Cricket™ program, providing annual grants of cash and equipment to clubs across Australia. Over four years, this program has contributed $1.53 million to local cricket clubs. Meanwhile, through the Group’s longstanding support of Opera Australia, the Australian Chamber Orchestra and Bangarra Dance Theatre, the Group is making art more accessible the Group’s partnership with Kaldor Public Art Projects supports ground- breaking exhibitions such as 13 Rooms shown in April 2013, showcasing the Group’s commitment to innovation through art. to all Australians. In addition, The Group also continues to support men’s and women’s health through its ongoing partnerships with the Breast Cancer Institute of Australia (BCIA) and the Prostate Cancer Foundation of Australia (PCFA). The Group has supported BCIA for more than 15 years, raising more than $3 million during this time. In September 2012 the Group organised 296 barbeque events for PCFA across the Group’s banking network and raised more than $117,000 in the process. In addition, the Group has been the major sponsor of the Australian of the Year Awards for more than 30 years, celebrating outstanding Australians and their commitment to the nation and their local communities. 5. Environmental Stewardship As one of Australia’s largest organisations, the Group recognises that its operations have direct and indirect impacts on the environment. We strive to actively manage those impacts to ensure the long term sustainability of the Group’s business and environment. Achieving the Carbon Reduction Target In May 2009, the Group set the goal of reducing its carbon emissions by 20% from 2008–09 emission levels by June 2013 (refer to the Sustainability Scorecard on page 33 for a definition of scope). The goal represented a reduction of 34,550 tonnes of carbon dioxide equivalent (CO2-e). The Group reached its target five months ahead of schedule in January 2013. By 30 June 2013, the Group had reduced its emissions by an additional 10,658 tonnes of CO2-e. Over the past four years, emissions for each full time employee have also steadily declined. A number of initiatives played a key role in achieving this target. These include: inefficient The Green Refresh Program, lighting throughout the Group’s branch network and upgrading the heating, ventilation and air conditioning (HVAC) systems in the retail and commercial buildings. replacing 32 Commonwealth Bank of Australia One of Australia’s most ambitious corporate property consolidations, which relocated the Group’s people from 19 buildings across Sydney to three purpose-built and sustainable campuses, the award-winning Commonwealth Bank Place in Sydney’s Darling Quarter. including Supporting the Group’s Clients in their Transition to a Low Carbon Economy The Carbon Solutions Team was formed as a direct response to the effects of climate change on both the Group and its clients. The team is responsible for the development and execution of the Group’s carbon markets strategy to ensure a leading position in Australia’s transformation to a low carbon economy. The team specialises in areas including: The Government’s Carbon Pricing Mechanism; Renewable energy projects such as solar photovoltaic systems, wind power, waste to energy systems and biomass energy; Energy efficiency; and Carbon farming solutions. The Carbon Solution Team’s strategy leverages the Group’s core trading, financing and distribution capabilities to provide a range of tailored financing and risk management solutions to assist clients in the management of their carbon and renewable energy risks and opportunities. In addition, the Group has been a major player in the renewable energy sector, with significant investments since 2004. The Group remains committed to the continued development of the renewable energy and carbon markets in the future. The Group also trades directly in the free carbon permit market with large emission-intensive trade exposed entities, providing financing and pricing certainty for the Group’s clients. Committing for the Long Term and Changing the Way we Work In 2012, Commonwealth Bank Place (CBP) and the Darling Quarter Precinct won a number of awards, including the prestigious Banksia Sustainability Award the Built Environment. This award showcased CBP’s world-leading environmental performance ratings, including six stars from the Green Star Office Design system and five stars from the National Australian Built Environmental Rating System (NABERS). In June 2013, CBP also received the United Nations Association of Australia Green Building Award. for CBP is the largest and most innovative commercial office development in the Sydney CBD. Integrating the commercial and public domains, CBP is a vibrant flagship campus for more than 6,000 of the Group’s employees. CBP features world class environmental design, including blackwater treatment and tri-generation technologies, as well as the world’s largest Activity Based Working (ABW) space. Bankwest has since adopted the ABW concept in its new head office, Bankwest Tower in Perth, housing nearly 3,000 employees. Meanwhile, the Group’s New Zealand subsidiary, Auckland Saving Bank (ASB), has embraced ABW in its new North Wharf head office development. Further Information Visit the microsite, commbank.com.au/sustainability2013, for more information on the Group’s approach to sustainability, insights on the Group’s key initiatives and achievements, and independently reviewed metrics for the 2013 financial year. The microsite covers the activities of companies wholly owned by the Group within Australia for the financial year ending 30 June 2013. Sustainability Scorecard (1) Customer Satisfaction Units 2013 2012 2011 Sustainability 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 Engagement Employee Engagement Index (5) Employee Turnover (Voluntary) (6) Diversity Women in Executive Manager and above roles (7) Safety and Well-being Lost Time Injury Frequency Rate (LTIFR) (8) Absenteeism (9) Environment Greenhouse Gas Emissions Scope 1 emissions (10) Scope 2 emissions (11) Scope 3 emissions (12) Financial Literacy Programs School Banking Students (active) (13) StartSmart Students Booked (14) 83.0 1st 79.0 2nd 75.2 4th 7.4 Equal 1st 7.3 Equal 1st 7.1 Equal 2nd 8.32 1st 7.86 1st 7.74 1st % % % Rate Rate 80 10.60 80 12.90 n/a 12.65 30.3 30.9 28.2 1.7 6.2 2.7 6.2 2.5 6.0 tCO2-e tCO2-e tCO2-e 8,780 100,997 17,767 8,941 118,047 20,137 9,835 137,948 22,885 233,217 284,834 191,416 235,735 140,280 200,081 (1) All metrics capture data from Australian domestic operations only (excluding Bankwest), unless otherwise stated. (2) The proportion of each financial institution’s MFI retail customers surveyed by Roy Morgan Research that are either ‘Very Satisfied’ or ‘Fairly Satisfied’ with their overall relationship with that financial institution on a scale of 1 to 5 where 1 is ‘Very Dissatisfied’ and 5 is ‘Very Satisfied’. The metric is reported as a 6 month rolling average to June, based on the Australian population aged 14 and over. The ranking refers to CBA’s position relative to the other three main Australian banks (Westpac, NAB and ANZ). The competitor set changed in 2011 to exclude St George. 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 relationship with that institution on a scale from 0 to 10 (0 is ‘Extremely Dissatisfied’, 10 is ‘Extremely Satisfied’). This is reported as a 6 month rolling average as at 30 June. The ranking refers to CBA’s position relative to the other three major Australian banks (Westpac, NAB, and ANZ). (4) The Colonial First State (the platform provider) score is calculated based on the weighted average (using the FUA as at December 2012 from the plan for Life FUA subscription database) of the overall satisfaction scores of FirstChoice and FirstWrap. The ranking is calculated by comparing the score with the weighted average of other platform providers in the relevant peer set. The relevant peer set includes platforms belonging to Westpac, NAB, ANZ, AMP and Macquarie in the Wealth Insights survey. In the previous year, the satisfaction score was calculated on a straight average of FirstChoice and FirstWrap. Due to the change in calculation of the satisfaction score this year, historical results have been restated. As a result, the score and ranking for 2012 has changed from 7.69 (2nd) to 7.86 (1st). For 2011 the ranking remains unchanged, but the satisfaction result changed from 7.79 to 7.74. Prior to 2011, the results remain unchanged. (5) The index shows the proportion of employees replying 4 or 5 to questions relating to satisfaction, retention, advocacy and pride on a scale of 1-5 (5 is ‘Strongly Agree’, 1 is ‘Strongly Disagree’). The result captures the responses of Group employees excluding Bankwest, ASB Bank and Sovereign entities. There is no data available prior to 2012, as in 2012 the Group moved the people and culture survey administration to a new provider. (6) Employee turnover refers to all voluntary exits of domestic, permanent employees as a percentage of the average domestic, permanent headcount paid directly by the Group (full-time, part-time, job share or on extended leave). (7) Percentage of roles at the level of Executive Manager and above filled by women, in relation to the total domestic headcount at this level as at 30 June. Headcount captures permanent headcount (full-time, part-time, job share, on extended leave), and contractors (fixed term arrangements) paid directly by the Group. (8) 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 the average number of domestic employees over the year. This relates to domestic employees only (permanent, casual and contractors paid directly by the Group). Data is complete as at 30 June for each financial year. Prior year data is updated due to late reporting incidents that occurred during the year, or the subsequent acceptance or rejection of claims made in the year. As a result, 2012 has changed from 2.1 to 2.7. (9) 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 domestic full-time equivalent (FTE). (10) Scope 1 carbon emissions relate to the consumption of gas and fuel (gasoline and diesel) by domestic retail and commercial properties, business use of domestic tool-of-trade vehicle fleet, dedicated bus services, business use of private vehicles, and business use of hire cars. (11) Scope 2 carbon emissions relate to the electricity use by domestic retail and commercial properties and domestic ATMs and certain residential properties. Due to the electricity billing cycle, 15% of 2013 electricity data was estimated to meet publication deadlines. Data was collected in line with NGER legislation requirements. Assets under the operational control of CFSGAM have been excluded. (12) Scope 3 carbon emissions relate to the upstream emissions related to Scope 1 and 2 emission sources. (13) The number of active school banking students as part of the Group's financial literacy programs. Active students are those who banked at least once during a 12 month period through a school banking school. (14) The number of students booked to attend Commonwealth Bank Foundation's StartSmart programs. StartSmart sessions cover different topics and the same student may be booked to attend a number of sessions. Annual Report 2013 33 Corporate Governance Introduction This statement outlines the key aspects of the Group’s corporate governance framework. The Board has consistently placed great importance on good corporate governance practices of the Group, which it believes is vital to the Group’s 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 practices of the Group comply with the revised “Corporate Governance Principles and Recommendations”, dated 30 June 2010, released by the ASX Corporate Governance Council. Charter The Board’s role and responsibilities are set out in the Board Charter. The responsibilities include: The Group’s corporate governance, establishment of Committees; including the Oversight of business and affairs by: – – Establishing with management and approving the strategies and financial objectives; Approving major corporate and capital initiatives, capital expenditure acquisitions and divestments in excess of limits delegated to management; – Overseeing the establishment of appropriate risk management systems the Group’s risk appetite and establishing appropriate financial policies such as target capital and liquidity ratios; including defining – Monitoring the performance of management and the environment in which the Group operates; Approving documents (including reports and statements to shareholders) required by the Bank’s Constitution and relevant regulation; Approval of the Group’s major HR policies and overseeing the development strategies for senior and high performing executives; and Employment of the Chief Executive Officer (CEO). A copy of the Board Charter is available on the Group’s website. The Board carries out the legal duties of its role in accordance with the Group’s values of integrity, collaboration, excellence, accountability and service. 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 responsibility to achieve the Group’s objective of creating long term value for its shareholders in part through excelling at securing and enhancing the financial wellbeing of people, businesses and communities. The CEO is responsible for the day to day management of the business 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 and 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 Board Performance and Renewal Risk Remuneration 34 Commonwealth Bank of Australia CEO Management < < delegation Provides advice to the CEO on > > key decisions made under management delegation Corporate Governance Composition There are currently nine Directors of the Bank and details of their period of office, experience, qualifications, special responsibilities and attendance at meetings are set out on pages 40 to 44 of the Directors’ Report. Membership of the Board and Committees is set out below: Board Membership Position Title Committee Membership Board Performance and Renewal Remuneration Audit Risk Chairman Chairman Member Ian M Narev Executive Chief Executive Officer - Director David J Turner Non-Executive, Independent John A Anderson Non-Executive, Independent Jane S Hemstritch Non-Executive, Launa K Inman S Carolyn H Kay Brian J Long Andrew M Mohl Harrison H Young Independent Non-Executive, Independent Non-Executive, Independent Non-Executive, Independent Non-Executive, Independent Non-Executive, Independent Colin R Galbraith (1) Non-Executive, Fergus D Ryan (1) Independent Non-Executive, Independent - - - - - - - - - - - - - Member Member Member Member - - Chairman - Member Member Member Member Member - Chairman Member Member - Member Member - - - - - Member - - - - - Member Chairman - - - - (1) Colin Galbraith and Fergus Ryan retired from the Board following the Annual General Meeting held on 30 October 2012. Constitution The Constitution of the Bank specifies that: The CEO and any other Executive Directors are not eligible to stand for election as Chairman of the Bank; The number of Directors will 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 decided that there will be nine Directors; and At each Annual General Meeting (AGM) one third of Directors (other than the CEO) will retire from office and may stand for re-election. The policy of the Board is that Non-Executive Directors are normally expected to serve a term of six years from the date of first election by shareholders, subject to re-election by shareholders as required under the Constitution and the ASX Listing Rules. That term may be extended to nine years where, at the end of the initial six year period, the Board determines that such an extension would be a benefit to the Bank and the Director is agreeable. On an exceptional basis, the Board may annually exercise its discretion to further extend the term of a Director should circumstances deem it appropriate, subject to the total term of appointment not exceeding twelve years. The Chairman would normally be expected to serve a term of at least five years in that capacity. Independence The Group’s Non-Executive Directors are required 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. The Board regularly assess each Director’s independence to ensure ongoing compliance with this requirement. Directors are required to conduct themselves in accordance with the ethical policies of the Group and 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 must also strictly adhere to the participation and voting constraints in relation to matters in which they may have an interest in. Each Director may from time to time have personal dealings with the Group or be involved with other companies or professional firms which may have dealings with the Group. Details of offices held by Directors with other organisations are disclosed 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 independent Directors. In reaching that determination, the Board has taken into account (in addition to the matters set out above): The specific disclosures made by each Director; 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 the accounting standards; That no Non-Executive Director personally carries on any role for the Group otherwise than as a Director of the Bank; and That no Non-Executive Director has a material contractual relationship with the Group other than as a Director of the Bank. Annual Report 2013 35 Corporate Governance Education and Review in an Directors participate induction program upon appointment and in ongoing education sessions on a regular basis. This program 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. Board Performance and Renewal Committee 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 CEO’s absence. the composition and effectiveness of The Board Performance and Renewal Committee annually review the Group’s corporate governance procedures. It considers the Commonwealth Bank of Australia Board and also the boards of the major wholly owned subsidiaries. It also considers the effectiveness of the Board and ensures that the Board annually reviews its own performance, policies and practices. These reviews seek to identify where improvements can be made in Board processes. They also assess the quality and effectiveness of information made available to Directors. The review process includes a performance assessment of the Board Committees and each Director. Every two years, this process is also facilitated by an external consultant. The Board used an independent facilitator in this year’s performance review. The review endorsed the current Board and Committee processes. The assessment has been considered by the Board and individual Director assessments have been diarised with Directors by the Chairman of the Board. After considering the results of the performance assessment, the Board will determine its endorsement of the Directors to stand for re-election at the next AGM. Performance evaluations in accordance with 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, on pages 47 to 64. In accordance with the Board’s policies, the Committee consists solely of independent Non-Executive Directors, with the CEO attending the meeting by invitation. A copy of the Board Performance and Renewal Committee Charter is available on the Group’s website. Selection of Directors of The Board Performance and Renewal Committee’s set of criteria for Director appointments are reviewed annually and adopted by the Board. These are aimed at creating a Board capable and motivating management to achieve sustained, outstanding performance in all respects. The Group’s aim is to ensure that any new appointee is able to contribute to the Board constituting a competitive advantage for the Group. Based on these criteria, each Director should: challenging, stretching Provide important and significant insights, input and questions to management from their experience and skill. Professional intermediaries are engaged to identify a diverse range of potential candidates for appointment as Directors based on the identified criteria. The Board Performance and Renewal Committee will assess the skills, experience and personal qualities of these candidates. It will also take into consideration other attributes including diversity to ensure that any appointment decisions adequately reflect the environment in which the Group operates. Information on the Group’s diversity strategy more generally can also be found in the Sustainability section of this report on pages 30 to 33. 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. include The Chairman will provide a letter to all new Directors setting out the terms of appointment and relevant Board policies. time commitment, code of ethics and These continuing education. All current Directors have been provided with a their appointment. A copy of the form of the appointment letter is available on the Group’s website. letter confirming terms of the 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, 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 meeting agendas 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 regular Board meeting agendas. In addition, ongoing strategy is the major focus of at least one Board meeting annually; An agreed policy on the basis that Directors are entitled to obtain access to Group documents and information, and to meet with management; and 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. Be capable of operating as part of an exceptional team; Ethical Standards Vigorously debate and challenge management in a constructive manner; Contribute outstanding performance and exhibit impeccable values; Be capable of inputting strongly to risk management, strategy and policy; Provide a mix of skills and experience required to challenge and contribute to the future strategy of the Group; Be excellently prepared and receive all necessary education; and 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 vote on or be present when the matter is being considered. If the material personal interest is disclosed or identified before a Board or Committee meeting takes place those Directors will also not receive a copy of any paper dealing with the matter. 36 Commonwealth Bank of Australia Share Trading The Board has adopted a Group Securities Trading policy which prohibits Directors, employees and contractors of the Group from: in the Group’s securities Dealing in possession of unpublished price-sensitive information; and they are if Communicating unpublished price-sensitive information to other people. Directors are also only permitted to deal with the Group’s securities within certain periods, as long as they are not in the possession of unpublished price-sensitive information. These periods include the 30 days after the half yearly and final results announcements, and 14 days after quarterly trading update releases. The Policy also requires 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. A copy of the policy is available on the Group’s website. Corporate Governance 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 is available on the Group’s website. Auditor PricewaterhouseCoopers the external auditor of the Bank at the 2007 AGM, effective from the beginning of the 2008 financial year. (PwC) was appointed as The PwC partner managing the Group’s external audit will attend the 2013 AGM and be available to respond to shareholder questions relating to the external audit. In line with current legislation, the Group requires that the partner be changed within five years of being appointed. The lead partner was changed with effect from 1 July 2012. The Group and its external auditor must continue to comply with US Auditor independence requirements. U.S. Securities and Exchange Commission (SEC) rules still apply to various activities that the Group undertakes in the United States, even though the Bank is not registered under the Exchange Act. Remuneration Arrangements Non-Audit Services Details of the governance arrangements and policies relevant to remuneration are set out in the Remuneration Report on pages 47 to 64. Audit Arrangements Audit Committee The Audit Committee assists 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 the Group, as well as obtaining an environment of understanding of the Group’s tax and accounting risks. The Audit Committee is responsible for overseeing accounting policies, professional accounting requirements, internal audit (GAA), external audit, APRA statutory and regulatory external auditor’s reporting appointment. The Charter of the Audit Committee incorporates a number of policies and practices to ensure that the Committee is independent and effective. requirements, and the These include: The Audit Committee will comprise at least three members. All members must be Non-Executive, Independent Directors and be financially literate. At least one member should be a financial expert with relevant qualifications and experience as referred to in the technical expertise guidance of the ASX Corporate Governance Principles and Recommendations; The Chairman of the Audit Committee cannot 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, The External Auditor Services Policy requires the Audit 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 external auditor’s independence. 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 themselves and the Group; interest between Require an themselves; indemnification from the Group to Seek contingency fees; nor Have a direct financial or business interest or a material indirect financial or business interest in the Group or any of its affiliates, or an employment relationship with the Group or any of its affiliates. Under the policy, the external auditor will not provide certain services including the following services: Bookkeeping or other services relating to accounting records or Financial Statements of the Group; Financial implementation; information systems design and Appraisal or valuation services (other than certain tax fairness opinions or only valuation services) and contribution-in-kind reports; Actuarial services unless approved in accordance with independence guidelines; Internal audit outsourcing services; Management functions, including acting as an employee and secondment arrangements; Human resources; Broker-dealer, investment adviser or investment banking services; Annual Report 2013 37 Corporate Governance Non-Audit Services (continued) that is consistent with the approved risk appetite. 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: Audit services to the Group or an affiliate; Related services connected with the 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 Group and Business Unit risk appetite statements, policies, delegated authorities and committee structures. 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: is for responsible The Board 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 “overseeing 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”. The CEO and the Chief Financial Officer have given the Board their declaration in accordance with section 295A of the Corporations Act 2001. The CEO and Chief Financial Officer have confirmed that the declarations are 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. 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 and funding, operational, insurance, compliance (including regulatory), and reputational risks assumed by the Group in the course of carrying on its business. It reviews regular reports from management on the measurement of risk and risk the adequacy and effectiveness of management and internal controls systems. the Group’s 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 38 Commonwealth Bank of Australia This framework, which is designed to achieve portfolio risk-return outcomes expectations, includes: consistent with the Group’s The Group Risk Appetite Statement; 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 management framework (including high-level policies and limits). It also makes recommendations to the Board on the key policies relating to capital (that underpin the Internal Capital Adequacy Assessment Process), liquidity and funding and other material risks. 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 Remuneration Committee to assist in the alignment of executive remuneration with appropriate risk behaviours. The Committee reviews significant correspondence with regulators, receives reports from management on 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 the Committee or the CRO. The Chairman of the Risk Committee provides a report to the Board following each Committee meeting. least annually or as decided by A copy of the Risk Committee charter appears on the Group’s website. Risk Management Framework The Group has an integrated risk management framework in place to identify, assess, manage and report risks and risk adjusted returns on a consistent and reliable basis. A description of the functions of the framework and the nature of the risks is set out in Notes 37 to 40 to the Financial Statements (pages 144 to 167). Continuous Disclosure 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. This is achieved via established reporting lines or as 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 disclosing 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 the market to have an understanding of the business operations and performance, the Group aims to provide shareholders with access to quality information 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; The Group’s website at www.commbank.com.au; and The investor relations app, refer to page 195. including communication The Group employs a wide range of communication approaches, with direct shareholders, publication of all relevant Group information on the shareholder centre section of the website and webcasting for shareholders. Upcoming of most market briefings webcasts are announced the market via ASX to announcements and publicised on the website to enable interested parties to participate. 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. The Group has taken these actions to encourage shareholder participation at general meetings. 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. Ethical Policies the Group are The values of integrity, collaboration, excellence, accountability and service. 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’s code of ethics, known as a Statement of Professional Practice, sets standards of behaviour required of all employees and directors including: To act properly and efficiently in pursuing the objectives of the Group; To avoid situations which may give rise to a conflict of interest; To know and adhere to the Group’s Equal Employment Opportunity policy and programs; Website 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 the Group’s people. The Group has also established the Group Securities Trading policy to ensure that unpublished price-sensitive information is not used in an illegal manner for personal Corporate Governance advantage. Our People The Group has implemented various policies and systems to enable its people to carry out their duties in accordance with the Group’s values. 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 Supporting Professional Development. Information on the Group’s diversity strategy can be found in the Sustainability section of this report on pages 30 to 33. Behaviour Policy to complying with The Group is strongly committed to maintaining an ethical workplace and legal and ethical responsibilities. The Group’s Behaviour policy requires its people to report fraud, corrupt conduct, mal-administration or serious and substantial waste by others. A system has been established which allows people to remain anonymous, if they wish, for reporting of these matters. The policy includes 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 Security Officer reports any such matters to the Audit Committee, noting the status of resolution and actions to be taken. Code of Conduct The Board will operate in a manner reflecting the Group’s its agreed corporate values and the governance guidelines, Corporations Act and all other applicable regulations. the Bank’s Constitution, in accordance with 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, and addressing both performance and compliance. The Board’s policies and codes include detailed provisions dealing with: The interaction 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 interest situations can be identified and appropriate action undertaken to avoid compromising the independence of the Board; and Securities dealings in compliance with the Group’s strict guidelines and in accordance with its values of integrity, collaboration, excellence, accountability and service. 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. Annual Report 2013 39 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 2013. 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 Other Directorships: Ashurst Australia, O’Connell Street Associates Pty Ltd, and Great Barrier Reef Foundation. Qualifications: Fellow of the Institute of Company Directors, Fellow of the Institute of Chartered Accountants in England and Wales. Mr Turner is a resident of New South Wales. Age 68. Mr Turner has been a member of the Board since 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 Remuneration Committee. Mr Turner has extensive experience in finance, international business and governance. He was Chairman of Cobham plc from May 2008 until May 2010. He has held a number of Directorships including Whitbread plc and the Iron Trades Insurance Group and has been a member of the Quotations Committee of the London Stock Exchange. 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. Ian M Narev, Managing Director and Chief Executive Officer Mr Narev commenced as Managing Director and Chief Executive Officer on 1 December 2011. Other Directorships: Commonwealth Bank Foundation (Chairman), and Financial Markets Foundation for Children. Qualifications: BA LLB (Hons) (Auckland), LLM (Cantab), LLM (NYU). Mr Narev is a resident of New South Wales. Age 46. Mr Narev joined the Group in May 2007. From then until January 2009, he was Group Head of Strategy, with responsibility for corporate strategy development, mergers and acquisitions and major cross business strategic initiatives. He is a member of the Risk Committee. From January 2009 until September 2011, Mr Narev was Group Executive, Business and Private Banking, one of the Group’s six operating divisions. Prior to joining CBA, Mr Narev was a partner of McKinsey’s New York, Sydney and Auckland offices from 1998 to 2007. He became a global partner in 2003, and from 2005 until his departure in 2007 was head of McKinsey’s New Zealand office. Prior to joining McKinsey, Mr Narev was a lawyer specialising in mergers and acquisitions. Sir John A Anderson, KBE Other Directorships: PGG Wrightson Limited (Chairman), National Property Trust Limited (Chairman), Steel & Tube Holdings Ltd (Chairman from October 2012), Turners & Growers Limited (Deputy Chairman from December 2012), and New Zealand Venture Investment Fund (Chairman) (ceased June 2013). the New Zealand Qualifications: Fellow of Institute of Chartered Accountants, Fellow of the Institute of Financial Professionals New Zealand, Fellow of the Institute of Directors, and Life Member of the Australian Institute of Banking and Finance. Sir John is a resident of Wellington, New Zealand. Age 67. Sir John has been a member of the Board since 12 March 2007. He is a member of the Risk Committee and Board Performance and Renewal Committee. Sir John is a highly respected business and community leader, having held many senior positions in the New Zealand finance industry including Chief Executive Officer and Director of ANZ National Bank Limited from 2003 to 2005 and the National Bank of New Zealand Limited from 1989 to 2003. In 1994, Sir John was awarded Knight Commander of the Civil Division of the Order of the British Empire, and in 2005 received “Outstanding Leadership Contributions to New Zealand”. In 2012 Sir John was awarded an Honorary Doctorate of Commerce by Victoria University, Wellington. inaugural Blake Medal the for 40 Commonwealth Bank of Australia Jane S Hemstritch Directors’ Report Other directorships: Lend Lease Corporation Limited, Santos Ltd, Tabcorp Holdings Ltd, and Victorian Opera Company Ltd (Chairman from February 2013). Qualifications: Fellow of Institute of Chartered Accountants in England and Wales, Fellow of the Institute of Chartered Accountants in Australia, BSc (Hons) London University, and Fellow of the Australian Institute of Company Directors. the Ms Hemstritch is a resident of Victoria. Age 59. Ms Hemstritch has been a member of the Board since 9 October 2006, and is the Chairman of the Remuneration Committee and a member of the Risk Committee. In Ms Hemstritch was Managing Director Asia Pacific for Accenture Limited from 2004 until her retirement in February 2007. this role, Ms Hemstritch was a member of Accenture’s global executive leadership team and oversaw the management of Accenture’s business portfolio in Asia Pacific. Ms Hemstritch had a 24 year career with Accenture, preceded by seven years in the accounting profession. 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. Launa K Inman Inman has been a member of Ms the Board since 16 March 2011, and is a member of the Audit Committee and the Risk Committee. Ms Inman was Managing Director and Chief Executive Officer of Billabong International Limited from 14 May 2012 until 2 August 2013. Prior to this, she was Managing Director of Target Australia Pty Limited from 2005 to November 2011, and Managing Director of Officeworks from 2004 to 2005. S Carolyn H Kay Other directorships: Managing Director and CEO of Billabong International Limited (ceased August 2013). Qualifications: MCom, University of South Africa (UNISA), BCom (Hons) (UNISA), BCom (Economics and Accounting) Institute of Company Directors (UNISA), and Australian (Member). Ms Inman is a resident of Victoria. Age 57. Ms Kay has been a member of the Board since 2003 and is also a member of the Audit Committee, Remuneration Committee and Risk Committee. She 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. Other directorships: Allens, Brambles Limited, Infrastructure NSW (Chairman of Audit and Risk Committee from April 2013), and Sydney Institute. Qualifications: BA (Melb), LLB (Melb), GDM (AGSM), and Fellow of the Australian Institute of Company Directors. Ms Kay is a resident of New South Wales. Age 52. Brian J Long Mr Long has been a member of 1 September 2010. He the Chairman of Committee and a member of the Risk Committee. the Board since the Audit is Mr Long retired as a partner of Ernst & Young on 30 June 2010. Until that time he was the Chairman of both the Ernst & Young 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 directorships: Cantarella Bros. Pty Ltd, and Ten Network Holdings Limited (Deputy Chairman). Qualifications: Fellow of Accountants in Australia. the Institute of Chartered Mr Long is a resident of New South Wales. Age 67. Annual Report 2013 41 Directors’ Report Andrew M Mohl Other directorships: Federal Government Export Finance and Insurance Corporation (EFIC) (Chairman) and AMP Foundation (retired September 2012). Qualifications: BEc (Hons), Monash. Mr Mohl is a resident of New South Wales. Age 57. is a member of Mr Mohl has been a member of the Board since 1 July 2008 and the Remuneration Committee. He has over 35 years of financial services experience. Mr Mohl was Managing Director and Chief Executive Officer of AMP Limited from October 2002 until December 2007. the Risk Committee and Mr Mohl’s previous roles at AMP included Managing Director, AMP Financial Services and Managing Director and Chief Investment Officer, AMP Asset Management. Mr Mohl was a former Group Chief Economist, Chief Manager, Retail Banking and Managing Director, ANZ Funds Management at ANZ Banking Group. Mr Mohl commenced his career at the Reserve Bank of Australia where his roles included Senior Economist and Deputy Head of Research. 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 and Board Performance and Renewal Committee. From 2003 to 2007, Mr Young was Chairman of Morgan Stanley Australia, and from 1998 to 2003 Vice Chairman of Morgan Stanley Asia. Prior to that, Mr Young 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. Colin R Galbraith, AM (Retired 30 October 2012) Other directorships: NBN Co Limited (Chairman) (ceased March 2013), Better Place (Australia) Pty (Chairman) (ceased February 2013), Humanities 21 Inc (ceased December 2012), Bank of England (ceased May 2012), and Financial Services Volunteer Corps (ceased December 2012). Qualifications: AB, cum laude, Harvard, LLD, honoris causa, Monash. Mr Young is a resident of Victoria. Age 68. Mr Galbraith was a member of the Board from June 2000 until October 2012. He was a member of the Risk Committee, Audit Committee and Board Performance and Renewal Committee. Mr Galbraith has extensive experience in commercial law, mergers and acquisitions, corporate governance and risk management. He was a senior partner of Allens and its predecessor firms until his retirement in 2006 after 32 years with that firm; during 20 years of which he was also Honorary Secretary to the Council of Legal Education in Victoria. Mr Galbraith is currently a special advisor for Gresham Partners Limited. Other directorships: CARE Australia, Colonial Foundation Limited (from May 2013), BHP Billiton Community Trust (Chairman), BHP Billiton Community Limited (Chairman), Arrium Limited (previously OneSteel Limited), and Australian Institute of Company Directors (ceased November 2012). Qualifications: LLB (Hons) LLM (University of Melbourne) Supreme Courts of Victoria, New South Wales, Queensland and Western Australia, Barrister and Solicitor. Mr Galbraith is a resident of Victoria. Age 65 Fergus D Ryan, AO (Retired 30 October 2012) Other directorships: Australian Foundation Investment Company Limited (AFIC). Qualifications: Fellow of Accountants in Australia. the Institute of Chartered Mr Ryan is a resident of Victoria. Age 70. Mr Ryan was a member of the Board from March 2000 until October 2012. He was a member of the Audit Committee and 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. 42 Commonwealth Bank of Australia Other Directorships The Directors held directorships on listed companies within the last three years as follows: Director David Turner John Anderson Company Cobham plc PGG Wrightson Ltd (NZ) National Property Trust NPT Limited (NZ) Steel & Tube Holdings Ltd (NZ) Turners & Growers Ltd (NZ) Jane Hemstritch Tabcorp Holdings Limited Santos Limited Lend Lease Corporation Limited Billabong International Limited Brambles Limited Ten Network Holdings Limited Arrium Limited Australian Foundation Investments Company Limited Launa Inman Carolyn Kay Brian Long Colin Galbraith Fergus Ryan Directors’ Meetings Directors’ Report Date Appointed Date of Ceasing (if applicable) 01/12/2007 06/05/2010 01/04/2010 01/04/2011 10/11/2011 03/04/2012 13/11/2008 16/02/2010 01/09/2011 14/05/2012 02/08/2013 21/08/2006 01/07/2010 25/10/2000 08/08/2001 The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors during the financial year were: Director David Turner Ian Narev John Anderson Jane Hemstritch Launa Inman Carolyn Kay Brian Long Andrew Mohl Harrison Young Colin Galbraith (2) Fergus Ryan (2) No. of Meetings Held (1) No. of Meetings Attended 10 10 10 10 10 10 10 10 10 3 3 10 10 10 10 10 10 10 10 10 3 3 (1) The number of meetings held during the time the Director was a member of the Board and was eligible to attend. (2) Colin Galbraith and Fergus Ryan retired effective 30 October 2012. Annual Report 2013 43 Directors’ Report Committee Meetings Director David Turner Ian Narev John Anderson Jane Hemstritch Launa Inman Carolyn Kay Brian Long Andrew Mohl Harrison Young Colin Galbraith (2) Fergus Ryan (2) Director David Turner John Anderson Harrison Young Colin Galbraith (2) Risk Committee Audit Committee Remuneration Committee No. of Meetings Held (1) No. of Meetings Attended No. of Meetings Held (1) No. of Meetings Attended No. of Meetings Held (1) No. of Meetings Attended 9 9 9 9 9 9 9 9 9 3 3 9 9 8 9 9 9 9 9 8 3 3 - - - - 6 9 9 - 9 3 3 - - - - 6 9 9 - 9 3 3 8 - - 8 - 8 - 8 - - - 8 - - 8 - 8 - 8 - - - Board Performance and Renewal Committee No. of Meetings Held (1) No. of Meetings Attended 7 7 5 2 7 6 5 2 (1) The number of meetings held during the time the Director was a member of the relevant committee. (2) Colin Galbraith and Fergus Ryan retired effective 30 October 2012. Principal Activities The principal activities of the Group during the financial year ended 30 June 2013 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. 44 Commonwealth Bank of Australia Consolidated Profit The Group’s net profit after income tax and non-controlling interests for the year ended 30 June 2013 was $7,677 million (2012: $7,090 million). The Group has produced another positive financial result amidst mixed economic conditions, including subdued credit growth, higher deposit funding costs, low interest rates, lower marginal costs of raising new wholesale funding and improved equity markets. to focus on securing The Group continues term sustainable competitive advantage through engaged staff collaborating to identify and meet more of our customers’ needs. This long term focus, combined with a diversified business model and a strong risk management culture, has again generated superior returns. long Operating income growth reflected strong momentum across the Retail, Wealth and New Zealand businesses. Business banking revenue remained subdued amid strong competition for domestic deposits. Operating expenses reflect a continued appetite to invest in technology and other growth initiatives, together with the impact of costly regulatory change and compliance initiatives, partly offset by productivity initiatives. Loan impairment expense decreased slightly due to improved home loan and credit card arrears, partly offset by increased commercial loan charges. Asset quality remains sound with continued conservative levels of provisioning and unchanged economic overlays. 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 200 cents per share amounting to $3,224 million. The dividend will be payable on 3 October 2013 to shareholders on the register at 5pm EST on 23 August 2013. Dividends paid in the year ended 30 June 2013 were as follows: In respect of the year to 30 June 2012, a fully franked final dividend of 197 cents per share amounting to $3,137 million was paid on 5 October 2012. The payment comprised direct cash disbursements of $2,207 million with $930 million being reinvested by participants through the DRP; and In respect of the year to 30 June 2013, a fully franked interim dividend of 164 cents per share amounting to $2,639 million was paid on 5 April 2013. The payment fully comprised direct cash disbursements. The DRP in respect of the interim dividend was satisfied in full by the on market purchase of shares. Review of Operations An analysis of operations for the financial year is set out in the Highlights and Group Performance Analysis sections. Changes in State of Affairs During the year, the Group continued to make significant progress in implementing a number of initiatives designed to ensure a better service outcome for the Group’s customers. Highlights included: Becoming the number one retail bank for customer satisfaction across all business areas, while delivering superior shareholder returns; “Bank of the Year” in the 2013 Money Magazine Awards; Completion of the Core Banking Modernisation Program, which involved the migration of 12+ million customers, offering real-time settlement and banking, and enabling industry leading functionality and innovation; and Continued investment in technological innovations, such as CommBank Kaching for Facebook, SmartSign, MyWealth and Branch of the Future to remain Australia’s leading technology bank. There have been no significant changes in the state of affairs Directors’ Report of the Group during the financial year. Events Subsequent to Balance Sheet Date The Bank expects the DRP for the final dividend for the year ended 30 June 2013 will be satisfied in full by an on market purchase and transfer of shares of approximately $806 million. to proposal On 24 July 2013 the Bank submitted an indicative, non- the Commonwealth Managed binding Investments Limited the (CMIL) Board management of Commonwealth Property Office Fund (CPA) and CFS Retail Property Trust Group (CFX). The proposal in incorporates CFX acquiring relation the wholesale property funds management business and integrated retail property management and development business owned by CBA. to CFX also internalise to The Bank also submitted an indicative, non-binding proposal to the Kiwi Income Properties Limited (KIPL) Board to internalise the management of the Kiwi Income Property Trust (KIP). As at the date of this report, the financial effect of any transaction cannot be estimated. 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 Following the successful completion of Activity Based Working (ABW) at Commonwealth Bank Place in Sydney last year, the Group has now completed the implementation of ABW at Bankwest Place in Perth and at North Wharf in Auckland, New Zealand. to two buildings The consolidation of the Group’s Melbourne Commercial portfolio the Melbourne CBD has in progressed with a move earlier this year to a substantially refurbished building at 357 Collins Street. The Melbourne consolidation will be complete when the workplace at 727 Collins Street near Docklands opens in the coming months. The Group is progressively looking to accommodate its refurbished in either new or substantially employees buildings. This strategy allows the Group to provide improved working environments its employees, use space more efficiently and sustainably as well as support more collaborative working. that are more productive for Business Strategies Business strategies, prospects and future developments which may affect the operations of the Group in subsequent years are referred in the Chief Executive Officer’s Statement. to In the opinion of the Directors, disclosure of any further information on likely strategic developments would be unreasonably prejudicial to the interests of the Group. Environmental Reporting 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 has recently updated its energy and emissions data management and reporting systems to comply with the legislation. is also subject the Energy Efficiency The Group Opportunities Act 2006 (EEO Act), which encourages large energy-using businesses to improve their energy efficiency. to As required by the EEO Act, the Group lodged its second five year energy efficiency assessment plan with the Federal Government in December 2012. The Group will continue to Annual Report 2013 45 Directors’ Report report to the Federal Government every three years as well as release a public report annually, covering all preceding years’ assessment outcomes. 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); and person who, at the request of a related body corporate of the Bank, acts as a member of the compliance committee of a registered scheme for which the related body corporate of the Bank is the responsible entity. 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 policy. The insurance is appropriate pursuant to 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. 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 both the volatility of equity markets on shareholder funds and the mark to market revaluations on the Guaranteed Annuity portfolio for a measure of core operating performance. regulation The Group is not subject to any other particular or significant environmental the Commonwealth or of a State or Territory, but can incur environmental liabilities as a lender. The Group has a number of policies is managed to ensure appropriately. in place the risk under any law of 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 Financial Statements that accompany this report. Directors’ Shareholdings and Options (continued) No options have previously been granted to the Directors or Chief Executive Officer. Options Outstanding As at the date of this report there are no options outstanding in relation to Commonwealth Bank ordinary shares. Directors’ Interests in Contracts A number of Directors have given written notices, stating that they hold office in specified companies and accordingly are to be regarded as having an interest in any contract or proposed contract that may be made between the Bank and any of those companies. Directors’ and Officers’ Indemnity The Directors, as named on pages 40 to 42 of this report, and the Secretaries of the Bank, being named on page 65 of this report, 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 and to the extent permitted by law, in favour of each: secretary and senior manager of the Bank; director, secretary and senior manager of a related body corporate of the Bank; person who, at the prior formal request of the Bank, acts as director, secretary or senior manager of a body 46 Commonwealth Bank of Australia Directors’ Report – Remuneration Report Message from the Remuneration Committee Chairman Dear Shareholder, The Group has continued to remain competitive in the 2013 financial customers, shareholders, employees and the community. Both financial and non-financial performance were positive. year, delivering to our value The Group has continued to demonstrate its commitment to building a vibrant customer focused culture and in 2013 achieved its goal of becoming the number one major bank for customer satisfaction across all main business areas. The Group has also made noteworthy progress against its goals in other priority areas of technology, strength, productivity and people, alongside above target financial performance. The delivery of this good performance has been the result of the hard work and dedication of the Group’s people. There were no increases to Non-Executive Directors’ fees in 2013. However, changes were made to the Non-Executive Director legislated to superannuation increases whilst supporting more effective management of fee costs. accommodate structure fee The Group’s remuneration frameworks are designed to attract and retain key executive talent, recognise the individual contributions of the Group’s people, and motivate them to achieve strong performance aligned to our business strategy, whilst discouraging excessive risk taking. this The Committee completed a comprehensive review of the Group’s executive remuneration framework in the 2013 financial year. Following review, a mandatory shareholding policy will be introduced from the 2014 financial year for the Chief Executive Officer and Group Executives. No other changes were made as the review confirmed that the Group’s current remuneration framework is well aligned with its business strategy and achieves good alignment between the remuneration interests of the Group’s employees and the interests of its shareholders. I hope you find the information we have provided in this report useful. Jane Hemstritch Committee Chairman 13 August 2013 Annual Report 2013 47 Directors’ Report – Remuneration Report 2013 Remuneration and Performance Highlights Completed a comprehensive review of executive remuneration framework O f Following this review a mandatory shareholding policy will be introduced from the 2014 financial year that requires the CEO and Group Executives to accumulate CBA shares over a five year period to the value of 300% of fixed remuneration for the CEO and 200% of fixed remuneration for Group Executives. Short term incentives reflect positive 2013 performance Long term incentive performance hurdles met Fixed fee model for Non- Executive Directors No other changes were made to the current executive remuneration structure as the review confirmed it is well aligned with the Group’s strategy. 2013 financial and non-financial performance were positive. Against this background, the average short term incentive payment for the CEO and Group Executives was 121% of their short term incentive targets. The vesting outcome of the long term incentive awarded in the 2010 financial year reflected TSR performance over four years at the 100th percentile of the peer group, and improvement in customer satisfaction to rank first against the major banks and close behind St.George. This performance resulted in 87.5% of the award vesting to those executives who participated in the plan. The Non-Executive Directors fee structure changed from base fees plus superannuation to a fixed fee model (inclusive of superannuation). This change was made to accommodate legislated superannuation increases whilst supporting more effective management of fee costs. 48 Commonwealth Bank of Australia Directors’ Report – Remuneration Report 2013 Remuneration Report This Remuneration Report details the approach to remuneration frameworks, outcomes and performance, for the Commonwealth Bank of Australia (CBA) and its Key Management Personnel (KMP) for the year ended 30 June 2013. In the 2013 financial year, KMP included the Non-Executive Directors, CEO and Group Executives listed in the table below. The table also includes movements during 2013. The key changes to the Executive team included: Robert Jesudason was appointed to the role of Group Executive, Group Strategic Development effective 1 July 2012; Ross McEwan resigned from the role of Group Executive, Retail Banking Services effective 13 July 2012; and Matthew Comyn was appointed to the role of Group Executive, Retail Banking Services from 10 August 2012. The report has been prepared and audited against the disclosure requirements of the Corporations Act 2001. Annual Report 2013 49 NamePositionTerm as KMPNon-Executive DirectorsDavid TurnerChairman Full YearJohn AndersonDirectorFull YearJane HemstritchDirectorFull YearLauna InmanDirectorFull YearCarolyn KayDirectorFull YearBrian LongDirectorFull YearAndrew MohlDirectorFull YearHarrison YoungDirectorFull YearFormer Non-Executive DirectorsColin Galbraith Director (retired on 30 October 2012)Part YearFergus RyanDirector (retired on 30 October 2012)Part YearManaging Director and CEOIan Narev Managing Director and CEOFull YearGroup ExecutivesSimon BlairGroup Executive, International Financial ServicesFull YearDavid CohenGroup General Counsel and Group Executive, Group Corporate AffairsFull YearMatthew ComynGroup Executive, Retail Banking Services (from 10 August 2012)Part YearDavid CraigGroup Executive, Financial Services and Chief Financial OfficerFull YearMichael HarteGroup Executive, Enterprise Services and Chief Information OfficerFull YearRobert JesudasonGroup Executive, Group Strategic DevelopmentFull YearMelanie LaingGroup Executive, Human ResourcesFull YearGrahame PetersenGroup Executive, Business and Private BankingFull YearIan SainesGroup Executive, Institutional Banking and MarketsFull YearAnnabel Spring Group Executive, Wealth Management Full YearAlden ToevsGroup Chief Risk OfficerFull YearFormer ExecutiveRoss McEwanGroup Executive, Retail Banking Services (resigned on 13 July 2012)Part Year Directors’ Report – Remuneration Report Continued monitoring of regulatory and legislative changes, both locally and offshore, ensuring our policies and practices remain compliant; and focus on embedding a Continued is appropriate framework that businesses with transparency governance and risk oversight. remuneration for our different in design, strong Our Independent Remuneration Consultant The Committee obtains executive remuneration information directly from its external independent remuneration consultant Ernst & Young (EY). Throughout 2013, the main information received from the Committee’s remuneration consultant related to: Regulatory reforms; Current market practices; and Material to support the Committee’s complete review of existing remuneration arrangements of the CEO and Group Executives. EY provides information to assist the Committee in making remuneration decisions. EY has not made any remuneration decisions or recommendations during the 2013 financial year. The Committee is solely responsible for making decisions within the terms of its Charter. 1.2 Our Remuneration Philosophy the backbone of our Our remuneration philosophy remuneration In summary, our remuneration philosophy for our CEO and Group Executives is to: framework, policies and processes. is Provide target remuneration which is market competitive, without putting upward pressure on the market; Align rewards with shareholder business strategy; interests and our Articulate clearly individual and Group performance, and reward; to Executives the link between individual Reward superior performance, while managing risks associated with delivering and measuring that performance; Provide flexibility to meet changing needs and emerging market practice; and Provide appropriate benefits on termination that do not deliver any windfall payments not to performance. related 1.3 Remuneration and Risk Management The Committee has a robust framework for the systematic review of risk and compliance issues impacting remuneration. The Committee: Takes note of any material risk impacting remuneration, with issues raised by the Committee provided to the Board’s Risk Committee for noting; issues Considers issues and recommendations raised by the Risk and Remuneration Review Committee, a management committee that monitors material risk and compliance issues throughout the year; May impose adjustments to remuneration outcomes of Executives before or after awards are made, subject to Board approval; and Works closely with the Board’s Risk Committee to ensure that any risks associated with remuneration arrangements are managed within the Group’s risk management framework. 1. Remuneration Governance 1.1 Remuneration Committee The Remuneration Committee (the Committee) is the main governing body for setting remuneration policy across the Group. The Committee develops remuneration philosophy, framework and policies, for Board approval. the The Committee is made up of independent Non-Executive Directors and currently consists of the following members: Jane Hemstritch (Chairman); Carolyn Kay; Andrew Mohl; and David Turner. The responsibilities of the Committee are outlined in their Charter, which is reviewed annually by the Board. The Charter the Group’s website at is available on www.commbank.com.au/shareholder. In summary, the Committee is responsible for recommending to the Board for approval: Remuneration for senior executive appointments, and appointments where the remuneration target of the individual exceeds their that of business/support unit; the head of Remuneration arrangements and all reward outcomes for the CEO, senior direct reports to the CEO and other individuals whose financial soundness of the Group; roles may affect the Remuneration arrangements internal control employees; for finance, risk and Remuneration arrangements for employees who have a significant portion of their total remuneration based on performance; and Significant changes in remuneration policy and structure, including superannuation, employee equity plans and benefits. This year, the Committee’s key areas of focus were: Changes to the Committee’s Charter, so that people- related matters are now part of the Board’s direct accountabilities. The Committee now focuses on Remuneration matters only; The appointment of Matthew Comyn in the role of Group Executive, Retail Banking Services the resignation of Ross McEwan in July 2012; following Ongoing communications with APRA emphasising the strong risk management embedded in remuneration frameworks; the existing executive A comprehensive review of remuneration is market competitive and aligns with the Group’s remuneration principles and philosophy; to ensure framework it The implementation of a mandatory Shareholding Policy for the CEO and Group Executives (effective from 2014); The annual review of our Group Remuneration Policy in December 2012, and a subsequent review in May 2013 to incorporate APRA’s governance requirements for all regulated subsidiaries of the Group; Changing the Non-Executive Directors’ fee structure from base fees plus superannuation to a fixed fee model (inclusive of to accommodate legislated superannuation increases whilst supporting more effective management of fee costs; superannuation), 50 Commonwealth Bank of Australia Directors’ Report – Remuneration Report The following diagram illustrates the Group’s remuneration and risk governance framework: 1.4 Non-Executive Directors Remuneration Non-Executive Directors receive fees to recognise their contribution to the work of the Board and the associated committees that they serve. Non-Executive Directors do not receive any performance-related remuneration. The Board Performance and Renewal Committee reviews the Non-Executive Directors fee schedule annually and examines fee levels against the market. No fee increases were awarded during the 2013 financial year. Following the retirement of Colin Galbraith and Fergus Ryan on 30 October 2012, the following changes to Committee composition were made: Launa Inman was appointed as a member of the Audit Committee, effective 30 October 2012; and Harrison Young was appointed as a member of the Board Performance and Renewal Committee, effective 30 October 2012. For the period from 1 July 2012 to 31 December 2012, Non- Executive Directors received base fees plus statutory superannuation contributions of 9% of their fees, capped at the maximum superannuation contributions base as prescribed under Superannuation Guarantee legislation. From 1 January 2013, the Non-Executive Directors fee structure changed from base fees plus superannuation to a fixed fee model (inclusive of superannuation). The change in the Non-Executive Directors fee structure was made to accommodate legislated superannuation increases whilst supporting more effective management of fee costs. The following table outlines the Non-Executive Directors fees for the main Board and the Committees as at 30 June 2013: Non-Executive Directors are required to hold 5,000 or more CBA shares. For those Non-Executive Directors who have holdings below this threshold, 20% of their after-tax base fees is used to purchase CBA shares until a holding of 5,000 shares has been reached. The total amount of Non-Executive Directors fees is capped at a maximum pool that is approved by shareholders. The current fee pool remains at $4 million, which was approved by shareholders at the Annual General Meeting (AGM) on 13 November 2008. The Directors’ Retirement Allowance Scheme, approved by shareholders at the 1997 AGM, was discontinued in 2002, which froze entitlements for participants at that time and was closed to new participants. Retiring allowances of $159,092 and $168,263 were paid to Colin Galbraith and Fergus Ryan respectively, following their retirement from the Board on 30 October 2012. There are no longer any Non-Executive Directors with a retiring allowance. The statutory table on page 60 provides the individual remuneration expense for each Non-Executive Director in relation to the 2013 performance year. (1) Fees are inclusive of base fees and superannuation. The Chairman does not receive separate Committee fees. Annual Report 2013 51 Remuneration CommitteeRisk & Remuneration Review CommitteeMonitoring and reporting of Group risk & compliance issuesIndependent RemunerationConsultantCBA BoardRisk CommitteePositionFees (1)($)BoardChairman849,800Non-Executive Director 236,400Audit CommitteeChairman56,300Member28,100Risk CommitteeChairman56,300Member28,100RemunerationChairman56,300CommitteeMember28,100Board Performance & Chairman11,300Renewal CommitteeMember11,300 Directors’ Report – Remuneration Report 2. Remuneration Framework The remuneration arrangements of our CEO and Group Executives are made up of both risk remuneration. This is composed of the following three elements: fixed and at Fixed remuneration is reviewed annually, following the end of the 30 June performance year. For the 2013 financial year remuneration increases for Executives. there were no fixed Fixed remuneration; Short Term Incentive (STI) at Risk; and Long Term Incentive (LTI) at Risk. The at risk components are based on performance against key financial and non-financial measures. More detail on executive remuneration and the link to performance is included in section 3 of this report. 2.1 Total Target Remuneration The following diagram illustrates the total target mix of the three remuneration elements: The three remuneration elements are broken down into equal portions of total target remuneration. When setting target remuneration levels, our key objective is to remain competitive by attracting and retaining highly talented Executives. We do this by considering the size and responsibilities of each role, using any relevant executive remuneration market surveys and disclosed data. Target remuneration is generally set around the market median for similar roles at peer organisations. Importantly, for our most senior roles, we aim to avoid adding upward reward pressure to market remuneration levels. Each component of remuneration has a direct link to our business strategy as detailed below. 2.2 Fixed Remuneration Fixed remuneration is made up of base remuneration and superannuation. Base remuneration includes cash salary and any salary sacrifice items; Superannuation contributions are capped at the relevant concessional contribution limit; The Board determines an appropriate level of fixed remuneration for the CEO and Group Executives, with recommendations from the Committee; and 2.3 Short Term Incentive The CEO and Group Executives have an STI target that is equal to 100% of their fixed remuneration. Executives will only receive the full amount if they meet all of their performance goals; The CEO and Group Executives have a maximum STI potential of 150% of their STI target. No STI awards will be made if the relevant performance goals are not met; Executives receive 50% of their STI payment as cash following the Group’s year-end results. The remaining 50% of the STI payment is deferred for one year and earns interest at the CBA one year term deposit rate; The CEO and Group Executives will forfeit the deferred portion of their STI if they resign or are dismissed from the Group before the end of the deferral period; The deferral assists in managing the risk of losing key Executive talent. It also allows the Board to reduce or cancel the deferred component of the STI where business outcomes are materially lower than expected; and STI payments are made within a funding cap which is determined by the Board after consideration of performance in the year. 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. See section 3.1 for more detail on STI outcomes and the link to performance. 2.4 Long Term Incentive The CEO and each Group Executive has an LTI target that is equal to 100% of their fixed remuneration; The LTI award has a four year performance period and is measured against relative Total Shareholder Return (TSR) and relative Customer Satisfaction performance hurdles; The performance hurdles are aligned to our key business priorities of Customer Focus and shareholder interests; Executives only receive value if performance hurdles are met at the end of the four years, subject to final Board review; and No dividends are paid while LTI awards are unvested. See section 3.2 for more detail on how the LTI award operates and its direct link to performance outcomes. 52 Commonwealth Bank of Australia 1/31/31/350% STI Deferred for 12 months50% STI Cash paidFixedRemuneration100% LTI Deferred for 4 years Directors’ Report – Remuneration Report 3. Linking Remuneration to Performance The remuneration framework is designed to attract and retain high calibre Executives by rewarding them for achieving goals that are aligned to the Group’s business strategy. All our incentives are directly linked to both short term and long term performance goals. 3.1 2013 Short Term Performance The table below provides an overview of performance for the year ended 30 June 2013 against key financial and non-financial performance measures. These measures are used to determine the individual STI outcomes of Executives, and are managed through a balanced scorecard approach. Financial objectives have a substantial weighting, and non-financial objectives vary by role. Executives managing business units typically have a 50% weighting on financial outcomes, while Executives managing support functions have a typical weighting of 30%. Performance 2013 Key Achievements Customer Focus Continue to build a vibrant customer focused culture. Strength Productivity Technology The Group’s continued commitment to its customer focused culture resulted in the Group becoming the number one major bank for customer satisfaction across all business areas. Specifically: For Retail Banking, in January 2013 the Bank achieved its number one rank among the major banks in Retail Main Financial Institution (MFI) Customer Satisfaction(1) for the first time since setting its goal to be number one in 2006. Since then CBA has continued to lead the major banks and achieved several record high scores. In Business Banking, CBA has maintained outright or equal first position in customer satisfaction (1) in all four business segments among the four major banks for the entire financial year. CBA continues to hold first position in the DBM Business Financial Services Monitor (BFSM, June 2013). Wealth Management’s platforms achieved a combined rating of first for adviser satisfaction among the four major banks and other key competitors. In Institutional Banking, CBA continues to perform strongly. The DBM Business Financial Services Monitor has ranked CBA outright or equal first in Institutional Banking MFI customer satisfaction(1) for the past 12 months. Maintain a strong, flexible Balance Sheet. The Group maintained a strong capital position with capital ratios well in excess of regulatory minimum capital requirements and the Board approved minimum levels at all times throughout the year ended 30 June 2013. The group preserved its well-diversified funding base including: – Customer deposits accounting for 63% of total funding at 30 June 2013 (2012: 62%); and – Short term wholesale funding accounted for 46% of total wholesale funding at 30 June 2013, down from 47% in the prior year. The Group continues to hold a high quality, well diversified liquid asset portfolio of $137 billion at 30 June 2013 (2012: $135 billion), to prudently meet Balance Sheet liquidity needs and regulatory requirements. The Group continues to manage growth by assessing opportunities that will generate sustainable returns for the long term, demonstrated in the current financial year by: – The acquisition of an additional 47% stake in Aussie Home Loans Pty Limited; and – Growth in existing loan portfolios, while maintaining conservative provisioning coverage ratios. Continuous and ongoing focus on eliminating waste, whilst making things simpler and easier for the Group’s customers and staff. To build capability to drive gains in long term productivity, the Group has completed training for a significant proportion of staff, commenced embedding a set of productivity habits across the Group, launched a program to develop internal productivity practitioners and employed global expertise. Productivity outcomes and behaviours have been embedded in reward and recognition systems together with the Group’s leadership capability framework. Projects have been executed across most business units delivering financial and customer benefits, and the transfer of productivity capability. Technology programs designed to enhance the customer experience through more innovative systems and processes, and improve efficiency levels. This financial year, the Group reached a significant milestone with the completion of its market-leading Core Banking Modernisation program, with more than 12 million customers now experiencing the benefits of a real-time banking platform. The Group continued evolving digital banking experiences, by developing applications that leverage real-time capability and streamline customer interfaces. Recent innovations include: – CommBank Kaching for Facebook, Australia’s first social media banking application, giving users a fast and secure payment option integrated into the platform; – Smartsign allows customers to execute loan documents electronically anytime, from anywhere in the world, using the Group’s secure online portal; and – MyWealth, an online platform that allows self-directed investors to research and invest in a range of financial products using one login, with investment and banking services in the same convenient online destination. In addition, the Branch of the Future program has continued to improve customer experience within the branch network. State-of-the-art features implemented include video conferencing facilities in branches, Annual Report 2013 53 Directors’ Report – Remuneration Report People allowing customers to rapidly connect with specialists, even if they are located in rural and remote areas. Develop a long term people focus. In the current financial year the Group’s people remained highly engaged, as shown by the Group’s recent employee engagement score of 80%. In October 2012, the Group launched a new approach to inclusion focussing on “you can be you”. Cultural diversity and ethnicity, Lesbian, Gay, Bisexual, Transgender and Intersex (LGBTI), and disability are now part of the Group’s diversity and inclusion strategy. Gender diversity is a key Group objective. The Group set a public target to increase the representation of women in leadership roles from 26.6% in December 2009 to 35% by December 2014. Progress is ongoing with 30.3% of women in executive roles as at 30 June 2013. The Group also continued to invest in its leadership development, talent and succession programs. The Group remains committed to not offshoring jobs. (1) Customer satisfaction is measured by three separate surveys. For the Retail bank, this is measured by Roy Morgan Research. Roy Morgan Research Main Financial Institution (MFI) Retail Customer Satisfaction measures percentage of the Australian population 14+, % “Very Satisfied” or “Fairly Satisfied” with their relationship with that MFI, based on a 6-month rolling average to June 2013. CBA excludes Bankwest. For business banking, this is measured by DBM Consultants Main Financial Institution (MFI) Business Customer Satisfaction. Satisfaction average with relationship with that MFI, 6-month rolling average to June 2013. For Wealth Management, customer satisfaction is measured by the Wealth Insights 2013 Service Level Report, Platforms. This survey measures satisfaction with the service of master trusts/wraps in Australia, by financial advisers. It includes Colonial First State’s FirstChoice and FirstWrap platforms. For Institutional Banking, customer satisfaction is measured by DBM Business Financial Services Monitor (June 2013) six month rolling average of MFI satisfaction ratings of Australian businesses. Institutional banking includes businesses with turnover of $100 million and above. Risk is also a key factor in accounting for short term performance. Firstly, we use PACC, a risk-adjusted measure, as one of our primary measures of financial performance. It takes into account not just the profit achieved, but also considers the risk to capital that was taken to achieve it. Secondly, Executives are required to comply with the relevant Group or Business Unit Risk Appetite Statement. STI awards are adjusted downwards where material risk issues occur. Thirdly, risk is also managed through the compulsory 50% deferral of the CEO and Group Executives’ STI outcomes for a period of 12 months and delivery of one-third of their total target remuneration after a 4 year period. Under the Group’s Remuneration Policy, the Board has discretion to make adjustments to deferred remuneration in various circumstances. Adjustments can include partial reductions or complete forfeiture of deferred STI awards. 3.2 Long Term Performance The executive remuneration structure also focuses on driving performance and creating shareholder alignment in the longer term, by providing Executives with LTI awards in the form of Reward Rights with a four year vesting period. Vesting is subject to performance against relative Total Shareholder Return (TSR) and relative Customer Satisfaction hurdles. The table below provides an overview of the CEO and Group Executives’ current LTI awards which have not yet vested. Overview of Unvested Long Term Incentive Awards at the end of the 2013 Financial Year Performance Period Ends 30 June 2014 30 June 2015 30 June 2016 Equity Plan Performance Hurdles Group Leadership Reward Plan (GLRP) Each reward is split and tested: 75% TSR relative to peer group 25% Customer Satisfaction ranking relative to peer group GLRP Award vested during 2013 Financial Year The GLRP award granted during the 2010 financial year reached the end of its four year performance period on 30 June 2013. The GLRP 2010 award was weighted against two performance hurdles, Customer Satisfaction (50% of the award) and TSR (50% of the award). At the end of the performance period, the results against these measures were solid and included: 100% vesting against the TSR hurdle. 75% vesting against the Customer Satisfaction hurdle, which compared CBA’s performance to the three other major banks and St.George. In line with the plan rules for this award, 87.5% of the total award vested. The Board reviewed the measurement outcomes of this award and concluded that the above vesting appropriately reflects performance over the four year performance period. No discretion was exercised. 54 Commonwealth Bank of Australia Directors’ Report – Remuneration Report 2013 GLRP Award granted in the 2013 Financial Year The CEO and Group Executives currently receive LTI awards under the GLRP. The awards granted may deliver value to Executives at the end of the four year performance period, subject to meeting performance hurdles as set out in the diagram below: The following table provides the key features of the 2013 GLRP award: Feature Description Instrument Reward Rights. Each Reward Right entitles the Executive to receive one CBA share in the future, subject to meeting the performance hurdles set out below. The number of rights that vest will not be known until the end of the performance period. Determining the number of Reward Rights The number of Reward Rights allocated depends on each Executive’s LTI Target (see diagram on page 52 for explanation of target remuneration). The number of Reward Rights allocated is calculated taking into account the expected number of shares to vest at the end of the performance period. Performance Period The performance period commences at the beginning of the financial year in which the award is granted. For the GLRP award granted in the 2013 financial year, the performance period started on 1 July 2012 and ends after four years on 30 June 2016. Any vesting will result in participants receiving shares during the first available trading window following the end of the performance period. Performance Hurdles Vesting Framework 75% of each award is subject to a performance hurdle, which measures the Group’s TSR performance relative to a set peer group(1). This is made up of the 20 largest companies on the Australian Securities Exchange (ASX) by market capitalisation at the beginning of the performance period, excluding resources companies and Commonwealth Bank of Australia; and 25% of each award is subject to a performance hurdle that measures the Group’s Customer Satisfaction outcomes relative to a peer group of Australia & New Zealand Banking Group Limited (ANZ), National Australia Bank Limited (NAB), Westpac Banking Corporation (WBC), and other key competitors for the wealth business. TSR (75% of the award) 100% vesting is achieved if the Group’s TSR is ranked in the top quarter of the peer group, (i.e. 75th percentile or higher); If the Group is ranked at the median, 50% of the Reward Rights will vest; Vesting occurs on a sliding scale if the Group is ranked between the median and the 75th percentile; and 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. Customer Satisfaction (25% of the award) Calculation of the Performance Results 100% vesting applies if the weighted average ranking for the Group over the performance period is 1st; 50% will vest if the Group’s weighted average ranking is 2nd; and Vesting of between 50% and 100% will occur on a pro-rata straight line basis if the Group’s weighted average ranking is between 2nd and 1st. No Reward Rights in this part of the award will vest if the Group’s weighted average ranking is less than 2nd. TSR is calculated independently by an external provider. Customer Satisfaction is measured with reference to the three independent surveys below: – Roy Morgan Research (measuring customer satisfaction across Retail Banking); – DBM, Business Financial Services Monitor (measuring customer satisfaction across Business Banking); and – Wealth Insights Service Level Report, Platforms (measuring customer satisfaction across Wealth Management). Annual Report 2013 55 Reward Rightsgranted4 year performance periodCustomer Satisfaction hurdle = 25%Total Shareholder Return hurdle = 75% Directors’ Report – Remuneration Report Board Discretion The Board also retains sole discretion to determine the amount and form of any award that may vest (if any) to prevent any unintended outcomes, or in the event of a corporate restructuring or capital event. Expiry At the end of the applicable performance period, any Reward Rights that have not vested will expire. (1) The peer group (at the beginning of the performance period) for the TSR performance hurdle (at the time of grant) comprised AGL Energy Limited, Amcor Limited, AMP Limited, Australia and New Zealand Banking Group Limited, Brambles Industries Limited, CSL Limited, Insurance Australia Group Limited, Macquarie Group Limited, National Australia Bank Limited, QBE Insurance Group Limited, Orica Limited, Stockland, Suncorp Group Limited, Telstra Corporation Limited, Transurban Group NPV, Wesfarmers Limited, Westfield Group Limited, Westfield Retail Trust, Westpac Banking Corporation and Woolworths Limited. Hedging of Unvested Equity Awards Employees are prohibited from hedging in relation to all of their unvested CBA equity awards, including shares or rights. Prohibited activity includes Executives controlling their exposure to risk in relation to their unvested awards. The CEO’s direct reports are also prohibited from using instruments or arrangements for margin borrowing, short selling or stock lending of any Bank securities or the securities of any other member of the Group. All hedging restrictions are included in the Group’s Securities Trading Policy. Long Term Performance against Key Measures As detailed above, long term incentive arrangements are designed to align Executives with the Group’s long term strategy and shareholder interests. The remainder of this section illustrates performance against key related metrics over time. Financial Performance The following graphs show the Group’s cash Net Profit after Tax (cash NPAT), cash Earnings per Share (cash EPS), share price movement and full-year dividend results over the past five financial years (including 2013). The solid performance has delivered sound returns to shareholders. Cash Net Profit after Tax (Cash NPAT) Cash EPS (Basic) Share Price Dividends per Share 56 Commonwealth Bank of Australia 4,4156,1016,8357,1137,81901,0002,0003,0004,0005,0006,0007,0008,0009,000Jun 09Jun 10Jun 11Jun 12Jun 13$ Million305.6395.5438.7449.4485.80.0100.0200.0300.0400.0500.0600.0Jun 09Jun 10Jun 11Jun 12Jun 13Cents$0$10$20$30$40$50$60$70Jun 09Jun 10Jun 11Jun 12Jun 13Share Price2.282.903.203.343.64$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00Jun 09Jun 10Jun 11Jun 12Jun 13 Directors’ Report – Remuneration Report Relative TSR Performance against the Group’s Peers The graph below represents CBA’s TSR performance against the comparator peer group for the period 1 July 2009 to 30 June 2013. The Group was ranked first relative to the peer group at the end of the period. TSR is calculated by an independent external supplier. (1) The peer group (at the end of the performance period) for the TSR performance hurdle (at the time of grant) comprised AGL Energy Limited, AMP Limited, Australia and New Zealand Banking Group Limited, ASX Limited, Brambles Industries Limited, Coca-Cola Amatil Limited, CSL Limited, Insurance Australia Group Limited, Macquarie Group Limited, National Australia Bank Limited, Qantas Airways Limited, QBE Insurance Group Limited, Stockland, Suncorp- Metway Limited, Telstra Corporation Limited, Transurban Group, Wesfarmers Group Limited, Westfield Group Limited, Westpac Banking Corporation and Woolworths Limited. Performance against Customer Satisfaction The following graphs show CBA’s customer satisfaction performance across Retail and Business areas. During the 2013 financial year, CBA achieved its number one rank amongst the major banks in retail MFI customer satisfaction(1) in January 2013 for the first time since setting its goal to be number one in 2006. Since January 2013, CBA continues to lead the major banks and achieved several record high scores. The Wealth Management results ranked the Group first for advisor satisfaction for the year ended 30 June 2013. Overall, positive improvements have been made against this measure. Retail Main Financial Institution Customer Satisfaction - Competitive Context (1) Roy Morgan Research Main Financial Institution (MFI) Retail Customer Satisfaction. Australian population 14+, % “Very Satisfied” or “Fairly Satisfied” with relationship with that MFI. 6 month rolling average to June 2013. CBA excludes Bankwest. Annual Report 2013 57 -40%-20%0%20%40%60%80%100%120%140%Total Shareholder Return 2013 (4 years)Comparator Peer Group 60%65%70%75%80%85%90%Jan-06Mar-06Jun-06Sep-06Dec-06Mar-07Jun-07Sep-07Dec-07Mar-08Jun-08Sep-08Dec-08Mar-09Jun-09Sep-09Dec-09Mar-10Jun-10Sep-10Dec-10Mar-11Jun-11Sep-11Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13% Satisfied ('Very Satisfied' or 'Fairly Satisfied')Major Bank 1Major Bank 2Major Bank 3Regional Bank 1CBADiff to No.1 -12.3%Source: Roy Morgan Research6 month rolling average Directors’ Report – Remuneration Report Business Main Financial Institution Customer Satisfaction - Competitive Context (1) DBM Business Financial Services Monitor (June 2013), average satisfaction rating of each financial institution’s MFI business customers across all Australian businesses, 6 month rolling average. 3.3 Performance Timeline of At Risk Remuneration Outcomes The Performance Management framework supports decisions in awarding appropriate annual STI outcomes for Executives. The STI performance objectives are communicated to Executives at the beginning of the performance year. Executives’ annual performance evaluations are conducted following the end of the financial year. For 2013, the evaluations were conducted in July 2013. The following diagram outlines the timing of the STI and LTI awards made to the Executives over the relevant performance periods. All awards are subject to risk and compliance reviews. 3.4 CEO and Group Executive Remuneration Received in the year ended 30 June 2013 The incentives awarded to the CEO and Group Executives are directly linked to the Group’s positive financial performance. Total statutory remuneration recognised for the CEO and Group Executives for the 2013 performance year was $43.8 million and is the total of the values for each executive shown in the statutory remuneration tables on pages 60 and 61. Statutory remuneration disclosures are prepared in accordance with the Corporations Act and Australian Accounting Standards. Total cash remuneration received by the CEO and Group Executives in relation to the 2013 performance year was $22.6 million. The total cash remuneration received is used by management to present a clear view of the Group’s remuneration payments made to the CEO and Group Executives during the performance year. 58 Commonwealth Bank of Australia 678 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13Satisfaction -AverageMajor Bank 1Major Bank 2Major Bank 3Regional Bank 1CBASource: DBM, Business Financial Services Monitor6 month rolling averageSTI Annual Performance ReviewSTI outcomes determined & approved by Board50 % of STI outcome paid as cashJun2014LTI LTI awards approved by BoardGroup Executives grant of LTI awardCEO grant of LTI awardJuly 201230 Jun 2013Jul 2013Aug 2013Sep 2013November201330 June 2017Vests subject to Risk Review and meeting set Performance HurdlesBoard Sets StrategySTI Targets are set Subject to Risk & Compliance ReviewVesting subject to Risk ReviewPerformance Measurement PeriodFollowing Shareholder Approval50% STI deferredfor 1 year LTI Award deferred for 4 years Directors’ Report – Remuneration Report Table (a) below shows cash remuneration received in relation to the 2013 performance year. The total cash payments received are made up of base remuneration and superannuation (fixed remuneration), and the non-deferred portion of the 2013 STI award. This table also includes the value of previous years’ deferred STI and LTI awards which vested during 2013. (a) Cash Remuneration in relation to the 2013 Financial Year (1) Base Remuneration and Superannuation make up an Executive's fixed remuneration. (2) This is the 50% of the 2013 STI for performance during the 12 months to 30 June 2013 (payable September 2013). The remaining 50% is deferred until 1 July 2014. (3) The value of all deferred cash and/or equity awards that vested during 2013 financial year. This includes the value of the award that vested, plus any interest and/or dividends accrued during the vesting period. (4) The value of any deferred cash and/or equity awards that were forfeited/lapsed during the 2013 financial year. (5) Group Executives as at 30 June 2013. (6) Matthew Comyn commenced in the KMP role effective 10 August 2012. His remuneration has been prorated accordingly. (b) CEO Reconciliation Table of Cash Payments from Table (a) and Statutory Remuneration Table on Page 60 Annual Report 2013 59 Base Remuneration &2013 STI forPerformance toTotal Cash Payments in relation Deferred CashDeferred Equity Superannuation (1)30 June 2013 (2)to the 2013 yearAwardsAwardsLTI Awards$$$$$$Managing Director and CEOIan Narev2,500,000 1,562,500 4,062,500 1,033,289 1,690,549 (171,721) Current Executives (5)Simon Blair830,000 506,300 1,336,300 453,679 - - David Cohen900,000 562,500 1,462,500 558,929 1,765,215 (166,654) Matthew Comyn (6)872,603 567,192 1,439,795 -- - David Craig1,380,000 862,500 2,242,500 804,240 2,121,914 (212,145) Michael Harte1,075,000 634,250 1,709,250 592,041 1,963,381 (191,933) Robert Jesudason800,000 504,000 1,304,000 -- - Melanie Laing800,000 480,000 1,280,000 165,230 - - Grahame Petersen1,175,000 628,625 1,803,625 578,232 2,124,981 (222,224) Ian Saines 1,330,000 744,800 2,074,800 686,592 2,518,246 (262,648) Annabel Spring980,000 627,200 1,607,200 386,231 95,280 - Alden Toevs1,430,000 850,850 2,280,850 739,139 2,152,481 (282,860) Previous Years' Awards that Vested during 2013 (3)Previous Years' Awards Forfeited/Lapsed during 2013 (4)2013$Financial Year Award VestsCash remuneration received in relation to 2013 - refer to table (a) above4,062,500 n/a2013 STI deferred for 12 months at risk1,562,500 2014Annual leave and long service leave accruals285,301 n/aOther Payments47,973 n/aShare based payments: accounting expense for 2013 for LTI awards made over the past 4 years 2010 GLRP:Expense for one award that may vest subject to customer satisfaction performance187,850 2014 2010 GLRP:Expense for one award that may vest subject to relative TSR performance166,206 2014 2011 GLRP:Expense for one award that may vest subject to customer satisfaction performance70,189 2015 2011 GLRP:Expense for one award that may vest subject to relative TSR performance185,843 2015 2012 GLRP:Expense for one award that may vest subject to customer satisfaction performance230,347 2016 2012 GLRP:Expense for one award that may vest subject to relative TSR performance533,272 2016 2013 GLRP:Expense for one award that may vest subject to customer satisfaction performance142,525 2017 2013 GLRP:Expense for one award that may vest subject to relative TSR performance330,388 2017Total Statutory Remuneration as per page 617,804,894 Directors’ Report – Remuneration Report 4. Key Management Personnel (KMP) Disclosure Tables 4.1 Non-Executive Directors Statutory Remuneration The statutory table below details individual statutory remuneration for the Non-Executive Directors for the year ended 30 June 2013. (1) Cash includes Board and Committee base fees received as cash including minor adjustments in relation to previous years. (2) Retiring allowances were paid to Colin Galbraith and Fergus Ryan when they retired from the Group on 30 October 2012. There are no longer any Non- Executive Directors with a retiring allowance. (3) The values shown in the table are the pre-tax portion of fees received as shares. (4) Comparative remuneration payments have been restated to reallocate between Cash and Non-Executive Directors Share Plan in the prior period. This reallocation did not impact the Total Statutory Remuneration disclosed. 4.2 Executive Statutory Remuneration The following statutory tables detail the statutory accounting expense of all remuneration related items for the CEO and all Group Executives. This includes remuneration costs in relation to both the previous and current performance year. The tables are different to the cash table on page 59, which shows the remuneration received in 2013 rather than the accrual amounts on the statutory accounting basis, as outlined in these statutory tables. The tables have been developed and audited against the relevant accounting standards. Refer to the footnotes below each table for more detail on each remuneration component. 60 Commonwealth Bank of Australia Short Term BenefitsShare Based paymentsRetiring Non-ExecutiveTotalSuper-AllowanceDirectors'StatutoryCash (1)annuationPaid (2)Share Plan (3)Remuneration$$$$$Chairman (4)David Turner2013839,538 16,470 - - 856,008 2012781,619 50,000 - - 831,619 Non-Executive Directors (4)John Anderson2013261,281 16,470 - - 277,751 2012251,779 18,128 - - 269,907 Jane Hemstritch2013306,614 16,470 - - 323,084 2012292,886 21,088 - - 313,974 Launa Inman2013213,402 16,470 - 53,351 283,223 2012193,202 17,388 - 48,301 258,891 Carolyn Kay2013306,565 16,470 - - 323,035 2012292,886 21,088 - - 313,974 Brian Long 2013306,468 16,470 - - 322,938 2012283,982 20,447 - - 304,429 Andrew Mohl2013278,244 16,470 - - 294,714 2012251,195 35,238 - - 286,433 Harrison Young2013314,130 16,470 - - 330,600 2012292,886 21,088 - - 313,974 Former Non-Executive Directors (4)Colin Galbraith201398,305 8,269 159,092 - 265,666 2012277,471 19,978 - - 297,449 Fergus Ryan201398,424 8,269 168,263 - 274,956 2012246,099 46,204 - - 292,303 Post Employment Benefits Directors’ Report – Remuneration Report (1) Base Remuneration comprises short term benefits, being the Cash Fixed component and post-employment benefit being Superannuation Fixed. (2) Cash Fixed remuneration is the total cost of salary including any salary sacrificed benefits. For most Executives, differences from 2012 relate to changes in Superannuation Fixed following a reduction in the concessional contributions cap. (3) Non-monetary Fixed represents the cost of car parking (including associated fringe benefits tax). (4) This is 50% of the 2013 STI for performance during the 12 months to 30 June 2013 (payable September 2013). (5) STI Deferred includes the compulsory deferral of 50% of total STI payments in recognition of performance for the year ended 30 June 2013. (6) Other short term benefits relate to company funded benefits (including associated fringe benefits tax where applicable). This item also includes interest accrued in relation to the 2012 STI deferred award, which vested on 1 July 2013 and net annual leave accruals. The 2012 comparative for Melanie Laing includes a cash payment of $380,000 relating to her sign-on arrangements when joining the Group on 15 February 2012. Includes long service entitlements accrued during the year. The long service leave valuation has been determined using assumptions consistent with AASB119. For Matthew Comyn, Robert Jesudason, Melanie Laing and Annabel Spring this also includes amounts relating to equity sign-on awards and/or deferred STI payments awarded under Executive General Manager arrangements. These equity awards are subject to forfeiture if the Executive ceases to be employed by the Group due to his or her resignation in any circumstances. The 2012 comparative for Ross McEwan includes amounts relating to other special arrangements. This equity award was forfeited in 2013 following Ross’ resignation. (7) (8) This includes the 2013 expense for Reward Shares/Rights awarded during the 2010, 2011, 2012 and 2013 financial years under the GLRP. (9) The percentage of 2013 remuneration related to performance was: Ian Narev 64%, Simon Blair 67%, David Cohen 68%, Matthew Comyn 54%, David Craig 67%, Michael Harte 66%, Robert Jesudason 38%, Melanie Laing 54%, Grahame Petersen 67%, Ian Saines 67%, Annabel Spring 56%, and Alden Toevs 66%. The percentage of 2013 performance related remuneration that was forfeited by Ross McEwan was 79%. (10) Matthew Comyn was appointed to the Group Executive Retail Banking Services role on 10 August 2013 and his remuneration has been prorated accordingly. For the 2012 comparative, Annabel Spring was appointed to the Group Executive Wealth Management role on 1 October 2011, Ian Narev was appointed to the CEO role effective 1 December 2011, and Melanie Laing commenced with the Group on 15 February 2012. The remuneration for these executives was prorated accordingly. (11) Ross McEwan resigned from the Group on 13 July 2012. The Other Short Term amount is negative as Ross McEwan’s negative annual leave accrual was greater than the other short term remuneration paid during the year ended 30 June 2013. Upon resignation, Ross forfeited his Reward Shares/Rights awarded during the 2010, 2011, 2012 and 2013 financial years under the GLRP, consistent with the plan rules. Annual Report 2013 61 Long Term BenefitsShare Based PaymentsShort Term Cash Fixed (2)$Superannuation Fixed$Non Monetary Fixed (3)$Cash STI Payment At Risk (4)$STI Deferred At Risk (5)$Other (6)$Long Term (7)$LTI Reward Shares/Rights (at risk) (8)$Total Statutory Remuneration (9)$Managing Director and CEOIan Narev (10) 20132,475,00025,00014,2281,562,5001,562,500223,97995,0671,846,6207,804,89420121,820,77925,0005,763999,544999,544171,491133,3531,520,5725,676,046Group ExecutivesSimon Blair 2013805,00025,00014,228506,300506,30085,05218,540901,6542,862,0742012780,00050,00013,787438,863438,863124,17123,081786,0212,654,786David Cohen 2013875,00025,00014,228562,500562,50090,66622,7511,013,1103,165,7552012850,00050,00013,787540,675540,67586,30927,1651,210,4603,319,071Matthew Comyn (10)2013850,34322,26011,766567,192567,19258,636207,144199,9182,484,451David Craig 20131,355,00025,00014,228862,500862,500133,98929,9821,469,0354,752,23420121,330,00050,00013,787777,975777,975145,22138,8621,670,4984,804,318Michael Harte20131,050,00025,00013,191634,250634,250153,08614,1621,200,1203,724,05920121,050,00025,00014,953572,706572,706124,00660,8521,420,1283,840,351Robert Jesudason2013775,00025,00014,228504,000504,00070,281995,507163,2053,051,221Melanie Laing (10) 2013775,00025,00014,228480,000480,00063,219265,203406,9732,509,6232012261,74837,7061,152159,834159,834402,556274,63991,2671,388,736Grahame Petersen20131,150,00025,00014,228628,625628,625108,674(5,662)1,338,0753,887,56520121,125,00050,00016,558559,348559,348107,73758,8221,607,2504,084,063Ian Saines 20131,305,00025,00014,228744,800744,800122,57412,1891,545,4744,514,06520121,280,00050,00013,787664,169664,169129,21246,7281,876,8624,724,927Annabel Spring (10)2013955,00025,00013,191627,200627,20080,059278,718474,4363,080,8042012714,94518,71610,142373,617373,61785,87511,463171,7251,760,100Alden Toevs 20131,405,00025,00014,228850,850850,850148,24730,4541,493,6614,818,29020121,380,00050,00013,787715,000715,000186,66538,7751,399,0994,498,326Former ExecutiveRoss McEwan (11) 201344,7864,118---(2,894)(653,662)(2,223,162)(2,830,814)20121,250,00050,00013,627607,750607,75058,575997,8241,755,9355,341,461Other Short Term BenefitsBase Remuneration (1) Directors’ Report – Remuneration Report 4.3 Executive STI Allocations for 2013 Includes 50% of the annual STI award payable as cash in recognition of performance for the year ended 30 June 2013. (1) The maximum STI is represented as a percentage of fixed remuneration. The minimum STI potential is zero. (2) (3) This represents 50% of the STI award that is deferred until 1 July 2014. The deferred awards are subject to Board review at the time of payment. (4) Matthew Comyn commenced in the KMP role on 10 August 2012. His STI target has been prorated accordingly. 4.4 Equity Awards Received as Remuneration The table below details the value and number of equity awards that were granted or forfeited/lapsed during 2013. It also shows the number of previous year’s awards that vested during the 2013 performance year. (1) This represents the maximum number of reward rights that may vest to each Executive. The value represents the fair value at grant date. The minimum LTI potential is zero. (2) Previous years' awards that vested include LTI and other deferred equity awards. (3) This includes the portion of the LTI award that reached the end of its performance period on 30 June 2013 that did not meet the performance hurdle and was forfeited. For Ross McEwan, this includes the Reward Shares/Rights awarded during the 2010, 2011, 2012 and 2013 financial years under the GLRP that were forfeited as a result of his resignation from the Group on 13 July 2012. All values are based on the fair value at grant of each award. 62 Commonwealth Bank of Australia STI Target Maximum STI Potential (1) $ %%$%$Managing Director and CEOIan Narev 2,500,000 150%50% 1,562,500 50% 1,562,500 Group ExecutivesSimon Blair 830,000 150%50% 506,300 50% 506,300 David Cohen 900,000 150%50% 562,500 50% 562,500 Matthew Comyn (4) 872,603 150%50% 567,192 50% 567,192 David Craig 1,380,000 150%50% 862,500 50% 862,500 Michael Harte 1,075,000 150%50% 634,250 50% 634,250 Robert Jesudason 800,000 150%50% 504,000 50% 504,000 Melanie Laing 800,000 150%50% 480,000 50% 480,000 Grahame Petersen 1,175,000 150%50% 628,625 50% 628,625 Ian Saines 1,330,000 150%50% 744,800 50% 744,800 Annabel Spring 980,000 150%50% 627,200 50% 627,200 Alden Toevs 1,430,000 150%50% 850,850 50% 850,850 STI Paid (2)STI Portion Deferred (3)Previous Years'Awards Vestedduring 2013 (2)NameClassUnits$UnitsUnits$Managing Director and CEOIan NarevReward Shares/Rights78,6812,987,31422,067(3,152)(171,721)Deferred Shares--5,698--Group ExecutivesSimon BlairReward Shares/Rights26,122956,396---Deferred Shares-----David Cohen Reward Shares/Rights28,3261,037,08621,418(3,059)(166,654)Deferred Shares--7,597--Matthew ComynReward Shares/Rights30,8431,129,235---Deferred Shares6,119333,3339,800--David Craig Reward Shares/Rights43,4321,590,15527,259(3,894)(212,145)Deferred Shares--7,597--Michael Harte Reward Shares/Rights33,8331,238,71924,663(3,523)(191,933)Deferred Shares--7,597--Robert JesudasonReward Shares/Rights25,179921,870---Deferred Shares4,295233,95323,625--Melanie LaingReward Shares/Rights25,179921,870---Deferred Shares--7,015--Grahame PetersenReward Shares/Rights36,9801,353,93428,557(4,079)(222,224)Deferred Shares--6,331--Ian SainesReward Shares/Rights41,8581,532,53133,749(4,821)(262,648)Deferred Shares--7,597--Annabel SpringReward Shares/Rights30,8431,129,235---Deferred Shares--1,583--Alden Toevs Reward Shares/Rights45,0051,647,74725,263(5,192)(282,860)Deferred Shares--10,130--Former ExecutiveRoss McEwan Reward Shares/Rights--31,153(125,294)(5,178,504)Deferred Shares--8,863(50,886)(2,500,029)Forfeited orGrantedLapsedduring 2013 (1)during 2013 (3) Directors’ Report – Remuneration Report 4.5 Fair Value Assumptions for Unvested Equity Awards For the Customer Satisfaction component of all LTI awards, the fair value is the closing market price of a CBA share as at the grant date. For the Total Shareholder Return component of the LTI awards, the fair value has been calculated using a Monte- Carlo simulation method using the following assumptions: (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. 4.6 Termination Arrangements The table below provides the termination arrangements included in all Executive contracts for our current KMP. (1) Permanent contracts are ongoing until notice is given by either party. (2) Severance applies where the termination is initiated by the Group, other than for misconduct or unsatisfactory performance. The termination entitlements are appropriate and do not deliver windfall payments on termination that are not related to performance. As part of these arrangements, Executives who resign or are dismissed will forfeit all their deferred awards (including cash and equity awards), and will generally not be entitled to a STI payment for that year. At the Board’s discretion, where an Executive’s exit is related to retrenchment, retirement or death, the Executive may be entitled to an STI payment and any outstanding LTI awards continue unchanged with performance measured at the end of the performance period related to each award. The Board has ultimate discretion over the amount of awards that may vest. Ross McEwan was the only KMP who left the Group during the 2013 financial year. Annual Report 2013 63 FairExercisePerformanceExpectedExpectedExpectedRisk FreeGrantValuePricePeriodLifeDividend YieldVolatilityRateAward TypeDate$$End(Years)%%%GLRP - Reward Rights (1)05/11/201257.40Nil30/06/2016n/an/an/an/aGLRP - Reward Rights (2)05/11/201231.49Nil30/06/20163.7Nil203.2GLRP - Reward Rights (1)04/10/201256.55Nil30/06/2016n/an/an/an/aGLRP - Reward Rights (2)04/10/201230.76Nil30/06/20163.7Nil203.0GLRP - Reward Rights (1)15/02/201250.23Nil30/06/2015n/an/an/an/aGLRP - Reward Rights (2)15/02/201231.87Nil30/06/20153.4Nil304.4GLRP - Reward Rights (1)15/11/201149.15Nil30/06/2015n/an/an/an/aGLRP - Reward Rights (2)15/11/201131.60Nil30/06/20153.6Nil304.2GLRP - Reward Rights (1)29/08/201147.96Nil30/06/2015n/an/an/an/aGLRP - Reward Rights (2)29/08/201132.23Nil30/06/20153.8Nil304.7GLRP - Reward Rights (1)10/03/201151.30Nil30/06/2014n/an/an/an/aGLRP - Reward Rights (2)10/03/201136.51Nil30/06/20143.3Nil305.5GLRP - Reward Rights (1)27/09/201052.86Nil30/06/2014n/an/an/an/aGLRP - Reward Rights (2)27/09/201037.61Nil30/06/20143.8Nil305.5GLRP - Reward Shares (1)25/09/200951.30Nil30/06/2013n/an/an/an/aGLRP - Reward Shares (2)25/09/200937.24Nil30/06/20133.8Nil305.4AssumptionsNameContract Type (1)NoticeSeverance (2)Managing Director & CEOIan NarevPermanent12 monthsn/aGroup ExecutivesSimon BlairPermanent6 months6 monthsDavid CohenPermanent6 months6 monthsMatthew ComynPermanent6 months6 monthsDavid CraigPermanent6 months6 monthsMichael HartePermanent6 months6 monthsRobert JesudasonPermanent6 months6 monthsMelanie LaingPermanent6 months6 monthsGrahame PetersenPermanent6 months6 monthsIan SainesPermanent6 months6 monthsAnnabel SpringPermanent6 months6 monthsAlden ToevsPermanent6 monthsn/a Directors’ Report – Remuneration Report Glossary of Key Terms To assist readers, key terms and abbreviations used in the remuneration report as they apply to the Group are set out below. Term Definition Base Remuneration Cash and non-cash remuneration paid regularly with no performance conditions. Board Deferred Shares The Board of Directors of the Group. Shares subject to forfeiture on resignation. Used for sign-on awards and deferred STI below Group Executive level. Executives The CEO and Group Executives are collectively referenced as ‘Executives’. 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 The Group’s long term incentive plan from 1 July 2009 for the CEO and Group Executives. Plan (GLRP) Key Management Personnel (KMP) Long Term Incentive (LTI) 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 plan is the GLRP. NPAT Net profit after tax. 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 Profit after capital charge. Remuneration Received Reward Shares Reward Rights Salary Sacrifice Represents all forms of consideration paid by the Group or on behalf of the Group during the current performance year ending 30 June 2013, in exchange for services previously rendered to the Group. Shares in CBA granted under the GLRP during the 2010 financial year and subject to performance hurdles. Rights to ordinary shares in CBA granted under the GLRP from the 2011 financial year and subject to performance hurdles. An arrangement where an employee agrees to forgo part of his or her cash component of Base Remuneration in return for non-cash benefits of a similar value. Short Term Incentive (STI) Remuneration paid with direct reference to the Group’s and the individual’s performance over one financial year. Statutory Remuneration 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. Total Shareholder Return (TSR) TSR measures a company’s share price movement, dividend yield and any return of capital over a specific period. 64 Commonwealth Bank of Australia Company Secretaries Auditor’s Independence Declaration Details of the Bank’s Company Secretaries, including their experience and qualifications, are set out below. We have obtained an independence declaration from our external auditor as presented on the following page. Directors’ Report Auditor Independence 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 general standard of independence imposed by the Corporations Act 2001. 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 service 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 and Chief Executive Officer’s Statements (pages 2 to 5), Highlights (pages 6 to 9), Group Performance Analysis (pages 10 to 19), Note 37 (pages 144 to 145) and Shareholding Information (pages 188 to 191) sections of this Annual Report. Margaret Taylor was appointed Company Secretary of the Commonwealth Bank of Australia effective 6 August 2013. Before joining the Bank, she held the position of Group General Counsel and Company Secretary of Boral Limited. Prior to that, she was Regional Counsel Australia/Asia with BHP Billiton, and prior to that a partner with law firm Minter Ellison, specialising in corporate and securities laws. She holds law and arts degrees from the University of Queensland and is a Fellow of Chartered Secretaries Australia. Carla Collingwood was appointed a Company Secretary of 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. John Hatton was Company Secretary of the Bank from 1994 until he retired on 5 July 2013. From 1985 until 1994, he was a solicitor with the Bank’s Legal Department. He has a Bachelor of Laws degree from the University of Sydney 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. 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 33 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 related services 2013 $’000 945 3,088 576 157 4,766 21,782 (1) An additional amount of $480,672 was paid to PwC for non-audit services provided to entities not consolidated into the Financial Statements. Signed in accordance with a resolution of the Directors. D J Turner Chairman 13 August 2013 I M Narev Managing Director and Chief Executive Officer 13 August 2013 Annual Report 2013 65 Auditor’s Independence Declaration As lead auditor for the audit of the Commonwealth Bank of Australia for the year ended 30 June 2013, 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 Commonwealth Bank of Australia and the entities it controlled during the year. Marcus Laithwaite Partner PricewaterhouseCoopers Sydney 13 August 2013 PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 66 Commonwealth Bank of Australia This page has been intentionally left blank Annual Report 2013 67 Five Year Financial Summary Includes investment experience. (1) (2) Due to the change in expectations on the size and impact of defined benefit superannuation plan expense, from 1 July 2009 this amount has been included as part of total expenses (“cash basis”) and is recorded in the Other segment. (3) Comparative information for 2012 only has been restated to reflect changes in the presentation of segment results in the current period. The changes include the reallocation of revenue, expenses and associated customer balances between segments based on where the customer relationship is managed; the allocation of residual earnings on capital across the business segments; and the impact of the Group relinquishing the banking licence held by Bankwest during October 2012. (4) Comparatives have been restated to conform to presentation in the current year. 68 Commonwealth Bank of Australia 20132012201120102009$M$M$M$M$MNet interest income13,94413,15712,64512,00810,184Other operating income (1)7,5556,9937,0147,0516,634Total operating income21,49920,15019,65919,05916,818Operating expenses(9,605)(9,196)(8,891)(8,601)(7,765)Impairment expense(1,082)(1,089)(1,280)(2,075)(3,048)Net profit before tax10,8129,8659,4888,3836,005Corporate tax expense(2,977)(2,736)(2,637)(2,266)(1,560)Non-controlling interests(16)(16)(16)(16)(30)Net profit after tax ("cash basis")7,8197,1136,8356,1014,415Defined benefit superannuation plan expense (2)----(10)Treasury shares valuation adjustment(53)(15)(22)(44)(28)Hedging and IFRS volatility27124(265)17(245)One-off expenses----(23)Tax on NZ structured finance transactions---(171)-Loss on disposal of controlled entities/investments--(7)(23)-Bankwest non-cash items(71)(89)(147)(216)614Count Financial acquisition costs-(43)---Bell Group litigation(45)----Net profit after income tax attributable to Equity holders of the Bank ("statutory basis")7,6777,0906,3945,6644,723Contributions to profit (after tax) (3)Retail Banking Services3,0542,7032,8542,4612,107Business and Private Banking1,4881,5131,030898736Institutional Banking and Markets1,2101,0981,0041,173166Wealth Management577492581592514New Zealand630557469387438Bankwest561527463(45)113IFS and Other194134353457537Net profit after tax ("underlying basis")7,7147,0246,7545,9234,611Investment experience after tax1058981178(196)Net profit after tax ("cash basis")7,8197,1136,8356,1014,415Balance SheetLoans, bills discounted and other receivables556,648525,682500,057493,459466,631Total assets (4)753,876718,859667,899646,330620,372Deposits and other public borrowings459,429437,655401,147374,663368,721Total liabilities (4)708,384677,287630,612610,760588,930Shareholders' equity45,49241,57237,28735,57031,442Net tangible assets33,59329,82126,21724,68820,738Risk weighted assets - Basel III (APRA)329,158n/an/an/an/aRisk weighted assets - Basel II (APRA)n/a302,787281,711290,821288,836Average interest earning assets653,637629,685597,406577,261510,510Average interest bearing liabilities609,557590,654559,095543,824483,283Assets (on Balance Sheet) - Australia (4)644,062621,985581,695561,618528,354Assets (on Balance Sheet) - New Zealand61,57855,49954,99356,94859,606Assets (on Balance Sheet) - Other48,23641,37531,21127,76432,412 Five Year Financial Summary (1) The productivity metrics have been calculated on a “cash basis”. Annual Report 2013 69 20132012201120102009Shareholder summaryDividends per share - fully franked (cents)364334320290228Dividend cover - statutory (times)1.31.31.31.31.3Dividend cover - cash (times)1.31.31.41.41.3Earnings per share (cents)BasicStatutory477.9448.9411.2367.9328.5Cash basis485.8449.4438.7395.5305.6Fully dilutedStatutory464.5432.9395.1354.2313.4Cash basis472.0433.4420.6379.8292.4Dividend payout ratio (%)Statutory76.875.278.379.773.1Cash basis75.475.073.273.978.2Net tangible assets per share ($)20.818.716.815.913.7Weighted average number of shares (statutory basic) (M)1,5981,5701,5451,5271,420Weighted average number of shares (statutory fully diluted) (M)1,6861,6741,6681,6401,548Weighted average number of shares (cash basic) (M)1,6011,5731,5481,5311,426Weighted average number of shares (cash fully diluted) (M)1,6891,6771,6711,6441,554Number of shareholders786,437792,906792,765784,382776,283Share prices for the year ($)Trading high74.1853.8055.7760.0046.69Trading low53.1842.3047.0536.2024.03End (closing price)69.1853.1052.3048.6439.00Performance ratios (%)Return on average Shareholders' equityStatutory18.218.718.417.516.8Cash basis18.418.619.518.715.8Return on average total assetsStatutory1.01.01.00.90.9Cash basis1.11.01.01.00.8Capital adequacy - Common Equity Tier One - Basel III (APRA)8.2n/an/an/an/aCapital adequacy - Tier One - Basel III (APRA)10.2n/an/an/an/aCapital adequacy - Tier Two - Basel III (APRA)1.0n/an/an/an/aCapital adequacy - Total - Basel III (APRA)11.2n/an/an/an/aCapital adequacy - Tier One - Basel IIn/a10.010.09.28.1Capital adequacy - Tier Two - Basel IIn/a1.01.72.32.3Capital adequacy - Total - Basel IIn/a11.011.711.510.4Net interest margin2.132.092.122.081.99Other information (numbers)Full-time equivalent employees44,96944,84446,06045,02544,218Branches/services centres (Australia)1,1661,1671,1601,1471,142Agencies (Australia)3,7643,8183,7953,8843,859ATM's (proprietary)4,3044,2134,1734,1494,075EFTPOS terminals181,227175,436170,855165,621167,025Productivity (1)Total income per full-time (equivalent) employee ($)474,660446,013424,186418,057386,381Employee expense/Total income (%)24.124.724.524.123.3Total operating expenses/Total income (%)45.046.045.545.745.4 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 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 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 Insurance Businesses Remuneration of Auditors Lease Commitments Contingent Liabilities, Contingent Assets and Commitments Fiduciary Activities Risk Management Credit Risk Market Risk Liquidity and Funding Risk Retirement Benefit Obligations Investments in Associates and Joint Ventures Key Management Personnel Related Party Disclosures Notes to the Statements of Cash Flows Disclosures about Fair Values of Financial Instruments Securitisation, Covered Bonds and Transferred Assets Controlled Entities Subsequent Events 70 Commonwealth Bank of Australia 71 72 73 74 76 78 88 90 91 96 99 100 100 100 101 102 107 108 111 113 115 117 117 117 118 119 119 121 123 124 126 128 129 133 134 135 138 140 141 141 143 144 145 162 164 167 170 171 174 174 176 181 182 184 Income Statements For the year ended 30 June 2013 Financial Statements The above Income Statements should be read in conjunction with the accompanying notes. Annual Report 2013 71 GroupBank20132012201120132012Note$M$M$M$M$MInterest income 234,73938,25837,47735,70734,761Interest expense 2(20,805)(25,136)(24,883)(23,541)(24,510)Net interest income13,93413,12212,59412,16610,251Other banking income 4,2374,0893,6435,6275,466Net banking operating income18,17117,21116,23717,79315,717Funds management income2,1471,9591,996--Investment revenue942226854--Claims and policyholder liability expense(924)(245)(808)--Net funds management operating income22,1651,9402,042--Premiums from insurance contracts2,3532,1141,884--Investment revenue449547547--Claims and policyholder liability expense from insurance contracts(1,584)(1,428)(1,313)--Net insurance operating income21,2181,2331,118--Total net operating income before impairment and operating expenses221,55420,38419,39717,79315,717Loan impairment expense2,14(1,146)(1,089)(1,280)(1,042)(988)Operating expenses2(9,680)(9,331)(9,060)(7,236)(6,338)Net profit before income tax210,7289,9649,0579,5158,391Corporate tax expense5(2,923)(2,736)(2,481)(2,223)(1,930)Policyholder tax expense5(112)(122)(166)--Net profit after income tax7,6937,1066,4107,2926,461Non-controlling interests(16)(16)(16)--Net profit attributable to Equity holders of the Bank7,6777,0906,3947,2926,461Group 201320122011NoteEarnings per share: Basic7477. 9448. 9411. 2 Fully diluted7464. 5432. 9395. 1Cents per share Financial Statements Statements of Comprehensive Income For the year ended 30 June 2013 The above Statements of Comprehensive Income should be read in conjunction with the accompanying notes. 72 Commonwealth Bank of Australia 20132012201120132012$M$M$M$M$MNet profit after income tax for the financial year7,6937,1066,4107,2926,461Other comprehensive income/(expense):Items that may be reclassified subsequently to profit/(loss):Gains and losses on cash flow hedging instruments:Recognised in equity(575)730(754)(619)847Transferred to Income Statement226758769229542Gains and losses on available-for-sale investments:Recognised in equity553(349)124365(315)Transferred to Income Statement on disposal(31)(81)(24)(31)(86)Foreign currency translation reserve476202(546)8280Income tax on items transferred directly to/from equity:Cash flow hedge reserve73(442)-122(415)Available-for-sale investments revaluation reserve(158)122(28)(101)119Foreign currency translation reserve(10)(12)16-(10)Total of items that may be reclassified554928(443)47762Items that will not be reclassified to profit or loss:Actuarial gains and losses from defined benefit superannuation plans net of tax311(223)(89)311(223)Revaluation of properties432695Income tax on revaluation of properties(1)(5)-(1)-Total of Items that will not be reclassified314(196)(83)319(218)Other comprehensive income/(expense) net of income tax868732(526)366544Total comprehensive income for the financial year8,5617,8385,8847,6587,005Total comprehensive income for the financial year is attributable to:Equity holders of the Bank8,5457,8225,8687,6587,005Non-controlling interests161616--Comprehensive income net of income tax8,5617,8385,8847,6587,005Group Bank Balance Sheets As at 30 June 2013 Financial Statements (1) Comparatives have been restated to conform to presentation in the current year. The above Balance Sheets should be read in conjunction with the accompanying notes. Annual Report 2013 73 Group Bank 2013201220132012Note$M $M $M $M AssetsCash and liquid assets820,63419,66618,03017,952Receivables due from other financial institutions97,74410,8866,99810,482Assets at fair value through Income Statement:10Trading19,61713,81618,39812,071Insurance14,35914,525--Other907980718980Derivative assets (1)1145,34039,56745,20339,691Available-for-sale investments (1)1259,60160,827125,941116,567Loans, bills discounted and other receivables13556,648525,682502,349407,122Bank acceptances of customers6,0639,7176,0599,715Shares in and loans to controlled entities (1)44--63,01775,006Property, plant and equipment152,7182,5031,5581,376Investment in associates and joint ventures422,2811,8981,6071,401Intangible assets1610,42310,2814,7134,123Deferred tax assets59359801,063899Other assets176,5987,5175,0915,872753,868718,845800,745703,257Assets held for sale18814814Total assets753,876718,859800,753703,271LiabilitiesDeposits and other public borrowings19459,429437,655425,276362,813Payables due to other financial institutions25,92222,12625,16621,457Liabilities at fair value through Income Statement208,7016,5553,3323,181Derivative liabilities (1)1138,58039,85140,22939,856Bank acceptances6,0639,7176,0599,715Due to controlled entities--113,868101,053Current tax liabilities211,5291,5371,4401,523Deferred tax liabilities21471338--Other provisions221,2491,224992902Insurance policy liabilities3213,00412,994--Debt issues23132,808124,712115,291102,312Managed funds units on issue891995--Bills payable and other liabilities2410,0509,56113,6799,377698,697667,265745,332652,189Loan capital259,68710,02210,43710,223Total liabilities708,384677,287755,769662,412Net assets45,49241,57244,98440,859Shareholders' EquityShare capital:Ordinary share capital2726,32325,17526,61925,498Other equity instruments279399391,8951,895Reserves261,3331,5712,6412,732Retained profits2616,36013,35613,82910,734Shareholders' equity attributable to Equity holders of the Bank44,95541,04144,98440,859Non-controlling interests29537531--Total Shareholders' equity45,49241,57244,98440,859 Financial Statements Statements of Changes in Equity For the year ended 30 June 2013 The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. 74 Commonwealth Bank of Australia GroupShareholders'equityattributableOrdinaryOtherto EquityNon-Total shareequityRetainedholderscontrollingShareholders'capitalinstrumentsReservesprofitsof the Bank interests equity$M$M$M$M$M$M$MAs at 30 June 201123,60293939211,82636,75952837,287Net profit after income tax---7,0907,090167,106Net other comprehensive income--955(223)732-732Total comprehensive income for the financial year--9556,8677,822167,838Transactions with equity holders in their capacity as equity holders:Dividends paid on ordinary shares---(5,096)(5,096)-(5,096)Dividends paid on other equity instruments---(30)(30)-(30)Dividend reinvestment plan (net of issue costs)1,363---1,363-1,363Other equity movements:Share based payments2-1-3-3Issue of shares (net of issue costs)237---237-237Purchase of treasury shares(96)---(96)-(96)Sale and vesting of treasury shares67---67-67Other changes--223(211)12(13)(1)As at 30 June 201225,1759391,57113,35641,04153141,572Net profit after income tax---7,6777,677167,693Net other comprehensive income--557311868-868Total comprehensive income for the financial year--5577,9888,545168,561Transactions with equity holders in their capacity as equity holders:Dividends paid on ordinary shares---(5,776)(5,776)-(5,776)Dividends paid on other equity instruments---(28)(28)-(28)Dividend reinvestment plan (net of issue costs)929---929-929Other equity movements:Share based payments--(4)-(4)-(4)Issue of shares (net of issue costs)193---193-193Purchase of treasury shares(664)---(664)-(664)Sale and vesting of treasury shares690---690-690Other changes--(791)82029(10)19As at 30 June 201326,3239391,33316,36044,95553745,492 Statements of Changes in Equity (continued) For the year ended 30 June 2013 Financial Statements The above Statements of Changes in Equity should be read in conjunction with the accompanying notes. Annual Report 2013 75 BankShareholders'equityattributableOrdinaryOtherto Equity shareequityRetainedholderscapitalinstrumentsReservesprofitsof the Bank$M$M$M$M$MAs at 30 June 201123,8961,8951,9649,59337,348Net profit after income tax---6,4616,461Net other comprehensive income--767(223)544Total comprehensive income for the financial year--7676,2387,005Transactions with equity holders in their capacity as equity holders:Dividends paid on ordinary shares---(5,096)(5,096)Dividend reinvestment plan (net of issue costs)1,363---1,363Other equity movements:Share based payments2-1-3Issue of shares (net of issue costs)237---237Other changes---(1)(1)As at 30 June 201225,4981,8952,73210,73440,859Net profit after income tax---7,2927,292Net other comprehensive income--55311366Total comprehensive income for the financial year--557,6037,658Additions through merger of banking licences--2079191,126Transactions with equity holders in their capacity as equity holders:Dividends paid on ordinary shares---(5,776)(5,776)Dividend reinvestment plan (net of issue costs)928---928Other equity movements:Share based payments--(4)-(4)Issue of shares (net of issue costs)193---193Other changes--(349)349-As at 30 June 201326,6191,8952,64113,82944,984Group 201320122011NoteDividends per share attributable to shareholders of the Bank:Ordinary shares6364334320Trust preferred securities5,7675,9896,020Cents per share Financial Statements Statements of Cash Flows (1) For the year ended 30 June 2013 It should be noted that the Group does not use these accounting Statements of Cash Flows in the internal management of its liquidity positions. (1) (2) Represents gross premiums and policy payments before splitting between policyholders and shareholders. (3) Cash and cash equivalents has been redefined to no longer include at call deposits with other financial institutions and settlement account balances with other banks. Comparatives have been restated to conform to presentation in the current year. (4) Amounts received from and paid to controlled entities are presented in line with how they are managed and settled. 76 Commonwealth Bank of Australia GroupBank20132012201120132012Note$M$M$M$M$MCash flows from operating activitiesInterest received 34,86838,33737,13436,06534,443Interest paid (21,056)(25,456)(24,464)(23,903)(24,750)Other operating income received 5,0475,1335,2403,3853,232Expenses paid(8,432)(8,537)(8,474)(6,269)(5,847)Income taxes paid(2,940)(2,372)(2,370)(2,679)(1,525)Net cash (outflows)/inflows from assets at fair value through Income Statement (excluding life insurance)(756)2,3284,452(368)3,059Net cash inflows/(outflows) from liabilities at fair value through Income Statement:Life insurance:Investment income2,551791552--Premiums received (2)2,1062,1382,200--Policy payments (2)(3,903)(3,032)(3,374)--Other liabilities at fair value through Income Statement1,503(3,603)(4,317)81(1,424)Cash flows from operating activities beforechanges in operating assets and liabilities8,9885,7276,5796,3127,188Changes in operating assets and liabilities arising from cash flow movementsMovement in available-for-sale investments:Purchases(45,429)(76,408)(62,733)(46,730)(101,037)Proceeds47,09062,86549,85737,57958,743Net change in deposits with regulatory authorities(2)(15)(72)(5)1Net increase in loans, bills discounted and other receivables(28,035)(25,754)(11,489)(29,042)(19,804)Net decrease/(increase) in receivables due from other financial institutions (3)3,54049(1,134)6,491(304)Net increase in securities purchased underagreements to resell(699)(498)(2,834)(62)(1,060)Life insurance business:Purchase of insurance assets at fair value through Income Statement(2,591)(2,189)(4,101)--Proceeds from sale/maturity of insurance assets at fair value through Income Statement3,8323,2915,914--Net (increase)/decrease in other assets(265)(61)201(368)(79)Net increase in deposits and other public borrowings17,24335,75031,89317,66429,227Net increase in payables due to other financial institutions (3)2,1234,7524,6372,3484,378Net increase/(decrease) in securities sold underagreements to repurchase3271,183(1,698)2811,458Net increase/(decrease) in other liabilities455155(575)3,847982Changes in operating assets and liabilities arising from cash flow movements(2,411)3,1207,866(7,997)(27,495)Net cash provided by/(used in) operating activities45(a)6,5778,84714,445(1,685)(20,307)Cash flows from investing activitiesPayments for acquisition of controlled entities45(e)-(125)---Net proceeds from disposal of controlled entities45(c)--19--Net proceeds from disposal of entities and businesses (net of cash disposals)-2115--Dividends received8252261,5071,563Net amounts received from controlled entities (4)---4224,767Proceeds from sale of property, plant and equipment3025272315Purchases of property, plant and equipment(642)(584)(443)(229)(218)Payments for acquistions of investments in associates/joint ventures(264)(85)(164)(206)(53)Purchase of intangible assets(464)(585)(533)(412)(547)Sale of assets held for sale 2-1225Additions through merger of banking licences---557-Net cash (used in)/provided by investing activities(1,256)(1,281)(1,041)1,28425,532 Statements of Cash Flows (1) (continued) For the year ended 30 June 2013 Financial Statements It should be noted that the Group does not use these accounting Statements of Cash Flows in the internal management of its liquidity positions. (1) (2) Cash and cash equivalents has been redefined to no longer include at call deposits with other financial institutions and settlement account balances with other banks. Comparatives have been restated to conform to presentation in the current year. The above Statements of Cash Flows should be read in conjunction with the accompanying notes. Annual Report 2013 77 GroupBank20132012201120132012Note$M$M$M$M$MCash flows from financing activitiesProceeds from issue of shares (net of issue costs)193261932Dividends paid (excluding Dividend Reinvestment Plan)(4,860)(3,748)(4,188)(4,833)(3,718)Proceeds from issuance of debt securities92,250162,430115,48086,296132,538Redemption of issued debt securities(93,691)(158,918)(123,801)(82,310)(127,003)Purchase of treasury shares(664)(96)(69)--Sale of treasury shares6341973--Issue of loan capital1,977--1,965-Redemption of loan capital(2,215)(1,775)(1,064)(1,909)(1,771)Other (2)218132(261)73352Net cash (used in)/provided by financing activities(6,158)(1,954)(13,824)(525)400Net (decrease)/increase in cash and cash equivalents(837)5,612(420)(926)5,625Effect of foreign exchange rates on cash and cash equivalents (2)852266707728241Cash and cash equivalents at beginning of year (2)12,6036,7256,43810,9465,080Cash and cash equivalents at end of year45(b)12,61812,6036,72510,74810,946 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 2013, were approved and authorised for issue by the Board of Directors on 13 August 2013. The Directors have the power to amend and reissue the Financial Statements. 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. is one of Australia’s The Group leading providers of integrated financial services, including retail, business and institutional banking, funds management, superannuation, life insurance, general insurance, broking services and finance company activities. 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. Basis of Preparation (a) Basis of Accounting This General Purpose Financial Report for the year ended 30 June 2013 has been prepared in accordance with Australian Accounting Standards (the standards), which include Australian Interpretations by virtue of AASB 1048 the ‘Interpretation and Application of Standards’, and requirements of the Corporations Act 2001. The Bank is a for- profit entity for the purposes of preparing this report. The Financial Statements also comply with the International Financial Reporting Standards (IFRS) as issued by the (IASB) and International Accounting Standards Board Interpretations as Interpretations Committee (IFRIC). issued by IFRS the (b) Historical Cost Convention This financial report has been prepared under the historical cost convention, except for certain assets and liabilities (including derivative instruments) measured at fair value. A more detailed discussion on measurement basis is outlined within this note. (c) Use of Estimates and Assumptions It also The preparation of the financial report requires the use of certain critical accounting estimates. 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 Critical Judgements and Estimates section. (d) Rounding of Amounts The amounts in this financial report have been rounded in accordance with ASIC Class Order 98/0100 to the nearest million dollars, unless otherwise indicated. The financial report is presented in Australian dollars. (e) Segment Reporting Operating segments are reported based on the Group’s structures. Senior organisational management review the Group’s internal reporting based around these segments, in order to assess performance and allocate resources. and management All transactions between segments are conducted on an arm’s length basis, with inter-segment revenue and costs 78 Commonwealth Bank of Australia being eliminated in “Other”. (f) Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of: AASB 2011-9 ‘Amendments to Australian Accounting of Other Standards – Presentation Comprehensive Income’ resulting in the separation of items in the Statements of Comprehensive Income into two groups based on whether or not they may be reclassified to profit or loss in the future; and Items of AASB 2013-2 ‘Amendments to AASB 1038 – Regulatory Capital’ resulting in the disclosure of the regulatory capital position of each life insurer in the Group. Comparatives Where necessary, comparative information has been restated to conform to changes in presentation in the current year. No significant changes have been made and all changes have been footnoted throughout the financial statements. (g) Principles of Consolidation Subsidiaries The consolidated financial report comprises the financial report of the Bank and its subsidiaries. Subsidiaries are entities (including special purpose entities) over which the Bank has control of the financial and operating policies so as to gain benefit from the activities or returns, or in the case of special purpose entities, where the Bank holds the majority of the residual ownership risks in order to obtain benefits from its activities. The effects of all transactions between entities in the Group are eliminated in full. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated Income Statement, Statement of Changes in Equity, and Balance Sheet. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Business Combinations Business combinations are accounted 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. for using Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value on the acquisition date. Goodwill is recorded as the excess of the total consideration transferred, the carrying amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the net identifiable assets acquired. If there is a deficit instead, this discount on acquisition is recognised directly in the consolidated Income Statement, but only after a reassessment of the identification and measurement of the net assets acquired. 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 other comprehensive income ‘OCI’. Associates and joint ventures are accounted for at cost less accumulated impairments at the Bank level. (h) Foreign Currency Translation Functional and Presentation Currency The consolidated financial statements are presented in Australian dollars, which functional and is presentation currency. The Group’s foreign operations joint (including subsidiaries, branches, associates, and ventures) will have different functional currencies based on the Bank’s Notes to the Financial Statements Note 1 Accounting Policies (continued) the currency of the main economy to which each operation is exposed. Foreign Currency Transactions the Foreign currency functional currency, using the exchange rates prevailing at the date of each transaction. transactions are translated into Monetary assets and liabilities resulting from foreign currency transactions are subsequently translated at the spot rate at reporting date. Exchange differences arising upon settling or translating monetary items at different rates to those at which they were initially recognised or previously reported, are recognised in the Income Statement. Foreign Operations The results and financial position of all Group entities that the Group’s have a presentation currency are the Group’s presentation currency as follows: functional currency different translated from into Assets and liabilities of each foreign operation are 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. foreign operation is disposed of, exchange When a differences are recognised in the Income Statement as part of the gain or loss on sale. No Group entities have a functional currency of a hyperinflationary economy. (i) Offsetting Income the Income and expenses are only offset Statement relevant accounting if permitted under standard. Examples of offsetting include gains and losses from foreign exchange exposures and trading operations. the in Financial assets and liabilities are offset and the net amount is presented in the Balance Sheet if, and only if, there is a currently enforceable legal right to offset the recognised amounts, and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. (j) Fair Value Measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Financial assets and income statement, available-for-sale investments and all derivative instruments are initially recognised and subsequently measured at fair value. liabilities at fair value through The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations, without any deduction for transaction costs. Assets and long positions are measured at a quoted bid price; liabilities and short positions are measured at a quoted asking price. Where the Group has positions with offsetting market risks, mid-market prices are used to measure the offsetting risk positions and a quoted bid or asking price adjustment is applied only to the net open position as appropriate. Non-market quoted financial instruments are mostly valued using valuation techniques based on observable inputs, except for a limited number of instances where observable market data is unavailable. In this instance, the financial instrument is initially recognised at the transaction price, which is generally the best indicator of fair value. This may differ from the value obtained from the valuation model. The timing of the recognition in the Income Statement of this initial difference in fair value depends on the individual facts and circumstances of each transaction, but is never later than when the market data becomes observable. The difference may be either amortised over the life of the transaction, recognised when the inputs become observable or on derecognition of the instrument, as appropriate. Income Statement Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognised for each major revenue stream as follows: (k) 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 income balance. investment and unearned the outstanding (l) Fee and Commission Income Fees and commissions that relate to the execution of a (for example, advisory or arrangement significant act services, placement fees) are recognised when the significant act has been completed. Fees charged for providing ongoing services (for example, maintaining, managing and administering existing facilities and funds) are recognised as income over the period the service is provided. fees and underwriting Fees and commissions, which include commitment fees to originate a loan that is unlikely to be drawn down, are recognised as fee income as the facility is provided. (m) Other Income Trading income represents both realised and unrealised gains and losses from changes in the fair value of trading assets, liabilities and derivatives. 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. Insurance income recognition is outlined in Note 1(ff). (n) Interest Expense Interest expense on financial liabilities measured at amortised cost is recognised in the Income Statement using the effective interest rate method. includes issue costs that are Interest expense initially recognised as part of the carrying value of the liability and amortised over the expected life using the effective interest rate method. These include fees and commissions payable to advisers and other expenses such as external legal costs, provided these are direct and incremental costs related to the issue of a financial asset. (o) Operating Expenses Operating expenses are recognised as the relevant service is rendered or once a liability is incurred. Staff expenses are recognised over the period the employee renders the service to receive the benefit. Staff expenses include share based remuneration which 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 the employee compensation corresponding increase in Annual Report 2013 79 Notes to the Financial Statements Note 1 Accounting Policies (continued) reserve. Market vesting conditions, such as share price performance conditions, are into account when estimating the fair value. Non–market vesting conditions, such as service conditions, are taken into account by adjusting the number of the equity instruments included in the measurement of the expense. taken Cash settled share based remuneration is recognised as a liability and remeasured to fair value until settled, with changes in the fair value recognised as an expense. Occupancy and equipment expenses include the depreciation and lease rentals that are outlined in Note 1(y) property, plant and equipment and Note 1(v) lease receivables respectively. IT expenses are recognised as incurred unless they qualify for capitalisation as an asset due to the related service generating probable future economic benefits. If capitalised the asset is subsequently amortised per Note 1(z) intangible assets. Taxation (p) Income Tax Expense Income tax is recognised in the Income Statement, except to the extent that it relates to items recognised directly in OCI, in which case the Statement of Comprehensive Income. Income tax on the profit or loss for the period comprises current and deferred tax. recognised in is it (q) Current Tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the Balance Sheet date, and any adjustment to tax payable in respect of previous years. (r) Deferred Tax Deferred tax is calculated using the Balance Sheet method where temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax base are recognised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities (i.e. through use or through sale), using tax rates 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 when it is probable that future taxable profits will be available for it to be used against. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are only offset when there is both a legal right to set-off and an intention to settle on a net basis with the same taxation authority. (s) The Tax Consolidated Group The Commonwealth Bank of Australia Tax Consolidated Group elected to be taxed as a single entity under the tax consolidation regime 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 the principles in AASB 112 ‘Income Taxes’, and on a modified ‘Tax Consolidation standalone basis under UIG 1052 Accounting’. in accordance with 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. from unused Any current tax liabilities/assets and deferred tax assets arising from subsidiaries are recognised in conjunction with any tax funding arrangement amounts by the Bank legal entity (as the head of the tax consolidated group). losses tax 80 Commonwealth Bank of Australia Assets (t) 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 the outstanding balance. Interest is recognised in the Income Statement using the effective interest method. For the purposes of the Statements of Cash Flows, cash and cash equivalents include cash and money at short call. (u) Financial Assets The Group classifies its financial assets in the following categories: fair value through Income the financial assets at Statement; derivative assets; loans and receivables; and available-for-sale investments. The classification of financial instruments at initial recognition depends on their purpose and characteristics and management’s intention when acquiring them. Financial instruments, except for loans and receivables, are initially recognised by the Group on the trade date, i.e. the date that the Group becomes a party to the contractual provisions of trades transacted in a regular way, i.e. purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Loans and receivables are recognised on settlement date, when funding is advanced to the borrowers. instruments. This applies the to All financial assets are measured initially at their fair value plus directly attributable transaction costs, except in the case of financial assets recorded at fair value through the Income Statement. Directly attributable transaction costs on these assets are expensed on subsequent fair value measurement. The Group has not classified any of its financial assets as held to maturity investments. Financial Assets at Fair Value through the Income Statement Assets classified at fair value through the Income Statement are further classified into three sub-categories: trading, insurance and other. Trading assets are those acquired or incurred principally for the purpose of selling or repurchasing in the near term, or if they are a part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit-taking. Discounted bills that the Group intends to sell into the market immediately or in the near term also meet the definition of assets held for trading. Due to their nature, such assets are included in loans, bills discounted and other receivables in the Balance Sheet, while being measured at fair value. Insurance assets are investments that back life insurance contracts and life investment contracts. These are outlined in Note 1 (hh). Other investments include financial assets which the Group has designated at fair value through Income Statement at inception to: eliminate an accounting mismatch; reflect they are managed on a fair value basis; or where the asset is a contract which contains an embedded derivative. to initial Subsequent financial assets are recognition, measured at fair value with changes in fair value recognised in other operating income. Dividends earned are recorded in other operating income. Interest earned is recorded within net interest income using the effective interest method. Derivative Financial Instruments Derivative financial instruments are contracts whose value is derived from one or more underlying price, index or other variable. They include forward rate agreements, futures, Notes to the Financial Statements Note 1 Accounting Policies (continued) options and interest rate, currency, equity and credit swaps. Derivatives are entered into for trading purposes or for hedging purposes. to initial recognition, gains or Subsequent losses on derivatives are recognised in the Income Statement, unless they are entered into for hedging purposes and designated into a cash flow hedge. 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 one of three hedge accounting models; 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. (i) 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. The changes in the fair value of the hedged asset or liability shall be adjusted against their carrying value. 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. (ii) Cash Flow Hedges Changes in fair value associated with the effective portion of a derivative designated as a cash flow hedge are recognised through other comprehensive income in the Cash Flow Hedge Reserve within equity. Ineffective portions are recognised immediately in the Income Statement. Amounts deferred in equity are transferred to the Income Statement in the period in which the hedged forecast transaction takes place. When a hedging instrument expires or is sold, terminated or exercised, or when the hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is reclassified to profit or loss 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. the (iii) Net Investment Hedges Gains and losses on derivative contracts relating to the effective portion of the net investment hedge are recognised in 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. foreign currency translation reserve (iv) 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. Available-for-Sale Investments (AFS) Available-for-sale investments are non-derivative financial assets that are not classified at fair value through Income Statement or as loans and receivables. They primarily include public debt securities held as part of the Group’s liquidity holdings. to Subsequent investments are initial recognition, AFS measured at fair value with unrealised gains and losses arising from changes in fair value recognised in the AFS 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 the Income Statement when earned. Foreign exchange gains and losses on AFS equity instruments are recognised directly in equity. The Group assesses at each Balance Sheet date, whether there is any objective evidence of impairment. 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 AFS 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 AFS equity securities are not reversed. Upon disposal, the accumulated change in fair value within the AFS investments reserve is transferred to the Income Statement and reported within other operating income. Loans, Bills Discounted and Other Receivables Loans, bills discounted and other receivables are non- derivative fixed and determinable payments that are not quoted in an active market. financial assets, with receivables include Loans, bills discounted and other overdrafts, home loans, credit card and other personal lending, term loans, bill financing, redeemable preference shares, securities, finance leases, and receivables due from other financial institutions (including loans, deposits with regulatory authorities and settlement account balances due from other banks). Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method and are presented net of provisions for impairment. Discounted bills included in this category due to their nature meet the definition of trading assets and are therefore measured at fair value through Income Statement in line with the accounting policy for assets held for trading. As a result discounted bills are not subject to impairment assessment. 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 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 estimated 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. Loans and other receivables are presented net of provisions for loan impairment. The Group has 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. Individual provisions for impairment are recognised to reduce the carrying amount of non-performing facilities to the present value of Individually significant provisions are calculated based on discounted cash flows. their expected future cash flows. The unwinding of the discount, from initial recognition of impairment through to recovery of the written down amount, is In subsequent periods, recognised as income. interest is recognised in the Income Statement using the original effective interest rate. in arrears/due on non-performing facilities interest All loans and other receivables 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 Annual Report 2013 81 Notes to the Financial Statements Note 1 Accounting Policies (continued) advances to the present value of their expected future cash flows 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. Derecognition of Financial Assets and Financial Liabilities The Group derecognises financial assets when the rights to receive cash flows from the asset have expired or when the Group transfers its rights to receive cash flows from the asset together with substantially all the risks and rewards of the asset. The Group enters into certain transactions where it transfers financial assets recognised on its Balance Sheet but retains either all or a majority of the risks and rewards of the transferred financial assets. If all or substantially all risks and rewards are retained, the transferred financial assets are not derecognised from the Balance Sheet. Transactions where transfers of financial assets result in the Group retaining all or substantially all risks and rewards include reverse repurchase transactions, and some of the Group’s securitisation and covered bonds programs. 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 the Income Statement. Repurchase and Reverse Repurchase Agreements Securities sold under repurchase agreements are retained in the financial statements where substantially all the risks and rewards of ownership remain with the Group. A counterparty liability is recognised within deposits and public borrowings. The difference between the sale price and the repurchase price is accrued over the life of the repurchase agreement and charged to interest expense in the income statement. Securities purchased under agreements to resell, where the Group does not acquire the risks and rewards of ownership, are recorded as receivables in cash and liquid assets. The security is not included in the Balance Sheet as the Group is not exposed to substantially all its risks and rewards. Interest income is accrued on the underlying receivable amount. Provision for 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’. Loan assets under committed lending facilities are not recognised until the facilities are drawn upon. Generally therefore, it will not be appropriate to provide for these assets under an incurred loss model. The Group however, has determined that it is appropriate to establish provisions in relation to such facilities where a customer has been downgraded. These provisions are disclosed as other liabilities in the Balance Sheet. As a lessor, the assets the Group has leased out under finance leases are recognised as lease receivables on the Balance Sheet at an amount equal to the net investment in the lease. Finance lease income reflects a constant periodic return on this net investment and is recognised within interest income in the Income Statement. The assets the Group has leased out under operating leases continue to be recognised on the Balance Sheet as property, plant and equipment and are depreciated accordingly. Operating Income Statement on a straight line basis over the lease term. lease revenue is recognised the in As a lessee, the Group engages only in operating leases. Rental expense is recognised on a straight line basis over the lease term. (w) 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. Loans to controlled entities are subsequently recorded at amortised cost less impairment. (x) 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 require that they be measured in line with another accounting standard. Assets classified as held for sale are neither amortised nor depreciated. (y) Property, Plant and Equipment The Group measures its property assets (land and buildings) at fair value, based on annual independent market valuations. Revaluation adjustments are 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. Upon sale or disposal, realised amounts in the asset revaluation reserve are transferred to retained profits. Other property, plant and equipment assets are stated at cost, which includes direct and incremental acquisition costs less accumulated depreciation and any if required. Subsequent costs are capitalised if these result in an enhancement to the asset. impairment Depreciation is calculated using the straight line method over the asset’s estimated useful economic life. The useful lives of major depreciable asset categories are as follows: Freehold land Buildings Fixtures and fittings Leasehold improvements Indefinite (not depreciated) Up to 30 years 10 – 20 years Lesser of unexpired lease term or lives as above Furniture and equipment 3 – 8 years (z) Intangible Assets Intangible assets are identifiable non-monetary assets without physical substance. They are recognised only if it is probable the asset will generate future benefits for the Group. They are measured at cost. Those assets with an indefinite useful life are tested for impairment annually. All intangible assets must be tested for impairment when there is an indication that its carrying amount may be greater than its recoverable amount. (v) Lease Receivables Goodwill Leases are classified as either a finance lease or an operating lease. Under a finance lease, substantially all the risks and legal ownership are transferred to the lessee. Under an operating lease, these risks remain with the lessor. incidental rewards to Goodwill has an indefinite useful life. It represents the excess of the cost of an acquisition over the fair value of the net identifiable assets acquired as at the date of acquisition. The cost of an acquisition is made up of the consideration 82 Commonwealth Bank of Australia Notes to the Financial Statements Note 1 Accounting Policies (continued) transferred, the amount of non-controlling interests and the fair value of any previously held equity interest in the acquiree. Goodwill arising from business combinations is included in intangible assets on the Balance Sheet. Goodwill is tested for impairment annually through allocation to a group of cost generating units (CGUs). The CGU’s recoverable amount is then compared to its carrying amount and an impairment is recognised for any excess carrying value. The CGUs and how their recoverable amount is calculated are listed in Note 16. Computer Software Costs Certain internal and external costs directly in acquiring and developing software are capitalised and amortised over the estimated useful life. The majority of software projects are amortised over three to five years. The Core Banking Modernisation software project is amortised over ten years. incurred Costs incurred on software maintenance are expensed as incurred. Core Deposits Core deposits were initially recognised at fair value following the acquisition of Bankwest and represent the value of the deposit base acquired in the business combination. Core deposits are amortised over their estimated useful life of seven years. Brand Names Brand names are recognised when acquired in a business combination. Initially recognised at fair value, in general they are considered to have a similar useful life to the period of the brand names existence at the time of purchase or an indefinite useful life. An indefinite useful life is considered appropriate when there is no foreseeable limit to the period over which the brand name is expected to generate cash flows. Management Fee Rights Management fee rights are recognised when acquired as part of a business combination and are considered to have an indefinite useful life under the contractual terms of the management agreements. Other Intangibles Other intangibles predominantly comprise customer lists. 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 Liabilities (aa) 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 (refer to previous discussion on derivative financial instruments in Note 1(u)). Financial liabilities are initially recognised at fair value less directly attributable transaction costs, except in the case of financial liabilities recorded at fair value through Income Statement. Directly attributable transaction costs on these liabilities are expensed on value measurement. subsequent fair 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, where the liabilities eliminate an accounting mismatch, or where they contain embedded derivatives. Subsequent to initial recognition these liabilities are measured at fair value with changes in fair value recognised in other operating income. Interest incurred is recorded within net interest income using the effective interest method. Liabilities at Amortised Cost (i) Deposits From Customers Deposits from customers include certificates of deposit, term deposits, savings deposits, other demand deposits and debentures. Subsequent they are measured at amortised cost. Interest and yield related fees are recognised on an effective interest basis. initial recognition to (ii) Payables Due to Other Financial Institutions Payables due to other financial institutions include deposits, vostro balances and settlement account balances due to other banks. Subsequent to initial recognition they are measured at amortised cost. Interest and yield related fees are recognised using the effective interest method. (iii) 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 taken to the Income redemption prior Statement in the period in which they are realised. to maturity are Where the Group has designated debt instruments at fair value through Income Statement, the changes in fair value are recognised in the Income Statement. The Group hedges interest rate and foreign currency risk on certain debt issues. When fair value 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. (iv) 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 thereafter at amortised cost using the effective interest method. transaction costs and (v) Bank Acceptances of Customers - Liability These are bills of exchange initially accepted and discounted by the Group and subsequently sold into the market. They are recognised at amortised cost. The market exposure is is recognised as a recognised to reflect the offsetting claim against the drawer of the bill. Bank acceptances generate interest and fee income that is recognised in the Income Statement when earned. liability. An asset of equal value (vi) Financial Guarantees and Credit Commitments In the ordinary course of business, the Group gives financial guarantees consisting of letters of credit, guarantees and acceptances. Financial guarantees are recognised within other liabilities in the financial statements initially at fair value, being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the Income Statement, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recorded in the Income Statement. The premium received is recognised in the Income Statement in other operating income on a straight line basis over the life of the guarantee. Loan commitments are defined amounts (unutilised credit lines or undrawn portions of credit lines) against which clients can borrow money under defined terms and conditions. Loan Annual Report 2013 83 Notes to the Financial Statements Note 1 Accounting Policies (continued) commitments that are cancellable by the Group are not recognised on the Balance Sheet. Upon a loan drawdown by the counterparty, the amount of the loan is accounted for in accordance with accounting policies loans and receivables. Irrevocable loan commitments are not recorded in the Balance Sheet, but a provision is recognised if it is probable that a loss has been incurred and a reliable estimate of the amount can be made. for (bb) Employee Benefits Annual Leave The provision outstanding liability entitlements at Balance Sheet date. for annual to employees leave represents for annual the current leave Long Service Leave The provision for long service leave is discounted to the present value and is set based on actuarial assumptions. The assumptions and provision balance are subject to tri-annual internal actuarial review. 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. Defined Benefit Superannuation Plans The Group currently sponsors superannuation plans for its employees. two defined benefit The net defined benefit liability or asset recognised in the Balance Sheet is the present value of the defined benefit obligation as at the Balance Sheet date less the fair value of plan assets. The defined benefit obligation is calculated by independent fund actuaries. In each reporting period, the movement in the net defined benefit liability or asset is treated as follows: The net movement relating to the current period service cost, interest cost, expected return on plan assets, past service and other costs (such as the effects of any curtailments and settlements) is recognised as an employee expense in the Income Statement; Movements relating to actuarial gains and losses are recognised directly in retained profits through OCI; and Contributions made by the Group are recognised directly against the net defined benefit liability or asset. Defined Contribution Superannuation Plans The Group sponsors a number of defined contribution superannuation plans. 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. (cc) Provisions Provisions are recognised when a probable obligation has arisen as a result of a past event that can be reliably measured. The following are examples of provisions raised. Provision for Dividends A provision for dividend payable dividends are determined or declared by the Directors. is recognised when Provisions for Restructuring Provisions for restructuring are recognised where there is a detailed formal plan for restructure and a demonstrated commitment to that plan. Provision for Self-Insurance The provision for self-insurance covers certain non-lending losses and non-transferred lending products the Group originates. The provision is reassessed annually in consultation with actuarial advice. insurance risks on 84 Commonwealth Bank of Australia Equity (dd) 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. (ee) Reserves General Reserve 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. Capital Reserve The capital reserve held by the Bank relates to historic internal Group restructuring performed at fair value. The capital reserve is eliminated on consolidation. Asset Revaluation Reserve The asset revaluation reserve is used to record revaluation adjustments on the Group’s property assets. In the event the asset is sold or disposed of, any balance in the reserve in relation to the asset is transferred directly to retained profits. Foreign Currency Translation Reserve Exchange differences arising on translation of the Group’s foreign operations are accumulated in the foreign currency translation reserve. The cumulative amount is reclassified to profit or loss when the foreign investment is disposed of or wound up. Cash Flow Hedge Reserve The cash flow hedge reserve is used to record fair value gains or losses associated with the effective portion of designated cash flow hedging instruments. Amounts are reclassified to profit or loss when the hedged transaction impacts profit or loss. Employee Compensation Reserve The employee compensation reserve is used to recognise the fair value of shares and other equity instruments issued to employees under the employee share plans and bonus schemes. Available-for-sale Investment Reserve The available-for-sale investment reserve includes changes in the fair value of available-for-sale financial assets. These changes are transferred to profit or loss when the asset is derecognised or impaired. Life and General Insurance Business The Group’s consolidated financial statements include the assets, liabilities, income and expenses of the life and general insurance businesses conducted by various subsidiaries of the Bank. Insurance contracts involve the acceptance of significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. The insured benefit is either not linked or only partly linked to the market value of the investments held, and the financial risks are substantially borne by the insurer. General insurance contracts are insurance contracts that are not life insurance contracts. Life investment contracts involve the origination of one or more financial instruments and may involve the provision of management services. Life investment contracts do not meet the definition of insurance contracts as they do not involve an acceptance of significant insurance risk by the Group’s life Notes to the Financial Statements Note 1 Accounting Policies (continued) insurers. The financial risks are substantially borne by the policyholder. (ff) Revenue Life insurance 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. Life investment premiums received include the management fee portion recognised as revenue over the period the 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. General insurance premium 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 actuarial assessment of the likely pattern in which risk will emerge. The portion not yet earned based on the pattern assessment is recognised as unearned premium liability. Returns on all investments controlled by life and general insurance businesses are recognised as revenue. (gg) Expenses Life and general insurance contract claims are recognised as an expense when a liability has been established. Acquisition costs (which include commission costs) are the costs associated with obtaining and recording insurance contracts. Acquisition costs are deferred or capitalised when they relate to the acquisition of new business or the renewal of existing business. These costs are amortised on the same basis as the earning pattern of the premium, over the life of the contract. The amount deferred is limited to the extent that they are deemed recoverable from the expected future profits. (hh) Investment Assets Assets backing insurance liabilities are carried at fair value through Income Statement. Investments held in the life insurance funds are subject to the restrictions imposed under the Life Act. Shareholders can only receive a distribution when the capital adequacy requirements of the Life Act are met. (ii) Policy Liabilities 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 340 ‘Valuation of Policy Liabilities’ issued by APRA. Life investment contract liabilities are measured at fair value in accordance with AASB 139. The balance is no less than the contract surrender value. General insurance policy liabilities are made up of two components: unearned premium liability and outstanding claims liability. The unearned premium liability is subject to a liability adequacy test. Any deficiency will be recognised as an expense in the Income Statement by first writing down any related deferred acquisition costs, with any excess being recorded on the Balance Sheet as an unexpired risk liability. The provision for outstanding claims is measured as the central estimate of the present value of expected future claims payments plus a risk margin. The expected future payments include those in relation to claims reported but not yet paid; claims incurred but not reported; claims incurred but not enough reported; and estimated claims handling costs. Other (jj) Managed Funds Units on Issue – Held by Non- controlling Unit-Holders life insurance and other The 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. funds When a controlled unit trust is consolidated, the amounts due to external unit-holders remain as managed funds units on issue liabilities in the Group’s consolidated balance sheet. In the Income Statement, the net profit or loss of the controlled entities relating to non-controlling interests is excluded from the Group’s net profit or loss. (kk) Asset Securitisation The Group conducts an asset securitisation program through which it packages and sells asset backed securities to investors. The Group is entitled to any residual income of the program after all payments due to investors and costs of the program have been met. Therefore the Group is considered to hold the majority of the residual risks and benefits within the entities through which asset securitisation is conducted and so it consolidates these entities. Liabilities associated with asset securitisation entities and related issue costs are accounted for on an amortised cost basis using the effective interest method. Interest rate swaps and liquidity facilities are provided at arm’s length to the program by the Group in accordance with APRA Prudential Guidelines. Derivatives return the risks and rewards of ownership of the securitised assets to the Group and consequently the Group cannot derecognise these assets. An imputed borrowing is recognised by the Bank inclusive of the derivative and any related fees. (ll) 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. (mm) 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, excluding the number of ordinary shares purchased and held as treasury shares. 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 convertible non- cumulative redeemable loan capital instruments. Critical Judgements 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. (nn) Provisions for Impairment of Financial Assets Provisions for impairment of financial assets are raised where there is objective evidence of impairment at an individual or collective basis, at an amount adequate to cover assessed credit related losses. Annual Report 2013 85 Notes to the Financial Statements Note 1 Accounting Policies (continued) Credit losses arise primarily from loans, but also from other credit instruments such as bank acceptances, contingent liabilities, guarantees and other financial instruments. Individually Assessed Provisions Individually assessed provisions are raised where there is objective evidence of impairment (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 borrowers are considered. Current developments in portfolios (industry, geographic and term) are reviewed. In the statistically managed (retail) segment, the history of defaults and losses, and the size, structure and diversity of portfolios are considered. In addition, management considers overall indicators of portfolio performance, quality and economic conditions. Changes in these estimates could have a direct impact on the level of provision determined. The amount required to bring the collective provision to the level assessed is recognised in the Income Statement as set out in Note 14. (oo) 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 calculated based on actuarial models and subject to annual review based on changes in underlying assumptions. Some of the provisions involve significant judgement about the likely outcome of various events and estimated future cash flows. The measurement of these obligations involves 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. The carrying value of these provisions is included in Note 22. (pp) Life Insurance Policyholder Liabilities The determination of life insurance policyholder liabilities involves the following key actuarial assumptions: Business assumptions including amount, timing and duration of claims/policy payments, policy lapse rates and acquisition and 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. 86 Commonwealth Bank of Australia 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. Further detail on the financial position on performance of the Group’s Life Insurance operations is set out in Note 32. (qq) 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 program and structured transactions. (rr) Financial Instruments at Fair Value A significant portion of financial instruments are carried on the Balance Sheet at fair value. The best evidence of fair value is quoted prices in an active market. If the market for a financial instrument is not active, the Group establishes fair value by using a valuation technique. The objective of using a valuation technique is to establish what the transaction price would have been on the measurement date in an arm’s length exchange motivated by normal business considerations. Valuation techniques include using recent arm’s length market transactions between knowledgeable willing parties (if available), reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Group uses that technique. The chosen valuation technique makes maximum use of market inputs and relies as little as possible on entity specific inputs. It incorporates all factors that market participants would consider in setting a price and is consistent with financial accepted economic methodologies instruments. Data inputs that the Group relies upon when valuing financial instruments relate to counterparty credit risk, volatility, correlation and extrapolation. for pricing Periodically, the Group calibrates its valuation techniques and tests them for validity using prices from any observable current market transactions in the same instrument (i.e. without modification or repackaging) and any other available observable market data. Details of the extent non-observable inputs are used to fair value financial instruments are included in Note 46. (ss) 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) whose recoverable amount the purpose of is calculated impairment testing. The recoverable amount calculation relies primarily on publicly available earnings multiples. Details of the inputs used in recoverable amount calculations are outlined further in Note 16. for (tt) Taxation Provisions for taxation require significant judgement with respect that are uncertain. For such uncertainties, the Group has estimated its tax provisions based on its expected outcomes. to outcomes (uu) Superannuation Obligations The Group currently sponsors two defined benefit plans as described in Note 41. For each of these plans, actuarial valuations of the plan’s obligations and the fair value Notes to the Financial Statements Note 1 Accounting Policies (continued) measurements of the plan’s assets are performed semi- annually in accordance with the requirements of AASB 119. The actuarial valuation of plan obligations is dependent upon a series of assumptions, the key ones being price inflation, discount rates, earnings growth, mortality, morbidity and investment returns assumptions. Different assumptions could significantly alter the amount of the difference between plan assets and obligations, and the superannuation cost charged to the Income Statement. Future Accounting Developments The following amendments to existing standards have been published and are mandatory for accounting periods beginning on or after 1 January 2013 or later periods, but have not been adopted. They are not expected to result in significant changes to the Group’s accounting policies. AASB 2010-7 ‘Amendments to Australian Accounting Standards arising from AASB 9 (December 2010); AASB 2011-4 ‘Amendments to Australian Accounting Individual Key Management to Remove Standards Personnel Disclosure Requirements’; AASB 2011-7 ‘Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards’; AASB 2011-8 ‘Amendments to Australian Accounting Standards arising from AASB 13’; AASB 2011-10 ‘Amendments to Australian Accounting Standards arising from AASB 119 (September 2011)’; AASB 2012-2 ‘Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities’; AASB 2012-3 ‘Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities’; AASB 2012-5 ‘Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle; AASB 2012-9 ‘Amendment to AASB 1048 arising from the Withdrawal of Australian Interpretation 1039’; and AASB 2012-10 ‘Amendments to Australian Accounting Standards and Other Amendments’. – Transition Guidance 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 financial statements and replaces SIC-12 ‘Consolidation – Special Purpose Entities’ in its entirety. 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. The implementation of AASB 10 will result in the Group consolidating some entities which were previously not consolidated and deconsolidating some entities that were previously consolidated. The financial impact to the Group is not expected to be significant, subject to further possible changes which are still under consideration by the AASB. Concurrent with standards were also issued: the issue of AASB 10, the following 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 will become effective for the Group from 1 July 2013. Application of these standards by the Group will not affect any of the amounts recognised in the financial statements, but will impact the type of information disclosed in relation to the Group’s investments. AASB 13 ‘Fair Value’ explains how to measure fair value and aims to enhance fair value disclosures. It will become effective for the Group from 1 July 2013. Initial application is not expected to result in any material impact to the Group. The amended AASB 119 ‘Employee Benefits’ will become effective for the Group from 1 July 2013. It will result in changes to the recognition and measurement of the Group’s defined benefit superannuation expense and termination benefits, as well as enhanced disclosures of the risks and characteristics of the Group’s defined benefit superannuation plans. The significant changes include: Annual defined benefit superannuation expense will include net interest expense or income, calculated by applying the relevant discount rate to the net defined benefit asset or liability. This will replace the current finance charge and expected return on plan assets. Applying this change to the year ended 30 June 2013 would have increased the total defined benefit plan expense by $84 million; and The discount rate used in calculating the defined benefit liability relating to active members can no longer include a 15% investment tax adjustment. This will result in a one-off decrease of $64 million in defined benefit liability as at 1 July 2013 which will be recognised through retained earnings. 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. AASB 132 ‘Financial Instruments: Presentation’, has been amended to clarify the conditions for offsetting financial assets and the Balance Sheet. These amendments are effective from 1 July 2013 for the Group but will not impact the Group’s current accounting practice for offsetting arrangements. liabilities in AASB 9 ‘Financial Instruments’ contains new accounting requirements for financial assets and liabilities, replacing the ‘Financial corresponding Instruments: Recognition and Measurement’. Exposure Drafts have been for impairment and hedge accounting along with limited changes to classification and measurements. released proposing new in AASB 139 requirements requirements The key changes include: Financial assets: realised gains and losses on non traded equity investments classified as fair value through other comprehensive income will not be recycled to the Income Statement; 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. Impairment: a prescribed amount of expected losses will be reflected in impairment allowances for loans and advances; and Hedge accounting: hedge accounting will be more principle based, allowing closer alignment with financial risk management. Adoption is not mandatory until annual periods beginning on or after 1 January 2015, with early adoption permitted. The potential financial impacts to the Group is not yet possible to determine, however to the standard significantly change the way the Group accounts for financial instruments. is not expected Annual Report 2013 87 Notes to the Financial Statements Note 2 Profit Profit before income tax has been determined as follows: (1) Comparative interest income on internal securitisation has been reclassified from Other financial institutions and Available-for-sale investments to Controlled entities for the Bank to conform to presentation in the current year. (2) Total interest income for financial assets that are not at fair value through profit or loss is $34,289 million (2012: $37,637 million, 2011: $36,626 million) for the Group and $35,293 million (2012: $34,204 million) for the Bank. (3) Comparative interest expense on internal securitisation and covered bond programs has been reclassified from Deposits to Controlled entities to conform to presentation in the current year. (4) Total interest expense for financial liabilities that are not at fair value through profit or loss is $20,607 million (2012: $24,816 million, 2011: $24,373 million) for the Group and $23,444 million (2012: $24,308 million) for the Bank. (5) The net gain on financial assets and liabilities designated at fair value was $3 million for the Group (2012: $4 million loss, 2011: $102 million gain) and $nil gain or loss for the Bank (2012: $3 million loss). (6) Non-trading derivatives are held for risk management purposes. (7) The Group result in 2013 had $nil gains or losses on disposal of controlled entities (2012: $nil, 2011: $10 million loss). Refer to Note 45 for further details. 88 Commonwealth Bank of Australia GroupBank20132012201120132012$M$M$M$M$MInterest IncomeLoans and bills discounted 32,02034,70934,37328,06526,957Other financial institutions (1)641021134551Cash and liquid assets 187330270145275Assets at fair value through Income Statement 450621851414557Available-for-sale investments (1)2,0182,4961,8704,8614,750Controlled entities (1)---2,1772,171Total interest income (2)34,73938,25837,47735,70734,761Interest ExpenseDeposits (3)15,07017,63316,95713,48114,298Other financial institutions233185222207190Liabilities at fair value through Income Statement 19832051097202Debt issues 4,8696,4926,6224,1185,202Controlled entities (3)---5,2094,125Loan capital435506572429493Total interest expense (4)20,80525,13624,88323,54124,510Net interest income13,93413,12212,59412,16610,251Other Operating IncomeLending fees 1,053997982960880Commissions1,9901,9971,9461,6211,532Trading income863522717797447Net gain on disposal of available-for-sale investments 3181243186Net gain/(loss) on other non-fair valued financial instruments(41)2(4)(41)(8)Net hedging ineffectiveness(25)394(29)33Net gain/(loss) on sale of property, plant and equipment(14)39(6)(13)40Net gain/(loss) on other fair valued financial instruments:Fair value through Income Statement (5)(1)48(2)-18Non-trading derivatives (6)2885(301)(30)82Dividends - Controlled entities---1,4641,540Dividends - Other9654834Funds management and investment contract income:Fees receivable on trust and other fiduciary activities1,6421,5171,662--Other523423380--Insurance contracts income1,2181,2331,118--Share of profit of associates and joint ventures16595109--Other (7)179178169819782Total other operating income7,6207,2626,8035,6275,466Total net operating income before impairment and operating expense21,55420,38419,39717,79315,717Impairment ExpenseLoan impairment expense 1,1461,0891,2801,042988Total impairment expense (Note 14)1,1461,0891,2801,042988 Notes to the Financial Statements Note 2 Profit (continued) (1) Certain comparative information has been reclassified to conform to presentation in the current year. (2) Comprises expenses related to the Count Financial Limited acquisition and expenses related to the Bankwest integration. (3) Merger related amortisation relates to Bankwest core deposits and customer lists. Annual Report 2013 89 GroupBank20132012201120132012$M$M$M$M$MStaff ExpensesSalaries and wages 4,2504,1364,0153,1652,769Share-based compensation19218515695103Superannuation - defined contribution plans584248(16)(48)Superannuation - defined benefit plan204168137204168Provisions for employee entitlements 961011207562Payroll tax223213213177150Fringe benefits tax3535382626Other staff expenses 9067605039Total staff expenses5,1484,9474,7873,7763,269Occupancy and Equipment ExpensesOperating lease rentals580585532493443Depreciation of property, plant and equipment298270262205178Repairs and maintenance9290877463Other 1121111128268Total occupancy and equipment expenses1,0821,056993854752Information Technology ServicesApplication, maintenance and development 439322324394244Data processing236241267236238Desktop1001051208790Communications202226221180194Amortisation of software assets245183183216150IT equipment depreciation7782787370Total information technology services1,2991,1591,1931,186986Other ExpensesPostage11411211210189Stationery8585846870Fees and commissions:Fees payable on trust and other fiduciary activities539563537--Professional fees (1)230188204206182Other (1)129122114297315Advertising, marketing and loyalty463459457364324Amortisation of intangible assets (excluding software and merger related amortisation)201816--Non-lending losses6781836064Other429406311268233Total other expenses2,0762,0341,9181,3641,277Total expenses9,6059,1968,8917,1806,284Investment and RestructuringIntegration expenses (2)-6094-54Merger related amortisation (3)75757556-Total investment and restructuring751351695654Total operating expenses9,6809,3319,0607,2366,338Profit before income tax10,7289,9649,0579,5158,391Net hedging ineffectiveness comprises:Gain/(loss) on fair value hedges:Hedging instruments(614)(337)(417)(424)(724)Hedged items617318427421702Cash flow hedge ineffectiveness(28)58(6)(26)55Net hedging ineffectiveness(25)394(29)33 Notes to the Financial Statements Note 3 Income from Ordinary Activities 90 Commonwealth Bank of Australia GroupBank20132012201120132012$M$M$M$M$MBankingInterest income34,73938,25837,47735,70734,761Fees and commissions 3,0432,9942,9282,5812,412Trading income863522717797447Net gain on disposal of available-for-sale investments recognised in Income Statement3181243186Net (loss)/gain on other non-fair valued financial instruments(41)2(4)(41)(8)Net hedging ineffectiveness(25)394(29)33Net (loss)/gain on other fair valued financial instruments:Fair value through Income Statement(1)48(2)-18Non-trading derivatives2885(301)(30)82Dividends9651,5121,574Net (loss)/gain on sale of property, plant and equipment (14)39(6)(13)40Share of profit of associates and joint ventures16595109--Other17917816981978238,97642,34741,12041,33440,227Funds Management, Investment Contract and Insurance Contract RevenueFunds management and investment contract income including premiums2,1471,9591,996--Insurance contract premiums and related income2,3532,1141,884--Investment income1,3917731,401--5,8914,8465,281--Total income44,86747,19346,40141,33440,227 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 (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 decreased by 75 basis points during the year while rates in New Zealand were unchanged. (1) Certain comparative information has been restated to conform to presentation in the current year. (2) Loans, bills discounted and other receivables include bank acceptances. (3) Excludes amortisation of acquisition related fair value adjustments made to fixed interest financial instruments. (4) Used for calculating net interest margin. Annual Report 2013 91 Group201320122011AverageInterestAverageAverageInterestAverageAverageInterestAverageInterest earning BalanceRateBalanceRateBalanceRateassets (1)$M$M%$M$M%$M$M%Cash and liquid assetsAustralia5,4591162. 16,5812333. 54,5831944. 2Overseas12,787710. 612,456970. 87,522761. 0Receivables due from other financial institutionsAustralia3,405351. 03,676691. 96,324500. 8Overseas5,888290. 55,321330. 68,113630. 8Assets at fair value through Income Statement - Trading & OtherAustralia10,5513623. 411,3664764. 215,0287114. 7Overseas6,035881. 56,1521452. 46,6281402. 1Available-for-sale investmentsAustralia52,6801,9333. 748,0732,3845. 033,3621,7765. 3Overseas6,822851. 27,2371201. 75,601941. 7Loans, bills discounted and other receivables (2)Australia (3)491,16028,8555. 9475,06631,7206. 7458,02531,2956. 8Overseas58,8503,1805. 453,7573,0245. 652,2203,1045. 9Intragroup assetsAustralia1,357261. 92,138341. 62,506220. 9Overseas---------Total interest earning assets and interest income including intragroup654,99434,7805. 3631,82338,3356. 1599,91237,5256. 3Intragroup eliminations(1,357)(26)1. 9(2,138)(34)1. 6(2,506)(22)0. 9Total interest earning assets and interest income (4)653,63734,7545. 3629,68538,3016. 1597,40637,5036. 3Group 201320122011Average Average Average Balance Balance Balance Non-interest earning assets$M $M $M Assets at fair value through Income Statement - InsuranceAustralia12,46413,22013,656Overseas2,1772,0462,069Property, plant and equipmentAustralia2,3801,9671,854Overseas210194181Other assetsAustralia52,03655,70641,661Overseas9,9868,9928,782Provisions for impairmentAustralia(4,516)(4,801)(5,205)Overseas(234)(263)(299)Total non-interest earning assets74,50377,06162,699Total assets728,140706,746660,105Percentage of total assets applicable to overseas operations (%)14.113.613.8 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) (1) Certain comparative information has been restated to conform to presentation in the current year. (2) Excludes amortisation of acquisition related fair value adjustments made to fixed interest financial instruments. (3) Debt issues include bank acceptances. 92 Commonwealth Bank of Australia Group 201320122011Average Interest Average Average Interest Average Average Interest Average Interest bearingBalance Rate Balance Rate Balance Rate liabilities (1)$M $M % $M $M % $M $M % Time depositsAustralia (2)210,2939,6474. 6200,71311,1315. 5185,24310,5875. 7Overseas35,6029542. 735,3781,1253. 232,7081,1273. 4Savings depositsAustralia (2)94,7142,3552. 586,1452,7343. 278,9582,5643. 2Overseas8,7402743. 17,4452723. 76,7722423. 6Other demand depositsAustralia (2) 89,6121,7662. 084,5072,3082. 779,7262,3953. 0Overseas3,988721. 83,534631. 82,462421. 7Payables due to other financialinstitutionsAustralia7,5181171. 64,602982. 13,9121213. 1Overseas13,7681160. 814,140870. 610,7631010. 9Liabilities at fair value throughIncome StatementAustralia2,433974. 04,3812004. 64,5262495. 5Overseas4,3991012. 35,1231202. 38,7292613. 0Debt issues (3)Australia 118,2954,6663. 9126,4776,4505. 1127,3886,5705. 2Overseas10,2572032. 07,096420. 65,534200. 4Loan capitalAustralia5,8462905. 05,7843205. 57,1303955. 5Overseas4,0921523. 75,3291943. 65,2441843. 5Intragroup borrowingsAustralia---------Overseas1,357261. 92,138341. 62,506220. 9Interest bearing liabilities and interest expense including intragroup 610,91420,8363. 4592,79225,1784. 2561,60124,8804. 4Intragroup eliminations(1,357)(26)1. 9(2,138)(34)1. 6(2,506)(22)0. 9Total interest bearing liabilities and interest expense609,55720,8103. 4590,65425,1444. 3559,09524,8584. 4Group 201320122011Average Average Average Balance Balance Balance Non-interest bearing liabilities$M $M $M Deposits not bearing interestAustralia7,8957,3126,989Overseas1,9031,6941,535Insurance policy liabilitiesAustralia11,79912,29813,114Overseas1,2551,2681,361Other liabilitiesAustralia42,94545,89733,517Overseas9,3328,3748,425Total non-interest bearing liabilities75,12976,84364,941Total liabilities684,686667,497624,036Shareholders' equity43,45439,24936,069Total liabilities and Shareholders' equity728,140706,746660,105Total liabilities applicable to overseas operations (%)13.613.413.4 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) Overseas intra-group borrowings have been adjusted into the interest spread and margin calculations to more appropriately reflect the overseas cost of funds. Changes in Net Interest Income: Volume and Rate Analysis The following tables show the movement in interest income and expense due to changes in volume and interest rates. Volume variances reflect the change in interest from the prior year due to movement in the average balance. Rate variance reflects the change in interest from the prior year due to changes in interest rates. Volume and rate variance for total interest earning assets and interest bearing liabilities have been calculated separately (rather than being the sum of the individual categories). Annual Report 2013 93 Group Avg BalInterestYieldAvg BalInterestYieldNet interest margin$M$M%$M$M%Total interest earning assets653,63734,7545. 32629,68538,3016. 08Total interest bearing liabilities609,55720,8103. 41590,65425,1444. 26Net interest income and interest spread13,9441. 9113,1571. 82Benefit of free funds0. 220. 27Net interest margin2. 132. 0920132012Group Avg Bal Interest Yield Avg Bal Interest Yield Geographical analysis of key categories$M $M % $M $M % Loans, bills discounted and other receivablesAustralia491,16028,8555. 87475,06631,7206. 68Overseas58,8503,1805. 4053,7573,0245. 63Total550,01032,0355. 82528,82334,7446. 57Other interest earning assetsAustralia72,0952,4463. 3969,6963,1624. 54Overseas31,5322730. 8731,1663951. 27Total103,6272,7192. 62100,8623,5573. 53Total interest bearing depositsAustralia394,61913,7683. 49371,36516,1734. 36Overseas 48,3301,3002. 6946,3571,4603. 15Total442,94915,0683. 40417,72217,6334. 22Other interest bearing liabilitiesAustralia 134,0925,1703. 86141,2447,0685. 00Overseas 32,5165721. 7631,6884431. 40Total166,6085,7423. 45172,9327,5114. 3420132012GroupJune 2013 June 2012 vs June 2012vs June 2011Change in net interest income$M$MDue to changes in average volume of interest earning assets506679Due to changes in interest margin281(167)Change in net interest income787512 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) (1) Certain comparative information has been restated to conform to presentation in the current year. 94 Commonwealth Bank of Australia June 2013 vs June 2012June 2012 vs June 2011Changes in net interest income:VolumeRateTotalVolumeRateTotalVolume and rate analysis$M$M$M$M$M$MInterest Earning Assets (1)Cash and liquid assetsAustralia(32)(85)(117)78(39)39Overseas2(28)(26)44(23)21Receivables due from other financial institutionsAustralia(4)(30)(34)(36)5519Overseas3(7)(4)(19)(11)(30)Assets at fair value through Income Statement - Trading & OtherAustralia(31)(83)(114)(163)(72)(235)Overseas(2)(55)(57)(11)165Available-for-sale investmentsAustralia199(650)(451)756(148)608Overseas(6)(29)(35)29(3)26Loans, bills discounted and other receivablesAustralia 1,010(3,875)(2,865)1,151(726)425Overseas 281(125)15689(169)(80)Intragroup loansAustralia(14)6(8)(4)1612Overseas------Changes in interest income including intragroup1,318(4,873)(3,555)1,968(1,158)810Intragroup eliminations14(6)84(16)(12)Changes in interest income1,365(4,912)(3,547)1,995(1,197)798Interest Bearing Liabilities and Loan Capital (1)Time depositsAustralia485(1,969)(1,484)871(327)544Overseas7(178)(171)88(90)(2)Savings depositsAustralia243(622)(379)230(60)170Overseas44(42)224630Other demand depositsAustralia120(662)(542)137(224)(87)Overseas81919221Payables due to other financial institutionsAustralia54(35)1918(41)(23)Overseas(3)322926(40)(14)Liabilities at fair value through Income StatementAustralia(83)(20)(103)(7)(42)(49)Overseas(17)(2)(19)(97)(44)(141)Debt issuesAustralia (370)(1,414)(1,784)(47)(73)(120)Overseas 4112016181422Loan capitalAustralia 3(33)(30)(74)(1)(75)Overseas(45)3(42)3710Intragroup borrowingsAustralia------Overseas(14)6(8)(4)1612Changes in interest expense including intragroup694(5,036)(4,342)1,354(1,056)298Intragroup eliminations14(6)84(16)(12)Changes in interest expense725(5,059)(4,334)1,373(1,087)286Changes in net interest income506281787679(167)512 Notes to the Financial Statements Note 4 Average Balances and Related Interest (continued) (1) Difference between the average interest rate earned and the average interest rate paid on funds. (2) A portion of the Group’s interest earning assets is funded by net interest free liabilities and Shareholders’ equity. The benefit to the Group of these interest free funds is the amount it would cost to replace them at the average cost of funds. (3) Net interest income divided by average interest earning assets for the year. Annual Report 2013 95 Group 201320122011Geographical analysis of key categories% % % AustraliaInterest spread (1)1. 921. 851. 86Benefit of interest-free liabilities, provisions and equity (2)0. 230. 280. 30Net interest margin (3)2. 152. 132. 16OverseasInterest spread (1)1. 561. 541. 52Benefit of interest-free liabilities, provisions and equity (2)0. 250. 250. 25Net interest margin (3)1. 811. 791. 77GroupInterest spread (1)1. 911. 821. 83Benefit of interest-free liabilities, provisions and equity (2)0. 220. 270. 29Net interest margin (3)2. 132. 092. 12 Notes to the Financial Statements Note 5 Income Tax The income tax expense for the year is determined from the profit before income tax as follows: (1) The New Zealand corporate tax rate was reduced from 30% to 28% for tax years starting on or after 1 April 2011. This change is effective for the Group from 1 July 2011. (2) Comparative information has been restated to conform to presentation in the current year. 96 Commonwealth Bank of Australia GroupBank20132012201120132012$M$M$M$M$MProfit before Income Tax10,7289,9649,0579,5158,391Prima facie income tax at 30%3,2182,9892,7172,8552,517Effect of amounts which are non-deductible/(assessable) in calculating taxable income:Taxation offsets and other dividend adjustments(3)(3)(7)(442)(462)Tax adjustment referable to policyholder income7986116--Tax losses not previously brought to account(18)(28)(6)(13)(23)Tax losses assumed by the Bank under UIG 1052----(12)Offshore tax rate differential(89)(83)(55)(12)(3)Offshore banking unit(33)(36)(17)(33)(36)Investment allowance--(2)--Effect of changes in tax rates (1)--3--Income tax (over)/under provided in previous years(50)22(71)(71)12Other(69)(89)(31)(61)(63)Total income tax expense3,0352,8582,6472,2231,930Corporate tax expense2,9232,7362,4812,2231,930Policyholder tax expense112122166--Total income tax expense3,0352,8582,6472,2231,930Group Bank Income tax expense attributable to 20132012201120132012profit from ordinary activities$M $M $M $M $M AustraliaCurrent tax expense2,3922,4872,2462,2961,919Deferred tax (benefit)/expense216(30)59(135)(36)Total Australia2,6082,4572,3052,1611,883OverseasCurrent tax expense4253193366826Deferred tax expense/(benefit)2826(6)21Total overseas4274013426247Total income tax expense3,0352,8582,6472,2231,930Group Bank 20132012201120132012Effective Tax Rate% % % % % Total – corporate 27. 527. 827. 923. 423. 0Retail Banking Services – corporate (2)29. 829. 629. 7n/an/aBusiness and Private Banking – corporate (2)29. 730. 128. 6n/an/aInstitutional Banking and Markets – corporate (2)23. 121. 323. 7n/an/aWealth Management – corporate (2)27. 727. 628. 1n/an/aNew Zealand – corporate (1) (2)24. 625. 724. 0n/an/aBankwest – corporate (2)29. 833. 034. 7n/an/a Notes to the Financial Statements Note 5 Income Tax (continued) (1) The following amounts are expected to be recovered within twelve months of the Balance Sheet date: for the Group $1,165 million (2012: $1,255 million); for the Bank $1,074 million (2012: $843 million). (2) 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. (3) The following amounts are expected to be settled within twelve months of the Balance Sheet date: for the Group $329 million (2012: $427 million); for the Bank $194 million (2012: $260 million). Annual Report 2013 97 GroupBank20132012201120132012$M$M$M$M$MDeferred tax asset balances comprise temporary differences attributable to:Amounts recognised in the Income Statement:Provision for employee benefits414381375347326Provisions for impairment on loans, bills discounted and other receivables1,1771,2641,3871,121804Other provisions not tax deductible until expense incurred17519220214592Recognised value of tax losses carried forward-11--Financial instruments9101534Other231212183216139Total amount recognised in the Income Statement2,0062,0602,1631,8321,365Amounts recognised directly in Other Comprehensive Income:Asset revaluation reserve22-22Foreign currency translation reserve33---Cash flow hedge reserve7772224425Employee compensation reserve1-111-Available-for-sale investments reserve-364578Total amount recognised directly in Other Comprehensive Income831132396435Total deferred tax assets (before set off) (1)2,0892,1732,4021,8961,400Set off of tax (2)(1,154)(1,193)(1,102)(833)(501)Net deferred tax assets9359801,3001,063899Deferred tax liability balances comprise temporary differences attributable to:Amounts recognised in the Income Statement:Impact of TOFA adoption11930119Lease financing370365370182181Defined benefit superannuation plan deficit(199)(141)(93)(199)(141)Intangible assets7312713462-Financial instruments142168772736Other58756457216171Total amount recognised in the Income Statement9841,0921,090244156Amounts recognised directly in Other Comprehensive Income:Revaluation of properties8279708261Foreign currency translation reserve--14--Cash flow hedge reserve25930221200245Defined benefit superannuation plan surplus1613411616134Available-for-sale investments reserve13924921465Total amount recognised directly in Other Comprehensive Income641439313589345Total deferred tax liabilities (before set off) (3)1,6251,5311,403833501Set off of tax (2)(1,154)(1,193)(1,102)(833)(501)Net deferred tax liabilities (Note 21)471338301--Deferred tax assets opening balance:9801,3001,2708991,112Movement in temporary differences during the year:Additions through merger of banking licences---469-Provisions for employee benefits33611214Provisions for impairment on loans, bills discounted and other receivables(87)(123)(89)(69)(19)Other provisions not tax deductible until expense incurred(17)(10)925Recognised value of tax losses carried forward(1)-(2)-(1)Financial instruments(32)(121)(234)28(193)Asset revaluation reserve-2--2Other2017(109)45(2)Set off of tax (2)39(91)444(332)(9)Deferred tax assets closing balance9359801,3001,063899 Notes to the Financial Statements Note 5 Income Tax (continued) (1) Deferred tax assets and liabilities are set off where they relate to income tax levied by the same taxation authority on either the same taxable entity or different taxable entities within the same taxable group. Deferred tax assets have not been recognised in respect of the following items: Potential deferred tax assets of the Group arose from: Tax losses and temporary differences in offshore centres. These deferred assets have not been recognised because it is not considered probable that future taxable profit will be available against which they can be realised. These potential tax benefits will only be obtained if: Future capital gains and assessable income of a nature and of an amount sufficient to enable the benefit from the losses to be realised is derived; Compliance with the conditions for claiming capital losses and deductions imposed by tax legislation is continued; and No changes in tax legislation adversely affect the Group in realising the benefit from deductions for the losses. Tax Consolidation Tax consolidation legislation has been enacted to allow Australian resident entities to elect to consolidate and be treated as single entities 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 $89 million (2012: $87 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(s). The amount receivable by the Bank under the tax funding agreement was $207 million as at 30 June 2013 (2012: $261 million receivable). This balance is included in ‘Other assets’ in the Bank’s separate Balance Sheet. Taxation of Financial Arrangements (TOFA) The new tax regime for financial instruments TOFA began to apply to the Tax Consolidated Group from 1 July 2010. The regime allows a closer alignment of the tax and accounting recognition and measurement of financial arrangements and their related flows. Following adoption, deferred tax balances from financial arrangements progressively reverse over a four year period. 98 Commonwealth Bank of Australia Group Bank 20132012201120132012$M $M $M $M $M Deferred tax liabilities opening balance:338301221--Movement in temporary differences during the year:Additions through merger of banking licences---292-Impact of TOFA adoption2(21)302(21)Property asset revaluations39(3)36Lease financing5(5)23114Defined benefit superannuation plan surplus/(deficit)68(130)(61)68(130)Intangible assets(54)(7)(11)(26)-Financial instruments46290(543)6154Other24(8)201(14)(14)Set off of tax (1)39(91)444(332)(9)Deferred tax liabilities closing balance (Note 21)471338301--Group Bank 20132012201120132012Deferred tax assets not taken to account$M $M $M $M $M Tax losses and other temporary differences on revenue account94711016657Tax losses on capital account--40--Total94711416657Group Bank Expiration of deferred tax assets not taken20132012201120132012 to account$M $M $M $M $M At Balance Sheet date carry-forward losses expired as follows:From one to two years146---From two to four years320181512After four years6645835145Losses that do not expire under current tax legislation11-40--Total94711416657 Notes to the Financial Statements Note 6 Dividends (1) The 2013 final dividend will be satisfied in full by cash disbursements with the Dividend Reinvestment Plan (DRP) anticipated to be satisfied in full by an on market purchase of shares. The 2012 final dividend was satisfied by cash disbursements of $2,207 and $930 million being reinvested by participants through the DRP. The 2011 final dividend was satisfied by cash disbursements of $2,099 million and $831 million being reinvested by participants 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 2013 to frank dividends for subsequent financial years, is $742 million (2012: $390 million). This figure is based on the franking accounts of the Bank at 30 June 2013, adjusted for franking credits that will arise from the payment of income tax payable on profits for the year, franking debits that will arise from the payment of dividends proposed, and franking credits that the Bank may be prevented from distributing in subsequent financial periods. The Bank expects that future tax payments will generate sufficient franking credits for the Bank to be able to continue to fully frank future dividend payments. These calculations have been based on the taxation law as at 30 June 2013. Dividend History (1) Dividend Payout Ratio: dividends divided by statutory earnings (earnings are net of dividends on other equity instruments). (2) DRP Participation Rate: the percentage of total issued share capital participating in the DRP. (3) Dividend expected to be paid on 3 October 2013. Annual Report 2013 99 Group Bank 20132012201120132012$M $M $M $M $M Ordinary SharesInterim ordinary dividend (fully franked) (2013: 164 cents; 2012: 137 cents; 2011: 132 cents)Interim ordinary dividend paid - cash component only2,6391,6351,5322,6391,635Interim ordinary dividend paid - dividend reinvestment plan-531513-531Total dividend paid2,6392,1662,0452,6392,166Other Equity InstrumentsDividend paid404242--Total dividend provided for, reserved or paid2,6792,2082,0872,6392,166Other provision carried6552376552Dividend proposed and not recognised as a liability (fully franked) (2013: 200 cents; 2012: 197 cents, 2011: 188 cents) (1)3,2243,1372,9303,2243,137Provision for dividendsOpening balance5237295237Provision made during the year5,8315,1134,6785,8315,113Provision used during the year(5,818)(5,098)(4,670)(5,818)(5,098)Closing balance (Note 22)6552376552Half-yearFull YearDRPPayoutPayoutDRPParticipationCents Per Ratio (1) Ratio (1)Price Rate (2)Half year endedShareDate Paid% % $ % 31 December 2010132 01/04/201167.5-52.9225.130 June 2011188 06/10/201188.278.347.4828.431 December 2011137 05/04/201260.1-48.8124.530 June 201219705/10/201291.175.254.5429.631 December 201216405/04/201372.5-68.7622.730 June 2013 (3)20003/10/201380.776.8-- Notes to the Financial Statements Note 7 Earnings Per Share Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the Bank by the weighted average number of ordinary shares on issue during the year, excluding the number of ordinary shares purchased and held as treasury shares. Diluted earnings per share amounts are calculated by dividing net profit attributable to ordinary equity holders of the Bank (after deducting interest on the convertible redeemable loan capital 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). Note 8 Cash and Liquid Assets Note 9 Receivables Due from Other Financial Institutions (1) Required by law for the Group to operate in certain regions. The majority of the above amounts are expected to be recovered within twelve months of the Balance Sheet date. 100 Commonwealth Bank of Australia Group 201320122011Earnings per ordinary shareBasic 477.9448.9411.2Fully diluted464.5432.9395.1Cents per ShareGroup 201320122011Reconciliation of earnings used in calculation of earnings per share$M $M $M Profit after income tax7,6937,1066,410Less: Other equity instrument dividends(40)(42)(42)Less: Non-controlling interests(16)(16)(16)Earnings used in calculation of basic earnings per share7,6377,0486,352Add: Profit impact of assumed conversions of loan capital193199235Earnings used in calculation of fully diluted earnings per share7,8307,2476,587Number of Shares 201320122011M M M Weighted average number of ordinary shares used in the calculationof basic earnings per share1,5981,5701,545Effect of dilutive securities - executive share plans and convertible loan capital instruments88104123Weighted average number of ordinary shares used in the calculation of fully diluted earnings per share1,6861,6741,668Group Bank 2013201220132012$M $M $M $M Notes, coins and cash at banks7,6538,5086,1837,161Money at short call4,3673,6963,9763,603Securities purchased under agreements to resell8,0167,0637,2827,006Bills received and remittances in transit598399589182Total cash and liquid assets20,63419,66618,03017,952GroupBank2013201220132012$M$M$M$MPlacements with and loans to other financial institutions7,61210,7556,97810,467Deposits with regulatory authorities (1)1321312015Total receivables due from other financial institutions7,74410,8866,99810,482 Notes to the Financial Statements Note 10 Assets at Fair Value through Income Statement (1) In addition to the assets above, the Group also measures bills discounted that are intended to be sold into the market at fair value. These are classified within Loans, bills discounted and other receivables (refer to Note 13). The above amounts are expected to be recovered within twelve months of the Balance Sheet date. Of the above amounts, $1,794 million is expected to be recovered within twelve months of the Balance Sheet date (2012: $1,717 million). Direct investments refer to positions held directly in the issuer of the investment. Indirect investments refer to investments that are held through unit trusts or similar investment vehicles. Investments held in the Australian statutory funds may only be used within the restrictions imposed under the Life Insurance Act 1995. Refer to Note 1(hh) for further details. (1) Designated at Fair Value through Income Statement at inception as they are managed by the Group on a fair value basis or to eliminate an accounting mismatch. Annual Report 2013 101 GroupBank2013201220132012$M $M $M $M Trading19,61713,81618,39812,071Insurance 14,35914,525--Other financial assets designated at fair value907980718980Total assets at fair value through Income Statement (1)34,88329,32119,11613,051GroupBank2013201220132012Trading$M $M $M $M Government bonds, notes and securities13,8668,49113,7808,146Corporate/financial institution bonds, notes and securities4,6724,6773,5503,298Shares and equity investments949502949502Other bonds, notes and securities130146119125Total trading assets19,61713,81618,39812,071Investments Investments Investments Investments Backing Life Backing Life Backing Life Backing Life Risk Investment Risk Investment Contracts Contracts Total Contracts Contracts Total 201320132013201220122012Insurance $M $M $M $M $M $M Equity Security Investments:Direct3899531,3424627201,182Indirect5423,1153,6575962,9103,506Total equity security investments9314,0684,9991,0583,6304,688Debt Security Investments:Direct8302351,0657536111,364Indirect2,1973,6995,8962,1924,2256,417Total debt security investments3,0273,9346,9612,9454,8367,781Property Investments:Direct22420342733195228Indirect221365586276472748Total property investments4455681,013309667976Other Assets2491,1371,3861888921,080Total life insurance investment assets4,6529,70714,3594,50010,02514,525Group Bank 2013201220132012Other (1)$M $M $M $M Government securities632980588980Receivables due from other financial institutions275-130-Total other assets at fair value through Income Statement907980718980 Notes to the Financial Statements Note 10 Assets at Fair Value through Income Statement (continued) Of the amounts in the preceding table, $862 million is expected to be recovered within twelve months of the Balance Sheet date by the Group (2012: $882 million). All amounts are expected to be recovered within twelve months of the Balance Sheet date by the Bank. Note 11 Derivative Financial Instruments Derivative Contracts Derivatives are classified as “Held for Trading” or “Held for Hedging”. Held for Trading derivatives are contracts entered into in order to meet customers’ needs, to undertake market making and positioning activities, or for risk management purposes that do not qualify for hedge accounting. Held for Hedging derivatives are instruments held for risk management purposes, which meet the criteria for hedge accounting. 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 (u). 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 $3 million net gain for the Group (2012: $19 million net loss), and $3 million net loss for the Bank (2012: $22 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 $28 million loss for the Group (2012: $58 million gain), and $26 million loss for the Bank (2012: $55 million gain). Amounts accumulated in Other Comprehensive Income in respect of cash flow hedges are recycled to the Income Statement when the forecast transaction occurs. Underlying cash flows from cash flow hedges are discounted to calculate deferred gains and losses which are expected to occur in the following periods: (1) Comparatives have been restated to conform to presentation in the current year. 102 Commonwealth Bank of Australia Exchange RateInterest RateGroupRelated ContractsRelated ContractsTotal20132012 (1)20132012 (1)20132012 (1)$M$M$M$M$M$MWithin 6 months(3)(23)552152(2)6 months - 1 year(15)5(52)(67)(67)(62)1 - 2 years(27)(14)212(2)185(16)2 - 5 years(173)(91)8311,3386581,247After 5 years(153)(20)(96)(221)(249)(241)Net deferred (losses)/gains(371)(143)9501,069579926Exchange Rate Interest Rate Bank Related Contracts Related Contracts Total 201320122013201220132012$M$M$M$M$M$MWithin 6 months(1)1481747186 months - 1 year(17)6(42)(77)(59)(71)1 - 2 years(25)(3)167(18)142(21)2 - 5 years(120)(102)8861,2477661,145After 5 years(94)(54)(74)(171)(168)(225)Net deferred (losses)/gains(257)(152)985998728846 Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) 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. The fair value of derivative financial instruments is set out in the following tables: (1) Comparatives have been restated to conform to presentation in the current year, due to derivatives that were netted off in the prior year which are now presented gross in line with accounting requirements (impact: $630 million as at 30 June 2012). (2) Comparatives have been reclassified to conform to presentation in the current year. (1) Comparatives have been reclassified to conform to presentation in the current year. (2) Comparatives have been restated to conform to presentation in the current year. Derivative assets and liabilities held for trading are expected to be recovered or due to be settled within twelve months of the Balance Sheet date. Annual Report 2013 103 Group20132012Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiabilityDerivative assets and liabilities$M$M$M$MHeld for trading (1) (2)36,531(30,571)31,954(29,113)Held for hedging (1)8,809(8,009)7,613(10,738)Total derivative assets/(liabilities)45,340(38,580)39,567(39,851)Group20132012Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiabilityDerivatives held for trading$M$M$M$MExchange rate related contracts:Forward contracts (1)7,529(6,896)3,709(4,181)Swaps (1) (2)14,570(9,819)9,817(7,378)Futures6-1-Options purchased and sold392(405)390(453)Total exchange rate related contracts22,497(17,120)13,917(12,012)Interest rate related contracts:Forward contracts (1)6(6)12(11)Swaps (1) (2)13,091(12,641)16,895(16,264)Futures---(1)Options purchased and sold (1)754(670)899(636)Total interest rate related contracts13,851(13,317)17,806(16,912)Credit related contracts:Swaps24(27)58(56)Total credit related contracts24(27)58(56)Equity related contracts:Swaps4(8)--Options purchased and sold78(25)60(44)Total equity related contracts82(33)60(44)Commodity related contracts:Swaps54(51)85(72)Options purchased and sold10(7)13(11)Total commodity related contracts64(58)98(83)Identified embedded derivatives (1)13(16)15(6)Total derivative assets/(liabilities) held for trading36,531(30,571)31,954(29,113) Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) (1) Comparatives have been restated to conform to presentation in the current year. The majority of derivative assets and liabilities held for hedging are expected to be recovered or due to be settled more than twelve months after the Balance Sheet date. 104 Commonwealth Bank of Australia Group20132012Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiabilityDerivatives held for hedging$M$M$M$MFair value hedgesExchange rate related contracts:Forward contracts1-2-Swaps (1)3,534(2,626)1,973(4,440)Total exchange rate related contracts3,535(2,626)1,975(4,440)Interest rate related contracts:Swaps (1)1,374(2,760)1,744(2,370)Options purchased and sold--3-Total interest rate related contracts1,374(2,760)1,747(2,370)Equity related contracts:Swaps33(1)58(4)Total equity related contracts33(1)58(4)Total fair value hedges4,942(5,387)3,780(6,814)Cash flow hedgesExchange rate related contracts:Swaps (1)1,103(1,242)669(2,093)Total exchange rate related contracts1,103(1,242)669(2,093)Interest rate related contracts:Swaps (1)2,764(1,378)3,164(1,827)Total interest rate related contracts2,764(1,378)3,164(1,827)Total cash flow hedges3,867(2,620)3,833(3,920)Net investment hedgesExchange rate related contracts:Forward contracts-(2)-(4)Total exchange rate related contracts-(2)-(4)Total net investment hedges-(2)-(4)Total derivative assets/(liabilities) held for hedging8,809(8,009)7,613(10,738) Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) (1) Comparatives have been restated to conform to presentation in the current year, due to derivatives that were netted off in the prior year, which are now presented gross in line with accounting standards (impact: $630 million as at 30 June 2012). (2) Comparatives have been reclassified to conform to presentation in the current year. (1) Comparatives have been restated to conform to presentation in the current year. (2) Comparatives have been reclassified to conform to presentation in the current year. Derivative assets and liabilities held for trading are expected to be recovered or due to be settled within twelve months of the Balance Sheet date. Annual Report 2013 105 Bank20132012Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiabilityDerivative assets and liabilities$M$M$M$MHeld for trading (1) (2)36,826(32,007)32,683(29,386)Held for hedging (1)8,377(8,222)7,008(10,470)Total derivative assets/(liabilities)45,203(40,229)39,691(39,856)Bank20132012Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiabilityDerivatives held for trading$M$M$M$MExchange rate related contracts:Forward contracts7,424(6,863)3,670(4,153)Swaps (1)14,605(9,725)9,910(7,194)Futures6-1-Options purchased and sold390(404)389(451)Derivatives held with controlled entities744(1,857)998(706)Total exchange rate related contracts23,169(18,849)14,968(12,504)Interest rate related contracts:Forward contracts6(6)10(11)Swaps (1) (2)12,613(12,036)16,149(15,320)Futures---(1)Options purchased and sold (2)752(667)898(630)Derivatives held with controlled entities (2)117(315)439(732)Total interest rate related contracts13,488(13,024)17,496(16,694)Credit related contracts:Swaps24(27)58(56)Total credit related contracts24(27)58(56)Equity related contracts:Swaps4(8)--Options purchased and sold78(25)60(44)Total equity related contracts82(33)60(44)Commodity related contracts:Swaps54(51)85(72)Options purchased and sold8(7)13(11)Derivatives held with controlled entities1-1-Total commodity related contracts63(58)99(83)Identified embedded derivatives (2)-(16)2(5)Total derivative assets/(liabilities) held for trading36,826(32,007)32,683(29,386) Notes to the Financial Statements Note 11 Derivative Financial Instruments (continued) (1) Comparatives have been restated to conform to presentation in the current year. The majority of derivative assets and liabilities held for hedging are expected to be recovered or due to be settled more than twelve months after the Balance Sheet date. 106 Commonwealth Bank of Australia Bank20132012Fair ValueFair ValueFair ValueFair ValueAssetLiabilityAssetLiabilityDerivatives held for hedging$M$M$M$MFair value hedgesExchange rate related contracts:Forward contracts1-2-Swaps (1)3,432(2,591)1,786(4,434)Derivatives held with controlled entities-(255)3-Total exchange rate related contracts3,433(2,846)1,791(4,434)Interest rate related contracts:Swaps (1)1,244(2,683)1,416(2,266)Derivatives held with controlled entities70(119)92(113)Total interest rate related contracts1,314(2,802)1,508(2,379)Equity related contracts:Swaps33(1)58(4)Total equity related contracts33(1)58(4)Total fair value hedges4,780(5,649)3,357(6,817)Cash flow hedgesExchange rate related contracts:Swaps (1)1,022(1,202)662(2,003)Derivatives held with controlled entities-(78)90(7)Total exchange rate related contracts1,022(1,280)752(2,010)Interest rate related contracts:Swaps (1)2,548(1,293)2,857(1,643)Derivatives held with controlled entities27-42-Total interest rate related contracts2,575(1,293)2,899(1,643)Total cash flow hedges3,597(2,573)3,651(3,653)Total derivative assets/(liabilities) held for hedging8,377(8,222)7,008(10,470) Notes to the Financial Statements Note 12 Available-for-Sale Investments (1) Supranational, Sovereign and Agency Securities (SSA). (2) Comparatives have been restated to conform to presentation in the current year. The following amounts are expected to be recovered within twelve months of the Balance Sheet date: for Group $12,920 million (2012: $19,160 million); for Bank $12,319 million (2012: $12,009 million). Revaluation of Available-for-sale investments resulted in a gain of $553 million for the Group (2012: $349 million loss) and a gain of $365 million for the Bank (2012: $315 million loss) recognised directly in other comprehensive income. 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: $31 million net gain (2012: $81 million net gain), Bank: $31 million net gain (2012: $86 million net gain). Proceeds received from settlement at or close to maturity of Available-for-sale investments for the Group were $44,645 million (2012: $50,490 million) and for the Bank were $35,135 million (2012: $46,417 million). Proceeds from the sale of Available-for-sale investments for the Group were $2,445 million (2012: $12,375 million) and for the Bank were $2,444 million (2012: $12,326 million). Maturity Distribution and Weighted Average Yield Annual Report 2013 107 GroupBank2013201220132012$M$M$M$MGovernment bonds, notes and securities29,50627,77028,45923,284Corporate/financial institution bonds, notes and securities19,80922,87520,00017,701Shares and equity investments647471527368Covered bonds, mortgage backed securities & SSA (1) (2)9,6089,70376,92575,207Other securities318307Total available-for-sale investments59,60160,827125,941116,567GroupMaturity Period at 30 June 20133 to10 orNon-0 to 3 Months12 Months1 to 5 Years5 to 10 Yearsmore YearsMaturingTotal$M%$M%$M%$M%$M%$M$MGovernment bonds, notes and securities8890.722,0860.9310,5194.8311,7535.004,2595.03-29,506Corporate/financial institution bonds, notes and securities7,1492.792,2232.9810,4323.3954.65---19,809Shares and equity investments4---------643647Covered bonds, mortgage backed securities & SSA--5674.644,3885.065474.724,1063.69-9,608Other securities----254.18----631Total available-for-sale investments8,042-4,876-25,364-12,305-8,365-64959,601GroupMaturity Period at 30 June 20123 to10 orNon-0 to 3 Months12 Months1 to 5 Years5 to 10 Yearsmore YearsMaturingTotal$M%$M%$M%$M%$M%$M$MGovernment bonds, notes and securities4,5731.553,1242.864,6065.199,8335.385,6345.29-27,770Corporate/financial institution bonds, notes and securities6,7113.974,7984.4811,3664.92-----22,875Shares and equity investments--40.0160.01----461471Covered bonds, mortgage backed securities & SSA----4,4784.911,2484.983,9775.10-9,703Other securities----------88Total available-for-sale investments11,284-7,926-20,456-11,081-9,611-46960,827 Notes to the Financial Statements Note 13 Loans, Bills Discounted and Other Receivables (1) Home loans balance includes residential mortgages that have been assigned to securitisation vehicles and covered bond trusts. Further detail on these residential mortgages is disclosed in Note 47. (2) Comparative information has been reclassified to conform to presentation in the current year. (3) 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 $184,807 million (2012: $181,465 million), and for Bank $167,238 million (2012: $127,327 million). The maturity tables below are based on contractual terms. Finance Lease Receivables The Group and the Bank provide finance leases to a broad range of clients to support financing needs in acquiring movable assets such as trains, aircraft, ships and major production and manufacturing equipment. Finance lease receivables are included within loans, bills discounted and other receivables to customers. 108 Commonwealth Bank of Australia GroupBank2013201220132012$M$M$M$MAustraliaOverdrafts20,03921,49720,03920,494Home loans (1) (2)338,023322,918336,927271,258Credit card outstandings11,45711,14911,4579,873Lease financing4,3284,2502,9442,883Bills discounted (2) (3)22,01716,77722,01716,777Term loans101,14199,902100,81479,447Other lending271625270209Other securities77--Total Australia497,283477,125494,468400,941OverseasOverdrafts1,098891187154Home loans (1)34,81730,063457409Credit card outstandings676603--Lease financing39247862141Term loans28,49223,22012,6789,885Total overseas65,47555,25513,38410,589Gross loans, bills discounted and other receivables562,758532,380507,852411,530LessProvisions for Loan Impairment (Note 14):Collective provision(2,827)(2,819)(2,628)(1,971)Individually assessed provisions (1,628)(2,008)(1,585)(1,011)Unearned income:Term loans(900)(1,032)(891)(1,001)Lease financing(755)(839)(399)(425)(6,110)(6,698)(5,503)(4,408)Net loans, bills discounted and other receivables556,648525,682502,349407,122Group 20132012GrossPresent Value GrossPresent Value Investment inof Minimum Investment inof Minimum Finance LeaseUnearnedLease Payment Finance LeaseUnearnedLease Payment ReceivableIncomeReceivable ReceivableIncomeReceivable $M$M$M $M$M$M Not later than one year1,390(221)1,1691,235(225)1,010One year to five years2,735(388)2,3472,592(412)2,180Over five years595(146)449901(202)6994,720(755)3,9654,728(839)3,889 Note 13 Loans, Bills Discounted and Other Receivables (continued) Notes to the Financial Statements (1) The industry split above has been prepared on an industry exposure basis. The maturity tables are based on contractual terms. Annual Report 2013 109 Bank 20132012Gross Present Value Gross Present Value Investment in of Minimum Investment in of Minimum Finance Lease Unearned Lease Payment Finance Lease UnearnedLease Payment Receivable Income Receivable Receivable Income Receivable $M $M $M $M $M $M Not later than one year1,028(125)903829(119)710One year to five years1,749(169)1,5801,877(173)1,704Over five years229(105)124318(133)1853,006(399)2,6073,024(425)2,599GroupMaturity Period at 30 June 2013Maturing 1MaturingMaturingYearBetweenAfteror Less1 & 5 Years5 YearsTotalIndustry (1)$M$M$M$MAustraliaSovereign1,6272121321,971Agriculture2,6372,2141,1205,971Bank and other financial3,3014,2603687,929Home loans7,98524,529305,509338,023Construction1,7195523632,634Other Personal7,33812,3202,13821,796Asset financing2,9955,3091108,414Other commercial and industrial47,59449,52213,429110,545Total Australia75,19698,918323,169497,283OverseasSovereign4,6493,7611,2609,670Agriculture1,3431,8623,2756,480Bank and other financial2,0792,1102,8407,029Home loans6,3153,74324,75934,817Construction10211287301Other Personal831284863Asset financing18123133274Other commercial and industrial2,6432,8085906,041Total overseas17,98014,54732,94865,475Gross loans, bills discounted and other receivables93,176113,465356,117562,758Maturing 1MaturingMaturingYearBetweenAfteror Less1 & 5 Years5 Years TotalInterest rate$M$M$M$MAustralia63,40583,039265,866412,310Overseas13,13210,42619,76343,321Total variable interest rates76,53793,465285,629455,631Australia11,79115,87957,30384,973Overseas4,8484,12113,18522,154Total fixed interest rates16,63920,00070,488107,127Gross loans, bills discounted and other receivables93,176113,465356,117562,758 Notes to the Financial Statements Note 13 Loans, Bills Discounted and Other Receivables (continued) (1) The industry split above has been prepared on an industry exposure basis. (2) Comparatives have been reclassified to conform to presentation in the current year (3) Comparatives have been restated to conform to presentation in the current year. The maturity tables are based on contractual terms. 110 Commonwealth Bank of Australia GroupMaturity Period at 30 June 2012Maturing 1MaturingMaturingYearBetweenAfteror Less1 & 5 Years5 YearsTotalIndustry (1)$M$M$M$MAustraliaSovereign (2)8495771931,619Agriculture (2)1,4182,2361,5975,251Bank and other financial (2)5,7303,3601,13510,225Home loans (3)7,28121,162294,475322,918Construction (2)1,2828726422,796Other Personal7,88311,7152,17421,772Asset financing2,9005,1631518,214Other commercial and industrial (2)(3)46,89645,05712,377104,330Total Australia74,23990,142312,744477,125OverseasSovereign3,6214,8901,72410,235Agriculture1,1511,7182,3295,198Bank and other financial9709141,2723,156Home loans7,0843,74919,23030,063Construction12112797345Other Personal634139656Asset financing111138219468Other commercial and industrial1,8462,1261,1625,134Total overseas15,53813,67526,04255,255Gross loans, bills discounted and other receivables89,777103,817338,786532,380Maturing 1MaturingMaturingYearBetweenAfteror Less1 & 5 Years5 YearsTotalInterest rate $M$M$M$MAustralia64,92275,873277,700418,495Overseas12,04810,80818,20941,065Total variable interest rates76,97086,681295,909459,560Australia9,31714,26935,04458,630Overseas3,4902,8677,83314,190Total fixed interest rates12,80717,13642,87772,820Gross loans, bills discounted and other receivables89,777103,817338,786532,380 Notes to the Financial Statements Note 14 Provisions for Impairment (1) Basel 2.5 and Basel III 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 30. (2) Comparative information has been restated to conform to presentation in the current year. Annual Report 2013 111 GroupBank20132012201120132012Provisions for impairment losses$M$M$M$M$MCollective provisionOpening balance2,8373,0433,4611,9891,926Additions through merger of banking licences---664-Net collective provision funding55931245522519Impairment losses written off(695)(740)(646)(649)(626)Impairment losses recovered154228206132171Other3(6)(23)1(1)Closing balance2,8582,8373,0432,6591,989Individually assessed provisionsOpening balance2,0082,1251,9921,0111,081Additions through merger of banking licences---894-Net new and increased individual provisioning9371,2021,602805700Write-back of provisions no longer required(350)(425)(367)(285)(231)Discount unwind to interest income(90)(122)(147)(77)(65)Other317365374256151Impairment losses written off(1,194)(1,137)(1,329)(1,019)(625)Closing balance1,6282,0082,1251,5851,011Total provisions for impairment losses4,4864,8455,1684,2443,000Less: Off balance sheet provisions(31)(18)(21)(31)(18)Total provisions for loan impairment4,4554,8275,1474,2132,982GroupBank20132012201120132012Provision ratios%%%%%Collective provision as a % of credit risk weighted assets - Basel III1. 02n/a n/a n/a (1)n/a (1)Total provision as a % of credit risk weighted assets - Basel III1. 60n/a n/a n/a (1)n/a (1)Collective provision as a % of credit risk weighted assets - Basel 2.5n/a 1. 091. 23n/a (1)n/a (1) Total provision as a % of credit risk weighted assets - Basel 2.5n/a 1. 852. 09n/a (1) n/a (1) Total provisions for impaired assets as a % of gross impaired assets (2)40. 6245. 4740. 6643. 5342. 82Total provisions for impairment losses as a % of gross loans and acceptances0. 790. 891. 000. 830. 71Group Bank 20132012201120132012Loan impairment expense$M $M $M $M $M Net collective provision funding55931245522519Net new and increased individual provisioning9371,2021,602805700Write-back of individually assessed provisions(350)(425)(367)(285)(231)Total loan impairment expense1,1461,0891,2801,042988 Notes to the Financial Statements Note 14 Provisions for Impairment (continued) 112 Commonwealth Bank of Australia Group Individually assessed provisions by20132012201120102009industry classification$M $M $M $M $M AustraliaSovereign-----Agriculture16889877577Bank and other financial217235254254483Home loans18225620215082Construction89152133132104Other personal1411112123Asset financing2314371531Other commercial and industrial8711,1631,3071,268760Total Australia1,5641,9202,0311,9151,560OverseasSovereign-----Agriculture16711159Bank and other financial561168Home loans1728251210Construction-----Other personal-----Asset financing-----Other commercial and industrial2647574982Total overseas64889477169Total individually assessed provisions1,6282,0082,1251,9921,729Group 20132012201120102009Loans written off by industry classification$M $M $M $M $M AustraliaSovereign-----Agriculture303210102Bank and other financial7951107383110Home loans21788849536Construction1394589724Other personal622657567651496Asset financing2538267258Other commercial and industrial686884989604255Total Australia1,7981,7951,8721,887961OverseasSovereign-----Agriculture45177-Bank and other financial10115086Home loans2124262518Construction--1-4Other personal2519221814Asset financing-----Other commercial and industrial3133368660Total overseas9182103186182Gross loans written off1,8891,8771,9752,0731,143Recovery of amounts previously written offAustralia1442161997070Overseas1012773Total amounts recovered1542282067773Net loans written off1,7351,6491,7691,9961,070 Notes to the Financial Statements Note 14 Provisions for Impairment (continued) Note 15 Property, Plant and Equipment The majority of the above amounts have expected useful lives longer than twelve months after the Balance Sheet date. There are no significant items of property, plant and equipment that are currently under construction. Land and buildings are carried at fair value based on independent valuations performed during the year; refer to Note 1(y). Annual Report 2013 113 Group20132012201120102009Loans recovered by industry classification$M $M $M $M $M AustraliaSovereign-----Agriculture----1Bank and other financial8173-1Home loans454331Construction-----Other personal1131471345952Asset financing617235Other commercial and industrial133017510Total Australia1442161997070OverseasSovereign-----Agriculture-----Bank and other financial1----Home loans1----Construction-----Other personal88763Asset financing-----Other commercial and industrial-4-1-Total overseas1012773Total loans recovered1542282067773GroupBank2013201220132012$M$M$M$MLandAt 30 June valuation217222197145Closing balance217222197145BuildingsAt 30 June valuation316351279255Closing balance316351279255Total land and buildings 533573476400Leasehold ImprovementsAt cost1,4161,3501,2001,020Provision for depreciation(772)(730)(661)(570)Closing balance644620539450EquipmentAt cost1,5171,5191,1711,018Provision for depreciation(1,174)(1,164)(910)(787)Closing balance343355261231Assets Under LeaseAt cost1,3661,144350353Provision for depreciation(168)(189)(68)(58)Closing balance1,198955282295Total property, plant and equipment2,7182,5031,5581,376 Notes to the Financial Statements Note 15 Property, Plant and Equipment (continued) Reconciliation of the carrying amounts of Property, Plant and Equipment is set out below: 114 Commonwealth Bank of Australia Group Bank 2013201220132012Carrying value at cost$M $M $M $M Land1021039759Buildings143164135123Total land and buildings at cost245267232182GroupBank2013201220132012$M$M$M$MLandCarrying amount at the beginning of the year222269145191Additions through merger of banking licences--52-Transfers to assets held for sale(3)(1)(3)(1)Disposals(3)(48)(3)(44)Net revaluations(1)25(1)Foreign currency translation adjustment2-1-Carrying amount at the end of the year217222197145BuildingsCarrying amount at the beginning of the year351388255309Additions through merger of banking licences--57-Additions834826Transfers to assets held for sale(3)(1)(2)(1)Disposals(3)(58)(3)(57)Transfers--(3)-Net revaluations42546Depreciation(43)(37)(37)(28)Foreign currency translation adjustment2---Carrying amount at the end of the year316351279255Leasehold ImprovementsCarrying amount at the beginning of the year620614450501Additions through merger of banking licences--97-Additions14612410042Disposals(15)(10)(10)(8)Net revaluations2(1)--Depreciation(116)(107)(99)(85)Foreign currency translation adjustment7-1-Carrying amount at the end of the year644620539450EquipmentCarrying amount at the beginning of the year355357231244Additions through merger of banking licences--57-Additions143158102108Disposals(12)(5)(8)(2)Transfers--3-Net revaluations32--Depreciation(151)(158)(124)(119)Foreign currency translation adjustment51--Carrying amount at the end of the year343355261231Assets Under LeaseCarrying amount at the beginning of the year955738295281Additions3582661941Disposals(70)(11)(14)(11)Net revaluations-1--Depreciation(65)(50)(18)(16)Foreign currency translation adjustment2011--Carrying amount at the end of the year1,198955282295 Notes to the Financial Statements Note 16 Intangible Assets (1) Core deposits represent 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 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 predominantly 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. The Count Financial Limited brand name ($4 million) is amortised over the estimated useful life of 20 years. (4) Other intangibles include the value of credit card relationships acquired from Bankwest and Count franchise relationships. This value represents future net income generated from the relationships that existed at Balance Sheet date. The assets have a useful life of 10 years based on the attrition rates of customers. Impairment Tests for Goodwill and Intangible Assets with Indefinite Lives To assess whether goodwill and other assets with indefinite useful lives are impaired, the carrying amount of a cash-generating unit is compared to the recoverable amount. The recoverable amount is 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. Earnings multiples relating to the Group‘s Banking (Retail Banking Services, Business and Private Banking, Bankwest and New Zealand) and Wealth Management cash-generating units are sourced from publicly available data associated with businesses displaying similar characteristics to those cash-generating units, and are applied to current earnings. The key assumption is the Price-Earnings (P/E) multiple observed for these businesses, which for the Banking businesses were in the range of 12.0–15.1 (2012: 10.0–11.8), and for Wealth Management businesses were in the range of 11.0–23.0 (2012: 11.6–23.1). The P/E multiples are sourced for similar companies operating in Australia and New Zealand. Carrying amounts of cash-generating units are determined with reference to the Group’s target equity for that business, which takes into account economic and regulatory capital levels and goodwill associated with that business. Goodwill Allocation to the following Cash-Generating Units (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 acquisitions of Colonial and Count Financial Limited. Annual Report 2013 115 GroupBank2013201220132012$M$M$M$MGoodwillPurchased goodwill at cost7,7237,7052,5222,522Closing balance 7,7237,7052,5222,522Computer Software CostsCost2,7702,4622,5032,108Accumulated amortisation(847)(762)(696)(507)Closing balance 1,9231,7001,8071,601Core Deposits (1)Cost495495495-Accumulated amortisation(318)(248)(318)-Closing balance 177247177-Management Fee Rights (2)Cost316316--Closing balance 316316--Brand Names (3)Cost190190186-Closing balance 190190186-Other Intangibles (4)Cost25525538-Accumulated amortisation(161)(132)(17)-Closing balance 9412321-Total intangible assets10,42310,2814,7134,123Group 20132012$M $M Retail Banking Services (1)4,1494,149Business and Private Banking297297Wealth Management (2)2,5872,587New Zealand690672Total7,7237,705 Notes to the Financial Statements Note 16 Intangible Assets (continued) Reconciliation of the carrying amounts of Intangible Assets is set out below: (1) Due primarily to the Core Banking Modernisation initiative. 116 Commonwealth Bank of Australia GroupBank2013201220132012$M$M$M$MGoodwill Opening balance7,7057,3992,5222,522Additions-232--Transfers-(5)--Foreign currency translation adjustments1879--Total goodwill 7,7237,7052,5222,522Computer Software CostsOpening balance1,7001,2971,6011,204Additions:Through merger of banking licences--10-From purchases142467From internal development (1)454562406540Amortisation(245)(183)(216)(150)Total computer software costs1,9231,7001,8071,601Core DepositsOpening balance247317--Additions through merger of banking licences--230-Amortisation(70)(70)(53)-Total core deposits177247177-Management Fee RightsOpening balance316311--Transfers-5--Total management fee rights316316--Brand NamesOpening balance190186--Additions through merger of banking licences--186-Additions-4--Total brand names190190186-Other IntangiblesOpening balance12393--Additions through merger of banking licences--24-Additions152--Disposals(5)---Amortisation(25)(22)(3)-Total other intangibles9412321- Notes to the Financial Statements Note 17 Other Assets The above amounts are expected to be recovered within twelve months of the Balance Sheet date. Note 18 Assets Held for Sale Note 19 Deposits and Other Public Borrowings The majority of the amounts are due to be settled within twelve months of the Balance Sheet date as shown in the maturity analysis table on the next page. Annual Report 2013 117 Group Bank 2013201220132012$M $M $M $M Accrued interest receivable2,1452,2752,7052,713Accrued fees/reimbursements receivable1,155883154212Securities sold not delivered1,4142,8929551,798Intragroup current tax receivable--207261Current tax assets4152--Prepayments453375370289Life insurance other assets42530941-Other965731659599Total other assets6,5987,5175,0915,872Group Bank 2013201220132012$M $M $M $M Available-for-sale investments312312Land and Buildings5252Total assets held for sale814814Group Bank 2013201220132012$M $M $M $M AustraliaCertificates of deposit42,34645,83943,31646,997Term deposits157,959152,543158,322127,640On demand and short term deposits195,017176,866195,199157,328Deposits not bearing interest 8,8917,5308,8917,528Securities sold under agreements to repurchase5,5025,2455,5395,258Total Australia409,715388,023411,267344,751OverseasCertificates of deposit6,2387,2566,1577,003Term deposits26,88128,9767,53610,853On demand and short term deposits14,46411,648233115Deposits not bearing interest2,0611,7528391Securities sold under agreements to repurchase70---Total overseas49,71449,63214,00918,062Total deposits and other public borrowings459,429437,655425,276362,813 Notes to the Financial Statements Note 19 Deposits and Other Public Borrowings (continued) Maturity Distribution of Certificates of Deposit and Term Deposits (1) All certificates of deposit issued by the Group are for amounts greater than $100,000. (2) Comparatives have been restated to conform to presentation in the current year. Note 20 Liabilities at Fair Value through Income Statement (1) These liabilities have been designated at fair value through Income Statement at inception as they are managed by the Group on a fair value basis. Designating these liabilities at fair value through Income Statement has also eliminated an accounting mismatch created by measuring assets and liabilities on a different basis. Of the above amounts, trading liabilities are expected to be settled within twelve months of the Balance Sheet date for the Group and the Bank. For the Group, the majority of the other amounts are expected to be settled within twelve months of the Balance Sheet date. For the Bank, debt instruments are expected to be settled more than twelve months after the Balance Sheet date. The change in fair value for those liabilities designated at fair value through Income Statement due to credit risk for the Group is an $11 million loss (2012: $26 million loss) and for the Bank is a $10 million loss (2012: $26 million loss), which has been calculated by determining the changes in credit spreads implicit in the fair value of the instruments issued. The cumulative change in fair value due to changes in credit risk for the Group is an $11 million gain (2012: $20 million gain) and for the Bank is a $10 million gain (2012: $20 million gain). The amount that would be contractually required to be paid at maturity to the holders of the financial liabilities designated at fair value through Income Statement for the Group is $8,641 million (2012: $6,505 million) and for the Bank is $3,278 million (2012: $3,141 million). 118 Commonwealth Bank of Australia GroupAt 30 June 2013MaturingMaturingMaturingMaturingThreeBetweenBetweenafterMonths or Three & Six & Twelve Twelve LessSix MonthsMonthsMonthsTotal$M$M$M$M$MAustraliaCertificates of deposit (1)20,6357,49556313,65342,346Term deposits103,85319,56027,3847,162157,959Total Australia124,48827,05527,94720,815200,305OverseasCertificates of deposit (1)2,7972,835539676,238Term deposits15,3445,3264,2601,95126,881Total overseas18,1418,1614,7992,01833,119Total certificates of deposits and term deposits142,62935,21632,74622,833233,424GroupAt 30 June 2012MaturingMaturingMaturingMaturingThreeBetweenBetweenafterMonths orThree &Six & Twelve TwelveLessSix MonthsMonthsMonthsTotal$M$M$M$M$MAustraliaCertificates of deposit (1) (2)18,7635,5962,41019,07045,839Term deposits99,02620,04527,9155,557152,543Total Australia117,78925,64130,32524,627198,382OverseasCertificates of deposit (1)5,4535646635767,256Term deposits20,1184,8932,5361,42928,976Total overseas25,5715,4573,1992,00536,232Total certificates of deposits and term deposits143,36031,09833,52426,632234,614Group Bank 2013201220132012$M$M$M$MDeposits and other borrowings (1)1,4541,298--Debt instruments (1)4,3002,775400699Trading liabilities2,9472,4822,9322,482Total liabilities at fair value through Income Statement8,7016,5553,3323,181 Notes to the Financial Statements Note 21 Tax Liabilities Note 22 Other Provisions Maturity Distribution for Other Provisions Annual Report 2013 119 GroupBank2013201220132012Note$M$M$M$MAustraliaCurrent tax liability1,4731,5181,4391,520Total Australia1,4731,5181,4391,520OverseasCurrent tax liability561913Deferred tax liability5471338--Total overseas52735713Total tax liabilities2,0001,8751,4401,523Group Bank 2013201220132012Note$M $M $M $M Long service leave445416412385Annual leave223231180193Other employee entitlements61715968Restructuring costs41744138General insurance claims159184--Self insurance/non-lending losses52534949Dividends665526552Other203143186117Total other provisions1,2491,224992902Group20132012Due to beDue to beDue to beDue to beSettled WithinSettled MoreSettled WithinSettled More12 Monthsthan 12 MonthsTotal12 Monthsthan 12 MonthsTotal$M$M$M$M$M$MLong service leave299146445282134416Annual leave22122232292231Other employee entitlements2596146771Restructuring costs34741581674General insurance claims1411815916024184Self insurance/non-lending losses133952143953Dividends65-6552-52Other1564720312221143Total9313181,2499213031,224 Notes to the Financial Statements Note 22 Other Provisions (continued) Provision Commentary Restructuring Costs Provisions are recognised for restructuring activities when a detailed plan has been developed and a valid expectation that the plan will be carried out is held by those affected by it. The majority of the provision is expected to be used within 12 months of the Balance Sheet date. General Insurance Claims This provision is to cover future claims on general insurance contracts that have been incurred but not reported. The provision will be realised upon settlement of claims whose maturities were uncertain at the reporting date. Self Insurance and Non-Lending Losses This provision covers certain non-transferred insurance risk and non-lending losses. The self insurance provision is reassessed annually in consultation with actuarial advice. 120 Commonwealth Bank of Australia Bank20132012Due to beDue to beDue to beDue to beSettled WithinSettled MoreSettled WithinSettled More12 Monthsthan 12 MonthsTotal12 Monthsthan 12 MonthsTotal$M$M$M$M$M$MLong service leave289123412275110385Annual leave180-180193-193Other employee entitlements-5959-6868Restructuring costs3474138-38General insurance claims------Self insurance/non-lending losses10394994049Dividends65-6552-52Other141451869918117Total719273992666236902GroupBank2013201220132012Reconciliation$M$M$M$MRestructuring costs:Opening balance741213856Additions through merger of banking licences--24-Additional provisions7272Amounts utilised during the year(40)(49)(28)(20)Closing balance41744138General insurance claims:Opening balance184193--Additional provisions54140--Amounts utilised during the year(79)(149)--Closing balance159184--Self insurance/non-lending losses:Opening balance53494945Additions through merger of banking licences--4-Additional provisions1112711Amounts utilised during the year(5)(1)(4)-Release of provision(7)(7)(7)(7)Closing balance52534949Other:Opening balance143161117183Additions through merger of banking licences--16-Additional provisions941806376Amounts utilised during the year(26)(173)(4)(63)Release of provision(8)(25)(6)(79)Closing balance203143186117 Notes to the Financial Statements Note 23 Debt Issues (1) Represents the contractual maturity of the underlying instrument. The Bank’s long term debt issues include notes issued under the: USD70 billion Euro Medium Term Note Program; the USD50 billion US Medium Term Note Program; the USD30 billion Covered Bond Program; the USD25 billion CBA New York Branch Medium Term Note Program; and other applicable debt documentation. Notes issued under debt programs are both fixed and variable rate. Interest rate risk associated with the notes is incorporated within the Bank’s interest rate risk framework. For certain debt issues booked in an offshore branch or subsidiary, the amounts have first been converted into the functional currency of the branch at a branch defined exchange rate, before being converted into the AUD equivalent. Where proceeds have been employed in currencies other than that of the ultimate repayment liability, swaps or other risk management arrangements have been entered into. Annual Report 2013 121 GroupBank2013201220132012Note$M$M$M$MMedium term notes71,03969,92364,81364,574Commercial paper34,60234,14233,73826,315Securitisation notes 478,9297,858--Covered bonds4718,23812,78916,74011,423Total debt issues132,808124,712115,291102,312Short Term Debt Issues by currencyUSD34,23028,43733,36626,143EUR999999-AUD9118191103GBP1825,30518230Other currencies-120-39Long term debt issues with less than one year to maturity20,11615,98315,70713,454Total short term debt issues54,71850,12549,44539,769Long Term Debt Issues by currencyUSD30,58131,01729,80029,814EUR17,07712,49215,98411,280AUD12,74213,0355,4376,464GBP3,6952,0713,1731,729NZD2,3972,715730472JPY4,9117,0184,8566,956Other currencies6,6486,1955,8275,784Offshore loans (all JPY)39443944Total long term debt issues78,09074,58765,84662,543Maturity Distribution of Debt Issues (1)Less than three months16,47224,58614,80517,910Between three and twelve months38,24625,53934,64021,859Between one and five years56,97054,86347,44345,739Greater than five years21,12019,72418,40316,804Total debt issues132,808124,712115,291102,312 Notes to the Financial Statements Note 23 Debt Issues (continued) (1) Comparatives have been restated to conform to presentation in the current year, which is now presenting short term borrowings by program, previously they were presented by issue currency. (2) The amount outstanding at period end is measured at amortised cost. (3) 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. (1) End of day, Sydney time. 122 Commonwealth Bank of Australia Group201320122011TotalOutstanding at year end (2)34,60234,14236,121Maximum amount outstanding at any month end (3)34,60239,24236,121Average amount outstanding (3)28,17836,72127,941US Commercial Paper ProgramOutstanding at year end (2)33,49226,47126,810Maximum amount outstanding at any month end (3)33,49230,99826,810Average amount outstanding (3)25,51528,29220,520Weighted average interest rate on:Average amount outstanding0.3%0.4%0.4%Outstanding at year end0.3%0.4%0.3%Euro Commercial Paper ProgramOutstanding at year end (2)1,1107,6719,311Maximum amount outstanding at any month end (3)6,6429,4729,311Average amount outstanding (3)2,6638,4157,377Weighted average interest rate on:Average amount outstanding0.6%0.8%1.3%Outstanding at year end0.5%0.7%1.0%Domestic Commercial Paper ProgramOutstanding at year end (2)---Maximum amount outstanding at any month end (3)-15080Average amount outstanding (3)11444Weighted average interest rate on:Average amount outstanding--5.1%Outstanding at year end--- $M (except where indicated)Short Term Borrowings by Program (1)As AtAs At30 June 30 June Currency20132012AUD 1.00 =USD0.92681.0181EUR0.70980.8079GBP0.60760.6509NZD1.18601.2756JPY91.564780.9160Exchange rates utilised (1) Notes to the Financial Statements Note 23 Debt Issues (continued) Guarantee Arrangements Commonwealth Bank of Australia Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding (Guarantee Scheme) The Bank issued debt under its programs which has the benefit of a guarantee by the Australian Government announced on 12 October 2008 and formally commenced on 28 November 2008. On 7 February 2010 it was announced that the Guarantee Scheme would close to new liabilities from 31 March 2010. The arrangements were provided in a Deed of Guarantee dated 20 November 2008, Scheme Rules and in additional documentation for offers to residents of the United States and other jurisdictions. The text of the Guarantee Scheme documents can be found at the Australian Government Guarantee website at www.guaranteescheme.gov.au. Fees are payable in relation to the Guarantee Scheme, calculated by reference to the term and amount of the liabilities guaranteed and the Bank’s credit rating. Existing guaranteed debt issued by the Bank remains guaranteed until maturity, unless redeemed earlier. The Financial Claims Scheme (also known as the Australian Government Deposit Guarantee), which is administered by the Australian Prudential Regulation Authority, guarantees deposits denominated in Australian dollars held in a specified range of deposit accounts with the Bank for balances per account-holder totalling up to $250,000. Deposits and Other Public Borrowings are set out in Note 19. Guarantee under the Commonwealth Bank Sale Act Historically, the due payment of all monies payable by the Bank was guaranteed by the Commonwealth of Australia under section 117 of the Commonwealth Banks Act 1959 (as amended) at 30 June 1996. With the sale of the Commonwealth’s shareholding in the Bank this guarantee has been progressively phased out under transitional arrangements found in the Commonwealth Bank Sale Act 1995. Demand deposits are no longer guaranteed by the Commonwealth under this guarantee. However, debt issues payable by the Bank under a contract entered into prior to 19 July 1996 and outstanding at 19 July 1999 remain guaranteed until maturity. Note 24 Bills Payable and Other Liabilities Other than the defined benefit superannuation plan deficit, the above amounts are expected to be settled within twelve months of the Balance Sheet date. Annual Report 2013 123 Group Bank 2013201220132012Note$M $M $M $M Bills payable861773823696Accrued interest payable3,2523,4112,5592,677Accrued fees and other items payable2,1861,8721,4641,200Defined benefit superannuation plan deficit41202464202464Securities purchased not delivered1,2751,175802694Amortised receipts820745485428Life insurance other liabilities and claims payable2983246240Other1,1567977,2823,178Total bills payable and other liabilities10,0509,56113,6799,377 Notes to the Financial Statements Note 25 Loan Capital As at the reporting date, there are no securities of the Group or the Bank that are contractually due for redemption in the next twelve months (note the Group has the right to call some securities earlier than the contractual maturity date). (1) USD100 million Floating Rate Notes On 15 October 1986, the State Bank of Victoria issued USD100 million of floating rate notes. The floating rate notes are perpetual but were able to be redeemed from October 1991. They were assigned to the Bank on 1 January 1991. The Bank entered into an agreement with the Commonwealth of Australia on 31 December 1991 which provides that, if certain events occur, the Bank may either issue CBA ordinary shares to the Commonwealth of Australia, or (with the consent of the Commonwealth of Australia) conduct a renounceable rights issue for CBA ordinary shares to all shareholders. The capital raised must be used to pay any amounts due and payable on the floating rate notes. The floating rate notes were issued into the international markets and are subject to English law. They qualify as Additional Tier One Capital of the Bank under the Basel III transitional arrangements instruments as implemented by APRA. for capital (2) TPS 2003 On 6 August 2003, a wholly owned entity of the Bank (CBA Capital Trust) issued USD550 million of Trust Preferred Securities (TPS 2003). TPS 2003 may be redeemed for cash on 30 June 2015 and, if not redeemed, CBA Capital Trust will be required to exchange TPS 2003 for CBA ordinary shares. TPS 2003 were issued into the US capital markets and are subject to Delaware law. They qualify as Additional Tier One Capital of transitional arrangements for capital instruments as implemented by APRA. the Bank under the Basel III (3) PERLS III On 6 April 2006, a wholly owned entity of the Bank (Preferred Capital Limited or “PCL”) issued $1,166 million of Perpetual Exchangeable Repurchaseable Listed Shares (PERLS III). PERLS III are preference shares which may be exchanged for CBA ordinary shares or $200 cash each (or a combination of both) on 6 April 2016. If PCL does not elect to exchange PERLS III, the margin on the distributions payable on 124 Commonwealth Bank of Australia PERLS III will increase by 1.00% per annum. PERLS III will automatically be exchanged for CBA preference shares no later than 10 Business Days prior to 6 April 2046. PERLS III are listed on the ASX and are subject to New South Wales law. They qualify as Additional Tier One Capital of the Bank under the Basel III transitional arrangements for capital instruments as implemented by APRA. (4) PERLS IV On 12 July 2007, the Bank issued $1,465 million of Perpetual Exchangeable Resaleable Listed Securities (PERLS IV). PERLS IV were stapled securities comprising an unsecured subordinated note issued by the Bank’s New York branch and a preference share issued by the Bank. All PERLS IV were bought back by the Bank during the year and subsequently cancelled. (5) PERLS V On 14 October 2009, the Bank issued $2,000 million of Perpetual Exchangeable Resaleable Listed Securities (PERLS V). PERLS V are stapled securities comprising an unsecured subordinated note issued by the Bank’s New Zealand branch and a preference share issued by the Bank. PERLS V may be resold to a third party or repurchased for $200 cash each on 31 October 2014 and, if not resold or repurchased, the Bank will be required to convert PERLS V into CBA ordinary shares. PERLS V are listed on the ASX and are subject to New South Wales law. They qualify as Additional Tier One Capital of the Bank under the Basel III transitional arrangements for capital instruments as implemented by APRA. (6) PERLS VI On 17 October 2012, the Bank issued $2,000 million of Perpetual Exchangeable Resaleable Listed Securities (PERLS VI). PERLS VI are unsecured subordinated notes. PERLS VI may be redeemed or resold to a third party for $100 cash each on 15 December 2018 and, if not redeemed or resold, the Bank will be required to exchange PERLS VI for CBA ordinary shares on 15 December 2020. Group BankCurrency 2013201220132012Amount (M)Footnotes$M $M $M $M Tier One Loan CapitalUndatedFRN USD 100 (1)1089810898UndatedTPS USD 550 (2)593540593540UndatedPERLS III AUD 1,166 (3)1,1601,1581,1601,158UndatedPERLS IV AUD 1,465 (4)-1,463-1,463UndatedPERLS V AUD 2,000 (5)1,9911,9851,9881,980UndatedPERLS VI AUD 2,000 (6)1,979-1,979-UndatedTPS USD 700 (7)--755684Total Tier One Loan Capital5,8315,2446,5835,923Tier Two Loan CapitalAUD denominated(8)799800799800USD denominated(9)377344377344JPY denominated(10)648927648801GBP denominated(11)246229246229NZD denominated(12)-559-274EUR denominated(12)1,4041,2331,4041,233CAD denominated(12)-288-288Total Tier Two Loan Capital3,4744,3803,4743,969Fair value hedge adjustments382398380331Total Loan Capital9,68710,02210,43710,223 Notes to the Financial Statements Note 25 Loan Capital (continued) PERLS VI are listed on the ASX and are subject to New South Wales law. They qualify as Additional Tier One Capital of the Bank under Basel III as implemented by APRA. (7) TPS 2006 On 15 March 2006, a wholly owned entity of the Bank (CBA Capital Trust II) issued USD700 million of Trust Preferred Securities (TPS 2006) which may be redeemed for cash, CBA Tier One Capital securities or CBA preference shares on 15 March 2016. If CBA Capital Trust II does not elect to redeem TPS 2006, the fixed distribution rate payable on TPS 2006 will change to a floating distribution rate. TPS 2006 will automatically be exchanged for CBA preference shares on 15 March 2056. TPS 2006 were issued into the US capital markets and are subject to Delaware law. They qualify as Additional Tier One Capital under the Basel III transitional arrangements for capital instruments as implemented by APRA. (8) AUD denominated Tier Two Loan Capital issuances floating rate notes, $275 million extendible December 1989, due December 2014; issued $25 million subordinated floating rate notes, issued April 1999, due April 2029; and $500 million subordinated floating rate notes, issued September 2008, due September 2018. Medium Term Notes), issued February 1999; JPY30 billion subordinated EMTN, issued October 1995, due October 2015; and JPY9 billion perpetual subordinated notes, issued May 1996. (11) GBP denominated Tier Two Loan Capital issuances GBP150 million subordinated EMTN, issued June 2003, due December 2023. (12) Other currencies Tier Two Loan Capital issuances NZD350 million redeemable preference shares, issued May 2005, due April 2015. On 18 May 2005, a wholly owned entity of the Bank (CBA Capital Australia Limited) issued NZD350 million redeemable redeemable preference shares. The preference shares are to be redeemed or repurchased by CBA Capital Australia Limited on 15 April 2015. The redeemable preference shares are listed on the New Zealand Stock Exchange and are subject to New South Wales law. They qualified as Tier Two Capital of the Bank until 15 April 2013. EUR1,000 million subordinated August 2009, due August 2019; and notes, issued CAD300 million subordinated notes, issued October 2007, redeemed October 2012. (9) USD denominated Tier Two Loan Capital issuances USD350 million subordinated fixed rate notes, issued June 2003, due June 2018. (10) JPY denominated Tier Two Loan Capital issuances JPY20 billion perpetual subordinated EMTN (Euro All Tier Two Capital securities (other than the NZD and CAD securities) qualify as Tier Two Capital under the Basel III transitional arrangements instruments as implemented by APRA. for capital Annual Report 2013 125 Notes to the Financial Statements Note 26 Shareholders’ Equity (1) Refer to Note 27. (2) During the year the number of shares issued included the acquisition of an additional 47% interest in Aussie Home Loans Pty Limited. During the prior year the Group acquired 100% of the issued share capital of Count Financial Limited partly funded by the issue of ordinary shares. (3) The determined dividend includes an amount attributable to Dividend Reinvestment Plan (DRP) of $930 million (final 2011/2012) with $929 million ordinary shares being issued under plan rules which include the carry forward of DRP balance from previous dividends. (4) Relates to the on market purchase of shares to satisfy the interim DRP and the movement in treasury shares held within Life Insurance Statutory Funds and the employee share scheme trust. (5) Dividends relating to equity instruments on issue other than ordinary shares. The balances disclosed above include a share of associates and joint ventures’ other comprehensive income of $1 million for the year ended 30 June 2013 (2012: $7 million). 126 Commonwealth Bank of Australia GroupBank2013201220132012Note$M$M$M$MOrdinary Share Capital (1)Opening balance25,17523,60225,49823,896Issue of shares (2)193237193237Dividend reinvestment plan (net of issue costs) (3)9291,3639281,363Exercise of executive options under employee share ownership schemes-2-2Purchase of treasury shares (4)(664)(96)--Sale and vesting of treasury shares (4)69067--Closing balance2726,32325,17526,61925,498Other Equity Instruments (1)Opening balance9399391,8951,895Closing balance279399391,8951,895Retained ProfitsOpening balance13,35611,82610,7349,593Additions through merger of banking licences--919-Actuarial gains and losses from defined benefit superannuation plans311(223)311(223)Realised gains and dividend income on treasury shares (1)2913--Operating profit attributable to Equity holders of the Bank7,6777,0907,2926,461Total available for appropriation21,37318,70619,25615,831Transfers from/(to) general reserve436(223)(3)-Transfers from capital reserve355-352-Transfers from employee compensation reserve-(1)-(1)Interim dividend - cash component(2,639)(1,635)(2,639)(1,635)Interim dividend - dividend reinvestment plan-(531)-(531)Final dividend - cash component(2,207)(2,099)(2,207)(2,099)Final dividend - dividend reinvestment plan (3)(930)(831)(930)(831)Other dividends (5)(28)(30)--Closing balance16,36013,35613,82910,734 Notes to the Financial Statements Note 26 Shareholders’ Equity (continued) Annual Report 2013 127 Group Bank 2013201220132012Reserves$M$M$M$MGeneral ReserveOpening balance1,201978570570Appropriation (to)/from retained profits(436)2233-Closing balance7651,201573570Capital ReserveOpening balance3513281,5941,576Additions through merger of banking licences--8-Revaluation surplus on sale of property423418Transfer to retained profits(355)-(352)-Closing balance-3511,2541,594Asset Revaluation ReserveOpening balance195191150163Additions through merger of banking licences--10-Revaluation of properties43295Transfers on sale of properties(4)(23)(4)(18)Tax on revaluation of properties(1)(5)(1)-Closing balance194195164150Foreign Currency Translation ReserveOpening balance(893)(1,083)(260)(330)Currency translation adjustments of foreign operations4891999376Currency translation on net investment hedge(13)3(11)4Tax on translation adjustments(10)(12)-(10)Closing balance(427)(893)(178)(260)Cash Flow Hedge ReserveOpening balance644(402)587(387)Additions through merger of banking licences--189-Gains and losses on cash flow hedging instruments:Recognised in other comprehensive income(575)730(619)847Transferred to Income Statement:Interest income(1,046)(354)(862)(254)Interest expense1,2721,1121,091796Tax on cash flow hedging instruments73(442)122(415)Closing balance368644508587Employee Compensation ReserveOpening balance136135136135Current period movement(4)1(4)1Closing balance132136132136Available-for-Sale Investments ReserveOpening balance(63)245(45)237Net gains and losses on revaluation of available-for-sale investments553(349)365(315)Net gains and losses on available-for-sale investments transferred toIncome Statement on disposal(31)(81)(31)(86)Tax on available-for-sale investments(158)122(101)119Closing balance301(63)188(45)Total Reserves1,3331,5712,6412,732Shareholders' Equity attributable to Equity holders of the Bank44,95541,04144,98440,859Shareholders' Equity attributable to Non-controlling interests537531--Total Shareholders' Equity45,49241,57244,98440,859 Notes to the Financial Statements Note 27 Share Capital Ordinary Share Capital (1) During the year the number of shares issued included the acquisition of an additional 47% interest in Aussie Home Loans Pty Limited. During the prior year the Group acquired 100% of the issued share capital of Count Financial Limited partly funded by the issue of ordinary shares. (2) The determined dividend includes an amount attributable to DRP of $930 million (final 2011/2012) and $831 million (final 2010/2011) with $929 million and $832 million ordinary shares being issued under plan rules, which include the carry forward of DRP balance from previous dividends. (3) The DRP in respect of 2012/2013 interim dividend was satisfied in full through the on market purchase and transfer of $596 million of shares to participating shareholders. (4) The gross dividend entitlement in respect of DRP for the 2011/2012 interim dividend was $531 million, with $531 million ordinary shares issued under plan rules. (5) Relates to treasury shares held within Life Insurance Statutory Funds and the employee share scheme trust. (1) During the year the number of shares issued included the acquisition of an additional 47% interest in Aussie Home Loans Pty Limited. During the prior year the Group acquired 100% of the issued share capital of Count Financial Limited partly funded by the issue of ordinary shares. (2) The DRP in respect of the 2012/2013 interim dividend was satisfied in full through the on market purchase and transfer of 8,662,389 shares to participating shareholders. (3) Relates to treasury shares held within the Life Insurance Statutory Funds and the employees share scheme trust. 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 Trust Preferred Securities 2006 On 15 March 2006, a wholly owned entity of the Bank (CBA Capital Trust II) issued USD700 million of Trust Preferred Securities (TPS 2006) into the US capital markets. They qualify as Additional Tier One Capital under the Basel III transitional arrangements for capital instruments as implemented by APRA. A related instrument was issued by the Bank to a subsidiary for $956 million and eliminates on consolidation. 128 Commonwealth Bank of Australia Group Bank 2013201220132012Issued and paid up ordinary capital$M $M $M $M Ordinary Share CapitalOpening balance (excluding treasury shares deduction)25,49823,89625,49823,896Issue of shares (1)193237193237Dividend reinvestment plan: Final dividend prior year (2)929832928832Dividend reinvestment plan: Interim dividend (3) (4)-531-531Exercise of executive options under employee share ownership schemes-2-2Closing balance (excluding treasury shares deduction)26,62025,49826,61925,498Less: treasury shares (5)(297)(323)--Closing balance26,32325,17526,61925,498Group Bank 2013201220132012Number of shares on issueShares Shares Shares Shares Opening balance (excluding treasury shares deduction)1,592,154,7801,558,637,2441,592,154,7801,558,637,244Issue of shares (1)2,747,9955,042,9492,747,9955,042,949Dividend reinvestment plan issues:2010/2011 Final dividend fully paid ordinary shares $47.48-17,524,300-17,524,3002011/2012 Interim dividend fully paid ordinary shares $48.81-10,874,187-10,874,1872011/2012 Final dividend fully paid ordinary shares $54.5417,026,061-17,026,061-2012/2013 Interim dividend fully paid ordinary shares $68.76 (2)----Exercise of executive options under employee share ownership schemes-76,100-76,100Closing balance (excluding treasury shares deduction)1,611,928,8361,592,154,7801,611,928,8361,592,154,780Less: Treasury Shares (3)(6,076,006)(6,874,405)--Closing balance1,605,852,8301,585,280,3751,611,928,8361,592,154,780Group Bank 2013201220132012Other equity instruments$M $M $M $M Issued and paid up9399391,8951,895Shares Shares Shares Shares Number of shares700,000700,0001,400,0001,400,000 Notes to the Financial Statements Note 27 Share Capital (continued) Dividends The Directors have declared a fully franked final dividend of 200 cents per share amounting to $3,224 million. The dividend will be payable on 3 October 2013 to shareholders on the register at 5pm EST on 23 August 2013. The Board determines the dividends based on the Group’s 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 197 cents per share amounting to $3,137 million was paid on 5 October 2012. The payment comprised cash disbursements of $2,207 million with $930 million being reinvested by participants through the DRP; and A fully franked interim dividend of 164 cents per share amounting to $2,639 million was paid on 5 April 2013. The payment fully comprised cash disbursements of $2,041 million. The DRP was satisfied in full by the on market purchase of shares. Dividend Reinvestment Plan The Bank expects the DRP for the final dividend for the year ended 30 June 2013 will be satisfied in full by an on market purchase of shares of approximately $806 million. Record Date The register closes for determination of dividend entitlement and for participation in the DRP at 5pm EST on 23 August 2013 at Link Market Services Limited, Locked Bag A14, Sydney South, 1235. Ex-dividend Date The ex-dividend date is 19 August 2013. Note 28 Share Based Payments The Group operates a number of cash and equity settled share plans as detailed below. 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 the Group’s net profit after tax (“cash basis”) of greater than 5%. If the hurdle is not met, the Board has discretion to determine whether a full award, a partial award or no award is made. 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. While the Group did not achieve the performance target for the 2012 financial year, the Board exercised its discretion and approved a partial grant of $800 worth of shares to each eligible employee in recognition of their contribution to the Group’s results in a difficult economic environment. The following table provides details of shares granted under the ESAP during the current and previous financial years ended 30 June. It is estimated that approximately $34.0 million of ordinary shares will be purchased on market at the prevailing market price for the 2013 grant. 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 the same as that which applies to ESAP. 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. A total of $0.5 million has been expensed during the year (2012: $1.1 million) in respect of this plan. Annual Report 2013 129 Number of sharesTotal numberTotalPeriodAllocation dateParticipants allocated by participant of shares allocatedIssue price $fair value $201314 Sep 201229,92114418,89454.7922,951,20220129 Sep 201127,46521576,76546.9127,056,046 Notes to the Financial Statements Note 28 Share Based Payments (continued) Employee Share Plan The Employee Share Plan (ESP) facilitates mandatory short term incentive (STI) deferral, sign-on incentives and retention awards. Under the ESP, shares awarded generally vest when 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 granted under the ESP. The weighted average fair value at grant date of shares awarded during the year was $54.82 (2012: $48.32). A total of $41.5 million has been expensed during the year (2012: $35.7 million) 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 facilitates mandatory STI deferral, sign-on incentives and retention awards. Under the ESPUP participants receive grants of performance units, which are monetary units with a value linked to the Bank’s share price. Performance units generally vest when 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. The weighted average fair value at grant date of performance units issued during the year was $54.63 (2012: $46.45). A total of $7.4 million has been expensed during the year (2012: $6.9 million) in respect of this plan. Group Employee Rights Plan The Group Employee Rights Plan (GERP) facilitates the mandatory STI deferral, sign-on incentives and retention awards for executives of selected subsidiary companies. Under the GERP, participants receive a right to a share which is subject to vesting conditions. Rights awarded generally vest when the participant remains in employment of the Group until the vesting date. The following table provides details of outstanding awards of rights granted under GERP. The weighted average fair value at grant date of rights issued during the year was $54.74 (2012: $48.08). A total of $1.5 million has been expensed during the year (2012: $1.0 million) in respect of this plan. 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. 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. 130 Commonwealth Bank of Australia OutstandingOutstandingPeriod1 JulyGrantedVestedForfeited30 JuneJuly 2010 - June 2011612,699-(104,199)(6,063)502,437July 2011 - June 20121,022,190-(167,615)(71,633)782,942July 2012 - June 2013-827,482(35,956)(14,961)776,565Total 20131,634,889827,482(307,770)(92,657)2,061,944Total 2012772,2681,108,959(179,273)(67,065)1,634,889OutstandingOutstandingPeriod1 JulyGrantedVestedForfeited30 JuneJuly 2010 - June 201163,943-(22,787)(1,869)39,287July 2011 - June 201295,347-(33,914)(4,827)56,606July 2012 - June 2013-79,634(26,271)(3,042)50,321Total 2013159,29079,634(82,972)(9,738)146,214Total 201295,643138,982(74,427)(908)159,290OutstandingOutstandingAllocation period1 JulyGrantedVestedForfeited30 JuneJuly 2009 - June 20106,587-(6,587)--July 2010 - June 201117,860-(979)(1,047)15,834July 2011 - June 201235,496-(3,949)(1,603)29,944July 2012 - June 2013-34,400(2,962)(2,081)29,357Total 201359,94334,400(14,477)(4,731)75,135Total 201231,08939,134(4,482)(5,798)59,943 Notes to the Financial Statements Note 28 Share Based Payments (continued) The following table provides details of shares granted under the ESSSP. Equity Participation Plan The Equity Participation Plan (EPP) facilitated the partial deferral of executives STI payments, together with sign-on and retention awards. Shares generally vest to participants when 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 EPP was closed to new offers in the 2010 financial year. The following table provides details of outstanding awards of shares granted under the mandatory component of EPP. (1) No awards were allocated from July 2005 to June 2007. A total of $0.04 million has been expensed during the year (2012: $11.0 million). 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 closed to new offers in the 2010 financial year. 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 generally vest when 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 EPPUP. Due to the vesting price of performance units being lower than the grant price, a $0.1 million gain (2012: $1.0 million loss) has been recognised 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 focuses on driving performance and shareholder alignment in the longer term. 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: 50% of the award assessed against Customer Satisfaction compared to a set peer group; and 50% of the award assessed against Total Shareholder Return (TSR) compared to a set peer group. For awards made from the 2011 financial year onwards: 25% of the award assessed against Customer Satisfaction compared to a set peer group; and 75% of the award assessed against TSR compared to a set peer group. The Customer Satisfaction peer group consists of the ANZ, NAB, St George (FY10 award only), Westpac and other key competitors. Annual Report 2013 131 PeriodParticipantsNumber of shares purchasedAverage share price $Total purchase consideration $201347717,96559.861,075,390201222714,31449.33706,109OutstandingVested andOutstandingAllocation period1 JulyGrantedReleasedForfeited30 JuneJuly 2002 - June 200323,315-(23,315)--July 2003 - June 200427,678-(4,216)-23,462July 2004 - June 2005 (1)23,796-(5,707)-18,089July 2007 - June 200827,150-(4,279)-22,871July 2008 - June 200948,344-(28,244)-20,100July 2009 - June 2010536,117-(519,365)-16,752Total 2013686,400-(585,126)-101,274Total 20121,446,306-(735,345)(24,561)686,400OutstandingOutstandingAllocation period1 JulyGrantedVestedForfeited30 JuneJuly 2009 - June 201043,383-(43,383)--Total 201343,383-(43,383)--Total 201258,973-(15,590)-43,383 Notes to the Financial Statements Note 28 Share Based Payments (continued) Group Leadership Reward Plan (continued) The TSR peer group for all awards comprises the 20 largest companies listed on the ASX (by market capitalisation) at the beginning of each respective performance period, excluding resource 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 2010 financial year 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 at the end of the performance period, with no vesting below this level. For the 2011 and 2012 financial year awards, the portion of the awards 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 at the end of the performance period. 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 the overall performance is worse at the end of the performance period than at the beginning, none of this portion will vest. For the 2013 financial year award, the portion of the award assessed against Customer Satisfaction that will vest is: 100% where the weighted average ranking for CBA over the performance period is 1st (i.e. 1.00), 50% where CBA’s weighted average ranking is 2nd and vesting on a sliding scale between 100% and 50% on a pro-rata straight line basis if CBA’s weighted average ranking is between 1st and 2nd (i.e. between 1.00 and 2.00). No Reward Rights in this part of the award will vest if CBA’s weighted average ranking is lower than 2nd (i.e. above 2.00). For the portion of the 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 was subject to the same performance hurdles as the four year award. The transitional award reached the end of its performance period on 30 June 2012 and in line with the plan rules 87.50% of the awarded rights vested. The following table provides details of outstanding awards of performance rights granted under the GLRP. The weighted average fair value at the grant date of all Reward Rights issued during the year was $53.86 per right (2012: $36.13). 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 2013 financial year award includes a risk free interest rate ranging from 3.04% to 3.22%, a nil dividend yield on the Bank’s ordinary shares and a volatility in the Bank share price of 20.0%. 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 $12.9 million has been expensed in the current year (2012: $18.8 million) for GLRP. Equity Reward Plan The Equity Reward Plan (ERP) was the Group’s long term incentive plan for executives until the final grants were made in 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 granted under the ERP. No amount has been expensed in the current or prior year. 132 Commonwealth Bank of Australia PerformancePerformanceOutstandingOutstandingperiod start datetest date1 JulyGrantedVestedForfeited30 June 1 July 200930 June 2012370,297-(312,931)(57,366)- 1 July 200930 June 2013523,919--(47,471)476,448 1 July 201030 June 2014388,412--(34,446)353,966 1 July 201130 June 2015416,986--(38,927)378,059 1 July 201230 June 2016-446,281--446,281Total 20131,699,614446,281(312,931)(178,210)1,654,754Total 20121,282,628416,986--1,699,614OutstandingOutstandingAllocation period1 JulyGrantedReleasedForfeited30 JuneJuly 2002 - June 20031,650-(1,650)--July 2003 - June 200415,500-(3,000)-12,500July 2004 - June 200513,500-(3,000)-10,500July 2005 - June 200632,780-(2,000)-30,780July 2006 - June 200738,900-(3,900)-35,000Total 2013102,330-(13,550)-88,780Total 2012209,590-(107,260)-102,330 Notes to the Financial Statements Note 28 Share Based Payments (continued) Non-Executive Directors Share Plan The Non-Executive Directors Share Plan (NEDSP) facilitates the following arrangements for Non-Executive Directors’ (NEDs): Acquisition of shares using 20% of their post-tax fees. NEDs are required to defer 20% of their post-tax fees until they reach a minimum shareholding requirement of 5,000 shares; 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 $0.03 million (2012: $0.2 million) was expensed reflecting shares purchased and allocated under the NEDSP. Note 29 Non-Controlling Interests The share capital above comprises predominantly New Zealand Perpetual Preference Shares (PPS) of AUD505 million. On 10 December 2002, ASB Capital Limited, a New Zealand subsidiary, issued NZD200 million (AUD182 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 payments 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 Limited, a New Zealand subsidiary, issued NZD350 million (AUD323 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 payments 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 PPS issued by ASB Limited (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. Annual Report 2013 133 Total fees appliedNumber of sharesAverage purchase pricePeriod$Participants purchased$201334,049153863.292012175,449103,67347.77Group 20132012$M $M Shareholders' equity537531Total non-controlling interests537531 Notes to the Financial Statements Note 30 Capital Adequacy Capital Management The Bank is an Authorised Deposit-taking Institution (ADI) and is subject to regulation by APRA under the authority of the Banking Act 1959. APRA has set minimum regulatory capital requirements for banks based on the Basel Committee on Banking Supervision (BCBS) guidelines. The Basel III measurement and monitoring of capital has been effective from 1 January 2013. APRA has adopted a more conservative approach than the minimum standards published by the BCBS and a more accelerated timetable. The 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 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 Common Equity Tier One (CET1), Tier One and Tier Two Capital. CET1 primarily consists of Shareholders’ Equity, less goodwill and other prescribed adjustments. Tier One Capital is comprised of CET1 plus other capital instruments acceptable to APRA. Tier Two Capital is comprised primarily of hybrid and debt the instruments acceptable aggregate of Tier One and Tier Two Capital. A detailed to APRA. Total Capital is breakdown of the components of capital is detailed on pages 24 to 25. The tangible component of the investment in the insurance and funds management operations are deducted 100% from CET1. Capital adequacy is measured by means of a risk based capital ratio. The capital ratios reflect capital (CET1, 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 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 both the Executive Committee and the Asset and Liability Committee (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 2012 and 2013 financial years were in compliance with both APRA minimum capital adequacy requirements and the Board Approved minimums. 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. 134 Commonwealth Bank of Australia Notes to the Financial Statements Note 31 Financial Reporting by Segments The principal activities of the Group are carried out in the below business segments. These segments are based on the distribution channels through which the customer relationship is being managed. 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 Other Divisions). 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 it provides the basis for the determination of the Bank’s dividends. The “cash basis” presents 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. (i) Retail Banking Services Retail Banking Services provides home loan, consumer finance and retail deposit products and servicing to all Retail bank customers. In addition, commission is received for the distribution of 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. (iii) Institutional Banking and Markets Institutional Banking and Markets services the Group’s major corporate, institutional and government clients using a relationship management model based on industry expertise and local insights. The Total Capital Solutions offering financial and includes debt and equity capital raising, commodities price transactional risk management and banking capabilities. Institutional Banking and Markets has international operations in London, Malta, New York, New Zealand, Singapore, Hong Kong, Japan and Shanghai. (iv) Wealth Management Wealth Management includes the Global Asset Management (including operations in Asia and Europe), 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 Institutional Banking and Markets). international business of (vi) Bankwest Bankwest is active in all domestic market segments, with lending diversified between the business, rural, housing and personal markets, including a full range of deposit products. (vii) Other Divisions The following parts of the business are included in Other Divisions: International Financial Services Asia incorporates the Asian retail and SME banking operations (Indonesia, China, Vietnam and India), investments in Chinese and life Vietnamese banks, 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; joint venture Chinese the Corporate Centre includes the results of unallocated Group support functions such as Investor Relations, Group Strategy, Secretariat and Treasury; and Group wide Eliminations/Unallocated intra- group elimination entries arising on consolidation, centrally raised provisions and other unallocated revenue and expenses. includes During the year, the Group made a number of segment reporting improvements effective from 1 July 2012. Results and balances for the comparative period in this note have been restated due to the following: Customer Reporting – revenue, expenses and associated customer balances were reallocated between segments based on where the customer relationship is being managed, rather than the business from which the product originated. This change primarily affects the presentation of the Retail Banking Services and Business and Private Banking segments. Capital Allocation – the Group allocated higher capital the to business segments requirements introduction of the Basel III regulatory capital framework. Earnings on equity were reallocated from the Corporate Centre (where residual capital was previously held) to each segment, with no change to total Group capital levels. following Single ADI – treasury-related revenues, operating expenses and balance sheet items were transferred from the Bankwest segment to the Corporate Centre following the relinquishment of the Bankwest banking licence. Annual Report 2013 135 Notes to the Financial Statements Note 31 Financial Reporting by Segments (continued) (1) Investment experience is presented on a pre-tax basis. (2) Operating expenses include volume related expenses. (3) 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 items for the period are Bell Group litigation ($45 million expense), treasury shares valuation adjustment ($53 million expense), unrealised gains and losses related to hedging and IFRS volatility ($27 million gain), and Bankwest non-cash items ($71 million expense). 136 Commonwealth Bank of Australia RetailBusiness andInstitutionalBankingPrivateBanking andWealthNewServices Banking Markets Management Zealand Bankwest Other Total $M$M$M$M$M$M$M$MNet interest income6,4272,9421,344-1,1091,53758513,944Other banking income1,5208101,289-2402101524,221Total banking income7,9473,7522,633-1,3491,74773718,165Funds management income---2,07554-172,146Insurance income---716247-711,034Total operating income7,9473,7522,6332,7911,6501,74782521,345Investment experience (1)---1576-(9)154Total net operating income before impairment and operating expense7,9473,7522,6332,9481,6561,74781621,499Operating expenses (2)(3,063)(1,355)(901)(2,008)(767)(825)(686)(9,605)Loan impairment expense(533)(280)(154)-(45)(118)48(1,082)Net profit before income tax4,3512,1171,57894084480417810,812Corporate tax expense(1,297)(629)(368)(253)(209)(243)22(2,977)Non-controlling interests------(16)(16)Net profit after tax ("cash basis") (3)3,0541,4881,2106876355611847,819Hedging and IFRS volatility----(24)-5127Other non-cash items--(45)(53)-(71)-(169)Net profit after tax ("statutory basis")3,0541,4881,1656346114902357,677Additional informationIntangible asset amortisation(31)(43)(24)(14)(27)(75)(126)(340)Depreciation(7)(15)(66)(3)(29)(37)(218)(375)Balance SheetTotal assets264,713103,605144,81320,50858,06073,88288,295753,876Acquisition of property plant and equipment, intangibles and other non-current assets11135936940187670Investment in associates and joint ventures257309892--1,0932,281Total liabilities181,12271,667143,13922,88252,79342,007194,774708,3842013 Note 31 Financial Reporting by Segments (continued) Notes to the Financial Statements (1) Comparatives have been restated to align to improvements made in segment reporting. For details of the changes made refer to Note 31 page 135. (2) Investment experience is presented on a pre-tax basis. (3) Operating expenses include volume related expenses. (4) 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 items for the period are Count Financial acquisition costs ($43 million expense), treasury shares valuation adjustment ($15 million expense), unrealised gains and losses related to hedging and IFRS volatility ($124 million gain), and Bankwest non-cash items ($89 million expense). (5) Comparatives have been restated to conform to presentation in the current year. Annual Report 2013 137 RetailBusiness andInstitutionalBankingPrivateBanking andWealthNewServicesBankingMarketsManagementZealandBankwestOtherTotal$M$M$M$M$M$M$M$MNet interest income5,9392,9211,489-1,0131,46233313,157Other banking income1,451860901-2142013003,927Total banking income7,3903,7812,390-1,2271,66363317,084Funds management income---1,88844-251,957Insurance income---691227-42960Total operating income7,3903,7812,3902,5791,4981,66370020,001Investment experience (2)---194(11)-(34)149Total net operating income before impairment and operating expense7,3903,7812,3902,7731,4871,66366620,150Operating expenses (3)(2,965)(1,350)(840)(1,909)(724)(848)(560)(9,196)Loan impairment expense(583)(266)(154)-(37)(61)12(1,089)Net profit before income tax3,8422,1651,3968647267541189,865Corporate tax expense(1,139)(652)(298)(235)(185)(227)-(2,736)Non-controlling interests------(16)(16)Net profit after tax ("cash basis") (4)2,7031,5131,0986295415271027,113Hedging and IFRS volatility----28-96124Other non-cash items---(58)-(89)-(147)Net profit after tax ("statutory basis")2,7031,5131,0985715694381987,090Additional informationIntangible asset amortisation(36)(45)(9)(8)(24)(84)(70)(276)Depreciation(8)(16)(52)(4)(26)(31)(215)(352)Balance SheetTotal assets (5)250,16699,786143,15520,64351,45673,96379,690718,859Acquisition of property plant and equipment, intangibles and other non-current assets682542874893198894Investment in associates71286822--9711,898Total liabilities (5)167,01870,531137,51621,08147,22646,833187,082677,2872012 (1) Notes to the Financial Statements Note 31 Financial Reporting by Segments (continued) Products and Services Information Revenue from external customers by product or service is disclosed in Notes 2 and 3. No single customer amounted to greater than 10% of the Group’s revenue. Geographical Information (1) Other locations include: United Kingdom, United States, Japan, Singapore, Malta, Hong Kong, Indonesia, China, India and Vietnam. (2) Non-current assets include Property, plant and equipment, Investments in associates and joint ventures and Intangibles. The geographical segment represents the location in which the transaction was recognised. Note 32 Insurance Businesses Life Insurance 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. Refer to Note 1(ff) – (ii). The insurance segment result is prepared on a business segment basis. 138 Commonwealth Bank of Australia GroupYear Ended 30 June201320122011Financial Performance & Position$M%$M%$M%IncomeAustralia39,18487. 341,80988. 640,98688. 4New Zealand3,8908. 73,7087. 93,8198. 2Other locations (1)1,7934. 01,6763. 51,5963. 4Total income44,867100. 047,193100. 046,401100. 0Non-Current Assets (2)Australia14,21192. 213,59492. 612,70692. 9New Zealand1,0236. 69176. 28526. 2Other locations (1)1881. 21711. 21230. 9Total non-current assets15,422100. 014,682100. 013,681100. 0Life InsuranceLife InvestmentContractsContractsGroup201320122013201220132012Summarised income statement$M$M$M$M$M$MPremium income and related revenue2,0421,8903052412,3472,131Outward reinsurance premiums expense(302)(249)--(302)(249)Claims expense(1,187)(1,103)(51)(35)(1,238)(1,138)Reinsurance recoveries233228--233228Investment revenue (excluding investments in subsidiaries):Equity securities1646757(92)921(86)Debt securities84368242494326862Property4022613210154Other39113146(68)18545Increase in contract liabilities(157)(202)(1,097)(314)(1,254)(516)Operating income9561,0733632581,3191,331Acquisition expenses(256)(254)(33)(30)(289)(284)Maintenance expenses(368)(329)(81)(78)(449)(407)Management expenses(14)(14)(25)(25)(39)(39)Net profit before income tax318476224125542601Income tax expense attributable to operating profit(125)(214)(121)(29)(246)(243)Net profit after income tax19326210396296358 Note 32 Insurance Businesses (continued) Notes to the Financial Statements The disclosure of the components of net profit after income tax is 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. Prescribed Capital of Controlled Insurance Companies Australian Life Insurers and General Insurers Under the Life Insurance Act 1995, life insurers are required to hold reserves in excess of the amount of policy liabilities. These additional reserves are necessary to support the life insurer's capital requirements under its business plan and to provide a cushion against adverse experience in managing long term risks. APRA has issued Life Prudential Standard (LPS) 110 'Capital Adequacy' for determining the level of capital reserves. LPS110 prescribes the minimum capital requirement for each statutory fund and the minimum level of assets required to be held in each statutory fund. Under APRA General Prudential Standard (GPS) 110 ‘Capital Adequacy’, general insurers are required to maintain a capital base in excess of its minimum capital requirement as defined under the Prudential Standard. The Group has been operating with a Board approved Capital Management Policy during the course of the year. The Group’s Capital Management Policy takes into account the need to hold additional capital as a prudential safeguard against inadvertent breach of the regulatory requirements. Overseas Life Insurers The overseas life insurers are required to hold reserves in excess of the amount of policy liabilities. The summarised information provided has been prepared in accordance with local solvency requirements, as prescribed by local Acts and prevailing local prudential rules. Annual Report 2013 139 Life Insurance Life Investment Contracts Contracts Group 201320122013201220132012Sources of life insurance net profit$M $M $M $M $M $M The net profit after income tax is represented by:Emergence of planned profit margins2222328395305327Difference between actual and planned experience(95)(57)19(1)(76)(58)Effects of changes to underlying assumptions8(20)--8(20)Reversal of previously recognised losses or loss recognition on groups of related products(4)2--(4)2Investment earnings on assets in excess of policyholder liabilities621081263110Other movements-(3)---(3)Net profit after income tax19326210396296358Life insurance premiums received and receivable2,0461,9025416782,5872,580Life insurance claims paid and payable1,2471,1681,6331,5762,8802,744Life InsuranceLife InvestmentContractsContractsGroupReconciliation of movements in201320122013201220132012policy liabilities$M$M$M$M$M$MContract policy liabilitiesGross policy liabilities opening balance3,2663,1379,72810,51512,99413,652Movement in policy liabilities reflected in the Income Statement2452111,0973141,342525Contract contributions recognised in policy liabilities69237439243448Contract withdrawals recognised in policy liabilities(61)(65)(1,582)(1,541)(1,643)(1,606)Non-cash movements(60)(26)41-(19)(26)FX translation adjustment19-681871Gross policy liabilities closing balance3,4153,2669,5899,72813,00412,994Liabilities ceded under reinsuranceOpening balance(172)(164)--(172)(164)Increase in reinsurance assets(89)(8)--(89)(8)Closing balance(261)(172)--(261)(172)Net policy liabilitiesExpected to be realised within 12 months5795641,7281,5832,3072,147Expected to be realised in more than 12 months2,5752,5307,8618,14510,43610,675Total net insurance policy liabilities3,1543,0949,5899,72812,74312,822 Notes to the Financial Statements Note 32 Insurance Businesses (continued) Prescribed Capital Amount (PCA) The figures in the table below show the number of times coverage for each insurance subsidiary representing the assets available for capital over the capital reserve. (1) 2013 PCA coverage was determined using the new Life and General Insurance Capital (LAGIC) Standard effective 1 January 2013. Note 33 Remuneration of Auditors During the financial year, the following fees were paid or payable for services provided by the auditor of the Group and the Bank, and its network firms: (1) An additional amount of $8,812,600 (2012: $9,231,613) was paid to PricewaterhouseCoopers by way of fees for entities not consolidated into the Financial Statements. Of this amount, $8,331,928 (2012: $8,411,965) relates to audit and audit-related services. The Audit Committee has considered the non-audit services provided by PricewaterhouseCoopers and is satisfied that the services and the level of fees are compatible with maintaining auditors’ independence. All such services were approved by the Audit Committee in accordance with pre-approved policies and procedures. Audit related services principally includes assurance and attestation reviews of the Group’s foreign disclosures for overseas investors, services in relation to regulatory requirements, acquisition accounting advice as well as reviews of internal control systems and financial or regulatory information. Taxation services included assistance and training in relation to tax legislation and developments and other services primarily consisted of project assurance and risk compliance support. Other services include project assurance particularly relating to information technology projects, and reviews of compliance with legal and regulatory frameworks. 140 Commonwealth Bank of Australia 20132012PCA CoverageTimesTimesThe Colonial Mutual Life Assurance Society Limited, Australia (1)1. 652. 19Sovereign Assurance Company Limited, New Zealand1. 291. 19PT Commonwealth Life, Indonesia7. 514. 82Commonwealth Insurance Limited, Australia (1)1. 921. 83GroupBank2013201220132012$'000$'000$'000$'000a) Audit and audit related servicesAudit servicesPricewaterhouseCoopers Australian firm14,62714,03010,0779,106Network firms of PricewaterhouseCoopers Australian firm3,9153,815517476Total remuneration for audit services18,54217,84510,5949,582Audit related servicesPricewaterhouseCoopers Australian firm2,7024,6202,1573,270Network firms of PricewaterhouseCoopers Australian firm53838921895Total remuneration for audit related services3,2405,0092,3753,365Total remuneration for audit and audit related services21,78222,85412,96912,947b) Non-audit servicesTaxation servicesPricewaterhouseCoopers Australian firm1,8811,5301,5131,432Network firms of PricewaterhouseCoopers Australian firm1,2071,347116360Total remuneration for tax related services3,0882,8771,6291,792Other ServicesPricewaterhouseCoopers Australian firm1,6782,5991,2872,599Network firms of PricewaterhouseCoopers Australian firm-41--Total remuneration for other services1,6782,6401,2872,599Total remuneration for non-audit services 4,7665,5172,9164,391Total remuneration for audit and non-audit services (1)26,54828,37115,88517,338 Notes to the Financial Statements Note 34 Lease Commitments (1) Comparatives have been restated to conform to presentation in the current year. Lease Arrangements Operating leases are entered into to meet the business needs of entities in the Group. Leases are primarily over commercial and retail premises and plant and equipment. Lease rentals are determined in accordance with market conditions when leases are entered into or on rental review dates. The total expected future sublease payments to be received are $149 million as at 30 June 2013 (2012: $77 million). Note 35 Contingent Liabilities, Contingent Assets and Commitments Details of contingent liabilities and off balance sheet business are presented below. The face (contract) value represents the maximum potential amount that could be lost if the counterparty fails to meet its financial obligations. (1) Guarantees are unconditional undertakings given to support the obligations of a customer to third parties. (2) Standby letters of credit are undertakings to pay, against presentation of documents, an obligation in the event of a default by a customer. (3) Bills of exchange endorsed by the Group and Bank which represent liabilities in the event of default by the acceptor and the drawer of the bill. (4) Documentary letters of credit are undertakings by the Group and Bank to pay or accept drafts drawn by a supplier of goods against presentation of documents in the event of payment default by a customer. (5) Performance related contingents are undertakings that oblige the Group and Bank to pay third parties should a customer fail to fulfil a contractual non- monetary obligation. (6) Commitments to provide credit include all obligations on the part of the Group and Bank to provide credit facilities. As facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. (7) Other commitments include underwriting facilities and commitments with certain drawdowns. Annual Report 2013 141 Group Bank 2013201220132012$M $M $M $M Lease Commitments - Property, Plant and Equipment (1)Due within one year 565544515404Due after one year but not later than five years 1,4271,4031,2841,053Due after five years 1,0731,044839639Total lease commitments - property, plant and equipment3,0652,9912,6382,096Group Face Value Credit Equivalent 2013201220132012Credit risk related instruments$M $M $M $M Guarantees (1)5,6965,3585,6965,357Standby letters of credit (2)134201134201Bill endorsements (3)19231923Documentary letters of credit (4)3,6531,7633,6211,759Performance related contingents (5)1,5421,6771,5101,605Commitments to provide credit (6)139,964127,833132,451113,503Other commitments (7)1,8682,0931,5101,468Total credit risk related instruments152,876138,948144,941123,916Bank Face Value Credit Equivalent 2013201220132012Credit risk related instruments$M $M $M $M Guarantees (1)5,3454,7185,3454,718Standby letters of credit (2)362362Bill endorsements (3)19231923Documentary letters of credit (4) 3,6011,7443,5751,744Performance related contingents (5)1,5421,5761,5101,554Commitments to provide credit (6)130,753109,648123,235105,045Other commitments (7)939934924924Total credit risk related instruments142,235118,645134,644114,010 Notes to the Financial Statements Note 35 Contingent Liabilities, Contingent Assets and Commitments (continued) Contingent Credit Liabilities (ASIC) commenced legal proceedings against the Bank in relation to Storm Financial, a Queensland-based financial planning firm that collapsed and went into receivership in March 2009. These proceedings were settled in September 2012 with CBA agreeing, without admission of liability, to pay affected investors up to approximately $136 million (in addition to payments under CBA’s resolution scheme). In addition, class action proceedings have been commenced against the Group in relation to Storm Financial. At this stage only the damages sought on behalf of the four lead applicants have been quantified on a number of alternate bases, thus quantification of the claims of all group members is not possible. The hearing of the proceedings commenced in March 2013 and is scheduled to conclude in September 2013. The Group believes that appropriate provisions are held to cover any exposures arising from the class action referred to above. Exception Fee Class Action In May 2011, Maurice Blackburn announced that it intended to sue 12 Australian banks, including Commonwealth Bank of Australia and Bankwest, with respect to exception fees. On 16 December 2011 proceedings were issued against Commonwealth Bank of Australia, and on 18 April 2012 against Bankwest. Both proceedings were proceedings are stayed until March 2014 pending the hearing of similar proceedings against another bank. The financial impact cannot be reliably measured at this stage; however, it is not anticipated to have a material impact on the Group. issued 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. Interbank Deposit Agreement The Bank is a participant to the Interbank Deposit Agreement along with the other three major Australian banks. This agreement has been certified as a liquidity support facility by APRA. Under the agreement, should one of the participants experience liquidity issues, it can request deposits from the other three participating banks, each of which are required to deposit up to $2 billion for a period of 30 days. At the end of 30 days the deposit holder has the option to repay the deposit in cash or by way of assignment of mortgages to the value of the deposit. Capital Commitments The Group is committed for capital expenditure on property, plant and equipment and computer software under contract of $17 million as at 30 June 2013 (2012: $54 million). The Bank is committed for $12 million (2012: $14 million). These commitments are expected to be extinguished within 12 months. Services Agreements The maximum contingent liability for termination benefits in respect of service agreements with the Chief Executive Officer and other Group Key Management Personnel at 30 June 2013 was $5 million (2012: $4.7 million). The Group and Bank 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 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. include guarantees, 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 and Bank’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 the irrevocable because discretion of the Group or Bank without the risk of incurring significant penalty or expense. In addition, commitments to purchase or sell loans are included in other commitments. they cannot be withdrawn at These transactions are categorised and credit equivalents risk-based calculated under APRA guidelines 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 Under the Basel III 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 than 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 and Bank 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 141 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. For all litigation exposure where some loss is probable and can be reliably estimated an appropriate provision has been made. Litigation related contingent liabilities at 30 June 2013: Storm Financial The Australian Securities and Investments Commission 142 Commonwealth Bank of Australia Notes to the Financial Statements Note 35 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 creditworthiness 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, re-pledge, or otherwise use some of the collateral received. At Balance Sheet date the carrying value of cash accepted as collateral (and recognised on the Group’s and the Bank’s Balance Sheets) and the fair value of securities accepted as collateral (but not recognised on the Group’s or the Bank’s Balance Sheets) were as follows: Assets Pledged 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: (1) These balances include assets sold under repurchase agreements. The liabilities related to these repurchase agreements are disclosed in Note 19. The Group and the Bank have pledged collateral as part of entering repurchase and derivative agreements. These transactions are governed by standard industry agreements. Note 36 Fiduciary Activities The Group conducts investment management and other fiduciary activities as responsible entity, trustee, custodian, adviser or manager for investment funds and trusts, including superannuation and approved deposit funds, wholesale and retail trusts. These funds and trusts are not consolidated as the Group does not have direct or indirect control. Where the Group incurs liabilities in respect of these activities, and the primary obligation is incurred in an agency capacity, for the fund or trust rather than on its own account, 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, administered or managed, but not reported in the Group’s Balance Sheet are as follows: (1) Comparatives have been restated to conform to presentation in the current year. Annual Report 2013 143 GroupBank2013201220132012$M$M$M$MCash6,9633,2886,6893,208Securities8,0167,0187,2827,006Collateral held14,97910,30613,97110,214Collateral held which is re-pledged or sold15---GroupBank2013201220132012$M$M$M$MCash2,8533,5072,8233,414Assets at fair value through Income Statement (1)5,8776,2225,8446,237Assets pledged8,7309,7298,6679,651Asset pledged which can be re-pledged or re-sold by counterparty5,5725,2455,5395,258Group 20132012$M $M Funds under administration (1)217,692177,508Assets under management (1)169,328140,400 Notes to the Financial Statements Note 37 Risk Management 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 the instruments are Group’s business. Managing financial risks, especially credit risk, is a fundamental part of the Group’s business activities. fundamental to Governance A description of the Group’s risk governance is set out in the Corporate Governance Section of the Annual Report (pages 34 to 39). Risk Management Framework The Group has in place an integrated risk management framework to identify, assess, manage and report risks and risk-adjusted returns on a consistent and reliable basis. This framework requires each business to manage the outcome of its risk-taking activities and allows it to benefit from the resulting risk adjusted returns. Accountability for risk management is structured by a “Three Lines of Defence” model as follows: the place Line 1 – Business Management – risk is best managed at it occurs. Business Managers are responsible for managing the risks for their business. This includes implementing approaches to proactively manage their risk within risk appetite levels, and using risk management outcomes (“the costs of risk”) and considerations as part of their day-to-day business making processes. integrated Line 2 – Risk Management – Group and Business Unit Risk Management teams provide risk management expertise and oversight for Business Management risk- taking activities. Risk Management develop and maintain aligned and frameworks, policies and procedures for risk management and ensure they are embedded and the day-to-day in use as part of management of the business. Risk Management also measures risk exposures to support risk decisions by business owners and also to make certain market and credit risk decisions under approved delegations of authority; in particular it undertakes quantitative and qualitative analysis of the credit exposures originated by the business as part of its responsibility for credit rating and decisioning. Line 3 – Group Audit and Assurance – provide independent assurance 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, including credit origination and credit quality of the portfolio. Material Business Risks There are a number of material business risks that could adversely affect the achievement of the Group’s financial performance objectives. The main financial risks affecting the Group are discussed in Notes 32 (Insurance Businesses), 38 (Credit Risk), 39 (Market Risk), and 40 (Liquidity and Funding Risk). Insurance Risk, Operational Risk, Compliance Risk, Strategic Business Risk and Reputational Risk are discussed below. Insurance Risk Insurance risk is the risk of loss due to increases in policy benefit payments 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) related claims being greater than expected. For the general insurance business, variability arises mainly through weather related incidents and similar events, as well as 144 Commonwealth Bank of Australia 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 that the level of risk associated with an individual contract can be accurately assessed, charged for through premium rates, and reserved for; Claims management, where an assessment is made such that only genuinely insured claims are admitted and paid; and Transferring a portion of the risk carried to reinsurers. Further information on the Life Insurance Business is included in Note 32 to the Financial Statements. Operational Risk inadequate or Operational risk is defined as the risk of economic loss arising internal processes, people, from systems, or from external events. It includes legal, regulatory, fraud, business continuity and technology risks. failed The Group’s Operational Risk Management Framework (ORMF) 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, including a consistent approach to operational risk management across the Group; Transparency, escalation and resolution of risk and control incidents and issues; and Making decisions based upon an informed risk-return analysis and appropriate standards of professional practice. The Group measures operational risk using an APRA approved Advanced Measurement Approach capital model which is integrated into the ORMF. The inputs include scenario analysis, loss data and risk indicators. Compliance Risk Compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss of reputation that the Group may suffer as a result of its failure to comply with the requirements of relevant laws, regulatory bodies, industry standards and codes. is consistent with The Group’s Compliance Risk Management Framework (CRMF) the Australian Standard on Compliance Programs. 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 Licences. The CRMF incorporates a number of components, including Group policies, a Compliance Obligations Register and a Compliance Review program 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, testing of implementation of controls, monitoring and framework effectiveness and the escalation, remediation and reporting of compliance incidents and control weaknesses. Strategic Business Risk Strategic business risk is defined as the risk of economic loss resulting from changes in the business environment caused Notes to the Financial Statements Note 37 Risk Management (continued) by the following factors: Macroeconomic conditions; Competitive forces at work; or Social trends. 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. it exists 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. the organisation and throughout Furthermore, 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 on Group-related responds respects, adverse transactions. reputational risk outcomes flow from the failure to manage other types of risk. In many but not all influences external to Note 38 Credit Risk 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), commitments to lend, investments financial market transactions, providers of credit enhancements (e.g. credit default swaps, lenders mortgage insurance), securitisations and other associated activities. In the insurance business, credit risk arises from investment in bonds and notes, loans, and from reliance on reinsurance. in bonds and notes, 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 appetite and 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 capacity, acceptable loan documentation tests. terms and security and The Group uses a Risk Committee approved diversified the management of credit risk portfolio approach concentrations comprised of the following: for A large credit exposures policy, which sets limits for aggregate exposures to individual, commercial, bank and government client groups; An industry concentrations policy that defines a system of limits for concentrations 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 by 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 and personal loan facilities, some leasing products and most secured commercial lending up to $1 million. Auto-decisioning is used to approve credit applications for eligible business and consumer customers. Auto-decisioning uses a scorecard approach based on the Group’s historical experience on similar applications, information from a credit reference bureau and/or from the Group’s existing knowledge of a customer’s behaviour. that do not meet scorecard Auto- Loan applications decisioning to a Risk Management Officer with a Personal Credit Approval Authority (PCAA) for manual decisioning. requirements may be referred 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 Risk Management or Business Credit Support Unit. Commercial lending up to $1 million is reviewed as part of the Group’s quality assurance process and oversight is provided by the independent Credit Portfolio Assurance unit. Facilities in for remedial management by centralised units based on delinquency band. the Retail segment become classified (ii) Credit Risk-Rated This segment comprises commercial exposures, including bank and government exposures. Each exposure 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 either a PD Rating Tool or Expert Judgement is used to determine the PD. Expert Judgement is used where the complexity of the transaction and/or the debtor is such that it is inappropriate to rely completely on a statistical model. Ratings by Moody’s or Standard and Poor’s may be used as inputs into the Expert Judgement assessment. 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 APRA. 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. 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. These credit facilities are not eligible for new or Annual Report 2013 145 Notes to the Financial Statements Note 38 Credit Risk (continued) 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 are classified as restructured where their original contractual arrangements have been modified to provide for concessions of interest or principal, for reasons that relate to the customer’s financial difficulties, rendering the facility non- commercial that have been the Group. Facilities restructured are considered impaired. to Default is usually consistent with one or more of the following criteria: The customer is 90 days or more overdue on a scheduled credit obligation repayment; or The customer is unlikely to repay their credit obligation to the Bank in full, without taking actions such as realising on available security. The Credit Portfolio Assurance unit, part of Group Audit and Assurance, reviews credit portfolios and business unit compliance with policies, portfolio standards, application of credit risk ratings and other key practices 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 that reviews and endorses the use of the tools prior to their implementation to ensure they are sufficiently predictive of risk. (i) Expected Loss Expected Loss (EL) is the product of: Probability of default (PD); Exposure at default (EAD); and Loss given default (LGD). For credit risk-rated facilities, EL is allocated within CRR bands. All credit risk-rated exposures are required to be reviewed at least annually although small transactions may be managed on a behavioural basis post origination. 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 except where prudential standards permit differentiation. EAD, expressed as a percentage of the facility limit, is the proportion of a facility that may be outstanding in the event of default. The EAD treatment is as follows for different facility types: Drawn committed facilities (such as fully drawn loans and advances), EAD will generally be the higher of the limit or outstanding balance; Committed facilities with uncertain future drawdown (such as credit cards and overdrafts), EAD is based on the Group’s historical experience of additional drawings prior to customer default; and Uncommitted outstanding balance only. facilities, EAD will generally be the 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; 146 Commonwealth Bank of Australia Carrying costs (effectively the costs of providing a facility that is not generating an interest return); and Realisation costs (costs of internal workout specialists). Various factors are considered when calculating PD, EAD and LGD. Considerations include the potential for default by a borrower due to economic, management, industry and other risks, and the mitigating benefits of any collateral. (ii) Unexpected Loss In addition to EL, a more stressed loss amount is calculated. This unexpected loss estimate directly affects the calculation of regulatory and internal economic capital requirements, refer to the Group Operations and Business Settings section and Note 30, for information relating to regulatory and economic capital. In addition to the credit risk management processes used to manage exposures to credit risk in the credit portfolio, the internal in assessing impairment and provisioning of financial assets, refer to Note 14. ratings process also assists management 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 and amount 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 100% collateralised by highly liquid debt securities, collateral is usually not sought on these balances as exposures are generally considered low risk. The collateral related to agreements to resell has been legally transferred to the Group subject to an agreement to return them for a fixed price. The Group’s cash and liquid asset balance as of 30 June 2013 was $20,634 million (2012: $19,666 million). Included (2012: $9,599 million) that is deposited with central banks and considered to carry less credit risk. is $9,250 million this balance in Receivables Due from Other Financial Institutions Collateral is usually not sought on these balances as exposures are generally considered to be of low risk. The exposures are mainly to relatively low risk banks (Rated A+, AA- or better). As of 30 June 2013, the Group had $7,744 million (2012: $10,886 million) receivable from other financial institutions. Trading Assets at Fair Value through Income Statement These assets are carried at fair value which accounts for the credit risk. Collateral is not generally sought from the issuer or counterparty. Credit derivatives have been used to a limited extent to credit risk. As of 30 June 2013, the Group held $19,617 million (2012: $13,816 million) trading assets at fair value. the exposure to mitigate 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. As at 30 June 2013, the Group has $9,707 million (2013: $10,025 million) of life investment contracts, the credit risk on which is borne by policyholders. Other Financial Assets Designated at Fair Value through Income Statement These assets are carried at fair value which accounts for the credit risk. Credit derivatives used to mitigate the exposure to credit risk are not significant. Notes to the Financial Statements Note 38 Credit Risk (continued) Derivative Assets The Group’s use of derivative contracts is outlined in Note 11. The Group is exposed to credit risk on derivative contracts, which arises as a result of counterparty credit risk. The Group’s exposure to counterparty risk is affected by the nature of the trades, the creditworthiness of the counterparty, netting, and collateral arrangements. for financial markets counterparties, but Credit risk from derivatives is mitigated where possible (typically less for corporate or government counterparties) frequently through netting agreements, whereby derivative assets and liabilities with the same counterparty can be offset. Group policy requires all netting arrangements legally documented. The International Swaps and Derivatives Association (ISDA) Master Agreement (or other derivative contracts) are used by the Group as an agreement for documenting over the counter (OTC) derivatives. It provides the contractual framework within which dealing activities across a range of OTC products are conducted, and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or other predetermined events occur. to be Collateral is obtained against derivative assets, depending on the creditworthiness of the counterparty and/or nature of the transaction. As at 30 June 2013, the Group held positive derivative asset OTC contracts with a value of $45,340 million (2012: $39,567 million) and collateral received of $6,963 million (2012: $3,288 million) covering some of these contracts. The credit risk is further reduced where the Group has master netting agreements. The offsets obtained by applying master netting agreements reduced the credit risk of the Group by approximately $19.5 billion as at 30 June 2013 (2012: $18.6 billion). Available-for-Sale (AFS) Securities As of 30 June 2013, the Group held $59,601 million (2012: $60,827 million) of AFS securities. Included in this holding are $523 million (2012: $1,317 million) of securities issued by Australian banks, which are subject to an Australian Government guarantee. Due from Controlled Entities Collateral is not generally taken on these intergroup balances. Credit Commitments and Contingent Liabilities The Group applies fundamentally the same risk management policies for off balance sheet risks as it does for its on balance sheet risks. In the case of credit commitments, customers and counterparties will be subject to the same credit management policies as for loans and advances. Collateral may be sought depending on the strength of the counterparty and the nature of the transaction. As at 30 June 2013, the Group had $152,876 million (2012: $138,948 million) of off balance sheet exposures (commitments and guarantees). Of these $82,199 million (2012: $70,041 million) are secured. Loans, Bills Discounted and Other Receivables The principal collateral types for balances are: loans and receivable Mortgages over residential and commercial real estate; Charges over business assets such as premises, inventory and accounts receivables; and Guarantees received from third parties. Specifically, the collateral mitigating credit risk of the key lending portfolios is addressed in the notes and tables below. (i) Home Loans All home loans are secured by fixed charges over borrowers’ residential properties, other properties (including commercial and broad acre), or cash (usually in the form of a charge over a deposit). Further, Lenders Mortgage Insurance (LMI) is taken out for most loans with a Loan to Value Ratio (LVR) higher than 80% at origination to cover 100% of the original principal plus interest. (ii) Personal Lending Personal lending (such as credit cards), is predominantly unsecured. (iii) Asset Finance The Group leases assets to corporate and retail clients. When the title to the underlying fixed assets is held by the Group as collateral, the balance is deemed fully secured. In other instances, a client’s facilities may be secured by collateral valued at less than the carrying amount of credit exposure. These facilities are deemed partially secured or unsecured. (iv) Other Commercial and Industrial Lending The Group’s main collateral types for other commercial and industrial lending consists of secured rights over specified assets of the borrower in the form of: commercial property; land rights; 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 other instances, a client’s facilities may be secured by collateral with value less than the carrying amount of the credit exposure. These facilities are deemed partially secured or unsecured. A facility is determined to be secured where the ratio of the exposure to that facility to the estimated value of the collateral is less than or equal to 100%. A facility is deemed to be partially secured when this ratio exceeds 100% but not more than 250%, and unsecured when either no security is held, (e.g. can include credit cards, personal loans, and exposures to highly rated corporate entities), or where the secured loan to estimated value of collateral exceeds 250%. Annual Report 2013 147 Notes to the Financial Statements Note 38 Credit Risk (continued) (1) Comparatives have been restated to conform to presentation in the current year. 148 Commonwealth Bank of Australia Group2013OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotalMaximum exposure ($M)372,84022,6598,688158,571562,758Collateral classification:Secured (%)99. 115. 099. 344. 680. 4Partially secured (%)0. 9-0. 714. 54. 7Unsecured (%)-85. 0-40. 914. 9Group2012OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotalMaximum exposure ($M) (1)352,98122,4288,682148,289532,380Collateral classification:Secured (%)98. 716. 299. 436. 677. 7Partially secured (%)1. 3-0. 613. 64. 7Unsecured (%)-83. 8-49. 817. 6Bank2013OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotal Maximum exposure ($M)337,38421,8088,227140,433507,852Collateral classification:Secured (%)99. 115. 499. 244. 580. 5Partially secured (%)0. 9-0. 813. 74. 4Unsecured (%)-84. 6-41. 815. 1Bank2012OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotal Maximum exposure ($M) (1)271,66720,0677,822111,974411,530Collateral classification:Secured (%)98. 919. 099. 539. 478. 5Partially secured (%)1. 1-0. 511. 03. 8Unsecured (%)-81. 0-49. 617. 7 Notes to the Financial Statements Note 38 Credit Risk (continued) Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements The below tables detail the concentration of credit exposure assets by significant geographical locations and counterparty types. Disclosures do not take into account collateral held and other credit enhancements. (1) In most cases the credit risk of insurance assets is borne by policyholders. However, on certain insurance contracts the Group retains exposure to credit risk. (2) Loans, bills discounted and other receivables is presented gross of provisions for impairment and unearned income on lease receivables in line with Note 13. (3) For the purpose of reconciling to the Balance Sheet, “Other assets” predominantly comprises assets which do not give rise to credit exposure, including Intangible assets, Property, plant and equipment and Other assets. Annual Report 2013 149 GroupAt 30 June 2013BankAssetOtherAgri-& OtherHomeConstr-OtherFinanc-Comm &SovereigncultureFinancialLoansuctionPersonalingIndust.OtherTotal $M $M $M $M $M $M $M $M $M $MCash and liquid assets--5,857------5,857Receivables due from otherfinancial institutions--3,808------3,808Assets at fair value throughIncome Statement:Trading9,726-1,078----2,406-13,210Insurance (1)945-8,013----3,487-12,445Other44-145------189Derivative assets4223335,189-42--4,539-40,225Available-for-sale investments28,587-23,311----859-52,757Loans, bills discountedand other receivables (2)1,9715,9717,929338,0232,63421,7968,414110,545-497,283Bank acceptances32,770190-554--2,537-6,054Other assets (3)98221,8217707491246917,60720,855Total on balance sheet Australia41,7968,79687,341338,7933,23721,8458,426124,84217,607652,683Credit risk exposures relating to off balance sheet assets:Guarantees1,43046192-726--2,935-5,329Loan commitments9191,4701,90560,5841,61518,625-37,686-122,804Other commitments123223,477-538--1,903-6,063Total Australia44,26810,33492,915399,3776,11640,4708,426167,36617,607786,879OverseasCredit risk exposures relating to on balance sheet assets:Cash and liquid assets--14,777------14,777Receivables due from otherfinancial institutions--3,936------3,936Assets at fair value throughIncome Statement:Trading493-798----5,116-6,407Insurance (1)--1,914------1,914Other587-131------718Derivative assets474153,481----1,145-5,115Available-for-sale investments5,460-1,359----25-6,844Loans, bills discountedand other receivables (2)9,6706,4807,02934,8173018632746,041-65,475Bank acceptances-------9-9Other assets (3)24142611-2361,6172,108Total on balance sheet overseas16,7086,49633,85134,81830286327612,3721,617107,303Credit risk exposures relating to off balance sheet assets:Guarantees7243-45--270-367Loan commitments3884471324,0667291,383-10,015-17,160Other commitments765191-10-75796-1,153Total overseas17,1796,95034,21738,8841,0862,24635123,4531,617125,983Total gross credit risk61,44717,284127,132438,2617,20242,7168,777190,81919,224912,862AustraliaCredit risk exposures relating to on balance sheet assets: Notes to the Financial Statements Note 38 Credit Risk (continued) Maximum Exposure to Credit Risk by Industry and Asset Class before Collateral Held or Other Credit Enhancements (1) In most cases the credit risk of insurance assets is borne by policyholders. However, on certain insurance contracts the Group retains exposure to credit risk. (2) Comparatives have been restated to conform to presentation in the current year. (3) Loans, bills discounted and other receivables is presented gross of provisions for impairment and unearned income on lease receivables in line with Note 13. (4) For the purpose of reconciling to the Balance Sheet, “Other assets” predominantly comprises assets which do not give rise to credit exposure, including Intangible assets, Property, plant and equipment and Other assets. 150 Commonwealth Bank of Australia GroupAt 30 June 2012BankAssetOtherAgri-& OtherHomeConstr-OtherFinanc-Comm &SovereigncultureFinancialLoansuctionPersonalingIndust.OtherTotal $M $M $M $M $M $M $M $M $M $MAustraliaCredit risk exposures relating to on balance sheet assets:Cash and liquid assets--7,519------7,519Receivables due from otherfinancial institutions--6,135------6,135Assets at fair value throughIncome Statement:Trading5,560-975----2,416-8,951Insurance (1)929-8,476----3,413-12,818Other--6------6Derivative assets (2)3116630,138-31--4,846-35,392Available-for-sale investments25,639-26,604----479-52,722Loans, bills discountedand other receivables (3)1,6195,25110,225322,9182,79621,7728,214104,330-477,125Bank acceptances32,886191-603--6,032-9,715Other assets (4)37611841,16511321748014,02316,010Total on balance sheet Australia34,0988,26490,453324,0833,44121,8048,231121,99614,023626,393Credit risk exposures relating to off balance sheet assets:Guarantees1,2413425814903--2,766-5,216Loan commitments1,1178142,08257,1581,90318,923-32,674-114,671Other commitments 96131,7704725--2,042-4,650Total Australia36,5529,12594,563381,2596,97240,7278,231159,47814,023750,930OverseasCredit risk exposures relating to on balance sheet assets:Cash and liquid assets--12,147------12,147Receivables due from otherfinancial institutions--4,751------4,751Assets at fair value throughIncome Statement:Trading407-859----3,599-4,865Insurance (1)--1,707------1,707Other967-7------974Derivative assets (2)22513,157----792-4,175Available-for-sale investments6,948-1,156----1-8,105Loans, bills discountedand other receivables (3)10,2355,1983,15630,0633456564685,134-55,255Bank acceptances-------2-2Other assets (4)1915,3781--1371,7467,183Total on balance sheet overseas18,8015,20032,31830,0643456564699,5651,74699,164Credit risk exposures relating to off balance sheet assets:Guarantees-12-12--127-142Loan commitments3923751973,8491681,172-7,009-13,162Other commitments711--3--1,032-1,107Total overseas19,2645,57732,51733,9135281,82846917,7331,746113,575Total gross credit risk55,81614,702127,080415,1727,50042,5558,700177,21115,769864,505 Notes to the Financial Statements Note 38 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, the type of client and the security cover. All exposures outside the policy limits 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): 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 12% 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 $19.5 billion as at 30 June 2013 (2012: $18.6 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 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 $16.7 billion as at 30 June 2013 (2012: $18.0 billion). Distribution of Financial Assets by Credit Classification When doubt arises as to the collectability of a credit facility, the financial instrument is classified and reported as impaired. Provisions for impairment are raised where there is objective evidence of impairment and for an amount adequate to cover assessed credit related losses. The Group regularly reviews its financial assets and monitors adherence to contractual terms. Credit risk-rated portfolios are assessed, at least at each Balance Sheet date, to determine whether the financial asset or portfolio of assets is impaired. The distribution of performing assets, past due assets, impaired assets and provisions for impairment by type of financial instrument at 30 June 2013 was: Distribution of Financial Instruments by Credit Quality Annual Report 2013 151 Group20132012NumberNumber5% to less than 10% of the Group's capital resources-110% to less than 15% of the Group's capital resources--Group2013Neither PastPast dueTotal Provisions Due norbut notImpairedfor ImpairmentImpaired ImpairedAssetsGrossLossesNet$M$M$M$M$M$MCash and liquid assets20,634--20,634-20,634Receivables due from other financial institutions7,744--7,744-7,744Assets at fair value through Income Statement:Trading19,617--19,617-19,617Insurance14,359--14,359-14,359Other907--907-907Derivative assets45,337-345,340-45,340Available-for-sale investments59,601--59,601-59,601Loans, bills discounted and other receivables:Australia480,45313,2913,539497,283(4,198)493,085Overseas63,0102,01844765,475(257)65,218Bank acceptances6,063--6,063-6,063Credit related commitments151,406-341151,747(31)151,716869,13115,3094,330888,770(4,486)884,284 Notes to the Financial Statements Note 38 Credit Risk (continued) Distribution of Financial Instruments by Credit Quality (continued) (1) Comparatives have been restated to conform to presentation in the current year. (1) On 1 October 2012 the Commonwealth Bank of Australia Limited and Bank of Western Australia Limited (Bankwest) commenced operating as a single Authorised Deposit-taking Institution (ADI). This resulted in all Bankwest assets and liabilities becoming the assets and liabilities of the Commonwealth Bank of Australia Limited. 152 Commonwealth Bank of Australia Group 2012Neither PastPast DueTotal Provisions Due nor but notImpairedfor Impairment Impaired ImpairedAssetsGrossLossesNet$M$M$M$M$M $MCash and liquid assets19,666--19,666-19,666Receivables due from other financial institutions10,886--10,886-10,886Assets at fair value through Income Statement:Trading13,816--13,816-13,816Insurance14,525--14,525-14,525Other980--980-980Derivative assets (1)39,559-839,567-39,567Available-for-sale investments (1)60,827--60,827-60,827Loans, bills discounted and other receivables: (1)Australia459,73313,2414,151477,125(4,596)472,529Overseas52,8412,00341155,255(231)55,024Bank acceptances9,717--9,717-9,717Credit related commitments (1)138,831-117138,948(18)138,930821,38115,2444,687841,312(4,845)836,467Bank (1)2013Neither PastPast DueTotal ProvisionsDue nor but notImpairedfor ImpairmentImpairedImpairedAssetsGrossLossesNet$M$M$M$M$M$MCash and liquid assets18,030--18,030-18,030Receivables due from other financial institutions6,998--6,998-6,998Assets at fair value through Income Statement:Trading18,398--18,398-18,398Insurance------Other718--718-718Derivative assets45,200-345,203-45,203Available-for-sale investments125,941--125,941-125,941Loans, bills discounted and other receivables:Australia477,70113,2723,495494,468(4,168)490,300Overseas13,27799813,384(45)13,339Bank acceptances6,059--6,059-6,059Shares in and loans to controlled entities63,017--63,017-63,017Credit related commitments140,767-339141,106(31)141,075916,10613,2813,935933,322(4,244)929,078 Notes to the Financial Statements Note 38 Credit Risk (continued) Distribution of Financial Instruments by Credit Quality (continued) (1) Comparatives have been restated to conform to presentation in the current year. Financial Assets Assessed as Impaired (1) This includes individually assessed provisions, as well as collective provisions held for these portfolios. (2) Comparatives have been restated to conform to presentation in the current year. Annual Report 2013 153 Bank2012Neither PastPast DueTotal ProvisionsDue nor but notImpairedfor ImpairmentImpairedImpairedAssetsGrossLossesNet$M$M$M$M$M$MCash and liquid assets17,952--17,952-17,952Receivables due from other financial institutions10,482--10,482-10,482Assets at fair value through Income Statement:Trading12,071--12,071-12,071Insurance------Other980--980-980Derivative assets (1)39,684-739,691-39,691Available-for-sale investments116,567--116,567-116,567Loans, bills discounted and other receivables: (1)Australia387,27011,2752,396400,941(2,949)397,992Overseas10,4401413510,589(33)10,556Bank acceptances9,715--9,715-9,715Shares in and loans to controlled entities75,006--75,006-75,006Credit related commitments (1)118,584-61118,645(18)118,627798,75111,2892,599812,639(3,000)809,639Group 20132012GrossTotal ProvisionsNet GrossTotal ProvisionsNet Impairedfor ImpairedImpaired Impairedfor ImpairedImpaired AssetsAssets (1)Assets AssetsAssets (1)Assets $M$M$M $M$M$M AustraliaHome loans946(182)764919(256)663Other personal (2)255(142)113212(131)81Asset financing58(23)3553(14)39Other commercial and industrial2,620(1,345)1,2753,079(1,639)1,440Financial assets assessed as impaired - Australia3,879(1,692)2,1874,263(2,040)2,223OverseasHome loans171(17)154163(28)135Other personal (2)9(3)610(3)7Asset financing4-47-7Other commercial and industrial267(47)220244(60)184Financial assets assessed as impaired - overseas451(67)384424(91)333Total financial assets assessed as impaired4,330(1,759)2,5714,687(2,131)2,556 Notes to the Financial Statements Note 38 Credit Risk (continued) Financial Assets Assessed as Impaired (continued) (1) On 1 October 2012 the Commonwealth Bank of Australia Limited and Bank of Western Australia Limited (Bankwest) commenced operating as a single Authorised Deposit-taking Institution (ADI). This resulted in all Bankwest assets and liabilities becoming the assets and liabilities of the Commonwealth Bank of Australia Limited. (2) This includes individually assessed provisions, as well as collective provisions held for these portfolios. (3) Comparatives have been restated to conform to presentation in the current year. 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. (1) On 1 October 2012 the Commonwealth Bank of Australia Limited and Bank of Western Australia Limited (Bankwest) commenced operating as a single Authorised Deposit-taking Institution (ADI). This resulted in all Bankwest assets and liabilities becoming the assets and liabilities of the Commonwealth Bank of Australia Limited. (2) Comparatives have been restated to conform to presentation in the current year. 154 Commonwealth Bank of Australia Bank 2013 (1)2012Gross Total ProvisionsNet Gross Total ProvisionsNet Impaired for ImpairedImpaired Impaired for ImpairedImpaired Assets Assets (2)Assets Assets Assets (2)Assets $M $M $M $M $M $M AustraliaHome loans945(182)763767(209)558Other personal (3)255(142)113183(111)72Asset financing56(22)3442(14)28Other commercial and industrial2,578(1,345)1,2331,463(754)709Financial assets assessed as impaired - Australia3,834(1,691)2,1432,455(1,088)1,367OverseasHome loans------Other personal------Asset financing1-13-3Other commercial and industrial100(22)78141(25)116Financial assets assessed as impaired - overseas101(22)79144(25)119Total financial assets assessed as impaired3,935(1,713)2,2222,599(1,113)1,486Group Bank 201320122013 (1)2012Distribution of loans by credit quality$M $M $M$M Gross loans AustraliaNeither past due nor impaired (2)480,453459,733477,701387,270Past due but not impaired (2)13,29113,24113,27211,275Impaired (2)3,5394,1513,4952,396Total Australia497,283477,125494,468400,941OverseasNeither past due nor impaired63,01052,84113,27710,440Past due but not impaired (2)2,0182,003914Impaired (2)44741198135Total overseas65,47555,25513,38410,589Total gross loans 562,758532,380507,852411,530 Notes to the Financial Statements Note 38 Credit Risk (continued) Credit Quality of Loans, Bills Discounted and Other Financial Assets which were 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. Segmentation of financial assets other than loans is based on external credit ratings of the counterparties and issuers of financial instruments held by the Group and the Bank. Loans which were Neither Past Due nor Impaired (1) Comparatives have been restated to conform to presentation in the current year. (2) For New Zealand Housing Loans, PDs reflect Reserve Bank of New Zealand requirements resulting in higher PDs on average and lower grading. Annual Report 2013 155 Group2013OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotalCredit grading$M$M$M$M$MAustraliaInvestment224,5313,58271281,617310,442Pass93,67113,4907,44741,058155,666Weak8,4533,547982,24714,345Total Australia326,65520,6198,257124,922480,453Overseas (2)Investment8,129-1019,68227,821Pass24,3656442408,98234,231Weak590--368958Total overseas33,08464425029,03263,010Total loans which were neither past due nor impaired359,73921,2638,507153,954543,463Group2012OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotalCredit grading $M $M$M$M$MAustralia (1)Investment201,8394,00652577,634284,004Pass100,02313,0427,42438,865159,354Weak9,3733,600773,32516,375Total Australia311,23520,6488,026119,824459,733Overseas (2)Investment5,07068116,80021,939Pass22,3683754056,46129,609Weak8605-4281,293Total overseas28,29844840623,68952,841Total loans which were neither past due nor impaired 339,53321,0968,432143,513512,574 Notes to the Financial Statements Note 38 Credit Risk (continued) Loans which were Neither Past Due nor Impaired (continued) (1) On 1 October 2012 the Commonwealth Bank of Australia Limited and Bank of Western Australia Limited (Bankwest) commenced operating as a single Authorised Deposit-taking Institution (ADI). This resulted in all Bankwest assets and liabilities becoming the assets and liabilities of the Commonwealth Bank of Australia Limited. (2) Comparatives have been restated to conform to presentation in the current year. Other Financial Assets which were Neither Past Due nor Impaired The majority of all other financial assets of the Group and the Bank that were neither past due nor impaired as of 30 June 2013 and 30 June 2012 were of investment grade. 156 Commonwealth Bank of Australia Bank (1) 2013OtherHomeOtherAssetCommercialLoansPersonalFinancingand IndustrialTotal Credit grading$M$M$M$M$M AustraliaInvestment224,2443,58165980,679309,163Pass92,88813,4907,32440,603154,305Weak8,4413,547942,15114,233Total Australia325,57320,6188,077123,433477,701OverseasInvestment188-111,46911,658Pass2541311,2721,540Weak6--7379Total overseas44813212,81413,277Total loans which were neither past due nor impaired326,02120,6318,079136,247490,978Bank 2012Other Home OtherAsset Commercial Loans PersonalFinancingand IndustrialTotal Credit grading $M $M $M $M $M AustraliaInvestment (2)166,9513,51244374,480245,386Pass (2)86,98512,1667,13723,812130,100Weak (2)6,9273,368631,42611,784Total Australia260,86319,0467,64399,718387,270OverseasInvestment231-19,1579,389Pass17118188431,050Weak1---1Total overseas403181910,00010,440Total loans which were neither past due nor impaired261,26619,0647,662109,718397,710 Notes to the Financial Statements Note 38 Credit Risk (continued) Age Analysis of Loans, Bills Discounted and Other Receivables that are Past Due but Not Impaired For the purposes of this analysis an asset is considered to be past due when any payment under the contractual terms has been missed. Past due loans are not classified as impaired if no loss to the Group is expected or if the loans are unsecured consumer loans and less than 180 days past due. It has not been practicable to determine the fair value of collateral held against these assets. (1) Collateral held against past due Home Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown. Personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and Other Commercial and Industrial receivables. (2) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made with the debtor. (3) Comparatives have been restated to conform to presentation in the current year. Annual Report 2013 157 Group 2013OtherHomeOtherAssetCommercialLoansPersonal (2)Financingand IndustrialTotal Loans which were past due but not impaired (1)$M$M$M$M$M AustraliaPast due 1 - 29 days5,999620629487,629Past due 30 - 59 days1,758178262292,191Past due 60 - 89 days902109102471,268Past due 90 - 179 days913-11511,065Past due 180 days or more87015-2531,138Total Australia10,442922991,82813,291OverseasPast due 1 - 29 days1,195149151931,552Past due 30 - 59 days2133836260Past due 60 - 89 days65111683Past due 90 - 179 days5852368Past due 180 days or more305-2055Total overseas1,561208212282,018Total loans which were past due but not impaired 12,0031,1301202,05615,309Group 2012Other Home OtherAsset Commercial Loans (2) (3)Personal (2) (3)Financing and Industrial Total Loans which were past due but not impaired (1)$M $M $M $M $M AustraliaPast due 1 - 29 days5,572631688807,151Past due 30 - 59 days1,806166451492,166Past due 60 - 89 days1,01110113971,222Past due 90 - 179 days1,183-11331,317Past due 180 days or more1,2011481621,385Total Australia10,7739121351,42113,241OverseasPast due 1 - 29 days1,129144421271,442Past due 30 - 59 days2322875272Past due 60 - 89 days971124114Past due 90 - 179 days91734105Past due 180 days or more5481770Total overseas1,603198551472,003Total loans which were past due but not impaired 12,3761,1101901,56815,244 Notes to the Financial Statements Note 38 Credit Risk (continued) Age Analysis of Loans, Bills Discounted and Other Receivables that are Past Due but Not Impaired (continued) (1) On 1 October 2012 the Commonwealth Bank of Australia Limited and Bank of Western Australia Limited (Bankwest) commenced operating as a single Authorised Deposit-taking Institution (ADI). This resulted in all Bankwest assets and liabilities becoming the assets and liabilities of the Commonwealth Bank of Australia Limited. (2) Collateral held against past due Home Loans receivables comprises residential and other real estate with an estimated fair value of at least the amounts shown. Personal receivables are generally unsecured. It has not been practicable to determine the fair value of collateral held against past due Asset Financing and Other Commercial and Industrial receivables. (3) Personal loans, credit cards and other personal financing balances are generally unsecured and written off at 180 days past due unless agreements have been made with the debtor. (4) Comparatives have been restated to conform to presentation in the current year. 158 Commonwealth Bank of Australia Bank (1)2013OtherHomeOtherAssetCommercialLoansPersonal (3)Financingand IndustrialTotal Loans which were past due but not impaired (2)$M$M$M$M$M AustraliaPast due 1 - 29 days5,992620599487,619Past due 30 - 59 days1,757178252292,189Past due 60 - 89 days90110972471,264Past due 90 - 179 days912--1511,063Past due 180 days or more86915-2531,137Total Australia10,431922911,82813,272OverseasPast due 1 - 29 days4---4Past due 30 - 59 days2---2Past due 60 - 89 days-----Past due 90 - 179 days3---3Past due 180 days or more-----Total overseas9---9Total loans which were past due but not impaired 10,440922911,82813,281Bank 2012OtherHomeOtherAssetCommercialLoansPersonal (3)Financingand IndustrialTotal Loans which were past due but not impaired (2)$M$M$M$M$M AustraliaPast due 1 - 29 days (4)5,522566524466,586Past due 30 - 59 days1,32114839931,601Past due 60 - 89 days772911246921Past due 90 - 179 days (4)977-10571,044Past due 180 days or more1,049132591,123Total Australia9,64181811570111,275OverseasPast due 1 - 29 days12---12Past due 30 - 59 days1---1Past due 60 - 89 days-----Past due 90 - 179 days1---1Past due 180 days or more-----Total overseas14---14Total loans which were past due but not impaired 9,65581811570111,289 Notes to the Financial Statements Note 38 Credit Risk (continued) Impaired Assets by Classification Assets in credit risk rated portfolios and home loan portfolios are assessed for objective evidence that the financial asset is impaired. Impaired assets in the unsecured retail segment are those facilities that are past due 90 days or more. Impaired assets are split into the following categories: Non-Performing Facilities; Restructured Facilities; and Unsecured retail products 90 days or more past due. 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. Restructured facilities are facilities where the original contractual terms have been modified to non-commercial terms 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. Unsecured retail products 90 days or more past due are credit cards, personal loans and other unsecured retail products which are 90 days or more past due. These loans are collectively provided for. 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. (1) Comparatives from 2010 onwards have been restated to conform to presentation in the current year. (2) Collective provisions are held for these portfolios. Annual Report 2013 159 Group 20132012201120102009$M $M $M $M $M AustraliaNon-Performing assets:Gross balances (1)3,3163,9664,5924,6333,514Less individual provisions for impairment(1,564)(1,920)(2,031)(1,915)(1,560)Net non-performing assets1,7522,0462,5612,7181,954Restructured assets:Gross balances346933878119Less individual provisions for impairment-----Net restructured assets346933878119Unsecured retail products 90 days or more past due:Gross balances217204202205-Less provisions for impairment (2)(128)(120)(109)(107)-Unsecured retail products 90 days or more past due89849398-Net Australia impaired assets2,1872,2232,6922,8942,073OverseasNon-Performing assets:Gross balances (1)356344467317407Less individual provisions for impairment(64)(88)(94)(77)(169)Net non-performing assets292256373240238Restructured assets:Gross balances8770189169170Less individual provisions for impairment-----Net restructured assets8770189169170Unsecured retail products 90 days or more past due:Gross balances8101417-Less provisions for impairment (2)(3)(3)(3)(3)-Unsecured retail products 90 days or more past due571114-Net overseas impaired assets384333573423408Total net impaired assets2,5712,5563,2653,3172,481 Notes to the Financial Statements Note 38 Credit Risk (continued) Impaired Assets by Classification (continued) (1) Comparatives have been restated to conform to presentation in the current year. (1) Comparatives from 2010 onwards have been restated to conform to presentation in the current year. (2) Comparatives have been reclassified to conform to presentation in the current year. (3) 2010 represents the balance of unsecured retail products 90 days or more past due. Impaired Loans by Industry and Status 160 Commonwealth Bank of Australia Group Australia Overseas Total Australia Overseas Total 201320132013201220122012Impaired assets by size $M $M $M $M $M $M Less than $1 million (1)1,3591851,5441,1081861,294$1 million to $10 million1,1591461,3051,3591101,469Greater than $10 million1,3611201,4811,7961281,924Total3,8794514,3304,2634244,687Group20132012201120102009$M $M $M $M $M Gross impaired assets - opening balance (1)4,6875,5025,4194,210683Acquisitions----770New and increased (1)3,0163,3894,1565,4554,374Balances written-off(1,774)(1,687)(1,798)(1,904)(1,056)Returned to performing or repaid (2)(2,165)(3,040)(2,740)(2,545)(561)Portfolio managed - new/increased/return to performing/repaid (2) (3)566523465203-Gross impaired assets - closing balance4,3304,6875,5025,4194,210Movement in gross impaired assetsGroup 2013GrossTotal ProvisionsNetImpairedfor ImpairedImpairedNet LoansLoansAssetsLoansWrite-offsRecoveriesWrite-offs Industry $M$M$M$M$M$M$M AustraliaSovereign1,971------Agriculture5,971398(168)23030-30Bank and other financial7,929300(217)8379(8)71Home loans338,023924(182)742217(4)213Construction2,634110(89)21139-139Other Personal21,796255(142)113622(113)509Asset Financing8,41458(23)3525(6)19Other commercial and industrial110,5451,494(871)623686(13)673Total Australia497,2833,539(1,692)1,8471,798(144)1,654OverseasSovereign9,670------Agriculture6,480142(16)1264-4Bank and other financial7,02936(5)3110(1)9Home loans34,817171(17)15421(1)20Construction3014-4---Other Personal8639(3)625(8)17Asset Financing2744-4---Other commercial and industrial6,04181(26)5531-31Total overseas 65,475447(67)38091(10)81Gross balances 562,7583,986(1,759)2,2271,889(154)1,735 Notes to the Financial Statements Note 38 Credit Risk (continued) Impaired Loans by Industry and Status (continued) (1) Comparatives have been restated to conform to presentation in the current year. Annual Report 2013 161 Group 2012GrossTotal ProvisionsNetImpairedfor ImpairedImpairedNet LoansLoansAssetsLoansWrite-offsRecoveriesWrite-offs Industry $M$M$M$M$M$M$M AustraliaSovereign1,619------Agriculture5,251224(89)13532-32Bank and other financial10,225341(235)10651(17)34Home Loans322,918910(256)65488(5)83Construction2,796218(152)6645-45Other Personal (1)21,772212(131)81657(147)510Asset Financing8,21453(14)3938(17)21Other commercial and industrial 104,3302,193(1,163)1,030884(30)854Total Australia477,1254,151(2,040)2,1111,795(216)1,579OverseasSovereign10,235------Agriculture5,19856(7)495-5Bank and other financial3,15679(6)731-1Home Loans30,063162(28)13424-24Construction345------Other Personal (1)65610(3)719(8)11Asset Financing4687-7---Other commercial and industrial5,13497(47)5033(4)29Total overseas 55,255411(91)32082(12)70Gross balances 532,3804,562(2,131)2,4311,877(228)1,649 Notes to the Financial Statements Note 39 Market Risk Market Risk Market risk is the potential of an adverse impact on the Group’s earnings from changes in interest rates, foreign exchange rates, commodity and equity prices, credit spreads, and the resale value of assets underlying operating leases at maturity (lease residual value risk). The Group makes a distinction between Traded and Non- traded market risks for the purposes of risk management, measurement and reporting. Traded market risks principally arise from the Group’s trading book activities within the Institutional Banking and Markets business and ASB. The predominant Non-traded market risk is interest rate risk that arises from banking book activities. Other Non-traded market risks are non-traded equity risk, market risk arising from the insurance business, structural foreign exchange risk and lease residual value risk. The Group’s assessment of regulatory capital required under the Basel II and Basel III framework is discussed in Note 30. 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 movements in market rates. The VaR measure for Non-traded Banking Book market risk uses six years of daily movement in market rates. VaR is modelled at a 97.5% confidence level over a 1 day holding period for trading book positions. A 20 day holding period is used for interest rate risk in the banking book (IRRBB), insurance business market risk and Non-traded equity risk. Stressed VaR is calculated for Traded market risk using the same methodology as the regular Traded market risk VaR except that the historical data is taken from a one year observation period of significant market volatility as seen during the Global Financial Crisis (GFC). that loss the maximum VaR is driven by actual historical observations and is not an estimate of the Group could experience from an extreme market event. As a result of this limitation, management also uses stress testing to measure the potential levels significantly higher than 97.5%. Management then uses the results in its decisions to manage the economic impact of market risk positions. loss at confidence for economic The stress events considered for 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’s Asset and Liability Committee (ALCO) on a regular basis. Stress tests also include a range of forward looking macro scenario stresses. The following table provides a summary of VaR, across the Group, for those market risk types where it is appropriate to use this measure. (1) The risk of these exposures has been represented in this table using a one day holding period. In practice however, these ‘non-traded’ exposures are managed to a longer holding period. (2) Average VaR calculated for each twelve month period. 162 Commonwealth Bank of Australia Traded Market Risk The Group trades and distributes financial markets products and provides risk management services to customers on a global basis. 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 market making within a controlled framework, to assist in the provision of products and services to customers. The Group maintains access to markets by quoting bid and offer prices with other market makers and carries an inventory of treasury, capital market and risk management instruments, including a broad range of securities and derivatives. The Group is a participant in all major markets across foreign exchange and interest rate products, debt, equity and commodities products as required to provide treasury, capital institutional, markets and risk management services to corporate, middle market and retail customers. Income is earned from spreads achieved through market making and from warehousing market risk. Trading positions are valued at fair value and taken to profit and loss on a mark is controlled by to market basis. Market concentrating trading activity in highly liquid markets. liquidity risk Trading assets at fair value through the Income Statement are shown in Note 10 Trading liabilities at fair value through the Income Statement are shown in Note 20. Note 3 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 (MRM) function. Credit Valuation Adjustment (CVA) is comparable to Traded market risk and is managed using a VaR and stress-testing framework. The Board Risk Committee and ALCO regularly monitor CVA exposures with daily oversight by the independent risk function. The Basel III framework has required a CVA regulatory capital charge since 1 January 2013. The following table provides a summary of VaR for the trading book of the Group. The VaR for ASB is shown separately; all other data relates to the Group and is split by risk type. (1) Average VaR calculated for each twelve month period. Non-Traded Market Risk Non-traded market risk activities are governed by the Group market the Board Risk Committee. The Group market risk framework governs all the framework approved by risk Average (2)As atAverage (2)As atTotal Market RiskJuneJuneJuneJuneVaR (1 day 97.5% 2013201320122012confidence)$M$M$M$MTraded Market Risk 9. 111. 611. 68. 7Non-Traded Interest Rate Risk (1)15. 39. 027. 718. 9Non-Traded Equity Risk (1)22. 425. 021. 521. 0Non-Traded Insurance Market Risk (1)7. 56. 98. 88. 0Average (1)As atAverage (1)As atTraded Market RiskJuneJuneJuneJuneVaR (1 day 97.5% 2013201320122012confidence)$M$M$M$MInterest rate risk5. 96. 15. 25. 9Foreign exchange risk 1. 01. 01. 00. 7Equities risk 2. 10. 42. 21. 7Commodities risk 1. 00. 91. 30. 8Credit spread risk2. 41. 72. 82. 3Diversification benefit (7. 4)(5. 4)(6. 6)(6. 2)Total general market risk 5. 04. 75. 95. 2Undiversified risk 3. 96. 73. 52. 5ASB Bank 0. 20. 22. 21. 0Total 9. 111. 611. 68. 7 Notes to the Financial Statements is the responsibility of Note 39 Market Risk (continued) activities performed in relation to Non-traded market risk. Implementation of the policy, procedures and limits for the Group the Group Executive undertaking activities with Non-traded market risk. The Group’s Risk division performs risk measurement and monitoring activities of Non-traded market risk. Ownership and management responsibility for the Bank’s 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 rate the propensity, 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. timing and quantum of interest The Group measures and manages the impact of interest rate risk in two ways: 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 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. impact of customer prepayments on The figures in the following table represent the net present value of the expected change in the Group’s future earnings in all future periods for the remaining term of all existing assets and liabilities. (1) Average VaR calculated for each twelve month period. (2) VaR is only for entities that have material risk exposure. (3) ASB data (expressed in NZD) is for the month-end date. (a) Next 12 months’ earnings Non-Traded Equity Risk 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. The prospective change to the net interest income is measured by using an Asset and 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 Group 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). (b) Economic Value Interest rate risk from the economic value perspective is The Group retains Non-traded equity risk through business development activities Institutional in divisions Banking and Markets, and Wealth Management. This activity is subject to governance arrangements approved by the Risk Committee of the Board, and is monitored on a decentralised basis within the Risk Management function. An indicative VaR measure is as follows: including 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 investment of (ii) market Shareholders’ capital. risk arising from the 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 assets under management and reduce the fee income collected for this class of business. Guarantees (to Policyholders) All financial assets within the Life Insurance Statutory Funds directly support either the Group's life insurance or life investment contracts. Market risk arises for the Group on contracts where the liabilities to policyholders are guaranteed by the Group. The Group manages this risk by the monthly monitoring and rebalancing of assets to contract liabilities. However, for some contracts the ability to match asset characteristics with policy obligations is constrained by a number of factors including regulatory requirements or the lack of investments that substantially align cash flows with the cash payments to be made to policyholders. Shareholders’ Capital A portion of financial assets held within the Insurance Annual Report 2013 163 JuneJuneNet Interest20132012Earnings at Risk$M$MAverage monthly exposureAUD105. 1152. 2NZD9. 520. 7High monthly exposureAUD128. 6284. 3NZD16. 232. 5Low monthly exposureAUD59. 340. 7NZD4. 311. 5As at balance dateAUD59. 381. 1NZD12. 113. 7Average (1)Average (1)JuneJuneNon-Traded Interest Rate VaR20132012(20 day 97.5% confidence) (2)$M$MAUD Interest rate risk68. 5123. 7NZD Interest rate risk (3)3. 01. 4As atAs atJuneJuneNon-Traded Equity VaR 20132012(20 day 97.5% confidence)$M$MVaR 112. 094. 0 Notes to the Financial Statements Note 39 Market Risk (continued) 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 85% in income assets (cash and fixed interest) and 15% in growth assets (shares and property) as at 30 June 2013. A 20 day 97.5% VaR measure is used to capture the Non- traded market risk exposures. (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 guaranteed liability to policyholders. Further information on the Insurance Businesses can be found in Note 32. 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 Group 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. Commonwealth Bank Group Super Fund for fund The Commonwealth Bank Group Super Fund (the Fund) was previously called the Officers Superannuation Fund and is the staff superannuation the Group’s Australian employees and former employees. Wealth Risk Management and Human Resources manage the risks of the Fund on behalf of the Group. Regular reporting is provided to senior management via the Group’s ALCO and the Board Risk Committee on the status of the surplus, risk sensitivities and risk management options. For further information on the Fund, refer to Note 41. Note 40 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 164 Commonwealth Bank of Australia 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 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, New Zealand, Bankwest, and overseas businesses, during periods of unfavourable market conditions. The Group’s to achieve funding policies are designed 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. Liquidity and Funding Risk Management Framework The Group’s liquidity and funding policies are approved by the Board and agreed with APRA. The Group has an Asset and Liability Committee (ALCO) 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. Group Treasury manages the Group’s liquidity and funding positions in accordance with the Group’s liquidity policies and has ultimate authority to execute liquidity decisions should the Group Contingent Liquidity Plan be evoked. Group Risk Management provides oversight of the Group’s liquidity and funding risks, compliance with Group policies and manages the Group’s relationship with prudential regulators. Subsidiaries within the Colonial Group apply their own liquidity and funding strategies to address their specific needs. The Group’s New Zealand banking subsidiary, ASB Bank, manages its own domestic liquidity and funding needs in accordance with its own liquidity policies and the policies of the Group. ASB’s liquidity policy is also overseen by the Reserve Bank of New Zealand. The Group also has a relatively small banking subsidiary in Indonesia that manages its own liquidity and funding on a similar basis. Liquidity and Funding Policies and Management The Group’s liquidity and funding policies provide that: Balance Sheet assets that cannot be liquidated quickly are funded with deposits or term borrowings that meet minimum maturity requirements with appropriate liquidity buffers; Short and long term wholesale funding limits are established, reviewed regularly and monitored to ensure that they are met. The Group’s market capacity is regularly assessed and used as a factor in funding strategies; At least a prescribed minimum level of assets are retained in highly liquid form; This 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 held to provide for the risk of the Group’s committed but undrawn lending obligations; Liquid assets are held in Australian dollar and foreign currency denominated securities in accordance with expected requirements; The Group has three categories of liquid assets within its domestic liquid assets portfolio. The first includes cash, government and Australian semi-government bonds. The second includes negotiable certificates of deposit, bank bills, bank term securities, supranational bonds and Australia Residential Mortgage-Backed Securities (RMBS) securities that meet certain Reserve Bank of Australia (RBA) requirements. The final is internal RMBS, being mortgages that have been securitised but Average (1)Average (1)Non-Traded VaR in Australian JuneJuneLife Insurance Business 20132012(20 day 97.5% confidence)$M$MShareholder funds (2)21. 323. 2Guarantees (to Policyholders) (3)20. 030. 7 Notes to the Financial Statements Note 40 Liquidity and Funding Risk (continued) retained by the Bank, are held for their repo-eligibility with the RBA under a stress scenario and included within Group liquids; and Offshore branches and subsidiaries adhere to liquidity policies and hold appropriate foreign currency liquid assets as required. All securities are central bank repo- eligible under normal market conditions. The Group’s key funding tools include: Its consumer retail funding base, which includes a wide range of retail transaction accounts, savings accounts and term deposits for individual consumers; Its small business customer and institutional deposit base; and international and domestic funding Its wholesale programs which include its Australian dollar Negotiable Certificates of Deposit; Australian dollar bank bills; Asian Transferable Certificates of Deposit program; Australian, U.S. and Euro Commercial Paper programs; U.S. Extendible Notes programs; Australian dollar Domestic Debt Program; U.S.144a and 3a2 Medium Term Note Programs; Euro Medium Term Note Program, multi jurisdiction Covered Bond program, and its Medallion securitisation program. The Group’s key liquidity tools include: A liquidity management model similar to a “maturity ladder” or “liquidity gap analysis”, that allows forecasting of liquidity needs on a daily basis; liquidity management model An additional 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 Maturity Analysis of Monetary Liabilities sufficient liquid assets available to ensure it meets all of its obligations as and when they fall due; Central bank repurchase agreement facilities provide the Group with the ability to borrow funds on a secured funding markets are basis, even when normal unavailable; and A robust Contingent Liquidity Plan is in place and regularly tested so that it can be evoked in case of need due to a liquidity event. Recent Market Environment in Australia. APRAs confirmed In May 2013, APRA released a discussion paper and draft prudential standards for implementing Basel III liquidity reforms its intention to introduce the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) requirements from 1 January 2015 and 1 January 2018 respectively. APRA will issue final prudential standards in the second half of 2013. The Group will update its liquidity and funding policies as appropriate to comply with the new standards. to lower credit spreads The Group’s wholesale funding costs generally improved over the course of the financial year as high levels of global liquidity and a generally improved economic global outlook combined in domestic and international debt capital markets. The Group has managed its debt portfolio to avoid concentrations such as dependence on single sources of funding, by type or by investor, and continues funding base and significant funding capacity in the domestic and global unsecured and secured debt markets. to maintain a diversified Details of the Group’s regulatory capital position and capital management activities are disclosed in Note 30. Amounts shown in the tables below are based on contractual undiscounted cash flows for the remaining contractual maturities. (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) All off balance sheet items are included in the 0 to 3 month maturity band to reflect their earliest possible maturity. Annual Report 2013 165 GroupMaturity Period as at 30 June 20130 to 33 to 121 to 5Over 5NotAt CallMonthsMonthsYearsYearsSpecifiedTotal$M$M$M$M$M$M$MMonetary liabilitiesDeposits and other public borrowings (1)222,387147,93969,45323,748432-463,959Payables due to other financial institutions9,30413,7472,489437--25,977Liabilities at fair value through Income Statement-3,6132,5241,8081,356-9,301Derivative financial instruments:Held for trading -30,138----30,138Held for hedging purposes (net-settled) -1021861,6532,142-4,083Held for hedging purposes (gross-settled): Outflows-30110,84625,70913,958-50,814Inflows-(277)(9,467)(24,016)(13,323)-(47,083)Bank acceptances-6,0612---6,063Insurance policy liabilities-----13,00413,004Debt issues and loan capital-17,37541,06367,39733,777-159,612Managed funds units on issue-----891891Other monetary liabilities8684,0791,944309-1017,301Total monetary liabilities232,559223,078119,04097,04538,34213,996724,060Guarantees (2)-5,696----5,696Loan commitments (2)-139,964----139,964Other commitments (2)-7,216----7,216Total off balance sheet items-152,876----152,876Total monetary liabilities and off balance sheet items232,559375,954119,04097,04538,34213,996876,936 Notes to the Financial Statements Note 40 Liquidity and Funding Risk (continued) (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) Comparatives have been restated to conform to presentation in the current year. (3) All off balance sheet items are included in the 0 to 3 month maturity band to reflect their earliest possible maturity. 166 Commonwealth Bank of Australia Group Maturity Period as at 30 June 20120 to 33 to 121 to 5Over 5NotAt CallMonthsMonthsYearsYearsSpecifiedTotal$M$M$M$M$M$M$MMonetary liabilitiesDeposits and other public borrowings (1) (2)199,783148,53566,23227,681526-442,757Payables due to other financial institutions4,07517,072673366--22,186Liabilities at fair value through Income Statement-2,6381,3581,974621-6,591Derivative financial instruments:Held for trading (2)-28,223----28,223Held for hedging purposes (net-settled) (2)-1502841,5352,263-4,232Held for hedging purposes (gross-settled): (2)Outflows-1,07210,00036,47415,297-62,843Inflows-(1,027)(8,772)(31,948)(14,171)-(55,918)Bank acceptances-9,7161---9,717Insurance policy liabilities-----12,99412,994Debt issues and loan capital-25,93530,49566,13333,527-156,090Managed funds units on issue-----995995Other monetary liabilities9802,8832,047442-1516,503Total monetary liabilities204,838235,197102,318102,65738,06314,140697,213Guarantees (3)-5,358----5,358Loan commitments (3)-127,833----127,833Other commitments (3)-5,757----5,757Total off balance sheet items-138,948----138,948Total monetary liabilities and off balance sheet items204,838374,145102,318102,65738,06314,140836,161BankMaturity Period as at 30 June 20130 to 33 to 121 to 5Over 5NotAt CallMonthsMonthsYearsYearsSpecifiedTotal$M$M$M$M$M$M$MMonetary liabilitiesDeposits and other public borrowings (1)206,390140,24460,07322,271487-429,465Payables due to other financial institutions9,00813,6522,46056--25,176Liabilities at fair value through Income Statement-3943711,7921,345-3,902Derivative financial instruments:Held for trading-29,704----29,704Held for hedging purposes (net-settled)-482161,9262,165-4,355Held for hedging purposes (gross-settled):Outflows--10,11336,42823,105-69,646Inflows--(8,779)(33,692)(21,800)-(64,271)Bank acceptances-6,059----6,059Debt issues and loan capital-15,56836,98956,05131,181-139,789Due to controlled entities4,0594,5406,19522,43176,643-113,868Other monetary liabilities8263,7677,169103-3211,897Total monetary liabilities220,283213,976114,807107,366113,12632769,590Guarantees (3)-5,345----5,345Loan commitments (3)-130,753----130,753Other commitments (3)-6,137----6,137Total off balance sheet items-142,235----142,235Total monetary liabilities and off balance sheet items220,283356,211114,807107,366113,12632911,825 Notes to the Financial Statements Note 40 Liquidity and Funding Risk (continued) (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) Comparatives have been restated to conform to presentation in the current year. (3) All off balance sheet items are included in the 0 to 3 month maturity band to reflect their earliest possible maturity. Note 41 Retirement Benefit Obligations Name of Plan Type Form of Benefit Date of Last Actuarial Assessment of the Fund Commonwealth Bank Group Super Defined Benefits (1) and Accumulation Commonwealth Bank of Australia (UK) Staff Benefits Scheme (CBA (UK) SBS) Defined Benefits (1) and Accumulation Indexed pension and lump sum 30 June 2012 Indexed pension and lump sum 30 June 2010 (2) (1) The defined benefit formulae are generally comprised of final superannuation salary, or final average superannuation salary, and service. (2) An actuarial assessment of the Fund at 30 June 2013 is currently in progress. 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 Commonwealth Bank Group Super from 8 July 1994. Further, the Bank ceased contributions to the Commonwealth Bank Group Super relating to salary sacrifice benefits from 1 July 1997. The Bank will continue to monitor the need to make contributions to Commonwealth Bank Group Super including the advice provided in the actuarial assessment of the Commonwealth Bank Group Super as at 30 June 2012. An actuarial assessment of the CBA (UK) SBS, as at 30 June 2010, confirmed a deficit of GBP68 million (AUD112 million at the 30 June 2013 exchange rate). Following 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 AUD4 million per annum (at the 30 June 2013 exchange rate) and additional contributions of GBP15 million per annum (AUD25 million per annum at the 30 June 2013 exchange rate) payable over five years to finance the fund deficit. Annual Report 2013 167 BankMaturity Period as at 30 June 20120 to 33 to 121 to 5Over 5NotAt CallMonthsMonthsYearsYearsSpecifiedTotal$M$M$M$M$M$M$MMonetary liabilitiesDeposits and other public borrowings (1) (2)166,386119,54554,49526,356526-367,308Payables due to other financial institutions3,79717,0206511--21,469Liabilities at fair value through Income Statement-3961481,867894-3,305Derivative financial instruments:Held for trading (2) -27,356----27,356Held for hedging purposes (net-settled) (2)-1062282,0192,277-4,630Held for hedging purposes (gross-settled): (2)Outflows--9,32641,40817,984-68,718Inflows--(8,154)(36,629)(16,762)-(61,545)Bank acceptances-9,715----9,715Debt issues and loan capital-19,05925,94554,79330,230-130,027Due to controlled entities3,2743,8564,32014,48175,122-101,053Other monetary liabilities8291,9134,56279-67,389Total monetary liabilities174,286198,96691,521104,375110,2716679,425Guarantees (3)-4,718----4,718Loan commitments (3)-109,648----109,648Other commitments (3)-4,279----4,279Total off balance sheet items-118,645----118,645Total monetary liabilities and off balance sheet items174,286317,61191,521104,375110,2716798,070 Notes to the Financial Statements Note 41 Retirement Benefit Obligations (continued) Defined Benefit Superannuation Plans The amounts reported in the Balance Sheet are reconciled as follows: 168 Commonwealth Bank of Australia CBA(UK)SBSTotal201320122013201220132012$M$M$M$M$M$MPresent value of funded obligations(3,333)(3,716)(472)(420)(3,805)(4,136)Fair value of plan assets3,2043,3603993123,6033,672Total pension liabilities as at 30 June(129)(356)(73)(108)(202)(464)Amounts in the Balance Sheet:Liabilities (Note 24)(129)(356)(73)(108)(202)(464)Net liabilities(129)(356)(73)(108)(202)(464)The amounts recognised in the Income Statement are as follows:Current service cost(66)(61)(4)(5)(70)(66)Interest cost(135)(167)(20)(19)(155)(186)Expected return on plan assets1922591516207275Employer financed benefits within accumulation division(186)(191)--(186)(191)Total included in defined benefit superannuation plan expense(195)(160)(9)(8)(204)(168)Actual return on plan assets2492005220301220Changes in the present value of the defined benefit obligation are as follows:Opening defined benefit obligation(3,716)(3,493)(420)(356)(4,136)(3,849)Current service cost(60)(55)(4)(5)(64)(60)Interest cost(135)(167)(20)(19)(155)(186)Member contributions(9)(9)--(9)(9)Actuarial gains/(losses)365(213)(15)(45)350(258)Benefits paid2222211714239235Exchange differences on foreign plans--(30)(9)(30)(9)Closing defined benefits obligation(3,333)(3,716)(472)(420)(3,805)(4,136)Changes in the fair value of plan assets are as follows:Opening fair value of plan assets3,3603,5693122733,6723,842Expected return1922591516207275Experience gains/(losses)57(59)37494(55)Total contributions9929263835Exchange differences on foreign plans--237237Benefits and expenses paid(228)(227)(17)(14)(245)(241)Employer financed benefits within accumulation division(186)(191)--(186)(191)Closing fair value of plan assets3,2043,3603993123,6033,672Commonwealth Bank Group Super 20132012201120102009$M $M $M $M $M Present value of funded obligations(3,333)(3,716)(3,493)(3,332)(3,118)Fair value of plan assets3,2043,3603,5693,6483,613Total net (liabilities)/assets(129)(356)76316495Experience adjustments on plan liabilities303(6)77(120)Experience adjustments on plan assets57(59)76115(829)Gains/(losses) from changes in actuarial assumptions335(216)(171)(276)(84)Total net actuarial gains/(losses)422(272)(101)(84)(1,033)Commonwealth Bank Group Super Notes to the Financial Statements Note 41 Retirement Benefit Obligations (continued) Actuarial gains and losses represent experience adjustments on plan assets and liabilities as well as adjustments arising from changes in actuarial assumptions. Total net actuarial losses recognised in equity from commencement of International Financial Reporting Standards (1 July 2005) to 30 June 2013 were $186 million (2012: $630 million). (1) This represents the expected rate of return for the coming year, i.e. 6.10% in 2012 represents the expected return to be earned during the financial year ended 30 June 2013. Under changes to AASB 119, this assumption is not required for financial years ending 30 June 2014 onwards. (2) For Commonwealth Bank Group Super, the salary increase assumption is a combined promotional and general increase assumption. The return on asset assumption is determined as the weighted average of the long term expected returns of each asset class where the weighting is the benchmark asset allocations of the assets backing the defined benefit risks. The long term expected returns of each asset class are determined following receipt of actuarial advice. The discount rate (gross of tax) assumption for Commonwealth Bank Group Super was based on the blend of yields on long dated Commonwealth and State government securities. In addition to financial assumptions, the mortality assumptions for pensioners can materially impact the defined benefit obligations. These assumptions are age related and allowances are made for future improvement in mortality. The expected life expectancies for pensioners are set out below: Annual Report 2013 169 20132012201120102009$M $M $M $M $M Present value of funded obligations(472)(420)(356)(377)(394)Fair value of plan assets399312273295308Total net liabilities(73)(108)(83)(82)(86)Experience adjustments on plan liabilities1(2)(14)192Experience adjustments on plan assets3741318(26)Losses from changes in actuarial assumptions(16)(43)(17)(44)-Total net actuarial gains/(losses)22(41)(18)(7)(24)CBA(UK)SBS 20132012201120102009$M $M $M $M $M Present value of funded obligations(3,805)(4,136)(3,849)(3,709)(3,512)Fair value of plan assets3,6033,6723,8423,9433,921Total net (liabilities)/assets(202)(464)(7)234409Experience adjustments on plan liabilities311(20)96(118)Experience adjustments on plan assets94(55)89133(855)Gains/(losses) from changes in actuarial assumptions319(259)(188)(320)(84)Total net actuarial gains/(losses)444(313)(119)(91)(1,057)Total 2013201220132012Economic assumptions% % % % The above calculations were based on the following assumptions:Discount rate at 30 June (gross of tax)4.604.004.504.40Expected return on plan assets at 30 June (1)n/a6.10n/a4.40Expected rate salary increases at 30 June (per annum) (2)3.753.504.604.10Commonwealth Bank Group SuperCBA(UK)SBS 2013201220132012Expected life expectancies for pensionersYears Years Years Years Male pensioners currently aged 6029.329.229.229.1Male pensioners currently aged 6524.524.324.324.2Female pensioners currently aged 6034.434.331.831.6Female pensioners currently aged 6529.329.226.726.6Commonwealth Bank Group SuperCBA(UK)SBS Notes to the Financial Statements Note 41 Retirement Benefit Obligations (continued) Further, the proportion of the retiring members of the main Commonwealth Bank Group Super defined benefit division electing to take pensions instead of lump sums may materially impact the defined benefit obligations. Of these retiring members, 36% 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. During the year ended 30 June 2013, the trustee reviewed and implemented a new investment strategy of 50% growth/50% defensive assets (previously 70% growth/30% defensive) for the assets backing the defined benefit portion of Commonwealth Bank Group Super. The actual asset allocations for the assets backing the defined benefit portion of Commonwealth Bank Group Super are as follows: (1) These are assets which are not included in the traditional asset classes of equities, fixed interest securities, real estate and cash. They include infrastructure investments as well as high yield and emerging market debt. The value of Commonwealth Bank Group Super’s equity holding in the Group as at 30 June 2013 was $130 million (2012: $113 million). Amounts on deposit with the Bank at 30 June 2013 totalled $15 million (2012: $21 million). Other financial instruments with the Group at 30 June 2013 totalled $nil (2012: $46 million). Note 42 Investments in Associates and Joint Ventures (1) The Group’s 80% interest in Aussie Home Loans Pty Limited is jointly controlled as the key financial and operating decisions require the unanimous consent of all directors. (2) These are joint ventures of the Group. (3) The value for CFS Retail Property Trust based on published quoted prices was $441 million as at 30 June 2013 (2012: $427 million). (4) The value for Commonwealth Property Office Fund based on published quoted prices was $165 million as at 30 June 2013 (2012: $152 million). (5) The consolidated entity has significant influence due to its relationship as Responsible Entity. These holdings exclude assets held in statutory funds backing policyholder liabilities, which are disclosed as Assets at fair value through Income Statement. (6) The value for Countplus Limited based on published quoted prices was $74 million as at 30 June 2013 (2012: $52 million). This investment was purchased during the 2012 financial year. (7) The investments included in “Other” are mostly joint ventures. For these investments, the Group is committed to equity injections of $36 million (2012: $nil) within 12 months and $5 million (2012: $41 million) greater than 12 months. 170 Commonwealth Bank of Australia 20132012Asset allocations%%Australian equities12.6 21.3 Overseas equities14.5 10.9 Real estate9.2 14.2 Fixed interest securities43.6 34.8 Cash5.8 4.3 Other (1)14.3 14.5 Actual AllocationGroup2013201220132012OwnershipOwnershipPrincipalCountry ofBalance$M$MInterest %Interest % ActivitiesIncorporationDateAussie Home Loans Pty Limited (1) (2)258718033Mortgage Broking Australia 30-JunBank of Hangzhou Co., Limited6485382020Commercial Banking China 31-DecBoCommLife Insurance Company Limited (2)80243838Life Insurance China 31-DecCFS Retail Property Trust (3) (5)43943988Funds Management Australia 30-JunCommonwealth Property Office Fund (4) (5)14714766Funds Management Australia 30-JunCountplus Limited (6)55563737Financial Advice Australia 30-JunFirst State European Diversified Investment Fund1511392030Funds Management Luxembourg 31-DecQilu Bank Co., Limited2232132020Commercial Banking China 31-DecVietnam International Commercial Joint Stock Bank2192172020Financial Services Vietnam 31-DecOther (7)6154Various Various Various Various VariousCarrying amount of investments in associates and joint ventures2,2811,898 Notes to the Financial Statements Note 42 Investments in Associates and Joint Ventures (continued) Note 43 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 47 to 64 and have been audited. Equity Holdings of Key Management Personnel Shareholdings 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 28. Shares Held by Directors All shares were acquired by Directors on normal terms and conditions or through the Non-Executive Director’s Share Plan. (1) Non-Executive Directors who hold less than 5,000 Commonwealth Bank shares are required to receive 20% of their total post-tax 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) PERLS: As at 30 June 2013 David Turner held 380 PERLS VI units (2012: nil), Colin Galbraith held 700 PERLS VI units (2012: nil), Brian Long held 400 PERLS V units (2012: 400 units), Fergus Ryan held 3,875 PERLS V units and 5,700 PERLS VI units (2012: 3,875 PERLS V units), and Jane Hemstritch held 2,500 PERLS III units, 500 PERLS V units and 6,300 PERLS VI units (2012: 2,500 PERLS III units, 1,150 PERLS IV units, and 500 PERLS V units). (4) Other securities: As at 30 June 2013 Jane Hemstritch held 5,000 CNGHA notes (2012: 5,000 CNGHA notes), and David Turner held 67,647 CPA units (2012: 67,647 CPA units). Annual Report 2013 171 Group20132012Share of Associates' and Joint Ventures profits$M $M Operating profits before income tax254164Income tax expense(44)(24)Operating profits after income tax210140Group20132012Financial information of Associates and Joint Ventures$M$MAssets90,24176,844Liabilities75,11963,481Revenue3,7413,976Operating profits after income tax1,4241,326GroupBank2013201220132012Key management personnel compensation$'000$'000$'000$'000Short term benefits35,40632,68335,40632,683Post-employment benefits777748777748Share-based payments9,88220,5169,88220,516Long term benefits1,3101,2411,3101,241Total47,37555,18847,37555,188BalanceSharesNet ChangeBalanceDirectorsClass1 July 2012Acquired (1)Other (2)30 June 2013Non-Executive DirectorsDavid TurnerOrdinary11,840--11,840PERLS (3)--380380Other securities (4)67,647--67,647John AndersonOrdinary17,672--17,672Jane HemstritchOrdinary25,775--25,775PERLS (3)4,150-5,1509,300Other securities (4)5,000--5,000Launa InmanOrdinary1,698538-2,236Carolyn KayOrdinary12,388--12,388Brian LongOrdinary11,109-5011,159PERLS (3)400--400Andrew MohlOrdinary52,640-7,20059,840Harrison Young Ordinary26,764--26,764Former Non-Executive DirectorsColin GalbraithOrdinary16,736--16,736PERLS (3)--700700Fergus RyanOrdinary18,863--18,863PERLS (3)3,875-5,7009,575 Notes to the Financial Statements Note 43 Key Management Personnel (continued) Shares held by the CEO and Group Executives (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, sign-on and special retention awards received as restricted shares. (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. For Alden Toevs this figure includes a reduction in vested Reward Shares to offset his 2009 sign-on payment. (4) Restated to recognise actual balance at 30 June 2012. 172 Commonwealth Bank of Australia Reward/Acquired/DeferredBalanceGranted asSharesNet ChangeBalanceClass (1)1 July 2012RemunerationVested (2)Other (3)30 June 2013Managing Director and CEOIan NarevOrdinary 21,276--27,76549,041Reward Shares/Rights 165,26578,681(22,067)(3,152)218,727Deferred Shares 5,698-(5,698)--Group ExecutivesSimon BlairOrdinary -----Reward Shares/Rights 77,09026,122--103,212Deferred Shares - ---- David Cohen Ordinary 49,737-29,01578,752Reward Shares/Rights 107,90028,326(21,418)(3,059)111,749Deferred Shares 7,597-(7,597)--Matthew ComynOrdinary18,145--(1,748)16,397Reward Shares/Rights-30,843--30,843Deferred Shares23,7926,119(9,800)-20,111David Craig Ordinary 87,780--10,45698,236Reward Shares/Rights 151,21443,432(27,259)(3,894)163,493Deferred Shares 7,597-(7,597)--Michael Harte Ordinary 60,632--32,26092,892Reward Shares/Rights 126,89233,833(24,663)(3,523)132,539Deferred Shares 7,597-(7,597)--Robert JesudasonOrdinary---625625Reward Shares/Rights-25,179--25,179Deferred Shares46,3234,295(23,625)-26,993Melanie LaingOrdinary (4)975--7,0157,990Reward Shares/Rights 23,95425,179--49,133Deferred Shares 10,961-(7,015)-3,946Grahame PetersenOrdinary 80,126-23,426103,552Reward Shares/Rights 143,02536,980(28,557)(4,079)147,369Deferred Shares 6,331-(6,331)--Ian Saines Ordinary 23,659--44,05267,711Reward Shares/Rights 166,47141,858(33,749)(4,821)169,759Deferred Shares 7,597-(7,597)--Annabel SpringOrdinary 1,024--1,5832,607Reward Shares/Rights 29,34230,843--60,185Deferred Shares 18,182-(1,583)-16,599Alden Toevs Ordinary 46,784--10,39357,177Reward Shares/Rights 178,31845,005(25,263)(16,274)181,786Deferred Shares 10,130-(10,130)--Former ExecutiveRoss McEwan Ordinary ---40,01640,016Reward Shares/Rights 156,447-(31,153)(125,294)-Deferred Shares 59,749-(8,863)(50,886)- Notes to the Financial Statements Note 43 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). Total Loans to Key Management Personnel Loans to Key Management Personnel Exceeding $100,000 in Aggregate (1) Some loans for Ross McEwan are held in New Zealand Dollars and converted to Australian Dollars for the purpose of this disclosure. The exchange rate as at 30 June 2012 has been used for opening balances, and the exchange rate at 30 June 2013 has been used for closing balances. The average exchange rate over the 2013 financial year has been used for calculating interest. The spot exchange rate was used for calculating the highest balance in the period. (2) Represents the highest balance per individual of loans outstanding at any period during the year ended 30 June 2013. Other Transactions of Key Management Personnel Financial Instrument Transactions Financial instrument transactions (other than loans and shares disclosed within this report) of Key Management Personnel occur in the ordinary course of business on an arm’s length basis. Disclosure of financial instrument transactions regularly made as part of normal banking operations is limited to disclosure of such transactions with Key Management Personnel and entities controlled or significantly influenced by them. All such financial instrument transactions that have occurred between entities within the Group and their Key Management Personnel have been trivial or domestic in nature and were in the nature of normal personal banking and deposit transactions. Transactions other than Financial Instrument Transactions of Banks All other transactions with Key Management Personnel and their related entities and other related parties are conducted on an arm’s length basis in the normal course of business and on commercial terms and conditions. These transactions principally involve the provision of financial and investment services by entities not controlled by the Group. Annual Report 2013 173 OpeningInterestClosingBalanceChargedBalanceNumber in$'000$'000$'000GroupDirectors 201396 5 96 2 20125 6 96 2 CEO & Group Executives 20137,137 479 9,486 1220127,153 456 7,137 12Total 20137,233 484 9,582 14 20127,158 462 7,233 14HighestBalanceInterestInterest NotBalanceBalance1 July 2012ChargedChargedWrite-off30 June 2013in Period$'000$'000$'000$'000$'000$'000 (2)Group ExecutivesSimon Blair4003--1414David Cohen58534--569601Matthew Comyn2,31851--1,2382,429Michael Harte4,375173--3,5674,683Robert Jesudason3,672183--3,1583,914Melanie Laing32527--661674Ross McEwan (1)1,4249--2891,478Total 13,099480--9,48314,193 Notes to the Financial Statements Note 44 Related Party Disclosures The Group is controlled by the Commonwealth Bank of Australia, the ultimate parent, which is incorporated in Australia. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions, or one other party controls both. The definition includes subsidiaries, associates, joint ventures, pension plans as well as other persons. A number of banking transactions are entered into with related parties in the normal course of business on an arm’s length basis. These include loans, deposits and foreign currency transactions, upon which some fees and commissions may be earned. Details of amounts paid or received from related parties, in the form of dividends or interest, are set out in Note 2. The Bank’s aggregate investments in, and loans to controlled entities are disclosed in the table below. Amounts due to controlled entities are disclosed in the Balance Sheet of the Bank. The Group also receives fees on an arm’s length basis of $81 million (2012: $74 million) from funds classified as associates. 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(s). The amount receivable by the Bank under the tax funding agreement with the tax consolidated entities is $207 million as at 30 June 2013 (2012: $261 million receivable). This balance is included in ‘Other assets’ in the Bank’s separate balance sheet. All transactions between Group entities are eliminated on consolidation. Note 45 Notes to the Statements of Cash Flows (a) Reconciliation of Net Profit after Income Tax to Net Cash provided by/(used in) Operating Activities (1) Cash and cash equivalents has been redefined to no longer include at call deposits with other financial institutions and settlement account balances with other banks. Comparatives have been restated to conform to presentation in the current year. 174 Commonwealth Bank of Australia Bank 20132012$M $M Shares in controlled entities16,16720,025Loans to controlled entities46,85054,981Total shares in and loans to controlled entities63,01775,006GroupBank20132012201120132012$M $M $M $M $M Net profit after income tax7,6937,1066,4107,2926,461Decrease/(increase) in interest receivable13079(224)358(318)(Decrease)/increase in interest payable(251)(320)476(362)(240)Net (increase)/decrease in assets at fair value through Income Statement (excluding life insurance)(3,472)3,3912,697(4,535)2,943Net (gain)/loss on sale of controlled entities and associates(7)(21)(7)-10Net gain on sale of investments-(1)(1)-(1)Net movement in derivative assets/liabilities 2,372(663)(79)3,781394Net loss/(gain) on sale of property, plant and equipment 14(39)613(40)Equity accounting profit(210)(120)(141)--Loan impairment expense1,1461,0891,2801,042994Depreciation and amortisation (including asset write downs)716628613549398Increase/(decrease) in liabilities at fair value through Income Statement (excluding life insurance)1,569(4,321)(4,851)126(1,424)Increase/(decrease) in other provisions 19(69)8040(71)Increase/(decrease) in income taxes payable4537105(341)167Increase/(decrease) in deferred tax liabilities13315280(292)116(Increase)/decrease in deferred tax assets (26)349(30)234173(Increase)/decrease in accrued fees/reimbursements receivable(272)18(1)3238Increase/(decrease) in accrued fees and other items payable31564(99)179(6)(Decrease)/increase in life insurance contract policy liabilities(1,401)(1,157)835--Increase/(decrease) in cash flow hedge reserve27(58)1526(55)Gain on changes in fair value of hedged items(617)(318)(427)(421)(702)Dividend received---(1,512)(1,573)Changes in operating assets and liabilities arising from cash flow movements (1)(2,411)3,1207,866(7,997)(27,495)Other1,065(99)(158)103(76)Net cash provided by/(used in) operating activities6,5778,84714,445(1,685)(20,307) Notes to the Financial Statements Note 45 Notes to the Statements of Cash Flows (continued) (b) Reconciliation of Cash For the purposes of the Statements of Cash Flows, cash includes cash and money at short call. (1) Cash and cash equivalents has been redefined to no longer include at call deposits with other financial institutions and settlement account balances with other banks. These are now considered part of cash flows from operating activities to enhance industry comparability. Comparatives have been restated to conform to presentation in the current year, (impact: $10,528 million as at 30 June 2012). (c) Disposal of Controlled Entities – Fair Value of Asset Disposal The Group disposed of certain St Andrew’s operations effective 1 July 2010. (d) Non-cash Financing and Investing Activities (1) The dividend reinvestment plan in respect of the interim dividend for 2012/13 was satisfied in full through an on market purchase and transfer of $596 million of shares to participating shareholders. (e) Acquisition of Controlled Entities The Group gained control of Count Financial Limited (Count Financial) on 29 November 2011. The Group subsequently acquired 100% of the issued share capital on 9 December 2011. Count Financial is an independent, accountant-based financial advice business. This acquisition will support the Group in growing its distribution capabilities through the expansion of its adviser network. The fair value of the identifiable assets acquired and liabilities assumed at the acquisition date are as follows: Annual Report 2013 175 GroupBank 20132012201120132012$M $M $M $M $M Notes, coins and cash at banks7,6538,5085,4246,1837,161Other short term liquid assets4,9654,0951,3014,5653,785Cash and cash equivalents at end of year (1)12,61812,6036,72510,74810,946Group201320122011$M$M$MNet assets--60Loss on sale (excluding realised foreign exchange losses and other related costs)--(10)Cash consideration received--50Less cash and cash equivalents disposed--(31)Net cash inflow on disposal--19Group201320122011$M$M$MShares issued under the Dividend Reinvestment Plan (1)9291,363511Group201320122011$M$M$MNet identifiable assets at fair value-140-Add: Goodwill-232-Purchase consideration transferred-372-Less: Cash and cash equivalents acquired-(10)--362-Less: Non-cash consideration-(237)-Net cash outflow on acquisition-125- Notes to the Financial Statements Note 46 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. AASB 7 ‘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’s 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. (1) Comparatives have been restated to conform to presentation in the current year. 176 Commonwealth Bank of Australia Group 20132012CarryingFair CarryingFair ValueValue ValueValue $M$M $M$M AssetsCash and liquid assets20,63420,63419,66619,666Receivables due from other financial institutions7,7447,74410,88610,886Assets at fair value through Income Statement: Trading19,61719,61713,81613,816 Insurance14,35914,35914,52514,525 Other907907980980Derivative assets (1)45,34045,34039,56739,567Available-for-sale investments59,60159,60160,82760,827Loans, bills discounted and other receivables556,648557,356525,682526,039Bank acceptances of customers6,0636,0639,7179,717Other assets6,9986,9987,9627,962LiabilitiesDeposits and other public borrowings459,429460,251437,655439,418Payables due to other financial institutions25,92225,92222,12622,126Liabilities at fair value through Income Statement8,7018,7016,5556,555Derivative liabilities (1)38,58038,58039,85139,851Bank acceptances6,0636,0639,7179,717Insurance policy liabilities13,00413,00412,99412,994Debt issues132,808136,638124,712125,818Managed funds units on issue891891995995Bills payable and other liabilities7,5747,5747,2317,231Loan capital9,6879,98910,02210,387 Notes to the Financial Statements Note 46 Disclosures about Fair Values of Financial Instruments (continued) (1) Comparatives have been restated to conform to presentation in the current year. 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 creditworthiness 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 creditworthiness. 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 creditworthiness of the customer. 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. Annual Report 2013 177 Bank 20132012CarryingFair CarryingFair ValueValue ValueValue $M$M $M$M AssetsCash and liquid assets18,03018,03017,95217,952Receivables due from other financial institutions6,9986,99810,48210,482Assets at fair value through Income Statement: Trading18,39818,39812,07112,071 Other718718980980Derivative assets (1)45,20345,20339,69139,691Available-for-sale investments125,941125,941116,567116,567Loans, bills discounted and other receivables502,349502,978407,122407,418Bank acceptances of customers6,0596,0599,7159,715Loans to controlled entities46,85046,85254,98155,080Other assets5,4235,4236,1386,138LiabilitiesDeposits and other public borrowings425,276426,048362,813364,002Payables due to other financial institutions25,16625,16621,45721,457Liabilities at fair value through Income Statement3,3323,3323,1813,181Derivative liabilities (1)40,22940,22939,85639,856Bank acceptances6,0596,0599,7159,715Due to controlled entities113,868113,868101,053101,053Debt issues115,291119,032102,312103,513Bills payable and other liabilities5,6485,6485,2675,267Loan capital10,43710,44510,22310,435 Notes to the Financial Statements Note 46 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. Financial instruments included in this category are liquid government and financial institution bonds, listed equities and exchange traded derivatives. 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. Financial instruments included in this category are corporate bonds, certificates of deposit, commercial paper, mortgaged backed securities and Over-the-Counter (OTC) derivatives including interest rate swaps, cross currency swaps and FX options. 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. Financial instruments included in this category for the Group and Bank are certain exotic OTC derivatives and internally issued residential mortgage backed securities for the Bank only. (1) Comparatives have been restated to conform to presentation in the current year. 178 Commonwealth Bank of Australia GroupLevel 1Level 2Level 3TotalLevel 1Level 2Level 3Total$M$M$M$M$M$M$M$MAssetsAssets at fair value through Income Statement:Trading16,0743,543-19,6179,9843,832-13,816Insurance4,5809,779-14,3594,6029,923-14,525Other632275-90796713-980Derivative assets (1)845,2636945,3401539,5262639,567Available-for-sale investments48,04111,556459,60149,03311,793160,827Total assets carried at fair value69,33570,41673139,82464,60165,08727129,715LiabilitiesLiabilities at fair value through Income Statement2,7525,949-8,7012,4494,106-6,555Derivative liabilities (1)-38,5661438,580539,8291739,851Life investment contracts-9,589-9,589-9,728-9,728Total liabilities carried at fair value2,75254,1041456,8702,45453,6631756,134Fair Value as at 30 June 2013Fair Value as at 30 June 2012 Notes to the Financial Statements Note 46 Disclosures about Fair Values of Financial Instruments (continued) (b) Valuation Methodology (continued) (1) Comparatives have been restated to conform to presentation in the current year. (2) Included within available-for-sale investments of the Bank are $67,853 million (2012: $66,458 million) of residential mortgage backed securities issued by Bank originated securitisation vehicles for potential repurchase by the Reserve Bank of Australia. Level 3 Movement Analysis for the year ended 30 June 2013 Annual Report 2013 179 BankLevel 1Level 2Level 3TotalLevel 1Level 2Level 3Total$M$M$M$M$M$M$M$MAssetsAssets at fair value through Income Statement:Trading16,0512,347-18,3989,7112,360-12,071Other588130-71896713-980Derivative assets (1)1245,1296245,203939,6701239,691Available-for-sale investments (2)46,96610,36568,610125,94139,09811,01066,459116,567Total assets carried at fair value63,61757,97168,672190,26049,78553,05366,471169,309LiabilitiesLiabilities at fair value through Income Statement2,737595-3,3322,448733-3,181Derivative liabilities (1)2340,1921440,229539,8341739,856Total liabilities carried at fair value2,76040,7871443,5612,45340,5671743,037Fair Value as at 30 June 2013Fair Value as at 30 June 2012GroupAssets at Fair Value through Income Available Statement Derivative for SaleDerivative Trading AssetsInvestments LiabilitiesTotal$M$M$M$M$MAs at 1 July 201163411(8)97Purchases-11--11Sales/Settlements(7)(3)-1(9)Gains/(losses) in the period:Recognised in the Income Statement1(24)-(10)(33)Recognised in the Statement of Comprehensive Income-----Transfers in-1-(2)(1)Transfers out(57)--2(55)As at 30 June 2012-261(17)10Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2012-1-(14)(13)As at 1 July 2012-261(17)10Purchases-441(5)40Sales/Settlements---1010Gains/(losses) in the period:Recognised in the Income Statement-7-(2)5Recognised in the Statement of Comprehensive Income-----Transfers in--2-2Transfers out-(8)--(8)As at 30 June 2013-694(14)59Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2013-6-(5)1 Notes to the Financial Statements Note 46 Disclosures about Fair Values of Financial Instruments (continued) Transfers in and out of Level 3 are due to changes in the observability of the inputs. The Group’s exposure to financial instruments measured at fair value based in full or in part on non-market observable inputs is restricted to a small number of financial instruments, which comprise an insignificant component of the portfolios to which they belong. 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 results. The Bank’s exposure to financial instruments measured at fair value based in full or part on non-market observable inputs consists almost entirely of Bank originated and internally issued RMBS. These securities have been originated for potential repurchase by the RBA. 180 Commonwealth Bank of Australia BankAssets at Fair Value through Income Available Statement Derivative for SaleDerivative Trading AssetsInvestments LiabilitiesTotal$M$M$M$M$MAs at 1 July 201162937,445(8)37,472Purchases-1129,051-29,062Sales/Settlements(6)(3)-1(8)Gains/(losses) in the period:Recognised in the Income Statement-(25)-(10)(35)Recognised in the Statement of Comprehensive Income--(37)-(37)Transfers in---(2)(2)Transfers out---22As at 30 June 2012-1266,459(17)66,454Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2012---1515As at 1 July 2012-1266,459(17)66,454Purchases-49-(5)44Sales/Settlements-(2)(1,150)10(1,142)Gains/(losses) in the period:Recognised in the Income Statement-10-(2)8Recognised in the Statement of Comprehensive Income--(136)-(136)Transfers in--688-688Transfers out-(7)--(7)Additions through merger of banking licence--2,749-2,749As at 30 June 2013-6268,610(14)68,658Gains/(losses) recognised in the Income Statement for financial instruments held as at 30 June 2013-8-(6)2 Notes to the Financial Statements Note 47 Securitisation, Covered Bonds and Transferred Assets Transfer of Financial Assets In the normal course of business the Group enters into transactions by which it transfers financial assets to counterparties or directly to Special Purpose Entities (SPE’s). These transfers do not give rise to derecognition of those financial assets for the Group. Repurchase Agreements 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. Securitisation Programs Residential mortgages securitised under the Group’s securitisation programs are equitably assigned to bankruptcy remote special purpose entities (SPEs). The Group is entitled to any residual income of the securitisation program after all payments due to investors have been met. In addition, where derivatives are transacted between the SPE and the Bank, such that the Bank retains exposure to the variability in cash flows from the transferred residential mortgages, the mortgages will continue to be recognised on the Bank’s balance sheet. The investors have full recourse only to the residential mortgages segregated into an SPE. Covered Bonds Programs To complement the existing wholesale funding sources, the Group has established two global covered bond programs for the Bank and ASB respectively. Certain residential mortgages have been assigned to a bankruptcy remote SPE associated with covered bond programs to provide security for the obligations payable on the covered bonds issued by the Group. Similarly to securitisation programs, the Group is entitled to any residual income after all payments due to covered bonds investors have been met. As the Bank retains substantially all of the risks and rewards associated with the mortgages through derivatives transacted with the SPE, the Bank continues to recognise the mortgages on its Balance Sheet. The covered bond holders have dual recourse to the Bank and the covered pool assets. At the Balance Sheet date, transferred financial assets that did not qualify for derecognition and their associated liabilities are as follows: (1) Securitisation liabilities of the Group include RMBS notes issued by securitisation SPEs and held by external investors. (2) Securitisation liabilities of the Bank include borrowings from securitisation SPEs, including the SPEs that issue only internally held notes for repurchase with central banks, recognised on transfer of residential mortgages by the Bank. Annual Report 2013 181 Group201320122013201220132012$M$M$M$M$M$MCarrying amount of transferred assets5,5725,24533,63422,35810,1699,279Carrying amount of associated liabilities (1)5,5725,24518,23812,7898,9297,858For those liabilities that have recourse only to the transferred assets--Fair value of transferred assets10,1839,291Fair value of associated liabilities8,9277,743Net position1,2561,548Agreements Covered Bonds Securitisation RepurchaseBank201320122013201220132012$M$M$M$M$M$MCarrying amount of transferred assets5,5395,25829,48719,89377,15075,113Carrying amount of associated liabilities (2)5,5395,25816,74011,42377,15075,095For those liabilities that have recourse only to the transferred assets--Fair value of transferred assets77,23475,214Fair value of associated liabilities77,15074,888Net position84326Agreements Covered Bonds SecuritisationRepurchase Notes to the Financial Statements Note 48 Controlled Entities (a) Material Subsidiaries A subsidiary is considered material based on its contribution to the consolidated entity’s profit, size of investment or nature of activity. The criteria applied are largely consistent with the definition of a “large proprietary company” following the Corporations Act 2001, i.e. if the subsidiary satisfies at least two of the following: The consolidated revenue for the financial year of the subsidiary and the entities it controls (if any) is $25 million or more; The value of the consolidated gross assets at the end of the financial year of the subsidiary and the entities it controls (if any) is $12.5 million or more; The subsidiary and the entities it controls (if any) have 50 or more employees at the end of the financial year. The material subsidiaries of the Bank including but not limited to those meeting the “large proprietaries company” definition are: All the above subsidiaries are 100% owned and incorporated in Australia. 182 Commonwealth Bank of Australia Entity Name Entity Name Australia(a) BankingAustralian Investment Exchange LimitedMedallion Trust Series 2007-1GBWA Group Services Pty LimitedMedallion Trust Series 2008-1RCBA AIR Pty LimitedMedallion Trust Series 2011-1CBA Covered Bond TrustMedallion Trust Series 2012-1CBA Equities LimitedMedallion Trust Series 2013-1CBA International Finance Pty LimitedMIS Funding No.1 Pty LimitedCBFC Leasing Pty LimitedPreferred Capital LimitedCBFC LimitedSAFE No2 Pty LimitedCommonwealth Securities LimitedSecuritisation Advisory Services Pty LimitedGT Funding No. 6 Limited PartnershipSeries 2006-1E SWAN TrustGT Operating No. 5 Limited PartnershipSeries 2007-1E SWAN TrustHomepath Pty LimitedSeries 2008-1D SWAN TrustIWL Broking Solutions LimitedSeries 2010-1 SWAN TrustIWL LimitedSeries 2010-2 SWAN TrustMedallion Trust Series 2005-1GSeries 2011-1 SWAN TrustMedallion Trust Series 2005-2GSecurity Holding Investment Entity Linking Deals LimitedMedallion Trust Series 2006-1GWallaby Warehouse Trust No.1(b) Insurance and Funds ManagementAvanteos Investments LimitedColonial Holding Company LimitedAvanteos Pty LtdCommonwealth Financial Planning LimitedCapital 121 Pty LimitedCommonwealth Insurance Holdings LimitedColonial Finance LimitedCommonwealth Insurance LimitedColonial First State Asset Management (Australia) LimitedCommonwealth Managed Investments LimitedColonial First State Group LimitedCount Financial LimitedColonial First State Investments LimitedFinancial Wisdom LimitedColonial First State Property LimitedFirst State Investment Managers (Asia) LimitedCFS Property Management TrustJacques Martin Administration and Consulting Pty LtdColonial First State Property Retail TrustThe Colonial Mutual Life Assurance Society Limited Notes to the Financial Statements Note 48 Controlled Entities (continued) (a) Material Subsidiaries (continued) The Group also consolidates a number of unit trusts as part of the ongoing investment activities of the life insurance and wealth businesses. These investment vehicles are excluded from the above list. (b) Disposal of Controlled Entities There have been no controlled entities disposed of during the year. The Group disposed of certain St Andrew’s operations effective 1 July 2010. For further details refer to Note 45(c). Annual Report 2013 183 Extent of BeneficialEntity Name Interest if not 100%Incorporated inNew Zealand(a) BankingAegis LimitedNew Zealand ASB Bank LimitedNew Zealand ASB Covered Bond Trustee LtdNew Zealand ASB Finance LimitedNew Zealand ASB Funding LimitedNew Zealand ASB Group Investments LimitedNew Zealand ASB Holdings LimitedNew Zealand CBA Asset Holdings (NZ) LimitedNew Zealand CBA Funding (NZ) LimitedNew Zealand CBA USD Funding LimitedNew Zealand Medallion NZ Series Trust 2009-1RNew Zealand (b) Insurance and Funds ManagementASB Group (Life) LimitedNew Zealand Kiwi Property Management LimitedNew Zealand Sovereign Assurance Company LimitedNew Zealand Other Overseas(a) Banking CBA (Europe) Finance LimitedUnited Kingdom CBA Capital Trust IDelaware USA CBA Capital Trust IIDelaware USA CBA Funding Trust IDelaware USA CommBank Europe LimitedMalta CommCapital S.a.r.lLuxembourg CommInternational LimitedMalta CTB Australia LimitedHong Kong Newport LimitedMalta PT Bank Commonwealth97%Indonesia (b) Insurance and Funds ManagementFirst State Investment Management (UK) LimitedUnited Kingdom First State Investment Services (UK) LimitedUnited Kingdom First State Investments (Bermuda) LimitedBermuda First State Investments (Hong Kong) LimitedHong Kong First State Investments (Singapore)Singapore First State Investments (UK Holdings) LimitedUnited Kingdom First State Investments (UK) LimitedUnited Kingdom First State Investments Holdings (Singapore) LimitedSingapore First State Investments International LimitedUnited Kingdom PT Commonwealth Life80%Indonesia SI Holdings LimitedUnited Kingdom Notes to the Financial Statements Note 48 Controlled Entities (continued) (c) Transition to a Single Authorised Deposit-taking Institution with Bank of Western Australia Limited (Bankwest) On 1 October 2012 the Commonwealth Bank of Australia Limited and Bank of Western Australia Limited (Bankwest) commenced operating as a single Authorised Deposit-taking Institution (ADI). In conjunction with that process, the legal entity Bank of Western Australia Limited was deregistered and the Commonwealth Bank of Australia Limited became its successor in law. This resulted in all of Bankwest’s assets and liabilities (including all deposits, contracts and debt securities previously issued by Bankwest) becoming the Commonwealth Bank of Australia Limited’s assets and liabilities. All Bankwest directly owned subsidiaries became directly owned by the Commonwealth Bank of Australia Limited. Details of the impact of transferring the assets and liabilities of Bankwest to the Bank and the derecognition of the Bank’s investment in Bankwest are set out below: Note 49 Subsequent Events The Bank expects the DRP for the final dividend for the year ended 30 June 2013 will be satisfied in full by an on market purchase and transfer of shares of approximately $806 million. On 24 July 2013 the Bank submitted an indicative, non-binding proposal to the Commonwealth Managed Investments Limited (CMIL) Board to internalise the management of Commonwealth Property Office Fund (CPA) and CFS Retail Property Trust Group (CFX). The proposal in relation to CFX also incorporates CFX acquiring the wholesale property funds management business and integrated retail property management and development business owned by CBA. The Bank also submitted an indicative, non-binding proposal to the Kiwi Income Properties Limited (KIPL) Board to internalise the management of the Kiwi Income Property Trust (KIP). As at the date of this report, the financial effect of any transaction cannot be estimated. The Directors are not aware of any other matter or circumstance that has occurred since the end of the financial year that has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. 184 Commonwealth Bank of Australia 1 October 2012$MAssetsCash and liquid assets557Receivables due from other financial institutions2,749Derivative assets(104)Available-for-sale investments2Loans, bills discounted and other receivables66,563Shares in and loans to controlled entities(32,472)Property, plant and equipment262Intangible assets449Deferred tax assets469Other assets151Total assets38,626LiabilitiesDeposits and other public borrowings43,567Payables due to other financial institutions80Liabilities at fair value through Income Statement1Derivative liabilities(363)Due to controlled entities(7,656)Other provisions43Debt issues665Deferred tax liabilities292Bills payable and other liabilities75037,379Loan capital121Total liabilities37,500Net assets1,126Shareholders' EquityShare capital:Ordinary share capital-Other equity instruments-Reserves207Retained profits919Total Shareholders' equity1,126 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 2013 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 2013. Signed in accordance with a resolution of the Directors. D J Turner Chairman 13 August 2013 I M Narev Managing Director and Chief Executive Officer 13 August 2013 Annual Report 2013 185 Independent auditor’s report to the members of Commonwealth Bank of Australia Report on the financial report We have audited the accompanying financial report of Commonwealth Bank of Australia, which comprises the balance sheets as at 30 June 2013, and the income statements, the statements of comprehensive income, statements of changes in equity and statements 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 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 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 of Commonwealth Bank of Australia 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 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 186 Commonwealth Bank of Australia Independent auditor’s report to the members of Commonwealth Bank of Australia (continued) Auditor’s opinion In our opinion: (a) the financial report of Commonwealth Bank of Australia is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of Commonwealth Bank of Australia’s and the consolidated entity’s financial position as at 30 June 2013 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. (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 47 to 64 of the directors’ report for the year ended 30 June 2013. The directors of 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 Commonwealth Bank of Australia for the year ended 30 June 2013, complies with section 300A of the Corporations Act 2001. Matters relating to the electronic presentation of the audited financial report This auditor’s report relates to the financial report and remuneration report of Commonwealth Bank of Australia for the year ended 30 June 2013 included on Commonwealth Bank of Australia’s website. Commonwealth Bank of Australia’s directors are responsible for the integrity of Commonwealth Bank of Australia’s website. We have not been engaged to report on the integrity of this website. The auditor’s report refers only to the financial report and remuneration report named above. It does not provide an opinion on any other information which may have been hyperlinked to/from the financial report or the remuneration report. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial report and remuneration report to confirm the information included in the audited financial report and remuneration report presented on this website. PricewaterhouseCoopers Marcus Laithwaite Partner Sydney 13 August 2013 Annual Report 2013 187 Shareholding Information Top 20 Holders of Fully Paid Ordinary Shares as at 2 August 2013 Rank Name of Holder Number of Shares % 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 19 19 20 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited Cogent Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Bond Street Custodians Limited AMP Life Limited Australian Foundation Investment UBS Wealth Management Australia Milton Corporation Limited BNP Paribas Nominees Pty Limited Dawnraptor Pty.Limited Navigator Australia Limited Argo Investments Limited Invia Custodian Pty Limited UBS Nominees Pty Limited Nulis Nominees (Australian) Limited Questor Financial Services Mr Barry Martin Lambert 238,623,271 186,493,456 137,009,826 71,997,100 31,956,078 16,977,575 15,689,114 14,023,354 8,482,900 6,087,323 3,029,225 2,988,966 2,747,995 2,625,492 2,577,895 2,429,464 2,208,536 2,182,498 2,132,891 1,643,613 14.80 11.57 8.50 4.47 1.98 1.05 0.97 0.87 0.53 0.38 0.19 0.19 0.17 0.16 0.16 0.15 0.14 0.14 0.13 0.10 The top 20 shareholders hold 751,906,572 shares which is equal to 46.65% of the total shares on issue. Stock Exchange Listing The shares of the Commonwealth Bank of Australia (Bank) 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 is not currently in the market conducting an on market buy-back of its shares. Range of Shares (Fully Paid Ordinary Shares and Employee Shares): 2 August 2013 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 Percentage of Shareholders Number of Shares 579,301 181,489 17,618 7,484 208 786,100 12,118 73.69 23.09 2.24 0.95 0.03 100.00 1.54 189,740,277 377,105,938 120,556,249 141,257,631 783,268,741 1,611,928,836 37,758 Percentage of Issued Capital 11.77 23.40 7.48 8.76 48.59 100.00 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. 188 Commonwealth Bank of Australia Top 20 Holders of Perpetual Exchangeable Repurchaseable Listed Shares III (“PERLS III”) as at 2 August 2013 Rank Name of Holder Number of Shares % Shareholding Information 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 19 19 20 UBS Wealth Management Australia AMP Life Limited National Nominees Limited Citicorp Nominees Pty Limited J P Morgan Nominees Australia Limited Navigator Australia Limited Mr Walter Lawton and Mrs Jan Rynette Lawton Nulis Nominees (Australia) Limited The Australian National University RBC Dexia Investor Services HSBC Custody Nominees Australia Limited Catholic Education Office Diocese of Parramatta ANZ Executors & Trustee Company Limited Truckmate (Australia) Pty Limited Kerlon Pty Limited BNP Paribas Noms Pty Limited Mutual Trust Pty Limited Mifare Pty Limited UCA Cash Management Fund Limited Fleischmann Holdings Pty Limited 226,048 135,309 113,824 111,842 90,994 74,728 70,000 57,793 56,282 56,021 54,063 49,750 38,232 35,000 30,000 29,781 29,386 25,000 25,000 22,500 3.88 2.32 1.95 1.92 1.56 1.28 1.20 0.99 0.97 0.96 0.93 0.85 0.66 0.60 0.51 0.51 0.50 0.43 0.43 0.39 The top 20 PERLS III shareholders hold 1,331,553 shares which is equal to 22.84% of the total shares on issue. Stock Exchange Listing PERLS III are preference shares issued by Preferred Capital Limited (a wholly-owned entity of the Bank). They are listed on the Australian Securities Exchange under the trade symbol PCAPA. Details of trading activity are published in most daily newspapers. Range of Shares (PERLS III): 2 August 2013 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 17,698 525 33 34 3 18,293 21 Percentage of Shareholders 96.74 2.87 0.18 0.19 0.02 100.00 0.11 Number of Shares 3,056,363 1,014,203 249,696 1,036,838 475,181 5,832,281 40 Percentage of Issued Capital 52.40 17.39 4.28 17.78 8.15 100.00 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 188 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. Annual Report 2013 189 Shareholding Information Top 20 Holders of Perpetual Exchangeable Resaleable Listed Securities V (“PERLS V”) as at 2 August 2013 Rank Name of Holder 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 19 19 20 Bond Street Custodians Limited UBS Wealth Management Australia Questor Financial Services Navigator Australia Limited HSBC Custody Nominees (Australia) Limited Nulis Nominees (Australia) Limited Australian Executor Trustees Limited RBC Dexia Investor Services Australia Nominees Pty Limited J P Morgan Nominees Australia Limited Netwealth Investments Limited National Nominees Limited Dimbulu Pty Limited Invia Custodian Pty Limited Citicorp Nominees Pty Limited Avanteos Investments Limited Pershing Australia Nominees Pty Limited JMB Pty Ltd Peters (Meat) Export Pty Limited Gyor Investments Pty Limited MR Terrence Elmore Peabody and MRS Mary Genevive Peabody Number of Securities % 348,746 272,500 204,310 127,381 119,074 99,262 90,321 90,288 88,183 64,111 51,057 50,000 48,564 37,099 35,833 35,422 33,925 28,455 25,000 25,000 3.49 2.73 2.04 1.27 1.19 0.99 0.90 0.90 0.88 0.64 0.51 0.50 0.49 0.37 0.36 0.35 0.34 0.28 0.25 0.25 The top 20 PERLS V security holders hold 1,874,531 securities which is equal to 18.73% of the total securities on issue. Stock Exchange Listing PERLS V are stapled securities comprising an unsecured subordinated note issued by the Bank’s New Zealand branch and a preference share issued by the Bank. They are listed on the Australian Securities Exchange under the trade symbol CBAPA. Details of trading activity are published in most daily newspapers. Range of Shares (PERLS V): 2 August 2013 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 Security holders 32,402 1,013 65 42 4 33,526 4 Percentage of Security holders 96.65 3.02 0.19 0.13 0.01 100.00 0.00 Number of Securities 5,636,796 1,993,508 489,890 1,194,686 685,120 10,000,000 5 Percentage of Issued Capital 56.37 19.94 4.90 11.95 6.84 100.00 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 During the winding-up of the Bank. 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 188. 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. 190 Commonwealth Bank of Australia Top 20 Holders of Perpetual Exchangeable Resaleable Listed Securities VI (“PERLS VI”) as at 2 August 2013 Shareholding Information Rank Name of Holder 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 19 19 20 UBS Wealth Management Australia Bond Street Custodians Limited J P Morgan Nominees Australia Limited Questor Financial Services HSBC Custody Nominees (Australia) Limited Cogent Nominees Pty Limited National Nominees Limited Snowside Pty Limited UCA Cash Management Fund Limited Citicorp Nominees Pty Limited Dimbulu Pty Limited Eastcote Pty Limited Australian Executor Trustees Limited Invia Custodian Pty Limited Netwealth Investments Limited Nulis Nominees (Australia) Limited V S Access Pty Limited Wenthor Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Marento Pty Limited Number of Securities 1,147,762 558,150 364,337 289,589 221,586 178,570 166,647 156,818 135,000 102,260 100,000 100,000 92,110 89,313 88,844 85,092 80,000 80,000 73,787 52,916 % 5.74 2.79 1.82 1.45 1.11 0.89 0.83 0.78 0.68 0.51 0.50 0.50 0.46 0.45 0.44 0.43 0.40 0.40 0.37 0.26 The top 20 PERLS VI security holders hold 4,162,781 securities which is equal to 20.81% of the total securities on issue. Stock Exchange Listing PERLS VI are unsecured subordinated notes issued by the Bank. They are listed on the Australian Securities Exchange under the trade symbol CBAPC. Details of trading activity are published in most daily newspapers. Range of Shares (PERLS VI): 2 August 2013 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 Security holders 25,054 2,524 205 95 8 27,886 - Percentage of Security holders 89.84 9.05 0.74 0.34 0.03 100.00 0.00 Number of Securities 7,984,496 5,356,843 1,558,659 2,557,116 2,542,886 20,000,000 - Percentage of Issued Capital 39.92 26.78 7.79 12.79 12.72 100.00 0.00 PERLS VI do not confer any voting rights in the Bank but if they are exchanged for 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 188 for the Bank’s ordinary shares. 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 converted 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 188 for the Bank’s ordinary shares and page 189 for the preference shares. Annual Report 2013 191 International Representation First State Investments Level 17, 599 Lexington Avenue New York NY 10022 Telephone: +1 212 848 9200 Facsimile: +1 212 336 7758 Managing Director, Americas James Twiss China CBA, Beijing Representative Office Unit 03C, 4-6,7B, Level 46 China World Tower, No. 1 Jian Guo Men Wai Avenue Beijing Telephone: +86 10 5680 3188 Facsimile: +86 10 5961 1916 China Chief Representative Tony Zhang 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 (Designate) Karen Chen CBA (Jiyuan) County Bank Co., Ltd. No.66, East Jishui Street, Jiyuan Henan Province 459000 Telephone: +86 391 556 5625 Facsimile: +86 391 556 5625 Managing Director Guo Wei CBA (Dengfeng) County Bank Co., Ltd. No. 1, Fu Lane 1, Songshan Road Dengfeng City, Henan Province 452470 Telephone: +86 371 6905 1006 Facsimile: +86 371 6905 1015 Managing Director Allen Li CBA (Lankao) County Bank Co., Ltd. East, Kaocheng Road, Lankao City Henan Province 475300 Telephone: +86 378 631 7888 Facsimile: +86 378 696 6997 Managing Director Allen Li CBA (Yichuan) County Bank Co., Ltd. No.132 East Side of North Wenhua Road Yichuan, Luoyang Henan Province 471300 Telephone: +86 379 6833 7161 Facsimile: +86 379 6833 7185 Managing Director Liqun Wei CBA (Mianchi) County Bank Co., Ltd. Store 2#-04&-05, Xinhua International Quarter Mianchi, Henan 472400 Telephone: +86 398 483 3908 Facsimile: +86 398 483 3906 Managing Director Liqun Wei CBA (Xinji) County Bank Co., Ltd. No. 1 Anding Avenue, Xinji, Hebei Province 052360 Telephone: +86 311 8349 7655 Facsimile: +86 311 8349 7655 Managing Director Chunsheng Li CBA (Yongnian) County Bank Co., Ltd. Jindi Ganden, Yingbin Street, Yongnian Hebei Province 057150 Telephone: +86 310 666 7300 Facsimile: +86 310 666 9566 Managing Director Chunsheng Li CBA (Cixian) County Bank Co., Ltd. No. 1 West Building, North Youyi Road Cixian, Hebei Province 056599 Telephone: +86 310 233 8015 Facsimile: +86 310 233 7999 Managing Director Chunsheng Li CBA (Wenxian) County Bank Co., Ltd. Level 1-2, AB#, Building 9. East TianciHuafu District, Wenquan town Wenxian, Henan Province, 454850 Telephone: +86 391 618 5007 Facsimile: +86 391 618 5060 Managing Director Fushan Wang CBA (Yongcheng) County Bank Co., Ltd. Shop 1#2#3#, Eurasian Sunshine Garden, Ouya road, Dongcheng District, Yongcheng, Henan Province, 476600 Telephone: +86 370 501 7916 Facsimile: +86 370 501 7910 Managing Director Fushan Wang CommBank Management Consulting (Shanghai) Co. Ltd 11F Azia Centre 1233 Lujiazui Ring Road, Pudong Shanghai 200120 Telephone: +86 21 6058 0100 Facsimile: +86 21 6168 3298 Executive General Manager China Karen Chen 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 ASB North Wharf 12 Jellicoe Street Auckland Central Auckland 1010 Telephone: +64 9 377 8930 Chief Executive Officer Barbara Chapman Sovereign Assurance Company Limited Level 4, Sovereign House 74 Taharoto Road, Takapuna, Auckland 0622 Telephone: + 64 9 487 9000 Managing Director Symon Brewis-Weston Colonial First State Global Asset Management Kiwi Income Property Trust Level 14, DLA Phillips Fox Tower National Bank Centre 205-209 Queen Street Auckland 1010 Telephone: +64 9 359 4000 Facsimile: +64 9 359 3997 Chief Executive Officer Chris Gudgeon First State Investments Level 3, 33-45 Hurstmere Road Takapuna Auckland 0622 Telephone: +64 9 448 4922 Facsimile: +64 9 486 7131 Managing Director, Asia Pacific Michael Stapleton Americas United States CBA Branch Office Level 17, 599 Lexington Avenue New York NY 10022 Telephone: +1 212 848 9200 Facsimile: +1 212 336 7758 Executive Vice President and General Manager, Americas Fiamma Morton 192 Commonwealth Bank of Australia International Representation 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 Managing Director, Asia Pacific Michael Stapleton Hong Kong CBA Branch Office 1501-5, Charter House 8 Connaught Road, Central Hong Kong Telephone: +852 2844 7500 Facsimile: +852 2845 9194 Executive General Manager Corporate and Institutional Banking Asia James Rickward First State Investments 6th Floor, Three Exchange Square 8 Connaught Place, Central Hong Kong Telephone: +852 2846 7555 Facsimile: +852 2868 4742 Managing Director, Asia Pacific Michael Stapleton India CBA Mumbai Branch Level 2, Hoechst House Nariman Point Mumbai 400021 Telephone: +91 22 6139 0100 Facsimile: +91 22 6139 0200 Chief Executive Officer Ravindra Parakushan 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 First State Investments 29th Floor, Gedung Artha Graha Sudirman Central Business District Jl. Jend. Sudirman Kav. 52-53 Jakarta 12190 Telephone: +62 21 2935 3300 Facsimile: +62 21 2935 3388 Managing Director, Asia Pacific Michael Stapleton 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 First State Investments 8th Floor, Toranomon Waiko Building 12-1 Toranomon 5-chome Minato-ku, Tokyo 105-0001 Telephone: +81 3 5402 4831 Facsimile: +81 3 5402 4839 Managing Director, Asia Pacific Michael Stapleton 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 One Temasek Avenue #17-01 Millenia Tower Singapore 039192 Telephone: +65 6538 0008 Facsimile: +65 6538 0800 Managing Director, Asia Pacific Michael Stapleton Vietnam CBA Representative Office Suite 202-203A Central Building 31 Hai Ba Trung, Hanoi Telephone: +84 4 3824 3213 Facsimile: +84 4 3824 3961 Chief Representative and Director of Investment and Banking Hanh Nguyen CBA HCMC Branch office Ground Floor Han Nam Office 65 Nguyen Du St., Dist. 1 Ho Chi Minh City Telephone: +84 8 5445 2939 Facsimile: +84 8 5445 2942 General Director Ross Munn Europe United Kingdom CBA Branch Office Senator House 85 Queen Victoria Street London EC4V 4HA Telephone: +44 20 7710 3999 Facsimile: +44 20 7710 3939 Regional General Manager Europe Paul Orchart First State Investments 3rd Floor, 30 Cannon Street London EC4M 6YQ Telephone: +44 0 20 7332 6500 Facsimile: +44 0 20 7332 6501 Managing Director, EMEA Chris Turpin Scotland First State Investments 23 St Andrew Square Edinburgh EH2 1BB Telephone: +44 0 131 473 2200 Facsimile: +44 0 131 473 2222 Managing Director, EMEA Chris Turpin Germany First State Investments Westhafen Tower Westhafenplatz 1 60327 Frankfurt a.M. Telephone: +49 0 69 710456 - 302 Managing Director, EMEA Chris Turpin Malta CommBank Europe Limited Level 3 Strand Towers 36 The Strand Sliema SLM1022 Telephone: +356 2132 0812 Facsimile: +356 2132 0811 Director/Chief Financial Officer John Kiddier France First State Investments 15, Avenue d’Eylau 75016 Paris Telephone: +33 1 7302 4674 Managing Director, EMEA Chris Turpin Annual Report 2013 193 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. 1300 245 463 (1300 AGLINE) AgriLine 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), visit or Monday www.commbank.com.au/commonwealthprivate Friday to 132 015 Commonwealth Financial Services For enquiries on retirement and superannuation products, or managed to 6pm investments. Available (Sydney Time), Monday to Friday. from 8.30am 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. 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 or investment home loan or to maintain an existing loan. Available from 8am to 8pm, 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 If you would like to pay us a compliment or are dissatisfied with any aspect of the service you have received. Internet Banking You can apply for a home loan, credit card, personal loan, term deposit or a savings account on the internet by visiting our website at www.commbank.com.au available 24 hours a day, 7 days a week. Do your everyday banking on our internet banking service NetBank at www.commbank.com.au/netbank available 24 hours a day, 7 days a week. To apply for access to NetBank, call 132 828. Available 24 hours a day, 7 days a week. Do your business banking on our Business Internet Banking Service CommBiz at www.commbank.com.au/CommBiz available 24 hours a day, 7 days a week. To apply for access to CommBiz, call 132 339. Available 24 hours a day, 7 days a week. Special Telephony Services Customers who are hearing or speech impaired can contact us via the National Relay Service (www.relayservice.com.au) (24 hours a day, 7 days a week). Telephone Typewriter (TTY) service users can be connected to any of our telephone numbers via 133 677. Speak and Listen (speech-to-speech relay) users can also connect to any of our telephone numbers by calling 1300 555 727. Internet relay users can be connected to our telephone numbers via National Relay Service. 131 519 CommSec (Commonwealth Securities) CommSec provides the information and tools to make smart investment easy, accessible and affordable for all Australians, by phone or Internet at www.commsec.com.au. 194 Commonwealth Bank of Australia Registered Office Ground Floor, Tower 1 201 Sussex Street Sydney NSW 2000 Telephone +61 2 9378 2000 Facsimile +61 2 9118 7192 Company Secretary Margaret Taylor Shareholder Information www.commbank.com.au/shareholder Share Registrar Link Market Services Limited Level 12 680 George Street SYDNEY NSW 2000 Telephone: 1800 022 440 Facsimile: +61 2 9287 0303 Internet: www.linkmarketservices.com.au Email: cba@linkmarketservices.com.au Telephone numbers for overseas shareholders New Zealand 0800 442 845 United Kingdom 0845 640 6130 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. Corporate Directory Annual Report 2013 195 CBA1421 010912 CBA1421 190813
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