Westpac Banking
Annual Report 2013

Plain-text annual report

2013 ANNUAL REPORT THE STRENGTH WE’VE BUILT TODAY IS DELIVERED IN OUR RESULTS. STRENGTH RETURN GROWTH PRODUCTIVITY WESTPAC BANKING CORPORATION ABN 33 007 457 141 Since our inception in 1817 we’ve built a legacy of leadership. In a young colony, through a great depression, through boom years, through a global fi nancial crisis and in the development of a portfolio of businesses, Westpac has a history of looking ahead with a long-term view. This report to shareholders, which will be lodged with the Australian Securities Exchange and the Australian Securities and Investments Commission, is also available on our website www.westpac.com.au/investorcentre For more information about Westpac refer to ‘Section 1’ and ‘Contact Us’, or visit www.westpac.com.au/investorcentre The Westpac Group Annual Report and The Westpac Group Annual Review and Sustainability Report represent Westpac’s extended reporting framework. 2013 ANNUAL REVIEW AND SUSTAINABILITY REPORT 2013 ANNUAL REPORT THE STRENGTH WE’VE BUILT TODAY… THE STRENGTH WE’VE BUILT TODAY IS DELIVERED IN OUR RESULTS. STRENGTH RETURN GROWTH PRODUCTIVITY STRENGTH RETURN GROWTH PRODUCTIVITY TABLE OF CONTENTS In this Annual Report a reference to ‘Westpac’, ‘Group’, ‘Westpac Group’, ‘we’, ‘us’ and ‘our’ is to Westpac Banking Corporation ABN 33 007 457 141 and its subsidiaries unless it clearly means just Westpac Banking Corporation. For certain information about the basis of preparing the financial information in this Annual Report see ‘Reading this report’ in Section 2. In addition, this Annual Report contains statements that constitute ‘forward-looking statements’ within the meaning of section 21E of the US Securities Exchange Act of 1934. For an explanation of forward-looking statements and the risks, uncertainties and assumptions to which they are subject, see ‘Reading this report’ in Section 2. Information contained in or accessible through the websites mentioned in this Annual Report does not form part of this report unless we specifically state that it is incorporated by reference and forms part of this report. All references in this report to websites are inactive textual references and are for information only. Annual Report Performance highlights Section 1 Chairman’s report Chief Executive Officer’s report Information on Westpac Business strategy Westpac’s approach to sustainability Five year non-financial summary Outlook Significant developments Corporate governance Directors’ report Remuneration report Section 2 Five year summary Reading this report Review of Group operations Income statement review Balance sheet review Capital resources Divisional performance Australian Financial Services Westpac Retail & Business Banking St.George Banking Group BT Financial Group (Australia) Westpac Institutional Bank Westpac New Zealand Other divisions Risk and risk management Risk factors Risk management Credit risk Liquidity risk Market risk Operational and compliance risk Other risks Other Westpac business information Section 3 Financial statements Notes to the financial statements Statutory statements 2 3 4 6 8 8 11 14 16 17 25 44 56 77 78 79 81 83 88 91 93 96 96 98 100 101 102 104 105 105 110 110 112 113 114 114 117 119 120 125 284 Section 4 Shareholding information Additional information Information for shareholders Glossary of abbreviations and defined terms Contact us 291 292 301 305 307 Inside back cover 1 2 3 4 2013 WESTPAC GROUP ANNUAL REPORT 1 PERFORMANCE HIGHLIGHTS Net profit after tax $6,816 million, up 14% Dividends $1.74, up 5%, plus special dividend Net profit after tax1,7 ($m) Dividend per ordinary share (cents) Special dividend 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 – 1 9 9 , 6 6 4 3 , 6 0 7 9 , 5 6 1 8 , 6 9 3 5 , 2 8 9 6 , 2 1 7 0 , 3 1 5 4 , 3 9 5 8 , 3 6 4 4 , 3 04 05 06 07 08 09 10 11 12 13 200 180 160 140 120 100 80 60 40 20 – 6 8 0 0 1 6 1 1 2 4 1 1 3 1 9 3 1 6 1 1 0 2 4 7 1 6 6 1 6 5 1 04 05 06 07 08 09 10 11 12 13 Cash Earnings $7,097 million, up 8% Returns 16.0% Cash Earnings5,7,8,9 ($m) Cash Earnings to average ordinary equity5,7,8,9 (%) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 – 9 5 5 , 2 04 7 9 0 , 7 1 0 3 , 6 8 9 5 , 6 9 7 8 , 5 5 7 6 , 4 7 4 0 , 7 5 0 5 , 3 4 0 8 , 2 9 7 0 , 3 05 06 07 08 09 10 11 12 13 25 20 15 10 5 – 4 . 1 2 2 . 2 2 0 . 3 2 8 . 3 2 3 . 2 2 1 . 6 1 0 . 6 1 5 . 5 1 0 . 6 1 0 . 4 1 04 05 06 07 08 09 10 11 12 13 Cash Earnings per ordinary share up 6% Cash Earnings per ordinary share5,7,8,9 (cents) 250 200 150 100 50 – 2 . 7 6 1 5 . 1 5 1 6 . 8 3 1 4 . 9 8 1 3 . 8 9 1 8 . 7 9 7 1 . 3 6 1 3 . 9 0 2 9 . 5 1 2 9 . 8 2 2 04 05 06 07 08 09 10 11 12 13 2013 2012 % change 2013 / 2012 Reported earnings Net profit after tax1 ($m) Earnings per share (cents) Dividends per share (cents) Special dividend per share (cents) Return on equity2 (%) Expense to income ratio (%) Common Equity tier 1 capital ratio (%)3 Asset quality ratio4 (%) Cash basis5,8,9 Cash Earnings ($m) Cash Earnings per share (cents) Cash return on equity2 (%) Economic profit6 ($m) 6,816 220.4 174 20 15.4 42.5 9.1 4.1 7,097 228.9 16.0 4,113 5,970 195.8 166 - 14.0 44.0 8.2 5.6 6,598 215.9 15.5 3,556 14 13 5 - 136bps 145bps 94bps 150bps 8 6 51bps 16 1 Net profit attributable to equity holders. 2 Return on average ordinary equity. 3 2012 ratio has been presented on a pro-forma Basel III basis, as Basel III was not effective in Australia until 1 January 2013. 4 Net impaired assets to equity and collectively assessed provisions. 5 The adjustments to our reported results to derive Cash Earnings are described in Note 32 of our 2013 Financial Statements. 6 Economic profit represents the excess of adjusted Cash Earnings over a minimum required rate of return on equity invested. For this purpose, adjusted Cash Earnings is defined as Cash Earnings plus the estimated value of franking credits paid to shareholders. The calculation of economic profit is described in more detail in Section 10 of Westpac’s Full Year 2013 Results (incorporating the requirements of Appendix 4E) lodged with the ASX on 4 November 2013 (the ‘ASX Announcement’). 7 Figures for 2004 are presented on an AGAAP basis; figures for 2005–2013 inclusive are prepared on an A-IFRS basis, so they are not directly comparable. 8 Figures for 2009 (and for Cash Earnings in 2008 only), are presented on a ‘pro forma’ basis, that is, as if the merger between Westpac and St.George Bank Limited was completed on 1 October 2007. The basis of presentation of the pro forma results is explained in more detail in Section 2.1 of the Full Year 2009 Results (incorporating the requirements of Appendix 4E) lodged with the ASX on 4 November 2009 and that section of the ASX Announcement is incorporated by reference into this Annual Report. 9 Cash Earnings for 2009 has been restated to exclude the impact of fair value adjustments related to the St.George merger. For further information refer to Note 32 to the financial statements in Westpac’s Annual Report 2010. 2 2013 WESTPAC GROUP ANNUAL REPORT 1 PERFORMANCE HIGHLIGHTS CHAIRMAN’S REPORT CHIEF EXECUTIVE OFFICER’S REPORT INFORMATION ON WESTPAC CORPORATE GOVERNANCE DIRECTORS’ REPORT REMUNERATION REPORT CHAIRMAN’S REPORT Westpac’s strength has delivered significant value to shareholders in 2013. The 2013 financial year has been a period of significant achievement and positive shareholder returns for the Westpac Group. From a performance perspective, Cash Earnings1 increased by a strong 8%, while at the same time we further strengthened the balance sheet and completed a number of important strategic milestones. Shareholders have seen very good returns with the share price increasing 32% for the year to 30 September 2013, well above the rise in both the ASX 200 and the banking sector indices. At the same time, the Board has continued to steadily increase ordinary dividends, up 8 cents per share to 174 cents per share (up 5%) as well as announcing a further 20 cents per share in special dividends. With the improvement in the share price this is a total return to shareholders of 39.5% over the financial year. Strong financial results Continued steady earnings have underpinned the returns, with 2013 Cash Earnings of $7,097 million an increase of 8% over the previous year. Earnings per share were similarly solid at 228.9 cents, rising 6%. We believe that Cash Earnings is the most appropriate measure for assessing our annual financial performance and is also a key measure used by the Board to determine dividends. For shareholders’ further reference, reported profit growth was somewhat higher than Cash Earnings growth this year, rising 14% to $6,816 million. The Cash Earnings result was supported by a 4% rise in revenue and a pleasing reduction in impairment charges. This performance reflects our success in implementing our strategy of building deep relationships across the Group, as well as the strength of our management team. Lindsay Maxsted Chairman The strength we’ve built today… Throughout this Annual Report we highlight the significant strengthening of the organisation over recent years, which positions us well to continue building shareholder wealth. We have used the opportunity to take learnings from the Global Financial Crisis and we have materially reshaped and strengthened our balance sheet to further protect the Group from external shocks. More specifically:  Westpac’s capital levels are now at the upper end of peers both globally and locally, with our common equity Tier 1 ratio at 9.1%, a level that is up almost a full percentage point over the year;  The Group’s funding position has strengthened, with the customer deposit to loan ratio climbing from 68% to 71%, and liquid assets rising to $126 billion; and  Asset quality has materially improved, with stressed assets to total committed exposures falling 57 basis points over the year to 1.6%. This is half the level encountered at the stress peak in 2010. The operational strength of the company has also improved. We have largely completed our $2 billion strategic investment priorities program, known as SIPs. Through this program we have substantially upgraded the stability and functionality of our systems which are supporting a much better experience for customers. Helping us lead tomorrow Our strong position today puts Westpac in an excellent position to take advantage of opportunities as they arise. In October, we announced the agreement to acquire selected assets of Lloyds Banking Group Australia for $1.45 billion. The assets are a very good strategic fit for us, lifting our Australian business banking assets by around 6%. From a shareholder perspective, the acquisition is expected to be earnings per share accretive by the end of the Group’s 2014 financial year and will be financed from internal resources. Final settlement is expected at the end of December 2013. 1 Results refer to Cash Earnings unless otherwise stated. For an explanation of Cash Earnings see footnote 5 of the ‘Performance highlights’ section of this Annual Report. 4 2013 WESTPAC GROUP ANNUAL REPORT Shareholders will appreciate the changes occurring across our economy, across our industry and in the way customers and our employees work, trade and interact. The repositioning of the Westpac Group in response to these changes is well underway as, for example more and more of our interactions move to enhanced online and mobile channels. We are also reshaping our branch network from transaction centres to sales and support hubs. This involves new layouts, enhanced technology, including self-serve options, and investment in our people. 2014 will also see the roll-out of our new mobile and online platform that will change the way customers manage their finances. At the same time, we are investing heavily in those areas of greatest growth and opportunity, including in wealth management and in our ability to capture the increased flows and connectivity between Asia and Australia/New Zealand. During 2013 we refreshed our sustainability strategy, outlining the areas where we are directing our efforts to make a meaningful difference. Supported by 10 specific objectives, we have made good progress, including in workforce diversity, allocating up to $6 billion to fund CleanTech and environmental projects, and the launch of new products to help customers achieve a more financially secure retirement. These developments position Westpac to positively benefit from the changing environment. CHAIRMAN’S REPORT Changes to the Board We have continued our process of Board renewal over the year, with Ewen Crouch and Peter Marriott joining the Board. Ewen brings extensive local and international business experience as one of Australia’s most experienced corporate lawyers, while Peter’s 30 years of experience in senior management roles in the finance industry will also be very valuable to the Board. 1 Peter Wilson retired from the Board during the year and Gordon Cairns has announced that he will step down from the Board after our 2013 AGM. We recognised Peter’s contribution at the 2012 AGM. Gordon’s deep business experience, pragmatic approach and his industry experience have been great assets for the Group. We thank Gordon and Peter for their contributions and wish them well. Outlook Looking ahead, we remain positive about the outlook for Australia as the economy continues to emerge from a prolonged period of low business and consumer confidence. Overall growth in Australia is likely to remain modest in the short term however, as mining investment slows and the fiscal constraints of many developed nations inhibit any material external growth stimulus. At the same time, we expect the transformation of our industry to continue as demographic shifts, heightened use of digital communications and the rise of Asia continue to reshape the operating environment. Given the strength we have built into our business and the proven momentum across all of our divisions, together with the substantial investments already underway, the Westpac Group remains well positioned to continue to meet the needs of our 12 million customers and to deliver sound, high quality returns to shareholders. Lindsay Maxsted Chairman 2013 WESTPAC GROUP ANNUAL REPORT 5 CHIEF EXECUTIVE OFFICER’S REPORT Gail Kelly Chief Executive Officer A SHARED FUTURE Every division across the Westpac Group has contributed to our strong performance in 2013, ensuring we are well- positioned for the future. A year of achievement I am delighted to report that 2013 has been a strong and successful year for the Westpac Group. We have delivered a high quality financial performance, further deepened customer relationships, strengthened the balance sheet and made significant strategic progress. This progress sets us up very well to continue to deliver on our strategy of becoming a more customer-centric organisation and improving returns for shareholders. Consistent financial results The strong increase in Cash Earnings1 of 8% in 2013 continues the consistent theme we have achieved over the last five years, with Cash Earnings growth averaging 7% per annum over this period. Each of our customer facing divisions and each of our brands supported our result with improved cash earnings and core earnings. Revenue increased 4%, reflecting a focus on disciplined growth in target areas, including deposits, trade finance, natural resources, Asia and in our expanding Bank of Melbourne franchise. Despite intense competition, net interest margins were well managed, coming in two basis points lower over the year. If Treasury and Markets income, which is more volatile, is excluded, margins increased one basis point on a Cash Earnings basis. We have managed expenses well and remain the most efficient Australian bank in the region with a cost to income ratio of 40.9%. We have achieved this while continuing to substantially invest in our businesses. 1 For an explanation of Cash Earnings see footnote 5 of the ‘Performance highlights’ section of this Annual Report. Pleasingly, asset quality continues to be a highlight, with both impaired assets and stressed assets continuing to decline. This improvement has contributed to a $365 million reduction in impairment charges over the year. All divisions performing Not only are all divisions performing strongly but they are also working well together to build the best solutions for customers. Whether it is a bank customer needing help with superannuation and insurance, or a small business looking to protect its business from currency or interest rate fluctuations, we provide a one team approach with integrated solutions. The results from our Australian Financial Services division were a standout, with cash earnings rising 12%. St.George Banking Group continued its momentum, leading the way with a 17% uplift in cash earnings. Its portfolio of brands – St.George, BankSA, Bank of Melbourne and RAMS – is a strong competitive advantage for us. Our Bank of Melbourne investment has been particularly successful and the business is carving out its niche as the bank for Victorians. Bank of Melbourne recently celebrated its second anniversary, and its growth and returns have exceeded our expectations. Westpac Retail & Business Banking has once again performed well, with a 9% uplift in cash earnings. The division has a very strong franchise and this has been reflected in the consistency of returns over the past four years. BT Financial Group, our wealth and insurance division, also performed strongly, with cash earnings up a strong 13%. 6 2013 WESTPAC GROUP ANNUAL REPORT CHIEF EXECUTIVE OFFICER’S REPORT 1 A particular highlight this year has been the high level of employee engagement. Our people are deeply committed to the Group’s vision and purpose, in essence helping our customers and our communities to prosper and grow. Creating a workforce that reflects the attitudes and needs of the communities in which we operate is a priority for us. To that end, we are leading the way with programs to support older employees, carers and those with disabilities including by providing more flexible work. The success of these programs has been reflected in the further rise in employee engagement to 87%, a level above global high performing companies2. We continue to play a leading role in gender diversity, with women accounting for 42% of our senior management team, up from 32% three years ago. Our 40 year partnership with the Westpac Rescue Helicopters has perhaps been our most visible partnership and we have further extended our support to Indigenous communities in Cape York and Redfern, including our support for the Empowered Communities Group through our partnership with Jawun. I continue to be impressed by the compassion and willingness shown by our people to volunteer and assist in recovery efforts following devastating bushfires and floods throughout the year. These events have again demonstrated the value of our continuing strong partnerships with organisations which are critical in times of community need, including our relationship of more than 120 years with Salvation Army and our 30 year partnership with Mission Australia. Leading tomorrow The success of Westpac over many years could not have been achieved without the support and dedication of our 36,000 people and my thanks go out to all of them. We will continue to invest in and develop our people because it is these individuals, collectively, with their courage and their passion that differentiates the Westpac Group. I would also like to thank our customers for their ongoing support – we strive every day to help you prosper and grow. Finally, thanks to you our shareholders. We greatly value your support and we will continue to work hard to further enhance the value and returns from your investment in us. A key element of the Westpac strategy is that banking, wealth management and insurance are closely linked; customers would like their financial needs to be addressed in an integrated way, and we aim to deliver our Group’s products and services to help them achieve that. Our success in integrated service delivery has underpinned BTFG’s robust performance. Our Institutional Bank maintained its lead position in the market this year and delivered a 11% uplift in cash earnings. We have been recognised as the Lead Domestic Transactional bank for the 10th consecutive year, and have been recognised as number 1 for Lead Relationship Bank in Australia for the last 2 years1. Our Westpac New Zealand business is an important contributor, delivering a 9% uplift in cash earnings in NZ dollars. This business has become an innovation hub for us, with initiatives including the redesign of its branch network and its use of technology to better support customers. Many of these initiatives are now being applied in our Australian operations. Westpac Pacific Banking also had a good year. While relatively small in its contribution, it has a big impact across the regions in which it operates. This division is helping communities in the Pacific Islands with new low-cost technologies, making banking more accessible, and is assisting in the economic development of the region. Clear strategic priorities I have been very pleased with the progress we have made on the strategic priorities I outlined last year. Nevertheless significant opportunities remain for the Group which we will actively pursue. We provide more detail on our strategic priorities throughout this report and I would like to call out a few highlights. Our first priority has been to remain strong. 2013 has been a year of great progress here and the Chairman’s Report has already covered this in some detail. On growth, we have been disciplined and targeted in our approach; focusing on those areas with the strongest growth profile, including customer deposits, Asian trade finance and wealth management. We continue to direct our investment spending to those areas that make the most difference for our customers. For example in 2013, we commenced the development of a new wealth platform and will shortly launch our new mobile and online banking platform, an internet banking service that will materially improve and simplify the way customers manage their finances. Gail Kelly Chief Executive Officer 1 Peter Lee Associates Large Corporate and Institutional Transactional Banking Survey Australia. Rank vs. top 4. Quantitative measures from 590 votes in 2013. Westpac ranks no. 1 for citations as ‘lead’ domestic transactional bank from 2004-2013. Westpac ranks no. 1 in the Peter Lee Associates relationship strength index score across the total respondent base. 2 Towers Watson High Performing Norm for People Leaders. 2013 WESTPAC GROUP ANNUAL REPORT 7 INFORMATION ON WESTPAC Westpac is one of the four major banking organisations in Australia and one of the largest banking organisations in New Zealand. We provide a broad range of banking and financial services in these markets, including retail, business and institutional banking and wealth management services. We have branches, affiliates and controlled entities1 throughout Australia, New Zealand and the Pacific region, and maintain branches and offices in some of the key financial centres around the world2. We were founded in 1817 and were the first bank established in Australia. In 1850 we were incorporated as the Bank of New South Wales by an Act of the New South Wales Parliament. In 1982 we changed our name to Westpac Banking Corporation following our merger with the Commercial Bank of Australia. On 23 August 2002, we were registered as a public company limited by shares under the Australian Corporations Act 2001 (Cth) (Corporations Act). As at 30 September 2013, our market capitalisation was $101.8 billion3 and we had total assets of $697 billion. Business strategy Westpac’s vision is ‘To be one of the world’s great companies, helping our customers, communities and people to prosper and grow’. Our strategy seeks to deliver on this vision by providing superior returns for our shareholders, building deep and enduring customer relationships, being a leader in the community and being a place where the best people want to work. In delivering on our strategy we are focused on our core markets including Australia and New Zealand, where we provide a comprehensive range of financial products and services that assist us in meeting all the financial services needs of our customers. With our strong position in these markets, and over 12 million customers, our focus is on organic growth, growing customer numbers in our chosen segments and building stronger and deeper customer relationships. A key element of this approach is our portfolio of financial services brands, which enables us to appeal to a broader range of customers, and provides us with the strategic flexibility to offer solutions that better meet individual customer needs. Asia is an important market for us and we are progressively building our presence and capability across the region to better support Australian and New Zealand customers operating, trading and transacting in the region, along with Asian customers seeking financial solutions and services in Australia and New Zealand. While we continue to build the business, the financial services environment remains challenging and has required us to maintain focus on strengthening our financial position while at the same time improving efficiency. This strengthening has involved lifting the level and quality of our capital, improving our funding and liquidity position and maintaining a high level of asset quality and provisioning. While we are currently one of the most efficient banks globally, as measured by a cost to income ratio, we continue to focus on ways to simplify our business to make it easier for customers to do business with us and to make work more enjoyable for our people. We believe that these improvement efforts also contribute to reducing unit costs that create capacity for further investment for growth. Sustainability is part of our strategy and supports our approach by anticipating and shaping the most pressing emerging social issues where we have the skills and experience to make a meaningful difference and drive business value. Our approach seeks to make sustainability part of the way we do business, embedded in our strategy, values, culture and processes. Supporting our customer focused strategy is a strong set of company-wide values, which are embedded in our culture. These are:  delighting customers;  one team;  integrity;  courage; and  achievement. 1 Refer to Note 38 to the financial statements for a list of our controlled entities as at 30 September 2013. 2 Contact details for our head office, major businesses and offshore locations can be found on the inside back cover. 3 Based on the closing share price of our ordinary shares on the ASX as at 30 September 2013. 8 2013 WESTPAC GROUP ANNUAL REPORT Strategic priorities To meet the challenges of the current environment and deliver on our strategy, we have a set of strategic priorities that are reviewed and refreshed each year. We will continue to manage these priorities in a balanced way with an appropriate mix of strength, growth, return and productivity. Our current strategic priorities are: a) A strong company  maintain strong levels of capital, to meet the needs of all our stakeholders and regulators;  continue to build on our funding and liquidity position, including ensuring a diversity of funding pools and optimising the composition of customer deposits in planning for new liquidity requirements; and  maintain a high quality portfolio of assets, coupled with strong provisioning. b) Grow in a targeted way  target investment in our wealth businesses, including continuing the development of a new funds platform;  deepen the capabilities of our Asian presence; and  expand and develop our business banking capability to better meet customer needs. c) Continue building deeper customer relationships  put customers at the centre of everything we do, with a focus on meeting their total financial needs, throughout their lives;  further build the connectivity between wealth, insurance and banking, and ensure we leverage capabilities across all business units;  continue to strengthen our corporate and institutional lead bank position through customer focus and enhanced product capabilities; and  use digital innovation to better meet customer demands. d) Materially simplify our products and processes  continue to enhance our digital offers to support more customers online and via mobile channels and assist the Group to move to smaller, more flexible and agile branch formats;  simplify our products and processes and continue to drive continuous improvement; and  focus on both revenue and cost productivity. e) One team approach  continue to focus on a customer centred, high performance workforce and culture;  strengthen the skills of our people to better support customers and meet their complete financial services needs;  empower our people to drive innovation, deliver new and improved ways of working and be responsive to change;  continue to enhance the diversity of our workforce; and  maintain a strong reputation and sustainability leadership. 1 INFORMATION ON WESTPAC Organisational structure Our operations comprise the following key customer-facing business divisions operating under multiple brands serving around 12 million customers1.  Australian Financial Services (AFS) is responsible for the Westpac Group’s Australian retail banking, business banking and wealth operations. AFS also includes the product and risk responsibilities for Australian Banking. It incorporates the operations of Westpac Retail & Business Banking (Westpac RBB), St.George Banking Group (St.George) and BT Financial Group (Australia) (BTFG), as follows: – Westpac RBB is responsible for sales and service for our consumer, small-to-medium enterprise (SME) customers, commercial and agribusiness customers (typically with turnover of up to $100 million) in Australia under the Westpac brand. Activities are conducted through Westpac RBB’s network of branches and business banking centres and specialised consumer and business relationship managers, with the support of cash flow, financial markets and wealth specialists, customer service centres, automatic teller machines (ATMs) and internet and mobile channels; – St.George is responsible for sales and service for consumer, business and corporate customers in Australia under the St.George, BankSA, Bank of Melbourne and RAMS brands. RAMS is a financial services group specialising in mortgages and online deposits. Consumer activities are conducted through a network of branches, third-party distributors, call centres, ATMs, EFTPOS terminals and internet banking services. Business and corporate customers (businesses with facilities typically up to $150 million) are provided with a wide range of banking and financial products and services including specialist advice for cash flow finance, trade finance, automotive and equipment finance, property finance, transaction banking and treasury services. Sales and service activities for business and corporate customers are conducted by relationship managers via business banking centres, internet and customer service centre channels; and – BTFG is Westpac’s Australian wealth division. BTFG’s funds management operations include the manufacturing and distribution of investment, superannuation and retirement products, investment platforms such as Wrap and Master Trusts, private banking, financial planning as well as margin lending and broking. BTFG’s insurance solutions cover the manufacturing and distribution of life, general and lenders mortgage insurance. BTFG’s brands include Advance Asset Management, Ascalon, Asgard, BT, BT Investment Management (62.1% owned by the Westpac Group and consolidated in BTFG’s Funds Management business), BT Select, Licensee Select, Securitor and the Advice, Private Banking and Insurance operations of Bank of Melbourne, BankSA, St.George and Westpac. 1 All customers, primary and secondary, with an active relationship (excludes channel only and potential relationships) as at 30 September 2013. 2013 WESTPAC GROUP ANNUAL REPORT 9  Westpac Institutional Bank (WIB) delivers a broad range of financial services to commercial, corporate, institutional and government customers with connections to Australia and New Zealand. WIB operates through dedicated industry relationship and specialist product teams, with expert knowledge in transactional banking, financial and debt capital markets, specialised capital, and alternative investment solutions. Customers are supported through branches and subsidiaries located in Australia, New Zealand, Asia, United States and United Kingdom.  Westpac New Zealand is responsible for the sales and service of banking, wealth and insurance products for consumers, business and institutional customers in New Zealand. Westpac conducts its New Zealand banking business through two banks in New Zealand: – Westpac New Zealand Limited, which is incorporated in New Zealand; and – Westpac Banking Corporation (NZ Division), a branch of Westpac, which is incorporated in Australia. The division operates via an extensive network of branches and ATMs across both the North and South Islands. Business and institutional customers are also served through relationship and specialist product teams. Banking products are provided under the Westpac and WIB brands while insurance and wealth products are provided under Westpac Life and BT brands respectively. Other divisions in the Group include:  Westpac Pacific, which provides banking services for retail and business customers in seven Pacific Island Nations. Branches, ATMs, telephone banking and internet banking channels are used to deliver business activities in Fiji, Papua New Guinea (PNG), Vanuatu, Cook Islands, Tonga, Solomon Islands and Samoa. Westpac Pacific’s financial products include personal savings, business transactional accounts, personal and business lending products, business services and a range of international products;  Group Services, encompassing technology, banking operations, compliance, legal and property services;  Treasury, which is primarily focused on the management of the Group’s interest rate risk and funding requirements; and  Core Support, which comprises those functions performed centrally, including finance, risk and human resources. These businesses are described in more detail in Section 2, including a summary of net profit and total assets by business division, and management’s discussion and analysis of business division performance. Australian Financial Services Institutional Westpac New Zealand Westpac Retail & Business Banking St.George Banking Group Wealth Group Services Core Support 10 2013 WESTPAC GROUP ANNUAL REPORT INFORMATION ON WESTPAC Sustainability materiality As part of our annual materiality review we identify, prioritise and define issues according to their impact on our stakeholders and our business. These issues are reviewed externally and internally and are assessed by KPMG as part of their assurance. Material issues identified in 2013 include: 1  the need to respond to the rapid changes in the demographics of our society;  the effect of digitisation on the way customers and businesses interact and do business;  new regulatory requirements which are shaping the financial services industry; and  the rise of Asia as the global economy’s growth engine. Responsiveness The issues identified during our materiality review directly inform the development of our responses, objectives and performance measures. Refreshed five-year strategy In addition to the sustainable business practices embedded in our day to day activities (such as sustainable lending practices, community investment and evolving the way we interact with and service our customers), in February 2013, we launched a refreshed sustainability strategy to guide our efforts for 2013–2017. As part of the strategy, we have set 10 measurable objectives in three priority areas, which are to:  help improve the way people work and live, as our society changes;  help find solutions to environmental challenges; and  help customers to have a better relationship with money, for a better life. Details of our key achievements against the sustainability strategy are provided on the following pages. Westpac’s approach to sustainability Across the Westpac Group, we believe in establishing a sustainable future for our operations and our stakeholders. This view is embedded in our strategy, values, culture and processes. In practice, this means we focus on anticipating and responding to the most pressing emerging issues that we believe will have a material impact on our customers, employees, suppliers, shareholders and the communities in which we operate, where we have the skills and experience to make a meaningful difference. Guiding our approach The Board has responsibility for considering the social, ethical and environmental impact of the Westpac Group’s activities, setting standards and monitoring compliance with Westpac’s sustainability policies and practices. Our sustainability strategy is based upon the use of the widely accepted global standard for Corporate Responsibility and Sustainable Development, the AA1000 AccountAbility Principles Standard (2008). Our sustainability principles In line with AA1000, we have adopted the standard’s three key principles: 1. Involving all stakeholders in developing our strategy – Inclusivity; 2. Evaluating all issues identified to determine the impact they may have on our stakeholders and our operations – Sustainability materiality; and 3. Ensuring our decisions, actions and performance, as well as our communication with stakeholders, are responsive to the issues identified – Responsiveness. Inclusivity Our approach to inclusivity during 2013 has included:  continuing work to understand and address customer concerns;  collaborating with key external stakeholders to inform our approach;  consulting with employees so as to better understand the drivers of strong employee engagement;  bringing together our General Managers with internal and external stakeholders to inform sustainability priorities and targets;  ongoing monitoring of our reputation across a wide range of mediums; and  working closely with numerous community organisations through employee volunteering, workplace giving and community support. 2013 WESTPAC GROUP ANNUAL REPORT 11 Sustainability scorecard The following table sets out key achievements against the 10 sustainability objectives outlined in our 2013–2017 Sustainability Strategy. Priority area Objective Help improve the way people work and live as our society changes 1. Ensure our workforce is representative of the community. 2. Extend length and quality of working lives. 3. Anticipate the future needs of ageing and culturally diverse customers. 4. Provide products and services to help customers adapt to environmental challenges. 5. Increase lending and investment in CleanTech and environmental services. Help find solutions to environmental challenges What we have done this year  Increased the participation of women in leadership to 42%, supported by ongoing recruitment initiatives, development, talent management and leadership role modelling.  Increased focus on mainstreaming workplace flexibility to meet the needs of our employees and enable greater employee agility and productivity and the survey showed the proportion of people working flexibly increased from 43% in 2010 to 62% in 2012.  Facilitated and sponsored internal and external Women of Influence award programs. Nominations for the external program increased by 40% from the previous year.  Continued to grow the representation of mature age employees in our workforce and put in place training, tools and support to encourage greater participation.  Released a new Accessibility Action Plan in May 2013 with initiatives to increase inclusion and participation of people with disabilities.  Embarked on a new Wellbeing program to help employees enhance their quality of life.  More than 8,400 employees completed an online wellbeing assessment and generated a personal report to identify ways to improve their wellbeing.  Developed planning tools supported by seminars to help employees achieve their goals.  Launched a contact centre for Prime of Life customers aged 50+ years.  Continued to provide consumer education on evolving financial needs and concerns as they age and retire.  Launched 'Solar Shed' in New Zealand in partnership with Meridian Energy, offering farmers easy and affordable access to solar energy through a package including a high quality grid connected solar system and a 100% Westpac equipment finance loan.  Provided an education seminar series to Australian small business customers on managing in a low carbon economy through Westpac’s Davidson Institute.  Committed up to $6 billion for lending and investment in CleanTech and environmental services by 2017. This will double the Group’s investment in the sector and includes renewable energy, greening the property sector, water efficiency and waste management activities.  Progress to date has been primarily in renewable energy, including two major wind farms and a solar farm. This work has been further supported by the establishment of a CleanTech working group with representation from across the Westpac Group. 6. Reduce our environmental footprint.  Introduced technology to reduce print paper wastage.  Progressed head office consolidation projects in Melbourne and Sydney.  Continued to upgrade lighting in retail sites as part of the Energy Efficiency Retail program.  Achieved Silver CEEDA certification for data centres.  Introduced waste audits in our head office sites.  Further emissions reduction expected as location based programs take effect.  Achieved carbon neutrality for the first time.  Launched Single Topic Personal Advice for life insurance – an advice package that provides customers with recommendations on life insurance and superannuation tailored to their situation.  Launched role relevant 'wealth' accreditation to selected Retail & Business Banking Bank Managers, encompassing 65–80 hours of formal learning over a 12 month period. Help customers to have a better relationship with money, for a better life 7. Ensure all our customers have access to the right advice to achieve a secure retirement. 12 2013 WESTPAC GROUP ANNUAL REPORT Priority area Objective 8. Help our customers meet their financial goals in retirement. 9. Increase access to financial services in the Pacific. 10. Help people gain access to social and affordable housing and services. INFORMATION ON WESTPAC 1 What we have done this year  In November 2012, BT Financial Group launched Wrap Capital Protection, a product allowing Australians to generate growth for retirement through their investment portfolio while preserving a minimum outcome at the end of an agreed term. This followed research into the needs of retirees and has particular relevance for investors in the period immediately pre- or post-retirement.  In October 2012, BT Investment Management launched the BT Equity Income Series focusing on certainty of income in uncertain times and aiming to deliver competitively high income, paid regularly and with low capital volatility.  Developed a Self Managed Super Fund (SMSF) bundled offer that combines relevant banking and wealth products.  Increased total In-store merchant numbers in the Pacific to 179, up from 30, following the 2012 launch of In-store Banking, a facility allowing selected merchants to provide banking services to customers using EFTPOS terminals.  Financial Education extended to all seven Pacific Island Nations, covering Money Basics, Financial First Steps and Business Basics to communities. More than 20,000 people participated.  In November 2012, Westpac Institutional Bank hosted its second Annual Social and Affordable Housing Forum, bringing together more than 100 delegates from government, regulators, not-for-profit organisations, urban planners, builders, financiers and advisors to develop innovative responses to the challenges faced by the social housing sector.  Following the forum, in February 2013 the Group committed to make available up to $2 billion in lending to the social and affordable housing sector by 2017.  Established credit underwriting standards for the Social and Affordable Housing sector. 2013 WESTPAC GROUP ANNUAL REPORT 13 FIVE YEAR NON-FINANCIAL SUMMARY Non-financial information as at 30 September unless indicated otherwise1 Customer Total customers (millions)2 Total online customers – active registrations (millions)3 Number of points of bank representation Number of ATMs Percentage of Talking ATMs (%)4 NPS5 – Westpac Australia – affluent6 NPS – Westpac Australia – commercial7 NPS – Westpac Australia – SME7 NPS – St.George8 consumer6 NPS – St.George8 business7 Social Sector Banking Footings ($m)9 Responsible Investment Funds Under Management ($m)10 Employees Total core full time equivalent staff (number at financial year end) Employee Engagement (%)11 Employee Voluntary Attrition (%)12 New Starter Retention (%)13 High Performer Retention (%)14 Lost Time Injury Frequency Rate (LTIFR)15 Women as a percentage of the total workforce (%) Women in Leadership (%)16 Environment Total Scope 1 and 2 emissions – Aust and NZ (tonnes CO2-e)17 Total Scope 3 emissions – Aust and NZ (tonnes CO2-e)18 Office paper – Aust and NZ (tonnes)19 Proportion of infrastructure and utilities financing in renewables and hydro – Aust and NZ (%)20 Finance assessed under the Equator Principles – Group ($m)21 Social Community investment – Group ($m)22 Community investment as a percentage of pre-tax profits – Group (%) Community investment as a percentage of pre-tax operating profit (Cash Earnings basis) – Group (%) Financial education – Group (participants)23 Financial education – Group (hours completed)24 2013 2012 2011 2010 2009 12.2 4.2 1,544 3,814 93 (9) (1) (5) 3.5 (6) 12,819 1,376 33,045 87 9.8 86.7 95.7 1.5 60 42 11.8 4.0 1,538 3,639 91 (18) (4) (17) - 1 11,490 981 33,418 84 9.9 84.8 95.9 1.9 61 40 11.5 3.7 1,532 3,544 88 (17) 3 (10) (2) (5) 8,210 644 11.3 3.4 1,517 3,625 (24) (7) (21) (4) 3 7,101 891 10.6 4.3 1,491 3,540 (16) (5) (24) (9) (21) 6,072 717 33,898 81 11.8 83.8 95.4 2.5 61 38 35,055 80 11.8 34,189 81 94.3 2.6 61 35 2.6 62 180,862 85,013 183,937 91,855 184,124 57,163 189,425 70,457 187,239 61,846 1,523 1,579 55 268 52 1,140 131 1.33 133 1.50 45 383 155 1.82 1.28 32,577 70,036 1.41 36,182 73,301 1.72 42,109 85,194 52 364 51 1,292 116 1.44 84 1.38 1.37 1.24 Supply chain Total supply chain spend – Aust ($bn)25 Percentage of top 80 suppliers screened for sustainabililty – Aust (%)26 All self assessed supplies as percentage of total supply chain spend 1 Dark grey shading indicates information was not collected in the relevant year. 2 All customers, primary and secondary, with an active relationship (excludes channel only and potential relationships). 3 Refers to the number of customers registered for online banking that have signed in within the last 90 days as at 30 September. 4 ATMs with an additional functionality to allow users to plug in an earpiece for oral instruction to provide additional assistance for visually 4.88 98 73 4.22 94 76 4.39 86 69 4.61 92 75 4.17 99 68 impaired users. 5 Net Promoter Score is a metric which measures the net percentage of customers that would recommend their main financial institution to a friend or colleague. Net Promoter ScoreSM is a trademark of Bain & Co Inc., Satmetrix Systems, Inc., and Mr Frederick Reichheld. 6 Source: Roy Morgan Research, 6MMA (six month moving average). 7 Sources: DBM Consultants Business Financial Service Monitor, September 2011–2013, 6MMA; TNS Business Financial Monitor, September 2008-2009, 6MMA. 8 NPS consumer and business scores are for the St.George Banking Group. NPS Business Score for 2010 restated from TNS Business Finance Monitor to DBM Business Financial Services Monitor in order to align with metrics reported by Westpac RBB. 14 2013 WESTPAC GROUP ANNUAL REPORT INFORMATION ON WESTPAC 9 Data refers to the total of assets (loans), liabilities (deposits) and funds under management (FUM) of the Westpac RBB business unit dedicated to social sector customers. Social sector customers are categorised according to specific criteria, including organisation structure, account types held, key words and special condition groups. 10 Refers to FUM which are managed using sustainable and/or ethical investment processes. 11 Employee engagement score is determined through a voluntary employee survey conducted internally using Towers Watson’s licensed survey methodology and is a score of employee engagement levels at the time the survey is administered. 2011 data excludes Westpac Pacific. 12 Employee Voluntary Attrition refers to the total voluntary separation of permanent employees over the 12 month average total permanent headcount for the period (includes full time, part time and maximum term employees). Excludes Westpac Pacific. 13 Voluntary New Starter retention over the 12 month rolling New Starter headcount for the period (includes full time and part time permanent 1 employees). Excludes Westpac Pacific. 14 Voluntary High Performer Retention over the 12 month rolling High Performer headcount for the period (includes full time, part time permanent and maximum term employees). Excludes Westpac Pacific. 15 Lost Time Injury Frequency Rate (LTIFR) measures the number of Lost Time Injuries, defined as injuries or illnesses (based on workers compensation claims accepted) resulting in an employee being unable to work for a full scheduled day (or shift) other than the day (or shift) on which the injury occurred where work was a significant contributing factor, per one million hours worked in the rolling 12 months reported. Excludes Westpac Pacific. 16 Women in Leadership refers to the proportion of women (permanent and maximum term employees) in people leadership roles or senior roles of influence as a proportion of all leaders across the Group. Includes CEO, Executive Team, General Managers, Senior Managers as direct reports to General Managers and the next two levels of management. Excludes Westpac Pacific. 17 Scope 1 greenhouse emissions are the release of greenhouse gases into the atmosphere as a direct result of Westpac’s Australian and New Zealand banking operations. Scope 2 emissions are indirect greenhouse gas emissions from consumption of purchased electricity from Westpac’s Australian and New Zealand banking operations. Australian data is prepared in accordance with the National Greenhouse and Energy Reporting Act 2007. New Zealand data is prepared in accordance with the New Zealand Ministry for the Environment’s guidance for greenhouse gas (GHG) reporting. These definitions also align with the GHG protocol and ISO 14064-1 standard and are reported for the period 1 July to 30 June. A new methodology has been applied in the calculation of this metric in line with new sustainability measures and accordingly 2012 comparatives for Full Year September 2012 have been restated. 18 Scope 3 emissions are greenhouse gases emitted as a consequence of Westpac’s Australian and New Zealand banking operations but by another facility. Australian data is prepared in accordance with the National Carbon Offset Standard. New Zealand data is prepared in accordance the New Zealand Ministry for the Environment’s guidance for GHG reporting. These definitions also align with the GHG protocol and ISO 14064-1 standard and are reported for the period 1 July to 30 June. A new methodology has been applied in the calculation of this metric in line with new sustainability measures and accordingly 2012 comparatives for Full Year September 2012 have been restated. 19 Total copy paper purchased (in tonnes) by the Westpac Group as reported by its suppliers. A new methodology has been applied in the calculation of this metric in line with new sustainability measures and accordingly 2012 comparatives for Full Year September 2012 have been restated. 20 Refers to aggregate committed exposures, as per APRA reporting standards. 21 The Equator Principles are a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing. 22 This amount includes monetary contributions, time contributions, management costs and in-kind contributions comprising of gifts and foregone fee revenue. Foregone fee revenue includes amounts that also align to FS7 under the GRI indicator for the Financial Services Sector. Figures for 2009 have been revised to align with the GRI indicator for Community Investment. 23 Refers to the number of attendees (staff, customers and general public) at a financial education course offered by the Westpac Group. Excludes internet based courses and keynote presentations offered by the Davidson Institute. 24 Refers to the number of hours of financial education received by staff, customers and general public, offered by the Westpac Group. Excludes internet based courses and keynote presentations offered by the Davidson Institute. 25 Refers to the total dollars spent in Australian dollars with external suppliers during the reporting period. 26 Refers to the percentage of top 80 suppliers by spend that have provided a self assessment against the Sustainable Supply Chain Management (SSCM) Code of Conduct and/or SSCM Questionnaire since the introduction of SSCM in 2003. 2013 WESTPAC GROUP ANNUAL REPORT 15 Competition The Westpac Group operates in a highly competitive environment across the regions in which we do business. We serve the banking, wealth and risk management needs of customer segments from consumers to small businesses through to large corporate and institutional clients. The Westpac Group competes with other financial services industry players for customers covering their needs of transacting, saving, investing, protecting and borrowing with a wide set of products and services. Our competitors range from large global organisations with broad offerings to entities more focused on specific regions or products. Our competitors include financial services and advisory companies such as banks, investment banks, credit unions, building societies, mortgage originators, credit card issuers, brokerage firms, fund and asset management companies, insurance companies and internet-based financial services providers. There are also new competitors emerging from other sectors including retail, technology and telecommunications. Our competitive position across customer segments, products and geographies is determined by a variety of factors. These factors include:  the type of customer served;  customer service quality and convenience;  the effectiveness of, and access to, distribution channels;  brand reputation and preference;  the quality, range, innovation and pricing of products and services offered;  technology solutions; and  the talent and experience of our employees. In Australia, we have seen intense competition for deposits continue to be driven in part by clearer global regulatory requirements for liquidity management and balance sheet composition. Banks and other financial institutions also seek to achieve a higher proportion of deposit funding as credit rating agencies and debt investors look for strong balance sheet positions in their assessment of quality institutions. We expect competition for lending to also remain high, with slower credit growth compared to the significant credit expansion Australia experienced over the majority of the last two decades. Businesses and consumers are cautious about the global outlook and continue to reduce debt. In mortgages, this lower growth and the desire of market participants to maintain or expand their market share using price has seen strong competition over the last year. This is expected to continue, particularly if lending growth remains modest. Serving business customers’ transaction and trade financing needs has been at the centre of competitive activity as customer expectations increase. In our wealth business, we expect competition to increase as financial institutions and industry funds move to capture a greater share of this fast growing market, particularly in superannuation (or pensions) and financial advice as the market responds to regulatory changes. The New Zealand market is experiencing strong competition as banks vie for new customers. Competition for deposits remains intense and the home lending market is particularly competitive on price and switching incentives. Outlook1 Australian economic conditions softened over the second half of 2012 and into 2013 with GDP growth moderating to 2.6%, unemployment trending higher to 5.7% and inflation well contained at 2.4% over the year. The slowing activity can be traced back to: a challenging international environment, with world growth below trend; a relatively high Australian dollar, eroding the competitiveness of trade exposed sectors; the continuing caution of consumers and businesses; a tightening of fiscal policy; and the beginnings of an easing in mining investment. Responding to this lower momentum, the Reserve Bank of Australia reduced the cash rate on four occasions over the past year. This easing in monetary policy has seen the cash rate at 30 September 2013, at 2.5%, 100bps lower than at 30 September 2012. Towards the latter months of the year ended September 2013 there have been some signs of improvement: the housing sector is responding to historically low interest rates; consumers and business are showing signs of increasing confidence, with an improvement in sentiment following the 2013 federal election creating a more stable political environment; and the Australian dollar has eased modestly, but still remains relatively high. Internationally, while world growth remains below trend, there are also some positive positions. Conditions in Europe stabilised in the June quarter and the Chinese economy showed a lift in momentum in the September quarter. Nevertheless the underlying fiscal position in the US and Europe remains fragile and sustainably restoring growth is likely to take some time. The recent shut-down of the US Government is perhaps a good indicator of the challenges still ahead. Similarly, the financial health of key economies in Europe remains weak and the path to improved growth is likely to be accompanied by further shocks. Asian activity continues to be very sound as these economies continue to become more reliant on home-grown demand rather than on global activity. This relatively consistent growth has helped to support activity in Australia and New Zealand. The year ahead is expected to see Australian economic growth continuing around 2.5% per annum. The pick-up in consumer and business sentiment should offset the winding back of resource related investment. However, the continuing low growth in the world’s developed economies is likely to restrain domestic growth to a below average trend level. For the financial services sector, demand for credit is expected to improve a little following the pick-up in housing activity and because business credit is coming off a very low base and some rise in investment across the broader economy is anticipated. While credit is expected to expand 4.5% over the year, growth in funds management and insurance is expected to be somewhat stronger as the rise in compulsory super contributions and the ageing of the population will continue to see more savings directed to superannuation and preparing for retirement. 1 All data and opinions under ‘Outlook’ are generated by our internal economists and management. 16 2013 WESTPAC GROUP ANNUAL REPORT The increasing digitisation of the economy is also expected to have a significant impact on financial services over the year as more and more activity is conducted online or via mobile devices. For Westpac, the Group will continue to focus on its strategic priorities in the year with a particular emphasis on:  remaining strong in our capital, funding and liquidity positions and continuing to improve asset quality;  further improving productivity through our simplification program that aims to materially reduce complexity from our products and processes;  continuing to develop our customer service channels. This includes finalising the roll-out of our new online and mobile platform and retooling our branch network to become advice hubs rather than transaction centres;  reorienting the company to growth with further investment in wealth platforms, continuing our expansion in Asia and those sectors of the economy likely to experience higher growth; and  further building our one team culture focusing on delivering the best outcome for customers. This includes enhancing our strong banking and wealth alignment, leveraging the skills of the institutional bank and ensuring technology continues to deliver for customers. Given the further strengthening of our balance sheet over the year, the solid operating performance across all divisions, and the good progress on our strategic priorities, Westpac believes it is well positioned to continue delivering sound, high quality returns to shareholders. Significant developments Acquisition of select businesses of Lloyds Banking Group Australia On 11 October 2013 Westpac announced it had entered into an agreement to acquire Lloyds Banking Group’s Australian asset finance business, Capital Finance Australia Limited (CFAL), and its corporate loan portfolio, BOS International (Australia) Ltd (BOSI), for $1.45 billion. As at 31 July 2013, CFAL’s motor vehicle finance and equipment finance business had total receivables of $6.8 billion across 213,000 consumer and commercial customers. BOSI’s corporate lending portfolio totals $2.7 billion of commitments. The deal is not subject to regulatory approvals and is expected to be completed on 31 December 2013. However, Westpac has notified the Australian Competition and Consumer Commission of the transaction and is co-operating with the Commission’s informal merger review process. Based on information as at 31 July 2013, the funding requirement for Westpac is estimated to be $8 billion. Issue of Additional Tier 1 capital securities On 8 March 2013, Westpac issued approximately $1.4 billion of Additional Tier 1 capital securities known as Westpac Capital Notes, which qualify as Additional Tier 1 capital of Westpac under APRA’s Basel III capital adequacy framework. INFORMATION ON WESTPAC Redemption and retirement of Additional Tier 1 capital securities On 19 August 2013, $332 million of Westpac Stapled Preferred Securities (Westpac SPS) were bought back on- market and subsequently cancelled. All remaining Westpac SPS were transferred to a nominated party on 26 September 2013 and subsequently converted into Westpac ordinary shares or redeemed. 1 On 30 September 2013 all outstanding (USD 750 million) Trust Preferred Securities of Westpac Capital Trust III (2003 TPS) were redeemed. Litigation  Exception fees – Westpac has been served with two separate class action proceedings by customers seeking to recover exception fees paid by those customers. The first set of proceedings was commenced in December 2011 by customers of the Westpac brand; the second was commenced in February 2012 by customers of the St.George Bank and BankSA brands. Similar class actions have been commenced against several other Australian banks. Westpac has agreed with the plaintiffs to put the proceedings against Westpac on hold until at least March 2014, pending further developments in the litigation against one of those other banks.  Bell litigation – Westpac was one of 20 defendant banks named in proceedings concerning the Bell Group of companies. The proceedings were brought by the liquidators of several Bell Group companies who challenged the defendant banks’ entitlement to receive the proceeds of realisation of Bell Group assets in the early 1990s. Westpac, along with the other defendant banks, had been found liable to repay its share of the monies received from the Bell Group plus interest. In March 2013, the defendant banks were granted special leave to appeal to the High Court of Australia. The appeal was due to be heard in 2013 but has been adjourned to 2014. On 17 September 2013 the parties announced that the matter was settled. Prior to the settlement, Westpac was entitled to file a claim as an unsecured creditor in the liquidation of the Bell companies and stood to recover part of the funds available for distribution to creditors. As part of the settlement, Westpac has agreed to release its claim for the distribution. The terms of the settlement remain confidential. The settlement is subject to various approvals being obtained in local and overseas jurisdictions, which may take up to six months. Westpac considers that appropriate provisioning has been made for this matter. Tax developments On 14 May 2013, the former Australian Government handed down the Federal Budget, which contained a number of proposed tax amendments. Key changes include:  amendments to the Offshore Banking Unit (OBU) provisions, affecting related party dealings, transactions with other banks’ OBUs and refining the list of eligible OBU activities. These changes were originally to apply from 1 October 2013. On 29 September 2013, the Assistant Treasurer announced a deferral of the start date to a date yet to be announced; 2013 WESTPAC GROUP ANNUAL REPORT 17  repealing the special rules that allow deductibility for interest incurred in deriving certain tax exempt foreign income (from 1 July 2014); and  the minimum amount of equity capital that a bank must hold to satisfy the ‘Thin Capitalisation’ rules would increase from 4% of risk weighted assets of the Australian business to 6%. It is not expected that any of these changes will have a material impact on the Westpac Group. On 7 August 2013, the Coalition (who assumed Government in September 2013) announced that if elected, it would cut the company tax rate by 1.5% to 28.5% from 1 July 2015. However, the Coalition also announced that it intends to introduce a paid parental leave (PPL) scheme which will be funded by a 1.5% levy on large companies, which will include Westpac. This will effectively offset the benefit of the cut to the company tax rate for large companies and will also create a two-tier company tax system from 1 July 2015. It is likely that the PPL levy will not be deductible and will not generate franking credits for the amount paid. Franking credits will only be generated on the company tax paid at the rate of 28.5%. Globally, there has been an increased focus by revenue authorities and governments on base erosion and profit shifting between jurisdictions. The revenue authorities are reviewing cross border and inter group transactions to ensure that the correct amount of profit is recognised in the relevant jurisdiction for tax purposes. The Westpac Group has numerous transactions for which tax transfer pricing is relevant, including:  those that are executed between head office and branches (or between branches); and  those executed with an external client (booked) in one jurisdiction and where support is provided by head office (or a branch) in another jurisdiction. Westpac will continue to monitor developments, but no material impact to the Westpac Group is expected. Changes to accounting standards In a continuing response to the global financial crisis, governments, regulators and accounting standard setters are working to revise certain accounting standards. The objective is to achieve convergence towards a single set of high-quality, global and independent accounting standards. The specific areas that have been targeted include accounting for financial instruments, provisioning for loan impairment charges, off-balance sheet exposures, the impairment and valuation of financial assets, consolidation and lease accounting. New accounting standards dealing with consolidation and the measurement of fair value apply to the Group from 1 October 2013. These new standards are not expected to have a material impact on the Group’s financial position or performance. The Group expects that there will be a number of new standards issued in coming years that will require changes to our current accounting approaches. Other significant developments Basel Committee on Banking Supervision Regulatory reforms and significant developments arising in relation to changes initiated by the Basel Committee on Banking Supervision (BCBS) include: Liquidity On 16 December 2010, the BCBS released the final text of the Basel III liquidity framework. The framework introduces two new liquidity measures: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The BCBS timetable for implementing the liquidity standard schedules the LCR to be introduced with a four year phase in period from 1 January 2015 and the NSFR from 1 January 2018. Both liquidity measures are subject to an observation and review period prior to implementation and as such are potentially subject to modification. Following a consultation process in mid-2013, the Australian Prudential Regulation Authority (APRA) released a draft liquidity standard (APS 210). APRA adopted the majority of the revisions to the LCR which had been announced by the BCBS in January 2013, with the key exception being that APRA has not adopted the proposed phase-in of the LCR from January 2015. As such, under the proposed APS 210 Westpac will need to meet the requirement of a minimum LCR of 100% from 1 January 2015. The remaining qualitative requirements come into force from 1 January 2014. Westpac’s liquidity risk management framework will be amended to address the new standard by 1 January 2014. The LCR requires banks to hold sufficient high-quality liquid assets, as defined, to withstand 30 days under a specific acute stress scenario. Since there are insufficient government bonds available in the Australian marketplace to allow institutions to meet the LCR, the Reserve Bank of Australia (RBA) has announced, jointly with APRA, that it will make available to Australian institutions a Committed Liquidity Facility (CLF) that, subject to satisfaction of qualifying conditions, can be accessed to help meet the LCR requirement. Capital On 16 December 2010, the BCBS released the final text of the Basel III capital framework. The framework was revised in June 2011 and incorporates higher global minimum capital requirements and the introduction of two new capital buffers. The framework includes:  an increase in the minimum common equity requirement from 2.0% to 4.5%;  an increase in the minimum Tier 1 capital requirement from 4.0% to 6.0%;  a capital conservation buffer at 2.5%, to be met with common equity; and  a countercyclical buffer of between 0% to 2.5% to be met with common equity or other fully loss absorbing capital (subject to further BCBS guidance). The buffer is intended to be applied during times of excess credit growth. 18 2013 WESTPAC GROUP ANNUAL REPORT 1 INFORMATION ON WESTPAC Systemically Important Financial Institutions (SIFIs) In November 2011, the BCBS published ‘Global systemically important banks: Assessment methodology and the additional loss absorbency requirement’. This document announced the final methodology for determining Global Systemically Important Banks (G-SIBs), and the Financial Stability Board (FSB) named 29 G-SIBs that would be subject to higher capital requirements and greater oversight. The list of G-SIBs is subject to annual review and in November 2012 the FSB issued an updated list of 28 G-SIBs as well as specifying the higher capital requirements proposed for each. These increased capital requirements will be phased in from January 2016. Westpac has not been named as a G-SIB. The G20 also directed the FSB to consider how to extend the framework to a broader set of SIFIs, including Domestic Systemically Important Banks (D-SIBs), and to make recommendations to the G20. On 12 October 2012, the BCBS issued the paper ‘A framework for dealing with domestic systemically important banks’. The paper sets out a principles based framework for regulating D-SIBs. However, until APRA develops the rules for implementing the framework in Australia, any impact on Westpac cannot be determined. Recovery and resolution planning In November 2011, the FSB finalised a comprehensive package of policy measures to improve the capacity of authorities to resolve failing SIFIs, without systemic disruption and without exposing taxpayers to risk of loss. As part of the package, a Recovery and Resolution Plan is required for any firm deemed by its home authority to have systemic importance to the domestic economy. In addition, SIFIs will be subject to resolvability assessments to ensure they may be resolved without severe systemic disruption and taxpayer loss while at the same time protecting systemically important functions. APRA has undertaken a pilot Recovery Planning project applying to Australia’s largest banks, including Westpac, with final plans delivered to APRA in mid-2012. APRA has advised Westpac of its expectation that the Recovery Plan be maintained and Westpac is reviewing and updating its Recovery Plan where required. In the US, Westpac also will be required to satisfy the resolution plan requirements of the Dodd-Frank Act, as implemented by regulations issued jointly by the US Federal Reserve Board and Federal Deposit Insurance Corporation. We expect to submit a resolution plan in relation to our US operations to US bank regulatory authorities by the applicable deadline, which is currently set for the end of 2013. The framework includes a compliance timetable, with phase- in arrangements starting from 1 January 2013 and some elements not becoming fully effective until 1 January 2019. In January 2011 the BCBS also issued a requirement for the contractual terms of capital instruments to include provisions for loss absorption at the point of non-viability. On 28 September 2012, APRA released the four final capital adequacy standards that will govern the implementation of the Basel III capital framework in Australia. On 13 November 2012 APRA released updated prudential standards which incorporated the Basel III requirements for counterparty credit risk. APRA has required Australian Authorised Deposit-taking Institutions (ADIs) such as Westpac to meet the new minimum capital requirements from 1 January 2013 and has proposed that the capital conservation buffer apply in full from its introduction date of 1 January 2016. Westpac’s current capital levels are well above the 7% common equity requirement that will apply from 1 January 2016 (including the proposed capital conservation buffer). Other Basel Accord reforms The Basel III capital framework also introduced a leverage ratio requirement. The BCBS proposes that introducing a simple, non-risk based leverage ratio requirement would act as a credible supplementary measure to the risk-based capital requirements. On 26 June 2013, the BCBS released a consultation paper on the leverage ratio. The paper includes detail on the proposed approach to calculation of the ratio as well as a set of public disclosure requirements for the ratio. The proposed timetable for the leverage ratio provides for testing and recalibration to occur until 2017, with public disclosure to commence from January 2015 and migration of the final standard to a Pillar 1 requirement from January 2018. In March 2013 the BCBS issued a consultation paper on measuring and controlling large exposures. The existing large exposures framework was established in 1991 and the proposed updated framework is intended to achieve greater consistency among and between jurisdictions in the way banks and supervisors measure, aggregate and control exposures to single counterparties. The final framework is proposed to be in place by January 2019. The BCBS is also currently conducting analysis on risk- weighted assets, which forms the denominator of the capital ratios. The BCBS has indicated that this work is intended to examine the consistency in the determination of risk- weighted assets across jurisdictions and will determine the direction of future work in this area, which will ultimately allow the BCBS to consider potential policy options. Each of these measures are in different stages of development and, following release of the respective regulations by the BCBS, APRA will consult on and develop the regulations to apply in Australia. Until APRA develops the final rules for implementing these measures in Australia, the impact on Westpac cannot be determined. 2013 WESTPAC GROUP ANNUAL REPORT 19 Australia The Federal Government has embarked on a program of regulatory reform which will affect Westpac. This includes: OTC derivatives reform The over-the-counter (OTC) derivatives market is undergoing significant regulatory reform globally. The reforms aim to improve transparency, mitigate systemic risk and protect against market abuse in the OTC derivatives market by encouraging clearing through central counterparties, reporting to trade repositories, exchange trading where appropriate, and imposing higher capital requirements on non-centrally cleared contracts. On 31 December 2012, Westpac provisionally registered with the US Commodity Futures Trading Commission as a Swap Dealer. Also, in September 2013, Westpac became a member of the Hong Kong Monetary Authority’s trade repository. Locally, on 9 July 2013, the Australian Securities and Investments Commission (ASIC) released the Derivative Transaction Rules (Reporting) 2013 which introduces mandatory trade reporting of OTC Derivatives. Westpac commenced reporting in accordance with the ASIC requirement on 1 October 2013. This reform required Westpac to build infrastructure to enable it to report on all OTC Derivatives transactions to ASIC via a licensed or prescribed trade repository. On 17 July 2013, the Reserve Bank of Australia (RBA), APRA and ASIC issued a report on the Australian OTC Derivatives Market in which they recommended that the Australian Government consider mandatory clearing for US dollar, Euro, British Pound and Yen denominated interest rate derivatives, primarily to maintain consistency with other international derivative regimes. The Australian Government is yet to proceed with the regulators’ recommendations. Westpac continues to monitor developments and comply with requirements imposed under OTC derivatives reforms prescribed by international regulators. These include regulatory changes being implemented by the US Commodity Futures Trading Commission and Securities and Exchange Commission under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); by the European Securities and Markets Authority under the European Market Infrastructure Regulations (EMIR) and Markets in Financial Instruments Directive (MiFID II); and by various financial regulators in Asia. On 2 September 2013, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commission (IOSCO) published a report which presents the final policy framework for establishing margin requirements for uncleared OTC derivatives. The report sets out a timetable for introducing such requirements between 1 December 2015 and December 2019. At this stage, the requirements have not yet been adopted in the US, Europe or Australia. Superannuation changes From 1 July 2013, superannuation funds can offer MySuper products if licensed by APRA. From 1 January 2014, employers can generally only make super guarantee contributions to a default super fund which offers a MySuper product. MySuper is part of the Government's response to the Super System (Cooper) Review and is a low cost, simple superannuation product. A MySuper product will be the default investment option where investment choice is not elected by the member. Other legislative changes include enhanced trustee and director obligations as well as ‘SuperStream’, a measure to improve the efficiency of processing superannuation transactions through the use of technology. An established project team continues to assess and implement changes to our existing superannuation products to ensure compliance with the new requirements which includes launching a number of MySuper products by December 2013. Financial advice changes On 27 June 2012 the Future of Financial Advice (FOFA) reforms became law. Several sets of regulations were made over the period 12 July 2012 to 28 June 2013. The FOFA reforms are aimed at improving consumer trust and confidence in, and the quality of, financial advice. The FOFA reforms include a ban on certain conflicted payments and soft dollar benefits, a ban on volume-based shelf space fees, a ban on the charging of asset-based fees on borrowed funds, a statutory best interests duty so that financial advisers must act in the best interests of their clients, and an ‘adviser charging regime’ where the investor will be required to opt-in every two years to receive ongoing advice and where advisers will be required to give annual disclosure of ongoing fees and services to investors. The majority of the proposed reforms commenced for the Westpac Group on 1 July 2013, although certain provisions relating to employee remuneration and payments under particular existing arrangements will not apply until 1 July 2014. Other aspects of the reforms, including an anti-avoidance provision and increased ASIC powers, commenced on 1 July 2012. Prior to being elected, the current Government indicated that it would look to provide greater certainty on the application of the new best interests duty and amend other certain aspects of the FOFA reforms, including the requirement to opt-in to ongoing adviser services every two years, We understand that the Government will announce its position before 31 December 2013 on any changes it proposes to make. Privacy law reform The Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth) received royal assent on 12 December 2012 and will commence on 12 March 2014. It amends the Privacy Act 1988 (Cth) to replace the National Privacy Principles with new Australian Privacy Principles and introduce a new, more comprehensive credit reporting system. In addition, significant new powers are provided to the Privacy Commissioner to enforce the revised law. These privacy reforms will require review and amendment of a wide range of Westpac Group documents, systems and procedures in relation to the management of personal information. 20 2013 WESTPAC GROUP ANNUAL REPORT Westpac continues to review these developments, engage with Government, regulators and industry bodies as appropriate, and amend its systems, processes and operations to align with regulatory changes as they occur. Changes to APRA’s crisis management powers On 12 September 2012, the Treasury released for public consultation a paper entitled Strengthening APRA’s Crisis Management Powers, which sought comment on a series of reform proposals directed at strengthening APRA’s crisis management powers. Submissions closed on 14 December 2012. Proposals under consideration include providing APRA with the ability, in times of financial distress, to direct regulated entities (including Westpac) in relation to disclosure requirements and broadening APRA’s powers to issue other directions to regulated entities. If implemented, these proposals could affect the regulatory framework applying to Westpac and its controlled entities. However, until final proposals are published and implemented, the full extent of the impact on us is uncertain. United States There are a number of significant regulatory reforms currently occurring in the United States (US). These include: Dodd-Frank Act Legislation designed to reform the system for supervision and regulation of financial firms in the US was signed into law on 21 July 2010. The Dodd-Frank Act contains a wide range of provisions that will affect financial institutions operating in the US, including foreign banks like Westpac. Included among its provisions are reforms designed to:  reduce systemic risk presented by very large financial institutions;  promote enhanced supervision, regulation, and prudential standards for financial institutions;  establish comprehensive supervision of financial markets;  impose new limits on permissible financial institution activities and investments;  expand regulation of the derivatives markets, protect consumers and investors from financial abuse; and  provide the US Government with the tools needed to manage a financial crisis. Many of the provisions of the Dodd-Frank Act require extensive rulemaking by US regulatory agencies before the provisions become effective. The issuance of final rules under the Dodd-Frank Act remains far from complete, with the process continuing. Aside from the observations regarding OTC derivatives reform above, until there is greater clarity regarding the final forms of the rules and their extra-territorial application, it is not possible to assess the full impact of the law and the regulations on our operations. However, in the event that some of the rules are implemented in or close to the current draft, significant investment in compliance and reporting programs and changes to business activities are likely to be required. 1 INFORMATION ON WESTPAC Foreign Account Tax Compliance Act (FATCA) Legislation incorporating provisions referred to as FATCA was passed in the US on 18 March 2010. Regulations published by the US Treasury on 28 January 2013 provide detail as to how FATCA should be implemented. The legislation and regulations require Foreign Financial Institutions (FFIs), such as Westpac, to enter into an FFI agreement (if they are not subject to the provisions of a Model 1 Intergovernmental Agreement (IGA), which is discussed below) under which they agree to identify and provide the US Internal Revenue Service (IRS) with information on accounts held by US persons and certain US owned foreign entities, or otherwise face 30% withholding tax on certain payments made to the FFI. In addition, FFIs that have entered into an FFI agreement will be required to withhold on certain payments made to FFIs that have not entered into an FFI agreement (and are not subject to an IGA) and account holders who do not respond to requests to confirm their US person status and/or do not agree to the FFI reporting certain account related information to the IRS. The IRS has also published a Model IGA in connection with the implementation of FATCA. The UK Government entered into an IGA with the US on 12 September 2012 and enacted UK domestic legislation to give effect to the provisions of that IGA on 1 September 2013. The Australian and New Zealand Governments are each currently in the process of negotiating the terms and conditions of an IGA with the US. The UK, Australian and New Zealand IGAs (once the latter two are concluded), and any IGAs that may be concluded between the US and other countries in which Westpac conducts business, will likely enable Westpac to report the required information relating to its business operations within these jurisdictions to the local tax authorities, which, in turn, will provide such information to the IRS. Further, operating within an IGA jurisdiction will relieve Westpac of the requirement to comply with an FFI agreement in relation to its business operations in that jurisdiction and to withhold from payments to, or close the accounts of, certain account holders, but Westpac will still be required to identify and report certain US accounts in that jurisdiction. An internal project has been established and is well progressed in implementing changes to comply with the requirements of FATCA across all jurisdictions in which Westpac operates. Westpac currently expects (subject to any restrictions under local law) that it will enter into an FFI agreement with respect to its branches and affiliated FFIs not located in countries that have entered into an IGA. It is anticipated that compliance with FATCA will give rise to significant costs and operational burdens, but that IGAs will reduce those costs and burdens, where applicable. 2013 WESTPAC GROUP ANNUAL REPORT 21 New Zealand Regulatory reforms and significant developments in New Zealand include: Open Bank Resolution (OBR) The Reserve Bank of New Zealand (RBNZ) OBR policy contemplates a bank being open for business on the next business day following a bank failure event and the bank being put into statutory management. From 30 June 2013 all locally incorporated registered banks with retail deposits over NZ$1 billion are required to be pre-positioned for OBR on an ongoing basis. The policy therefore applies to Westpac New Zealand Limited (WNZL) and WNZL has been compliant with the new requirements since they came into effect. In the event of failure, a bank must be able to achieve certain outcomes, including being able to freeze liabilities and process pending payments, determine customers’ account balances on a per account basis, set aside a proportion of account balances that have been frozen, and resume customers’ access to their transaction and other accounts on the next business day following the bank’s closure. Notwithstanding the pre-positioning requirement, there is no obligation on the part of the New Zealand Government to use OBR in the event of a bank failure. New conditions of registration to formally impose the OBR requirements took effect on the implementation date. Basel III The RBNZ has adopted the core Basel III capital measures relating to new capital ratios and most of the recommendations relating to the definition of capital. From 1 January 2013, the requirements for Total Tier 1 capital increased to 6.0% and must include common equity of 4.5%. The conservation buffer will be implemented in full from 1 January 2014 at which time Total Tier 1 capital will increase to 8.5% and will need to include 7% common equity. The countercyclical capital buffer will also be able to be deployed from 1 January 2014. The RBNZ is not specifying any upper limit on the countercyclical buffer. The RBNZ has not adopted the leverage ratio. Financial Markets Conduct Act (FMCA) The FMCA represents an overhaul of the existing securities law regime in New Zealand and will impact various aspects of the wider Westpac New Zealand business. It introduces changes to product disclosure and governance together with new licensing and registration requirements. The existing prospectus/investment statement dual disclosure model will no longer apply. A single product disclosure statement will be implemented and this will be supported by an online register of other material documentation. The FMCA was enacted in September 2013, however, most of the provisions will come into force at a later date. Much of the detail will be prescribed in regulations which are expected in the first half of 2014. The FMCA must be completely in force by 1 April 2017. Credit law reform/responsible lending The Credit Contracts and Financial Services Law Reform Bill was introduced into the House in April 2013 and was referred to the Select Committee in September. The bill reforms the entire suite of legislation that governs consumer credit contracts. The Credit Contracts and Consumer Finance Act 2003 (CCCFA) is being amended to provide for a regulatory responsible lending code. In addition, existing consumer protections are being strengthened by changing current CCCFA provisions on disclosure, fees, hardship and ‘oppressive contracts’. Reserve Bank of New Zealand (Covered Bonds) Amendment Bill The Reserve Bank of New Zealand (Covered Bonds) Amendment Bill provides a legislative framework for the issuance of covered bonds by New Zealand registered banks. The Bill was introduced into the House in May 2012 and had its second reading in February 2013. New Zealand registered banks are currently permitted by the RBNZ to issue covered bonds. It is a condition of registration that a covered bond issuance cannot exceed 10% of total assets. The legislation will provide certainty for investors that the cover pool assets will be disgorged from statutory management and liquidation regimes. The Bill will require the registration of covered bond programs and provides for a transition period for the registration of existing programs. RBNZ – macro-prudential policy In March 2013 the RBNZ released its final policy position on its macro-prudential policy framework. The policy aims to promote greater financial system stability by building additional resilience in the financial system during periods of rapid credit growth and rising leverage or abundant liquidity, and dampening excessive growth in credit and asset prices. The policy will apply only to registered banks initially and includes the following four instruments: sectoral capital requirements, restrictions on high loan to value ratio (LVR) lending; adjustments to the core funding ratio; and the countercyclical capital buffer. The latter already forms part of the Basel III reforms. A memorandum of understanding between the Minister of Finance and the RBNZ was signed in May 2013. The RBNZ released its framework for restrictions on high LVR residential mortgage lending in August 2013 and also announced that it would be imposing restrictions on this lending effective from 1 October 2013. New conditions of registration restrict residential lending with an LVR of more than 80%, to 10% of the total of the qualifying new mortgage lending amounts arising in the loan- to-valuation measurement period. Anti-Money Laundering legislation The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 came into full force on 30 June 2013. From this date, WNZL has been compliant with the new regulatory requirements, which impose higher requirements on banks to perform customer due diligence and report on transactions, in addition to new requirements to monitor transactions. The legislation also provides for a supervisory regime. 22 2013 WESTPAC GROUP ANNUAL REPORT Supervision and regulation Australia Within Australia we are subject to supervision and regulation by six principal agencies: APRA; the Reserve Bank of Australia (RBA); the Australian Securities and Investments Commission (ASIC); the Australian Securities Exchange (ASX); the Australian Competition and Consumer Commission (ACCC); and the Australian Transaction Reports and Analysis Centre (AUSTRAC). APRA is responsible for the prudential supervision of banks, credit unions, building societies, life and general insurance companies, friendly societies and most superannuation (pension) funds. APRA’s roles include establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made to customers by the institutions it supervises are met. As an ADI, we report prudential information to APRA including information in relation to capital adequacy, large exposures, credit quality and liquidity. Our controlled entities in Australia that are authorised insurers and trustees of superannuation funds are also subject to the APRA regulatory regime. Reporting is supplemented by consultations, on-site inspections and targeted reviews. Our external auditors also have an obligation to report on compliance with certain statutory and regulatory banking requirements and on any matters that in their opinion may have the potential to materially prejudice the interests of depositors and other stakeholders. Australia’s risk-based capital adequacy guidelines are based on the approach agreed upon by the Basel Committee on Banking Supervision. National discretion is then applied to that approach which results in Australia’s capital requirements being more stringent. Refer to ‘Capital resources – Basel Capital Accord’ in Section 2. The RBA is responsible for monetary policy, maintaining financial system stability and promoting the safety and efficiency of the payments system. The RBA is an active participant in the financial markets, manages Australia’s foreign reserves, issues Australian currency notes and serves as banker to the Australian Government. ASIC is the national regulator of Australian companies. Its primary responsibility is to regulate and enforce company, consumer credit, financial markets and financial services laws that protect consumers, investors and creditors. With respect to financial services, it promotes honesty and fairness by providing consumer protection, using regulatory powers to enforce laws relating to deposit-taking activities, general insurance, life insurance, superannuation, retirement savings accounts, securities (such as shares, debentures and managed investments) and futures contracts and financial advice. ASIC has responsibility for supervising trading on Australia’s domestic licensed markets and of trading participants. 1 INFORMATION ON WESTPAC The ASX operates Australia’s primary national market for trading of securities issued by listed companies. Some of our securities (including our ordinary shares) are listed on the ASX and we therefore have obligations to comply with the ASX Listing Rules, which have statutory backing under the Corporations Act. The ASX has responsibility for the oversight of listed entities under the ASX Listing Rules and for monitoring and enforcing compliance with the ASX Operating Rules by its market, clearing and settlement participants. The ACCC is an independent statutory authority responsible for the regulation and prohibition of anti-competitive and unfair market practices and mergers and acquisitions in Australia. Its broad objective is to administer the Competition and Consumer Act 2010 and related legislation to bring greater competitiveness, fair trading, consumer protection and product safety to the Australian economy. The ACCC’s role in consumer protection complements that of Australian state and territory consumer affairs agencies that administer the unfair trading legislation of their jurisdictions. The Australian Government’s present policy, known as the ‘four pillars policy’, is that there should be no fewer than four major banks to maintain appropriate levels of competition in the banking sector. Under the Financial Sector (Shareholding) Act 1998, the Australian Government’s Treasurer must approve an entity acquiring a stake of more than 15% in a financial sector company. Proposals for foreign acquisitions of a stake in Australian banks are subject to the Australian Government’s foreign investment policy and, where required, approval by the Australian Government under the Australian Foreign Acquisitions and Takeovers Act 1975. For further details refer to ‘Limitations affecting security holders’ in Section 4. AUSTRAC oversees the compliance of Australian reporting entities including Westpac, within the requirements under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and the Financial Transaction Reports Act 1988. These requirements include:  implementing programs for identifying and monitoring customers, and for managing the risks of money laundering and terrorism financing;  reporting suspicious matters, threshold transactions and international funds transfer instructions; and  submitting an annual compliance report. AUSTRAC provides financial information to state, territory and Australian federal law enforcement, security, social justice and revenue agencies, and certain international counterparts. 2013 WESTPAC GROUP ANNUAL REPORT 23 New Zealand The RBNZ is responsible for supervising New Zealand registered banks. The New Zealand prudential supervision regime requires that registered banks publish quarterly disclosure statements, which contain information on financial performance and risk positions as well as attestations by the directors about the bank’s compliance with its conditions of registration and certain other matters. United States Our New York branch is a US federally licensed branch and therefore is subject to supervision, examination and extensive regulation by the US Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System (the US Federal Reserve) under the US International Banking Act of 1978 (IBA) and related regulations. Under the IBA, we may not open any branch, agency or representative office in the US or acquire more than 5% of the voting stock of any US bank without the prior approval of the US Federal Reserve. A US federal branch must maintain, with a US Federal Reserve member bank, a capital equivalency deposit as prescribed by the US Comptroller of the Currency in an amount which is the greater of:  the amount of capital (but not surplus) that would be required of a national bank organised at the same location; or  5% of its total liabilities (including acceptances, but excluding accrued expenses, and amounts due and other liabilities to other branches, agencies, and subsidiaries of the foreign bank). In addition, a US federal branch is examined by the US Comptroller of the Currency at least once each calendar year. The examination covers risk management, operations, credit and asset quality, and compliance with the record- keeping and reporting requirements that apply to national banks, including the maintenance of its accounts and records separate from those of the foreign bank, and any additional requirements prescribed by the US Comptroller of the Currency. A US federal branch of a foreign bank is, by virtue of the IBA, subject to the receivership powers exercisable by the US Comptroller of the Currency. At this time we have not elected to become, and therefore we are not, a financial holding company as defined in the Gramm-Leach-Bliley Act of 1999. Anti-money laundering regulation and related requirements Australia Westpac has a Group-wide program to manage its obligations under the Anti-Money Laundering and Counter- Terrorism Financing Act 2006. We continue to actively engage with the regulator, AUSTRAC, on our activities. United States The USA PATRIOT Act of 2001 requires US financial institutions, including the US branches of foreign banks, to take certain steps to prevent, detect and report individuals and entities involved in international money laundering and the financing of terrorism. The required actions include verifying the identity of financial institutions and other customers and counterparties, terminating correspondent accounts for foreign ‘shell banks’ and obtaining information about the owners of foreign bank clients and the identity of the foreign bank’s agent for service of process in the US. The anti-money laundering compliance requirements of the USA PATRIOT Act include requirements to adopt and implement an effective anti-money laundering program, report suspicious transactions or activities, and implement due diligence procedures for correspondent and other customer accounts. Westpac’s New York branch and its other US operations maintain an anti-money laundering compliance program designed to address US legal requirements. US economic and trade sanctions, as administered by the Office of Foreign Assets Control (OFAC), prohibit or significantly restrict US financial institutions, including the US branches and operations of foreign banks, and other US persons from doing business with certain persons, entities and jurisdictions. Westpac’s New York branch and its other US operations maintain compliance programs designed to comply with OFAC sanctions programs, and Westpac has a Group-wide program to ensure adequate compliance. Significant contracts Westpac’s significant long-term contracts are summarised in Note 34 to the financial statements. Legal proceedings Our entities are defendants from time-to-time in legal proceedings arising from the conduct of our business and material legal proceedings, if any, are described in Note 36 to the financial statements and under ‘Significant Developments’ above. As appropriate, a provision has been raised in respect of these proceedings and disclosed in the financial statements. Principal office Our principal office is located at 275 Kent Street, Sydney, New South Wales, 2000, Australia. Our telephone number for calls within Australia is 132 032 and our international telephone number is (+61) 2 9293 9270. 24 2013 WESTPAC GROUP ANNUAL REPORT CORPORATE GOVERNANCE INTRODUCTION This corporate governance statement describes our corporate governance framework, policies and practices as at 4 November 2013. Framework and approach Our approach to corporate governance is based on a set of values and behaviours that underpin day-to-day activities, provide transparency and fair dealing, and seek to protect stakeholder interests. This approach includes a commitment to excellence in governance standards, which Westpac sees as fundamental to the sustainability of our business and our performance. It includes monitoring local and global developments in corporate governance and assessing their implications. We have equity securities listed on securities exchanges in Australia, New Zealand and the United States. Australia We comply with the ASX Corporate Governance Principles and Recommendations (ASXCGC Recommendations) published by the ASX Limited’s Corporate Governance Council (ASXCGC). We must also comply with the Corporations Act and as an ADI must comply with governance requirements prescribed by APRA under Prudential Standard CPS 510 (Governance). This statement addresses each of the eight ASXCGC Recommendations with an explanation of our corporate governance practices, demonstrating our compliance with each Recommendation. A checklist summarising our compliance is included at the end of this statement. Further details about the ASXCGC Recommendations can be found on the ASX Limited (ASX) website www.asx.com.au. New Zealand Westpac also has ordinary shares quoted on the NZSX, which is the main board equity security market operated by NZX Limited (NZX). As an overseas listed issuer in New Zealand, we are deemed to satisfy and comply with the NZSX Listing Rules, provided that we remain listed on the ASX and comply with the ASX Listing Rules. The ASX, through the ASXCGC Recommendations, and NZX, through the NZX Corporate Governance Best Practice Code, have adopted similar ‘comply or explain’ approaches to corporate governance. However, the ASXCGC Recommendations may materially differ from the corporate governance rules and the principles of NZX’s Corporate Governance Best Practice Code. United States Westpac has American Depositary Shares (ADS) representing its ordinary shares quoted on the New York Stock Exchange (NYSE). Under the NYSE Listing Rules, foreign private issuers are permitted to follow home country practice in respect of corporate governance in lieu of the NYSE Listing Rules. However, we are still required to comply with certain audit committee and additional notification requirements. We comply in all material respects with all NYSE Listing Rules applicable to us. Under the NYSE Listing Rules, foreign private issuers are required to disclose any significant ways in which their corporate governance practices differ from those followed by domestic US companies. We have compared our corporate governance practices to the corporate governance requirements of the NYSE Listing Rules and note the significant differences below. 1 The NYSE Listing Rules require that, subject to limited exceptions, shareholders be given the opportunity to vote on equity compensation plans and material revisions to those plans. In Australia there are no laws or securities exchange listing rules that require shareholder approval of equity based incentive plans or individual grants under those plans (other than for Directors, including the Chief Executive Officer (CEO)). Westpac’s employee equity plans have been disclosed in the Remuneration report in Section 9 of the Directors’ report, which is subject to a non-binding shareholder vote at the Annual General Meeting (AGM) and grants to our CEO are approved by shareholders. The details of all grants under our equity-based incentive plans have been disclosed in Note 25 of our financial statements for the year ended 30 September 2013. The NYSE Listing Rules provide that the Nominations Committee’s responsibilities should include selecting, or recommending that the Board select, the Director nominees for the next annual meeting for shareholders, and overseeing the evaluation of the Board. The Board, rather than the Nominations Committee, reviews and recommends the Director nominees for election at the AGM and undertakes an annual review of its performance. Websites This statement and a range of documents referred to in it are available on our corporate governance website at www.westpac.com.au/corpgov. This website contains copies and summaries of charters, principles and policies referred to in this statement. Investor communications and information, including the Westpac Group Annual Report 2013, Annual Review and Sustainability Report 2013, investor discussion packs and presentations, can be accessed at www.westpac.com.au/investorcentre. Information on our corporate responsibility and sustainability policies, practices and outcomes, including additional sustainability reporting and performance in external sustainability assessments, are available at www.westpac.com.au/corporateresponsibility. 2013 WESTPAC GROUP ANNUAL REPORT 25 GOVERNANCE FRAMEWORK Independent Assurance  External auditors  Legal or other  Group Assurance professional advice Board n o i t a g e e D l , e c n a r u s s A h g u o r h t i t h g s r e v O g n i t r o p e R Delegation Accountability Chief Executive Officer d r a o B s e e t t i m m o C Remuneration Nominations Risk Management Provide assurance on risk components of financial statements Audit Technology The diagram above shows the current Committees of the Board. From time to time the Board may form other Committees or request Directors to undertake specific extra duties. In addition, from time to time the Board participates (either directly or through representatives) in due diligence committees in relation to strategic decisions, capital and funding activities. The Executive Team, Disclosure Committee and Executive Risk Committees are not Board Committees (that is, they have no delegation of authority from the Board) but sit beneath the CEO and the Board Committees to implement Board-approved strategies, policies and management of risk across the Group. The key functions of the Board and each of the Board Committees are outlined in this corporate governance statement. All Board Committee Charters are available on our corporate governance website at www.westpac.com.au/corpgov. 26 2013 WESTPAC GROUP ANNUAL REPORT BOARD, COMMITTEES AND OVERSIGHT OF MANAGEMENT Board of Directors Roles and responsibilities The Board Charter outlines the roles and responsibilities of the Board. Key responsibilities in summary are: The Board Charter, Board Committee Charters and the Constitution are available on our corporate governance website www.westpac.com.au/corpgov. 1 CORPORATE GOVERNANCE The Delegated Authority Policy Framework outlines principles to govern decision-making within the Westpac Group, including appropriate escalation and reporting to the Board. The Board has also delegated to the CEO, and through the CEO to other executives, responsibility for the day-to-day management of our business. The scope of, and limitations to, management delegated authority is clearly documented and covers areas such as operating and capital expenditure, funding and securitisation, and lending. These delegations balance effective oversight with appropriate empowerment and accountability of management. Independence Together, the Board members have a broad range of relevant financial and other skills and knowledge, combined with the extensive experience necessary to guide our business. Details are set out in Section 1 of the Directors’ report. All of our Non-executive Directors satisfy our criteria for independence, which align with the guidance provided in the ASXCGC Recommendations and the criteria applied by the NYSE and the US Securities and Exchange Commission (SEC). The Board assesses the independence of our Directors on appointment and annually. Each Director provides an annual attestation of his or her interests and independence. Directors are considered independent if they are independent of management and free from any business or other relationship that could materially interfere with, or reasonably be perceived to materially interfere with, the exercise of their unfettered and independent judgment. Materiality is assessed on a case by case basis by reference to each Director’s individual circumstances rather than by applying general materiality thresholds. Each Director is expected to disclose any business or other relationship that he or she has directly, or as a partner, shareholder or officer of a company or other entity that has an interest in Westpac or a related entity. The Board considers information about any such interests or relationships, including any related financial or other details, when it assesses the Director’s independence.  approving the strategic direction of Westpac Group;  evaluating Board performance and determining Board size and composition;  considering and approving the Westpac Board Renewal Policy;  appointing and determining the duration, remuneration and other terms of appointment of the CEO, Chief Financial Officer (CFO) and other Group Executives;  determining the remuneration of persons whose activities in the Board’s opinion affects the financial soundness of Westpac, any person specified by APRA, and any other person the Board determines;  evaluating the performance of the CEO, and monitoring the performance of other senior executives;  succession planning for the Board, CEO and Group Executives;  approving the appointment of Group Executives, General Manager Group Assurance and Group General Counsel and monitoring the performance of senior management;  approving the annual targets and financial statements and monitoring performance against forecast and prior periods;  determining our dividend policy;  determining our capital structure;  approving our risk management strategy and frameworks, and monitoring their effectiveness;  considering the social, ethical and environmental impact of our activities and monitoring compliance with our sustainability policies and practices;  monitoring Workplace Health and Safety (WH&S) issues in Westpac Group and considering appropriate WH&S reports and information;  maintaining an ongoing dialogue with Westpac’s auditors and, where appropriate, principal regulators; and  internal governance including delegated authorities, policies for appointments to our controlled entity Boards and monitoring resources available to senior executives. Delegated authority The Constitution and the Board Charter enable the Board to delegate to Committees and management. The roles and responsibilities delegated to the Board Committees are captured in the Charters of each of the five established Committees, namely:  Audit;  Risk Management;  Nominations;  Remuneration; and  Technology. 2013 WESTPAC GROUP ANNUAL REPORT 27 Size and membership of Board Committees as at 30 September 2013 Lindsay Maxsted John Curtis Status Chairman, Non-executive, Independent Deputy Chairman, Non-executive, Independent Gail Kelly CEO, Executive Elizabeth Bryan Non-executive, Independent Gordon Cairns Non-executive, Independent Ewen Crouch Non-executive, Independent Robert Elstone Non-executive, Independent Peter Hawkins Non-executive, Independent Peter Marriott Ann Pickard Non-executive, Independent Non-executive, Independent Board Audit Committee Board Risk Management Committee Board Nominations Committee Board Remuneration Committee Board Technology Committee Chair       Chair      Chair        Chair         Chair  The charts below demonstrate that our Board comprises a majority of independent Directors and show the tenure of our current Non-executive Directors. Length of tenure of Non-executive Directors Balance of Non-executive and Executive Directors 9–10 years 11% 6–7 years 11% 5–6 years 11% 4–5 years 23% 0–1 years 22% Independent Non-executive Directors 80% 1–2 years 22% Independent Non-executive Chairman 10% Executive Director 10% 28 2013 WESTPAC GROUP ANNUAL REPORT Chairman The Board elects one of the independent Non-executive Directors as Chairman. Our current Chairman is Lindsay Maxsted, who became Chairman on 14 December 2011. The Chairman’s role includes:  providing effective leadership to the Board in relation to all Board matters;  guiding the agenda and conducting all Board meetings;  in conjunction with the Company Secretaries, arranging regular Board meetings throughout the year, confirming that minutes of meetings accurately record decisions taken and, where appropriate, the views of individual Directors;  overseeing the process for appraising Directors and the Board as a whole;  overseeing Board succession;  acting as a conduit between management and Board, and being the primary point of communication between the Board and CEO;  representing the views of the Board to the public; and  taking a leading role in creating and maintaining an effective corporate governance system. Deputy Chairman Our Deputy Chairman is John Curtis. The Deputy Chairman’s role includes:  chairing Board and shareholder meetings when the Chairman is unable to do so; and  undertaking additional matters on the Chairman’s behalf, as requested by the Chairman. CEO Our CEO is Gail Kelly. The CEO’s role includes:  leadership of the management team;  developing strategic objectives for the business; and  the day-to-day management of the Westpac Group’s operations. Board meetings The Board had eight scheduled meetings for the financial year ended 30 September 2013, with additional meetings held as required. In July each year the Board discusses our strategic plan and approves our overall strategic direction. The Board also conducts a half year review of our strategy. The Board conducts workshops on specific subjects relevant to our business throughout the year. Board meetings are characterised by robust exchanges of views, with Directors bringing their experience and independent judgment to bear on the issues and decisions at hand. Non-executive Directors regularly meet without management present, so that they can discuss issues appropriate to such a forum. In all other respects, senior executives are invited, where considered appropriate, to participate in Board meetings. They also are available to be contacted by Directors between meetings. Meetings attended by Directors for the financial year ended 30 September 2013 are reported in Section 8 of the Directors’ report. CORPORATE GOVERNANCE Nomination and appointment The Board Nominations Committee is responsible for:  developing and reviewing policies on Board composition, strategic function and size; 1  reviewing and making recommendations to the Board annually on diversity generally within the Westpac Group, measurable objectives for achieving diversity and progress in achieving those objectives;  planning succession of the Non-executive Directors;  developing and implementing induction programs for new Directors and ongoing education for existing Directors;  developing eligibility criteria for the appointment of Directors;  recommending appointment of Directors to the Board; and  considering and recommending candidates for appointment to the Boards of relevant subsidiaries. Westpac seeks to maintain a Board of Directors with a broad range of financial and other skills, experience and knowledge necessary to guide the business of the Westpac Group. The Board Nominations Committee considers and makes recommendations to the Board on candidates for appointment as Directors. Such recommendations pay particular attention to the mix of skills, experience, expertise, diversity and other qualities of existing Directors, and how the candidate’s attributes will balance and complement those qualities. External consultants are used to access a wide base of potential Directors. New Directors receive an induction pack which includes a letter of appointment setting out the expectations of the role, conditions of appointment including the expected term of appointment, and remuneration. This letter conforms to the ASXCGC Recommendations. The attendance of Board Nominations Committee members at the Committee’s meetings is set out in Section 8 of the Directors’ report. Term of office The Board may appoint a new Director, either to fill a casual vacancy or as an addition to the existing Directors, provided the total number of Directors does not exceed 15 Non-executive Directors and three Executive Directors. Except for the Managing Director, a Director appointed by the Board holds office only until the close of the next AGM but is eligible for election by shareholders at that meeting. Our Constitution states that at each AGM, one-third of eligible Directors, and any other Director who has held office for three or more years since their last election, must retire. In determining the number of Directors to retire by rotation, no account is to be taken of Directors holding casual vacancy positions or of the CEO. The Directors to retire by rotation are those who have been the longest in office. A retiring Director holds office until the conclusion of the meeting at which he or she retires but is eligible for re-election by shareholders at that meeting. 2013 WESTPAC GROUP ANNUAL REPORT 29 The Board makes recommendations concerning the election or re-election of any Director by shareholders. In considering whether to support a candidate, the Board takes into account the results of the Board performance evaluation conducted during the year. The Board has a Tenure Policy, which limits the maximum tenure of office that any Non-executive Director other than the Chairman may serve to nine years, from the date of first election by shareholders. The maximum tenure for the Chairman is 12 years (inclusive of any term as a Director prior to being elected as Chairman), from the date of first election by shareholders. The Board, on its initiative and on an exceptional basis, may exercise discretion to extend the maximum terms specified above where it considers that such an extension would benefit the Group. Such discretion will be exercised on an annual basis and the Director concerned will be required to stand for re-election annually. Education On appointment, all Directors are offered an induction program appropriate to their experience to familiarise them with our business, strategy and any current issues before the Board. The induction program includes meetings with the Chairman, the CEO, the Board Committee Chairs and each Group Executive. The Board encourages Directors to continue their education by participating in workshops held throughout the year, attending relevant site visits and undertaking relevant external education. Access to information and advice All Directors have unrestricted access to company records and information, and receive regular detailed financial and operational reports from senior management. Each Director also enters into an access and indemnity agreement which, among other things, provides for access to documents for up to seven years after his or her retirement as a Director. The Chairman and other Non-executive Directors regularly consult with the CEO, CFO and other senior executives, and may consult with, and request additional information from, any of our employees. All Directors have access to advice from senior internal legal advisors including the Group General Counsel. In addition, the Board collectively, and all Directors individually, have the right to seek independent professional advice, at our expense, to help them carry out their responsibilities. While the Chairman’s prior approval is needed, it may not be unreasonably withheld. Company Secretaries We have two Company Secretaries appointed by the Board. The Senior Company Secretary, who is also Legal Counsel to the Board, attends Board and Board Committee meetings and is responsible for providing Directors with advice on legal and corporate governance issues together with the Group General Counsel. The Group Company Secretary attends Board and Board Committee meetings and is responsible for the operation of the secretariat function, including implementing our governance framework and, in conjunction with management, giving practical effect to the Board’s decisions. Profiles of our Company Secretaries are set out in Section 1 of the Directors’ report. Board Committees Composition and independence Board Committee members are chosen for the skills and experience they can contribute to the respective Board Committees. All of the Board Committees are comprised of independent Non-executive Directors. The CEO is also a member of the Board Technology Committee. Operation and reporting Scheduled meetings of the Board Committees occur quarterly, with the exception of the Board Technology Committee which has scheduled meetings three times a year. All Board Committees are able to meet more frequently as necessary. Each Board Committee is entitled to the resources and information it requires and has direct access to our employees and advisers. The CEO attends all Board Committee meetings, except where she has a material personal interest in a matter being considered. Senior executives and other selected employees are invited to attend Board Committee meetings as required. All Directors can receive all Board Committee papers and can attend any Board Committee meeting, provided there is no conflict of interest. Performance Board, Board Committees and Directors The Board undertakes ongoing self-assessment as well as commissioning an annual performance review by an independent consultant. The review process conducted in 2013 included an assessment of the performance of the Board, the Board Committees, and each Director with outputs collected, analysed and presented to the Board. The Board discussed the results and agreed follow up action on matters relating to Board composition, process and priorities. The Chairman also discusses the results with individual Directors and Board Committee Chairs. The full Board (excluding the Chairman) reviews the results of the performance review of the Chairman and results are then privately discussed between the Chairman and Deputy Chairman. Management The Board, in conjunction with its Board Remuneration Committee, is responsible for approving the performance objectives and measures for the CEO and other senior executives, and providing input into the evaluation of performance against these objectives. The Board Risk Management Committee also refers to the Board Remuneration Committee any matters that come to its attention that are relevant with respect to remuneration policy or practices. Management performance evaluations for the financial year ended 30 September 2013 were conducted following the end of the financial year. There is a further discussion on performance objectives and performance achieved in the Remuneration report contained in the Directors’ report. 30 2013 WESTPAC GROUP ANNUAL REPORT All new senior executives are provided with extensive briefing on our strategies and operations, and the respective roles and responsibilities of the Board and senior management. Advisory Boards Each brand in our portfolio has its own unique identity and market position. Westpac maintains an Advisory Board for each of BankSA and Bank of Melbourne. Each assists in preserving the unique identity of these brands within the overall multi-brand strategy of the Westpac Group through oversight of management reports in relation to their brand health and positioning. In particular, the Advisory Boards are responsible for:  providing advice to management on management’s strategies and initiatives to continue to strengthen the unique brand position and identity;  providing advice to management of the relevant brand so as to promote and preserve its distinct position and identity and align brand values with those of the relevant communities served;  considering and assessing reports provided by management on the health of the relevant brand;  acting as ambassadors for the relevant bank, including through supporting community and major corporate promotional events to assist in building relationships with the bank’s customers, local communities and the business and government sector, and advising senior management on community matters relevant to the provision of financial services in the community it serves; and  alerting management to local market opportunities and issues of which Advisory Board members are aware that would enhance the provision of services to customers and potential customers and the position of the bank in its local communities. 1 CORPORATE GOVERNANCE ETHICAL AND RESPONSIBLE DECISION-MAKING Code of Conduct and Principles for Doing Business Our ‘Code of Conduct’ describes the standards of conduct expected of our people, both employees and contractors. It provides a set of guiding principles to help us make the right decision every time. The six principles making up the Code are:  we act with honesty and integrity;  we comply with laws and with our policies;  we respect confidentiality and do not misuse information;  we value and maintain our professionalism;  we work as a team; and  we manage conflicts of interest responsibly. The focus of each of the principles is to uphold the reputation of the Group. The Code of Conduct has the full support of the Board and the Executive Team, and we take compliance with the Code very seriously. Our ‘Principles for Doing Business’ (the Principles) underpin the Group’s commitment to sustainable business practice and community involvement. In summary:  we believe in maintaining the highest level of governance and ethical practice while protecting the interests of our stakeholders;  we believe in putting our customers at the centre of everything we do;  we believe our people are a crucial element of a successful service business;  we are committed to managing our direct and indirect impacts on the environment;  we believe being actively involved in the community is fundamental to the sustainability of our business; and  we believe that our suppliers should be viewed as partners in our sustainability journey. The Principles also align with significant global initiatives that promote responsible business practices and apply to all Directors, employees and contractors. We also have a range of internal guidelines, communications and training processes and tools, including an online learning module entitled ‘Doing the Right Thing’, which apply to and support our Code of Conduct and the Principles. Key policies In addition to our Code of Conduct and the Principles, we have a number of key policies to manage our compliance and human resource requirements. We also voluntarily subscribe to a range of external industry codes, such as the Code of Banking Practice and the ePayments Code. 2013 WESTPAC GROUP ANNUAL REPORT 31 Code of Ethics for Senior Finance Officers The Code of Accounting Practice and Financial Reporting (the Code) complements our Code of Conduct. The Code is designed to assist the CEO, CFO and other principal financial officers in applying the highest ethical standards to the performance of their duties and responsibilities with respect to accounting practice and financial reporting. The Code requires that those officers:  act honestly and ethically, particularly with respect to conflicts of interest;  provide full, fair, accurate and timely disclosure in reporting and other communications;  comply with applicable laws, rules and regulations;  promptly report violations of the Code; and  be accountable for adherence to the Code. Conflicts of interest Westpac Group has a detailed conflicts of interest framework, which includes a Group policy supported by more specific divisional policies and guidelines aimed at identifying and managing actual, potential or apparent conflicts of interest. The conflicts of interest framework includes a separate Gifts and Hospitality Policy. This policy provides employees with guidance to manage their obligations relating to the giving or receiving of gifts or hospitality. The Board All Directors are required to disclose any actual, potential or apparent conflicts of interest upon appointment and are required to keep these disclosures to the Board up to date. Any Director with a material personal interest in a matter being considered by the Board must declare their interest and, unless the Board resolves otherwise, may not be present during the boardroom discussions or vote on the relevant matter. Our employees and contractors We expect our employees and contractors to:  have in place adequate arrangements for the management of actual, potential or apparent conflicts of interest;  obtain consent from senior management before accepting a directorship on the board of a non-Westpac Group company;  disclose any material interests they have with our customers or suppliers to their manager and not be involved with customer relationships where they have such an interest;  not participate in business activities outside their employment with us (whether as a principal, partner, director, agent, guarantor, investor or employee) without approval or when it could adversely affect their ability to carry out their duties and responsibilities; and  not solicit, provide facilitation payments, accept or offer money, gifts, favours or entertainment which might influence, or might appear to influence, their business judgment. Fit and Proper Person assessments We have a Board approved Fit and Proper Policy that meets the requirements of the related APRA Prudential Standards. In accordance with that policy, we assess the fitness and propriety of our Directors and also of employees who perform specified statutory roles required by APRA Prudential Standards or ASIC guidelines. The Chairman of the Westpac Board (and in the case of the Westpac Chairman, the Westpac Board) is responsible for assessing the Westpac Board Directors, Non-executive Directors on subsidiary Boards, Group Executives, external auditors and actuaries. An executive Fit and Proper Committee is responsible under delegated authority of the Westpac Board for undertaking assessments of all other employees who hold statutory roles. In all cases the individual is asked to provide a detailed declaration, and background checks are undertaken. Assessments occur upon appointment to the relevant position and are re-assessed annually. Concern reporting and whistleblower protection Under our Whistleblower Protection Policy, our employees and contractors are encouraged to raise any concerns about activities or behaviour that may be unlawful or unethical. The Policy outlines all reporting channels, including our concern reporting system ‘Concern Online’ which enables reporting on an anonymous basis. Concerns may include suspected breaches of the Code of Conduct, the Principles and any internal policy or regulatory requirement. Employees who raise concerns may choose to involve the Whistleblower Protection Officer, who is responsible for protecting the employee against victimisation. We investigate reported concerns in a manner that is fair and objective to all people involved. If the investigation shows that wrongdoing has occurred, we are committed to changing our processes and taking action in relation to employees or contractors who have behaved incorrectly. Where illegal conduct has occurred, this may involve reporting the matter to relevant authorities. Statistics about concerns raised are reported quarterly to both the Board Risk Management Committee and the Westpac Group Operational Risk & Compliance Committee. Securities trading Under the Westpac Group Securities Trading Policy, Directors, employees and contractors are restricted from dealing in any securities and other financial products if they possess inside information. They are also prohibited from passing on inside information to others who may use that information to trade in securities. In addition, Directors and any employee or contractor who, because of their seniority or the nature of their position, may have access to material non-public information about Westpac (Prescribed Employees) are subject to further restrictions, including prohibitions on trading prior to and immediately following annual and half year profit announcements. 32 2013 WESTPAC GROUP ANNUAL REPORT We manage and monitor our obligations through:  the insider trading provisions of our policy, which prohibit any dealing in any securities where a Director or employee has access to inside information that may affect the price of those securities;  placing limitations upon Directors, employees and contractors participating in a new product issue where their position puts them in an actual, potential or apparent position of conflict of interest;  restrictions limiting the periods in which the Directors and Prescribed Employees can trade in our shares or other company securities (Blackout Periods);  requiring Directors and Prescribed Employees1 to notify their intention to trade outside Blackout Periods and confirm that they have no inside information;  monitoring the trading of Westpac securities by Directors and Prescribed Employees;  maintaining a register of Prescribed Employees, which is regularly updated;  notifying ASX of trades by Directors of Westpac securities as required under the ASX Listing Rules; and  forbidding employees from entering into hedging arrangements in relation to their unvested employee shares or securities, whether directly or indirectly. DIVERSITY Westpac Group has a Group Diversity Policy that sets out the diversity initiatives for the Westpac Group. In this context, diversity covers gender, age, ethnicity, accessibility, flexibility, cultural background, sexual orientation and religious beliefs. The objectives of the policy are to ensure that the Westpac Group:  has a workforce profile that delivers competitive advantage through the ability to garner a deep understanding of customer needs;  has a truly inclusive workplace where every individual can shine regardless of gender, cultural identity, age, work style or approach;  leverages the value of diversity for all our stakeholders to deliver the best customer experience, improved financial performance and a stronger corporate reputation; and  continues to take a leadership position on diversity practices and setting the agenda in the external community. To achieve these objectives the Westpac Group:  has set Board determined, measurable objectives for achieving gender diversity. The Board assesses annually both the objectives and progress in achieving them;  assesses pay equity on an annual basis;  encourages and supports the application of flexibility policies into practice across the business; 1 CORPORATE GOVERNANCE  is committed to proactively assisting Indigenous Australians to access employment across our brands; and  implements our Accessibility Action Plan for employees and customers with a disability, including ensuring employment opportunities are accessible for people with disabilities. The implementation of these objectives is overseen by the Westpac Group Diversity Council chaired by the CEO. The Board, or an appropriate Committee of the Board, will receive regular updates from the Westpac Group Diversity Council on these diversity initiatives. We will also continue to listen to the needs of our employees through our employee surveys and specific diversity focused surveys. In October 2010, the Board set a measurable objective to increase the proportion of women in leadership roles (over 5,000 leaders from our Executive Team through to our bank managers) from 33% to 40% by 2014. At 30 September 2013, the proportion of women employed by Westpac Group was as follows:  Board of Directors: 30%;  leadership2 roles: 42%; and  total Westpac workforce: 60% SUSTAINABILITY We view sustainable and responsible business practices as important for our business and to add shareholder value. This means conducting our business in a responsible, trustworthy and ethical manner, while accepting accountability for our impacts on society and the environment. We are committed to transparency and fair dealing, treating employees and customers responsibly, and having solid links with the community. Reporting We report on our performance against these objectives in the Annual Review and Sustainability Report, the Annual Report, and the full year and half year ASX results. We also provide additional detailed information on our website. Our management and our reporting of sustainability aim to address the issues that we believe are the most material for our business and stakeholders, now and in the future. We understand that this is an evolving agenda and seek to progressively embed the management of sustainability issues into business as usual practice, while also anticipating and shaping emerging social issues where we have the skills and experience to make a meaningful difference and drive business value. 1 Prescribed Employees are employees who, because of their seniority or the nature of their position, are likely to come in contact with key financial, operational and strategic information about Westpac that will, or is likely to have, a material effect on the price or value of Westpac securities. 2 Women in leadership refers to the proportion of women (permanent and maximum term) in people leadership roles or senior roles of influence as a proportion of all leaders across the Group. It includes the CEO, Executive Team, General Managers, Senior Managers as direct reports to General Managers and the next two levels of management. 2013 WESTPAC GROUP ANNUAL REPORT 33 Our Sustainability Report is independently assured against the AA1000 Assurance Standard and follows the Global Reporting Initiative G3 Framework. The assurance process not only tests the integrity of the data, but also tests the effectiveness of our underlying systems and processes, and the extent to which corporate responsibility and sustainability policies and processes are embedded across our organisation. In addition, we actively participate in various independent external assessments by authoritative sustainability and governance rating organisations benchmarking us against the highest standards of governance. FINANCIAL REPORTING Approach to financial reporting Our approach to financial reporting reflects three core principles:  that our financial reports present a true and fair view;  that our accounting methods comply with applicable accounting standards and policies; and  that our external auditor is independent and serves security holders’ interests. The Board, through the Board Audit Committee, monitors Australian and international developments relevant to these principles, and reviews our practices accordingly. The Board delegates oversight responsibility for risk management between the Board Audit Committee and the Board Risk Management Committee. Board Audit Committee As detailed in its charter, the Board Audit Committee has oversight of:  the integrity of the financial statements and financial reporting systems;  the external auditor’s qualifications, performance, independence and fees;  performance of the internal audit function;  financial reporting and regulatory compliance with reference to the Board Risk Management Committee. This includes an oversight of regulatory and statutory reporting requirements; and  procedures for the receipt, retention and treatment of financial complaints, including accounting, internal controls or auditing matters, and the confidential reporting by employees of concerns regarding accounting or auditing matters. The Board Audit Committee reviews, discusses with management and the external auditor, and assesses:  any significant estimates and judgments in financial reports, and monitors the methods used to account for unusual transactions;  the processes used to monitor and comply with laws, regulations and other requirements relating to external reporting of financial and non-financial information;  the major financial risk exposures; and  the process surrounding the disclosures made by the CEO and CFO in connection with their personal certifications of the annual financial statements. As part of its oversight responsibilities, the Board Audit Committee also conducts discussions with a wide range of internal and external stakeholders including:  the Board Risk Management Committee, CFO, Chief Risk Officer (CRO), General Manager, Group Assurance, management and the external auditor, about our major financial risk exposures and the steps management has taken to monitor and control such exposures;  the General Manager, Group Assurance and external auditor concerning their audit and any significant findings, and the adequacy of management’s responses;  management and the external auditor concerning the half year and annual financial statements;  management and the external auditor regarding any correspondence, with regulators or government agencies, and reports that raise issues of a material nature; and  the Legal Counsel to the Board and the Group General Legal Counsel regarding any legal matters that may have a material impact on, or require disclosure in, the financial statements. Periodically, the Board Audit Committee consults with the external auditor without the presence of management about internal controls over financial information, reporting and disclosure and the fullness and accuracy of Westpac’s financial statements. The Board Audit Committee also meets with the General Manager, Group Assurance without management being present. Financial knowledge The Board Audit Committee comprises four independent, Non-executive Directors and is chaired by Robert Elstone. All Board Audit Committee members have appropriate financial experience, an understanding of the financial services industry and satisfy the independence requirements under the ASXCGC Recommendations, the United States Securities Exchange Act of 1934 (as amended) and its related rules, and the NYSE Listing Rules. The Board has determined that Lindsay Maxsted, member of the Board Audit Committee, is an ‘audit committee financial expert’ and independent in accordance with US securities law. The designation of Lindsay Maxsted as an audit committee financial expert does not impose duties, obligations or liability on him that are greater than those imposed on him as a Board Audit Committee member, and does not affect the duties, obligations or liability of any other Board Audit Committee member or Board member. Audit committee financial experts are not deemed as an ‘expert’ for any other purpose. The Board Audit Committee’s membership is set out in the table entitled ‘Size and membership of Board Committees as at 30 September 2013’ in the Directors’ report. The full qualifications of the Audit Committee members and their attendance at Board Audit Committee meetings are set out in Section 1 and Section 8 of the Directors’ report. 34 2013 WESTPAC GROUP ANNUAL REPORT External auditor The role of the external auditor is to provide an independent opinion that our financial reports are true and fair, and comply with applicable regulations. Our external auditor is PricewaterhouseCoopers (PwC), appointed by shareholders at the 2002 AGM. Our present PwC lead audit partner is Michael Codling and the review audit partner is Matthew Lunn. Michael Codling and Matthew Lunn assumed responsibility for these roles in December 2011 and December 2012 respectively. The external auditor receives all Board Audit Committee and Board Risk Management Committee papers, attends all meetings of both committees and is available to Committee members at any time. The external auditor also attends the AGM to answer questions from shareholders regarding the conduct of its audit, the audit report and financial statements and its independence. As our external auditor, PwC is required to confirm its independence and compliance with specified independence standards on a quarterly basis. The roles of lead audit partner and review audit partner must be rotated every five years and cannot be resumed by the same person for a minimum of five years. We strictly govern our relationship with the external auditor, including restrictions on employment, business relationships, financial interests and use of our financial products by the external auditor. Engagement of the external auditor To avoid possible independence or conflict issues, the external auditor is not permitted to carry out certain types of non-audit services for Westpac and may be limited as to the extent to which it can perform other non-audit services as specified in our ‘Pre-approval of engagement of PwC for audit and non-audit services’ (the Guidelines). Use of the external audit firm for any non-audit services must be assessed and approved in accordance with the pre-approval process determined by the Board Audit Committee and set out in the Guidelines. The breakdown of the aggregate fees billed by the external auditor in respect of each of the two most recent financial years for audit, audit-related, tax and other services is provided in Note 33 to our financial statements for the year ended 30 September 2013. A declaration regarding the Board’s satisfaction that the provision of non-audit services by PwC is compatible with the general standards of auditor independence is provided in Section 10 of the Directors’ report. 1 CORPORATE GOVERNANCE Group Assurance (internal audit) Group Assurance is Westpac’s internal audit function providing the Board and Executive Management with an independent and objective evaluation of the adequacy and effectiveness of management’s control over risk. Group Assurance covers the governance, risk management and internal control frameworks of Westpac and its wholly owned subsidiaries. It has access to all of our entities, and conducts audits and reviews following a risk-based planning approach, the outline for which has been approved by the Board Audit Committee. Group Assurance provides regular reports to the Board Audit Committee and, as deemed appropriate, the Board Risk Management Committee, and raises any significant issues with those Committees. The General Manager Group Assurance operates under a Group Assurance charter approved by the Board Audit Committee and has a direct reporting line to the Chairman of that Committee. MARKET DISCLOSURE We maintain a level of disclosure that seeks to provide all investors with equal, timely, balanced and meaningful information. Consistent with these standards the Westpac Group maintains a Board approved Market Disclosure Policy, which governs how we communicate with our shareholders and the investment community. The policy reflects the requirements of the ASX, NZX and other offshore stock exchanges where we have disclosure obligations, as well as relevant securities and corporations legislation. Under our policy, information that a reasonable person would expect to have a material effect on the price or value of our securities must first be disclosed via the ASX unless an exception applies under regulatory requirements. Our Disclosure Committee is responsible for determining what information should be disclosed publicly under the policy, and for assisting employees in understanding what information may require disclosure to the market on the basis that it is price sensitive. The Disclosure Committee is comprised of the CEO, the Executive Team, the Group General Counsel and the General Manager, Corporate Affairs and Sustainability. The Chief Operating Officer is the Disclosure Officer. The Disclosure Officer is ultimately responsible for all communication with relevant stock exchanges and notifying regulators in any jurisdiction as a result of market disclosure. Once relevant information is disclosed to the market and available to investors, it is also published on our website. This includes investor discussion packs, presentations on and explanations about our financial results. Our website information also includes Annual Review and Sustainability Reports, Annual Reports, profit announcements, CEO and executive briefings (including webcasts, recordings or transcripts of all major events), notices of meetings and key media releases. 2013 WESTPAC GROUP ANNUAL REPORT 35 SHAREHOLDER COMMUNICATION AND PARTICIPATION We seek to keep our shareholders fully informed through a variety of communication mediums. These are regularly reviewed to improve our communications and utilise new technologies. These approaches include:  direct communications with shareholders via mail and email;  the publication of all relevant company information in the Investor Centre section of our website; and  access to all major market briefings and shareholder meetings via webcasts. Shareholders are provided with advance notice of all major market briefings and shareholder meetings, through ASX announcements and/or the publication of an investor calendar of events on our website. Shareholders are given the option to receive information in print or electronic format. We regard the AGM as an important opportunity for engaging and communicating with shareholders. Shareholders are encouraged to attend and actively participate in our AGM, which is webcast and can also be viewed at a later time from our website. Shareholders who are unable to attend the AGM are able to lodge their proxies through a number of channels, including via the internet. At the time of receiving the Notice of Meeting, shareholders are also invited to put forward questions they would like addressed at the AGM. CEO and CFO assurance The Board receives regular reports from management about our financial condition and operational results, as well as that of our controlled entities. The CEO and the CFO annually provide formal statements to the Board, and have done so for the financial year ended 30 September 2013, that state that in all material respects:  Westpac’s financial records for the financial year have been properly maintained in that they: – correctly record and explain its transactions, and financial position and performance; – enable true and fair financial statements to be prepared and audited; and – are retained for seven years after the transactions covered by the records are completed;  the financial statements and notes required by the accounting standards for the financial year comply with the accounting standards;  the financial statements and notes for the financial year give a true and fair view of Westpac’s and its consolidated entities’ financial position and of their performance;  any other matters that are prescribed by the Corporations Act and regulations as they relate to the financial statements and notes for the financial year are satisfied; and  the declarations provided in accordance with section 295A of the Corporations Act are founded on a sound system of risk management and internal control, and that the system is operating effectively in all material respects in relation to financial reporting risks. RISK MANAGEMENT Roles and responsibilities The Board is responsible for reviewing and approving our overall risk management strategy, including determining our appetite for risk. The Board has delegated to the Board Risk Management Committee responsibility for providing recommendations to the Board on Westpac Group’s risk- reward strategy, setting risk appetite, approving frameworks, policies and processes for managing risk, and determining whether to accept risks beyond management’s approval discretion. The Board Risk Management Committee monitors the alignment of our risk profile with our risk appetite, which is defined in the Board Statement of Risk Appetite, and with our current and future capital requirements. The Board Risk Management Committee receives regular reports from management on the effectiveness of our management of Westpac’s material business risks. More detail about the role of the Board Risk Management Committee is set out later in this section under ‘Board Risk Management Committee’. The CEO and Executive Team are responsible for implementing our risk management strategy and frameworks, and for developing policies, controls, processes and procedures for identifying and managing risk in all of Westpac’s activities. Our approach to risk management is that ‘risk is everyone’s business’ and that responsibility and accountability for risk begins with the business units that originate the risk. The 1st Line of Defence – Risk identification, risk management and self-assurance Divisional business units are responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite and policies. They are required to establish and maintain appropriate risk management controls, resources and self-assurance processes. The 2nd Line of Defence – Establishment of risk management frameworks and policies and risk management oversight Our 2nd Line of Defence is a separate risk advisory, control and monitoring function which establishes frameworks, policies, limits and processes for the management, monitoring and reporting of risk. It also evaluates and opines on the adequacy and effectiveness of 1st Line controls and application of frameworks and policies and, where necessary, requires improvement and monitors the 1st Line's progress toward remediation of identified deficiencies. 36 2013 WESTPAC GROUP ANNUAL REPORT Our 2nd Line of Defence has three layers: We distinguish five main types of risk: CORPORATE GOVERNANCE  our executive risk committees lead the optimisation of risk-reward by overseeing the development of risk appetite statements, risk management frameworks, policies and risk concentration controls, and monitoring Westpac’s risk profile for alignment with approved appetites and strategies;  our Group Risk function is independent from the business divisions, reports to the Chief Risk Officer (CRO), and establishes and maintains the Group-wide risk management frameworks, policies and concentration limits that are approved by the Board Risk Management Committee. It also reports on Westpac’s risk profile to executive risk committees and the Board Risk Management Committee; and  divisional risk areas are responsible for developing division-specific risk appetite statements, policies, controls, procedures, monitoring and reporting capability, which align to the Board’s Statement of Risk Appetite and the risk management frameworks approved by the Board Risk Management Committee. These risk areas are independent of the Divisions’ 1st Line business areas, with each divisional CRO having a direct reporting line to the CRO, as well as to their Division’s Group Executive. The 3rd Line of Defence – Independent assurance Our Group Assurance function independently evaluates the adequacy and effectiveness of the Group’s overall risk management framework and controls. Our overall risk management approach is summarised in the following diagram: Risk appetite and frameworks BOARD 2nd LINE Risk Committees Group Risk Divisional Risk Group-wide policies and standards Divisional risk appetite and policies 3rd LINE Independent assurance Risk reporting Risk acceptance and monitoring Risk identification, evaluation and management 1st LINE Business units (Risk origination within risk appetite) Our overall risk management governance structure is set out in more detail in the table ‘Risk Management Governance Structure’ included in this statement. Risk management approach We regard managing the risks that affect our business as a fundamental activity, as they influence our performance, reputation and future success. Effective risk management involves taking an integrated and balanced approach to risk and reward, and enables us to both increase financial growth opportunities and mitigate potential loss or damage. Mitigation and optimisation strategies are of equal importance and need to be effectively aligned and integrated.  credit risk – the risk of financial loss where a customer or counterparty fails to meet their financial obligations to Westpac; 1  liquidity risk – the risk that the Group will be unable to fund assets and meet obligations as they become due;  market risk – the risk of an adverse impact on earnings resulting from changes in market factors, such as foreign exchange rates, interest rates, commodity prices and equity prices. This includes interest rate risk in the banking book – the risk to interest income from a mismatch between the duration of assets and liabilities that arises in the normal course of business activities;  operational risk – operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The definition is aligned to the regulatory (Basel II) definition, including legal and regulatory risk but excluding strategic and reputation risk; and  compliance risk – the risk of legal or regulatory sanction, financial or reputation loss, arising from our failure to abide by the compliance obligations required of us as a financial services group. In addition to, and linked to, these five main types of risk, we also manage the following risks:  business risk – the risk associated with the vulnerability of a line of business to changes in the business environment;  environmental, social and governance risks – the risk that the Group damages its reputation or financial performance due to failure to recognise or address material existing or emerging sustainability related environmental, social or governance issues;  equity risk – the potential for financial loss arising from movements in equity values. Equity risk may be direct, indirect or contingent;  insurance risk – the risk of mis-estimation of the expected cost of insured events, volatility in the number or severity of insured events, and mis-estimation of the cost of incurred claims;  related entity (contagion) risk – the risk that problems arising in other Westpac Group members compromise the financial and operational position of the authorised deposit-taking institutions in the Westpac Group; and  reputation risk – the risk to earnings or capital arising from negative public opinion resulting from the loss of reputation or public trust and standing. Westpac has received advanced accreditation from APRA and the RBNZ under the Basel II capital framework, and uses the Advanced Internal Ratings Based (AIRB) approach for credit risk and the Advanced Measurement Approach (AMA) for operational risk when calculating regulatory capital. 2013 WESTPAC GROUP ANNUAL REPORT 37 Board Risk Management Committee The Board Risk Management Committee comprises all of Westpac’s independent, Non-executive Directors and is chaired by Elizabeth Bryan. As set out in its charter, the Board Risk Management Committee:  provides recommendations to the Board on Westpac Group’s risk-reward strategy;  sets risk appetite;  reviews and approves the frameworks for managing risk, including capital, credit, liquidity, market, operational, compliance and reputation risk;  reviews and approves the limits and conditions that apply to credit risk approval authority delegated to the CEO, CFO and CRO and any other officers of the Westpac Group to whom the Board has delegated credit approval authority;  monitors the risk profile, performance, capital levels, exposures against limits and the management and control of our risks;  monitors changes anticipated in the economic and business environment and other factors considered relevant to our risk profile and risk appetite;  oversees the development and ongoing review of key policies that support our frameworks for managing risk; and  may approve accepting risks beyond management’s approval discretion. From the perspective of specific types of risk, the Board Risk Management Committee role includes:  credit risk – approving key policies and limits supporting the Credit Risk Management Framework, and monitoring the risk profile, performance and management of our credit portfolio;  liquidity risk – approving the internal liquidity assessment process, key policies and limits supporting the Liquidity Risk Management Framework, including our funding strategy and liquidity requirements, and monitoring the liquidity risk profile;  market risk – approving key policies and limits supporting the Market Risk Management Framework, including, but not limited to, the Value at Risk and Net Interest Income at Risk limits, and monitoring the market risk profile;  operational risk – monitoring the operational risk profile, the performance of operational risk management and controls, and the development and ongoing review of operational risk policies; and  compliance risk – reviewing compliance risk processes and our compliance with applicable laws, regulations and regulatory requirements, discussing with management and the external auditor any material correspondence with regulators or government agencies and any published reports that raise material issues, and reviewing complaints and whistleblower concerns. The Board Risk Management Committee also:  approves the internal capital adequacy assessment process and in doing so reviews the outcomes of enterprise wide stress testing, sets the preferred capital ranges for regulatory capital having regard to Westpac internal economic capital measures, and reviews and monitors capital levels for consistency with the Westpac Group's risk appetite;  provides relevant periodic assurances to the Board Audit Committee regarding the operational integrity of the Risk Management Framework; and  refers to other Board Committees any matters that come to the attention of the Board Risk Management Committee that are relevant for those respective Board Committees. The Board Risk Management Committee’s membership is set out in the table titled ‘Size and membership of Board Committees as at 30 September 2013’ in the Directors’ report. The full qualifications of Board Risk Management Committee members and their attendance at Board Risk Management Committee meetings are set out in Section 1 and Section 8 of the Directors’ report. Compliance Management Framework Westpac’s Compliance Management Framework sets out our approach to managing compliance and mitigating compliance risk, in order to achieve our compliance objectives. To proactively manage our compliance risks, we must:  comply with both the letter and ‘spirit’ of the law while being attentive to the needs of our clients;  embed the requirements of our regulators into how we do business, how we conduct ourselves and how our systems and processes are designed and operate;  maintain a compliance culture where everyone in every part of the Westpac Group has responsibility for compliance. The mechanisms we use to implement our approach include:  maintaining a strong governance environment;  identifying obligations, developing and maintaining Compliance Plans and implementing change;  developing, implementing and testing compliance controls; and  monitoring and reporting incidents, issues and risks. As with other forms of risk, business line management is primarily responsible for managing compliance. This is supported by a dedicated Compliance function covering the Group and each area of the business. The Compliance function reports to the Chief Compliance Officer. Regular reports are provided to the Operational Risk & Compliance Committee and the Board Risk Management Committee on the status of compliance across the Group. 38 2013 WESTPAC GROUP ANNUAL REPORT CORPORATE GOVERNANCE The Board Remuneration Committee reviews and recommends to the Board the size of variable reward pools each year based on consideration of pre-determined business performance indicators and the financial soundness of Westpac. The Board Remuneration Committee also approves remuneration arrangements outside of the Group Remuneration Policy relating to individuals or groups of individuals which are significant because of their sensitivity, precedent or disclosure implications. In addition, the Board Remuneration Committee considers and evaluates the performance of senior executives when making remuneration determinations and otherwise as required. 1 Independent remuneration consultants are engaged by the Board Remuneration Committee to provide information across a range of issues including remuneration benchmarking, market practices and emerging trends and regulatory reforms. The Board Remuneration Committee’s membership is set out in the table titled ‘Size and membership of Board Committees as at 30 September 2013’ in the Directors’ report. The full qualifications of Board Remuneration Committee members and their attendance at Board Remuneration Committee meetings are set out in Section 1 and Section 8 of the Directors’ report. Further details of our remuneration framework are included in the Remuneration report which is in Section 9 of the Directors’ report. The Board Remuneration Committee reviews and recommends the report for approval. REMUNERATION The Board Remuneration Committee assists the Board by ensuring that Westpac has coherent remuneration policies and practices that fairly and responsibly reward individuals having regard to performance, Westpac’s risk management framework, the law and the highest standards of governance. The Board Remuneration Committee has been in place for the whole of the financial year and is comprised of four independent Non-executive Directors and is chaired by John Curtis. All members of the Board Remuneration Committee are also members of the Board Risk Management Committee, which assists in the integration of effective risk management into the remuneration framework. As set out in its charter, the Board Remuneration Committee:  reviews and makes recommendations to the Board in relation to the Westpac Group Remuneration Policy (Group Remuneration Policy) and assesses the Group Remuneration Policy’s effectiveness and its compliance with prudential standards;  reviews and makes recommendations to the Board in relation to the individual remuneration levels of the CEO, Non-executive Directors, Group Executives, other Executives who report directly to the CEO, other persons whose activities in the Board’s opinion affect the financial soundness of Westpac, any person specified by APRA, and any other person the Board determines;  reviews and makes recommendations to the Board in relation to the remuneration structures for each category of persons covered by the Group Remuneration Policy;  reviews and makes recommendations to the Board on corporate goals and objectives relevant to the remuneration of the CEO, and the performance of the CEO in light of these objectives;  reviews and makes recommendations to the Board on the short-term and long-term incentive plans for Group Executives;  reviews and makes recommendations to the Board in relation to approving equity based remuneration plans; and  oversees general remuneration practices across the Group. 2013 WESTPAC GROUP ANNUAL REPORT 39 Risk Management Governance Structure Westpac’s risk management governance structure is set out in the table below: Board  reviews and approves our overall risk management strategy. Board Risk Management Committee (BRMC)  provides recommendations to the Board on the Westpac Group’s risk-reward strategy;  sets risk appetite;  approves frameworks and key policies for managing risk;  monitors our risk profile, performance, capital levels, exposures against limits and management and control of our risks;  monitors changes anticipated in the economic and business environment and other factors relevant to our risk profile;  oversees the development and ongoing review of key policies that support our frameworks for managing risk; and  determines whether to accept risks beyond the approval discretion provided to management. Other Board Committees with a risk focus Board Audit Committee  oversees the integrity of financial statements and financial reporting systems. Board Remuneration Committee  reviews any matters raised by the BRMC with respect to risk-adjusted remuneration. Board Technology Committee  oversees information technology strategy and implementation. Executive Team  executes the Board-approved strategy;  assists with the development of the Board Statement of Risk Appetite;  delivers the Group’s various strategic and performance goals within the approved risk appetite; and  monitors key risks within each business unit, capital adequacy and the Group’s reputation. Executive risk committees Westpac Group Credit Risk Committee (CREDCO)  leads the optimisation of credit risk-reward across the Group;  oversees the Credit Risk Management Framework and key policies;  oversees our credit risk profile; and  identifies emerging credit risks and appropriate actions to address these. Westpac Group Market Risk Committee (MARCO)  leads the optimisation of market risk-reward across the Group;  oversees the Market Risk Management Framework and key policies;  oversees our market risk profile; and  identifies emerging market risks and appropriate actions to address these. Westpac Group Asset & Liability Committee (ALCO)  leads the optimisation of funding and liquidity risk-reward across the Group;  reviews the level and quality of capital to ensure that it is commensurate with the Group’s risk profile, business strategy and risk appetite;  oversees the Liquidity Risk Management Framework and key policies;  oversees the funding and liquidity risk profile and balance sheet risk profile; and  identifies emerging funding and liquidity risks and appropriate actions to address these. 40 2013 WESTPAC GROUP ANNUAL REPORT CORPORATE GOVERNANCE Risk Management Governance Structure (continued) Executive risk committees (continued) 1 Westpac Group Operational Risk & Compliance Committee (OPCO)  leads the optimisation of operational risk-reward across the Group;  oversees the operational risk management framework, the compliance management framework and key supporting policies;  oversees our operational risk and compliance profiles;  oversees the reputation risk and environmental, social and governance (ESG) risk management frameworks and key supporting policies; and  identifies emerging operational and compliance risks and appropriate actions to address these. Westpac Group Remuneration Oversight Committee (ROC)  provides assurance that the remuneration arrangements across the Group have been examined from a People, Risk and Finance perspective;  responsible for ensuring that risk is embedded in all key steps in our remuneration framework;  reviews and makes recommendations to the CEO for recommendation to the Board Remuneration Committee on the Group Remuneration Policy and provides assurance that remuneration arrangements across the Group encourage behaviour that supports Westpac’s long-term financial soundness and the risk management framework;  reviews and monitors the remuneration arrangements (other than for Group Executives) for Responsible Persons (as defined in the Group’s Statutory Officers Fit and Proper Policy), risk and financial control personnel, and all other employees for whom a significant portion of total remuneration is based on performance and whose activities, either individually or collectively, may affect the financial soundness of Westpac; and  reviews and recommends to the CEO for recommendation to the Board Remuneration Committee the criteria and rationale for determining the total quantum of the Group variable reward pool. Group and divisional risk management Group Risk  develops the Group-level risk management frameworks for approval by the BRMC;  directs the review and development of key policies supporting the risk management frameworks;  establishes risk concentration limits and monitors risk concentrations; and  monitors emerging risk issues. Compliance Function  develops the Group-level compliance framework for approval by the BRMC;  directs the review and development of compliance policies, compliance plans, controls and procedures;  monitors compliance and regulatory obligations and emerging regulatory developments; and  reports on compliance standards. Divisional risk management  develops division-specific policies, risk appetite statements, controls, procedures, and monitoring and reporting capability that align to the frameworks approved by the BRMC. Independent internal review Group Assurance  reviews the adequacy and effectiveness of management controls for risk. Divisional business units Business Units  responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite policies; and  establish and maintain appropriate risk management controls, resources and self-assurance processes. 2013 WESTPAC GROUP ANNUAL REPORT 41 Checklist of Westpac’s compliance with ASXCGC Recommendations ASXCGC Recommendations (with 2010 Amendments) Reference Compliance Principle 1: Lay solid foundations for management and oversight 1.1 1.2 1.3 Establish the functions reserved to the Board and those delegated to senior executives and disclose those functions. Page 27 Comply Disclose the process for evaluating the performance of senior executives. Page 30 Comply Provide the information indicated in Guide to reporting on Principle 1. Pages 27, 30 Comply Principle 2: Structure the Board to add value 2.1 2.2 2.3 2.4 2.5 2.6 A majority of the Board should be independent Directors. Pages 27, 28 Comply The chair should be an independent Director. The roles of chair and chief executive officer should not be exercised by the same individual. The Board should establish a nomination committee. Disclose the process for evaluating the performance of the Board, its committees and individual Directors. Page 28 Page 28 Page 28 Page 30 Comply Comply Comply Comply Provide the information indicated in Guide to reporting on Principle 2. Pages 27–30 Comply Principle 3: Promote ethical and responsible decision-making 3.1 Establish a code of conduct and disclose the code or a summary of the code as to: Page 31 Comply 3.1.1 3.1.2 3.1.3 the practices necessary to maintain confidence in the company’s integrity the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. 3.2 3.3 3.4 3.5 Establish a policy concerning diversity and disclose the policy or a summary of that policy. Page 33 Comply Disclose the measurable objectives for achieving gender diversity set by the Board in accordance with the diversity policy and progress towards achieving them. Page 33 Comply Disclose the proportion of women employees in the whole organisation, women in senior executive positions and women on the Board. Page 33 Comply Provide the information indicated in Guide to reporting on Principle 3. Pages 31, 33 Comply Principle 4: Safeguard integrity in financial reporting 4.1 4.2 4.3 4.4 The Board should establish an audit committee. Structure the audit committee so that it:  consists only of Non-executive Directors;  consists of a majority of independent Directors;  is chaired by an independent chair, who is not chair of the Board; and  has at least three members. The audit committee should have a formal charter. Provide the information indicated in Guide to reporting on Principle 4. Page 34 Comply Pages 28, 34 Comply Page 34 Pages 28, 34–35 Comply Comply 42 2013 WESTPAC GROUP ANNUAL REPORT CORPORATE GOVERNANCE ASXCGC Recommendations (with 2010 Amendments) Reference Compliance Principle 5: Make timely and balanced disclosure 5.1 Establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. Page 35 Comply 1 5.2 Provide the information indicated in Guide to reporting on Principle 5. Page 35 Comply Principle 6: Respect the rights of shareholders 6.1 6.2 Design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose the policy or a summary of that policy. Page 36 Comply Provide the information indicated in Guide to reporting on Principle 6. Page 36 Comply Principle 7: Recognise and manage risk 7.1 7.2 7.3 Establish policies for the oversight and management of material business risks and disclose a summary of those policies. Pages 36–41 Comply The Board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks. The Board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. Pages 36–41 Comply Page 36 Comply 7.4 Provide the information indicated in Guide to reporting on Principle 7. Pages 36–41 Comply Principle 8: Remunerate fairly and responsibly 8.1 8.2 8.3 8.4 Establish a remuneration committee. The remuneration committee should be structured so that it:  consists of a majority of independent Directors;  is chaired by an independent chair; and  has at least three members. Page 39 Page 28 Comply Comply Clearly distinguish the structure of Non-executive Directors’ remuneration from that of executive Directors and senior executives. Page 39 Comply Provide the information indicated in Guide to reporting on Principle 8. Pages 33, 39 Comply 2013 WESTPAC GROUP ANNUAL REPORT 43 DIRECTORS’ REPORT Our Directors present their report together with the financial statements of the Group for the financial year ended 30 September 2013. 1. DIRECTORS The names of the persons who have been Directors, or appointed as Directors, during the period since 1 October 2012 and up to the date of this report are: Lindsay Philip Maxsted, Gail Patricia Kelly, John Simon Curtis, Elizabeth Blomfield Bryan, Gordon McKellar Cairns, Ewen Graham Wolseley Crouch (Director from 1 February 2013), Robert George Elstone, Peter John Oswin Hawkins, Peter Ralph Marriott (Director from 1 June 2013), Ann Darlene Pickard and Peter David Wilson (retired as Director on 13 December 2012). Particulars of the skills, experience, expertise and responsibilities of the Directors at the date of this report, including all directorships of other listed companies held by a Director at any time in the past three years immediately before 30 September 2013 and the period for which each directorship has been held, are set out below. Name: Lindsay Maxsted, DipBus (Gordon), FCA, FAICD Age: 59 Term of office: Director since March 2008 and Chairman since December 2011. Other principal directorships: Managing Director of Align Capital Pty Ltd and Director of Baker IDI Heart and Diabetes Institute Holdings Limited. Other interests: Nil. Date of next scheduled re-election: December 2014. Independent: Yes. Current directorships of listed entities and dates of office: Director of Transurban Group (since March 2008, and Chairman since August 2010). Director of BHP Billiton Limited (since March 2011) and BHP Billiton plc (since March 2011). Other Westpac related entities directorships and period of office: Nil. Skills, experience and expertise: Lindsay was formerly a partner at KPMG and was the CEO of that firm from 1 January 2001 to 31 December 2007. His principal area of practice prior to his becoming CEO was in the corporate recovery field managing a number of Australia’s largest insolvency / workout / turnaround engagements including Name: Gail Kelly, HigherDipEd, BA, MBA with Distinction, HonDBus Age: 57 Term of office: Managing Director & Chief Executive Officer since February 2008. Date of next scheduled re-election: Not applicable. Independent: No. Current directorships of listed entities and dates of office: Nil. Other principal directorships: The Business Council of Australia and the Financial Markets Foundation for Children. Other interests: Director of the Australian Bankers’ Association. Member of the Global Board of Advisers at the US Council on Foreign Relations and is a member of the Sydney Cricket and Sports Ground Trust. Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Gail began her banking career in 1980 in South Africa, and by 2001 Gail had held various senior management roles in a broad range of areas including retail and commercial banking, strategy, marketing and human Linter Textiles (companies associated with Abraham Goldberg), Bell Publishing Group, Bond Brewing, McEwans Hardware and Brashs. He is also a former Director and Chairman of the Victorian Public Transport Corporation. Lindsay is a member of the Advisory Board of Coolmore Australia and a Fellow of the Australian Institute of Company Directors. Westpac Board Committee membership: Chairman of the Board Nominations Committee. Member of each of the Board Audit and Board Risk Management Committees. Directorships of other listed entities over the past three years and dates of office: Nil. resources. Gail has spent over eleven years as CEO of two Australian banks, St.George Bank from 2002 to 2007 and Westpac from 1 February 2008 to date. Gail is CARE Australia's Ambassador for Women's Empowerment. Westpac Board Committee membership: Member of the Board Technology Committee. Directorships of other listed entities over the past three years and dates of office: Nil. 44 2013 WESTPAC GROUP ANNUAL REPORT DIRECTORS’ REPORT 1 Skills, experience and expertise: For the past 25 years John has been a professional company director and has been chairman and director of a wide variety of public companies, government entities and foreign corporations. In more recent times he has been largely involved in the financial services sector with his current appointments and former appointments with Merrill Lynch, Perpetual Limited and First Data Corporation in Australia. Prior to 1987, John was a Director of Wormald International Limited and was responsible for its operations in Australia, Europe, Asia and the Americas. During part of that time he was Chairman of the National Building and Construction Council, the peak industry body. Westpac Board Committee membership: Chairman of the Board Remuneration Committee. Member of each of the Board Nominations and Board Risk Management Committees. Directorships of other listed entities over the past three years and dates of office: Nil. she served for six years as Managing Director of Deutsche Asset Management and its predecessor organisation, NSW State Superannuation Investment and Management Corporation. Westpac Board Committee membership: Chairman of the Board Risk Management Committee. Member of each of the Board Nominations, Board Remuneration and Board Technology Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Westpac Board Committee membership: Member of each of the Board Remuneration and Board Risk Management Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Other principal directorships: Nil. Other interests: Member of the Takeovers Panel. Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Elizabeth has over 32 years experience in the financial services industry, government policy and administration, and on the boards of companies and statutory organisations. Prior to becoming a professional director Other interests: Senior Advisor to each of McKinsey & Company and Greenhill Australia (formerly Greenhill Caliburn). Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Gordon has extensive Australian and international experience as a senior executive, most recently as CEO of Lion Nathan Limited. Gordon has also held a wide range of senior management positions in marketing and finance with PepsiCo, Cadbury Schweppes and Nestlé (Spillers). Name: John Curtis AM, BA, LLB (Hons.) Age: 63 Term of office: Director and Deputy Chairman since December 2008. Date of next scheduled re-election: December 2014. Independent: Yes. Current directorships of listed entities and dates of office: Nil. Other principal directorships: Chairman of Allianz Australia Limited. Other interests: Nil. Other Westpac related entities directorships: Nil. Name: Elizabeth Bryan AM, BA (Econ.), MA (Econ.) Age: 67 Term of office: Director since November 2006. Date of next scheduled re-election: December 2013. Independent: Yes. Current directorships of listed entities and dates of office: Director of Caltex Australia Limited (since July 2002, and Chairman since October 2007). Name: Gordon Cairns, MA (Hons.) Age: 63 Term of office: Director since July 2004. Date of next scheduled re-election: Not applicable. Gordon Cairns will retire following the 2013 AGM. Independent: Yes. Current directorships of listed entities and dates of office: Director of Origin Energy Limited (since June 2007, and Chairman since October 2013). Other principal directorships: World Education Australia Limited. Chairman of Origin Foundation Pty Limited and Quick Service Restaurant Group Pty Limited. 2013 WESTPAC GROUP ANNUAL REPORT 45 Name: Ewen Crouch AM, BEc (Hons.), LLB, FAICD Age: 57 Term of office: Director since February 2013. Date of next scheduled re-election: December 2013. Independent: Yes. Current directorships of listed entities and dates of office: Director of Bluescope Steel Limited (since March 2013). Other principal directorships: Sydney Symphony Limited. Chairman of Mission Australia. Other interests: Member of the Takeovers Panel and the AICD’s Law Committee and Curriculum Portfolio Committee. Member of the Corporations Committee of the Law Council of Australia. Name: Robert Elstone, BA (Hons.), MA (Econ.), MCom Age: 60 Term of office: Director since February 2012. Date of next scheduled re-election: December 2015. Independent: Yes. Current directorships of listed entities and dates of office: Nil. Other principal directorships: University of Western Australia Business School. Other interests: Adjunct Professor in the Schools of Business at the Universities of Sydney and Western Australia. Other Westpac related entities directorships and dates of office: Nil. Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Ewen is one of Australia’s most accomplished mergers and acquisitions (M&A) lawyers, having worked on some of Australia’s most significant M&A transactions throughout his extensive legal career. Ewen was a partner of Allens, one of Australia’s leading law firms, from 1 July 1988 until 31 January 2013. He served as a member of the firm’s board for 11 years. He held the position of Deputy Managing Partner from 1993 to 1996, and Executive Partner, International Offices, responsible for the China and South-East Asia practices of the firm between 1999 to 2004. From 2004 to 2010 he was Co-Head, Skills, experience and expertise: Robert has over 30 years experience in senior management roles spanning investment banking, corporate finance, wholesale financial markets and risk management. From 2006 to 2011, Robert was Managing Director and CEO of the Australian Securities Exchange. Previously, he was Managing Director and CEO of the Sydney Futures Exchange from 2000 to 2006 and, from 1995 to 2000 he was Finance Director of Pioneer International. Robert was a Non-executive Director of the National Australia Bank from 2004 to 2006, an inaugural member of the Board of Guardians of the Future Fund in 2006, and, during the years 2007 to 2009, he was Chairman Mergers & Acquisitions and Equity Capital Markets. From 1 January 2009 to 31 December 2012, he was Chairman of Partners. Ewen is a Fellow of the Australian Institute of Company Directors. He is admitted to practice law in New South Wales, Victoria, the Australian Capital Territory and Western Australia. Westpac Board Committee membership: Member of each of the Board Remuneration and Board Risk Management Committees. Directorships of other listed entities over the past three years and dates of office: Nil. of the Financial Sector Advisory Council to the Federal Treasurer. Robert is an Adjunct Professor at the Business Schools of the Universities of Sydney and Western Australia. Robert was appointed to the University of Western Australia Business School Board at the start of 2013. Westpac Board Committee membership: Chairman of the Board Audit Committee. Member of each of the Board Technology, Board Nominations and Board Risk Management Committees. Directorships of other listed entities over the past three years and dates of office: ASX Limited (July 2006 to October 2011). 46 2013 WESTPAC GROUP ANNUAL REPORT DIRECTORS’ REPORT Name: Peter Hawkins, BCA (Hons.), SF Fin, FAIM, ACA (NZ), FAICD Age: 59 Term of office: Director since December 2008. Date of next scheduled re-election: December 2013. Independent: Yes. Current directorships of listed entities and dates of office: Mirvac Group (since January 2006). Other principal directorships: Liberty Financial Pty Ltd, Treasury Corporation of Victoria, Murray Goulburn Co-operative Co. Limited and Clayton Utz. Name: Peter Marriott, BEc (Hons.), FCA Age: 56 Term of office: Director since June 2013. Date of next scheduled re-election: December 2013. Independent: Yes. Current directorships of listed entities and dates of office: ASX Limited (since July 2009). Other principal directorships: ASX Clearing Corporation Limited and ASX Settlement Corporation Limited. Chairman of Austraclear Limited. Other interests: Nil. Name: Ann Pickard, BA, MA Age: 58 Term of office: Director since December 2011. Date of next scheduled re-election: December 2014. Independent: Yes. Current directorships of listed entities and dates of office: Nil. Other principal directorships: Nil. Other interests: Nil. Other Westpac related entities directorships and dates of office: Nil. Other interests: Nil. Other Westpac related entities directorships and dates of office: Member of the Bank of Melbourne Advisory Board since November 2010. Skills, experience and expertise: Peter’s career in the banking and financial services industry spans over 41 years in Australia and overseas at both the highest levels of management and directorship of major organisations. Peter has held various senior management and directorship positions with Australia and New Zealand Banking Group Limited from 1971 to 2005. He was also a Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Peter has over 30 years experience in senior management roles in the finance industry encompassing international banking, finance and auditing. Peter joined Australia and New Zealand Banking Group Limited (ANZ) in 1993 and held the role of Chief Financial Officer from 1997 to May 2012. Prior to his career at ANZ, Peter was a banking and finance and audit and consulting partner at KPMG Peat Marwick. Peter has been a Non-executive Director of ASX Limited (and Skills, experience and expertise: Ann has 25 years of international experience as a senior manager in large organisations, with responsibility for major corporate transformations, maximising return on assets in challenging environments, complex negotiations, large scale development projects and strategic planning. In June 2013, Ann was appointed Royal Dutch Shell’s Executive Vice President Arctic, Upstream Americas. Before her current role, Ann was the Executive Vice President of Shell’s upstream business in Australia from March 2010, and later her role was expanded to Country Chair of Australia in August 2010. 1 Director of BHP (NZ) Steel Limited from 1990 to 1991, ING Australia Limited from 2002 to 2005, Esanda Finance Corporation from 2002 to 2005 and Visa Inc. from 2008 to 2011. Westpac Board Committee membership: Chairman of the Board Technology Committee. Member of each of the Board Audit, Board Nominations and Board Risk Management Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Chairman of its Board Audit & Risk Committee) since 1 July 2009. This appointment has involved Peter acting as a Director on the ASX Group Clearing and Settlement Boards and as Chairman of Austraclear Limited. Peter was formerly a Director of ANZ National Bank Limited in New Zealand and various ANZ subsidiaries. Westpac Board Committee membership: Member of each of the Board Risk Management and Board Audit Committees. Directorships of other listed entities over the past three years and dates of office: ANZ National Bank Limited (November 2004 to May 2012), New Zealand listed. Prior to this, Ann was Shell’s Regional Executive Vice President for Sub Sahara Africa, overseeing the company’s exploration and production, gas and LNG activities in the region. She has also held the position of Director – Global Businesses and Strategy and been a member of the Shell Gas & Power Executive Committee with responsibility for Global LNG, Power and Gas & Power Strategy. Westpac Board Committee membership: Member of each of the Board Risk Management and Board Remuneration Committees. Directorships of other listed entities over the past three years and dates of office: Nil. 2013 WESTPAC GROUP ANNUAL REPORT 47 Company Secretary Our Company Secretaries as at 30 September 2013 are John Arthur and Tim Hartin. John Arthur (LLB (Hons.)) was appointed Group Executive, Counsel & Secretariat and Company Secretary on 1 December 2008. On 24 November 2011, John was appointed Chief Operating Officer and continues to hold the position of Senior Company Secretary. Most recently prior to that appointment, John was Managing Director & Chief Executive of Investa Property Group until 2007. Previously, John has been a partner at Freehills and Group General Counsel of Lend Lease Limited. He also served as Chairman of legal firm Gilbert + Tobin and has had a distinguished career as legal partner, corporate executive and non-executive director. Tim Hartin (LLB (Hons.)) was appointed Group Company Secretary on 7 November 2011. Prior to his appointment, Tim worked for a number of years as a transactional lawyer at Henderson Boyd Jackson W.S. in Scotland and in London in Herbert Smith's corporate and corporate finance division. Tim joined Gilbert + Tobin as a Consultant in 2004, where he provided corporate advisory services to ASX listed companies. Tim joined Westpac in 2006 as Counsel, Corporate Core and most recently was the Head of Legal - Risk Management & Workouts, Counsel & Secretariat. 2. EXECUTIVE TEAM As at 30 September 2013 our Executive Team was: Name Position Managing Director & Chief Executive Officer Chief Operating Officer Chief Executive Officer, Westpac New Zealand Limited Chief Financial Officer Chief Executive Officer, BT Financial Group Chief Executive Officer, St.George Banking Group Chief Executive, Australian Financial Services Gail Kelly John Arthur Peter Clare Philip Coffey Brad Cooper George Frazis Brian Hartzer Christine Parker Group Executive, Human Resources & Corporate Affairs Greg Targett Rob Whitfield Jason Yetton Chief Risk Officer Group Executive, Westpac Institutional Bank Group Executive, Westpac Retail & Business Banking Year Joined Group Year Appointed to Position 2008 2008 2008 1996 2007 2009 2012 2007 2008 1986 1992 2008 2011 2012 2005 2010 2012 2012 2011 2009 2009 2011 There are no family relationships between or among any of our Directors or Executive Team members. 48 2013 WESTPAC GROUP ANNUAL REPORT DIRECTORS’ REPORT Gail Kelly HigherDipEd, BA, MBA with Distinction, HonDBus. Age 57 Managing Director & Chief Executive Officer Gail began her banking career in 1980 in South Africa, and by 2001 she had held various senior management roles in a broad range of areas including retail and commercial banking, strategy, marketing and human resources. Gail has spent over eleven years as Chief Executive Officer of two Australian banks, St.George Bank from 2002 to 2007 and Westpac from 1 February 2008 to date. 1 Gail holds a Bachelor of Arts degree and Higher Diploma of Education from Cape Town University, an MBA with Distinction from the University of Witwatersrand, and an Honorary Doctorate of Business from Charles Sturt University. Gail is a Non-executive Director of the Business Council of Australia, the Australian Bankers’ Association and the Financial Markets Foundation for Children. She sits on the Global Board of Advisers at the US Council on Foreign Relations and is a member of the Sydney Cricket and Sports Ground Trust. Gail is also CARE Australia's Ambassador for Women's Empowerment. John Arthur LLB (Hons.). Age 58 Chief Operating Officer John was appointed Chief Operating Officer on 24 November 2011 with responsibility for Group Services, which encompasses technology, banking operations, property, compliance, legal and secretariat services. He joined Westpac as Group Executive, Counsel & Secretariat on 1 December 2008. Before that appointment, John was Managing Director & CEO of Investa Property Group. Previously, John has been a partner at Freehills and Group General Counsel of Lend Lease Limited. He also served as Chairman of legal firm Gilbert + Tobin and has had a distinguished career as a legal partner, corporate executive and non-executive director. Peter Clare BCom, MBA. Age 50 Chief Executive Officer, Westpac New Zealand Limited Peter was appointed Chief Executive Officer, Westpac New Zealand Limited, in April 2012. Prior to this appointment, Peter held the role of Chief Operating Officer, Australian Financial Services from November 2011. Before that appointment, Peter held the role of Group Executive, Product & Operations from July 2008. Peter joined Westpac as Group Executive, Consumer Financial Services in March 2008, with responsibility for sales, service, third-party consumer product relationships and product development for Westpac’s consumer customers across Australia. Prior to joining Westpac, Peter was Group Executive, Group Technology & Operations at St.George Bank Limited following five years as Group Executive, Strategy with St.George Bank Limited. Between 1997 and 2002, Peter worked for the Commonwealth Bank of Australia in a range of senior roles, covering strategy, merger programs, operations and performance improvement. He has also worked in management consultancy and insolvency accountancy roles. Philip Coffey BEc (Hons.). Age 56 Chief Financial Officer Philip was appointed Chief Financial Officer in December 2005, with responsibility for Westpac’s strategy, finance, tax, treasury and investor relations functions. He joined Westpac in 1996, and was appointed Group Executive, Westpac Institutional Bank in 2002. He has extensive experience in financial markets, funds management and finance, firstly with the Reserve Bank of Australia, then Citicorp and AIDC Limited. He has held roles in the UK and New Zealand. Philip has an honours degree in Economics and has completed the Executive Program at Stanford University Business School. Brad Cooper DipBM, MBA. Age 51 Chief Executive Officer, BT Financial Group Brad was appointed Chief Executive Officer, BT Financial Group on 1 February 2010. Brad initially joined Westpac in April 2007 as Chief Executive, Westpac New Zealand Limited and after successfully leading a change program in that market, moved to the role of Group Chief Transformation Officer leading the Westpac Group’s St.George merger implementation. Prior to joining Westpac, Brad was Chairman of GE Capital Bank and CEO of GE Consumer Finance UK & Ireland. He drove GE's UK Six Sigma program and was certified as a Quality Leader (Black Belt) in December 2002. He was promoted to CEO of GE Consumer Finance UK in January 2003 and appointed Chairman of GE Capital Bank in April 2004. 2013 WESTPAC GROUP ANNUAL REPORT 49 George Frazis B Eng (Hons.), MBA (AGSM/Wharton). Age 49 Chief Executive Officer, St.George Banking Group George was appointed Chief Executive Officer, St.George Banking Group in April 2012. Prior to this appointment, George joined the Westpac Group in March 2009 as Chief Executive, Westpac New Zealand Limited. George is highly experienced in the financial services industry. He was formerly Group Executive General Manager at National Australia Bank. Prior to that, George was a senior executive in Commonwealth Bank of Australia's Institutional Banking Division and has also been a partner with the Boston Consulting Group. Brian Hartzer BA European History, CFA. Age 46 Chief Executive, Australian Financial Services Brian joined Westpac as Chief Executive, Australian Financial Services on 25 June 2012. Australian Financial Services comprises Westpac Retail & Business Banking, St.George Banking Group and BT Financial Group. Prior to joining Westpac, Brian spent three years in the UK as CEO for Retail, Wealth and Ulster Bank at the Royal Bank of Scotland Group. Prior to that, he spent ten years with ANZ in Australia in a variety of roles, including his final role as CEO, Australia and Global Segment Lead for Retail and Wealth. Before joining ANZ, Brian spent ten years as a financial services consultant in New York, San Francisco and Melbourne. Brian graduated from Princeton University with a degree in European History and is a Chartered Financial Analyst. Christine Parker BGDipBus (HRM). Age 53 Group Executive, Human Resources & Corporate Affairs Christine was appointed Group Executive, Human Resources & Corporate Affairs on 1 October 2011, with responsibility for human resources strategy and management, including reward and recognition, safety, learning and development, careers and talent, employee relations and employment policy. She is also responsible for Corporate Affairs & Sustainability. Prior to this appointment, she was Group General Manager, Human Resources, from March 2010, with responsibilities across the entire Westpac Group. Prior to that, Christine was General Manager, Human Resources, Westpac New Zealand Limited, when she joined Westpac in 2007. Prior to joining Westpac, Christine was Group HR Director, Carter Holt Harvey, and from 1999 to 2004, she was Director of HR with Restaurant Brands New Zealand. Greg Targett BEc, DipEd, SF Fin, CFTP. Age 56 Chief Risk Officer Greg was appointed Chief Risk Officer on 2 July 2009. Greg joined Westpac as Deputy Chief Risk Officer on 1 December 2008. Prior to the merger between Westpac and St.George Bank Limited, Greg was Chief Risk Officer of St.George Bank Limited and was a member of the St.George Bank Limited Executive Management Committee from 2006. He joined St.George Bank Limited in May 2003 from National Australia Bank where he held the role of General Manager, Wholesale and Business Banking Credit. During his 23 year career with National Australia Bank, Greg had a variety of senior roles in Australia and overseas in venture capital, planning and strategy, credit risk, corporate banking and retail banking. Rob Whitfield BCom, GradDipBanking, GradDipFin, AMP (Harvard). Age 49 Group Executive, Westpac Institutional Bank Rob was appointed Group Executive, Westpac Institutional Bank in July 2009. He has responsibility for Westpac’s global relationships with corporate, institutional and government clients, and core product offerings across financial and capital markets, transactional banking and working capital and payments. In addition, Rob has responsibility for Hastings Funds Management Limited and Westpac’s structured finance, global treasury, Asia and Pacific Island businesses. Rob joined Westpac as a graduate in 1986, where he gained broad financial markets experience. He joined Treasury in 1993 and was appointed Group Treasurer in 2000. In 2004, he became Chief Risk Officer and joined the Executive Team in December 2005. From April 2007, Rob undertook advisory work as a Group Executive for Westpac's CEO with responsibility for the oversight of the merger with St.George Bank Limited. He was appointed Group Executive, Risk Management in November 2008 prior to assuming his current role. Jason Yetton BCom, GDAppFin, TGMP (Harvard). Age 42 Group Executive, Westpac Retail & Business Banking Jason was appointed Group Executive, Westpac Retail & Business Banking on 24 November 2011. Prior to this appointment, he was General Manager, Retail and Regional Banking, Westpac Retail & Business Banking from 2010. Before that, Jason was General Manager, Retail Banking from 2008. During 2008, he was a member of the Group’s 2017 strategy team. Prior to that role, Jason held a number of roles in BT Financial Group, including Head of Product, General Manager, Customer Solutions and CEO Commerce BT Unit Trust (based in Malaysia from 1997 to 1999). He joined BT as a graduate trainee in 1992. 50 2013 WESTPAC GROUP ANNUAL REPORT 3. REPORT ON THE BUSINESS a) Principal activities The principal activities of the Group during the financial year ended 30 September 2013 were the provision of financial services including lending, deposit taking, payments services, investment portfolio management and advice, superannuation and funds management, insurance services, leasing finance, general finance and foreign exchange services. 1 DIRECTORS’ REPORT There have been no significant changes in the nature of the principal activities of the Group during 2013. b) Review of and results of operations and financial position A review of the operations of the Group and its divisions and their results for the financial year ended 30 September 2013 is set out in Section 2 of the Annual Report under the sections ‘Review of Group operations’ and ‘Divisional performance’, which form part of this report. Further information about our financial position and financial results is included in the financial statements in Section 3 of the Annual Report, which form part of this report. The net profit attributable to equity holders of Westpac for the financial year ended 30 September 2013 was $6,816 million. c) Dividends Since 30 September 2013, Westpac has announced a final ordinary dividend of 88 cents per Westpac ordinary share and a special dividend of 10 cents per Westpac ordinary share, totalling approximately $3,047 million (2012 final ordinary dividend of 84 cents per Westpac ordinary share, totalling $2,588 million). The dividends will be fully franked and will be paid on 19 December 2013. An interim ordinary dividend for the current financial year of 86 cents per Westpac ordinary share and a special dividend of 10 cents per Westpac ordinary share for the half year ended 31 March 2013, totalling $2,980 million, were paid as a fully franked dividend on 2 July 2013 (2012 interim ordinary dividend of 82 cents per Westpac ordinary share, totalling $2,506 million). d) Significant changes in state of affairs and events during and since the end of 2013 financial year Significant changes in the state of affairs of the Group during 2013 were:  capital transactions including the issuance of approximately $1.4 billion of new Additional Tier 1 capital securities known as Westpac Capital Notes, the buy-back or redemption/conversion of Westpac Stapled Preferred Securities, and the redemption of the Trust Preferred Securities of Westpac Capital Trust III (2003 TPS);  ongoing regulatory changes and developments, which have included changes to liquidity, capital, derivatives, financial services, taxation and other regulatory requirements; and  on 11 October 2013 Westpac announced it had entered into an agreement to acquire Lloyds Banking Group’s Australian asset finance business, Capital Finance Australia Limited (CFAL), and its corporate loan portfolio, BOS International (Australia) Ltd (BOSI), for $1.45 billion. For a discussion of these matters, please refer to ‘Significant developments’ in Section 1 of the Annual Report under ‘Information on Westpac’. 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 these operations or the state of affairs of the Group in subsequent financial years. e) Business strategies, developments and expected results Our business strategies, prospects and likely major developments in the Group’s operations in future financial years and the expected results of those operations are discussed in Section 1 of the Annual Report under ‘Information on Westpac’, including under ‘Outlook’ and ‘Significant developments’. Further information on our business strategies and prospects for future financial years and likely developments in our operations and the expected results of operations have not been included in this report because the Directors believe it would be likely to result in unreasonable prejudice to us. 2013 WESTPAC GROUP ANNUAL REPORT 51 4. DIRECTORS’ INTERESTS a) Directors’ interests in securities The following particulars for each Director are set out in the Remuneration report in Section 9 of the Directors’ report and Note 41 of our consolidated financial statements for the year ended 30 September 2013 and in the tables below:  their relevant interests in our shares or the shares of any of our related bodies corporate;  their relevant interests in debentures of, or interests in, any registered managed investment scheme made available by us or any of our related bodies corporate;  their rights or options over shares in, debentures of, or interests in, any registered managed investment scheme made available by us or any of our related bodies corporate; and  any contracts: – to which the Director is a party or under which they are entitled to a benefit; and – that confer a right to call for or deliver shares in, debentures of, or interests in, any registered managed investment scheme made available by us or any of our related bodies corporate. Directors’ interests in Westpac and related bodies corporate as at 4 November 2013 Number of Relevant Interests in Westpac Ordinary Shares Number of Westpac Share Options Number of Westpac Share Rights Westpac CPS Westpac Banking Corporation Current Directors Lindsay Maxsted Gail Kelly John Curtis3 Elizabeth Bryan Gordon Cairns Ewen Crouch Robert Elstone Peter Hawkins Peter Marriott Ann Pickard 16,654 1,876,5881 18,287 25,353 17,038 34,374 10,000 15,218 20,000 9,8004 - - - - - - - - - - - 711,9562 - - - - - - - - - - - - - - - 1,370 - - Former Directors Peter Wilson 1 Gail Kelly’s interest in Westpac ordinary shares includes 55,133 restricted shares held under the CEO Restricted Share Plan. 2 Share rights issued under the CEO Performance Plan. 3 John Curtis and his related bodies corporate also hold relevant interests in 470,487 units of the BT Balanced Equity Income Fund. 4 Ann Pickard’s relevant interests arise through holding 9,800 Westpac American Depository Shares (ADS). One ADS represents one Westpac fully 16,5985 - - - paid ordinary share. 5 Figure displayed is as at Peter Wilson's retirement date of 13 December 2012. Note: Certain subsidiaries of Westpac offer a range of registered schemes. The Directors from time to time invest in these schemes and are required to provide a statement to the ASX when any of their interests in these schemes change. ASIC has exempted each Director from the obligation to notify the ASX of a relevant interest in a security that is an interest in BT Cash Management Trust (ARSN 087 531 539), BT Premium Cash Fund (ARSN 089 299 730), Westpac Cash Management Trust (ARSN 088 187 928), BT Wholesale Managed Cash Fund (ARSN 088 832 491) or BT Wholesale Enhanced Cash Fund (ARSN 088 863 469). 52 2013 WESTPAC GROUP ANNUAL REPORT b) Indemnities and insurance Under the Westpac Constitution, unless prohibited by statute, we must indemnify each of the Directors and Company Secretaries of Westpac and of each of our related bodies corporate (except related bodies corporate listed on a recognised stock exchange), each employee of Westpac or our subsidiaries (except subsidiaries listed on a recognised stock exchange), and each person acting as a responsible manager under an Australian Financial Services Licence of any of Westpac’s wholly-owned subsidiaries against every liability incurred by each such person in their capacity as director, company secretary, employee or responsible manager, as the case may be; and all legal costs incurred in defending or resisting (or otherwise in connection with) proceedings, whether civil or criminal or of an administrative or investigatory nature, in which the person becomes involved because of that capacity. Each of the Directors named in this Directors’ report and each of the Company Secretaries of Westpac has the benefit of this indemnity. Consistent with shareholder approval at the 2000 Annual General Meeting, Westpac has entered into a Deed of Access and Indemnity with each of the Directors, which includes indemnification in identical terms to that provided in the Westpac Constitution. Westpac also executed a deed poll in September 2009 providing indemnification equivalent to that provided under the Westpac Constitution to individuals acting as:  statutory officers (other than as a director) of Westpac;  directors and other statutory officers of wholly-owned subsidiaries of Westpac; and  directors and statutory officers of other nominated companies as approved by Westpac in accordance with the terms of the deed poll and Westpac’s Contractual Indemnity Policy. Some employees of Westpac’s related bodies corporate and responsible managers of Westpac and its related bodies corporate are also currently covered by a deed poll that was executed in November 2004, which is in similar terms to the September 2009 deed poll. DIRECTORS’ REPORT The Westpac Constitution also permits us, to the extent permitted by law, to pay or agree to pay premiums for contracts insuring any person who is or has been a Director or Company Secretary of Westpac or any of its related bodies corporate against liability incurred by that person in that capacity, including a liability for legal costs, unless: 1  we are forbidden by statute to pay or agree to pay the premium; or  the contract would, if we paid the premium, be made void by statute. Under the September 2009 deed poll, Westpac also agrees to provide directors’ and officers’ insurance to Directors of Westpac and Directors of Westpac’s wholly-owned subsidiaries. For the year ended 30 September 2013, the Group has insurance cover in respect of the amounts which we may have to pay under the indemnities set out above. That cover is subject to the terms and conditions of the relevant insurance, including but not limited to the limit of indemnity provided by the insurance. The insurance policies prohibit disclosure of the premium payable and the nature of the liabilities covered. c) Options and share rights outstanding As at the date of this report there are 3,381,902 share options outstanding and 4,173,911 share rights outstanding in relation to Westpac ordinary shares. The expiry date of the share options range between 21 January 2014 and 1 October 2018 and the weighted average exercise price is $24.37. The latest dates for exercise of the share rights range between 21 January 2014 and 1 April 2023. Holders of outstanding share options and share rights in relation to Westpac ordinary shares do not have any rights under the share options and share rights to participate in any share issue or interest of Westpac or any other body corporate. d) Proceedings on behalf of Westpac No person has applied to the Court under section 237 of the Corporations Act for leave to bring proceedings on behalf of Westpac, or to intervene in any proceedings to which Westpac is a party, for the purpose of taking responsibility on behalf of Westpac for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of Westpac with leave of the Court under section 237 of the Corporations Act. 2013 WESTPAC GROUP ANNUAL REPORT 53 5. ENVIRONMENTAL DISCLOSURE The Westpac Group’s environmental framework starts with ‘Our Principles for Doing Business’, which outline our broad environmental principles. This framework includes:  our environmental policy statement ‘Westpac and the Environment: Our Environmental Policy’, which has been in place since 1992;  our sustainable supply chain management framework;  our environmental, social and governance (ESG) risk management framework; and  public reporting of our environmental performance. We also participate in a number of voluntary initiatives including the Carbon Disclosure Project, the Equator Principles, the United Nations Principles for Responsible Investment and the United Nations Global Compact CEO Water Mandate. The National Greenhouse and Energy Reporting Act 2007 (Cth) (National Greenhouse Act) came into effect in July 2008. The Group reports on greenhouse gas emissions, energy consumption and production under the National Greenhouse Act for the period 1 July through 30 June each year. The Group is subject to the reporting requirements of the Energy Efficiency Opportunities Act 2006 (Cth) (EEO Act), which requires a report to be submitted to the Commonwealth Government and the public identifying and evaluating cost effective energy savings opportunities. The Group registered under the EEO Act on 24 March 2010. Our Assessment and Reporting Schedule was submitted on 22 December 2010. The third public report will be submitted to the Commonwealth Government by 31 December 2013. The public report is available on the Westpac website once it is submitted. Through the course of engaging with the EEO Act program during 2013, Westpac implemented or is in the process of implementing 25 energy efficiency opportunities which are expected to result in energy and maintenance cost savings exceeding $700,000 per year. We comply with our obligations under the EEO Act. The NSW Energy Savings Scheme (ESS) commenced on 1 July 2009 and it is administered by the Independent Pricing and Regulatory Tribunal of NSW. The scheme is designed to increase opportunities to improve energy efficiency in NSW by financially rewarding companies and households who undertake eligible energy efficiency projects. Under the scheme, voluntary participants, generally businesses, are awarded energy savings certificates (ESCs) following investment in energy saving activities. Mandatory scheme participants, generally electricity retailers, buy ESCs to meet legislative targets. The NSW Energy Savings Scheme is currently set to run until 2020. Since the commencement of the ESS, Westpac has earned in excess of $800,000 through the sale of ESCs. In addition in 2013 the Group became a signatory of the National Carbon Offset Standard (NCOS) which, in line with our sustainability strategy, commits the Group to being carbon neutral under the NCOS until 30 June 2017. Our operations are not subject to any other particular and significant environmental regulation under any law of the Commonwealth of Australia or of any State or Territory of Australia. We may, however, become subject to environmental regulation as a result of our lending activities in the ordinary course of business and we have policies in place to ensure that this potential risk is addressed as part of our normal processes. We have not incurred any liability (including for rectification costs) under any environmental legislation. Further details on our environmental performance, including progress against our climate change strategy and details of our emissions profile are available on our website at www.westpac.com.au/about-westpac/sustainability-and- community. 6. ROUNDING OF AMOUNTS Westpac is an entity to which ASIC Class Order 98/100 dated 10 July 1998, relating to the rounding of amounts in Directors’ report and financial reports, applies. Pursuant to this Class Order, amounts in this Directors’ report and the accompanying financial report have been rounded to the nearest million dollars, unless indicated to the contrary. 7. POLITICAL EXPENDITURE In line with Westpac policy, no cash donations were made to political parties during the financial year ended 30 September 2013. The expenditure reflected in the table below relates to payment for participation in legitimate political activities where they were assessed to be of direct business relevance to Westpac. Such activities include business observer programs attached to annual party conferences, policy dialogue forums and other political functions such as speeches and events with industry participants. Political expenditure, year ended 30 September 2013 Australia Australian Labor Party Liberal Party of Australia National Party of Australia Total 1 Represents aggregate amount at both Federal and State/Territory Amount $1 114,080.00 110,166.50 10,650.00 234,896.50 levels. New Zealand The total expenditure on political activities in New Zealand for the year ended 30 September 2013 was NZ$11,580. In line with Westpac policy, no cash donations were made to political parties in New Zealand during the year. 54 2013 WESTPAC GROUP ANNUAL REPORT 8. DIRECTORS’ MEETINGS Each Director attended the following meetings of the Board and Committees of the Board during the financial year ended 30 September 2013: Notes Board Audit Committee Risk Management Committee Nominations Committee Remuneration Committee Technology Committee 1 DIRECTORS’ REPORT Number of meetings held during the year Director Lindsay Maxsted Gail Kelly John Curtis Elizabeth Bryan Gordon Cairns Ewen Crouch Robert Elstone Peter Hawkins Peter Marriott Ann Pickard Peter Wilson A 9 9 9 9 9 6 9 9 3 9 3 B 9 9 9 9 8 6 9 9 3 9 3 A 4 - - - - - 4 4 1 - 1 B 4 - - - - - 4 4 1 - 1 A 4 - 4 4 4 3 4 4 1 4 1 B 4 - 3 4 4 3 4 4 1 4 1 1 2 3 4 5 6 7 8 9 10 11 A 4 - 4 4 - - 3 4 - - 1 B 4 - 3 4 - - 3 4 - - 1 A - - 5 5 5 3 - - - 5 - B - - 5 5 5 3 - - - 5 - A - 2 - 2 - - 2 2 - - - B - 2 - 2 - - 2 2 - - - This table shows membership of standing Committees of the Board. From time to time the Board may form other committees or request Directors to undertake specific extra duties. A - Meetings eligible to attend as a member B - Meetings attended as a member Unless otherwise stated, each Director has been a member, or the Chairman, of the relevant Committee for the whole of the period from 1 October 2012. 1 Chairman of the Board Nominations Committee. Member of the Board Audit Committee and the Board Risk Management Committee. 2 Member of the Board Technology Committee. 3 Chairman of the Board Remuneration Committee. Member of the Board Risk Management Committee and the Board Nominations Committee. 4 Chairman of the Board Risk Management Committee. Member of the Board Nominations Committee, the Board Remuneration Committee and the Board Technology Committee. 5 Member of the Board Risk Management Committee and the Board Remuneration Committee. 6 Ewen Crouch was appointed as a Director on 1 February 2013. Member of the Board Risk Management Committee and the Board Remuneration Committee from 1 February 2013. 7 Chairman of the Board Audit Committee from 13 December 2012. Member of the Board Audit Committee until 12 December 2012. Member of the Board Nominations Committee from 1 February 2013. Member of the Board Risk Management Committee and the Board Technology Committee. 8 Chairman of the Board Technology Committee. Member of the Board Audit Committee, the Board Risk Management Committee and the Board Nominations Committee. 9 Peter Marriott was appointed as a Director on 1 June 2013. Member of the Board Audit Committee and Board Risk Management Committee from 22 July 2013. 10 Member of the Board Risk Management Committee and the Board Remuneration Committee. 11 Peter Wilson retired from the Board and its Committees on 13 December 2012. 2013 WESTPAC GROUP ANNUAL REPORT 55 9. REMUNERATION REPORT Introduction from the Chairman of the Board Remuneration Committee Dear Shareholder, We are pleased to present Westpac’s 2013 Remuneration Report (Report). The past year has been one focused on consolidation and embedding the substantive changes made to our remuneration policies and framework over the past 2–3 years. Since 2010, we have adjusted almost every aspect of our remuneration framework including:  the alignment of our target pay mix for the CEO and Senior Executives, increasing the weighting to long term incentives;  the structure of our Long Term Incentive Plan performance hurdles and the removal of re-testing;  our Executive Reward Policy, including our approach for benchmarking remuneration for the CEO and Senior Executives; and  reducing the maximum incentive opportunity under our annual Short Term Incentive plan from 200% to 150% of target, and increasing the amount deferred from 25% to 40%. While we have chosen to allow the substantive changes made in 2011 and 2012 to flow through the 2013 business cycle, we are mindful of the changing external environment and will be conducting a further review of some key elements of our remuneration framework in 2014. We have not increased fixed remuneration or incentive targets for the CEO or Senior Executives since 2011, except where there was a change in role or significant market anomaly. We will be continuing with this approach for 2014. The Group has delivered strong financial performance this year and very pleasing results and value for our shareholders. While we did not increase the fixed remuneration or incentive targets for the CEO or Senior Executives in 2013, our ‘at risk’ incentive plans have allowed us to recognise and reward high performers across our business who were instrumental in delivering these results. We have again this year simplified and focused the Report with the aim of helping our shareholders navigate important though complex information and, as ever, welcome your feedback. John Curtis Chairman – Board Remuneration Committee 56 2013 WESTPAC GROUP ANNUAL REPORT 1. Remuneration snapshot This section provides an overview of the Group’s remuneration arrangements during the 2013 financial year. 1.1. Remuneration strategy, principles and framework Executive remuneration framework The CEO and Senior Executives (Group Executives) are remunerated based on a Total Reward framework: 1 DIRECTORS’ REPORT Westpac’s Remuneration Strategy Manage risk appropriately Link pay to shareholders interests Attract and retain high performance executives Executive Total Reward Framework At Risk Remuneration (Variable Reward) (66%) Short-term Incentive (STI) 34% Long-term Incentive (LTI) 32% Motivate strong performance against short-term and long-term performance measures Fixed Remuneration (34%) Comprises:  cash salary;  salary sacrifice items; and  employer superannuation Maximum opportunity = 150% of Target STI contributions in line with statutory obligations. Cash STI 60% of Total STI Deferred STI Restricted shares or share rights 40% of Total STI Comprise performance share rights which vest over a three-year period if performance hurdles are achieved. The target pay mix was adopted in 2012 and will be achieved over time for existing Senior Executives as their remuneration increases (noting that there were no increases to fixed remuneration or incentive targets for the CEO or Senior Executives in 2013). The Total Reward framework has three components and, in aggregate, is benchmarked against relevant financial services competitors. Fixed remuneration – takes into account the size and complexity of the role, individual responsibilities, experience, skills and disclosed market-related pay levels within the financial services industry. Short-term incentive (STI) – is determined based on an STI target set using similar principles to those used for fixed remuneration, and on individual, divisional and Group performance objectives for the year. Performance is measured against risk-adjusted financial targets and non-financial targets that support the Group’s short and long-term strategy. Long-term incentive (LTI) – is designed to retain executives and to align their performance with the long-term interests of shareholders. The amount of the award takes into account market benchmarks, individual performance over time, succession potential and key skills. 1.2. Remuneration for all other employees The remuneration strategy for all other employees remains aligned with our approach for Senior Executives. In particular:  fixed remuneration is aligned to the market and is reviewed annually;  we provide superannuation for employees in Australia, New Zealand and some other countries in which we operate;  employees have the opportunity to participate in an STI scheme designed to support the objectives of their division and the Group, including risk management. All employees who receive an STI award above a certain threshold have a portion of the award deferred; and  eligible employees may receive an annual award of Westpac ordinary shares up to the value of $1,000 under the Employee Share Plan provided the Group meets at least one of two hurdles: an increase in share price or the achievement of a basket of strategic measures. The CEO, Senior Executives and any employees who received an STI award deferred into equity or an LTI award during the year are not eligible to receive an Employee Share Plan award for that year. 2013 WESTPAC GROUP ANNUAL REPORT 57 1.3. Key management personnel remuneration disclosed in this Report The remuneration of key management personnel (KMP) for the Westpac Group is disclosed in this Report. In 2013, KMP included Non-executive Directors, the CEO and Senior Executives who report to the CEO and/or lead significant parts of the business. CEO and Senior Executives Name Position Gail Kelly Managing Director & Chief Executive Officer Senior Executives John Arthur Peter Clare Chief Operating Officer Chief Executive Officer, Westpac New Zealand Limited Philip Coffey Chief Financial Officer Brad Cooper Chief Executive Officer, BT Financial Group George Frazis Chief Executive Officer, St.George Banking Group Brian Hartzer Chief Executive, Australian Financial Services Christine Parker Group Executive, Human Resources & Corporate Affairs Greg Targett Chief Risk Officer Rob Whitfield Group Executive, Westpac Institutional Bank Jason Yetton Group Executive, Westpac Retail & Business Banking Non-executive Directors Name Lindsay Maxsted John Curtis Elizabeth Bryan Gordon Cairns Ewen Crouch1 Robert Elstone Peter Hawkins Peter Marriott2 Ann Pickard Peter Wilson3 1 Appointed 1 February 2013. 2 Appointed 1 June 2013. 3 Retired on 13 December 2012. Position Chairman Deputy Chairman Director Director Director Director Director Director Director Director Term as KMP Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Term as KMP Full Year Full Year Full Year Full Year Part Year Full Year Full Year Part Year Full Year Part Year 58 2013 WESTPAC GROUP ANNUAL REPORT 2. Governance and risk management This section details the Group’s approach to governance and risk management as they relate to remuneration. 2.1. Governance The Group’s remuneration policies and practices strive to fairly and responsibly reward employees, having regard to performance, Westpac’s risk management framework, the law and high standards of governance. The role of the Board is to provide strategic guidance for the Group and effective oversight of management. In this way the Board is accountable to shareholders for performance. As part of this role, the Board has overall responsibility for remuneration. The Remuneration Committee supports the Board. Its primary function is to assist the Board fulfil its responsibilities to shareholders with regard to remuneration. The Remuneration Committee monitors the Group’s remuneration policies and practices, external remuneration practices, market expectations and regulatory requirements in Australia and internationally. The Committee’s purpose, responsibilities and duties are outlined in the Charter which is available on the Group’s website. All Board Committee Charters are reviewed every two years. The Board Remuneration Committee Charter was last reviewed and amended in May 2012. Members of the Remuneration Committee during 2013 All members of the Remuneration Committee are independent Non-executive Directors. During 2013 the members were:  John Curtis (Chairman);  Elizabeth Bryan;  Gordon Cairns;  Ewen Crouch (Member from 1 February 2013); and  Ann Pickard. Independent remuneration consultant During 2013, the Board retained Guerdon Associates as its independent consultant to provide specialist information on executive remuneration and other Group remuneration matters. These services are provided directly to the Remuneration Committee and are independent of management. The Chairman of the Remuneration Committee oversees the engagement of, remuneration arrangements for, and payment of, the independent consultant. Work undertaken by Guerdon Associates during 2013 included the provision of information relating to the benchmarking of CEO and Senior Executive remuneration; market practice regarding LTI valuation methodologies; and analysis regarding the Group’s Earnings per Share (EPS) based LTI performance hurdle. No remuneration recommendations as prescribed under the Corporations Act were made by Guerdon Associates in 2013. DIRECTORS’ REPORT Other internal governance structures The Westpac internal governance structure includes three levels of Remuneration Oversight Committees (ROCs) which focus on the appropriateness and consistency of remuneration arrangements and outcomes within individual functions, divisions and across the Group. The ROCs support the Board Remuneration Committee by ensuring that the Group-wide remuneration frameworks and outcomes are consistent with the Board’s approved policy. 1 2.2. Risk management We aim to integrate effective risk management into the remuneration framework throughout the organisation. The Chairman of the Board Risk Management Committee is a member of the Remuneration Committee, and members of the Remuneration Committee are also members of the Board Risk Management Committee. In carrying out its duties, the Remuneration Committee can access personnel from risk and financial control, and engage external advisors who are independent of management. The Group’s remuneration strategy, executive remuneration framework, policies and practices all reflect the sound risk management that is fundamental to the way we operate. The performance of each division within the Group is reviewed and measured with reference to how risk is managed and the results influence remuneration outcomes. The executive total reward framework specifically includes features to take account of risk. Each year the Board determines the size of the variable reward pool which funds variable reward outcomes across the Group. This is based on our performance for the year and an assessment of how profit should be shared among shareholders, employees and retained for ongoing capital requirements. The primary financial indicator used is economic profit, which measures profitability adjusted for risk in the business. Cash earnings, return on equity, cash earnings per share and dividends are also taken into account. STI outcomes are based on both financial and non-financial measures, with the latter reflecting risk management outcomes and the Group’s progress on the implementation of our strategy. Group economic profit and Group return on equity accounted for 40% of the CEO’s scoreboard for 2013, the Senior Executive scoreboards having 40% allocated across Group economic profit and divisional economic profit and/or Group return on equity. A performance measure related to the Board’s Risk Appetite Statement accounted for a further 10% of the CEO’s and Senior Executives’ scoreboards. In addition, the CEO and each Senior Executive is assessed on specific risk measures that may influence any discretionary adjustment to the scoreboard. Ultimately, the Board has 100% discretion with the STI outcome. We believe this discretion is vital to balance a mechanistic approach in determining performance and reward outcomes and to enable previous decisions (either good or bad) to be taken into account. This discretion may be exercised both up and down. 2013 WESTPAC GROUP ANNUAL REPORT 59 Approval of remuneration decisions We follow a strict process of ‘two-up’ approval for all remuneration decisions. This means that remuneration is approved by the next most senior person above the employee’s manager. This concept is also reflected in our requirement for the Board, based on recommendations from the Remuneration Committee, to approve:  performance outcomes and remuneration for the CEO and Senior Executives; and  performance outcomes and remuneration for other executives who report directly to the CEO, other persons whose activities in the Board’s opinion affect the financial soundness of the Group and any other person specified by APRA. Performance and remuneration outcomes for all General Managers (who report to Senior Executives) are approved by the CEO, on the recommendation of the Senior Executive to whom they report. Any significant remuneration arrangements that fall outside the Group Remuneration Policy are referred to the Remuneration Committee for review and approval. Shareholding requirements and hedging policy To further align their interests with shareholders, the CEO and Senior Executives are expected to build and maintain a substantial Westpac shareholding within five years of being appointed to their role. For the CEO the value of that shareholding is expected to be no less than five times her annual fixed package. For Senior Executives, the expected minimum is a value of $1.2 million. Participants in the Group’s equity plans are forbidden from entering either directly or indirectly into hedging arrangements for unvested shares in their STI and LTI equity awards. No financial products of any kind may be used to mitigate the risk associated with these equity instruments. Any attempt to hedge these securities makes them subject to forfeiture. These restrictions have been in place for some time and satisfy the requirements of the Corporations Act which prohibit hedging of unvested shares. 3. Executive remuneration 3.1. Remuneration structure and policy a) Fixed remuneration Fixed remuneration comprises cash salary, salary sacrifice items and employer superannuation. The Group provides superannuation contributions in line with statutory obligations. Fixed remuneration is reviewed annually and is effective from 1 January each year taking into consideration:  role and accountabilities;  relevant market benchmarks within the financial services industry; and  the attraction, retention and motivation of key executives given ongoing competition for talent in a challenging environment. There have been no increases to the fixed remuneration or incentive targets for the CEO or Senior Executives following the last remuneration review. The CEO’s fixed remuneration and incentive targets have been unchanged since January 2011. b) STI STI provides the opportunity for participants to earn cash and deferred equity incentives where specific outcomes have been achieved in the financial year. The CEO and Senior Executives each have a balanced scoreboard, combining both annual financial and non-financial objectives which support the Group’s strategic short and long-term goals. STI targets The CEO’s target STI opportunity for 2013 was $3.6 million. STI targets for Senior Executives are set by the Remuneration Committee and approved by the Board at the beginning of each performance year based on a number of factors including market competitiveness and the nature of the role. The STI targets for the 2013 performance year did not increase for the CEO and Senior Executives. The STI awards for Senior Executives are managed within the Group-wide variable reward pool. STI outcomes are subject to both a quantitative and qualitative assessment, including a risk management overlay, which is embedded in our scoreboard measurement process. The maximum STI opportunity is 150% of target. The Board has the capacity to adjust STI outcomes (and reduce STI outcomes to zero if appropriate) during the assessment process. 60 2013 WESTPAC GROUP ANNUAL REPORT STI structure The table below details the type of equity and the instrument used to grant the 2013 deferred STI allocated to executives. DIRECTORS’ REPORT STI Structure 1 Cash STI Deferred STI Deferred STI Equity Delivered 60% of the 2013 STI outcome will be paid as cash in December 2013. 40% of the 2013 STI outcome will be deferred in the form of restricted Westpac ordinary shares or rights to ordinary shares. Vesting Details Half of deferred STI will vest in October 2014. Half of deferred STI will vest in October 2015. Executive Type of Equity Equity Plan CEO Senior Executives in Australia Senior Executives outside Australia Westpac ordinary shares1 CEO Restricted Share Plan Restricted Share Plan Westpac share rights2 Westpac Performance Plan 1 Shares granted under the CEO Restricted Share Plan and the Restricted Share Plan rank equally with Westpac ordinary shares for dividends and voting rights from the date they are granted. The Board has the discretion to satisfy vested share right grants and the allocation of subsequent shares to participants, or the allocation of restricted shares under the deferred STI, by either the issue of new shares or on-market purchase of shares. 2 Rights to ordinary shares entitle the holder to Westpac ordinary shares at the time of vesting. By deferring a portion of the STI in the form of restricted equity, incentive payments are better aligned with the interests of shareholders as the ultimate value of the deferred portion is tied to movements in share price over the restriction period. Deferred STI also supports our objective of retaining key talent, as it is generally forfeited if the holder resigns during the restriction period. Deferred shares are forfeited if the Executive is dismissed for cause. The deferred STI awards recognise past performance and are not subject to further performance conditions and deferred shares attract dividend distributions over the vesting period. The shares are subject to forfeiture at Board discretion in the event of a material risk issue or financial mis-statement. Details of deferred STI allocations granted in prior years, which have been exercised during the year ended 30 September 2013, are included in Section 3.3 of this Report. c) LTI The CEO and Senior Executives are also eligible for an LTI award. LTI award opportunities The CEO was granted an LTI award of $2.7 million for 2013 under the CEO Performance Plan, unchanged from 2012. The award was received in the form of share rights under arrangements approved by shareholders at the 2010 Annual General Meeting. Senior Executives receive annual LTI awards in the form of share rights under the Westpac Reward Plan. A share right is not a Westpac share and does not attract the payment of dividends. At the beginning of each year, the Board, advised by the Remuneration Committee, sets the dollar value of the LTI award target for each Senior Executive. LTI targets for Senior Executives were unchanged from 2012. 2013 WESTPAC GROUP ANNUAL REPORT 61 LTI structure The following diagram and table sets out the key features of LTI awards made in December 2012 to the CEO under the CEO Performance Plan and to Senior Executives under the Westpac Reward Plan. LTI Structure Performance share rights granted Relative Total Shareholder Return (TSR) Cash EPS Compound Annual Growth Rate (CAGR) 50% of allocation subject to this hurdle. 50% of allocation subject to this hurdle. Vesting Framework Vesting Framework The TSR component of the allocation will be measured at 30 September 2015 and will vest in line with the diagram below if the relative TSR Ranking is at the 50th percentile or above. There is a single test and no re-testing. The EPS component of the allocation will be measured at 30 September 2015 and will vest in line with the diagram below if performance is between the threshold and maximum targets or above. There is a single test and no re-testing. TSR Allocation to Vest EPS Allocation to Vest g n i t s e V n o i t a c o l l A f o % 100 75 50 25 0 0 25 50 75 100 WBC Relative TSR Ranking Percentile g n i t s e V n o i t a c o l l A f o % 100 75 50 25 0 0 1 3 2 Below Target 4 At Target 5 6 Maximum Target WBC EPS Target LTI Equity Delivery Executive CEO Senior Executives (All locations) Type of Equity Equity Plan Westpac Performance Share Rights CEO Performance Plan Westpac Reward Plan 62 2013 WESTPAC GROUP ANNUAL REPORT DIRECTORS’ REPORT CEO Performance Plan and Westpac Reward Plan Instrument Share rights – the Board has the discretion to satisfy vested grants and the allocation of subsequent shares to participants by either the issue of new shares or on-market purchase of shares. 1 Determining the number of securities The number of share rights each individual receives is determined by dividing the dollar value of the LTI award by the value of the share rights at the beginning of the performance assessment period (performance period). The value of share rights is determined using a Monte Carlo simulation pricing model, which uses assumptions based on expected life, volatility, risk free interest rate and dividend yield associated with the securities and the risk of forfeiture attributed to each performance hurdle. The Monte Carlo simulation pricing model discounts the market price of Westpac shares at grant to take into consideration these assumptions. The value of a share right may differ depending on the performance hurdle applied. The value of share rights to be allocated is calculated by an independent valuer. Performance hurdles The CEO and Senior Executives only receive value from their LTI awards where the performance hurdles are achieved. The two hurdles for the December 2012 grants are Westpac’s relative TSR and Cash EPS CAGR. Relative TSR provides an external comparative measure of overall returns over a specified timeframe incorporating share price movements and assuming that dividends over the period have been reinvested. The TSR data is averaged over the three months preceding the measurement date. The Cash EPS CAGR over a three year period was introduced as an internal earnings measure for grants made from October 2011 in response to feedback from investors and a subsequent independent review of our LTI performance hurdles. Cash EPS CAGR provides a measure of Westpac’s underlying financial growth. Together, the use of these two hurdles is intended to provide a balanced view of the Group’s overall performance and provide strong alignment with shareholder interests. Both hurdles operate independently. TSR (50% of the allocation) Cash EPS CAGR (50% of the allocation) Westpac’s TSR percentile ranking must equal or exceed the 50th percentile of a defined group of comparator companies (the ‘ranking group’) over the performance period. The ranking group is comprised of the top 10 selected Australian banking and financial sector companies listed on the ASX with which Westpac competes for customers. This measure provides a link with the creation of value for shareholders over the long-term (up to three years). The companies in the 2013 ranking group for the CEO Performance Plan and the Westpac Reward Plan are:  AMP Limited;  ASX Limited;  Australia and New Zealand Banking Group The Cash EPS CAGR measure focuses on growth in cash earnings over a three year performance period. A description of the process used to determine cash earnings is provided at Note 32 to the financial statements. Westpac has a policy of not providing guidance to the market. Accordingly, the Board will advise specific EPS targets and the Group’s performance against target following the test date. The EPS targets were developed with the assistance of an independent external adviser who was provided access to Westpac’s long-term business plan and analyst forecasts in regard to the long-term performance of Westpac and its peers. Limited;  Bendigo and Adelaide Bank Limited;  Commonwealth Bank of Australia;  Insurance Australia Group Limited;  Lend Lease Group;  Macquarie Group Limited;  National Australia Bank Limited; and  Suncorp Group Limited. 2013 WESTPAC GROUP ANNUAL REPORT 63 CEO Performance Plan and Westpac Reward Plan Targets are set for stretch performance The Board considers the vesting profile as being appropriate as 100% vesting will only occur where Westpac is ranked 3rd or better out of the total of 11 companies (including Westpac). It is the Board’s view that the EPS targets for both the 2011 and 2012 grants are stretching and the thresholds will be difficult to achieve in the current economic environment. The TSR performance will be measured once at the completion of the 3 year performance period. Westpac shares will be allocated in satisfaction of vested share rights at no cost to participants. Who measures the performance hurdle outcomes? To ensure objectivity and external validation, TSR results are calculated by an independent external consultant and are provided to the Board or its delegate to review and determine vesting outcomes. The expensed value of the December 2011 and 2012 grants in Table 5.2 have been discounted to zero and 50% respectively, reflecting the Board’s current assessment of the probability of the EPS hurdles being met and share rights vesting over time. That is, based on current forecasts the Board do not expect the December 2011 grant to meet the threshold target. The Cash EPS CAGR will be determined by the Board based on the Cash EPS disclosed in our results for the 2014 financial year in respect of the December 2011 awards, and 2015 in respect of the December 2012 awards. Early vesting is possible in limited cases For awards made since 1 October 2009, unvested securities may vest before a test date if the employee is no longer employed by the Group due to death or disability. In general, any such vesting is not subject to performance hurdles being met. For the CEO, all unvested securities will vest if the CEO leaves the Group due to sickness or in certain circumstances, such as within 12 months of a change of control. Retesting There is no re-testing on awards made since 2011. Any securities remaining unvested after the nominated measurement period lapse immediately. Lapsing of securities Where the CEO or a Senior Executive leaves the Group due to resignation or dismissal for cause before vesting occurs, securities will lapse unless the Board determines otherwise. Where a holder acts fraudulently or dishonestly, or is in material breach of his or her obligations under the CEO Performance Plan, the Westpac Reward Plan and/or to the Group, unexercised performance share rights (whether vested or unvested) will lapse, unless the Board determines otherwise. Other plans and awards We provide separate reward plans for small, specialised parts of the business. Payments under these plans are directly linked to growth of that part of the business and are capped at an appropriate proportion of the value and/or profitability of the relevant part of the business. These plans are designed to provide market competitive remuneration for the relevant employees. Westpac also has ‘grandfathered’ plans, under which no further awards are made and performance or vesting periods have passed. These vested securities continue to run their course. Other long-term awards The Restricted Share Plan and Westpac Performance Plan are used:  to grant deferred STI awards to certain employees; and  for one-off awards to attract Senior Executives, executives or specialist employees to the Group or for retention in specific circumstances. Where awards are made on joining, these typically compensate for real value forfeited on leaving the previous employer which might otherwise deter that executive from joining the Group. Awards to key employees below senior management level may also be made under the Restricted Share Plan and Westpac Performance Plan. Under these arrangements, employees receive awards of Westpac ordinary shares or share rights, which are restricted for a period as determined by the Board. This allows the flexibility to tailor the restriction period to the circumstances of the award. 64 2013 WESTPAC GROUP ANNUAL REPORT 3.2. Linking reward and performance CEO performance objectives and key highlights The Remuneration Committee reviews and makes recommendations to the Board on individual performance objectives for the CEO. These objectives are intended to provide a robust link between remuneration outcomes and the key drivers of long-term shareholder value. The STI objectives are set in the form of a scoreboard with targets and measures aligned to our strategic priorities cascaded from the CEO scoreboard to the relevant Senior Executive scoreboard. The key financial and non-financial objectives for the CEO in the 2013 financial year, with commentary on key highlights are provided below. 1 DIRECTORS’ REPORT Category Weighting Measure1 Return 20% Economic Profit Growth 20% 20% Return on Equity Customer Growth Wealth Strategy Asia Strategy Strength 10% Adherence to Group Risk Appetite Statement (RAS) 10% Sustainable funding – Deposit to Loan Ratio Performance highlights  Delivered Economic Profit of $4,113 million, representing a 16% increase over 2012 and exceeding target.  16%, up 51bps on 2012 and exceeding target.  Westpac’s Institutional Bank retained its #1 rank as lead domestic bank for relationship banking and lead domestic bank for transactional banking, the latter for the 10th year running.  Strong customer growth across our brands: – customers with 4 or more products up 8% in St.George and Westpac Retail & Business Bank; – above system growth in mortgages and deposits for St.George; and – achievement of strategic targets for Bank of Melbourne, including growth of customer numbers.  Strong growth in customers who consider us their main bank, with a record number of additional Westpac Group customers taking up a Wealth product or advice.  Asia revenues increased by 33% over 2012, with significant targeted investments in footprint, capability, platforms and systems delivered during the year.  Delivered sector leading capital, improved liquidity and funding profiles and an industry leading impairment charge while operating within our Group RAS.  Outstanding credit quality performance.  Exceeded target, achieving the 2014 target 12 months ahead of plan while delivering above target returns to shareholders. 10% Employee Engagement  Employee Engagement of 87%, above the Global High Performing norm of 85%, indicating that our employees have confidence in our vision. Employee Advocacy  Employee Advocacy 4 points above the Global High Performing norm, exceeding target. Lost Time Injury Frequency Rate (LTIFR) Retention of employees in 1st year of service  We have made significant progress in embedding a strong safety culture across the Group, our LTIFR results improving 23%, well ahead of target.  Implementation of key strategies focussed on retaining employees that join the Westpac Group have resulted in our new starter retention rate increasing to 86.7%, exceeding target. Productivity 10% Expense to Income Ratio  We continued to lead the industry with an Expense to Income Revenue per Full-Time Equivalent Employee (FTE) Radical Simplification Program Ratio of 40.9%, on target.  Delivered increased revenue per FTE, in line with target.  The Program has made significant progress in simplifying our key business processes and technology systems to make it easier for our customers to do business with us; and providing our employees with the necessary tools, processes and frameworks to simplify their work.  Culture of continuous improvement well embedded in the Group. 1 Individual measures will differ for each Senior Executive. 2013 WESTPAC GROUP ANNUAL REPORT 65 Our primary financial measure is economic profit which the Board believes, in combination with return on equity, is the best measure of risk adjusted returns and of the value created for shareholders. The remaining measures focus on ensuring that we remain strong; deliver targeted growth; drive simplification, innovation and productivity while helping our customers, communities and people to prosper and grow. Aligning pay with performance and shareholder return The following graphs show the CEO’s STI payment as a percentage of target STI and its relationship to our primary financial metric, Group economic profit, and the Group’s TSR over the past three years. The final STI outcome for 2013 reflects the Board’s view of performance across all balanced scoreboard measures relative to planned outcomes, and the value the Group has delivered for our shareholders. STI Award for CEO vs. Economic Profit Total Shareholder Return 2010–2013 4,200 4,000 3,800 3,600 3,400 3,200 3,000 2,800 2,600 ) m $ ( i t i f o r p c m o n o c E 150% 125% 100% 75% 50% ) t e g r a t % s a ( t n e m y a p I T S 2011 2012 2013 Economic Profit ($m) STI award for CEO 80 70 60 50 40 30 20 10 - ) % ( n r u t e R l r e d o h e r a h S l a t o T (10) 01-Oct-10 01-Oct-11 01-Oct-12 01-Oct-13 Application of discretion The Board and the Remuneration Committee recognise that the scoreboard approach, while embracing a number of complementary performance objectives, will never entirely assess overall performance. The Remuneration Committee may therefore make discretionary adjustments, positive and negative, to the scoreboard outcomes for the CEO and Senior Executives. The Remuneration Committee uses the following criteria to apply discretionary adjustments:  matters not known or not relevant at the beginning of the financial year, which are relevant to the under or over performance of the CEO and Senior Executives during the financial year;  the degree of stretch implicit in the scoreboard measures and targets themselves and the context in which the targets were set;  whether the operating environment during the financial year has been materially better or worse than forecast;  comparison with the performance of the Group’s principal competitors, particularly major shareholder and customer benchmarks;  any major positive or negative risk management or reputational issue that impacts the Group;  the quality of the financial result as shown by its composition and consistency;  whether there have been major positive or negative aspects regarding the quality of leadership and/or behaviours consistent with our values; and  any other relevant over or under performance or other matter not captured. At the end of the year the Remuneration Committee reviews performance against objectives and applies any adjustments it considers appropriate. The Remuneration Committee then recommends STI outcomes for the CEO and each Senior Executive to the Board for approval, thereby ensuring the Board retains oversight of final awards. 66 2013 WESTPAC GROUP ANNUAL REPORT LTI performance outcomes The following table provides the Group’s TSR, dividend, share price and cash earnings per share performance each year from 2009 to 2013. Years Ended 30 September DIRECTORS’ REPORT 2013 66.09% TSR – three years 90.91% TSR – five years Dividends per Westpac share (cents)1 174 Cash Earnings per Westpac share2,3 $2.29 $34.79 Share price – high $24.23 Share price – low Share price – close $32.73 1 Does not include 20 cent special dividends determined in 2013. 2 Cash earnings are not prepared in accordance with A-IFRS and have not been subject to audit. 3 2009 cash earnings per share are on a pro forma basis. That is, prepared as if the merger with St.George was completed on 1 October 2008. 2012 25.61% 20.03% 166 $2.16 $24.99 $19.00 $24.85 2011 9.6% 18.5% 156 $2.09 $25.60 $17.84 $20.34 2010 3.7% 51.5% 139 $1.98 $28.43 $20.56 $23.24 2009 20.0% 76.7% 116 $1.64 $26.74 $14.40 $26.25 1 The vesting outcomes for awards made to the CEO and Senior Executives under the CEO Performance Plan and Westpac Reward Plan that reached a scheduled test date during the reporting period are set out below. Equity Instrument Type of Equity Commencement Date1 Test Date TSR Percentile in Ranking Group Vested Lapsed % % CEO Performance Plan Performance options 1 December 2008 1 December 2012 2 80th percentile and share rights 21 December 2009 20 December 2012 60th percentile Westpac Reward Plan Performance options 1 October 2008 1 October 2012 2 80th percentile and share rights 1 October 2009 1 October 2012 70th percentile 100 70 100 90 - - - - 1 Commencement date refers to the commencement of the performance period. 2 2nd Test Date – 90% of these awards vested in 2012; the remaining 10% vested in 2013. There has been no re-testing for awards granted since 2011. Remain in Plan % - 30 - 10 3.3. Remuneration outcomes for the CEO and Senior Executives – Linking Reward and Performance The following table has been prepared to provide shareholders with an outline of the remuneration which has been received for the 2013 performance year either as cash or in the case of prior equity awards, the value which has vested in 2013 (see note 4 below). Details in this table supplement the statutory requirements in Section 5.2. Unlike the statutory table, which represents remuneration outcomes prepared in accordance with accounting standards (A-IFRS), this table shows the actual remuneration value received by Executives and is not prepared in accordance with A-IFRS. Fixed Remuneration1 $ 2013 STI Cash Payment2 $ 2013 Total Cash Payments3 $ Prior Year Equity Awards4 Vested during 2013 Prior Year Equity Awards4 Forfeited during 2013 $ Managing Director & Chief Executive Officer Gail Kelly 2,989,989 2,656,800 5,646,789 5,345,598 $ - Senior Executives John Arthur Peter Clare Philip Coffey Brad Cooper George Frazis Brian Hartzer5 Christine Parker Greg Targett Rob Whitfield Jason Yetton 1 Fixed remuneration includes cash salary, annual leave accrual and salary sacrificed items plus employer superannuation. 2 The cash STI payment represents 60% of the 2013 STI outcome and will be paid in December 2013. The remaining 40% is deferred in the form of 986,173 1,289,840 1,816,235 1,599,807 1,499,041 3,268,225 438,130 1,328,297 1,659,052 621,036 1,198,844 1,012,120 1,278,053 1,034,451 950,162 2,164,019 802,855 1,321,322 1,768,837 810,358 2,150,444 1,912,120 2,541,653 2,354,451 2,121,362 3,252,119 1,494,055 2,163,122 2,940,037 1,460,158 951,600 900,000 1,263,600 1,320,000 1,171,200 1,088,100 691,200 841,800 1,171,200 649,800 - - - - - - - - - - equity and will vest in equal tranches in October 2014 and 2015. 3 This is the addition of the first and second columns. 4 Prior year equity awards include both deferred STI and LTI allocations subject to performance hurdles which have vested in 2013 (refer Brian Hartzer below). The equity value has been calculated as the number of securities that vested during the year ended 30 September 2013, multiplied by the five day volume weighted average price of Westpac ordinary shares at the time they vested, less any exercise price payable. 5 Brian Hartzer – Chief Executive, Australian Financial Services was recruited to the Group in late 2011 and commenced employment in June 2012. The value shown as vested equity above relates to a specific allocation made in 2012, which reflects equity foregone with his previous employer. 2013 WESTPAC GROUP ANNUAL REPORT 67 4. Non-executive Director Remuneration 4.1. Structure and policy Remuneration policy Westpac’s Non-executive Director remuneration strategy is designed to attract and retain experienced, qualified Board members and remunerate them appropriately for their time and expertise. As the Board’s focus is on strategic direction, long-term corporate performance and the creation of shareholder value, fees for Non-executive Directors are not directly related to the Group’s short-term results and Non-executive Directors do not receive performance-based remuneration. Non-executive Director remuneration consists of the following components: Remuneration component Paid as Detail Base fee Cash This fee is for service on the Westpac Banking Corporation Board. The base fee for the Chairman covers all responsibilities, including all Board Committees. Committee fees Cash Additional fees are paid to Non-executive Directors for chairing or participating in Board Committees. Superannuation Superannuation Reflects statutory superannuation contributions which are capped at the superannuation maximum contributions base as prescribed under the Superannuation Guarantee legislation. Subsidiary Board and Advisory Board fees Cash Fees are for service on Subsidiary Boards and Advisory Boards. These fees are paid by the relevant subsidiary company. Non-executive Director remuneration in 2013 For the year ended 30 September 2013, there were no changes made to Non-executive Director remuneration. Changes to Board and Committee composition The following changes were made to Board and Committee composition:  Robert Elstone was appointed Chairman of the Audit Committee, replacing Peter Wilson, effective 13 December 2012; and  Ewen Crouch and Peter Marriott were appointed as Non-executive Directors to the Westpac Board effective 1 February 2013 and 1 June 2013 respectively. Fee pool At the 2008 Annual General Meeting, the current fee pool of $4.5 million per annum was approved by shareholders. For the year ended 30 September 2013, $3.01 million (67%) of this fee pool was used. The fee pool is inclusive of employer superannuation contributions. Fee framework This section details the current Non-executive Director fee framework. Base and committee fees The following table sets out the Board and standing Committee fees: Base Fee Chairman Deputy Chairman Non-executive Directors Committee Chairman Fees Audit Committee Risk Management Committee Remuneration Committee Technology Committee Committee Membership Fees Audit Committee Risk Management Committee Remuneration Committee Technology Committee Committee fees are not payable to the Chairman and members of the Nominations Committee. 68 2013 WESTPAC GROUP ANNUAL REPORT Annual Rate $ 760,000 270,000 210,000 60,000 60,000 48,000 30,000 30,000 30,000 24,000 15,000 DIRECTORS’ REPORT Superannuation The Group pays superannuation contributions to Non-executive Directors of up to 9.25% of their fees (9% prior to 1 July 2013). These contributions are capped at the maximum compulsory superannuation contributions base prescribed under Superannuation Guarantee legislation. Employer contributions are paid into an eligible superannuation fund nominated by the Director. 1 Subsidiary Board and Advisory Board fees Throughout the reporting period, additional fees were payable to certain Directors for membership on Subsidiary Boards or Advisory Boards. These fees vary according to the position held, the size, level and nature of activity in the division and the time commitment required. The table below sets out the annual fees payable to the relevant Directors for service on Subsidiary and Advisory Boards in 2013: Director Peter Hawkins Peter Wilson1 1 The fees for service on the WNZL Subsidiary Board are paid in New Zealand dollars and have been converted to Australian dollars using the Subsidiary / Advisory Board Bank of Melbourne Advisory Board Westpac New Zealand Limited Role Director Chair Annual Rate $35,000 $139,883 2013 year to date average exchange rate (1AUD = 1.2153NZD). Equity participation Non-executive Directors have voluntarily resolved to build and maintain their individual holdings of Westpac ordinary shares to align their interests with the long-term interests of shareholders. Details of Non-executive Directors’ Westpac (and related bodies corporate) shareholdings are set out in Section 4 (a) of the Directors’ report. 2013 WESTPAC GROUP ANNUAL REPORT 69 5. Required remuneration disclosures 5.1. Details of Non-executive Director remuneration Details of Non-executive Director remuneration are set out in the table below: Short-term Benefits Post Employment Benefits Name Westpac Banking Corporation Board Fees1 $ Subsidiary and Advisory Board Fees $ Superannuation $ Retiring Allowance Accrued During the Year4 $ Lindsay Maxsted, Chairman 2013 2012 John Curtis, Deputy Chairman 2013 2012 Elizabeth Bryan 2013 2012 Gordon Cairns 2013 2012 760,000 661,503 348,000 365,770 309,000 323,377 264,000 278,377 Ewen Crouch, appointed 1 February 2013 2013 174,646 Robert Elstone 2013 2012 Peter Hawkins 2013 2012 310,096 182,254 300,000 300,000 Peter Marriott, appointed 1 June 2013 2013 80,504 Ann Pickard 2013 2012 264,000 205,836 Former Non-executive Directors Peter Wilson2, retired on 13 December 2012 62,308 2013 306,489 2012 - - - - - - - - - - - 35,000 35,000 - - - 28,941 131,875 16,870 15,961 16,816 15,961 16,870 15,961 16,870 15,961 11,372 16,870 9,194 16,816 15,961 5,784 16,870 13,332 3,421 15,961 - - - - - - - - - - - - - - - - - - Total $ 776,870 677,464 364,816 381,731 325,870 339,338 280,870 294,338 186,018 326,966 191,448 351,816 350,961 86,288 280,870 219,168 94,670 454,325 Total fees 2013 3 2012 1 2 Peter Wilson remains the Chairman of Westpac New Zealand Ltd. The fees in this table have been pro-rated consistent with his tenure as a member Includes fees paid to the Chairman and members of Board Committees. 3,075,054 3,479,158 2,872,554 3,038,587 138,559 146,451 63,941 279,693 - 14,427 of the Westpac Board. The annual fee is disclosed in Section 4. 3 The total fees for 2012 reflect the prior year remuneration for the 2012 reported Non-executive Directors. 4 There were no Non-executive Directors with a retiring allowance in 2013. 70 2013 WESTPAC GROUP ANNUAL REPORT DIRECTORS’ REPORT 5.2. Remuneration details – KMP and other Senior Executives This section sets out details of remuneration for the CEO and Senior Executives for the 2013 financial year, calculated in accordance with statutory accounting requirements. Short-term Benefits Fixed Remu- neration1 $ STI (cash)2 $ Name Non- monetary Benefits3 $ Other Short-term Benefits4 $ Post Employment Benefits Long Service Leave6 $ Superann- uation Benefits5 $ Share-based Payments Restricted Shares7 Options8 $ $ Share Rights8 $ Total9 $ Managing Director & Chief Executive Officer Gail Kelly 2013 2012 2,656,800 2,268,000 2,964,957 3,001,714 Senior Executives John Arthur, Chief Operating Officer 2013 2012 1,175,117 1,131,518 951,600 702,000 11,026 2,565 14,293 13,053 - - - - Peter Clare, Chief Executive Officer, Westpac New Zealand Limited 2013 - 2012 1,008,654 900,000 810,000 158,423 973,964 18,293 - Philip Coffey, Chief Financial Officer 2013 2012 1,253,051 1,312,031 1,263,600 1,080,000 3,028 2,033 Brad Cooper, Chief Executive Officer, BT Financial Group 2013 2012 1,320,000 1,009,555 1,080,000 956,185 3,013 3,028 George Frazis, Chief Executive Officer, St.George Banking Group 2013 2012 1,171,200 1,005,158 912,000 925,231 22,505 2,888 Brian Hartzer, Chief Executive, Australian Financial Services10 2013 1,088,100 2,145,092 3,028 FY13 Remuneration impact relating to recruitment 2013 - 2012 150,000 622,080 - 644,488 185,712 - - - - - - - - Christine Parker, Group Executive, Human Resources & Corporate Affairs 2013 691,200 2012 223,677 782,964 600,000 825,411 46,109 - - Greg Targett, Chief Risk Officer 2013 2012 1,296,512 1,323,898 841,800 690,000 3,028 3,013 Rob Whitfield, Group Executive, Westpac Institutional Bank 2013 2012 1,171,200 1,296,000 1,744,159 1,711,723 299,326 160,603 - - - - Jason Yetton, Group Executive, Westpac Retail & Business Banking - 2013 - 2012 649,800 660,000 790,984 834,966 3,028 1,736 25,032 27,102 51,108 51,217 1,621,079 1,704,358 - 63,862 1,848,328 2,473,166 9,178,330 9,591,984 23,727 43,503 18,260 31,205 484,297 471,581 3,466 14,056 - 15,975 183,193 592,446 25,002 43,270 (254,682) 44,198 769,480 825,490 24,896 50,791 15,217 15,244 763,815 766,713 - - - 173 - 222 - 195 441,316 384,414 3,108,610 2,777,274 682,595 409,671 2,796,201 2,974,708 434,553 548,696 3,494,032 3,855,940 449,082 594,341 3,585,593 3,466,482 24,931 28,254 15,221 7,627 660,204 - 486,064 167,365 316,218 660,959 3,135,510 3,270,315 18,927 33,487 72,161 - - 3,373,875 370,000 10,614 8,985 2,461,533 19,891 19,253 12,177 17,357 374,529 307,823 24,810 43,601 20,549 33,242 485,315 537,857 - - - - 26 - - 114,447 3,475,242 - - 4,018,363 3,808,924 137,885 84,774 2,242,323 1,900,753 388,659 493,833 3,060,673 3,125,444 24,678 24,326 27,373 27,423 827,911 688,660 - 130 359,415 530,560 4,454,062 4,439,425 19,374 24,126 12,170 30,681 434,004 339,824 - - 243,598 124,471 2,152,958 2,015,804 1 Fixed remuneration is the total cost of salary, salary sacrificed benefits (including motor vehicles, parking, etc., and any associated fringe benefits tax) and an accrual for annual leave entitlements. 2 2013 STI figures reflect annual cash performance awards accrued but not yet paid in respect of the year ended 30 September 2013. 3 Non-monetary benefits are determined on the basis of the cost to the Group (including associated fringe benefits tax, where applicable) and include annual health checks, provision of taxation advice, relocation costs, living away from home expenses and allowances. 4 The payment to Brian Hartzer in 2012 reflects annual incentive foregone from his previous employer. 5 The CEO and Senior Executives are provided with insurance cover under the Westpac Group Plan at no cost. Superannuation benefits have been calculated consistent with AASB 119. 6 Phil Coffey took long service leave during the year which resulted in a negative adjustment of $254,682. 7 The value of restricted shares is amortised over the applicable vesting period, and the amount shown is the amortisation relating to the 2013 reporting year (and 2012 year as comparison). The equity granted to Brian Hartzer on his recruitment in 2012 relates to equity foregone with his previous employer and will be forfeited if Mr Hartzer resigns or is terminated for cause before the vesting dates. 2013 WESTPAC GROUP ANNUAL REPORT 71 The equity granted to Brian Hartzer on his recruitment in 2012 relates to equity foregone with his previous employer and will be forfeited if Mr Hartzer resigns or is terminated for cause before the vesting dates. 8 Equity-settled remuneration is based on the amortisation over the vesting period (normally two or three years) of the ‘fair value’ at grant date of hurdled and unhurdled options and share rights that were granted during the four years ended 30 September 2013. Details of prior years’ grants have been disclosed in previous Annual Reports. 9 The percentage of the total remuneration which is performance related (i.e., STI cash plus share based payments) was: Gail Kelly 67%, John Arthur 60%, Peter Clare 63%, Philip Coffey 71%, Brad Cooper 71%, George Frazis 68%, Brian Hartzer 62%, Christine Parker 54%, Greg Targett 56%, Rob Whitfield 53% and Jason Yetton 62%. The percentage of total remuneration delivered in the form of options (including share rights) was: Gail Kelly 20%, John Arthur 14%, Peter Clare 24%, Philip Coffey 12%, Brad Cooper 13%, George Frazis 10%, Brian Hartzer 2%, Christine Parker 6%, Greg Targett 13%, Rob Whitfield 8% and Jason Yetton 11%. 10 Brian Hartzer’s remuneration for 2013 has been separated into two elements, the first line being his remuneration as the Chief Executive, AFS for 2013, the second line being those elements which have been incurred as the result of the buy-out of equity forfeited on his resignation from his previous employer and includes $362,125 in relocation-related benefits and $282,363 FBT expense on his relocation from London. Brian Hartzer’s 2012 remuneration shows the combined remuneration values. Brian received a total relocation benefit of $185,712, inclusive of FBT in 2012. 5.3. STI allocations for the CEO and Senior Executives This section sets out details of STI awards for the CEO and Senior Executives for the 2013 financial year. STI Target $ Maximum STI1 % STI Portion Paid in Cash2 % $ STI Portion Deferred3 % $ Managing Director & Chief Executive Officer Gail Kelly 3,600,000 150 60 2,656,800 40 1,771,200 Senior Executives John Arthur Peter Clare Philip Coffey Brad Cooper George Frazis Brian Hartzer Christine Parker Greg Targett Rob Whitfield Jason Yetton 1 The maximum STI Potential is 150% of the individual STI Target. 2 60% of the STI outcome for the year is paid as cash in December 2013. 3 40% of the actual STI outcome is deferred in the form of restricted shares or share rights, half vesting on 1 October 2014 and the remainder vesting 951,600 900,000 1,263,600 1,320,000 1,171,200 1,088,100 691,200 841,800 1,171,200 649,800 1,300,000 1,500,000 1,800,000 2,000,000 1,600,000 1,550,000 900,000 1,150,000 1,600,000 950,000 634,400 600,000 842,400 880,000 780,800 725,400 460,800 561,200 780,800 433,200 150 150 150 150 150 150 150 150 150 150 40 40 40 40 40 40 40 40 40 40 60 60 60 60 60 60 60 60 60 60 on 1 October 2015. 72 2013 WESTPAC GROUP ANNUAL REPORT 5.4. Movement in equity-settled instruments during the year This table shows the details of movements during 2013 in the number and value of equity instruments for the CEO and Senior Executives under the relevant plans. DIRECTORS’ REPORT Name Type of Equity Instrument Managing Director & Chief Executive Officer Gail Kelly CEO Performance options CEO Performance share rights Shares under the CEO Restricted Share Plan Senior Executives John Arthur Performance share rights Shares under Restricted Share Plan Peter Clare Philip Coffey Brad Cooper George Frazis Performance options Performance share rights Unhurdled share rights Shares under Restricted Share Plan Performance options Performance share rights Shares under Restricted Share Plan Performance options Performance share rights Shares under Restricted Share Plan Performance options Performance share rights Unhurdled share rights Shares under Restricted Share Plan Brian Hartzer Performance share rights Shares under Restricted Share Plan Christine Parker Performance options Greg Targett Rob Whitfield Jason Yetton Performance share rights Unhurdled share rights Shares under Restricted Share Plan Performance share rights Shares under Restricted Share Plan Performance options Performance share rights Shares under Restricted Share Plan Performance options Performance share rights Shares under Restricted Share Plan Number Granted1 Number Vested2 Number Exercised3 Value Granted4 $ Value Exercised5 $ Value Forfeited or Lapsed5,6 $ 1 - 213,101 35,612 128,174 400,043 128,174 - 3,471,153 2,839,469 4,124,474 58,400 66,984 n/a 1,517,172 n/a 71,033 18,076 - 39,462 22,942 - - 67,087 27,809 - 59,194 27,809 - 43,409 - 23,483 30,780 3,862 - 27,623 - 15,449 55,247 17,767 - 47,355 33,371 - 51,301 16,994 17,256 22,763 8,180 23,187 - 28,725 10,480 32,354 40,799 9,202 28,310 36,128 - 26,962 20,703 13,098 - 104,850 1,220 3,047 - 14,553 25,883 28,011 6,135 32,354 34,639 3,272 8,627 16,313 17,256 n/a - 23,187 - n/a 1,121,512 469,596 - 623,049 526,667 - 426,002 n/a - 572,422 - n/a 219,591 32,354 n/a - 1,059,213 722,449 1,140,164 798,729 n/a - 28,310 n/a - 26,962 20,703 n/a - n/a 12,204 3,047 2,838 n/a 25,883 n/a 403,365 98,939 n/a - 58,107 n/a - 934,594 722,449 - 685,369 - 610,064 485,971 100,331 - 436,131 - 401,349 872,274 461,568 - 747,667 866,944 - 809,975 441,487 - 698,894 n/a - 665,616 525,986 n/a - n/a 107,135 75,222 73,728 n/a 638,978 n/a 3,166,253 2,935,740 n/a - 1,763,524 n/a - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 No performance options were granted in 2013. 2 100% of unhurdled share rights granted in 2010 vested in October 2012. The remaining 10% of performance options granted to the CEO in 2008 vested in December 2012, and the remaining 10% of performance options granted to Senior Executives in 2008 vested in October 2012. Both were assessed against the TSR performance hurdle. 3 Vested options and share rights that were granted prior to October 2009 can be exercised up to a maximum of 10 years from their commencement date. For each share right and each performance option exercised during the year, the relevant Executive received one fully paid Westpac ordinary share. The exercise price for share rights is nil. 4 For share rights, the value granted represents the number of securities granted multiplied by the fair value per instrument as set out in the table titled ‘Fair value of LTI grants made during the year’ below. For restricted shares, the value granted represents the number of ordinary shares granted multiplied by the five day volume weighted average price of a Westpac ordinary share on the date the shares were granted. These values, which represent the full value of the equity-based awards made to disclosed Executives in 2013, do not reconcile with the amount shown in the table in Section 5.2, which shows amortised totals of equity awards over their vesting period. The minimum total value of the grants for future financial years is nil and an estimate of the maximum possible total value in future financial years is the fair value, as shown above. 5 The value of each option or share right exercised or lapsed is calculated based on the five day volume weighted average price of Westpac ordinary shares on the ASX on the date of exercise (or lapse), less the relevant exercise price (if any). Where the exercise price is greater than the five day volume weighted average price of Westpac ordinary shares, the value has been calculated as nil. 6 Apart from equity instruments referred to in this section, no other equity instruments granted in prior years vested and none were forfeited during the financial year. 2013 WESTPAC GROUP ANNUAL REPORT 73 Fair value of LTI grants made during the year The table below provides a summary of the fair value of LTI awards granted to the CEO and Senior Executives during 2013 calculated in accordance with Australian accounting standard AASB 2 Share-based Payments and is used for accounting purposes only. The LTI grants will vest on satisfaction of performance and/or service conditions tested in future financial years. Equity Instrument Performance Hurdle Granted to Grant Date Commencement Date1 Test Date Expiry Fair Value2 per Instrument CEO Performance Plan Relative TSR Share Rights Cash EPS CAGR Gail Kelly 13 December 2012 13 December 2012 1 October 2012 1 October 2015 1 October 2022 1 October 2012 1 October 2015 1 October 2022 $11.86 $21.85 $11.75 Westpac Reward Plan Relative TSR Share Rights $20.86 1 The commencement date is the start of the performance period. Awards to the CEO were approved by shareholders at the Annual General Meeting 28 November 2012 Cash EPS CAGR Executives 28 November 2012 1 October 2012 1 October 2015 1 October 2022 1 October 2012 1 October 2015 1 October 2022 All Senior held on 15 December 2010. 2 The fair values of share rights granted during the year included in the table above have been independently calculated at their respective grant dates based on the requirements of Australian accounting standard AASB 2 Share-based Payments. The fair value of rights with Cash EPS CAGR hurdles has been assessed with reference to the share price at grant date and a discount rate reflecting the expected dividend yield over their vesting periods. For the purpose of allocating rights with Cash EPS CAGR hurdles, the valuation also takes into account the average Cash EPS CAGR outcome using a Monte Carlo simulation model. The fair value of rights with hurdles based on TSR performance relative to a group of comparator companies also takes into account the average TSR outcome determined using a Monte Carlo simulation pricing model. 5.5. Employment agreements The remuneration and other terms of employment for the CEO and Senior Executives are formalised in their employment agreements. Each of these employment agreements provide for the payment of fixed and performance-based remuneration, superannuation and other benefits such as death and disablement insurance cover. The term and termination provisions of the employment agreements for the current KMP are summarised below. Term Who Conditions Duration of agreement  CEO and all Senior Executives  Ongoing until notice given by either Notice to be provided by the executive or the Group to terminate the employment agreement Termination payments to be made on termination without cause  CEO and Senior Executives  Jason Yetton  CEO and all Senior Executives party  12 months1  6 months1  Deferred STI and LTI awards vest according to the applicable equity plan rules Termination for cause  CEO, John Arthur, Brian Hartzer, Christine Parker, Greg Targett, Rob Whitfield and Jason Yetton  Immediately for misconduct  3 months notice for poor performance  All other Senior Executives  Immediately for misconduct  Standard contractual notice period for poor performance Post-employment restraints 1 Payment in lieu of notice may in certain circumstances be approved by the Board for some or all of the notice period.  CEO and all Senior Executives  12 month non-solicitation restraint Certain individuals have provisions in their contracts for different terms due to grandfathered contractual benefits or individual circumstances:  Gail Kelly – The restricted period on all unvested restricted shares (deferred STI) will continue to the full term when Gail Kelly ceases employment with Westpac, except for death, sickness or disability or in certain circumstances within 12 months of change of control of Westpac. In these circumstances all unvested restricted shares will vest. On immediate termination for misconduct, all restricted shares will be forfeited. When Gail Kelly ceases employment with Westpac, all unvested performance share rights (LTI) will lapse at the Board’s discretion, except under circumstances of death, sickness or disability or in certain circumstances within 12 months of change of control of Westpac. In these circumstances all unvested performance share rights will vest. On immediate termination for misconduct, all unvested performance share rights will lapse;  Peter Clare – Provisions relating to his relocation from Sydney to Auckland;  Brian Hartzer – Provisions relating to his relocation from London to Sydney;  Christine Parker – Provisions relating her relocation from Auckland to Sydney; and  Rob Whitfield – Provisions relating to accommodation in Sydney. 74 2013 WESTPAC GROUP ANNUAL REPORT 10. AUDITOR a) Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act is below: 1 DIRECTORS’ REPORT AUDITOR’S INDEPENDENCE DECLARATION As lead auditor for the audit of Westpac Banking Corporation for the year ended 30 September 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 Westpac Banking Corporation and the entities it controlled during the period. Michael Codling Partner PricewaterhouseCoopers Sydney, Australia 4 November 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 b) Non-audit services We may decide to engage PwC on assignments additional to their statutory audit duties where their expertise or experience with Westpac or a controlled entity is important. Details of the non-audit service amounts paid or payable to PwC for non-audit services provided during the 2012 and 2013 financial years are set out in Note 33 to the financial statements. PwC also provides audit and non-audit services to non-consolidated entities, non-consolidated trusts of which a Westpac Group entity is trustee, manager or responsible entity and non-consolidated superannuation funds or pension funds. The fees in respect of these services were approximately $7.7 million in total (2012 $8.6 million). PwC may also provide audit and non-audit services to other entities in which Westpac holds a minority interest and which are not consolidated. Westpac is not aware of the amount of any fees paid to PwC by those entities. Westpac has a policy on engaging PwC, details of which are set out in the ‘Corporate governance’ section, including the subsection entitled ‘Engagement of the external auditor’, which forms part of this Directors’ report. The Board has considered the position and, in accordance with the advice received from the Board Audit Committee, is satisfied that the provision of the non-audit services during 2013 by PwC is compatible with the general standard of independence for auditors imposed by the Corporations Act. The Directors are satisfied that the provision of non-audit services by PwC, as set out above, did not compromise the auditor independence requirements of the Corporations Act for the following reasons:  all non-audit services have been reviewed by the Board Audit Committee to ensure they do not impact the impartiality and objectivity of the auditor; and  none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accounts. 2013 WESTPAC GROUP ANNUAL REPORT 75 11. RESPONSIBILITY STATEMENT The Directors of Westpac Banking Corporation confirm that to the best of their knowledge:  the consolidated financial statements for the financial year ended 30 September 2013, which have been prepared in accordance with the accounting policies described in Note 1 to the consolidated financial statements, being in accordance with A-IFRS, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and  the Annual Report from the section entitled ‘Information on Westpac’ to and including the section entitled ‘Other Westpac business information’ includes a fair review of the information required by the Disclosure and Transparency Rules 4.1.8R to 4.1.11R of the United Kingdom Financial Conduct Authority. Signed in accordance with a resolution of the Board. Lindsay Maxsted Chairman 4 November 2013 Gail Kelly Managing Director & Chief Executive Officer 4 November 2013 76 2013 WESTPAC GROUP ANNUAL REPORT FIVE YEAR SUMMARY READING THIS REPORT REVIEW OF GROUP OPERATIONS DIVISIONAL PERFORMANCE RISK AND RISK MANAGEMENT OTHER WESTPAC BUSINESS INFORMATION 2 FIVE YEAR SUMMARY1 (in $millions unless otherwise indicated) Income statements for the years ended 30 September2 Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Net profit attributable to owners of Westpac Banking Corporation Balance sheet as at 30 September2 Loans Other assets Total assets Deposits and other borrowings Debt issues Loan capital Other liabilities Total liabilities Total shareholders’ equity and non-controlling interests Key financial ratios Shareholder value Dividends per ordinary share (cents) Special dividends per ordinary share (cents) Dividend payout ratio (%)3 Return on average ordinary equity (%) Basic earnings per share (cents) Net tangible assets per ordinary share ($)4 Share price ($): High Low Close Business performance Operating expenses to operating income ratio (%) Net interest margin Capital adequacy Total equity to total assets (%) Total equity to total average assets (%) APRA Basel III: Common equity Tier 1 (%)5 Tier 1 ratio (%)6 Total capital ratio (%)6 2013 2012 2011 2010 2009 12,865 5,774 18,639 (7,927) (847) 9,865 (2,975) (74) 6,816 536,164 160,439 696,603 424,482 144,133 9,330 71,177 649,122 47,481 12,502 5,481 17,983 (7,909) (1,212) 8,862 (2,826) (66) 5,970 514,445 160,520 674,965 394,991 147,847 9,537 76,371 628,746 46,219 11,996 4,917 16,913 (7,406) (993) 8,514 (1,455) (68) 6,991 496,609 173,619 670,228 370,278 165,931 8,173 82,038 626,420 43,808 11,842 5,068 16,910 (7,416) (1,456) 8,038 (1,626) (66) 6,346 477,655 140,622 618,277 337,385 150,971 9,632 80,171 578,159 40,118 11,646 4,859 16,505 (7,171) (3,238) 6,096 (2,579) (71) 3,446 463,459 126,128 589,587 329,456 133,024 11,138 79,398 553,016 36,571 174 20 78.9 15.4 220.4 11.07 34.79 24.23 32.73 42.5 2.14 6.8 6.9 9.1 10.7 12.3 166 - 84.8 14.0 195.8 10.47 24.99 19.00 24.85 44.0 2.16 6.8 7.0 8.2 10.3 11.7 156 - 67.0 17.8 233.0 9.96 25.60 17.84 20.34 43.8 2.19 6.5 7.0 n/a 9.7 11.0 139 - 64.9 17.4 214.2 8.96 28.43 20.56 23.24 43.9 2.21 6.5 6.6 n/a 9.1 11.0 116 - 92.6 10.8 125.3 7.89 26.74 14.40 26.25 43.4 2.38 6.2 6.3 n/a 8.1 10.8 Credit quality Net impaired assets to equity and collectively assessed provisions (%) Total provisions for impairment on loans and credit commitments to total loans (basis points) Other information Full-time equivalent staff (number at financial year end)7 34,189 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 35,055 33,418 33,898 33,045 101 105 6.3 5.7 6.2 5.6 4.1 88 73 82 and may differ from results previously reported. 2 The above income statement extracts for 2013, 2012 and 2011 and balance sheet extracts for 2013 and 2012 are derived from the consolidated financial statements included in this Annual Report. The above income statement extracts for 2010 and 2009 and balance sheet extracts for 2011, 2010 and 2009 are derived from financial statements previously published. 3 Excludes special dividends. 4 Total equity attributable to owners of Westpac Banking Corporation, after deducting goodwill and other intangible assets divided by the number of ordinary shares outstanding, less treasury shares held. 5 Basel III was not effective in Australia until 1 January 2013. The 2012 ratio has been presented on a pro forma Basel III basis. No comparatives are presented for other years. For further information, refer to Note 30 to the financial statements. 6 Basel III was not effective in Australia until 1 January 2013. Comparatives are presented on a Basel II basis. For further information, refer to Note 30 to the financial statements. 7 Full-time equivalent employees includes full-time and pro-rata part-time staff. It excludes staff on unpaid absences (e.g. unpaid maternity leave), overtime, temporary and contract staff. 78 2013 WESTPAC GROUP ANNUAL REPORT READING THIS REPORT Disclosure regarding forward-looking statements This Annual Report contains statements that constitute ‘forward-looking statements’ within the meaning of Section 21E of the US Securities Exchange Act of 1934. Forward-looking statements are statements about matters that are not historical facts. Forward-looking statements appear in a number of places in this Annual Report and include statements regarding our intent, belief or current expectations with respect to our business and operations, market conditions, results of operations and financial condition, including, without limitation, future loan loss provisions and financial support to certain borrowers. We use words such as ‘will’, ‘may’, ‘expect’, ‘intend’, ‘seek’, ‘would’, ‘should’, ‘could’, ‘continue’, ‘plan’, ‘estimate’, ‘anticipate’, ‘believe’, ‘probability’, ‘risk’ or other similar words to identify forward-looking statements. These forward- looking statements reflect our current views with respect to future events and are subject to change, certain risks, uncertainties and assumptions which are, in many instances, beyond our control, and have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations or that the effect of future developments on us will be those anticipated. Actual results could differ materially from those which we expect, depending on the outcome of various factors, including, but not limited to:  the effect of, and changes in, laws, regulations, taxation or accounting standards or practices and government policy, particularly changes to liquidity, leverage and capital requirements;  the stability of Australian and international financial systems and disruptions to financial markets and any losses or business impacts Westpac or its customers or counterparties may experience as a result;  market volatility, including uncertain conditions in funding, equity and asset markets;  adverse asset, credit or capital market conditions;  changes to our credit ratings;  levels of inflation, interest rates, exchange rates and market and monetary fluctuations;  market liquidity and investor confidence;  changes in economic conditions, consumer spending, saving and borrowing habits in Australia, New Zealand and in other countries in which Westpac or its customers or counterparties conduct their operations and our ability to maintain or to increase market share and control expenses;  the effects of competition in the geographic and business areas in which Westpac conducts its operations;  reliability and security of Westpac’s technology and risks associated with changes to technology systems;  the timely development and acceptance of new products and services and the perceived overall value of these products and services by customers;  the effectiveness of our risk management policies, including our internal processes, systems and employees;  the occurrence of environmental change or external events in countries in which Westpac or its customers or counterparties conduct their operations;  internal and external events which may adversely impact our reputation;  changes in political, social or economic conditions in any of the major markets in which Westpac or its customers or counterparties operate;  the success of strategic decisions involving business expansion and integration of new businesses; and  various other factors beyond Westpac’s control. The above list is not exhaustive. For certain other factors that may impact on forward-looking statements made by us, refer to ‘Risk factors’ under the section ‘Risk and risk management’. When relying on forward-looking statements to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and events. Westpac is under no obligation to update any forward- looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise, after the date of this Annual Report. Significant developments For a discussion of significant developments impacting the Group, refer to ‘Significant developments’ under ‘Information on Westpac’ in Section 1. Currency of presentation, exchange rates and certain definitions In this Annual Report, ‘financial statements’ means our audited consolidated balance sheets as at 30 September 2013 and 30 September 2012 and income statements, statements of comprehensive income, changes in equity and cash flows for each of the years ended 30 September 2013, 2012 and 2011 together with accompanying notes which are included in this Annual Report. Our financial year ends on 30 September. As used throughout this Annual Report, the financial year ended 30 September 2013 is referred to as 2013 and other financial years are referred to in a corresponding manner. We publish our consolidated financial statements in Australian dollars. In this Annual Report, unless otherwise stated or the context otherwise requires, references to ‘dollars’, ‘dollar amounts’, ‘$’, ‘AUD’ or ‘A$’ are to Australian dollars, references to ‘US$’, ‘USD’ or ‘US dollars’ are to United States dollars and references to ‘NZ$’, ‘NZD’ or ‘NZ dollars’ are to New Zealand dollars. Solely for the convenience of the reader, certain Australian dollar amounts have been translated into US dollars at a specified rate. These translations should not be construed as representations that the Australian dollar amounts actually represent such US dollar amounts or have been or could be converted into US dollars at the rate indicated. Unless otherwise stated, the translations of Australian dollars into US dollars have been made at the rate of A$1.00 = US$0.9342, the noon buying rate in New York City for cable transfers in Australian dollars as certified for customs purposes by the Federal Reserve Bank of New York (the ‘noon buying rate’) as of Monday, 30 September 2013. The 2013 WESTPAC GROUP ANNUAL REPORT 79 2 Australian dollar equivalent of New Zealand dollars at 30 September 2013 was A$1.00 = NZ$1.1260, being the closing spot exchange rate on that date. Refer to ‘Exchange rates’ in Section 4 for information regarding the rates of exchange between the Australian dollar and the US dollar for the financial years ended 30 September 2009 to 30 September 2013. Any discrepancies between totals and sums of components in tables contained in this Annual Report are due to rounding. 80 2013 WESTPAC GROUP ANNUAL REPORT REVIEW OF GROUP OPERATIONS Selected consolidated financial and operating data We have derived the following selected financial information as of, and for the financial years ended, 30 September 2013, 2012, 2011, 2010 and 2009 from our audited consolidated financial statements and related notes. financial assets and financial liabilities, including derivatives, is largely determined based on valuation models using observable market prices and rates. Where observable market inputs are not available, day one profits or losses are not recognised. This information should be read together with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report. Accounting standards The financial statements and other financial information included elsewhere in this Annual Report, unless otherwise indicated, have been prepared and presented in accordance with Australian Accounting Standards (A-IFRS). They also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The financial statements have been prepared in accordance with the accounting policies described in Note 1 to the financial statements. Recent accounting developments For a discussion of recent accounting developments refer to Note 1 to the financial statements. Critical accounting estimates Our reported results are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of the income statement and the balance sheet. Our principal accounting policies are disclosed in Note 1 to the financial statements. Note 1 also includes a description of our critical accounting assumptions and estimates. We have discussed the development and selection of the critical accounting estimates with our Board Audit Committee (BAC). The following is a summary of the areas we consider involve our most critical accounting estimates. For more detail refer to Note 1 to the financial statements. Fair value of financial instruments Financial instruments classified as held-for-trading or designated at fair value through profit or loss and financial assets classified as available-for-sale are recognised in the financial statements at fair value. All derivatives are measured and recognised at fair value. As far as possible, financial instruments are valued with reference to quoted, observable market prices or by using models which employ observable valuation parameters. Where valuation models rely on parameters for which inputs are not observable, judgments and estimation may be required. As at 30 September 2013, the fair value of trading securities, financial assets designated at fair value through profit or loss, loans designated at fair value, available-for-sale securities and life insurance assets was $98,601 million (2012: $91,816 million). The value of financial liabilities at fair value through income statement, deposits and other borrowings at fair value, debt issues at fair value and life insurance liabilities was $73,883 million (2012: $95,527 million). The fair value of outstanding derivatives was a net liability of $4,634 million (2012: $3,446 million net liability). The fair value of financial assets and financial liabilities determined by valuation models that use unobservable market prices was $1,332 million (2012: $1,276 million) and $37 million (2012: $100 million), respectively. The fair value of other We believe that the judgments and estimates used are reasonable in the current market. However, a change in these judgments and estimates would lead to different results as future market conditions can vary from those expected. Provisions for impairment charges on loans Provisions for loan impairment charges represent management’s best estimate of the losses incurred in the loan portfolios as at the balance date. There are two components of our loan impairment provisions: individually assessed provisions (IAPs) and collectively assessed provisions (CAPs). In determining IAPs, considerations that have a bearing on the expected future cash flows are taken into account. For example, the business prospects of the customer, the realisable value of collateral, our position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process. These judgments and estimates can change with time as new information becomes available or as work-out strategies evolve, resulting in revisions to the impairment provision as individual decisions are made. The CAPs are established on a portfolio basis taking into account the level of arrears, collateral and security, past loss experience and expected defaults based on portfolio trends. The most significant factors in establishing these provisions are estimated loss rates and related emergence periods. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates, unemployment levels, payment behaviour and bankruptcy rates. As at 30 September 2013, gross loans to customers were $539,806 million (2012: $518,279 million) and the provision for impairment on loans was $3,642 million (2012: $3,834 million). Goodwill Goodwill represents the excess of purchase consideration, the 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 fair value of the Group’s share of the identified net assets of acquired businesses. The determination of the fair value of the assets and liabilities of acquired businesses requires the exercise of management judgment. Different fair values would result in changes to the goodwill and to the post-acquisition performance of the acquisitions. 2013 WESTPAC GROUP ANNUAL REPORT 81 2 Goodwill is tested for impairment annually by determining if the carrying value of the cash-generating unit (CGU) that it has been allocated to is recoverable. The recoverable amount is the higher of the CGU’s fair value less costs to sell and its value in use. Determination of appropriate cash flows and discount rates for the calculation of the value in use is subjective. As at 30 September 2013, the carrying value of goodwill was $8,868 million (2012: $8,797 million). Refer to Note 15 to the financial statements for further information. Superannuation obligations The actuarial valuation of our defined benefit plan obligations are dependent upon a series of assumptions, the key ones being discount rate, salary increase rate, mortality, morbidity and investment returns assumptions. Different assumptions could significantly alter the amount of the difference between plan assets and defined benefit obligations and the amount recognised directly in retained earnings. The superannuation deficits across all our plans as at 30 September 2013 were in aggregate $306 million (2012: $632 million). Provisions (other than loan impairment charges) Provisions are held in respect of a range of obligations such as employee entitlements, restructuring costs, litigation provisions and non-lending losses, impairment charges on credit commitments and surplus lease space. Some of the provisions involve significant judgment about the likely outcome of various events and estimated future cash flows. Income taxes The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. All our businesses predominantly operate in jurisdictions with similar tax rates to the Australian corporate tax rate. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group estimates its tax liabilities based on the Group’s understanding of the tax law. Where the final outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period where such determination is made. Provisions for taxation held in respect of uncertain tax positions represent the tax benefits at risk. The assessment of the amount of tax benefits at risk involves the exercise of management judgments about the ultimate outcomes of the contested transactions. Life insurance contract liabilities The actuarial valuation of life insurance contract liabilities and associated deferred policy acquisition costs are dependent upon a number of assumptions. The key factors impacting the valuation of these liabilities and related assets are the cost of providing benefits and administrating the contracts, mortality and morbidity experience, discontinuance experience and the rate at which projected future cash flows are discounted. 82 2013 WESTPAC GROUP ANNUAL REPORT INCOME STATEMENT REVIEW Consolidated income statement1 REVIEW OF GROUP OPERATIONS Year Ended 30 September 2012 A$ 36,873 (24,371) 12,502 5,481 2009 A$ 30,446 (18,800) 11,646 4,859 2010 A$ 34,151 (22,309) 11,842 5,068 2011 A$ 38,098 (26,102) 11,996 4,917 2013 US$2 30,837 (18,819) 12,018 5,394 2013 A$ 33,009 (20,144) 12,865 5,774 (in $millions unless otherwise indicated) Interest income Interest expense Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Net profit for the year Profit attributable to non-controlling interests Net profit attributable to owners of Westpac 3,446 Banking Corporation Weighted average number of ordinary shares (millions) 2,747 Basic earnings per ordinary share (cents) 125.3 Diluted earnings per share (cents)3 123.2 Dividends per ordinary share (cents) 116 Special dividends per ordinary share (cents) - Dividend payout ratio (%)4 92.6 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 17,412 (7,405) (791) 9,216 (2,779) 6,437 (69) 18,639 (7,927) (847) 9,865 (2,975) 6,890 (74) 17,983 (7,909) (1,212) 8,862 (2,826) 6,036 (66) 16,913 (7,406) (993) 8,514 (1,455) 7,059 (68) 16,910 (7,416) (1,456) 8,038 (1,626) 6,412 (66) 16,505 (7,171) (3,238) 6,096 (2,579) 3,517 (71) 6,991 2,997 233.0 223.6 156 - 67.0 5,970 3,043 195.8 190.5 166 - 84.8 6,368 3,087 205.9 201.3 163 19 78.9 6,816 3,087 220.4 215.5 174 20 78.9 6,346 2,960 214.2 207.1 139 - 64.9 and may differ from results previously reported. 2 Australian dollar amounts have been translated into US dollars solely for the convenience of the reader at the rate of A$1.00 = US$0.9342, the noon buying rate in New York City on 30 September 2013. 3 Based on basic earnings per share, with the weighted average number of fully paid ordinary shares outstanding adjusted for the conversion of dilutive potential ordinary shares, issued for no consideration, and after adjusting earnings for distributions on dilutive potential ordinary shares. 4 Calculated by dividing the dividends per ordinary share by the basic earnings per ordinary share. Excludes special dividends. Overview of performance – 2013 v 2012 Net profit attributable to owners of Westpac Banking Corporation was $6,816 million in 2013, an increase of $846 million or 14% compared to 2012. The higher net profit for the year reflected a 4% increase in net operating income before operating expenses and impairment charges, flat operating expenses, and a 30% decrease in impairment charges. Net interest income was $12,865 million in 2013, an increase of $363 million or 3% compared to 2012, reflecting growth in customer deposits of 10%, loan growth of 4% and lower margins. Non-interest income was $5,774 million in 2013, an increase of $293 million or 5% compared to 2012, reflecting higher trading, wealth management and insurance income. Operating expenses were $7,927 million in 2013, an increase of $18 million compared to 2012, as operating cost increases and higher investment costs were offset by expense reductions from delivery of productivity initiatives. In 2012, costs associated with the Group’s supplier program along with a litigation provision lifted reported expenses that year. There were no similar expense items in 2013. Impairment charges were $847 million in 2013, a decrease of $365 million or 30% compared to 2012, reflecting continued improvements in asset quality including further reductions in stressed assets and new impaired assets. The effective tax rate was 30.2% in 2013 compared to 31.9% in 2012. The reduction in effective tax rate mostly reflected an additional tax expense in 2012, related to the retrospective application of new Taxation of Financial Arrangements (TOFA) legislation to the merger with St.George, which was not repeated in 2013. 2013 basic earnings per share were 220.4 cents per share compared to 195.8 cents per share in 2012. The increase in the number of shares on issue in 2013 was primarily due to shares issued under the Dividend Reinvestment Plan (DRP) in December 2012. The Board has determined a final dividend of 88 cents per ordinary share and a special dividend of 10 cents per ordinary share. The full year ordinary dividends of 174 cents represent an increase of 5% over the dividends declared in 2012 and a pay-out ratio of 79%. The total special dividends for 2013 are 20 cents. The total full year ordinary and special dividends are fully franked. 2013 WESTPAC GROUP ANNUAL REPORT 83 2 Income statement review – 2013 v 2012 Net interest income – 2013 v 2012 Interest income Interest expense Net interest income Increase/(decrease) in net interest income Due to change in volume Due to change in rate Change in net interest income 2013 $m 33,009 (20,144) 12,865 430 (67) 363 2012 $m 36,873 (24,371) 12,502 556 (50) 506 2011 $m 38,098 (26,102) 11,996 207 (53) 154 Net interest income was $12,865 million in 2013, an increase of $363 million or 3% compared to 2012. Net interest margins declined 2 basis points to 2.14% in 2013 from 2.16% in 2012. The lower net interest margin reflected lower treasury revenue; the impact of lower interest rates; and a competitive environment for deposits (particularly at call deposits), which were mostly offset by improved margins from asset repricing in lending portfolios. Loan growth1 in 2013 was 4% higher compared to 2012, with the key feature being 4% growth in Australian housing loans. Foreign exchange translation of foreign denominated loans added 1% to growth. Loan growth had the following specific components:  Australian housing loans increased $12.2 billion or 4%, with growth across all brands;  New Zealand lending increased $7.3 billion or 15%, with foreign exchange (FX) translation impacts contributing $5.6 billion to growth. Mortgage growth was the main driver of growth excluding FX translation impacts;  other overseas loans increased $3.0 billion or 44% due primarily to growth in trade finance in Asia; and  Australian personal lending increased $0.8 billion or 5% reflecting growth in personal loans; partially offset by  Australian business lending declined $1.6 billion or 1% due to run off in stressed assets and the subdued business lending environment. Total deposits and other borrowings (deposits)1 increased $29.5 billion or 7% in 2013 compared to 2012. Deposits increased 1% due to foreign exchange translation impacts of foreign denominated deposits. Growth in customer deposits2 exceeded growth in loans resulting in the deposit to loan ratio increasing 377 basis points. Deposit growth had the following specific components:  Australian at call deposits increased $28.1 billion or 19%, primarily due to growth in online and bonus saver at call accounts;  New Zealand customer deposits increased $8.0 billion or 24%, with growth in both at call and term deposits. Foreign exchange translation impacts contributed $4.4 billion to New Zealand deposit growth;  Australian non-interest bearing deposits increased $3.8 billion or 23%, due to increased balances in mortgage offset accounts; and  other overseas customer deposits grew $2.4 billion or 21%, primarily due to growth of deposits in Asia; partially offset by  Australian term deposits declined $7.3 billion or 5%, with customer preference changing during the year to at call accounts; and  certificates of deposit decreased $5.4 billion or 11% due to reduced wholesale funding needs and improved liquidity. 1 2 For the purposes of this discussion on net interest income, loan and deposit growth has been determined by comparing balances at 30 September 2013 to balances at 30 September 2012. Customer deposits are a subset of total deposits. Certificates of deposit are excluded from total deposits to calculate customer deposits. 84 2013 WESTPAC GROUP ANNUAL REPORT Interest spread and margin – 2013 v 2012 REVIEW OF GROUP OPERATIONS 2013 $m 2012 $m 2011 $m Group Net interest income Average interest earning assets Average interest bearing liabilities Average net non-interest bearing assets, liabilities and equity Interest spread1 Benefit of net non-interest bearing assets, liabilities and equity2 Net interest margin3 1 2 The benefit of net non-interest bearing assets, liabilities and equity is determined by applying the average yield paid on all interest bearing liabilities to Interest spread is the difference between the average yield on all interest earning assets and the average yield on all interest bearing liabilities. 11,996 548,221 513,535 34,686 1.87% 0.32% 2.19% 12,502 577,745 540,527 37,218 1.87% 0.29% 2.16% 12,865 599,869 560,470 39,399 1.91% 0.23% 2.14% the average level of net non-interest bearing funds as a percentage of average interest earning assets. 3 Net interest margin is calculated by dividing net interest income by average interest earning assets. Net interest margin was 2.14% in 2013, a decline of 2 basis points compared to 2012. Key drivers of the margin decrease were:  a 12 basis point decline from higher retail and wholesale funding costs. This included: – a 10 basis point decline due to the cost of customer deposits increasing, reflecting competition for online and savings products (6 basis points) and lower hedging benefit on low interest transaction accounts (4 basis points); and – a 2 basis point decline due to an increase in wholesale funding costs, reflecting the impact of increased average liquid asset holdings and the cost of buying back certain government guaranteed debt.  a 2 basis point decline due to lower returns on capital balances as interest rates reduced over the year;  a 1 basis point decline reflecting lower amortisation of fair value adjustments relating to the merger with St.George; and  a 1 basis point decline from Treasury and Markets income, as Treasury income was lower and Markets income recorded in net interest income was lower; partially offset by  a 14 basis point increase from asset spreads due to repricing across lending portfolios to recover higher funding costs. Non-interest income – 2013 v 2012 Fees and commissions Wealth management and insurance income Trading income Other income Total non-interest income 2013 $m 2,723 1,944 1,069 38 5,774 2012 $m 2,630 1,791 850 210 5,481 2011 $m 2,568 1,618 558 173 4,917 Non-interest income was $5,774 million in 2013, an increase of $293 million or 5% compared to 2012. The increase was primarily driven by higher trading, wealth management and insurance income, partially offset by a decline in other income. Fees and commissions income was $2,723 million in 2013, an increase of $93 million or 4% compared to 2012. This increase was primarily due to:  an increase in business and commercial lending fee income of $74 million; and  an increase in credit card interchange income from higher customer spending and the launch of a new premium credit card, Westpac Black. Wealth management and insurance income was $1,944 million in 2013, an increase of $153 million or 9% compared to 2012. This increase was primarily due to:  higher FUM/FUA related income of $106 million due to improved investment markets and positive net FUM/FUA inflows;  increase in general insurance income of $48 million as a result of repricing of premiums, growth in sales through the branch networks and decreased catastrophe and working claims; and  increase in life insurance income of $13 million with net earned premium growth of 21% driven by new business sales offset by an increase in claims; partially offset by  lenders mortgage insurance income decrease of $20 million due to lower credit demand and as a result of the Group’s decision to reduce underwriting risk on the mortgage insurance on loans with an LVR greater than 90%. 2013 WESTPAC GROUP ANNUAL REPORT 85 2 Trading income increased by $219 million or 26% compared to 2012. Increased market volatility saw more customers actively managing their risks, with Westpac well positioned to capture the increase in customer sales income. Credit valuation adjustment (CVA)1 in 2013 was a benefit of $88 million, compared to a charge of $39 million in 2012. Other income was $38 million in 2013, a decrease of $172 million or 82% compared to 2012. This decrease was primarily driven by the impact of hedging future Westpac New Zealand earnings of $86 million and hedging foreign operations of $80 million as a result of the depreciation of the Australian dollar against the New Zealand and US dollar. Operating expenses – 2013 v 2012 Salaries and other staff expenses Equipment and occupancy expenses Other expenses Total operating expenses Total operating expenses to net operating income ratio 2013 $m 4,287 1,370 2,270 7,927 42.5% 2012 $m 4,258 1,278 2,373 7,909 44.0% 2011 $m 4,055 1,115 2,236 7,406 43.8% Operating expenses were $7,927 million in 2013, an increase of $18 million compared to 2012. Excluding foreign exchange translation impacts, operating expenses decreased $27 million. The key factors of this result were:  delivery of benefits from productivity initiatives and reduced costs associated with the supplier program; and  a provision raised in 2012 relating to the Bell litigation not repeated in 2013; partially offset by  higher investment costs which added 3% to expense growth, including 1% from higher software amortisation and hardware depreciation. Salaries and other staff expenses were $4,287 million in 2013, an increase of $29 million or 1% compared to 2012. This increase reflects:  an average annual salary increase of 2%; and  additional staff to support the Group’s investment into regulatory change and compliance programs, additional Bank of Melbourne branches, further expansion in Asia and wealth investments; partially offset by  the delivery of productivity initiatives and lower restructuring costs associated with the supplier program. Equipment and occupancy costs were $1,370 million in 2013, an increase of $92 million or 7% compared to 2012. This increase was driven by:  software amortisation, impairments and hardware depreciation related to the Group’s investment program increased $60 million; and  rental and other property related costs increased $32 million through 15 additional Bank of Melbourne branches, the full period impact of the Western Sydney data centre and cost increases following annual rental reviews. Other expenses were $2,270 million in 2013, a reduction of $103 million or 4% compared to 2012. This decrease was driven by:  a provision raised in 2012 relating to longstanding legal proceedings not repeated in 2013; and  delivery of cost management initiatives and other cost reductions; partially offset by  higher technology licensing and maintenance costs as a result of investment programs; and  increased marketing costs to support the refresh of the Group’s brands. 1 Included in the determination of the fair value of derivatives is a credit valuation adjustment (CVA). Where the derivative has a positive fair value (asset), this credit adjustment is to reflect the credit worthiness of the counterparty. Where the derivative has a negative fair value (liability), this credit adjustment reflects the Group’s own credit risk. 86 2013 WESTPAC GROUP ANNUAL REPORT Impairment charges – 2013 v 2012 Impairment charges Impairment charges to average gross loans (basis points) REVIEW OF GROUP OPERATIONS 2013 $m 847 16 2012 $m 1,212 24 2011 $m 993 20 Impairment charges for 2013 were $847 million, a decrease of $365 million or 30% compared to 2012, representing 16 basis points of average gross loans. Key movements to impairment charges were:  new individually assessed provisions less write-backs and recoveries were $557 million in 2013, a decrease of $313 million compared to 2012 due to a slowdown in the emergence of new impaired assets. The largest reductions were recorded in WIB and Westpac New Zealand, where charges were $207 million and $93 million lower respectively;  total new collectively assessed provisions were $290 million in 2013, a decrease of $52 million compared to 2012 as the benefits from reducing stress in business portfolios led to lower collective provision requirements. This was particularly a feature of the St.George result in 2013; and  consumer lending portfolios in Westpac RBB and Westpac New Zealand experienced an increase in new collectively assessed provisions as the large improvement in 2012 from strengthening consumer balance sheets was not repeated. Income tax expense – 2013 v 2012 Income tax expense Tax as a percentage of profit before income tax expense (effective tax rate) 2013 $m 2,975 30.2% 2012 $m 2,826 31.9% 2011 $m 1,455 17.1% Income tax expense was $2,975 million in 2013, an increase of $149 million or 5% compared to 2012. The effective tax rate decreased to 30.2% in 2013, from 31.9% in 2012. The decrease in the effective tax rate was primarily due to retrospective amendments to the income tax law during the year ended 30 September 2012 which applied to consolidated groups and TOFA. Those amendments had an adverse impact to certain liabilities that were consolidated as part of the St.George merger. This led to an additional $165 million tax expense for 2012, which was not repeated in 2013. Excluding the impact of the above adjustment, the effective tax rate for 2012 would have been 30.0%. 2013 WESTPAC GROUP ANNUAL REPORT 87 2 BALANCE SHEET REVIEW Selected consolidated balance sheet data1 The detailed components of the balance sheet are set out in the notes to the financial statements. 2013 US$m2 10,929 10,472 26,490 2013 A$m 11,699 11,210 28,356 As at 30 September 2011 A$m 16,258 8,551 49,145 2012 A$m 12,523 10,228 35,489 2010 A$m 4,464 12,588 36,102 2009 A$m 3,272 9,974 33,187 Cash and balances with central banks Receivables due from other financial institutions Derivative financial instruments Trading securities, other financial assets designated at fair value and available-for-sale securities Loans Life insurance assets All other assets Total assets Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance liabilities All other liabilities Total liabilities excluding loan capital Total loan capital3 Total liabilities Net assets Total equity attributable to owners of Westpac Banking Corporation Non-controlling interests Total shareholders’ equity and non-controlling interests Average balances 577,831 Total assets Loans and other receivables4 426,845 32,008 Shareholders’ equity 1,915 Non-controlling interests 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 47,807 463,459 12,384 19,504 589,587 9,235 329,456 10,848 36,478 133,024 11,737 11,100 541,878 11,138 553,016 36,571 55,599 477,655 12,310 19,559 618,277 8,898 337,385 4,850 44,039 150,971 11,560 10,824 568,527 9,632 578,159 40,118 71,739 514,445 8,240 22,301 674,965 7,564 394,991 9,964 38,935 147,847 7,208 12,700 619,209 9,537 628,746 46,219 79,100 536,164 8,637 21,437 696,603 8,836 424,482 10,302 32,990 144,133 7,426 11,623 639,792 9,330 649,122 47,481 69,006 496,609 7,916 22,743 670,228 14,512 370,278 9,803 39,405 165,931 7,002 11,316 618,247 8,173 626,420 43,808 73,895 500,884 8,069 20,026 650,765 8,255 396,551 9,624 30,819 134,649 6,937 10,858 597,693 8,716 606,409 44,356 662,137 501,118 42,605 1,964 684,056 516,482 44,350 1,972 607,677 469,999 36,434 1,914 639,045 482,497 41,432 1,842 628,428 476,083 39,378 1,921 44,249 1,970 46,219 46,618 863 47,481 43,550 806 44,356 34,637 1,934 36,571 38,189 1,929 40,118 41,826 1,982 43,808 and may differ from results previously reported. 2 Australian dollar amounts have been translated into US dollars solely for the convenience of the reader at the rate of A$1.00 = US$0.9342, the noon buying rate in New York City on 30 September 2013. 3 This includes Westpac Capital Notes (Westpac CN), Westpac Convertible Preference Shares (Westpac CPS), Westpac Stapled Preferred Securities II (SPS II) and 2004 Trust Preferred Securities (2004 TPS) in 2013; Westpac CPS, Westpac Stapled Preferred Securities (SPS), SPS II and 2004 TPS in 2012; and SPS, SPS II and 2004 TPS in 2011, 2010 and 2009. 4 Other receivables include other assets, cash and balances with central banks. 88 2013 WESTPAC GROUP ANNUAL REPORT Summary of consolidated ratios Year Ended 30 September REVIEW OF GROUP OPERATIONS 2013 US$1 2013 A$ 2012 A$ 2011 A$ 2010 A$ 2009 A$ 2.19 1.11 17.8 16.9 2.21 1.04 17.4 16.5 2.14 1.00 15.4 14.7 2.14 1.00 15.4 14.7 2.16 0.90 14.0 13.4 (in $millions unless otherwise indicated) Profitability ratios (%) Net interest margin2 Return on average assets3 Return on average ordinary equity4 Return on average total equity5 Capital ratio (%) Average total equity to average total assets Tier 1 ratio (%)6 Total capital ratio6 Earnings ratios Basic earnings per ordinary share (cents)7 Diluted earnings per ordinary share (cents)8 Dividends per ordinary share (cents) Special dividends per ordinary share (cents) Dividend payout ratio (%)9 Credit quality ratios Impairment charges on loans written off (net of recoveries) Impairment charges on loans written off (net of recoveries) to average loans (bps) 43 1 Australian dollar amounts have been translated into US dollars solely for the convenience of the reader at the rate of A$1.00 = US$0.9342, the noon 214.2 207.1 139 - 64.9 233.0 223.6 156 - 67.0 195.8 190.5 166 - 84.8 220.4 215.5 174 20 78.9 205.9 201.3 163 19 78.9 125.3 123.2 116 - 92.6 2.38 0.60 10.8 10.2 6.8 10.7 12.3 6.7 10.3 11.7 6.8 10.7 12.3 5.9 8.1 10.8 6.3 9.1 11.0 6.6 9.7 11.0 1,323 1,604 1,236 1,874 1,300 1,867 25 25 32 38 27 buying rate in New York City on 30 September 2013. 2 Calculated by dividing net interest income by average interest earning assets. 3 Calculated by dividing net profit attributable to owners of Westpac Banking Corporation by average total assets. 4 Calculated by dividing net profit attributable to owners of Westpac Banking Corporation by average ordinary equity. 5 Calculated by dividing net profit attributable to owners of Westpac Banking Corporation by average ordinary equity and non-controlling interests. 6 For details on this ratio refer to Note 30 to the financial statements. 7 Based on the weighted average number of fully paid ordinary shares. 8 Based on basic earnings per share, with the weighted average number of fully paid ordinary shares outstanding adjusted for the conversion of dilutive potential ordinary shares, issued for no consideration, and after adjusting earnings for distributions on dilutive potential ordinary shares. 9 Calculated by dividing the dividends per ordinary share by the basic earnings per ordinary share. Excludes special dividends. Balance sheet review Assets – 2013 v 2012 Total assets as at 30 September 2013 were $696.6 billion, an increase of $21.6 billion or 3% compared to 30 September 2012. This growth was primarily due to:  loans increased $21.7 billion primarily due to growth in Australian loans of $11.4 billion, New Zealand loans of $7.3 billion and other overseas loans of $3.0 billion. Loan growth of $6.5 billion was the result of foreign exchange translation impacts;  trading securities, other financial assets designated at fair value and available-for-sale securities increased $7.4 billion due to higher liquid assets of $5.4 billion; and  receivables due from other financial institutions increased $1.0 billion due to higher collateral posted with counterparties as a result of collateralised derivative movements; partially offset by  derivative financial instruments decreased $7.1 billion due to the impact of interest rate movements on interest rate derivative valuations and foreign exchange rate changes driving a reduction in cross currency swap valuations. Liabilities and equity – 2013 v 2012 Total liabilities as at 30 September 2013 were $649.1 billion, an increase of $20.4 billion compared to 30 September 2012. Growth in total liabilities was primarily due to:  deposits increasing $29.5 billion. Growth was due to Australian deposits increasing $20.9 billion and New Zealand deposits increasing $8.2 billion. Deposit growth of $5.5 billion was due to foreign exchange translation impacts; and  payables due to other financial institutions increased $1.3 billion primarily due to an increase in deposits with offshore central banks; partially offset by  derivative financial instruments declined $5.9 billion for the same reasons noted above for derivative financial instrument assets; and  debt issues decreased $3.7 billion primarily due to a decline in long term unsecured wholesale funding, partially offset by the issuance of $6.2 billion of covered bonds. Growth in equity was primarily due to retained profits increasing $1.8 billion, which was partially offset by a decline of $1.1 billion in non-controlling interests due to the redemption of a hybrid instrument. 2013 WESTPAC GROUP ANNUAL REPORT 89 2 Loan quality 2013 v 2012 Total gross loans1 Average gross loans Australia New Zealand Other overseas Total average gross loans 1 Gross loans are stated before related provisions for impairment. As at 30 September 2013 $m 539,806 467,835 50,112 8,807 526,754 2012 $m 518,279 455,753 45,911 6,930 508,594 2011 $m 500,654 439,165 44,279 5,228 488,672 Total gross loans represented 77% of the total assets of the Group as at 30 September 2013, unchanged from 2012. Australia and New Zealand average gross loans were $517.9 billion in 2013, an increase of $16.2 billion or 3% from $501.7 billion in 2012. This increase was primarily due to growth in Australian housing lending, with foreign exchange translation impacts also contributing to loan growth. Other overseas average loans were $8.8 billion in 2013, an increase of $1.9 billion or 27% from $6.9 billion in 2012. Approximately 15.6% of the loans at 30 September 2013 mature within one year and 23.0% mature between one year and five years. Retail lending comprises the majority of the loan portfolio maturing after five years. Impaired loans Non-performing loans1: Gross Impairment provisions Net Restructured loans: Gross Impairment provisions Net Overdrafts, personal loans and revolving credit greater than 90 days past due: Gross Impairment provisions Net 1,364 2,585 Net impaired loans Provisions for impairment on loans and credit commitments Individually assessed provisions Collectively assessed provisions Total provisions for impairment on loans and credit commitments Loan quality Total impairment provisions for impaired loans to total impaired loans2 Total impaired loans to total loans Total provisions for impairment on loans and credit commitments to total loans Total provisions for impairment on loans and credit commitments to total impaired loans Collectively assessed provisions to non-housing performing loans 1 Non-performing loans are loans with an impaired internal risk grade, excluding restructured assets. 2 109.7% 1.4% 0.73% 0.67% 43.2% 3,949 2013 $m As at 30 September 2012 $m 2011 $m 2010 $m 2009 $m 3,249 (1,363) 1,886 4,034 (1,463) 2,571 4,287 (1,487) 2,800 4,240 (1,677) 2,563 3,526 (1,308) 2,218 156 (56) 100 195 (135) 60 2,046 153 (44) 109 199 (134) 65 2,745 1,470 2,771 129 (29) 100 200 (147) 53 2,953 1,461 2,953 132 (32) 100 213 (155) 58 2,721 1,622 3,439 71 (26) 45 173 (148) 25 2,288 1,228 3,506 4,241 4,414 5,061 4,734 37.4% 0.85% 0.82% 96.7% 1.6% 36.0% 40.7% 39.3% 0.92% 0.95% 0.81% 0.88% 1.05% 1.01% 95.6% 1.7% 110.4% 2.0% 125.6% 1.8% Impairment provisions relating to impaired loans include individually assessed provisions plus the proportion of the collectively assessed provisions that relate to impaired loans. The proportion of the collectively assessed provisions that relate to impaired loans was $190 million as at 30 September 2013 (2012: $171 million, 2011: $202 million, 2010: $244 million, 2009: $254 million). This sum is compared to the total gross impaired loans to determine this ratio. 90 2013 WESTPAC GROUP ANNUAL REPORT REVIEW OF GROUP OPERATIONS The quality of our loan portfolio continued to improve during 2013, with 77% of our exposure as at 30 September 2013 to either investment grade or secured consumer mortgages (2012: 76%, 2011: 76%) and 97% of our exposure as at 30 September 2013 in our core markets of Australia, New Zealand and the Pacific region (2012: 97%, 2011: 98%). At 30 September 2013, total impaired loans as a percentage of total gross loans were 0.67%, a decrease of 0.18% from 0.85% at 30 September 2012. At 30 September 2013, we had 8 impaired counterparties with exposure greater than $50 million, collectively accounting for 20% of total impaired loans. This compares to 12 impaired counterparties with exposure greater than $50 million in 2012 accounting for 23% of total impaired loans. There were 16 impaired exposures at 30 September 2013 that were less than $50 million and greater than $20 million (2012: 25 impaired exposures). We believe that Westpac remains appropriately provisioned with total impairment provisions for impaired loans to total impaired loans coverage at 43.2% at 30 September 2013 compared to 37.4% at 30 September 2012. Total provisions for impairment on loans and credit commitments to total impaired loans represented 109.7% of total impaired loans as at 30 September 2013, up from 96.7% at 30 September 2012. Total provisions for impairments on loans and credit commitments to total loans was 0.73% at 30 September 2013, down from 0.82% at 30 September 2012 (2011: 0.88%). Consumer mortgage loans 90 days past due at 30 September 2013 were 0.51% of outstandings, unchanged from 0.51% of outstandings at 30 September 2012 (2011: 0.55%). Other consumer loan delinquencies (including credit card and personal loan products) were 1.04% of outstandings as at 30 September 2013, a decrease of 7 basis points from 1.11% of outstandings as at 30 September 2012 (2011: 1.16%). Potential problem loans as at 30 September 2013 amounted to $1,619 million, a decrease of 23% from $2,115 million at 30 September 2012. The reduction of potential problem loans is due mainly to the upgrade or repayment of some of these assets. Potential problem loans are facilities that are performing and no loss is expected, but the customer demonstrates significant weakness in debt servicing or security cover that could jeopardise repayment of debt on current terms if not rectified. Potential problem loans are identified using established credit frameworks and policies, which include the ongoing monitoring of facilities through the use of watchlists. CAPITAL RESOURCES Capital management strategy Westpac’s approach seeks to balance the fact that capital is an expensive form of funding with the need to be adequately capitalised as an ADI. Westpac considers the need to balance efficiency, flexibility and adequacy when determining sufficiency of capital and when developing capital management plans. Westpac evaluates these considerations through an Internal Capital Adequacy Assessment Process (ICAAP), the key features of which include:  the development of a capital management strategy, including preferred capital range, capital buffers and contingency plans;  consideration of both economic and regulatory capital requirements;  a process that challenges the capital measures, coverage and requirements which incorporates, amongst other things, the impact of adverse economic scenarios; and  consideration of the perspectives of external stakeholders including rating agencies and equity and debt investors. Westpac’s capital ratios are significantly above APRA minimum capital adequacy requirements. Basel Capital Accord The regulatory limits applied to our capital ratios are consistent with A global regulatory framework for more resilient banks and banking systems, also known as Basel III, issued by the Bank of International Settlements. This framework reflects the advanced risk management practices that underpin the calculation of regulatory capital through a broad array of risk classes and advanced measurement processes. As provided for in the Basel III accord, APRA has exercised discretions to make the framework applicable in the Australian market, and in particular has required that Australian banks use sophisticated models for credit risk, operational risk and interest rate risk taken in the banking book. In addition, APRA has applied discretion in the calculation of the components of regulatory capital. The new Basel III prudential standards became effective on 1 January 2013. Westpac is accredited by APRA to apply advanced models permitted by the Basel III global capital adequacy regime to the measurement of its regulatory capital requirements. Westpac uses the Advanced Internal Ratings-Based approach for credit risk, the Advanced Measurement Approach (AMA) for operational risk and the internal model approach for Interest Rate Risk in the Banking Book (IRRBB). Effective risk management is regarded as a key activity performed at all levels of the Group. Achieving advanced accreditation from APRA has resulted in a broad array of changes to risk management practices that have been implemented across all risk classes. We recognise that embedding these principles and practices into day-to-day activities of the divisions to achieve the full benefits of these changes is an ongoing facet of risk management. 2013 WESTPAC GROUP ANNUAL REPORT 91 2 Australia’s risk-based capital adequacy guidelines are generally consistent but not completely aligned with the approach agreed upon by the Basel Committee on Banking Supervision (BCBS). APRA has exercised its discretion in applying the Basel framework to Australian ADIs, resulting in a more conservative approach than the minimum standards published by the BCBS. APRA also introduced the new standards from 1 January 2013 with no phasing in of higher capital requirements as allowed by the BCBS. The application of these discretions act to reduce reported capital ratios relative to those reported in other jurisdictions. Under APRA’s implementation of Basel III, Australian banks are required to maintain a minimum Common Equity Tier 1 ratio of at least 4.5%, Tier 1 ratio of 6.0% and Total Regulatory Capital of 8.0%. Subject to certain limitations, Common Equity Tier 1 capital consists of paid-up share capital, retained profits and certain reserves, less the deduction of certain intangible assets, capitalised expenses and software, and investments and retained earnings in insurance and funds management subsidiaries that are not consolidated for capital adequacy purposes. The balance of eligible capital is defined as additional Tier 1 or Tier 2 capital which includes, subject to limitations, mandatory convertible notes, perpetual floating rate notes and like instruments, and term subordinated debt less a deduction for holdings of Westpac’s own subordinated debt. Westpac’s regulatory capital ratios as at 30 September1 are summarised in the table below: Common equity Deductions from common equity Total common equity after deductions Additional Tier 1 capital Net Tier 1 regulatory capital Tier 2 capital Deductions from Tier 2 capital Total Tier 2 capital after deductions Total regulatory capital Credit risk: On-balance sheet assets Off-balance sheet assets Equity risk Market risk Operational risk Interest rate risk in the banking book Other assets Total risk weighted assets Common Equity Tier 1 capital ratio Additional Tier 1 capital ratio Tier 1 capital ratio Tier 2 capital ratio Total regulatory capital ratio 1 Basel III was not effective in Australia until 1 January 2013. The 2012 comparative is presented on a Basel II basis. 2013 $m 45,361 (17,392) 27,969 4,769 32,738 4,918 - 4,918 37,656 185,023 75,245 - 9,059 27,299 6,929 3,817 307,372 9.1% 1.6% 10.7% 1.6% 12.3% 2012 $m 40,873 (15,902) 24,971 5,571 30,542 5,792 (1,622) 4,170 34,712 182,831 62,268 1,263 12,087 26,757 10,234 2,461 297,901 8.4% 1.9% 10.3% 1.4% 11.7% Refer to ‘Significant developments’ in Section 1 for a discussion on future regulatory developments that may impact upon capital requirements. 92 2013 WESTPAC GROUP ANNUAL REPORT DIVISIONAL PERFORMANCE DIVISIONAL PERFORMANCE – 2013 v 2012 Our operations comprise three primary customer-facing business divisions:  Australian Financial Services (AFS), which incorporates the operations of: – Westpac Retail & Business Banking, which we refer to as Westpac RBB; – St.George Banking Group, which we refer to as St.George; and – BT Financial Group (Australia), which we refer to as BTFG  Westpac Institutional Bank, which we refer to as WIB; and  Westpac New Zealand. Other divisions in the Group include Westpac Pacific, Group Services, Treasury and Core Support. The accounting standard AASB 8 Operating Segments requires segment results to be presented on a basis that is consistent with information provided internally to Westpac’s key decision makers. In assessing its financial performance, including divisional results, the Westpac Group uses a measure of performance referred to as ‘Cash Earnings’. Cash Earnings is not a measure of cash flow or net profit determined on a cash accounting basis, as it includes non-cash items reflected in net profit determined in accordance with A-IFRS. The specific adjustments outlined below include both cash and non-cash items. Cash Earnings, as calculated by Westpac, is viewed as a measure of the level of profit that is generated by ongoing operations and is expected to be available over the long term for distributions to shareholders. A reconciliation of Cash Earnings to net profit attributable to owners of Westpac Banking Corporation for each business division is set out in Note 32 to the financial statements. To calculate Cash Earnings, Westpac adjusts net profit attributable to owners of Westpac Banking Corporation for the items outlined below. Management believes this allows the Group to more effectively assess performance for the current period against prior periods and to compare performance across business divisions and across peer companies. Three categories of adjustments are made to statutory results to determine Cash Earnings:  material items that key decision makers at the Westpac Group believe do not reflect ongoing operations;  items that are not considered when dividends are recommended, such as the amortisation of intangibles, impact of Treasury shares and economic hedging impacts; and  accounting reclassifications between individual line items that do not impact statutory results, such as policyholder tax recoveries1. The discussion of our divisional performance in this section is presented on a Cash Earnings basis unless otherwise stated. Cash Earnings is not directly comparable to statutory results presented in other parts of this Annual Report. Outlined below are the current Cash Earnings adjustments to the statutory results: 1. Trust Preferred Securities (TPS) revaluations – adjustment for movements in economic hedges, including associated tax effects impacting the foreign currency translation reserve, relating to hybrid instruments classified as non-controlling interests. The adjustment is required as these hybrid instruments are not fair valued, however the hedges are fair valued and therefore there is a mismatch in the timing of income recognition in the statutory results. The mismatch is added back to statutory results in deriving Cash Earnings as it does not affect the Group’s profits over time. 2. Treasury shares – under A-IFRS, Westpac shares held by the Group in the managed funds and life business are deemed to be Treasury shares and the results of holding these shares are not permitted to be recognised as income in the statutory results. In deriving Cash Earnings, these results are included to ensure there is no asymmetrical impact on the Group’s profits because the Treasury shares support policyholder liabilities and equity derivative transactions which are re-valued in determining income. 3. Ineffective hedges – the gain/(loss) on ineffective hedges is reversed in deriving Cash Earnings for the period because the gain or loss arising from the fair value movement in these hedges reverses over time and does not affect the Group’s profits over time. 4. Fair value gain/(loss) on economic hedges (which do not qualify for hedge accounting under A-IFRS) and own credit comprises: – – the unrealised fair value gain/(loss) on foreign exchange hedges of future New Zealand earnings impacting non- interest income is reversed in deriving Cash Earnings as it may create a material timing difference on statutory results but does not affect the Group’s Cash Earnings during the life of the hedge; the unrealised fair value gain/(loss) on foreign exchange hedges of fees payable for the use of the Government guarantee on foreign denominated wholesale funding is reversed in deriving Cash Earnings as it may create a material timing difference on statutory results but does not affect the Group’s Cash Earnings during the life of the hedge; 1 Policyholder tax recoveries – income and tax amounts that are grossed up to comply with the A-IFRS accounting standard covering life insurance business (policyholder tax recoveries) are reversed in deriving income and taxation expense on a Cash Earnings basis. 2013 WESTPAC GROUP ANNUAL REPORT 93 2 – – certain long term debt issuances are recognised at fair value. In deriving fair value, adjustments are made to reflect changes in Westpac’s own credit spread. The resulting unrealised gain/(loss) from credit spread movements is reversed in deriving Cash Earnings as this amount may create a material timing difference on statutory results but does not affect the Group’s Cash Earnings over time; and the unrealised fair value gain/(loss) on hedges of accrual accounted term funding transactions is reversed in deriving Cash Earnings as it may create a material timing difference on statutory results but does not affect the Group’s Cash Earnings during the life of the hedge. 5. Gain/(loss) on buyback of Government guaranteed debt – during the years ended 30 September 2013 and 30 September 2011, the Group bought back certain Government guaranteed debt issues which reduced Government guarantee fees (70 basis points) paid. In undertaking the buybacks, a cost was incurred reflecting the difference between current interest rates and the rate at which the debt was initially issued. In the statutory result, the cost incurred is recognised at the time of the buyback. In Cash Earnings, the cost incurred is being amortised over the original term of the debt that was bought back, consistent with a 70 basis point saving being effectively spread over the remaining life of the issue. The Cash Earnings adjustment gives effect to the timing difference between statutory results and Cash Earnings. 6. Fair value amortisation of financial instruments – the accounting for the merger with St.George resulted in the recognition of fair value adjustments on the St.George retail bank loans, deposits, wholesale funding and associated hedges, with these fair value adjustments being amortised over the life of the underlying transactions. The amortisation of these adjustments is considered to be a timing difference relating to non-cash flow items that do not affect cash distributions available to shareholders, and therefore have been treated as a Cash Earnings adjustment. 7. Amortisation of intangible assets comprises: – – the merger with St.George resulted in the recognition of core deposit intangibles and customer relationships intangible assets that are amortised over their useful lives, ranging between five and nine years. The amortisation of intangible assets (excluding capitalised software) is a Cash Earnings adjustment because it is a non-cash flow item and does not affect cash distributions available to shareholders; and the acquisition of J O Hambro Capital Management (JOHCM) by BT Investment Management (BTIM) during the year ended 30 September 2012 resulted in the recognition of management contract intangible assets. These intangible items are amortised over their useful lives, ranging between five and 20 years. The amortisation of intangible assets (excluding capitalised software) is a Cash Earnings adjustment because it is a non-cash flow item and does not affect cash distributions available to shareholders. 8. Supplier program – during the year ended 30 September 2012, the Group incurred and provisioned for expenses as part of its program to increase the use of global specialists in certain technology and back office operations. These expenses included costs associated with streamlining and better documenting systems and processes, technology costs to enable infrastructure and enhance interaction with suppliers, and costs associated with restructuring the workforce. Given these significant expenses were not considered in determining dividends they were treated as Cash Earnings adjustments. 9. Litigation provision – during the year ended 30 September 2012, the Group recognised a provision of $111 million ($78 million after tax) with respect to the Bell litigation. This has been treated as a Cash Earnings adjustment due to its size, the historical nature of the proceedings and because it did not reflect ongoing operations. 10. Tax on Financial Arrangements (TOFA) tax consolidation adjustment – during the year ended 30 September 2012, taxation legislation was introduced that included retrospective amendments to the income tax law as it applies to TOFA and tax consolidated groups. The amendments had an adverse application to certain liabilities that were consolidated as part of the merger with St.George. This gave rise to an additional income tax expense of $165 million for the year ended 30 September 2012. Consistent with other tax adjustments relating to the merger with St.George, this adjustment was treated as a Cash Earnings adjustment due to its size and because it did not reflect ongoing operations. 11. Merger transaction and integration expenses – as part of the merger with St.George, transaction and integration expenses incurred over three years following the merger were treated as a Cash Earnings adjustment as they did not impact the earnings expected from St.George following the integration period. The integration project was completed in 2011. 12. St.George Tax Consolidation adjustment – finalisation of tax consolidation related to the merger with St.George gave rise to a reduction in income tax expense of $1,110 million during the year ended 30 September 2011. The tax consolidation process required Westpac to reset the tax value of certain St.George assets to the appropriate market value of those assets at the effective date of the tax consolidation (31 March 2009). These adjustments were treated as a Cash Earnings adjustment due to their size and because they did not reflect ongoing operations. 13. Tax provision – during the year ended 30 September 2011, the Group increased tax provisions by $70 million in respect of certain existing positions for transactions previously undertaken by the Group. The increase reflected the recent trend of global taxation authorities challenging the historical tax treatment of cross border and complex transactions. This increase in tax provisions was treated as a Cash Earnings adjustment as it related to the global management of historical tax positions and did not reflect ongoing operations. The Group’s management of tax positions has moved to disclosing any such transactions to the taxation authorities at or around the time of execution. 94 2013 WESTPAC GROUP ANNUAL REPORT Cash Earnings and assets by division The following tables present, for each of the key divisions of our business, the Cash Earnings and total assets at the end of the financial years ended 30 September 2013, 2012 and 2011. Refer to Note 32 to the financial statements for the disclosure of our geographic and business segments and the reconciliation to net profit attributable to owners of Westpac Banking Corporation. Cash Earnings by business division DIVISIONAL PERFORMANCE Australian Financial Services Westpac Retail & Business Banking St.George Banking Group BT Financial Group (Australia) Westpac Institutional Bank Westpac New Zealand Other divisions Total Cash Earnings Total assets by business division Australian Financial Services Westpac Retail & Business Banking St.George Banking Group BT Financial Group (Australia) Westpac Institutional Bank Westpac New Zealand Other divisions Total assets Years Ended 30 September 2013 $m 2,300 1,441 737 1,635 634 350 7,097 2012 $m 2,114 1,231 653 1,473 548 579 6,598 As at 30 September 2013 $bn 262 160 28 97 62 88 697 2012 $bn 255 155 27 98 49 91 675 2011 $m 1,850 1,233 729 1,427 442 620 6,301 2011 $bn 247 150 26 101 46 100 670 In presenting divisional results on a management reporting basis, internal charges and transfer pricing adjustments are included in the performance of each business reflecting our management structure rather than a legal one. (These results cannot be compared to results for individual legal entities.) Where management reporting structures or accounting classifications have changed, comparatives have been revised and may differ from results previously reported. Our internal transfer pricing frameworks facilitate risk transfer, profitability measurement, capital allocation and business unit alignment, tailored to the jurisdictions in which we operate. Transfer pricing allows us to measure the relative contribution of our products and divisions to the Group’s interest margin, and other dimensions of performance. Key components of our transfer pricing frameworks are funds transfer pricing for interest rate and liquidity risk, and allocation of basis and contingent liquidity costs, including capital allocation. Overhead costs are allocated to revenue generating businesses. 2013 WESTPAC GROUP ANNUAL REPORT 95 2 AUSTRALIAN FINANCIAL SERVICES Australian Financial Services (AFS) is responsible for the Westpac Group’s Australian retail banking, business banking and wealth operations. It incorporates the operations of Westpac Retail & Business Banking (Westpac RBB), St.George Banking Group (St.George) and BT Financial Group (Australia) (BTFG). AFS also includes the product and risk responsibilities for Australian Banking. Performance of AFS Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Deposits and other borrowings Loans Total assets Total operating expenses to net operating income ratio 2013 $m 9,272 3,697 12,969 (5,777) (780) 6,412 (1,916) (18) 4,478 (150) 4,328 $bn 259.0 423.7 449.4 2012 $m 8,694 3,399 12,093 (5,553) (863) 5,677 (1,671) (8) 3,998 (151) 3,847 $bn 239.3 412.0 436.8 44.5% 45.9% 2011 $m 8,534 3,253 11,787 (5,415) (936) 5,436 (1,617) (7) 3,812 (146) 3,666 $bn 214.3 398.5 422.8 45.9% WESTPAC RETAIL & BUSINESS BANKING Westpac Retail & Business Banking (Westpac RBB) is responsible for sales and service for our consumer, small-to-medium enterprise (SME) customers and commercial and agribusiness customers (typically with turnover of up to $100 million) in Australia under the Westpac brand. Activities are conducted through Westpac RBB’s network of branches and business banking centres and specialised consumer and business relationship managers, with the support of cash flow, financial markets and wealth specialists, customer service centres, ATMs and internet and mobile channels. Performance of Westpac RBB Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Deposits and other borrowings Loans Total assets Total operating expenses to net operating income ratio 2013 $m 5,650 1,277 6,927 (3,154) (486) 3,287 (987) 2,300 - 2,300 $bn 150.1 256.4 261.9 2012 $m 5,304 1,184 6,488 (3,079) (429) 2,980 (866) 2,114 - 2,114 $bn 138.5 250.3 255.3 45.5% 47.5% 2011 $m 5,166 1,091 6,257 (3,087) (547) 2,623 (773) 1,850 - 1,850 $bn 125.1 242.1 247.0 49.3% 96 2013 WESTPAC GROUP ANNUAL REPORT DIVISIONAL PERFORMANCE 2013 v 2012 Westpac RBB Cash Earnings were $2,300 million in 2013, an increase of $186 million or 9% compared to 2012. Net interest income increased by $346 million or 7% compared to 2012. This was driven by an increase in interest-earning assets and higher margins. Features of this result included:  loans increased $6.1 billion or 2% compared to 2012, primarily due to: – an increase in mortgages of $5.4 billion or 3% compared to 2012 which accounted for the majority of lending growth; – other consumer lending increased 2% compared to 2012, with growth in personal lending offsetting a decline in cards; and – an increase in business lending of 1% compared to 2012, with most of the growth in long term lending. Short-term lending and working capital balances were lower. Repayments were also higher over the year, particularly in agribusiness.  deposits increased $11.6 billion or 8% compared to 2012, primarily due to: – an increase in at call deposits of $16.9 billion or 21% compared to 2012, driven primarily by growth in consumer deposits (Reward Saver and mortgage offset accounts) and an increase in business deposits of $2.7 billion or 10% compared to 2012; partially offset by – a decrease in term deposits of 9% compared to 2012, as customers chose to hold their funds in at call accounts.  margins increased 10 basis points to 2.33% compared to 2012, primarily driven by: – an increase in lending spreads (up 26 basis points), mostly from the repricing of mortgages and business loans to better reflect higher funding costs; and – decreased deposit spreads (down 14 basis points) due to continued competitive pricing in at call savings accounts, where most of the deposit growth has occurred. Non-interest income increased $93 million or 8% compared to 2012, primarily due to:  an increase in business lending fees, which have continued to be repriced to more appropriately reflect the cost of providing business facilities; and  an increase in cards income due to volume driven interchange fee increases and an increase in the use of premium rewards cards, including Westpac Black. Operating expenses increased $75 million or 2% compared to 2012, primarily due to:  an increase in compliance and investment spending including software amortisation; and  improved productivity across frontline roles, reduced full-time equivalent employees (FTE) and disciplined expense management offset by salary and wage increases, CPI increases and higher marketing costs associated with the new brand launch. Impairment charges increased $57 million or 13% compared to 2012, primarily due to prior year benefitting from an improvement in asset quality, which led to a reduction in provisioning; this improvement was not matched in 2013. 2013 WESTPAC GROUP ANNUAL REPORT 97 2 ST.GEORGE BANKING GROUP St.George Banking Group (St.George) is responsible for sales and service for consumer, business and corporate customers in Australia under the St.George, BankSA, Bank of Melbourne and RAMS brands. RAMS is a financial services group specialising in mortgages and online deposits. Consumer activities are conducted through a network of branches, third party distributors, call centres, ATMs, EFTPOS terminals and internet banking services. Business and corporate customers (businesses with facilities typically up to $150 million) are provided with a wide range of banking and financial products and services including specialist advice for cash flow finance, trade finance, automotive and equipment finance, property finance, transaction banking and treasury services. Sales and service activities for business and corporate customers are conducted by relationship managers via business banking centres, internet and customer service centre channels. Performance of St.George Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Deposits and other borrowings Loans Total assets Total operating expenses to net operating income ratio 2013 $m 3,216 552 3,768 (1,415) (293) 2,060 (619) 1,441 (128) 1,313 $bn 88.6 152.7 159.8 2012 $m 2,966 565 3,531 (1,341) (433) 1,757 (526) 1,231 (129) 1,102 $bn 80.9 147.6 154.6 37.6% 38.0% 2011 $m 2,930 549 3,479 (1,323) (393) 1,763 (530) 1,233 (129) 1,104 $bn 70.8 142.0 149.6 38.0% 2013 v 2012 St.George Cash Earnings were $1,441 million in 2013, an increase of $210 million or 17% compared to 2012. Net interest income increased by $250 million or 8% compared to 2012. This was driven by an increase in interest-earning assets and a 10 basis point improvement in margins. Features of this result included:  loans increased $5.1 billion or 3% compared to 2012, primarily due to: – an increase in mortgages of $6.1 billion or 6% compared to 2012. Growth was across all brands particularly in Bank of Melbourne; partially offset by – a decrease in business lending of 5% compared to 2012 due to lower commercial property lending from the run off of existing facilities and from stressed assets refinanced out of the business.  deposits increased $7.7 billion or 10% compared to 2012 with deposit growth more than fully funding loan growth over the year, primarily due to an increase in at call savings accounts with RAMS deposits contributing $1.3 billion of growth, offsetting a decrease in term deposits of $0.8 billion (down 2%); and  margins increased 10 basis points to 2.22% compared to 2012, primarily due to: – an increase in lending spreads of 26 basis points, with mortgage repricing and improved business lending spreads to recover increases in funding costs; partially offset by – a decrease in deposit spreads of 16 basis points, as competition continued to see spreads on new deposits lower than the portfolio average. Non-interest income decreased $13 million or 2% compared to 2012, primarily due to:  lower financial markets income; partially offset by  increased business lending fees. 98 2013 WESTPAC GROUP ANNUAL REPORT DIVISIONAL PERFORMANCE Operating expenses increased $74 million or 6% compared to 2012, primarily due to:  costs associated with the investment in Bank of Melbourne has added approximately $36 million in expenses including new branches, increased employee numbers and an increase in depreciation and amortisation; and  the launch of new ‘Business Connect’ model for serving SME customers contributed to the increase along with increased technology costs; partially offset by  productivity savings. Impairment charges decreased $140 million or 32% compared to 2012, due to:  a decrease in business impairment charges of $135 million compared to 2012, primarily due to the continued improvement in asset quality and lower levels of business stressed assets; and  lower consumer impairment charges of $5 million compared to 2012, driven by improvements in delinquencies. 2013 WESTPAC GROUP ANNUAL REPORT 99 2 BT FINANCIAL GROUP (AUSTRALIA) BT Financial Group (Australia) (BTFG) is Westpac’s Australian wealth division. BTFG’s funds management operations include the manufacturing and distribution of investment, superannuation and retirement products, investment platforms such as Wrap and Master Trusts, private banking, financial planning as well as margin lending and broking. BTFG’s insurance solutions cover the manufacturing and distribution of life, general and lenders mortgage insurance. BTFG’s brands include Advance Asset Management, Ascalon, Asgard, BT, BT Investment Management Limited (BTIM) (62.1% owned by the Westpac Group and consolidated in BTFG’s Funds Management business), Licensee Select, BT Select, Securitor, and the Advice, Private Banking and Insurance operations of Bank of Melbourne, BankSA, St.George and Westpac. Performance of BTFG Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Deposits and other borrowings Loans Total assets Funds under management Funds under administration Total operating expenses to net operating income ratio 2013 $m 406 1,868 2,274 (1,208) (1) 1,065 (310) (18) 737 (22) 715 $bn 20.3 14.6 27.7 76.2 102.7 53.1% 2012 $m 424 1,650 2,074 (1,133) (1) 940 (279) (8) 653 (22) 631 $bn 19.9 14.1 26.9 56.5 87.9 54.6% 2011 $m 438 1,613 2,051 (1,005) 4 1,050 (314) (7) 729 (17) 712 $bn 18.4 14.4 26.2 41.4 77.4 49.0% 2013 v 2012 BTFG Cash Earnings were $737 million in 2013, an increase of $84 million or 13% compared to 2012. Net interest income decreased $18 million or 4% compared to 2012, primarily due to improved volumes and stronger margins in Private Wealth offset by a decline in margin lending balances. Non-interest income increased $218 million or 13% compared to 2012, primarily due to:  an increase in life insurance revenue with net earned premiums rising 21%, reflecting the expansion of distribution to the Independent Financial Advisor and aligned financial planner networks, partially offset by margin compression, a slight deterioration in lapse rates and an increase in claims consistent with the larger portfolio;  an increase in general insurance revenue with gross written premiums rising 17% from annual pricing reviews, growth in new business through cross sell across the banking brands. Claim expenses have reduced compared to 2012;  a decrease in lenders mortgage insurance revenue due to modest mortgage growth and the continued impact of the decision to de-risk the portfolio in 2009 and an increase in claims reflecting the work out of delinquent mortgages; and  an increase in funds management income due to: – an increase in average FUM due to inflows, improved markets and FX impacts, partially offset by a reduction in FUM margins; – an increase in funds under administration (FUA) income driven by flows on platforms and improved markets; – an increase in performance fees received in BTIM and JOHCM; – an increase in advice income from new business revenue generated by an expanded planner network with greater focus on targeted segments and increasing customer facing time; and – an increase in Ascalon revenue from seed pool revaluation gains. 100 2013 WESTPAC GROUP ANNUAL REPORT DIVISIONAL PERFORMANCE Operating expenses increased $75 million, or 7% compared to 2012, primarily due to:  an increase in investment related costs of $45 million;  an increase in performance fee related bonuses associated with BTIM and JOHCM of $17 million; and  an increase in other operating costs due to higher FTE, costs associated with regulatory change and other volume related costs. WESTPAC INSTITUTIONAL BANK Westpac Institutional Bank (WIB) delivers a broad range of financial services to commercial, corporate, institutional and government customers with connections to Australia and New Zealand. WIB operates through dedicated industry relationship and specialist product teams, with expert knowledge in transactional banking, financial and debt capital markets, specialised capital, and alternative investment solutions. Customers are supported through branches and subsidiaries located in Australia, New Zealand, Asia, US and UK. Performance of WIB Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Deposits and other borrowings Loans Total assets Total operating expenses to net operating income ratio 2013 $m 1,635 1,667 3,302 (1,070) 89 2,321 (686) 1,635 - 1,635 $bn 72.8 56.5 97.2 32.4% 2012 $m 1,706 1,484 3,190 (987) (127) 2,076 (603) 1,473 - 1,473 $bn 64.5 53.9 97.8 30.9% 2011 $m 1,700 1,182 2,882 (938) 90 2,034 (607) 1,427 - 1,427 $bn 48.3 51.8 101.5 32.5% 2013 v 2012 WIB Cash Earnings were $1,635 million in 2013, an increase of $162 million or 11% compared to 2012. Net interest income decreased $71 million or 4% compared to 2012, primarily due to a 23 basis point decline in margins. While margin pressure was experienced on both assets and liabilities, competition was most intense for transactional deposit balances. Features of this result included:  loans increased $2.6 billion or 5% compared to 2012, primarily in targeted areas of trade finance, with particularly good growth from Asia; and  deposits increased $8.3 billion or 13% compared to 2012, as WIB continued to build its total relationship focus resulting in growth in term deposits and transactional deposits. Non-interest income increased $183 million or 12% compared to 2012, primarily due to:  an increase in markets income compared to 2012. Growth during the year was most prominent in interest rate products as customers sought to more actively manage their risk as interest rates declined, while movements in the currency increased customer demand for FX hedging products; and  a benefit in credit valuation adjustment of $87 million compared to a charge of $58 million in 2012; partially offset by  lower Hastings revenue primarily due to reduced performance fees. Operating expenses increased $83 million or 8% compared to 2012, primarily due to:  an increase in WIB’s investment in Asia, including building product and technology capabilities, along with additional FTE and branch premises; and  performance-related payments associated with the gains from the Hastings business in the first half of 2013. Asset quality improved in 2013, and as a result impairments contributed an $89 million benefit to earnings, compared to a $127 million charge in 2012. The high level of write-backs and collectively assessed provision benefits continued in 2013, with new individually assessed provisions lower than 2012. 2013 WESTPAC GROUP ANNUAL REPORT 101 2 WESTPAC NEW ZEALAND Westpac New Zealand is responsible for sales and service of banking, wealth and insurance products for consumers, business and institutional customers in New Zealand. Westpac conducts its New Zealand banking business through two banks in New Zealand: Westpac New Zealand Limited, which is incorporated in New Zealand and Westpac Banking Corporation (NZ Division), a branch of Westpac, which is incorporated in Australia. The division operates via an extensive network of branches and ATMs across both the North and South Islands. Business and institutional customers are also served through relationship and specialist product teams. Banking products are provided under the Westpac and WIB brands while insurance and wealth products are provided under Westpac Life and BT brands respectively. Performance of Westpac New Zealand Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Deposits and other borrowings Loans Total assets Funds under management Total operating expenses to net operating income ratio 2013 $m 1,309 364 1,673 (697) (97) 879 (242) (3) 634 - 634 2012 $m 1,224 336 1,560 (653) (148) 759 (208) (3) 548 - 548 2011 $m 1,137 304 1,441 (627) (185) 629 (184) (3) 442 - 442 $bn 41.4 54.7 61.5 3.9 41.7% $bn 33.5 47.4 48.6 2.9 41.9% $bn 29.8 45.2 46.3 2.1 43.5% 2013 v 2012 Westpac New Zealand Cash Earnings were $634 million in 2013, an increase of $86 million or 16% compared to 2012. Net interest income increased $85 million or 7% compared to 2012, of which foreign exchange translation impacts contributed $75 million. Excluding foreign exchange impacts, net interest income increased $10 million due to average interest-earning assets increasing, partially offset by margins declining 34 basis points. Margins and interest-earning assets were impacted by the inclusion of liquid assets in 2013. Adjusting for these assets, margins were 10 basis points lower. Features of this result included:  loans increased $7.3 billion or 15% compared to 2012, primarily due to: – foreign exchange impacts of $5.6 billion; and – an increase in mortgages and business lending of $1.7 billion compared to 2012. Growth was predominantly in the targeted segment of loans with an LVR less than 80%.  deposits increased $7.9 billion or 24% compared to 2012, primarily due to: – foreign exchange impacts of $4.2 billion; and – an increase in term deposits and other deposits, driven by growth in consumer online savings and business transaction accounts.  margins reduced 10 basis points to compared to 2012. The 10 basis point contraction in underlying margins was primarily due to: – lending spreads were lower as competition increased and customers switched to lower spread fixed rate mortgage products; and – deposit spreads decreased due to competition and lower returns on non-interest bearing deposits. 102 2013 WESTPAC GROUP ANNUAL REPORT DIVISIONAL PERFORMANCE Non-interest income increased $28 million or 8% compared to 2012, primarily due to:  an increase in facility fees and wealth fees earned from FUM/FUA growth (up $1.2 billion); partially offset by  the one-off insurance policy benefit received in 2012. Operating expenses increased $44 million or 7% compared to 2012, of which foreign exchange translation impacts contributed $41 million. Excluding foreign exchange impacts, this increase was primarily due to salary and other inflationary increases, including rental expenses and continued investment in strategic priorities, largely offset by benefits delivered from ongoing productivity initiatives. Impairment charges decreased $51 million or 34% compared to 2012, primarily due to:  continued improvement in stressed assets; and  a decrease in business individually assessed provision charges of 81% compared to 2012; partially offset by  an increase in impairment charges on a small number of institutional customers. 2013 WESTPAC GROUP ANNUAL REPORT 103 2 OTHER DIVISIONS Other divisions comprise: Westpac Pacific Westpac Pacific provides banking services for retail and business customers in seven Pacific Island Nations. Branches, ATMs, telephone banking and internet banking channels are used to deliver business activities in Fiji, Papua New Guinea (PNG), Vanuatu, Cook Islands, Tonga, Solomon Islands and Samoa. Westpac Pacific’s financial products include personal savings, business transactional accounts, personal and business lending products, business services and a range of international products. Group Services1 Group Services encompasses technology, banking operations, compliance, legal and property services. Treasury Treasury is primarily focused on the management of the Group’s interest rate risk and funding requirements by managing the mismatch between Group assets and liabilities. Treasury’s earnings are primarily impacted by the hedging decisions taken on behalf of the Group to manage net interest income outcomes and assist net interest income growth. Core Support1 Core Support comprises those functions performed centrally, including finance, risk and human resources. Group Items Group Items includes earnings on capital not allocated to divisions, accounting entries for certain intra-group transactions that facilitate the presentation of the performance of our operating segments, earnings from non core asset sales and certain other head office items such as centrally raised provisions. Performance of Other divisions Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation 2013 $m 696 193 889 (166) (59) 664 (259) (55) 350 (131) 219 2012 $m 939 294 1,233 (186) (74) 973 (336) (58) 579 (477) 102 2011 $m 798 215 1,013 (126) 38 925 (247) (58) 620 836 1,456 2013 v 2012 Other divisions’ Cash Earnings were $350 million in 2013, a decrease of $229 million or 40% compared to 2012. Net interest income decreased $243 million or 26% compared to 2012, primarily due to lower Treasury income. In the more stable credit spread environment, Treasury experienced lower returns on the liquid assets portfolio compared to 2012. Higher interest costs related to recent subordinated debt and hybrid issues also reduced net interest income. Non-interest income decreased $101 million or 34% compared to 2012, primarily due to:  profit from the sale of Visa shares in 2012 ($46 million) was not repeated;  reduced research and development tax credits received ($57 million); and  hedging of offshore earnings and cost of hedging offshore capital. Operating expenses decreased $20 million or 11% compared to 2012, primarily due to lower spend on centrally managed programs. Impairment charges decreased $15 million primarily due to a single large provision in Vanuatu in 2012, which was not repeated in 2013. The effective tax rate increased from 34.5% in 2012 to 39.0% in 2013, primarily from the impact of higher non-deductible distributions on Westpac CPS and Westpac CN. 1 Costs are allocated to other businesses in the Group, largely AFS and WIB. 104 2013 WESTPAC GROUP ANNUAL REPORT RISK AND RISK MANAGEMENT RISK FACTORS Our business is subject to risks that can adversely impact our business, results of operations, financial condition and future performance. If any of the following risks occur, our business, results of operations, financial condition or future performance could be materially adversely affected, with the result that the trading price of our securities could decline and as a security holder you could lose all, or part, of your investment. You should carefully consider the risks described and the other information in this Annual Report before investing in our securities. The risks and uncertainties described below are not the only ones we may face. Additional risks and uncertainties that we are unaware of, or that we currently deem to be immaterial, may also become important factors that affect us. Risks relating to our business Our businesses are highly regulated and we could be adversely affected by failing to comply with existing laws and regulations or by changes in laws, regulations or regulatory policy As a financial institution, we are subject to detailed laws and regulations in each of the jurisdictions in which we operate or obtain funding, including Australia, New Zealand and the United States. We are also supervised by a number of different regulatory and supervisory authorities which have broad administrative power over our businesses. In Australia, the relevant regulatory authorities include the Australian Prudential Regulation Authority (APRA), Reserve Bank of Australia (RBA), Australian Securities and Investments Commission (ASIC), Australian Securities Exchange (ASX), Australian Competition and Consumer Commission (ACCC), the Australian Transaction Reports and Analysis Centre (AUSTRAC) and the Australian Taxation Office (ATO). The Reserve Bank of New Zealand (RBNZ) and the Financial Markets Authority (FMA) have supervisory oversight of our New Zealand operations. In the United States we are subject to supervision and regulation by the US Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC). In other jurisdictions in which we operate, including the United Kingdom, Asia and the Pacific, we are also required to comply with relevant requirements of the local regulatory bodies. We are responsible for ensuring that we comply with all applicable legal and regulatory requirements (including accounting standards) and industry codes of practice in the jurisdictions in which we operate or obtain funding, as well as meeting our ethical standards. Compliance risk arises from these legal and regulatory requirements. If we fail to comply, we may be subject to fines, penalties or restrictions on our ability to do business. An example of the broad administrative power available to regulatory authorities is the power available to APRA under the Banking Act 1959 in certain circumstances to investigate our affairs and/or issue a direction to us (such as a direction to comply with a prudential requirement, to conduct an audit, to remove a Director, executive officer or employee or not to undertake transactions). Any such costs and restrictions could adversely affect our business, reputation, prospects, financial performance or financial condition. As with other financial services providers, we face increasing supervision and regulation in most of the jurisdictions in which we operate or obtain funding, particularly in the areas of funding, liquidity, capital adequacy and prudential regulation. In December 2010 the Basel Committee on Banking Supervision (BCBS) announced a revised global regulatory framework known as Basel III. Basel III, among other things, increases the required quality and quantity of capital held by banks and introduces new minimum standards for the management of liquidity risk. APRA has announced that it supports the Basel III framework and it will incorporate the framework into its prudential standards. The Basel III capital framework came into effect from 1 January 2013, subject to various transitional arrangements. Further details on the Basel III framework are set out in Section 1 under ‘Information on Westpac’. During the year ended 30 September 2013 there were also a series of other regulatory releases from authorities in the various jurisdictions in which we operate or obtain funding proposing significant regulatory change for financial institutions. This includes global OTC derivatives reform as well as the US Dodd-Frank legislation which is designed to reform the entire system for the supervision and regulation of financial firms that operate in or have a connection with the US, including foreign banks like Westpac. Other areas of potential change that could impact us include changes to accounting and reporting requirements, tax legislation, regulation relating to remuneration, consumer protection and competition legislation and bribery, anti-money laundering and counter-terrorism financing laws. In addition, further changes may occur driven by policy, prudential or political factors. Regulation is becoming increasingly extensive and complex. Some areas of potential regulatory change involve multiple jurisdictions seeking to adopt a coordinated approach. This may result in conflicts with specific requirements of the jurisdictions in which we operate and, in addition, such changes may be inconsistently introduced across jurisdictions. Changes may also occur in the oversight approach of regulators. It is possible that governments in jurisdictions in which we operate or obtain funding might revise their application of existing regulatory policies that apply to, or impact, Westpac’s business, including for reasons relating to national interest and/or systemic stability. Regulatory changes and the timing of their introduction continue to evolve and we currently manage our businesses in the context of regulatory uncertainty. The nature and impact of future changes are not predictable and are beyond our control. Regulatory compliance and the management of regulatory change is an increasingly important part of our strategic planning. We expect that we will be required to continue to invest significantly in compliance and the management and implementation of regulatory change and, at the same time, significant management attention and resources will be required to update existing or implement new processes to comply with the new regulations. Regulatory change may also impact our operations by requiring us to have increased levels of liquidity and higher levels of, and better quality, capital as well as place 2013 WESTPAC GROUP ANNUAL REPORT 105 2 restrictions on the businesses we conduct, require us to amend our corporate structure or require us to alter our product and service offerings. If regulatory change has any such effect, it could adversely affect one or more of our businesses, restrict our flexibility, require us to incur substantial costs and impact the profitability of one or more of our business lines. Any such costs or restrictions could adversely affect our business, prospects, financial performance or financial condition. For further information refer to ‘Significant developments’ in Section 1 and the sections ‘Critical accounting assumptions and estimates’ and ‘Future developments in accounting standards’ in Note 1 to the financial statements. Adverse credit and capital market conditions may significantly affect our ability to meet funding and liquidity needs and may increase our cost of funding We rely on credit and capital markets to fund our business and as a source of liquidity. Our liquidity and costs of obtaining funding are related to credit and capital market conditions. Global credit and capital markets have experienced extreme volatility, disruption and decreased liquidity in recent years. While there have been periods of stability in these markets, the environment has become more volatile and unpredictable. This has been exacerbated by the potential for sovereign debt defaults and/or banking failures in Europe which has contributed to volatility in stock prices and credit spreads. Adding to the uncertainty has been a slowing in the economic outlook for a number of countries, including China and the uncertain recovery of the US economy. Our direct exposure to the affected European countries is immaterial, with the main risks we face being damage to market confidence, changes to the access and cost of funding and a slowing in global activity or through other impacts on entities with whom we do business. As of 30 September 2013, approximately 32% of our total funding originated from domestic and international wholesale markets, of this around 59% was sourced outside Australia and New Zealand. A shift in investment preferences of businesses and consumers away from bank deposits towards other asset or investment classes would increase our need for funding from relatively less stable or more expensive forms of funding. If market conditions deteriorate due to economic, financial, political or other reasons, our funding costs may be adversely affected and our liquidity and our funding and lending activities may be constrained. If our current sources of funding prove to be insufficient, we may be forced to seek alternative financing. The availability of such alternative financing, and the terms on which it may be available, will depend on a variety of factors, including prevailing market conditions, the availability of credit, our credit ratings and credit market capacity. Even if available, the cost of these alternatives may be more expensive or on unfavourable terms, which could adversely affect our results of operations, liquidity, capital resources and financial condition. There is no assurance that we will be able to obtain adequate funding and do so at acceptable prices, nor that we will be able to recover any additional costs. If Westpac is unable to source appropriate funding, we may also be forced to reduce our lending or begin to sell liquid securities or we may be unable to pay our debts. Such actions may adversely impact our business, prospects, liquidity, capital resources, financial performance or financial condition. Westpac enters into collateralised derivative obligations, which may require Westpac to post additional collateral based on movements in market rates, which have the potential to adversely affect Westpac’s liquidity. For a more detailed description of liquidity risk, refer to the section ‘Liquidity risk’ in this section and Note 27 to the financial statements. Sovereign risk may destabilise financial markets adversely Sovereign risk, or the risk that foreign governments will default on their debt obligations, increase borrowings as and when required or be unable to refinance their debts as they fall due or nationalise participants in their economy, has emerged as a risk to the recovery prospects of many economies. This risk is particularly relevant to a number of European countries and during 2013 became more relevant to the United States. Should one sovereign default, there could be a cascading effect to other markets and countries, the consequences of which, while difficult to predict, may be similar to or worse than those experienced during the global financial crisis. Such an event could destabilise global financial markets adversely affecting our liquidity, financial performance or financial condition. Failure to maintain credit ratings could adversely affect our cost of funds, liquidity, competitive position and access to capital markets Credit ratings are independent opinions on our creditworthiness. Our credit ratings affect the cost and availability of our funding from capital markets and other funding sources and they may be important to customers or counterparties when evaluating our products and services. Therefore, maintaining high quality credit ratings is important. The credit ratings assigned to us by rating agencies are based on an evaluation of a number of factors, including our financial strength, structural considerations regarding the Australian financial system and the credit rating of the Australian Government. A credit rating downgrade could be driven by the occurrence of one or more of the other risks identified in this section or by other events including changes to the methodologies used by the rating agencies to determine ratings. Failure to maintain our current credit ratings could adversely affect our cost of funds and related margins, collateral requirements, liquidity, competitive position and our access to capital markets. The extent and nature of these impacts would depend on various factors, including the extent of any ratings change, whether our ratings differ among agencies (split ratings) and whether any ratings changes also impact our peers or the sector. A systemic shock in relation to the Australian, New Zealand or other financial systems could have adverse consequences for Westpac or its customers or 106 2013 WESTPAC GROUP ANNUAL REPORT counterparties that would be difficult to predict and respond to There is a risk that a major systemic shock could occur that causes an adverse impact on the Australian, New Zealand or other financial systems. As outlined above, over recent years the financial services industry and capital markets have been, and may continue to be, adversely affected by market volatility and the negative outlook for global economic conditions. Concerns about Eurozone sovereign risk and, more recently, extended political debate in the United States in relation to the debt ceiling have highlighted the risk that a shock to one of the major global economies could result in currency fluctuations and operational disruptions that negatively impact the Group. Any such market and economic disruptions could adversely affect financial institutions such as Westpac because consumer and business spending may decrease, unemployment may rise and demand for the products and services we provide may decline, thereby reducing our earnings. These conditions may also affect the ability of our borrowers to repay their loans or our counterparties to meet their obligations, causing us to incur higher credit losses. These events could also result in the undermining of confidence in the financial system, reducing liquidity and impairing our access to funding and impairing our customers and counterparties and their businesses. If this were to occur, our business, prospects, financial performance or financial condition could be adversely affected. The nature and consequences of any such event are difficult to predict and there can be no certainty that we could respond effectively to any such event. Declines in asset markets could adversely affect our operations or profitability Declines in Australian, New Zealand or other asset markets, including equity, residential and commercial property and other asset markets, could adversely affect our operations and profitability. Declining asset prices impact our wealth management business. Earnings in our wealth management business are, in part, dependent on asset values because we receive fees based on the value of securities and/or assets held or managed. A decline in asset prices could negatively impact the earnings of this business. Declining asset prices could also impact customers and counterparties and the value of security (including residential and commercial property) we hold against loans and derivatives which may impact our ability to recover amounts owing to us if customers or counterparties were to default. It may also affect our level of provisioning which in turn impacts profitability. Our business is substantially dependent on the Australian and New Zealand economies Our revenues and earnings are dependent on economic activity and the level of financial services our customers require. In particular, lending is dependent on various factors including economic growth, business investment, levels of employment, interest rates and trade flows in the countries in which we operate. RISK AND RISK MANAGEMENT We currently conduct the majority of our business in Australia and New Zealand and, consequently, our performance is influenced by the level and cyclical nature of lending in these countries. These factors are in turn impacted by both domestic and international economic conditions, natural disasters and political events. A significant decrease in the Australian and New Zealand housing markets or property valuations could adversely impact our home lending activities because the ability of our borrowers to repay their loans or counterparties to honour their obligations may be affected, causing us to incur higher credit losses, or the demand for our home lending products may decline. Adverse changes to the economic and business conditions in Australia and New Zealand and other countries such as China, India and Japan, could also adversely affect the Australian economy and customers. In particular, due to the current relationship between Australia and China, particularly in the mining and resources sectors, a slowdown in China’s economic growth could negatively impact the Australian economy. Changes in economic conditions could in turn result in reduced demand for our products and services and affect the ability of our borrowers to repay their loans. If this were to occur, it could negatively impact our business, prospects, financial performance or financial condition. An increase in defaults in credit exposures could adversely affect our liquidity, capital resources, financial performance or financial condition Credit risk is a significant risk and arises primarily from our lending activities. The risk arises from the possibility that some customers and counterparties will be unable to honour their obligations to us, including the repayment of loans and interest. We hold collective and individually assessed provisions for these credit exposures. If economic conditions deteriorate, some customers and/or counterparties could experience higher levels of financial stress and we may experience a significant increase in defaults and write-offs, and be required to increase our provisioning. Such events would diminish available capital and could adversely affect our liquidity, capital resources, financial performance or financial condition. Credit risk also arises from certain derivative contracts we enter into and from our dealings with, and holdings of, debt securities issued by other banks, financial institutions, companies, governments and government bodies the financial conditions of which may be affected to varying degrees by economic conditions in global financial markets. For a discussion of our risk management procedures, including the management of credit risk, refer to the ‘Risk management’ section and Note 27 to the financial statements. We face intense competition in all aspects of our business The financial services industry is highly competitive. We compete, both domestically and internationally, with retail and commercial banks, asset managers, investment banking firms, brokerage firms, other financial service firms and businesses in other industries with emerging financial 2013 WESTPAC GROUP ANNUAL REPORT 107 2 services aspirations. This includes specialist competitors that may not be subject to the same capital and regulatory requirements and therefore may be able to operate more efficiently. If we are unable to compete effectively in our various businesses and markets, our market share may decline. Increased competition may also adversely affect us by diverting business to our competitors or creating pressure to lower margins. Increased competition for deposits could also increase our cost of funding and lead us to access other types of funding. We rely on bank deposits to fund a significant portion of our balance sheet and deposits have been a relatively stable source of funding. We compete with banks and other financial services firms for such deposits. To the extent that we are not able to successfully compete for deposits, we would be forced to rely more heavily on more expensive or less stable forms of funding, or reduce lending. We are also dependent on our ability to offer products and services that match evolving customer preferences. If we are not successful in developing or introducing new products and services or responding or adapting to changes in customer preferences and habits, we may lose customers to our competitors. This could adversely affect our business, prospects, financial performance or financial condition. For more detail on how we address competitive pressures refer to ‘Competition’ in Section 1. We could suffer losses due to market volatility We are exposed to market risk as a consequence of our trading activities in financial markets and through the asset and liability management of our financial position. In our financial markets trading business, we are exposed to losses arising from adverse movements in levels and volatility of interest rates, foreign exchange rates, commodity prices, credit prices and equity prices. If we were to suffer substantial losses due to any market volatility it may adversely affect our business, prospects, liquidity, capital resources, financial performance or financial condition. For a discussion of our risk management procedures, including the management of market risk, refer to the ‘Risk management’ section. We could suffer losses due to operational risks Operational risk is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events, including legal risk but excluding strategic or reputational risk. It also includes, among other things, technology risk, model risk and outsourcing risk. As a financial services organisation we are exposed to a variety of operational risks. We are also highly dependent on the conduct of our employees, contractors and external service providers. We could, for example, be adversely affected in the event of human error, inadequate or failed processes or if an employee, contractor or external service provider engages in fraudulent conduct. We could also incur losses from an unintentional or negligent failure to meet a professional obligation to specific clients, including fiduciary and suitability requirements, or from the nature or design of a product. These may include client, product and business practice risks such as product defects and unsuitability, market manipulation, insider trading, misleading or deceptive conduct in advertising and inadequate or defective financial advice. While we have policies and processes to minimise the risk of human error and employee, contractor or external service provider misconduct, these policies and processes may not always be effective. Fraudulent conduct can also emerge from external parties seeking to access the bank’s systems and customers’ accounts. If systems, procedures and protocols for managing and minimising fraud fail, or are ineffective, they could lead to loss which could adversely affect our business, prospects, reputation, financial performance, or financial condition. As a financial services organisation, Westpac is heavily reliant on the use of models in the conduct of its business. We are therefore exposed to model risk, being the risk of loss arising because of errors or inadequacies in a model, or in the control and use of the model. Westpac relies on a number of suppliers, both in Australia and overseas, to provide services to it and its customers. Failure by these suppliers to deliver services as required could disrupt services and adversely impact Westpac’s operations, profitability or reputation. Operational risks could impact on our operations or adversely affect demand for our products and services. Operational risks can directly impact our reputation and result in financial losses which would adversely affect our financial performance or financial condition. For a discussion of our risk management procedures, including the management of operational risk, refer to the ‘Risk management’ section. We could suffer losses due to security breaches or technology failures The reliability and security of our information and technology infrastructure and our customer databases are crucial in maintaining our banking applications and processes. There is a risk that our information and technology systems might fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control. The proliferation of new technologies, the increasing use of the internet and telecommunications to conduct financial transactions and the growing sophistication and activities of organised crime have resulted in increased information security risks for major financial institutions such as Westpac. While Westpac has systems in place to detect and respond to cyberattacks, there can be no assurance that we will not suffer losses relating to cyberattacks or other information security breaches in the future. Our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems and networks, and the systems and networks of external suppliers. Although we implement significant measures to protect the security and confidentiality of our information, there is a risk that the computer systems, software and networks on which we rely may be subject to security breaches, unauthorised access, computer viruses, external attacks or internal breaches that could have an adverse security impact and compromise our 108 2013 WESTPAC GROUP ANNUAL REPORT confidential information or that of our customers and counterparts. Any such security breach could result in regulatory enforcement actions, reputational damage and reduced operational effectiveness. Such events could subsequently adversely affect our business, prospects, financial performance or financial condition. Our risk and exposure to such matters remains heightened because of the evolving nature of technological threats, Westpac’s prominence within the financial services industry and our plans to continue to improve and expand our internet and mobile banking infrastructure. We continue to modify or enhance our cybersecurity systems and investigate or remediate any information security vulnerabilities, investing additional resources as required to counter new and emerging threats as they continue to evolve. Security breaches or cyberattacks on Westpac’s networks, systems or devices could result in the loss of customers and business opportunities, theft of intellectual property, significant disruption to Westpac’s operations and business, misappropriation of Westpac’s confidential information and/or that of our customers, damage to Westpac’s computers or systems and/or those of our customers, reputational damage and claims for compensation and regulatory investigations and penalties, which could adversely affect our business, prospects, financial performance, or financial condition. Further, our ability to develop and deliver products and services to customers is dependent upon technology that requires periodic renewal. We are constantly managing technology projects including projects to consolidate duplicate technology platforms, simplify and enhance our technology and operations environment, improve productivity and provide for a better customer experience. Failure to implement these projects or manage associated change effectively could result in cost overruns, a failure to achieve anticipated productivity, operational instability or reputational damage. In turn, this could place us at a competitive disadvantage and adversely affect our financial performance. We could suffer losses due to failures in risk management strategies We have implemented risk management strategies and internal controls involving processes and procedures intended to identify, monitor and mitigate the risks to which we are subject, including liquidity risk, credit risk, market risk (including interest rate, foreign exchange and equity risk), compliance risk, conduct risk and operational risk; all of which comprise important elements of the Group’s reputational risk. However, there are inherent limitations with any risk management framework as there may exist, or emerge in the future, risks that we have not anticipated or identified. If any of our risk management processes and procedures prove ineffective or inadequate or are otherwise not appropriately implemented, we could suffer unexpected losses and reputational damage which could adversely affect our business, prospects, financial performance or financial condition. RISK AND RISK MANAGEMENT For a discussion of our risk management procedures, refer to the ‘Risk management’ section. We could suffer losses due to insurance risk We have exposure to insurance risk in both life insurance and general insurance business, which may adversely affect our business, operations and financial condition. Insurance risk is the risk of loss due to increases in policy benefits arising from variations in the incidence or severity of insured events. In the life insurance business, insurance risk arises primarily through mortality (death) and morbidity (illness and injury) risks being greater than expected. In the general insurance business, insurance risk arises mainly through environmental factors (including floods and bushfires) and other calamities, such as earthquakes, tsunamis and volcanic activity, as well as general variability in home, contents, motor, travel and other insurance claim amounts. Further details on environmental risk factors are discussed below. We could suffer losses due to environmental factors We and our customers operate businesses and hold assets in a diverse range of geographical locations. Any significant environmental change or external event (including fire, storm, flood, earthquake or pandemic) in any of these locations has the potential to disrupt business activities, impact on our operations, damage property and otherwise affect the value of assets held in the affected locations and our ability to recover amounts owing to us. In addition, such an event could have an adverse impact on economic activity, consumer and investor confidence, or the levels of volatility in financial markets. This risk of losses due to environmental factors is also relevant to our insurance business. The frequency and severity of external events such as natural disasters is difficult to predict and it is possible that the amounts we reserve for such events may not be adequate to cover actual claims that may arise, which could adversely affect our business, prospects, financial performance or financial condition. Reputational damage could harm our business and prospects Our ability to attract and retain customers and our prospects could be adversely affected if our reputation is damaged. There are various potential sources of reputational damage, including potential conflicts of interest, pricing policies, failing to comply with legal and regulatory requirements, ethical issues, engagement and conduct of external suppliers, failing to comply with money laundering laws, trade sanctions and counter-terrorism finance legislation or privacy laws, litigation, failure of information security systems, improper sales and trading practices, failing to comply with personnel and supplier policies, improper conduct of companies in which we hold strategic investments, technology failures, security breaches and risk management failures. Our reputation could also be adversely affected by the actions of the financial services industry in general or from the actions of customers and counterparties. Failure to appropriately address issues that could or do give rise to reputational risk could also impact the regulatory 2013 WESTPAC GROUP ANNUAL REPORT 109 2 change agenda, give rise to additional legal risk, subject us to regulatory enforcement actions, fines and penalties, or remediation costs, or harm our reputation among customers, investors and the marketplace. This could lead to loss of business which could adversely affect our business, prospects, financial performance or financial condition. Effective risk management is one of the keys to achieving this goal. It influences our customer experiences and public perceptions, our financial performance, reputation and shareholder expectations, and thus our future success. We regard managing risk to be a fundamental activity, performed at all levels of the Group. We could suffer losses due to impairment to capitalised software, goodwill and other intangible assets that may adversely affect our business, operations and financial condition In certain circumstances Westpac may be exposed to a reduction in the value of intangible assets. As at 30 September 2013, Westpac carried goodwill principally related to its investments in Australia, intangible assets principally relating to assets recognised on acquisition of subsidiaries and capitalised software balances. Westpac is required to assess the recoverability of the goodwill balances on at least an annual basis. For this purpose Westpac uses either a discounted cash flow or a multiple of earnings calculation. Changes in the assumptions upon which the calculation is based, together with expected changes in future cash flows, could materially impact this assessment, resulting in the potential write-off of part or all of the goodwill balances. Capitalised software and other intangible assets are assessed for indicators of impairment at least annually. In the event that an asset is no longer in use, or that the cash flows generated by the asset do not support the carrying value, in certain circumstances an impairment will be recorded, adversely impacting the Group’s financial condition. We could suffer losses if we fail to syndicate or sell down underwritten securities As a financial intermediary we underwrite listed and unlisted debt and equity securities. Underwriting activities include the development of solutions for corporate and institutional customers who need capital and investor customers who have an appetite for certain investment products. We may guarantee the pricing and placement of these facilities. We could suffer losses if we fail to syndicate or sell down our risk to other market participants. This risk is more pronounced in times of heightened market volatility. Certain strategic decisions may have adverse effects on our business Westpac, at times, evaluates and may undertake strategic decisions which may include business expansion. The expansion, or integration of a new business, can be complex and costly and may require Westpac to comply with additional local or foreign regulatory requirements which may carry additional risks. These decisions may, for a variety of reasons, not deliver the anticipated positive business results and could have a negative impact on our business, prospects, engagement with regulators, financial performance or financial condition. RISK MANAGEMENT Our vision is to be one of the world’s great companies, helping our customers, communities and people to prosper and grow. Our risk management strategy is approved by our Board and implemented through the CEO and the executive management team. The BRMC has been delegated the responsibility for approving and maintaining an effective risk management framework. For further information regarding the role and responsibilities of the BRMC and other Board committees in managing risk, refer to ‘Corporate governance – Risk management’ in Section 1. The CEO and executive management team are responsible for implementing the risk management strategy and frameworks and for developing policies, controls, processes and procedures for identifying and managing risk in all of Westpac’s activities. We follow a ‘Three Lines of Defence’ philosophy for risk management. As outlined in the ‘Corporate governance’ section our approach to managing risk is that ‘risk is everyone’s business’ and that responsibility and accountability for risk begins with the business units that originate the risk. For a comprehensive discussion of the risks to which Westpac is exposed, and its policies to manage these risks, refer to ‘Corporate governance – Risk management’ in Section 1 and Note 27 to the financial statements. CREDIT RISK Credit risk is the risk of financial loss where a customer or counterparty fails to meet their financial obligations. We have a well-established framework and supporting policies for managing the credit risk associated with lending across our business divisions. The framework and policies encompass all stages of the credit cycle – origination, evaluation, approval, documentation, settlement, ongoing administration and problem management. For example, we have established product-based standards for lending to individuals, with key controls including minimum serviceability standards and maximum loan to security value ratios. We offer residential property loans to both owner- occupiers and investors at both fixed and variable rates, secured by a mortgage over the subject property or other acceptable collateral. Where we lend to higher loan to value ratios we typically also require lenders mortgage insurance. Similarly, we have established criteria for business, commercial, corporate and institutional lending, which can vary by industry segment. In this area we focus on the performance of key financial risk ratios, including interest coverage, debt serviceability and balance sheet structure. When providing finance to smaller business, commercial and corporate borrowers we typically obtain security, such as a mortgage over property and/or a general security agreement over business assets. For larger corporates and institutions we typically also require compliance with selected financial ratios and undertakings and may hold security. In respect of commercial property lending we maintain loan origination and ongoing risk management standards, including specialised management for higher value loans. We 110 2013 WESTPAC GROUP ANNUAL REPORT RISK AND RISK MANAGEMENT consider factors such as the nature, location, quality and expected demand for the asset, tenancy profile and experience and quality of management. We actively monitor the Australian and New Zealand property markets and the composition of our commercial property loan book across the Group. The extension of credit is underpinned by the Group’s Principles of Responsible Lending. This is reflected in our commitment to comply with all local legislation, codes of practice and relevant guidelines and obligations to market our products responsibly and stay in touch with the expectations of customers and the community. Refer to Note 27 to the financial statements for details of our credit risk management policies. Provisions for impairment charges on loans For information on the basis for determining the provision for impairment charges on loans refer to ‘Critical accounting assumptions and estimates’ in Note 1 to the financial statements. Credit risk concentrations We monitor our credit portfolio to manage risk concentrations. At 30 September 2013, our exposure to consumers comprised 71% (2012: 71%, 2011: 71%) of our on-balance sheet loans and 57% (2012: 57%, 2011: 56%) of total credit commitments. At 30 September 2013, 90% (2012: 91%, 2011: 91%) of our exposure to consumers was supported by residential real estate mortgages. The consumer category includes investment property loans to individuals, credit cards, personal loans, overdrafts and lines of credit. Our consumer credit risks are diversified, with substantial consumer market share in every state and territory in Australia, New Zealand and the Pacific region. Moreover, these customers service their debts with incomes derived from a wide range of occupations, in city as well as country areas. Exposures to businesses, government and other financial institutions are classified into a number of industry clusters based on groupings of related Australian and New Zealand Standard Industrial Classification (ANZSIC) codes and are monitored against industry risk limits. The level of industry risk is measured and monitored on a dynamic basis. Exposures are actively managed from a portfolio perspective, with risk mitigation techniques used to regularly re-balance the portfolio. We also control the concentration risks that can arise from large exposures to individual borrowers. 2013 WESTPAC GROUP ANNUAL REPORT 111 2 LIQUIDITY RISK Liquidity risk is the risk that the Group will be unable to fund assets and meet obligations as they become due. This risk could potentially arise as a result of:  an inability to meet efficiently both expected and unexpected current and future cashflows and collateral needs without affecting either daily operations or the financial condition of the bank; and/or  inadequate market depth or market disruption impacting the ability to easily offset or eliminate a position at the market price. Liquidity risk is managed through our BRMC-approved liquidity framework. Refer to Note 27 to the financial statements for a more detailed discussion of our liquidity risk management policies. Westpac debt programs and issuing shelves Access in a timely and flexible manner to a diverse range of debt markets and investors is provided by the following programs and issuing shelves as at 30 September 2013: Program Limit Issuer(s) Program/Issuing Shelf Type Australia No limit Euro Market USD 2.5 billion USD 20 billion USD 70 billion USD 7.5 billion USD 20 billion EUR 5 billion Japan JPY 750 billion JPY 750 billion United States USD 45 billion USD 10 billion WBC Debt Issuance Program WBC WBC/WSNZL1 Euro Transferable Certificate of Deposit Program Euro Commercial Paper and Certificate of Deposit Program WBC WSNZL1 WBC2 WSNZL3 WBC WBC WBC WSNZL1 Euro Medium Term Note Program Euro Medium Term Note Program Global Covered Bond Program Global Covered Bond Program Samurai shelf Uridashi shelf US Commercial Paper Program US Commercial Paper Program USD 35 billion WBC US MTN Program USD 15 billion WBC (NY Branch) Medium Term Deposit Notes No limit No limit No limit New Zealand WBC (NY Branch) Certificate of Deposit Program WBC WBC US Securities and Exchange Commission registered shelf US Securities and Exchange Commission registered shelf for retail MTNs No limit WNZL Medium Term Note and Registered Certificate of Deposit Program 1 Notes issued under this program by Westpac Securities NZ Limited, London branch are guaranteed by Westpac New Zealand Limited, its parent company. 2 Notes issued under this program are guaranteed by BNY Trust Company of Australia Limited as trustee of the Westpac Covered Bond Trust. 3 Notes issued under this program by Westpac Securities NZ Limited, London branch are guaranteed by Westpac New Zealand Limited, its parent company, and Westpac NZ Covered Bond Limited. 112 2013 WESTPAC GROUP ANNUAL REPORT RISK AND RISK MANAGEMENT MARKET RISK Market risk is the risk of an adverse impact on earnings resulting from changes in market factors, such as foreign exchange rates, interest rates, commodity prices and equity prices. Market risk arises in both trading and banking book activities. Our trading activities are conducted in our Financial Markets and Treasury businesses. Financial Market’s trading book activity represents dealings that encompass book running and distribution activity. Treasury’s trading activity represents dealings that include the management of interest rate, foreign exchange (FX) and credit spread risk associated with wholesale funding, liquid asset portfolios and hedging of foreign currency earnings and capital deployed offshore. Refer to Note 27 to the financial statements for a more detailed discussion of our market risk management policies. The table below depicts the aggregate Value at Risk (VaR), by risk type, for the years ended 30 September 2013, 30 September 2012 and 30 September 2011: Interest rate risk Foreign exchange risk Equity risk Commodity risk2 Other market risks3 Diversification effect Net market risk 1 2 3 30 September 2013 Consolidated and Parent Entity1 30 September 2012 30 September 2011 High $m 30.8 5.7 0.8 6.1 13.0 n/a 35.4 Low $m 9.1 0.5 0.1 1.2 5.8 n/a 12.5 Average $m 16.7 2.1 0.3 2.9 7.9 (10.7) 19.2 High $m 29.0 8.0 1.8 5.1 21.6 n/a 41.2 Low Average $m 10.5 0.8 0.2 1.0 7.8 n/a 16.8 $m 18.4 3.3 0.5 2.5 16.6 (12.5) 28.8 High $m 40.9 8.4 1.7 6.6 24.9 n/a 50.0 Low $m 12.8 0.8 0.2 1.1 16.6 n/a 19.9 Average $m 24.7 3.3 0.5 2.7 21.1 (20.7) 31.6 In the current year we have revised our presentation to compare aggregate VaR from a six monthly to an annual basis. Includes electricity risk. Includes prepayment risk and credit spread risk (exposure to movements in generic credit rating bands). The graph below compares the actual profit and loss from trading activities on a daily basis to VaR over the reporting period: ) m $ ( s s o L d n a t i f o r P y l i l a D a u t c A 30 20 10 - (10) (20) (30) (40) 5 10 15 20 25 30 35 40 Daily Value at Risk ($m) Each point on the graph represents one day’s profit or loss from trading activities. The result is placed on the graph relative to the associated VaR utilisation. The downward sloping line represents the point where a loss is equal to VaR utilisation. Therefore any point below the line represents a back-test exception (i.e. where the loss is greater than VaR). 2013 WESTPAC GROUP ANNUAL REPORT 113 2 OPERATIONAL RISK AND COMPLIANCE RISK Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events including legal risk but excluding strategic or reputation risk. It also includes, among other things, technology risk, model risk and outsourcing risk. The way operational risk is managed has the potential to positively or negatively impact our customers, our employees, our financial performance and our reputation. Compliance risk is the risk of legal or regulatory sanction, financial loss, customer impact or reputational loss, arising from our failure to abide by the compliance obligations required of us as a financial services group. Compliance is focused on meeting our legal and regulatory obligations in each of the jurisdictions in which we operate by proactively managing compliance risk. Refer to ‘Corporate governance’ in Section 1 for information on our management of operational and compliance risk. The Group’s Operational Risk Management Framework and Compliance Management Framework assist all divisions to achieve their objectives through the effective identification, measurement, management, monitoring and reporting of their risks. The Frameworks define the principles, policies and processes, systems, and roles and responsibilities that we use to meet our obligations under the law, based on the letter and spirit of the regulatory standards that apply to the Group. The Frameworks are underpinned by a culture of individual accountability and responsibility, based on a Three Lines of Defence model. This is discussed in further detail in Note 27 to the financial statements. OTHER RISKS Business risk The risk associated with the vulnerability of a line of business to changes in the business environment. Environmental, social and governance risks The risk of damage to Westpac’s reputation or financial performance due to failure to recognise or address material existing or emerging sustainability-related environmental, social or governance issues. The Group has in place a Risk Management Framework that is supported by a suite of key supporting policies and position statements. These include the Principles for Doing Business, Principles for Responsible Lending, ESG Credit Risk Policy and Sustainable Supply Chain Policy, many of which are publicly available. The Framework was reviewed and updated in 2012. Westpac is also a signatory to a number of voluntary principles-based frameworks that guide the integration of ESG-related issues into investment analysis. These include the Equator Principles covering project finance activities and the United Nations Principles for Responsible Investment covering investment analysis. Equity risk The potential for financial loss arising from adverse movements in the value of our direct and indirect equity investments. The Group’s direct equity risk arises from principal investments or net trading or underwriting positions in listed or unlisted equities. It also includes seed funding, debt for equity swaps, equity derivatives and other situations where the value of Westpac’s investment is directly affected by the change in value of the equity instrument to the full extent of that change. Our indirect equity risk is primarily related to the potential for equity market volatility to impact on fee income that is based on the size of funds under management and administration. The Group has in place various policies, limits and controls to manage these risks and the conflicts of interest that can potentially arise. Insurance risk The risk of misestimation of the expected cost of insured events, volatility in the number or severity of insured events, and misestimation of the cost of incurred claims. Subsidiaries within the Group’s BT Financial Group undertake life insurance, general insurance and lenders mortgage insurance. They are governed by independent boards and are subject to separate regulatory oversight and controls. These subsidiaries have comprehensive reinsurance arrangements in place to transfer risk and protect against catastrophic events. They are capitalised to a level that exceeds the minimum required by the relevant regulator. Related entity (contagion) risk The risk that problems arising in other Westpac Group members compromise the financial and operational position of the ADI in the Westpac Group. The Group has in place a Risk Management Framework and a suite of supporting policies and procedures governing the control of dealings with, and activities that may be undertaken by, Group members. Controls include the measurement, approval and monitoring of, and limitations on, the extent of intra-group credit exposures and other forms of parent entity support, plus requirements related to control of Group badging, product distribution, promotional material, service-level agreements and managing potential conflicts of interest. 114 2013 WESTPAC GROUP ANNUAL REPORT RISK AND RISK MANAGEMENT Reputation risk The risk to earnings or capital arising from negative public opinion resulting from the loss of reputation or public trust and standing. Reputation risk can arise from gaps between current and/or emerging stakeholder perceptions and expectations relative to our current or planned activities, performance or behaviours. It can affect the Group’s brands and businesses positively or negatively. Stakeholder perceptions can include (but are not limited to) views on financial performance, quality of products or services, quality of management, leadership and governance, history and heritage and our approach to sustainability, social responsibility and ethical behaviour. We have a Risk Management Framework and key supporting policies in place covering the way we manage reputation risk as one of our key risks across the Group, including the setting of risk appetite and roles and responsibilities for risk identification, measurement and management, monitoring and reporting. SPECIAL PURPOSE ENTITIES We are associated with a number of special purpose entities (also known as special purpose vehicles or SPVs) in the ordinary course of business, primarily to provide funding and financial services products to our customers. SPVs are typically set up for a single, pre-defined purpose, have a limited life and generally are not operating entities nor do they have employees. The most common form of SPV structure involves the acquisition of financial assets by the SPV that are funded by the issuance of securities to external investors (securitisation). Repayment of the securities is determined by the performance of the assets acquired by the SPV. Under A-IFRS, an SPV is consolidated and reported as part of the Group if it is controlled by the parent entity in line with AASB 127 Consolidated and Separate Financial Statements or deemed to be controlled in applying UIG Interpretation 112 Consolidation – Special Purpose Entities. The definition of control is based on the substance rather than the legal form. Refer to Note 1 to the financial statements for a description of how we apply the requirements to evaluate whether to consolidate SPVs. In the ordinary course of business, we have established or sponsored the establishment of SPVs in relation to securitisation, as detailed below. Capital is held, as appropriate, against all SPV-related transactions and exposures. COVERED BOND GUARANTORS Through our covered bond programs we assign our equitable interests in residential mortgage loans to an SPV covered bond guarantor which guarantees the obligations of our covered bonds. We provide arm’s length swaps to the covered bond guarantor in accordance with relevant prudential guidelines. We have no obligation to repurchase any assets from the covered bond guarantor, other than in certain circumstances where there is a breach of representation or warranty. We may repurchase loans from the covered bond guarantor at our discretion, subject to the conditions set out in the transaction documents. As at 30 September 2013, the carrying value of assets pledged for the covered bond programs for the Group was $34.2 billion (2012: $18.3 billion). Refer to Note 31 to the financial statements for further details. SECURITISATION SPVs Through our securitisation programs we assign our equitable interests in assets (in respect of RMBS, principally residential mortgage loans, and in respect of ABS, principally auto receivables) to SPVs which issue securities to investors. We provide arm’s length interest rate swaps and liquidity facilities to the SPVs in accordance with relevant prudential guidelines. We have no obligation to repurchase any securitisation securities, other than in certain circumstances (excluding impaired assets) where there is a breach of representation or warranty within 120 days of the initial sale (except in respect of our program in New Zealand which imposes no such time limitation). We may remove assets from the program where they cease to conform with the terms and conditions of the securitisation programs or through a program’s clean-up features. As at 30 September 2013, own assets securitised through a combination of privately or publicly placed issues to Australian, New Zealand, European and United States investors was $10.8 billion (2012: $11.1 billion). Under A-IFRS substantially all of the SPVs involved in our loan securitisation programs are consolidated by the Group. Refer to Note 31 to the financial statements for further details. CUSTOMER FUNDING CONDUITS We arrange financing for certain customer transactions through a commercial paper conduit that provides customers with access to the commercial paper market. As at 30 September 2013, we administered one significant conduit (2012: one), that was created prior to 1 February 2003, with commercial paper outstanding of $1.8 billion (2012: $2.6 billion). We provide a letter of credit facility as credit support to the commercial paper issued by the conduit. This facility is a variable interest in the conduit that we administer and represents a maximum exposure to loss of $186 million as at 30 September 2013 (2012: $266 million). The conduit is consolidated by the Group. Refer to Note 31 to the financial statements for further details. 2013 WESTPAC GROUP ANNUAL REPORT 115 2 STRUCTURED FINANCE TRANSACTIONS We are involved with SPVs to provide financing to customers or to provide financing to the Group. Any financing arrangements to customers are entered into under normal lending criteria and are subject to our normal credit approval processes. The assets arising from these financing activities are generally included in receivables due from other financial institutions or available-for- sale securities. The liabilities arising from these financing activities are generally included in payables due to other financial institutions, debt issues or financial liabilities designated at fair value. Exposures in the form of guarantees or undrawn credit lines are included within contingent liabilities and credit-related commitments. OFF-BALANCE SHEET ARRANGEMENTS Wealth management activity Refer to Note 37 to the financial statements for details of our wealth management activities. Other off-balance sheet arrangements Refer to Note 35 to the financial statements for details of our superannuation plans and Note 36 for details of our contingent liabilities, contingent assets and credit commitments. FINANCIAL REPORTING Internal control over financial reporting The US Congress passed the Public Company Accounting Reform and Investor Protection Act in July 2002, which is commonly known as the Sarbanes-Oxley Act of 2002 (SOX). SOX is a wide ranging piece of US legislation concerned largely with financial reporting and corporate governance. We are obligated to comply with SOX by virtue of being a foreign registrant with the SEC and we have established procedures designed to comply with all applicable requirements of SOX. Disclosure controls and procedures Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the US Securities Exchange Act of 1934) as of 30 September 2013. Based upon this evaluation, our CEO and CFO have concluded that the design and operation of our disclosure controls and procedures were effective as of 30 September 2013. Management’s Report on internal control over financial reporting Rule 13a-15(a) under the US Securities Exchange Act of 1934 requires us to maintain an effective system of internal control over financial reporting. Refer to the sections headed ‘Management’s report on internal control over financial reporting’ and ‘Report of independent registered public accounting firm’ in Section 3 for those reports. Changes in our internal control over financial reporting There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the US Securities Exchange Act of 1934) for the year ended 30 September 2013 that has been identified that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 116 2013 WESTPAC GROUP ANNUAL REPORT OTHER WESTPAC BUSINESS INFORMATION EMPLOYEES The number of employees in each area of business as at 30 September1: 2013 2012 2011² AFS Westpac RBB St.George BTFG 9,847 5,149 4,164 1,793 4,481 10,163 35,597 10,171 5,106 3,898 1,751 4,691 10,058 35,675 10,940 5,190 3,709 1,707 4,660 11,600 37,806 WIB Westpac New Zealand Other Total employees 1 Total employees (including FTE working on merger integration projects) includes full-time, pro-rata part-time, overtime, temporary and contract staff. 2 2011 FTE restated for changes in business structure. 2013 v 2012 Total FTE decreased by 78 compared to 30 September 2012. This decrease was primarily driven by the delivery of productivity initiatives, offset by additional FTE to support investment across the Group. Specifically, the movement comprised:  a decrease of 210 FTE in Westpac New Zealand from productivity program benefits;  a decrease of 15 FTE across AFS due to operating model changes and other productivity initiatives, offset by investment in Bank of Melbourne and an increase in staff supporting Wealth investments;  an increase of 105 FTE across other businesses relating to regulatory change and compliance programs, offset by supplier program benefits and other productivity initiatives; and  an increase of 42 FTE in WIB to support further expansion in Asia. PROPERTY We occupy premises primarily in Australia, New Zealand and the Pacific Islands including 1,544 branches, (2012: 1,538) as at 30 September 2013. As at 30 September 2013, we owned approximately 2.0% (2012: 2.2%) of the premises we occupied in Australia, none (2012: none) in New Zealand and 53% (2012: 55%) in the Pacific Islands. The remainder of premises are held under commercial lease with the terms generally averaging five years. As at 30 September 2013, the carrying value of our directly owned premises and sites was approximately $182 million (2012: $223 million). Westpac Place in the Sydney CBD is the Group’s head office and has a 6,212 seat capacity. In 2008 we signed a 10 year 9 month lease, which commenced in November 2008 and contains three six-year options to extend. 60 Martin Place in the Sydney CBD is the next largest corporate site. The Martin Place office has a 2,338 seat capacity. A lease commitment at this site extends to 2015 with two two-year options to extend. We have retained a corporate presence in Kogarah, in the Sydney metro area, which is a key corporate office of St.George. The Kogarah head office has a 2,416 seat capacity. A lease commitment at this site extends to 2021 with five five-year options to extend. In July 2010, Westpac entered into a lease and services agreement for a purpose built data centre in Western Sydney. This agreement relates to the design, construction and operation of the data centre and is for a period of 15 years with two further five year option periods. The site was handed over on 28 September 2011. In November 2011, an Agreement for Lease for part of 150 Collins Street, Melbourne, was executed between the following parties: Westpac Banking Corporation (Tenant), APN (Lessor), and APN and Grocon (Developers). The term of the lease is 12 years. Design work is complete and the building is progressing, with occupancy expected to commence mid-2014. In June 2012, an Agreement for Lease between Westpac Banking Corporation and Lend Lease (Millers Point) Pty Ltd (Developer) was executed with Westpac as anchor tenant for the T2 Tower at the Barangaroo South development. The term of the lease is 15 years. Design work is significantly advanced, with occupancy on track for mid- to late 2015. ‘Westpac on Takutai Square’ is Westpac New Zealand’s head office, located at the Eastern end of Britomart Precinct near Customs Street in Auckland, contains 23,012 square metres of office space across two buildings and has a capacity of approximately 1,960 seats. A lease commitment at this site extends to 2021, with two six-year options to extend. SIGNIFICANT LONG TERM AGREEMENTS Westpac’s significant long term agreements are summarised in Note 34 to the financial statements. RELATED PARTY DISCLOSURES Details of our related party disclosures are set out in Note 40 to the financial statements and details of Directors’ interests in securities are set out in Note 41 to the financial statements. The related party disclosures relate principally to transactions with our Directors and Director-related parties as we do not have individually significant shareholders and our transactions with other related parties are not significant. Other than as disclosed in Note 40 and Note 41 to the financial statements, if applicable, loans made to parties related to Directors and other key management personnel of Westpac are made in the ordinary course of business on normal terms and conditions (including interest rates and collateral). Loans are made on the same terms and conditions (including interest rates and collateral) as apply to other employees and certain customers in accordance with established policy. These loans do not involve more than the normal risk of collectability or present any other unfavourable features. AUDITOR’S REMUNERATION Auditor’s remuneration, including goods and services tax, to the external auditor for the years ended 30 September 2013 and 2012 is provided in Note 33 to the financial statements. 2012 WESTPAC GROUP ANNUAL REPORT 117 2 Audit related services Westpac Group Secretariat monitors the application of the pre-approval process in respect of audit, audit-related and non-audit services provided by PricewaterhouseCoopers (PwC) and promptly brings to the attention of the BAC any exceptions that need to be approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. The pre-approval guidelines are communicated to Westpac’s divisions through publication on the Westpac intranet. During the year ended 30 September 2013, there were no fees paid by Westpac to PwC that required approval by the BAC pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. 118 2013 WESTPAC GROUP ANNUAL REPORT FINANCIAL STATEMENTS Income statements Statements of comprehensive income Balance sheets Statements of changes in equity Cash flow statements NOTES TO THE FINANCIAL STATEMENTS Note 1 Summary of significant accounting policies Note 2 Net interest income Note 3 Non-interest income Note 4 Operating expenses Note 5 Income tax Note 6 Dividends Note 7 Earnings per share Note 8 Receivables due from other financial Note 9 institutions Trading securities and other financial assets designated at fair value Note 10 Available-for-sale securities Note 11 Loans Note 12 Provisions for impairment charges Note 13 Property, plant and equipment Note 14 Deferred tax assets and deferred tax liabilities Note 15 Goodwill and other intangible assets Note 16 Other assets Note 17 Payables due to other financial institutions Note 18 Deposits and other borrowings Note 19 Financial liabilities at fair value through income statement Note 20 Provisions Note 21 Other liabilities Note 22 Debt issues Note 23 Loan capital Note 24 Shareholders’ equity and non-controlling interests Note 25 Share-based payments Note 26 Average balance sheet and interest rates Note 27 Financial risk Note 27.1 Approach to risk management Note 27.2 Credit risk management Note 27.3 Funding and liquidity risk management Note 27.4 Market risk Note 28 Fair values of financial assets and liabilities Note 29 Derivative financial instruments Note 30 Capital adequacy Note 31 Securitisation and covered bonds Note 32 Group segment information Note 33 Auditor’s remuneration Note 34 Expenditure commitments Note 35 Superannuation commitments Note 36 Contingent liabilities, contingent assets and credit commitments Note 37 Fiduciary activities Note 38 Group entities Note 39 Other group investments Note 40 Related party disclosures Note 41 Director and other key management personnel disclosures Note 42 Notes to the cash flow statements Note 43 Subsequent events 3 STATUTORY STATEMENTS Directors’ declaration Management’s report on internal control over financial reporting Independent Auditor’s report to the members of Westpac Banking Corporation Report of independent registered public accounting firm FINANCIAL STATEMENTS Income statements for the years ended 30 September Westpac Banking Corporation Interest income Interest expense Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Net profit for the year Profit attributable to non-controlling interests Net profit attributable to owners of Westpac Banking Corporation Earnings per share (cents) Basic Diluted Note 2 2 3 4 12 5 Consolidated 2013 $m 33,009 (20,144) 12,865 5,774 2012 $m 36,873 (24,371) 12,502 5,481 2011 $m 38,098 (26,102) 11,996 4,917 Parent Entity 2013 $m 32,942 (22,079) 10,863 5,375 2012 $m 36,401 (25,851) 10,550 4,041 18,639 (7,927) (847) 9,865 (2,975) 6,890 (74) 17,983 (7,909) (1,212) 8,862 (2,826) 6,036 (66) 16,913 (7,406) (993) 8,514 (1,455) 7,059 (68) 16,238 (6,450) (662) 9,126 (2,256) 6,870 - 14,591 (6,491) (1,001) 7,099 (2,147) 4,952 - 6,816 5,970 6,991 6,870 4,952 7 7 220.4 215.5 195.8 190.5 233.0 223.6 The above income statements should be read in conjunction with the accompanying notes. 120 2013 WESTPAC GROUP ANNUAL REPORT Statements of comprehensive income for the years ended 30 September Westpac Banking Corporation Net profit for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Gains/(losses) on available-for-sale securities: Recognised in equity Transferred to income statements Gains/(losses) on cash flow hedging instruments1: Recognised in equity Transferred to income statements Exchange differences on translation of foreign operations Income tax on items taken directly to or transferred directly from equity: Available-for-sale securities reserve Cash flow hedging reserve Foreign currency translation reserve Items that will not be reclassified subsequently to profit or loss Defined benefit obligation actuarial gains/(losses) recognised in equity (net of tax) Other comprehensive income for the year (net of tax) Total comprehensive income for the year Attributable to: Owners of Westpac Banking Corporation Non-controlling interests FINANCIAL STATEMENTS Consolidated 2013 $m 6,890 2012 $m 6,036 2011 $m 7,059 Parent Entity 2013 $m 6,870 2012 $m 4,952 57 (104) (51) (234) 114 15 85 (11) 216 87 6,977 6,903 74 6,977 139 (127) 519 - (64) (1) (160) 4 23 333 6,369 6,303 66 6,369 (73) (66) 796 - 25 39 (243) (32) (189) 257 7,316 7,248 68 7,316 7 (88) (68) (260) 125 16 98 (11) 194 13 6,883 6,883 - 6,883 69 (46) 473 - (210) (10) (142) 4 37 175 5,127 5,127 - 5,127 Total comprehensive income for the year 1 In the current year we have enhanced the presentation to separately show amounts recognised in equity and transferred to income statements. The above statements of comprehensive income should be read in conjunction with the accompanying notes. 3 2013 WESTPAC GROUP ANNUAL REPORT 121 Balance sheets as at 30 September Westpac Banking Corporation Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans – housing and personal Loans – business Life insurance assets Regulatory deposits with central banks overseas Due from subsidiaries Investments in subsidiaries Property, plant and equipment Deferred tax assets Goodwill and other intangible assets Other assets Total assets Liabilities Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments Debt issues Current tax liabilities Life insurance liabilities Due to subsidiaries Provisions Deferred tax liabilities Other liabilities Total liabilities excluding loan capital Loan capital Total liabilities Net assets Shareholders’ equity Share capital: Ordinary share capital Treasury shares and RSP treasury shares Reserves Retained profits Convertible debentures Total equity attributable to owners of Westpac Banking Corporation Non-controlling interests Total shareholders’ equity and non-controlling interests Contingent liabilities, contingent assets and credit commitments Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m Note 11,699 11,210 46,330 2,759 28,356 30,011 382,702 153,462 8,637 1,571 - - 1,174 1,791 12,341 4,560 696,603 8,836 424,482 10,302 32,990 144,133 908 7,426 - 1,576 22 9,117 639,792 9,330 649,122 47,481 12,523 10,228 44,603 2,664 35,489 24,472 365,221 149,224 8,240 1,893 - - 1,137 2,176 12,134 4,961 674,965 7,564 394,991 9,964 38,935 147,847 1,022 7,208 - 1,935 33 9,710 619,209 9,537 628,746 46,219 9,509 9,317 44,928 2,090 28,405 26,394 343,407 128,250 - 1,463 119,038 4,880 971 1,646 9,725 3,697 733,720 8,738 380,208 10,302 32,438 121,555 853 - 120,553 1,395 - 7,440 683,482 9,330 692,812 40,908 10,993 7,328 42,975 1,903 35,184 21,039 331,228 126,261 - 1,773 92,740 4,692 960 2,032 9,609 3,888 692,605 7,490 359,329 9,964 37,803 124,699 937 - 93,379 1,764 - 7,940 643,305 9,537 652,842 39,763 27,021 (253) 953 18,897 - 46,618 863 47,481 26,355 (192) 958 17,128 - 44,249 1,970 46,219 27,021 (181) 691 12,622 755 40,908 - 40,908 26,355 (114) 753 10,877 1,892 39,763 - 39,763 42 8 9 9 29 10 11 11 13 14 15 16 17 18 19 29 22 20 14 21 23 24 24 24 24 36 The above balance sheets should be read in conjunction with the accompanying notes. 122 2013 WESTPAC GROUP ANNUAL REPORT Statements of changes in equity as at 30 September Westpac Banking Corporation Share capital Balance as at beginning of the year Shares issued: Dividend reinvestment plan Option and share rights schemes Redemption of Westpac SPS Shares purchased for delivery upon exercise of options and share rights (net of tax) Acquisition of RSP treasury shares Disposal of other treasury shares Balance as at end of the year Available-for-sale securities reserve Balance as at beginning of the year Current period movement due to changes in other comprehensive income: Net gains/(losses) from changes in fair value Exchange differences Income tax effect Transferred to income statements Income tax effect Balance as at end of the year Share-based payment reserve Balance as at beginning of the year Current period movement due to transactions with employees Balance as at end of the year Cash flow hedging reserve Balance as at beginning of the year Current period movement due to changes in other comprehensive income: Net gains/(losses) from changes in fair value Income tax effect Transferred to income statements Income tax effect Balance as at end of the year Foreign currency translation reserve Balance as at beginning of the year Current period movement due to changes in other comprehensive income: Foreign currency translation adjustment Tax on foreign currency translation adjustment Balance as at end of the year Other reserves Balance as at beginning of the year Transactions with owners Balance as at end of the year Total reserves Movements in retained profits Balance as at beginning of the year Current period movement due to changes in other comprehensive income: Actuarial gains/(losses) on defined benefit obligations (net of tax) Profit attributable to owners of Westpac Banking Corporation Transaction with owners: Ordinary dividends paid Special dividends paid Distributions on convertible debentures Realised gain on redemption of 2003 TPS Balance as at end of the year Total comprehensive income attributable to non-controlling interests Total comprehensive income attributable to owners of Westpac Banking Corporation Total comprehensive income for the year FINANCIAL STATEMENTS Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 26,163 25,269 24,496 26,241 25,338 531 124 173 873 26 - 747 23 - 531 124 173 873 26 - (162) (68) 7 26,768 - (8) 3 26,163 - - 3 25,269 (162) (68) 1 26,840 - (8) 12 26,241 44 31 131 (39) 57 - (17) (104) 32 12 790 130 920 471 (51) 14 (234) 71 271 139 2 (39) (127) 38 44 648 142 790 112 519 (160) - - 471 (73) - 23 (66) 16 31 540 108 648 (441) 796 (243) - - 112 7 - (10) (88) 26 (104) 727 119 846 484 (68) 20 (260) 78 254 (52) 69 - (24) (46) 14 (39) 602 125 727 153 473 (142) - - 484 (354) (294) (287) (460) (254) 114 (11) (251) 7 (6) 1 953 (64) 4 (354) 1 6 7 958 25 (32) (294) - 1 1 498 125 (11) (346) 41 - 41 691 (210) 4 (460) 41 - 41 753 17,128 16,059 13,750 10,877 10,867 216 6,816 23 5,970 (189) 6,991 194 6,870 37 4,951 3 (5,249) (310) - 296 18,897 74 (4,924) - - - 17,128 66 (4,493) - - - 16,059 68 (5,258) (310) (47) 296 12,622 - (4,931) - (47) - 10,877 - 6,903 6,977 6,303 6,369 7,248 7,316 6,883 6,883 5,127 5,127 The above statements of changes in equity should be read in conjunction with the accompanying notes. 2013 WESTPAC GROUP ANNUAL REPORT 123 Cash flow statements1 for the years ended 30 September Westpac Banking Corporation Cash flows from operating activities Interest received Interest paid Dividends received excluding life business Other non-interest income received Operating expenses paid Income tax paid excluding life business Life business: Receipts from policyholders and customers Interest and other items of similar nature Dividends received Payments to policyholders and suppliers Income tax paid Cash flows from operating activities before changes in operating assets and liabilities Net (increase)/decrease in: Trading and fair value assets Loans Due from other financial institutions Life insurance assets and liabilities Regulatory deposits with central banks overseas Derivative financial instruments Net increase/(decrease) in: Financial liabilities at fair value through income statement Deposits and other borrowings Due to other financial institutions Consolidated Note 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 33,048 (20,520) 10 6,618 (6,717) (2,691) 36,966 (24,317) 12 5,081 (6,514) (1,897) 37,864 (25,866) 17 3,398 (7,110) (1,861) 33,032 (22,457) 1,820 3,844 (4,975) (2,437) 36,590 (25,816) 575 4,181 (4,687) (1,912) 1,759 45 301 (1,912) (109) 1,789 41 387 (1,898) (95) 2,256 40 379 (1,831) (55) - - - - - - - - - - 9,832 9,555 7,231 8,827 8,931 (319) (15,667) (511) (154) 489 9,126 4,271 (18,893) (2,418) (115) (263) 3,679 (8,117) (18,325) 3,674 (160) (384) (17,919) (811) (13,372) (1,544) - 490 8,972 3,112 (11,815) (2,830) - (233) 3,802 266 22,155 363 25,580 155 26,381 (6,807) 15,545 4,932 31,498 5,439 7,869 266 17,646 345 20,819 158 20,206 (6,767) 14,564 42 2,845 (7,978) - - (742) (402) 15 - (6,262) 3,328 (9,791) (17) 1,541 (644) (251) 4 - (5,830) 3,651 (8,783) - - (603) (252) 7 (270) (6,250) 5,043 (11,802) - - (738) (304) 7 - (7,794) Net cash provided by/(used in) operating activities Cash flows from investing activities Proceeds from available-for-sale securities Purchase of available-for-sale securities Net (increase)/decrease in investments in controlled entities Net movement in amounts due to/from controlled entities Purchase of intangible assets Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchase of controlled entity, net of cash acquired Net cash used in investing activities Cash flows from financing activities Issue of loan capital (net of issue costs) Redemption of loan capital Proceeds from share placement and share purchase plan Proceeds from exercise of employee options Purchase of shares on exercise of employee options and rights Net increase/(decrease) in debt issues Purchase of RSP treasury shares Net sale/(purchase) of other treasury shares Payment of dividends Payment of distributions to non-controlling interests Redemption of 2003 Trust Preferred Securities Net cash provided by financing activities Net increase/(decrease) in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents as at the beginning of the year Cash and cash equivalents as at the end of the year 1 The presentation of the cash flow statements has been revised this year to better reflect the nature of our business. Certain cash flows have been 4,124 (2,631) - 25 - (9,955) (8) 3 (4,050) (72) - (12,564) (3,269) (466) 16,258 12,523 1,958 (2,244) - 124 (174) (11,747) (68) 1 (5,084) - (805) (18,039) (3,050) 1,566 10,993 9,509 1,958 (2,244) - 124 (174) (14,005) (68) 7 (5,028) (50) (805) (20,285) (2,499) 1,675 12,523 11,699 - (1,404) 68 23 - 14,328 (3) 6 (3,746) (82) - 9,190 10,797 997 4,464 16,258 4,124 (2,631) - 25 - (5,577) (8) 12 (4,104) - - (8,159) (3,276) (481) 14,750 10,993 996 (5,491) (8) (4,461) (511) (213) 7 - (9,681) reclassified between operating activities, investing activities and financing activities, and we have revised comparatives for 2012 and 2011 in order to ensure consistency. These changes have had no impact on the reported net increase/decrease in cash and cash equivalents. The above cash flow statements should be read in conjunction with the accompanying notes. Details of the reconciliation of net cash provided by operating activities to net profit attributable to owners of Westpac Banking Corporation are provided in Note 42. 124 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of accounting (i) General This general purpose financial report has been prepared in accordance with the requirements for an authorised deposit-taking institution under the Banking Act 1959 (as amended), Australian Accounting Standards (A-IFRS), other authoritative pronouncements of the Australian Accounting Standards Board (AASB), Urgent Issues Group Interpretations and the Corporations Act 2001. Westpac Banking Corporation is a for-profit entity for the purposes of preparing this financial report. The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. This financial report also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). This financial report also includes additional disclosures required for foreign registrants by the United States Securities and Exchange Commission. References to standards and interpretations under A-IFRS in this financial report have similar references in the standards and interpretations of IFRS as issued by the IASB. This financial report of Westpac Banking Corporation (the Parent Entity), together with its controlled entities (the Group or Westpac), for the year ended 30 September 2013 was authorised for issue by the Board of Directors on 4 November 2013. The Directors have the power to amend and reissue the financial report. (ii) Comparative revisions Comparative information has been revised where appropriate to enhance comparability. Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. (iii) Changes in accounting standards From 1 July 2012, the Group applied amendments to AASB 101 Presentation of Financial Statements outlined in AASB 2011-9 Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income. The change only relates to disclosures and has had no impact on consolidated earnings per share or net income. The changes have been applied retrospectively and require the Group to separately present those items of other comprehensive income that may be reclassified to profit or loss in the future from those that will never be reclassified to profit or loss. These changes are included in the statements of comprehensive income. (iv) Historical cost convention The financial report has been prepared under the historical cost convention, as modified by applying fair value accounting to available-for-sale financial assets and financial assets and liabilities (including derivative instruments) at fair value through profit or loss. (v) Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries (including special purpose entities) controlled by the Parent Entity and the results of all subsidiaries. The effects of all transactions between entities in the Group are eliminated. Control exists when the Parent Entity has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The definition of control is based on the substance rather than the legal form of an arrangement. In assessing control, potential voting rights that are presently exercisable or convertible are taken into account. Subsidiaries are fully consolidated from the date on which control commences and they are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries (refer to Note 1(e)). 3 2013 WESTPAC GROUP ANNUAL REPORT 125 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Changes in the Group’s ownership interest in a subsidiary after control is obtained which do not result in a loss of control are accounted for as transactions with equity holders in their capacity as equity holders. Any difference between the amount by which the non-controlling interest is adjusted and the fair value of the consideration paid or received is recognised directly in equity. When the Group ceases to control a subsidiary any retained interest in the entity is remeasured to its fair value, with any resulting gain or loss recognised in the income statement. The interest of non-controlling shareholders is stated at their proportion of the net profit and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly, by Westpac. (vi) Foreign currency translation a. Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The financial statements are presented in Australian dollars which is the Parent Entity’s functional and presentation currency. All amounts are expressed in Australian dollars except where otherwise indicated. b. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statements, except where deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges. c. Group companies Assets and liabilities of overseas branches and subsidiaries that have a functional currency other than the Australian dollar are translated at exchange rates prevailing on the balance date. Income and expenses are translated at average exchange rates prevailing during the period. Other equity balances are translated at historical exchange rates. Exchange differences are recognised through the Statement of comprehensive income in the foreign currency translation reserve. On consolidation, exchange differences arising from the translation of borrowings and other currency instruments designated as hedges of the net investment in overseas branches and subsidiaries are reflected in the foreign currency translation reserve. When all or part of a foreign operation is sold or borrowings that are part of the net investments are repaid, a proportionate share of such exchange differences are recognised in the income statement as part of the gain or loss on sale or repayment of borrowing. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing exchange rate. b. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognised for each major revenue stream as follows: Interest income (i) Interest income for all interest earning financial assets including those at fair value is recognised in the income statement using the effective interest rate method. The effective interest rate method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, cash flows are estimated based upon all contractual terms of the financial instrument (for example, prepayment options) but do not consider future credit losses. The calculation includes all fees and other amounts paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Interest relating to impaired loans is recognised using the loan’s original effective interest rate based on the net carrying value of the impaired loan after giving effect to impairment charges or for a variable rate loan, the current effective interest rate determined under the contract. This rate is also used to discount the future cash flows for the purpose of measuring impairment charges. For loans that have been impaired this method results in cash receipts being apportioned between interest and principal. (ii) Leasing Finance leases are accounted for under the net investment method whereby income recognition is based on a pattern reflecting a constant periodic rate of return on the net investment in the finance lease and is included as part of interest income. 126 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (iii) Fee income Fees and commissions are generally recognised on an accrual basis over the period during which the service is performed. All fees relating to the successful origination or settlement of a loan (together with the related direct costs) are deferred and recognised as an adjustment to the effective interest rate on the loan. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time proportionate basis. Asset management fees related to investment funds are recognised over the period the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continuously provided over an extended period of time. (iv) Net trading income Realised gains or losses, and unrealised gains or losses arising from changes in the fair value of the trading assets and liabilities are recognised as trading income in the income statement in the period in which they arise except for recognition of day one profits or losses which are deferred where certain valuation inputs are unobservable. Dividend income on the trading portfolio is also recorded as part of non-interest income. Interest income or expense on the trading portfolio is recognised as part of net interest income. (v) Other dividend income Dividends on quoted shares are recognised on the ex-dividend date. Dividends on unquoted shares are recognised when the company’s right to receive payment is established. (vi) Gain or loss on sale of property, plant and equipment The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds less costs of disposal, and the carrying amount of the asset, and is recognised as non-interest income. c. Expense recognition (i) Interest expense Interest expense, including premiums or discounts and associated expenses incurred on the issue of financial liabilities, is recognised in the income statement using the effective interest rate method (refer to Note 1(b)(i)). Impairment on loans and receivables carried at amortised cost (ii) The charge recognised in the income statement for impairment on loans and receivables carried at amortised cost reflects the net movement in the provisions for individually assessed and collectively assessed loans, write-offs and recoveries of impairments previously written-off. (iii) Leasing Operating lease payments are recognised in the income statement as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the benefit received. Incentives received on entering into operating leases are recorded as liabilities and amortised as a reduction of rental expense on a straight-line basis over the lease term. (iv) Commissions and other fees External commissions and other costs paid to acquire loans are capitalised and amortised using the effective interest rate method (refer to Note 1(b)(i)). All other fees and commissions are recognised in the income statement over the period in which the related service is received. (v) Wealth management acquisition costs Acquisition costs are the variable costs of acquiring new business principally in relation to the Group’s life insurance and retail funds management business. Managed investment acquisition costs Deferred acquisition costs associated with the retail funds management business are costs that are directly related to and incremental to the acquisition of new business. These costs are recorded as an asset and are amortised in the income statement on the same basis as the recognition of related revenue. 3 Life insurance acquisition costs Deferred acquisition costs associated with the life insurance business are costs that are incremental to the acquisition of new business. These costs are recorded as an asset and are amortised in the income statement on the same basis as the recognition of related revenue. 2013 WESTPAC GROUP ANNUAL REPORT 127 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (vi) Share-based payment Certain employees are entitled to participate in option and share ownership schemes. Options and share rights The fair value of options and share rights provided to employees as share-based payments is recognised as an expense with a corresponding increase in equity. The fair value is measured at grant date and is recognised over the period the services are received which is the expected vesting period during which the employees would become entitled to exercise the option or share right. The fair value of options and share rights is estimated at grant date using a Binomial/Monte Carlo simulation pricing model incorporating the vesting and market-related hurdle features of the grants. The fair value of the options and share rights excludes the impact of any non-market vesting conditions such as participants’ continued employment by the Group. The non- market vesting conditions are included in assumptions used when determining the number of options and share rights expected to become exercisable for which an expense is recognised. At each reporting date these assumptions are revised and the expense recognised each year takes into account the most recent estimates. Employee Share Plan The value of shares expected to be issued to employees for nil consideration under the Employee Share Plan (ESP) is recognised as an expense over the financial year and provided for as other employee benefits. The fair value of any ordinary shares issued to satisfy the obligation to employees is recognised within equity, or if purchased on market, the obligation to employees is satisfied by delivering shares that have been purchased on market. Restricted Share Plan The fair value of shares allocated to employees for nil consideration under the Restricted Share Plan (RSP) is recognised as an expense over the vesting period. The fair value of ordinary shares issued to satisfy the obligation to employees is measured at grant date and is recognised as a separate component of equity. Westpac has formed a trust to hold any shares forfeited by employees until they are reallocated to employees in subsequent grants in the Group’s RSP. Shares allocated to employees under the RSP, which have not yet vested, are treated as treasury shares and deducted from shareholders’ equity. Income tax d. Income tax expense on the profit for the year comprises current tax and the movement in deferred tax balances. Current tax is the expected tax payable on the taxable income for the financial year using tax rates that have been enacted or substantively enacted for each jurisdiction at the balance date, and any adjustment to tax payable in respect of previous years. Deferred tax is accounted for using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding amounts used for taxation purposes. Deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or other intangible assets with indefinite expected life, the initial recognition of assets and liabilities that affect neither accounting nor taxable profit (other than in a business combination), or differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates that have been enacted or substantively enacted for each jurisdiction at the balance date that are expected to apply when the liability is settled or the asset is realised. Current and deferred tax attributable to amounts recognised in other comprehensive income are also recognised in other comprehensive income. Except as noted above, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. For presentation purposes deferred tax assets and deferred tax liabilities have been offset where they relate to the same taxation authority on the same taxable entity or different entities in the same taxable group. For members of Westpac’s Australian tax consolidated group, tax expense/income, deferred tax liabilities and assets arising from temporary differences are recognised in the separate financial statements of the members of the tax-consolidated group using a ‘group allocation basis’ that removes the tax impact of certain transactions between members of the tax-consolidated group. Deferred tax liabilities and assets are recognised by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits of the members of the tax-consolidated group are recognised by the Parent Entity (as head entity in the tax-consolidated group). 128 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e. Acquisitions of assets (i) External acquisitions The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of exchange. Acquisition-related costs are expensed as incurred. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price as at the date of exchange. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. For each business combination, the non-controlling interest is measured either at fair value or at the proportionate share of the acquiree’s identifiable net assets. The excess of the cost of acquisition, the 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 fair value of the Group’s share of the identifiable net assets acquired, is recorded as goodwill. Where settlement of any part of cash consideration is deferred, amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the Group’s incremental borrowing rate. (ii) Common control transactions The predecessor method of accounting is used to account for business combinations between entities in the Group. Assets acquired and liabilities assumed in a common control transaction are measured initially at the acquisition date at the carrying value from the Group’s perspective. The excess of the cost of acquisition over the initial carrying values of the Entity’s share of the net assets acquired is recorded as part of a common control reserve. Where relevant, in the financial report the phrase ‘additions through merger’ includes both balances acquired through external acquisitions and through common control transactions. f. Assets (i) Financial assets The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale securities. Management determines the classification of its financial assets at initial recognition.  Financial assets at fair value through profit or loss This category has two sub-categories: firstly financial assets held for trading and secondly those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling it in the near term, if it is part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit taking, if it is a derivative that is not a designated hedging instrument, or if so designated on acquisition by management, in accordance with conditions set out in Note 1(f)(i)(e).  Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.  Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group’s management has the positive intention and ability to hold to maturity.  Available-for-sale securities Available-for-sale securities are those debt or equity securities that are designated as available-for-sale or that are not classified as financial assets at fair value through profit or loss, loans and receivables or held-to-maturity investments. Other investments, which comprise of unlisted equity securities that do not have a quoted price in an active market and where fair value cannot be estimated within a reasonable range of probable outcomes, are carried at cost. 3 Recognition of financial assets Purchases and sales of financial assets at fair value through profit or loss, held-to-maturity and available-for-sale are recognised on trade-date, the date on which the Group commits to purchase or sell the asset. Loans are recognised when cash is advanced to the borrowers. Financial assets at fair value through profit or loss are recognised initially at fair value. All other financial assets are recognised initially at fair value plus directly attributable transaction costs. 2013 WESTPAC GROUP ANNUAL REPORT 129 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Available-for-sale financial assets and financial assets recognised at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are subsequently carried at amortised cost using the effective interest method unless loans are designated at fair value through profit or loss in order to reduce an accounting mismatch. Realised and unrealised gains or losses arising from changes in the fair value of financial assets at fair value through profit or loss are included in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised in other comprehensive income until the financial asset is derecognised or impaired, at which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement. Dividends on available-for-sale equity instruments are recognised in the income statement when the right to receive payment is established. Foreign exchange gains or losses and interest, calculated using the effective interest rate method, on available-for-sale debt instruments are also recognised in the income statement. The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active, the Group establishes fair value using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. a. Cash and balances with central banks Cash and balances with central banks includes cash at branches, Reserve Bank settlement account balances and nostro balances. They are brought to account at the face value or the gross value of the outstanding balance, where appropriate. These balances have a maturity of less than three months. b. Receivables due from other financial institutions Receivables due from other financial institutions include conduit assets, collateral placed and interbank lending. They are accounted for as loans and receivables and subsequently measured at amortised cost using the effective interest rate method. c. Derivative financial instruments Derivative financial instruments including forwards, futures, swaps and options are recognised in the balance sheet at fair value. Fair value is obtained from quoted market prices, independent dealer price quotations, discounted cash flow models and option pricing models, which incorporate current market and contractual prices for the underlying instrument, time to expiry, yield curves and volatility of the underlying. Also included in the determination of the fair value of derivatives is a credit valuation adjustment (CVA). Where the derivative has a positive fair value (asset), this credit adjustment is to reflect the credit worthiness of the counterparty. Where the derivative has a negative fair value (liability), this credit adjustment reflects the Group’s own credit risk. These credit adjustments are taken into account after considering any relevant collateral or master netting agreements. d. Trading securities Trading securities include debt and equity instruments which are actively traded and securities purchased under agreement to resell. They are accounted for as financial assets at fair value through profit or loss. e. Other financial assets designated at fair value Certain non-trading bonds, notes and commercial bills are designated as fair value through profit or loss. This designation is only made if the financial asset contains an embedded derivative or it is managed on a fair value basis in accordance with a documented strategy, or if designating it at fair value reduces an accounting mismatch. f. Available-for-sale securities Available-for-sale securities are public and other debt and equity securities that are not classified as fair value through profit or loss, loans and receivables or as held-to-maturity investments. The accounting policy for available-for-sale securities is set out in Note 1(f)(i). g. Loans Loans includes advances, overdrafts, home loans, credit card and other personal lending, term loans, leasing receivables, bill financing and acceptances. The accounting policy for loans and receivables is in Note 1(f)(i). Security is obtained if, based on an evaluation of the customer’s credit worthiness, it is considered necessary for the customer’s overall borrowing facility. Security would normally consist of assets such as cash deposits, receivables, inventory, plant and equipment, real estate or investments. Loan products that have both a mortgage and deposit facility are presented on a gross basis in the balance sheet, segregating the loan and deposit component into the respective balance sheet line items. Interest earned on this product is presented on a net basis in the income statement as this reflects how the customer is charged. 130 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) h. Regulatory deposits with central banks overseas In several countries in which the Group operates, the law requires that regulatory deposits be lodged with the local central bank at a rate of interest generally below that prevailing in the market. The amount of the deposit and the interest rate receivable is determined in accordance with the requirements of the local central bank. They are measured at amortised cost using the effective interest rate method. i. Life insurance assets Assets held by the life insurance companies, including investments in funds managed by the Group, are designated at fair value through profit or loss as required by AASB 1038 Life Insurance Contracts. Changes in fair value are included in the income statement. Most assets are held in the life insurance statutory funds and can only be used within the restrictions imposed under the Life Insurance Act 1995. The main restrictions are that the assets in a fund can only be used to meet the liabilities and expenses of that fund, to acquire investments to further the business of the fund or as distribution when solvency and capital adequacy requirements are met. Therefore they are not as liquid as other financial assets. j. Derecognition of financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:  the rights to receive cash flows from the asset have expired; or  the entity has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement and cannot sell or repledge the asset other than to the transferee; and  either the Group has transferred substantially all the risks and rewards of the asset, or the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group transfers its right to receive cashflows from an asset or has entered into a pass-through arrangement without transferring nor retaining substantially all the risks and rewards of ownership nor transferred control of these assets, the asset continues to be recognised on the balance sheet to the extent of the Group’s continuing involvement in the asset. Impairment of financial assets (ii) Assets carried at amortised cost The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment charges are recognised if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events: a. significant financial difficulty of the issuer or obligor; b. a breach of contract, such as a default or delinquency in interest or principal payments; c. the Group granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a concession that the Group would not otherwise consider; d. it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; e. the disappearance of an active market for that financial asset because of financial difficulties; or f. observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the Group, including: 3 – adverse changes in the payment status of borrowers in the Group; or – national or local economic conditions that correlate with defaults on the assets in the Group. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment is, or continues to be, recognised are not included in a collective assessment of impairment. 2013 WESTPAC GROUP ANNUAL REPORT 131 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) If there is objective evidence that an impairment on loans and receivables or held-to-maturity investments has been incurred, the amount of the charge is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of a provision account and the amount of the loss is recognised in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Group’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows for a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical 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 historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows for groups of assets reflect, and are directionally consistent with, changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. When a loan or a part of a loan is uncollectable, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the charge for loan impairment in the income statement. If, in a subsequent period, the amount of the impairment charge decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment charge is reversed by adjusting the provision account. The amount of the reversal is recognised in the income statement. Available-for-sale The Group assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. For debt instruments classified as available-for-sale, impairment is determined by using the same methodology as Note 1(f)(ii). For equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is also considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment charge on that financial asset previously recognised in profit or loss – is removed from other comprehensive income and recognised in the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment charge was recognised in the income statement, the impairment charge is reversed through the income statement. Subsequent reversal of impairment charges on equity instruments are not recognised in the income statement until the instrument is disposed of. (iii) Non-financial assets a. Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation and impairment. Cost is the fair value of the consideration provided plus incidental costs directly attributable to the acquisition. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognised in the income statement as an expense as incurred. Impairment is recognised as a part of operating expenses in the income statement. Computer software is capitalised at cost and classified as property, plant and equipment where it is integral to the operation of associated hardware. Depreciation is calculated using the straight-line method to allocate the cost of assets less any residual value over their estimated useful lives, as follows:  Premises and sites  Leasehold improvements  Furniture and equipment Up to 50 years Up to 10 years 3 to 15 years The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds less costs of disposal, and the carrying amount of the asset, and is recognised as non-interest income. 132 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) b. Intangible assets Goodwill Goodwill represents amounts arising on the acquisition of businesses. Prior to the revised AASB 3 Business Combinations, goodwill represented the excess of purchase consideration, including directly attributable expenses associated with the acquisition, over the fair value of the Group’s share of the identifiable net assets of the acquired business. Goodwill arising on the acquisition of a business subsequent to the adoption of the revised AASB 3 represents the excess of the purchase consideration, the 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 fair value of the Group’s share of net identifiable assets acquired. All goodwill is considered to have an indefinite life. Goodwill is tested for impairment annually and whenever there is an indication that it may be impaired, and is carried at cost or deemed cost less accumulated impairment. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to Cash Generating Units (CGUs) based on management’s analysis of where the synergies resulting from an acquisition are expected to arise.  Brands Brand intangible assets are recognised on the acquisition of businesses and represent the value attributed to brand names associated with businesses acquired. The useful life of brands recognised is estimated to be indefinite as there is no foreseeable limit to the period over which the brand name is expected to generate net cash flows. Brands are not amortised but tested for impairment annually or more frequently when indicators of impairment are identified.  Core deposit intangibles Core deposit intangibles were recognised as part of the merger with St.George and represent the value, or avoided cost, of having a deposit base from consumer and business transaction accounts, savings accounts, term deposits and other money market and cash management accounts that provide a valuable source of funding. Core deposit intangibles are amortised using the straight-line method over a period of nine years and are stated at cost less accumulated amortisation and impairment. Core deposit intangibles are assessed for impairment at each reporting date and whenever there is an indicator of impairment. Other intangibles Other intangibles are stated at cost less accumulated amortisation (where relevant) and impairment. Other intangibles consist of distribution relationships, customer relationships, computer software, value of in-force business and service contracts. These are assessed for impairment at each reporting date and whenever there is an indicator of impairment. For significant other intangibles, the accounting policies are as follows:  Financial planner distribution relationships Distribution relationship intangibles were recognised as part of the merger with St.George and represent the value attributable to financial planner relationships. These assets are amortised using the straight-line method to allocate the cost of the assets over their estimated useful lives of eight years.  Credit card customer relationships The credit card customer relationship intangibles were recognised as part of the merger with St.George and represent the value attributable to the future fee and interest revenue from credit card relationships. These assets are amortised using the straight-line method to allocate the cost of the assets over their estimated useful lives of five years.  Computer software Internal and external costs directly incurred in the purchase or development of computer software, including subsequent upgrades and enhancements are recognised as intangible assets when it is probable that they will generate future economic benefits attributable to the Group. These assets are amortised using the straight-line method to allocate the cost of the asset less any residual value over their estimated useful lives of between three and ten years. (iv) Investments in controlled entities Investments in controlled entities are initially recorded by Westpac at cost. Investments in controlled entities are subsequently held at the lower of cost and recoverable amount. 3 2013 WESTPAC GROUP ANNUAL REPORT 133 Impairment of non-financial assets NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (v) The carrying amount of the Group’s non-financial assets, other than deferred tax assets and assets arising from employee benefits, are reviewed at each balance date to determine whether there is any indication of impairment. If such an indication exists, the asset’s recoverable amount is estimated. An impairment charge is recognised whenever the carrying amount of an asset or the CGU to which it is allocated exceeds its recoverable amount. With the exception of goodwill for which impairment charges are not reversed, where an impairment charge subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment charge been recognised for the asset (or CGU) in prior years. Impairment charges and reversals of impairment charges are recognised in the income statement. The recoverable amount of an asset is the greater of its fair value less cost to sell and value-in-use. In assessing value-in-use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the CGU to which the asset belongs. g. Liabilities (i) Financial liabilities Financial liabilities held at amortised cost are initially recognised at fair value plus transaction cost. Financial liabilities held at fair value, which includes derivatives and liabilities designated at fair value, are initially recognised at fair value with all transaction costs expensed as incurred. Financial liabilities are recognised when an obligation arises and derecognised when it is discharged, cancelled or expires. a. Payables due to other financial institutions Payables due to other financial institutions includes interbank lending, vostro balances, collateral received and settlement account balances due to other financial institutions. They are measured at amortised cost. b. Deposits and other borrowings at fair value Deposits at fair value include certain certificates of deposit and certain interest bearing deposits. They are classified at fair value through profit or loss as they are managed as part of a trading portfolio. c. Deposits and other borrowings at amortised cost Deposits at amortised cost include non-interest bearing deposits repayable at call, certain certificates of deposit and certain interest bearing deposits. They are measured at amortised cost. d. Derivative financial instruments Derivative financial instruments including forwards, futures, swaps and options are recognised in the balance sheet at fair value. Fair values are obtained from quoted market prices, independent dealer price quotations, discounted cash flow models and option pricing models, which incorporate current market and contractual prices for the underlying instrument, time to expiry, yield curves and volatility of the underlying. Also included in the determination of the fair value of derivatives is a credit valuation adjustment (CVA). Where the derivative has a positive fair value (asset), this credit adjustment reflects the credit worthiness of the counterparty. Where the derivative has a negative fair value (liability), this credit adjustment reflects the Group’s own credit risk. These credit adjustments are taken into account after considering any relevant collateral or master netting agreements. e. Financial liabilities at fair value through income statement Securities sold under repurchase agreements as part of a trading portfolio and securities sold short are classified as trading liabilities. They are accounted for as financial liabilities at fair value through profit or loss. f. Debt issues These are bonds, notes, commercial paper and debentures that have been issued by entities in the Westpac Group. Debt issues are measured either at fair value through profit or loss or at amortised cost using the effective interest rate method. Debt issues are measured at fair value through profit or loss to reduce an accounting mismatch, which arises from associated derivatives executed for risk management purposes. g. Acceptances These are bills of exchange initially accepted and discounted by Westpac that have been subsequently rediscounted into the market. They are measured at amortised cost. Bill financing provided to customers by accepting and discounting of bills of exchange is reported as part of loans. 134 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) h. Loan capital Loan capital includes 2004 Trust Preferred Securities (2004 TPS), Westpac Convertible Preference Shares, Westpac Capital Notes and Westpac SPS (redeemed September 2013) and SPS II that qualify as Additional Tier 1 capital and subordinated bonds, subordinated notes, notes and debentures that qualify as Tier 2 capital as defined by APRA for capital adequacy purposes. Loan capital is measured at amortised cost using the effective interest method. i. Financial guarantees Financial guarantee contracts are recognised as financial liabilities at the time the guarantee is issued. The liability is initially measured at fair value and subsequently at the higher of the amount determined in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less cumulative amortisation, where appropriate. The fair value of a financial guarantee contract is determined as the present value of the difference in net cash flows between the contractual payments under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligation. j. Derecognition of financial liabilities 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, and the difference in the respective carrying amounts is recognised in profit or loss. (ii) Life insurance liabilities Life insurance liabilities consist of life insurance contract liabilities, life investment contract liabilities and external liabilities of managed investment schemes controlled by statutory life funds. Life insurance contract liabilities The value of life insurance contract liabilities is calculated using the margin on services methodology. The methodology takes into account the risks and uncertainties of the particular classes of the life insurance business written. Deferred policy acquisition costs are included in the measurement basis of life insurance contract liabilities and are therefore equally sensitive to the factors that are considered in the liabilities measurement. This methodology is in accordance with Actuarial Standard 1.04 Valuation of Policy Liabilities issued by the Life Insurance Actuarial Standard Board (LIASB) under the Life Insurance Act 1995. Under this methodology, planned profit margins and an estimate of future liabilities are calculated separately for each related product group using applied assumptions at each reporting date. Profit margins are released over each reporting period in line with the service that has been provided. The balance of the planned profit is deferred by including them in the value of policy liabilities. Life investment contract liabilities Life investment contract liabilities are designated at fair value through profit or loss. Fair value is based on the higher of the valuation of linked assets, or the minimum current surrender value. External liabilities of managed investment schemes controlled by statutory life funds External liabilities of managed investment schemes controlled by statutory life funds are designated at fair value through profit or loss. 3 2013 WESTPAC GROUP ANNUAL REPORT 135 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (iii) Provisions a. Employee entitlements Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the balance date are recognised in provisions in respect of employees’ services up to the balance date and are measured at the amounts expected to be paid when the liabilities are settled. No provision is made for non-vesting sick leave as the pattern of sick leave taken indicates that no additional liability will arise for non-vesting sick leave. Long service leave Liabilities for long service leave expected to be settled within 12 months of the balance date are recognised in the provision for long service leave and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for long service leave and other deferred employee benefits expected to be settled more than 12 months from the balance date are recognised in the provision for long service leave and are measured at the present value of future payments expected to be made in respect of services provided by employees up to the balance date. Consideration is given to expected future wage and salary levels, experience of employee departure and periods of service. Expected future payments are discounted to their net present value using market yields at the balance date on government bonds with terms that match as closely as possible the estimated timing of future cash flows. Employee benefit on-costs A liability is also carried for on-costs, including payroll tax, in respect of provisions for certain employee benefits which attract such costs. Termination benefits Liabilities for termination benefits are recognised when a detailed plan for the terminations has been developed and a valid expectation has been raised in those employees affected that the terminations will be carried out. Liabilities for termination benefits are recognised within other liabilities unless the timing or amount is uncertain, in which case they are recognised as provisions. Liabilities for termination benefits expected to be settled within 12 months are measured at amounts expected to be paid when they are settled. Amounts expected to be settled more than 12 months from the balance date are measured at the estimated cash outflows, discounted using market yields at the balance date on government bonds with terms to maturity and currency that match, as closely as possible, the estimated future payments, where the effect of discounting is material. b. Provision for leasehold premises The provision for leasehold premises covers net outgoings on certain unoccupied leased premises or sub-let premises where projected rental income falls short of rental expense. The liability is determined on the basis of the present value of net future cash flows. c. Provision for restructuring A provision for restructuring is recognised where there is a demonstrable commitment and a detailed plan such that there is little or no discretion to avoid payments to other parties and the amount can be reliably estimated. d. Provision for dividends A liability for dividends is recognised when dividends are declared, determined or publicly recommended by the Directors but not distributed as at the balance date. e. Provision for litigation and non-lending losses A provision for litigation is recognised where it is probable that there will be an outflow of economic resources. Non-lending losses are any losses that have not arisen as a consequence of an impaired credit decision. Those provisions include litigation and associated costs, frauds and the correction of operational issues. f. Provision for impairment on credit commitments A provision for undrawn contractually committed facilities and guarantees provided are calculated using the same methodology as provision for impairment charges on loans (refer to Note 1(j)(ii)). 136 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) h. Equity (i) Ordinary shares Ordinary shares are recognised at the amount paid up per ordinary share net of directly attributable issue costs. (ii) Treasury shares Where the Parent Entity or other members of the consolidated Group purchases shares in the Parent Entity, the consideration paid is deducted from ordinary share capital 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. (iii) Other equity instruments Convertible debentures issued by the parent entity in respect of the 2003 Trust Preferred Securities (2003 TPS, redeemed September 2013) and 2006 Trust Preferred Securities (2006 TPS) are recognised in the balance sheet at the amount of consideration received net of issue costs. They are translated into Australian currency using the rate of exchange on issue date and distributions on them are recognised when entitlements are determined in accordance with the terms of the convertible debentures. (iv) Non-controlling interests Non-controlling interests represents the share in the net assets of subsidiaries attributable to equity interests that are not owned directly or indirectly by the Parent Entity. The Group also has on issue 2003 TPS (redeemed September 2013) and 2006 TPS that are hybrid instruments and are classified as non-controlling interests. (v) Reserves Foreign currency translation reserve As noted in Note 1(a)(vi), exchange differences arising on translation of the assets and liabilities of overseas branches and subsidiaries are reflected in the foreign currency translation reserve. Any offsetting gains or losses on hedging these balances, together with any tax effect are also reflected in this reserve, which may be either a debit or credit balance. Any credit balance in this reserve would not normally be regarded as being available for payment of dividends until such gains are realised. Available-for-sale securities reserve This comprises the changes in the fair value of available-for-sale financial securities and hedges where applicable, net of tax. These changes are transferred to the income statement in non-interest income when the asset is either derecognised or impaired. Cash flow hedging reserve This comprises the fair value gains and losses associated with the effective portion of designated cash flow hedging instruments. Share-based payment reserve This comprises the fair value of share-based payments recognised as an expense. Other reserves Other reserves for the Parent Entity consists of the common control reserve (refer Note 1(e)(ii)). Other reserves for the Group consists of transactions relating to a change in the parent entity’s ownership of a subsidiary that does not result in a loss of control. The amount recorded in other reserves reflects the difference between the amount by which non-controlling interests are adjusted and the fair value of any consideration paid or received. i. Other accounting principles and policies (i) Hedging The Group uses derivative instruments as part of its asset and liability management activities to manage exposures to interest rates and foreign currency, including exposures arising from forecast transactions. The method of recognising the fair value gain or loss on derivatives depends on the nature of the hedging relationship. Hedging relationships are of three types:  fair value hedge: a hedge of the change in fair value of recognised assets or liabilities or unrecognised firm commitments;  cash flow hedge: a hedge of variability in highly probable future cash flows attributable to a recognised asset or liability, or a 3 forecasted transaction; and  hedge of a net investment in a foreign operation: a hedge of the amount of the Group’s interest in the net assets of a foreign operation. The Group uses hedge accounting for derivatives designated in this way when certain criteria are met. At the time a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument and hedged item, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been highly effective in offsetting changes in the fair value or cash flows of the hedged items. 2013 WESTPAC GROUP ANNUAL REPORT 137 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A hedge is regarded as highly effective if, at inception and throughout its life, the Group can expect changes in the fair value or cash flows of the hedged item to be almost fully offset by the changes in the fair value or cash flows of the hedging instrument, and actual results of the hedge are within a range of 80% to 125% of these changes. Hedge ineffectiveness represents the amount by which the changes in the fair value of the hedging derivative differ from changes in the fair value of the hedged item or the amount by which changes in the cash flow of the hedging derivative differ from changes (or expected changes) in the present value of the cash flows of the hedged item. a. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributed to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, any previous adjustment to the carrying amount of a hedged item recognised at amortised cost is amortised to the income statement over the period to maturity. b. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income. The gain or loss relating to any ineffective portion is recognised immediately in the income statement. 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 other comprehensive income at that time remains in other comprehensive income and is recognised in profit or loss in the period in which the hedge item affects profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the income statement. c. Hedge of a net investment in a foreign operation Hedges of net investments in overseas branches and subsidiaries are accounted for in a manner similar to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in the foreign currency translation reserve in other comprehensive income and the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in other comprehensive income are included in the income statement when the overseas branch or subsidiary is disposed. (ii) Embedded derivatives In certain instances a derivative may be embedded in a host contract. If the host contract is not carried at fair value through profit or loss, the embedded derivative is separated from the host contract and accounted for as a standalone derivative instrument at fair value where the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract. (iii) Recognition of deferred day one profit or loss The best evidence of fair value at initial recognition is the transaction price, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets. Westpac has entered into transactions where fair value is determined using valuation models for which not all significant inputs are market observable prices or rates. Such a financial instrument is initially recognised at the transaction price which is the best indicator of fair value, although the value obtained from the relevant valuation model may differ. The difference between the transaction price and the model value, commonly referred to as ‘day one profit or loss’, is not recognised immediately in profit or loss. The timing of recognition of deferred day one profit or loss is determined individually. It is either amortised over the life of the transaction, deferred until the instrument’s fair value can be determined using market observable inputs, or realised through settlement. The financial instrument is subsequently measured at fair value, adjusted for the deferred day one profit or loss. Subsequent changes in fair value are recognised immediately in the income statement without reversal of deferred day one profits or losses. (iv) Loan securitisation The Group, through its loan securitisation program, packages and sells loans (principally housing mortgage loans) as securities to investors. The program includes the securitisation of the Group’s own assets as well as assets from customer funding conduits. In such transactions, the Group provides an equitable interest in the loans to investors who provide funding to the Group. Securitised loans that do not qualify for derecognition and associated funding are included in loans and debt issues respectively. 138 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (v) Fiduciary activities Certain controlled entities within the Group conduct investment management and other fiduciary activities as responsible entity or manager on behalf of individuals, trusts, retirement benefit plans and other institutions. These activities involve the management of assets in investment schemes and superannuation funds, and the holding or placing of assets on behalf of third parties. Where controlled entities, as responsible entities, incur liabilities in respect of these activities, a right of indemnity exists against the assets of the applicable trusts. As these assets are sufficient to cover liabilities, and it is not probable that the controlled entities will be required to settle them, the assets and liabilities are not included in the consolidated financial statements. The Group also manages life insurance statutory fund assets that are included in the consolidated financial statements. (vi) Offsetting Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. (vii) Securities borrowed or lent and repurchase or reverse repurchase agreements As part of its trading activities, Westpac lends and borrows securities on a collateralised basis. The securities subject to the borrowing or lending are not derecognised from the balance sheet, as the risks and rewards of ownership remain with the initial holder. Where cash is provided as collateral, the cash paid to third parties on securities borrowed is recorded as a receivable, while cash received from third parties on securities lent is recorded as a borrowing. Repurchase transactions, where Westpac sells securities under an agreement to repurchase, and reverse repurchase transactions, where Westpac purchases securities under an agreement to resell, are conducted on a collateralised basis. Trading securities sold, but subject to repurchase agreements are disclosed as part of financial liabilities at fair value through income statement. Fees and interest relating to stock borrowing or lending and repurchase or reverse repurchase agreements are recognised in interest income and interest expense in the income statement, using the effective interest rate method, over the expected life of the agreements. Westpac continually reviews the fair value of the underlying securities and, where appropriate, requests or provides additional collateral to support the transactions. (viii) Superannuation obligations Obligations for contributions to the defined contribution superannuation plan are recognised as an expense in the income statement as incurred. The asset or liability recognised in the balance sheet in respect of the defined benefit superannuation plan is the present value of the defined benefit obligation as at the reporting date less the fair value of the plan’s assets. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of government bonds that have terms to maturity approximating to the terms of the related superannuation liability. The calculation is performed at least annually by an independent qualified actuary using the projected unit credit method. The actuarial valuation of plan obligations is dependent upon a series of assumptions, the key ones being price inflation, salaries growth, mortality, morbidity and investment returns assumptions. Different assumptions could significantly alter the amount of difference between plan assets and obligations, and the superannuation cost charged to the income statement. Actuarial gains and losses related to the defined benefit superannuation plan are recorded directly in retained earnings. The net surplus or deficit that arises within the plan is recognised and disclosed separately in other assets and other liabilities as appropriate. (ix) Earnings per share Basic earnings per share (EPS) is determined by dividing net profit after tax attributable to equity holders of Westpac, excluding costs of servicing other equity instruments, by the weighted average number of ordinary shares outstanding during the financial year, excluding the number of ordinary shares purchased by the Group and held as treasury shares. Diluted EPS is calculated by adjusting the earnings and number of shares used in the determination of the basic EPS for the effects of dilutive options, share rights and other dilutive potential ordinary shares. 3 In relation to options, share rights and restricted shares, the weighted average number of shares is adjusted to take into account the weighted average number of shares assumed to have been issued for nil consideration in determining diluted EPS. The number of ordinary shares assumed to be issued for nil consideration represents the difference between the number that would have been issued at the exercise price and the number that would have been issued at the average market price over the reporting period. In relation to instruments convertible into ordinary shares under certain conditions, the weighted average number of shares is adjusted to determine the number of ordinary shares that may arise on conversion, by dividing the face value of the instruments by the average market price over the reporting period, taking into account any applicable discount on conversion weighted by the number of instruments on issue. 2013 WESTPAC GROUP ANNUAL REPORT 139 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (x) Leases Leases are classified as either finance leases or operating leases. Under a finance lease, substantially all the risks and rewards incidental to legal ownership are transferred to the lessee. In contrast, an operating lease exists where the leased assets are allocated to the lessor. In its capacity as a lessor, the Group primarily offers finance leases. The Group recognises the assets held under finance lease in the balance sheet as loans at an amount equal to the net investment in the lease. The recognition of finance income is based on a pattern reflecting a constant periodic return on the Group’s net investment in the finance lease. Finance lease income is included within interest income in the income statement (refer to Note 1(b)(ii)). In its capacity as a lessee, the Group mainly uses property and equipment under operating leases. Payments due to the lessor under operating leases are charged to equipment and occupancy expense on a straight-line basis over the term of the lease (refer to Note 1(c)(iii)). (xi) Segment reporting Operating segments are presented on a basis that is consistent with information provided internally to Westpac’s key decision makers. In assessing the financial performance of its divisions internally, Westpac uses a measure of performance it refers to as ‘Cash Earnings’. To calculate Cash Earnings, Westpac adjusts the statutory result for material items that key decision makers believe do not reflect ongoing operations, items that are not considered when dividends are recommended and accounting reclassifications between individual line items that do not impact statutory results, such as policyholder tax recoveries. Details of the specific adjustments made to the statutory result in arriving at Cash Earnings are included in Note 32. (xii) Rounding of amounts In accordance with ASIC Class Order 98/100, all amounts have been rounded to the nearest million dollars unless otherwise stated. j. Critical accounting assumptions and estimates The application of the Group’s accounting policies necessarily requires the use of judgment, estimates and assumptions. Should different assumptions or estimates be applied, the resulting values would change, impacting the net assets and income of the Group. The nature of assumptions and estimates used and the value of the resulting asset and liability balances are included in the policies below. (i) Fair value of financial instruments Financial instruments classified as held-for-trading or designated at fair value through profit or loss and financial assets classified as available-for-sale are recognised in the financial statements at fair value. All derivatives are measured and recognised at fair value. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Financial instruments are either priced with reference to a quoted market price for that instrument or by using a valuation model. Where the fair value is calculated using financial market pricing models, the methodology used is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to the present value. These models use as their basis independently sourced market parameters including, for example, interest rate yield curves, equities and commodities prices, option volatilities and currency rates. Most market parameters are either directly observable or are implied from instrument prices; however, profits or losses are recognised upon initial recognition only when such profits can be measured by reference to observable current market transactions or valuation techniques based on observable market inputs. The calculation of fair value for any financial instrument may also require adjustment of the quoted price or model value to reflect the cost of credit risk (where not embedded in underlying models or prices used). The process of calculating fair value on illiquid instruments or from a valuation model may require estimation of certain pricing parameters, assumptions or model characteristics. These estimates are calibrated against industry standards, economic models and observed transaction prices. The fair value of financial instruments is provided in Note 28 as well as the mechanism by which fair value has been derived. 140 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The majority of the Group’s derivatives are valued using valuation techniques that utilise observable market inputs. The fair value of substantially all securities positions carried at fair value is determined directly from quoted prices or from market observable inputs applied in valuation models. The Group has financial assets measured at fair value of $126,957 million (2012: $127,305 million). $1,332 million of this is measured at fair value based on significant unobservable market inputs (2012: $1,276 million). The Group has financial liabilities measured at fair value of $106,873 million (2012: $134,253 million). $37 million of this is measured at fair value based on significant unobservable market inputs (2012: $100 million). Sensitivities to reasonably possible changes in non-market observable valuation assumptions would not have a material impact on the Group or the Parent Entity’s reported results. (ii) Provisions for impairment charges on loans and credit commitments The Group’s loan impairment provisions are established to recognise incurred impairment in its portfolio of loans. A loan is impaired when there is objective evidence that events occurring since the loan was recognised have affected expected cash flows from the loan. The impairment charge is the difference between the carrying value of the loan and the present value of estimated future cash flows calculated at the loan’s original effective interest rate for fixed rate loans and the loan’s current effective interest rate for variable rate loans. Provisions for loan impairment represent management’s estimate of the impairment charges incurred in the loan portfolios as at the balance date. Changes to the provisions for loan impairment and changes to the provisions for undrawn contractually committed facilities and guarantees provided are reported in the income statement as part of impairment charges on loans. At 30 September 2013, gross loans to customers totalled $539,806 million (2012: $518,279 million) and the provision for loan impairment was $3,642 million (2012: $3,834 million). There are two components to the Group’s loan impairment provisions: individual and collective. Individual component All impaired loans that exceed specified thresholds are individually assessed for impairment. Individually assessed loans principally comprise the Group’s portfolio of commercial loans to medium and large businesses. Impairment is recognised as the difference between the carrying value of the loan and the discounted value of management’s best estimate of future cash repayments and proceeds from any security held (discounted at the loan’s original effective interest rate for fixed rate loans and the loan’s current effective interest rate for variable rate loans). Relevant considerations that have a bearing on the expected future cash flows are taken into account, including the business prospects for the customer, the realisable value of collateral, the Group’s position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process. Subjective judgments are made in this process. Furthermore, judgments can change with time as new information becomes available or as work-out strategies evolve, resulting in revisions to the impairment provision as individual decisions are taken. Collective component This is made up of two elements: loan impairment provisions for impaired loans that are below individual assessment thresholds (collective impaired loan provisions) and for loan impairments that have been incurred but have not been separately identified at the balance sheet date (incurred but not reported provisions). These are established on a portfolio basis taking into account the level of arrears, collateral, past loss experience and defaults based on portfolio trends. The most significant factors in establishing these provisions are the estimated loss rates and the related emergence periods. The emergence period for each loan product type is determined through detailed studies of loss emergence patterns. Loan files where losses have emerged are reviewed to identify the average time period between observable loss indicator events and the loss becoming identifiable. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates and their effect on customer spending, unemployment levels, payment behaviour and bankruptcy rates. The impairment charge reflected in the income statement is $847 million (2012: $1,212 million) and the provision balance at 30 September 2013 of $3,642 million (2012: $3,834 million) represents 0.67% of loans (2012: 0.74%). Provisions for credit commitments are calculated using the same methodology as described above. The provision for credit commitments was $307 million (2012: $407 million) and was disclosed as part of provisions. Refer to Note 20. 3 (iii) Goodwill As stated in Note 1(f)(iii)(b), goodwill represents the excess of purchase consideration, the 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 fair value of the Group’s share of the identified net assets of acquired businesses. Goodwill is tested for impairment at least annually. The carrying value of goodwill as at 30 September 2013 was $8,868 million (2012: $8,797 million). The determination of the fair value of assets and liabilities of the acquired businesses requires the exercise of management judgment. Different fair values would result in changes to the goodwill balance and to the post-acquisition performance of the acquisition. 2013 WESTPAC GROUP ANNUAL REPORT 141 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) To determine if goodwill is impaired the carrying value of the identified CGU to which the goodwill is allocated, including the allocated goodwill, is compared to its recoverable amount. Recoverable amount is the higher of the CGU’s fair value less costs to sell and its value in use. Value in use is the present value of expected future cash flows from the CGU. Determination of appropriate cash flows and discount rates for the calculation of value in use is subjective. Fair value is the amount obtainable for the sale of the CGU in an arm’s length transaction between knowledgeable, willing parties. The assumptions applied to determine if any impairment exists are outlined in Note 15. Goodwill impairment testing resulted in an impairment of goodwill of nil (2012: nil). (iv) Superannuation obligations The Group operates a number of defined benefit plans as described in Note 35. For each of these plans, actuarial valuations of the plan’s obligations and the fair value measurements of the plan’s assets are performed at least annually in accordance with the requirements of AASB 119 Employee Benefits. The actuarial valuation of plan obligations is dependent upon a series of assumptions, the key ones being price inflation, salaries growth, mortality, morbidity, investment returns and discount rate 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. Refer to Note 35 for details of the Group’s defined benefit deficit balances. (v) Provisions (other than loan impairment) Provisions are held in respect of a range of obligations such as employee entitlements, restructuring costs, litigation provisions and non-lending losses and onerous contracts (for example leases with surplus space). Provisions carried for long service leave are supported by an independent actuarial report. Some of the provisions involve significant judgment about the likely outcome of various events and estimated future cash flows. The deferral of these benefits involves the exercise of management judgments about the ultimate outcomes of the transactions. Payments that are expected to be incurred after more than one year are discounted at a rate which reflects both current interest rates and the risks specific to that provision. (vi) Income taxes The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax outcome is unclear. Provisions for tax are held to reflect these tax uncertainties. The Group estimates its tax liabilities based on the Group’s understanding of the tax law. Where the final outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period where such determination is made. Refer to Note 14 for details of the Group’s deferred tax balances. (vii) Life insurance contract liabilities Life insurance contract liabilities are computed using statistical or mathematical methods, which are expected to give approximately the same results as if an individual liability was calculated for each contract. These computations are made by suitably qualified personnel on the basis of recognised actuarial methods, with due regard to relevant actuarial principles. The methodology takes into account the risks and uncertainties of the particular classes of the life insurance business written. Deferred policy acquisition costs are connected with the measurement basis of life insurance contract liabilities and are equally sensitive to the factors that are considered in the liability measurement. The key factors that affect the estimation of these liabilities and related assets are:  the cost of providing benefits and administrating the contracts;  mortality and morbidity experience, including enhancements to policyholder benefits;  discontinuance experience, which affects the Group’s ability to recover the cost of acquiring new business over the life of the contracts; and  the rate at which projected future cash flows are discounted. In addition, factors such as regulation, competition, interest rates, taxes, securities market conditions and general economic conditions affect the level of these liabilities. In some contracts, the Group shares experience on investment results with its customers, which can offset the impacts of these factors on the profitability of these products. 142 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) k. Future developments in accounting standards The following new standards and interpretations which may have a material impact on the Group have been issued, but are not yet effective and have not been early adopted by the Group: AASB 9 Financial Instruments (Part 1: Classification and Measurement) was issued by the Australian Accounting Standards Board in December 2009. If the standard is not early adopted it will be effective for the 30 September 2016 financial year end. The major changes under the standard are:  AASB 9 Financial Instruments replaces the multiple classification and measurement models in AASB 139 Financial Instruments: Recognition and Measurement with a single model that has two classification categories: amortised cost and fair value;  a financial asset is measured at amortised cost if two criteria are met: a) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows, and b) the contractual cash flows under the instrument solely represent the payment of principal and interest;  if a financial asset is eligible for amortised cost measurement, an entity can elect to measure it at fair value if it eliminates or significantly reduces an accounting mismatch;  there will be no separation of an embedded derivative where the instrument is a financial asset;  equity instruments must be measured at fair value however, an entity can elect on initial recognition to present the fair value changes on non-trading equity investments directly in other comprehensive income. There is no subsequent recycling of fair value gains and losses to profit or loss; however dividends from such investments will continue to be recognised in profit or loss;  if an entity holds an investment in asset-backed securities (ABS) it must determine the classification of that investment by looking through to the underlying assets and assess the credit quality of the investment compared with the underlying portfolio of assets. If an entity is unable to look through to the underlying assets, then the investment must be measured at fair value; and  the portion of a change of fair value relating to the entity’s own credit risk for financial liabilities measured at fair value utilising the fair value option is presented in other comprehensive income, except when that would create an accounting mismatch. If such a mismatch would be created or enlarged, the entity is required to present all changes in fair value (including the effects of changes in the credit risk of the liability) in profit or loss. The IASB currently has an active project that may result in limited amendments to the classification and measurement requirements of AASB 9 and add new requirements to address the impairment of financial assets and hedge accounting. As a result of the issuance and reissuance of AASB 9, two further standards have been issued by the AASB which give effect to consequential changes to a number of Australian Accounting Standards and Interpretations. These standards are AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 which was issued in December 2009 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) which was issued in December 2010. These standards will be applicable when AASB 9 is adopted by the Group. AASB 9 will impact the classification and measurement of the Group’s financial instruments when adopted. AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements was issued in July 2011 and will be effective for the 30 September 2014 financial year end. The amendments remove all the individual key management personnel (KMP) disclosures in AASB 124 Related Party Disclosures that were specific to Australian entities. However, these disclosures will be required to be included in the remuneration report. AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements and AASB 12 Disclosure of Interests in Other Entities were issued in August 2011 and will be effective for the 30 September 2014 financial year end.  AASB 10 changes the definition of control and requires that it be applied to all entities to determine whether control exists. 3 The new definition focuses on the need for both power and exposure to variability of returns in order for control to be present. AASB 10 replaces guidance on control and consolidation in AASB 127 Consolidated and Separate Financial Statements, and Interpretation 12 Consolidation – Special Purpose Entities. The core principle that a consolidated entity presents a parent and its subsidiaries as if they are a single economic entity remains unchanged, as do the mechanics of consolidation. The standard introduces a single definition of control that applies to all entities. It focuses on the need to have both power and rights or exposure to variable returns. Power is the current ability to direct the activities that significantly influence returns. Returns must vary and can be positive, negative or both. Control exists when the investor can use its power to affect the amount of its returns. There is also new guidance on participating and protective rights and on agent/principal relationships. 2013 WESTPAC GROUP ANNUAL REPORT 143 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The application of AASB 10 is expected to result in the Group consolidating some entities which are not currently being consolidated under AASB 127. The consolidation of these entities is not expected to have a material impact on the Group’s financial position or performance.  AASB 11 introduces a principles-based approach to accounting for joint arrangements. The focus is no longer on the legal structure of joint arrangements, but rather on how rights and obligations are shared by the parties to the joint arrangement. Based on the assessment of rights and obligations, a joint arrangement will be classified as either a joint operation or a joint venture. Joint ventures are accounted for using the equity method, and the choice to proportionately consolidate will no longer be permitted. Parties to a joint operation will account for their share of revenues, expenses, assets and liabilities in much the same way as under the previous standard. Application of AASB 11 has no material impact on the Group.  AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10 and AASB 11, and replaces the disclosure requirements currently found in AASB 127 Consolidated and Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures. Application of this standard 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 Measurement was issued in September 2011 and will be effective for the 30 September 2014 financial year end. The new standard replaces existing guidance on fair value measurement in several standards with a single, unified definition of fair value and a framework for measuring and disclosing fair values. AASB 13 applies to all assets and liabilities measured at fair value, not just financial instruments. The new standard will require additional disclosures, however it is not expected to have a material impact on the Group. A revised AASB 119 Employee Benefits was issued in September 2011 which will be effective for the 30 September 2014 financial year end, with retrospective application. It will result in changes to the recognition and measurement of the Group’s defined benefit superannuation expense, as well as enhanced disclosures of the risks and characteristics of the Group’s defined benefit superannuation plans. The significant changes include:  the 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 September 2013 would have increased the total defined benefit plan expense by $49 million, with an equal and opposite change to the amount that is recognised as re-measurement in other comprehensive income for the year; and  the discount rate used in calculating the defined benefit liability relating to active members can no longer include an investment tax adjustment. This will result in a one-off decrease of $61 million in defined benefit liability as at 1 October 2012 which will be recognised through retained earnings. AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities was issued in June 2012 and will be effective for the 30 September 2014 financial year end. The amendment requires disclosure of information that will enable users to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with recognised financial assets and liabilities on the Group’s financial position. The amendment is expected to result in additional disclosures. AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities was issued in June 2012 and will be effective for the 30 September 2015 financial year end. The amendment provides application guidance to addressing inconsistencies applied to offsetting criteria provided in AASB 132 Financial Instruments: Presentation, including clarifying the meaning of current legal enforceable right of set-off is legally enforceable in all circumstances and that some gross settlement systems (such as through a clearing house) may be considered as the equivalent to net settlement. The amendment is not expected to have a material impact on the Group. 144 2013 WESTPAC GROUP ANNUAL REPORT NOTE 2. NET INTEREST INCOME NOTES TO THE FINANCIAL STATEMENTS Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 102 113 31 1,665 67 1,226 29,781 23 - 1 33,009 99 188 8 2,091 108 1,116 33,238 24 - 1 36,873 71 251 (13) 2,356 99 789 34,530 12 - 3 38,098 Interest income Cash Receivables due from other financial institutions Net ineffectiveness on qualifying hedges Trading securities Other financial assets designated at fair value Available-for-sale securities Loans Regulatory deposits with central banks overseas Due from subsidiaries Other interest income Total interest income1 Interest expense Payables due to other financial institutions Certificates of deposit At call and term deposits Trading liabilities Other financial liabilities designated at fair value Debt issues Due to subsidiaries Loan capital Other interest expense Total interest expense2 Net interest income 1 Total interest income for financial assets that are not at fair value through profit or loss is $31,246 million (2012: $34,666 million, 2011: $35,656 million) for the Group and $31,246 million (2012: $34,276 million, 2011: $34,738 million) for the Parent Entity. (191) (1,907) (12,775) (5,738) (38) (4,578) - (469) (406) (26,102) 11,996 (244) (1,619) (12,983) (4,500) (20) (4,388) - (454) (163) (24,371) 12,502 (190) (1,009) (11,546) (2,762) (27) (4,008) - (529) (73) (20,144) 12,865 67 38 29 1,603 64 1,085 26,125 23 3,907 1 32,942 (189) (978) (10,352) (2,525) - (3,407) (4,064) (494) (70) (22,079) 10,863 2 Total interest expense for financial liabilities that are not at fair value through profit or loss is $16,116 million (2012: $17,990 million, 2011: $18,300 million) for the Group and $18,357 million (2012: $19,916 million, 2011: $19,440 million) for the Parent Entity. 77 77 7 2,019 99 908 29,643 24 3,546 1 36,401 (242) (1,586) (11,942) (4,129) - (3,684) (3,697) (428) (143) (25,851) 10,550 3 2013 WESTPAC GROUP ANNUAL REPORT 145 NOTE 3. NON-INTEREST INCOME Fees and commissions1 Facility fees Transaction fees and commissions received Other non-risk fee income Transactions with subsidiaries Total fees and commissions Wealth management and insurance income Life insurance and funds management net operating income General insurance and lenders mortgage insurance net operating income Total wealth management and insurance income Trading income Foreign exchange income Other trading securities Total trading income Other income Dividends received from subsidiaries Dividends received from other entities Net gain on disposal of assets Net gain/(loss) on ineffective hedges Net gain/(loss) on hedging overseas operations Net gain/(loss) on derivatives held for risk management purposes2 Net gain/(loss) on financial instruments designated at fair value Other Total other income Total non-interest income Wealth management and insurance income comprised Funds management income Life insurance premium income Life insurance commissions, investment income and other income Life insurance claims and changes in life insurance liabilities General insurance and lenders mortgage insurance net premiums earned General insurance and lenders mortgage insurance investment, commissions and other income General insurance and lenders mortgage insurance claims incurred, underwriting and commission expenses Total wealth management and insurance income 1 Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 1,253 1,160 310 - 2,723 1,179 1,185 266 - 2,630 1,105 1,180 283 - 2,568 1,206 946 285 299 2,736 1,163 948 239 253 2,603 1,738 1,613 1,463 206 1,944 440 629 1,069 - 10 67 (1) (6) (118) 32 54 38 5,774 1,149 761 1,125 (1,297) 178 1,791 155 1,618 476 374 850 - 12 46 3 78 (36) 27 80 210 5,481 1,037 637 836 (897) 329 229 558 - 17 51 (5) 55 (28) 28 55 173 4,917 914 559 99 (109) 402 370 356 25 30 30 (221) 1,944 (222) 1,791 (231) 1,618 - - - 343 663 1,006 1,813 7 62 (1) (253) (114) 65 54 1,633 5,375 - - - - - - - - - - - 387 350 737 568 7 45 3 13 (32) 31 66 701 4,041 - - - - - - - - In the current year, we have revised our presentation within fees and commissions to reflect transactions between the Parent Entity and its subsidiaries. We have revised 2012 comparatives for the Parent Entity for consistency. Income from derivatives held for risk management purposes reflects impact of economic hedge of foreign currency capital and earnings where hedge accounting is not achieved. 2 146 2013 WESTPAC GROUP ANNUAL REPORT NOTE 4. OPERATING EXPENSES Salaries and other staff expenses Salaries and wages Employee entitlements Employee related taxes Superannuation expense: Defined contribution plans Defined benefit plans (Note 35) Equity based compensation Restructuring costs Other Total salaries and other staff expenses Equipment and occupancy expenses Operating lease rentals Depreciation, amortisation and impairment: Premises Leasehold improvements Furniture and equipment Technology Software Equipment repairs and maintenance Electricity, water and rates Land tax Other Total equipment and occupancy expenses Other expenses Amortisation of deferred expenditure Amortisation and impairment of intangible assets Non-lending losses Purchased services: Technology and information services Legal Other professional services Credit card loyalty programs Stationery Postage and freight Outsourcing costs Insurance Advertising Training Travel Other expenses Total other expenses Operating expenses NOTES TO THE FINANCIAL STATEMENTS Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 3,264 325 223 254 21 155 28 17 4,287 3,113 326 209 237 39 155 159 20 4,258 3,015 305 194 234 29 112 110 56 4,055 2,588 282 190 198 21 113 18 3 3,413 2,514 284 181 190 39 119 143 9 3,479 565 535 505 487 464 13 108 62 94 403 78 12 8 27 1,370 3 221 43 350 26 380 135 76 146 587 20 164 21 64 34 2,270 7,927 14 106 62 85 352 76 12 8 28 1,278 6 225 172 278 29 402 133 78 151 620 16 147 20 66 30 2,373 7,909 16 89 63 76 265 80 12 6 3 1,115 4 208 43 254 29 448 127 82 145 592 14 176 28 70 16 2,236 7,406 12 94 54 82 336 67 8 8 15 1,163 17 208 30 245 15 284 135 57 117 478 13 110 15 47 103 1,874 6,450 13 92 54 71 291 66 8 7 20 1,086 18 208 161 208 17 285 133 58 123 496 11 94 13 48 53 1,926 6,491 3 2013 WESTPAC GROUP ANNUAL REPORT 147 NOTE 5. INCOME TAX The income tax expense for the year is reconciled to the profit before income tax as follows Profit before income tax Prima facie income tax based on the Australian company tax rate of 30% The effect of amounts which are not deductible/(assessable) in calculating taxable income Change in tax rate1 Rebatable and exempt dividends Life insurance: Tax adjustment on policyholders’ earnings2 Adjustment for life business tax rates Hybrid capital distributions3 Other non-assessable items Other non-deductible items Adjustment for overseas tax rates Income tax (over)/under provided in prior years St.George tax consolidation adjustment4 TOFA tax consolidation adjustment5 Other items Total income tax expense in the income statement Income tax analysis Income tax expense attributable to profit from ordinary activities comprised: Current income tax: Australia Overseas Deferred income tax: Australia Overseas Under/(over) provision in prior years: Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 9,865 2,960 8,862 2,659 8,514 2,554 9,126 2,738 7,099 2,130 (2) (2) 1 (1) 7 (2) - (544) 2 (168) 24 (8) 26 (18) 37 - (7) - - (35) 2,975 2,237 357 2,594 387 1 388 8 (6) 10 (29) 53 3 (10) - 165 (27) 2,826 2,175 344 2,519 319 (2) 317 (10) (6) - (40) 66 1 (33) (1,110) - 28 1,455 1,809 180 1,989 (591) 90 (501) - 1 26 (16) 31 16 (9) - - 13 2,256 1,751 102 1,853 405 7 412 - 2 10 (17) 45 21 (12) - 165 (31) 2,147 1,767 140 1,907 259 (7) 252 Australia Overseas (7) (5) (12) Total Australia 2,019 Total overseas 128 2,147 Total income tax expense attributable to profit from ordinary activities 1 During 2013 the company tax rate in the UK reduced from 24% to 23%. The impact of this change has been taken to account in the measurement of deferred tax at the end of the reporting period. The impact of the change in the UK and Fiji company tax rates from 26% to 24%, and 28% to 20% respectively was included in 2012. The impact of the change in New Zealand’s company tax rate from 30% to 28% was included in 2011. In accordance with the requirements of AASB 1038, tax expense for 2013 includes a $35 million tax expense on policyholders’ investment earnings (2012: $12 million tax expense, 2011: $14 million tax benefit) of which $11 million (2012: $4 million tax expense, 2011: $4 million tax benefit) is included in the prima facie tax expense of $2,960 million and the balance of $24 million tax expense (2012: $8 million tax expense, 2011: $10 million tax benefit) is shown here. (2) (7) (9) 2,154 102 2,256 (20) (13) (33) 1,198 257 1,455 (8) (2) (10) 2,486 340 2,826 (1) (6) (7) 2,623 352 2,975 2 3 Reflects distributions on Westpac Convertible Preference Shares and Westpac Capital Notes which are non-tax deductible. 4 Following the redemption of St.George Bank Limited’s hybrid instruments on 31 March 2009, St.George and all its wholly owned Australian subsidiaries joined the Westpac tax consolidated group. Westpac was required to reset the tax value of certain St.George assets to the appropriate market value of those assets. Given the complexity of this process, the assessed tax treatment for the 2011 financial year and following years was agreed with the ATO in March 2011 and gave rise to a reduction of income tax expense of $1,110 million. 5 New legislation that included retrospective amendments to the income tax law as it applies to TOFA and tax consolidated groups was introduced during the 2012 financial year. The amendments had an adverse application to certain liabilities that were consolidated as part of the St.George merger. This gave rise to an additional income tax expense of $165 million for the 2012 financial year. 148 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 5. INCOME TAX (CONTINUED) Tax consolidation The Parent Entity and its wholly owned, Australian-controlled entities implemented the tax consolidation legislation as of 1 October 2002. All entities in the tax consolidated group have entered into a tax sharing agreement which, in the opinion of the Directors, limits the joint and several liabilities of the wholly owned entities in the case of a default by the head entity, Westpac. The entities have also entered into a tax funding agreement under which the wholly owned entities fully compensate the Parent Entity for any current tax payable assumed and are compensated by the Parent Entity for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the Parent Entity under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement are settled on a quarterly basis in line with the Parent Entity’s obligations to pay tax instalments. Any unpaid amounts at balance date are recognised as current intercompany receivables or payables. Taxation of financial arrangements (TOFA) TOFA applies to all entities in the Australian tax consolidation group from 1 October 2010. Subject to certain elections being made, TOFA improves the alignment of the tax treatment of gains and losses from financial arrangements with the accounting treatment adopted in the financial statements. The transitional rules require deferred tax balances impacted by TOFA to be amortised to taxable income over a four year period. NOTE 6. DIVIDENDS Recognised amounts Ordinary dividends 2012 final dividend paid 84 cents per share (2011: 80 cents per share, 2010: 74 cents per share) all fully franked at 30% 2013 interim dividend paid 86 cents per share (2012: 82 cents per share, 2011: 76 cents per share) all fully franked at 30% Total ordinary dividends Special dividends Special dividend paid 10 cents per share determined 3 May 2013 (2012: nil, 2011: nil) fully franked at 30% Total special dividends Distributions on other equity instruments Convertible debentures Total distributions on other equity instruments Dividends not recognised at year end Since year end the Directors have recommended the payment of the following dividends on ordinary shares: Ordinary shares 88 cents per share (2012: 84 cents per share, 2011: 80 cents per share) all fully franked at 30% Special dividend 10 cents per share (2012: nil, 2011: nil) fully franked at 30% Total dividends not recognised at year end Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 2,584 2,423 2,209 2,588 2,425 2,665 5,249 2,501 4,924 2,284 4,493 2,670 5,258 2,506 4,931 310 310 - - - - - - - - - - 310 310 47 47 - - 47 47 2,731 2,584 2,423 2,736 2,588 310 3,041 - 2,584 - 2,423 311 3,047 - 2,588 The amount disclosed as recognised for ordinary dividends is the final dividend paid in respect of the prior financial year and the interim dividend and special dividend paid in respect of the current financial year. The Board has determined to satisfy the DRP for the 2013 final and special dividends by arranging for the purchase of existing shares on issue and delivery to participants. The DRP will not include a discount. 3 Franking account balance Franking account balance as at year end Franking credits that will arise from payment of current income tax Adjusted franking account balance after payment of current income tax Franking credits to be utilised for payment of the above unrecognised dividends Adjusted franking account balance Parent Entity 2013 $m 2012 $m 2011 $m 1,247 644 1,891 (1,306) 585 1,453 685 2,138 (1,109) 1,029 2,118 273 2,391 (1,048) 1,343 2013 WESTPAC GROUP ANNUAL REPORT 149 NOTE 7. EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing the net profit attributable to equity holders of Westpac by the weighted average number of ordinary shares on issue during the year, excluding the number of ordinary shares purchased by the Group and held as Treasury shares. Diluted EPS is calculated by adjusting the earnings and the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. Reconciliation of earnings used in the calculation of earnings per ordinary share ($m) Net profit attributable to owners of Westpac Banking Corporation RSP treasury shares distributions1 2004 TPS distributions 2007 convertible notes distributions Westpac SPS distributions Westpac SPS II distributions Westpac CPS dividends Westpac CN distributions 2013 Consolidated 2012 2011 Basic Diluted Basic Diluted Basic Diluted 6,816 (12) - - - - - - 6,816 - 21 - 27 30 53 30 5,970 (11) - - - - - - 5,970 - 18 16 34 36 34 - 6,991 (8) - - - - - - 6,991 - 20 31 37 39 - - Net profit attributable to owners of Westpac Banking Corporation adjusted for the effect of dilution 6,804 6,977 5,959 6,108 6,983 7,118 Weighted average number of ordinary shares (millions) Weighted average number of ordinary shares Effect of own shares held Potential dilutive adjustment: Exercise of options and share rights and vesting of restricted shares Conversion of 2004 TPS Conversion of 2007 convertible notes Conversion of Westpac SPS Conversion of Westpac SPS II Conversion of Westpac CPS Conversion of Westpac CN 3,100 (13) 3,100 (13) 3,056 (13) 3,056 (13) 3,010 (13) 3,010 (13) - - - - - - - 3,087 220.4 14 17 - 31 28 37 24 3,238 215.5 - - - - - - - 3,043 195.8 13 21 23 43 38 26 - 3,207 190.5 - - - - - - - 2,997 233.0 7 27 52 53 47 - - 3,183 223.6 Total weighted average number of ordinary shares Earnings per ordinary share (cents) 1 While the equity granted to employees remains unvested, RSP treasury shares are deducted from ordinary shares on issue in arriving at the weighted average number of ordinary shares outstanding. Despite the shares being unvested, employees are entitled to dividends and to voting rights on the shares. Consequently, a portion of the profit for the period is allocated to RSP treasury shares to arrive at earnings attributed to ordinary shareholders. Information concerning the classification of securities Options and share rights Options and share rights granted to employees prior to 30 September 2013 are considered to be potential ordinary shares and have been considered in the determination of diluted EPS. The options and share rights have not been considered in the determination of basic EPS. Details relating to options and share rights are set out in Note 25. During the year, 6,759,140 (2012: 2,146,405, 2011: 2,114,547) options and share rights were converted to ordinary shares. The diluted EPS calculation includes that portion of these options and share rights assumed to be issued for nil consideration, weighted with reference to the date of conversion. The exercise prices of all options are included in Note 25. In determining diluted EPS, options and share rights with an exercise price (including grant date fair value that will be expensed in future periods) greater than the average Westpac share price over the year have not been included, as these are not considered dilutive. Performance options and performance share rights are only included in determining diluted EPS to the extent that they are dilutive and performance hurdles are met at year end. Subsequent to 30 September 2013:  112,706 ordinary shares were issued to employees due to the exercise of options (2012: 200,591, 2011: 170,290); and  779,062 ordinary shares were issued to employees due to the exercise of share rights (2012: 709,521, 2011: 31,128). 150 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 7. EARNINGS PER SHARE (CONTINUED) Restricted Share Plan Under the Restricted Share Plan (RSP), Westpac ordinary shares are allocated to eligible employees for nil consideration. Full entitlement to these shares does not vest until a service period has been completed. RSP shares have not been included in determining basic EPS. For further details, refer to Note 25. 2004 TPS As 2004 TPS can be exchanged for ordinary shares in certain circumstances, any dilutive impact must be considered. For 2013, 2004 TPS were dilutive (2012: dilutive, 2011: dilutive) and have been included in the determination of diluted EPS. 2004 TPS have not been included in the determination of basic EPS. 2007 convertible notes The 2007 convertible notes were redeemed for cash on 19 April 2012. As the 2007 convertible notes could have been exchanged for ordinary shares at the discretion of Westpac upon certain conditions being satisfied, the potential dilutive effect was considered. For 2012 and 2011, the 2007 convertible notes were dilutive and were included in the determination of diluted EPS. The number of ordinary shares that could arise from conversion has been weighted for the proportion of the 2012 year that the 2007 convertible notes were on issue. 2007 convertible notes were not included in the determination of basic EPS in 2012 and 2011. Westpac Stapled Preferred Securities (Westpac SPS and Westpac SPS II) Westpac SPS were and Westpac SPS II are securities, each consisting of a perpetual, unsecured, non-cumulative subordinated note issued by Westpac’s New York branch, stapled to a preference share issued by Westpac. Westpac SPS were issued on 30 July 2008 and Westpac SPS II were issued on 31 March 2009. Westpac SPS were redeemed or converted to ordinary shares on 26 September 2013. As Westpac SPS could and Westpac SPS II can be exchanged for ordinary shares in certain circumstances, any dilutive impact must be considered. For 2013, the Westpac SPS (for the proportion of the period the instrument was on issue) and Westpac SPS II were dilutive (2012: dilutive, 2011: dilutive) and have been included in the determination of diluted EPS. Westpac SPS and Westpac SPS II have not been included in the determination of basic EPS. Westpac Convertible Preference Shares (Westpac CPS) Westpac CPS are fully paid, perpetual, non-cumulative, unsecured preference shares issued by Westpac on 23 March 2012. As Westpac CPS are convertible into ordinary shares on the scheduled conversion date or under certain circumstances, any dilutive impact must be considered. For 2013, Westpac CPS were dilutive (2012: dilutive) and have been included in the determination of diluted EPS. Westpac CPS have not been included in the determination of basic EPS. Westpac Capital Notes (Westpac CN) Westpac CN are fully paid, non-cumulative, convertible, transferable, redeemable, subordinated, perpetual, unsecured notes issued by Westpac. As Westpac CN are convertible into ordinary shares on the scheduled conversion date or under certain circumstances, any dilutive impact must be considered. Westpac CN were issued on 8 March 2013. For 2013, Westpac CN were dilutive and have been included in the determination of diluted EPS. Westpac CN were weighted for the proportion of the period the instrument was on issue. Westpac CN have not been included in the determination of basic EPS. Westpac Subordinated Notes II (Westpac SN II) Westpac SN II are fully paid, redeemable, subordinated and unsecured debt obligations of Westpac. Westpac SN II were issued on 23 August 2013. As Westpac SN II do not have a scheduled conversion date and are only convertible to ordinary shares if APRA determines that Westpac is, or would become non-viable. Westpac SN II were not dilutive in 2013. The terms and conditions associated with 2004 TPS, Westpac SPS II, Westpac CPS, Westpac CN and Westpac SN II are discussed in more detail in Note 23. 3 NOTE 8. RECEIVABLES DUE FROM OTHER FINANCIAL INSTITUTIONS Conduit assets1 Cash collateral Interbank lending Total receivables due from other financial institutions 1 Further information on conduit assets is disclosed in Note 31. Consolidated 2013 $m 1,710 7,137 2,363 11,210 2012 $m 2,544 4,737 2,947 10,228 Parent Entity 2013 $m - 6,987 2,330 9,317 2012 $m - 4,409 2,919 7,328 2013 WESTPAC GROUP ANNUAL REPORT 151 NOTE 9. TRADING SECURITIES AND OTHER FINANCIAL ASSETS DESIGNATED AT FAIR VALUE Securities Securities purchased under agreement to resell Other financial assets designated at fair value Total trading securities and other financial assets designated at fair value Trading securities includes the following: Australian public securities: Commonwealth securities State Government securities Australian equity securities Australian debt securities Overseas public securities Overseas debt securities Other securities Total securities Securities purchased under agreement to resell Total trading securities Other financial assets designated at fair value include: Australian debt securities Overseas debt securities Australian equity securities Total other financial assets designated at fair value Consolidated 2013 $m 39,448 6,882 2,759 2012 $m 34,455 10,148 2,664 2011 $m 45,195 2,776 2,960 Parent Entity 2013 $m 38,046 6,882 2,090 2012 $m 32,827 10,148 1,903 49,089 47,267 50,931 47,018 44,878 Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 4,501 9,865 22 14,647 6,152 4,236 25 39,448 6,882 46,330 3,172 6,249 44 20,952 826 3,164 48 34,455 10,148 44,603 1,996 8,821 48 28,419 2,024 3,842 45 45,195 2,776 47,971 4,501 9,740 22 14,645 6,151 2,962 25 38,046 6,882 44,928 3,172 6,158 44 20,463 639 2,303 48 32,827 10,148 42,975 Consolidated 2013 $m 1,928 543 288 2,759 2012 $m 1,840 545 279 2,664 2011 $m 2,145 677 138 2,960 Parent Entity 2013 $m 1,444 543 103 2,090 2012 $m 1,313 475 115 1,903 The Group has total holdings of debt securities from the Australian Commonwealth Government, one Australian financial institution, two Australian State-Governments and the US Government, the aggregate book and market value, each of which exceeded 10% of the Group total shareholders’ equity at 30 September 2013. The Group holds $4,978 million of US Government treasury notes recognised in the categories trading securities, other financial assets designated at fair value or available-for-sale securities (Note 10) at 30 September 2013 (2012: $573 million1, 2011: $344 million). 1 The 2012 comparative has been restated from the $37 million previously reported. 152 2013 WESTPAC GROUP ANNUAL REPORT NOTE 10. AVAILABLE-FOR-SALE SECURITIES NOTES TO THE FINANCIAL STATEMENTS Available-for-sale securities – at fair value Australian public securities (State Government securities) Australian debt securities Overseas public securities Overseas debt securities Australian equity securities Overseas equity securities Available-for-sale securities – at cost1 Unlisted securities Total available-for-sale securities 1 Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 17,464 9,071 2,477 797 10 180 29,999 18,342 2,667 2,427 801 106 122 24,465 14,572 615 1,788 855 66 169 18,065 17,464 8,692 5 221 8 - 26,390 18,342 2,369 - 219 106 - 21,036 12 30,011 7 24,472 10 18,075 4 26,394 3 21,039 Investments in certain unlisted securities are measured at cost because the fair value cannot be reliably measured. These investments represent non-controlling interests in companies for which active markets do not exist and quoted prices are not available. Available-for-sale securities change in fair value resulted in a gain of $57 million for the Group (2012: $139 million gain, 2011: $73 million loss) and a gain of $7 million for the Parent Entity (2012: $69 million gain) being recognised in other comprehensive income. The following table shows the maturities of the Group’s available-for-sale securities and their weighted-average yield as at 30 September 2013. There are no tax-exempt securities. Carrying amount Australian public securities Australian debt securities Overseas public securities Overseas debt securities Australian equity securities Overseas equity securities Unlisted securities at cost Total by maturity Within 1 Year % $m Over 1 Year to 5 Years $m % Over 5 Years to 10 Years $m % Over 10 Years % $m No Specific Maturity % $m Weighted Average % Total $m 2013 297 241 600 207 - - - 1,345 2.0 3.6 2.4 2.0 - - - 5,693 7,026 752 556 - - - 14,027 4.9 4.2 3.9 3.3 - - - 10,640 1,698 1,125 34 - - - 13,497 4.9 4.0 4.5 6.3 - - - 6.1 4.3 - - - - - 834 106 - - - - - 940 - - - - 10 180 12 202 - - - - - - - 17,464 9,071 2,477 797 10 180 12 30,011 4.9 4.1 3.8 2.9 - - - The maturity profile is determined based upon contractual terms for available-for-sale instruments. 3 2013 WESTPAC GROUP ANNUAL REPORT 153 NOTE 11. LOANS The following table shows loans disaggregated by type of product. Loans are classified based on the location of the booking office: Australia Overdrafts Credit card outstandings Overnight and at call money market loans Acceptance of finance Term loans:1 Housing2 Housing – line of credit Total housing Non-housing Finance leases1 Margin lending2 Other Total Australia New Zealand Overdrafts Credit card outstandings Overnight and at call money market loans Term loans: Housing Non-housing Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 2,965 9,560 112 36,191 3,171 9,675 136 38,175 2,965 9,560 112 36,191 3,171 9,675 136 38,175 298,967 29,565 328,532 87,240 4,976 2,041 2,527 474,144 283,703 32,639 316,342 84,244 5,997 2,279 2,995 463,014 298,931 29,565 328,496 80,469 3,011 2,082 2,527 465,413 283,645 32,639 316,284 78,267 3,657 2,337 2,995 454,697 1,125 1,201 1,230 1,147 1,045 1,215 - - - - - 3 Other Total New Zealand Total other overseas Total loans Provisions on loans (refer to Note 12) Total net loans3 Net loans classification4 Loans – housing and personal Loans – business Total net loans3 1 Securitised loans are included in term loans and finance leases. Further detail on securitised assets is disclosed in Note 31. 2 Comparative information for the Parent Entity has been revised to conform to presentation with current year. 3 382,702 153,462 536,164 365,221 149,224 514,445 33,389 18,242 398 55,585 10,077 539,806 (3,642) 536,164 28,685 15,784 369 48,245 7,020 518,279 (3,834) 514,445 - 21 287 308 8,892 474,613 (2,956) 471,657 - 20 285 308 5,672 460,677 (3,188) 457,489 343,407 128,250 471,657 331,228 126,261 457,489 Included in net loans is $11 billion (2012: $12 billion) of loans designated at fair value to reduce an accounting mismatch. The cumulative change in fair value of the loans attributable to credit risk is a decrease of $98 million (2012: $125 million) for the Group and Parent Entity. The change in fair value of loans attributable to credit risk recognised during the period is $27 million (2012: $8 million) for the Group and Parent Entity. 4 Loans – housing and personal include products of a retail nature including mortgages, personal loans, credit cards and customer overdrafts. Loans – business include corporate funding, working capital, trade and overdraft facilities. 154 2013 WESTPAC GROUP ANNUAL REPORT NOTE 11. LOANS (CONTINUED) The following table shows loans presented based on their industry classification: NOTES TO THE FINANCIAL STATEMENTS Consolidated 2013 $m 2012 $m 2011 $m 2010 $m 2009 $m 7,174 7,795 6,511 19,388 563 12,287 1,883 54,066 10,163 15,683 8,039 2,640 267,490 2,389 416,071 7,106 7,549 6,313 13,101 930 10,663 1,836 47,184 9,467 15,868 9,351 3,239 328,109 2,298 463,014 7,121 7,790 6,084 15,925 781 11,339 1,488 45,559 8,936 16,094 6,677 2,581 316,777 1,330 448,482 7,195 7,797 5,968 13,643 806 10,958 1,337 48,398 9,408 16,240 7,351 2,421 301,150 1,282 433,954 7,108 7,304 6,049 13,259 881 9,415 2,339 49,030 9,715 14,619 8,868 3,002 340,139 2,416 474,144 Australia1 Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other Total Australia Overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other Total overseas Total loans Provisions on loans Total net loans 1 To improve presentation, we have revised 2012 comparatives for loans – business booked in Australia to better reflect their industry concentration. 2 Services includes education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities includes electricity, gas and water and communication services. 570 4,699 1,180 1,886 474 2,143 363 9,156 2,026 3,289 1,800 1,104 19,574 148 48,412 482,366 (4,711) 477,655 580 4,975 1,180 1,998 464 2,925 368 9,659 2,149 4,047 1,928 1,010 20,723 166 52,172 500,654 (4,045) 496,609 594 5,345 1,220 2,406 533 3,682 640 9,620 2,174 4,411 1,589 1,212 21,766 73 55,265 518,279 (3,834) 514,445 585 6,506 1,367 2,960 639 3,319 2,921 11,225 2,651 5,014 1,528 1,476 25,363 108 65,662 539,806 (3,642) 536,164 691 4,903 1,242 2,699 450 2,607 291 9,844 2,392 2,976 1,976 1,340 19,103 1,258 51,772 467,843 (4,384) 463,459 3 2013 WESTPAC GROUP ANNUAL REPORT 155 NOTE 11. LOANS (CONTINUED) The following table shows the consolidated contractual maturity distribution of all loans by type of customer as at 30 September 2013: Up to 1 Year $m 1 to 5 Years $m Over 5 Years $m 2013 Loans by type of customer in Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services1 Trade2 Transport and storage Utilities3 Retail lending Other Total Australia Total overseas Total loans 1 Services includes education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities includes electricity, gas and water and communication services. 765 946 1,310 3,019 504 933 556 5,781 1,723 2,128 891 197 277,548 370 296,671 35,148 331,819 3,623 3,298 3,258 5,792 268 4,674 1,384 25,302 5,496 6,980 5,977 1,924 43,277 618 111,871 12,061 123,932 2,720 3,060 1,481 4,448 109 3,808 399 17,947 2,496 5,511 2,000 881 19,314 1,428 65,602 18,453 84,055 Total $m 7,108 7,304 6,049 13,259 881 9,415 2,339 49,030 9,715 14,619 8,868 3,002 340,139 2,416 474,144 65,662 539,806 Interest rate segmentation of Group loans maturing after one year By offices in Australia By offices overseas Total loans maturing after one year Loans at Variable Interest Rates $m 2013 Loans at Fixed Interest Rates $m Consolidated Loans at Variable Interest Rates $m 2012 Loans at Fixed Interest Rates $m Total $m Total $m 332,738 18,079 350,817 75,804 29,130 104,934 408,542 47,209 455,751 330,398 17,568 347,966 56,176 22,126 78,302 386,574 39,694 426,268 156 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 11. LOANS (CONTINUED) Loans include the following finance receivables: Gross investment in finance leases, receivable: Due within one year Due after one year but not later than five years Due after five years Unearned future finance income on finance leases Net investment in finance leases Accumulated allowance for uncollectible minimum lease payments Net investment in finance leases after accumulated allowance The net investment in finance leases may be analysed as follows: Due within one year Due after one year but not later than five years Due after five years Total net investment in finance leases NOTE 12. PROVISIONS FOR IMPAIRMENT CHARGES Collectively assessed provisions Balance as at beginning of the year Transfers1 Provisions raised/(released) Write-offs Interest adjustment Exchange rate and other adjustments Balance as at end of the year Individually assessed provisions Balance as at beginning of the year Transfers1 Provisions raised Write-backs Write-offs Interest adjustment Exchange rate and other adjustments Balance as at end of the year Total provisions for impairment charges on loans and credit commitments Less provisions for credit commitments (refer to Note 20) Total provisions for impairment charges on loans 1 Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 737 4,742 647 (948) 5,178 (21) 5,157 705 4,026 447 5,178 747 5,692 797 (1,034) 6,202 (27) 6,175 716 4,901 585 6,202 409 2,739 358 (456) 3,050 (13) 3,037 395 2,393 262 3,050 425 3,377 432 (527) 3,707 (26) 3,681 410 2,966 331 3,707 Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 2,771 - 290 (708) 196 36 2,585 1,470 - 1,112 (479) (691) (75) 27 1,364 3,949 (307) 3,642 2,953 - 342 (756) 229 3 2,771 1,461 - 1,442 (468) (952) (38) 25 1,470 4,241 (407) 3,834 3,439 - (24) (739) 264 13 2,953 1,622 - 1,619 (542) (1,188) (11) (39) 1,461 4,414 (369) 4,045 2,336 - 181 (581) 162 9 2,107 1,227 - 946 (412) (571) (78) 11 1,123 3,230 (274) 2,956 2,536 (44) 285 (646) 195 10 2,336 1,251 (31) 1,219 (416) (787) (35) 26 1,227 3,563 (375) 3,188 In 2012, provisions in respect of loans were transferred to Westpac New Zealand Limited as part of a business reorganisation. 3 Reconciliation of impairment charges Individually assessed provisions raised Write-backs Recoveries Collectively assessed provisions raised/(released) Impairment charges Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 1,112 (479) (76) 290 847 1,442 (468) (104) 342 1,212 1,619 (542) (60) (24) 993 946 (412) (53) 181 662 1,219 (416) (87) 285 1,001 2013 WESTPAC GROUP ANNUAL REPORT 157 NOTE 12. PROVISIONS FOR IMPAIRMENT CHARGES (CONTINUED) The following table presents provisions for impairment charges on loans by industry classification for the past five years: 2013 $m 2012 Consolidated 2011 2010 2009 % $m % $m % $m % $m % 0.9 0.5 0.6 1.2 2.8 0.6 11.8 1.0 0.9 1.6 0.5 2.7 0.5 25.6 1.5 2.0 1.7 0.6 2.7 0.1 10.9 1.2 2.9 1.1 0.8 1.9 0.2 27.6 1.2 1.1 1.7 0.9 2.7 0.1 12.2 2.9 2.1 1.1 0.5 1.6 0.2 28.3 1.0 0.6 1.4 1.3 2.0 - 12.7 2.2 2.2 0.9 0.5 1.7 0.2 26.7 53 46 73 38 116 2 518 121 87 47 22 67 7 1,197 45 28 63 58 90 2 559 96 97 38 23 74 7 1,180 44 27 32 60 143 31 595 51 47 80 27 137 26 1,300 59 80 66 24 108 4 428 48 116 45 29 76 6 1,089 Individually assessed provisions by industry Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Mining Property, property services and business services Services1 Trade2 Transport and storage Utilities3 Retail lending Other Total Australia New Zealand Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Mining Property, property services and business services Services1 Trade2 Transport and storage Utilities3 Retail lending Total New Zealand Other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Property, property services and business services Services1 Trade2 Transport and storage Retail lending Total other overseas Total overseas Total individually assessed provisions Total collectively assessed provisions Total provisions for impairment charges and 100.0 credit commitments 1 Services includes education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities includes electricity, gas and water and communication services. 1 1 - - - 6 16 - 19 9 52 322 1,622 3,439 4 3 2 33 2 13 3 4 2 2 68 275 1,364 2,585 2 - - 17 2 19 1 2 17 10 70 281 1,461 2,953 2 2 7 23 2 9 2 1 1 4 53 273 1,470 2,771 0.1 0.1 0.2 0.5 - 0.2 - - - 0.1 1.2 6.4 34.7 65.3 - - - 0.6 - 0.4 - - 0.4 0.2 1.6 6.4 33.1 66.9 0.1 0.1 0.1 0.7 0.1 0.2 0.1 0.1 0.1 0.1 1.7 6.9 34.5 65.5 - - - - - 0.1 0.3 - 0.4 0.2 1.0 6.4 32.0 68.0 2 46 2 1 10 - 143 5 13 - 12 36 270 1 17 6 9 6 37 71 40 2 - 1 17 207 2 20 4 3 29 1 112 6 7 - - 27 211 5 20 2 9 16 - 116 35 3 - - 14 220 - 0.5 0.1 0.1 0.7 - 2.5 0.1 0.2 - - 0.6 4.8 - 0.9 - - 0.2 - 2.9 0.1 0.3 - 0.2 0.8 5.4 0.1 0.5 0.1 0.2 0.4 - 2.7 0.8 0.1 - - 0.3 5.2 - 0.4 0.2 0.2 0.2 0.9 1.8 1.0 0.1 - - 0.4 5.2 4,241 3,949 100.0 100.0 4,414 100.0 5,061 50 43 33 74 93 46 409 49 62 15 37 148 23 1,082 2 17 4 1 14 - 43 4 6 2 - 31 124 4 3 8 - - - 1 4 2 - 22 146 1,228 3,506 1.1 0.9 0.7 1.6 2.0 1.0 8.6 1.0 1.3 0.3 0.8 3.1 0.5 22.9 - 0.4 0.1 - 0.3 - 0.9 0.1 0.1 - - 0.7 2.6 0.1 0.1 0.2 - - - - 0.1 - - 0.5 3.1 26.0 74.0 4,734 100.0 158 2013 WESTPAC GROUP ANNUAL REPORT NOTE 12. PROVISIONS FOR IMPAIRMENT CHARGES (CONTINUED) The following table shows details of loan write-offs by industry classifications for the past five years: NOTES TO THE FINANCIAL STATEMENTS Write-offs Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Mining Property, property services and business services Services1 Trade2 Transport and storage Utilities3 Retail lending Other Total Australia New Zealand Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Mining Property, property services and business services Services1 Trade2 Transport and storage Utilities3 Retail lending Other Total New Zealand Other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Property, property services and business services Services1 Trade2 Transport and storage Retail lending Other Total other overseas Total write-offs Write-offs in relation to: Collectively assessed provisions Individually assessed provisions 2013 $m (31) (30) (46) (14) (50) (5) (340) (58) (69) (18) (2) (545) (9) (1,217) (1) (7) (4) (13) (3) - (94) (5) (4) (1) - (46) - (178) (1) - - - (2) - (1) - - - - (4) (1,399) (708) (691) (1,399) Consolidated 2012 $m 2011 $m 2010 $m 2009 $m (24) (11) (106) (11) (45) (1) (453) (41) (53) (37) (33) (597) (11) (1,423) (2) (23) (9) (2) (17) (1) (105) (5) (3) (1) - (59) (1) (228) (3) (1) (3) (12) (1) (7) (2) (2) (19) (7) - (57) (1,708) (34) (23) (27) (5) (134) (15) (507) (28) (57) (60) (7) (661) (21) (1,579) (3) (59) (24) (1) (12) - (126) (4) (15) - (13) (84) (1) (342) - - - - (3) (1) - - - - (2) (6) (1,927) (47) (9) (68) (30) (45) (14) (272) (32) (51) (25) (4) (566) (39) (1,202) (2) (4) (4) (1) (15) - (29) (4) (3) (2) - (79) (3) (146) - - - - - (3) - - - - - (3) (1,351) (756) (952) (1,708) (739) (1,188) (1,927) (667) (684) (1,351) (5) (6) (37) (327) (37) (13) (156) (107) (115) (13) (101) (611) (22) (1,550) (1) - (27) (3) (70) - (146) (3) (10) - - (88) (2) (350) (3) (2) (5) - - (3) (6) (3) (1) - - (23) (1,923) (632) (1,291) (1,923) 3 Total write-offs 1 Services includes education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities includes electricity, gas and water and communication services. 2013 WESTPAC GROUP ANNUAL REPORT 159 NOTE 12. PROVISIONS FOR IMPAIRMENT CHARGES (CONTINUED) The following table shows details of recoveries of loans by industry classifications for the past five years: 2013 $m Consolidated 2012 $m 2011 $m 2010 $m 2009 $m Recoveries Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Property, property services and business services Services1 Trade2 Transport and storage Utilities3 Retail lending Other Total Australia Total New Zealand Total other overseas Total recoveries Total write-offs Net write-offs and recoveries 1 Services includes education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities includes electricity, gas and water and communication services. 1 1 1 3 8 11 - 1 1 - 41 - 68 8 - 76 (1,399) (1,323) - - - - - 9 - - - - 46 - 55 5 - 60 (1,927) (1,867) - - 1 2 5 23 1 1 1 - 61 1 96 8 - 104 (1,708) (1,604) 1 - 2 - 2 3 1 1 1 - 31 2 44 4 3 51 (1,351) (1,300) - - - - - - - - - 2 37 2 41 - 8 49 (1,923) (1,874) 160 2013 WESTPAC GROUP ANNUAL REPORT NOTE 13. PROPERTY, PLANT AND EQUIPMENT NOTES TO THE FINANCIAL STATEMENTS Premises and sites Cost Accumulated depreciation Net carrying amount Leasehold improvements Cost Accumulated amortisation Net carrying amount Furniture and equipment Cost Accumulated depreciation Net carrying amount Technology Cost Accumulated depreciation Net carrying amount Total property, plant and equipment Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 320 (138) 182 1,138 (586) 552 737 (563) 174 569 (303) 266 1,174 364 (141) 223 980 (463) 517 698 (516) 182 574 (359) 215 1,137 208 (51) 157 886 (456) 430 521 (379) 142 301 (59) 242 971 252 (53) 199 770 (357) 413 503 (348) 155 307 (114) 193 960 3 2013 WESTPAC GROUP ANNUAL REPORT 161 NOTE 13. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Reconciliations of the carrying amount for each class of property, plant and equipment are set out below: Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 173 2 (1) (13) - 38 199 198 2 (1) (14) - 38 223 199 2 (1) (12) 1 (32) 157 223 4 (1) (13) - (31) 182 Premises and sites Balance as at beginning of the year Additions Disposals Depreciation Exchange rate adjustments Other1 Balance as at end of the year Leasehold improvements Balance as at beginning of the year Additions Disposals Amortisation Exchange rate adjustments Other1 Balance as at end of the year Furniture and equipment Balance as at beginning of the year Additions Disposals Depreciation Exchange rate adjustments Balance as at end of the year Technology Balance as at beginning of the year Additions Disposals Depreciation Impairments Exchange rate adjustments Other Balance as at end of the year 1 During the current financial year, assets were reclassified from premises and sites to leasehold improvements. During the previous financial year, 563 101 (4) (106) 1 (38) 517 517 103 (2) (108) 9 33 552 215 144 (2) (90) (4) 1 2 266 193 130 (2) (78) (4) 1 2 242 228 73 (1) (85) - (1) 1 215 413 78 (1) (94) 1 33 430 182 53 (1) (62) 2 174 155 41 (1) (54) 1 142 169 76 (1) (62) - 182 140 70 (1) (54) - 155 198 65 (1) (71) - (1) 3 193 471 76 (4) (92) - (38) 413 assets were reclassified from leasehold improvements to premises and sites. 162 2013 WESTPAC GROUP ANNUAL REPORT NOTE 14. DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES Deferred tax assets NOTES TO THE FINANCIAL STATEMENTS The balance comprises temporary differences attributable to: Amounts recognised in income statements Provisions for impairment charges on loans Provision for employee benefits Treasury/financial market products Property, plant and equipment Provision for litigation and non-lending losses Provision for credit commitments Provision for restructuring Provision for lease liabilities Other provisions Other liabilities Life insurance policy liabilities Tax losses recognised Change in tax rate (refer to Note 5) Amounts recognised directly in other comprehensive income Available-for-sale securities Retirement benefit deficit Other equity items Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 1,064 312 150 217 8 79 16 31 50 572 - - - 2,499 1,126 297 87 227 91 111 34 29 44 780 36 1 (1) 2,862 860 267 145 205 7 79 16 26 44 560 - - - 2,209 934 249 64 222 89 111 34 26 41 767 - - (1) 2,536 (4) 107 - 103 (811) 1,791 525 1,266 (18) 190 4 176 (862) 2,176 673 1,503 13 107 - 120 (683) 1,646 484 1,162 (2) 190 4 192 (696) 2,032 639 1,393 Set-off of deferred tax liabilities pursuant to set-off provisions1 Net deferred tax assets Net deferred tax assets to be recovered within 12 months Net deferred tax assets to be recovered after more than 12 months Movement Opening balance as at beginning of the year Credited to income statements Recognised in other comprehensive income Set-off of deferred tax liabilities pursuant to set-off provisions1 Closing balance as at end of the year 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 2,176 499 (73) (811) 1,791 2,651 407 (20) (862) 2,176 2,456 302 (30) (696) 2,032 2,032 369 (72) (683) 1,646 different taxable entities within the same taxable group. 3 2013 WESTPAC GROUP ANNUAL REPORT 163 NOTE 14. DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES (CONTINUED) Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: Tax losses on revenue account The deferred tax assets related to losses will only be recognised if: Consolidated 2013 $m 81 2012 $m 78 Parent Entity 2013 $m 76 2012 $m 74  the Group or relevant entity derives future assessable income of a nature or amount sufficient to enable the benefits from the deductions for the losses to be utilised;  the Group or relevant entity continues to comply with the conditions of deductibility imposed by tax legislation;  no changes in tax legislation adversely affect the Group or relevant entity in realising the benefits from the deductions for the losses; and  the deductible temporary differences and tax losses have not expired under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not considered probable that future taxable profit will be available against which they can be realised. Deferred tax liabilities Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 100 117 166 19 315 717 32 166 111 5 378 692 121 20 168 - 265 574 39 33 109 - 308 489 The balance comprises temporary differences attributable to: Amounts recognised in income statements Treasury/financial market products Finance lease transactions Property, plant and equipment Life insurance assets Other assets Amounts recognised directly in other comprehensive income Cash flow hedges 116 116 (811) 22 10 12 203 203 (862) 33 15 18 109 109 (683) - - - 207 207 (696) - - - Set-off of deferred tax assets pursuant to set-off provisions1 Net deferred tax liabilities Net deferred tax liabilities to be recovered within 12 months Net deferred tax liabilities to be recovered after more than 12 months Movements Opening balance as at beginning of the year Charged to income statements Recognised in other comprehensive income Set-off of deferred tax assets pursuant to set-off provisions1 Closing balance as at end of the year 1 Deferred tax assets and liabilities are set-off where they relate to the same taxation authority on either the same taxable entity or different entities 33 887 (87) (811) 22 11 724 160 (862) 33 - 781 (98) (683) - 1 554 141 (696) - within the same taxable group. Deferred tax liabilities relating to aggregate temporary differences of $35 million (2012: $29 million) associated with investments in subsidiaries have not been recognised because the Parent Entity controls whether the liability will be incurred and it is satisfied that the liability will not be incurred in the foreseeable future. 164 2013 WESTPAC GROUP ANNUAL REPORT NOTE 15. GOODWILL AND OTHER INTANGIBLE ASSETS NOTES TO THE FINANCIAL STATEMENTS Goodwill Balance as at beginning of the year Additions through business combination1 Exchange rate and other adjustments Balance as at end of the year Computer software Balance as at beginning of the year Additions Impairment Amortisation Exchange rate adjustments Other Balance as at end of the year Cost Accumulated amortisation Carrying amount Brand names Balance as at beginning of the year Balance as at end of the year Carrying amount Core deposit intangibles Balance as at beginning of the year Amortisation Balance as at end of the year Cost Accumulated amortisation Carrying amount Other intangible assets Balance as at beginning of the year Additions through business combination1 Impairment Amortisation Exchange rate and other adjustments Balance as at end of the year Cost Accumulated amortisation Carrying amount Total goodwill and other intangible assets 1 Attributable to the acquisition of J O Hambro Capital Management Limited. Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 8,797 - 71 8,868 1,551 738 (15) (388) 14 (3) 1,897 3,033 (1,136) 1,897 670 670 670 851 (166) 685 1,494 (809) 685 265 - (3) (52) 11 221 557 (336) 221 12,341 8,582 214 1 8,797 1,303 603 (23) (329) (2) (1) 1,551 2,382 (831) 1,551 670 670 670 1,016 (165) 851 1,494 (643) 851 208 120 (5) (55) (3) 265 544 (279) 265 12,134 6,653 - - 6,653 1,351 643 (15) (321) 1 16 1,675 2,168 (493) 1,675 636 636 636 851 (166) 685 1,279 (594) 685 118 - - (42) - 76 226 (150) 76 9,725 6,653 - - 6,653 1,135 511 (23) (268) - (4) 1,351 1,617 (266) 1,351 636 636 636 1,016 (165) 851 1,279 (428) 851 160 - - (42) - 118 226 (108) 118 9,609 3 2013 WESTPAC GROUP ANNUAL REPORT 165 NOTE 15. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) Goodwill has been allocated to the following Cash Generating Units (CGUs): Consolidated 2013 $m Parent Entity 2013 $m 2012 $m Westpac Retail & Business Banking St.George Banking Group Westpac Institutional Bank1 BT Financial Group (Australia) Hambro New Zealand Retail Banking BT New Zealand Hastings1 Bank of Tonga Total goodwill 1 During the financial year, $56 million of goodwill has been reallocated from the Westpac Institutional Bank CGU to the Hastings CGU. 2012 $m 980 980 980 980 4,464 4,464 4,351 4,351 487 543 487 487 2,103 2,103 835 835 232 208 - - 457 411 - - 12 11 - - 120 64 - - 13 13 - - 8,868 8,797 6,653 6,653 Impairment tests for goodwill To assess whether goodwill is impaired, the carrying amount of each CGU is compared to their recoverable amount determined on a value in use basis. Key assumptions used in recoverable amount calculations The recoverable amount of each significant CGU is determined based on the Group’s projections of future pre-tax cash flows discounted by the Group’s after tax return on equity rate of 11.0% (2012: 11.0%), adjusted to a pre-tax rate of 15.7% for Australia, 15.3% for New Zealand and 14.5% for the United Kingdom (2012: 15.7% for Australia, 15.3% for New Zealand, 14.5% for the United Kingdom). All future cash flows are based on approved two year forecasts (2012: two years). All cash flows beyond the two year period have an assumed growth rate of zero for all significant CGUs for the purpose of goodwill impairment testing. The strategic business plan assumes certain economic conditions and business performance, which are considered appropriate as they are consistent with observable historical information and current market expectations of the future. The forecasts applied by management are not reliant on any one particular assumption and no impairment would arise in significant CGUs even if zero growth is achieved over the two year forecast period. Sensitivity to changes in assumptions Management consider alternative key assumptions including, for example, increasing the discount rate by 1% or reducing future cash flows by 10%. Under these scenarios the recoverable amount of each significant CGU would continue to exceed its carrying value. This is illustrated in the table below: Westpac Retail & Business Banking St.George Banking Group BT Financial Group (Australia) Excess of Recoverable Amount over the Carrying Value Decrease Increase Cash Flows by 10% Discount Rate by 1% 2012 2012 $m $m 4,208 4,760 793 1,135 1,390 1,607 Base Case 2013 $m 8,494 2,911 2,977 2012 $m 6,141 2,001 2,159 2013 $m 6,289 1,541 2,189 2013 $m 6,918 1,931 2,411 166 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 16. OTHER ASSETS Accrued interest receivable Securities sold not delivered Deferred expenditure Deferred acquisition costs Trade debtors Prepayments Accrued fees and commissions Other Total other assets NOTE 17. PAYABLES DUE TO OTHER FINANCIAL INSTITUTIONS Cash collateral Offshore central bank deposits Interbank borrowing Securities sold under agreements to repurchase Total payables due to other financial institutions Consolidated 2013 $m 1,194 1,416 24 126 533 135 164 968 4,560 2012 $m 1,278 1,841 17 143 534 96 323 729 4,961 Parent Entity 2013 $m 1,018 1,383 1 - 205 116 66 908 3,697 2012 $m 1,108 1,841 2 1 176 79 106 575 3,888 Consolidated 2013 $m 1,285 2,936 4,615 - 8,836 2012 $m 1,356 1,595 4,564 49 7,564 Parent Entity 2013 $m 1,285 2,936 4,517 - 8,738 2012 $m 1,354 1,595 4,492 49 7,490 3 2013 WESTPAC GROUP ANNUAL REPORT 167 Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 29,163 123 29,286 32,786 119 32,905 29,163 123 29,286 33,234 119 33,353 20,464 16,659 20,464 16,659 175,102 147,038 175,106 147,042 132,028 139,351 132,028 139,351 327,594 303,048 327,598 303,052 356,880 335,953 356,884 336,405 1,362 1,362 1,134 1,134 2,905 2,368 16,419 22,104 41,428 42,790 12,702 18,392 33,462 34,596 - - - - - - - - - - - - - - 11,111 91 11,202 13,081 149 13,230 11,111 91 11,202 13,081 149 13,230 766 732 294 232 1,914 10,930 13,610 24,812 1,982 8,498 11,212 24,442 1,437 10,391 12,122 23,324 1,518 7,944 9,694 22,924 424,482 394,991 380,208 359,329 46,400 382,467 347,905 339,555 312,929 424,482 394,991 380,208 359,329 47,086 40,653 42,015 NOTE 18. DEPOSITS AND OTHER BORROWINGS Australia Certificates of deposit At fair value At amortised cost Total certificates of deposit At call and term deposits Non-interest bearing, repayable at call Other interest bearing: At call Term Total at call and term deposits Total Australia New Zealand Certificates of deposit At fair value Total certificates of deposit At call and term deposits Non-interest bearing, repayable at call Other interest bearing: At call Term Total at call and term deposits Total New Zealand Other overseas Certificates of deposit At fair value At amortised cost Total certificates of deposit At call and term deposits Non-interest bearing, repayable at call Other interest bearing: At call Term Total at call and term deposits Total other overseas Total deposits and other borrowings Deposits and other borrowings at fair value Deposits and other borrowings at amortised cost Total deposits and other borrowings 168 2013 WESTPAC GROUP ANNUAL REPORT NOTE 18. DEPOSITS AND OTHER BORROWINGS (CONTINUED) The following table shows average balances and average rates in each of the past three years for major categories of deposits: NOTES TO THE FINANCIAL STATEMENTS Australia Non-interest bearing Certificates of deposit Other interest bearing at call Other interest bearing term Total Australia Overseas Non-interest bearing Certificates of deposit Other interest bearing at call Other interest bearing term Total overseas 2013 Average Balance $m Average Rate % Consolidated 2012 Average Balance $m Average Rate % 2011 Average Balance $m Average Rate % 18,399 29,352 162,748 133,534 344,033 3,345 15,259 16,483 29,300 64,387 3.1% 3.1% 3.9% 0.6% 2.9% 2.9% 15,101 34,401 143,130 124,881 317,513 2,875 18,478 14,260 24,953 60,566 4.4% 3.8% 5.1% 0.6% 2.7% 3.2% 13,134 38,161 141,719 99,994 293,008 2,515 19,840 12,600 22,066 57,021 4.7% 4.3% 5.5% 0.6% 2.9% 3.9% Certificates of deposit and term deposits All certificates of deposit issued by foreign offices were greater than US$100,000. The maturity profile of certificates of deposit and term deposits greater than US$100,000 issued by Australian operations is set out below: Certificates of deposit greater than US$100,000 Term deposits greater than US$100,000 Consolidated 2013 Between 3 and 6 Months $m 9,306 24,790 Between 6 Months and 1 Year $m 34 15,574 Less Than 3 Months $m 19,823 59,138 Over 1 Year $m 123 6,889 Total $m 29,286 106,391 NOTE 19. FINANCIAL LIABILITIES AT FAIR VALUE THROUGH INCOME STATEMENT1 Securities sold under agreements to repurchase2 Securities sold short Total trading liabilities Other financial liabilities at fair value Total financial liabilities at fair value through income statement 1 Deposits and other borrowings at fair value are disclosed in Note 18 and debt issues at fair value are disclosed in Note 22. 2 Securities sold under agreements to repurchase are not derecognised from the balance sheet, as set out in Note 1(i)(vii). The carrying value of Consolidated 2013 $m 7,967 2,335 10,302 - 10,302 2012 $m 6,776 3,187 9,963 1 9,964 Parent Entity 2013 $m 7,967 2,335 10,302 - 10,302 2012 $m 6,776 3,187 9,963 1 9,964 securities pledged under repurchase agreements for the Group and the Parent Entity is $8,101 million (2012: $6,902 million). The amount that would be contractually required to be paid at maturity to the holders of other financial liabilities at fair value for the Group and the Parent Entity is nil (2012: $1 million). 2013 WESTPAC GROUP ANNUAL REPORT 169 3 NOTE 20. PROVISIONS Long service leave Annual leave and other employee benefits Litigation and non-lending losses Provision for impairment on credit commitments (refer to Note 12) Leasehold premises Restructuring provisions Total provisions Consolidated 2013 $m 340 802 28 307 46 53 1,576 2012 $m 334 740 306 407 34 114 1,935 Parent Entity 2013 $m 311 687 24 274 46 53 1,395 2012 $m 308 638 297 375 34 112 1,764 Litigation and non-lending losses Litigation and non-lending loss provisions include litigation and associated costs, frauds and the correction of operational issues. Provision for impairment on credit commitments Provision is made for incurred losses as a result of the commitment to extend credit. Leasehold premises Provisions are made for unavoidable costs in relation to making good the property to the same or similar state as when the lease was entered into and for premises sub let at lower rates of rent than payable under the head lease. Restructuring provisions Provisions are recognised for restructuring activities where there is a demonstrable commitment and a detailed plan such that there is little or no discretion to avoid payments to other parties. The majority of restructuring provisions are expected to be used within 12 months after 30 September 2013. Consolidated Balance as at beginning of the year Additions Utilised Unutilised reversed Exchange differences Increase on unwinding of discount Other Balance as at end of the year Parent Entity Balance as at beginning of the year Additions Utilised Unutilised reversed Increase on unwinding of discount Other Balance as at end of the year Long Service Leave $m Annual Leave and Other Employee Benefits $m Litigation and Non- Lending Losses $m Provision for Impairment on Credit Commitments $m Leasehold Premises $m Restructuring Provisions $m 334 57 (31) (21) 1 - - 340 308 49 (28) (18) - - 311 740 959 (893) (4) - - - 802 638 856 (803) (4) - - 687 306 17 (285) (10) - - - 28 297 11 (276) (8) - - 24 407 - - - - 10 (110) 307 375 - - - 9 (110) 274 34 16 (4) - - - - 46 34 16 (4) - - - 46 114 15 (71) (5) - - - 53 112 12 (66) (5) - - 53 Total $m 1,935 1,064 (1,284) (40) 1 10 (110) 1,576 1,764 944 (1,177) (35) 9 (110) 1,395 170 2013 WESTPAC GROUP ANNUAL REPORT NOTE 21. OTHER LIABILITIES Unearned general insurance premiums Outstanding general insurance claims Defined benefit deficit1 Accrued interest payable Credit card loyalty program Securities purchased not delivered Trade creditors and other accrued expenses Other Total other liabilities 1 Refer to Note 35 for more details. NOTES TO THE FINANCIAL STATEMENTS Consolidated 2013 $m 347 234 306 2,970 328 1,714 1,019 2,199 9,117 2012 $m 370 248 632 3,346 317 1,884 917 1,996 9,710 Parent Entity 2013 $m - - 278 2,657 - 1,714 776 2,015 7,440 2012 $m - - 570 3,035 - 1,884 702 1,749 7,940 NOTE 22. DEBT ISSUES Presented below are the Group and Parent Entity’s debt issues at 30 September 2013 and 2012. The distinction between short-term and long-term debt is based on the maturity of the underlying security at origination. Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m Debt issues Short-term debt: Own issuances Customer conduits1 Acceptances2 29,350 1,772 102 31,224 27,058 2,543 266 29,867 26,842 - 102 26,944 23,805 - 266 24,071 Total short-term debt Long-term debt: Covered bonds Senior Securitisation Convertible notes Structured notes Total long-term debt Total debt issues Debt issues at fair value3 Debt issues at amortised cost Total debt issues 1 Further information on customer conduits is disclosed in Note 31. 2 Acceptances were previously presented as a separate item on the face of the balance sheet. 3 The amount that would be contractually required to be paid at maturity to the holders of the financial liabilities designated at fair value through profit or 10,392 90,236 - - - 100,628 124,699 27,601 97,098 124,699 11,951 95,506 10,079 25 419 117,980 147,847 31,269 116,578 147,847 16,229 78,382 - - - 94,611 121,555 11,151 110,404 121,555 18,140 83,860 10,372 30 507 112,909 144,133 14,140 129,993 144,133 loss for the Group is $14,400 million (2012: $31,312 million) and for the Parent Entity is $11,422 million (2012: $27,629 million). Included in the carrying value of debt issues at fair value is a decrease for change in own credit spreads of $44 million (2012: nil) for the Group and Parent Entity. 3 2013 WESTPAC GROUP ANNUAL REPORT 171 NOTE 22. DEBT ISSUES (CONTINUED) Short-term debt US commercial paper Euro commercial paper (by currency): AUD CAD EUR GBP USD Total euro commercial paper Asset backed commercial paper (by currency): AUD USD Total asset backed commercial paper NZD promissory notes Acceptances1 Total short-term debt Long-term debt (by currency): AUD CAD CHF EUR GBP HKD JPY NOK NZD SGD USD ZAR Total long-term debt 1 Acceptances were previously presented as a separate item on the face of the balance sheet. Consolidated 2013 $m 2012 $m 28,867 25,320 - - 29 358 54 441 1,048 724 1,772 42 102 31,224 36,099 723 2,048 15,876 3,609 751 11,619 560 3,353 166 38,105 - 112,909 18 12 - 1,164 506 1,700 1,733 810 2,543 38 266 29,867 39,003 708 1,969 14,019 2,676 808 14,719 531 2,256 309 40,938 44 117,980 (in $millions unless otherwise stated) Short-term borrowings US commercial paper Maximum amount outstanding at any month end Approximate average amount outstanding Approximate weighted average interest rate on: Average amount outstanding Outstanding as at end of the year Consolidated 2013 2012 2011 35,727 30,158 43,842 35,969 42,280 37,991 0.4% 0.4% 0.5% 0.7% 0.4% 0.4% 172 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 23. LOAN CAPITAL Loan capital Subordinated bonds Subordinated perpetual notes Convertible debentures and Trust preferred securities Stapled preferred securities Convertible preference shares Capital notes Total loan capital Details of loan capital are as follows: Basel III transitional subordinated bonds1 USD 75 million subordinated bonds due 2015 USD 400 million subordinated bonds due 2015 AUD 160 million subordinated bonds due 20182 AUD 500 million subordinated bonds due 20182 USD 350 million subordinated bonds due 2018 GBP 200 million subordinated bonds due 20183 AUD 625 million subordinated bonds due 20184 AUD 125 million subordinated bonds due 20184 AUD 500 million subordinated bonds due 2022 AUD 1,676 million subordinated bonds due 2022 USD 800 million subordinated bonds due 2023 Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 4,886 378 616 906 1,177 1,367 9,330 5,521 337 568 1,936 1,175 - 9,537 4,886 378 616 906 1,177 1,367 9,330 5,521 337 568 1,936 1,175 - 9,537 Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 88 450 - - 421 - - - 499 1,664 848 81 389 158 500 394 318 627 125 499 1,661 769 88 450 - - 421 - - - 499 1,664 848 81 389 158 500 394 318 627 125 499 1,661 769 Basel III fully compliant subordinated bonds5 AUD 925 million subordinated bonds due 20256 Total subordinated bonds 1 Qualify for transitional treatment as Tier 2 capital of Westpac under APRA’s Basel III capital adequacy framework. 2 These bonds were redeemed on 9 April 2013. 3 These bonds were redeemed on 29 April 2013. 4 These bonds were redeemed on 9 May 2013. 5 Qualify as Tier 2 capital of Westpac under APRA’s Basel III capital adequacy framework. 6 Westpac may be required to convert some or all subordinated bonds into a variable number of Westpac ordinary shares upon the occurrence of a 916 4,886 - 5,521 916 4,886 - 5,521 non-viability trigger event. A non-viability trigger event will occur if APRA determines Westpac is, or would become, non-viable. For each subordinated bond, holders will receive a number of Westpac ordinary shares calculated using the formula described in the terms and conditions of the subordinated bonds, but subject to a maximum conversion number which is 16.1551 Westpac ordinary shares. The maximum conversion number is set using a Westpac ordinary share price which is broadly equivalent to 20% of the Westpac ordinary share price at the time of issue of the subordinated bonds. The price at which Westpac ordinary shares will be issued is based on the Westpac ordinary share price determined over the five business day period prior the non-viability trigger event and includes a 1% discount. If Westpac is unable to convert the Basel III fully compliant subordinated bonds for any reason, holder’s rights in relation to the bonds will be terminated. 3 2013 WESTPAC GROUP ANNUAL REPORT 173 NOTE 23. LOAN CAPITAL (CONTINUED) Subordinated perpetual notes US$352.1million (2012: US$352.1 million) subordinated perpetual floating rate notes Convertible debentures and Trust preferred securities Convertible debentures issued on 5 April 2004 US$525,000,000 525,000 2004 TPS of US$1,000 each Total convertible debentures and Trust preferred securities Stapled preferred securities 10,362,670 Westpac SPS of A$100 each 9,083,278 Westpac SPS II of A$100 each Total stapled preferred securities Convertible preference shares 11,893,605 Westpac CPS of A$100 each Convertible notes 13,835,690 Westpac CN of A$100 each Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 378 - 616 616 - 906 906 337 - 568 568 1,033 903 1,936 378 616 - 616 - 906 906 337 568 - 568 1,033 903 1,936 1,177 1,175 1,177 1,175 1,367 - 1,367 - Subordinated perpetual notes These notes have no final maturity but may, subject to the approval of APRA and subject to certain other conditions, be redeemed at par at the option of Westpac. Interest is cumulative and is payable on the notes semi-annually, subject to Westpac being solvent immediately after making the payment and having paid any dividend on any class of share capital of Westpac within the prior 12 month period. The notes qualify for transitional treatment as Tier 2 capital of Westpac under APRA’s Basel III capital adequacy framework. The rights of the noteholders and coupon holders are subordinated to the claims of all creditors (including depositors) of Westpac other than those creditors whose claims against Westpac are expressed to rank equally with or after the claims of the noteholders and coupon holders. Convertible debentures and 2004 TPS A wholly owned entity Westpac Capital Trust IV (Capital Trust IV) issued 525,000 2004 TPS in the United States of America at US$1,000 each on 5 April 2004, with non-cumulative semi-annual distributions (31 March and 30 September) in arrears at the annual rate of 5.256% up to but excluding 31 March 2016. From, and including 31 March 2016 the 2004 TPS will pay non- cumulative quarterly distributions (30 June, 30 September, 31 December and 31 March) in arrears at a floating rate equal to the London InterBank Offer Rate (LIBOR) plus 1.7675% per year. Capital Trust IV has also issued common securities with a total price of US$1,000 to Westpac Capital Holdings Inc. 2004 TPS qualify for transitional treatment as Additional Tier 1 capital of Westpac under APRA’s Basel III capital adequacy framework. The sole assets of the Capital Trust IV comprise 525,001 2004 Funding TPS issued by a wholly owned entity, Tavarua Funding Trust IV (Funding Trust IV) totalling US$525,001,000. The 2004 Funding TPS have an issue price of US$1,000 each with non-cumulative semi-annual distributions in arrears at the annual rate of 5.256% up to but excluding 31 March 2016. From and including 31 March 2016, the 2004 Funding TPS will pay non-cumulative quarterly distributions (30 June, 30 September, 31 December and 31 March) in arrears at a floating rate equal to LIBOR plus 1.7675% per year. Funding Trust IV has issued common securities with a total price of US$1,000 to Westpac. The assets of Funding Trust IV comprise convertible debentures issued by Westpac in aggregate amount of US$525,001,000 and US Government securities purchased with the proceeds of the common securities. The convertible debentures are unsecured, junior subordinated obligations of Westpac and will rank subordinate and junior in right of payment of principal and distributions to Westpac’s obligations to its depositors and creditors. The convertible debentures will only pay distributions to the extent they are declared by the Board of Directors of Westpac, or an authorised committee of the Board. Any distribution is subject to the satisfaction that no deferral conditions exist. If certain deferral conditions exist a distribution is not permitted to be declared unless approved by APRA. Westpac has guaranteed, on a subordinated basis, the payment in full of distributions or redemption amounts, the delivery of ADRs and other payments on the 2004 TPS and the 2004 Funding TPS to the extent that the Capital Trust IV and the Funding Trust IV have funds available. 174 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 23. LOAN CAPITAL (CONTINUED) Conversion The convertible debentures have no stated maturity, but will automatically convert into American Depositary Receipts (ADRs) each representing 40 Westpac preference shares (non-cumulative preference shares in Westpac with a liquidation amount of US$25) on 31 March 2053, or earlier in the event that a distribution is not made or certain other events occur. Upon issue the amount paid up on each Westpac preference share will be deemed to be US$25. The 2004 TPS will then be redeemed for ADRs. The dividend payment dates and distribution rates on Westpac preference shares will be the same as those otherwise applicable to 2004 TPS. The holders of the ADRs will, in certain circumstances, have the right to convert their Westpac preference shares represented by ADRs into a variable number of Westpac ordinary shares on 31 March 2054 by giving notice to Westpac. For each preference share converted, holders will receive a number of Westpac ordinary shares calculated using the formula described in the 2004 TPS terms. The price at which Westpac ordinary shares will be issued is based on the Westpac ordinary share price determined over the 20 trading day period prior to the optional conversion date and includes a 5% discount. Redemption With the prior written consent of APRA, if required, Westpac may elect to redeem the convertible debentures for cash before 31 March 2016 in whole upon the occurrence of certain specific events, and in whole or in part on 31 March 2016 or any distribution date thereafter. The proceeds received by Funding Trust IV from the redemption of the convertible debentures must be used to redeem the 2004 Funding TPS and ultimately the 2004 TPS. The redemption price of the 2004 TPS will equal US$1,000 per 2004 TPS plus the accrued and unpaid distribution for the then current semi-annual or quarterly period to the date of redemption or, if the date of redemption is a distribution date, the accrued and unpaid distribution for the most recent semi-annual or quarterly period. The holders of the convertible debentures, 2004 Funding TPS and 2004 TPS do not have an option to require redemption of these instruments. Westpac SPS Westpac issued 10,362,670 Westpac SPS at a face value of $100 each on 30 July 2008. Westpac SPS were stapled securities, each consisting of a perpetual, unsecured, non-cumulative subordinated note issued by Westpac’s New York branch stapled to a preference share issued by Westpac. On 19 August 2013, $332 million of Westpac SPS were bought back on-market and subsequently cancelled. All remaining Westpac SPS were transferred to a nominated party on 26 September 2013 and subsequently converted into Westpac ordinary shares or redeemed. Westpac SPS II Westpac issued 9,083,278 Westpac SPS II at a face value of $100 each on 31 March 2009. Westpac SPS II are stapled securities, each consisting of a perpetual, unsecured, non-cumulative subordinated note issued by Westpac’s New York branch stapled to a preference share issued by Westpac. Westpac SPS II qualify for transitional treatment as Additional Tier 1 capital of Westpac under APRA’s Basel III capital adequacy framework. Westpac SPS II are expected to pay non-cumulative, floating rate quarterly distributions (30 September, 31 December, 31 March and 30 June) which are expected to be fully franked. The distribution rate on Westpac SPS II is calculated as the Australian 90-day bank bill rate plus the margin of 3.80% per annum, together multiplied by one minus the Australian corporate tax rate (30% during the year ended 30 September 2013). Westpac SPS II distributions are subject to a distribution payment test and distributions will not be paid if the Westpac directors determine not to pay a distribution, the distribution payment exceeds the distributable profits of Westpac (unless APRA otherwise gives its prior written approval), or APRA objects to the payment of the distribution. Westpac SPS II distributions will consist of interest payment on the notes while the notes remain stapled to the preference shares. Following an assignment event, the notes will unstaple from the preference shares and holders will only hold preference shares. Dividends will then become payable on the preference shares if the preference shares have not been converted or redeemed. 3 An assignment event includes, among others, a date selected by Westpac at its absolute discretion, the date preference shares are converted or redeemed, or where interest on the notes has not been paid in full. Westpac SPS II rank for payment in a winding up of Westpac ahead of ordinary shares and equally with equal ranking capital securities but are subordinated to claims of Westpac deposit holders and other senior creditors. Holders of Westpac SPS II are entitled to vote at a general meeting of Westpac in limited circumstances only. 2013 WESTPAC GROUP ANNUAL REPORT 175 NOTE 23. LOAN CAPITAL (CONTINUED) Scheduled conversion, transfer, redemption On 30 September 2014, the initial mandatory conversion date of Westpac SPS II, it is expected that the Westpac SPS II will either be converted into a variable number of Westpac ordinary shares, provided certain conversion conditions are satisfied, or transferred to a nominated party at the election of Westpac for cash equal to their face value. If Westpac SPS II are not converted, transferred or redeemed on the initial mandatory conversion date, they will remain on issue and may either be converted, transferred or redeemed at the next distribution payment date, subject to satisfaction of the conversion conditions. For each Westpac SPS II that is converted, holders will receive a number of Westpac ordinary shares calculated using the formula described in the Westpac SPS II terms. The price at which Westpac ordinary shares will be issued is based on the Westpac ordinary share price determined over the 20 business day period prior to the mandatory conversion date and includes a 1% discount. If the conversion conditions are not satisfied on a mandatory conversion date, Westpac SPS II may in certain circumstances be redeemed for their face value subject to APRA approval. Early conversion, transfer, redemption Following an acquisition event, if Westpac has not otherwise elected to convert or redeem, the Westpac SPS II will automatically convert as described above, providing the conversion conditions are satisfied. In certain other limited circumstances, such as for tax or regulatory reasons, Westpac SPS II may be converted as described above, transferred or redeemed at Westpac’s election prior to the initial mandatory conversion date. Westpac CPS Westpac issued 11,893,605 Westpac Convertible Preference Shares (Westpac CPS) at a face value of $100 each on 23 March 2012. Westpac CPS are fully paid, perpetual, non-cumulative, convertible, unguaranteed and unsecured preference shares which rank in priority to ordinary shares. Westpac CPS qualify for transitional treatment as Additional Tier 1 capital of Westpac under APRA’s Basel III capital adequacy framework. Westpac CPS are expected to pay preferred, non-cumulative, floating rate semi-annual dividends (30 September and 31 March) which are expected to be fully franked. The dividend rate is calculated as the Australian 180-day bank bill rate per annum plus the margin of 3.25% per annum, together multiplied by one minus the Australian corporate tax rate (30% during the year ended 30 September 2013). Westpac CPS dividends are discretionary and only payable subject to a dividend payment test, being that dividends will not be paid if the Westpac directors determine not to pay a dividend, the dividend payment exceeds the distributable profits of Westpac (unless APRA otherwise gives its prior written approval), or APRA objects to the payment of the dividend. Westpac CPS rank for payment in a winding up of Westpac ahead of ordinary shares and equally with equal ranking capital securities but are subordinated to claims of Westpac deposit holders and other senior creditors. Holders of Westpac CPS are entitled to vote at a general meeting of Westpac in limited circumstances only. Scheduled conversion On the scheduled conversion date, it is expected that the Westpac CPS will either be converted into a variable number of Westpac ordinary shares provided certain conversion conditions are satisfied, or transferred to a nominated party at the election of Westpac for cash equal to their face value. The scheduled conversion date will be the earlier of 31 March 2020 and the first dividend payment date after 31 March 2020 on which the conversion conditions are satisfied. For each Westpac CPS converted, holders will receive a number of Westpac ordinary shares calculated using the formula described in the Westpac CPS terms. The price at which Westpac ordinary shares will be issued is based on the Westpac ordinary share price determined over the 20 business day period prior to the scheduled conversion date and includes a 1% discount. If Westpac CPS are not converted or transferred on the initial scheduled conversion date, they will remain on issue and may either be converted or transferred on the next dividend payment date, providing the conversion conditions are satisfied. Early conversion The Westpac CPS will be converted earlier upon a capital trigger event. A capital trigger event will occur when Westpac’s Common Equity Tier 1 Capital ratio is equal to or less than 5.125% (on a level 2 basis1). Westpac must convert all Westpac CPS into a variable number of ordinary shares following a capital trigger event. No conversion conditions apply in these circumstances. For each Westpac CPS, holders will receive a number of Westpac ordinary shares calculated using the formula described in the Westpac CPS terms, but subject to a maximum conversion number, which is 24.0038 Westpac ordinary shares. The maximum conversion number is set using a Westpac ordinary share price which is broadly equivalent to 20% of the Westpac ordinary share price at the time of issue. For each Westpac CPS, holders will receive a number of Westpac ordinary shares as described above, except that the price at which Westpac ordinary shares will be issued is based on the Westpac ordinary share price determined over a five business day period prior the capital trigger event. 1 Level 1 comprises Westpac Banking Corporation and its subsidiary entities that have been approved by APRA as being part of a single ‘Extended Licenced Entity’ for the purposes of measuring capital adequacy. Level 2 includes all subsidiary entities except those entities specifically excluded by APRA regulations for the purposes of measuring capital adequacy. 176 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 23. LOAN CAPITAL (CONTINUED) Conversion may also occur early following an acquisition event, on broadly similar terms to scheduled conversion, described above. In certain other limited circumstances (such as for tax, regulatory or change of control reasons) Westpac may elect to convert, transfer or redeem Westpac CPS. Conversions or redemptions at Westpac’s election are subject to APRA’s prior written approval and, in respect of conversions, to satisfaction of the conversion conditions. Westpac CN Westpac issued 13,835,690 Westpac Capital Notes (Westpac CN) at a face value of $100 each on 8 March 2013. Westpac CN are fully paid, perpetual, non-cumulative, convertible, transferrable, redeemable, subordinated, perpetual and unsecured notes which rank in priority to ordinary shares and equally with equal ranking capital securities but behind all senior creditors and depositors. Westpac CN qualify as Additional Tier 1 capital of Westpac under APRA’s Basel III capital adequacy framework. Westpac CN are expected to pay non-cumulative, floating rate quarterly distributions (8 September, 8 December, 8 March and 8 June) which are expected to be fully franked. The distribution rate is calculated as the Australian 90-day bank bill rate plus the margin of 3.20% per annum, together multiplied by one minus the Australian corporate tax rate (30% during the period ended 30 September 2013). Distributions are discretionary, and are only payable subject to satisfaction of the distribution payment conditions, being Westpac’s absolute discretion; the distribution payment not resulting in a breach of Westpac’s capital requirements under APRA’s prudential standards; the distribution payment not resulting in Westpac becoming, or likely to become, insolvent; and APRA not otherwise objecting to the payment of the distribution. In the event of a winding-up, and assuming Westpac CN remain on issue and have not been converted or otherwise had their rights terminated following a capital trigger event or non-viability trigger event, Westpac CN rank in priority to ordinary shares and equally with equal ranking capital securities but behind all senior creditors (including depositors and all holders of Westpac’s senior or less subordinated debt). If conversion occurs prior to a winding-up, Westpac CN holders will hold ordinary shares and rank equally with other holders of ordinary shares. Westpac may redeem or transfer the Westpac CN on 8 March 2019, being the optional redemption or transfer date. In certain other limited circumstances (such as for tax and regulatory reasons) Westpac may elect to redeem Westpac CN. Redemptions at Westpac’s election are subject to APRA’s prior written approval. The Westpac CN convert into Westpac ordinary shares in the following circumstances: Scheduled conversion On the scheduled conversion date, the Westpac CN will be converted into a variable number of Westpac ordinary shares, provided certain conversion conditions are satisfied. The scheduled conversion date will be the earlier of 8 March 2021 and the first distribution payment date after 8 March 2021 on which the conversion conditions are satisfied. For each Westpac CN, holders will receive a number of Westpac ordinary shares calculated using the formula described in the Westpac CN terms. The price at which Westpac ordinary shares will be issued is based on the share price determined over the 20 business day period prior to the scheduled conversion date and includes a 1% discount. If the conversion conditions are not satisfied conversion will not occur and conversion will occur on the next distribution payment date, provided the conversion conditions are satisfied. Early conversion The Westpac CN will be converted earlier upon a capital trigger event or non-viability trigger event. A capital trigger event will occur when Westpac’s Common Equity Tier 1 Capital ratio is equal to or less than 5.125% (on a level 1 or level 2 basis1). A non-viability trigger event will occur if APRA determines Westpac is, or would become, non-viable. No conversion conditions apply in these circumstances. For each Westpac CN, holders will receive a number of Westpac ordinary shares calculated using the formula described in the Westpac CN terms, but subject to a maximum conversion number, which is 16.7280 Westpac ordinary shares. The maximum conversion number is set using a Westpac ordinary share price which is broadly equivalent to 20% of the share price at the time of issue. The price at which Westpac ordinary shares will be issued is based on the share price determined over the five business day period prior to the capital trigger event or non-viability trigger event. Following the occurrence of a capital trigger event or non-viability trigger event, if Westpac is unable to convert the Westpac CNs for any reason, holder’s rights in relation to Westpac CN will be terminated. 3 Conversion may also occur early following an acquisition event, on broadly similar terms to scheduled conversion, described above. Holders of Westpac CN have no right to vote at a general meeting of Westpac before conversion. Holders have certain voting rights which can be exercised at a meeting of holders. 1 Level 1 comprises Westpac Banking Corporation and its subsidiary entities that have been approved by APRA as being part of a single ‘Extended Licenced Entity’ for the purposes of measuring capital adequacy. Level 2 includes all subsidiary entities except those entities specifically excluded by APRA regulations for the purposes of measuring capital adequacy. 2013 WESTPAC GROUP ANNUAL REPORT 177 NOTE 24. SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTERESTS Contributed equity Ordinary shares 3,109,048,309 (2012: 3,080,192,894) each fully paid RSP treasury shares 7,855,661 (2012: 8,697,511) Other treasury shares 5,422,506 (2012: 5,699,912) Share capital Other equity instruments Convertible debentures: Issued on 13 August 2003 NZ$1,293,105,172 (with net issue costs of NZ$9 million) Issued on 21 June 2006 A$762,737,500 (with net issue costs of A$8 million) Total other equity instruments Non-controlling interests Trust preferred securities: 750,000 2003 TPS of US$1,000 each (with net issue costs of NZ$9 million) 7,627,375 2006 TPS of A$100 each (with net issue costs of A$8 million) Other Total non-controlling interests Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m 27,021 (176) (77) (253) 26,768 26,355 (108) (84) (192) 26,163 27,021 (176) (5) (181) 26,840 26,355 (108) (6) (114) 26,241 - - - - 755 108 863 - - - 1,137 755 78 1,970 - 1,137 755 755 755 1,892 - - - - - - - - Ordinary shares In accordance with the Corporations Act Westpac does not have authorised capital and all ordinary shares issued have no par value. Ordinary shares entitle the holder to participate in dividends as declared and in the event of winding up of Westpac, to participate in the proceeds in proportion to the number of and amounts paid on the shares held. Ordinary shares entitle the holder to one vote per share, either in person or by proxy, at a meeting of Westpac shareholders. During the year ended 30 September 2013, 28,855,415 ordinary shares were issued:  to equity holders in relation to the Dividend Reinvestment Plan (DRP), 21,372,496 ordinary shares at a price of $24.86;  to eligible staff under the ESP, 1,052,610 ordinary shares issued for nil consideration;  to note holders in relation to conversion of the Westpac Stapled Preferred Securities, 5,319,225 ordinary shares at a price of $32.49;  to eligible executives and senior management under the Westpac Performance Plan (WPP), upon the exercise of options, 324,906 ordinary shares at an average exercise price of $18.21 and upon exercise of share rights, 159,244 shares for nil consideration; and  to eligible employees upon exercise of options under the Westpac Reward Plan (WRP), 30,255 ordinary shares at an average exercise price of $23.40 and upon exercise of share rights, 596,679 ordinary shares for nil consideration. 178 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 24. SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTERESTS (CONTINUED) During the year ended 30 September 2013, 27,026,826 existing ordinary shares were purchased:  18,773,392 ordinary shares at an average price of $28.91 and delivered to equity holders under the DRP;  2,612,217 ordinary shares at an average price of $26.04 and allocated to employees under the RSP for nil consideration;  1,768,808 ordinary shares at an average price of $30.36 and delivered to employees upon the exercise of options under the WPP at an average exercise price of $21.17;  422,052 ordinary shares at an average price of $30.28 and delivered to employees upon the exercise of share rights under the WPP for nil consideration;  1,263,359 ordinary shares at an average price of $31.73 and delivered to employees upon the exercise of options under the WRP at an average exercise price of $26.35;  9,374 ordinary shares at an average price of $31.87 and delivered to employees upon the exercise of share rights under the WRP for nil consideration;  400,043 ordinary shares at an average price of $33.25 and delivered to CEO upon the exercise of options under the Chief Executive Performance Plan (CEOPP) at an average exercise price of $25.08;  128,174 ordinary shares at an average price of $33.25 and delivered to CEO upon exercise of share rights under the CEOPP for nil consideration;  1,649,407 ordinary shares at an average price of $29.77 and delivered to former CEO upon the exercise of options under the CEOPP at an average exercise price of $22.14; and  the purchase of existing ordinary shares in respect of employee share plans resulted in a tax benefit of $11.6 million being recognised as contributed equity. Restricted Share Plan treasury shares Ordinary shares allocated to eligible employees under the RSP are classified as treasury shares until unconditional ownership of the shares vest at the end of the restriction period. Other treasury shares Treasury shares includes ordinary shares held by statutory life funds and managed investment schemes and ordinary shares held by Westpac in respect of equity derivatives sold to customers. During the year 67,128 treasury shares were purchased at an average price of $29.15 and 344,534 treasury shares were sold at an average price of $27.96. Convertible debentures and 2003 TPS A wholly owned entity Westpac Capital Trust III (Capital Trust III) issued 750,000 2003 TPS in the United States of America at US$1,000 each on 13 August 2003. Capital Trust III also issued common securities with a total price of US$1,000 to Westpac Capital Holdings Inc. The sole assets of the Capital Trust III were 750,001 Funding 2003 TPS issued by a wholly owned entity, Tavarua Funding Trust III (Funding Trust III) totalling US$750,001,000. The Funding 2003 TPS had an issue price of US$1,000 each. Funding Trust III issued common securities with a total price of US$1,000 to Westpac Funding Holdings Pty Limited. The assets of Funding Trust III were convertible debentures issued by Westpac in aggregate amount of NZ$1,293,105,172, US Government securities purchased with the proceeds of the common securities and a currency swap with Westpac. The convertible debentures were unsecured, junior subordinated obligations of Westpac and ranked subordinate and junior in right of payment of principal and distributions to Westpac’s obligations to its depositors and creditors. Following Westpac’s election to redeem the convertible debentures on 30 September 2013, the convertible debentures, Funding 2003 TPS, 2003 TPS, and common securities were redeemed at par on this date. Convertible notes and 2006 TPS A Westpac controlled entity, Westpac TPS Trust, issued 7,627,375 2006 TPS in Australia at $100 each on 21 June 2006. The 2006 TPS are preferred units in the Westpac TPS Trust, with non-cumulative floating rate distributions which are expected to be fully franked. Westpac TPS Trust also issued one ordinary unit with an issue price of $100 to Westpac. Westpac, as holder of the ordinary unit, is entitled to any residual income or assets of the Westpac TPS Trust not distributed to holders of 2006 TPS. The principal assets of Westpac TPS Trust are 7,627,375 convertible notes (the notes) issued by Westpac in an aggregate amount of $762,737,500. The notes qualify for transitional treatment as Additional Tier 1 capital of Westpac under APRA’s Basel III capital adequacy framework. 3 2013 WESTPAC GROUP ANNUAL REPORT 179 NOTE 24. SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTERESTS (CONTINUED) The 2006 TPS are scheduled to pay quarterly distributions (30 September, 31 December, 31 March and 30 June) in arrears, subject to certain conditions being satisfied. The distribution rate on 2006 TPS, until 30 June 2016 (the step-up date), is calculated as the Australian 90 day bank bill rate plus 1% per annum (the initial margin), together multiplied by one minus the Australian corporate tax rate (30% during the year ended 30 September 2013). After the step-up date, the initial margin will increase by a one time step-up of 1% per annum. Distributions on the 2006 TPS will only be made if Westpac pays interest on the notes and certain other conditions (which broadly correspond to the interest payment conditions on the notes) are satisfied. Interest on the notes is subject to an interest payment test and interest will not be paid if Westpac directors have not resolved to make the interest payment, the payment of interest exceeds distributable profits (unless APRA gives its prior approval) and APRA does not otherwise object to the payment. The interest payments on the notes are expected to exceed the aggregate amount of the distributions to be made on 2006 TPS. The excess will be distributed to Westpac, as holder of the ordinary unit in the Westpac TPS Trust, on each distribution payment date. The notes are unsecured obligations of Westpac and rank subordinate and junior in right of payment of principal and interest to Westpac’s obligations to depositors and creditors, other than subordinated creditors holding subordinated indebtedness that is stated to rank equally with, or junior to the notes. Conversion, exchange and redemption Westpac can redeem 2006 TPS for cash with APRA approval or convert into a variable number of Westpac ordinary shares calculated in accordance with the Westpac TPS terms, on the step-up date or any distribution payment date after the step-up date, for certain tax, regulatory or change of control reasons and in certain other circumstances. If Westpac elects to redeem 2006 TPS, holders will receive cash equal to their face value. If Westpac elects to convert 2006 TPS, for each 2006 TPS, holders will receive a number of ordinary shares calculated using the formula described in the 2006 TPS terms subject to a maximum conversion number which is 50 Westpac ordinary shares. The price at which Westpac ordinary shares will be issued is based on the Westpac ordinary share price determined over the 20 business day period prior to the elected conversion date and includes a 2.5% discount. If Westpac redeems or converts 2006 TPS, Westpac must also redeem or convert the notes in a corresponding manner. The 2006 TPS will automatically exchange into Westpac preference shares upon the occurrence of an automatic exchange event, that is, if the 2006 TPS are still on issue on 30 September 2055 or in certain other limited circumstances, including the occurrence of an event of default or an APRA event (unless APRA determines otherwise). On exchange, all 2006 TPS on issue will exchange into preference shares directly issued by Westpac and the notes and the 2006 TPS will be redeemed simultaneously. On exchange, 2006 TPS holders will receive one preference share for each 2006 TPS. NOTE 25. SHARE-BASED PAYMENTS Executive and Senior Officer equity plans Options, restricted shares and/or share rights are granted to the CEO, selected executives and key senior employees under the following schemes. (i) Westpac Reward Plan The Westpac Reward Plan (WRP) was introduced in 2006. It provides a mechanism for rewarding superior long-term performance from the most senior management in Australia and overseas. Under the WRP senior managers may be invited to receive an award of performance options or performance share rights. An option or share right under the WRP is the right to acquire a share in the future provided all conditions are met, with an exercise price for options set at the commencement of the performance period. The exercise price for options is based on the prevailing market price of Westpac ordinary shares at the commencement of the performance period. The exercise price for share rights is nil. No performance options have been awarded since October 2009. Awards made from October 2011 are subject to two performance measures each applying to 50% of the value of the award. The two hurdles are Westpac’s relative Total Shareholder Return (TSR)1 and Compound Annual Growth Rate in Cash EPS (Cash EPS CAGR). Full vesting of TSR hurdled performance share rights occurs when Westpac’s TSR is at (or exceeds) the 75th percentile relative to the comparator group, scaling down to 50% vesting on a straight-line basis for median performance. Below median performance, no vesting occurs. The comparator group for TSR comparisons focuses on the top 10 financial sector peers. Full vesting of Cash EPS CAGR hurdled share rights occurs when a maximum target Cash EPS CAGR is achieved, scaling down to 50% vesting at a threshold Cash EPS CAGR target. Below the threshold target Cash EPS CAGR, no vesting occurs. These awards are subject to a single test at the end of the three year performance period. Any securities remaining unvested after the performance period lapse immediately. 1 TSR measures a company’s share price movement and assumes that dividends over the period have been reinvested (i.e. the change in value of an investment in that company’s shares) and excluding tax effects. 180 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 25. SHARE-BASED PAYMENTS (CONTINUED) For awards made prior to October 2011 all awards were subject to a TSR hurdle and the initial TSR performance is tested at the third anniversary of the commencement of the performance period, with subsequent performance testing possible at the fourth and fifth anniversaries of the commencement of the performance period. At subsequent performance test dates (where they exist) further vesting may occur only if the TSR ranking has improved. Upon exercising vested performance options and performance share rights, the executive has the right to take up his or her entitlement in whole or in part as fully paid ordinary shares. The exercise price is payable at that time. A performance option or performance share right lapses if it is not exercised prior to the end of its term. WRP – outstanding performance options and performance share rights The following table sets out details of outstanding performance options and performance share rights under the WRP: Commencement Date Latest Date for Exercise Exercise Price Outstanding at 1 October 2012 Granted During the Year Exercised During the Year Lapsed During the Year Outstanding at 30 September 2013 Outstanding and Exercisable at 30 September 2013 20 December 2017 1 October 2018 Performance options 17 December 2007 1 October 2008 Total 2013 Weighted average exercise price Performance share rights 1 October 2009 1 October 2010 1 October 2011 1 October 2012 Total 2013 Total 2012 Performance options Weighted average exercise price Performance share rights 1 October 2019 1 October 2020 1 October 2021 1 October 2022 $30.10 $23.40 1,593,886 1,398,864 2,992,750 $26.97 557,113 - - 736,501 - 1,293,614 $26.29 - - - - - 1,036,773 662,363 1,699,136 $27.49 1,036,773 662,363 1,699,136 $27.49 nil nil nil nil 675,050 753,806 1,273,052 - - - - 1,132,587 2,701,908 1,132,587 606,053 - - - 606,053 524 13,597 38,080 - 52,201 68,473 740,209 1,234,972 1,132,587 3,176,241 1,499 - - - 1,499 3,511,117 $26.15 - - 1,501,701 1,389,308 260,869 $16.49 - 257,498 $26.49 189,101 2,992,750 $26.97 2,701,908 2,873,621 $27.12 - The weighted average remaining contractual life of outstanding performance options at 30 September 2013 was 4.5 years (2012: 5.6 years). The weighted average remaining contractual life of outstanding performance share rights at 30 September 2013 was 8.1 years (2012: 8.2 years). The weighted average fair value at grant date of WRP performance share rights issued during the year was $15.79 (2012: $13.00). (ii) Westpac Performance Plan The Westpac Performance Plan (WPP) was introduced in 2002 and was used to provide awards of performance options and/or performance share rights to senior executives and other key employees. Currently the WPP is primarily used for employees based in New Zealand to provide long-term incentive awards or as a mechanism for the mandatory deferral of a portion of their short-term incentives. An option or share right under the WPP is the right to acquire a share in the future provided all conditions are met, with an exercise price for options generally set at the time the invitation is made. The exercise price for options is equal to the average market price of Westpac ordinary shares traded on the ASX over the five trading days up to the time the invitation is made. The exercise price for share rights is nil. 3 Performance options and performance share rights Performance options and performance share rights under the WPP have all vested. Upon exercising vested performance options or performance share rights, the executive has the right to take up his or her entitlement in whole or in part as fully paid ordinary shares. The exercise price is payable at that time. A performance option or performance share right lapses if it is not exercised prior to the end of its term. 2013 WESTPAC GROUP ANNUAL REPORT 181 NOTE 25. SHARE-BASED PAYMENTS (CONTINUED) WPP – outstanding performance options No performance options were granted under the WPP during the year. The following table sets out details of outstanding performance options granted under the WPP in previous years: Latest Date for Exercise 20 January 2013 1 May 2013 21 January 2014 20 January 2015 20 December 2015 20 December 2015 15 December 2016 Commencement Date 20 January 2003 1 May 2003 21 January 2004 20 January 2005 20 December 2005 20 December 2005 15 December 2006 Total 2013 Weighted average exercise price Total 2012 Weighted average exercise price Exercise Price $13.59 $15.04 $16.34 $18.98 $20.53 $22.53 $23.98 Outstanding at 1 October 2012 21,907 16,433 349,940 1,016,562 1,060,021 56,592 1,332,226 3,853,681 $20.90 4,611,438 $20.48 Exercised Granted During During the Year the Year 14,633 - 16,433 - 246,936 - 563,450 - 533,375 - - - 718,887 - - 2,093,714 $20.71 - 584,352 - $16.74 - Lapsed During the Year 7,274 - - - - - - 7,274 $13.59 173,405 $23.87 Outstanding at 30 September 2013 Outstanding and Exercisable at 30 September 2013 - - - - 103,004 103,004 453,112 453,112 526,646 526,646 56,592 56,592 613,339 613,339 1,752,693 1,752,693 $21.15 3,853,681 $20.90 $21.15 3,853,681 $20.90 The weighted average remaining contractual life of outstanding performance options at 30 September 2013 was 2.2 years (2012: 3.1 years). 182 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 25. SHARE-BASED PAYMENTS (CONTINUED) WPP – outstanding performance share rights No performance share rights were granted under the WPP during the year. The following table sets out details of outstanding vested performance share rights granted under the WPP: Latest Dates for Exercise Commencement Dates Two-year initial testing period 20 January 2003 to 1 August 2003 3 November 2003 to 3 August 2004 5 November 2004 to 1 August 2005 1 November 2005 to 3 August 2006 1 November 2006 to 15 December 2006 1 December 2008 to 1 March 2009 20 January 2013 to 1 August 2013 3 November 2013 to 3 August 2014 5 November 2014 to 1 August 2015 1 November 2015 to 3 August 2016 1 November 2016 to 15 December 2016 1 December 2018 to 1 March 2019 Three-year initial testing period 20 January 2003 to 1 August 2003 3 November 2003 to 3 August 2004 5 November 2004 to 1 August 2005 1 November 2005 to 3 August 2006 1 November 2006 to 15 December 2006 Total 2013 Total 2012 20 January 2013 to 1 August 2013 3 November 2013 to 3 August 2014 5 November 2014 to 1 August 2015 1 November 2015 to 3 August 2016 1 November 2016 to 15 December 2016 Outstanding at 1 October 2012 Granted During the Year Exercised During the Year Lapsed During the Year Outstanding at 30 September 2013 Outstanding and Exercisable at 30 September 2013 16,001 57,160 97,261 109,942 40,136 17,359 23,022 40,981 74,374 172,583 1,877 650,696 868,201 - - - - - - - - - - - - - 16,001 40,938 53,148 47,257 36,646 17,359 23,022 18,827 25,839 61,117 - - - - - - - - - - - - 16,222 16,222 44,113 44,113 62,685 62,685 3,490 3,490 - - - - 22,154 22,154 48,535 48,535 111,466 111,466 1,877 342,031 212,976 - - 4,529 - 308,665 650,696 - 308,665 650,696 The weighted average remaining contractual life of outstanding performance share rights at 30 September 2013 was 1.7 years (2012: 2.7 years). Unhurdled options and unhurdled share rights The WPP is also used for key employees based outside Australia, who received unhurdled share rights restricted for one to three years. No unhurdled options were granted under the WPP during the year. After the restriction period applying to them has passed, vested unhurdled options and unhurdled share rights can be exercised to receive the underlying fully paid ordinary shares. 3 2013 WESTPAC GROUP ANNUAL REPORT 183 NOTE 25. SHARE-BASED PAYMENTS (CONTINUED) WPP – outstanding unhurdled options and unhurdled share rights The following table sets out details of outstanding unhurdled options and unhurdled share rights granted under the WPP: Commencement Date Latest Date for Exercise Exercise Price Outstanding at 1 October 2012 Granted During the Year Exercised During the Year Lapsed During the Year 15 December 2016 $23.93 Options 15 December 2006 Total 2013 Share rights One-year vesting period 1 December 2008 to 1 June 2009 1 November 2009 to 1 April 2010 1 November 2010 to 1 April 2011 1 October 2011 to 1 August 2012 1 September 2012 to 1 December 2012 Two-year vesting period 1 November 2007 to 1 September 2008 1 October 2008 to 1 April 2009 1 October 2009 to 1 April 2010 1 October 2010 to 1 August 2011 1 October 2011 to 1 August 2012 1 September 2012 to 1 October 2012 1 December 2018 to 1 June 2019 1 November 2019 to 1 April 2020 1 November 2020 to 1 April 2021 1 October 2021 to 1 August 2022 1 September 2022 to 1 December 2022 1 November 2017 to 1 September 2018 1 October 2018 to 1 April 2019 1 October 2019 to 1 April 2020 1 October 2020 to 1 August 2021 1 October 2021 to 1 August 2022 1 September 2022 to 1 October 2022 15 December 2016 to 1 June 2017 17 December 2017 to 1 September 2018 1 October 2018 to 1 April 2019 1 October 2019 to 1 April 2020 1 October 2020 to 1 August 2021 1 October 2021 to 1 June 2022 1 October 2022 to 1 April 2023 Three-year vesting period 15 December 2006 to 1 June 2007 17 December 2007 to 1 September 2008 1 October 2008 to 1 April 2009 1 October 2009 to 1 April 2010 1 October 2010 to 1 August 2011 1 October 2011 to 1 June 2012 1 October 2012 to 1 April 2013 Total 2013 Total 2012 Options Share rights Outstanding at 30 September 2013 Outstanding and Excercisable at 30 September 2013 42,779 42,779 42,779 42,779 5,681 5,681 - - 8,573 8,573 16,789 16,789 37,155 - 42,779 42,779 5,681 1,074 9,743 52,201 - - - - - - - - - 1,074 1,170 35,412 - 39,336 2,181 - - - - - - - 12,335 5,313 16,355 110,764 65,926 - - - - - - 74,781 742 1,495 9,242 156 490 726 11,437 11,437 3,328 6,387 3,328 6,387 89,393 1,901 19,470 19,470 - - 3,030 1,444 62,896 73,337 - - 29,392 25,826 20,650 113,420 175,769 162,161 - - - - - - 3,982 10,600 9,005 - 163 520 25,410 25,410 15,063 15,063 11,125 11,125 81,808 5,395 26,217 26,217 - - 15,512 160,257 13,282 148,879 - 806,610 129,084 243,201 - 246,104 4,977 47,596 $23.93 nil 56,147 767,379 - 280,288 - 237,250 13,368 3,807 124,107 756,111 42,779 806,610 - - - 149,480 42,779 126,369 nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil nil The weighted average fair value at grant date of unhurdled share rights issued during the year was $21.88 per right (2012: $17.59 per right). The weighted average remaining contractual life of outstanding unhurdled options and unhurdled share rights at 30 September 2013 was 7.4 years (2012: 7.7 years). 184 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 25. SHARE-BASED PAYMENTS (CONTINUED) (iii) Chief Executive Officer Performance Plan (Gail Kelly) Gail Kelly currently holds performance share rights under the Chief Executive Officer Performance Plan (CEOPP). Performance share rights have a nil exercise price. No performance options have been awarded since December 2008. Grants to Mrs Kelly under the CEOPP were approved by shareholders at Westpac’s AGM on 13 December 2007, 16 December 2009 and 15 December 2010. Awards made from October 2011 are subject to two performance measures each applying to 50% of the value of the award. The two hurdles are Westpac’s relative TSR and Cash EPS CAGR. The vesting conditions for these awards are the same as set out above for awards made under the WRP from October 2011. For awards made prior to October 2011, all awards were subject to a TSR hurdle. The vesting conditions for these awards are also the same as awards made under the WRP prior to October 2011. CEOPP – outstanding performance options and performance share rights The following table sets out details of outstanding awards of performance options and performance share rights granted under the CEOPP: Commencement Date Latest Date for Exercise Exercise Price Outstanding at 1 October 2012 Granted During the Year Exercised During the Year Lapsed During the Year Outstanding at 30 September 2013 1 February 2018 1 December 2018 Performance options 1 February 2008 1 December 2008 Total 2013 Weighted average exercise price Performance share rights 1 December 2008 21 December 2009 1 October 2010 1 October 2011 1 October 2012 Total 2013 Total 2012 Performance options Weighted average exercise price Performance share rights 1 December 2018 21 December 2019 1 October 2020 1 October 2021 1 October 2022 $25.89 $16.80 nil nil nil nil nil nil 364,431 35,612 400,043 $25.08 11,973 166,002 176,125 272,929 - 627,029 720,556 $21.40 486,545 - - - - - - - - 213,101 213,101 - - 272,929 364,431 35,612 400,043 25.08 11,973 116,201 - - - 128,174 320,513 $16.80 132,445 - - - - - - - - - - - - - - - - - - 49,801 176,125 272,929 213,101 711,956 400,043 $25.08 627,029 The weighted average fair value at grant date of performance share rights granted during the year was $16.29 per right (2012: $12.83 per right). As at 30 September 2013, no outstanding share rights issued to Mrs Kelly were exercisable. The remaining weighted average contractual life of outstanding performance share rights was 7.9 years (2012: 8.2 years). (iv) Fair value assumptions The fair values of share rights granted during the year included in the tables above have been independently calculated at their respective grant dates based on the requirements of Australian accounting standard AASB 2 Share-based Payments. The fair values of rights without TSR based hurdles, including rights with Cash EPS CAGR hurdles, have been assessed with reference to the share price at grant date and a discount rate reflecting the expected dividend yield over their vesting periods. 3 The fair value of rights with hurdles based on TSR performance relative to a group of comparator companies also takes into account the average TSR outcome determined using a Monte Carlo simulation pricing model. Other key assumptions include:  the assumptions included in the valuation of the awards of performance share rights to Gail Kelly include a risk free interest rate of 2.7%, a dividend yield on Westpac ordinary shares of 6.4% and a volatility in the Westpac share price of 23.6%;  the assumptions included in the valuation of the awards of share rights under the WRP and WPP include a risk free interest rate of 2.7%, a dividend yield on Westpac ordinary shares of 6.6% and a volatility in the Westpac share price of 23.7%;  volatility has been assessed by considering the historic volatility of the market price of Westpac shares; and  other assumptions include volatilities of, and correlation factors between, share price movements of the comparator group members and Westpac which are used to assess the impact of the TSR performance hurdles and have been derived from the historic volatilities and correlations. 2013 WESTPAC GROUP ANNUAL REPORT 185 NOTE 25. SHARE-BASED PAYMENTS (CONTINUED) (v) Chief Executive Officer Restricted Share Plan Gail Kelly received awards of Westpac ordinary shares under the Chief Executive Officer Restricted Share Plan (CEO RSP) in relation to her employment agreement. The awards were approved by Westpac shareholders at Westpac’s AGM on 13 December 2007, 16 December 2009 and 15 December 2010. Like the general RSP, Westpac ordinary shares are allocated under the CEO RSP at no cost to Mrs Kelly, with vesting subject to remaining employed with Westpac for a set period. Shares in the CEO RSP are held in Mrs Kelly’s name and are restricted until satisfaction of the vesting conditions. Shares in the CEO RSP rank equally with Westpac ordinary shares for dividends and voting rights. For awards made prior to October 2009, shares may be held in the CEO RSP for up to 10 years from the date they are granted. For awards made from October 2009, shares are released from the CEO RSP on vesting. The following table details outstanding awards of shares issued under the CEO RSP: Allocation date 22 December 2010 22 December 2011 21 December 2012 Total 2013 Total 2012 Outstanding at 1 October 2012 41,051 77,799 - 118,850 119,415 Granted During the Year - - 58,400 58,400 77,799 Released 41,051 25,933 - 66,984 78,364 Forfeited During the Year Outstanding at 30 September 2013 - - - - - - 51,866 58,400 110,266 118,850 186 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 25. SHARE-BASED PAYMENTS (CONTINUED) (vi) Restricted Share Plan The Restricted Share Plan (RSP) provides Westpac with an instrument for attracting and rewarding key employees. Under the RSP, Westpac shares may be allocated to eligible employees at no cost with vesting subject to remaining employed with Westpac for a period determined by the Board. Shares in the RSP are held in the name of the employee and are restricted until satisfaction of the vesting conditions. Shares in the RSP rank equally with Westpac ordinary shares for dividends and voting rights. For awards made prior to October 2009, shares may be held in the RSP for up to 10 years from the date they are granted. For awards made from October 2009, shares are released from the RSP on vesting. Outstanding RSP awards The following table details outstanding awards of shares issued under the RSP: Allocation date Outstanding at 1 October 2012 October – December 2006 January – March 2007 April – June 2007 July – September 2007 October – December 2007 January – March 2008 April – June 2008 July – September 2008 October – December 2008 January – March 2009 April – June 2009 January – March 2010 April – June 2010 July – September 2010 October – December 2010 January – March 2011 April – June 2011 July – September 2011 October – December 2011 January – March 2012 April – June 2012 July – September 2012 October – December 2012 January – March 2013 April – June 2013 July – September 2013 Total 2013 Total 2012 317,448 3,588 15,161 4,375 509,055 10,223 34,367 8,412 1,053,055 77,774 8,734 1,407,193 26,923 21,043 3,071,819 3,652 35,891 39,910 3,468,057 66,773 41,639 358,432 - - - - 10,583,524 8,757,518 Granted During the Year - - - - - - - - - - - - - - - - - - - - - - 2,557,841 66,712 76,497 40,967 2,742,017 4,122,216 Released 45,353 2,990 - 1,922 70,986 1,960 16,951 - 176,299 1,819 - 1,407,193 26,923 18,731 1,254,982 1,960 28,151 18,298 370,983 59,157 10,858 127,012 24,094 - - - 3,666,622 2,120,599 Forfeited During the Year - - - - - - - - - - - - - 2,312 69,175 - 5,553 - 94,257 - - 4,805 43,388 638 - - 220,128 175,611 Outstanding at 30 September 2013 272,095 598 15,161 2,453 438,069 8,263 17,416 8,412 876,756 75,955 8,734 - - - 1,747,662 1,692 2,187 21,612 3,002,817 7,616 30,781 226,615 2,490,359 66,074 76,497 40,967 9,438,791 10,583,524 (vii) Chief Executive Securities Agreement 2003 (David Morgan) At 30 September 2013 there were no performance options outstanding (2012: 1,649,407 with a weighted average exercise price of $22.14 and a weighted average remaining contractual life of 3.3 years) under the Chief Executive Securities Agreement 2003. 3 (viii) Other Group share-based plans Westpac also provides plans for small, specialised parts of the Group. The benefits under these plans are directly linked to growth and performance of the relevant part of the business. The plans individually and in aggregate are not material to the Group. 2013 WESTPAC GROUP ANNUAL REPORT 187 NOTE 25. SHARE-BASED PAYMENTS (CONTINUED) General information on Executive and Senior Officer share plans The market price of Westpac’s ordinary shares as at the close of business on 30 September 2013 was $32.73 (2012: $24.85). Details of the shares issued on exercise of options and share rights under each of the Executive and Senior Officer share plans during the year ended 30 September 2013 are set out below: Plan/Agreement 2013 WRP and WPP Options Share rights Chief Executive Officer Performance Plan Options Share rights Chief Executive Securities Agreement 2003 (David Morgan) Options 2012 WRP and WPP Options Share rights Chief Executive Officer Performance Plan Options Share rights SOSPS Total Number of Shares Issued/ Allocated Weighted Average Share Price at Date of Exercise $ Consideration Received ($’000) Dates on which Options or Share Rights Were Exercised Exercise Price $ October – December 2012 13.59 - 23.98 January – March 2013 16.34 - 23.98 April – June 2013 16.34 - 30.10 July – September 2013 16.34 - 30.10 October – December 2012 January – March 2013 April – June 2013 July – September 2013 - - - - 384,428 1,136,987 1,655,486 210,427 816,804 72,518 197,001 107,865 April – June 2013 16.80 - 25.89 April – June 2013 - 400,043 128,174 25.40 28.02 32.76 30.81 25.36 27.54 31.92 30.96 33.09 33.09 7,225 24,740 40,826 4,576 - - - - 10,033 - October 2012 – June 2013 19.17 - 24.18 1,649,407 29.44 36,519 October – December 2011 13.59 - 18.98 April – June 2012 16.34 - 18.98 July – September 2012 13.59 - 23.98 October – December 2011 January – March 2012 April – June 2012 July – September 2012 - - - - April – June 2012 16.80 October – December 2011 April – June 2012 - - October – December 2011 14.65 January – March 2012 14.65 - 16.24 182,949 506,082 156,190 149,237 42,181 175,072 83,736 320,513 107,758 24,687 343,000 55,000 22.51 22.32 24.27 21.22 21.06 21.45 22.43 22.84 20.37 22.84 21.54 20.41 2,679 8,437 2,970 - - - - 5,385 - - 5,025 830 Shares allotted to satisfy the exercise of options or share rights under the employee equity plans will rank equally with all other issued Westpac ordinary shares and qualify for the payment of dividends and shareholder voting rights from the day of allotment. The employee equity plans are operated in compliance with ASIC Regulatory Guide 49 which provides relief from the disclosure and licensing provisions of the Corporations Act. Included in the ASIC regulatory guide is a five percent limit on the number of shares that can be issued under an employee equity plan without issuing a prospectus. 188 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 25. SHARE-BASED PAYMENTS (CONTINUED) Under the regulatory guide, the number of shares (including shares that are the subject of options and share rights) to be offered to employees at any particular time cannot, at the time the offer is made and when aggregated with the number of shares the subject of previously issued unexercised options and share rights issued to employees under those plans and with the number of shares issued during the previous five years under all employee share schemes, exceed 5% of the total number of shares on issue at the time that offer is made. The names of all persons who hold options and/or share rights currently on issue are entered in Westpac’s register of option holders which may be inspected at Link Market Services, Level 12, 680 George Street, Sydney, New South Wales. Employee Share Plan Under the Employee Share Plan (ESP), Westpac ordinary shares may be allocated at no cost to employees to recognise their contribution to Westpac’s financial performance over the previous financial year. The maximum annual award value under the ESP is $1,000 per employee per year. However, the number of shares employees receive (if any) depends on Westpac’s share price performance over the 12 months to 30 September or a combination of customer-centric measures, and is subject to Board discretion. The shares must normally remain within the ESP for three years unless the employee leaves Westpac. Participants are entitled to receive any dividend or other distribution attaching to shares held under the ESP. Participants are also entitled to exercise voting rights attaching to the shares. Westpac’s Australian permanent employees (including part-time employees) who have been in six months continuous employment as at 30 September each year are eligible to participate in the ESP. Executives and senior management who participate in any Westpac long-term incentive plan or deferred short-term incentive plan are not eligible to participate in the ESP during the same year. The number of shares employees receive is calculated by dividing the award value by the prevailing market price of Westpac’s ordinary shares when the shares are granted. Share allocation in the 2012 ESP award was by way of newly issued shares. The following table provides details of shares issued under the ESP during the years ended 30 September: Allocation Date 4 December 2012 2 December 2011 Number of Participants 26,990 27,005 2013 2012 Average Number of Shares Allocated per Participant 39 49 Total Number of Shares Allocated 1,052,610 1,323,245 Market Price per Share $25.23 $20.35 Total Fair Value $26,557,350 $26,928,036 The liability accrued in respect of the ESP at 30 September 2013 is $28 million (2012: $28 million) and is provided for as other employee benefits. 3 2013 WESTPAC GROUP ANNUAL REPORT 189 NOTE 26. AVERAGE BALANCE SHEET AND INTEREST RATES The following table lists the average balances and related interest for the major categories of the Group’s interest earning assets and interest bearing liabilities. Averages used are predominantly daily averages: Year Ended 30 September 2013 Interest Income $m Average Balance $m Average Rate % Consolidated Year Ended 30 September 2012 Year Ended 30 September 2011 Average Balance $m Interest Income $m Average Rate % Average Balance $m Interest Income $m Average Rate % Assets Interest earning assets Receivables due from other financial institutions: Australia New Zealand Other overseas Trading securities: Australia New Zealand Other overseas Other financial assets designated at fair value: Australia Other overseas Available-for-sale securities: Australia New Zealand Other overseas Regulatory deposits: Other overseas Loans and other receivables1: 2,852 338 5,959 36,916 3,309 6,041 1,590 221 21,475 2,085 1,089 86 5 22 1,498 88 79 3.0% 1.5% 0.4% 3,215 220 4,935 4.1% 36,082 4,538 2.7% 5,072 1.3% 62 5 3.9% 2.3% 1,708 311 1,107 93 26 5.2% 16,240 1,784 4.5% 1,062 2.4% 135 4 49 1,873 123 95 100 8 1,006 80 30 4.2% 1.8% 1.0% 5.2% 2.7% 1.9% 5.9% 2.6% 6.2% 4.5% 2.8% 3,800 328 5,382 37,265 4,733 4,159 1,397 156 12,238 391 986 172 26 53 2,133 149 74 95 4 743 20 26 4.5% 7.9% 1.0% 5.7% 3.1% 1.8% 6.8% 2.6% 6.1% 5.1% 2.6% 1,512 23 1.5% 1,460 24 1.6% 1,303 12 0.9% Australia New Zealand Other overseas 449,405 50,801 16,276 26,712 2,924 279 5.9% 440,416 5.8% 46,416 1.7% 14,286 30,202 2,870 274 6.9% 425,905 44,694 6.2% 5,484 1.9% 31,467 2,900 224 36,873 33,009 599,869 5.5% 577,745 Total interest earning assets and interest income Non-interest earning assets Cash, receivables due from other financial institutions and regulatory deposits Derivative financial instruments Life insurance assets All other assets2 Total non-interest earning assets Total assets 1 Loans and receivables are stated net of provisions for impairment charges on loans. Other receivables include other assets and cash with 1,350 33,952 10,507 34,398 723 33,967 8,474 41,023 2,745 36,688 8,027 36,932 80,207 628,428 84,187 684,056 84,392 662,137 6.4% 548,221 38,098 7.4% 6.5% 4.1% 6.9% 2 central banks that are interest earning. Includes property, plant and equipment, goodwill and intangibles, other assets, deferred tax and non-interest bearing loans relating to mortgage offset accounts. 190 2013 WESTPAC GROUP ANNUAL REPORT NOTE 26. AVERAGE BALANCE SHEET AND INTEREST RATES (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Year Ended 30 September 2013 Consolidated Year Ended 30 September 2012 Year Ended 30 September 2011 Average Balance $m Interest Average Rate % Expense $m Average Balance $m Interest Expense $m Average Rate % Average Balance $m Interest Expense $m Average Rate % Liabilities Interest bearing liabilities Payables due to other financial institutions: Australia New Zealand Other overseas Deposits and other borrowings: Australia New Zealand Other overseas Loan capital: Australia Other overseas Other interest bearing liabilities1: Australia New Zealand Other overseas Total interest bearing liabilities and interest expense Non-interest bearing liabilities Deposits and payables due to other financial institutions: Australia New Zealand Other overseas Derivative financial instruments Life insurance policy liabilities All other liabilities2 Total non-interest bearing liabilities Total liabilities Shareholders’ equity Non-controlling interests Total equity Total liabilities and equity 1 2 4,218 458 4,648 131 7 52 3.1% 1.5% 1.1% 4,072 336 4,837 186 6 52 4.6% 1.8% 1.1% 2,927 502 4,656 135 11 45 325,634 35,674 25,368 11,141 1,214 200 3.4% 302,412 3.4% 30,324 0.8% 27,367 13,301 1,066 235 4.4% 279,874 28,283 3.5% 26,223 0.9% 13,352 1,086 244 7,183 2,436 414 115 5.8% 4.7% 5,129 2,455 327 127 6.4% 5.2% 5,802 2,457 332 137 144,777 10,073 1 6,309 561 - n/a n/a n/a 151,204 11,841 550 8,426 616 29 n/a n/a n/a 149,514 12,292 1,005 10,235 431 94 4.6% 2.2% 1.0% 4.8% 3.8% 0.9% 5.7% 5.6% n/a n/a n/a 560,470 20,144 3.6% 540,527 24,371 4.5% 513,535 26,102 5.1% 19,173 2,578 783 35,542 7,335 11,853 77,264 637,734 44,350 1,972 46,322 684,056 15,920 2,237 657 37,788 6,919 13,520 77,041 617,568 42,605 1,964 44,569 662,137 13,965 2,089 472 36,052 9,951 11,065 73,594 587,129 39,378 1,921 41,299 628,428 Includes net impact of Treasury balance sheet management activities. Includes other liabilities, provisions, current and deferred tax liabilities. 3 2013 WESTPAC GROUP ANNUAL REPORT 191 NOTE 26. AVERAGE BALANCE SHEET AND INTEREST RATES (CONTINUED) The following table allocates changes in net interest income between changes in volume and changes in rate for the last two fiscal years. Volume and rate variances have been calculated on the movement in average balances and the change in the interest rates on average interest earning assets and average interest bearing liabilities. The variance caused by change in both volume and rate has been allocated in proportion to the relationship of the absolute dollar amount of each change to the total. Interest earning assets Receivables due from other financial institutions: Australia New Zealand Other overseas Trading securities: Australia New Zealand Other overseas Other financial assets designated at fair value: Australia Other overseas Available-for-sale securities: Australia New Zealand Other overseas Regulatory deposits: Other overseas Loans and other receivables: Australia New Zealand Other overseas Total change in interest income Consolidated 2013 Change Due to 2012 Change Due to Volume $m Rate $m Total $m Volume $m Rate $m Total $m (15) 2 10 43 (33) 18 (7) (2) 324 13 1 (34) (1) (37) (418) (2) (34) (31) (1) (223) - (5) (49) 1 (27) (375) (35) (16) (38) (3) 101 13 (4) (26) (9) (4) (68) (6) 16 21 4 243 71 2 (11) (13) - (192) (20) 5 (16) - 20 (11) 2 1 (2) (1) 1 11 (37) (22) (4) (260) (26) 21 5 4 263 60 4 12 616 271 38 1,280 (4,106) (217) (33) (5,144) (3,490) 54 5 (3,864) 1,072 112 360 (2,337) (142) 1,789 (3,014) (1,265) (30) 50 (310) (1,225) 192 2013 WESTPAC GROUP ANNUAL REPORT NOTE 26. AVERAGE BALANCE SHEET AND INTEREST RATES (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Consolidated 2013 Change Due to 2012 Change Due to Volume $m Rate $m Total $m Volume $m Rate $m Total $m Interest bearing liabilities Payables due to other financial institutions: Australia New Zealand Other overseas Deposits and other borrowings: Australia New Zealand Other overseas Loan capital: Australia Other overseas Other interest bearing liabilities: Australia New Zealand Other overseas Total change in interest expense Change in net interest income: Australia New Zealand Other overseas Total change in net interest income 7 2 (2) (62) (1) 2 (55) 1 - 53 (4) 2 (2) (1) 5 1,021 188 (17) (3,181) (40) (18) (2,160) 148 (35) 1,075 78 11 (1,126) (98) (20) (44) (11) 87 (12) (39) - 34 (10) 51 (5) 7 (51) (20) (9) (5) (10) 131 (1) (358) (92) (29) 850 160 155 115 430 (1,759) 37 - (5,077) (2,117) (55) (29) (4,227) 116 (16) (43) 1,233 (1,925) 201 (22) (2,964) (1,809) 185 (65) (1,731) 234 (216) (85) (67) 394 (61) 30 363 37 110 409 556 483 (288) (245) (50) 520 (178) 164 506 3 2013 WESTPAC GROUP ANNUAL REPORT 193 NOTE 27. FINANCIAL RISK Westpac’s risk appetite is set by the Board. The risk appetite cannot be defined by a single metric. It has many dimensions and is an amalgam of top-down requirements (including Westpac’s target debt rating and complying with regulatory requirements) and bottom-up aggregates (such as risk concentration limits). Westpac uses an economic capital model as the basis of risk measurement, calibrated to its target debt rating. Westpac’s appetite for risk is influenced by a range of factors, including whether a risk is considered consistent with its strategy (core risk) and whether an appropriate return can be achieved from taking that risk. Westpac has a lower appetite for risks that are not part of its core strategy. Westpac seeks to achieve an appropriate return on risk and prices its products accordingly. Westpac seeks to maximise total shareholder returns over the longer term by achieving an appropriate balance between growth and volatility of returns and by ultimately returning that value to shareholders. Westpac distinguishes the following types of risk, and takes an integrated approach towards managing them. These risks are: Type of risk Description Key risks   credit risk – the risk of financial loss where a customer or counterparty fails to meet their financial obligations to Westpac; liquidity risk – the risk that the Group will be unable to fund assets and meet obligations as they become due;   market risk – the risk of an adverse impact on earnings resulting from changes in market factors, such as foreign exchange rates, interest rates, commodity prices and equity prices. This includes interest rate risk in the banking book – the risk to interest income from a mismatch between the duration of assets and liabilities that arises in the normal course of business activities; operational risk – operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The definition is aligned to the regulatory (Basel III) definition, including legal and regulatory risk but excluding strategic and reputation risk; and compliance risk – the risk of legal or regulatory sanction, financial or reputation loss, arising from our failure to abide by the compliance obligations required of us as a financial services group.  Other related risks       business risk – the risk associated with the vulnerability of a line of business to changes in the business environment; environmental, social and governance risks – the risk that the Group damages its reputation or financial performance due to failure to recognise or address material existing or emerging sustainability related environmental, social or governance issues; equity risk – the potential for financial loss arising from movements in equity values. Equity risk may be direct, indirect or contingent; insurance risk – the risk of mis-estimation of the expected cost of insured events, volatility in the number or severity of insured events, and mis-estimation of the cost of incurred claims; related entity (contagion) risk – the risk that problems arising in other Westpac Group members compromise the financial and operational position of the authorised deposit-taking institutions in the Westpac Group; and reputation risk – the risk to earnings or capital arising from negative public opinion resulting from the loss of reputation or public trust and standing. 194 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) Note 27 provides a summary of Westpac’s risk management framework, as well as a discussion of Westpac’s financial risk management policies and practices and quantitative information on some of its principal financial risk exposures. The information contained in Note 27 comprises the following: 27.1 Approach to risk management 27.2 Credit risk management 27.2.1 Credit risk management policy 27.2.2 Provision and impairment policy 27.2.3 Internal credit risk ratings system 27.2.4 Credit risk mitigation, collateral and other credit enhancements 27.2.5 Credit risk concentrations 27.2.6 Credit quality of financial assets 27.2.7 Financial assets that are neither past due nor impaired 27.2.8 Financial assets that are past due, but not impaired 27.2.9 Items 90 days past due, or otherwise in default, but well secured and not impaired 27.2.10 Impaired loans 27.3 Funding and liquidity risk management 27.3.1 Sources of liquidity 27.3.2 Liquidity reporting 27.3.3 Market developments 27.3.4 Contractual maturity of financial liabilities 27.3.5 Expected maturity 27.4 Market risk 27.4.1 Traded market risk 27.4.2 Non-traded market risk 27.1 Approach to risk management The Board is responsible for reviewing and approving our overall risk management strategy, including determining our appetite for risk. The Board has delegated to the BRMC responsibility for providing recommendations to the Board on the Westpac Group’s risk-reward strategy, setting risk appetite, approving frameworks, policies and processes for managing risk, and determining whether to accept risks beyond management’s approval discretion. The BRMC monitors the alignment of our risk profile with our risk appetite, which is defined in the Board Statement of Risk Appetite, and with our current and future capital requirements. The BRMC receives regular reports from management on the effectiveness of our management of Westpac’s material business risks. More detail about the role of the BRMC is set out in the Westpac risk management governance structure table below. The CEO and Executive Team are responsible for implementing our risk management strategy and frameworks, and for developing policies, controls, processes and procedures for identifying and managing risk in all of Westpac’s activities. Our approach to risk management is that ‘risk is everyone’s business’ and that responsibility and accountability for risk begins with the business units that originate the risk. 3 Westpac follows a ‘3 Lines of Defence’ philosophy of risk management, for which the key elements are: The 1st Line of Defence – risk identification, risk management and self-assurance Divisional business units are responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite and policies. They are required to establish and maintain appropriate risk management controls, resources and self-assurance processes. The 2nd Line of Defence – establishment of risk management frameworks and policies and risk management oversight Our 2nd Line of Defence is a separate risk advisory, control and monitoring function which establishes frameworks, policies, limits and processes for the management, monitoring and reporting of risk. It also evaluates and opines on the adequacy and effectiveness of 1st Line controls and application of frameworks and policies and, where necessary, requires improvement and monitors the 1st Line’s progress toward remediation of identified deficiencies. 2013 WESTPAC GROUP ANNUAL REPORT 195 NOTE 27. FINANCIAL RISK (CONTINUED) Our 2nd Line of Defence has three layers:  our executive risk committees lead the optimisation of risk-reward by overseeing the development of risk appetite statements, risk management frameworks, policies and risk concentration controls, and monitoring Westpac’s risk profile for alignment with approved appetites and strategies;  our Group Risk function is independent from the business divisions, reports to the CRO, and establishes and maintains the Group-wide risk management frameworks, policies and concentration limits that are approved by the BRMC. It also reports on Westpac’s risk profile to executive risk committees and the BRMC; and  divisional risk areas are responsible for developing division-specific risk appetite statements, policies, controls, procedures, monitoring and reporting capability, which align to the Board’s Statement of Risk Appetite and the risk management frameworks approved by the BRMC. These risk areas are independent of the Divisions’ 1st Line business areas, with each divisional CRO having a direct reporting line to the CRO, as well as to their Division’s Group Executive. The 3rd Line of Defence – independent assurance Our Group Assurance function independently evaluates the adequacy and effectiveness of the Group’s overall risk management framework and controls. This approach allows risks within our risk appetite to be balanced against appropriate rewards. Westpac’s risk management governance structure is set out in more detail in the following table: Board  reviews and approves our overall risk management strategy. provides recommendations to the Board on the Westpac Group’s risk-reward strategy; sets risk appetite; approves frameworks and key policies for managing risk; Board Risk Management Committee (BRMC)     monitors our risk profile, performance, capital levels, exposures against limits and management and control of our risks;  monitors changes anticipated in the economic and business environment and other factors relevant to our risk profile;  oversees the development and ongoing review of key policies that support our frameworks for managing risk; and  determines whether to accept risks beyond the approval discretion provided to management. Other Board Committees with a risk focus Board Audit Committee  oversees the integrity of financial statements and financial reporting systems. Board Remuneration Committee  reviews any matters raised by the BRMC with respect to risk-adjusted remuneration. Board Technology Committee  oversees information technology strategy and implementation. Executive Team     monitors key risks within each business unit, capital adequacy and the Group’s reputation. executes the Board-approved strategy; assists with the development of the Board Statement of Risk Appetite; delivers the Group’s various strategic and performance goals within the approved risk appetite; and Executive risk committees Westpac Group Credit Risk Committee (CREDCO)     leads the optimisation of credit risk-reward across the Group; oversees the credit risk management framework and key policies; oversees our credit risk profile; and identifies emerging credit risks and appropriate actions to address these. Westpac Group Market Risk Committee (MARCO)     leads the optimisation of market risk-reward across the Group; oversees the market risk management framework and key policies; oversees our market risk profile; and identifies emerging market risks and appropriate actions to address these. 196 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) Executive risk committees (continued) Westpac Group Asset & Liability Committee (ALCO)   leads the optimisation of funding and liquidity risk-reward across the Group; reviews the level and quality of capital to ensure that it is commensurate with the Group’s risk profile, business strategy and risk appetite; oversees the liquidity risk management framework and key policies; oversees the funding and liquidity risk profile and balance sheet risk profile; and identifies emerging funding and liquidity risks and appropriate actions to address these.    Westpac Group Operational Risk & Compliance Committee (OPCO)  leads the optimisation of operational risk-reward across the Group;  oversees the operational risk management framework, the compliance management framework and key supporting policies; oversees our operational risk and compliance profiles; oversees the reputation risk and environmental, social and governance (ESG) risk management frameworks and key supporting policies; and identifies emerging operational and compliance risks and appropriate actions to address these.    Westpac Group Remuneration Oversight Committee (ROC)  provides assurance that the remuneration arrangements across the Group have been examined from a People, Risk and Finance perspective; responsible for ensuring that risk is embedded in all key steps in our remuneration framework; reviews and makes recommendations to the CEO for recommendation to the Board Remuneration Committee on the Group Remuneration Policy and provides assurance that remuneration arrangements across the Group encourage behaviour that supports Westpac’s long-term financial soundness and the risk management framework; reviews and monitors the remuneration arrangements (other than for Group Executives) for Responsible Persons (as defined in the Group’s Statutory Officers Fit and Proper Policy), risk and financial control personnel, and all other employees for whom a significant portion of total remuneration is based on performance and whose activities, either individually or collectively, may affect the financial soundness of Westpac; and reviews and recommends to the CEO for recommendation to the Board Remuneration Committee the criteria and rationale for determining the total quantum of the Group variable reward pool.     Group and divisional risk management Group Risk     monitors emerging risk issues. develops the Group-level risk management frameworks for approval by the BRMC; directs the review and development of key policies supporting the risk management frameworks; establishes risk concentration limits and monitors risk concentrations; and develops the Group-level compliance framework for approval by the BRMC; directs the review and development of compliance policies, compliance plans, controls and procedures; Compliance Function    monitors compliance and regulatory obligations and emerging regulatory developments; and  reports on compliance standards. Divisional risk management  develops division-specific policies, risk appetite statements, controls, procedures, and monitoring and reporting capability that align to the frameworks approved by the BRMC. 3 Independent internal review Group Assurance  reviews the adequacy and effectiveness of management controls for risk. Divisional business units Business Units  responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite policies; and establish and maintain appropriate risk management controls, resources and self-assurance processes.  2013 WESTPAC GROUP ANNUAL REPORT 197 NOTE 27. FINANCIAL RISK (CONTINUED) 27.2 Credit risk management Credit risk is the risk of financial loss where a customer or counterparty fails to meet their financial obligations. 27.2.1 Credit risk management policy Westpac maintains a credit risk management framework and a number of key supporting policies, which are intended to clearly define roles and responsibilities, acceptable practices, limits and key controls:  the Credit Risk Management framework describes the principles, methodologies, systems, roles and responsibilities, reports and key controls that exist for managing credit risk in Westpac;  the Credit Risk Rating System policy describes the credit risk rating system philosophy, design, key features and uses of rating outcomes; and  Westpac has established policies governing the management of three key types of concentration risk: – individual customers or groups of related customers; – specific industries (e.g. property); and – individual countries. Westpac has an established policy governing the delegation of credit approval authorities and a set of formal limits for the extension of credit. These limits represent the delegation of credit approval authority to responsible individuals throughout the organisation. Credit manuals exist in each business unit to govern the extension of credit. These manuals include general policies covering the origination, evaluation, approval, documentation, settlement and ongoing management of credit risks including management of problem loans. These manuals are regularly updated by the business units, with significant changes approved by Group Risk. Sector policies exist to guide the extension of credit where industry-specific guidelines are considered necessary (e.g. acceptable financial ratios or types of collateral). These policies are maintained by the business unit risk management teams. Westpac has an established related entity risk management framework and supporting policies, which include governance of credit exposures to related entities, so as to minimise contagion risk for the extended licensed entity and to ensure compliance with the prudential requirements prescribed by APRA. 27.2.2 Provision and impairment policy Provisions for loan impairment represent management’s best estimate of the losses incurred in the loan portfolios as at the balance date. There are two components of Westpac’s loan impairment provisions: individually assessed provisions and collectively assessed provisions. In determining the individually assessed provisions, relevant considerations that have a bearing on the expected future cash flows are taken into account, for example, the business prospects of the customer, the realisable value of collateral, Westpac’s position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process. These judgments and estimates can change with time as new information becomes available or as work-out strategies evolve, resulting in revisions to the impairment provision as individual decisions are made. The collectively assessed provisions are established on a portfolio basis taking into account the level of arrears, collateral, past loss experience and expected defaults based on portfolio trends. The most significant factors in establishing these provisions are estimated loss rates and related emergence periods. The provisions also takes into account management’s assessment of changes or events that have recently occurred in sectors of the economy or in the economy as a whole that are not yet reflected in underlying provisioning factors. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ from reported loan impairment provisions. These uncertainties include the economic environment, notably interest rates, unemployment levels, payment behaviour and bankruptcy rates. 198 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) 27.2.3 Internal credit risk ratings system The principal objective of the credit risk rating system is to produce a reliable assessment of the credit risk to which the Group is exposed. Westpac’s internal credit risk rating system for transaction-managed customers assigns a Customer Risk Grade (CRG) to each customer, corresponding to their expected probability of default (PD). Each facility is assigned a loss given default (LGD). The Westpac risk rating system has 20 risk grades for non-defaulted customers and 10 risk grades for defaulted customers. Non-defaulted CRGs are mapped to Moody’s and Standard & Poor’s (S&P) external senior ranking unsecured ratings. Customers that are not transaction-managed (referred to as the program-managed portfolio) are segmented into pools of similar risk. Segments are created by analysing characteristics that have historically proven predictive in determining if an account is likely to go into default. Customers are then grouped according to these predictive characteristics and each segment assigned a PD and LGD. The table below shows the current alignment between Westpac’s CRGs and the corresponding external rating. Note that only high-level CRG groupings are shown. Financial Statement Disclosure Westpac CRG Moody’s Rating Strong Good/satisfactory A B C D Aaa – Aa3 A1 – A3 S&P Rating AAA – AA– A+ – A– Baa1 – Baa3 BBB+ – BBB– Ba1 – B1 BB+ – B+ Financial Statement Disclosure Westpac CRG Weak Weak/default/non-performing E F G – H Definitions Watchlist Special Mention Substandard/Default Control mechanisms for the credit risk rating system Westpac’s credit risk rating system is reviewed annually to confirm that the rating criteria and procedures are appropriate given the current portfolio and external conditions. The BRMC and CREDCO monitor the risk profile, performance and management of Westpac’s credit portfolio and development and review of key credit risk policies. All models materially impacting the risk rating process are periodically reviewed in accordance with Westpac’s model risk policies. Specific credit risk estimates (including PD, LGD and exposure at default (EAD) levels) are overseen, reviewed annually and approved by the Credit Risk Estimates Committee (a subcommittee of CREDCO). 3 2013 WESTPAC GROUP ANNUAL REPORT 199 NOTE 27. FINANCIAL RISK (CONTINUED) 27.2.4 Credit risk mitigation, collateral and other credit enhancements Westpac uses a variety of techniques to reduce the credit risk arising from its lending activities. Enforceable legal documentation establishes Westpac’s direct, irrevocable and unconditional recourse to any collateral, security or other credit enhancements provided. The table below describes the nature of collateral held for financial asset classes: Cash and other balances held with central banks, including regulatory deposits These exposures are generally considered to be low risk due to the nature of the counterparties. Collateral is generally not sought on these balances. Receivables due from other financial institutions These exposures are mainly to relatively low risk banks (Rated A+, AA– or better). Collateral is generally not sought on these balances. Derivative financial instruments Master netting agreements are typically used to enable the effects of derivative assets and liabilities with the same counterparty to be offset when measuring these exposures. Additionally, collateralisation agreements are also typically entered into with major institutional counterparties to avoid the potential build up of excessive mark-to-market positions. Trading securities These exposures are carried at fair value which reflects the credit risk. No collateral is sought directly from the issuer or counterparty; however this may be implicit in the terms of the instrument. Other financial assets designated at fair value These exposures are carried at fair value which reflects the credit risk. The terms of debt securities may include collateralisation. Available-for-sale securities Collateral is not sought directly with respect to these exposures; however collateralisation may be implicit in the structure of the asset. Loans – housing and personal1 Housing loans are secured by a mortgage over property, and additional security may take Loans – business1 Life insurance assets the form of guarantees and deposits. Personal lending (including credit cards and overdrafts) is predominantly unsecured. Where security is taken, it is restricted to eligible motor vehicles. Loans – business may be secured, partially secured or unsecured. Security is typically taken by way of a mortgage over property and/or a general security agreement over business assets, or other assets. Other forms of credit protection may also be sought or taken out if warranted. These assets are carried at fair value, which reflects the credit risk. Collateral is typically not held other than for investments in Australian mortgages where recourse to a charge over the underlying properties is held. Due from subsidiaries These exposures are generally considered to be low risk due to the nature of the counterparties. Collateral is generally not sought on these balances. 1 This includes collateral held in relation to associated credit commitments. Risk reduction Westpac recognises the following as eligible collateral for credit risk mitigation:  cash, primarily in Australian dollars (AUD), New Zealand dollars (NZD), US dollars (USD), Canadian dollars (CAD), British pounds (GBP) or European Union euro (EUR);  bonds issued by Australian Commonwealth, State and Territory governments or their Public Sector Enterprises, provided these attract a zero risk-weighting under Australian Prudential Standard (APS) 112;  securities issued by other specified AA– / Aa3-rated sovereign governments; and  credit-linked notes (provided the proceeds are invested in cash or other eligible collateral described above). 200 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) Risk transfer For mitigation by way of risk transfer, Westpac only recognises unconditional irrevocable guarantees or standby letters of credit issued by, or eligible credit derivative protection bought from, the following entities, provided they are not related to the underlying obligor:  sovereign entities;  public sector entities in Australia and New Zealand;  ADIs and overseas banks; and  other entities with a minimum risk grade equivalent of A3 / A–. Management of risk mitigation Westpac facilitates the management of these risks through controls covering:  collateral valuation and management;  credit portfolio management; and  netting. Collateral valuation and management Westpac revalues collateral related to financial markets positions on a daily basis to monitor the net risk position, and has formal processes in place so that calls for collateral top-up or exposure reduction are made promptly. An independent operational unit has responsibility for monitoring these positions. The collaterisation arrangements are documented via the Credit Support Annex of the International Swaps and Derivatives Association (ISDA) dealing agreements. Credit Portfolio Management Credit Portfolio Management (CPM) is a division that manages the overall risk in Westpac’s corporate, sovereign and bank credit portfolios. CPM includes a dedicated portfolio trading desk with the specific mandate of actively monitoring the underlying exposure and any offsetting hedge positions. Specific reporting is maintained and monitored on the matching of hedges with underlying facilities, with any adjustments to hedges (including unwinds or extensions) managed dynamically. CPM purchases credit protection from entities meeting our acceptability criteria as described under the Risk reduction and Risk transfer sections above. CPM also sells protection to diversify risk. Netting Risk reduction by way of current account set-off is recognised for exposures to creditworthy customers domiciled in Australia and New Zealand only. Customers are required to enter into formal agreements giving Westpac the unfettered right to set-off gross credit and debit balances in their nominated accounts to determine Westpac’s net exposure within each of these two jurisdictions. Cross-border set-offs are not permitted. Close-out netting is undertaken for off balance sheet financial market transactions with counterparties with whom Westpac has entered into a single bilateral master netting agreement which allows such netting in specified jurisdictions, and is supported by a written and reasoned legal opinion on the enforceability of that agreement. Close-out netting effectively aggregates pre- settlement risk exposure at time of default, thus reducing overall exposure. 27.2.5 Credit risk concentrations A concentration of credit risk exists when a number of counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Westpac monitors its credit portfolio to manage risk concentrations. Exposures are actively managed from a portfolio perspective, with risk mitigation techniques used to rebalance the portfolio. Individual customers or groups of related customers Westpac has large exposure limits governing the aggregate size of credit exposure normally acceptable to individual customers and groups of related customers. These limits are tiered by customer risk grade. 3 Specific industries Exposures to businesses, governments and other financial institutions are classified into a number of industry clusters based on groupings of related Australian and New Zealand Standard Industrial Classification (ANZSIC) codes and are monitored against industry risk appetite limits. The level of industry risk is measured on a dynamic basis. Individual countries Westpac has limits governing risks related to individual countries, such as political situations, government policies, economic conditions or other country-specific events, that may adversely affect either a customer’s ability to purchase or transfer currency to meet its obligations to Westpac, or Westpac’s ability to realise its assets in a particular country. Such risks include, but are not limited to, exchange control events, nationalisation, war, disaster, economic meltdown or government failure. 2013 WESTPAC GROUP ANNUAL REPORT 201 NOTE 27. FINANCIAL RISK (CONTINUED) The table below sets out the maximum exposure to credit risk (excluding any collateral received) and the credit risk concentrations to which the Group and the Parent Entity are exposed. The total will not reconcile to the Group or Parent Entity’s total assets on the balance sheet as cash, non-financial assets and other financial assets have been excluded from the table below. Investments in subsidiaries and amounts due from subsidiaries have also been excluded from the Parent Entity’s disclosure. Consolidated 2013 Other Financial Assets Designated at Fair Value $m Available- For-Sale Securities $m Loans - Housing and Personal $m Trading Securities $m Loans - Business Derivatives1 $m $m Life Insurance Assets $m Total (On Balance Sheet) $m Credit Commit- ments $m - - - 19 157 107 6,951 7,234 1,218 12 - 30 3 198 39 192 423 232 - 204 565 - - 6,488 115 442 1,944 - - 8,725 - - 2,099 878 9,217 2,300 1,483 8,005 3,006 683 111 58 45 165 1,615 3,980 16,151 29 26 21,568 7,333 6,075 65,083 7,189 5,607 11,315 39,050 10,093 3,170 - - 12,944 17,464 - - 20,501 51 4 12 22 - 39 130 106 - 2,450 3 9 - 188 123 - - 26,512 37 305 53 7 174 - - 34,076 45,672 8,938 14,095 8,774 2,968 - 2,416 126,320 3,358 777 524 94 34 340,139 - 347,824 Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other Total Australia New Zealand Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other Total New Zealand 1 Derivatives give rise to credit risk where there is a positive current fair value. Credit derivatives also expose the writer of the contract to the risk of 13,698 50,254 5,291 10,283 7,078 14,985 3,186 9,740 2,979 4,485 70,435 - 340,278 288 2,504 - 8,426 570,567 138,413 10,992 2,506 2,842 1,160 1,522 24,463 45 65,403 5,225 1,261 1,118 203 74 24,417 1 35,033 5,638 1,218 1,706 885 1,103 46 44 20,552 489 121 255 593 891 33 88 24,959 122 23 17 35 299 - - 3,260 7 - 1 37 39 - - 3,893 - - - - - - - 2,454 - 4 - - 7 - - 211 30 1 2,564 917 1,369 145 3,787 2,118 480 635 364 1,496 6,181 1,197 7,654 1,169 - - 16 - 2,624 1,863 - - 602 1,661 455 5,602 411 1,033 1,936 868 1,162 501 1,324 6,376 257 17,428 4 1 162 1 - 590 119 48 2 6 405 23 528 784 681 28 4 - - - - - - - - - 456 148 307 - - - - - - 78 1 - - - - default of the referenced entity. See Note 29 for further details regarding credit derivative exposures. 2 Services includes education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities includes electricity, gas and water and communication services. 202 2013 WESTPAC GROUP ANNUAL REPORT NOTE 27. FINANCIAL RISK (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Consolidated 2013 Other Financial Assets Designated at Fair Value $m Available- For-Sale Securities $m Loans - Housing and Personal $m Trading Securities $m Loans - Business Derivatives1 $m $m Life Insurance Assets $m Total (On Balance Sheet) $m Credit Commit- ments $m - - - - - 6 34 164 112 1,297 - - - - - - 130 124 1 6 1 - - 309 - - 128 - - 428 608 - - 376 172 5,659 375 166 1,245 - - 3,548 4,813 - - Other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other Total other overseas Other risk concentrations Amounts due from financial institutions Regulatory deposits Total gross credit risk 1 Derivatives give rise to credit risk where there is a positive current fair value. Credit derivatives also expose the writer of the contract to the risk of 362 172 2,190 440 308 900 63 19,929 - - - - - - - 8,361 - - - - 9 - - 1,045 310 168 2,180 436 299 52 54 9,131 52 4 10 4 - 848 9 946 - - - - - - - 309 - - - - - - - 137 5,461 1,253 2,443 30 1,249 2,443 383,803 156,003 - - - - - - - - 46,330 28,356 30,011 2,759 1 4 - 9 - - - - - 11,210 1,571 8,637 668,680 165,018 217 20 1,544 160 170 127 - 9,177 3 3,512 1,817 default of the referenced entity. See Note 29 for further details regarding credit derivative exposures. 2 Services includes education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities includes electricity, gas and water and communication services. 3 2013 WESTPAC GROUP ANNUAL REPORT 203 NOTE 27. FINANCIAL RISK (CONTINUED) Consolidated 2012 Other Financial Assets Designated at Fair Value $m Available- For-Sale Securities $m Loans - Housing and Personal $m Trading Securities $m Loans - Business1 Derivatives2 $m $m Life Insurance Assets $m Total (On Balance Sheet) $m Credit Commit- ments $m - - - 30 24 166 995 6,940 7,160 21 - 45 1 210 33 228 369 92 - 215 582 - 29 6,098 118 421 1,583 - - 2,369 - - 1,959 1,304 7,861 3,025 724 133 66 40 140 1,783 3,817 16,311 7,582 6,377 68,310 33 35 26,842 7,431 5,892 11,518 929 10,453 1,803 37,922 11,363 2,568 18,340 - - - - 17,941 18,403 116 13 17 23 - 39 128 120 - 2,352 1 11 - 316 170 - 1 21,208 28 66 32 114 107 - 8 36,828 44,028 8,753 15,354 9,262 3,204 41 2,298 127,906 3,156 714 514 89 35 328,068 - 335,108 Australia1 Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services3 Trade4 Transport and storage Utilities5 Retail lending Other Total Australia New Zealand Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services3 Trade4 Transport and storage Utilities5 Retail lending Other Total New Zealand 1 To improve presentation we have revised 2012 comparatives for loans – business booked in Australia to better reflect their industry concentration. 2 Derivatives give rise to credit risk where there is a positive current fair value. Credit derivatives also expose the writer of the contract to the risk of 13,279 48,745 5,373 9,901 7,111 16,239 3,059 10,687 2,850 4,971 66,833 - 328,276 244 2,397 - 8,051 562,498 133,845 9,482 2,126 2,680 1,096 1,349 20,778 223 58,220 4,372 1,222 1,015 202 69 20,737 - 30,125 4,876 879 1,630 836 982 41 31 18,120 791 201 273 827 1,187 47 90 31,045 - - - - - - - 2,185 171 25 35 58 288 - 192 4,389 60 - - - 8 - - 3,212 3 - - - 2 - - 189 58 1 3,319 494 332 1,417 5,335 1,150 8,322 722 1,054 143 - - 2,702 2,869 1,972 395 1,715 - - 4,774 394 1,119 520 1,509 369 1,622 855 1,211 478 1,270 5,393 248 15,308 - 1 151 - - 470 440 - - 162 74 5 503 754 561 5 386 21 27 3 - - - - - - - - - 443 278 160 - - - - - - 69 2 2 1 - - default of the referenced entity. See Note 29 for further details regarding credit derivative exposures. 3 Services includes education, health and community services, cultural and recreational services and personal and other services. 4 Trade includes wholesale trade and retail trade. 5 Utilities includes electricity, gas and water and communication services. 204 2013 WESTPAC GROUP ANNUAL REPORT NOTE 27. FINANCIAL RISK (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Consolidated 2012 Other Financial Assets Designated at Fair Value $m Available- For-Sale Securities $m Loans - Housing and Personal $m Trading Securities $m Loans - Business Derivatives1 $m $m Life Insurance Assets $m Total (On Balance Sheet) $m Credit Commit- ments $m 23 88 83 1,211 - - - - - 4 - - - - - - 156 152 - 7 1 - - 54 68 65 725 - - 288 103 - - - - 389 685 - - 68 72 5,917 - - 4,460 Other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other Total other overseas Other risk concentrations Amounts due from financial institutions Regulatory deposits Total gross credit risk 1 Derivatives give rise to credit risk where there is a positive current fair value. Credit derivatives also expose the writer of the contract to the risk of 372 97 1,766 552 166 988 42 13,029 - - - - - - - 4,563 317 69 1,757 548 161 55 31 5,990 - - - - 5 - - 1,079 55 4 9 3 - 933 11 1,030 - 24 - - - - - 312 - - - 1 - - - 55 8 1,785 249 796 1,787 250 152,016 366,263 - - - - - - - - 44,603 35,489 24,472 2,664 - 2 1 - - - - - - 42 2,346 909 173 20 1,522 90 97 121 - 6,725 10,228 1,893 8,240 645,868 155,878 default of the referenced entity. See Note 29 for further details regarding credit derivative exposures. 2 Services includes education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities includes electricity, gas and water and communication services. 3 2013 WESTPAC GROUP ANNUAL REPORT 205 NOTE 27. FINANCIAL RISK (CONTINUED) Parent Entity 2013 Other Financial Assets Designated at Fair Value $m Available- For-Sale Securities $m Loans - Housing and Personal $m Trading Securities $m Loans - Business Derivatives1 $m $m Life Insurance Assets $m Total (On Balance Sheet) $m Credit Commit- ments $m - - - - 19 - - - - - - - - - 155 6,857 7,031 1,218 3 196 38 192 423 232 114 437 1,924 - - 8,713 - - 1,507 801 8,920 2,175 1,483 8,005 3,005 1,615 3,978 16,151 7,150 5,340 57,799 29 26 21,623 7,007 4,877 11,088 38,961 9,590 2,449 - - 12,944 17,464 - - 20,501 51 4 2 22 - 14 130 106 - 1,781 2 9 - 15 - - - 26,203 37 305 53 7 174 - - 34,076 44,801 8,215 13,601 8,217 2,944 - 2,046 121,549 3,328 770 519 93 34 336,253 - 343,864 Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail Lending Other Total Australia New Zealand Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services - and business services Services2 - Trade3 - - Transport and storage Utilities4 - - Retail lending - Other - Total New Zealand 1 Derivatives give rise to credit risk where there is a positive current fair value. Credit derivatives also expose the writer of the contract to the risk of 13,697 48,659 - 5,290 9,442 - 7,056 14,428 - 3,184 8,939 - 2,980 - 4,173 70,434 - 336,392 - 288 2,132 - 552,485 138,384 489 121 255 593 891 33 86 25,012 132 209 18 83 338 - 2 6,059 122 23 17 35 299 - 2 3,259 7 - 1 37 39 - - 2,492 23 11 202 39 253 1 - 835 3 186 - 11 - - - 308 30 1 2,561 54 4 4,051 16 - 1,468 1,116 50 2 - 14 11 60 118 103 - 119 48 2 924 - - 73 2 - 8 3 22 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - default of the referenced entity. See Note 29 for further details regarding credit derivative exposures. 2 Services includes education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities includes electricity, gas and water and communication services. 206 2013 WESTPAC GROUP ANNUAL REPORT NOTE 27. FINANCIAL RISK (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Parent Entity 2013 Other Financial Assets Designated at Fair Value $m Available- For-Sale Securities $m Loans - Housing and Personal $m Trading Securities $m Loans - Business Derivatives1 $m $m Life Insurance Assets $m Total (On Balance Sheet) $m Credit Commit- ments $m 33 162 108 1,297 - - - - - 6 99 - - - - - - 105 1 3 1 - - 309 - - 125 - - 186 371 149 5,410 370 146 1,241 4,812 - - - - 3,548 Other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other Total other overseas Other risk concentrations Amounts due from financial institutions Regulatory deposits Total gross credit risk 1 Derivatives give rise to credit risk where there is a positive current fair value. Credit derivatives also expose the writer of the contract to the risk of 186 158 2,033 286 271 392 55 17,886 - - - - - - - 8,360 166 156 2,028 283 271 34 47 8,482 - - - - - - - 191 20 2 5 3 - 358 8 410 - - - - - - - 309 - - - - - - - 134 4,856 1,187 2,427 30 1,184 2,427 9,317 1,463 130,339 344,274 - - - - - - - - 44,928 28,405 26,394 2,090 5 - - - 3 - 9 - - - - - 3 3,366 1,803 205 19 1,493 144 169 35 - 8,837 - 587,210 148,056 default of the referenced entity. See Note 29 for further details regarding credit derivative exposures. 2 Services includes education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities includes electricity, gas and water and communication services. 3 2013 WESTPAC GROUP ANNUAL REPORT 207 NOTE 27. FINANCIAL RISK (CONTINUED) Parent Entity 2012 Other Financial Assets Designated at Fair Value $m Available- For-Sale Securities $m Loans - Housing and Personal $m Trading Securities $m Loans - Business1 Derivatives2 $m $m Life Insurance Assets $m Total (On Balance Sheet) $m Credit Commit- ments $m - - - - 30 - - - - - - - - - 166 995 7,027 6,831 1 210 33 228 369 92 118 421 1,583 - - 2,336 - - 1,396 1,304 7,861 3,025 1,783 3,817 16,311 7,355 5,599 61,187 33 35 26,553 7,204 5,143 11,378 830 10,122 1,664 37,802 10,817 1,802 - - 17,941 18,341 - - 18,402 116 13 5 23 - 16 126 120 - 1,686 - 11 - 67 154 - 1 20,910 28 66 32 114 107 - 8 36,827 42,989 7,900 14,781 8,738 3,170 41 2,278 123,069 3,156 714 514 89 35 324,588 - 331,628 Australia1 Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services3 Trade4 Transport and storage Utilities5 Retail Lending Other Total Australia New Zealand Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services - and business services Services3 - Trade4 - - Transport and storage Utilities5 - - Retail lending - Other - Total New Zealand 1 To improve presentation we have revised 2012 comparatives for loans – business booked in Australia to better reflect their industry concentration. 2 Derivatives give rise to credit risk where there is a positive current fair value. Credit derivatives also expose the writer of the contract to the risk of 13,278 46,969 - 5,371 8,915 - 7,081 15,600 - 3,058 9,851 - 2,850 - 4,779 66,833 - 324,796 - 244 2,377 - 544,876 133,811 791 201 273 827 1,187 47 90 30,756 171 25 35 58 288 - 192 4,382 307 25 41 76 458 2 201 6,275 60 - - - 8 - - 1,585 26 20 201 112 244 1 1 965 76 - 6 18 162 2 9 308 58 1 3,312 58 1 4,578 - - 1,263 162 74 5 252 - - 85 135 - 415 104 6 35 40 65 1 30 1 - - - - - - - - - - - - - - - - - - - - - - - - - - 3 - - - - - - - - - - - - - - - - - - - - - - - - 2 1 3 - - - - - - default of the referenced entity. See Note 29 for further details regarding credit derivative exposures. 3 Services includes education, health and community services, cultural and recreational services and personal and other services. 4 Trade includes wholesale trade and retail trade. 5 Utilities includes electricity, gas and water and communication services. 208 2013 WESTPAC GROUP ANNUAL REPORT NOTE 27. FINANCIAL RISK (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Parent Entity 2012 Other Financial Assets Designated at Fair Value $m Available- For-Sale Securities $m Loans - Housing and Personal $m Trading Securities $m Loans - Business Derivatives1 $m $m Life Insurance Assets $m Total (On Balance Sheet) $m Credit Commit- ments $m 22 61 75 1,208 - - - - - 4 - - - - - - 131 127 - 4 - - - 46 62 46 651 - - 217 103 - - - - 129 62 50 5,503 - - 4,460 Other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other Total other overseas Other risk concentrations Amounts due from financial institutions Regulatory deposits Total gross credit risk 1 Derivatives give rise to credit risk where there is a positive current fair value. Credit derivatives also expose the writer of the contract to the risk of 185 54 1,632 412 134 430 35 10,627 - - - - - - - 4,563 169 53 1,628 410 134 33 28 5,235 - - - - - - - 129 16 1 4 2 - 397 7 437 - - - - - - - 217 - - - - - - - 46 7 1,661 226 110 1,663 226 7,328 1,773 128,612 332,065 - - - - - - - - 42,975 35,184 21,039 1,903 - 2 - - - - - - - - - - 42 2,195 864 163 19 1,459 68 96 34 - 6,306 - 570,879 141,082 default of the referenced entity. See Note 29 for further details regarding credit derivative exposures. 2 Services includes education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities includes electricity, gas and water and communication services. 3 2013 WESTPAC GROUP ANNUAL REPORT 209 NOTE 27. FINANCIAL RISK (CONTINUED) 27.2.6 Credit quality of financial assets The tables below segregate the financial assets of the Group and Parent Entity between financial assets that are neither past due nor impaired, past due but not impaired and impaired. Non-financial assets of the Group and Parent Entity are excluded from the tables below and therefore the total will not reconcile to total assets on the balance sheets. 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 breakdown in the tables below does not always align with the underlying basis by which credit risk is managed within Westpac. Financial assets of the Group at 30 September can be disaggregated as follows: Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Life insurance assets Regulatory deposits with central banks overseas Other financial assets Total Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Life insurance assets Regulatory deposits with central banks overseas Other financial assets Total Neither Past Due Nor Impaired $m 11,699 Past Due But Not Impaired $m - 11,210 46,330 2,757 28,356 30,010 369,740 149,272 8,632 1,571 3,697 663,274 - - - - - 13,455 3,739 5 - 44 17,243 Neither Past Due Nor Impaired $m 12,523 Past Due But Not Impaired $m - 10,228 44,603 2,664 35,489 24,471 353,094 144,266 8,237 1,893 4,273 641,741 - - - - - 12,538 3,995 3 - 41 16,577 Consolidated 2013 Impaired $m - - - 2 - 1 608 2,992 - - 9 3,612 Total $m 11,699 11,210 46,330 2,759 28,356 30,011 383,803 156,003 8,637 1,571 3,750 684,129 Consolidated 2012 Impaired $m - - - - - 1 631 3,755 - - 11 4,398 Total $m 12,523 10,228 44,603 2,664 35,489 24,472 366,263 152,016 8,240 1,893 4,325 662,716 Impairment Provision $m - - - - - - (1,101) (2,541) - - - (3,642) Impairment Provision $m - - - - - - (1,042) (2,792) - - - (3,834) Total Carrying Value $m 11,699 11,210 46,330 2,759 28,356 30,011 382,702 153,462 8,637 1,571 3,750 680,487 Total Carrying Value $m 12,523 10,228 44,603 2,664 35,489 24,472 365,221 149,224 8,240 1,893 4,325 658,882 210 2013 WESTPAC GROUP ANNUAL REPORT NOTE 27. FINANCIAL RISK (CONTINUED) Financial assets of the Parent Entity at 30 September can be disaggregated as follows: NOTES TO THE FINANCIAL STATEMENTS Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Life insurance assets Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets Total Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Life insurance assets Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets Total Parent Entity 2013 Neither Past Due Nor Impaired $m 9,509 Past Due But Not Impaired $m - Impaired $m - 9,317 44,928 2,088 28,405 26,394 332,173 124,650 - 1,463 119,038 3,179 701,144 - - - - - 11,649 3,271 - - - 38 14,958 - - 2 - - 452 2,418 - - - 7 2,879 Total $m 9,509 9,317 44,928 2,090 28,405 26,394 344,274 130,339 - 1,463 119,038 3,224 718,981 Parent Entity 2012 Neither Past Due Nor Impaired $m 10,993 Past Due But Not Impaired $m - Impaired $m - 7,328 42,975 1,903 35,184 21,039 320,632 122,193 - 1,773 92,740 3,721 660,481 - - - - - 10,960 3,410 - - - 35 14,405 - - - - - 473 3,009 - - - 8 3,490 Total $m 10,993 7,328 42,975 1,903 35,184 21,039 332,065 128,612 - 1,773 92,740 3,764 678,376 Impairment Provision $m - - - - - - (867) (2,089) - - - - (2,956) Impairment Provision $m - - - - - - (837) (2,351) - - - - (3,188) Total Carrying Value $m 9,509 9,317 44,928 2,090 28,405 26,394 343,407 128,250 - 1,463 119,038 3,224 716,025 Total Carrying Value $m 10,993 7,328 42,975 1,903 35,184 21,039 331,228 126,261 - 1,773 92,740 3,764 675,188 3 2013 WESTPAC GROUP ANNUAL REPORT 211 NOTE 27. FINANCIAL RISK (CONTINUED) 27.2.7 Financial assets that are neither past due nor impaired The credit quality of financial assets of the Group that are neither past due nor impaired have been assessed by reference to the credit risk rating system adopted internally: 2013 Good/ Satisfactory $m Strong $m Cash and balances with central banks Receivables due from other financial institutions Trading securities1 Other financial assets designated at fair value1 Derivative financial instruments Available-for-sale securities1 Loans: 11,699 11,210 46,330 2,611 27,246 29,403 - - - 145 1,060 606 Consolidated Weak $m Total $m Strong $m - - - 1 50 1 11,699 12,523 11,210 46,330 10,228 44,553 2,757 28,356 30,010 2,450 34,611 23,777 2012 Good/ Satisfactory $m - - 50 210 781 694 Weak $m Total $m - - - 4 97 - 12,523 10,228 44,603 2,664 35,489 24,471 288,940 63,197 8,560 Loans – housing and personal2 Loans – business Life insurance assets3 Regulatory deposits with central banks overseas Other financial assets4 Total financial assets 1 Trading securities, other financial assets designated at fair value and available-for-sale securities of nil (2012: $193 million) that do not have assigned 353,094 144,266 8,237 279,371 53,790 8,143 369,740 149,272 8,632 1,706 3,085 474,237 125 1,182 157,742 1,378 3,270 493,844 1,893 4,273 641,741 116 410 162,537 1,571 3,697 663,274 72,870 81,736 94 79,425 80,703 72 853 8,740 - 1,375 5,372 - 77 17 6,893 62 6 9,762 2 credit ratings have been included in the strong category. In the current year we have allocated loans – housing and personal into strong, good/satisfactory and weak categories. Previously these were all presented as good/satisfactory. We have revised comparatives for consistency. 3 Life insurance assets include $7,146 million (2012: $6,687 million) of unit linked investment contract assets and $1,399 million (2012: $1,320 million) of unrated investments in managed schemes and mortgages. The Group has no direct exposure to unit linked investments as the liability to policy holders are directly linked to the performance of these assets. The investments in managed schemes and mortgages are predominantly managed by the BT Financial Group. 4 Other financial assets includes accrued interest of $1,325 million (2012: $1,226 million) which is allocated to the relevant credit quality classifications in proportion to and to correspond with the loan balances to which it relates. Securities sold not yet delivered of $1,416 million (2012: $1,841 million) is also included in this balance which is allocated proportionately based on the trading securities balance classifications. ` 212 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) 2013 Good/ Satisfactory $m Strong $m 9,509 9,317 44,928 1,984 27,295 26,377 - - - 103 1,060 16 Parent Entity Weak $m Total $m Strong $m - - - 1 50 1 9,509 10,993 9,317 44,928 7,328 42,925 2,088 28,405 26,394 1,779 34,306 21,036 2012 Good/ Satisfactory $m - - 50 120 781 3 Weak $m Total $m - - - 4 97 - 10,993 7,328 42,975 1,903 35,184 21,039 278,576 55,752 52,498 64,569 1,099 4,329 332,173 124,650 270,949 47,156 49,204 67,759 479 7,278 320,632 122,193 Cash and balances with central banks Receivables due from other financial institutions Trading securities1 Other financial assets designated at fair value1 Derivative financial instruments Available-for-sale securities1 Loans: Loans – housing and personal2 Loans – business Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets3 Total financial assets 1 Trading securities and other financial assets designated at fair value of nil (2012: $193 million) that do not have assigned credit ratings have been 1,379 119,038 2,868 577,023 1,705 92,740 2,685 533,602 6 - 1,031 118,954 7 - 297 118,550 1,463 119,038 3,179 701,144 1,773 92,740 3,721 660,481 62 - 5 7,925 77 - 14 5,571 2 included in the strong category. In the current year we have allocated loans – housing and personal into strong, good/satisfactory and weak categories. Previously these were all presented as good/satisfactory. We have revised comparatives for consistency. 3 Other financial assets includes accrued interest of $1,159 million (2012: $1,065 million) which is allocated to the relevant credit quality classifications in proportion to and to correspond with the loan balances to which it relates. Securities sold not yet delivered of $1,383 million (2012: $1,841 million) is also included in this balance which is allocated proportionately based on the trading securities balance classifications. The following analysis shows our assessment of the coverage provided by collateral held in support of financial assets that are neither past due nor impaired. The estimated realisable value of collateral held is based on a combination of:  formal valuations currently held in respect of such collateral; and  management’s assessment of the estimated realisable value of all collateral held given its experience with similar types of assets in similar situations and the circumstances peculiar to the subject collateral. This analysis also takes into consideration any other relevant knowledge available to management at the time. It is our practice to obtain updated valuations when either management considers that it cannot satisfactorily estimate a realisable value or when it is determined to be necessary to move to a forced sale of the collateral. In the table below, a financial asset that is neither past due nor impaired is deemed to be ‘fully secured’ where the ratio of the asset amount to our current estimated net present value of the realisable collateral is less than or equal to 100%. Such assets are deemed to be ‘partially secured’ when this ratio exceeds 100% but not more than 150%, and ‘unsecured’ when either no security is held (e.g. can include credit cards, personal loans, and exposure to highly rated corporate entities) or where the secured loan to estimated recoverable value exceeds 150%. 3 Loans – Housing and Personal % 95.8 1.3 2.9 100.0 2013 Loans – Business % 54.3 24.3 21.4 100.0 Consolidated Loans – Housing and Personal % 94.7 1.7 3.6 100.0 Total % 83.8 7.9 8.3 100.0 2012 Loans – Business % 55.0 24.5 20.5 100.0 Fully secured Partially secured Unsecured Total 2013 WESTPAC GROUP ANNUAL REPORT Total % 83.2 8.3 8.5 100.0 213 NOTE 27. FINANCIAL RISK (CONTINUED) Loans – Housing and Personal % 97.3 0.4 2.3 100.0 2013 Loans – Business % 54.0 25.2 20.8 100.0 Parent Entity Loans – Housing and Personal % 95.8 0.8 3.4 100.0 Total % 85.5 7.2 7.3 100.0 2012 Loans – Business % 54.5 25.7 19.8 100.0 Total % 84.4 7.6 8.0 100.0 Fully secured Partially secured Unsecured Total 27.2.8 Financial assets that are past due, but not impaired An age analysis of financial assets that are past due, but not impaired is set out in the table below. For the purposes of this analysis an asset is considered to be past due when any payment under the contractual terms has been missed. The amount included is the entire contractual amount, rather than the overdue amount. The Group expends considerable effort in monitoring overdue assets. Assets may be overdue for a number of reasons, including late payments or incomplete documentation. Late payment may be influenced by factors such as the holiday periods and the timing of weekends. Financial assets that were past due, but not impaired can be disaggregated based on days overdue at 30 September as follows: Loans Loans – housing and personal Loans – business Life insurance assets Other financial assets Total Loans Loans – housing and personal Loans – business Life insurance assets Other financial assets Total 2013 2012 Consolidated 1–5 days $m 6–89 days $m 90+ days $m Total $m 1–5 days $m 6–89 days $m 90+ days $m Total $m 3,919 760 - 12 4,691 8,028 2,289 5 26 10,348 1,508 690 - 6 2,204 13,455 3,739 5 44 17,243 3,249 1,671 - 12 4,932 7,697 1,199 3 22 8,921 1,592 1,125 - 7 2,724 12,538 3,995 3 41 16,577 2013 2012 Parent Entity 1–5 days $m 6–89 days $m 90+ days $m Total $m 1–5 days $m 6–89 days $m 90+ days $m Total $m 3,403 605 - 10 4,018 6,811 2,071 - 23 8,905 1,435 595 - 5 2,035 11,649 3,271 - 38 14,958 2,776 1,563 - 11 4,350 6,734 841 - 18 7,593 1,450 1,006 - 6 2,462 10,960 3,410 - 35 14,405 The following analysis shows our assessment of the coverage provided by collateral held in support of financial assets that are past due but not impaired. The estimated realisable value of collateral held is based on a combination of:  formal valuations currently held in respect of such collateral; and  management’s assessment of the estimated realisable value of all collateral held given its experience with similar types of assets in similar situations and the circumstances peculiar to the subject collateral. This analysis also takes into consideration any other relevant knowledge available to management at the time. It is our practice to obtain updated valuations when either management considers that it cannot satisfactorily estimate a realisable value or when it is determined to be necessary to move to a forced sale of the collateral. 214 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) In the table below, a financial asset that is past due but not impaired is deemed to be ‘fully secured’ where the ratio of the asset amount to our current estimated net present value of the realisable collateral is less than or equal to 100%. Such assets are deemed to be ‘partially secured’ when this ratio exceeds 100% but not more than 150%, and ‘unsecured’ when either no security is held (e.g. can include credit cards, personal loans, and exposure to highly rated corporate entities) or where the secured loan to estimated recoverable value exceeds 150%. Loans – Housing and Personal % 90.7 2.3 7.0 100.0 Loans – Housing and Personal % 94.9 0.9 4.2 100.0 2013 Loans – Business % 51.2 25.7 23.1 100.0 2013 Loans – Business % 48.2 27.7 24.1 100.0 Consolidated Loans – Housing and Personal % 92.6 2.2 5.2 100.0 Total % 82.1 7.4 10.5 100.0 Parent Entity Loans – Housing and Personal % 94.7 0.5 4.8 100.0 Total % 84.7 6.8 8.5 100.0 2012 Loans – Business % 52.0 24.4 23.6 100.0 2012 Loans – Business % 51.1 24.9 24.0 100.0 Total % 82.8 7.5 9.7 100.0 Total % 84.3 6.3 9.4 100.0 Fully secured Partially secured Unsecured Total Fully secured Partially secured Unsecured Total 27.2.9 Items 90 days past due, or otherwise in default, but well secured and not impaired These include financial assets that are:  currently 90 days or more past due but well secured;  assets that were, but are no longer 90 days past due however are yet to satisfactorily demonstrate sustained improvement to allow reclassification; and  other assets in default, but well secured and not impaired, such as where an order for bankruptcy or similar legal action has been instituted in respect of credit obligations (e.g. appointment of an Administrator or Receiver). Australia 2012 $m 2,528 2013 $m 2,329 2011 $m 2,840 New Zealand 2012 $m 121 2013 $m 136 2011 $m 138 Other Overseas 2012 $m 37 2013 $m 22 2011 $m 46 2013 $m 2,487 Total 2012 $m 2,686 2011 $m 3,024 Consolidated Gross amount 3 2013 WESTPAC GROUP ANNUAL REPORT 215 NOTE 27. FINANCIAL RISK (CONTINUED) 27.2.10 Impaired loans Financial assets assessed as impaired The gross amount of impaired loans, along with the provision for impairment, by class of asset at 30 September, is summarised in the tables below: Loans – Housing and Personal $m 2013 Loans – Business $m 266 (124) 142 342 (156) 186 608 (280) 328 2,887 (1,240) 1,647 105 (34) 71 2,992 (1,274) 1,718 Loans – Housing and Personal $m 2013 Loans – Business $m 173 (87) 86 279 (127) 152 452 (214) 238 2,324 (1,036) 1,288 94 (29) 65 2,418 (1,065) 1,353 Consolidated Loans – Housing and Personal $m 2012 Loans – Business $m 297 (128) 169 334 (151) 183 631 (279) 352 3,658 (1,342) 2,316 97 (20) 77 3,755 (1,362) 2,393 Total $m 3,153 (1,364) 1,789 447 (190) 257 3,600 (1,554) 2,046 Parent Entity Loans – Housing and Personal $m 2012 Loans – Business $m 196 (79) 117 277 (130) 147 473 (209) 264 2,920 (1,148) 1,772 89 (19) 70 3,009 (1,167) 1,842 Total $m 2,497 (1,123) 1,374 373 (156) 217 2,870 (1,279) 1,591 Total $m 3,955 (1,470) 2,485 431 (171) 260 4,386 (1,641) 2,745 Total $m 3,116 (1,227) 1,889 366 (149) 217 3,482 (1,376) 2,106 Individually impaired Gross amount Impairment provision Carrying amount Collectively impaired Gross amount Impairment provision Carrying amount Total gross amount Total impairment provision Total carrying amount Individually impaired Gross amount Impairment provision Carrying amount Collectively impaired Gross amount Impairment provision Carrying amount Total gross amount Total impairment provision Total carrying amount 216 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) The following analysis shows our assessment of the coverage provided by collateral held in support of impaired financial assets. The estimated realisable value of collateral held is based on a combination of:  formal valuations currently held in respect of such collateral; and  management’s assessment of the estimated realisable value of all collateral held given its experience with similar types of assets in similar situations and the circumstances peculiar to the subject collateral. This analysis also takes into consideration any other relevant knowledge available to management at the time. It is our practice to obtain updated valuations when either management considers that it cannot satisfactorily estimate a realisable value or when it is determined to be necessary to move to a forced sale of the collateral. In the table below, an individually impaired financial asset is deemed to be ‘fully secured’ where the ratio of the impaired asset amount to our current estimated net present value of realisable collateral is less than or equal to 100%. Such assets are deemed to be ‘partially secured’ when this ratio exceeds 100% but not more than 150%, and ‘unsecured’ when either no security is held (e.g. can include credit cards, personal loans and exposure to corporate entities) or where the secured loan to recoverable value exceeds 150%. Loans – Housing and Personal % 63.3 11.2 25.5 100.0 Loans – Housing and Personal % 73.3 7.1 19.6 100.0 2013 Loans – Business % 24.8 24.4 50.8 100.0 2013 Loans – Business % 23.4 23.9 52.7 100.0 Consolidated Loans – Housing and Personal % 62.0 10.0 28.0 100.0 Total % 31.3 22.2 46.5 100.0 Parent Entity Loans – Housing and Personal % 66.0 4.7 29.3 100.0 Total % 31.3 21.3 47.4 100.0 2012 Loans – Business % 19.8 27.9 52.3 100.0 2012 Loans – Business % 17.0 26.7 56.3 100.0 Total % 25.9 25.3 48.8 100.0 Total % 23.7 23.7 52.6 100.0 Fully secured Partially secured Unsecured Total Fully secured Partially secured Unsecured Total Impaired loans comprise non-performing loans, overdrafts, personal loans, revolving credit facilities greater than 90 days past due and restructured loans. Non-performing loans Non-performing loans are loans with an impaired internal risk grade, excluding restructured assets. These were attributed to the following geographical segments: Consolidated Australia 2012 $m 3,212 (1,199) 2,013 2013 $m 2,574 (1,099) 1,475 2011 $m 3,437 (1,215) 2,222 New Zealand 2012 $m 743 (224) 519 2013 $m 586 (210) 376 2011 $m 736 (212) 524 Other Overseas 2012 $m 79 (40) 39 2013 $m 89 (54) 35 2011 $m 114 (60) 54 2013 $m 3,249 (1,363) 1,886 Total 2012 $m 4,034 (1,463) 2,571 2011 $m 4,287 (1,487) 2,800 3 Gross amount Impairment provision Net 2013 WESTPAC GROUP ANNUAL REPORT 217 NOTE 27. FINANCIAL RISK (CONTINUED) Overdrafts, personal loans and revolving credit facilities greater than 90 days past due Overdrafts, personal loans and revolving credit facilities greater than 90 days past due for the Group were attributed to the following geographical segments: Consolidated Australia 2012 $m 186 (126) 60 2013 $m 181 (126) 55 2011 $m 186 (138) 48 New Zealand 2012 $m 12 (7) 5 2013 $m 14 (9) 5 2011 $m 13 (8) 5 Other Overseas 2012 $m 1 (1) - 2013 $m - - - 2011 $m 1 (1) - 2013 $m 195 (135) 60 Total 2012 $m 199 (134) 65 2011 $m 200 (147) 53 Gross amount Impairment provision Net Restructured financial assets Assets are deemed to be restructured financial assets when the original contractual terms have been formally modified to provide for concessions of interest or principal for reasons related to the financial difficulties of the customer. Restructured financial assets for the Group were attributed to the following geographical segments: Consolidated Australia 2012 $m 43 (19) 24 2013 $m 34 (23) 11 2011 $m 21 (11) 10 New Zealand 2012 $m - - - 2013 $m - - - 2011 $m 1 - 1 Other Overseas 2012 $m 110 (25) 85 2013 $m 122 (33) 89 2011 $m 107 (18) 89 Total 2012 $m 153 (44) 109 2013 $m 156 (56) 100 2011 $m 129 (29) 100 Gross amount Impairment provision Net Restructured financial assets of the parent entity as at 30 September 2012 were: Gross amount Impairment provision Net 2013 $m 153 (56) 97 2012 $m 150 (44) 106 The following table summarises the interest received and forgone on impaired and restructured financial assets: Interest received Interest forgone Consolidated 2013 Australia $m 14 255 Overseas $m 18 16 Total $m 32 271 27.3 Funding and liquidity risk management Liquidity risk is the risk that the Group will be unable to fund assets and meet obligations as they become due. This risk could potentially arise as a result of:  an inability to meet efficiently both expected and unexpected current and future cashflows and collateral needs without affecting either daily operations or the financial condition of the bank; and/or  inadequate market depth or market disruption impacting the ability to easily offset or eliminate a position at the market price. Liquidity risk is managed through our BRMC-approved liquidity framework. Responsibility for liquidity management is delegated to Treasury, under the oversight of ALCO. Treasury manages liquidity on a daily basis and submits monthly reports to ALCO and quarterly reports to the BRMC. Monthly reports are provided to APRA. Treasury is also responsible for monitoring and managing our funding base so that it is prudently maintained and adequately diversified. 218 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) Our liquidity risk management framework models our ability to fund under both normal conditions and during a crisis situation, with models run globally and for specific geographical regions: Australia, New Zealand and offshore. This approach is designed to ensure that our funding framework is sufficiently flexible to accommodate a wide range of market conditions. The global liquidity management framework is reviewed annually. The annual review encompasses the funding scenarios modelled, the modelling approach, wholesale funding capacity, limit determination and minimum holdings of liquid assets. The liquidity framework is reviewed by ALCO prior to approval by the BRMC. Treasury also undertakes an annual funding review that outlines the funding strategy for the coming year. This review encompasses trends in global markets, peer analysis, wholesale funding capacity, expected funding requirements and a funding risk analysis. This strategy is continuously reviewed to take account of changing market conditions, investor sentiment and estimations of asset and liability growth rates. The annual funding strategy is reviewed and supported by ALCO prior to approval by the BRMC. We maintain a contingency funding plan that details the broad actions to be taken in response to severe disruptions in our ability to fund some or all of our activities in a timely manner and at a reasonable cost. This document is reviewed annually and defines a committee of senior executives to manage a crisis and allocates responsibility to individuals for key tasks. 27.3.1 Sources of liquidity Sources of liquidity are regularly reviewed to maintain a wide diversification by currency, geography, product and term. Sources include, but are not limited to:  deposits;  debt issues;  proceeds from sale of marketable securities;  repurchase agreements with central banks;  principal repayments on loans;  interest income;  fee income; and  an interbank deposit agreement. The Group does not rely on committed funding lines as a source of liquidity. Wholesale funding The Group monitors the composition and stability of its funding base so it is maintained within the Group’s funding and liquidity risk appetite. This includes a target of greater than 75% for the Stable Funding Ratio. Stable funding includes customer deposits, wholesale term funding with residual maturity greater than 12 months, equity and securitisation. The Group’s funding profile continued to strengthen through 2013, with improvements in key funding and liquidity metrics. Growth in customer deposits ahead of growth in new lending supported an increase in the Stable Funding Ratio of 99 basis points to 84% at 30 September 2013. Customer deposits as a proportion of total funding increased by 290 basis points to 61%. The Group’s stable funding sources include an additional 2% from securitisation, 14% from long term funding with a residual maturity greater than one year and 7% from equity. The proportion of total funding from wholesale sources maturing within one year decreased by 99 basis points to 16%. Strong customer deposit growth also saw a significant increase in the Group’s customer deposit to loan ratio, up 377 basis points to 71.4% at 30 September 2013 from 67.6% at 30 September 2012, with customer deposits increasing $34.9 billion over the year and net loans increasing $21.7 billion. Maintaining a diverse funding base and ensuring the Group has capacity and flexibility to access a wide range of funding markets, debt investors and products is an important part of managing liquidity risk. 3 In 2013, the Group raised $21.6 billion in wholesale term funding, with a weighted average maturity of 4.8 years. The Group’s strong product capabilities enabled access to a wide range of investors through issuance in a number of formats, including Additional Tier 1 and Tier 2 capital, senior unsecured debt, covered bonds, RMBS and Auto ABS, the latter being the first Auto ABS issued by a major Australian bank. The Group is also the only Australian bank to issue in SEC registered format in the United States enabling it to access both institutional and retail investors. Importantly, higher levels of liquidity also enabled the Group to buy back $8.1 billion mainly in Government-guaranteed debt over the year, which has reduced the Group’s refinancing requirements in 2014 and 2015. Borrowings and outstandings from existing debt programs and issuing shelves at 30 September 2013 can be found in various notes to the financial statements including Note 17, Note 18, Note 22 and Note 23. 2013 WESTPAC GROUP ANNUAL REPORT 219 NOTE 27. FINANCIAL RISK (CONTINUED) Credit ratings As at 30 September 2013 the Parent Entity’s credit ratings were: Standard & Poor’s Moody’s Investors Services Fitch Ratings Short-term A–1+ P–1 F1+ 2013 Long-term AA– Aa2 AA– Outlook Stable Stable Stable As of 30 September 2013, approximately 32% of the Group’s total funding originated from wholesale funding markets, principally in Australia, the United States, Europe and Japan. Investors in these markets have historically relied significantly upon credit ratings issued by independent credit rating organisations in making their investment decisions. If Westpac’s credit ratings were to decline from current levels, the Group’s borrowing costs and capacity may be adversely affected. A downgrade in Westpac’s credit ratings from current levels is likely to require the Group to pay higher interest rates than we do currently on our wholesale borrowings. This would increase the Group’s funding costs and could reduce net interest margins. In addition, the Group’s borrowing capacity could be diminished, which may adversely affect the Group’s ability to fund the growth of our balance sheet or reduce our liquidity. A credit rating is not a recommendation to buy, sell or hold Westpac securities. Such ratings are subject to revision or withdrawal at any time by the assigning rating agency. Investors are cautioned to evaluate each rating independently of any other rating. Liquid assets Treasury holds a portfolio of high quality liquid assets as a buffer against unforeseen funding requirements. These assets are 100% eligible for repurchase agreements with the Reserve Bank of Australia or another central bank and are held in cash, Government, State Government and highly rated investment grade paper. The level of liquid asset holdings is reviewed frequently and is consistent with both the requirements of the balance sheet and market conditions. Liquid assets that qualify as eligible collateral for repurchase agreements with an applicable central bank (including internal securitisation) have increased by $15.5 billion to $125.6 billion over the last 12 months, as a result of strong customer deposit growth and collateral inflows from declines in the value of the Australian dollar. This elevated level of liquidity has provided flexibility to the Group to be selective in its timing of executing wholesale issuance. WIB also has holdings of trading securities which arise from its daily business operations. These assets are typically high quality investment grade names and stock is generally very liquid. While these assets are excluded from the Group’s prudential liquidity portfolio, we do consider them as a source of funds in our crisis scenario analysis. A summary of liquid asset holdings is as follows: 2013 2012 Average $m 7,981 Cash 1,648 Receivables due from other financial institutions 36,083 Trading securities 19,401 Available-for-sale securities Loans1 35,917 394 Regulatory deposits with central banks 101,424 Total liquid assets 1 Loans are self-originated AAA rated mortgage backed securities which are eligible for repurchase with the Reserve Bank of Australia and Reserve Actual $m 9,057 2,026 32,680 22,462 43,108 841 110,174 Average $m 9,047 1,308 35,142 24,947 45,542 627 116,613 Actual $m 8,522 1,370 32,711 27,845 54,536 663 125,647 Bank of New Zealand. 220 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) 27.3.2 Liquidity reporting Scenario analysis In fulfilling our obligations under APRA’s liquidity prudential standard, the Group performs scenario analysis on a daily basis. The ‘going concern’ and ‘crisis’ scenarios present the maturity profiles of cash flows, based on assumptions agreed with APRA. The ‘going concern’ model measures our liquidity requirements under normal business conditions. Wholesale debt maturities are added to planned net asset growth to provide an estimate of the wholesale funding task across a range of time horizons. The cumulative liquidity mismatch is managed within a Board approved limit structure; with limits set at intervals from one week, to twelve months. The ‘crisis’ scenario measures liquidity requirements during the first week of a name-specific crisis. The crisis model reflects normal model flows plus expected sources and applications of funds under crisis conditions. Under a crisis scenario Westpac is expected to experience large customer and wholesale outflows against which liquid assets are held to ensure continued solvency. In this scenario, the cumulative mismatch must be positive out to five business days. Liquidity review The table below outlines the review performed in managing our liquidity: Frequency Daily Monthly Quarterly Liquidity report  Produced by Finance  Reviewed by Group Risk  Monitored within Treasury  Submitted to the BBRC1  Submitted to ALCO  Submitted to APRA  Submitted to the BRMC 1 BBRC is the Banking Book Risk Committee, a sub-committee of MARCO, responsible for oversight of liquidity and interest rate risk mismatches in the banking book. 27.3.3 Market developments In late 2010, the BCBS released the final text of Basel III. The framework introduces two new liquidity measures; the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR is scheduled to be introduced from 1 January 2015 and the NSFR from 1 January 2018. Both liquidity measures are subject to an observation and review period prior to implementation and, as such, are potentially subject to modification. In response to its observation and review process, the BCBS issued a revised framework for the LCR and liquidity risk monitoring in January 2013, including proposed recalibration of certain elements and phase-in arrangements over four years for the LCR from January 2015. Following a consultation process in mid-2013, APRA released a revised liquidity standard (APS 210) May 2013. APRA adopted the majority of the revisions to the LCR announced by the BCBS in January 2013, with the key exception being that APRA has not adopted the proposed phase-in of the LCR and has retained the requirement for a minimum LCR of 100% from 1 January 2015. The remaining qualitative requirements come into force from 1 January 2014. Westpac’s liquidity risk management framework will be amended to address the new standard by 1 January 2014. The LCR requires banks to hold sufficient high-quality liquid assets, as defined, to withstand 30 days under an acute stress scenario. Since there are insufficient Government bonds available in the Australian marketplace to allow institutions to meet the LCR, the Reserve Bank of Australia (RBA) has announced, jointly with the Australian Prudential Regulation Authority (APRA), that it will make available to Australian institutions a Committed Liquidity Facility (CLF) that can be accessed to meet the LCR requirement. 3 APRA has released draft prudential standards regarding the implementation of the Basel III liquidity framework in Australia but, until the final standards are released and full details on operation of the RBA Committed Liquidity Facility are known, the full extent of the impact on the Group is uncertain. 2013 WESTPAC GROUP ANNUAL REPORT 221 NOTE 27. FINANCIAL RISK (CONTINUED) 27.3.4 Contractual maturity of financial liabilities The tables below present cash flows associated with financial liabilities including derivative liabilities, payable at the balance sheet date, by remaining contractual maturity. The amounts disclosed in the table are the contractual undiscounted cash flows, whereas the Group manages inherent liquidity risk based on expected cash flows. Cash flows associated with liabilities include both principal payments as well as fixed or variable interest payments incorporated into the relevant coupon period. Principal payments reflect the earliest contractual maturity date. Derivative liabilities designed for hedging purposes are expected to be held for their remaining contractual lives, and reflect gross cash flows derived as the fixed rate and/or the expected variable rate applied to the notional principal over the remaining contractual term and where relevant includes the receipt and payment of the notional amount under the contract. Foreign exchange obligations have been translated to Australian dollars using the closing spot rates at the end of the reporting period. The balances in the tables below will not necessarily agree to amounts presented on the face of the balance sheet as amounts in the table incorporate cash flows on an undiscounted basis and include both principal and associated future interest payments. Financial liabilities at fair value through income statement are not all managed for liquidity purposes on the basis of their contractual maturity. The liabilities that we manage based on their contractual maturity are presented on a contractual undiscounted basis in the tables below: Consolidated 2013 Over 1 Month to 3 Months $m Over 3 Months to 1 Year $m Over 1 Year to 5 Years $m Up to 1 Month $m Over 5 Years $m Total $m 6,176 271,597 1,642 67,642 554 73,161 491 16,870 - 367 8,863 429,637 10,302 26,029 99 - - 238 - - 699 - - 10,302 - 1,599 - 247 26,029 2,882 Liabilities Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments: Held for trading Held for hedging purposes (net settled) Held for hedging purposes (gross settled): Cash outflow Cash inflow 1,602 (1,488) 6,167 1,972 322,456 3,450 325,906 5,175 (4,793) 10,013 516 80,433 63 80,496 7,508 (5,457) 43,540 2,321 122,326 175 122,501 21,103 (17,812) 82,639 - 104,890 6,689 111,579 Debt issues Other financial liabilities Total liabilities excluding loan capital Loan capital1 Total undiscounted financial liabilities Total contingent liabilities and commitments Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments 1 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. 148,368 44 148,412 - - - - - - - - - - - - 146 (115) 12,065 - 12,710 - 12,710 35,534 (29,665) 154,424 4,809 642,815 10,377 653,192 148,368 44 148,412 222 2013 WESTPAC GROUP ANNUAL REPORT NOTE 27. FINANCIAL RISK (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Consolidated 2012 Over 1 Month to 3 Months $m Over 3 Months to 1 Year $m Over 1 Year to 5 Years $m Up to 1 Month $m 6,100 229,158 980 76,518 49 78,380 445 16,302 9,555 28,852 72 1 - 186 31 - 903 262 - 2,367 Over 5 Years $m - 745 159 - 955 Total $m 7,574 401,103 10,008 28,852 4,483 Liabilities Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments: Held for trading Held for hedging purposes (net settled) Held for hedging purposes (gross settled): Cash outflow Cash inflow 1,555 (1,396) 8,603 2,116 284,615 3,130 287,745 6,091 (5,406) 14,266 466 93,102 76 93,178 9,679 (6,461) 33,074 2,094 117,749 1,818 119,567 25,481 (20,142) 93,803 - 118,518 4,062 122,580 Debt issues Other financial liabilities Total liabilities excluding loan capital Loan capital1 Total undiscounted financial liabilities Total contingent liabilities and commitments Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments 1 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. 139,809 98 139,907 - - - - - - - - - - - - 3,612 (2,979) 11,155 - 13,647 1,128 14,775 46,418 (36,384) 160,901 4,676 627,631 10,214 637,845 139,809 98 139,907 3 2013 WESTPAC GROUP ANNUAL REPORT 223 NOTE 27. FINANCIAL RISK (CONTINUED) Liabilities Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments: Held for trading Held for hedging purposes (net settled) Held for hedging purposes (gross settled): Cash outflow Cash inflow Parent Entity 2013 Over 1 Month to 3 Months $m Over 3 Months to 1 Year $m Over 1 Year to 5 Years $m Up to 1 Month $m Over 5 Years $m Total $m 6,078 246,524 1,642 59,694 554 62,747 491 15,408 - 367 8,765 384,740 10,302 26,180 74 - - 227 - - 656 - - 10,302 - 1,543 - 241 26,180 2,741 1,525 (1,431) 4,695 120,553 1,937 416,437 3,450 419,887 4,025 (3,760) 7,111 - 445 69,384 63 69,447 7,078 (5,122) 37,867 - 2,006 105,786 175 105,961 15,742 (13,281) 69,771 - - 89,674 6,689 96,363 Debt issues Due to subsidiaries Other financial liabilities Total liabilities excluding loan capital Loan capital1 Total undiscounted financial liabilities Total contingent liabilities and commitments Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments 1 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. 132,271 44 132,315 - - - - - - - - - - - - 146 (115) 10,745 - - 11,384 - 11,384 28,516 (23,709) 130,189 120,553 4,388 692,665 10,377 703,042 132,271 44 132,315 224 2013 WESTPAC GROUP ANNUAL REPORT NOTE 27. FINANCIAL RISK (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Parent Entity 2012 Up to 1 Month $m Over 1 Month to 3 Months $m Over 3 Months to 1 Year $m Over 1 Year to 5 Years $m Over 5 Years $m 6,080 207,693 941 71,021 49 70,840 430 14,559 9,555 29,124 50 1 - 182 31 - 746 262 - 2,295 - 743 159 - 926 Total $m 7,500 364,856 10,008 29,124 4,199 Liabilities Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments: Held for trading Held for hedging purposes (net settled) Held for hedging purposes (gross settled): Cash outflow Cash inflow 1,452 (1,331) 6,463 93,379 2,079 354,544 3,130 357,674 4,879 (4,199) 11,538 - 389 84,752 76 84,828 5,252 (3,772) 27,817 - 1,747 102,710 1,818 104,528 22,227 (17,867) 81,081 - - 102,987 4,062 107,049 Debt issues Due to subsidiaries Other financial liabilities Total liabilities excluding loan capital Loan capital1 Total undiscounted financial liabilities Total contingent liabilities and commitments Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments 1 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. 125,787 98 125,885 - - - - - - - - - - - - 3,338 (2,780) 9,234 - - 11,620 1,128 12,748 37,148 (29,949) 136,133 93,379 4,215 656,613 10,214 666,827 125,787 98 125,885 3 2013 WESTPAC GROUP ANNUAL REPORT 225 NOTE 27. FINANCIAL RISK (CONTINUED) 27.3.5 Expected maturity The tables below present the balance sheet based on expected maturity dates. The liability balances in the following tables will not agree to the contractual maturity tables (27.3.4 Contractual maturity of financial liabilities) due to the analysis below being based on expected rather than contractual maturities, the impact of discounting and the exclusion of interest accruals beyond the reporting period. Included in the tables below are equity securities classified as trading securities, available-for-sale investments and life insurance assets that have no specific maturity. These assets have been classified based on the expected period of disposal. Deposits are presented in the table below on a contractual basis, however as part of our normal banking operations we would expect a large proportion of these balances to be retained. Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans (net of provisions) Life insurance assets Regulatory deposits with central banks overseas All other assets Total assets Liabilities Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance policy liabilities All other liabilities Total liabilities excluding loan capital Loan capital Total liabilities Net assets/(net liabilities) Due within 12 Months $m Consolidated 2013 Greater than 12 Months $m 11,699 11,210 24,967 880 21,026 1,434 82,247 409 975 5,008 159,855 8,347 408,651 10,288 22,278 54,479 - 10,319 514,362 - 514,362 (354,507) - - 21,363 1,879 7,330 28,577 453,917 8,228 596 14,858 536,748 489 15,831 14 10,712 89,654 7,426 1,304 125,430 9,330 134,760 401,988 Total $m 11,699 11,210 46,330 2,759 28,356 30,011 536,164 8,637 1,571 19,866 696,603 8,836 424,482 10,302 32,990 144,133 7,426 11,623 639,792 9,330 649,122 47,481 226 2013 WESTPAC GROUP ANNUAL REPORT NOTE 27. FINANCIAL RISK (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans (net of provisions) Life insurance assets Regulatory deposits with central banks overseas All other assets Total assets Liabilities Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance policy liabilities All other liabilities Total liabilities excluding loan capital Loan capital Total liabilities Net assets/(net liabilities) Due within 12 Months $m Consolidated 2012 Greater than 12 Months $m 12,523 10,228 22,843 1,102 23,922 822 89,931 723 225 5,553 167,872 7,131 380,189 9,959 25,522 50,496 13 10,738 484,048 2,762 486,810 (318,938) - - 21,760 1,562 11,567 23,650 424,514 7,517 1,668 14,855 507,093 433 14,802 5 13,413 97,351 7,195 1,962 135,161 6,775 141,936 365,157 Total $m 12,523 10,228 44,603 2,664 35,489 24,472 514,445 8,240 1,893 20,408 674,965 7,564 394,991 9,964 38,935 147,847 7,208 12,700 619,209 9,537 628,746 46,219 3 2013 WESTPAC GROUP ANNUAL REPORT 227 NOTE 27. FINANCIAL RISK (CONTINUED) Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans (net of provisions) Regulatory deposits with central banks overseas Due from subsidiaries Investments in subsidiaries All other assets Total assets Liabilities Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments Debt issues Due to subsidiaries All other liabilities Total liabilities excluding loan capital Loan capital Total liabilities Net assets/(net liabilities) Due within 12 Months $m Parent Entity 2013 Greater than 12 Months $m 9,509 9,317 23,803 632 21,029 503 68,475 867 119,038 - 4,180 257,353 8,250 365,728 10,288 22,202 47,544 120,553 8,809 583,374 - 583,374 (326,021) - - 21,125 1,458 7,376 25,891 403,182 596 - 4,880 11,859 476,367 488 14,480 14 10,236 74,011 - 879 100,108 9,330 109,438 366,929 Total $m 9,509 9,317 44,928 2,090 28,405 26,394 471,657 1,463 119,038 4,880 16,039 733,720 8,738 380,208 10,302 32,438 121,555 120,553 9,688 683,482 9,330 692,812 40,908 228 2013 WESTPAC GROUP ANNUAL REPORT NOTE 27. FINANCIAL RISK (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans (net of provisions) Regulatory deposits with central banks overseas Due from subsidiaries Investments in subsidiaries All other assets Total assets Liabilities Payables due to other financial institutions Deposits and other borrowings Financial liabilities at fair value through income statement Derivative financial instruments Debt issues Due to subsidiaries All other liabilities Total liabilities excluding loan capital Loan capital Total liabilities Net assets/(net liabilities) Due within 12 Months $m Parent Entity 2012 Greater than 12 Months $m 10,993 7,328 21,453 779 23,625 15 75,957 106 92,740 - 4,526 237,522 7,071 346,131 9,959 25,466 42,858 93,379 9,140 534,004 2,762 536,766 (299,244) - - 21,522 1,124 11,559 21,024 381,532 1,667 - 4,692 11,963 455,083 419 13,198 5 12,337 81,841 - 1,501 109,301 6,775 116,076 339,007 Total $m 10,993 7,328 42,975 1,903 35,184 21,039 457,489 1,773 92,740 4,692 16,489 692,605 7,490 359,329 9,964 37,803 124,699 93,379 10,641 643,305 9,537 652,842 39,763 27.4 Market risk Market risk is the risk of an adverse impact on earnings resulting from changes in market factors, such as foreign exchange rates, interest rates, commodity prices and equity prices. This includes interest rate risk in the banking book – the risk to interest income from a mismatch between the duration of assets and liabilities that arises in the normal course of business activities. 27.4.1 Traded market risk Approach Westpac’s exposure to traded market risk arises out of the trading activities of Financial Markets and Treasury. These activities are controlled by a Board-approved market risk framework that incorporates a Board-approved Value at Risk (VaR) limit. VaR is the primary mechanism for measuring and controlling market risk. Market risk is managed using VaR and structural risk limits (including volume limits and basis point value limits) in conjunction with scenario analysis and stress testing. Market risk limits are allocated to business managers based upon business strategies and experience, in addition to the consideration of market liquidity and concentration of risks. All trades are fair valued daily, using the appropriate fair value methodology as described in Note 28. Rates that have limited independent sources are reviewed at least on a monthly basis. Financial Market’s trading book activity represents dealings that encompass book running and distribution activity. The types of market risk arising from these activities include interest rate, foreign exchange, commodity, equity price, credit spread and volatility risk. 3 Treasury’s trading activity represents dealings that include the management of interest rate, foreign exchange and credit spread risk associated with wholesale funding, liquid asset portfolios and foreign exchange repatriations. 2013 WESTPAC GROUP ANNUAL REPORT 229 NOTE 27. FINANCIAL RISK (CONTINUED) VaR limits Market risk arising from trading book activities is primarily measured using VaR based on an historical simulation methodology. VaR is the potential loss in earnings from adverse market movements calculated over a one-day time horizon to a 99% confidence level using a minimum of one year of historical data. VaR takes account of all material market variables that may cause a change in the value of the trading portfolio, including interest rates, foreign exchange rates, price changes, volatility and the correlations between these variables. In addition to the Board approved market risk VaR limit for trading activities, MARCO has approved separate VaR sub-limits for the trading activities of Financial Markets and Treasury. Backtesting Daily backtesting of VaR results is performed to support model integrity. A review of both the potential profit or loss outcomes is also undertaken to monitor any skew created by the historical data. Stress testing Daily stress testing against pre-determined scenarios is carried out to analyse potential losses arising from extreme or unexpected movements beyond the 99% confidence level. An escalation framework around selective stress tests has been approved by MARCO. Stress and scenario tests include historical market movements, those defined by MARCO or Financial Markets and Treasury Risk (FMTR) and independent scenarios developed by Westpac’s economics department. Profit or loss notification framework The BRMC has approved a profit or loss notification framework. Included in this framework are levels of escalation in accordance with the size of the profit or loss. Triggers are applied to both a 1-day and a rolling 20-day cumulative total. Risk reporting Daily monitoring of current exposure and limit utilisation is conducted independently by the FMTR unit, which monitors market risk exposures against VaR and structural limits. Daily VaR position reports are produced by risk type, by product lines and by geographic region. These are supplemented by structural risk reporting, advice of profit or loss trigger levels and stress testing escalation trigger points. Model accreditation has been granted by APRA to use the internal model for the determination of regulatory capital for the key classes of interest rate (general market), foreign exchange, commodity and equity risks (including specific risk). Under the model, regulatory capital is derived from both the current VaR window (market data is based upon the most recent 12 months of historical data) and a Stressed VaR window (12 months of market data that includes a period of significant financial stress), where these VaR measures are calculated as a 10-day, 99th percentile, one-tailed confidence interval. Specific risk refers to the variations in individual security prices that cannot be explained by general market movements and event and default risk. Interest rate specific risk capital (specific issuer risk) is calculated using the Standard method and is added to the VaR regulatory capital measure. Risk mitigation Market risk positions are managed by the trading desks consistent with delegated trading and product authorities. Risks are consolidated into portfolios based on product and risk types. Risk management is carried out by suitably qualified personnel with varying levels of seniority commensurate with the nature and scale of market risks under management. Determination of fair value Refer to Note 28 for the basis for determining fair value. The following controls allow for continuous monitoring of market risk by management:  trading authorities and responsibilities are clearly delineated at all levels to provide accountability;  a structured system of limits and reporting of exposures;  all new products and significant product variations undergo an approval process to confirm business risks have been identified prior to launch;  models that are used to determine risk or profit or loss for Westpac’s financial statements are independently reviewed;  duties are segregated so that employees involved in the origination, processing and valuation of transactions operate under separate reporting lines, minimising the opportunity for collusion; and  legal counsel approves documentation for compliance with relevant laws and regulations. 230 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) The table below depicts the aggregate VaR, by risk type, for the years ended 30 September 2013, 30 September 2012 and 30 September 2011: 30 September 2013 Consolidated and Parent Entity1 30 September 2012 30 September 2011 High $m 30.8 5.7 0.8 6.1 13.0 n/a 35.4 Low $m 9.1 0.5 0.1 1.2 5.8 n/a 12.5 Average $m 16.7 2.1 0.3 2.9 7.9 (10.7) 19.2 High $m 29.0 8.0 1.8 5.1 21.6 n/a 41.2 Low Average $m 10.5 0.8 0.2 1.0 7.8 n/a 16.8 $m 18.4 3.3 0.5 2.5 16.6 (12.5) 28.8 High $m 40.9 8.4 1.7 6.6 24.9 n/a 50.0 Low $m 12.8 0.8 0.2 1.1 16.6 n/a 19.9 Average $m 24.7 3.3 0.5 2.7 21.1 (20.7) 31.6 Interest rate risk Foreign exchange risk Equity risk Commodity risk2 Other market risks3 Diversification effect Net market risk 1 In the current year we have revised our presentation to compare aggregate VaR from a six monthly to an annual basis. We have revised comparatives for consistency. Includes electricity risk. Includes prepayment risk and credit spread risk (exposure to movements in generic credit rating bands). 2 3 Commodity, Carbon and Energy trading Commodity, Carbon and Energy trading (CCE) activity is part of our Financial Markets business. All trades are marked-to- market daily, using independently sourced or reviewed rates. Rates are compared to Australian Financial Market Association published prices, brokers’ quotes, and futures prices as appropriate. Rates that have limited independent sources are reviewed on a regular basis by the WIB Revaluation Committee. The CCE business is managed within market risk structural and VaR limits. Credit risk is controlled by pre-settlement risk limits by counterparty. CCE trading activities include electricity, gas, oil, emission, agricultural products, base metals and precious metals. These activities involve dealings in swaps, options, swaptions, Asian options and futures. Energy trading also includes Settlement Residue Auctions (SRAs) and Renewable Energy Certificates (RECs). Carbon trading activities includes Australian, New Zealand and European carbon units. The total fair value of commodity, carbon and energy contracts outstanding as at 30 September 2013 were $9 million (2012: $8 million). 27.4.2 Non-traded market risk Approach The banking book activities that give rise to market risk include lending activities, balance sheet funding and capital management. Interest rate risk, currency risk and funding and liquidity risk are inherent in these activities. Treasury’s Asset and Liability Management (ALM) unit is responsible for managing the interest rate risk arising from these activities. All material regions, business lines and legal entities are included in Westpac’s IRRBB framework. Asset and Liability Management ALM manages the structural interest rate mismatch associated with the transfer priced balance sheet, including the investment of Westpac’s capital to its agreed benchmark duration. A key risk management objective is to achieve reasonable stability of net interest income (NII) over time. These activities are overseen by the independent FMTR unit, reviewed by MARCO and conducted within a risk framework and appetite set down by the BRMC. Material non-traded interest rate risk is managed in five centres: Sydney manages risk associated with the Australian balance sheet, the Auckland office manages risk associated with the New Zealand balance sheet, the Singapore office manages risk associated with the Asian balance sheet, while New York and London centres manage risk associated with those locations respectively. The risk from these five centres is monitored both at a local and aggregate level. 3 NII sensitivity NII sensitivity is managed in terms of the net interest income-at-risk (NaR) modelled over a three year time horizon using a 99% confidence interval for movements in wholesale market interest rates. The position managed covers the Australian and New Zealand banking books, where the banking book is defined as the entire banking balance sheet less the trading book. A simulation model is used to calculate Westpac’s potential NaR. The NII simulation framework combines the underlying balance sheet data with assumptions about run off and new business, expected repricing behaviour and changes in wholesale market interest rates. Simulations using a range of interest rate scenarios are used to provide a series of potential future NII outcomes. The interest rate scenarios modelled include those projected using historical market interest rate volatility as well as 100 and 200 basis point shifts up and down from the current market yield curves in Australia and New Zealand. Additional stressed interest rate scenarios are also considered and modelled. A comparison between the NII outcomes from these modelled scenarios indicates the sensitivity to interest rate changes. 2013 WESTPAC GROUP ANNUAL REPORT 231 NOTE 27. FINANCIAL RISK (CONTINUED) NaR limit The BRMC has approved a NaR limit. This limit is managed by the Group Treasurer and is expressed as a deviation from benchmark hedge levels over a one-year rolling time frame, to a 99% confidence level. This limit is monitored by FMTR. VaR limit The BRMC has also approved a VaR limit for ALM activities. This limit is managed by the Group Treasurer and monitored by FMTR. Additionally, FMTR sets structural risk limits to prevent undue concentration of risk. Structural foreign exchange risk Structural foreign exchange rate risk results from the generation of foreign currency denominated earnings and from the foreign currency capital that we have deployed in offshore branches and subsidiaries with functional currencies other than Australian dollars. As a result of the requirement to translate earnings and net assets of the foreign operations into our Australian dollar consolidated financial statements, movements in exchange rates could lead to changes in the Australian dollar equivalent of offshore earnings and capital which could introduce variability to our reported financial results. This is referred to as translation risk. In order to minimise this exposure, we manage the foreign exchange rate risk associated with offshore earnings and capital as follows:  foreign currency denominated earnings that are generated during the current financial year are hedged;  capital that is defined to be permanently employed in an offshore jurisdiction (for example to meet regulatory or prudential requirements) and which has no fixed term is hedged;  capital or profits that are denominated in currencies to which we have an immaterial exposure are not hedged; and  ALCO determines the appropriateness of the foreign exchange earnings hedges and associated limits. Risk reporting IRRBB risk measurement systems and personnel are centralised in Sydney. These include front office product systems, which capture all treasury funding and derivative transactions; the transfer pricing system, which captures all retail transactions in Australia and New Zealand; non-traded VaR systems; and the NII system, which calculates NII and NaR for the Australian and New Zealand balance sheets. Daily monitoring of current exposure and limit utilisation is conducted independently by FMTR, which monitors market risk exposures against VaR and NaR limits. Reports detailing structural positions and VaR are produced and distributed daily for use by dealers and management across all stakeholder groups. Monthly and quarterly reports are produced for the senior management market risk forums of MARCO and the BRMC respectively to provide transparency of material market risks and issues. Risk mitigation IRRBB stems from the ordinary course of banking activities, including structural interest rate risk (the mismatch between the duration of assets and liabilities) and capital management. Hedging Westpac’s exposure to interest rate risk is undertaken using derivatives. The hedge accounting strategy adopted is to utilise a combination of cash flow, fair value and net investment hedge approaches. Some derivatives held for economic hedging purposes do not meet the criteria for hedge accounting as defined under AASB 139 Financial Instruments: Recognition and Measurement, and therefore are accounted for in the same way as derivatives held for trading. The same controls as used to monitor traded market risk allow for the continuous monitoring by management of IRRBB. Value at risk – IRRBB The table below depicts VaR for IRRBB: Consolidated 30 September 2013 30 September 2012 As at $m 8.8 High $m 21.0 Low $m 6.7 Average $m 11.8 As at $m 9.4 High $m 15.7 Low $m 2.4 Average $m 8.4 As at 30 September 2013 the value at risk – IRRBB for the Parent Entity was $7.6 million (30 September 2012: $9.4 million). 232 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 27. FINANCIAL RISK (CONTINUED) Net interest income-at-risk (NaR) The table below depicts NaR assuming a 100 basis point shock (decrease) over the next 12 months as a percentage of reported net interest income: Consolidated Parent Entity 30 September 2013 Maximum Exposure % 0.98 1.03 Minimum Exposure % 0.24 0.20 Average Exposure % 0.64 0.68 As at % 0.51 0.53 30 September 2012 Maximum Exposure % 1.84 2.23 Minimum Exposure % 0.60 0.60 As at % 1.07 1.18 Average Exposure % 1.32 1.56 Equity risk Financial assets classified as available-for-sale are subject to market risk which is not captured by the market risk VaR. Regular reviews are performed to substantiate the valuation of equity investments and are regularly reviewed by management for impairment. Whilst the fair value of individual equity securities classified as available-for-sale can fluctuate considerably, the overall impact to the Group is not material. NOTE 28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Fair Valuation Control Framework The Group’s control environment uses a well-established Fair Valuation Control Framework to ensure that fair value is either determined or validated by a function independent of the party that undertakes the transaction. This framework formalises the policies and procedures used by the Group to achieve compliance with relevant accounting, industry and regulatory standards. The framework includes specific controls relating to the revaluation of financial instruments, independent price verification, fair value adjustments and financial reporting. A key element of the Fair Valuation Control Framework is the Revaluation Committee, comprising senior finance and risk valuation experts from within the Group. The Revaluation Committee review the application of the agreed policies and procedures to ensure a fair value measurement basis is applied. The method of determining fair value according to the Fair Valuation Control Framework differs depending on the information available. Quoted price in an active market The best evidence of fair value is a quoted price in an active market. Wherever possible the Group determines the fair value of a financial instrument based on the quoted price. Valuation techniques Where no direct quoted price in an active market is available, the Group applies present value estimates or other market accepted valuation techniques. The use of a market accepted valuation technique will typically involve the use of a valuation model and appropriate inputs to the model. The majority of models used by the Group employ only observable market data as inputs. However, for certain financial instruments data may be employed which is not readily observable in current markets. Typically in these instances valuation inputs will be derived using alternative means (including extrapolation from other relevant market data) and tested against historic transactions. The use of these inputs will require a high degree of management judgment. In order to determine a reliable fair value, where appropriate, management may apply adjustments to the techniques used above. These adjustments reflect the Group’s assessment of factors that market participants would consider in setting the fair value. When determining the fair value of financial instruments, adjustments are made to the mid-market valuations to cover credit risk and bid-offer spreads. 3  Credit valuation adjustment (CVA) Some market and model derived valuations assume similar credit quality for all counterparties. To correct for this assumption, a CVA is employed on the majority of derivative positions which reflects the market view of the counterparty credit risk. A debit valuation adjustment (DVA) is employed to adjust for our own credit risk. Westpac uses a Monte Carlo simulation methodology to calculate the expected future credit exposure for all derivative exposures including inputs regarding probabilities of default (PDs) and loss given default (LGD). PDs are derived from market observed credit spreads by reference to credit default swap (CDS) for individual or sector curves for the relevant tenors to calculate CVA, and Westpac’s CDS curve for the relevant tenors to calculate DVA. PDs are then applied to the horizon of potential exposures to derive both the CVA and DVA. 2013 WESTPAC GROUP ANNUAL REPORT 233 NOTE 28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED)  Bid-offer spreads The fair value of financial assets and liabilities should reflect bid prices for assets and offer prices for liabilities. Prices are adjusted to reflect current bid-offer spreads. The fair values of large holdings of financial instruments are based on a multiple of the estimated value of a single instrument, and do not include block adjustments for the size of the holding. Fair value hierarchy The Group categorises all fair value instruments according to the following hierarchy:  Level 1 Financial instruments valued using recent unadjusted quoted prices in active markets for identical assets or liabilities. An active market is one in which prices are readily and regularly available and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Valuation of Level 1 instruments require little or no management judgment. Financial instruments included in this class are spot and exchange traded derivatives for equities, foreign exchange, commodities and interest rate products.  Level 2 Valuation techniques utilising observable market prices applied to these assets or liabilities include the use of market standard discounting methodologies, option pricing models and other valuation techniques widely used and accepted by market participants. The financial instruments included in this category are mainly over the counter (OTC) derivatives with observable market inputs and financial instruments with fair value derived from consensus pricing with sufficient contributors. Financial instruments included in the Level 2 category are: – trading securities – including government bonds, state government bonds, corporate fixed rate bonds and floating rate bonds; and – derivatives – including interest rate swaps, credit default swaps, foreign exchange swaps, foreign exchange options and equity options.  Level 3 Financial instruments valued using at least one input that could have a significant effect on the instrument’s valuation which is not based on observable market data (unobservable input). Unobservable inputs are those not readily available in an active market due to illiquidity or complexity of the product. These inputs are generally derived and extrapolated from other relevant market data and calibrated against current market trends and historic transactions. These valuations are calculated using a high degree of management judgment. Financial instruments included in the Level 3 category are trading securities, including some ABS and non-Australian dollar- denominated government securities issued by Pacific Islands governments. A financial instrument’s categorisation within the valuation hierarchy is based on the lowest level input that is significant to the fair value measurement. Valuation techniques The specific valuation techniques, the observability of the inputs used in valuation models and the subsequent classification for each significant product category are outlined below:  Interest rate products These are products linked to interest rates (e.g. Bank Bills Swap Rate (BBSW) or London Interbank Offer Rate (LIBOR)) or inflation indices. This includes exchange traded interest rate futures, interest rate and inflation swaps, swaptions, caps, floors, exchange traded interest rate options on futures, inflation options, collars and other non-vanilla interest rate derivatives. Exchange traded interest rate futures and options on futures are traded in liquid, active markets where prices are readily observable. No modelling or assumptions are used in the valuation. Exchange traded interest rate futures and options on futures are classified as Level 1 instruments. 234 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) Interest rate derivative cash flows are valued using interest rate curves whereby observable market data is used to construct the term structure of forward rates. This term structure is used to project and discount future cash flows based on the terms of the trade. Instruments with optionality are valued using market observable or consensus provided volatilities. Non-vanilla interest rate derivatives are valued using industry standard models based on market observable inputs which are determined separately for each parameter. Where unobservable, inputs will be set with reference to an observable proxy. In general, interest rate derivatives are classified as Level 2 instruments.  Foreign exchange products These are products linked to the foreign exchange market. This includes FX spot and futures contracts, FX forward contracts, FX swaps, FX options and other non-vanilla FX derivatives. There are observable markets for futures and spot contracts in major global currencies. No modelling or assumptions are used in valuation of these instruments. FX spot and future contracts are classified as Level 1 instruments. FX swap and forward valuations are derived from market observable inputs or consensus pricing providers using industry standard models. FX swaps and forwards are classified as Level 2 instruments. FX options and other FX derivatives are valued using industry standard models and market observable inputs. Where unobservable, inputs will be set with reference to an observable proxy. In general, FX options and other FX derivatives are classified as Level 2 instruments.  Asset backed products These are debt and derivative products that are linked to the cash flows of a pool of referenced assets via securitisation. This category includes residential mortgage backed securities (RMBS), collateralised debt obligations (CDOs), collateralised loan obligations (CLOs) and other asset backed securities (ABS). Australian RMBS denominated in Australian dollars are valued using a market accepted model with observable inputs sourced from a consensus data provider. The main inputs to the model are the trading margin and the weighted average life of the security. They are classified as Level 2 instruments. Despite the availability of an RMBS model in Westpac, input data for the trading margin on Australian issued RMBS, denominated in foreign currency, is considered unreliable. Trading levels in these instruments are low. Proxy data from the Australian denominated RMBS market is used to derive the fair value for these instruments. Australian issued RMBS denominated in foreign currency are classified as Level 3 instruments. Offshore RMBS are classified as Level 2 and consensus data is used to determine their fair value. As synthetic CDO prices are not generally available, Synthetic CDOs are valued using a model. The model uses a combination of established analytic and numerical approaches. The model calculates fair value based on observable and unobservable parameters including credit spreads, recovery rates, correlations and interest rates. As some of the model inputs (e.g. correlations) are indirectly implied or unobservable, synthetic CDOs are classified as Level 3 instruments. Where available, cash CDO, CLO and ABS products are valued using prices obtained from consensus data providers and classified as Level 2 instruments. Where consensus prices are not available, these products are valued using quotes provided by a third party broker or independent lead manager and classified as Level 3 instruments.  Other credit products These products are linked to the credit spread of a referenced entity or index and include Single Name and Index CDS. CDS are valued using an industry standard model that incorporates the credit spread as its principal input. Credit spreads are obtained from consensus market data providers. Single name and index CDS are classified as Level 2 instruments.  Non-asset backed debt instruments 3 Australian government bonds are valued using market standard methodologies incorporating observable inputs in the form of market quoted yields. Other government bonds, state government bonds, corporate bonds and commercial paper are valued using observable market prices which are sourced from consensus pricing services, broker quotes or inter- dealer prices. These debt market products are classified as Level 2 instruments.  Equity products This category includes cash equities and equity indices, exchange traded equity options, OTC equity options and OTC equity warrants. Cash equities and equity indices are traded on major global exchanges in liquid markets. No modelling or assumptions are used in valuation. These are categorised as Level 1 assets. 2013 WESTPAC GROUP ANNUAL REPORT 235 NOTE 28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) Exchange traded equity options, OTC equity options and equity warrants are valued using industry standard models. The models calculate fair value based on input parameters such as stock prices, dividends, volatilities and interest rates. In general, input parameters are deemed observable. These are classified as Level 2 instruments.  Commodity products These products are exchange traded and OTC derivatives based on underlying commodities such as energy, carbon, agriculture, metals, crude oil and refined products, power and natural gas. Commodity spot and futures, energy spot and futures together with carbon futures are traded on major global exchanges in liquid markets. No modelling or assumptions are used in the valuation of these instruments. These are classified as Level 1 instruments. The valuation of commodity, carbon and energy derivatives are determined using industry standard models incorporating discounting of cash flows and other industry standard modelling techniques. Valuation inputs include forward curves, volatilities implied from market observable inputs, discount curves and underlying spot and futures prices. The significant inputs are market observable or available through a consensus data service. Where unobservable, inputs will be set with reference to an observable proxy. In general, commodity, carbon and energy derivatives are classified as Level 2 instruments.  Certificates of deposit The fair value of certificates of deposit are determined using a discounted cash flow analysis using markets rates offered for deposits of similar remaining maturities and are classified as Level 2 instruments.  Debt issues at fair value Where a quoted price is not available the fair value of debt issues is determined using a discounted cash flow approach, using a discount rate which reflects the terms of the instrument and the timing of cash flows adjusted for market observable changes in the applicable credit rating of Westpac. These instruments are classified as Level 2 instruments. The table below summarises the attribution of financial instruments to the fair value hierarchy based on the measurement basis after initial recognition: 2013 Valuation Techniques (Market Observable) (Level 2) $m Valuation Techniques (Non-Market Observable) (Level 3) $m Quoted Market Prices (Level 1) $m Consolidated Quoted Market Prices (Level 1) $m Total $m 2012 Valuation Techniques (Market Observable) (Level 2) $m Valuation Techniques (Non-Market Observable) (Level 3) $m Total $m 20 46,310 - 46,330 18 44,585 - 44,603 40 12 90 - 1,805 2,181 28,340 29,119 10,876 6,832 538 4 790 - - 2,759 28,356 29,999 10,876 8,637 159 33 193 - 2,105 2,067 35,444 23,446 11,844 6,135 438 12 826 - - 2,664 35,489 24,465 11,844 8,240 1,967 123,658 1,332 126,957 2,508 123,521 1,276 127,305 - 44 14 - - 58 42,015 10,258 32,952 14,127 7,426 106,778 - - 24 13 - 37 42,015 10,302 32,990 14,140 7,426 - 71 38 - - 47,086 9,893 38,824 31,242 7,208 - 47,086 - 73 27 - 9,964 38,935 31,269 7,208 106,873 109 134,253 100 134,462 Assets Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans Life insurance assets1 Total assets carried at fair value Liabilities Deposits and other borrowings at fair value Financial liabilities at fair value through income statement Derivative financial instruments Debt issues at fair value Life insurance liabilities2 Total liabilities carried at fair value 1 In the current year, we have reassessed the fair value hierarchy classification of life insurance assets. Comparatives have been restated for consistency. In the current year, we have revised our presentation to include life insurance liabilities. We have included comparatives for consistency. 2 236 2013 WESTPAC GROUP ANNUAL REPORT NOTE 28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS 2013 Valuation Techniques (Market Observable) (Level 2) $m Valuation Techniques (Non-Market Observable) (Level 3) $m Quoted Market Prices (Level 1) $m Parent Entity Quoted Market Prices (Level 1) $m Total $m 2012 Valuation Techniques (Market Observable) (Level 2) $m Valuation Techniques (Non-Market Observable) (Level 3) $m Total $m - 44,928 18 42,957 - 42,975 Assets Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans Total assets carried at fair value Liabilities Deposits and other borrowings at fair value Financial liabilities at fair value through income statement Derivative financial instruments Debt issues at fair value Total liabilities carried at fair value 20 37 12 - - 69 - 44 14 - 58 44,908 1,761 28,389 26,190 10,876 292 4 200 - 2,090 28,405 26,390 10,876 112,124 496 112,689 40,653 10,258 32,400 11,151 94,462 - - 24 - 24 40,653 10,302 32,438 11,151 105 33 97 - 253 - 71 38 - 1,398 35,139 20,810 11,844 400 12 129 - 1,903 35,184 21,036 11,844 112,148 541 112,942 46,400 9,893 37,692 27,601 - 46,400 - 73 - 9,964 37,803 27,601 94,544 109 121,586 73 121,768 Sensitivities to reasonably possible changes in non-market observable valuation assumptions would not have a material impact on the Group’s or Parent Entity’s reported results. 3 2013 WESTPAC GROUP ANNUAL REPORT 237 NOTE 28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) Reconciliation of non-market observables The following tables summarise the changes in financial instruments carried at fair value derived from non-market observable valuation techniques (Level 3): Consolidated 2013 Other Financial Assets Designated at Available- for-Sale Fair Value Derivatives $m 12 $m 438 Securities Total Assets $m 1,276 $m 826 Derivatives $m 73 Debt Issues at Fair Value $m 27 Total Liabilities $m 100 51 - 41 20 (245) (28) 251 10 538 9 (2) 1 1 - (1) (5) (2) - 4 (2) - 2 1,642 - (1,625) - 10 (65) 790 49 3 1,684 20 (1,871) (33) 259 (55) 1,332 (9) 1 8 - (23) (10) (16) - 24 - 7 2 Consolidated 2012 6 - - - (20) - - - 13 11 (3) 1 8 - (43) (10) (16) - 37 13 Other Financial Assets Designated at Available- for-Sale Fair Value Derivatives $m 11 $m 693 Securities Total Assets $m 1,473 $m 769 Derivatives $m 52 Debt Issues at Fair Value $m 22 Total Liabilities $m 74 (17) - 160 4 (308) (86) - (8) 438 - - 6 - - - (5) - 12 - 2 1,899 - (1,845) - - 1 826 (17) 2 2,065 4 (2,153) (86) (5) (7) 1,276 (8) - 35 - - (7) 1 - 73 5 - - - - - - - 27 (3) - 35 - - (7) 1 - 100 (25) - - (25) 8 (5) 3 Balance as at beginning of year Gains/(losses) on assets/ (gains)/losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions Issues Disposals Settlements Transfers into or out of non-market observables Others1 Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2013 1 Includes foreign currency translation impacts. Balance as at beginning of year Gains/(losses) on assets/ (gains)/losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions Issues Disposals Settlements Transfers into or out of non-market observables Others1 Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2012 1 Includes foreign currency translation impacts. 238 2013 WESTPAC GROUP ANNUAL REPORT NOTE 28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Parent Entity 2013 Other Financial Assets Designated at Available- for-Sale Fair Value Derivatives $m 12 $m 400 Securities Total Assets $m 541 $m 129 Derivatives $m 73 Debt Issues at Fair Value $m - Total Liabilities $m 73 42 - 38 20 (199) (28) 11 8 292 5 (2) 1 1 - (1) (5) (2) - 4 (2) - 2 104 - (63) - 9 19 200 40 3 143 20 (263) (33) 18 27 496 (9) 1 8 - (23) (10) (16) - 24 - 3 2 Parent Entity 2012 - - - - - - - - - - (9) 1 8 - (23) (10) (16) - 24 2 Other Financial Assets Designated at Available- for-Sale Fair Value Derivatives $m 11 $m 658 Securities Total Assets $m 727 $m 58 Derivatives $m 52 Debt Issues at Fair Value $m - Total Liabilities $m 52 (23) - 160 4 (308) (86) - (5) 400 - - 6 - - - (5) - 12 - 2 168 - (94) - - (5) 129 (23) 2 334 4 (402) (86) (5) (10) 541 (8) - 35 - - (7) 1 - 73 (31) - - (31) 8 - - - - - - - - - - (8) - 35 - - (7) 1 - 73 8 3 Balance as at beginning of year Gains/(losses) on assets/ (gains)/losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions Issues Disposals Settlements Transfers into or out of non-market observables Others1 Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2013 1 Includes foreign currency translation impacts. Balance as at beginning of year Gains/(losses) on assets/ (gains)/losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions Issues Disposals Settlements Transfers into or out of non-market observables Others1 Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2012 1 Includes foreign currency translation impacts. Other than as noted in the fair value table above in relation to the life insurance assets, there have been no significant transfers of financial instruments between Level 1 and Level 2. Transfers into and out of Level 3 have occurred due to changes in observability in the significant inputs into the valuation models used to determine the fair value of the related financial instruments. Day one profit or loss For financial assets and financial liabilities measured at fair value through the profit or loss, when the transaction price is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose inputs include only data from observable markets, Westpac recognises the difference between the transaction price and the fair value (‘day one’ profit or loss) in the income statement as non-interest income. In cases where use is made of data which is not observable, day one profit or loss is only recognised in the income statement when the inputs become observable, or over the life of the instrument. 2013 WESTPAC GROUP ANNUAL REPORT 239 NOTE 28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) The following table summarises the deferral and recognition of day one profit or loss for the Group and the Parent Entity, where a valuation technique has been applied for which not all the inputs are observable in the market: Balance at the beginning of the period Deferral on new transactions Recognised in the income statements during the period Subsequent to observability Derecognition of the instruments Balance at the end of the period Consolidated Parent Entity 2013 $m 6 5 (4) (1) - 6 2012 $m 5 4 (2) - (1) 6 2013 $m 5 5 (3) (1) - 6 2012 $m 5 2 (1) - (1) 5 Fair value of financial instruments Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at 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 is the amount for which an asset could be exchanged, or a liability settled, in an arm’s length transaction between knowledgeable, willing parties. The fair value disclosure does not cover those instruments that are not considered to be financial instruments from an accounting perspective, such as income tax and intangible assets. The following table summarises the carrying value and fair value of all financial instruments of the Group and the Parent Entity as at 30 September 2013: Consolidated 2013 Carrying Amount $m Fair Value $m 2012 Carrying Amount $m Fair Value $m 11,699 11,210 46,330 2,759 28,356 30,011 536,164 8,637 1,571 3,750 680,487 11,699 11,210 46,330 2,759 28,356 30,011 536,823 8,637 1,571 3,750 681,146 12,523 10,228 44,603 2,664 35,489 24,472 514,445 8,240 1,893 4,325 658,882 Financial assets Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities1 Loans (net of impairment provision) Life insurance assets Regulatory deposits with central banks overseas Other financial assets Total financial assets Financial liabilities Payables due to other financial institutions Deposits and other borrowings at fair value Deposits and other borrowings at amortised cost Financial liabilities at fair value through income statement Derivative financial instruments Debt issues at fair value Debt issues at amortised cost Life insurance liabilities2 Loan capital Other financial liabilities Total financial liabilities 1 At 30 September 2013 financial instruments with a carrying value of $12 million (2012: $7 million) were included in available-for-sale securities, however as their fair value could not be reliably measured these were carried at cost. These amounts have not been included in the fair value hierarchy tables; however have been included in the tables above. In the current year, we have revised our presentation to include life insurance liabilities. We have included comparatives for consistency. 7,564 47,086 347,905 9,964 38,935 31,269 116,578 7,208 9,537 8,022 624,068 8,836 42,015 382,467 10,302 32,990 14,140 129,993 7,426 9,330 7,780 645,279 8,836 42,015 383,669 10,302 32,990 14,140 132,058 7,426 9,374 7,780 648,590 2 12,523 10,228 44,603 2,664 35,489 24,472 515,384 8,240 1,893 4,325 659,821 7,564 47,086 348,922 9,964 38,935 31,269 117,689 7,208 9,526 8,022 626,185 240 2013 WESTPAC GROUP ANNUAL REPORT NOTE 28. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Parent Entity 2013 Carrying Amount $m Fair Value $m 2012 Carrying Amount $m Fair Value $m 9,509 9,317 44,928 2,090 28,405 26,394 471,657 1,463 119,038 3,224 716,025 10,993 7,328 42,975 1,903 35,184 21,039 457,489 1,773 92,740 3,764 675,188 9,509 9,317 44,928 2,090 28,405 26,394 472,252 1,463 119,038 3,224 716,620 Financial assets Cash and balances with central banks Receivables due from other financial institutions Trading securities Other financial assets designated at fair value Derivative financial instruments Available-for-sale securities1 Loans (net of impairment provision) Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets Total financial assets Financial liabilities Payables due to other financial institutions Deposits and other borrowings at fair value Deposits and other borrowings at amortised cost Financial liabilities at fair value through income statement Derivative financial instruments Debt issues at fair value Debt issues at amortised cost Due to subsidiaries Loan capital Other financial liabilities Total financial liabilities 1 At 30 September 2013 financial instruments with a carrying value of $4 million (2012: $3 million) were included in available-for-sale securities, however as their fair value could not be reliably measured these were carried at cost. These amounts have not been included in the fair value hierarchy tables, however have been included in the tables above. 7,490 46,400 312,929 9,964 37,803 27,601 97,098 93,379 9,537 7,250 649,451 8,738 40,653 340,692 10,302 32,438 11,151 112,266 120,553 9,374 7,044 693,211 8,738 40,653 339,555 10,302 32,438 11,151 110,404 120,553 9,330 7,044 690,168 10,993 7,328 42,975 1,903 35,184 21,039 458,122 1,773 92,740 3,764 675,821 7,490 46,400 313,880 9,964 37,803 27,601 98,349 93,379 9,526 7,250 651,642 For financial instruments not carried at fair value in the balance sheet, fair value has been derived as follows: Loans The carrying value of loans is net of individually and collectively assessed provisions for impairment charges. The fair value of loans is based on observable market transactions, where available. In the absence of observable market transactions, fair value is estimated using discounted cash flow models. For variable rate loans, the discount rate used is the current effective interest rate. The discount rate applied for fixed rate loans reflects the market rate for the maturity of the loan and the credit worthiness of the borrower. Deposits and other borrowings Deposits by customers’ accounts are grouped by maturity. Fair values of deposit liabilities payable on demand (interest free, interest bearing and savings deposits) approximate their carrying value. Fair values for term deposits are estimated using discounted cash flows, applying market rates offered for deposits of similar remaining maturities. Debt issues and loan capital Fair values are calculated using a discounted cash flow model. The discount rates applied reflect the terms of the instruments, the timing of the estimated cash flows and are adjusted for any changes in Westpac’s credit spreads. Other financial assets and liabilities For all other financial assets and liabilities, the carrying value approximates to the fair value. These items are either short-term in nature, re-price frequently or are of a high credit rating. 3 2013 WESTPAC GROUP ANNUAL REPORT 241 NOTE 29. DERIVATIVE FINANCIAL INSTRUMENTS Derivative contracts include forwards, futures, swaps and options, all of which are bilateral contracts or payment exchange agreements, whose values derive from the value of an underlying asset, reference rate or index. Derivatives are flexible and cost-effective tools for assisting in the management of interest rate, exchange rate, commodity, credit and equity exposures. The following terms are used in the remainder of this note to describe the Group and the Parent Entity’s exposure to derivatives. Reference to the Group applies equally to the Parent Entity. A forward contract obliges one party to buy and the other to sell a specific underlying product or instrument at a specific price, amount and date in the future. A forward rate agreement is an agreement between two parties establishing a contract interest rate on a notional principal over a specified period commencing at a specific future date. A futures contract is similar to a forward contract. A futures contract obliges its owner to buy a specific underlying commodity or financial instrument at a specified price on the contract maturity date (or to settle the value for cash). Futures are exchange traded. A swap transaction obliges the two parties to the contract to exchange a series of cash flows at specified intervals known as payment or settlement dates. An option contract gives the option holder the right, but not the obligation, to buy or sell a specified amount of a given commodity or financial instrument at a specified price during a certain period or on a specific date. The writer of the option contract is obliged to perform if the holder exercises the right contained therein. A credit default swap (CDS) is a contract that provides for a specified payment to be made to the purchaser of the swap following a defined credit event. The notional amount is a measure of the volume which may be used for examining changes in derivative activity over time. The notional amount is the face value of the contract and does not reflect the amount at risk, which is generally only a small fraction of this value. The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognised on the balance sheet, but do not necessarily indicate the amount of future cash flows involved or the current fair value of the instruments, and therefore do not indicate the Group’s exposure to credit or price risk. Certain leveraged derivatives include an explicit leverage factor in the payment formula. The leverage factor has the effect of multiplying the notional amount such that the impact of changes in the underlying price or prices may be greater than that indicated by the notional amount alone. The Group has no exposure to these types of transactions. The derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in the reference rate or index relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable and thus the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. The Group uses derivatives in two distinct capacities: as a trader, and as an end-user as part of its asset and liability management activities. Trading As a trader, the Group’s primary objective is to derive income from the sale of derivatives to meet Westpac’s customers’ needs. In addition to the sale of derivatives to customers, the Group also undertakes market making and risk management activities. Market making involves providing quotes to other dealers, who reciprocate by providing the Group with their own quotes. This process provides liquidity in the key markets in which the Group operates. The Group also trades on its own account to exploit arbitrage opportunities and market anomalies, as well as to take outright views on market direction. These activities represent a limited part of the Group’s derivative activities. Hedging Hedging the Group’s exposures to interest rate, credit and foreign exchange rate risk is undertaken in the normal course of business by using derivatives. This activity is principally carried out by Treasury within the risk management framework of limits, practices and procedures set and overseen by MARCO. The hedge accounting strategy adopted by Westpac is to utilise a combination of cash flow, fair value and net investment hedge approaches. Some derivatives held for economic hedging purposes do not meet the criteria for hedge accounting as defined under AASB 139 Financial Instruments: Recognition and Measurement and therefore are accounted for in the same way as derivatives held for trading. This includes the management of risks associated with future New Zealand dollar earnings and the management of credit risk exposures in Westpac’s lending portfolio. 242 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 29. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) a. Fair value hedges The Group hedges a proportion of its interest rate risk and foreign exchange risk from medium-term debt issuances using single currency and cross-currency interest rate derivatives. The Group also hedges part of its interest rate risk from fixed rate assets denominated both in local and foreign currencies using interest rate derivatives designated as fair value hedges. For the Group, the change in the fair value of hedging instruments designated in fair value hedges was $249 million gain (2012: $1,213 million loss) while the change in the fair value of hedged items attributed to the hedge risk was a $244 million loss (2012: $1,210 million gain). For the Parent Entity, the change in the fair value of hedging instruments designated in fair value hedges was $205 million gain (2012: $1,191 million loss) while the change in the fair value of hedged items attributed to the hedge risk was $202 million loss (2012: $1,188 million gain). b. Cash flow hedges Exposure to the volatility of interest cash flows from floating rate customer deposits, at call balances and loans is hedged through the use of interest rate derivatives. Exposure to foreign currency principal and interest cash flows from floating rate medium-term debt issuances is hedged through the use of cross-currency derivatives. Underlying cash flows from cash flow hedges are, as a proportion of total cash flows, expected to occur in the following periods: 2013 Cash inflows (assets) Cash outflows (liabilities) 2012 Cash inflows (assets) Cash outflows (liabilities) Less Than 1 Month 1 Month to 3 Months 3 Months to 1 Year 1 Year to 2 Years 2 Years to 3 Years 3 Years to 4 Years 4 Years to 5 Years Over 5 Years 6.8% 6.5% 1.7% 1.8% 6.5% 6.8% 10.6% 10.9% 35.4% 36.1% 21.0% 20.2% 29.8% 30.2% 35.3% 36.1% 10.3% 9.9% 20.2% 20.0% 5.8% 5.7% 5.2% 5.0% 3.5% 3.4% 3.6% 3.7% 1.8% 1.4% 2.3% 2.2% For the Group, a gain on cashflow hedges of $25 million was recognised due to hedge ineffectiveness (2012: $10 million gain). For the Parent Entity, a gain on cashflow hedges of $25 million was recognised due to hedge ineffectiveness (2012: $10 million gain). c. Dual fair value and cash flow hedges Fixed rate foreign currency denominated medium-term debt is hedged using cross-currency interest rate derivatives, designated as fair value hedges of foreign interest rates and cash flow hedges of foreign exchange rates. d. Net investment hedges The Group hedges the majority of the currency translation risk of net investments in foreign operations through foreign exchange forward contracts. 3 2013 WESTPAC GROUP ANNUAL REPORT 243 NOTE 29. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) The notional amount and fair value of derivative instruments held for trading and designated in hedge relationships are set out in the following tables: Consolidated 30 September 2013 Fair Value Asset $m Fair Value Liability $m Notional $m 30 September 2012 Notional $m Fair Value Asset $m Fair Value Liability $m Held for trading Interest rate: Futures1 Forwards Swaps Options Foreign exchange: Forwards Swaps Options Commodities Equities Credit Total held for trading derivatives Fair value hedges Interest rate: Swaps2 Foreign exchange: Swaps2,3 Total fair value hedging derivatives Cash flow hedges Interest rate: Swaps2 Foreign exchange: 137,682 175,276 1,290,282 78,677 473,838 285,218 31,003 3,466 378 50,741 2,526,561 - 35 13,313 152 4,193 6,038 416 117 9 266 24,539 - (49) (13,194) (109) (4,889) (6,938) (440) (106) (8) (296) (26,029) 106,703 146,344 1,004,349 36,881 461,873 270,610 23,130 3,365 386 64,067 2,117,708 - 36 17,496 287 3,948 9,196 281 100 14 443 31,801 - (46) (17,292) (211) (4,897) (5,491) (303) (112) (9) (491) (28,852) 40,704 606 (1,945) 33,930 827 (2,772) 27,821 68,525 1,586 2,192 (2,418) (4,363) 30,359 64,289 440 1,267 (4,097) (6,869) 107,075 1,464 (829) 97,521 2,251 (1,330) Swaps2,3 10,545 117,620 Total cash flow hedging derivatives 5,674 Net investment hedges 2,718,380 Total derivatives 1 The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 13,833 111,354 3,713 2,297,064 (1,692) (2,521) (77) (32,990) 168 2,419 2 35,489 153 1,617 8 28,356 (1,805) (3,135) (79) (38,935) 30 September. 2 The unrealised foreign exchange gains or loss on derivatives in hedge relationships are substantially offset by the retranslation at spot exchange 3 rates of the foreign currency denominated debt being hedged, which affects profit and loss in the current year. Included within foreign exchange swaps in fair value hedging derivatives are derivatives designated in both cash flow and fair value hedge relationships under the dual designation strategy. 244 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 29. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Parent Entity 30 September 2013 Fair Value Asset $m Fair Value Liability $m Notional $m 30 September 2012 Notional $m Fair Value Asset $m Fair Value Liability $m Held for trading Interest rate: Futures1 Forwards Swaps Options Foreign exchange: Forwards Swaps Options Commodities Equities Credit Total held for trading derivatives Fair value hedges Interest rate: Swaps2 Foreign exchange: Swaps2,3 Total fair value hedging derivatives Cash flow hedges Interest rate: Swaps2 Foreign exchange: 137,682 175,276 1,301,903 78,677 474,535 285,883 31,003 3,466 378 50,741 2,539,544 - 35 13,373 152 4,191 6,046 416 117 9 266 24,605 - (49) (13,227) (109) (4,893) (7,052) (440) (106) (8) (296) (26,180) 106,703 146,344 1,009,876 36,881 461,566 272,483 23,130 3,365 386 64,050 2,124,784 - 36 17,541 287 3,941 8,908 281 100 14 443 31,551 - (48) (17,368) (211) (4,885) (5,700) (303) (112) (9) (488) (29,124) 36,848 633 (1,838) 29,760 783 (2,575) 24,868 61,716 1,578 2,211 (2,230) (4,068) 27,358 57,118 440 1,223 (3,784) (6,359) 97,567 1,428 (801) 93,869 2,241 (1,265) Swaps2,3 8,246 105,813 Total cash flow hedging derivatives 4,977 Net investment hedges 2,712,050 Total derivatives 1 The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 11,100 104,969 2,866 2,289,737 (1,318) (2,119) (71) (32,438) 153 1,581 8 28,405 168 2,409 1 35,184 (980) (2,245) (75) (37,803) 30 September. 2 The unrealised foreign exchange gains or loss on derivatives in hedge relationships are substantially offset by the retranslation at spot exchange 3 rates of the foreign currency denominated debt being hedged, which affects profit and loss in the current year. Included within foreign exchange swaps in fair value hedging derivatives are derivatives designated in both cash flow and fair value hedge relationships under the dual designation strategy. Credit derivatives Through the use of credit derivatives, the Group is exposed to or protected from the risk of default of the underlying entity referenced by the derivative, dependant on whether the Group is a purchaser or seller of credit protection. The primary credit derivatives used by the Group are CDSs, which are predominantly executed with other financial institutions. 3 2013 WESTPAC GROUP ANNUAL REPORT 245 NOTE 29. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Credit derivatives are primarily entered into to facilitate institutional customer transactions and to manage our credit risk exposures. The notional amount and fair value of credit derivatives are presented in the following tables: Consolidated Fair Value Liability $m Credit protection bought1 (256) Credit protection sold (40) Total2 (296) 1 Counterparties to derivatives relating to credit protection bought are predominantly financial institutions. 2 The table above does not include total return swaps included with credit derivatives in the previous table. Notional $m 25,576 25,165 50,741 2013 Fair Value Asset $m 22 244 266 Notional $m 32,554 31,495 64,049 Parent Entity Fair Value Liability $m Credit protection bought1 (256) Credit protection sold (40) Total2 (296) 1 Counterparties to derivatives relating to credit protection bought are predominantly financial institutions. 2 The table above does not include total return swaps included with credit derivatives in the previous table. Notional $m 25,576 25,165 50,741 2013 Fair Value Asset $m 22 244 266 Notional $m 32,554 31,495 64,049 2012 Fair Value Asset $m 220 223 443 2012 Fair Value Asset $m 220 223 443 Fair Value Liability $m (226) (259) (485) Fair Value Liability $m (226) (259) (485) NOTE 30. CAPITAL ADEQUACY APRA has responsibility for the prudential supervision of ADIs, life and general insurance companies and superannuation funds in Australia. Westpac is an ADI. Australia’s risk-based capital adequacy guidelines are generally consistent but not completely aligned with the approach agreed upon by the Basel Committee on Banking Supervision (BCBS). APRA has exercised its discretion in applying the Basel framework to Australian ADIs, resulting in a more conservative approach than the minimum standards published by the BCBS. APRA also introduced the new standards from 1 January 2013 with no phasing in of higher capital requirements as allowed by BCBS. The applications of these discretions act to reduce reported capital ratios relative to those reported in other jurisdictions. Under APRA’s implementation of Basel III, Australian banks are required to maintain a minimum Common Equity Tier 1 ratio of at least 4.5%, Tier 1 ratio of 6.0% and Total Regulatory Capital of 8.0%. Subject to certain limitations, Common Equity Tier 1 capital consists of paid-up share capital, retained profits and certain reserves, less the deduction of certain intangible assets, capitalised expenses and software, and investments and retained earnings in insurance and funds management subsidiaries that are not consolidated for capital adequacy purposes. The balance of eligible capital is defined as additional Tier 1 or Tier 2 capital which includes, subject to limitations, mandatory convertible notes, perpetual floating rate notes and like instruments, and term subordinated debt less a deduction for holdings of Westpac’s own subordinated debt. Westpac’s capital ratios are significantly above APRA minimum capital adequacy requirements. Westpac 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. Capital management strategy Westpac’s approach seeks to balance the fact that capital is an expensive form of funding with the need to be adequately capitalised as an ADI. Westpac considers the need to balance efficiency, flexibility and adequacy when determining sufficiency of capital and when developing capital management plans. Westpac evaluates these considerations through an Internal Capital Adequacy Assessment Process (ICAAP), the key features of which include:  the development of a capital management strategy, including preferred capital range, capital buffers and contingency plans;  consideration of both economic and regulatory capital requirements;  a process that challenges the capital measures, coverage and requirements which incorporates amongst other things, the impact of adverse economic scenarios; and  consideration of the perspectives of external stakeholders including rating agencies and equity and debt investors. 246 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 31. SECURITISATION AND COVERED BONDS Westpac derives rewards and has exposure to risks from various forms of securitisation structures:  own asset securitisation; and  customer funding conduits. Own assets securitised Securitisation is a funding, liquidity and capital management tool. Securitisation provides Westpac the option to liquefy a pool of assets and increase the Group’s wholesale funding capacity. Westpac may provide arm’s length facilities to the securitisation vehicles. The facilities entered into typically include the provision of liquidity, funding and derivative contracts. Where the Parent Entity and the Group have continuing involvement with the securitisation vehicle, through ongoing exposure to the risks and rewards associated with the assets, the provision of derivatives, liquidity facilities and trust management and operational services, the originated assets remain recognised on the balance sheet for accounting purposes, and Westpac consolidates the securitisation vehicles. Customer funding conduits The Group arranges funding for certain customer transactions through a securitisation conduit (Waratah Receivables Corporation Limited and other related SPVs) that provides customers with access to funding from commercial paper markets. Given that Westpac provides liquidity, credit enhancements, foreign exchange facilities and management and operational services, it is deemed to have exposure to the associated risks and rewards and is required to consolidate the vehicles. Revenue from securitisation structures Fee income Westpac receives a market-based fee or margin in return for its services as trust manager, servicer, foreign exchange counterparty and facilities provider. Securitisation risk management Credit exposure Where relevant, counterparty exposure arising from funding, liquidity, credit support and funding facilities, foreign exchange and swap arrangements for both own asset securitisation and customer funding conduits are approved within the Group’s normal credit process and are captured and monitored in key source systems along with other facilities and derivatives entered into by Westpac. Market risk Exposures arising from transactions with securitisation conduits and other counterparties are captured as part of Westpac’s traded and non-traded market risk reporting and limit management framework. The interest rate and basis risk generated by Westpac’s provision of hedge arrangements to securitisation vehicles are captured and managed in Westpac’s ALM framework. The risk generated by Westpac’s provision of liquidity and redraw facilities to own asset vehicles is captured and managed within Treasury’s liquidity risk policies along with all other contingent liquidity facilities. Funding and liquidity management Exposure to and the impact of securitisation transactions are managed under the Market and Liquidity Risk Management Framework and are integrated into routine reporting for capital and liquidity positions, net interest margin analysis, balance sheet forecasting and funding scenario testing. The Group’s funding plan incorporates consideration of overall liquidity risk limits and the level of securitisation of Westpac originated assets. Westpac provided undrawn liquidity facilities to the customer funding conduit of $1,784 million at 30 September 2013 (30 September 2012: $2,552 million). Similarly undrawn funding and liquidity facilities of $532 million were provided by Westpac (30 September 2012: $369 million) for the securitisation of its own assets. 3 2013 WESTPAC GROUP ANNUAL REPORT 247 NOTE 31. SECURITISATION AND COVERED BONDS (CONTINUED) The table below presents assets securitised by the Group: Consolidated Residential mortgage Auto and equipment finance Other assets securitised Other1 Total 1 This reflects cash held by the own asset securitisation vehicles, which has not yet been distributed to noteholders. Total $m 11,193 925 75 412 12,605 Own Assets $m 10,763 - - 350 11,113 Own Assets $m 9,483 925 - 412 10,820 2013 Customer Conduits $m 1,710 - 75 - 1,785 2012 Customer Conduits $m 2,544 - 10 - 2,554 Total $m 13,307 - 10 350 13,667 The table below presents assets securitised by the Parent Entity: Parent Entity Own Assets1 $m 71,658 5,532 77,190 2013 Customer Conduits $m - - - Total $m 71,658 5,532 77,190 Own Assets1 $m 59,941 3,598 63,539 2012 Customer Conduits $m - - - Total $m 59,941 3,598 63,539 Residential mortgage Other2 Total 1 Own assets securitised by the Parent Entity include internal mortgage backed securitisation of $66,535 million (2012: $52,426 million) which are available for external issuance and qualifies for repurchase with the RBA. 2 This reflects cash held by the own asset securitisation vehicles, which have not yet been distributed to noteholders. The table below presents the underlying liabilities of the Group as a result of the securitisation of assets: Notes issued Own Assets $m 10,372 2013 Customer Conduits $m 1,772 Consolidated Total $m 12,144 Own Assets $m 10,078 2012 Customer Conduits $m 2,543 The table below presents the underlying liabilities of the Parent Entity as a result of the securitisation of assets: Due to subsidiaries Own Assets $m 76,741 2013 Customer Conduits $m - Parent Entity Total $m 76,741 Own Assets $m 62,504 2012 Customer Conduits $m - Total $m 12,621 Total $m 62,504 Certain own asset securitisation and customer funding conduit notes have been issued in foreign currencies and have been translated to Australian dollars using the spot foreign exchange rate on the balance sheet date. These foreign exchange exposures are fully hedged with foreign exchange derivatives. Associated derivatives are not presented in the tables above and explain the mismatch between assets securitised and notes issued. 248 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 31. SECURITISATION AND COVERED BONDS (CONTINUED) The table below presents the fair value of own assets securitised and underlying liabilities as a result of the securitisation of assets for the Consolidated Group and Parent Entity: Residential mortgage Auto and equipment finance Other Fair value of assets securitised Notes issued Fair value of underlying liabilities Net fair value Consolidated 2013 $m 9,495 943 412 10,850 10,353 10,353 497 2012 $m 10,784 - 350 11,134 9,950 9,950 1,184 Parent Entity 2013 $m 71,753 - 5,532 77,285 76,159 76,159 1,126 2012 $m 60,036 - 3,598 63,634 61,217 61,217 2,417 Covered bonds The Group has two covered bond programs: one utilises Australian residential mortgages (Australian Program) and one utilises New Zealand residential mortgages (New Zealand Program). Pursuant to these programs, selected pools of residential mortgages are assigned to bankruptcy remote special purpose vehicles (SPVs). Those SPVs provide unconditional and irrevocable guarantees of the related covered bonds that are issued by members of the Group. As such, the covered bondholders have recourse to the issuer of the covered bond and, in the event that the issuer fails to make a payment when due, to the covered bond SPV. The Group has continuing involvement with the covered bond SPVs as it is exposed to the risks and rewards associated with the pools of residential mortgages (including by way of the derivatives it has entered into with the SPVs). Accordingly, for accounting purposes, the SPVs are consolidated entities of the Group. As at 30 September 2013, the carrying value of covered bonds on issue for the Group was $18,140 million (2012: $11,951 million) and for the Parent Entity $16,229 million (2012: $10,392 million). The carrying value of assets pledged for the covered bond programs for the Group was $34,244 million (2012: $18,333 million) and for the Parent Entity $30,232 million (2012: $15,333 million). The difference between the carrying value of covered bonds on issue and the carrying value of assets pledged for the covered bond programs includes the amount of over-collateralisation required to maintain the ratings of the covered bonds on issue and additional assets primarily to allow for future issuance of covered bonds without delay. The additional assets that allow for future issuance can be repurchased by Westpac at its discretion, subject to the conditions set out in the transaction documents. 3 2013 WESTPAC GROUP ANNUAL REPORT 249 NOTE 32. GROUP SEGMENT INFORMATION The accounting standard AASB 8 Operating Segments requires segment results to be presented on a basis that is consistent with information provided internally to Westpac’s key decision makers. In assessing its financial performance, including divisional results, the Westpac Group uses a measure of performance referred to as ‘Cash Earnings’. Cash Earnings is not a measure of cash flow or net profit determined on a cash accounting basis, as it includes non-cash items reflected in net profit determined in accordance with A-IFRS. The specific adjustments include both cash and non-cash items. Cash Earnings, as calculated by Westpac, is viewed as a measure of the level of profit that is generated by ongoing operations and is expected to be available over the long term for distributions to shareholders. Management believes this allows the Group to more effectively assess performance for the current period against prior periods and to compare performance across business divisions and across peer companies. Three categories of adjustments are made to statutory results to determine Cash Earnings:  material items that key decision makers at Westpac believe do not reflect ongoing operations;  items that are not considered when dividends are recommended, such as the amortisation of intangibles, impact of Treasury shares and economic hedging impacts; and  accounting reclassifications between individual line items that do not impact statutory results, such as policyholder tax recoveries1. The basis of segment reporting reflects the management of the business, rather than the legal structure of the Group. The operating segment results have been presented on a management reporting basis and consequently internal charges and transfer pricing adjustments have been reflected in the performance of each operating segment. Inter-segment pricing is determined on an arm’s length basis. Reportable operating segments The operating segments are defined by the customers they service and the services they provide:  Australian Financial Services (AFS) is responsible for the Westpac Group’s Australian retail banking, business banking and wealth operations. It incorporates the operations of: – Westpac Retail & Business Banking (Westpac RBB), which is responsible for sales and service for consumer, small-to- medium enterprise customers and commercial and agribusiness customers in Australia under the Westpac brand; – St.George Banking Group (St.George), which is responsible for sales and service for our consumer, business and corporate customers in Australia under the St.George, BankSA, Bank of Melbourne and RAMS2 brands; – BT Financial Group (Australia) (BTFG), which is Westpac’s Australian wealth division. Its operations include funds management and insurance solutions. BTFG’s brands include Advance Asset Management, Ascalon, Asgard, BT, BT Investment Management (BTIM)3, Licensee Select, BT Select, Securitor, and the advice, private banking and insurance operations of Bank of Melbourne, BankSA, St.George and Westpac.  Westpac Institutional Bank (WIB) delivers a broad range of financial services to commercial, corporate, institutional and government customers with connections to Australia and New Zealand. Customers are supported through branches and subsidiaries located in Australia, New Zealand, Asia, US and UK;  Westpac New Zealand is responsible for sales and service of banking, wealth and insurance products for consumers, business and institutional customers in New Zealand. Banking products are provided under the Westpac and WIB brands while insurance and wealth products are provided under Westpac Life and BT brands respectively. Other divisions in the Group include:  Westpac Pacific, which provides banking services for retail and business customers in seven Pacific Island Nations;  Treasury, which is primarily focused on the management of the Group’s interest rate risk and funding requirements by managing the mismatch between Group assets and liabilities;  Group Services, which encompasses technology, banking operations, compliance, legal and property services;  Core Support, which comprises those functions performed centrally including finance, risk and human resources; and  Group items, including earnings on capital not allocated to divisions, accounting entries for certain intra-group transactions that facilitate the presentation of the performance of our operating segments, earnings from non core asset sales and certain other head office items such as centrally raised provisions. 1 2 3 Policyholder tax recoveries – income and tax amounts that are grossed up to comply with the A-IFRS accounting standard covering Life Insurance Business (policyholder tax recoveries) are reversed in deriving income and taxation expense on a Cash Earnings basis. RAMS is a financial services group specialising in mortgages and online deposits. BTIM is 62% owned by the Westpac Group and consolidated in BTFG’s Funds Management business. 250 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 32. GROUP SEGMENT INFORMATION (CONTINUED) The tables below present the segment results on a Cash Earnings basis: Consolidated 2013 Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Additional information Depreciation, amortisation and impairments Balance sheet Total assets Total liabilities Acquisition of property, plant and equipment, goodwill and other intangible assets Westpac Retail & Business Banking $m 5,650 1,277 6,927 (3,154) (486) 3,287 (987) - 2,300 - St.George Banking Group $m 3,216 552 BT Financial Group (Australia) $m 406 1,868 3,768 (1,415) (293) 2,060 (619) - 1,441 (128) 2,274 (1,208) (1) 1,065 (310) (18) 737 (22) AFS $m 9,272 3,697 12,969 (5,777) (780) 6,412 (1,916) (18) 4,478 (150) Westpac Westpac New Institutional Bank $m 1,635 1,667 Other Zealand Divisions $m 696 193 $m 1,309 364 3,302 (1,070) 89 2,321 (686) - 1,635 - 1,673 (697) (97) 879 (242) (3) 634 - 889 (166) (59) 664 (259) (55) 350 (131) Total $m 12,912 5,921 18,833 (7,710) (847) 10,276 (3,103) (76) 7,097 (281) 2,300 1,313 715 4,328 1,635 634 219 6,816 (68) (45) (44) (157) (48) (50) (428) (683) 261,880 167,005 159,770 90,141 27,698 29,420 449,348 286,566 97,247 115,347 61,469 53,882 88,539 193,327 696,603 649,122 66 28 82 176 104 117 645 1,042 3 2013 WESTPAC GROUP ANNUAL REPORT 251 NOTE 32. GROUP SEGMENT INFORMATION (CONTINUED) Consolidated 2012 Westpac Retail & Business Banking $m 5,304 1,184 6,488 (3,079) (429) 2,980 (866) - 2,114 - St.George Banking Group $m 2,966 565 BT Financial Group (Australia) $m 424 1,650 3,531 (1,341) (433) 1,757 (526) - 1,231 (129) 2,074 (1,133) (1) 940 (279) (8) 653 (22) AFS $m 8,694 3,399 12,093 (5,553) (863) 5,677 (1,671) (8) 3,998 (151) Westpac Westpac New Zealand $m 1,224 336 Institutional Bank $m 1,706 1,484 Other Divisions $m 939 294 3,190 (987) (127) 2,076 (603) - 1,473 - 1,560 (653) (148) 759 (208) (3) 548 - 1,233 (186) (74) 973 (336) (58) 579 (477) Total $m 12,563 5,513 18,076 (7,379) (1,212) 9,485 (2,818) (69) 6,598 (628) 2,114 1,102 631 3,847 1,473 548 102 5,970 (70) (44) (41) (155) (37) (51) (382) (625) 255,268 159,120 154,642 82,421 26,871 28,554 436,781 270,095 97,823 110,389 48,648 33,970 91,713 214,292 674,965 628,746 122 105 366 593 56 84 456 1,189 Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Additional information Depreciation, amortisation and impairments Balance sheet Total assets Total liabilities Acquisition of property, plant and equipment, goodwill and other intangible assets 252 2013 WESTPAC GROUP ANNUAL REPORT NOTE 32. GROUP SEGMENT INFORMATION (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Consolidated 2011 Westpac Retail & Business Banking $m 5,166 1,091 6,257 (3,087) (547) 2,623 (773) - 1,850 - St.George Banking Group $m 2,930 549 BT Financial Group (Australia) $m 438 1,613 3,479 (1,323) (393) 1,763 (530) - 1,233 (129) 2,051 (1,005) 4 1,050 (314) (7) 729 (17) AFS $m 8,534 3,253 11,787 (5,415) (936) 5,436 (1,617) (7) 3,812 (146) Westpac Westpac New Zealand $m 1,137 304 Institutional Bank $m 1,700 1,182 Other Divisions $m 798 215 2,882 (938) 90 2,034 (607) - 1,427 - 1,441 (627) (185) 629 (184) (3) 442 - 1,013 (126) 38 925 (247) (58) 620 836 Total $m 12,169 4,954 17,123 (7,106) (993) 9,024 (2,655) (68) 6,301 690 1,850 1,104 712 3,666 1,427 442 1,456 6,991 (39) (16) (30) (85) (37) (49) (342) (513) 246,989 146,226 149,595 72,216 26,223 26,978 422,807 245,420 101,482 96,643 46,336 30,366 99,603 253,991 670,228 626,420 94 52 83 229 96 83 736 1,144 Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Net Cash Earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Additional information Depreciation, amortisation and impairments Balance sheet Total assets Total liabilities Acquisition of property, plant and equipment, goodwill and other intangible assets 3 2013 WESTPAC GROUP ANNUAL REPORT 253 NOTE 32. GROUP SEGMENT INFORMATION (CONTINUED) Reconciliation of Cash Earnings to net profit Consolidated 2013 Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Consolidated 2012 Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Consolidated 2011 Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Cash Earnings for the year Cash Earnings for the Year $m 12,912 5,921 Policyholder Tax Recoveries $m - 35 TPS Revaluations1 $m - (67) Treasury Shares2 $m - (49) Ineffective Hedges3 $m 29 (1) 18,833 (7,710) (847) 10,276 (3,103) (76) 7,097 35 - - 35 (35) - - (67) - - (67) 58 - (9) (49) - - (49) 7 - (42) 28 - - 28 (8) - 20 Cash Earnings for the Year $m 12,563 5,513 Policyholder Tax Recoveries $m - 12 TPS Revaluations1 $m - (17) Treasury Shares2 $m - (30) Ineffective Hedges3 $m 8 3 Fair Value Gain/(Loss) on Economic Hedges4 $m (10) - 18,076 (7,379) (1,212) 9,485 (2,818) (69) 6,598 12 - - 12 (12) - - (17) - - (17) (10) - (27) (30) - - (30) 3 - (27) 11 - - 11 (4) - 7 (10) - - (10) 3 - (7) Cash Earnings for the Year $m 12,169 4,954 Policyholder Tax Recoveries $m - (12) TPS Revaluations1 $m - (27) Treasury Shares2 $m - 7 Ineffective Hedges3 $m (13) (5) Fair Value Gain/(Loss) on Economic Hedges4 $m (52) - 17,123 (7,106) (993) 9,024 (2,655) (68) 6,301 (12) - - (12) 12 - - (27) - - (27) 6 - (21) 7 - - 7 (1) - 6 (18) - - (18) 5 - (13) (52) - - (52) 16 - (36) 254 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS Fair Value Gain/(Loss) on Economic Hedges4 $m 81 (65) Buyback of Government Guaranteed Debt5 $m (62) - Fair Value Amortisation of Financial Instruments6 $m (95) - Amortisation of Intangible Assets7 $m - - Total Cash Earnings Adjustments $m (47) (147) Net Profit for the Year $m 12,865 5,774 16 - - 16 (6) - 10 (62) - - (62) 19 - (43) (95) - - (95) 28 - (67) - (217) - (217) 65 2 (150) (194) (217) - (411) 128 2 (281) 18,639 (7,927) (847) 9,865 (2,975) (74) 6,816 Buyback of Government Guaranteed Debt5 $m 7 - Fair Value Amortisation of Financial Instruments6 $m (66) - Amortisation of Intangible Assets7 $m - - Supplier Program8 $m - - Litigation Provision9 $m - - TOFA Tax Consolidation Adjustment10 $m - - Total Cash Earnings Adjustments $m (61) (32) Net Profit for the Year $m 12,502 5,481 7 - - 7 (2) - 5 (66) - - (66) 20 - (46) - (220) - (220) 66 3 (151) - (199) - (199) 60 - (139) - (111) - (111) 33 - (78) - - - - (165) - (165) (93) (530) - (623) (8) 3 (628) 17,983 (7,909) (1,212) 8,862 (2,826) (66) 5,970 Buyback of Government Guaranteed Debt5 $m (7) - Fair Value Amortisation of Financial Instruments6 $m (98) - Amortisation of Intangible Assets7 $m - - Merger Transaction and Integration Expenses11 $m (3) - Tax Consolidation Adjustment12 $m - - Tax Provision13 $m - - Total Cash Earnings Adjustments $m (173) (37) Net Profit for the Year $m 11,996 4,917 3 (7) - - (7) 2 - (5) (98) - - (98) 29 - (69) - (208) - (208) 62 - (146) (3) (92) - (95) 29 - (66) - - - - 1,110 - 1,110 - - - - (70) - (70) (210) (300) - (510) 1,200 - 690 2013 WESTPAC GROUP ANNUAL REPORT 16,913 (7,406) (993) 8,514 (1,455) (68) 6,991 255 NOTE 32. GROUP SEGMENT INFORMATION (CONTINUED) Cash Earnings for the year Cash Earnings adjustments: TPS revaluations1 Treasury shares2 Ineffective hedges3 Fair value gain/(loss) on economic hedges and own credit4 Buyback of government guaranteed debt5 Fair value amortisation of financial instruments6 Amortisation of intangible assets7 Supplier program8 Litigation provision9 TOFA tax consolidation adjustment10 Merger transaction and integration expenses11 St.George tax consolidation adjustment12 Tax provision13 Year Ended 30 September 2013 $m 7,097 Year Ended 30 September 2012 $m 6,598 Year Ended 30 September 2011 $m 6,301 (9) (42) 20 (27) (27) 7 (21) 6 (13) 10 (43) (67) (150) - - - - - - (281) (7) 5 (46) (151) (139) (78) (165) - - - (628) (36) (5) (69) (146) - - - (66) 1,110 (70) 690 Total Cash Earnings adjustments Net profit attributable to owners of Westpac 6,991 Banking Corporation 1 Adjustment for movements in economic hedges, including associated tax effects impacting the foreign currency translation reserve, relating to hybrid instruments classified as non-controlling interests. The adjustment is required as these hybrid instruments are not fair valued, however the hedges are fair valued and therefore there is a mismatch in the timing of income recognition in the statutory results. The mismatch is added back to statutory results in deriving Cash Earnings as it does not affect the Group’s profits over time. 6,816 5,970 2 Under A-IFRS, Westpac shares held by the Group in the managed funds and life business are deemed to be Treasury shares and the results of holding these shares are not permitted to be recognised as income in the statutory results. In deriving Cash Earnings, these results are included to ensure there is no asymmetrical impact on the Group’s profits because the Treasury shares support policyholder liabilities and equity derivative transactions which are re-valued in determining income. 3 The gain/(loss) on ineffective hedges is reversed in deriving Cash Earnings for the period because the gain or loss arising from the fair value movement in these hedges reverses over time and does not affect the Group’s profits over time. 4 Fair value gain/(loss) on economic hedges (which do not qualify for hedge accounting under A-IFRS) and own credit comprises:   the unrealised fair value gain/(loss) on foreign exchange hedges of future New Zealand earnings impacting non-interest income is reversed in deriving Cash Earnings as it may create a material timing difference on statutory results but does not affect the Group’s Cash Earnings during the life of the hedge; the unrealised fair value gain/(loss) on foreign exchange hedges of fees payable for the use of the Government guarantee on foreign denominated wholesale funding is reversed in deriving Cash Earnings as it may create a material timing difference on statutory results but does not affect the Group’s Cash Earnings during the life of the hedge;  certain long term debt issuances are recognised at fair value. In deriving fair value, adjustments are made to reflect changes in Westpac’s own credit spread. The resulting unrealised gain/(loss) from credit spread movements is reversed in deriving Cash Earnings as this amount may create a material timing difference on statutory results but does not affect the Group’s Cash Earnings over time; and the unrealised fair value gain/(loss) on hedges of accrual accounted term funding transactions is reversed in deriving Cash Earnings as it may create a material timing difference on statutory results but does not affect the Group’s Cash Earnings during the life of the hedge.  5 During the years ended 30 September 2013 and 30 September 2011, the Group bought back certain Government guaranteed debt issues which reduced Government guarantee fees (70 basis points) paid. In undertaking the buybacks, a cost was incurred reflecting the difference between current interest rates and the rate at which the debt was initially issued. In the statutory result, the cost incurred is recognised at the time of the buyback. In Cash Earnings, the cost incurred is being amortised over the original term of the debt that was bought back, consistent with a 70 basis point saving being effectively spread over the remaining life of the issue. The Cash Earnings adjustment gives effect to the timing difference between statutory results and Cash Earnings. 6 The accounting for the merger with St.George resulted in the recognition of fair value adjustments on the St.George retail bank loans, deposits, wholesale funding and associated hedges, with these fair value adjustments being amortised over the life of the underlying transactions. The amortisation of these adjustments is considered to be a timing difference relating to non-cash flow items that do not affect cash distributions available to shareholders, and therefore have been treated as a Cash Earnings adjustment. 7 Amortisation of intangible assets comprises:   the merger with St.George resulted in the recognition of core deposit intangibles and customer relationships intangible assets that are amortised over their useful lives, ranging between five and nine years. The amortisation of intangible assets (excluding capitalised software) is a Cash Earnings adjustment because it is a non-cash flow item and does not affect cash distributions available to shareholders; and the acquisition of J O Hambro Capital Management (JOHCM) by BT Investment Management (BTIM) during the year ended 30 September 2012 resulted in the recognition of management contract intangible assets. These intangible items are amortised over their useful lives, ranging between five and 20 years. The amortisation of intangible assets (excluding capitalised software) is a Cash Earnings adjustment because it is a non-cash flow item and does not affect cash distributions available to shareholders. 256 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 32. GROUP SEGMENT INFORMATION (CONTINUED) 8 During the year ended 30 September 2012, the Group incurred and provisioned for expenses as part of its program to increase the use of global specialists in certain technology and back office operations. These expenses included costs associated with streamlining and better documenting systems and processes, technology costs to enable infrastructure and enhance interaction with suppliers, and costs associated with restructuring the workforce. Given these significant expenses were not considered in determining dividends they were treated as Cash Earnings adjustments. 9 During the year ended 30 September 2012, the Group recognised a provision of $111 million ($78 million after tax) with respect to the Bell litigation. This has been treated as a Cash Earnings adjustment due to its size, the historical nature of the proceedings and because it did not reflect ongoing operations. 10 During the year ended 30 September 2012, taxation legislation was introduced that included retrospective amendments to the income tax law as it applies to the Taxation of Financial Arrangements (TOFA) and tax consolidated groups. The amendments had an adverse application to certain liabilities that were consolidated as part of the merger with St.George. This gave rise to an additional income tax expense of $165 million for the year ended 30 September 2012. Consistent with other tax adjustments relating to the merger with St.George, this adjustment was treated as a Cash Earnings adjustment due to its size and because it did not reflect ongoing operations. 11 As part of the merger with St.George, transaction and integration expenses incurred over three years following the merger were treated as a Cash Earnings adjustment as they did not impact the earnings expected from St.George following the integration period. The integration project was completed in 2011. 12 Finalisation of tax consolidation related to the merger with St.George gave rise to a reduction in income tax expense of $1,110 million during the year ended 30 September 2011. The tax consolidation process required Westpac to reset the tax value of certain St.George assets to the appropriate market value of those assets at the effective date of the tax consolidation (31 March 2009). These adjustments were treated as a Cash Earnings adjustment due to their size and because they did not reflect ongoing operations. 13 During the year ended 30 September 2011, the Group increased tax provisions by $70 million in respect of certain existing positions for transactions previously undertaken by the Group. The increase reflected the recent trend of global taxation authorities challenging the historical tax treatment of cross border and complex transactions. This increase in tax provisions was treated as a Cash Earnings adjustment as it related to the global management of historical tax positions and did not reflect ongoing operations. The Group’s management of tax positions has moved to disclosing any such transactions to the taxation authorities at or around the time of execution. Revenue from products and services Details of revenue from external customers by product or service are disclosed in Notes 2 and 3. No single customer amounts to greater than 10% of the Group’s revenue. Geographic segments Geographic segments are based on the location of the office in which the following items are recognised: 2013 $m % 2012 $m Revenue Australia New Zealand Other1 Total Non-current assets2 Australia New Zealand Other1 Total 1 Other includes Pacific Islands, Asia, the Americas and Europe. 2 Non-current assets includes property, plant and equipment, goodwill and other intangible assets. 12,324 786 405 13,515 34,159 3,885 739 38,783 91.2 5.8 3.0 100.0 88.1 10.0 1.9 100.0 38,195 3,676 483 42,354 12,250 650 371 13,271 % 90.2 8.7 1.1 100.0 92.3 4.9 2.8 100.0 2011 $m 39,192 3,559 264 43,015 12,282 605 50 12,937 % 91.1 8.3 0.6 100.0 94.9 4.7 0.4 100.0 3 2013 WESTPAC GROUP ANNUAL REPORT 257 NOTE 33. AUDITOR’S REMUNERATION During the financial year, the auditor of the Group and Parent Entity, PricewaterhouseCoopers (PwC), and its related practices earned the following remuneration including goods and services tax: PwC – Australian firm Audit and review of financial reports of Westpac Banking Corporation or any entity in the Group Other audit-related work Total audit and other assurance services Taxation Other services Total remuneration paid to PwC – Australian firm Related practices of PwC Audit and review of financial reports of Westpac Banking Corporation or any entity in the Group Other audit-related work Total audit and other assurance services Taxation Total remuneration paid to related practices of PwC Total remuneration paid to PwC Consolidated 2013 $’000 2012 $’000 Parent Entity 2013 $’000 2012 $’000 16,139 669 16,808 141 1,353 18,302 2,709 159 2,868 20 2,888 21,190 15,249 1,476 16,725 65 696 17,486 2,773 139 2,912 114 3,026 20,512 15,395 669 16,064 141 1,353 17,558 355 - 355 - 355 17,913 14,874 1,465 16,339 65 668 17,072 340 - 340 - 340 17,412 For compliance with SEC disclosure requirements, remuneration to the external auditor, including goods and services tax, for the years ended 30 September 2013 and 2012 is summarised from the table above as follows: Audit fees Non-audit fees: Audit-related fees Tax fees All other fees Total non-audit fees Total fees paid to PwC 2013 $’000 18,848 828 161 1,353 2,342 21,190 2012 $’000 18,022 1,615 179 696 2,490 20,512 It is Westpac’s policy to engage the external auditors on assignments additional to their statutory audit duties, only if their independence is not impaired or seen to be impaired, and where their expertise and experience with Westpac is important. All services were approved by the Audit Committee in accordance with the pre-approval policy and procedures. In the tables above, audit services include the audit of the year end and review of the half year statutory reports and comfort letters associated with debt issues and capital raisings for the Parent Entity, its controlled entities and the consolidated Group. Audit-related services include consultations regarding accounting standards and reporting requirements and regulatory compliance reviews. Taxation services include tax compliance and tax advisory services. Other services include consulting services on the operational risk model and assurance on the development of an upgraded wealth platform. The external auditor, PwC, also provides audit and non-audit services to non-consolidated entities sponsored by the Group, non-consolidated trusts of which a Westpac Group entity is trustee, manager or responsible entity and non-consolidated superannuation funds or pension funds. The fees in respect of their services were approximately $7.7 million in total (2012: $8.6 million). PwC may also provide audit and non-audit services to other entities in which Westpac holds a minority interest, and which are not consolidated. Westpac is not aware of the amount of any fees paid by those entities. 258 2013 WESTPAC GROUP ANNUAL REPORT NOTE 34. EXPENDITURE COMMITMENTS NOTES TO THE FINANCIAL STATEMENTS Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m Lease commitments (all leases are classified as operating leases) Premises and sites Furniture and equipment Total lease commitments Due within one year Due after one year but not later than five years Due after five years Total lease commitments Other expenditure commitments1 Payable within one year 623 Payable later than one year but not later than five years 1,214 Payable after five years 64 1,901 Total other expenditure commitments 1 Amounts presented for other expenditure commitments represent the estimated spend on Westpac’s significant contracts over their remaining term. 3,883 22 3,905 509 1,712 1,684 3,905 3,747 16 3,763 490 1,565 1,708 3,763 3,513 16 3,529 444 1,512 1,573 3,529 3,423 9 3,432 437 1,401 1,594 3,432 713 1,462 29 2,204 687 1,450 64 2,201 622 1,291 29 1,942 This would differ from the contractually committed amount. As at 30 September 2013, the total future minimum lease payments expected to be received by the Group and Parent Entity from non-cancellable sub-leases was $17 million (2012: $21 million) and $17 million (2012: $21 million) respectively. Operating 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. Leased premises that have become excess to the Group’s business needs have been sublet where possible and any expected rental shortfalls fully provided for. There are no restrictions imposed on the Group by lease arrangements other than in respect of the specific premises being leased. The Group has lease commitments resulting from the sale and lease back of various premises. These leases are generally for a term of five years with an option to extend for another five years. In most instances, other than the lease arrangement, the Group has no ongoing interests in the premises. Service agreements The maximum contingent liability for termination benefits in respect of service agreements with the CEO and other Group Key Management Personnel at 30 September 2013 was $14.2 million (2012: $15.1 million). Significant long term agreements On 30 September 2013, Westpac entered into an agreement with IBM Australia Limited to provide project delivery resources specific for Integrated Migration and Transformation Program (IMTP) requirements. On 1 July 2013, Westpac renewed its agreement with Microsoft Australia Pty Limited for a further three years, to June 2016. The renewed agreement relates to the provision of software licences, software support and consulting services to all brands and divisions of Westpac in Australia and internationally, including the Pacific Islands, New Zealand, Asia and Europe. On 30 June 2013, Westpac and IBM Australia Limited executed a new Enterprise Licensing Agreement for five years. This agreement renews current IBM software licences held by Westpac and provides the flexibility for Westpac to substitute existing licences for alternative products of the same value. 3 On 25 June 2012, Westpac commenced a five year agreement with InfoSys Technologies Limited to provide maintenance and development support within the testing and corporate systems areas of technology. On 12 November 2012, Westpac commenced an additional five year agreement with InfoSys Technologies Limited to provide maintenance and development support within the group customer master and customer assisted services areas of technology. On 25 June 2012, Westpac commenced a five year agreement with Tata Consultancy Services to provide maintenance and development support within the information systems area of technology. On 12 November 2012, Westpac commenced an additional five year agreement with Tata Consultancy Services to provide maintenance and development support within the customer self service area of technology. On 8 August 2012, Westpac extended its agreement with Telecom New Zealand for a further two years, commencing 1 November 2012 to 31 October 2014. Telecom is responsible for Westpac’s telecommunications services in New Zealand. 2013 WESTPAC GROUP ANNUAL REPORT 259 NOTE 34. EXPENDITURE COMMITMENTS (CONTINUED) On 1 July 2012 and 30 July 2012, Westpac entered into five year agreements with Toll Transport Pty Ltd and Linfox Armaguard Pty Limited respectively for the provision of cash-in-transit services. On 30 June 2012, Westpac entered into a 4.5 year agreement with Toll Transport Pty Ltd for the provision of freight and courier services. On 1 January 2012, the agreement between Westpac and IBM Daksh Business Process Services Pty Limited for the provision of business process outsourcing services was novated to IBM Australia Limited and the term extended by two years to December 2018. On 30 September 2011, Westpac extended its agreement with IBM New Zealand Limited for a further five years, commencing 1 March 2012 to 28 February 2017. IBM is responsible for Westpac’s IT infrastructure services in New Zealand including mainframes and midrange systems, storage, security, data centre network services and workplace printing. On 26 August 2011, Westpac extended its agreement with Telstra Corporation Limited for a further two years, to December 2013. The extended agreement relates to the provision of telecommunications outsourcing services to Westpac in Australia and internationally. On 18 May 2011, Westpac entered an agreement with HP Enterprise Services BPA Limited (HP) to amend and extend its loan processing service agreement for a further four years. On 20 December 2012, the agreement was novated from HP Enterprise Services BPA Limited to HP Australia Pty Limited. On 19 November 2010, Westpac entered into an agreement with IBM Australia Limited which relates to the core banking technology operations in Australia and has an initial term of five years. Westpac entered into an agreement with Fujitsu Australia Limited to lease a purpose-built data centre from 21 September 2010 for 15 years with three further five year options and a services agreement for 15 years with two further five year options. On 28 June 2010, Westpac extended its agreement with FD Australia Limited to provide a managed service for cards processing until 2019. This involves managing the application within the Westpac/IBM environment. Westpac retains control of its cards sales, credit, collections and customer service functions. On 24 June 2010, Westpac entered into an agreement with Fiserv Solutions of Australia Pty Limited (Fiserv) under which Westpac licenses certain software and Fiserv provides services in connection with Westpac’s online transformation program. The term of maintenance and support has been extended to eight years that can be renewed by Westpac for periods of 12 months each. The agreement continues until Fiserv’s obligations have been completed in respect of the program. On 1 April 2010, Westpac commenced a five year master services agreement with United Group Services Pty Limited for the provision of real estate services, facilities management, workplace management, program management and finance management. On 1 October 2007, St.George entered into a five year agreement with Optus Networks Pty Limited for the provision of telecommunications carriage services and various outsourced administration functions. Following the initial four year term the agreement was extended for a sixth year due to certain service level agreements being met. On 3 November 2006, Westpac entered into a master relationship agreement with Genpact U.S. LLC (subsequently novated to Genpact International Inc) for the provision of back office administrative support services. On 2 May 2013, Westpac extended the term of the Genpact master relationship agreement by five years to May 2018. On 4 February 2005, Westpac, in conjunction with the National Australia Bank and the Commonwealth Bank of Australia, entered into a 12 year agreement with Fiserv Solutions of Australia Pty Limited for the provision of voucher (cheque) processing services. Commitments in relation to long-term contracts are included in other expenditure commitments above. 260 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 35. SUPERANNUATION COMMITMENTS Westpac had the following defined benefit plans at 30 September 2013: Name of Plan Westpac Group Plan (WGP) Type Form of Benefit Defined benefit and accumulation Indexed pension and lump sum Westpac New Zealand Superannuation Scheme (WNZS) Defined benefit and accumulation Indexed pension and lump sum Westpac Banking Corporation UK Staff Superannuation Scheme (UKSS) Defined benefit Indexed pension and lump sum Date of Last Actuarial Assessment of the Funding Status 30 June 2012 30 June 2013 5 April 2012 Westpac UK Medical Benefits Scheme Defined benefit Medical benefits Not applicable All of the defined benefit sections of the schemes are closed to new members. Contributions Funding recommendations are made based on the Attained Age Method, which impacts the timing of contribution requirements and assumes that the plans will not be discontinued. The specific contributions for each of the plans are set out below:  WGP – contributions are made to the WGP at the rate of 11.8% of members’ salaries;  WNZS – contributions are made to the WNZS at the rate of 12% of members’ salaries; and  UKSS – contributions are made to the UKSS at the rate of £4.27 million per annum. The table below summarises the calculation of the surplus/(deficit) used to make funding recommendations, based on the guidance in Australian Accounting Standard AAS 25 Financial Reporting by Superannuation Plans: Market value of assets Present value of accrued benefits Surplus/(deficit) 1 Calculated as at 30 June 2012 (WGP), 5 April 2012 (UKSS) and 30 June 2013 (WNZS). 2 Calculated as at 30 June 2012 (WGP), 5 April 2009 (UKSS) and 30 June 2011 (WNZS). Consolidated 2013¹ $m 1,747 1,710 37 2012² $m 1,667 1,642 25 Parent Entity 2013¹ $m 1,679 1,638 41 2012² $m 1,610 1,575 35 The following economic assumptions applied for the funding calculations differ to assumptions used in the accounting calculations due to different valuation dates, discount rates and assumptions linked to expected returns on assets. Discount rate Expected return on plan assets Expected increase in average salary of plan members WGP 7.3% 7.3% 4.0% WNZS 5.5% 5.5% 3.5% UKSS 5.2% 5.2% 4.8% 3 2013 WESTPAC GROUP ANNUAL REPORT 261 NOTE 35. SUPERANNUATION COMMITMENTS (CONTINUED) Defined benefit deficit The defined benefit deficit amount reported in the balance sheet, based on the AASB 119 Employee Benefits accounting calculations can be reconciled as follows: Fair value of plan assets Present value of funded and unfunded obligations Net obligations Consolidated Parent Entity 2013 $m 1,971 2012 $m 1,736 2011 $m 1,669 2010 $m 1,709 2009 $m 1,654 2013 $m 1,902 2012 $m 1,679 2011 $m 1,610 2010 $m 1,651 2009 $m 1,553 2,277 (306) 2,368 (632) 2,345 (676) 2,134 (425) 2,042 (388) 2,180 (278) 2,254 (575) 2,241 (631) 2,039 (388) 1,915 (362) Defined benefit superannuation expense The amount recognised in the income statement is as follows: Current service cost Past service cost Interest cost Expected return on plan assets Net defined benefit superannuation expense Consolidated Parent Entity 2013 $m 50 - 87 (116) 21 2012 $m 60 - 89 (110) 39 2011 $m 56 (3) 96 (120) 29 2013 $m 49 - 84 (112) 21 2012 $m 59 - 87 (107) 39 2011 $m 55 (3) 94 (117) 29 Change in benefit obligation The change in the present value of the defined benefit obligation is as follows: Consolidated 2013 $m 2,368 50 87 (103) 15 (165) 25 2,277 2012 $m 2,345 60 89 43 16 (182) (3) 2,368 Parent Entity 2013 $m 2,254 49 84 (85) 14 (155) 19 2,180 2012 $m 2,241 59 87 27 16 (172) (4) 2,254 14 2,240 2,254 1 Unfunded obligations relate to the UK medical benefits scheme in respect of which assets are not held in a separate plan. Westpac’s obligations for 15 2,165 2,180 14 2,354 2,368 15 2,262 2,277 Benefit obligation at the beginning of the period Current service cost Interest cost Actuarial losses/(gains) Contributions by members Benefits paid Exchange and other adjustments Benefit obligation at the end of the period Funded status of plans: Unfunded obligations1 Wholly or partly funded obligations the UK medical benefits scheme is included in the defined benefit liability. 262 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 35. SUPERANNUATION COMMITMENTS (CONTINUED) Change in plan assets The change in the fair value of plan assets is as follows: Fair value of plan assets at beginning of the year Expected returns on plan assets Actuarial gains Actual returns on plan assets Employer contributions Contributions by members Benefits paid Exchange and other adjustments Fair value of plan assets at end of the year Assumptions used in the AASB 119 accounting calculations Consolidated 2013 $m 1,736 116 189 305 53 15 (165) 27 1,971 2012 $m 1,669 110 77 187 49 16 (182) (3) 1,736 Parent Entity 2013 $m 1,679 112 184 296 49 14 (156) 20 1,902 2012 $m 1,610 107 76 183 46 16 (172) (4) 1,679 Consolidated and Parent Entity 2013 2012 Discount rate1 Expected return on plan assets – active members2 Expected return on plan assets – pensioners2 Expected increase in average salary of plan members Rate of increase for pensions Initial health care inflation Long-term health care inflation 1 Overseas Funds 2.5–4.4% 5.1–6.0% 5.1–6.0% 3.5–4.7% 2.5–3.0% 7.0% 4.0% In 2012 the discount rate assumption for WGP was changed from one based on the yield on 10 year Australian Federal Government bonds to a rate based on the weighted average yield on the population of available state and federal government bonds with durations exceeding 10 years. The change of assumption reduced the defined benefit obligation by $79 million, recognised directly in retained earnings as part of actuarial gains and losses. Overseas Funds 3.4–4.4% n/a n/a 3.0–5.1% 2.5–3.4% 7.6% 2.0–4.0% Australian Funds 4.6% n/a n/a 3.5% 2.5% n/a n/a Australian Funds 4.1% 6.6% 7.5% 3.5% 2.5% n/a n/a 2 This represents the expected rate of return for the forthcoming year. Under changes to AASB 119 this assumption is not required for financial years ending on or after 30 September 2014 onwards. In addition to the financial assumptions presented above, the pension mortality assumptions may also have a significant impact on measuring the net obligation. The average mortality assumptions are age related and allowances are made for future mortality improvements. The assumptions for our principal fund the WGP for 2013 are that a 60-year-old male pensioner is assumed to have a remaining life expectancy of 30.5 and a 60-year-old female pensioner is assumed to have a remaining life expectancy of 33.6. AASB 119 requires that the expected return on assets be based on assumptions about the expected long-term rate of return. The expected returns on assets were calculated as the weighted average return based on the benchmark asset allocation and estimates of the expected future return in each sector in each asset class (consistent with the inflation assumption). The expected return on assets for active members is net of tax and the expected return on pensioner assets is gross of tax. Experience adjustments Experience adjustments on plan assets Experience adjustments on plan liabilities 2013 $m 189 103 Consolidated Parent Entity 2012 $m 2011 $m 2010 $m 2009 $m 2013 $m 2012 $m 2011 $m 2010 $m 2009 $m 77 (31) (3) (69) 184 76 (29) (1) (66) (43) (234) (125) 112 85 (27) (233) (113) 96 3 Actuarial gains and losses, as well as adjustments arising from changes in actuarial assumptions, represent experience adjustments on plan assets and plan liabilities. The cumulative amount of actuarial gains or losses recognised in other comprehensive income to 30 September 2013 was $409 million (2012: $701 million) for the Group and $371 million (2012: $640 million) for the Parent Entity. 2013 WESTPAC GROUP ANNUAL REPORT 263 NOTE 35. SUPERANNUATION COMMITMENTS (CONTINUED) Asset allocation The actual asset allocation at 30 September was: Cash Equity instruments Debt instruments Property Other assets1 Consolidated and Parent Entity 2013 2012 Australian Funds 5% 50% 20% 7% 18% 100% Overseas Funds - 52% 44% 4% - 100% Australian Funds 4% 50% 21% 6% 19% 100% Overseas Funds 1% 40–57% 42–50% 10% - 100% 1 Other assets comprise alternative asset classes including investments in infrastructure funds and private equity funds. Investments held in Westpac and related entities Value of plan assets invested in debt and equity securities of Westpac Value of plan assets invested in related parties of Westpac Total Consolidated 2013 $m 9 7 16 2012 $m 7 13 20 Parent Entity 2013 $m - 7 7 2012 $m - 13 13 Post-retirement health care The effect of a one percentage point change in assumed health care trend rates, assuming all other assumptions remain constant, would not be material on either the current service costs or the accumulated benefit obligation of the Westpac UK Medical Benefits Scheme at 30 September 2013. NOTE 36. CONTINGENT LIABILITIES, CONTINGENT ASSETS AND CREDIT COMMITMENTS The Group is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers and in managing its own risk profile. These financial instruments include commitments to extend credit, bill endorsements, financial guarantees, standby letters of credit and underwriting facilities. The Group’s exposure to credit loss in the event of non-performance by the other party is represented by the contract or notional amount of those financial instruments. However, some commitments to extend credit and provide underwriting facilities can be cancelled or revoked at any time at the Group’s option. The Group uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Group takes collateral where it is considered necessary to support both on- and off-balance sheet financial instruments with credit risk. The Group evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral taken, if deemed necessary, on the provision of a financial facility is based on management’s evaluation of the credit risk of the counterparty. 264 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 36. CONTINGENT LIABILITIES, CONTINGENT ASSETS AND CREDIT COMMITMENTS (CONTINUED) Off-balance sheet credit risk-related financial instruments excluding derivatives at 30 September are as follows: Contract or Notional Amount Consolidated 2013 $m 2012 $m Parent Entity 2013 $m 2012 $m Credit risk-related instruments Standby letters of credit and financial guarantees1 4,402 Trade letters of credit2 2,542 Non-financial guarantees3 8,253 Commitments to extend credit4 125,787 Other commitments5 98 141,082 Total credit risk-related instruments 1 Standby letters of credit are undertakings to pay, against presentation documents, an obligation in the event of a default by a customer. Guarantees are unconditional undertakings given to support the obligations of a customer to third parties. The Group may hold cash as collateral for certain guarantees issued. 4,474 2,589 8,908 139,809 98 155,878 4,252 3,172 8,317 132,271 44 148,056 4,334 3,218 9,054 148,368 44 165,018 2 Trade letters of credit are undertakings by the Group to pay or accept drafts drawn by an overseas supplier of goods against presentation of documents in the event of default by a customer. 3 Non-financial guarantees include undertakings that oblige the Group to pay third parties should a customer fail to fulfil a contractual non-monetary obligation. 4 Commitments to extend credit include all obligations on the part of the Group to provide credit facilities. As facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. In addition to the commercial commitments disclosed above at 30 September 2013, the Group offered $12.4 billion (2012: $7.4 billion) of facilities to customers, which had not yet been accepted. 5 Other commitments include underwriting facilities. Standby letters of credit and financial guarantees Trade letters of credit Non-financial guarantees Commitments to extend credit Other commitments Total commercial commitments Up to 1 Year $m 1,390 3,218 5,526 60,281 - 70,415 Over 1 to 3 Years $m 2,184 - 1,394 29,613 - 33,191 Over 5 Years $m 584 - 1,722 43,772 44 46,122 Total $m 4,334 3,218 9,054 148,368 44 165,018 $m 176 - 412 14,702 - 15,290 Consolidated 2013 Over 3 to 5 Years Contingent assets The credit commitments shown in the table above also constitute assets. These commitments would be classified as loans and other assets in the balance sheet on the contingent event occurring. Additional liabilities and commitments Legislative liabilities The Group had the following assessed liabilities as at 30 September 2013:  $24 million (2012: $24 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation Act 1987 and the Workplace Injury Management and Workers’ Compensation Act 1998 (New South Wales); 3  $11 million (2012: $11 million) based on actuarial assessment as a self-insurer under the Accident Compensation Act 1985 (Victoria);  $6 million (2012: $5 million) based on actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1986 (South Australia);  $2 million (2012: $2 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Rehabilitation Act 2003 (Queensland); and  $1 million (2012: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation Act 1951 (Australian Capital Territory). Adequate provision has been made for these liabilities in the provision for annual leave and other employee benefits (refer to Note 20). 2013 WESTPAC GROUP ANNUAL REPORT 265 NOTE 36. CONTINGENT LIABILITIES, CONTINGENT ASSETS AND CREDIT COMMITMENTS (CONTINUED) Litigation Contingent liabilities exist in respect of actual and potential claims and proceedings. An assessment of the Group’s likely loss has been made on a case-by-case basis for the purpose of the financial statements and specific provisions have been made where appropriate.  Westpac has been served with two separate class action proceedings by customers seeking to recover exception fees paid by those customers. The first set of proceedings was commenced by customers of the Westpac brand; the second by customers of the St.George Bank and BankSA brands. Westpac has agreed with the plaintiffs to put the proceedings against Westpac, St.George and BankSA on hold until at least March 2014, pending further developments in similar litigation commenced against another Australian bank.  Westpac has been served with a class action proceeding brought on behalf of Westpac customers who borrowed money to invest in Storm Financial-badged investments. Westpac intends to defend these proceedings. As the two named applicants have not quantified the damages that they seek, and given the preliminary nature of these proceedings, it is not possible to estimate any potential liability at this stage. Liquidity support Westpac is a participant to the Interbank Deposit Agreement along with three other Australian banks. In accordance with the Interbank Deposit Agreement, a deposit notice may be served upon the other participants by a bank which is experiencing liquidity problems. The other participants are then required to deposit equal amounts of up to $2 billion each 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. Financial Claims Scheme Under the Financial Claims Scheme (FCS) the Australian Government provides depositors a free guarantee of deposits in eligible ADIs up to and including $250,000. The FCS applies to an eligible ADI if APRA has applied for the winding up of the ADI and the responsible Australian Government minister has declared that the FCS applies to the ADI. The Financial Claims Scheme (ADIs) Levy Act 2008 provides for the imposition of a levy to fund the excess of certain APRA FCS costs connected to an ADI. The levy would be imposed on liabilities of eligible ADIs to their depositors and cannot be more than 0.5% of the amount of those liabilities. Contingent tax risk The ATO is reviewing the taxation treatment of certain transactions undertaken by the Group in the course of normal business activities. Risk reviews and audits are also being undertaken by revenue authorities in other jurisdictions, as part of normal revenue authority activity in those countries. The Group has assessed these and other taxation claims arising in Australia and elsewhere, including seeking independent advice where appropriate, and considers it holds appropriate provisions. Assets pledged In addition to assets supporting securitisation and covered bond programs disclosed in Note 31, the Group and Parent Entity have provided collateral to secure liabilities as part of standard terms of transaction with other financial institutions. The carrying value of financial assets pledged as collateral to secure liabilities is: Cash Cash deposit on stock borrowed Securities (including certificates of deposit) Securities pledged under repurchase agreements1 Total amount pledged to secure liabilities 1 Comparative information has been revised to conform to presentation with current year. Consolidated 2013 $m 7,091 46 177 8,101 15,415 2012 $m 4,666 71 459 6,902 12,098 Parent Entity 2013 $m 6,941 46 177 8,101 15,265 2012 $m 4,409 - 459 6,902 11,770 Collateral received All collateral received from counterparties to secure liabilities, besides residential mortgages, is received in the form of cash or securities. Cash held as collateral, recognised on the Group’s and Parent Entity’s balance sheets as at 30 September 2013 was $1,285 million (2012: $1,356 million). Securities received as collateral under reverse repurchase agreements as at 30 September 2013 was $6,882 million (2012: $10,148 million). 266 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 36. CONTINGENT LIABILITIES, CONTINGENT ASSETS AND CREDIT COMMITMENTS (CONTINUED) Parent Entity guarantees and undertakings The following guarantees and undertakings are extended to entities in the Group by the Parent Entity:  issue of letters of comfort in respect of certain subsidiaries in the normal course of business. The letters recognise that Westpac has a responsibility to ensure that those subsidiaries continue to meet their obligations;  guarantees to Westpac Bank-PNG-Limited (expires on January 2014) and Westpac Bank Samoa Limited subsidiaries that support loans made to customers in those two jurisdictions, to the extent that the loans exceed prescribed limits; and  guarantees to certain wholly owned subsidiaries that are Australian financial services or credit licensees to comply with legislative requirements. Each guarantee provided does not exceed $40 million per annum. The guarantees will only give rise to a liability where the entity concerned becomes legally obliged to pay on account of a claim under the relevant licence. The Parent Entity has a right of indemnity to recover funds payable under the guarantees. NOTE 37. FIDUCIARY ACTIVITIES Certain controlled entities within the Group conduct investment management and other fiduciary activities as responsible entity or manager on behalf of individuals, trusts, retirement benefit plans and other institutions. These activities involve the management of assets in investment schemes and superannuation funds, and the holding or placing of assets on behalf of third parties. Where controlled entities, as responsible entities, incur liabilities in respect of these activities, a right of indemnity exists against the assets of the applicable investment schemes or funds. As these assets are sufficient to cover liabilities, and it is not probable that the controlled entities will be required to settle them, the liabilities are not included in the consolidated financial statements. The Group also manages life insurance statutory fund assets that are included in the consolidated financial statements. 3 2013 WESTPAC GROUP ANNUAL REPORT 267 NOTE 38. GROUP ENTITIES The consolidated Group as at 30 September 2013 includes the following controlled entities1: Country of Incorporation Name Country of Incorporation Name Westpac Banking Corporation 1925 Advances Pty Limited General Credit Holdings Pty Limited General Credits Pty Limited G.C.L. Investments Pty Limited Ascalon Capital Managers Limited Ascalon Capital Managers (Asia) Limited Canning Park Capital Pte Ltd2 Ascalon Funds Seed Pool Trust Asgard Wealth Solutions Limited Asgard Capital Management Limited Hitton Pty Limited EQR Securities Pty Limited Securitor Financial Group Limited Australia Australia Australia Infrastructure GP LLP2 Europe Infrastructure Debt LP2 Hastings Infrastructure 2 Limited2 Australia Hastings Funds Management (USA) Inc. Australia Australia Hastings Advisers, LLC Hastings Investments GP LLC Hong Kong Hastings Investment Capital, LP Singapore Hastings Investment Management Pty Limited Australia Hickory Trust Australia Nationwide Management Pty Limited Australia Australia Australia St.George Custodial Pty Limited Partnership Pacific Pty Limited4 Partnership Pacific Securities Pty Limited4 Australia RMS Warehouse Trust 2007-1 Australian Loan Processing Security Company Pty Limited Australia Seed Pool Trust No 2 Australian Loan Processing Security Trust Bill Acceptance Corporation Pty Limited4 Mortgage Management Pty Limited4 BLE Capital Limited BLE Capital Investments Pty Limited BLE Development Pty Limited BLE Holdings Pty Limited BT Short Term Income Fund Castlereagh Trust CBA Limited Belliston Pty Limited Challenge Limited Crusade CP Management Pty Limited Crusade CP No.1 Pty Limited7 Crusade CP Trust No. 41 Crusade CP Trust No. 44 Crusade CP Trust No. 48 Crusade CP Trust No. 49 Crusade CP Trust No. 50 Crusade CP Trust No. 52 Crusade CP Trust No. 53 Crusade CP Trust No. 54 Crusade CP Trust No. 55 Crusade CP Trust No. 56 Crusade CP Trust No. 57 Crusade CP Trust No. 58 Crusade CP Trust No. 60 Crusade Management Limited Crusade Euro Trust 1 E of 2006 Crusade Euro Trust 1 E of 2007 Crusade Global Trust 2 of 2004 Crusade Global Trust 1 of 2005 Crusade Global Trust 2 of 2005 Crusade Global Trust 1 of 2006 Crusade Global Trust 2 of 2006 Crusade Global Trust 1 of 2007 Crusade Trust 1A of 2005 Crusade Trust No.2P of 2008 Danaby Pty Limited Hastings Management Pty Limited Hastings Funds Management Asia Pte. Limited2 Hastings Funds Management Limited Hastings Forestry Investments Limited Hastings Forests Australia Pty Limited Hastings Private Equity Fund IIA Pty Limited Hastings Funds Management (UK) Limited Hastings Infrastructure 1 Limited2 Australia Series 2007-1G WST Trust Australia Series 2008-1M WST Trust Australia Series 2009-1 WST Trust Australia Series 2011-1 WST Trust Australia Series 2011-2 WST Trust Australia Series 2011-3 WST Trust Australia Australia Australia Series 2012-1 WST Trust Series 2013-1 WST Trust2 Sixty Martin Place (Holdings) Pty Limited Australia 1925 (Commercial) Pty Limited Australia 1925 (Industrial) Pty Limited Australia Halcyon Securities Limited Australia Packaging Properties 1 Pty Limited Australia Packaging Properties 2 Pty Limited Australia Packaging Properties 3 Pty Limited Australia Pashley Investments Pty Limited Australia Westpac Investment Vehicle No.3 Pty Limited Australia Sallmoor Pty Limited Australia Teuton Pty Limited Australia Westpac Administration Pty Limited Australia Westpac Asian Lending Pty Limited Australia Westpac Debt Securities Pty Limited Australia Westpac Direct Equity Investments Pty Limited Australia Westpac Equipment Finance Limited Australia Australia Westpac Equipment Finance (No.1) Pty Limited Westpac Global Capital Markets Pty Limited4 Australia Westpac Group Investments Australia Pty Limited Australia W1 Investments Pty Limited Australia Westpac Investment Vehicle Pty Limited Australia Australia Australia Australia Australia Westpac Funds Financing Holdco Pty Limited Westpac Funds Financing Pty Limited Westpac Investment Vehicle No.2 Pty Limited Westpac Cook Cove Trust I Westpac Cook Cove Trust II Australia Westpac Pacific Limited Partnership Australia Westpac Syndications Management Pty Limited Australia Australia Australia St.George Business Finance Pty Limited St.George Equity Finance Limited St.George Finance Holdings Limited Australia St.George Finance Limited Singapore Australia Crusade ABS Series 2012-1 Trust2 St.George Motor Finance Limited5 New Zealand St.George Life Limited Australia Australia UK UK St.George Procurement Management Pty Limited St.George Security Holdings Pty Limited Sydney Capital Corporation Inc7 Tavarua Funding Trust IV 268 2013 WESTPAC GROUP ANNUAL REPORT UK UK UK USA USA USA USA Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia USA USA NOTE 38. GROUP ENTITIES (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Name Country of Incorporation Name Country of Incorporation The Mortgage Company Pty Limited Value Nominees Pty Limited Waratah Receivables Corporation Pty Limited7 Waratah Securities Australia Limited7 Westpac Altitude Rewards Trust Westpac Bank of Tonga Westpac Bank Samoa Limited5 Westpac Bank-PNG-Limited5 Westpac Capital Holdings Inc. Westpac Capital Trust III Westpac Capital Trust IV Westpac Covered Bond Trust Westpac Delta LLC Westpac Equity Holdings Pty Limited Altitude Administration Pty Limited Altitude Rewards Pty Limited Hastings Group Pty Limited Qvalent Pty Limited RAMS Financial Group Pty Limited Westpac Financial Consultants Limited Westpac Financial Services Group Limited Advance Asset Management Limited BT Financial Group (NZ) Limited BT Funds Management (NZ) Limited BT Financial Group Pty Limited BT Australia Pty Limited BT Funds Management Limited Oniston Pty Limited BT Life Limited BT Portfolio Services Limited Magnitude Group Pty Limited BT Funds Management No.2 Limited BT Investment Management Limited5 BT Investment Management (Fund Services) Limited2 BT Investment Management (Institutional) Limited4 Australia Westpac General Insurance Services Limited Australia Australia Australia Australia BT Long Term Income Fund Westpac Equity Pty Limited Westpac General Insurance Limited Westpac Lenders Mortgage Insurance Limited Tonga Westpac Securities Limited Samoa Net Nominees Limited Papua New Guinea Westpac Securitisation Management Pty Limited USA Westpac Europe Limited USA Westpac Financial Holdings Pty Limited USA BT Securities Limited Australia BT (Queensland) Pty Limited USA Westpac Funding Holdings Pty Limited Australia Tavarua Funding Trust III Australia Westpac Investments U.K. Limited Australia Codrington S.a.r.l. Australia Westpac Leasing Nominees-Vic.-Pty Limited Australia Westpac Overseas Holdings No. 2 Pty Limited Australia Westpac New Zealand Group Limited Australia Australia Australia New Zealand New Zealand Westpac New Zealand Limited Westpac Cash PIE Fund2,7 Westpac NZ Operations Limited Aotearoa Financial Services Limited Number 120 Limited Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia The Home Mortgage Company Limited The Warehouse Financial Services Limited5 Westpac (NZ) Investments Limited Westpac NZ Leasing Limited Westpac NZ Securitisation Holdings Limited5 Westpac NZ Securitisation Limited Westpac NZ Securitisation No.2 Limited2 Westpac NZ Covered Bond Holdings Limited5 Westpac NZ Covered Bond Limited Westpac Securities NZ Limited Westpac Term PIE Fund7 BTIM UK Limited UK Westpac Overseas Holdings Pty Limited J O Hambro Capital Management Holdings Limited J O Hambro Capital Management Limited UK UK A.G.C. (Pacific) Limited Westpac Americas Inc. JOHCM (Singapore) Pte Limited JOHCM (USA) General Partner Inc JOHCM (USA) Inc2 JOHCMG Share Trustee Limited BT Private Nominees Pty Limited Westpac Custodian Nominees Limited Singapore Westpac Investment Capital Corporation USA USA UK Westpac USA Inc. Southern Cross Inc. Westpac Capital Markets Holding Corp Australia Westpac Capital Markets LLC Australia Westpac Finance (HK) Limited Westpac Financial Services Group-NZ-Limited New Zealand Westpac Group Investment-NZ-Limited Westpac Life-NZ-Limited Westpac Nominees-NZ-Limited HLT Custodian Trust MIF Custodian Trust New Zealand Westpac Holdings-NZ-Limited New Zealand New Zealand Westpac Capital-NZ-Limited Westpac Equity Investments NZ Limited New Zealand Westpac Singapore Limited Westpac Superannuation Nominees-NZ-Limited New Zealand Westpac Properties Limited Westpac Financial Services Limited Westpac Life Insurance Services Limited Westpac RE Limited Westpac Securities Administration Limited Australia Westpac Securitisation Holdings Pty Limited Australia Westpac Structured Products Limited Australia Westpac TPS Trust Australia Westpac Unit Trust Australia Australia Australia Australia Australia Australia Australia Australia UK Australia Australia Australia Australia USA UK Luxembourg Australia Australia New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Australia Papua New Guinea USA USA USA USA USA USA Hong Kong New Zealand New Zealand New Zealand New Zealand Singapore Australia Australia Australia Australia Australia 3 2013 WESTPAC GROUP ANNUAL REPORT 269 NOTE 38. GROUP ENTITIES (CONTINUED) Notes 1 Controlled entities shown in bold type are owned directly by Westpac Banking Corporation (WBC). Overseas companies predominantly carry on business in the country of incorporation. For unincorporated entities, ‘Country of Incorporation’ refers to the country where business is carried on. The financial years of all controlled entities are the same as that of Westpac unless otherwise stated. From time to time the Group consolidates a small number of unit trusts where ownership exceeds 50%. Ownership of these entities is part of the ongoing investment activities of the life insurance and wealth businesses and are not separately disclosed. 2 The following controlled entities were acquired, created or incorporated during the financial year:  BT Investment Management (Fund Services) Limited  Canning Park Capital Pte. Limited  Crusade ABS Series 2012-1 Trust  Europe Infrastructure Debt LP  Hastings Funds Management Asia Pte. Limited  Hastings Infrastructure 1 Limited  Hastings Infrastructure 2 Limited   JOHCM (USA) Inc.  Series 2013-1 WST Trust  Westpac Cash PIE Fund  Westpac NZ Securitisation No.2 Limited Infrastructure GP LLP 3 The following controlled entities ceased to be controlled or were disposed of during the financial year: Infrastructure Australia (No.3) Limited Infrastructure Australia (No.4) Limited  Australian Infrastructure Fund International 1 Pty Ltd  Challenge Finance Pty Limited  Crusade ABS Series 2008-2 Trust  Crusade Euro Trust No.1E of 2004  Crusade Global Trust 1 of 2004  FAI Trust No.2  Gemini Trust    Orion Trust  Phoenix Trust  Series 2005-1G WST Trust  St.George Group Holdings Pty Limited  St.George Insurance Australia Pty Limited  Tasman LLC  TIF International 1 Pty Limited  Westpac Capital Corporation  Westpac Private Equity Pty Limited  Westpac Securities Inc.  WFAL No.1 Loan Trust 4 The following controlled entities changed their name during the financial year:  Athena Finance Pty Limited to Westpac Global Capital Markets Pty Limited  Bill Acceptance Corporation Limited to Bill Acceptance Corporation Pty Limited  BT Investment Management (RE) Limited to BT Investment Management (Institutional) Limited  Mortgage Management Limited to Mortgage Management Pty Limited  Partnership Pacific Limited to Partnership Pacific Pty Limited  Partnership Pacific Securities Limited to Partnership Pacific Securities Pty Limited 5 All entities listed in this note are wholly owned controlled entities except the following: BT Investment Management Limited St.George Motor Finance Limited The Warehouse Financial Services Limited Westpac Bank-PNG-Limited Westpac Bank Samoa Limited Westpac NZ Covered Bond Holdings Limited6 Westpac NZ Securitisation Holdings Limited6 Incorporated Acquired Created Created Incorporated Incorporated Incorporated Created Incorporated Created Created Incorporated Disposed Deregistered Terminated Terminated Terminated Ceased Terminated Deregistered Deregistered Terminated Terminated Terminated Deregistered Deregistered Cancelled Disposed Deregistered Deregistered Deregistered Terminated 15 November 2012 11 September 2013 6 December 2012 18 September 2013 31 October 2012 21 August 2013 21 August 2013 21 August 2013 28 March 2013 18 February 2013 14 November 2012 2 November 2012 23 November 2012 19 April 2013 11 February 2013 27 February 2013 4 December 2012 30 September 2013 25 March 2013 13 October 2012 13 October 2012 25 March 2013 25 March 2013 22 March 2013 24 July 2013 31 October 2012 13 November 2012 1 September 2013 25 March 2013 26 September 2013 25 March 2013 22 November 2012 23 September 2013 6 September 2013 3 April 2013 6 September 2013 6 September 2013 6 September 2013 Percentage Owned 2013 62.1% 75.0% 51.0% 89.9% 93.5% 19.0% 19.0% 2012 64.5% 75.0% 51.0% 89.9% 93.5% 19.0% 19.0% 6 9.5% of the equity in both Westpac NZ Securitisation Holdings Limited (WNZSHL) and Westpac NZ Covered Bond Holdings Limited (WNZCBHL) is held directly by Westpac Holdings-NZ-Limited and another 9.5% is held directly by Westpac NZ Operations Limited. Although WBC and its controlled entities only own a total of 19%, due to contractual and structural arrangements, each of WNZSHL and WNZCBHL is considered to be a controlled entity within WBC. 7 The Group has funding agreements in place with these entities and is deemed to have exposure to the associated risks and rewards. These entities are therefore deemed to be controlled without ownership. 270 2013 WESTPAC GROUP ANNUAL REPORT NOTE 39. OTHER GROUP INVESTMENTS The Group had a significant non-controlling shareholding in the following entities as at 30 September 2013: NOTES TO THE FINANCIAL STATEMENTS Above The Index Asset Management Pty Limited Alleron Investment Management Limited Angusknight Pty Limited Athos Capital Limited Boyd Cook Cove Unit Trust Cardlink Services Limited Cards NZ Limited Cash Services Australia Pty Limited Cook Cove Investment Pty Limited Cook Cove Investment Trust Cook Cove Pty Limited and its controlled entities Exact Mining Group Pty Limited1 H3 Global Advisors Pty Limited Paymark Limited Regal Funds Management Asia Limited Regal Funds Management Pty Limited RV Capital Pte Limited St Hilliers Enhanced Property Fund No.2 Sydney Harbour Bridge Holdings Pty Limited Vipro Pty Limited Westpac Employee Assistance Foundation Pty Limited Westpac Essential Services Trust I and II and their controlled and non-controlled entities 1 Rhodes Contracting Pty Limited changed its name to Exact Mining Group Pty Limited on 25 February 2013. Country Where Beneficial Interest % 37.0 39.7 50.0 35.0 50.0 25.0 18.8 25.0 50.0 50.0 50.0 25.5 43.9 25.0 30.0 30.0 30.0 15.0 49.0 33.3 50.0 Business is Carried On Australia Australia Australia Hong Kong Australia Australia New Zealand Australia Australia Australia Australia Australia Australia New Zealand Singapore Australia Singapore Australia Australia Australia Australia Australia 36.8 Nature of Business Funds management Funds management Employment and training Funds management Investment fund Card clearing system Credit card provider Cash logistics Investment company Investment fund Investment company Services to mining Funds management Electronic payments processing Funds management Funds management Funds management Property fund Intellectual property Voucher processing Corporate trustee Asset management The total carrying amount of the Group’s significant non-controlling shareholding was $191 million (2012: $208 million). In terms of the contribution to the results of the Group, the above investments are not material either individually or in aggregate. 3 2013 WESTPAC GROUP ANNUAL REPORT 271 NOTE 40. RELATED PARTY DISCLOSURES Directors’ interests in contracts As required by the Corporations Act, some Directors have given notice that they hold office in specified companies and as such are to be regarded as having an interest in any contract or proposed contract which may be made between Westpac and those companies. Unless otherwise noted all other transactions with Directors, Director-related entities and other related parties are in the ordinary course of business on normal terms and conditions (including interest and collateral) as apply to other employees and certain customers. These transactions consist principally of normal banking and financial services. Ultimate parent Westpac Banking Corporation is the ultimate parent company of the Group. Subsidiaries Transactions between Westpac and its subsidiaries during 2013 have included the provision of a wide range of banking and other financial facilities, some of which have been on commercial terms and conditions; others have been on terms and conditions which represented a concession to the subsidiaries. Details of amounts paid to or received from related parties, in the form of dividends or interest, are set out in Note 2 and Note 3. Other intragroup transactions, which may or may not be on commercial terms, include the provision of management and administration services, staff training, data processing facilities, transfer of tax losses, and the leasing of property, plant and equipment. Similar transactions between Group entities and other related parties have been almost invariably on commercial terms and conditions as agreed between the parties. Such transactions are not considered to be material, either individually or in aggregate. NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES Directors of Westpac during the year ended 30 September 2013 were: Name Lindsay Maxsted Gail Kelly John Curtis Elizabeth Bryan Gordon Cairns Ewen Crouch1 Robert Elstone Peter Hawkins Peter Marriott2 Ann Pickard Peter Wilson3 1 Appointed 1 February 2013. 2 Appointed 1 June 2013. 3 Retired 13 December 2012. Position Chairman Managing Director & Chief Executive Officer Deputy Chairman Director Director Director Director Director Director Director Director 272 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) Other key management personnel with the greatest authority for strategic direction and management during the year ended 30 September 2013 were: Name Position Senior Executives John Arthur Peter Clare Philip Coffey Brad Cooper George Frazis Brian Hartzer Chief Operating Officer Chief Executive Officer, Westpac New Zealand Limited Chief Financial Officer Chief Executive Officer, BT Financial Group (Australia) Chief Executive Officer, St.George Banking Group Chief Executive, Australian Financial Services Christine Parker Group Executive, Human Resources & Corporate Affairs Greg Targett Rob Whitfield Jason Yetton Chief Risk Officer Group Executive, Westpac Institutional Bank Group Executive, Westpac Retail & Business Banking Key management personnel were all employed by Westpac as at 30 September 2013 except for Peter Clare (WNZL). Total compensation of all key management personnel, including Non-executive Directors, the CEO and other key management personnel: Consolidated 2013 2012 Parent Entity 2013 2012 Short-term Benefits $ Post Employment Benefits $ Termination Benefits $ Share-based Payments $ Total $ 31,937,697 31,613,929 29,981,809 29,574,544 373,290 701,351 369,824 689,910 - 2,182,500 15,465,959 17,872,746 47,776,946 52,370,526 - 2,182,500 14,600,171 16,714,407 44,951,804 49,161,361 Detailed remuneration disclosures of Non-executive Directors, CEO and other key management personnel are included in the Remuneration report. 3 2013 WESTPAC GROUP ANNUAL REPORT 273 NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) Options and share rights holdings The following table sets out details of performance options, performance share rights and unhurdled share rights held by the CEO and other key management personnel for the year ended 30 September 2013: Type of Equity-Based Instrument Number Held at Start of Year Number Granted During the Year as Remuneration Number Exercised During the Year Number Lapsed During the Year Number Held at End of Year Number Vested and Exercisable at End of Year Senior Executives Gail Kelly John Arthur Peter Clare Philip Coffey Brad Cooper George Frazis Brian Hartzer Christine Parker Greg Targett Rob Whitfield Jason Yetton Performance option Performance share right 400,043 627,029 - 213,101 400,043 128,174 - - - - 711,956 - Performance share right 98,744 71,033 17,256 - 152,521 - Performance option Performance share right Unhurdled share right 81,799 106,311 - - 39,462 22,942 - 23,187 - 81,799 81,799 - - 122,586 - 22,942 - - Performance option Performance share right 548,949 141,802 - 67,087 219,591 32,354 - 329,358 329,358 - 176,535 - Performance option Performance share right 196,785 156,191 - 59,194 - 28,310 - 196,785 196,785 - 187,075 - Performance share right Unhurdled share right 118,169 20,703 43,409 - 26,962 20,703 - 134,616 - - - - Performance share right - 30,780 - - 30,780 - Performance option Performance share right Unhurdled share right 25,036 22,813 2,838 - 27,623 - 12,204 3,047 2,838 12,832 12,832 - - 47,389 - - - - Performance share right 128,547 55,247 25,883 - 157,911 - Performance option Performance share right 559,597 202,322 - 47,355 403,365 98,939 - 156,232 156,232 - 150,738 - Performance option Performance share right 196,989 87,192 - 51,301 - 58,107 - 196,989 196,989 80,386 - - Former Senior Executives1 Peter Hanlon Performance option Performance share right 202,391 106,311 - - - - - - n/a n/a n/a n/a 1 This information relates to the period the individual was a key management personnel. 274 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) The following table sets out details of performance options, performance share rights and unhurdled share rights held by the CEO and other key management personnel for the year ended 30 September 2012: Type of Equity-Based Instrument Number Held at Start of Year Number Granted During the Year as Remuneration Number Exercised During the Year Number Lapsed During the Year Number Held at End of Year Number Vested and Exercisable at End of Year Senior Executives Gail Kelly John Arthur Peter Clare Philip Coffey Brad Cooper George Frazis Peter Hanlon Brian Hartzer1 Christine Parker2 Greg Targett Rob Whitfield Jason Yetton2 Performance option Performance share right 720,556 486,545 - 272,929 320,513 132,445 - 400,043 - 627,029 364,431 - Performance share right 58,311 40,433 - - 98,744 - Performance option Performance share right 81,799 55,769 - 50,542 - - - 81,799 - 106,311 73,619 - Performance option Performance share right 676,257 75,087 - 66,715 127,308 - - 548,949 - 141,802 538,469 - Performance option Performance share right 196,785 80,378 - 75,813 - - - 196,785 - 156,191 187,583 - Performance option Performance share right Unhurdled share right 260,869 62,573 30,698 - 55,596 - 260,869 - 9,995 - - - 118,169 20,703 - - - - Performance option Performance share right 202,391 55,769 - 50,542 - - - 202,391 - 106,311 194,569 - n/a - - - - - Performance option Performance share right Unhurdled share right n/a n/a n/a - 11,927 - - - - - - - 25,036 22,813 2,838 23,816 - 2,838 Performance share right 72,719 60,650 4,822 - 128,547 - Performance option Performance share right 559,597 141,672 - 60,650 - - - 559,597 - 202,322 553,462 66,585 Performance option Performance share right n/a n/a - 17,689 - - - 196,989 87,192 - 193,717 49,480 Former Senior Executives2 Rob Chapman 3 Rob Coombe Performance share right 29,039 42,960 - - n/a n/a n/a n/a 1 Brian Hartzer received an allocation of restricted shares on commencement of employment. In 2012 he was not awarded any options or share rights. 2 This information relates to the period these individuals were key management personnel. Performance option Performance share right - - 362,240 96,909 - - - - n/a n/a 2013 WESTPAC GROUP ANNUAL REPORT 275 NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) Shareholdings The following table sets out details of relevant interests in Westpac ordinary shares held by the Non-executive Directors (including their related parties) during the year ended 30 September 20131. Current Directors Lindsay Maxsted 2013 2012 John Curtis 2013 2012 Elizabeth Bryan 2013 2012 Gordon Cairns 2013 2012 Ewen Crouch2 2013 Robert Elstone2 2013 2012 Peter Hawkins3 2013 2012 Peter Marriott2 2013 Ann Pickard 2013 2012 Former Directors2 Peter Wilson 2013 2012 Ted Evans 2012 Carolyn Hewson 2012 Number Held at Start of Year Other Changes During the Year Number Held at End of Year 16,039 15,360 40,953 80,787 23,737 21,954 17,038 17,038 693 679 (22,493) (39,834) 1,616 1,783 - - 16,732 16,039 18,460 40,953 25,353 23,737 17,038 17,038 n/a 147 37,903 10,000 n/a 15,218 15,218 n/a 9,800 n/a 16,598 16,087 24,408 16,348 75,361 - - - - - - 9,800 - 511 - - - 10,000 10,000 15,218 15,218 20,000 9,800 9,800 n/a 16,598 n/a n/a n/a Graham Reaney 2012 1 None of these shares include non-beneficially held shares. 2 This information relates to the period these individuals were Non-executive Directors. 3 In addition to holdings of ordinary shares, Peter Hawkins and his related parties held interests in 1,465 SPS (2012: 1,465) and 1,370 CPS (2012: 1,370) at the start of the year. The SPS were redeemed during the year (2012: no change). No change occurred during the year in relation to the CPS and 1,370 CPS were held at year end. Refer to Note 23 for details of SPS and CPS. 276 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) The following table sets out details of Westpac ordinary shares held by the CEO and other key management personnel (including their related parties) for the year ended 30 September 2013: Total Number Held at Start of Year RSP Shares Granted as Compensation Number Received on Exercise of Equity Instruments Other Changes During the Year RSP Shares Held at End of Year Total Number Held at End of Year1 Senior Executives Gail Kelly 2013 2012 John Arthur2 2013 2012 Peter Clare 2013 2012 Philip Coffey 2013 2012 Brad Cooper 2013 2012 George Frazis 2013 2012 Brian Hartzer 2013 2012 Christine Parker 2013 2012 Greg Targett 2013 2012 Rob Whitfield 2013 2012 1,839,971 1,459,214 96,975 64,742 50,335 40,986 301,473 295,581 146,375 133,478 39,492 140,200 331,906 n/a 25,947 8,932 151,035 119,102 311,883 275,734 58,400 77,799 18,076 25,933 - 32,416 27,809 44,204 27,809 43,222 23,483 39,292 3,862 331,906 15,449 17,015 17,767 27,111 33,371 36,149 528,217 452,958 (550,000) (150,000) 110,266 118,850 1,876,588 1,839,971 17,256 - 23,187 - 251,945 127,308 28,310 - 47,665 270,864 - - 18,089 - 25,883 4,822 8,445 6,300 (51,912) (23,067) (262,913) (165,620) (145,871) (30,325) (10,000) (410,864) (157,156) - (35,982) - - - 35,364 40,051 21,610 50,335 110,928 123,918 56,623 64,942 49,677 39,292 178,612 279,600 23,503 22,607 35,841 46,085 502,304 - (403,365) - 140,829 142,097 140,752 96,975 21,610 50,335 318,314 301,473 56,623 146,375 100,640 39,492 178,612 331,906 23,503 25,947 194,685 151,035 444,193 311,883 90,955 n/a 16,994 21,990 58,107 - (29,268) 5,997 Jason Yetton 2013 2012 Former Senior Executives3 Peter Hanlon 2013 2012 Rob Chapman 2012 Rob Coombe 2012 n/a 1 The highest number of shares held by an individual in the above tables is 0.06% of total Westpac ordinary shares outstanding at 30 September 2013. 2 In addition to holdings of ordinary shares, John Arthur and his related parties held interests in 885 SPS II (2012: 885) at the start of the year. During the year, interests in 1,000 Capital Notes were acquired (2012: nil). Interests in 885 SPS II and 1,000 Capital Notes were held at year end. Refer to Note 23 for details of SPS II and Capital Notes. 123,681 88,893 n/a 123,681 136,788 90,955 - 81,509 - 34,774 61,147 60,466 (98,317) 147,206 140,571 24,047 - 14 n/a - - - - - - - - 3 This information relates to the period these individuals were key management personnel. 2013 WESTPAC GROUP ANNUAL REPORT 277 3 NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) The following table sets out the details of the performance options, performance share rights and unhurdled share rights held at 30 September 2013 by the CEO and other key management personnel (including their related parties): Gail Kelly John Arthur Peter Clare Philip Coffey Brad Cooper George Frazis Brian Hartzer Christine Parker Greg Targett Latest Date for Exercise 21 Dec 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 1 Oct 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 1 Oct 2018 1 Oct 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 20 Jan 2015 15 Dec 2016 1 Oct 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 17 Dec 2017 1 Oct 2018 1 Oct 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 1 Oct 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 1 Oct 2022 17 Dec 2017 1 Oct 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 1 Oct 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 Number of Share Rights 49,801 176,125 272,929 213,101 1,917 39,138 40,433 71,033 - 2,576 30,006 50,542 62,404 - - 3,595 39,138 66,715 67,087 - - 3,145 48,923 75,813 59,194 2,996 32,615 55,596 43,409 30,780 - 338 7,501 11,927 27,623 2,876 39,138 60,650 55,247 Number of Options - - - - - - - - 81,799 - - - - 179,791 149,567 - - - - 104,761 92,024 - - - - - - - - - 12,832 - - - - - - - - Exercise Price of Options n/a n/a n/a n/a n/a n/a n/a n/a $23.40 n/a n/a n/a n/a $18.98 $23.98 n/a n/a n/a n/a $30.10 $23.40 n/a n/a n/a n/a n/a n/a n/a n/a n/a $30.10 n/a n/a n/a n/a n/a n/a n/a n/a 278 2013 WESTPAC GROUP ANNUAL REPORT NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS Rob Whitfield Jason Yetton Latest Date for Exercise 21 Jan 2014 20 Jan 2015 1 Oct 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 20 Jan 2015 20 Dec 2015 15 Dec 2016 17 Dec 2017 1 Oct 2018 1 Oct 2019 1 Oct 2020 1 Oct 2021 1 Oct 2022 Number of Share Rights - - 3,595 39,138 60,650 47,355 - - - - - 959 10,437 17,689 51,301 Number of Options 81,319 74,913 - - - - 29,965 50,174 46,538 37,593 32,719 - - - - Exercise Price of Options $16.34 $18.98 n/a n/a n/a n/a $18.98 $20.53 $23.98 $30.10 $23.40 n/a n/a n/a n/a Loans to Directors and other key management personnel disclosures All financial instrument transactions that have occurred during the financial year between the Directors and the Westpac Group are in the ordinary course of business on normal terms and conditions (including interest and collateral) as apply to other employees and certain customers. These transactions consisted principally of normal personal banking and financial investment services. 3 2013 WESTPAC GROUP ANNUAL REPORT 279 NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) 2013 Details of loans to Directors and other key management personnel (including their related parties) of the Group are: Directors Other key management personnel1 Balance at Start of Year $ 6,465,643 9,335,265 15,800,908 Interest Paid and Payable for the Year $ 425,339 353,350 778,689 Interest Not Charged $ - - - 1 The balance as at 30 September 2012 previously included $1,264,377 in respect of Peter Hanlon. Balance at End of Year $ 8,789,573 6,048,376 14,837,949 Number in Group at End of Year 4 7 11 Individuals (including their related parties) with loans above $100,000 during the 30 September 2013 financial year were: Interest Paid and Payable for the Year $ Interest Not Charged $ Balance at End of Year $ Highest Indebtedness During the Year $ - - - - - - - - - - - 1,170,000 1,475,386 1,665,458 4,478,729 814,208 250,000 2,237,554 299,382 61,588 2,186,643 199,000 1,209,900 1,475,386 2,009,910 5,141,294 1,173,183 689,146 5,284,168 366,106 1,453,229 2,650,899 1,799,000 Directors Lindsay Maxsted Gordon Cairns Ewen Crouch1 John Curtis Balance at Start of Year $ 1,205,000 1,475,386 n/a 3,785,257 69,275 80,284 63,584 212,195 Other key management personnel Peter Clare Philip Coffey Brad Cooper George Frazis Brian Hartzer Christine Parker Jason Yetton 1 This information relates to the period the individual was a Non-executive Director. 1,071,166 250,000 4,949,857 366,106 396,915 502,221 1,799,000 58,595 14,567 152,831 21,667 13,251 10,773 81,667 280 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 41. DIRECTOR AND OTHER KEY MANAGEMENT PERSONNEL DISCLOSURES (CONTINUED) 2012 Details of loans to Directors and other key management personnel (including their related parties) of the Group are: Directors Other key management personnel1 Balance at Start of Year $ 6,319,623 12,171,250 18,490,873 Interest Paid and Payable for the Year $ 395,694 646,721 1,042,415 Interest Not Charged $ - - - 1 The balance as at 30 September 2011 previously included $1,042,069 in respect of Bob McKinnon. Balance at End of Year $ 6,465,643 10,599,642 17,065,285 Number in Group at End of Year 3 8 11 Individuals (including their related parties) with loans above $100,000 during the 30 September 2012 financial year were: Balance at Start of Year $ Interest Paid and Payable for the Year $ Interest Not Charged $ Balance at End of Year $ Highest Indebtedness During the Year $ Directors Lindsay Maxsted Gordon Cairns John Curtis Graham Reaney1 820,800 1,475,386 3,540,435 391,700 61,950 94,062 232,254 7,305 Other key management personnel Robert Chapman1 Peter Clare Philip Coffey Brad Cooper George Frazis Peter Hanlon Brian Hartzer1 Christine Parker1,2 Greg Targett Jason Yetton1 1 This information relates to the period these individuals were key management personnel. 2 Christine Parker’s loan balance at 1 October 2011 was $878,947. 7,453,760 - 250,000 3,635,836 1,056 683,721 n/a n/a 148,376 n/a 200,097 12,119 15,935 274,834 8,159 56,845 7,323 15,138 1,503 52,441 - - - - - - - - - - - - - - 1,205,000 1,475,386 3,785,257 - - 1,071,166 250,000 4,949,857 366,106 1,264,377 396,915 502,221 - 1,799,000 1,285,000 1,475,386 3,907,454 392,300 10,909,659 1,890,006 250,000 5,300,122 397,787 1,264,377 402,505 956,147 148,376 1,807,361 NOTE 42. NOTES TO THE CASH FLOW STATEMENTS Cash and balances with central banks Cash on hand Balance with central banks Total cash and balances with central banks Consolidated 2013 $m 9,862 1,837 11,699 2012 $m 11,138 1,385 12,523 2011 $m 14,814 1,444 16,258 Parent Entity 2013 $m 9,270 239 9,509 2012 $m 10,816 177 10,993 3 2013 WESTPAC GROUP ANNUAL REPORT 281 NOTE 42. NOTES TO THE CASH FLOW STATEMENTS (CONTINUED) Cash and cash equivalents Reconciliation of net cash (used in)/provided by operating activities to net profit attributable to equity holders of Westpac Banking Corporation is set out below: Reconciliation of net cash provided by/(used in) operating activities to net profit Net profit Adjustments: Depreciation, amortisation and impairment (Decrease)/increase in sundry provisions and other non-cash items Impairment charges on loans (Increase)/decrease in loans Increase/(decrease) in deposits and other borrowings (Increase)/decrease in receivables due from other financial institutions (Decrease)/increase in payables due to other financial institutions (Increase)/decrease in trading and fair value assets Increase/(decrease) in financial liabilities at fair value through income statement (Increase)/decrease in derivative financial instruments (Increase)/decrease in accrued interest receivable Increase/(decrease) in accrued interest payable (Decrease)/increase in current and deferred tax Net cash (used in)/provided by operating activities Details of assets and liabilities of controlled entities and businesses acquired Total assets (financial and tangible) excluding cash Identifiable intangible assets Total liabilities Fair value of identifiable net assets acquired Goodwill Total Consideration paid Debt and equity instruments issued Cash paid Total consideration transferred Cash paid Less cash acquired Cash paid (net of cash acquired) Consolidated 2013 $m 2012 $m 2011 $m Parent Entity 2013 $m 2012 $m 6,890 6,036 7,059 6,870 4,952 904 1,567 923 (15,667) 22,155 (511) 363 (319) 266 9,126 84 (376) 175 25,580 850 (47) 1,316 (18,893) 26,381 (2,418) (6,807) 4,271 155 3,679 134 54 834 15,545 721 (1,727) 1,053 (18,325) 31,498 3,674 5,439 (8,117) 4,932 (17,919) (194) 236 (461) 7,869 803 1,398 715 (13,372) 17,646 (1,544) 345 (811) 266 8,972 90 (378) (181) 20,819 747 1,452 1,088 (11,815) 20,206 (2,830) (6,767) 3,112 158 3,802 189 35 235 14,564 - - - - - - - - - - - - 73 120 (70) 123 214 337 45 292 337 292 (22) 270 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Business acquired On 1 October 2011 BT Investment Management Limited (an entity controlled by Westpac) acquired 100% of the share capital of J O Hambro Capital Management Limited, a company incorporated in the United Kingdom. The results for the year ended 30 September 2012 include the financial impact of full ownership from 1 October 2011. Non-cash financing activities 2012 $m Shares issued under the dividend reinvestment plan1 873 Issuance of loan capital2 - Shares issued on redemption of Westpac SPS - 1 The dividend reinvestment plan in respect of the interim dividend for 2013 ($543 million) was satisfied in full through purchase of existing shares and 2012 $m 873 - - 2013 $m 531 332 173 - - 2011 $m 747 332 173 Parent Entity 2013 $m 531 Consolidated transfer of shares to participating shareholders. 2 Holders of Westpac SPS notes who participated in the reinvestment offer to subscribe for Westpac Subordinated Notes II. 282 2013 WESTPAC GROUP ANNUAL REPORT NOTES TO THE FINANCIAL STATEMENTS NOTE 43. SUBSEQUENT EVENTS Acquisition of select businesses of Lloyds Banking Group Australia On 11 October 2013 Westpac announced it had entered into an agreement to acquire Lloyds Banking Group’s Australian asset finance business, Capital Finance Australia Limited (CFAL), and its corporate loan portfolio, BOS International (Australia) Ltd (BOSI), for $1.45 billion. As at 31 July 2013, CFAL’s motor vehicle finance and equipment finance business had total receivables of $6.8 billion across 213,000 consumer and commercial customers. BOSI’s corporate lending portfolio totals $2.7 billion of commitments. The deal is not subject to regulatory approvals and is expected to be completed on 31 December 2013. However, Westpac has notified the Australian Competition and Consumer Commission of the transaction and is co-operating with the Commission’s informal merger review process. Based on information as at 31 July 2013, the funding requirement for Westpac is estimated to be $8 billion. 3 2013 WESTPAC GROUP ANNUAL REPORT 283 STATUTORY STATEMENTS DIRECTORS’ DECLARATION In the Directors’ opinion: a. the financial statements and notes set out in ‘Section 3 – Financial report for the year ended 30 September 2013’ are in accordance with the Corporations Act 2001, including: (i) complying with Australian Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of Westpac Banking Corporation and the Group’s financial position as at 30 September 2013 and of their performance, as represented by the results of their operations, changes in equity and their cash flows, for the financial year ended on that date; and b. there are reasonable grounds to believe that Westpac will be able to pay its debts as and when they become due and payable. Note 1(a) confirms that the financial report also complies with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declaration by the Chief Executive Officer and the Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. For and on behalf of the Board. Lindsay Maxsted Chairman Sydney 4 November 2013 Gail Kelly Managing Director & Chief Executive Officer 284 2013 WESTPAC GROUP ANNUAL REPORT STATUTORY STATEMENTS MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The following report is required by rules of the US Securities and Exchange Commission The management of Westpac is responsible for establishing and maintaining adequate internal control over financial reporting for Westpac as defined in Rule 13a – 15 (f) under the Securities Exchange Act of 1934, as amended. Westpac’s internal control system is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable accounting standards. Westpac’s internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately reflect the transactions and dispositions of the assets of Westpac and its consolidated entities; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable accounting standards, and that receipts and expenditures of Westpac are being made only in accordance with authorizations of management and directors of Westpac and its consolidated entities; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of Westpac and its consolidated entities that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Westpac management, with the participation of the CEO and CFO, assessed the effectiveness of Westpac’s internal control over financial reporting as of 30 September 2013 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management has concluded that Westpac’s internal control over financial reporting as of 30 September 2013 was effective. The effectiveness of Westpac’s internal control over financial reporting as of 30 September 2013 has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, as stated in their report which is included herein. 3 2013 WESTPAC GROUP ANNUAL REPORT 285 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF WESTPAC BANKING CORPORATION Report on the financial report We have audited the accompanying financial report of Westpac Banking Corporation (the Corporation), which comprises the balance sheets as at 30 September 2013, and the income statements, the statements of comprehensive income, the statements of changes in equity and cash flow statements for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for both the Corporation and the Westpac Banking Corporation Group (the Consolidated Entity). The Consolidated Entity comprises the Corporation and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the Corporation 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, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial report complies with International Financial Reporting Standards as issued by the International Accounting Standards Board. 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 judgment, 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. Auditor’s opinion In our opinion: a. the financial report of the Corporation is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Corporation’s and the Consolidated Entity’s financial position as at 30 September 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; and b. the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. 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. 286 2013 WESTPAC GROUP ANNUAL REPORT STATUTORY STATEMENTS Report on the Remuneration Report We have audited the Remuneration Report included in the Directors’ report in Section 1 of this Annual Report for the year ended 30 September 2013. The directors of the Corporation are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the Remuneration Report of the Corporation for the year ended 30 September 2013, complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Michael Codling Partner Craig Stafford Partner Sydney, Australia 4 November 2013 3 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. 2013 WESTPAC GROUP ANNUAL REPORT 287 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Westpac Banking Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated cash flow statements present fairly, in all material respects, the financial position of Westpac Banking Corporation (the ‘Corporation’) and its subsidiaries at 30 September 2013 and 30 September 2012, and the results of their operations and their cash flows for each of the three years in the period ended 30 September 2013 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of 30 September 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included under the heading ‘Management’s Report on Internal Control over Financial Reporting’ in the accompanying Annual Report. Our responsibility is to express opinions on these financial statements and on the Corporation’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and International Standards on Auditing. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Our audit of the consolidated financial statements of the Corporation and its subsidiaries was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The Corporation has included parent entity only information on the face of the consolidated financial statements and other parent entity only disclosures in the notes to the financial statements. Such parent entity only information is presented for purposes of additional analysis and is not a required part of the consolidated financial statements presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Such information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements, and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 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. 288 2013 WESTPAC GROUP ANNUAL REPORT STATUTORY STATEMENTS Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers Sydney, Australia 4 November 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. Limitation on Independent Registered Public Accounting Firm’s Liability The liability of PricewaterhouseCoopers (an Australian partnership which we refer to as PwC Australia), with respect to claims arising out of its audit reports included in this Annual Report, is subject to the limitations set forth in the Professional Standards Act 1994 of New South Wales, Australia, as amended (the Professional Standards Act) and The Institute of Chartered Accountants in Australia (NSW) Scheme adopted by The Institute of Chartered Accountants in Australia (ICAA) on 8 October 2013 and approved by the New South Wales Professional Standards Council pursuant to the Professional Standards Act (the NSW Accountants Scheme) or, in relation to matters occurring on or prior to 7 October 2013, the predecessor schemes. The Professional Standards Act and the NSW Accountants Scheme may limit the liability of PwC Australia for damages with respect to certain civil claims directly or vicariously from anything done or omitted by it in New South Wales in the performance of its professional services for us, including, without limitation, its audits of our financial statements, a maximum liability for audit work of $75 million or, in relation to matters occurring on or prior to 7 October 2007, $20 million. The limit does not apply to claims for breach of trust, fraud or dishonesty. The current NSW Accountants Scheme expires on 7 October 2014 unless further extended or replaced. In addition, there is equivalent professional standards legislation in place in other states and territories in Australia and amendments have been made to a number of Australian federal statutes to limit liability under those statutes to the same extent as liability is limited under state and territory laws by professional standards legislation. 3 These limitations of liability may limit recovery upon the enforcement in Australian courts of any judgment under US or other foreign laws rendered against PwC Australia based on or related to its audit report on our financial statements. Substantially all of PwC Australia’s assets are located in Australia. However, the Professional Standards Act and the NSW Accountants Scheme have not been subject to judicial consideration and therefore how the limitation will be applied by the courts and the effect of the limitation on the enforcement of foreign judgments are untested. 2013 WESTPAC GROUP ANNUAL REPORT 289 This page has intentionally been left blank. 290 2013 WESTPAC GROUP ANNUAL REPORT SHAREHOLDING INFORMATION ADDITIONAL INFORMATION 4 INFORMATION FOR SHAREHOLDERS GLOSSARY OF ABBREVIATIONS AND DEFINED TERMS CONTACT US SHAREHOLDING INFORMATION WESTPAC ORDINARY SHARES Top 20 ordinary shareholders as at 3 October 2013 HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Ltd National Nominees Limited Citicorp Nominees Pty Limited Cogent Nominees Pty Limited RBC Global Services Australia Nominees Pty Limited AMP Life Limited Australian Foundation Investment Company Limited UBS Private Clients Australia Nominees Pty Ltd Bond Street Custodians Limited BNP Paribas Milton Corporation Limited Argo Investments Limited Navigator Australia Limited Questor Financial Services Limited Invia Custodian Pty Limited Nulis Nominees (Australia) Limited UBS Nominees Pty Ltd New Zealand Central Securities Depository Limited Avanteos Investments Limited Total of Top 20 registered shareholders Number of Fully Paid Ordinary Shares 525,710,217 396,508,567 308,829,947 153,694,015 65,047,059 42,400,242 26,734,198 18,236,232 16,234,379 14,139,325 10,831,262 10,447,684 9,851,594 7,125,874 4,875,708 4,841,273 4,812,629 4,015,742 2,846,153 2,800,570 1,629,982,670 % Held 16.91 12.75 9.93 4.94 2.09 1.36 0.86 0.59 0.52 0.45 0.35 0.34 0.32 0.23 0.16 0.16 0.15 0.13 0.09 0.09 52.42 As at 3 October 2013 there were 579,695 holders of our ordinary shares compared to 563,072 in 2012 and 572,106 in 2011. Ordinary shareholders with a registered address in Australia held approximately 98% of our fully paid share capital at 3 October 2013 (approximately 98% in 2012 and 98% in 2011). Substantial shareholders as at 3 October 2013 As at 3 October 2013 there were no shareholders who had a ‘substantial holding’ of our shares within the meaning of the Corporations Act. A person has a substantial holding of our shares if the total votes attached to our voting shares in which they or their associates have relevant interests is 5% or more of the total number of votes attached to all our voting shares. The above table of the Top 20 ordinary shareholders includes shareholders that may hold shares for the benefit of third parties. Significant changes in ordinary share ownership of substantial shareholders On 17 May 2012, National Australia Bank Limited became a substantial shareholder having relevant interest in 178,904,696 ordinary shares (5.86% of total votes outstanding). They ceased to be a substantial shareholder on 18 May 2012. Control of registrant We are not directly or indirectly owned or controlled by any other corporation(s) or by any foreign government. Refer to the section ‘Exchange controls and other limitations affecting security holders’, which provides information on the Foreign Acquisitions and Takeovers Act 1975, Corporations Act 2001 and Financial Sector (Shareholdings) Act 1998, which impose limits on equity holdings. At 30 September 2013, our Directors and Executive Officers owned beneficially, directly or indirectly, an aggregate of 3,662,812 (0.12%) of the fully paid ordinary shares outstanding. 292 2013 WESTPAC GROUP ANNUAL REPORT SHAREHOLDING INFORMATION Analysis by range of holdings of ordinary shares as at 3 October 2013 1,000 – 5,000 – – 10,000 – 100,000 Number of Shares 1 1,001 5,001 10,001 100,001 and over Totals Number of Holders of Fully Paid Ordinary Shares 319,944 200,360 35,487 23,256 648 579,695 % 55.19 34.57 6.12 4.01 0.11 100.00 Number of Fully Paid Ordinary Shares 133,155,206 459,808,217 249,617,772 491,718,253 1,774,748,861 3,109,048,309 Number of Holders of Share Options and Rights 60 157 46 85 20 368 % 4.28 14.79 8.03 15.82 57.08 100.00 There were 9,633 shareholders holding less than a marketable parcel ($500) based on a market price of $32.64 at the close of trading on 3 October 2013. Voting rights of ordinary shares Holders of our fully paid ordinary shares have, at general meetings (including special general meetings), one vote on a show of hands and, upon a poll, one vote for each fully paid ordinary share held by them. WESTPAC STAPLED PREFERRED SECURITIES II (WESTPAC SPS II) Top 20 holders of Westpac SPS II as at 3 October 2013 BT Portfolio Services Limited UBS Wealth Management Australia Nominees Pty Ltd Invia Custodian Pty Limited Navigator Australia Limited HSBC Custody Nominees (Australia) Limited Questor Financial Services Limited UCA Cash Management Fund Limited Bond Street Custodians Limited Nulis Nominees (Australia) Limited RBC Dexia Investor Services Australia Nominees Pty Limited Alsop Pty Ltd National Nominees Limited Dimbulu Pty Ltd Domer Mining Co Pty Ltd Randazzo C&G Developments Pty Ltd JP Morgan Nominees Australia Ltd Avanteos Investments Limited Baptist Community Services - NSW & ACT Pershing Australia Nominees Pty Ltd Sir Moses Montefiore Jewish Home Total of Top 20 registered holders Analysis by range of holdings of Westpac SPS II as at 3 October 2013 Number of Securities – 1,000 1 – 5,000 1,001 – 5,001 10,000 – 100,000 10,001 100,001 and over Totals Number of Holders of Westpac SPS II 13,308 1,070 76 49 5 14,508 % 91.73 7.38 0.52 0.34 0.03 100.00 Number of Westpac SPS II 559,272 162,611 153,320 146,276 137,696 129,491 100,000 99,107 80,417 72,579 60,000 59,916 51,000 50,000 50,000 47,935 42,071 36,000 34,688 30,000 2,102,379 Number of Westpac SPS II 3,955,478 2,346,875 608,869 1,369,626 802,430 9,083,278 % Held 6.16 1.79 1.69 1.61 1.52 1.43 1.10 1.09 0.89 0.80 0.66 0.66 0.56 0.55 0.55 0.53 0.46 0.40 0.38 0.33 23.16 4 % 43.55 25.84 6.70 15.08 8.83 100.00 There were two security holders holding less than a marketable parcel ($500) of Westpac SPS II based on a market price of $102.45 at the close of trading on 3 October 2013. 2013 WESTPAC GROUP ANNUAL REPORT 293 WESTPAC CONVERTIBLE PREFERENCE SHARES (WESTPAC CPS) Top 20 holders of Westpac CPS as at 3 October 2013 UBS Wealth Management Australia Nominees Pty Ltd BT Portfolio Services Limited Questor Financial Services Limited National Nominees Limited Navigator Australia Limited UCA Cash Management Fund Ltd Nulis Nominees (Australia) Limited JP Morgan Nominees Australia Ltd RBC Dexia Investor Services Australia Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Netwealth Investments Limited Austrust Limited Dimbulu Pty Ltd Mrs Linda Anne Van Lieshout Asgard Capital Management Ltd Eastcote Pty Ltd Finot Pty Ltd JMB Pty Ltd Randazzo C&G Developments Pty Ltd Bond Street Custodians Limited Total of Top 20 registered holders Analysis by range of holdings of Westpac CPS as at 3 October 2013 Number of Securities – 1,000 1 – 5,000 1,001 – 5,001 10,000 – 100,000 10,001 100,001 and over Totals Number of Holders of Westpac CPS 17,710 1,144 83 56 8 19,001 % 93.21 6.02 0.44 0.29 0.04 100.00 Number of Westpac CPS 644,887 295,663 211,283 182,166 172,592 166,300 163,531 129,300 117,928 116,579 96,444 80,308 70,000 60,000 50,400 50,000 50,000 50,000 50,000 48,252 2,805,633 Number of Westpac CPS 5,315,317 2,653,927 648,685 1,532,007 1,743,669 11,893,605 % Held 5.42 2.49 1.78 1.53 1.45 1.40 1.37 1.09 0.99 0.98 0.81 0.68 0.59 0.50 0.42 0.42 0.42 0.42 0.42 0.41 23.59 % 44.69 22.31 5.46 12.88 14.66 100.00 There were no security holders holding less than a marketable parcel ($500) of Westpac CPS based on a market price of $102.80 at the close of trading on 3 October 2013. 294 2013 WESTPAC GROUP ANNUAL REPORT WESTPAC CAPITAL NOTES Top 20 holders of Westpac Capital Notes as at 3 October 2013 SHAREHOLDING INFORMATION UBS Wealth Management Australia Nominees Pty Ltd BT Portfolio Services Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited Zashvin Pty Ltd JP Morgan Nominees Australia Ltd National Nominees Limited Cogent Nominees Pty Limited John E Gill Trading Pty Ltd Tandom Pty Ltd Willimbury Pty Ltd Questor Financial Services Limited Vinsun Custodians Pty Ltd RBC Dexia Investor Services Australia Nominees Pty Limited Northern Metropolitan Cemeteries Erskine Import Pty Ltd Fibora Pty Ltd Royal Freemasons Benevolent Institution Kept Safe Pty Ltd Mr Alexander Shaw Total of Top 20 registered holders Analysis by range of holdings of Westpac Capital Notes as at 3 October 2013 Number of Securities – 1,000 1 – 5,000 1,001 – 5,001 10,000 – 100,000 10,001 100,001 and over Totals Number of Holders of Westpac Capital Notes 14,499 1,466 124 74 9 16,172 % 89.64 9.07 0.77 0.46 0.06 100.00 Number of Westpac Capital Notes 1,093,388 268,305 235,678 155,394 150,000 148,530 140,786 125,000 102,311 100,000 100,000 97,242 90,000 73,678 50,000 50,000 50,000 50,000 50,000 50,000 3,180,312 Number of Westpac Capital Notes 4,875,497 3,462,132 1,050,567 2,201,530 2,245,964 13,835,690 % Held 7.90 1.94 1.70 1.12 1.08 1.07 1.02 0.90 0.74 0.72 0.72 0.70 0.65 0.53 0.36 0.36 0.36 0.36 0.36 0.36 22.95 % 35.24 25.03 7.59 15.91 16.23 100.00 There were two security holders holding less than a marketable parcel ($500) of Westpac Capital Notes based on a market price of $102.01 at the close of trading on 3 October 2013. 4 2013 WESTPAC GROUP ANNUAL REPORT 295 WESTPAC SUBORDINATED NOTES II Top 20 holders of Westpac Subordinated Notes II as at 3 October 2013 UBS Wealth Management Australia Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited Invia Custodian Pty Limited JP Morgan Nominees Australia Ltd BT Portfolio Services Limited Bond Street Custodians Limited Cogent Nominees Pty Limited Sydney Harbour Tunnel Co Ltd National Nominees Limited Citicorp Nominees Pty Limited RBC Dexia Investor Services Australia Nominees Pty Limited Forbar Custodians Limited Sandhurst Trustees Ltd Hardings Trading Pty Ltd Mr James Yong Xiang Chen & Mrs Jin Mei Wang Chen Domer Mining Company Pty Ltd KGD Investments Pty Ltd LZR Investment Pty Ltd The Walter and Eliza Hall Institute of Medical Research The Corporation of the Trustees of the Roman Catholic Archdiocese of Brisbane Total of Top 20 registered holders Number of Westpac Subordinated Notes II 567,551 520,639 311,638 218,710 204,258 172,918 159,290 150,000 120,121 102,651 85,598 81,340 65,000 55,000 50,000 50,000 50,000 50,000 50,000 40,000 % Held 6.13 5.63 3.37 2.36 2.21 1.87 1.72 1.62 1.30 1.11 0.93 0.88 0.70 0.59 0.54 0.54 0.54 0.54 0.54 0.43 3,104,714 33.55 Analysis by range of holdings of Westpac Subordinated Notes II as at 3 October 2013 Number of Securities – 1,000 1 – 5,000 1,001 – 5,001 10,000 – 100,000 10,001 100,001 and over Totals Number of Holders of Westpac Subordinated Notes II 7,716 1,031 69 57 8 8,881 % 86.88 11.61 0.78 0.64 0.09 100.00 Number of Westpac Subordinated Notes II 2,834,117 2,422,757 601,694 1,605,228 1,789,054 9,252,850 % 30.63 26.18 6.50 17.35 19.34 100.00 There were no security holders holding less than a marketable parcel ($500) of Westpac Subordinated Notes II based on a market price of $101.10 at the close of trading on 3 October 2013. Voting rights of Westpac SPS II, Westpac CPS, Westpac Capital Notes and Westpac Subordinated Notes II In accordance with the terms of issue, holders of Westpac SPS II and Westpac CPS have no right to vote at any general meeting of Westpac except in the following circumstances: a. on a proposal: – to reduce the share capital of Westpac; – that affects rights attached to Westpac SPS II preference shares or Westpac CPS (as applicable); – to wind up Westpac; or – for the disposal of the whole of the property, business and undertaking of Westpac; b. on a resolution to approve the terms of a share buy back agreement, other than a buy back agreement relating to Westpac SPS II preference shares or Westpac CPS (as applicable); c. during a period in which a dividend (or part of a dividend) in respect of Westpac SPS II preference shares or Westpac CPS (as applicable) is in arrears; or d. during the winding up of Westpac. When entitled to vote at a general meeting of Westpac in respect of the matters listed above, holders of Westpac SPS II and Westpac CPS are entitled to exercise one vote on a show of hands and one vote for each Westpac SPS II or Westpac CPS held on a poll. 296 2013 WESTPAC GROUP ANNUAL REPORT Holders of Westpac SPS II and Westpac CPS have the same rights as the holders of Westpac’s ordinary shares in relation to receiving notices, reports and financial statements, and attending and being heard at all general meetings of Westpac. In accordance with the terms of issue, holders of Westpac Capital Notes and Westpac Subordinated Notes II have no right to vote at any general meeting of Westpac before conversion into Westpac ordinary shares. If conversion occurs (in accordance with the applicable terms of issue), holders of Westpac SPS II, Westpac CPS, Westpac Capital Notes or Westpac Subordinated Notes II (as applicable) will become holders of Westpac ordinary shares and have the voting rights that attach to Westpac ordinary shares. Exchange controls and other limitations affecting security holders Australian exchange controls Australian laws control and regulate or permit the control and regulation of a broad range of payments and transactions involving non-residents of Australia. Pursuant to a number of exemptions, authorities and approvals, there are no general restrictions from transferring funds from Australia or placing funds to the credit of non-residents of Australia. However, Australian foreign exchange controls are implemented from time to time against prescribed countries, entities and persons. At the present time, these include: a. withholding taxes in relation to remittances or dividends (to the extent they are unfranked) and interest payments; b. the financial sanctions administered by the Department of Foreign Affairs and Trade (DFAT) in accordance with the Autonomous Sanctions Act 2011 and the Autonomous Sanctions Regulations 2011, specifically, in relation to transactions involving the transfer of funds or payments to, by the order of, or on behalf of: – supporters of the former Federal Republic of Yugoslavia (the Milosevic regime) and certain persons identified by the International Criminal Tribunal for the former Yugoslavia; – persons or entities associated with activities that seriously undermine democracy, respect for human rights and the rule of law in Zimbabwe; – certain entities and individuals associated with the Democratic People’s Republic of Korea; – persons or entities that have contributed to or are contributing to Iran’s nuclear or missile program; – certain individuals and entities associated with the Burmese military; – certain individuals and entities associated with the Republic of Fiji Military Forces and commodore Josaia Voreqe Bainimarama; – certain individuals and entities associated with the former Qadhafi regime in Libya; and – certain individuals and entities associated with the Syrian regime, without the prior approval of the Minister for Foreign Affairs. SHAREHOLDING INFORMATION c. the United Nations Security Council (UNSC) financial sanctions administered by DFAT including: – Terrorist Asset Freezing Regime In accordance with the Charter of the United Nations Act 1945 and the Charter of the United Nations (Dealings with Assets) Regulations 2008, a person is prohibited from using or dealing with funds, financial assets or economic resources of persons or entities listed as terrorists by the Minister for Foreign Affairs in the Commonwealth of Australia Gazette. It is also a criminal offence to make assets available to such persons or entities. – Country-based sanctions Under the Charter of the United Nations Act 1945 and associated regulations, UNSC financial sanctions have been implemented. It is an offence to use or deal with funds, financial assets or economic resources of persons or entities associated with certain countries designated by the UNSC. It is also a criminal offence to make assets available to such persons or entities. Limitations affecting security holders The following Australian laws impose limitations on the right of non-residents or non-citizens of Australia to hold, own or vote Westpac shares. All these limitations apply to the holders of the ADRs evidencing ADS, issued by our Depositary in the United States. Foreign Acquisitions and Takeovers Act 1975 Acquisitions of interests in shares in Australian companies by foreign interests are subject to review and approval by the Treasurer of Australia under the Australian Government’s foreign investment policy, and where required, the Foreign Acquisitions and Takeovers Act 1975 (Cth). That legislation applies to any acquisition by a foreign person, including a corporation or group of associated foreign persons, which results in ownership of 15% or more of the issued shares of an Australian company or the ability to control 15% or more of the total voting power. In addition, the legislation applies to any acquisition by a foreign person that would result in non-associated foreign persons having, together with any associate or associates of any of them, in the aggregate, 40% or more of the total voting power or ownership of an Australian company. The legislation requires any persons proposing to make any such acquisition to first notify the Treasurer of their intention to do so. Where such an acquisition has already occurred, the Treasurer has the power to order divestment. Financial Sector (Shareholdings) Act 1998 The Financial Sector (Shareholdings) Act 1998 (Cth) imposes restrictions on shareholdings in Australian financial sector companies (which includes Westpac). Under that legislation a person (including a corporation) may not hold more than a 15% ‘stake’ in a financial sector company without prior approval from the Treasurer of Australia. A person’s stake in a financial sector company is equal to the aggregate of the person’s voting power in the company and the voting power of the person’s associates. The concept of voting power is very broadly defined. The Treasurer may approve a higher percentage stake if the Treasurer is satisfied that it is in the national interest to do so. 4 2013 WESTPAC GROUP ANNUAL REPORT 297 In addition, even if a person’s stake in a financial sector company does not exceed the 15% limit, the Treasurer has the power to declare that a person has ‘practical control’ of a financial sector company and require the person to relinquish that control or reduce their stake in that company. Corporations Act 2001 The Corporations Act 2001 (Cth) prohibits any person (including a corporation) from acquiring a relevant interest in our voting shares if, after the acquisition, that person or any other person would be entitled to exercise more than 20% of the voting power in our shares. The prohibition is subject to certain limited exceptions. In addition, under the Corporations Act, a person is required to give a notice to us and to the ASX providing certain prescribed information, including their name, address and details of their relevant interests in our voting shares if they begin to have, or cease to have, a substantial holding in us, or if they already have a substantial holding and there is a movement of at least 1% in their holding. Such notice must, generally, be provided within two business days after the person becomes aware of that information. A person will have a substantial holding if the total votes attached to our voting shares in which they or their associates have relevant interests is 5% or more of the total number of votes attached to all our voting shares. The concepts of ‘associate’ and ‘relevant interest’ are broadly defined in the Corporations Act and investors are advised to seek their own advice on their scope. In general terms, a person will have a relevant interest in a share if they: a. are the holder of that share; b. have power to exercise, or control the exercise of, a right to vote attached to that share; or c. have power to dispose of, or control the exercise of a power to dispose of, that share. It does not matter how remote the relevant interest is or how it arises. If two or more persons can jointly exercise any one of these powers, each of them is taken to have that power. Nor does it matter that the power or control is express or implied, formal or informal, exercisable either alone or jointly with someone else. The American Depositary Receipts agreement The Deposit Agreement among JPMorgan Chase Bank of New York as Depositary, and us, and the record holders from time to time of all ADRs, applies all of the provisions of our Constitution to ADR holders. Record holders of ADRs are required by the Deposit Agreement to comply with our requests for information as to the capacity in which such holders own ADRs and related ordinary shares as well as to the identity of any other person interested in such ADRs and related ordinary shares and the nature of such interest. Enforceability of foreign judgments in Australia We are an Australian public corporation with limited liability. All of our Directors and Executive Officers reside outside the US. Substantially all or a substantial portion of the assets of all or many of such persons are located outside the US. As a result, it may not be possible for investors to effect service of process within the US upon such persons or to enforce against them judgments obtained in US courts predicated upon the civil liability provisions of the federal securities laws of the US. There may be doubt as to the enforceability in Australia, in original actions or in actions for enforcement of judgments of US courts, of civil liabilities predicated upon the federal securities laws of the US. Taxation Australian taxation The following discussion is a summary of certain Australian taxation implications of the ownership and disposition of ordinary shares (including ADS) for shareholders holding their shares on capital account. This discussion is based on the laws in force at the date of the Annual Report and the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and The Prevention of Fiscal Evasion with respect to Taxes on Income (the Tax Treaty), and is subject to any changes in Australian law and any change in the Tax Treaty occurring after that date. This discussion is intended only as a descriptive summary and does not purport to be a complete analysis of all the potential Australian tax implications of owning and disposing of ordinary shares. The specific tax position of each investor will determine the applicable Australian income tax implications for that investor and we recommend that investors consult their own tax advisers concerning the implications of owning and disposing of ordinary shares. Taxation of dividends Under the Australian dividend imputation system, Australian tax paid at the company level is imputed (or allocated) to shareholders by means of imputation credits which attach to dividends paid by the company to the shareholder. Such dividends are termed ‘franked dividends’. When an Australian resident individual shareholder receives a franked dividend, the shareholder receives a tax offset to the extent of the franking credits, which can be offset against the Australian income tax payable by the shareholder. An Australian resident shareholder may, in certain circumstances, be entitled to a refund of excess franking. The extent to which a dividend is franked typically depends upon a company’s available franking credits at the time of payment of the dividend. Accordingly, a dividend paid to a shareholder may be wholly or partly franked or wholly unfranked. 298 2013 WESTPAC GROUP ANNUAL REPORT Fully franked dividends paid to non-resident shareholders are exempt from Australian dividend withholding tax. Dividends paid to a non-resident shareholder which are not fully franked are subject to dividend withholding tax at the rate of 30% (unless reduced by a double tax treaty) to the extent they are unfranked. In the case of residents of the US who are entitled to the benefits of the Tax Treaty and are beneficially entitled to the dividends, the rate is reduced to 15% under the Tax Treaty, provided the shares are not effectively connected with a permanent establishment or a fixed base of the non-resident in Australia through which the non-resident carries on business in Australia or provides independent personal services. In the case of residents of the US that have a permanent establishment or fixed base in Australia where the shares in respect of which the dividends are paid are attributable to that permanent establishment or fixed base, there is no dividend withholding tax. Rather, such dividends will be taxed on a net assessment basis and, where the dividends are franked, entitlement to a tax offset may arise. Fully franked dividends paid to non-resident shareholders and dividends that have been subject to dividend withholding tax should not be subject to any further Australian income tax. There are circumstances where a shareholder may not be entitled to the benefit of franking credits. The application of these rules depend upon the shareholder’s own circumstances, including the period during which the shares are held and the extent to which the shareholder is ‘at risk’ in relation to their shareholding. Gain or loss on disposition of shares Generally, any profit made by a resident shareholder on disposal of shares will be subject to capital gains tax. However, if the shareholder is regarded as a trader or speculator, or carries on a business of investing for profit, any profits may be taxed as ordinary income. A discount may be available on capital gains on shares held for 12 months or more by individuals, trusts or complying superannuation entities. The discount is one half for individuals and trusts, and one third for complying superannuation entities. Companies are not eligible for the capital gains tax discount. For shares acquired prior to 21 September 1999, an alternative basis of calculation of the capital gain may be available which allows the use of an indexation formula. Normal rates of income tax would apply to capital gains so calculated. Any capital loss can only be offset against capital gains. Excess capital losses can be carried forward for offset against future capital gains. Generally, subject to two exceptions, a non-resident disposing of shares in an Australian public company who holds those shares on capital account will be free from income tax in Australia. The main exceptions are:  shares held as part of a trade or business conducted through a permanent establishment in Australia. In such a case, any profit on disposal would be assessable to tax. Losses may give rise to capital losses or be otherwise deductible; and SHAREHOLDING INFORMATION  shares held in public companies where the shareholder and its associates have held at the time of disposal (or at least 12 months in the 24 months prior to disposal) a holding of 10% or more in the company and more than 50% of the company’s assets are represented by interests in Australian real property (which is unlikely to be the case for Westpac). In such a case, capital gains tax would apply. United States taxation The following discussion is a summary of certain US federal income tax implications of the ownership and disposition of ordinary shares (including ADS) by US holders (as defined below) that hold the ordinary shares as capital assets. This discussion is based on the US Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, and the Tax Treaty, all as currently in effect and all of which are subject to change, possibly on a retroactive basis. This discussion is intended only as a descriptive summary. It does not purport to be a complete analysis of all the potential US federal income tax consequences of owning and disposing of ordinary shares and does not address US federal income tax considerations that may be relevant to US holders subject to special treatment under US federal income tax law (such as banks, insurance companies, real estate investment trusts, regulated investment companies, dealers in securities, tax-exempt entities, retirement plans, certain former citizens or residents of the US, persons holding ordinary shares as part of a straddle, hedge, conversion transaction or other integrated investment, persons that have a ‘functional currency’ other than the US dollar, persons that own 10% or more (by voting power) of our stock, persons that generally mark their securities to market for US federal income tax purposes or persons that receive ordinary shares as compensation). As this is a complex area, we recommend investors consult their own tax advisers concerning the US federal, state and/or local implications of owning and disposing of ordinary shares. For the purposes of this discussion you are a US holder if you are a beneficial owner of ordinary shares and you are for US federal income tax purposes:     an individual that is a citizen or resident of the US; a corporation created or organised in or under the laws of the US or any state thereof or the District of Columbia; an estate, the income of which is subject to US federal income taxation regardless of its source; or a trust, if a US court can exercise primary supervision over the trust’s administration and one or more US persons are authorised to control all substantial decisions of the trust, or certain electing trusts that were in existence on 19 August 1996 and were treated as domestic trusts on that date. If an entity treated as a partnership for US federal income tax purposes owns the ordinary shares, the US federal income tax implications of the ownership and disposition of ordinary shares will generally depend upon the status and activities of such partnership and its partners. Such an entity should consult its own tax adviser concerning the US federal income tax implications to it and its partners of owning and disposing of ordinary shares. 4 2013 WESTPAC GROUP ANNUAL REPORT 299 Taxation of dividends If you are a US holder, you must include in your income as a dividend, the gross amount of any distributions paid by us out of our current or accumulated earnings and profits (as determined for US federal income tax purposes) without reduction for any Australian tax withheld from such distribution. If you are a non-corporate US holder, dividends paid to you that constitute qualified dividend income may be taxable to you at a preferential tax rate so long as certain holding period and other requirements are met. Dividends we pay with respect to the ordinary shares generally will be qualified dividend income. Each non-corporate US holder should consult their own tax advisor regarding the possible applicability of the reduced tax rate and the related restrictions and special rules. Dividends paid by us constitute ordinary income that must generally be included in income when actually or constructively received. Such dividends will not be eligible for the dividends-received deduction generally allowed to corporate shareholders with respect to dividends received from US corporations. The amount of the dividend that you must include in your income as a US holder will be the US dollar value of the Australian dollar payments made, determined at the spot Australian dollar/US dollar rate on the date the dividend distribution is included in your income, regardless of whether the payment is in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. This gain or loss generally will be income from sources within the US for foreign tax credit limitation purposes. Distributions on an ordinary share in excess of current and accumulated earnings and profits, as determined for US federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in such ordinary share and thereafter as capital gain. Subject to certain limitations, Australian tax withheld in accordance with the Tax Treaty and paid over to Australia may be claimed as a foreign tax credit against your US federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to a preferential tax rate. A US holder that does not elect to claim a US foreign tax credit for Australian income tax withheld may instead claim a deduction for such withheld tax, but only for a taxable year in which the US holder elects to do so with respect to all non- US income taxes paid or accrued in such taxable year. Dividends paid by us generally will be income from sources outside the US for foreign tax credit limitation purposes. Under the foreign tax credit rules, dividends will, depending on your circumstances, be ‘passive category’ or ‘general category’ income for purposes of computing the foreign tax credit. The rules relating to US foreign tax credits are very complex, and each US holder should consult its own tax adviser regarding the application of such rules. Taxation of capital gains If you sell or otherwise dispose of your ordinary shares, you will generally recognise a capital gain or loss for US federal income tax purposes equal to the difference between the US dollar value of the amount that you realise and your tax basis, determined in US dollars, in your ordinary shares. A capital gain of a non-corporate US holder is generally taxed at a reduced rate if the holder has a holding period greater than one year. The deductibility of capital losses is subject to limitations. Such capital gain or loss generally will be income from sources within the US, for foreign tax credit limitation purposes. Medicare tax Beginning in 2013, in addition to regular US federal income tax, certain US holders that are individuals, estates or trusts (and possibly certain foreign estates or trusts with US beneficiaries) are subject to a 3.8% tax on all or a portion of their net investment income, which may include all or a portion of their dividend income and net gain from the disposition of their ordinary shares. Passive foreign investment company considerations We believe that we will not be treated as a passive foreign investment company (PFIC) for US federal income tax purposes, and this discussion assumes we are not a PFIC. However, the determination as to whether we are a PFIC is made annually at the end of each taxable year and therefore could change. If we were to be treated as a PFIC, a US holder of ordinary shares could be subject to certain adverse tax consequences. Disclosure requirements for specified foreign financial assets Individual US holders (and certain US entities specified in US Internal Revenue Service (IRS) guidance) who, during any taxable year, hold any interest in any specified foreign financial asset, generally will be required to file with their US federal income tax returns certain information on IRS Form 8938 if the aggregate value of all such assets exceeds certain specified amounts. ‘Specified foreign financial asset’ generally includes any financial account maintained with a non-US financial institution and may also include the ordinary shares if they are not held in an account maintained with a financial institution. Substantial penalties may be imposed, and the period of limitations on assessment and collection of US federal income taxes may be extended, in the event of a failure to comply. US holders should consult their own tax advisers as to the possible application to them of this filing requirement. Information reporting and backup withholding Under certain circumstances, information reporting and/or backup withholding may apply to US holders with respect to payments on or the proceeds from the sale, exchange or other disposition of the ordinary shares, unless an applicable exemption is satisfied. US holders that are corporations generally are excluded from information reporting and backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or credit against a US holder’s US federal income tax liability if the required information is furnished by the US holder on a timely basis to the IRS. 300 2013 WESTPAC GROUP ANNUAL REPORT ADDITIONAL INFORMATION OUR CONSTITUTION Overview We were incorporated in 1850 under the Bank of New South Wales Act, a special piece of legislation passed by the New South Wales Parliament at a time when there was no general companies’ legislation in Australia. On 23 August 2002, Westpac became registered under the Corporations Act 2001 (Cth) as a public company limited by shares. As part of the process of becoming a company regulated under the Corporations Act, shareholders adopted a new constitution at the AGM on 15 December 2000, which came into operation on 23 August 2002. Our constitution has been subsequently amended by shareholders on 15 December 2005, 13 December 2007 and 13 December 2012. Our objects and purposes Our constitution does not contain a statement of our objects and purposes. As a company regulated by the Corporations Act, we have the legal capacity and powers of an individual both within and outside Australia, and all the powers of a body corporate, including the power to issue and cancel shares, to issue debentures, to distribute our property among our equity holders (either in kind or otherwise), to give security by charging our uncalled capital, to grant a floating charge over our property and to do any other act permitted by any law. Directors’ voting powers Under clause 9.11(a) of our constitution, subject to complying with the Corporations Act regarding disclosure of and voting on matters involving material personal interests, our Directors may: a. hold any office or place of profit in our company, except that of auditor; b. hold any office or place of profit in any other company, body corporate, trust or entity promoted by our company or in which it has an interest of any kind; c. enter into any contract or arrangement with our company; d. participate in any association, institution, fund, trust or scheme for past or present employees or directors of our company or persons dependent on or connected with them; e. act in a professional capacity (or be a member of a firm that acts in a professional capacity) for our company, except as auditor; and f. participate in, vote on and be counted in a quorum for any meeting, resolution or decision of the Directors and be present at any meeting where any matter is being considered by the Directors. Under clause 9.11(b) of our constitution, a Director may do any of the above despite the fiduciary relationship of the Director’s office: a. without any liability to account to our company for any direct or indirect benefit accruing to the Director; and b. without affecting the validity of any contract or arrangement. Under the Corporations Act, however, a Director who has a material personal interest in any matter to be considered at any Board meeting must not be present while the matter is being considered or vote on the matter, unless the other Directors resolve to allow that Director to be present and vote or a declaration is made by ASIC permitting that Director to participate and vote. These restrictions do not apply to a limited range of matters set out in section 191(2) of the Corporations Act, where the Director’s interest: a. arises because the Director is a shareholder of the company in common with other shareholders; b. arises in relation to the Director’s remuneration as a Director of the company; c. relates to a contract the company is proposing to enter into that is subject to shareholder approval and will not impose obligations on the company if not approved by shareholders; d. arises merely because the Director is a guarantor or has given an indemnity or security for all or part of a loan (or proposed loan) to the company; e. arises merely because the Director has a right of subrogation in relation to a guarantee or indemnity referred to in (d); f. g. h. relates to a contract that insures, or would insure, the Director against liabilities the Director incurs as an officer of the company (but only if the contract does not make the company or related body corporate the insurer); relates to any payment by the company or a related body corporate in respect of certain indemnities permitted by the Corporations Act or any contract relating to such an indemnity; or is in a contract or proposed contract with, or for the benefit of, or on behalf of, a related body corporate and arises merely because the Director is a Director of that related body corporate. If there are not enough Directors to form a quorum for the board meeting because of Directors’ interests in a particular matter, a general meeting for shareholders may be called to consider the matter and interested Directors are entitled to vote on any proposal to requisition such a meeting. Under clause 9.7 of our constitution, the maximum aggregate amount of annual remuneration to be paid to our Non-executive Directors must be approved by our shareholders. This aggregate amount is paid to the Non-executive Directors in such manner as the Board from time to time determines. Directors’ remuneration is one of the exceptions under section 191 of the Corporations Act to the prohibitions against being present and voting on any matter in which a Director has a material personal interest. 4 2013 WESTPAC GROUP ANNUAL REPORT 301 Directors’ borrowing powers Clause 10.2 of our constitution empowers our Directors, as a Board, to exercise all the powers of Westpac to borrow or raise money, to charge any property or business of Westpac or all or any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of Westpac or of any other person. Such powers may only be changed by amending the constitution, which requires a special resolution (that is, a resolution passed by at least 75% of the votes cast by members entitled to vote on the resolution and for which notice has been given in accordance with the Corporations Act. Minimum number of Directors Our constitution requires that the minimum number of Directors is determined in accordance with the Corporations Act or other regulations. Currently the Corporations Act prescribes three as a minimum number of Directors and APRA governance standards specify five as the minimum number of Directors for APRA regulated entities. Westpac’s current number of Directors is above these prescribed minimums. Share rights The rights attaching to our ordinary shares are set out in the Corporations Act and in our constitution, and may be summarised as follows: a) Profits and dividends Holders of ordinary shares are entitled to receive such dividends on those shares as may be determined by our Directors from time to time. Dividends that are paid but not claimed may be invested by our Directors for the benefit of Westpac until required to be dealt with in accordance with any law relating to unclaimed monies. Our constitution requires that dividends be paid out of our profits. In addition, under the Corporations Act, Westpac must not pay a dividend unless our assets exceed our liabilities immediately before the dividend is declared and the excess is sufficient for payment of the dividend. In addition, the payment must be fair and reasonable to the company’s shareholders and must not materially prejudice our ability to pay our creditors. Subject to the Corporations Act, the constitution, the rights of persons (if any) entitled to shares with special rights to dividend and any contrary terms of issue of or applying to any shares, our Directors may determine that a dividend is payable, fix the amount and the time for payment and authorise the payment or crediting by Westpac to, or at the direction of, each shareholder entitled to that dividend. If any dividends are returned unclaimed, we are generally obliged, under the Banking Act 1959 (Cth), to hold those amounts as unclaimed monies for a period of three years. If at the end of that period the monies remain unclaimed by the shareholder concerned, we must submit an annual unclaimed money return to the Australian Securities and Investment Commission by 31 March each year containing the unclaimed money as at 31 December of the previous year. Upon such payment being made, we are discharged from further liability in respect of that amount. Our Directors may, before paying any dividend, set aside out of our profits such sums as they think proper as reserves, to be applied, at the discretion of our Directors, for any purpose for which the profits may be properly applied. Our Directors may carry forward so much of the profits remaining as they consider ought not to be distributed as dividends without transferring those profits to a reserve. The following restrictions apply to our ability to declare and/or pay dividends: (i) if the payment of the dividend would breach or cause a breach by us of applicable capital adequacy or other supervisory requirements of APRA. Currently, one such requirement is that a dividend should not be paid without APRA’s prior consent if payment of that dividend, after taking into account all other dividends (if any) paid on our shares and payments on more senior capital instruments, in the financial year to which they relate, would cause the aggregate of such dividend payments to exceed our after tax earnings for the financial year, as reflected in our relevant audited consolidated financial statements; and (ii) if, under the Banking Act 1959 (Cth), we are directed by APRA not to pay a dividend; (iii) if the declaration or payment of the dividend would result in us becoming insolvent; or (iv) if any interest payment, dividend, redemption payment or other distribution on certain Additional Tier 1 securities issued by the Group is not paid in accordance with the terms of those securities, we may be restricted from declaring and/or paying dividends on ordinary shares (and certain Additional Tier 1 securities). This restriction is subject to a number of exceptions. b) Voting rights Holders of our fully paid ordinary shares have, at general meetings (including special general meetings), one vote on a show of hands and, upon a poll, one vote for each fully paid share held by them. c) Voting and re-election of Directors Under our constitution, at each AGM one-third of eligible Directors (or if their number is not a multiple of three, the number nearest to one-third) and any other Director who has held office for three years or more since the Director’s last election, must retire from office. In determining the number of Directors to retire, no account is to be taken of a Director who holds office in order to fill a casual vacancy or the Managing Director. A retiring Director holds office until the conclusion of the meeting at which that Director retires but is eligible for re-election at the meeting. Under the ASX Listing Rules, no Executive or Non-executive Director of a listed entity, apart from the Managing Director, may continue to hold office, without offering himself or herself for re-election, past the third AGM following their appointment or three years, whichever is the longer. 302 2013 WESTPAC GROUP ANNUAL REPORT Under the Corporations Act, the election or re-election of each Director by shareholders at a general meeting of a public company must proceed as a separate item, unless the shareholders first resolve that the elections or re-elections may be voted on collectively. A resolution to allow collective voting in relation to elections or re-elections is effective only if no votes are cast against that resolution. Any resolution electing or re-electing two or more Directors in contravention of this requirement is void. d) Winding up Subject to any preferential entitlement of holders of preference shares on issue at the relevant time, holders of our ordinary shares are entitled to share equally in any surplus assets if we are wound up. e) Sinking fund provisions We do not have any class of shares on issue that is subject to any sinking fund provisions. Variation of rights attaching to our shares Under the Corporations Act, unless otherwise provided by the terms of issue of a class of shares, the terms of issue of a class of shares in Westpac can only be varied or cancelled in any way by a special resolution of Westpac and with either the written consent of our shareholders holding at least three quarters of the votes in that class of shares or with the sanction of a special resolution passed at a separate meeting of the holders of that class of shares. Convening general meetings Under our constitution, our Directors may convene and arrange to hold a general meeting of Westpac whenever they think fit and must do so if required to do so under the Corporations Act and ASX Listing Rules. Under the Corporations Act, our Directors must call and arrange to hold a general meeting of Westpac if requested to do so by our shareholders who hold at least 5% of the votes that may be cast at the general meeting or 100 shareholders entitled to vote at the meeting. Shareholders who hold at least 5% of the votes that may be cast at a general meeting may also call and arrange to hold a general meeting of Westpac at their own expense. At least 28 days notice must be given of a meeting of our shareholders. Written notice must be given to all shareholders entitled to attend and vote at the meeting. All ordinary shareholders are entitled to attend and, subject to the constitution and the Corporations Act, to vote at general meetings of Westpac. Limitations on securities ownership A number of limitations apply in relation to the ownership of our shares, and these are more fully described in the section ‘Limitations affecting security holders’. Change in control restrictions Restrictions apply under the Corporations Act, the Financial Sector (Shareholdings) Act 1998 (Cth) and the Foreign Acquisitions and Takeovers Act 1975 (Cth). For more detailed descriptions of these restrictions, refer to the sections ‘Limitations affecting security holders’, Foreign Acquisitions and Takeovers Act 1975, Financial Sector (Shareholdings) Act 1998, and Corporations Act 2001. ADDITIONAL INFORMATION Substantial shareholder disclosure There is no provision in our constitution that requires a shareholder to disclose the extent of their ownership of our shares. Under the Corporations Act, however, any person who begins or ceases to have a substantial holding of our shares must notify us within two business days after they become aware of that information. A further notice must be given to us if there is an increase or decrease of 1% in a person’s substantial holding. Copies of these notices must also be given to the ASX. A person has a substantial holding of our shares if the total votes attached to our voting shares in which they or their associates have relevant interests is 5% or more of the total number of votes attached to all our voting shares. For more details, refer to the section ‘Corporations Act 2001’. We also have a statutory right under the Corporations Act to trace the beneficial ownership of our shares by giving a direction to a shareholder, or certain other persons, requiring disclosure to us of, among other things, their own relevant interest in our shares and the name and address of each other person who has a relevant interest in those shares, the nature and extent of that interest and the circumstances that gave rise to that other person’s interest. Such disclosure must, except in certain limited circumstances, be provided within two business days after the direction is received. Australian Company and Business Numbers All Australian companies have a unique nine-digit identifier, referred to as an Australian Company Number (ACN), which must be included on public documents, eligible negotiable instruments and the company’s common seal. In addition, entities can apply for registration on the Australian Business Register and be allocated a unique eleven-digit identifier known as an Australian Business Number (ABN). For Australian companies, the last nine digits of their ABN are identical to their ACN. The ABN may be quoted on documents in lieu of the ACN. Our ACN is 007 457 141 and our ABN is 33 007 457 141. Documents on display We are subject to the disclosure requirements of the US Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file Annual Reports with, and furnish other information to, the United States SEC. These materials and other information furnished by us may be inspected and copied at the SEC's Conventional and Electronic Reading Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the SEC’s Conventional and Electronic Reading Room by calling the SEC in the United States at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Since April 2002, we have filed our reports on Form 20-F and have furnished other information to the SEC in electronic format which may be accessed through this website. 4 2013 WESTPAC GROUP ANNUAL REPORT 303 EXCHANGE RATES For each of the years indicated, the high, low, average and year-end noon buying rates1 for Australian dollars were: High Low Average3 Close (on 30 September)4 2014² 0.9705 0.9366 n/a n/a Year Ended 30 September 2012 2011 2013 2010 2009 1.0579 0.8901 0.9885 0.9342 (US$ per A$1.00) 1.0806 0.9453 1.0371 1.0388 1.1026 0.9594 1.0318 0.9744 0.9714 0.8172 0.9003 0.9640 0.8824 0.6073 0.7400 0.8824 For each of the months indicated, the high and low noon buying rates for Australian dollars were: October 2013² September 2013 Month August 2013 July 2013 June 2013 May 2013 High Low 1 The noon buying rate in New York City for cable transfers in Australian dollars as certified for customs purposes by the Federal Reserve Bank 0.9444 0.9055 0.9770 0.9165 0.9259 0.8957 0.9705 0.9366 1.0313 0.9608 (US$ per A$1.00) 0.9193 0.8901 of New York. 2 Through to 25 October 2013. On 25 October 2013, the noon buying rate was A$1.00 = US$0.9578. 3 The average is calculated by using the average of the exchange rates on the last day of each month during the period. 4 The noon buying rate at such date may differ from the rate used in the preparation of our consolidated financial statements at such date. Refer to Note 1(a)(vi) to the financial statements. 304 2013 WESTPAC GROUP ANNUAL REPORT INFORMATION FOR SHAREHOLDERS FINANCIAL CALENDAR Westpac Ordinary Shares (ASX code: WBC) Record date for final dividend Annual General Meeting Final dividend payable 14 November 20131 13 December 2013 19 December 2013 Financial Half Year end 31 March 2014 Interim results and dividend announcement 5 May 2014 Record date for interim dividend Interim dividend payable 16 May 20142,3 2 July 20143 Westpac Stapled Preferred Securities II (ASX Code: WBCPB) Record date for quarterly distribution 23 December 2013 Payment date for quarterly distribution 31 December 2013 Record date for quarterly distribution 21 March 2014 Payment date for quarterly distribution 31 March 2014 Record date for quarterly distribution 20 June 2014 Payment date for quarterly distribution 30 June 2014 Financial Year end 30 September 2014 Final results and dividend announcement 3 November 2014 Record date for quarterly distribution 22 September 2014 Payment date for quarterly distribution 30 September 2014 Record date for final dividend Annual General Meeting 14 November 20144,5 12 December 20146 Westpac Subordinated Notes (ASX code: WBCHA) Record date for quarterly interest payment 14 February 2014 19 December 20144 Final dividend payable 1 Record date for 2013 final dividend in New York – 13 November 2013. 2 Record date for 2014 interim dividend in New York – 15 May 2014. 3 Dates will be confirmed at the time of announcing the 2014 interim results. 4 Dates will be confirmed at the time of announcing the 2014 final results. 5 Record date for 2014 final dividend in New York – 13 November 2014. 6 Details regarding the location of this meeting and the business to be dealt with will be contained in the separate Notice of Meeting sent to shareholders in November 2014. Westpac Capital Notes (ASX code: WBCPD) Payment date for quarterly interest payment 24 February 2014* Record date for quarterly interest payment 15 May 2014 Payment date for quarterly interest payment 23 May 2014 Record date for quarterly interest payment 15 August 2014 Payment date for quarterly interest payment 25 August 2014* Record date for quarterly distribution 28 February 2014 Record date for quarterly interest payment 14 November 2014 Payment date for quarterly distribution 11 March 2014* Record date for quarterly distribution 30 May 2014 Payment date for quarterly distribution 10 June 2014* Payment date for quarterly interest payment 24 November 2014* Westpac Subordinated Notes II (ASX code: WBCHB) Record date for quarterly distribution 29 August 2014 Record date for quarterly interest payment 14 February 2014 Payment date for quarterly distribution 8 September 2014 Record date for quarterly distribution 28 November 2014 Payment date for quarterly distribution 8 December 2014 Westpac Convertible Preference Shares (ASX Code: WBCPC) Record date for semi-annual dividend 21 March 2014 Payment date for semi-annual dividend 31 March 2014 Payment date for quarterly interest payment 24 February 2014* Record date for quarterly interest payment 14 May 2014 Payment date for quarterly interest payment 22 May 2014 Record date for quarterly interest payment 14 August 2014 Payment date for quarterly interest payment 22 August 2014 Record date for semi-annual dividend 22 September 2014 Record date for quarterly interest payment 14 November 2014 Payment date for semi-annual dividend 30 September 2014 * Next business day when a payment date falls on a non-business day. Payment date for quarterly interest payment 24 November 2014* 4 ANNUAL GENERAL MEETING The Westpac Annual General Meeting (AGM) will be held in Plenary Hall 2 at the Melbourne Convention Centre, 1 Convention Centre Place, South Wharf, Melbourne, on Friday, 13 December 2013, commencing at 10:00 am. The AGM will be webcast live on the internet at www.westpac.com.au/investorcentre and an archived version of the webcast will be placed on the website to enable the AGM proceedings to be viewed at a later time. 2013 WESTPAC GROUP ANNUAL REPORT 305 USEFUL INFORMATION Key sources of information for shareholders We report our full year performance to shareholders, in late October or early November, in two forms: an Annual Review and Sustainability Report, and an Annual Report. We also report half-yearly to shareholders via a newsletter, in conjunction with the dividend payments in July and December. Electronic communications Shareholders can elect to receive the following communications electronically:  Annual Review and Annual Report;  Dividend statements when paid by direct credit or via Westpac’s Dividend Reinvestment Plan (DRP);  Notices of Meetings and proxy forms; and  Shareholder Newsletters and major company announcements. Shareholders who wish to register their email address should go to www.westpac.com.au/investorcentre and click on ‘Register your email’ under ‘Shareholder News’, or contact the Westpac share Registrar. For Registrar contact details see opposite. Online information Australia Westpac’s internet site www.westpac.com.au provides information for shareholders and customers, including:    access to internet banking and online investing services; details on Westpac’s products and services; company history, results, economic updates, market releases and news; and corporate responsibility and Westpac in the community activities.  Investors can short cut to the Investor Centre at www.westpac.com.au/investorcentre. The Centre includes the current Westpac share price and charting, and links to the latest ASX announcements and Westpac’s share Registrars’ websites. New Zealand Westpac’s New Zealand internet site www.westpac.co.nz provides:   access to internet banking services; details on products and services, including a comprehensive home buying guide; economic updates, news and information, key financial results; and sponsorships and other community activities.   Stock exchange listings Westpac ordinary shares are listed on:  Australian Securities Exchange, (code WBC);  New York Stock Exchange (NYSE), as American Depositary Shares, (code WBK); and  New Zealand Exchange Limited, (code WBC). Westpac Investor Relations Information other than that relating to your shareholding can be obtained from: Westpac Investor Relations Level 20, 275 Kent Street Sydney NSW 2000 Australia Telephone: +61 2 8253 3143 Facsimile: +61 2 8253 1207 Email: investorrelations@westpac.com.au Share registrars For information about your shareholding or to notify a change of address etc., you should contact the appropriate share Registrar. Please note that, in Australia, broker sponsored holders are required to contact their broker to amend their address. Australia – Ordinary shares on the main register Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Postal address: Locked Bag A6015, Sydney South NSW 1235 Website: www.linkmarketservices.com.au Shareholder enquiries: Telephone: 1800 804 255 (toll free within Australia) International: +61 1800 804 255 Facsimile: +61 2 9287 0303 Email: westpac@linkmarketservices.com.au New Zealand – Ordinary shares on the New Zealand branch register Link Market Services Limited Level 16, Brookfields House 19 Victoria Street West Auckland 1142, New Zealand Postal address: P.O. Box 91976, Auckland 1030, New Zealand Website: www.linkmarketservices.co.nz Shareholder enquiries: Telephone: 0800 002 727 (toll free within New Zealand) International: +64 9 375 5998 Facsimile: +64 9 375 5990 Email: lmsenquiries@linkmarketservices.com Depositary in USA for American Depositary Shares (ADS) 1 Listed on New York Stock Exchange (code WBK - CUSIP 961214301) The Bank of New York Mellon PO Box 358516 Pittsburgh, PA 15252-8516, USA ADS holder enquiries: Telephone: 1-888-BNY-ADRS (1-888-269-2377) (toll free number for domestic callers) International: +1 201 680 6825 Email: shrrelations@bnymellon.com Website: www.bnymellon.com/shareowner 1 Each ADS represents one fully paid ordinary share. 306 2013 WESTPAC GROUP ANNUAL REPORT GLOSSARY OF ABBREVIATIONS AND DEFINED TERMS Australian Accounting Standards Board Corporations Act Australian Corporations Act 2001 AASB ABN ABS ACCC ACN ADI ADRs ADS AFS AGAAP AGM A-IFRS AIRB ALCO ALM AMA ANZSIC APRA APS ASIC ASX ASXCGC ATMs ATO AUSTRAC AUD BAC BCBS BankSA BRMC BTFG BTIM CAD CAPs Australian Business Number Asset-backed securities Australian Competition and Consumer Commission Australian Company Number Authorised Deposit-taking Institution American Depositary Receipts American Depositary Shares Australian Financial Services Australian Generally Accepted Accounting Principles Annual General Meeting Australian Accounting Standards Advanced Internal Ratings Based Westpac Group Asset & Liability Committee Asset and Liability Management Advanced Measurement Approach Australian and New Zealand Standard Industrial Classification Australian Prudential Regulation Authority Australian Prudential Standard Australian Securities and Investments Commission Australian Securities Exchange ASX Limited’s Corporate Governance Council Automatic teller machines Australian Taxation Office Australian Transaction Reports and Analysis Centre Australian dollar Board Audit Committee Basel Committee on Banking Supervision Bank of South Australia Board Risk Management Committee BT Financial Group Australia BT Investment Management Limited Canadian dollar Collectively assessed provisions Capital Trust III Westpac Capital Trust III Capital Trust IV Westpac Capital Trust IV Cash EPS Cash Earnings per share Cash EPS CAGR Compound Annual Growth in Cash EPS CCCFA CCE CDO CDS CEO CEOPP CEO RSP CFO CFTC CGU CHF CLF CLO Credit Contracts and Consumer Finance Act 2003 Commodity, Carbon and Energy trading Collateralised debt obligations Credit default swap Chief Executive Officer Chief Executive Officer Performance Plan Chief Executive Officer Restricted Share Plan Chief Financial Officer Commodity Futures Trading Commission Cash-Generating Unit Swiss franc Committed Liquidity Facility Collateralised loan obligations COSO CPM CREDCO CRG CRO CVA DFAT Dodd-Frank Act DRP D-SIBS DVA EAD EEO Act EFTPOS EMIR EPS ESC ESG ESP ESS EUR FATCA FFIs FMCA FMTR FOFA FSB FTE FUA FUM Committee of Sponsoring Organizations of the Treadway Commission Credit Portfolio Management Westpac Group Credit Risk Committee Customer Risk Grade Chief Risk Officer Credit valuation adjustment Department of Foreign Affairs and Trade Dodd-Frank Wall Street Reform and Consumer Protection Act Dividend Reinvestment Plan Domestic Systemically Important Banks Debit valuation adjustment Exposure at Default Energy Efficiency Opportunities Act 2006 (Cth) Electronic Funds Transfer Point Of Sale European Market Infrastructure Regulations Earnings per share Energy Saving Certificate Environmental, social and governance Employee Share Plan Energy Savings Scheme European Union euro Foreign Account Tax Compliance Act Foreign Financial Institutions Financial Markets Conduct Act Financial Markets and Treasury Risk Future of Financial Advice Financial Stability Board Full time equivalent employees Funds under administration Funds under management Funding Trust III Tavarua Funding Trust III Funding Trust IV Tavarua Funding Trust IV FX GBP GHG G-SIBS Hastings HKD IAPs IASB IBA ICAA ICAAP IFRS IGA IRS IOSCO IRRBB IRS ISDA JPY Foreign Exchange British pound Greenhouse gas Global Systemically Important Banks Hastings Funds Management Limited Hong Kong dollar Individually Assessed Provisions International Accounting Standards Board US International Banking Act of 1978 Institute of Chartered Accountants in Australia Internal Capital Adequacy Assessment Process International Financial Reporting Standards Intergovernmental Agreement Internal Revenue Service International Organization of Securities Commission Interest Rate Risk in the Banking Book Internal Revenue Service International Swaps and Derivatives Association Japanese Yen 4 2013 WESTPAC GROUP ANNUAL REPORT 307 SSCM St.George STI The Group TOFA 2003 TPS 2004 TPS 2006 TPS TSR UKSS UNSC US USD Sustainable Supply Chain Management St.George Bank Limited and its subsidiaries, unless context clearly means just St.George Bank Limited Short-term incentive Westpac Banking Corporation Group Taxation of financial arrangements rules contained in the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 Trust Preferred Securities 2003 Trust Preferred Securities 2004 Trust Preferred Securities 2006 Total Shareholder Return UK Staff Superannuation Scheme United Nations Security Council United States American dollar US Federal Reserve US Federal Reserve System VaR WBC Value at Risk Westpac Banking Corporation Westpac CN Westpac Capital Notes Westpac CPS Westpac Convertible Preference Shares WGP Westpac RBB Westpac SN II WH&S WIB WNZL WNZS WPP WRP WSNZL WNZSHL ZAR Westpac Group Plan Westpac Retail & Business Banking Westpac Subordinated Notes II Workplace Health and Safety Westpac Institutional Bank Westpac New Zealand Limited Westpac New Zealand Superannuation Scheme Westpac Performance Plan Westpac Reward Plan Westpac Securities NZ Limited Westpac NZ Securitisation Holdings Limited South African rand JOHCM J O Hambro Capital Management Key management personnel Liquidity Coverage Ratio Loss given default Life Insurance Actuarial Standard Board London InterBank Offer Rate Long-term incentive Lost time injury frequency rate Loan to value ratio Westpac Group Market Risk Committee Markets in Financial Instruments Directive Moody’s Investors Service Net interest income-at-risk National Carbon Offset Standard Net interest income Norwegian krone Net Promoter Score Net Stable Funding Ratio New York Stock Exchange New Zealand New Zealand dollar New Zealand Stock Exchange New Zealand Exchange Open Bank Resolution Office of the Comptroller of the Currency Office of Foreign Assets Control Westpac Group Operational Risk and Compliance Committee Over the counter Probability of Default Passive foreign investment company Papua New Guinea PricewaterhouseCoopers RAMS Home Loans Reserve Bank of Australia Reserve Bank of New Zealand Renewable Energy Certificates Residential Mortgage Backed Securities Westpac Group Remuneration Oversight Committee Restricted Share Plan Standard & Poor’s US Securities and Exchange Commission Singapore dollar Systemically Important Financial Institutions Strategic Investment Priorities, an investment portfolio of 15 major strategic programs aimed at delivering business and technology capabilities across the Group to improve the customer experience Small to medium enterprises Self Managed Super Fund Senior Officers’ Share Purchase Scheme Sarbanes Oxley Act of 2002 Stapled Preferred Securities Special purpose vehicles Settlement Residue Auctions KMP LCR LGD LIASB LIBOR LTI LTIFR LVR MARCO MiFID II Moody’s NaR NCOS NII NOK NPS NSFR NYSE NZ NZD NZSX NZX OBR OCC OFAC OPCO OTC PD PFIC PNG PwC RAMS RBA RBNZ RECs RMBS ROC RSP S&P SEC SGD SIFIs SIPs SME SMSF SOSPS SOX SPS SPVs SRAs 308 2013 WESTPAC GROUP ANNUAL REPORT NOTES 4 2013 WESTPAC GROUP ANNUAL REPORT 309 NOTES 310 2013 WESTPAC GROUP ANNUAL REPORT NOTES 4 2013 WESTPAC GROUP ANNUAL REPORT 311 NOTES 312 2013 WESTPAC GROUP ANNUAL REPORT CONTACT US WESTPAC GROUP Head Offi ce 275 Kent Street, Sydney NSW 2000 Australia Tel: +61 2 9374 7113 Facsimile: +61 2 8253 4128 International payments Tel: +61 2 9806 4032 Email: online@westpac.com.au www.westpac.com.au/westpacgroup RAMS RAMS Financial Group Pty Ltd Level 7, 17 York Street Sydney NSW 2000 Australia Mail: GPO Box 4008, Sydney NSW 2001 Australia Tel: +61 2 8218 7000 Fax: +61 2 8218 7171 Email: communications@rams.com.au www.rams.com.au WESTPAC NEW ZEALAND 16 Takutai Square, Auckland 1010 New Zealand Tel: +64 9 912 8000 Email: customer_solutions@ westpac.co.nz www.westpac.co.nz AUSTRALIAN FINANCIAL SERVICES Westpac Retail & Business Banking Tel: 132 032 – Consumer Tel: 132 142 – Business From outside Australia: +61 2 9293 9270 Email: online@westpac.com.au www.westpac.com.au BT Financial Group 275 Kent Street, Sydney NSW 2000 Australia Tel: 132 135 From outside Australia: +61 2 8222 7154 Email: customer.relations@ btfi nancialgroup.com www.bt.com.au St.George Bank St.George House, 4–16 Montgomery Street Kogarah NSW 2217 Australia Mail: Locked Bag 1, Kogarah NSW 1485 Australia Tel: +61 2 9236 1111 Facsimile: +61 2 9952 1000 Email: stgeorge@stgeorge.com.au www.stgeorge.com.au Bank of Melbourne Level 8, 530 Collins Street Melbourne VIC 3000 Australia Tel: 13 22 66 From outside Australia: +61 3 9982 4186 Facsimile: +61 3 9296 4371 Email: info@bankofmelbourne.com.au www.bankofmelbourne.com.au BankSA 97 King William Street, Adelaide SA 5000 Australia Mail: GPO Box 399, Adelaide SA 5001 Australia Tel: 131 376 From outside Australia: +61 2 9845 4772 Email: banksa@banksa.com.au www.banksa.com.au WESTPAC INSTITUTIONAL BANK Tel: 132 032 Facsimile: +61 2 8254 6938 Email: institutionalbank@westpac.com.au www.westpac.com.au Institutional Bank Locations Hong Kong India – Mumbai People’s Republic of China – Beijing – Shanghai Republic of Indonesia – Jakarta Republic of Singapore – Singapore United States of America – New York United Kingdom – London Westpac Pacifi c Tel: 132 032 From outside Australia: +61 2 9293 9270 Facsimile: +61 2 8253 1193 Email: online@westpac.com.au www.westpac.com.au/pacifi c Pacifi c Banking Locations Cook Islands – Rarotonga Fiji – Suva Papua New Guinea – Port Moresby Samoa – Apia Solomon Islands – Honiara Tonga – Nuku’alofa Vanuatu – Port Vila Global locations Specifi c contact details for the many locations globally can be located on our website at www.westpac.com.au. Select ‘About Westpac’ from the top menu bar, then ‘Global Locations’ from the ‘Explore’ menu. Share Registrar Link Market Services Limited 680 George Street Sydney NSW 2000 Australia Mail: Locked Bag A6015, Sydney South NSW 1235 Tel: +61 1800 804 255 Facsimile: +61 2 9287 0303 Email: westpac@linkmarketservices. com.au www.linkmarketservices.com.au Sustainability Contacts For further information on the Westpac Group’s sustainability policies and performance: Email: corporateresponsibility@ westpac.com.au www.westpac.com.au/ corporateresponsibility Tel: +61 2 8254 8488 For information on our compliance with International Agreements, including the United Nations Global Compact and Declaration on Human Rights, contact the General Manager of Group Corporate Aff airs & Sustainability via the details above. www.westpac.com.au The Westpac Group Annual Report 2013 is printed on PEFC certifi ed paper. Compliance with the certifi cation criteria set out by the Programme for the Endorsement of the Forest Certifi cation (PEFC) means that the paper fi bre is sourced from sustainable forests. 

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