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Bank of MontrealWhat’s important to you is important to us. 2015 Westpac Group Annual Report It’s personal. It’s more than being a bank—becoming a world renowned service organisation is more than knowing and serving customers. It’s about understanding what matters to them, how we can help, and make a real difference in their lives. Getting that right is deeply personal to every one of our 40,000 people at the Westpac Group. What’s important to you is important to us. 2015 Westpac Group Annual Review & Sustainability Report What’s important to you is important to us. 2015 Westpac Group Annual Report What’s important to you is important to us. 2015 Westpac Group Sustainability Performance Report 2015 Annual Review & Sustainability Report 2015 Annual Report 2015 Sustainability Performance Report The Westpac Group Annual Review & Sustainability Report, the Westpac Group Annual Report, and the Westpac Group Sustainability Performance Report represent Westpac’s extended reporting framework. 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 the inside back cover, or visit www.westpac.com.au/investorcentre Westpac Banking Corporation ABN 33 007 457 141 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 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 risk and compliance risk Other risks Other Westpac business information Section 3 Financial statements Notes to the financial statements Statutory statements Section 4 Shareholding information Additional information Information for shareholders Glossary of abbreviations and defined terms Contact us 2 3 4 7 14 14 17 19 21 22 28 29 43 71 72 73 75 77 82 86 88 90 91 92 95 96 97 99 99 105 105 106 107 108 109 112 115 116 122 249 255 256 266 270 273 inside back cover 1 2 3 4 2015 Westpac Group Annual Report 1 Performance highlights Net profit after tax $8,012 million, up 6% Dividends $1.87, up 3%2 Net profit after tax1 ($m) Dividends per ordinary share (cents) Special dividends 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 – 2 1 0 , 8 1 6 5 , 7 1 9 9 , 6 6 4 3 , 6 1 5 7 , 6 6 3 9 , 5 1 5 4 , 3 9 5 8 , 3 6 4 4 , 3 1 7 0 , 3 06 07 08 09 10 11 12 13 14 15 200 180 160 140 120 100 80 60 40 20 – 0 2 4 7 1 2 8 1 7 8 1 6 6 1 6 5 1 2 4 1 1 3 1 9 3 1 6 1 1 6 1 1 06 07 08 09 10 11 12 13 14 15 Cash earnings $7,820 million, up 3% Returns 15.8% Cash earnings3,4,5 ($m) Cash earnings to average ordinary equity3,4,5 (%) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 – 8 2 6 , 7 0 2 8 , 7 3 6 0 , 7 1 0 3 , 6 4 6 5 , 6 9 7 8 , 5 7 4 0 , 7 5 0 5 , 3 5 7 6 , 4 9 7 0 , 3 06 07 08 09 10 11 12 13 14 15 25 20 15 10 5 – 0 . 3 2 8 . 3 2 3 . 2 2 1 . 6 1 0 . 6 1 4 . 5 1 9 . 5 1 4 . 6 1 8 . 5 1 0 . 4 1 06 07 08 09 10 11 12 13 14 15 Cash earnings per ordinary share, up 2% Cash earnings per ordinary share3,4,5 (cents) 300 250 200 150 100 50 – 4 . 9 8 1 3 . 8 9 1 2 . 7 6 1 7 . 3 6 1 3 . 9 0 2 8 . 4 1 2 8 . 7 9 1 4 . 5 4 2 5 . 9 4 2 8 . 7 2 2 06 07 08 09 10 11 12 13 14 15 2015 2014 % change 2015 / 2014 Reported earnings Net profit after tax1 ($m) Earnings per share (cents) Dividends per share (cents) Return on equity6 (%) Expense to income ratio (%) Common Equity Tier 1 capital ratio (%) Asset quality ratio7 (%) Cash basis3,5 Cash earnings ($m) Cash earnings per share (cents) Cash return on equity6 (%) Economic profit8 ($m) 8,012 256.3 187 16.2 43.8 9.5 1.8 7,820 249.5 15.8 4,418 7,561 243.7 182 16.3 42.9 9.0 2.5 7,628 245.4 16.4 4,491 6% 5% 3% (4bps) 90bps 53bps (69bps) 3% 2% (57bps) (2%) 1 Net profit attributable to ordinary equity holders. 2 Excluding special dividends but including dividends determined in 2015. 3 The adjustments to our reported results to derive cash earnings are described in Note 2 of our 2015 financial statements. 4 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 Westpac’s 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. 5 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. 6 Return on average ordinary equity. 7 Net impaired assets to equity and collectively assessed provisions. 8 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 5 of Westpac’s Full Year 2015 Results (incorporating the requirements of Appendix 4E) lodged with the ASX on 2 November 2015 (the ‘ASX Announcement’). 2 2015 Westpac Group Annual Report Performance highlights Chairman’s report Chief Executive Officer’s report Information on Westpac Corporate governance Directors’ report Remuneration Report 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 – 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 – 300 250 200 150 100 50 – Performance highlights Net profit after tax $8,012 million, up 6% Dividends $1.87, up 3%2 Net profit after tax1 ($m) Dividends per ordinary share (cents) Special dividends 2 1 0 , 8 1 6 5 , 7 1 9 9 , 6 6 4 3 , 6 1 5 7 , 6 6 3 9 , 5 0 2 4 7 1 2 8 1 7 8 1 6 6 1 6 5 1 2 4 1 1 3 1 9 3 1 6 1 1 6 1 1 1 5 4 , 3 9 5 8 , 3 6 4 4 , 3 1 7 0 , 3 06 07 08 09 10 11 12 13 14 15 06 07 08 09 10 11 12 13 14 15 Cash earnings $7,820 million, up 3% Returns 15.8% Cash earnings3,4,5 ($m) Cash earnings to average ordinary equity3,4,5 (%) 8 2 6 , 7 0 2 8 , 7 3 6 0 , 7 1 0 3 , 6 4 6 5 , 6 9 7 8 , 5 7 4 0 , 7 5 0 5 , 3 5 7 6 , 4 9 7 0 , 3 0 . 3 2 8 . 3 2 3 . 2 2 1 . 6 1 0 . 6 1 4 . 5 1 9 . 5 1 4 . 6 1 8 . 5 1 0 . 4 1 06 07 08 09 10 11 12 13 14 15 06 07 08 09 10 11 12 13 14 15 200 180 160 140 120 100 80 60 40 20 – 25 20 15 10 5 – Cash earnings per ordinary share, up 2% Cash earnings per ordinary share3,4,5 (cents) 4 . 9 8 1 3 . 8 9 1 2 . 7 6 1 7 . 3 6 1 3 . 9 0 2 8 . 4 1 2 8 . 7 9 1 4 . 5 4 2 5 . 9 4 2 8 . 7 2 2 06 07 08 09 10 11 12 13 14 15 2015 2014 2015 / 2014 % change Reported earnings Net profit after tax1 ($m) Earnings per share (cents) Dividends per share (cents) Return on equity6 (%) Expense to income ratio (%) Common Equity Tier 1 capital ratio (%) Asset quality ratio7 (%) Cash basis3,5 Cash earnings ($m) Cash earnings per share (cents) Cash return on equity6 (%) Economic profit8 ($m) 8,012 256.3 7,561 243.7 187 16.2 43.8 9.5 1.8 7,820 249.5 15.8 4,418 182 16.3 42.9 9.0 2.5 7,628 245.4 16.4 4,491 6% 5% 3% (4bps) 90bps 53bps (69bps) 3% 2% (57bps) (2%) 1 Net profit attributable to ordinary equity holders. 2 Excluding special dividends but including dividends determined in 2015. 3 The adjustments to our reported results to derive cash earnings are described in Note 2 of our 2015 financial statements. 4 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 Westpac’s 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. 5 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. 6 Return on average ordinary equity. 7 Net impaired assets to equity and collectively assessed provisions. 8 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 5 of Westpac’s Full Year 2015 Results (incorporating the requirements of Appendix 4E) lodged with the ASX on 2 November 2015 (the ‘ASX Announcement’). 2 2015 Westpac Group Annual Report Performance highlights Chairman’s report Chief Executive Officer’s report Information on Westpac Corporate governance Directors’ report Remuneration Report 1 Chairman’s report Chairman’s report Lindsay Maxsted Chairman Positioned for the future In another period of significant change and development, Westpac has continued to deliver value for shareholders . The 2015 financial year has been another significant period for Westpac. We appointed a new CEO, refreshed the Group’s strategy, and proactively responded to regulatory change. At the same time we have supported shareholders by enhancing the value of the franchise and increasing dividends. In February 2015 Brian Hartzer commenced as our 25th CEO, taking the reins from Gail Kelly who had successfully led your company for the previous seven years. Gail was a great leader and left the organisation in very good shape. Choosing a new CEO is one of the most important roles of a Board and we were very pleased to appoint such a strong executive with the skills and experience to take Westpac into its third century. In selecting a new CEO, the Board set clear criteria and undertook a global search. I would like to share some of our considerations with shareholders as it reinforces how the Board thinks about Westpac’s future, and the areas we want to develop. At the top of our criteria list, the Board was looking for a seasoned banking executive with excellent leadership skills. While it may appear obvious, it is important to highlight that banking is a complex industry and the Board strongly believes that deep banking experience is essential to run one of the largest banks in the world. On strategy, the Board is committed to our customer-centric approach, and we were looking for an executive who would further develop this strategy while recognising the significant change facing our industry. Accordingly we sought a CEO who was alert to the issues and had the capability to proactively respond and turn opportunity into advantage. Brian Hartzer met this criteria, particularly with his strong grasp of digital technologies and how they are impacting our industry. This, combined with his success in managing our Australian Financial Services division for the prior three years, made Brian the clear choice for CEO. Performance summary The Group has had another solid year in 2015. Cash earnings1 were $7,820 million, an increase of 3% over the previous year. The company uses cash earnings as a key metric for determining dividends and believes it is the most appropriate measure for assessing financial performance. Statutory net profit in 2015 increased 6% to $8,012 million. This year, the Group reported some significant infrequent items including a gain on the partial sale of BT Investment Management (BTIM), a tax benefit associated with our acquisition of select Australian businesses of Lloyds Bank, and costs from changes to the accounting of technology investment spending. Because of their size and nature they were excluded from the calculation of cash earnings. Cash earnings growth was supported by a solid operating performance across all divisions which led to a 4% rise in operating revenue, and a 3% lift in core earnings (profit before impairment charges). The Group’s key financial metrics also remained strong with a cash return on equity of 15.8%, net interest margin of 2.08% and an expense to income ratio of 42%. This latter efficiency metric places Westpac as one of the more efficient banks in the world. Strength remains a hallmark of Westpac with all dimensions improving. A hallmark of Westpac is strength and this continued in 2015 with all dimensions of the business improving, including: asset quality has further improved with impaired assets declining 19%, and delinquent accounts remaining low; capital levels have significantly lifted; and funding and liquidity remain strong with total liquid assets reaching $136 billion and the liquidity coverage ratio reaching 121%. 1 Results refer to cash earnings unless otherwise stated. For an explanation of cash earnings see footnote 3 of the ‘Performance Highlights’ section of Westpac’s Annual Report. Capital Dividends Following the release of the final report from the Financial The Group’s solid financial performance has supported a System Inquiry (FSI) in late 2014, capital has been a hot further increase in dividends through the year. The 2015 topic across the industry. Among a range of considerations, final dividend was 94 cents per share fully franked, and the FSI report recommended that Australian banks needed combined with the 2015 interim dividend, total dividends for to be ‘unquestionably strong’ and to achieve that they would the year were 187 cents per share, an increase of 3%. need to increase capital. We responded, raising capital early and aiming to lift our Comparing dividends paid to the share price at 30 September 2015 of $29.70, that translates to a yield of 6.3%. capital ratios to the upper end of our preferred range. That While dividends have increased, because of our capital preferred range for our common equity tier 1 (CET1) capital initiatives, the path of increases has slowed with a one cent ratio is between 8.75 and 9.25%. This saw Westpac raise $2 billion of equity with our 2015 first half result. We also raised a further $0.5 billion from the per share rise over the last two halves. We continue to pay out a high portion of profits as dividends to distribute franking credits that are valued by shareholders. partial sale of our shareholding in BTIM. These initiatives It is important to highlight that despite increasing capital, we contributed to increasing our CET1 capital ratio to 9.5% by have maintained our dividend approach of steadily September 2015 and above our preferred range. increasing dividends within a sustainable pay-out ratio. In July this year APRA responded to the FSI report, including announcing changes to the calculation of risk While on the topic of dividends, a number of shareholders have written to me following suggestions that Australia’s weighted assets for Australian mortgages. That change is to imputation system should be reviewed. apply from 1 July 2016. This was significant, increasing the capital we need to support our Australian mortgage portfolio by over 50%. I am on the record as being a strong advocate of Australia’s imputation system. There are a number of reasons for this view but in summary Australia’s imputation system: removes The size of this required increase led us to announce a fully the double taxation of company profits; encourages underwritten pro rata Entitlement Offer to raise appropriate balance sheet settings by companies; reduces approximately $3.5 billion of additional equity. We decided to the incentive for companies to minimise tax; and it supports raise capital via an Entitlement Offer as we felt this was the the efficient allocation of resources across the economy. It is fairest alternative for shareholders. At the time of writing, the good tax policy and good for our economy and we will Entitlement Offer had not been finalised but feedback has continue to make our views well known. been very positive. The institutional offer was particularly well supported with approximately 95% of institutional entitlements being taken up. In aggregate, and following the Entitlement Offer, we will have topped up our capital by around $6 billion this calendar year, with the majority raised from existing shareholders. The Board and I greatly appreciate the very strong support from shareholders for these initiatives. Changes in the capital required by Australian banks is part of a global debate on how much capital banks should hold. In essence, regulators are aiming to avoid a repeat of the Global Financial Crisis. This is a worthy aim, and we are advocates for strong banking systems that are able to withstand crisis. Australia has a very strong banking sector, recognised by many as one of the strongest in the world, but remaining strong requires constant vigilance as the next source of stress is usually different from the last. Regulatory objectives to strengthen the banks are supported, but at the same time we must acknowledge the sector’s strong starting point and that efforts to further strengthen banks, and balance sheets, come at a cost. Requiring banks to hold more capital for example has real costs. It impacts returns, it increases costs to borrowers and it impacts the economy by diverting resources from other productive uses. It is vital that we seek to get this balance right between capital and strength, particularly at a time when our economy is in need of both confidence and investment. The operating environment Banking is undergoing significant change; changes in technology, changes in customer behaviour and changes in regulation. If anything, these trends have accelerated. Technology, or the digital revolution, is a particular challenge for boards because, as has been experienced in other industries, it has the potential to materially impact the value of the business. This year the Board devoted more time to technology developments and issues such as cyber-crime, disruption, and the progress on our various technology investments. Our technology management team has also been strengthened through the year. Technology and potential disruption are topics we take very seriously and I am pleased that we have maintained a dedicated Board Technology Committee since 2009 to lead our thinking on these matters. Regulatory change has also been significant across the sector through 2015. In addition to capital increases we have needed to respond to changes in regulation across a range of areas including superannuation, financial planning and liquidity management. We have also responded to inquiries on financial advice and on credit cards. At the same time, failures in other banking markets have prompted regulators to question whether the same issues exist in Australia or not, and this has increased regulatory scrutiny. All these elements have involved significant cost and effort. We are working cooperatively with regulators to continue to protect customers and hope that future change will not impose excessive costs or stifle innovation. 4 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 5 Chairman’s report In another period of significant change and development, Westpac has continued to deliver value for shareholders The 2015 financial year has been another significant period Performance summary Lindsay Maxsted Chairman Positioned for the future . for Westpac. We appointed a new CEO, refreshed the Group’s strategy, and proactively responded to regulatory change. At the same time we have supported shareholders by enhancing the value of the franchise and increasing dividends. In February 2015 Brian Hartzer commenced as our 25th CEO, taking the reins from Gail Kelly who had successfully led your company for the previous seven years. Gail was a great leader and left the organisation in very good shape. Choosing a new CEO is one of the most important roles of a Board and we were very pleased to appoint such a strong executive with the skills and experience to take Westpac into its third century. In selecting a new CEO, the Board set clear criteria and undertook a global search. I would like to share some of our considerations with shareholders as it reinforces how the Board thinks about Westpac’s future, and the areas we want to develop. At the top of our criteria list, the Board was looking for a seasoned banking executive with excellent leadership skills. While it may appear obvious, it is important to highlight that banking is a complex industry and the Board strongly believes that deep banking experience is essential to run one of the largest banks in the world. On strategy, the Board is committed to our customer-centric approach, and we were looking for an executive who would further develop this strategy while recognising the significant change facing our industry. Accordingly we sought a CEO who was alert to the issues and had the capability to proactively respond and turn opportunity into advantage. Brian Hartzer met this criteria, particularly with his strong grasp of digital technologies and how they are impacting our industry. This, combined with his success in managing our Australian Financial Services division for the prior three years, made Brian the clear choice for CEO. The Group has had another solid year in 2015. Cash earnings1 were $7,820 million, an increase of 3% over the previous year. The company uses cash earnings as a key metric for determining dividends and believes it is the most appropriate measure for assessing financial performance. Statutory net profit in 2015 increased 6% to $8,012 million. This year, the Group reported some significant infrequent items including a gain on the partial sale of BT Investment Management (BTIM), a tax benefit associated with our acquisition of select Australian businesses of Lloyds Bank, and costs from changes to the accounting of technology investment spending. Because of their size and nature they were excluded from the calculation of cash earnings. Cash earnings growth was supported by a solid operating performance across all divisions which led to a 4% rise in operating revenue, and a 3% lift in core earnings (profit before impairment charges). The Group’s key financial metrics also remained strong with a cash return on equity of 15.8%, net interest margin of 2.08% and an expense to income ratio of 42%. This latter efficiency metric places Westpac as one of the more efficient banks in the world. improving. Strength remains a hallmark of Westpac with all dimensions A hallmark of Westpac is strength and this continued in 2015 with all dimensions of the business improving, including: asset quality has further improved with impaired assets declining 19%, and delinquent accounts remaining low; capital levels have significantly lifted; and funding and liquidity remain strong with total liquid assets reaching $136 billion and the liquidity coverage ratio reaching 121%. 1 Results refer to cash earnings unless otherwise stated. For an explanation of cash earnings see footnote 3 of the ‘Performance Highlights’ section of Westpac’s Annual Report. Capital Following the release of the final report from the Financial System Inquiry (FSI) in late 2014, capital has been a hot topic across the industry. Among a range of considerations, the FSI report recommended that Australian banks needed to be ‘unquestionably strong’ and to achieve that they would need to increase capital. We responded, raising capital early and aiming to lift our capital ratios to the upper end of our preferred range. That preferred range for our common equity tier 1 (CET1) capital ratio is between 8.75 and 9.25%. This saw Westpac raise $2 billion of equity with our 2015 first half result. We also raised a further $0.5 billion from the partial sale of our shareholding in BTIM. These initiatives contributed to increasing our CET1 capital ratio to 9.5% by September 2015 and above our preferred range. In July this year APRA responded to the FSI report, including announcing changes to the calculation of risk weighted assets for Australian mortgages. That change is to apply from 1 July 2016. This was significant, increasing the capital we need to support our Australian mortgage portfolio by over 50%. The size of this required increase led us to announce a fully underwritten pro rata Entitlement Offer to raise approximately $3.5 billion of additional equity. We decided to raise capital via an Entitlement Offer as we felt this was the fairest alternative for shareholders. At the time of writing, the Entitlement Offer had not been finalised but feedback has been very positive. The institutional offer was particularly well supported with approximately 95% of institutional entitlements being taken up. In aggregate, and following the Entitlement Offer, we will have topped up our capital by around $6 billion this calendar year, with the majority raised from existing shareholders. The Board and I greatly appreciate the very strong support from shareholders for these initiatives. Changes in the capital required by Australian banks is part of a global debate on how much capital banks should hold. In essence, regulators are aiming to avoid a repeat of the Global Financial Crisis. This is a worthy aim, and we are advocates for strong banking systems that are able to withstand crisis. Australia has a very strong banking sector, recognised by many as one of the strongest in the world, but remaining strong requires constant vigilance as the next source of stress is usually different from the last. Regulatory objectives to strengthen the banks are supported, but at the same time we must acknowledge the sector’s strong starting point and that efforts to further strengthen banks, and balance sheets, come at a cost. Requiring banks to hold more capital for example has real costs. It impacts returns, it increases costs to borrowers and it impacts the economy by diverting resources from other productive uses. It is vital that we seek to get this balance right between capital and strength, particularly at a time when our economy is in need of both confidence and investment. Chairman’s report Dividends The Group’s solid financial performance has supported a further increase in dividends through the year. The 2015 final dividend was 94 cents per share fully franked, and combined with the 2015 interim dividend, total dividends for the year were 187 cents per share, an increase of 3%. Comparing dividends paid to the share price at 30 September 2015 of $29.70, that translates to a yield of 6.3%. While dividends have increased, because of our capital initiatives, the path of increases has slowed with a one cent per share rise over the last two halves. We continue to pay out a high portion of profits as dividends to distribute franking credits that are valued by shareholders. It is important to highlight that despite increasing capital, we have maintained our dividend approach of steadily increasing dividends within a sustainable pay-out ratio. While on the topic of dividends, a number of shareholders have written to me following suggestions that Australia’s imputation system should be reviewed. I am on the record as being a strong advocate of Australia’s imputation system. There are a number of reasons for this view but in summary Australia’s imputation system: removes the double taxation of company profits; encourages appropriate balance sheet settings by companies; reduces the incentive for companies to minimise tax; and it supports the efficient allocation of resources across the economy. It is good tax policy and good for our economy and we will continue to make our views well known. The operating environment Banking is undergoing significant change; changes in technology, changes in customer behaviour and changes in regulation. If anything, these trends have accelerated. Technology, or the digital revolution, is a particular challenge for boards because, as has been experienced in other industries, it has the potential to materially impact the value of the business. This year the Board devoted more time to technology developments and issues such as cyber-crime, disruption, and the progress on our various technology investments. Our technology management team has also been strengthened through the year. Technology and potential disruption are topics we take very seriously and I am pleased that we have maintained a dedicated Board Technology Committee since 2009 to lead our thinking on these matters. Regulatory change has also been significant across the sector through 2015. In addition to capital increases we have needed to respond to changes in regulation across a range of areas including superannuation, financial planning and liquidity management. We have also responded to inquiries on financial advice and on credit cards. At the same time, failures in other banking markets have prompted regulators to question whether the same issues exist in Australia or not, and this has increased regulatory scrutiny. All these elements have involved significant cost and effort. We are working cooperatively with regulators to continue to protect customers and hope that future change will not impose excessive costs or stifle innovation. 4 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 5 1 Competition is expected to remain strong as the sector adjusts to holding more capital. Summary It has been another good year for Westpac. Our divisions are in good shape, performance has been sound and we have materially strengthened the company’s balance sheet. Banking is undergoing significant change but given our clear strategy, ongoing investment and strong management team, your company is well positioned for the changing environment. Westpac is well placed to continue delivering sound returns to shareholders. LINDSAY MAXSTED Chairman Westpac Group The operating environment for banks more generally has been supportive although sentiment remains cautious. This can be seen in consumer spending and their approach to borrowing. For businesses, caution is reflected in modest investment and conservative balance sheets. As a result, credit growth has hovered at around 6% for much of 2015. The flip side to caution and modest growth is that consumer and business balance sheets are healthy and asset quality remains in excellent shape. We have seen stronger growth in housing, along with commercial property and infrastructure. That growth has tended to be skewed to NSW and Victoria, which have been less impacted by the slowdown in mining. Conversely, growth in Western Australia has been more subdued with the economy adjusting to lower incomes as mining investment eases. Board composition Following some major changes in the Board over recent years, 2015 was a period of moderate change. Brian Hartzer joined the Board on becoming CEO while Gail Kelly retired. We also welcomed Craig Dunn to the Board in June. Craig is a strong addition, and as the immediate past CEO of AMP Limited, he brings experience as a recent executive and a deep understanding of wealth management – a key area of growth for the Group. Craig also brings additional digital insights to the Board as Chairman of the recently opened Stone and Chalk. Stone and Chalk is a fintech hub supporting digital innovation in financial services in Australia. Outlook We continue to be positive about the outlook for Australia and New Zealand. Both economies have relatively low unemployment, controlled inflation and moderate growth. Growth has been below trend as the slowdown in mining investment has not been fully offset by improved spending or from the effects of the lower Australian dollar. Within Australia, the outlook is for a modest lift in the real GDP growth rate back to trend which we now assess at around 2.75%.That compares with growth of around 2.2% over the last year. The anticipated lift in the GDP growth rate reflects expectations for some improvement in household spending growth, non-mining investment, and exports. Partially offsetting these factors is an expected further contraction in mining investment and a smaller contribution from residential construction. These forecasts are reliant upon some further weakness in the Australian dollar, ongoing record low interest rates, and a stable year for our terms of trade. A bright spot will be the ongoing recovery in Australia’s net exports of services that are benefitting significantly from the competitive Australian dollar. These sectors along with health and professional services are boosting jobs growth. Lead indicators point to the unemployment rate initially stabilising before drifting lower as economic growth improves. For banking we are expecting broadly similar credit growth to that achieved in 2015 although the composition is expected to be a little different, with improved business lending and an easing in housing growth. Chief Executive Officer’s report Brian Hartzer Chief Executive Officer Building on Strong Foundations Dear Fellow Shareholders, In my first report to you as Chief Executive Officer I would like to start by acknowledging what an honour it is to have the opportunity to lead a company with such a rich history, strong values, and well-positioned businesses. I believe banks exist to support economic development, and Westpac’s position as Australia’s first bank, and oldest company, means we have a proud history of contributing to the success of the Australian and New Zealand economies. In this and future letters, my aim will be to share with you my candid assessment of how the company is performing, what challenges and opportunities we are facing, and what our priorities will be for the next period. Thanks to the outstanding leadership of my predecessor, Gail Kelly, and the talent and dedication of the 40,000 people who work here, I’m pleased to report that our company is in great shape. We have a very strong balance sheet, excellent asset quality, and are the most efficient bank in the sector. More broadly, our approach to running our business in a way that balances the needs of all stakeholders—customers, shareholders, employees, and the communities we serve— has seen us once again recognised as the global banking leader in the Dow Jones Sustainability Index —the eighth time we’ve been named the sector leader since 2002. All of our business divisions are performing well, and I’m pleased to report that— unlike many of our global banking peers—we have not been distracted by businesses outside of our core markets or with significant legacy problems that need to be remediated. Our financial results for the 2015 financial year reflect this. As you can see in this report, Westpac delivered cash earnings of $7,820 million in full year 2015, a 3% uplift on the prior year. This represented earnings per share of 249.5 cents, and a cash return on equity of 15.8% - a solid performance given the environment. Reported net profit was up a stronger 6%. This performance is a testament to the strong foundation that was built by the leaders in whose footsteps I follow: most recently Gail Kelly—as well as David Morgan and Bob Joss before her—who led Westpac through periods of significant change while enhancing the value of the company. My aim is to continue this tradition. Strong leadership is an essential element in any company, and one of my first priorities as CEO has been to build a first-rate team. Westpac has a very experienced and talented executive team who have worked well together over many years. To this strong starting point we have added some fresh energy through the recruitment of Lyn Cobley—who leads our Institutional Banking business—as well as the internal promotions of David Lindberg to lead our Commercial & Business Bank; George Frazis—to lead our new Consumer Bank—and the confirmation of David McLean as CEO Westpac New Zealand. Gary Thursby (Chief Strategy Officer) also joined the Group executive team during the year. Getting the right leadership team in place has been critical. While financial services has regularly seen significant change since Westpac first opened its doors almost 199 years ago, seldom have we seen a period where external forces are so rapidly transforming our operating environment. In my opinion, it’s the biggest period of change that we’ve seen in Australian banking since deregulation in the 1980s. The drivers of this have been well reported: the shift from a resource and construction driven economy to a service-led economy; the aging of the baby boomers, and the pervasive impact of technology on customer needs and competition. In financial services, we are also dealing with the aftermath of the Global Financial Crisis (GFC), in several respects. First, there are ongoing efforts by regulators to address the risk of ‘too big to fail’ banks by tightening requirements on capital levels, funding, and liquidity. Second, in response to various mis-selling and other scandals, there is rightly no tolerance from regulators and communities for poor conduct and culture. And finally there’s the pressure on banks’ lending margins as central banks try to stimulate economic growth through quantitative easing—the impact of the ‘wall of money’ in financial markets. 6 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 7 The operating environment for banks more generally has Competition is expected to remain strong as the sector been supportive although sentiment remains cautious. This adjusts to holding more capital. Chief Executive Officer’s report Summary It has been another good year for Westpac. Our divisions are in good shape, performance has been sound and we have materially strengthened the company’s balance sheet. Banking is undergoing significant change but given our clear strategy, ongoing investment and strong management team, your company is well positioned for the changing environment. to shareholders. Westpac is well placed to continue delivering sound returns LINDSAY MAXSTED Chairman Westpac Group can be seen in consumer spending and their approach to borrowing. For businesses, caution is reflected in modest investment and conservative balance sheets. As a result, credit growth has hovered at around 6% for much of 2015. The flip side to caution and modest growth is that consumer and business balance sheets are healthy and asset quality remains in excellent shape. We have seen stronger growth in housing, along with commercial property and infrastructure. That growth has tended to be skewed to NSW and Victoria, which have been less impacted by the slowdown in mining. Conversely, growth in Western Australia has been more subdued with the economy adjusting to lower incomes as mining investment eases. Board composition Following some major changes in the Board over recent years, 2015 was a period of moderate change. Brian Hartzer joined the Board on becoming CEO while Gail Kelly retired. We also welcomed Craig Dunn to the Board in June. Craig is a strong addition, and as the immediate past CEO of AMP Limited, he brings experience as a recent executive and a deep understanding of wealth management – a key area of growth for the Group. Craig also brings additional digital insights to the Board as Chairman of the recently opened Stone and Chalk. Stone and Chalk is a fintech hub supporting digital innovation in financial services in Australia. Outlook We continue to be positive about the outlook for Australia and New Zealand. Both economies have relatively low unemployment, controlled inflation and moderate growth. Growth has been below trend as the slowdown in mining investment has not been fully offset by improved spending or from the effects of the lower Australian dollar. Within Australia, the outlook is for a modest lift in the real GDP growth rate back to trend which we now assess at around 2.75%.That compares with growth of around 2.2% over the last year. The anticipated lift in the GDP growth rate reflects expectations for some improvement in household spending growth, non-mining investment, and exports. Partially offsetting these factors is an expected further contraction in mining investment and a smaller contribution from residential construction. These forecasts are reliant upon some further weakness in the Australian dollar, ongoing record low interest rates, and a stable year for our terms of trade. A bright spot will be the ongoing recovery in Australia’s net exports of services that are benefitting significantly from the competitive Australian dollar. These sectors along with health and professional services are boosting jobs growth. Lead indicators point to the unemployment rate initially stabilising before drifting lower as economic growth improves. For banking we are expecting broadly similar credit growth to that achieved in 2015 although the composition is expected to be a little different, with improved business lending and an easing in housing growth. Brian Hartzer Chief Executive Officer Building on Strong Foundations Dear Fellow Shareholders, In my first report to you as Chief Executive Officer I would like to start by acknowledging what an honour it is to have the opportunity to lead a company with such a rich history, strong values, and well-positioned businesses. I believe banks exist to support economic development, and Westpac’s position as Australia’s first bank, and oldest company, means we have a proud history of contributing to the success of the Australian and New Zealand economies. In this and future letters, my aim will be to share with you my candid assessment of how the company is performing, what challenges and opportunities we are facing, and what our priorities will be for the next period. Thanks to the outstanding leadership of my predecessor, Gail Kelly, and the talent and dedication of the 40,000 people who work here, I’m pleased to report that our company is in great shape. We have a very strong balance sheet, excellent asset quality, and are the most efficient bank in the sector. More broadly, our approach to running our business in a way that balances the needs of all stakeholders—customers, shareholders, employees, and the communities we serve— has seen us once again recognised as the global banking leader in the Dow Jones Sustainability Index —the eighth time we’ve been named the sector leader since 2002. All of our business divisions are performing well, and I’m pleased to report that— unlike many of our global banking peers—we have not been distracted by businesses outside of our core markets or with significant legacy problems that need to be remediated. Our financial results for the 2015 financial year reflect this. As you can see in this report, Westpac delivered cash earnings of $7,820 million in full year 2015, a 3% uplift on the prior year. This represented earnings per share of 249.5 cents, and a cash return on equity of 15.8% - a solid performance given the environment. Reported net profit was up a stronger 6%. This performance is a testament to the strong foundation that was built by the leaders in whose footsteps I follow: most recently Gail Kelly—as well as David Morgan and Bob Joss before her—who led Westpac through periods of significant change while enhancing the value of the company. My aim is to continue this tradition. Strong leadership is an essential element in any company, and one of my first priorities as CEO has been to build a first-rate team. Westpac has a very experienced and talented executive team who have worked well together over many years. To this strong starting point we have added some fresh energy through the recruitment of Lyn Cobley—who leads our Institutional Banking business—as well as the internal promotions of David Lindberg to lead our Commercial & Business Bank; George Frazis—to lead our new Consumer Bank—and the confirmation of David McLean as CEO Westpac New Zealand. Gary Thursby (Chief Strategy Officer) also joined the Group executive team during the year. Getting the right leadership team in place has been critical. While financial services has regularly seen significant change since Westpac first opened its doors almost 199 years ago, seldom have we seen a period where external forces are so rapidly transforming our operating environment. In my opinion, it’s the biggest period of change that we’ve seen in Australian banking since deregulation in the 1980s. The drivers of this have been well reported: the shift from a resource and construction driven economy to a service-led economy; the aging of the baby boomers, and the pervasive impact of technology on customer needs and competition. In financial services, we are also dealing with the aftermath of the Global Financial Crisis (GFC), in several respects. First, there are ongoing efforts by regulators to address the risk of ‘too big to fail’ banks by tightening requirements on capital levels, funding, and liquidity. Second, in response to various mis-selling and other scandals, there is rightly no tolerance from regulators and communities for poor conduct and culture. And finally there’s the pressure on banks’ lending margins as central banks try to stimulate economic growth through quantitative easing—the impact of the ‘wall of money’ in financial markets. 6 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 7 1 These rising community and regulatory expectations of the sector make it essential that we strive to operate our business sustainably. At Westpac, we pride ourselves on engaging with all our stakeholders, but there is more we can do to better explain this balance and the inherent trade-offs that we make. From a business point of view, the magnitude of change that we face has meant we needed to take a fresh look at our strategy and priorities for the next 3-5 years, to make sure that we were keeping up with stakeholder expectations and, as far as possible, turning these challenges into opportunities to strengthen our competitive position. The sections that follow describe the strategy and our priorities and why we believe Westpac is well placed to move to leadership as we enter our third century of business in 2017.I will also provide my perspective on the performance of our various business units and some of the material decisions we took this year. Service-led strategy The starting point for our strategy has been to understand the fundamental shifts in customers’ needs and expectations. Customers’ financial needs are becoming more complex, and at the same time they want their banking to be dramatically simpler and more efficient. They expect high quality, unbiased advice, and they want it at a time and place that suits them—not the bank. They want the strength and trust that comes in dealing with a safe bank brand, and they recognise that they have growing choice in providers. Technology has clearly played a role in these changes. The growth of the Internet and ubiquity of mobile devices in many aspects of commerce is changing what customers expect from their bank, as well as giving banks more flexibility in the way they deliver products and services. It also creates the very real threat of disruption to existing businesses from new competitors. Rather than fear these changes, Westpac has decided to embrace them. We believe that if we stay focused on delivering great service to our customers, then new technologies give us a fantastic opportunity to become even more competitive and efficient. As a result, earlier this year we added the small, but important word ‘service’ into our overall company vision – to be one of the world’s great service companies, helping our customers, communities and people to prosper and grow. This may seem like a minor change, but we see it as an important difference. It affects everything we do, from changing what we offer customers and the way we work, to how we reward our people and set our priorities as a company. As a service company, our job is to help customers achieve something that’s important to them—not just to sell them another product. It’s also a philosophy that is consistent with our role as a bank in supporting economic development, and running our business in a sustainable way. From an investment point of view, the focus on service helps us retain and grow our customer base, as well as build loyalty and deepen relationships, without relying solely on price. That allows us to sustain our margins and continue to invest in the business. A service orientation also encourages us to avoid excessively risky segments and to offer suitable products and services in line with customers and regulatory expectations. All of this in turn enhances the value of our franchise. Many of our competitors refer to similar themes, so our success in achieving service leadership will depend to a great degree on how well we implement. We have therefore translated our strategy into a 3-5 year program that we call the ‘Service Revolution’. The program is comprised of five strategic priorities, supported by a series of projects that have clear accountabilities and metrics to assess performance. We are making good progress on each of these priorities. 1. Performance discipline Westpac is already recognised for its disciplined financial management and strong balance sheet. At an overall level, we seek to balance strength, return, productivity, and growth. At a divisional level, all our businesses generate solid returns, operate in a highly efficient way, and have an excellent risk profile. While our overarching objective is to grow the long-term value of the franchise, we know that it is important to deliver strong financial performance, year-in and year-out. To that end we are seeking to maintain our return on equity above 15%-a challenging target in the context of increasing capital requirements. Around the world, well-managed banks with similar mix of businesses have typically achieved this level of return, and we consider Westpac to be in the same league. We also recognise capital is a scarce and valuable resource that needs to be put to work efficiently. At this level of return we can also continue to sustain dividends and support growth. 2. Service leadership As we seek to build one of the world’s great service companies, we’ve substantially evolved the way we are responding to customers’ expectations about how and where we support them. This includes an increase in our future annual investment spend of around 20%, directed to growth, service, and efficiency initiatives. This year we have made significant progress in using digital innovation to redesign the customer experience, making things simpler, easier and better for our customers and for our people. For example, our new online/mobile banking platform, Westpac Live, has contributed to an increase in the number of products per customer and a significant decrease in complaints. Similar results are being achieved in New Zealand since the February 2015 launch of our new award- winning online banking platform, Westpac One. We are also investing in our physical network. This includes the reconfiguration of branches into new formats that offer state-of-the-art digital solutions to make transactions quicker and easier for both consumer and business customers. This approach frees up bankers to spend more time with To measure our progress on this, we’ve set a new target of customers. Regardless of their location, customers can also achieving a 40% cost to income ratio by 2017. Chief Executive Officer’s report connect via video conference with a range of financial service specialists—a particularly powerful solution for business customers. Over 80% of our sites are video enabled and we expect over half our branch network to be in the new format over the next three years. To measure our success with this priority we have set a target to attract another one million customers by 2017, and deepen our relationship with them by increasing the number of our products they have. This is a stretching goal and will mean that our people will have to work hard to nurture every 4. Targeted growth While we have delivered sound growth over recent years, it is vital that we identify and invest in those sectors and segments that will generate stronger growth over the medium term. We are focusing on wealth, small and medium enterprises (SME) and Asia as our big-ticket growth ‘highways’. In addition, we are seeking to grow in markets and segments where specific opportunities have been identified—in particular home lending to owner-occupiers. In wealth, the Group already has a leading position in administration platforms and is seeking to build on that further with our investment in Panorama, a state-of-the-art single customer relationship. 3. Digital transformation completely new ways. Digitisation brings with it exciting opportunities to improve online platform that helps customers—and their advisers—to efficiency and to deliver banking and financial services in manage their wealth, including their superannuation. To date the system has over $1.3 billion of funds under administration and more than 2,000 advisers are registered We have already seen the benefits of this opportunity this year. This included the launch of our Live Online Lending to use the platform. Application (LOLA) that has completely reengineered the Insurance is another area where we see significant application and approval process for small business lending; opportunities to grow. We recently entered into a strategic and BT Go-Invest, the first-of-its-kind digital portal that alliance with Allianz to expand the range of insurance enables customers to view their share portfolios and make products available, and to streamline the origination process. transactions online 24/7. We have also introduced a range of As part of this, a number of competitive new products will be new mobile apps, including the first banking app for a rolled out in the 2016 financial year. smart watch. We’re also alert to the emergence of new business models modest over recent years, we continue to see opportunity. with the potential to ‘disrupt’ traditional banking, as well as Australia and New Zealand business is fundamentally SME- the increased threat of cyber-crime. To ensure we stay one dominated, so supporting this segment is good for the entire While growth from SME customers has been relatively step ahead of these issues, we are exploring innovative technology partnerships and investments. This includes a $50 million investment in our Reinventure fund, which invests in promising start-up ‘fintech’ businesses. One of the early investments was in Society One – one of Australia’s first peer-to-peer lenders. With a economy. Our investment is focused on being proactive in supporting businesses and making it easier for them to do business with us. Our revolutionary LOLA platform is not only making the process of taking out a loan easier, it is helping customers to determine how much they can borrow and what their options are to grow their business. different take on traditional banking, peer-to-peer lending In Asia, the Group continues to invest and build our has created a niche market offshore and we wanted to keep capability. Our strategy is focused on connecting Australian abreast of developments locally. So far, Reinventure has made seven separate business investments, which helps us to keep pace with digital and New Zealand customers with Asia and increasingly, to support Asian-based customers looking to invest and grow in Australia and New Zealand. innovation. As some of these new fintech solutions begin to We have steadily built our business in the region and now take off we hope to be already on the runway with them. have strong capabilities in trade, financial markets and We’re also continually improving the resilience and security of our systems to protect the confidentiality, integrity and transactional banking. We have also built market leadership in AUD/CNY currency hedging. availability of customer information and sensitive commercial 5. Workforce revolution data. This saw us invest in QuintessenceLabs, a security firm specialising in quantum-computing enhanced cyber security. At the core of Westpac’s ability to meet the challenges of the future and revolutionise the way we deliver service is our people and our organisation’s culture. This investment will further boost the Group’s information security capabilities and provide access to a pipeline of security innovations. It also signals our proactive, strategic approach to building security capabilities now and in the future. We have increased our efforts on a number of fronts to get this right, including programs to provide the best physical environment, tools, systems and policies for our people, while fostering a new mindset to drive greater agility, productivity, and wellbeing. The ultimate impact of this digital transformation will be a genuine win-win: our customers will benefit from better security and an improved customer experience; our staff will have more time to spend with customers and on meaningful work; and the bank (and its shareholders) will benefit from lower risk and significantly improved productivity. We’re also working to ensure that our organisational culture attracts employees who put customers’ interests first, are highly engaged, inclusive, and digitally confident. By the end of the calendar year more than 10,000 employees will have relocated into new, ‘agile’ workspaces – 8 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 9 These rising community and regulatory expectations of the From an investment point of view, the focus on service helps material decisions we took this year. We are making good progress on each of these priorities. sector make it essential that we strive to operate our business sustainably. At Westpac, we pride ourselves on engaging with all our stakeholders, but there is more we can do to better explain this balance and the inherent trade-offs that we make. From a business point of view, the magnitude of change that we face has meant we needed to take a fresh look at our strategy and priorities for the next 3-5 years, to make sure that we were keeping up with stakeholder expectations and, as far as possible, turning these challenges into opportunities to strengthen our competitive position. The sections that follow describe the strategy and our priorities and why we believe Westpac is well placed to move to leadership as we enter our third century of business in 2017.I will also provide my perspective on the performance of our various business units and some of the Service-led strategy The starting point for our strategy has been to understand the fundamental shifts in customers’ needs and expectations. Customers’ financial needs are becoming more complex, and at the same time they want their banking to be dramatically simpler and more efficient. They expect high quality, unbiased advice, and they want it at a time and place that suits them—not the bank. They want the strength and trust that comes in dealing with a safe bank brand, and they recognise that they have growing choice in providers. Technology has clearly played a role in these changes. The growth of the Internet and ubiquity of mobile devices in many aspects of commerce is changing what customers expect from their bank, as well as giving banks more flexibility in the way they deliver products and services. It also creates the very real threat of disruption to existing businesses from new competitors. embrace them. Rather than fear these changes, Westpac has decided to We believe that if we stay focused on delivering great service to our customers, then new technologies give us a fantastic opportunity to become even more competitive and efficient. As a result, earlier this year we added the small, but important word ‘service’ into our overall company vision – to be one of the world’s great service companies, helping our customers, communities and people to prosper and grow. This may seem like a minor change, but we see it as an important difference. It affects everything we do, from changing what we offer customers and the way we work, to how we reward our people and set our priorities as a company. As a service company, our job is to help customers achieve something that’s important to them—not just to sell them another product. It’s also a philosophy that is consistent with our role as a bank in supporting economic development, and running our business in a sustainable way. us retain and grow our customer base, as well as build loyalty and deepen relationships, without relying solely on price. That allows us to sustain our margins and continue to invest in the business. A service orientation also encourages us to avoid excessively risky segments and to offer suitable products and services in line with customers and regulatory expectations. All of this in turn enhances the value of our franchise. Many of our competitors refer to similar themes, so our success in achieving service leadership will depend to a great degree on how well we implement. We have therefore translated our strategy into a 3-5 year program that we call the ‘Service Revolution’. The program is comprised of five strategic priorities, supported by a series of projects that have clear accountabilities and metrics to assess performance. 1. Performance discipline Westpac is already recognised for its disciplined financial management and strong balance sheet. At an overall level, we seek to balance strength, return, productivity, and growth. At a divisional level, all our businesses generate solid returns, operate in a highly efficient way, and have an excellent risk profile. While our overarching objective is to grow the long-term value of the franchise, we know that it is important to deliver strong financial performance, year-in and year-out. To that end we are seeking to maintain our return on equity above 15%-a challenging target in the context of increasing capital requirements. Around the world, well-managed banks with similar mix of businesses have typically achieved this level of return, and we consider Westpac to be in the same league. We also recognise capital is a scarce and valuable resource that needs to be put to work efficiently. At this level of return we can also continue to sustain dividends and support growth. 2. Service leadership As we seek to build one of the world’s great service companies, we’ve substantially evolved the way we are responding to customers’ expectations about how and where we support them. This includes an increase in our future annual investment spend of around 20%, directed to growth, service, and efficiency initiatives. This year we have made significant progress in using digital innovation to redesign the customer experience, making things simpler, easier and better for our customers and for our people. For example, our new online/mobile banking platform, Westpac Live, has contributed to an increase in the number of products per customer and a significant decrease in complaints. Similar results are being achieved in New Zealand since the February 2015 launch of our new award- winning online banking platform, Westpac One. We are also investing in our physical network. This includes the reconfiguration of branches into new formats that offer state-of-the-art digital solutions to make transactions quicker and easier for both consumer and business customers. This approach frees up bankers to spend more time with customers. Regardless of their location, customers can also connect via video conference with a range of financial service specialists—a particularly powerful solution for business customers. Over 80% of our sites are video enabled and we expect over half our branch network to be in the new format over the next three years. To measure our success with this priority we have set a target to attract another one million customers by 2017, and deepen our relationship with them by increasing the number of our products they have. This is a stretching goal and will mean that our people will have to work hard to nurture every single customer relationship. 3. Digital transformation Digitisation brings with it exciting opportunities to improve efficiency and to deliver banking and financial services in completely new ways. We have already seen the benefits of this opportunity this year. This included the launch of our Live Online Lending Application (LOLA) that has completely reengineered the application and approval process for small business lending; and BT Go-Invest, the first-of-its-kind digital portal that enables customers to view their share portfolios and make transactions online 24/7. We have also introduced a range of new mobile apps, including the first banking app for a smart watch. We’re also alert to the emergence of new business models with the potential to ‘disrupt’ traditional banking, as well as the increased threat of cyber-crime. To ensure we stay one step ahead of these issues, we are exploring innovative technology partnerships and investments. This includes a $50 million investment in our Reinventure fund, which invests in promising start-up ‘fintech’ businesses. One of the early investments was in Society One – one of Australia’s first peer-to-peer lenders. With a different take on traditional banking, peer-to-peer lending has created a niche market offshore and we wanted to keep abreast of developments locally. So far, Reinventure has made seven separate business investments, which helps us to keep pace with digital innovation. As some of these new fintech solutions begin to take off we hope to be already on the runway with them. We’re also continually improving the resilience and security of our systems to protect the confidentiality, integrity and availability of customer information and sensitive commercial data. This saw us invest in QuintessenceLabs, a security firm specialising in quantum-computing enhanced cyber security. Chief Executive Officer’s report To measure our progress on this, we’ve set a new target of achieving a 40% cost to income ratio by 2017. 4. Targeted growth While we have delivered sound growth over recent years, it is vital that we identify and invest in those sectors and segments that will generate stronger growth over the medium term. We are focusing on wealth, small and medium enterprises (SME) and Asia as our big-ticket growth ‘highways’. In addition, we are seeking to grow in markets and segments where specific opportunities have been identified—in particular home lending to owner-occupiers. In wealth, the Group already has a leading position in administration platforms and is seeking to build on that further with our investment in Panorama, a state-of-the-art online platform that helps customers—and their advisers—to manage their wealth, including their superannuation. To date the system has over $1.3 billion of funds under administration and more than 2,000 advisers are registered to use the platform. Insurance is another area where we see significant opportunities to grow. We recently entered into a strategic alliance with Allianz to expand the range of insurance products available, and to streamline the origination process. As part of this, a number of competitive new products will be rolled out in the 2016 financial year. While growth from SME customers has been relatively modest over recent years, we continue to see opportunity. Australia and New Zealand business is fundamentally SME- dominated, so supporting this segment is good for the entire economy. Our investment is focused on being proactive in supporting businesses and making it easier for them to do business with us. Our revolutionary LOLA platform is not only making the process of taking out a loan easier, it is helping customers to determine how much they can borrow and what their options are to grow their business. In Asia, the Group continues to invest and build our capability. Our strategy is focused on connecting Australian and New Zealand customers with Asia and increasingly, to support Asian-based customers looking to invest and grow in Australia and New Zealand. We have steadily built our business in the region and now have strong capabilities in trade, financial markets and transactional banking. We have also built market leadership in AUD/CNY currency hedging. 5. Workforce revolution At the core of Westpac’s ability to meet the challenges of the future and revolutionise the way we deliver service is our people and our organisation’s culture. This investment will further boost the Group’s information security capabilities and provide access to a pipeline of security innovations. It also signals our proactive, strategic approach to building security capabilities now and in the future. We have increased our efforts on a number of fronts to get this right, including programs to provide the best physical environment, tools, systems and policies for our people, while fostering a new mindset to drive greater agility, productivity, and wellbeing. The ultimate impact of this digital transformation will be a genuine win-win: our customers will benefit from better security and an improved customer experience; our staff will have more time to spend with customers and on meaningful work; and the bank (and its shareholders) will benefit from lower risk and significantly improved productivity. We’re also working to ensure that our organisational culture attracts employees who put customers’ interests first, are highly engaged, inclusive, and digitally confident. By the end of the calendar year more than 10,000 employees will have relocated into new, ‘agile’ workspaces – 8 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 9 1 including at Melbourne’s Collins Street, Brisbane’s Eagle Street and Sydney’s Barangaroo and Kogarah. Among those employees already in the new workspaces we’ve already seen dramatic improvements across key measures of productivity, flexibility, and absenteeism. We also believe a workforce that embraces diversity–those from different cultural backgrounds, different ages, genders, abilities and sexual orientation—allows us to tap a deeper talent pool and gives us greater insight to respond creatively to the needs of our diverse customer base. In 2015 we took further action on a number of these priorities. This year the proportion of leadership roles held by women rose to 46%, up from 44% last year. And initiatives to deliver our Reconciliation Action Plan have put us well on track to attract an additional 500 Aboriginal or Torres Strait Islander people to our organisation by 2017. We’re proud of these outcomes, but we have significant work to do to keep up momentum and create true inclusion. An important milestone this year was the completion of a new Enterprise Agreement with the Finance Sector Union that creates substantial benefits for employees, the business and customers. The new agreement, which replaces 19 complex instruments with one set of innovative, customer- focused terms, represents a market-leading package to help attract and retain the right people. With that background on our strategy and priorities, let me now turn to our financial performance this year. 2015: A solid financial performance Our 2015 result can be best summarised as one of disciplined growth, well-managed margins, continued investment and a strengthening of all elements of the franchise. Cash earnings, our preferred measure of performance was up 3% to $7,820 million for the 2015 financial year with cash earnings per share up 2% to 249.5 cents. Our return on equity was a solid 15.8% and remains above our 15% target. On a reported basis Westpac's net profit of $8,012 million was 6% higher. The stronger growth in reported profit compared to cash earnings was due to a small number of large infrequent items that are included in reported profit but which were excluded from the calculation of cash earnings. These items included $665 million after tax gain on the partial sale of BTIM and $64 million of tax benefits associated with the acquisition of Lloyds Australia. These were partially offset by changes in the accounting of technology investment spending which contributed to a $354 million (post tax) write-down of capitalised technology costs. Operating income for the group was up by 4% from a 7% increase in lending, a 4% increase in customer deposits and flat net interest margins. The increase in lending was mostly due to an increase in Australian mortgages of 7%, which was broadly in line with growth in the system. Within housing, the investor category has seen much attention over the year, particularly following the introduction of a regulatory cap on growth of 10% per annum. We responded by tightening our lending criteria and adjusting our pricing on investment loans, and our growth has now eased below the 10% limit. At the same time, as opportunities in investor housing slowed we increased our focus on owner-occupied lending, and this has contributed to a strong uplift in applications and approvals in the latter months of the year. Business lending has shown some ‘green shoots’ in recent months and after a period of relatively subdued activity we experienced solid growth. For the last year much of that growth was in areas such as infrastructure and commercial property, although more recently we are seeing a broader pickup in commercial activity. This has been especially strong in SME, where our new ‘Connect’ model of video conferencing is supporting our bankers and customers where there is improving confidence to invest and grow. We have also continued to experience good growth in equipment financing, thanks in part to our acquisition of Lloyd’s Australian operations last year. This has been a very successful acquisition for us which continues to perform ahead of expectations. Non-interest income was little changed over the year although the underlying trends are positive, particularly in wealth management. A good example was the 8% increase in Funds Under Administration (FUA), where we continue to lead the market on platforms and have seen continuing positive flows. However, these gains were offset by a lower contribution from trading income and some severe storms which increased claims and reduced insurance income. Expenses increased 5% over the year, with most of that increase due to investment related costs, including the reconfiguration and upgrade of our branches and launching a new online capability in both Australia and New Zealand. These investments represent a deliberate commitment to the future of our franchise, and were partially offset by productivity benefits in our existing operations of around $239million. Our expense to income ratio for the year was 42%, a little higher than 2014 but still ranking us as the most efficient bank in Australia, and one of the more efficient banks globally. Impairment charges (or bad debts) were $103 million higher over the year with the increase due to lower write-backs, higher write-offs and the growth in our book. To be clear, the rise in impairments is in the context of a portfolio that has been well managed and is in good shape, rather than from a deterioration in asset quality. Over recent years we have been successful in assisting stressed businesses to improve their financial position. This has meant we have been able to write back provisions that we had previously set aside for loss. However, there is a limited pool of such stressed assets, and as the proportion of stressed companies has declined, so too have the write- backs—leading to a net increase in impairments charge. Divisional Performance To support our service strategy, we made changes during the year to our organisational structure. This has led to the creation of two new divisions: Consumer Bank, with accountability for the service and support of retail banking customers; and the Commercial & Business Bank, to support the needs of commercial and small business customers. These divisions will continue to support our portfolio of brands. Our other divisions – BT Financial Group, completed on 30th of October 2015 while the proposed sale Westpac Institutional Bank, and New Zealand remain largely unchanged. Given the restructure occurred in the latter half of the year we reported our 2015 performance using the previous operating structure; the new structure will apply to our 2016 reporting. Our retail and business banking divisions represent 69% of our business and were the real drivers of performance this year. Westpac Retail & Business Banking increased cash earnings by 8%, St.George Banking Group increased cash earnings by 7% and our New Zealand business increased cash earnings by 6% in $NZ and by 8% in $A. This was achieved through disciplined balance sheet growth, well-managed margins and improved efficiency. For Westpac Retail & Business Banking, the highlight of the year was the completion and roll-out to customers of Westpac Live, our sector-leading online/mobile platform. In St.George all of our brands contributed, and our Bank of Melbourne expansion in particular, continues to be a great success story. For Westpac NZ, the highlight was our alliance with Air New Zealand to offer Airpoints to customers, which has seen significant growth in our customer base. Cash earnings for Westpac Institutional Bank (WIB) were 12% lower than full year 2014. While WIB achieved good growth in target areas, it faced some significant headwinds this year. These included an accounting change for derivative adjustments which reduced pre-tax earnings by $122 million, and lower margins from high levels of global liquidity. WIB is the premier institutional banking franchise in the country. Despite the headwinds, it generates good returns overall and provides significant value to both our retail banking and wealth businesses. However, the division operates in international markets and is more impacted by global developments. The most obvious example has been the impact of ongoing quantitative easing adopted by a number of international central banks, which has artificially increased global liquidity and driven down margins on institutional lending. This can be seen in WIB’s 15 basis point decline in margins over the year. In wealth, we have a genuine comparative advantage in the way we make it more convenient for customers to manage their banking and wealth needs. In 2015, BT Financial Group continued to grow, although this growth was tempered by the partial sale of the division’s active fund manager BTIM and higher catastrophe insurance claims. Our investment in BTIM has been very successful, but we don’t see our competitive advantage coming from active funds management: it’s a highly competitive activity and clients rightly want investment recommendations that avoid conflicts of interest. Our sell-down therefore allowed us to release capital, while allowing us to continue to work closely with BTIM to manufacture innovative products that meet client investment needs. Through the year we also finalised the sale of three Pacific Island businesses in Samoa, Tonga and the Cook Islands. The sale of our business in the Solomon Islands was Chief Executive Officer’s report of Westpac’s Vanuatu operations has not yet proceeded. The decision was driven by our desire to reduce risk of operating in these small but challenging markets, with the purchaser (the Bank of South Pacific) being based in the region and therefore having a better long-term appetite and skillset in managing these challenges. Westpac will continue to operate in Fiji and Papua New Guinea, which are both larger markets where we have been operating successfully for some time. Asset quality continues to improve Asset quality was a highlight for the year, continuing its improving trend. Stressed assets to total committed exposures is a key measure we watch closely; that ratio has fallen again this year to 0.99% and is down from a peak of 3.20% in the middle of the GFC. At the same time, impaired assets declined 19% while the provision coverage against impaired assets was steady at 46%. Looking more closely at the consumer portfolio, mortgage delinquencies are little changed over the year. The trends in unsecured lending are similar. There has been much discussion around the slowdown in mining and the potential for an increase in bad debts. This is an area we're watching closely and includes businesses directly affected by lower commodity prices as well as those companies supporting the industry across a broader range of sectors. Westpac has been underweight the mining and mining services sectors for some time and while we expect conditions to get worse before they get better, we are confident with the high quality of our portfolio. Where we do have exposures, they are largely to the higher-quality names that have efficient operating costs. That said, further losses are likely and we have put aside additional provisions in our economic overlays just in case, but the size of those losses is not expected to be material. Housing has also continued to be a hotly discussed topic through the year with price rises leading some commentators to claim that we are in the midst of a housing bubble. There is no doubt housing prices are strong in some markets, but we do not subscribe to the view that we are in a bubble. That’s because we believe the economics of Australian housing are sound. We are seeing genuine demand for housing that has consistently exceeded supply from both investors and owner-occupiers. It is only recently that we have seen an increase in building activity to help match demand. In addition, and perhaps more importantly, there has been no easing in credit standards across the industry. By that I mean we continue to lend to those people who have the capacity to repay, and the standards by which we measure that capacity have not relaxed—in fact we tightened our lending criteria in a number of areas this year. So overall we see the housing market as rational, with sound fundamentals. Of course, that does not mean we will not see stress in selected pockets. The housing market will always remain a local proposition, and we continue to monitor our exposures 10 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 11 including at Melbourne’s Collins Street, Brisbane’s Eagle opportunities in investor housing slowed we increased our Street and Sydney’s Barangaroo and Kogarah. Among those focus on owner-occupied lending, and this has contributed to employees already in the new workspaces we’ve already a strong uplift in applications and approvals in the latter portfolio of brands. Our other divisions – BT Financial Group, Westpac Institutional Bank, and New Zealand remain largely unchanged. seen dramatic improvements across key measures of months of the year. productivity, flexibility, and absenteeism. Business lending has shown some ‘green shoots’ in recent We also believe a workforce that embraces diversity–those months and after a period of relatively subdued activity we from different cultural backgrounds, different ages, genders, experienced solid growth. For the last year much of that abilities and sexual orientation—allows us to tap a deeper growth was in areas such as infrastructure and commercial talent pool and gives us greater insight to respond creatively property, although more recently we are seeing a broader to the needs of our diverse customer base. In 2015 we took further action on a number of these priorities. This year the proportion of leadership roles held by women rose to 46%, up from 44% last year. And initiatives pickup in commercial activity. This has been especially strong in SME, where our new ‘Connect’ model of video conferencing is supporting our bankers and customers where there is improving confidence to invest and grow. to deliver our Reconciliation Action Plan have put us well on We have also continued to experience good growth in track to attract an additional 500 Aboriginal or Torres Strait equipment financing, thanks in part to our acquisition of Islander people to our organisation by 2017. We’re proud of Lloyd’s Australian operations last year. This has been a very these outcomes, but we have significant work to do to keep successful acquisition for us which continues to perform up momentum and create true inclusion. ahead of expectations. An important milestone this year was the completion of a Non-interest income was little changed over the year new Enterprise Agreement with the Finance Sector Union although the underlying trends are positive, particularly in that creates substantial benefits for employees, the business wealth management. A good example was the 8% increase and customers. The new agreement, which replaces 19 in Funds Under Administration (FUA), where we continue to complex instruments with one set of innovative, customer- lead the market on platforms and have seen continuing focused terms, represents a market-leading package to help positive flows. However, these gains were offset by a lower attract and retain the right people. With that background on our strategy and priorities, let me now turn to our financial performance this year. 2015: A solid financial performance Our 2015 result can be best summarised as one of disciplined growth, well-managed margins, continued investment and a strengthening of all elements of the franchise. Cash earnings, our preferred measure of performance was up 3% to $7,820 million for the 2015 financial year with cash earnings per share up 2% to 249.5 cents. Our return on equity was a solid 15.8% and remains above our 15% target. On a reported basis Westpac's net profit of $8,012 million was 6% higher. The stronger growth in reported profit compared to cash earnings was due to a small number of large infrequent items that are included in reported profit but which were excluded from the calculation of cash earnings. These items included $665 million after tax gain on the partial sale of BTIM and $64 million of tax benefits associated with the acquisition of Lloyds Australia. These were partially offset by changes in the accounting of technology investment spending which contributed to a $354 million (post tax) write-down of capitalised technology costs. Operating income for the group was up by 4% from a 7% increase in lending, a 4% increase in customer deposits and flat net interest margins. contribution from trading income and some severe storms which increased claims and reduced insurance income. Expenses increased 5% over the year, with most of that increase due to investment related costs, including the reconfiguration and upgrade of our branches and launching a new online capability in both Australia and New Zealand. These investments represent a deliberate commitment to the future of our franchise, and were partially offset by productivity benefits in our existing operations of around $239million. Our expense to income ratio for the year was 42%, a little higher than 2014 but still ranking us as the most efficient bank in Australia, and one of the more efficient banks globally. Impairment charges (or bad debts) were $103 million higher over the year with the increase due to lower write-backs, higher write-offs and the growth in our book. To be clear, the rise in impairments is in the context of a portfolio that has been well managed and is in good shape, rather than from a deterioration in asset quality. Over recent years we have been successful in assisting stressed businesses to improve their financial position. This has meant we have been able to write back provisions that we had previously set aside for loss. However, there is a limited pool of such stressed assets, and as the proportion of stressed companies has declined, so too have the write- backs—leading to a net increase in impairments charge. The increase in lending was mostly due to an increase in Divisional Performance Australian mortgages of 7%, which was broadly in line with To support our service strategy, we made changes during growth in the system. Within housing, the investor category the year to our organisational structure. This has led to the has seen much attention over the year, particularly following creation of two new divisions: Consumer Bank, with the introduction of a regulatory cap on growth of 10% per accountability for the service and support of retail banking annum. We responded by tightening our lending criteria and customers; and the Commercial & Business Bank, to adjusting our pricing on investment loans, and our growth has now eased below the 10% limit. At the same time, as support the needs of commercial and small business customers. These divisions will continue to support our Given the restructure occurred in the latter half of the year we reported our 2015 performance using the previous operating structure; the new structure will apply to our 2016 reporting. Our retail and business banking divisions represent 69% of our business and were the real drivers of performance this year. Westpac Retail & Business Banking increased cash earnings by 8%, St.George Banking Group increased cash earnings by 7% and our New Zealand business increased cash earnings by 6% in $NZ and by 8% in $A. This was achieved through disciplined balance sheet growth, well-managed margins and improved efficiency. For Westpac Retail & Business Banking, the highlight of the year was the completion and roll-out to customers of Westpac Live, our sector-leading online/mobile platform. In St.George all of our brands contributed, and our Bank of Melbourne expansion in particular, continues to be a great success story. For Westpac NZ, the highlight was our alliance with Air New Zealand to offer Airpoints to customers, which has seen significant growth in our customer base. Cash earnings for Westpac Institutional Bank (WIB) were 12% lower than full year 2014. While WIB achieved good growth in target areas, it faced some significant headwinds this year. These included an accounting change for derivative adjustments which reduced pre-tax earnings by $122 million, and lower margins from high levels of global liquidity. WIB is the premier institutional banking franchise in the country. Despite the headwinds, it generates good returns overall and provides significant value to both our retail banking and wealth businesses. However, the division operates in international markets and is more impacted by global developments. The most obvious example has been the impact of ongoing quantitative easing adopted by a number of international central banks, which has artificially increased global liquidity and driven down margins on institutional lending. This can be seen in WIB’s 15 basis point decline in margins over the year. In wealth, we have a genuine comparative advantage in the way we make it more convenient for customers to manage their banking and wealth needs. In 2015, BT Financial Group continued to grow, although this growth was tempered by the partial sale of the division’s active fund manager BTIM and higher catastrophe insurance claims. Our investment in BTIM has been very successful, but we don’t see our competitive advantage coming from active funds management: it’s a highly competitive activity and clients rightly want investment recommendations that avoid conflicts of interest. Our sell-down therefore allowed us to release capital, while allowing us to continue to work closely with BTIM to manufacture innovative products that meet client investment needs. Through the year we also finalised the sale of three Pacific Island businesses in Samoa, Tonga and the Cook Islands. The sale of our business in the Solomon Islands was Chief Executive Officer’s report completed on 30th of October 2015 while the proposed sale of Westpac’s Vanuatu operations has not yet proceeded. The decision was driven by our desire to reduce risk of operating in these small but challenging markets, with the purchaser (the Bank of South Pacific) being based in the region and therefore having a better long-term appetite and skillset in managing these challenges. Westpac will continue to operate in Fiji and Papua New Guinea, which are both larger markets where we have been operating successfully for some time. Asset quality continues to improve Asset quality was a highlight for the year, continuing its improving trend. Stressed assets to total committed exposures is a key measure we watch closely; that ratio has fallen again this year to 0.99% and is down from a peak of 3.20% in the middle of the GFC. At the same time, impaired assets declined 19% while the provision coverage against impaired assets was steady at 46%. Looking more closely at the consumer portfolio, mortgage delinquencies are little changed over the year. The trends in unsecured lending are similar. There has been much discussion around the slowdown in mining and the potential for an increase in bad debts. This is an area we're watching closely and includes businesses directly affected by lower commodity prices as well as those companies supporting the industry across a broader range of sectors. Westpac has been underweight the mining and mining services sectors for some time and while we expect conditions to get worse before they get better, we are confident with the high quality of our portfolio. Where we do have exposures, they are largely to the higher-quality names that have efficient operating costs. That said, further losses are likely and we have put aside additional provisions in our economic overlays just in case, but the size of those losses is not expected to be material. Housing has also continued to be a hotly discussed topic through the year with price rises leading some commentators to claim that we are in the midst of a housing bubble. There is no doubt housing prices are strong in some markets, but we do not subscribe to the view that we are in a bubble. That’s because we believe the economics of Australian housing are sound. We are seeing genuine demand for housing that has consistently exceeded supply from both investors and owner-occupiers. It is only recently that we have seen an increase in building activity to help match demand. In addition, and perhaps more importantly, there has been no easing in credit standards across the industry. By that I mean we continue to lend to those people who have the capacity to repay, and the standards by which we measure that capacity have not relaxed—in fact we tightened our lending criteria in a number of areas this year. So overall we see the housing market as rational, with sound fundamentals. Of course, that does not mean we will not see stress in selected pockets. The housing market will always remain a local proposition, and we continue to monitor our exposures 10 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 11 1 Chief Executive Officer’s report Summary On 8 April 2017, Westpac will be the first Australian company to reach 200 years of age. As we look forward to celebrating that important milestone, I believe we are well positioned as we approach our third century of business. Given all the changes going on in the economy and in the banking industry, our focus on service and helping customers achieve what’s important to them is the right strategy for the times. At the same time, we remain committed to getting the balance right between all of our stakeholders. Finally, I’d like to assure you as a shareholder that I and my executive team are committed to building on the strong foundation we’ve inherited. We will continue to run and grow our business in a sustainable way that we trust will make you proud of your association with Westpac and pleased with your investment in our shares. With warm regards, BRIAN HARTZER Chief Executive Officer Westpac Group at a local area-by-local area level (and sometimes a building by building level). In addition, we recognise that housing affordability continues to be an issue in the community. Nevertheless we are not expecting a major housing downturn. Impact of changing regulation One of the main challenges of the post-GFC environment has been the increase in regulatory requirements and oversight. We have seen this across both banking and wealth, in our financial markets activities, and in the requirements for how we manage the balance sheet, including capital. The direct costs of these changes are significant: In 2015 we spent $260 million on modifying our systems in response to regulatory change, after spending $340 million in 2014. In response to new capital rules, by the end of this calendar year Westpac will have raised the level of equity capital we hold by almost $6 billion in less than 12 months. That’s a significant increase, which lifts our internationally comparable capital ratios well into the top quartile of banks globally. Most of that capital has been sourced from existing shareholders, and I would like to especially thank you for your support. During the year, Westpac also implemented and reported under new liquidity coverage ratio requirements, adding further strength to our balance sheet. These requirements are being introduced across the globe to improve the resilience of banks to liquidity shocks. The goal is to ensure we hold sufficient liquid assets to support potential cash outflows in a stressed scenario, and we are required to maintain a ratio of greater than 100%. At 30 September our ratio was 121% and we held $136 billion in unencumbered liquid assets. against mortgages is increasing by over 50%. We took the difficult decision that this had to be incorporated in our pricing, which resulted in an increase on variable mortgage interest rates of 15 to 20 basis points. As this increase does not fully recover the economic cost of capital, we continue to believe this was a fair balancing of costs between customers and shareholders. Looking to the future, we have sought to be as clear as possible on our capital needs and implications for our dividend policy. However, there is still some uncertainty over how much capital banks globally will need to hold, as regulators continue to review the system. We expect the international regulator – the Basel Committee on Banking Supervision – to deliver recommendations by 2016, following which our local regulator, APRA, will need to decide how this may be applied to Australian banks. We trust that any future changes to capital will be fully assessed taking into consideration their ultimate impact on consumers, the financial sector, and the economy as a whole. Having already raised capital above our preferred range and at the upper end of banks globally we feel well placed to respond to any further change. Sustainable future I am confident the actions we are taking in line with our strategic priorities are setting us on the right course to help maintain solid returns, while positioning us well for the future. We recognise that much of our future value is dependent on our ability to sustain our reputation and relationship with customers and the wider community. That’s why we take very seriously our approach to sustainability overall, including our response to important social and economic issues. We fully support the notion that Australia’s banks need to be ‘unquestionably strong’ and that more capital and better liquidity management are important steps to creating a system more resilient to future global financial shocks. In line with this approach, we made significant progress against the goals of our 2017 Sustainability Strategy, the details of which are in our supplementary 2015 Sustainability Performance Report. However, we recognise that strength comes at a cost, which is ultimately borne by customers and shareholders. What is often forgotten in the public debate on this issue is that our capital overwhelmingly represents the savings, retirement funds, and the superannuation balances of individual Australians. Around 50% of our shares are held directly by individuals and superannuation funds, with approximately 30% held by Australian institutions whose role is to manage the retirement savings of many more Australians. So we have an obligation to ensure that we obtain an appropriate return on that capital. And so in raising incremental capital, we have sought to apportion the increased cost in a way that strikes a fair balance between customers and shareholders. As part of this, many shareholders will be aware that we needed to slow the pace of our dividend increases to one cent per half. Similarly, our return on equity has eased over the year as the amount of equity has increased. Much of the higher capital requirements relates to mortgages; specifically, the capital we will need to hold At the core of this strategy is our goal to make a significant positive impact on our communities. We estimate the value of the financial backing and banking services we provide to initiatives and projects that create positive societal outcomes is around $124 billion. This includes lending aimed at growing the stock of social and affordable housing, and more than $6 billion driving growth in the CleanTech and environmental service sector. Through this backing, we are playing a vital role in mobilising finance to help address the big issues that face our communities, such as climate change and financial resilience. This complements our ongoing commitment to responsible lending and finance. 12 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 13 Chief Executive Officer’s report Summary On 8 April 2017, Westpac will be the first Australian company to reach 200 years of age. As we look forward to celebrating that important milestone, I believe we are well positioned as we approach our third century of business. Given all the changes going on in the economy and in the banking industry, our focus on service and helping customers achieve what’s important to them is the right strategy for the times. At the same time, we remain committed to getting the balance right between all of our stakeholders. Finally, I’d like to assure you as a shareholder that I and my executive team are committed to building on the strong foundation we’ve inherited. We will continue to run and grow our business in a sustainable way that we trust will make you proud of your association with Westpac and pleased with your investment in our shares. With warm regards, BRIAN HARTZER Chief Executive Officer Westpac Group at a local area-by-local area level (and sometimes a building against mortgages is increasing by over 50%. We took the by building level). In addition, we recognise that housing affordability continues to be an issue in the community. Nevertheless we are not expecting a major housing downturn. Impact of changing regulation One of the main challenges of the post-GFC environment has been the increase in regulatory requirements and oversight. We have seen this across both banking and wealth, in our financial markets activities, and in the requirements for how we manage the balance sheet, including capital. The direct costs of these changes are significant: In 2015 we spent $260 million on modifying our systems in response to regulatory change, after spending $340 million in 2014. In response to new capital rules, by the end of this calendar year Westpac will have raised the level of equity capital we hold by almost $6 billion in less than 12 months. That’s a significant increase, which lifts our internationally comparable capital ratios well into the top quartile of banks globally. Most of that capital has been sourced from existing shareholders, and I would like to especially thank you for your support. difficult decision that this had to be incorporated in our pricing, which resulted in an increase on variable mortgage interest rates of 15 to 20 basis points. As this increase does not fully recover the economic cost of capital, we continue to believe this was a fair balancing of costs between customers and shareholders. Looking to the future, we have sought to be as clear as possible on our capital needs and implications for our dividend policy. However, there is still some uncertainty over how much capital banks globally will need to hold, as regulators continue to review the system. We expect the international regulator – the Basel Committee on Banking Supervision – to deliver recommendations by 2016, following which our local regulator, APRA, will need to decide how this may be applied to Australian banks. We trust that any future changes to capital will be fully assessed taking into consideration their ultimate impact on consumers, the financial sector, and the economy as a whole. Having already raised capital above our preferred range and at the upper end of banks globally we feel well placed to respond to any further change. Sustainable future I am confident the actions we are taking in line with our During the year, Westpac also implemented and reported strategic priorities are setting us on the right course to help under new liquidity coverage ratio requirements, adding maintain solid returns, while positioning us well for further strength to our balance sheet. These requirements the future. are being introduced across the globe to improve the resilience of banks to liquidity shocks. The goal is to ensure we hold sufficient liquid assets to support potential cash outflows in a stressed scenario, and we are required to maintain a ratio of greater than 100%. At 30 September our ratio was 121% and we held $136 billion in unencumbered liquid assets. We recognise that much of our future value is dependent on our ability to sustain our reputation and relationship with customers and the wider community. That’s why we take very seriously our approach to sustainability overall, including our response to important social and economic issues. We fully support the notion that Australia’s banks need to be ‘unquestionably strong’ and that more capital and better liquidity management are important steps to creating a system more resilient to future global financial shocks. In line with this approach, we made significant progress against the goals of our 2017 Sustainability Strategy, the details of which are in our supplementary 2015 Sustainability Performance Report. However, we recognise that strength comes at a cost, which is ultimately borne by customers and shareholders. What is often forgotten in the public debate on this issue is that our capital overwhelmingly represents the savings, retirement funds, and the superannuation balances of individual Australians. Around 50% of our shares are held directly by individuals and superannuation funds, with approximately 30% held by Australian institutions whose role is to manage the retirement savings of many more Australians. So we have an obligation to ensure that we obtain an appropriate return on that capital. And so in raising incremental capital, we have sought to apportion the increased cost in a way that strikes a fair balance between customers and shareholders. As part of this, many shareholders will be aware that we needed to slow the pace of our dividend increases to one cent per half. Similarly, our return on equity has eased over the year as the amount of equity has increased. Much of the higher capital requirements relates to mortgages; specifically, the capital we will need to hold At the core of this strategy is our goal to make a significant positive impact on our communities. We estimate the value of the financial backing and banking services we provide to initiatives and projects that create positive societal outcomes is around $124 billion. This includes lending aimed at growing the stock of social and affordable housing, and more than $6 billion driving growth in the CleanTech and environmental service sector. Through this backing, we are playing a vital role in mobilising finance to help address the big issues that face our communities, such as climate change and financial resilience. This complements our ongoing commitment to responsible lending and finance. 12 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 13 1 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 consumer1, business and institutional banking and wealth management services. We have branches, affiliates and controlled entities2 throughout Australia, New Zealand, Asia and the Pacific region, and maintain branches and offices in some of the key financial centres around the world3. 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 2015, our market capitalisation was $95 billion4 and we had total assets of $812 billion. Business strategy Westpac’s vision is ‘To be one of the world’s great service 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 focussed 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 the financial services needs of our customers. With our strong position in these markets, and over 13 million customers5, 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. 1 A consumer is defined as a person that uses our products and services. It does not include business entities. 2 Refer to Note 35 to the financial statements for a list of our material controlled entities as at 30 September 2015. 3 Contact details for our head office, major businesses and offshore locations can be found on the inside back cover. 4 Based on the closing share price of our ordinary shares on the ASX as at 30 September 2015. 5 All customers with an active relationship (excludes channel only and potential relationships) as at 30 September 2015. 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. As part of our service-focussed strategy, in 2015 we embarked on a service revolution for our customers. This program is a substantial step-up in our strategy seeking to: provide a truly personal service for customers while better anticipating their needs; put customers in control of their finances; and innovate and simplify to reinvent the customer experience. As part of our multi-year transformation, we implemented a new operating structure to increase clarity of accountability for transformation while simplifying and speeding up decision making. We also recognise that digitisation is occurring at an accelerated pace and customer behaviours are changing. The service revolution responds to these trends with the support of digital technologies. This includes new services that make banking available 24/7 such as smart ATMs and our new online/mobile platform, Westpac Live. It extends to new banking apps that provide greater flexibility for customers to choose how to manage their finances, and it includes using digitisation to simplify our processes to provide a better customer experience. With market leading front-end systems, we are now focussed on aligning our technology architecture to our service strategy. Sustainability is part of our strategy where we seek to anticipate and shape 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 focussed 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. Strategic priorities Organisational structure To meet the challenges of the current environment and Our operations comprise five primary customer-facing deliver on our strategy, we have established clear strategic business divisions operating under multiple brands serving Information on Westpac acquire new customers by making it simpler, easier and customers (businesses with facilities up to $150 million) in priorities: a) Performance discipline to be the region’s best performing bank; manage the business in a balanced way across strength, growth, return and productivity; maintain strong levels of capital, to meet the needs of all our stakeholders and requirements of regulators; continue to enhance our funding and liquidity position, including ensuring a diversity of funding pools and optimising the composition of customer deposits; and maintain a high quality portfolio of assets, coupled with strong provisioning. b) Service leadership all channels; experiences; and provide a seamless customer experience across deepen relationships through context-based customer better for people to bank with us. c) Digital transformation create a 21st century, digitised bank with multi- brand capabilities; simplify products and processes by digitising end-to- end; and drive efficiency opportunities from digitisation and consolidation of systems. d) Targeted growth pursue growth opportunities; and wealth and Asia. e) Workforce revolution focus on stronger growth in small to medium enterprise, focus on a customer service, high performance workforce and culture; strengthen the skills of our people to better serve customers and meet their complete financial needs; empower our people to drive innovation, deliver new and improved ways of working and be responsive to change; and continue to enhance the diversity of our workforce. around 13 million customers. Although Westpac announced in June 2015 that it would implement a new organisational structure for its Australian retail and business banking operations, up to 30 September 2015, the accounting and financial performance continued to be reported (both internally and externally) on the basis of the existing structure. That structure is as follows: Westpac Retail & Business Banking (Westpac RBB) is responsible for sales and service to consumer, small-to- medium enterprise (SME), commercial and agribusiness customers (with turnover of up to $100 million) in Australia under the Westpac brand. Activities are conducted through Westpac RBB’s network of branches, third party distributors, call centres, automatic teller machines (ATMs), EFTPOS terminals, internet and mobile banking services, business banking centres and specialised consumer and business relationship managers. Support is provided by cash flow, trade finance, transactional banking, financial markets, property finance and wealth specialists. St.George Banking Group (St.George) is responsible for sales and service to consumer, SME and corporate Australia under the St.George, BankSA, Bank of Melbourne and RAMS brands. RAMS is a financial services group specialising in mortgages and online deposits. Activities are conducted through St.George’s network of branches, third- party distributors, call centres, ATMs, EFTPOS terminals, internet and mobile banking services, business banking centres and specialised consumer and business relationship managers. Support is provided by cash flow, trade finance, transactional banking, automotive and equipment finance, financial markets, property finance and wealth specialists. BT Financial Group (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 including BT Wrap and Asgard, private banking, financial planning as well as equity capability 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 Select, Licensee Select, Securitor and the Advice, Private Banking and Insurance operations of Bank of Melbourne, BankSA, St.George and Westpac. In June 2015, Westpac announced the partial sale of its interest in BT Investment Management (BTIM). Following completion of the sale, Westpac’s holding in BTIM decreased from 59.1% of BTIM’s issued capital to 31.0%. 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; this includes a growing customer base in Asia. 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, the United States and the United Kingdom. 14 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 15 Information on Westpac Westpac is one of the four major banking organisations in Asia is an important market for us and we are progressively 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 consumer1, business and institutional banking and wealth management services. 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. We have branches, affiliates and controlled entities2 While we continue to build the business, the financial throughout Australia, New Zealand, Asia and the Pacific services environment remains challenging and has required region, and maintain branches and offices in some of the us to maintain focus on strengthening our financial position key financial centres around the world3. 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 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. New South Wales Parliament. In 1982 we changed our While we are currently one of the most efficient banks name to Westpac Banking Corporation following our merger globally, as measured by a cost to income ratio, we continue with the Commercial Bank of Australia. On 23 August 2002, to focus on ways to simplify our business to make it easier we were registered as a public company limited by shares for customers to do business with us and to make work more under the Australian Corporations Act 2001 (Cth) enjoyable for our people. We believe that these (Corporations Act). As at 30 September 2015, our market capitalisation was $95 billion4 and we had total assets of $812 billion. Business strategy Westpac’s vision is ‘To be one of the world’s great service 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 focussed 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 the financial services needs of our customers. With our strong position in these markets, and over 13 million customers5, 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. improvement efforts also contribute to reducing unit costs that create capacity for further investment for growth. As part of our service-focussed strategy, in 2015 we embarked on a service revolution for our customers. This program is a substantial step-up in our strategy seeking to: provide a truly personal service for customers while better anticipating their needs; put customers in control of their finances; and innovate and simplify to reinvent the customer experience. As part of our multi-year transformation, we implemented a new operating structure to increase clarity of accountability for transformation while simplifying and speeding up decision making. We also recognise that digitisation is occurring at an accelerated pace and customer behaviours are changing. The service revolution responds to these trends with the support of digital technologies. This includes new services that make banking available 24/7 such as smart ATMs and our new online/mobile platform, Westpac Live. It extends to new banking apps that provide greater flexibility for customers to choose how to manage their finances, and it includes using digitisation to simplify our processes to provide a better customer experience. With market leading front-end systems, we are now focussed on aligning our technology architecture to our service strategy. Sustainability is part of our strategy where we seek to anticipate and shape 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 focussed strategy is a strong set of company-wide values, which are embedded in our culture. 1 A consumer is defined as a person that uses our products and services. It does not include business entities. 2 Refer to Note 35 to the financial statements for a list of our material controlled entities as at 30 September 2015. 3 Contact details for our head office, major businesses and offshore locations can be found on the inside back cover. 4 Based on the closing share price of our ordinary shares on the ASX as at 30 September 2015. 5 All customers with an active relationship (excludes channel only and potential relationships) as at 30 September 2015. These are: delighting customers; one team; integrity; courage; and achievement. Strategic priorities To meet the challenges of the current environment and deliver on our strategy, we have established clear strategic priorities: a) Performance discipline to be the region’s best performing bank; manage the business in a balanced way across strength, growth, return and productivity; maintain strong levels of capital, to meet the needs of all our stakeholders and requirements of regulators; continue to enhance our funding and liquidity position, including ensuring a diversity of funding pools and optimising the composition of customer deposits; and maintain a high quality portfolio of assets, coupled with strong provisioning. b) Service leadership provide a seamless customer experience across all channels; deepen relationships through context-based customer experiences; and acquire new customers by making it simpler, easier and better for people to bank with us. c) Digital transformation create a 21st century, digitised bank with multi- brand capabilities; simplify products and processes by digitising end-to- end; and drive efficiency opportunities from digitisation and consolidation of systems. d) Targeted growth pursue growth opportunities; and focus on stronger growth in small to medium enterprise, wealth and Asia. e) Workforce revolution focus on a customer service, high performance workforce and culture; strengthen the skills of our people to better serve customers and meet their complete financial needs; empower our people to drive innovation, deliver new and improved ways of working and be responsive to change; and continue to enhance the diversity of our workforce. Information on Westpac Organisational structure Our operations comprise five primary customer-facing business divisions operating under multiple brands serving around 13 million customers. Although Westpac announced in June 2015 that it would implement a new organisational structure for its Australian retail and business banking operations, up to 30 September 2015, the accounting and financial performance continued to be reported (both internally and externally) on the basis of the existing structure. That structure is as follows: Westpac Retail & Business Banking (Westpac RBB) is responsible for sales and service to consumer, small-to- medium enterprise (SME), commercial and agribusiness customers (with turnover of up to $100 million) in Australia under the Westpac brand. Activities are conducted through Westpac RBB’s network of branches, third party distributors, call centres, automatic teller machines (ATMs), EFTPOS terminals, internet and mobile banking services, business banking centres and specialised consumer and business relationship managers. Support is provided by cash flow, trade finance, transactional banking, financial markets, property finance and wealth specialists. St.George Banking Group (St.George) is responsible for sales and service to consumer, SME and corporate customers (businesses with facilities up to $150 million) 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. Activities are conducted through St.George’s network of branches, third- party distributors, call centres, ATMs, EFTPOS terminals, internet and mobile banking services, business banking centres and specialised consumer and business relationship managers. Support is provided by cash flow, trade finance, transactional banking, automotive and equipment finance, financial markets, property finance and wealth specialists. BT Financial Group (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 including BT Wrap and Asgard, private banking, financial planning as well as equity capability 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 Select, Licensee Select, Securitor and the Advice, Private Banking and Insurance operations of Bank of Melbourne, BankSA, St.George and Westpac. In June 2015, Westpac announced the partial sale of its interest in BT Investment Management (BTIM). Following completion of the sale, Westpac’s holding in BTIM decreased from 59.1% of BTIM’s issued capital to 31.0%. 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; this includes a growing customer base in Asia. 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, the United States and the United Kingdom. 14 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 15 1 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 three Pacific Island Nations. Branches, ATMs, telephone banking and internet banking channels are used to deliver business activities in Fiji, Papua New Guinea (PNG) and Vanuatu. In July 2015, Westpac announced that it had sold its banking operations in Samoa, Cook Islands and Tonga to the Bank of South Pacific Limited (BSP). On 30 October 2015, Westpac sold its banking operations in the Solomon Islands to BSP. Westpac Pacific’s financial products include personal savings, business transactional accounts, personal and business lending products, business services and a range of international products; Customer & Business Services, which encompasses banking operations, customer contact centres, product, marketing, compliance, legal and property services; Group Technology, which comprises functions responsible for technology strategy and architecture, infrastructure and operations, applications development and business integration; Treasury, which is primarily focussed 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. Westpac Retail & Business Banking St.George Banking Group Wealth Institutional Westpac New Zealand Inclusivity Customer & Business Services Group Technology Core Support For a description of the new organisational structure for Australian retail and business banking, see ‘Significant developments – new organisational structure’. Information on Westpac Westpac’s approach to sustainability Sustainability materiality Across the Westpac Group, we believe in establishing a As part of our annual materiality review we identify, prioritise sustainable future for our operations and our stakeholders. and define issues according to their impact on our This view is embedded in our strategy, values, culture and processes. In practice, this means we seek to 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 key principles: Inclusivity; involving all stakeholders in developing our strategy - evaluating all issues identified to determine the impact they may have on our stakeholders and our operations - Sustainability materiality; and ensuring our decisions, actions and performance, as well as our communication with stakeholders, are responsive to the issues identified – Responsiveness. stakeholders and our business. These issues are reviewed externally and internally and are assessed by Ernst & Young as part of their assurance. Material issues identified in 2015 include: the need to respond to changing customer expectations; the effect of digitisation on the way customers and businesses interact and do business; new regulatory requirements that are shaping the financial services industry; and the importance of understanding and managing environmental, social and corporate governance risks within our value chain. For further detail, please see our online Annual Review and Sustainability Report and Sustainability Performance Report. Responsiveness The issues identified during our materiality review directly inform the development of our responses, objectives and 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 serve our customers), we continue to track our progress against the sustainability strategy, which guides 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; In line with AA1000, we have adopted the Standard’s three performance measures. Our approach to inclusivity during 2015 has included: help find solutions to environmental challenges; and continuing work to understand and address help our customers to have a better relationship with customer concerns; our approach; collaborating with key external stakeholders to inform 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. money, for a better life. During 2015 we have updated the targets within our sustainability strategy, reflecting stakeholder feedback, to include: additional metrics to provide a more complete picture of our environmental performance, including a greenhouse gas emissions target for retail and commercial property and water and waste reduction targets; a higher threshold for determining the green buildings included in our target for lending and investment to the CleanTech and environmental services sector, in line with industry trends; and a new target to recruit 500 additional Indigenous Australians by 2017. 16 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 17 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: retail and business customers in three Pacific Island Nations. Branches, ATMs, telephone banking and internet banking channels are used to deliver business activities in Fiji, Papua New Guinea (PNG) and Vanuatu. In July 2015, Westpac announced that it had sold its banking operations in Samoa, Cook Islands and Tonga to the Bank of South Pacific Limited (BSP). On 30 October 2015, Westpac sold its banking operations in the Solomon Islands to BSP. Westpac Pacific’s financial products include personal savings, business transactional accounts, personal and business lending products, business services and a range of international products; Customer & Business Services, which encompasses banking operations, customer contact centres, product, marketing, compliance, legal and property services; Group Technology, which comprises functions responsible for technology strategy and architecture, infrastructure and operations, applications development and business integration; Treasury, which is primarily focussed 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 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. Westpac Pacific, which provides banking services for human resources. Westpac Retail & Business Banking St.George Banking Group Wealth Institutional Westpac New Zealand Customer & Business Services Group Technology Core Support For a description of the new organisational structure for Australian retail and business banking, see ‘Significant developments – new organisational structure’. 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 seek to 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: involving all stakeholders in developing our strategy - Inclusivity; evaluating all issues identified to determine the impact they may have on our stakeholders and our operations - Sustainability materiality; and 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 2015 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. 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 Ernst & Young as part of their assurance. Material issues identified in 2015 include: the need to respond to changing customer expectations; the effect of digitisation on the way customers and businesses interact and do business; new regulatory requirements that are shaping the financial services industry; and the importance of understanding and managing environmental, social and corporate governance risks within our value chain. For further detail, please see our online Annual Review and Sustainability Report and Sustainability Performance Report. Responsiveness The issues identified during our materiality review directly inform the development of our responses, objectives and performance measures. 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 serve our customers), we continue to track our progress against the sustainability strategy, which guides 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 our customers to have a better relationship with money, for a better life. During 2015 we have updated the targets within our sustainability strategy, reflecting stakeholder feedback, to include: additional metrics to provide a more complete picture of our environmental performance, including a greenhouse gas emissions target for retail and commercial property and water and waste reduction targets; a higher threshold for determining the green buildings included in our target for lending and investment to the CleanTech and environmental services sector, in line with industry trends; and a new target to recruit 500 additional Indigenous Australians by 2017. 16 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 17 1 Performance against sustainability objectives1 Objectives Priority Help improve the way people work and live as our society changes Ensure our workforce is representative of the community. Extend length and quality of working lives. Help find solutions to environmental challenges Help customers to have a better relationship with money, for a better life Anticipate the future product and service needs of ageing and culturally diverse customers. Provide products and services to help customers adapt to environmental challenges. Increase lending and investment in CleanTech and environmental services. Reduce our environmental footprint. Ensure all our customers have access to the right advice to achieve a secure retirement. Help our customers meet their financial goals in retirement. Increase access to financial services. Increased women in leadership2 to 46%, up from 44% in 2014. Full year 2015 performance Recruited an additional 150 Indigenous Australians. Participation of mature age workers (50+) is 20.8%, down from 20.9% one year ago. Employee mean retirement age has remained steady at 61.6 years. The Group has continued to promote flexible working including training for people leaders and the creation of online training and tools to support a gradual transition to retirement. A Wellbeing Policy was developed for the Group. Launched BTFG’s ‘Changing the Face of Advice’ program in October 2014, incorporating the Adviser View register with planner qualifications and customer ratings. The program also covers higher minimum educational and ethical standards for all BTFG planners and the launch of an Advice Commitment customer charter. The intent of the program is to give Australians access to better information on financial planning and planners. Since 2013 launched five unique product/services, including the issuance of a green bond in September 2015 to directly fund renewable and green building projects in Australia. Following the introduction of a higher threshold for green buildings in line with industry trends, total TCE for the CleanTech and environmental services sector is $6.1 billion, still ahead of our $6 billion target by 2017. 60.7% of total energy financing is directed to renewable energy generation (including hydro, wind and solar). Maintained carbon neutrality. Achieved our power use effectiveness and energy efficiency targets of 1.7PUE and 197kWh/m2 respectively. Recycling rates in Sydney head offices improved to 61%, tracking ahead of target. Reached our stretch target of a 15% reduction in office paper two years ahead of schedule. 1,588 customer facing employees hold an externally recognised wealth accreditation, 90% against target. The take-up of superannuation and retirement offers has been impacted by regulatory changes affecting the industry, including the Future of Financial Advice reforms. A new customer engagement and retention program commenced during the year. Met the Group’s 2015 target for Westpac Pacific with over 292,000 net basic banking accounts. In-store transaction volumes were over 391,000 and mobile banking activations over 58,000. Help people gain access to social and affordable housing and services. Loaned more than $1.0 billion to the social and affordable housing sector as at 30 September 2015, up from $0.82 billion as at 30 September 2014. Construction commenced on 275 new affordable homes as part of the Group’s largest single community housing finance. 1 All results as at 30 September 2015 except environmental footprint which is as at 30 June 2015. Refer to www.westpac.com.au/sustainability for glossary of terms and metric definitions. 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 Executive Team, General Managers, Senior Managers as direct reports to General Managers and the next two levels of management. Excludes Westpac Pacific. 18 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 19 Five year non-financial summary1 Customer Total customers (millions)2 Digitally active customers (millions)3 Branches Branches with 24/7 capability (%)4 Number of ATMs Smart ATMs (%)5 Net Promoter Score (NPS) Australia - consumer6 Net Promoter Score (NPS) Australia - business6 Net Promoter Score (NPS) NZ - consumer6 Change in consumer complaints (%) - Australia Change in consumer complaints (%) - NZ Products per customer7 Wealth customer penetration (%)8 Employees Employee Voluntary Attrition (%)9 New Starter Retention (%)10 High Performer Retention (%)11 Lost Time Injury Frequency Rate (LTIFR)12 Women as a percentage of the total workforce (%) Women in Leadership (%)13 Information on Westpac 2015 2014 2013 2012 2011 11.8 4.0 11.5 3.7 1,429 1,534 1,544 1,538 1,532 3,850 3,890 3,814 3,639 3,544 13.1 4.9 22 31 1.1 (0.7) +5 (31) (22) 2.98 19.7 10.6 85.3 95.0 0.8 59 46 12.8 4.7 15 24 0.9 1.2 +2 (27) (19) 2.96 20.0 9.8 88.0 95.8 1.1 59 44 12.2 4.2 - 17 (2.4) (5.3) +8 (15) (16) 3.00 18.7 9.8 86.7 95.7 1.5 60 42 (7.7) (10.8) +9 2.84 18.4 9.9 84.8 95.9 1.9 61 40 - - - - - - - (7.7) (7.0) n/a3 - - - - - 17.0 11.5 84 95.3 2.5 61 38 - - - Total core (permanent) full time equivalent staff (number at financial year end) 32,620 33,586 33,045 33,418 33,898 Environment Total Scope 1 and 2 emissions - Aust and NZ (tonnes CO2-e)14 Total Scope 3 emissions - Aust and NZ (tonnes CO2-e)15 Paper Consumption - Aust and NZ (tonnes)16 173,437 175,855 180,862 183,937 184,124 67,959 73,871 85,013 91,855 57,163 4,857 5,334 5,762 Responsible lending and investment Proportion of electricity generation financing in renewables including hydro - Aust and NZ (%) 17 Electricity generation portfolio emissions intensity (tonnes CO2-e/MWh)18 Finance assessed under the Equator Principles - Group ($m)19 Responsible Investment Funds Under Management ($m)20 Social impact Community investment ($m)21 Community investment as a percentage of pre-tax profits - Group (%) Community investment as a percentage of pre-tax operating profit (cash earnings basis) Financial education (participants)22 Supply chain Top suppliers self-assessed - Australia (%)23 Spend with Indigenous suppliers - Australia ($ million)24 61 0.38 1,065 15,017 59 0.41 851 - 55 0.44 268 - 52 45 1,140 383 116 1.04 217 2.02 131 1.33 133 1.50 155 1.82 1.02 1.99 1.28 1.41 1.72 60,342 49,812 32,577 36,182 42,109 100 1.2 100 - 98 - 94 - 92 - Performance against sustainability objectives1 Priority Objectives Full year 2015 performance Help improve the way people work and live as our Ensure our workforce is representative of the community. society changes Extend length and quality of working lives. Help find solutions to environmental challenges Help customers to have a better relationship with money, for a better life Anticipate the future product and service needs of ageing and culturally diverse customers. Provide products and services to help customers adapt to environmental challenges. Increase lending and investment in CleanTech and environmental services. Reduce our environmental footprint. Ensure all our customers have access to the right advice to achieve a secure retirement. Help our customers meet their financial goals in retirement. Increase access to financial services. Increased women in leadership2 to 46%, up from 44% in 2014. Recruited an additional 150 Indigenous Australians. Participation of mature age workers (50+) is 20.8%, down from 20.9% one year ago. Employee mean retirement age has remained steady at 61.6 years. The Group has continued to promote flexible working including training for people leaders and the creation of online training and tools to support a gradual transition to retirement. A Wellbeing Policy was developed for the Group. Launched BTFG’s ‘Changing the Face of Advice’ program in October 2014, incorporating the Adviser View register with planner qualifications and customer ratings. The program also covers higher minimum educational and ethical standards for all BTFG planners and the launch of an Advice Commitment customer charter. The intent of the program is to give Australians access to better information on financial planning and planners. Since 2013 launched five unique product/services, including the issuance of a green bond in September 2015 to directly fund renewable and green building projects in Australia. Following the introduction of a higher threshold for green buildings in line with industry trends, total TCE for the CleanTech and environmental services sector is $6.1 billion, still ahead of our $6 billion target by 2017. 60.7% of total energy financing is directed to renewable energy generation (including hydro, wind and solar). Maintained carbon neutrality. and 197kWh/m2 respectively. Achieved our power use effectiveness and energy efficiency targets of 1.7PUE Recycling rates in Sydney head offices improved to 61%, tracking ahead Reached our stretch target of a 15% reduction in office paper two years ahead of target. of schedule. 1,588 customer facing employees hold an externally recognised wealth accreditation, 90% against target. The take-up of superannuation and retirement offers has been impacted by regulatory changes affecting the industry, including the Future of Financial Advice reforms. A new customer engagement and retention program commenced during the year. Met the Group’s 2015 target for Westpac Pacific with over 292,000 net basic banking accounts. In-store transaction volumes were over 391,000 and mobile banking activations over 58,000. 1 All results as at 30 September 2015 except environmental footprint which is as at 30 June 2015. Refer to www.westpac.com.au/sustainability for glossary of terms and metric definitions. 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 Executive Team, General Managers, Senior Managers as direct reports to General Managers and the next two levels of management. Excludes Westpac Pacific. Five year non-financial summary1 Customer Total customers (millions)2 Digitally active customers (millions)3 Branches Branches with 24/7 capability (%)4 Number of ATMs Smart ATMs (%)5 Net Promoter Score (NPS) Australia - consumer6 Net Promoter Score (NPS) Australia - business6 Net Promoter Score (NPS) NZ - consumer6 Change in consumer complaints (%) - Australia Change in consumer complaints (%) - NZ Products per customer7 Wealth customer penetration (%)8 Employees Total core (permanent) full time equivalent staff (number at financial year end) Employee Voluntary Attrition (%)9 New Starter Retention (%)10 High Performer Retention (%)11 Lost Time Injury Frequency Rate (LTIFR)12 Women as a percentage of the total workforce (%) Women in Leadership (%)13 Environment Total Scope 1 and 2 emissions - Aust and NZ (tonnes CO2-e)14 Total Scope 3 emissions - Aust and NZ (tonnes CO2-e)15 Paper Consumption - Aust and NZ (tonnes)16 Information on Westpac 2015 2014 2013 2012 2011 13.1 4.9 12.8 4.7 12.2 4.2 11.8 4.0 11.5 3.7 1,429 1,534 1,544 1,538 1,532 22 15 - - - 3,850 3,890 3,814 3,639 3,544 31 1.1 (0.7) +5 (31) (22) 2.98 19.7 24 0.9 1.2 +2 (27) (19) 2.96 20.0 17 (2.4) (5.3) +8 (15) (16) 3.00 18.7 - (7.7) (10.8) +9 - - 2.84 18.4 - (7.7) (7.0) n/a3 - - - 17.0 32,620 33,586 33,045 33,418 33,898 10.6 85.3 95.0 0.8 59 46 9.8 88.0 95.8 1.1 59 44 9.8 86.7 95.7 1.5 60 42 9.9 84.8 95.9 1.9 61 40 11.5 84 95.3 2.5 61 38 173,437 175,855 180,862 183,937 184,124 67,959 73,871 85,013 91,855 57,163 4,857 5,334 5,762 - - Responsible lending and investment Proportion of electricity generation financing in renewables including hydro - Aust and NZ (%) 17 Electricity generation portfolio emissions intensity (tonnes CO2-e/MWh)18 Finance assessed under the Equator Principles - Group ($m)19 Responsible Investment Funds Under Management ($m)20 Social impact Community investment ($m)21 Community investment as a percentage of pre-tax profits - Group (%) 61 0.38 1,065 15,017 59 0.41 851 - 55 0.44 268 - 52 - 1,140 - 116 1.04 217 2.02 131 1.33 133 1.50 45 - 383 - 155 1.82 Community investment as a percentage of pre-tax operating profit (cash earnings basis) Financial education (participants)22 1.02 1.99 1.28 1.41 1.72 60,342 49,812 32,577 36,182 42,109 Help people gain access to social and affordable housing and services. Loaned more than $1.0 billion to the social and affordable housing sector as at 30 September 2015, up from $0.82 billion as at 30 September 2014. Construction commenced on 275 new affordable homes as part of the Group’s largest single community housing finance. Supply chain Top suppliers self-assessed - Australia (%)23 Spend with Indigenous suppliers - Australia ($ million)24 100 1.2 100 - 98 - 94 - 92 - 18 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 19 1 1 All data represents Group performance as at 30 September 2015 unless otherwise stated. 2 All customers with an active relationship (excludes channel only and potential relationships). 3 Refers to the number of customers registered for online banking and who have signed in online within the last 90 days as at 30 September. 4 Branches with 24/7 capability allowing customers to self-serve (for cash deposits and withdrawals) via a range of devices. 5 ATMs with deposit taking functionality. Excludes old style envelope deposit machines. 6 Net Promoter Score (NPS) measures the net likelihood of recommendation to others of the customer’s main financial institution for retail or business banking. Net Promoter ScoreSM is a trademark of Bain & Co Inc., Satmetrix Systems, Inc., and Mr Frederick Reichheld. For retail banking, using a scale of 1 to 10 (1 means ‘very unlikely’ and 10 means ‘very likely’), the 1-6 raters (detractors) are deducted from the 9-10 raters (promoters). For business banking, using a scale of 0 to 10 (0 means ‘extremely unlikely’ and 10 means ‘extremely likely’), the 0-6 raters (detractors) are deducted from the 9-10 raters (promoters). NPS Consumer: Australia source - Roy Morgan Research, September 2011 – 2015, 6MMA. Westpac Group, Main Financial Institution (as defined by the customer). Consumers aged 14 or over; NZ source - NZ Retail market monitor provided by Camorra Research. NPS Business: Australia source: DBM Consultants Business Financial Services Monitor, September 2011 – 2015, 6MMA. Westpac Group, MFI customers, all businesses. 7 Roy Morgan Research, Respondents aged 18+, 6 month rolling average, September 2015. Products Per Customer (PPC) results are based on the total number of ‘Banking and Finance’ products from the ‘Institution Group’ held by a ‘Retail and Business Banking (RBB)’ customer. The figure is calculated by dividing the total number of Banking and Finance products held by ‘Retail and Business Banking (RBB)’ customers at the Institution Group by its total ‘Retail and Business Banking (RBB)’ number of customers. 8 Data based on Roy Morgan Research, Respondents aged 14+. 12 month average to September 2015. Wealth penetration is defined as the proportion of Australians who have a Deposit or Transaction Account, Mortgage, Personal Lending or Major Card with a Banking Group and also have Managed Investments, Superannuation or Insurance with the same Banking Group. 9 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). 2015 data includes Westpac Pacific (excluded in prior years). 10 Voluntary New Starter retention over the 12 month rolling New Starter headcount for the period (includes full time and part time permanent employees). Excludes Westpac Pacific. 11 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. 12 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. 13 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 Executive Team, General Managers, Senior Managers as direct reports to General Managers and the next two levels of management. 2015 data includes Westpac Pacific (not included in prior years). 14 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 Guidance for Voluntary Corporate Greenhouse Gas Reporting published by the New Zealand Ministry for the Environment. These definitions also align with the GHG protocol and ISO 14064 1 standard and are reported for the period 1 July to 30 June. 15 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 for GHG reporting. These definitions also align with the GHG protocol and ISO 14064 reported for the period 1 July to 30 June. 1 standard and are ‐ 16 Total copy paper purchased (in tonnes) by the Westpac Group as reported by its suppliers. 17 Measured as the percentage of indirect and direct financing (TCE) to energy generation assets in the Australian and New Zealand electricity markets. 18 Data is based on the reported exposures to energy generation (AUD lending only). The average financed carbon intensity is calculated by weighting ‐ each loan (total committed exposures) by the carbon intensity of each company. 19 The Equator Principles are a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing. 20 BTFG funds applying an environmental, social and governance (ESG integration) approach. Data prior to 2015 not available due to change in reporting methodology. 21 This amount includes monetary contributions, time contributions, management costs and in-kind contributions comprising gifts and foregone fee revenue. The 2014 figure includes Westpac’s $100 million contribution to the Westpac Bicentennial Foundation. 22 Refers to the number of attendees (employees, customers and general public) at financial education courses and who access training courses offered by the Westpac Group. Excludes keynote presentations offered by the Davidson Institute. 23 Refers to suppliers in our top 80 by spend. 24 Annual spend with businesses that are 51% or more owned and operated by an Aboriginal or Torres Strait Islander person and certified with a relevant member organisation. 20 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 21 Information on Westpac 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 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 The Australian economy had another year of below trend growth as it continued to be buffeted by a slowdown in industry players for customers, covering their transacting, mining investment and a sharp fall in its terms of trade. At saving, investing, protecting and borrowing needs with a the same time, a cautious approach from households and wide set of products and services. Our competitors range businesses combined with governments seeking to reduce from large global organisations with broad offerings to debt, has further limited growth. the type of customer served; over the last year. entities more focussed 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. We operate in an environment where digital innovation is changing the competitive landscape and there are 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: 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; digital and technology solutions; and the talent and experience of our employees. In Australia, we have seen 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 high quality deposit funding as credit rating agencies and debt investors look for strong balance sheet positions in their assessment of quality institutions. Competition for lending is also expected to remain high. At the same time, businesses and consumers are cautious about the global outlook and continue to reduce debt. The residential mortgage market continues to be highly competitive, with market participants seeking to maintain or expand their market share using price. This is expected to continue. 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 international outlook also softened over the year. Growth in China has been slower than most expected at the beginning of the year, and that slowdown has been a key catalyst to the fall in global commodity prices. With excess capacity in many industries, China’s growth rate seems set to slow further next year. In contrast, the US economy has lifted somewhat more quickly than anticipated with improved growth prospects expected to carry through to next year. Europe seems to have stabilised with a low, but nevertheless positive, growth outlook. Within Australia, the 2016 outlook is for a modest lift in the real GDP growth rate back to trend which we now assess at around 2.75%. That compares with growth of around 2.2% The anticipated lift in the GDP growth rate reflects expectations for some improvement in household spending growth, non mining investment and exports. Partially offsetting these factors is expected to be a further contraction in mining investment and a smaller contribution from residential construction as residential investment peaks. These forecasts are predicated upon some further weakness in the Australian dollar; ongoing record low interest rates; and a stable year for Australia’s terms of trade. A bright spot will be the ongoing recovery in Australia’s net exports of services which are benefitting from the more competitive Australian dollar. These sectors, along with health and professional services, are boosting jobs growth. Lead indicators point to the unemployment rate initially stabilising before drifting lower as economic growth improves. Price pressures are expected to remain benign with core CPI inflation remaining well controlled and wages growth subdued. This backdrop is likely to be consistent with interest rates remaining around the current record lows. Given this economic backdrop, financial system credit growth is expected to remain around current levels although there will be some modest rebalancing as property related growth slows in favour of other forms of business borrowing. Growth in funds management is expected to remain solid as population growth and an ageing population continues to direct more savings to superannuation in preparation for retirement. 1 All data and opinions under ‘Outlook’ are generated by our internal economists and management. 1 All data represents Group performance as at 30 September 2015 unless otherwise stated. 2 All customers with an active relationship (excludes channel only and potential relationships). 3 Refers to the number of customers registered for online banking and who have signed in online within the last 90 days as at 30 September. 4 Branches with 24/7 capability allowing customers to self-serve (for cash deposits and withdrawals) via a range of devices. 5 ATMs with deposit taking functionality. Excludes old style envelope deposit machines. 6 Net Promoter Score (NPS) measures the net likelihood of recommendation to others of the customer’s main financial institution for retail or business banking. Net Promoter ScoreSM is a trademark of Bain & Co Inc., Satmetrix Systems, Inc., and Mr Frederick Reichheld. For retail banking, using a scale of 1 to 10 (1 means ‘very unlikely’ and 10 means ‘very likely’), the 1-6 raters (detractors) are deducted from the 9-10 raters (promoters). For business banking, using a scale of 0 to 10 (0 means ‘extremely unlikely’ and 10 means ‘extremely likely’), the 0-6 raters (detractors) are deducted from the 9-10 raters (promoters). NPS Consumer: Australia source - Roy Morgan Research, September 2011 – 2015, 6MMA. Westpac Group, Main Financial Institution (as defined by the customer). Consumers aged 14 or over; NZ source - NZ Retail market monitor provided by Camorra Research. NPS Business: Australia source: DBM Consultants Business Financial Services Monitor, September 2011 – 2015, 6MMA. Westpac Group, MFI customers, all businesses. 7 Roy Morgan Research, Respondents aged 18+, 6 month rolling average, September 2015. Products Per Customer (PPC) results are based on the total number of ‘Banking and Finance’ products from the ‘Institution Group’ held by a ‘Retail and Business Banking (RBB)’ customer. The figure is calculated by dividing the total number of Banking and Finance products held by ‘Retail and Business Banking (RBB)’ customers at the Institution Group by its total ‘Retail and Business Banking (RBB)’ number of customers. 8 Data based on Roy Morgan Research, Respondents aged 14+. 12 month average to September 2015. Wealth penetration is defined as the proportion of Australians who have a Deposit or Transaction Account, Mortgage, Personal Lending or Major Card with a Banking Group and also have Managed Investments, Superannuation or Insurance with the same Banking Group. 9 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). 2015 data includes Westpac Pacific (excluded in prior years). 10 Voluntary New Starter retention over the 12 month rolling New Starter headcount for the period (includes full time and part time permanent 11 Voluntary High Performer Retention over the 12 month rolling High Performer headcount for the period (includes full time, part time permanent and employees). Excludes Westpac Pacific. maximum term employees). Excludes Westpac Pacific. 12 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. 13 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 Executive Team, General Managers, Senior Managers as direct reports to General Managers and the next two levels of management. 2015 data includes Westpac Pacific (not included in prior years). 14 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 Guidance for Voluntary Corporate Greenhouse Gas Reporting published by the New Zealand Ministry for the Environment. These definitions also align with the GHG protocol and ISO 14064 1 standard and are reported for the period 1 July to 30 June. 15 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 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. 16 Total copy paper purchased (in tonnes) by the Westpac Group as reported by its suppliers. ‐ 17 Measured as the percentage of indirect and direct financing (TCE) to energy generation assets in the Australian and New Zealand electricity markets. 18 Data is based on the reported exposures to energy generation (AUD lending only). The average financed carbon intensity is calculated by weighting each loan (total committed exposures) by the carbon intensity of each company. 19 The Equator Principles are a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing. 20 BTFG funds applying an environmental, social and governance (ESG integration) approach. Data prior to 2015 not available due to change in reporting methodology. 21 This amount includes monetary contributions, time contributions, management costs and in-kind contributions comprising gifts and foregone fee revenue. The 2014 figure includes Westpac’s $100 million contribution to the Westpac Bicentennial Foundation. 22 Refers to the number of attendees (employees, customers and general public) at financial education courses and who access training courses offered by the Westpac Group. Excludes keynote presentations offered by the Davidson Institute. 23 Refers to suppliers in our top 80 by spend. relevant member organisation. 24 Annual spend with businesses that are 51% or more owned and operated by an Aboriginal or Torres Strait Islander person and certified with a 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 transacting, saving, investing, protecting and borrowing needs with a wide set of products and services. Our competitors range from large global organisations with broad offerings to entities more focussed 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. We operate in an environment where digital innovation is changing the competitive landscape and there are 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; digital and technology solutions; and the talent and experience of our employees. In Australia, we have seen 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 high quality deposit funding as credit rating agencies and debt investors look for strong balance sheet positions in their assessment of quality institutions. Competition for lending is also expected to remain high. At the same time, businesses and consumers are cautious about the global outlook and continue to reduce debt. The residential mortgage market continues to be highly competitive, with market participants seeking to maintain or expand their market share using price. This is expected to continue. 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. Information on Westpac 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 The Australian economy had another year of below trend growth as it continued to be buffeted by a slowdown in mining investment and a sharp fall in its terms of trade. At the same time, a cautious approach from households and businesses combined with governments seeking to reduce debt, has further limited growth. The international outlook also softened over the year. Growth in China has been slower than most expected at the beginning of the year, and that slowdown has been a key catalyst to the fall in global commodity prices. With excess capacity in many industries, China’s growth rate seems set to slow further next year. In contrast, the US economy has lifted somewhat more quickly than anticipated with improved growth prospects expected to carry through to next year. Europe seems to have stabilised with a low, but nevertheless positive, growth outlook. Within Australia, the 2016 outlook is for a modest lift in the real GDP growth rate back to trend which we now assess at around 2.75%. That compares with growth of around 2.2% over the last year. The anticipated lift in the GDP growth rate reflects expectations for some improvement in household spending growth, non mining investment and exports. Partially offsetting these factors is expected to be a further contraction in mining investment and a smaller contribution from residential construction as residential investment peaks. These forecasts are predicated upon some further weakness in the Australian dollar; ongoing record low interest rates; and a stable year for Australia’s terms of trade. A bright spot will be the ongoing recovery in Australia’s net exports of services which are benefitting from the more competitive Australian dollar. These sectors, along with health and professional services, are boosting jobs growth. Lead indicators point to the unemployment rate initially stabilising before drifting lower as economic growth improves. Price pressures are expected to remain benign with core CPI inflation remaining well controlled and wages growth subdued. This backdrop is likely to be consistent with interest rates remaining around the current record lows. Given this economic backdrop, financial system credit growth is expected to remain around current levels although there will be some modest rebalancing as property related growth slows in favour of other forms of business borrowing. Growth in funds management is expected to remain solid as population growth and an ageing population continues to direct more savings to superannuation in preparation for retirement. 1 All data and opinions under ‘Outlook’ are generated by our internal economists and management. 20 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 21 1 For Westpac, our five strategic priorities will continue to be our focus in the period ahead and assist in delivering on our service revolution. These include: maintaining our performance disciplines – continuing to be prudent in the management of capital, seeking to maintain our ROE above 15%, and strength in our capital, funding and liquidity positions; through service leadership, grow customer numbers by 1 million from 2015 to 2017 while also increasing the number (on average) of products each customer holds; digital transformation is utilising technology to materially improve efficiency and reduce the Group’s cost to income ratio to below 40% over the next 3 years; wealth, small and medium business enterprises and Asia continue to be our areas of targeted growth. These include our investment in a new wealth platform, called Panorama, and making business banking specialists more accessible through video conferencing technologies; and through our workforce revolution priority, we are seeking to build a stronger and more diverse workforce where the best people want to work. The financial services industry continues to be under significant regulatory change. Globally this includes the expected release of a revised capital framework by the Basel Committee on Banking Supervision while locally we also continue to expect further regulatory change. Given the strength of our business, and our balance sheet, in both absolute terms and relative to peers, we are well placed to respond to any additional regulatory change. Looking ahead, with our strong positioning, disciplined growth and solid operating performance across all divisions, combined with good progress on our strategic priorities, Westpac believes it is well positioned to continue delivering sustainable outcomes to shareholders. Significant developments Corporate significant developments Appointment of new Chief Executive Officer On 13 November 2014, Westpac announced the retirement of Gail Kelly as Chief Executive Officer effective 1 February 2015. The Westpac Board appointed Brian Hartzer as the Group’s CEO from 2 February 2015. Mr Hartzer was part of the Group’s executive team and was formerly the Chief Executive, Australian Financial Services, responsible for the Westpac Group’s retail, business banking and wealth businesses. Inquiry into Australia’s Financial System On 20 November 2013, the Federal Government formally announced the appointment of Mr David Murray AO to head an inquiry into Australia’s financial system (FSI). The FSI’s terms of reference, announced on 20 December 2013, charged the FSI with examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth. Recommendations were to be aimed at fostering an efficient, competitive and flexible financial system, consistent with financial stability, prudence, public confidence and capacity to meet the needs of users. The FSI’s Final Report made 44 recommendations relating to a broad number of matters across the financial sector. Westpac supported the majority of the recommendations during the Government’s consultation process, which was completed on 31 March 2015. On 20 October 2015, the Government announced its formal response to the FSI’s recommendations. The Government endorsed the overwhelming majority of the recommendations across the five key areas the FSI considered: Resilience; Superannuation; Innovation; Consumer Outcomes; and the Regulatory System. The Government will establish a number of consultation processes to consider detailed implementation. Westpac will continue to actively contribute to these ongoing consultations, which we expect to continue for a number of years. FSI’s recommendations on bank capital The Government’s response endorsed APRA’s actions to date in implementing the FSI’s capital-related recommendations, and confirmed APRA’s responsibility for the implementation of the remaining capital proposals. To date, APRA has formally responded to two of the FSI’s recommendations. On 13 July 2015 APRA released the results of a study comparing the capital position of the Australian major banks against a group of international banking peers. The study was conducted by APRA in response to Recommendation 1 of the FSI that proposed Australian bank capital ratios should be in the top quartile of global peers to demonstrate the banks are ‘unquestionably strong.’ APRA’s study confirmed that the Australian major banks are well capitalised. Based on capital adequacy ratios as at 30 June 2014, the study found that the major banks would need to increase their capital adequacy ratios by at least 200 basis points to be comfortably positioned in the top quartile of their international peers over the medium to long term. In response, Westpac is undertaking a fully underwritten, pro rata accelerated renounceable entitlement offer to raise approximately $3.5 billion of ordinary equity, which will add approximately 100 basis points to Westpac’s Common Equity Tier 1 (CET1) capital ratio. Earlier this year, Westpac also completed a partial sale of its shareholding in BTIM, which increased Westpac’s CET1 capital ratio by 15 basis points. These developments are discussed in further detail below. On 20 July 2015, APRA announced an interim change to how risk weighted assets (RWA) will be calculated on Australian residential mortgages for banks that use the Advanced Internal-Ratings Based (IRB) approach to credit risk. This change was in response to Recommendation 2 of the FSI regarding the differential in mortgage capital requirements between Advanced IRB and Standardised banks. The outcome of this change is expected to lead to the ratio of mortgage RWA to mortgage exposures for the Group increasing to approximately 25%, with an effective date of 1 July 2016. Further changes relevant to regulatory capital requirements for Australian banks were also proposed by the FSI and are likely to result from current international regulatory reviews being undertaken by the Basel Committee on Banking Information on Westpac Supervision (BCBS) and the Financial Stability Board (FSB) The proposed sale of Westpac’s Vanuatu operations has not considering leverage ratios, risk weight models for Advanced yet proceeded. Given the impact of Cyclone Pam in and Standardised banks, and Total Loss Absorbing Capacity Vanuatu, the Reserve Bank of Vanuatu decided that now is (TLAC) for Global Systemically Important Banks (G-SIBs). not the time for a change of ownership in the country’s The final outcomes of these reviews remain uncertain. banking sector. APRA will be responsible for interpreting these international developments to Australia’s circumstances and their final impact will depend on APRA’s implementation. Share entitlement offer On 14 October 2015, Westpac announced it was undertaking a fully underwritten, pro rata accelerated Partial sale of BTIM On 16 June 2015, Westpac announced its intention to undertake a partial sale of its shareholding in BTIM by way of an Institutional Offer and a Retail Offer. The fully- underwritten Institutional Offer and Retail Offer resulted in the sale of 55 million and 27 million BTIM shares renounceable entitlement offer to raise approximately $3.5 respectively at a price of $8.20 a share. Following billion of ordinary equity. The equity raised will add completion of the sale, Westpac’s holding in BTIM approximately 100 basis points to Westpac’s CET1 capital decreased from 59.1% of BTIM’s issued capital to 31.0% ratio and will place Westpac’s CET1 capital ratio within the and Westpac’s CET1 capital ratio increased by 15 top quartile of banks globally, with a CET1 capital ratio of over 14% on an internationally comparable basis1. The capital raised responds to changes in mortgage risk weights that will increase the amount of capital required to be held against mortgages by more than 50%, with the increased regulatory requirement to be applied from 1 July 2016. To support the offer, Westpac also announced its unaudited preliminary Full Year 2015 result. Interim DRP and partial DRP Underwrite On 4 May 2015, Westpac announced that it would satisfy the dividend reinvestment plan (DRP) for the 2015 interim dividend by issuing Westpac ordinary shares at a 1.5% discount. Westpac also entered into an agreement to have the DRP on the 2015 interim dividend partially underwritten. Approximately $2 billion worth of Westpac ordinary shares were issued under the DRP and the partial DRP underwrite, which raised our CET1 capital ratio by 57 basis points. Issue of Westpac Capital Notes 3 On 8 September 2015, Westpac, through its London branch, issued approximately $1.32 billion of securities known as Westpac Capital Notes 3, which qualify as Additional Tier 1 capital of Westpac under APRA’s capital adequacy framework. Changes to accounting for technology investment spending At its Strategy Update on 7 September 2015, Westpac announced that, in light of the Group’s revised technology and digital strategy, the rapid changes in technology, and evolving regulatory requirements, it was reviewing the accounting approach applied to investment spending. On 6 October 2015, Westpac announced that this review had been completed, resulting in various accounting changes. The balance sheet impact of these changes has seen a reduction in the technology assets balance of $505 million (pre-tax) reported as an expense in the Full Year 2015 statutory results. This has been excluded from cash earnings. Sale of Westpac operations in four Pacific Island Nations On 14 July 2015, Westpac announced the completion of the sale of its banking operations in the Cook Islands, Samoa and Tonga to BSP for $91 million. On 30 October 2015, Westpac completed the sale of its banking operations in the Solomon Islands for $23.6 million. 1 The basis of the internationally comparable CET1 capital ratio aligns with the APRA study titled ‘International capital comparison study’ dated 13 July 2015. basis points. New organisational structure On 10 June 2015, Westpac announced a new, simplified organisational structure for its Australian retail and business banking operations designed to accelerate the Group’s customer focussed strategy. Under the new structure, two new divisions have been created: Consumer Bank – responsible for all consumer banking products and services under the Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands; and Commercial & Business Bank – responsible for serving small and medium enterprises, commercial and agri- business customers, as well as asset and equipment finance. Specialist business bankers will continue to operate under their respective brands. Each of these new divisions will be responsible for improving the end-to-end service experience of their respective customer segments and will have dedicated product, marketing and digital capabilities. Litigation Since 2011, Westpac has been served with three class action proceedings brought on behalf of customers seeking to recover exception fees paid by those customers. 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, pending further developments in the litigation against one of those other banks. In April 2015, the Full Court of the Federal Court unanimously found all of the exception fees charged by that other bank to be lawful. The plaintiffs are currently appealing certain aspects of that judgment to the High Court of Australia. The appeal is scheduled to be heard in February 2016. Tax developments On 30 March 2015, the Australian Government released a Tax Discussion Paper that considers all aspects of the Australian tax system. It is intended to initiate debate on the future of Australia’s tax system. A public consultation process has commenced and is expected to continue over the next 12-18 months. The Discussion Paper does question the ongoing effectiveness of the dividend imputation system but it does not contain any recommendations or details of any proposed reforms. The impact of any changes to Westpac, its shareholders and customers cannot be 22 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 23 For Westpac, our five strategic priorities will continue to be The FSI’s Final Report made 44 recommendations relating our focus in the period ahead and assist in delivering on our to a broad number of matters across the financial sector. through our workforce revolution priority, we are seeking the implementation of the remaining capital proposals. service revolution. These include: maintaining our performance disciplines – continuing to be prudent in the management of capital, seeking to maintain our ROE above 15%, and strength in our capital, funding and liquidity positions; through service leadership, grow customer numbers by 1 million from 2015 to 2017 while also increasing the number (on average) of products each customer holds; digital transformation is utilising technology to materially improve efficiency and reduce the Group’s cost to income ratio to below 40% over the next 3 years; wealth, small and medium business enterprises and Asia continue to be our areas of targeted growth. These include our investment in a new wealth platform, called Panorama, and making business banking specialists more accessible through video conferencing technologies; and to build a stronger and more diverse workforce where the best people want to work. The financial services industry continues to be under significant regulatory change. Globally this includes the expected release of a revised capital framework by the Basel Committee on Banking Supervision while locally we also continue to expect further regulatory change. Given the strength of our business, and our balance sheet, in both absolute terms and relative to peers, we are well placed to respond to any additional regulatory change. Looking ahead, with our strong positioning, disciplined growth and solid operating performance across all divisions, combined with good progress on our strategic priorities, Westpac believes it is well positioned to continue delivering sustainable outcomes to shareholders. Significant developments Corporate significant developments Appointment of new Chief Executive Officer On 13 November 2014, Westpac announced the retirement of Gail Kelly as Chief Executive Officer effective 1 February 2015. The Westpac Board appointed Brian Hartzer as the Group’s CEO from 2 February 2015. Mr Hartzer was part of the Group’s executive team and was formerly the Chief Executive, Australian Financial Services, responsible for the Westpac Group’s retail, business banking and wealth businesses. Inquiry into Australia’s Financial System On 20 November 2013, the Federal Government formally announced the appointment of Mr David Murray AO to head an inquiry into Australia’s financial system (FSI). The FSI’s terms of reference, announced on 20 December 2013, charged the FSI with examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth. Recommendations were to be aimed at fostering an efficient, competitive and flexible financial system, consistent with financial stability, prudence, public confidence and capacity to meet the needs of users. Westpac supported the majority of the recommendations during the Government’s consultation process, which was completed on 31 March 2015. On 20 October 2015, the Government announced its formal response to the FSI’s recommendations. The Government endorsed the overwhelming majority of the recommendations across the five key areas the FSI considered: Resilience; Superannuation; Innovation; Consumer Outcomes; and the Regulatory System. The Government will establish a number of consultation processes to consider detailed implementation. Westpac will continue to actively contribute to these ongoing consultations, which we expect to continue for a number of years. FSI’s recommendations on bank capital The Government’s response endorsed APRA’s actions to date in implementing the FSI’s capital-related recommendations, and confirmed APRA’s responsibility for To date, APRA has formally responded to two of the FSI’s recommendations. On 13 July 2015 APRA released the results of a study comparing the capital position of the Australian major banks against a group of international banking peers. The study was conducted by APRA in response to Recommendation 1 of the FSI that proposed Australian bank capital ratios should be in the top quartile of global peers to demonstrate the banks are ‘unquestionably strong.’ APRA’s study confirmed that the Australian major banks are well capitalised. Based on capital adequacy ratios as at 30 June 2014, the study found that the major banks would need to increase their capital adequacy ratios by at least 200 basis points to be comfortably positioned in the top quartile of their international peers over the medium to long term. In response, Westpac is undertaking a fully underwritten, pro rata accelerated renounceable entitlement offer to raise approximately $3.5 billion of ordinary equity, which will add approximately 100 basis points to Westpac’s Common Equity Tier 1 (CET1) capital ratio. Earlier this year, Westpac also completed a partial sale of its shareholding in BTIM, which increased Westpac’s CET1 capital ratio by 15 basis points. These developments are discussed in further detail below. On 20 July 2015, APRA announced an interim change to how risk weighted assets (RWA) will be calculated on Australian residential mortgages for banks that use the Advanced Internal-Ratings Based (IRB) approach to credit risk. This change was in response to Recommendation 2 of the FSI regarding the differential in mortgage capital requirements between Advanced IRB and Standardised banks. The outcome of this change is expected to lead to the ratio of mortgage RWA to mortgage exposures for the Group increasing to approximately 25%, with an effective date of 1 July 2016. Further changes relevant to regulatory capital requirements for Australian banks were also proposed by the FSI and are likely to result from current international regulatory reviews being undertaken by the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB) considering leverage ratios, risk weight models for Advanced and Standardised banks, and Total Loss Absorbing Capacity (TLAC) for Global Systemically Important Banks (G-SIBs). The final outcomes of these reviews remain uncertain. APRA will be responsible for interpreting these international developments to Australia’s circumstances and their final impact will depend on APRA’s implementation. Share entitlement offer On 14 October 2015, Westpac announced it was undertaking a fully underwritten, pro rata accelerated renounceable entitlement offer to raise approximately $3.5 billion of ordinary equity. The equity raised will add approximately 100 basis points to Westpac’s CET1 capital ratio and will place Westpac’s CET1 capital ratio within the top quartile of banks globally, with a CET1 capital ratio of over 14% on an internationally comparable basis1. The capital raised responds to changes in mortgage risk weights that will increase the amount of capital required to be held against mortgages by more than 50%, with the increased regulatory requirement to be applied from 1 July 2016. To support the offer, Westpac also announced its unaudited preliminary Full Year 2015 result. Interim DRP and partial DRP Underwrite On 4 May 2015, Westpac announced that it would satisfy the dividend reinvestment plan (DRP) for the 2015 interim dividend by issuing Westpac ordinary shares at a 1.5% discount. Westpac also entered into an agreement to have the DRP on the 2015 interim dividend partially underwritten. Approximately $2 billion worth of Westpac ordinary shares were issued under the DRP and the partial DRP underwrite, which raised our CET1 capital ratio by 57 basis points. Issue of Westpac Capital Notes 3 On 8 September 2015, Westpac, through its London branch, issued approximately $1.32 billion of securities known as Westpac Capital Notes 3, which qualify as Additional Tier 1 capital of Westpac under APRA’s capital adequacy framework. Changes to accounting for technology investment spending At its Strategy Update on 7 September 2015, Westpac announced that, in light of the Group’s revised technology and digital strategy, the rapid changes in technology, and evolving regulatory requirements, it was reviewing the accounting approach applied to investment spending. On 6 October 2015, Westpac announced that this review had been completed, resulting in various accounting changes. The balance sheet impact of these changes has seen a reduction in the technology assets balance of $505 million (pre-tax) reported as an expense in the Full Year 2015 statutory results. This has been excluded from cash earnings. Sale of Westpac operations in four Pacific Island Nations On 14 July 2015, Westpac announced the completion of the sale of its banking operations in the Cook Islands, Samoa and Tonga to BSP for $91 million. On 30 October 2015, Westpac completed the sale of its banking operations in the Solomon Islands for $23.6 million. 1 The basis of the internationally comparable CET1 capital ratio aligns with the APRA study titled ‘International capital comparison study’ dated 13 July 2015. Information on Westpac The proposed sale of Westpac’s Vanuatu operations has not yet proceeded. Given the impact of Cyclone Pam in Vanuatu, the Reserve Bank of Vanuatu decided that now is not the time for a change of ownership in the country’s banking sector. Partial sale of BTIM On 16 June 2015, Westpac announced its intention to undertake a partial sale of its shareholding in BTIM by way of an Institutional Offer and a Retail Offer. The fully- underwritten Institutional Offer and Retail Offer resulted in the sale of 55 million and 27 million BTIM shares respectively at a price of $8.20 a share. Following completion of the sale, Westpac’s holding in BTIM decreased from 59.1% of BTIM’s issued capital to 31.0% and Westpac’s CET1 capital ratio increased by 15 basis points. New organisational structure On 10 June 2015, Westpac announced a new, simplified organisational structure for its Australian retail and business banking operations designed to accelerate the Group’s customer focussed strategy. Under the new structure, two new divisions have been created: Consumer Bank – responsible for all consumer banking products and services under the Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands; and Commercial & Business Bank – responsible for serving small and medium enterprises, commercial and agri- business customers, as well as asset and equipment finance. Specialist business bankers will continue to operate under their respective brands. Each of these new divisions will be responsible for improving the end-to-end service experience of their respective customer segments and will have dedicated product, marketing and digital capabilities. Litigation Since 2011, Westpac has been served with three class action proceedings brought on behalf of customers seeking to recover exception fees paid by those customers. 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, pending further developments in the litigation against one of those other banks. In April 2015, the Full Court of the Federal Court unanimously found all of the exception fees charged by that other bank to be lawful. The plaintiffs are currently appealing certain aspects of that judgment to the High Court of Australia. The appeal is scheduled to be heard in February 2016. Tax developments On 30 March 2015, the Australian Government released a Tax Discussion Paper that considers all aspects of the Australian tax system. It is intended to initiate debate on the future of Australia’s tax system. A public consultation process has commenced and is expected to continue over the next 12-18 months. The Discussion Paper does question the ongoing effectiveness of the dividend imputation system but it does not contain any recommendations or details of any proposed reforms. The impact of any changes to Westpac, its shareholders and customers cannot be 22 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 23 1 determined until further details are released and any changes to the law made. Regulatory significant developments Basel Committee on Banking Supervision Regulatory reforms and significant developments arising in relation to changes initiated by the BCBS and the FSB include: Global Systemically Important Financial Institutions (G- SIFIs) Each year in November the FSB publishes the list of identified G-SIBs and specifies 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. However the BCBS has issued a framework for extending the SIFIs requirements to domestic systemically important banks (D-SIBs). Capital In 2010, the BCBS outlined the Basel III capital framework for banks globally as follows: 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. APRA’s adoption of the framework has required Australian Authorised Deposit-taking Institutions (ADIs) such as Westpac to meet the above minimum capital requirements from 1 January 2013 and the capital conservation buffer in full from its introduction date of 1 January 2016. In December 2013 APRA released its approach for implementing a D-SIB framework in Australia. Westpac is one of four Australian banks which APRA has identified as a D-SIB. APRA has proposed that each D-SIB, including Westpac, will have to meet a higher loss absorbency requirement of 1% to be met by common equity. The 1% requirement will be added to the capital conservation buffer effectively increasing the buffer from 2.5% to 3.5%. The countercyclical buffer is not currently required. Westpac’s current capital levels are already above the regulatory requirement that will apply from 1 January 2016 (including the 3.5% capital conservation buffer). Further details of Westpac’s regulatory capital, leverage ratio and liquidity coverage ratio disclosures as well as the full terms and conditions of the regulatory capital instruments can be accessed at www.westpac.com.au/about- westpac/investor-centre/financial-information/regulatory- disclosures. Increased loss absorbency In November 2014 the FSB issued a consultation paper for enhancing the Total Loss Absorbing Capacity (TLAC) for G- SIBs to operate alongside the Basel III capital requirements. These proposals form part of the G20’s initiatives aimed at ‘Ending too-big-to-fail’ and ensuring that the resolution of a failing G-SIFI can be carried out without causing systemic disruption or resorting to taxpayer support. The FSB has stated that the TLAC requirement would not be introduced before 2019 and it is not known at this stage whether there is any intention to extend the requirement beyond G-SIBs. The FSI had recommended the implementation in Australia of a framework for minimum loss absorbing and recapitalisation capacity sufficient to facilitate the orderly resolution of ADIs and minimise taxpayer support. In its response to the FSI, the Government endorsed APRA to implement the recommendation in line with emerging international practice. Reform of the risk-based capital framework In December 2014, the BCBS released two consultation papers on proposals for Capital Floors and proposed revisions to the Standardised Approach for Credit Risk, which puts forward possible amendments to the risk weighted asset framework for capital. The measures are in addition to ongoing consultation work of the BCBS on reforms to capital treatment of operational risk and market risk. In combination these reform measures are intended to improve the consistency and comparability of bank capital ratios. However, further clarity from BCBS is not expected before the end of 2015 after which APRA will need to consult on, and then finalise, the Australian standards. Until that time, it is not possible to determine the impact on Westpac. Leverage ratio 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. In January 2014, the BCBS published an amended leverage ratio framework. In May 2015, APRA released new disclosure requirements in relation to the leverage ratio which will initially only apply to select ADIs, including Westpac, and from 1 July 2015 required the disclosure of the leverage ratio on a quarterly basis. The proposed timetable for implementation of the leverage ratio provides for testing and recalibration of the framework to occur until 2017 and migration of the final standard to a Pillar 1 requirement from January 2018. OECD Common Reporting Standard The Organisation for Economic Cooperation and Development (OECD) has developed Common Reporting Standard (CRS) rules for the automatic exchange of financial account information amongst OECD member states. CRS will require the Westpac Group to identify the tax residency of all customers and to report the tax residency and account details of non-resident customers to the relevant authorities in jurisdictions in which the CRS rules operate. Subject to final legislation, it is currently intended that Australian financial institutions can voluntarily implement the rules from 1 January 2017, but will have to be compliant from 1 January 2018. The rules could impose additional costs and operational burdens on Westpac. Certain countries (such as the United Kingdom and India) will implement the rules with effect from 1 January 2016. Westpac is implementing changes to its business operations to comply with the CRS requirements in these countries from accounts, or otherwise face 30% withholding tax on certain 1 January 2016. OTC derivatives reform The international regulatory reforms relating to over-the- counter (OTC) derivatives continue to be implemented by financial regulators across the globe. In Australia, Westpac commenced reporting OTC derivatives transactions to a Prescribed Repository in accordance with the Derivative Transaction Rules (Reporting) 2013 on 1 October 2013. Westpac continues to work with ASIC and industry associations in relation to the implementation of these rules and the phase-in of requirements to other industry participants. On 8 September 2015, the Australian Government enacted regulations imposing a central clearing mandate for prescribed classes of interest rate derivatives denominated in Australian Dollar, US Dollar, Euro, Japanese Yen and British Pounds. This mandate is imposed on major domestic and foreign banks that act as dealers in the Australian OTC derivatives market. ASIC is currently consulting with industry on final clearing rules and the expected compliance date with the regulations is April 2016. As a provisionally-registered Swap Dealer with the US Commodity Futures Trading Commission (CFTC), Westpac is subject to a range of entity-level and transaction-level requirements pursuant to the Dodd-Frank Act. Pursuant to the European Market Infrastructure Regulations (EMIR) established by the European Securities and Markets Authority (ESMA), from October 2014, Westpac is subject to certain risk mitigation obligations in relation to OTC Derivatives traded with European counterparties or through its London Branch. Further, Westpac will be subject to a central clearing mandate for certain interest rate derivatives with European counterparties by April 2016. Westpac is also subject to OTC derivatives trade reporting regulations imposed by the Monetary Authority of Singapore and various provincial financial regulators in Canada. Westpac continues to monitor developments in response to requirements imposed by international regulators. These include regulations published by the CFTC and the Securities and Exchange Commission under the Dodd-Frank Act; by the ESMA and local European financial regulators under the EMIR and Markets in Financial Instruments Directive (MiFID II); and by various financial regulators in Asia and Canada. Westpac also continues to monitor the international response to the final policy framework for establishing margin requirements for uncleared OTC 2 September 2013. United States Foreign Account Tax Compliance Act (FATCA) Provisions commonly referred to as FATCA and related US Treasury regulations generally 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)) under which they agree to identify and provide the US Internal Revenue Service (IRS) with information on certain US connected Information on Westpac 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 are neither party to an FFI agreement nor subject to an IGA and certain account holders that fail to provide prescribed information. The Australian Government signed an IGA with the United States on 28 April 2014, which came into force on 30 June 2014. The Australian IGA, and any IGAs that may be concluded between the US and other countries in which Westpac conducts business, will relieve Westpac of the requirement to withhold on payments to, or close, certain accounts, and will provide certain other benefits. Westpac has implemented changes to its business operations to comply with the requirements of FATCA across all jurisdictions in which it operates. Westpac has entered into an FFI agreement with respect to its branches and affiliated FFIs not located in countries that have entered into an IGA. Compliance with FATCA will continue to give rise to significant ongoing costs and operational burdens for Westpac. New Zealand Zealand include: Regulatory reforms and significant developments in New Financial Markets Conduct Act (FMCA) The FMCA overhauls New Zealand’s securities law regime and impacts various aspects of Westpac New Zealand’s business. It has introduced changes to product disclosure and governance together with new licensing and registration requirements as well as new fair dealing provisions. The use of product disclosure statements is being implemented, supported by an online register of other material documentation. The FMCA was enacted in September 2013. Most of its provisions, as well as new regulations setting out the detail of the regime, came into force on 1 December 2014, subject to transitional provisions of up to two years. The majority of the fair dealing requirements in the FMCA came into force in April 2014. Credit law reform/responsible lending The Credit Contracts and Consumer Finance Amendment Act 2014 received Royal Assent in June 2014 and came into full effect in June 2015. The Act reformed the entire suite of legislation that governs consumer credit contracts. It created new responsible lending principles and provided for a regulatory responsible lending code, which was issued in March 2015. Consumer protections were also being strengthened by changes to provisions on disclosure, fees, hardship and ‘oppressive’ contracts. The Consumer Law Reform Bill was passed in December 2013. The Bill amended six separate Acts, including the Fair Trading Act. Among the amendments introduced into the Fair Trading Act were prohibitions on unfair contract terms and on making unsubstantiated representations about a product or service and new provisions regulating uninvited direct sales. The unfair contract terms provisions came into force in March 2015. The unsubstantiated representations prohibitions and uninvited direct sales provisions came into effect in June 2014. derivatives as published by the BCBS and the International Consumer law reform Organisation of Securities Commission (IOSCO) on 24 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 25 determined until further details are released and any changes to the law made. Regulatory significant developments Basel Committee on Banking Supervision Regulatory reforms and significant developments arising in relation to changes initiated by the BCBS and the FSB include: SIFIs) Global Systemically Important Financial Institutions (G- Each year in November the FSB publishes the list of identified G-SIBs and specifies 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. However the BCBS has issued a framework for extending the SIFIs requirements to domestic systemically important banks (D-SIBs). Capital In 2010, the BCBS outlined the Basel III capital framework for banks globally as follows: an increase in the minimum common equity requirement from 2.0% to 4.5%; from 4.0% to 6.0%; a countercyclical buffer of between 0% to 2.5% to be met with common equity or other fully loss absorbing capital. APRA’s adoption of the framework has required Australian Authorised Deposit-taking Institutions (ADIs) such as Westpac to meet the above minimum capital requirements from 1 January 2013 and the capital conservation buffer in full from its introduction date of 1 January 2016. In December 2013 APRA released its approach for implementing a D-SIB framework in Australia. Westpac is one of four Australian banks which APRA has identified as a D-SIB. APRA has proposed that each D-SIB, including Westpac, will have to meet a higher loss absorbency requirement of 1% to be met by common equity. The 1% requirement will be added to the capital conservation buffer effectively increasing the buffer from 2.5% to 3.5%. The countercyclical buffer is not currently required. failing G-SIFI can be carried out without causing systemic disruption or resorting to taxpayer support. The FSB has stated that the TLAC requirement would not be introduced before 2019 and it is not known at this stage whether there is any intention to extend the requirement beyond G-SIBs. The FSI had recommended the implementation in Australia of a framework for minimum loss absorbing and recapitalisation capacity sufficient to facilitate the orderly resolution of ADIs and minimise taxpayer support. In its response to the FSI, the Government endorsed APRA to implement the recommendation in line with emerging international practice. Reform of the risk-based capital framework In December 2014, the BCBS released two consultation papers on proposals for Capital Floors and proposed revisions to the Standardised Approach for Credit Risk, which puts forward possible amendments to the risk weighted asset framework for capital. The measures are in addition to ongoing consultation work of the BCBS on reforms to capital treatment of operational risk and market risk. In combination these reform measures are intended to improve the consistency and comparability of bank capital ratios. However, further clarity from BCBS is not expected on, and then finalise, the Australian standards. Until that time, it is not possible to determine the impact on Westpac. 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. In January 2014, the BCBS published an amended leverage ratio framework. In May 2015, APRA released new disclosure requirements in relation to the leverage ratio which will initially only apply to select ADIs, including Westpac, and from 1 July 2015 required the disclosure of the leverage ratio on a quarterly basis. The proposed timetable for implementation of the leverage ratio provides for testing and recalibration of the framework to occur until 2017 and migration of the final standard to a Pillar 1 requirement from January 2018. OECD Common Reporting Standard The Organisation for Economic Cooperation and Development (OECD) has developed Common Reporting Standard (CRS) rules for the automatic exchange of a capital conservation buffer at 2.5%, to be met with common equity; and Leverage ratio an increase in the minimum Tier 1 capital requirement before the end of 2015 after which APRA will need to consult Westpac’s current capital levels are already above the financial account information amongst OECD regulatory requirement that will apply from 1 January 2016 member states. (including the 3.5% capital conservation buffer). CRS will require the Westpac Group to identify the tax Further details of Westpac’s regulatory capital, leverage ratio residency of all customers and to report the tax residency and liquidity coverage ratio disclosures as well as the full terms and conditions of the regulatory capital instruments can be accessed at www.westpac.com.au/about- westpac/investor-centre/financial-information/regulatory- disclosures. Increased loss absorbency In November 2014 the FSB issued a consultation paper for enhancing the Total Loss Absorbing Capacity (TLAC) for G- SIBs to operate alongside the Basel III capital requirements. These proposals form part of the G20’s initiatives aimed at ‘Ending too-big-to-fail’ and ensuring that the resolution of a and account details of non-resident customers to the relevant authorities in jurisdictions in which the CRS rules operate. Subject to final legislation, it is currently intended that Australian financial institutions can voluntarily implement the rules from 1 January 2017, but will have to be compliant from 1 January 2018. The rules could impose additional costs and operational burdens on Westpac. Certain countries (such as the United Kingdom and India) will implement the rules with effect from 1 January 2016. Westpac is implementing changes to its business operations to comply with the CRS requirements in these countries from 1 January 2016. OTC derivatives reform The international regulatory reforms relating to over-the- counter (OTC) derivatives continue to be implemented by financial regulators across the globe. In Australia, Westpac commenced reporting OTC derivatives transactions to a Prescribed Repository in accordance with the Derivative Transaction Rules (Reporting) 2013 on 1 October 2013. Westpac continues to work with ASIC and industry associations in relation to the implementation of these rules and the phase-in of requirements to other industry participants. On 8 September 2015, the Australian Government enacted regulations imposing a central clearing mandate for prescribed classes of interest rate derivatives denominated in Australian Dollar, US Dollar, Euro, Japanese Yen and British Pounds. This mandate is imposed on major domestic and foreign banks that act as dealers in the Australian OTC derivatives market. ASIC is currently consulting with industry on final clearing rules and the expected compliance date with the regulations is April 2016. As a provisionally-registered Swap Dealer with the US Commodity Futures Trading Commission (CFTC), Westpac is subject to a range of entity-level and transaction-level requirements pursuant to the Dodd-Frank Act. Pursuant to the European Market Infrastructure Regulations (EMIR) established by the European Securities and Markets Authority (ESMA), from October 2014, Westpac is subject to certain risk mitigation obligations in relation to OTC Derivatives traded with European counterparties or through its London Branch. Further, Westpac will be subject to a central clearing mandate for certain interest rate derivatives with European counterparties by April 2016. Westpac is also subject to OTC derivatives trade reporting regulations imposed by the Monetary Authority of Singapore and various provincial financial regulators in Canada. Westpac continues to monitor developments in response to requirements imposed by international regulators. These include regulations published by the CFTC and the Securities and Exchange Commission under the Dodd-Frank Act; by the ESMA and local European financial regulators under the EMIR and Markets in Financial Instruments Directive (MiFID II); and by various financial regulators in Asia and Canada. Westpac also continues to monitor the international response to the final policy framework for establishing margin requirements for uncleared OTC derivatives as published by the BCBS and the International Organisation of Securities Commission (IOSCO) on 2 September 2013. United States Foreign Account Tax Compliance Act (FATCA) Provisions commonly referred to as FATCA and related US Treasury regulations generally 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)) under which they agree to identify and provide the US Internal Revenue Service (IRS) with information on certain US connected Information on Westpac accounts, 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 are neither party to an FFI agreement nor subject to an IGA and certain account holders that fail to provide prescribed information. The Australian Government signed an IGA with the United States on 28 April 2014, which came into force on 30 June 2014. The Australian IGA, and any IGAs that may be concluded between the US and other countries in which Westpac conducts business, will relieve Westpac of the requirement to withhold on payments to, or close, certain accounts, and will provide certain other benefits. Westpac has implemented changes to its business operations to comply with the requirements of FATCA across all jurisdictions in which it operates. Westpac has entered into an FFI agreement with respect to its branches and affiliated FFIs not located in countries that have entered into an IGA. Compliance with FATCA will continue to give rise to significant ongoing costs and operational burdens for Westpac. New Zealand Regulatory reforms and significant developments in New Zealand include: Financial Markets Conduct Act (FMCA) The FMCA overhauls New Zealand’s securities law regime and impacts various aspects of Westpac New Zealand’s business. It has introduced changes to product disclosure and governance together with new licensing and registration requirements as well as new fair dealing provisions. The use of product disclosure statements is being implemented, supported by an online register of other material documentation. The FMCA was enacted in September 2013. Most of its provisions, as well as new regulations setting out the detail of the regime, came into force on 1 December 2014, subject to transitional provisions of up to two years. The majority of the fair dealing requirements in the FMCA came into force in April 2014. Credit law reform/responsible lending The Credit Contracts and Consumer Finance Amendment Act 2014 received Royal Assent in June 2014 and came into full effect in June 2015. The Act reformed the entire suite of legislation that governs consumer credit contracts. It created new responsible lending principles and provided for a regulatory responsible lending code, which was issued in March 2015. Consumer protections were also being strengthened by changes to provisions on disclosure, fees, hardship and ‘oppressive’ contracts. Consumer law reform The Consumer Law Reform Bill was passed in December 2013. The Bill amended six separate Acts, including the Fair Trading Act. Among the amendments introduced into the Fair Trading Act were prohibitions on unfair contract terms and on making unsubstantiated representations about a product or service and new provisions regulating uninvited direct sales. The unfair contract terms provisions came into force in March 2015. The unsubstantiated representations prohibitions and uninvited direct sales provisions came into effect in June 2014. 24 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 25 1 Reserve Bank of New Zealand (RBNZ) – housing review stage two – residential property investors The RBNZ has concluded stage two of its housing review and is amending its Capital Adequacy Frameworks to provide for a new asset class treatment for property investor residential mortgage loans. The new classification, which applies to all locally incorporated banks, will apply from 1 November 2015 for new lending. Banks will be required to classify their existing residential loans by 31 October 2016. The capital requirements for this lending will increase as a higher risk weighting will apply than for owner occupied residential mortgage lending. RBNZ – New loan to value ratio (LVR) restrictions Restrictions on high LVR lending are part of the RBNZ’s macro-prudential policy framework and have been in place since October 2013. In May 2015 the RBNZ announced that in response to growing market risk from the Auckland housing market it was proposing changes to its LVR policy. From 1 November 2015 there will be a 5 percent limit on property investor residential mortgage lending in the Auckland region where the LVR is above 70 percent. Restrictions on residential mortgage lending to owner occupiers in Auckland will continue to be 10 percent where the LVR exceeds 80 percent. For residential mortgage lending in other parts of New Zealand the limit on lending where the LVR exceeds 80 percent will be increased to 15 percent from 10 percent. RBNZ – Review of outsourcing policy In August 2015 the RBNZ released a consultation paper proposing revisions to its Outsourcing Policy (BS11). The RBNZ considers that the Outsourcing Policy is closely linked to its Open Bank Resolution (OBR) Policy and the proposed changes reflect this. In summary, the RBNZ is proposing to broaden the functionality that a bank would need to continue delivering in the event of statutory management and is proposing three areas where outsourcing to related parties would be prohibited. In this respect the RBNZ is seeking to ensure that the bank has direct ownership and control over certain data that would be required to enable the bank to calculate its financial positions at the end of each business day. In particular it must have its own SWIFT gateway and licence for the processing of transactions, and it should be able to undertake its regulatory reporting using its own data. The RBNZ is also proposing that banks be required to notify the RBNZ about proposals to outsource prior to an agreement being entered into and that a notice of non- objection be obtained in some or all instances. Submissions close in December 2015. 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 the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and re-insurance companies, friendly societies and most of the superannuation (pension) industry. APRA’s role includes establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by the institutions it supervises are met within a stable, efficient and competitive financial system. 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 BCBS. 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 fairness and transparency 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. 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 2001. 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. 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. The FMA is New Zealand's financial conduct regulator. Its main objective is to promote and facilitate the development of fair, efficient, and transparent financial markets. Its functions include promoting the confident and informed participation of businesses, investors, and consumers in those markets. The Financial Markets Conduct Act, which was passed in 2013, resulted in the FMA having extensive new responsibilities in the licensing and supervision of various market participants as well as new enforcement powers. Information on Westpac United States Our New York branch is a US federally licensed branch and therefore is subject to supervision, examination and 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. 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, which is at least equal to 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 subject to periodic onsite examination by the US Comptroller of the Currency. Such examination may address risk management, operations, asset quality, compliance with the record-keeping and reporting, and any additional requirements prescribed by the US Comptroller of the Currency from time to time. 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. We are not a Financial Holding Company as defined in the Gramm-Leach-Bliley Act of 1999. Westpac and some of its affiliates are engaged in various activities that are subject to regulation by other US federal regulatory agencies including the US Securities & Exchange Commission and the US Commodity Futures Anti-money laundering regulation and Trading Commission. 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. 26 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 27 Reserve Bank of New Zealand (RBNZ) – housing review Supervision and regulation stage two – residential property investors The RBNZ has concluded stage two of its housing review and is amending its Capital Adequacy Frameworks to provide for a new asset class treatment for property investor residential mortgage loans. The new classification, which applies to all locally incorporated banks, will apply from 1 November 2015 for new lending. Banks will be required to classify their existing residential loans by 31 October 2016. The capital requirements for this lending will increase as a higher risk weighting will apply than for owner occupied residential mortgage lending. RBNZ – New loan to value ratio (LVR) restrictions Restrictions on high LVR lending are part of the RBNZ’s macro-prudential policy framework and have been in place since October 2013. In May 2015 the RBNZ announced that in response to growing market risk from the Auckland housing market it was proposing changes to its LVR policy. From 1 November 2015 there will be a 5 percent limit on property investor residential mortgage lending in the Auckland region where the LVR is above 70 percent. Restrictions on residential mortgage lending to owner occupiers in Auckland will continue to be 10 percent where the LVR exceeds 80 percent. For residential mortgage lending in other parts of New Zealand the limit on lending where the LVR exceeds 80 percent will be increased to 15 percent from 10 percent. RBNZ – Review of outsourcing policy In August 2015 the RBNZ released a consultation paper proposing revisions to its Outsourcing Policy (BS11). The RBNZ considers that the Outsourcing Policy is closely linked to its Open Bank Resolution (OBR) Policy and the proposed changes reflect this. In summary, the RBNZ is proposing to broaden the functionality that a bank would need to continue delivering in the event of statutory management and is proposing three areas where outsourcing to related parties would be prohibited. In this respect the RBNZ is seeking to ensure that the bank has direct ownership and control over certain data that would be required to enable the bank to calculate its financial positions at the end of each business day. In particular it must have its own SWIFT gateway and licence for the processing of transactions, and it should be able to undertake its regulatory reporting using its own data. The RBNZ is also proposing that banks be required to notify the RBNZ about proposals to outsource prior to an agreement being entered into and that a notice of non- objection be obtained in some or all instances. Submissions close in December 2015. 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 the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and re-insurance companies, friendly societies and most of the superannuation (pension) industry. APRA’s role includes establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by the institutions it supervises are met within a stable, efficient and competitive financial system. 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 BCBS. 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 fairness and transparency 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. 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 2001. 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. 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. The FMA is New Zealand's financial conduct regulator. Its main objective is to promote and facilitate the development of fair, efficient, and transparent financial markets. Its functions include promoting the confident and informed participation of businesses, investors, and consumers in those markets. The Financial Markets Conduct Act, which was passed in 2013, resulted in the FMA having extensive new responsibilities in the licensing and supervision of various market participants as well as new enforcement powers. Information on Westpac United States Our New York branch is a US federally licensed branch and therefore is subject to supervision, examination and 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. 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, which is at least equal to 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 subject to periodic onsite examination by the US Comptroller of the Currency. Such examination may address risk management, operations, asset quality, compliance with the record-keeping and reporting, and any additional requirements prescribed by the US Comptroller of the Currency from time to time. 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. We are not a Financial Holding Company as defined in the Gramm-Leach-Bliley Act of 1999. Westpac and some of its affiliates are engaged in various activities that are subject to regulation by other US federal regulatory agencies including the US Securities & Exchange Commission and the US Commodity Futures Trading Commission. 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. 26 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 27 1 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. 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 31 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 (+61) 2 9374 7113 and our international telephone number is (+61) 2 9293 9270. Corporate Governance Statement 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 comply with the ASX Corporate Governance Principles and Recommendations with 2014 amendments published by the ASX Limited’s Corporate Governance Council. Westpac’s 2015 Corporate Governance 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 the Corporate Governance Statement. Websites Investor communications and information, including the Westpac Group Annual Report 2015, Annual Review and Sustainability Report 2015, 2015 Sustainability Performance Report, investor discussion packs and presentations, can be accessed at www.westpac.com.au/investorcentre Directors’ report 30 September 2015. 1. Directors Our Directors present their report together with the financial statements of the Group for the financial year ended The names of the persons who have been Directors, or appointed as Directors, during the period since 1 October 2014 and up to the date of this report are: Lindsay Philip Maxsted, Brian Charles Hartzer (Managing Director & Chief Executive Officer from 2 February 2015), Gail Patricia Kelly (retired as Managing Director & Chief Executive Officer on 1 February 2015), Elizabeth Blomfield Bryan, Ewen Graham Wolseley Crouch, Catriona Alison Deans (Alison Deans), Craig William Dunn (Director from 1 June 2015), Robert George Elstone, Peter John Oswin Hawkins, Peter Ralph Marriott, and Ann Darlene Pickard (retired as Director on 12 December 2014). 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 2015 and the period for which each directorship has been held, are set out below. Name: Lindsay Maxsted, Other principal directorships: Australia’s largest DipBus (Gordon), FCA, FAICD Managing Director of Align Capital insolvency/workout/turnaround Pty Ltd and Director of Baker IDI engagements including Linter Age: 61 Term of office: Director since March 2008 and Chairman since December 2011. Holdings Limited. Other interests: Nil. Heart and Diabetes Institute Date of next scheduled re-election: December 2017. Independent: Yes. Current directorships of listed entities and dates of office: Transurban Group (since March 2008, and Chairman since August 2010), BHP Billiton Limited (since March 2011) and BHP Billiton plc (since March 2011). Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Lindsay was formerly a partner at KPMG and was the CEO of that firm from January 2001 to December 2007. His principal area of practice prior to his becoming CEO was in the corporate recovery field managing a number of Name: Brian Hartzer, Other interests: Nil. BA, CFA Age: 48 Term of office: Managing Director & Chief Executive Date of next scheduled re-election: Not applicable. Independent: No. Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Director & Chief Executive Officer in February 2015. Brian joined Westpac as Chief Executive, Australian Financial Services in Officer since February 2015. Brian was appointed Managing Current directorships of listed June 2012 encompassing Westpac entities and dates of office: Retail & Business Banking, Nil. Other principal directorships: The Financial Markets Foundation for Children and Chairman of the Australian Bankers’ Association Incorporated. 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. 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. Westpac Board Committee membership: Chairman of the Board Nominations Committee. Member of each of the Board Audit and Board Risk & Compliance Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Prior to that, he spent ten years with Australia and New Zealand Banking Group Limited (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. 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. 28 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 29 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. 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 31 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 (+61) 2 9374 7113 and our international telephone number is (+61) 2 9293 9270. Corporate Governance Statement 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 comply with the ASX Corporate Governance Principles and Recommendations with 2014 amendments published by the ASX Limited’s Corporate Governance Council. Westpac’s 2015 Corporate Governance 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 the Corporate Governance Statement. Websites Investor communications and information, including the Westpac Group Annual Report 2015, Annual Review and Sustainability Report 2015, 2015 Sustainability Performance Report, investor discussion packs and presentations, can be accessed at www.westpac.com.au/investorcentre Directors’ report Our Directors present their report together with the financial statements of the Group for the financial year ended 30 September 2015. 1. Directors The names of the persons who have been Directors, or appointed as Directors, during the period since 1 October 2014 and up to the date of this report are: Lindsay Philip Maxsted, Brian Charles Hartzer (Managing Director & Chief Executive Officer from 2 February 2015), Gail Patricia Kelly (retired as Managing Director & Chief Executive Officer on 1 February 2015), Elizabeth Blomfield Bryan, Ewen Graham Wolseley Crouch, Catriona Alison Deans (Alison Deans), Craig William Dunn (Director from 1 June 2015), Robert George Elstone, Peter John Oswin Hawkins, Peter Ralph Marriott, and Ann Darlene Pickard (retired as Director on 12 December 2014). 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 2015 and the period for which each directorship has been held, are set out below. Name: Lindsay Maxsted, DipBus (Gordon), FCA, FAICD Age: 61 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 2017. Independent: Yes. Current directorships of listed entities and dates of office: Transurban Group (since March 2008, and Chairman since August 2010), BHP Billiton Limited (since March 2011) and BHP Billiton plc (since March 2011). Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Lindsay was formerly a partner at KPMG and was the CEO of that firm from January 2001 to 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 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. Westpac Board Committee membership: Chairman of the Board Nominations Committee. Member of each of the Board Audit and Board Risk & Compliance Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Name: Brian Hartzer, BA, CFA Age: 48 Term of office: Managing Director & Chief Executive Officer since February 2015. Date of next scheduled re-election: Not applicable. Independent: No. Current directorships of listed entities and dates of office: Nil. Other principal directorships: The Financial Markets Foundation for Children and Chairman of the Australian Bankers’ Association Incorporated. Other interests: Nil. Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Brian was appointed Managing Director & Chief Executive Officer in February 2015. Brian joined Westpac as Chief Executive, Australian Financial Services in June 2012 encompassing 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 Australia and New Zealand Banking Group Limited (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. 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. 28 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 29 1 Name: Elizabeth Bryan AM, BA (Econ.), MA (Econ.) Other principal directorships: Nil. Age: 69 Term of office: Director since November 2006. Date of next scheduled re-election: December 2015. Independent: Yes. Current directorships of listed entities and dates of office: Caltex Australia Limited (since July 2002, and Chairman since October 2007), Insurance Australia Group Limited (since December 2014, and Deputy Chairman since June 2015) and Virgin Australia Holdings Limited (Chairman since May 2015). Other interests: Member of the Takeovers Panel, ASIC Director Advisory Panel and President of YWCA NSW. Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Elizabeth has wide experience on the boards of companies. Prior to becoming a professional director she served for six years as Managing Director of Deutsche Asset Management and its predecessor organisation, Name: Ewen Crouch AM, BEc (Hons.), LLB, FAICD Age: 59 Term of office: Director since February 2013. Date of next scheduled re-election: December 2016. Independent: Yes. Current directorships of listed entities and dates of office: BlueScope Steel Limited (since March 2013). Other principal directorships: Chairman of Mission Australia. Other interests: Member of the Commonwealth Remuneration Tribunal, Law Committee of the Australian Institute of Company Directors, Corporations Committee of the Law Council of Australia and Board member of the Sydney Symphony Orchestra and Jawun. 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 lawyers, having worked on some of Australia’s most significant transactions during his career as a partner at Allens from July 1988 to January 2013. He served as a member of that firm’s board for eleven years including four years as Chairman of Partners as well as holding the following roles whilst a partner: Co-Head Mergers & Acquisitions and Equity Capital Markets, Executive Partner, Asian Offices and Deputy Managing Partner. Ewen was a member of the Takeovers Panel between 2010 to 2015. NSW State Superannuation Investment and Management Corporation. Westpac Board Committee membership: Chairman of the Board Risk & Compliance Committee. Member of each of the Board Nominations and Board Remuneration Committees. Directorships of other listed entities over the past three years and dates of office: Nil. In 2013, Ewen was awarded an Order of Australia in recognition of his significant service to the law as a contributor to legal professional organisations and to the community. Westpac Board Committee membership: Chairman of the Board Remuneration Committee. Member of each of the Board Nominations and Board Risk & Compliance Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Name: Alison Deans, BA, MBA, GAICD Other Westpac related entities Independent Director of Social directorships and dates of Ventures Australia from Term of office: Director since Skills, experience and Age: 47 April 2014. Date of next scheduled re-election: December 2017. Independent: Yes. office: Nil. expertise: Alison has more than 20 years’ experience in senior management and strategy consulting roles focussed on e-commerce, media and financial Current directorships of listed services in Australia. During this entities and dates of office: time, Alison held a number of Directors’ report September 2007 to April 2013. Alison was formerly appointed by the Australian Government to a Panel of Experts conducting an independent cost-benefit analysis and regulatory review of the National Broadband Network. Westpac Board Committee membership: Member of each of the Board Risk & Compliance Insurance Australia Group Limited (since February 2013) and Cochlear Limited (since January 2015). Other principal directorships: kikki.K Holdings Pty Ltd. Other interests: Nil. senior executive roles including as the CEO of eCorp Limited, Hoyts Cinemas and eBay, and Board Technology Australia and New Zealand. Most Committees. recently, she was the CEO of the technology-based investment company netus Pty Ltd, which was acquired by Fairfax Media Limited in 2012. She was also an Directorships of other listed entities over the past three years and dates of office: Nil. Name: Craig Dunn, BCom, FCA Age: 52 Term of office: Director since June 2015. Date of next scheduled re-election: December 2015. Independent: Yes. Current directorships of listed entities and dates of office: Nil. Other principal directorships: Financial Literacy Australia Limited, The Australian Ballet and Chairman of Stone and Chalk Limited. Other Westpac related entities Forum, the Consumer and directorships and dates of Financial Literacy Taskforce and office: Nil. Skills, experience and expertise: Craig has more than 20 years’ experience in financial services, including as CEO of a Panel member of the Australian Government's Financial System Inquiry. Westpac Board Committee membership: Member of each AMP Limited from January 2008 of the Board Risk & Compliance to December 2013. Craig was and Board Remuneration previously a Board member of Committees. the Australian Japanese Business Cooperation Committee, and former Chairman of the Investment and Financial Services Association (now the Financial Services Council). He was also a member Directorships of other listed entities over the past three years and dates of office: AMP Limited (January 2008 to December 2013). Other interests: Member of the ASIC External Advisory Panel of the Financial Services Advisory Committee, the and Consultant to King & Wood Australian Financial Centre Mallesons. 30 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 31 Name: Elizabeth Bryan AM, Other principal directorships: NSW State Superannuation Advisory Panel and President of membership: Chairman of the BA (Econ.), MA (Econ.) Nil. Age: 69 Term of office: Director since November 2006. Date of next scheduled re-election: December 2015. Independent: Yes. Current directorships of listed entities and dates of office: Caltex Australia Limited (since July 2002, and Chairman since October 2007), Insurance Australia Group Limited (since December 2014, and Deputy Chairman since June 2015) and Virgin Australia Holdings Limited (Chairman since May 2015). Other interests: Member of the Takeovers Panel, ASIC Director YWCA NSW. Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Elizabeth has wide experience on the boards of companies. Prior to becoming a professional director she served for six years as Managing Director of Deutsche Asset Management and its predecessor organisation, Investment and Management Corporation. Westpac Board Committee Board Risk & Compliance Committee. Member of each of the Board Nominations and Board Remuneration Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Name: Ewen Crouch AM, BEc (Hons.), LLB, FAICD Age: 59 Term of office: Director since February 2013. Date of next scheduled re-election: December 2016. Independent: Yes. Other Westpac related entities In 2013, Ewen was awarded an directorships and dates of office: Nil. Skills, experience and expertise: Ewen is one of Australia’s most accomplished mergers and acquisitions lawyers, having worked on some of Australia’s most significant Order of Australia in recognition of his significant service to the law as a contributor to legal professional organisations and to the community. Westpac Board Committee membership: Chairman of the Board Remuneration Current directorships of listed entities and dates of office: BlueScope Steel Limited (since transactions during his career as Committee. Member of each of a partner at Allens from July the Board Nominations and 1988 to January 2013. He served Board Risk & Compliance March 2013). as a member of that firm’s board Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Other principal directorships: Chairman of Mission Australia. Other interests: Member of the Commonwealth Remuneration Tribunal, Law Committee of the Australian Institute of Company Directors, Corporations Committee of the Law Council of Australia and Board member of the Sydney Symphony Orchestra and Jawun. for eleven years including four years as Chairman of Partners as well as holding the following roles whilst a partner: Co-Head Mergers & Acquisitions and Equity Capital Markets, Executive Partner, Asian Offices and Deputy Managing Partner. Ewen was a member of the Takeovers Panel between 2010 to 2015. Name: Alison Deans, BA, MBA, GAICD Age: 47 Term of office: Director since April 2014. Date of next scheduled re-election: December 2017. Independent: Yes. Current directorships of listed entities and dates of office: Insurance Australia Group Limited (since February 2013) and Cochlear Limited (since January 2015). Other principal directorships: kikki.K Holdings Pty Ltd. Other interests: Nil. Name: Craig Dunn, BCom, FCA Age: 52 Term of office: Director since June 2015. Date of next scheduled re-election: December 2015. Independent: Yes. Current directorships of listed entities and dates of office: Nil. Other principal directorships: Financial Literacy Australia Limited, The Australian Ballet and Chairman of Stone and Chalk Limited. Other interests: Member of the ASIC External Advisory Panel and Consultant to King & Wood Mallesons. Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Alison has more than 20 years’ experience in senior management and strategy consulting roles focussed on e-commerce, media and financial services in Australia. During this time, Alison held a number of senior executive roles including as the CEO of eCorp Limited, Hoyts Cinemas and eBay, Australia and New Zealand. Most recently, she was the CEO of the technology-based investment company netus Pty Ltd, which was acquired by Fairfax Media Limited in 2012. She was also an Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Craig has more than 20 years’ experience in financial services, including as CEO of AMP Limited from January 2008 to December 2013. Craig was previously a Board member of the Australian Japanese Business Cooperation Committee, and former Chairman of the Investment and Financial Services Association (now the Financial Services Council). He was also a member of the Financial Services Advisory Committee, the Australian Financial Centre Directors’ report Independent Director of Social Ventures Australia from September 2007 to April 2013. Alison was formerly appointed by the Australian Government to a Panel of Experts conducting an independent cost-benefit analysis and regulatory review of the National Broadband Network. Westpac Board Committee membership: Member of each of the Board Risk & Compliance and Board Technology Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Forum, the Consumer and Financial Literacy Taskforce and a Panel member of the Australian Government's Financial System Inquiry. Westpac Board Committee membership: Member of each of the Board Risk & Compliance and Board Remuneration Committees. Directorships of other listed entities over the past three years and dates of office: AMP Limited (January 2008 to December 2013). 30 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 31 1 Directors’ report Company Secretary Our Company Secretaries as at 30 September 2015 are John Arthur and Tim Hartin. John Arthur (LLB (Hons.)) was appointed Group Executive, Counsel & Secretariat and Company Secretary in December 2008. In November 2011, John was appointed Chief Operating Officer and continues to hold the position of Senior Company Secretary. Before that appointment, John was Managing Director & CEO of Investa Property Group until 2007. Previously, John had been a partner at Freehills and Group General Counsel of Lend Lease Corporation 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 in November 2011. Prior to his appointment, Tim was 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 2015 our Executive Team was: Name Position Managing Director & Chief Executive Officer Deputy Chief Executive Officer Chief Operating Officer Chief Executive, Westpac Institutional Bank Chief Executive Officer, BT Financial Group Chief Information Officer Chief Executive, Consumer Bank Brian Hartzer Philip Coffey John Arthur Lyn Cobley Brad Cooper David Curran George Frazis Peter King David Lindberg David McLean Alexandra Holcomb Chief Risk Officer Chief Financial Officer Chief Executive, Commercial & Business Bank Chief Executive Officer, Westpac New Zealand Limited Christine Parker Group Executive, Human Resources, Corporate Affairs Gary Thursby Chief Strategy Officer & Sustainability There are no family relationships between or among any of our Directors or Executive Team members. Year Joined Year Appointed Group to Position 2012 1996 2008 2015 2007 2014 2009 1996 1994 2012 1999 2007 2008 2015 2014 2011 2015 2010 2014 2015 2014 2014 2015 2015 2011 2015 Name: Robert Elstone, BA (Hons.), MA (Econ.), MCom Age: 62 Term of office: Director since February 2012. Date of next scheduled re-election: December 2017. 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 at the Business Schools of the Universities of Sydney and Western Australia. Name: Peter Hawkins, BCA (Hons.), SF Fin, FAIM, ACA (NZ), FAICD Age: 61 Term of office: Director since December 2008. Date of next scheduled re-election: December 2015. Independent: Yes. Current directorships of listed entities and dates of office: Mirvac Group (since January 2006) and MG Responsible Entity Limited (since April 2015, which is the responsible entity for ASX listed MG Unit Trust). Other Westpac related entities directorships and dates of office: Nil. 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 July 2006 to October 2011, Robert was Managing Director and CEO of ASX Limited. Previously, he was Managing Director and CEO of the Sydney Futures Exchange from May 2000 to July 2006, and from January 1995 to May 2000, he was Finance Director of Pioneer International. Other principal directorships: Liberty Financial Pty Ltd, Murray Goulburn Co-operative Co. Limited and Clayton Utz. 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 40 years in Australia and overseas at both the highest levels of management and directorship of major organisations. Peter has Name: Peter Marriott, BEc (Hons.), FCA Age: 58 Term of office: Director since June 2013. Date of next scheduled re-election: December 2016. Independent: Yes. Current directorships of listed entities and dates of office: ASX Limited (since July 2009). Other principal directorships: ASX Clearing Corporation Limited, ASX Settlement Corporation Limited and Chairman of Austraclear Limited. Other interests: Member of the Review Panel & Policy Council of the Banking & Finance Oath. 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 July 1997 to May 2012. Prior to his career Robert was a Non-executive Director of the National Australia Bank from September 2004 to July 2006, an inaugural member of the Board of Guardians of the Future Fund, and former Chairman of the Financial Sector Advisory Council to the Federal Treasurer. Westpac Board Committee membership: Member of each of the Board Audit, Board Remuneration and Board Risk & Compliance Committees. Directorships of other listed entities over the past three years and dates of office: Nil. held various senior management and directorship positions with Australia and New Zealand Banking Group Limited from 1971 to 2005. He was also previously a Director of BHP (NZ) Steel Limited, ING Australia Limited, Esanda Finance Corporation and Visa Inc. Westpac Board Committee membership: Chairman of the Board Technology Committee. Member of each of the Board Audit, Board Nominations and Board Risk & Compliance Committees. Directorships of other listed entities over the past three years and dates of office: Nil. at ANZ, Peter was a banking and finance, audit and consulting partner at KPMG Peat Marwick. Peter was formerly a Director of ANZ National Bank Limited in New Zealand and various ANZ subsidiaries. Westpac Board Committee membership: Chairman of the Board Audit Committee. Member of each of the Board Nominations, Board Risk & Compliance and Board Technology Committees. Directorships of other listed entities over the past three years and dates of office: Nil. 32 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 33 Name: Robert Elstone, Other Westpac related entities Robert was a Non-executive BA (Hons.), MA (Econ.), MCom directorships and dates of Company Secretary Our Company Secretaries as at 30 September 2015 are John Arthur and Tim Hartin. Directors’ report John Arthur (LLB (Hons.)) was appointed Group Executive, Counsel & Secretariat and Company Secretary in December 2008. In November 2011, John was appointed Chief Operating Officer and continues to hold the position of Senior Company Secretary. Before that appointment, John was Managing Director & CEO of Investa Property Group until 2007. Previously, John had been a partner at Freehills and Group General Counsel of Lend Lease Corporation 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 in November 2011. Prior to his appointment, Tim was 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 2015 our Executive Team was: Name Position Brian Hartzer Philip Coffey John Arthur Lyn Cobley Brad Cooper David Curran George Frazis Alexandra Holcomb Peter King David Lindberg David McLean Christine Parker Gary Thursby Managing Director & Chief Executive Officer Deputy Chief Executive Officer Chief Operating Officer Chief Executive, Westpac Institutional Bank Chief Executive Officer, BT Financial Group Chief Information Officer Chief Executive, Consumer Bank Chief Risk Officer Chief Financial Officer Chief Executive, Commercial & Business Bank Chief Executive Officer, Westpac New Zealand Limited Group Executive, Human Resources, Corporate Affairs & Sustainability Chief Strategy Officer Year Joined Group Year Appointed to Position 2012 1996 2008 2015 2007 2014 2009 1996 1994 2012 1999 2007 2008 2015 2014 2011 2015 2010 2014 2015 2014 2014 2015 2015 2011 2015 There are no family relationships between or among any of our Directors or Executive Team members. Age: 62 Term of office: Director since February 2012. Date of next scheduled re-election: December 2017. 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 at the Business office: Nil. Skills, experience and expertise: Robert has over 30 years’ experience in senior management roles spanning investment banking, corporate finance, wholesale financial Director of the National Australia Bank from September 2004 to July 2006, an inaugural member of the Board of Guardians of the Future Fund, and former Chairman of the Financial Sector Advisory Council to the Federal Treasurer. markets and risk management. Westpac Board Committee From July 2006 to October 2011, membership: Member of each Robert was Managing Director of the Board Audit, Board and CEO of ASX Limited. Remuneration and Board Risk & Previously, he was Managing Compliance Committees. Director and CEO of the Sydney Futures Exchange from May 2000 to July 2006, and from Directorships of other listed entities over the past three years and dates of office: Nil. Schools of the Universities of January 1995 to May 2000, he Sydney and Western Australia. was Finance Director of Pioneer International. Name: Peter Hawkins, Other principal directorships: held various senior management BCA (Hons.), SF Fin, FAIM, Liberty Financial Pty Ltd, Murray and directorship positions with ACA (NZ), FAICD Age: 61 Term of office: Director since December 2008. Date of next scheduled re-election: December 2015. Independent: Yes. Current directorships of listed entities and dates of office: Mirvac Group (since January 2006) and MG Responsible Entity Limited (since April 2015, which is the responsible entity for ASX listed MG Unit Trust). Name: Peter Marriott, BEc (Hons.), FCA Age: 58 Term of office: Director since June 2013. Date of next scheduled re-election: December 2016. Independent: Yes. entities and dates of office: ASX Limited (since July 2009). Other principal directorships: ASX Clearing Corporation Limited, ASX Settlement Corporation Limited and Chairman of Austraclear Limited. Goulburn Co-operative Co. Limited and Clayton Utz. 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 40 years in Australia and overseas at both the highest levels of management and directorship of major organisations. Peter has Australia and New Zealand Banking Group Limited from 1971 to 2005. He was also previously a Director of BHP (NZ) Steel Limited, ING Australia Limited, Esanda Finance Corporation and Visa Inc. Westpac Board Committee membership: Chairman of the Board Technology Committee. Member of each of the Board Audit, Board Nominations and Board Risk & Compliance Committees. Directorships of other listed entities over the past three years and dates of office: Nil. Other interests: Member of the at ANZ, Peter was a banking and Review Panel & Policy Council of finance, audit and consulting the Banking & Finance Oath. Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Peter has over 30 years’ experience in senior industry encompassing international banking, finance and auditing. Peter joined Australia and New Zealand partner at KPMG Peat Marwick. Peter was formerly a Director of ANZ National Bank Limited in New Zealand and various ANZ subsidiaries. Westpac Board Committee membership: Chairman of the Board Audit Committee. Member of each of the Board Nominations, Board Risk & Compliance and Board Technology Committees. Directorships of other listed Banking Group Limited (ANZ) in entities over the past three 1993 and held the role of Chief years and dates of office: Nil. Financial Officer from July 1997 to May 2012. Prior to his career Current directorships of listed management roles in the finance 32 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 33 1 Brian Hartzer BA, CFA. Age 48 Managing Director & Chief Executive Officer Brian was appointed Managing Director & Chief Executive Officer in February 2015. Brian joined Westpac as Chief Executive, Australian Financial Services in June 2012 encompassing Westpac Retail & Business Banking, St.George Banking Group and BT Financial Group. Brian was appointed Chairman of the Australian Bankers' Association in February 2015. 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 Australia and New Zealand Banking Group Limited (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. Philip Coffey BEc (Hons.). Age 58 Deputy Chief Executive Officer Philip was appointed Deputy Chief Executive Officer in April 2014 with responsibility for overseeing Westpac’s contribution to the Federal Government’s Financial System Inquiry and supporting relationships with key stakeholders including industry groups, regulators, customers and government. He is also responsible for the Group’s strategy, mergers and acquisitions function. Prior to this appointment, Philip held the role of Chief Financial Officer from December 2005. Previous to this, he was Group Executive, Westpac Institutional Bank, having been appointed to that position in 2002. Philip first joined Westpac in 1996 as Head of Foreign Exchange. Philip has extensive experience in financial markets, funds management and finance. He began his career at the Reserve Bank of Australia before moving to Citicorp and AIDC Limited. He has also held roles in the United Kingdom and New Zealand. Philip has an honours degree in Economics from the University of Adelaide and has completed the Executive Programme at Stanford University Business School. John Arthur LLB (Hons.). Age 60 Chief Operating Officer John was appointed Chief Operating Officer in November 2011. He has responsibility for enterprise investments, contact centres, procurement, analytics, banking operations, property, compliance, legal and secretariat services. He joined Westpac as Group Executive, Counsel & Secretariat in December 2008. Before that appointment, John was Managing Director & CEO of Investa Property Group. Previously, John had been a partner at Freehills and Group General Counsel of Lend Lease Corporation 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. Lyn Cobley BEc, SF FIN, GAICD. Age 52 Chief Executive, Westpac Institutional Bank Lyn was appointed Chief Executive, Westpac Institutional Bank in September 2015. She has responsibility for Westpac’s global relationships with corporate, institutional and government clients as well as all products across financial and capital markets, transactional banking, structured finance and working capital payments. In addition, Lyn oversees Hastings Funds Management, global treasury as well as Westpac’s International and Pacific Island businesses. Lyn has over 20 years' experience in financial services. Prior to joining Westpac, Lyn held a variety of senior positions at the Commonwealth Bank of Australia (CBA) including serving as Group Treasurer from 2007 to 2013 and most recently as Executive General Manager, Retail Products & Third Party Banking. She was also Head of Financial Institutions at Barclays Capital in Australia, held senior roles at Citibank in Australia and Asia Pacific including Head of Securitisation and was CEO of Trading Room (a joint venture between Macquarie Bank and Fairfax). Lyn has a Bachelor of Economics from Macquarie University, is a Senior Fellow of the Financial Services Institute of Australia and is a graduate of the Australian Institute of Company Directors. Directors’ report Brad Cooper DipBM, MBA. Age 53 Chief Executive Officer, BT Financial Group Brad was appointed Chief Executive Officer, BT Financial Group in 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. David Curran BCom. Age 50 Chief Information Officer David was appointed Chief Information Officer in September 2014. David joined Westpac in February 2014 as a consultant on the Group’s banking technology modernisation program. David has almost 30 years of experience with proven expertise in IT and financial services and the implementation of large, complex projects. Before joining Westpac, David spent ten years in senior roles at the Commonwealth Bank of Australia (CBA). Before joining CBA, he spent sixteen years at Accenture, where he was a partner, primarily consulting on financial services. George Frazis B Eng (Hons.), MBA (AGSM/Wharton). Age 51 Chief Executive, Consumer Bank George was appointed Chief Executive, Consumer Bank in June 2015, responsible for managing the end to end relationship with consumer customers. This includes all consumer distribution, digital, marketing, transformation and banking products and services under the Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands. Prior to this appointment, he was CEO, St.George Banking Group. 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 and an officer in the Royal Australian Air Force. Alexandra Holcomb BA, MBA, MA. Age 54 Chief Risk Officer Alexandra was appointed Chief Risk Officer in August 2014. As Westpac Group’s Chief Risk Officer, Alexandra is responsible for risk management activities across the enterprise across all risk classes and Westpac’s strategic risk objectives. Since joining Westpac in 1996, Alexandra has held a number of senior positions including Group General Manager, Group Strategy, M&A and Major Projects, Group Executive of Group Strategy, Head of Westpac Institutional Bank Strategy, and most recently, Group General Manager of Global Transactional Services. Prior to joining Westpac, Alexandra was a senior executive from 1992 to 1996 with Booz Allen & Hamilton International where she specialised in international credit, working throughout the Asia Pacific region. Before that, she worked with Chase Manhattan Bank in New York in private and business banking and international credit audit. She also worked in project finance in Paris and New York for Banque Indosuez and Barclays Bank respectively. Alexandra is a Fellow of the Australian Institute of Company Directors and a Board member of Asia Society Australia. She has an MBA in Finance and Multinational Management from the Wharton School of Business and a Master of Arts in International Studies and French from the University of Pennsylvania. She also holds a BA in English and Economics from Cornell University. 34 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 35 Brian Hartzer BA, CFA. Age 48 Managing Director & Chief Executive Officer Brian was appointed Managing Director & Chief Executive Officer in February 2015. Brian joined Westpac as Chief Executive, Australian Financial Services in June 2012 encompassing Westpac Retail & Business Banking, St.George Banking Group and BT Financial Group. Brian was appointed Chairman of the Australian Bankers' Association in February 2015. 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 Australia and New Zealand Banking Group Limited (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. Philip Coffey BEc (Hons.). Age 58 Deputy Chief Executive Officer Philip was appointed Deputy Chief Executive Officer in April 2014 with responsibility for overseeing Westpac’s contribution to the Federal Government’s Financial System Inquiry and supporting relationships with key stakeholders including industry groups, regulators, customers and government. He is also responsible for the Group’s strategy, mergers and acquisitions function. Prior to this appointment, Philip held the role of Chief Financial Officer from December 2005. Previous to this, he was Group Executive, Westpac Institutional Bank, having been appointed to that position in 2002. Philip first joined Westpac in 1996 as Head of Foreign Exchange. Philip has extensive experience in financial markets, funds management and finance. He began his career at the Reserve Bank of Australia before moving to Citicorp and AIDC Limited. He has also held roles in the United Kingdom and New Zealand. Philip has an honours degree in Economics from the University of Adelaide and has completed the Executive Programme at Stanford University Business School. John Arthur LLB (Hons.). Age 60 Chief Operating Officer John was appointed Chief Operating Officer in November 2011. He has responsibility for enterprise investments, contact centres, procurement, analytics, banking operations, property, compliance, legal and secretariat services. He joined Westpac as Group Executive, Counsel & Secretariat in December 2008. Before that appointment, John was Managing Director & CEO of Investa Property Group. Previously, John had been a partner at Freehills and Group General Counsel of Lend Lease Corporation 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. Lyn Cobley BEc, SF FIN, GAICD. Age 52 Chief Executive, Westpac Institutional Bank Lyn was appointed Chief Executive, Westpac Institutional Bank in September 2015. She has responsibility for Westpac’s global relationships with corporate, institutional and government clients as well as all products across financial and capital markets, transactional banking, structured finance and working capital payments. In addition, Lyn oversees Hastings Funds Management, global treasury as well as Westpac’s International and Pacific Island businesses. Lyn has over 20 years' experience in financial services. Prior to joining Westpac, Lyn held a variety of senior positions at the Commonwealth Bank of Australia (CBA) including serving as Group Treasurer from 2007 to 2013 and most recently as Executive General Manager, Retail Products & Third Party Banking. She was also Head of Financial Institutions at Barclays Capital in Australia, held senior roles at Citibank in Australia and Asia Pacific including Head of Securitisation and was CEO of Trading Room (a joint venture between Macquarie Bank and Fairfax). Lyn has a Bachelor of Economics from Macquarie University, is a Senior Fellow of the Financial Services Institute of Australia and is a graduate of the Australian Institute of Company Directors. Directors’ report Brad Cooper DipBM, MBA. Age 53 Chief Executive Officer, BT Financial Group Brad was appointed Chief Executive Officer, BT Financial Group in 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. David Curran BCom. Age 50 Chief Information Officer David was appointed Chief Information Officer in September 2014. David joined Westpac in February 2014 as a consultant on the Group’s banking technology modernisation program. David has almost 30 years of experience with proven expertise in IT and financial services and the implementation of large, complex projects. Before joining Westpac, David spent ten years in senior roles at the Commonwealth Bank of Australia (CBA). Before joining CBA, he spent sixteen years at Accenture, where he was a partner, primarily consulting on financial services. George Frazis B Eng (Hons.), MBA (AGSM/Wharton). Age 51 Chief Executive, Consumer Bank George was appointed Chief Executive, Consumer Bank in June 2015, responsible for managing the end to end relationship with consumer customers. This includes all consumer distribution, digital, marketing, transformation and banking products and services under the Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands. Prior to this appointment, he was CEO, St.George Banking Group. 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 and an officer in the Royal Australian Air Force. Alexandra Holcomb BA, MBA, MA. Age 54 Chief Risk Officer Alexandra was appointed Chief Risk Officer in August 2014. As Westpac Group’s Chief Risk Officer, Alexandra is responsible for risk management activities across the enterprise across all risk classes and Westpac’s strategic risk objectives. Since joining Westpac in 1996, Alexandra has held a number of senior positions including Group General Manager, Group Strategy, M&A and Major Projects, Group Executive of Group Strategy, Head of Westpac Institutional Bank Strategy, and most recently, Group General Manager of Global Transactional Services. Prior to joining Westpac, Alexandra was a senior executive from 1992 to 1996 with Booz Allen & Hamilton International where she specialised in international credit, working throughout the Asia Pacific region. Before that, she worked with Chase Manhattan Bank in New York in private and business banking and international credit audit. She also worked in project finance in Paris and New York for Banque Indosuez and Barclays Bank respectively. Alexandra is a Fellow of the Australian Institute of Company Directors and a Board member of Asia Society Australia. She has an MBA in Finance and Multinational Management from the Wharton School of Business and a Master of Arts in International Studies and French from the University of Pennsylvania. She also holds a BA in English and Economics from Cornell University. 34 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 35 1 Peter King BEc, FCA. Age 45 Chief Financial Officer Peter was appointed Chief Financial Officer in April 2014, with responsibility for Westpac’s Finance, Group Audit, Tax, Treasury and Investor Relations functions. Prior to this appointment, Peter was the Deputy Chief Financial Officer for three years. Since joining Westpac in 1994, Peter has held senior finance positions across the Group, including in Group Finance, Business and Consumer Banking, Business and Technology Services, Treasury and Financial Markets. Peter commenced his career at Deloitte Touché Tohmatsu. He has a Bachelor of Economics from Sydney University and completed the Advanced Management Programme at INSEAD. He is a Fellow of the Institute of Chartered Accountants. David Lindberg HBA (Hons. Economics). Age 40 Chief Executive, Commercial & Business Bank David was appointed Chief Executive, Commercial & Business Bank in June 2015, responsible for managing the Group’s end to end relationships across small and medium enterprises, commercial and agri-business customers as well as asset and equipment finance. Prior to this appointment, David was Chief Product Officer, responsible for the Group’s retail and business products across all brands, as well as overseeing the Group’s digital activities. Before joining Westpac in 2012, David was Executive General Manager, Cards, Payments & Retail Strategy at the Commonwealth Bank of Australia. David was also formerly Managing Director, Strategy, Marketing & Customer Segmentation at Australia and New Zealand Banking Group Limited and Managing Vice President and Head of Australia for First Manhattan. David McLean LLB (Hons.). Age 57 Chief Executive Officer, Westpac New Zealand Limited David was appointed Chief Executive Officer, Westpac New Zealand Limited in February 2015. Since joining Westpac in February 1999, David has held a number of senior roles including Head of Debt Capital Markets New Zealand, General Manager, Private, Wealth and Insurance New Zealand and Head of Westpac Institutional Bank New Zealand, and most recently, Managing Director of the Westpac New York branch. Before joining Westpac, David was Director, Capital Markets at Deutsche Morgan Grenfell since 1994, where he was responsible for starting and developing a new debt capital markets origination business. He also established the New Zealand branch of Deutsche Bank and was New Zealand Resident Branch Manager. In 1988, David joined Southpac/National Bank as a Capital Markets Executive. Prior to this, David worked as a lawyer in private practice and also served as in 1985. David is a Barrister & Solicitor of the High Court of New Zealand. house counsel for NatWest NZ from ‐ Christine Parker BGDipBus (HRM). Age 55 Group Executive, Human Resources, Corporate Affairs & Sustainability Christine was appointed Group Executive, Human Resources, Corporate Affairs & Sustainability in 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. Prior to joining Westpac in 2007, Christine was Group Human Resources Director, Carter Holt Harvey, and from 1999 to 2004, she was Director of Human Resources with Restaurant Brands New Zealand. 36 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 37 Directors’ report Gary Thursby BEc, DipAcc, FCA. Age 53 Chief Strategy Officer Gary was appointed Chief Strategy Officer in February 2015. Reporting to the Deputy Chief Executive Officer, Gary is responsible for the development of the Group’s strategy, along with business development and mergers and acquisitions. Gary first joined Westpac in 2008 and more recently was Chief Financial Officer, Australian Financial Services, where his responsibilities included Westpac’s Australian retail banking and wealth management businesses. Gary has a wealth of financial services experience, having held a range of senior positions across a number of financial institutions over the last 20 years. Prior to joining Westpac, he served as Chief Financial Officer, Retail Bank at the Commonwealth Bank of Australia. Gary commenced his career at Deloitte Touché Tohmatsu. Gary has a Bachelor of Economics and a Post Graduate Diploma in Accounting from Flinders University of South Australia and is a Fellow of the Institute of Chartered Accountants. 3. Report on the business a) Principal activities The principal activities of the Group during the financial year ended 30 September 2015 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. There have been no significant changes in the nature of the principal activities of the Group during 2015. b) Operating and financial review The net profit attributable to equity holders of Westpac for the financial year ended 30 September 2015 was $8,012 million, an increase of $451 million or 6% compared to 2014. Key features of this result were: - - a 9% increase in net operating income before operating expenses and impairment charges with: net interest income of $14,267 million, an increase of $725 million or 5% compared to 2014, with loan growth of 7%, customer deposit growth of 4% and stable margins; and non-interest income of $7,375 million, an increase of $980 million or 15% compared to 2014, primarily due to the gain on the partial sale of BTIM ($1,036 million). Excluding this item, non-interest income reduced $56 million or 1%, from lower trading income and lower insurance income reflecting higher insurance claims; operating expenses were $9,473 million, an increase of $926 million or 11% compared to 2014. This included $505 million related to changes to accounting for technology investment spending. Excluding this item, operating expenses increased $421 million or 5% primarily due to higher investment related costs, including increased software amortisation and foreign currency translation impacts; and impairment charges were $753 million, an increase of $103 million or 16% compared to 2014, mostly due to a reduced benefit from credit quality improvements. Overall asset quality improved during the year with stressed exposures as a percentage of total committed exposures reducing from 1.24% to 0.99%. A review of the operations of the Group and its divisions and their results for the financial year ended 30 September 2015 is set out in Section 2 of the Annual Report under the sections ‘Review of Group operations’ and ‘Divisional performance’, which form Further information about our financial position and financial results is included in the financial statements in Section 3 of the part of this report. Annual Report, which form part of this report. c) Dividends Since 30 September 2015, Westpac has announced a final ordinary dividend of 94 cents per Westpac ordinary share, totalling approximately $2,993 million for the year ended 30 September 2015 (2014 final ordinary dividend of 92 cents per Westpac ordinary share, totalling approximately $2,860 million). The dividend will be fully franked and will be paid on 21 December 2015. An interim ordinary dividend for the current financial year of 93 cents per Westpac ordinary share for the half year ended 31 March 2015, totalling $2,902 million, was paid as a fully franked dividend on 2 July 2015 (2014 interim ordinary dividend of 90 cents per Westpac ordinary share, totalling $2,798 million). Peter King BEc, FCA. Age 45 Chief Financial Officer Peter was appointed Chief Financial Officer in April 2014, with responsibility for Westpac’s Finance, Group Audit, Tax, Treasury and Investor Relations functions. Prior to this appointment, Peter was the Deputy Chief Financial Officer for three years. Since joining Westpac in 1994, Peter has held senior finance positions across the Group, including in Group Finance, Business and Consumer Banking, Business and Technology Services, Treasury and Financial Markets. Peter commenced his career at Deloitte Touché Tohmatsu. He has a Bachelor of Economics from Sydney University and completed the Advanced Management Programme at INSEAD. He is a Fellow of the Institute of Chartered Accountants. David Lindberg HBA (Hons. Economics). Age 40 Chief Executive, Commercial & Business Bank David was appointed Chief Executive, Commercial & Business Bank in June 2015, responsible for managing the Group’s end to end relationships across small and medium enterprises, commercial and agri-business customers as well as asset and equipment finance. Prior to this appointment, David was Chief Product Officer, responsible for the Group’s retail and business products across all brands, as well as overseeing the Group’s digital activities. Before joining Westpac in 2012, David was Executive General Manager, Cards, Payments & Retail Strategy at the Commonwealth Bank of Australia. David was also formerly Managing Director, Strategy, Marketing & Customer Segmentation at Australia and New Zealand Banking Group Limited and Managing Vice President and Head of Australia for First Manhattan. David McLean LLB (Hons.). Age 57 Chief Executive Officer, Westpac New Zealand Limited David was appointed Chief Executive Officer, Westpac New Zealand Limited in February 2015. Since joining Westpac in February 1999, David has held a number of senior roles including Head of Debt Capital Markets New Zealand, General Manager, Private, Wealth and Insurance New Zealand and Head of Westpac Institutional Bank New Zealand, and most recently, Managing Director of the Westpac New York branch. Before joining Westpac, David was Director, Capital Markets at Deutsche Morgan Grenfell since 1994, where he was responsible for starting and developing a new debt capital markets origination business. He also established the New Zealand branch of Deutsche Bank and was New Zealand Resident Branch Manager. In 1988, David joined Southpac/National Bank as a Capital Markets Executive. Prior to this, David worked as a lawyer in private practice and also served as in house counsel for NatWest NZ from 1985. David is a Barrister & Solicitor of the High Court of New Zealand. Christine Parker BGDipBus (HRM). Age 55 Group Executive, Human Resources, Corporate Affairs & Sustainability ‐ Christine was appointed Group Executive, Human Resources, Corporate Affairs & Sustainability in 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. Prior to joining Westpac in 2007, Christine was Group Human Resources Director, Carter Holt Harvey, and from 1999 to 2004, she was Director of Human Resources with Restaurant Brands New Zealand. Directors’ report Gary Thursby BEc, DipAcc, FCA. Age 53 Chief Strategy Officer Gary was appointed Chief Strategy Officer in February 2015. Reporting to the Deputy Chief Executive Officer, Gary is responsible for the development of the Group’s strategy, along with business development and mergers and acquisitions. Gary first joined Westpac in 2008 and more recently was Chief Financial Officer, Australian Financial Services, where his responsibilities included Westpac’s Australian retail banking and wealth management businesses. Gary has a wealth of financial services experience, having held a range of senior positions across a number of financial institutions over the last 20 years. Prior to joining Westpac, he served as Chief Financial Officer, Retail Bank at the Commonwealth Bank of Australia. Gary commenced his career at Deloitte Touché Tohmatsu. Gary has a Bachelor of Economics and a Post Graduate Diploma in Accounting from Flinders University of South Australia and is a Fellow of the Institute of Chartered Accountants. 3. Report on the business a) Principal activities The principal activities of the Group during the financial year ended 30 September 2015 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. There have been no significant changes in the nature of the principal activities of the Group during 2015. b) Operating and financial review The net profit attributable to equity holders of Westpac for the financial year ended 30 September 2015 was $8,012 million, an increase of $451 million or 6% compared to 2014. Key features of this result were: a 9% increase in net operating income before operating expenses and impairment charges with: - - net interest income of $14,267 million, an increase of $725 million or 5% compared to 2014, with loan growth of 7%, customer deposit growth of 4% and stable margins; and non-interest income of $7,375 million, an increase of $980 million or 15% compared to 2014, primarily due to the gain on the partial sale of BTIM ($1,036 million). Excluding this item, non-interest income reduced $56 million or 1%, from lower trading income and lower insurance income reflecting higher insurance claims; operating expenses were $9,473 million, an increase of $926 million or 11% compared to 2014. This included $505 million related to changes to accounting for technology investment spending. Excluding this item, operating expenses increased $421 million or 5% primarily due to higher investment related costs, including increased software amortisation and foreign currency translation impacts; and impairment charges were $753 million, an increase of $103 million or 16% compared to 2014, mostly due to a reduced benefit from credit quality improvements. Overall asset quality improved during the year with stressed exposures as a percentage of total committed exposures reducing from 1.24% to 0.99%. A review of the operations of the Group and its divisions and their results for the financial year ended 30 September 2015 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. c) Dividends Since 30 September 2015, Westpac has announced a final ordinary dividend of 94 cents per Westpac ordinary share, totalling approximately $2,993 million for the year ended 30 September 2015 (2014 final ordinary dividend of 92 cents per Westpac ordinary share, totalling approximately $2,860 million). The dividend will be fully franked and will be paid on 21 December 2015. An interim ordinary dividend for the current financial year of 93 cents per Westpac ordinary share for the half year ended 31 March 2015, totalling $2,902 million, was paid as a fully franked dividend on 2 July 2015 (2014 interim ordinary dividend of 90 cents per Westpac ordinary share, totalling $2,798 million). 36 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 37 1 d) Significant changes in state of affairs and events during and since the end of the 2015 financial year Significant changes in the state of affairs of the Group were: the appointment of Brian Hartzer as Chief Executive Officer effective 2 February 2015; Westpac’s fully underwritten, pro rata accelerated renounceable entitlement offer to raise approximately $3.5 billion of ordinary equity; Westpac Banking Corporation Directors’ interests in Westpac and related bodies corporate as at 2 November 2015 Number of Relevant Interests in Westpac Ordinary Shares Number of Westpac Share Rights Westpac CPS Directors’ report the issue of approximately $2 billion worth of Westpac ordinary shares under the 2015 interim DRP and partial DRP underwrite; the issuance of approximately $1.32 billion of securities known as Westpac Capital Notes 3; the sale of Westpac’s banking operations in the Solomon Islands, Cook Islands, Samoa and Tonga to the Bank of South Pacific Limited for $114.6 million; the partial sale of Westpac’s shareholding in BTIM (down from 59.1% to 31.0%); the announcement of Westpac’s new operating structure on 10 June 2015; the impact of various accounting changes, resulting in a reduction in the technology assets balance of $505 million (pre- tax) reported as an expense in the Full Year 2015 statutory results; and ongoing regulatory changes and developments, which have included changes to liquidity, capital, financial services, taxation and other regulatory requirements. 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. 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 for the year ended 30 September 2015 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. Current Directors Lindsay Maxsted Brian Hartzer Elizabeth Bryan Ewen Crouch Alison Deans Craig Dunn Robert Elstone Peter Hawkins Peter Marriott Former Directors Gail Kelly Ann Pickard 17,799 49,571 1 26,801 34,877 3 9,000 8,500 10,291 15,218 4 20,000 1,797,295 5 13,800 7 225,199 2 390,534 6 - - - - - - - - - - - - - - - - - - - 1,370 1 Brian Hartzer’s interest in Westpac ordinary shares includes 12,075 restricted shares held under the Restricted Share Plan. 2 Share rights issued under the LTI Performance Plan. 3 Ewen Crouch and his related bodies corporate also hold relevant interests in 250 Westpac Capital Notes 2. 4 Peter Hawkins and his related bodies corporate also hold relevant interests in 1,433 Westpac Subordinated Notes and 850 Westpac Capital Notes 3. 5 Gail Kelly's interest in Westpac ordinary shares includes 85,667 restricted shares held under the CEO Restricted Share Plan. Figure displayed is as at Gail Kelly's retirement date of 1 February 2015. 6 Share rights issued under the CEO Performance Plan and held as at Gail Kelly's retirement date of 1 February 2015. 7 Ann Pickard’s relevant interests arise through holding 13,800 Westpac American Depositary Shares (ADS). One ADS represents one Westpac fully paid ordinary share. Figure displayed is as at Ann Pickard's retirement date of 12 December 2014. 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). 38 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 39 Significant changes in the state of affairs of the Group were: the appointment of Brian Hartzer as Chief Executive Officer effective 2 February 2015; Westpac’s fully underwritten, pro rata accelerated renounceable entitlement offer to raise approximately $3.5 billion of the issue of approximately $2 billion worth of Westpac ordinary shares under the 2015 interim DRP and partial DRP ordinary equity; underwrite; the issuance of approximately $1.32 billion of securities known as Westpac Capital Notes 3; the sale of Westpac’s banking operations in the Solomon Islands, Cook Islands, Samoa and Tonga to the Bank of South Pacific Limited for $114.6 million; the partial sale of Westpac’s shareholding in BTIM (down from 59.1% to 31.0%); the announcement of Westpac’s new operating structure on 10 June 2015; the impact of various accounting changes, resulting in a reduction in the technology assets balance of $505 million (pre- tax) reported as an expense in the Full Year 2015 statutory results; and ongoing regulatory changes and developments, which have included changes to liquidity, capital, financial services, taxation and other regulatory requirements. 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. 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 for the year ended 30 September 2015 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. d) Significant changes in state of affairs and events during and since the end of the 2015 financial year Directors’ interests in Westpac and related bodies corporate as at 2 November 2015 Directors’ report Westpac Banking Corporation Current Directors Lindsay Maxsted Brian Hartzer Elizabeth Bryan Ewen Crouch Alison Deans Craig Dunn Robert Elstone Peter Hawkins Peter Marriott Number of Relevant Interests in Westpac Ordinary Shares Number of Westpac Share Rights Westpac CPS 17,799 49,571 1 26,801 34,877 3 9,000 8,500 10,291 15,218 4 20,000 - 225,199 2 - - - - - - - - - - - - - - 1,370 - Former Directors Gail Kelly Ann Pickard 1 Brian Hartzer’s interest in Westpac ordinary shares includes 12,075 restricted shares held under the Restricted Share Plan. 2 Share rights issued under the LTI Performance Plan. 3 Ewen Crouch and his related bodies corporate also hold relevant interests in 250 Westpac Capital Notes 2. 4 Peter Hawkins and his related bodies corporate also hold relevant interests in 1,433 Westpac Subordinated Notes and 850 Westpac Capital Notes 3. 5 Gail Kelly's interest in Westpac ordinary shares includes 85,667 restricted shares held under the CEO Restricted Share Plan. Figure displayed is as at 1,797,295 5 13,800 7 390,534 6 - - - Gail Kelly's retirement date of 1 February 2015. 6 Share rights issued under the CEO Performance Plan and held as at Gail Kelly's retirement date of 1 February 2015. 7 Ann Pickard’s relevant interests arise through holding 13,800 Westpac American Depositary Shares (ADS). One ADS represents one Westpac fully paid ordinary share. Figure displayed is as at Ann Pickard's retirement date of 12 December 2014. 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). 38 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 39 1 b) Indemnities and insurance Under the Westpac Constitution, unless prohibited by statute, we 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. 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: 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 2015, 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 747,152 share options outstanding and 4,489,400 share rights outstanding in relation to Westpac ordinary shares. The expiry date of the share options range between 20 December 2015 and 1 October 2018 and the weighted average exercise price is $26.73. The latest dates for exercise of the share rights range between 20 December 2015 and 1 May 2026. 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 application has been made and no proceedings have been brought or intervened in, on behalf of Westpac under section 237 of the Corporations Act. 5. Environmental disclosure 6. Rounding of amounts As part of our 2017 Sustainability Strategy we have set Westpac is an entity to which ASIC Class Order 98/100 targets for our environmental performance. The Westpac dated 10 July 1998, relating to the rounding of amounts in Group’s environmental framework starts with ‘Our Principles Directors’ report and financial reports, applies. Pursuant to for Doing Business’, which outline our broad environmental this Class Order, amounts in this Directors’ report and the Directors’ report 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 2015. 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. Australia Political expenditure, year ended 30 September 2015 Amount 69,550 84,895 $1 - 154,445 Australian Labor Party Liberal Party of Australia National Party of Australia Total levels. New Zealand 1 Represents aggregate amount at both Federal and State/Territory There was no expenditure on political activities in New Zealand for the year ended 30 September 2015. In line with Westpac policy, no cash donations were made to political parties in New Zealand during the year. principles. This framework includes: our Westpac Group Environment Policy, which has been in place since 1992; our Sustainable Supply Chain Management Framework; our Sustainability Risk Management Framework; and public reporting of our environmental performance. We also participate in a number of voluntary initiatives including the Dow Jones Sustainability Index, CDP1, the Equator Principles, the Principles for Responsible Investment, the United Nations Global Compact and the Banking Environment Initiative’s Soft Commodities Compact. 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 was previously subject to the reporting requirements of the Energy Efficiency Opportunities Act 2006 (Cth) (EEO Act). The Commonwealth Government repealed the EEO Act, effective from 29 June 2014. Accordingly, all obligations and activities under the EEO Program, including reporting requirements, have ceased.2 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 information on our climate change approach, details of our emissions profile and environmental footprint, and progress against our environmental targets and carbon neutral program are available on our website at www.westpac.com.au/about-westpac/sustainability-and- community. 1 Formerly known as the Carbon Disclosure Project. 2 Westpac implemented energy efficiency opportunities which are expected to result in estimated energy savings of 28,154GJ, carbon savings of 7,112tCO2e and cost savings of $977,063 per year. Westpac also participated in the voluntary NSW Energy Saving Scheme and earned over $195,498 through the sale of 14,816 Energy Savings Certificates. 40 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 41 this indemnity. Constitution. b) Indemnities and insurance Under the Westpac Constitution, unless prohibited by statute, we 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 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 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. 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: 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 2015, 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 747,152 share options outstanding and 4,489,400 share rights outstanding in relation to Westpac ordinary shares. The expiry date of the share options range between 20 December 2015 and 1 October 2018 and the weighted average exercise price is $26.73. The latest dates for exercise of the share rights range between 20 December 2015 and 1 May 2026. 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 237 of the Corporations Act. No application has been made and no proceedings have been brought or intervened in, on behalf of Westpac under section 5. Environmental disclosure 6. Rounding of amounts Directors’ report 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 2015. 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 2015 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 69,550 84,895 - 154,445 levels. New Zealand There was no expenditure on political activities in New Zealand for the year ended 30 September 2015. In line with Westpac policy, no cash donations were made to political parties in New Zealand during the year. As part of our 2017 Sustainability Strategy we have set targets for our environmental performance. The Westpac Group’s environmental framework starts with ‘Our Principles for Doing Business’, which outline our broad environmental principles. This framework includes: our Westpac Group Environment Policy, which has been in place since 1992; our Sustainable Supply Chain Management Framework; our Sustainability Risk Management Framework; and public reporting of our environmental performance. We also participate in a number of voluntary initiatives including the Dow Jones Sustainability Index, CDP1, the Equator Principles, the Principles for Responsible Investment, the United Nations Global Compact and the Banking Environment Initiative’s Soft Commodities Compact. 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 was previously subject to the reporting requirements of the Energy Efficiency Opportunities Act 2006 (Cth) (EEO Act). The Commonwealth Government repealed the EEO Act, effective from 29 June 2014. Accordingly, all obligations and activities under the EEO Program, including reporting requirements, have ceased.2 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 information on our climate change approach, details of our emissions profile and environmental footprint, and progress against our environmental targets and carbon neutral program are available on our website at www.westpac.com.au/about-westpac/sustainability-and- community. 1 Formerly known as the Carbon Disclosure Project. 2 Westpac implemented energy efficiency opportunities which are expected to result in estimated energy savings of 28,154GJ, carbon savings of 7,112tCO2e and cost savings of $977,063 per year. Westpac also participated in the voluntary NSW Energy Saving Scheme and earned over $195,498 through the sale of 14,816 Energy Savings Certificates. 40 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 41 1 8. Directors’ meetings Each Director attended the following meetings of the Board and Committees of the Board during the financial year ended 30 September 2015: Introduction from the Chairman of the Board Remuneration Committee Notes Board Audit Committee Risk & Compliance Committee Nominations Committee Remuneration Committee Technology Committee We are pleased to present Westpac’s 2015 Remuneration Report (Report). Number of meetings held during the year Director Lindsay Maxsted Brian Hartzer Gail Kelly Elizabeth Bryan Ewen Crouch Alison Deans Craig Dunn Robert Elstone Peter Hawkins Peter Marriott Ann Pickard 1 2 3 4 5 6 7 8 9 10 11 A 10 6 4 10 10 10 3 10 10 10 4 B 10 6 3 10 10 10 3 9 10 10 4 C - - 1 - - - - 1 - - - A 4 - - - - - - 4 4 4 - B 4 - - - - - - 4 4 4 - A 4 - - 4 4 4 1 4 4 4 1 B 4 - - 4 4 3 1 4 4 4 1 C - - - - - 1 - - - - - A 4 - - 4 4 - - 1 4 3 - B 4 - - 4 4 - - 1 4 3 - A - - - 5 5 - 1 5 - - 2 B - - - 5 5 - 1 5 - - 2 A - 2 1 - - 3 - - 3 3 - B - 2 1 - - 3 - - 3 3 - 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 C – Leave of absence granted 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 2014. 1 Chairman of the Board Nominations Committee. Member of the Board Audit Committee and the Board Risk & Compliance Committee. 2 Brian Hartzer was appointed Managing Director & Chief Executive Officer on 2 February 2015. Member of the Board the deferred component of the Short-Term Incentive (STI) increased from 40% to 50% deferred over two years and as a Technology Committee from 13 February 2015. 3 Gail Kelly retired as Managing Director & Chief Executive Officer and member of the Board Technology Committee on 1 February 2015. 4 Chairman of the Board Risk & Compliance Committee. Member of the Board Nominations Committee and the Board Remuneration Committee. 5 Chairman of the Board Remuneration Committee. Member of the Board Nominations Committee and the Board Risk & vesting period. Compliance Committee. 6 Member of the Board Risk & Compliance Committee and the Board Technology Committee. 7 Craig Dunn was appointed as a Director on 1 June 2015. Member of the Board Remuneration Committee and Board Risk & Compliance Committee from 5 June 2015. 8 Chairman of the Board Audit Committee, and member of the Board Nominations Committee, until 31 December 2014. Member of the Board Remuneration Committee, the Board Risk & Compliance Committee, and from 1 January 2015, a member of the Board Audit Committee. 9 Chairman of the Board Technology Committee. Member of the Board Audit Committee, the Board Nominations Committee and the Board Risk & Compliance Committee. 10 Chairman of the Board Audit Committee from 1 January 2015. Member of the Board Audit Committee until 31 December 2014. Member of the Board Risk & Compliance Committee, the Board Technology Committee, and from 13 February 2015, a member of the Board Nominations Committee. 11 Ann Pickard retired from the Board and its Committees on 12 December 2014. Ewen Crouch Chairman – Board Remuneration Committee Directors’ report 9. Remuneration Report Dear Shareholder, 2015 Remuneration outcomes Each year, the Board assesses a number of factors when determining remuneration outcomes. In addition to approved scoreboards including financial performance, the Committee assesses elements such as result quality, performance drivers, the operating environment and accounting changes or adjustments. This year, the outcomes also recognise the smooth transition to the new CEO and management’s contribution in the context of significant regulatory change. It is against this framework that the short and long-term incentive outcomes have been determined. The 2012 Long-Term Incentive (LTI) grant qualified for 36% vesting this year reflecting our performance against the hurdles established in 2012. In particular: Westpac’s LTI plan Total Shareholder Return (TSR) over the last three years was 62.5%. While ranking second amongst the four major Australian banks, this was a 30th percentile outcome against the designated peer group. As this outcome was below the 50th percentile vesting threshold, none of the 2012 TSR hurdled rights vested. Westpac’s Cash Earnings per Share (EPS) growth over the last three years totalled 15.56%, which was above the vesting threshold of 12.8% (4.1% compound annual growth), but below the maximum of 19.1% (6% compound annual growth). Accordingly, 72% of the 2012 EPS performance tranche vested. Executive changes Brian Hartzer commenced as CEO on 2 February 2015 and there were a number of changes in executive appointments during the year. These included the appointment of Lyn Cobley as Chief Executive, Westpac Institutional Bank and David McLean as CEO of Westpac New Zealand after acting in the role. David Lindberg also joined the Executive Team with his appointment as Chief Executive, Commercial & Business Bank while George Frazis was appointed Chief Executive, Consumer Bank. Consistent with prior commitments by the Board, all of the new Group Executives, including the CEO, had starting remuneration levels below those of the prior incumbents, applying the Group pay mix. Remuneration frameworks The revised remuneration framework outlined in last year’s Report was implemented in 2015: result the cash component of STI paid to our Group Executives has reduced; and the prospective approach to LTI allocations introduced, with an extended vesting period of four years. The value of LTI share rights for our executives in Section 6.2 also increased as a consequence of the new 2015 LTI grant, though the values remain ‘at risk’ and subject to meeting both TSR and EPS based performance hurdles over a four year We are confident that that our remuneration framework is well positioned to attract and retain the highest quality executives and provide remuneration outcomes which reflect our business performance and sustained outcomes in the interests of our shareholders. 42 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 43 8. Directors’ meetings 30 September 2015: Each Director attended the following meetings of the Board and Committees of the Board during the financial year ended 9. Remuneration Report Introduction from the Chairman of the Board Remuneration Committee Notes Board Committee Risk & Compliance Committee Committee Committee Committee We are pleased to present Westpac’s 2015 Remuneration Report (Report). Audit Nominations Remuneration Technology Dear Shareholder, Directors’ report Number of meetings held during the year Director Lindsay Maxsted Brian Hartzer Gail Kelly Elizabeth Bryan Ewen Crouch Alison Deans Craig Dunn Robert Elstone Peter Hawkins Peter Marriott Ann Pickard 1 2 3 4 5 6 7 8 9 10 11 A 10 6 4 10 10 10 3 10 10 10 4 B 10 6 3 10 10 10 3 9 10 10 4 C 1 - - - - - - - - - 1 A 4 - - - - - - 4 4 4 - B 4 - - - - - - 4 4 4 - A 4 - - 4 4 4 1 4 4 4 1 B 4 - - 4 4 3 1 4 4 4 1 C 1 - - - - - - - - - - A 4 - - 4 4 - - 1 4 3 - B 4 - - 4 4 - - 1 4 3 - A - - - 5 5 - 1 5 - - 2 B - - - 5 5 - 1 5 - - 2 A - 2 1 3 - - - - 3 3 - B - 2 1 3 - - - - 3 3 - 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 C – Leave of absence granted 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 2014. Committee. 1 February 2015. Remuneration Committee. Compliance Committee. 1 Chairman of the Board Nominations Committee. Member of the Board Audit Committee and the Board Risk & Compliance 2 Brian Hartzer was appointed Managing Director & Chief Executive Officer on 2 February 2015. Member of the Board Technology Committee from 13 February 2015. 3 Gail Kelly retired as Managing Director & Chief Executive Officer and member of the Board Technology Committee on 4 Chairman of the Board Risk & Compliance Committee. Member of the Board Nominations Committee and the Board 5 Chairman of the Board Remuneration Committee. Member of the Board Nominations Committee and the Board Risk & 6 Member of the Board Risk & Compliance Committee and the Board Technology Committee. 7 Craig Dunn was appointed as a Director on 1 June 2015. Member of the Board Remuneration Committee and Board Risk & Compliance Committee from 5 June 2015. 8 Chairman of the Board Audit Committee, and member of the Board Nominations Committee, until 31 December 2014. Member of the Board Remuneration Committee, the Board Risk & Compliance Committee, and from 1 January 2015, a 9 Chairman of the Board Technology Committee. Member of the Board Audit Committee, the Board Nominations Committee member of the Board Audit Committee. and the Board Risk & Compliance Committee. 10 Chairman of the Board Audit Committee from 1 January 2015. Member of the Board Audit Committee until 31 December 2014. Member of the Board Risk & Compliance Committee, the Board Technology Committee, and from 13 February 2015, a member of the Board Nominations Committee. 11 Ann Pickard retired from the Board and its Committees on 12 December 2014. 2015 Remuneration outcomes Each year, the Board assesses a number of factors when determining remuneration outcomes. In addition to approved scoreboards including financial performance, the Committee assesses elements such as result quality, performance drivers, the operating environment and accounting changes or adjustments. This year, the outcomes also recognise the smooth transition to the new CEO and management’s contribution in the context of significant regulatory change. It is against this framework that the short and long-term incentive outcomes have been determined. The 2012 Long-Term Incentive (LTI) grant qualified for 36% vesting this year reflecting our performance against the hurdles established in 2012. In particular: Westpac’s LTI plan Total Shareholder Return (TSR) over the last three years was 62.5%. While ranking second amongst the four major Australian banks, this was a 30th percentile outcome against the designated peer group. As this outcome was below the 50th percentile vesting threshold, none of the 2012 TSR hurdled rights vested. Westpac’s Cash Earnings per Share (EPS) growth over the last three years totalled 15.56%, which was above the vesting threshold of 12.8% (4.1% compound annual growth), but below the maximum of 19.1% (6% compound annual growth). Accordingly, 72% of the 2012 EPS performance tranche vested. Executive changes Brian Hartzer commenced as CEO on 2 February 2015 and there were a number of changes in executive appointments during the year. These included the appointment of Lyn Cobley as Chief Executive, Westpac Institutional Bank and David McLean as CEO of Westpac New Zealand after acting in the role. David Lindberg also joined the Executive Team with his appointment as Chief Executive, Commercial & Business Bank while George Frazis was appointed Chief Executive, Consumer Bank. Consistent with prior commitments by the Board, all of the new Group Executives, including the CEO, had starting remuneration levels below those of the prior incumbents, applying the Group pay mix. Remuneration frameworks The revised remuneration framework outlined in last year’s Report was implemented in 2015: the deferred component of the Short-Term Incentive (STI) increased from 40% to 50% deferred over two years and as a result the cash component of STI paid to our Group Executives has reduced; and the prospective approach to LTI allocations introduced, with an extended vesting period of four years. The value of LTI share rights for our executives in Section 6.2 also increased as a consequence of the new 2015 LTI grant, though the values remain ‘at risk’ and subject to meeting both TSR and EPS based performance hurdles over a four year vesting period. We are confident that that our remuneration framework is well positioned to attract and retain the highest quality executives and provide remuneration outcomes which reflect our business performance and sustained outcomes in the interests of our shareholders. Ewen Crouch Chairman – Board Remuneration Committee 42 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 43 1 Directors’ report 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 Group Executives; and 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 the Australian Prudential Regulation Authority. 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 those of shareholders, the CEO and Group 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 his annual fixed package. For Group Executives, the expected minimum is a value of $1.2 million. unvested securities. Participants in the Group’s equity plans are forbidden from entering either directly or indirectly into hedging arrangements for unvested securities 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 1. Governance and risk management This section details the Group’s approach to governance and risk management as they relate to remuneration. 1.1. Governance The Group’s remuneration policies and practices strive to fairly and responsibly reward employees, having regard to performance, the Group’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 to fulfil its responsibilities to shareholders with regard to remuneration. The Remuneration Committee monitors the remuneration policies and practices of the Group, 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 2014. Members of the Remuneration Committee during 2015 All members of the Remuneration Committee are independent Non-executive Directors. During 2015, the members were: Ewen Crouch (Chairman); Elizabeth Bryan; Craig Dunn (member from 5 June 2015); Robert Elstone; and Ann Pickard (retired 12 December 2014). Independent remuneration consultant During 2015, 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 which is 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 2015 included the provision of information relating to the benchmarking of Non-executive Director, CEO and Group Executive remuneration and analysis regarding the Group’s Earnings per Share (EPS) LTI performance hurdle. No remuneration recommendations, as prescribed under the Corporations Act, were made by Guerdon Associates in 2015. Internal governance structure 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 and 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 Group’s approved policy. 1.2. Risk management We aim to integrate effective risk management into the remuneration framework throughout the organisation. The Chairman of the Board Risk & Compliance Committee is a member of the Remuneration Committee, and members of the Remuneration Committee are also members of the Board Risk & Compliance 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 the Group’s performance for the year and an assessment of how profit should be shared among shareholders and employees and retained for growth. The primary financial indicator used is economic profit, which measures cash earnings adjusted for cost of capital used in the business. Cash earnings, return on equity (ROE), Cash EPS 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 progress on the implementation of the Group’s strategy. Group economic profit, Group core earnings growth and Group ROE accounted for 40% of the CEO’s scoreboard for 2015. Similarly, Group Executive scoreboards had 45% of their STI allocated based on Group economic profit, divisional economic profit, divisional core earnings growth and divisional expense management (Chief Risk Officer 30%). A performance measure related to the Board’s Risk Appetite Statement accounted for a further 10% of the CEO’s and Group Executives’ scoreboards. In addition, the CEO and each Group Executive are assessed on specific risk measures that may influence any discretionary adjustment to the scoreboard. Ultimately, the Board has 100% discretion over 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. 44 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 45 Directors’ report 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 Group Executives; and 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 the Australian Prudential Regulation Authority. 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 those of shareholders, the CEO and Group 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 his annual fixed package. For Group 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 securities 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 securities. 1. Governance and risk management This section details the Group’s approach to governance and risk management as they relate to remuneration. 1.1. Governance The Group’s remuneration policies and practices strive to fairly and responsibly reward employees, having regard to performance, the Group’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 to fulfil its responsibilities to shareholders with regard to remuneration. The Remuneration Committee monitors the remuneration policies and practices of the Group, 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 2014. Members of the Remuneration Committee during 2015 All members of the Remuneration Committee are independent Non-executive Directors. During 2015, the members were: Ewen Crouch (Chairman); Elizabeth Bryan; Ann Pickard (retired 12 December 2014). Independent remuneration consultant During 2015, 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 which is 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 2015 included the provision of information relating to the benchmarking of Non-executive Director, CEO and Group Executive remuneration and analysis regarding the Group’s Earnings per Share (EPS) LTI performance hurdle. No remuneration recommendations, as prescribed under the Corporations Act, were made by Guerdon Associates in 2015. Internal governance structure 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 and 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 Group’s approved policy. 1.2. Risk management We aim to integrate effective risk management into the remuneration framework throughout the organisation. The Chairman of the Board Risk & Compliance Committee is a member of the Remuneration Committee, and members of the Remuneration Committee are also members of the Board Risk & Compliance 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 the Group’s performance for the year and an assessment of how profit should be shared among shareholders and employees and retained for growth. The primary financial indicator used is economic profit, which measures cash earnings adjusted for cost of capital used in the business. Cash earnings, return on equity (ROE), Cash EPS and dividends are also taken STI outcomes are based on both financial and non-financial measures, with the latter reflecting risk management outcomes and progress on the implementation of the Group’s strategy. Group economic profit, Group core earnings growth and Group ROE accounted for 40% of the CEO’s scoreboard for 2015. Similarly, Group Executive scoreboards had 45% of their STI allocated based on Group economic profit, divisional economic profit, divisional core earnings growth and divisional expense management (Chief Risk Officer 30%). A performance measure related to the Board’s Risk Appetite Statement accounted for a further 10% of the CEO’s and Group Executives’ scoreboards. In addition, the CEO and each Group Executive are assessed on specific risk measures that may influence any discretionary adjustment to the scoreboard. Ultimately, the Board has 100% discretion over 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. Craig Dunn (member from 5 June 2015); Robert Elstone; and into account. 44 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 45 1 2. Key Management Personnel remuneration disclosed in this Report 3. Remuneration snapshot 2015 The remuneration of key management personnel (KMP) for the Group is disclosed in this Report. In 2015, KMP comprised Non-executive Directors, the CEO and Group Executives who reported to the CEO and/or led significant parts of the business. CEO and Group Executives Name Position Term as KMP Managing Director & Chief Executive Officer Brian Hartzer1 Gail Kelly2 Managing Director & Chief Executive Officer Managing Director & Chief Executive Officer Group Executives Philip Coffey Deputy Chief Executive Officer John Arthur Lyn Cobley3 Chief Operating Officer Chief Executive, Westpac Institutional Bank Brad Cooper Chief Executive Officer, BT Financial Group David Curran George Frazis4 Chief Information Officer Chief Executive, Consumer Bank Alexandra Holcomb Chief Risk Officer Peter King David Lindberg5 David McLean6 Christine Parker Rob Whitfield7 Jason Yetton8 Chief Financial Officer Chief Executive, Commercial & Business Bank Chief Executive Officer, Westpac New Zealand Limited Group Executive, Human Resources & Corporate Affairs Full Year Group Executive, Westpac Institutional Bank Group Executive, Westpac Retail & Business Banking Non-executive Directors Name Position Lindsay Maxsted Chairman Elizabeth Bryan Director Ewen Crouch Alison Deans Craig Dunn9 Director Director Director Robert Elstone Director Peter Hawkins Director Full Year Part Year Full Year Full Year Part Year Full Year Full Year Full Year Full Year Full Year Part Year Full Year Part Year Part Year Term as KMP Full Year Full Year Full Year Full Year Part Year Full Year Full Year Director Peter Marriott Ann Pickard10 1 Brian Hartzer was Chief Executive, Australian Financial Services (AFS) prior to his appointment as Managing Director & Chief Executive Officer on 2 Part Year Full Year Director February 2015. 2 Gail Kelly retired as Managing Director & Chief Executive Officer on 1 February 2015. 3 Lyn Cobley was appointed Group Executive, Westpac Institutional Bank with effect from 7 September 2015. 4 George Frazis was Chief Executive Officer, St.George Banking Group prior to his appointment as Chief Executive, Consumer Bank on 10 June 2015. 5 David Lindberg was Chief Product Officer prior to his appointment as Chief Executive, Commercial & Business Bank on 10 June 2015. 6 David McLean was Acting Chief Executive Officer, Westpac New Zealand Limited prior to his appointment as Chief Executive Officer, Westpac New Zealand Limited on 2 February 2015. 7 Rob Whitfield resigned effective 10 July 2015. 8 Jason Yetton ceased as Group Executive, Westpac Retail & Business Banking on 10 June 2015. 9 Craig Dunn was appointed on 1 June 2015. 10 Ann Pickard retired on 12 December 2014. 46 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 47 Directors’ report This section provides an overview of the Group’s remuneration arrangements during the 2015 financial year. 3.1. Remuneration strategy, principles and framework Executive remuneration framework The CEO and Group Executives are remunerated based on a Total Reward framework: Westpac’s Remuneration Strategy Motivate strong performance Manage risk appropriately. Link pay to shareholders’ interests. Attract and retain high performing executives. against short-term and long-term performance measures. Executive Total Reward Framework Fixed Remuneration (34%) Comprises: cash salary; salary sacrificed items; and employer superannuation contributions in line with statutory obligations. At Risk Remuneration (Variable Reward) (66%) Short-term Incentive (STI) Long-term Incentive (LTI) 34% 32% Maximum opportunity = 150% of Target STI Cash STI Deferred STI 50% of Total STI Restricted shares or Comprises performance share rights which vest over a four-year period if performance hurdles are achieved. share rights 50% of Total STI The target pay mix was adopted in 2012 and is being progressively implemented for existing Group Executives as their remuneration increases. In 2015, Christine Parker and Jason Yetton received increases as their remuneration was significantly below that of their peers and in competitor organisations. George Frazis also received a market aligned increase during 2015. 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 strategy; and Long-term incentive (LTI) – is designed to align the total remuneration of executives to the long-term performance of the Group and the interests of shareholders. The amount of the award takes into account market benchmarks, individual performance over time, succession potential and key skills. 4. Executive remuneration 4.1. Remuneration structure and policy a) Fixed remuneration Fixed remuneration comprises cash salary, salary sacrificed items and employer superannuation contributions. The Group provides superannuation contributions in line with statutory obligations. Fixed remuneration is reviewed annually taking into consideration: role and accountabilities; relevant market benchmarks within the financial services industry; and the attraction, motivation and retention of key executives. 2. Key Management Personnel remuneration disclosed in this Report 3. Remuneration snapshot 2015 Directors’ report The remuneration of key management personnel (KMP) for the Group is disclosed in this Report. In 2015, KMP comprised Non-executive Directors, the CEO and Group Executives who reported to the CEO and/or led significant parts of the business. CEO and Group Executives Name Position Managing Director & Chief Executive Officer Brian Hartzer1 Gail Kelly2 Group Executives Managing Director & Chief Executive Officer Managing Director & Chief Executive Officer Philip Coffey Deputy Chief Executive Officer John Arthur Lyn Cobley3 Chief Operating Officer Chief Executive, Westpac Institutional Bank Brad Cooper Chief Executive Officer, BT Financial Group David Curran Chief Information Officer George Frazis4 Chief Executive, Consumer Bank Alexandra Holcomb Chief Risk Officer Peter King Chief Financial Officer David Lindberg5 David McLean6 Rob Whitfield7 Jason Yetton8 Chief Executive, Commercial & Business Bank Chief Executive Officer, Westpac New Zealand Limited Group Executive, Westpac Institutional Bank Group Executive, Westpac Retail & Business Banking Christine Parker Group Executive, Human Resources & Corporate Affairs Full Year Term as KMP Full Year Part Year Full Year Full Year Part Year Full Year Full Year Full Year Full Year Full Year Part Year Full Year Part Year Part Year Full Year Full Year Full Year Full Year Part Year Full Year Full Year Full Year Part Year Term as KMP Non-executive Directors Name Position Lindsay Maxsted Chairman Elizabeth Bryan Director Ewen Crouch Alison Deans Craig Dunn9 Director Director Director Robert Elstone Director Peter Hawkins Director Peter Marriott Ann Pickard10 Director Director February 2015. 1 Brian Hartzer was Chief Executive, Australian Financial Services (AFS) prior to his appointment as Managing Director & Chief Executive Officer on 2 2 Gail Kelly retired as Managing Director & Chief Executive Officer on 1 February 2015. 3 Lyn Cobley was appointed Group Executive, Westpac Institutional Bank with effect from 7 September 2015. 4 George Frazis was Chief Executive Officer, St.George Banking Group prior to his appointment as Chief Executive, Consumer Bank on 10 June 2015. 5 David Lindberg was Chief Product Officer prior to his appointment as Chief Executive, Commercial & Business Bank on 10 June 2015. 6 David McLean was Acting Chief Executive Officer, Westpac New Zealand Limited prior to his appointment as Chief Executive Officer, Westpac New 8 Jason Yetton ceased as Group Executive, Westpac Retail & Business Banking on 10 June 2015. Zealand Limited on 2 February 2015. 7 Rob Whitfield resigned effective 10 July 2015. 9 Craig Dunn was appointed on 1 June 2015. 10 Ann Pickard retired on 12 December 2014. This section provides an overview of the Group’s remuneration arrangements during the 2015 financial year. 3.1. Remuneration strategy, principles and framework Executive remuneration framework The CEO and Group Executives are remunerated based on a Total Reward framework: Westpac’s Remuneration Strategy Motivate strong performance against short-term and long-term performance measures. Manage risk appropriately. Link pay to shareholders’ interests. Attract and retain high performing executives. Executive Total Reward Framework Fixed Remuneration (34%) Comprises: cash salary; salary sacrificed items; and employer superannuation contributions in line with statutory obligations. At Risk Remuneration (Variable Reward) (66%) Short-term Incentive (STI) 34% Long-term Incentive (LTI) 32% Maximum opportunity = 150% of Target STI Cash STI 50% of Total STI Deferred STI Restricted shares or share rights 50% of Total STI Comprises performance share rights which vest over a four-year period if performance hurdles are achieved. The target pay mix was adopted in 2012 and is being progressively implemented for existing Group Executives as their remuneration increases. In 2015, Christine Parker and Jason Yetton received increases as their remuneration was significantly below that of their peers and in competitor organisations. George Frazis also received a market aligned increase during 2015. 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 strategy; and Long-term incentive (LTI) – is designed to align the total remuneration of executives to the long-term performance of the Group and the interests of shareholders. The amount of the award takes into account market benchmarks, individual performance over time, succession potential and key skills. 4. Executive remuneration 4.1. Remuneration structure and policy a) Fixed remuneration Fixed remuneration comprises cash salary, salary sacrificed items and employer superannuation contributions. The Group provides superannuation contributions in line with statutory obligations. Fixed remuneration is reviewed annually taking into consideration: role and accountabilities; relevant market benchmarks within the financial services industry; and the attraction, motivation and retention of key executives. 46 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 47 1 b) Short-Term Incentive (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 each Group Executive are assessed using a balanced scoreboard, combining both annual financial and non-financial objectives which support the Group’s strategic goals. STI targets Brian Hartzer’s full year STI target opportunity for 2015 as CEO was set at $2,686,000. His actual STI target opportunity reflects the part year as CEO and Chief Executive, AFS. STI targets for Group Executives are set by the Remuneration Committee and approved by the Board at the beginning of each performance year based on a range of factors including market competitiveness and the nature of each role. The STI targets for the 2015 performance year did not increase for those Group Executives whose fixed remuneration was unchanged in 2015. The STI awards for Group 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) in the assessment process. STI structure 2015 The table below details how and when STI outcomes are delivered, and for deferred payments, the type of equity and the instrument used: STI Structure The following diagram and table set out the key features of the 2015 LTI awards made in December 2014 to Group Executives under the Westpac LTI Plan. No awards were made under the CEO Performance or LTI Plans in December 2014. Cash STI Deferred STI Deferred STI Equity Delivered 50% of the 2015 STI outcome will be paid as cash in December 2015. 50% of the 2015 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 2016. Half of deferred STI will vest in October 2017. Executive Type of Equity Equity Plan CEO Group Executives in Australia Group 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. Directors’ report 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. The deferred STI awards are allocated as restricted shares and, as they recognise past performance and are not subject to further performance conditions, attract dividends over the vesting period. If an executive resigns or retires, or otherwise leaves the Group before his or her securities vest, the Board has discretion in relation to how those securities are treated. If the executive leaves the Group to join another organisation, or is terminated for cause, their securities are generally forfeited. In other circumstances, the Board may elect to allow the securities to remain on foot for the balance of the relevant restriction period and then vest. Securities are also subject to forfeiture at the Board’s discretion in the event of a material issue or financial mis-statement. Details of deferred STI allocations granted in prior years, which have been exercised during the year ended 30 September 2015, are included in Section 6.4 of this Report. c) Long-Term Incentive (LTI) The CEO and Group Executives are also eligible for an LTI award. LTI structure 2014 Report (page 62), and will vest in 2017. LTI structure 2015 The LTI grants made for the 2014 remuneration period follow the format and performance hurdles detailed in the 2014 Annual LTI Structure 2015 Performance Share Rights Granted Composite TSR index (50% of the allocation) Cash EPS CAGR (50% of the allocation) 4 year vesting period 4 year vesting period Weighted Total Shareholder Return (TSR) – measured over a 4 Cash EPS Compound Annual Growth Rate (CAGR) – measured year performance period and will vest on 30 September 2018. as at 30 September 2017 and any rights capable of vesting will vest on 30 September 2018. Composite TSR index and vesting profile As at 30 September 2018, the 4 year TSR performance of each of the index companies will be multiplied by its index weighting, and the total of the 10 scores will comprise the composite index performance measure. If the Group’s TSR outcome over the same period equals the composite TSR index, 50% will vest. The Group’s TSR outcome must exceed the composite index plus 21.551 for 100% to vest as illustrated below. There is a single test and no re-testing. The composite index Company ANZ Banking Group Commonwealth Bank National Australia Bank AMP Bank of Queensland Bendigo and Adelaide Bank Challenger Macquarie Group Perpetual Suncorp Group 1 21.55 (5% average CAGR). TSR weighting TSR Index vesting 16.67% 16.67% 16.67% 7.14% 7.14% 7.14% 7.14% 7.14% 7.14% 7.14% g n i t s e V n o i t a c o l l A f o % 100 75 50 25 0 = Index Target Index Growth WBC TSR Outcome 48 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 49 b) Short-Term Incentive (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 each Group Executive are assessed using a balanced scoreboard, combining both annual financial and non-financial objectives which support the Group’s strategic goals. STI targets Brian Hartzer’s full year STI target opportunity for 2015 as CEO was set at $2,686,000. His actual STI target opportunity reflects the part year as CEO and Chief Executive, AFS. STI targets for Group Executives are set by the Remuneration Committee and approved by the Board at the beginning of each performance year based on a range of factors including market competitiveness and the nature of each role. The STI targets for the 2015 performance year did not increase for those Group Executives whose fixed remuneration was unchanged in 2015. The STI awards for Group 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) in the assessment process. The table below details how and when STI outcomes are delivered, and for deferred payments, the type of equity and the STI structure 2015 instrument used: Cash STI 50% of the 2015 STI outcome will be paid as cash in December 2015. STI Structure Deferred STI Deferred STI Equity Delivered 50% of the 2015 STI outcome will be deferred in the form of restricted Westpac ordinary shares or rights to ordinary shares. Vesting Details Half of Half of deferred STI deferred STI will vest in will vest in October 2016. October 2017. Executive Type of Equity Equity Plan CEO Group Executives in Australia Group Executives outside Australia Westpac ordinary shares1 CEO Restricted Share Plan Restricted Share Plan Westpac share Westpac rights2 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. Directors’ report 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. The deferred STI awards are allocated as restricted shares and, as they recognise past performance and are not subject to further performance conditions, attract dividends over the vesting period. If an executive resigns or retires, or otherwise leaves the Group before his or her securities vest, the Board has discretion in relation to how those securities are treated. If the executive leaves the Group to join another organisation, or is terminated for cause, their securities are generally forfeited. In other circumstances, the Board may elect to allow the securities to remain on foot for the balance of the relevant restriction period and then vest. Securities are also subject to forfeiture at the Board’s discretion in the event of a material issue or financial mis-statement. Details of deferred STI allocations granted in prior years, which have been exercised during the year ended 30 September 2015, are included in Section 6.4 of this Report. c) Long-Term Incentive (LTI) The CEO and Group Executives are also eligible for an LTI award. LTI structure 2014 The LTI grants made for the 2014 remuneration period follow the format and performance hurdles detailed in the 2014 Annual Report (page 62), and will vest in 2017. LTI structure 2015 The following diagram and table set out the key features of the 2015 LTI awards made in December 2014 to Group Executives under the Westpac LTI Plan. No awards were made under the CEO Performance or LTI Plans in December 2014. LTI Structure 2015 Performance Share Rights Granted Composite TSR index (50% of the allocation) Cash EPS CAGR (50% of the allocation) 4 year vesting period 4 year vesting period Weighted Total Shareholder Return (TSR) – measured over a 4 year performance period and will vest on 30 September 2018. Cash EPS Compound Annual Growth Rate (CAGR) – measured as at 30 September 2017 and any rights capable of vesting will vest on 30 September 2018. Composite TSR index and vesting profile As at 30 September 2018, the 4 year TSR performance of each of the index companies will be multiplied by its index weighting, and the total of the 10 scores will comprise the composite index performance measure. If the Group’s TSR outcome over the same period equals the composite TSR index, 50% will vest. The Group’s TSR outcome must exceed the composite index plus 21.551 for 100% to vest as illustrated below. There is a single test and no re-testing. The composite index Company ANZ Banking Group Commonwealth Bank National Australia Bank AMP Bank of Queensland Bendigo and Adelaide Bank Challenger Macquarie Group Perpetual Suncorp Group 1 21.55 (5% average CAGR). TSR weighting 16.67% 16.67% 16.67% 7.14% 7.14% 7.14% 7.14% 7.14% 7.14% 7.14% g n i t s e V n o i t a c o l l A f o % TSR Index vesting 100 75 50 25 0 = Index Target Index Growth WBC TSR Outcome 48 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 49 1 LTI award opportunities Brian Hartzer did not receive any awards under the CEO LTI Plan related to his appointment as CEO. No awards were made in 2015 to Gail Kelly (former CEO) under the CEO Performance Plan. Group Executives receive annual LTI awards in the form of share rights under the Westpac LTI 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 Group Executive. Westpac LTI Plan – Granted after 1 October 2014 Equity 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 the on-market purchase of shares, or as a cash payment. One share right entitles the holder to one ordinary share at the time of vesting at a nil exercise cost. 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 by an independent valuer taking as a starting point the market price of Westpac shares at grant, and utilising a Monte Carlo simulation pricing model, applying 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 value of a share right may be different for TSR hurdled share rights than for EPS hurdled share rights. Performance hurdles In December 2014 on the transition from a three to four year performance and vesting cycle, Group Executives were allocated both the 2014 LTI allocation vesting in 2017 and the 2015 LTI allocation vesting in 2018. The LTI grants retain dual TSR and EPS hurdles which are detailed below. The TSR data is averaged over the three months preceding the measurement date. 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. The two hurdles operate independently. 2014 LTI Award 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 (peer group) over the three year performance period. The peer group is comprised of the top 10 selected Australian companies listed on the ASX in the financial services sector. The companies in the 2014 peer group for the Westpac Reward Plan are: AMP Limited; ASX Limited; Australia and New Zealand Banking Group 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. 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 2 to the financial statements. Westpac has a policy of not providing guidance to the market. Accordingly, the Board will advise specific Cash EPS targets and the Group’s performance against target following the test date. The Cash EPS targets were developed with the assistance of an independent external advisor 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. The EPS performance will be measured once at the completion of the performance period. Westpac shares will be allocated in satisfaction of vested share rights at no cost to participants. Directors’ report Westpac LTI Plan – Granted after 1 October 2014 2015 LTI Award TSR (50% of the allocation) Cash EPS CAGR (50% of the allocation) The Cash EPS CAGR measure as described for the 2014 grant is unchanged for the 2015 LTI award. EPS rights which satisfy the EPS hurdle and qualify for vesting at the completion of the three year performance period will have a one year holding lock applied and will vest at the completion of the four year term from the commencement date. Westpac’s TSR must equal the growth in the composite index in order for 50% of the TSR tranche to vest. For 100% to vest, Westpac’s TSR must exceed the growth of the composite index by 21.55 (i.e. average 5% compound annual growth over the four year performance period). The companies in the 2015 peer group for the Westpac LTI Plan are: AMP Limited; Australia and New Zealand Banking Group Limited; Bendigo and Adelaide Bank Limited; Bank of Queensland; Challenger Limited; Commonwealth Bank of Australia; Macquarie Group Limited; National Australia Bank Limited; Perpetual Limited; and Suncorp Group Limited. of the composite index plus 21.55. The TSR performance will be measured once at the completion of the performance period. Westpac shares will be allocated in satisfaction of vested share rights at no cost to participants. Targets are set for stretch performance The Board considers the vesting profile as being The expensed value of the December 2013, 2014 appropriate as 100% vesting will only occur where, in and 2015 grants in Table 6.2 of this Report have respect of the 2014 LTI award, Westpac is ranked been discounted to 50%, reflecting the Board’s third or better out of the total of 11 companies current assessment of the probability of the (including Westpac), and in respect of the 2015 LTI threshold EPS hurdles being met and share rights award, Westpac’s TSR equals or exceeds the growth vesting over time. Who measures the performance hurdle outcomes? To ensure objectivity and external validation, TSR The Cash EPS CAGR outcome will be determined results are calculated by an independent external by the Board based on the Cash EPS disclosed in consultant and are provided to the Board or its our results at the completion of the performance delegate to review and determine vesting outcomes. period. Under the relevant plan rules, the Board Under the relevant plan rules, the Board may may exercise discretion if in all prevailing exercise discretion if in all prevailing circumstances circumstances Directors think it is appropriate to do Directors think it is appropriate to do so when determining the ultimate vesting outcome. so when determining the ultimate vesting outcome. Early vesting is possible in limited cases performance hurdles being met. For awards made since 1 October 2009, unvested securities may vest before a test date if the executive is no longer employed by the Group due to death or disability. In general, any such vesting is not subject to No re-testing There is no re-testing on awards made since 2011. Any securities remaining unvested after the nominated measurement period including any holding lock period lapse immediately. 50 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 51 LTI award opportunities Brian Hartzer did not receive any awards under the CEO LTI Plan related to his appointment as CEO. No awards were made in 2015 to Gail Kelly (former CEO) under the CEO Performance Plan. Group Executives receive annual LTI awards in the form of share rights under the Westpac LTI 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 Group Executive. Westpac LTI Plan – Granted after 1 October 2014 Equity 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 the on-market purchase of shares, or as a cash payment. One share right entitles the holder to one ordinary share at the time of vesting at a nil exercise cost. Determining the number of securities period). 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 The value of share rights is determined by an independent valuer taking as a starting point the market price of Westpac shares at grant, and utilising a Monte Carlo simulation pricing model, applying 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 value of a share right may be different for TSR hurdled share rights than for EPS hurdled share rights. Performance hurdles In December 2014 on the transition from a three to four year performance and vesting cycle, Group Executives were allocated both the 2014 LTI allocation vesting in 2017 and the 2015 LTI allocation vesting in 2018. The LTI grants retain dual TSR and EPS hurdles which are detailed below. The TSR data is averaged over the three months preceding the measurement date. 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. The two hurdles operate independently. 2014 LTI Award TSR (50% of the allocation) Cash EPS CAGR (50% of the allocation) Westpac’s TSR percentile ranking must equal or The Cash EPS CAGR measure focuses on growth exceed the 50th percentile of a defined group of in cash earnings over a three year performance comparator companies (peer group) over the three period. A description of the process used to year performance period. The peer group is comprised of the top 10 selected Australian companies listed on the ASX in the financial services sector. The companies in the 2014 peer group for the Westpac Reward Plan are: AMP Limited; ASX Limited; Limited; Australia and New Zealand Banking Group 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. determine cash earnings is provided at Note 2 to the financial statements. Westpac has a policy of not providing guidance to the market. Accordingly, the Board will advise specific Cash EPS targets and the Group’s performance against target following the test date. The Cash EPS targets were developed with the assistance of an independent external advisor 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. The EPS performance will be measured once at the completion of the performance period. Westpac shares will be allocated in satisfaction of vested share rights at no cost to participants. Directors’ report Westpac LTI Plan – Granted after 1 October 2014 2015 LTI Award TSR (50% of the allocation) Cash EPS CAGR (50% of the allocation) Westpac’s TSR must equal the growth in the composite index in order for 50% of the TSR tranche to vest. For 100% to vest, Westpac’s TSR must exceed the growth of the composite index by 21.55 (i.e. average 5% compound annual growth over the four year performance period). The Cash EPS CAGR measure as described for the 2014 grant is unchanged for the 2015 LTI award. EPS rights which satisfy the EPS hurdle and qualify for vesting at the completion of the three year performance period will have a one year holding lock applied and will vest at the completion of the four year term from the commencement date. The companies in the 2015 peer group for the Westpac LTI Plan are: AMP Limited; Australia and New Zealand Banking Group Limited; Bendigo and Adelaide Bank Limited; Bank of Queensland; Challenger Limited; Commonwealth Bank of Australia; Macquarie Group Limited; National Australia Bank Limited; Perpetual Limited; and Suncorp Group Limited. The Board considers the vesting profile as being appropriate as 100% vesting will only occur where, in respect of the 2014 LTI award, Westpac is ranked third or better out of the total of 11 companies (including Westpac), and in respect of the 2015 LTI award, Westpac’s TSR equals or exceeds the growth of the composite index plus 21.55. The TSR performance will be measured once at the completion of the performance period. Westpac shares will be allocated in satisfaction of vested share rights at no cost to participants. 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. Under the relevant plan rules, the Board may exercise discretion if in all prevailing circumstances Directors think it is appropriate to do so when determining the ultimate vesting outcome. Targets are set for stretch performance Who measures the performance hurdle outcomes? The expensed value of the December 2013, 2014 and 2015 grants in Table 6.2 of this Report have been discounted to 50%, reflecting the Board’s current assessment of the probability of the threshold EPS hurdles being met and share rights vesting over time. The Cash EPS CAGR outcome will be determined by the Board based on the Cash EPS disclosed in our results at the completion of the performance period. Under the relevant plan rules, the Board may exercise discretion if in all prevailing circumstances Directors think it is appropriate to do so when determining the ultimate vesting outcome. Early vesting is possible in limited cases For awards made since 1 October 2009, unvested securities may vest before a test date if the executive 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. No re-testing There is no re-testing on awards made since 2011. Any securities remaining unvested after the nominated measurement period including any holding lock period lapse immediately. 50 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 51 1 Treatment of securities Westpac LTI Plan – Granted after 1 October 2014 The Board has discretion in relation to performance share rights where the CEO or a senior executive resigns or retires, or otherwise leaves the Group before vesting occurs. This discretion enables the Board to vest the relevant securities or leave them on foot for the remainder of the performance period. In exercising its discretion, the Board will take into account all relevant circumstances including those surrounding the departure in question. The Board may also adjust the number of performance share rights downwards, or to zero (in which case they will lapse) where the circumstances of the departure warrant, or to respond to misconduct resulting in significant financial and/or reputational impact to Westpac. Where a holder acts fraudulently or dishonestly, or is in material breach of his or her obligations under the relevant equity plan, unexercised performance share rights (whether vested or unvested) will lapse unless the Board determines otherwise. Directors’ report 4.2. 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 Group Executive scoreboard. The key financial and non-financial objectives for the CEO in the 2015 financial year, with commentary on key highlights are provided below: Category Weighting Measure1 Performance Highlights Return 30% Economic Profit Return on Equity Return on Equity was 15.8% exceeding our target of 15%, Growth 10% Core Earnings Growth The Group delivered 3% growth in core earnings, with our 20% Customers We have exceeded our customer growth targets, making The Group delivered EP of $4.418 million, down 2% from FY14. While cash earnings increased 3%, the EP outcome was impacted by a 6% increase in average ordinary equity. with all divisions achieving returns above their cost of capital despite difficult operating conditions and increased capital requirements. Australian and New Zealand consumer and business banks performing above target. Core earnings were impacted by severe weather claims in BTFG and the partial sale of BTIM as well as the FVA adjustments and below target margins in WIB. solid progress towards our goal of on-boarding a million new customers by 2017, while importantly reducing complaints by 31% year on year and down 80% over the past three years. Reached stretch target of 10 million customers across the Group 18 months ahead of target. The Westpac Institutional Bank regained its No.1 spot on the Peter Lee relationship strength index, while retaining the No.1 Lead Transaction Bank position for a 12th year in a row. Our digital platforms have been key to the engagement of customers with Westpac Live ranked No.2 globally by Forrester Research and Westpac One delivering the Best Online Bank award from Canstar in New Zealand. We continued to grow our market share for business credit, household deposits and credit cards at or above system. Maintained sector leading wealth penetration at around 20%. BT Platforms Funds Under Administration ranked No.1 for market share. We continued to grow our Corporate and Institutional customer base for a third straight year. Market Share Wealth Asia Strength 10% Adherence to Group Risk Appetite Statement (RAS) The Group has a strong capital position, improved liquidity and funding profiles and impairments at the lowest level among the major Australian banks. The Group has delivered its financial performance while operating within our Group RAS. 10% Balance Sheet Strength and The Group’s asset quality remains sector leading with Net Sustainable Funding Interest Margin performance maintained. Our funding position is strong and well diversified, the average duration extended from 2.77 years to 2.82 years. 10% Business & Technology Significant progress has been made towards having a world Architecture class online and mobile capability, a more resilient infrastructure and a clear road map for continuing development. 52 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 53 Treatment of securities Westpac LTI Plan – Granted after 1 October 2014 The Board has discretion in relation to performance share rights where the CEO or a senior executive resigns or retires, or otherwise leaves the Group before vesting occurs. This discretion enables the Board to vest the relevant securities or leave them on foot for the remainder of the performance period. In exercising its discretion, the Board will take into account all relevant circumstances including those surrounding the departure in question. The Board may also adjust the number of performance share rights downwards, or to zero (in which case they will lapse) where the circumstances of the departure warrant, or to respond to misconduct resulting in significant financial and/or reputational impact to Westpac. Where a holder acts fraudulently or dishonestly, or is in material breach of his or her obligations under the relevant equity plan, unexercised performance share rights (whether vested or unvested) will lapse unless the Board determines otherwise. Directors’ report 4.2. 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 Group Executive scoreboard. The key financial and non-financial objectives for the CEO in the 2015 financial year, with commentary on key highlights are provided below: Category Weighting Measure1 Return 30% Economic Profit Performance Highlights The Group delivered EP of $4.418 million, down 2% from FY14. While cash earnings increased 3%, the EP outcome was impacted by a 6% increase in average ordinary equity. Return on Equity Return on Equity was 15.8% exceeding our target of 15%, Growth 10% Core Earnings Growth with all divisions achieving returns above their cost of capital despite difficult operating conditions and increased capital requirements. The Group delivered 3% growth in core earnings, with our Australian and New Zealand consumer and business banks performing above target. Core earnings were impacted by severe weather claims in BTFG and the partial sale of BTIM as well as the FVA adjustments and below target margins in WIB. 20% Customers We have exceeded our customer growth targets, making solid progress towards our goal of on-boarding a million new customers by 2017, while importantly reducing complaints by 31% year on year and down 80% over the past three years. Reached stretch target of 10 million customers across the Group 18 months ahead of target. The Westpac Institutional Bank regained its No.1 spot on the Peter Lee relationship strength index, while retaining the No.1 Lead Transaction Bank position for a 12th year in a row. Our digital platforms have been key to the engagement of customers with Westpac Live ranked No.2 globally by Forrester Research and Westpac One delivering the Best Online Bank award from Canstar in New Zealand. We continued to grow our market share for business credit, household deposits and credit cards at or above system. Maintained sector leading wealth penetration at around 20%. BT Platforms Funds Under Administration ranked No.1 for market share. We continued to grow our Corporate and Institutional customer base for a third straight year. The Group has a strong capital position, improved liquidity and funding profiles and impairments at the lowest level among the major Australian banks. The Group has delivered its financial performance while operating within our Group RAS. The Group’s asset quality remains sector leading with Net Interest Margin performance maintained. Our funding position is strong and well diversified, the average duration extended from 2.77 years to 2.82 years. Significant progress has been made towards having a world class online and mobile capability, a more resilient infrastructure and a clear road map for continuing development. Market Share Wealth Asia Strength 10% Adherence to Group Risk Appetite Statement (RAS) 10% 10% Balance Sheet Strength and Sustainable Funding Business & Technology Architecture 52 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 53 1 10% People and Sustainability We have retained our position as the most sustainable bank globally in the 2015 Dow Jones Sustainability Indices (DJSI) Review. The number of women in leadership grew to 46% and is on track to meet our 2017 target of 50%. Our continued focus on a culture of workplace safety has delivered a 28% reduction in Long Term Injury Frequency Rate well ahead of targets and our 2014 result. 1 Individual measures will differ for each Group Executive. Directors’ report Our primary financial measure is economic profit which the Board believes, in combination with ROE, is an appropriate measure of returns and of the value created for shareholders complementing the LTI measures. The remaining measures focus on ensuring that we remain strong; deliver targeted growth; and drive simplification, innovation and productivity while helping our customers, communities and people to prosper and grow. The final STI outcome for 2015 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. Aligning pay with performance and shareholder return Graph 1 shows the CEO’s STI payment as a percentage of STI target and its relationship to our primary financial metric, economic profit, while Graph 2 shows the Group’s ROE performance being the other key financial metric. Graphs 3 and 4 show the Group’s TSR and EPS performance respectively, these being the LTI hurdles. Graph 1: STI Award for CEO vs Economic Profit Graph 2: Return on Equity (ROE) 2012 to 2015 2012 2013 2014 2015 2012 2013 2014 2015 Economic Profit ($m) ST I Award for CEO Return on Equity Average Share Count (m) Graph 3: Total Shareholder Return (TSR) 2011 to 2015 Graph 4: Cash Earnings per Share (EPS) 2012 to 2015 150 140 130 120 110 100 90 80 70 60 50 ) % ( O E C r o f d r a w A I T S ) % ( y t i u q E n o n r u t e R 17 16 15 14 13 e r a h S r e p s t n e C 260 250 240 230 220 210 200 190 3,300 3,100 2,900 2,700 2,500 ) m ( t n u o C e r a h S e g a r e v A 4 . 5 4 2 5 . 9 4 2 8 . 7 2 2 9 . 5 1 2 ) m $ ( t i f o r P c i m o n o c E 5,200 4,700 4,200 3,700 3,200 2,700 2,200 1,700 ) % ( n r u t e R r e d l o h e r a h S l a t o T 130 110 90 70 50 30 10 (10) Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 2012 2013 2014 2015 WBC Pee r 1 Pee r 2 Pee r 3 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 Group 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 Group 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; 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 54 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 55 10% People and Sustainability We have retained our position as the most sustainable bank globally in the 2015 Dow Jones Sustainability Indices (DJSI) Review. The number of women in leadership grew to 46% and is on track to meet our 2017 target of 50%. Our continued focus on a culture of workplace safety has delivered a 28% reduction in Long Term Injury Frequency Rate well ahead of targets and our 2014 result. 1 Individual measures will differ for each Group Executive. Directors’ report Our primary financial measure is economic profit which the Board believes, in combination with ROE, is an appropriate measure of returns and of the value created for shareholders complementing the LTI measures. The remaining measures focus on ensuring that we remain strong; deliver targeted growth; and drive simplification, innovation and productivity while helping our customers, communities and people to prosper and grow. The final STI outcome for 2015 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. Aligning pay with performance and shareholder return Graph 1 shows the CEO’s STI payment as a percentage of STI target and its relationship to our primary financial metric, economic profit, while Graph 2 shows the Group’s ROE performance being the other key financial metric. Graphs 3 and 4 show the Group’s TSR and EPS performance respectively, these being the LTI hurdles. Graph 1: STI Award for CEO vs Economic Profit Graph 2: Return on Equity (ROE) 2012 to 2015 ) m $ ( i t i f o r P c m o n o c E 5,200 4,700 4,200 3,700 3,200 2,700 2,200 1,700 150 140 130 120 110 100 90 80 70 60 50 ) % ( O E C r o f d r a w A I T S ) % ( y t i u q E n o n r u t e R 17 16 15 14 13 3,300 3,100 2,900 2,700 2,500 ) m ( t n u o C e r a h S e g a r e v A 2012 2013 2014 2015 2012 2013 2014 2015 Economic Profit ($m) ST I Award for CEO Return on Equity Average Share Count (m) Graph 3: Total Shareholder Return (TSR) 2011 to 2015 Graph 4: Cash Earnings per Share (EPS) 2012 to 2015 ) % ( n r u t e R l r e d o h e r a h S l a t o T 130 110 90 70 50 30 10 (10) e r a h S r e p s t n e C 260 250 240 230 220 210 200 190 4 . 5 4 2 5 . 9 4 2 8 . 7 2 2 9 . 5 1 2 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 2012 2013 2014 2015 WBC Pee r 1 Pee r 2 Pee r 3 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 Group 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 Group 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; 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 54 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 55 1 any other relevant under or over performance or other matter not captured. The process ensures that financial measures such as EP are adjusted for non-operating items which impact the current year process such as write-offs, accounting standard changes or one-off transactions (where appropriate) to ensure that employees are neither advantaged nor disadvantaged when determining the incentive outcome. Adjustments are considered on a multi- year basis where appropriate e.g. where a material adjustment has been brought forward into the current year. 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 Group Executive to the Board for approval, thereby ensuring the Board retains oversight of final awards. The following table provides the Group’s TSR, dividend, cash earnings per share and share price performance each year from Directors’ report LTI performance outcomes 2011 to 2015: TSR – three years TSR – five years Dividends per Westpac share (cents)1 Cash earnings per Westpac share2 Share price – high Share price – low Share price – close 2015 62.30% 92.78% 187 $2.50 $40.07 $29.10 $29.70 2014 102.03% 103.74% 182 $2.45 $35.99 $30.00 $32.14 Years Ended 30 September 2013 66.09% 90.91% 174 $2.29 $34.79 $24.23 $32.73 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 1 Does not include 20 cent special dividend determined in 2013. 2 Cash earnings are not prepared in accordance with AAS and have not been subject to audit. The vesting outcomes for awards made to the CEO and Group Executives under the CEO Performance Plan and Westpac Reward Plan that reached the completion of the performance period during the financial year, are set out below. No changes have been made to the terms and conditions of prior grants. TSR hurdle vesting outcomes TSR Percentile in Vested Lapsed in Plan Remain Equity Instrument Type of Equity Test Date Ranking Group CEO Performance Plan2 Performance share rights 21 December 2009 21 December 2014 3 40th percentile Commencement Date1 1 October 2010 1 October 2015 3 50th percentile 1 October 2012 1 October 2015 30th percentile Westpac Reward Plan Performance share rights 1 October 2010 1 October 2015 3 50th percentile 1 October 2012 1 October 2015 30th percentile 1 Commencement date refers to the commencement of the performance period. 2 CEO Performance Plan refers to awards made to Gail Kelly. 3 Third test date. Unvested share rights lapsed. There is no re-testing for awards granted since 2011. % 70 90 - - 90 % 30 10 100 10 100 % - - - - - Cash EPS CAGR hurdle vesting outcomes Equity Instrument Type of Equity Test Date Performance CEO Performance Plan2 Performance share rights 1 October 2012 1 October 2015 Westpac Reward Plan Performance share rights 1 October 2012 1 October 2015 4.94% 4.94% % 72 72 % 28 28 Commencement Date1 Cash EPS CAGR Vested Lapsed 1 Commencement date refers to the commencement of the performance period. 2 CEO Performance Plan refers to awards made to Gail Kelly. 2012 Cash EPS CAGR hurdle The Cash EPS CAGR hurdle and vesting profile over the three year vesting period for the 2012 LTI grant was: a minimum of 4.1% CAGR for 50% to vest; 6% CAGR for 100% to vest; and straight-line vesting between 4.1% and 6% CAGR. The Cash EPS CAGR range was developed prior to the allocation in December 2012, and reflected stretch targets in the context of both consensus analyst forecasts and the Westpac strategic plan and business forecasting. The performance range also reflected the forecast market and operating conditions in late 2012. 56 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 57 The process ensures that financial measures such as EP are adjusted for non-operating items which impact the current year process such as write-offs, accounting standard changes or one-off transactions (where appropriate) to ensure that employees are neither advantaged nor disadvantaged when determining the incentive outcome. Adjustments are considered on a multi- year basis where appropriate e.g. where a material adjustment has been brought forward into the current year. 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 Group Executive to the Board for approval, thereby ensuring the Board retains oversight of final awards. any other relevant under or over performance or other matter not captured. LTI performance outcomes Directors’ report The following table provides the Group’s TSR, dividend, cash earnings per share and share price performance each year from 2011 to 2015: Years Ended 30 September TSR – three years TSR – five years Dividends per Westpac share (cents)1 Cash earnings per Westpac share2 Share price – high Share price – low 2015 62.30% 92.78% 187 $2.50 $40.07 $29.10 2014 102.03% 103.74% 182 $2.45 $35.99 $30.00 Share price – close 1 Does not include 20 cent special dividend determined in 2013. 2 Cash earnings are not prepared in accordance with AAS and have not been subject to audit. $29.70 $32.14 2013 66.09% 90.91% 174 $2.29 $34.79 $24.23 $32.73 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 The vesting outcomes for awards made to the CEO and Group Executives under the CEO Performance Plan and Westpac Reward Plan that reached the completion of the performance period during the financial year, are set out below. No changes have been made to the terms and conditions of prior grants. TSR hurdle vesting outcomes Equity Instrument Type of Equity CEO Performance Plan2 Performance share rights Westpac Reward Plan Performance share rights Commencement Date1 Test Date TSR Percentile in Ranking Group Vested % Lapsed % 21 December 2009 21 December 2014 3 1 October 2015 3 1 October 2015 1 October 2010 1 October 2012 40th percentile 50th percentile 30th percentile 1 October 2010 1 October 2012 1 October 2015 3 1 October 2015 50th percentile 30th percentile 70 90 - 90 - 30 10 100 10 100 Remain in Plan % - - - - - 1 Commencement date refers to the commencement of the performance period. 2 CEO Performance Plan refers to awards made to Gail Kelly. 3 Third test date. Unvested share rights lapsed. There is no re-testing for awards granted since 2011. Cash EPS CAGR hurdle vesting outcomes Equity Instrument CEO Performance Plan2 Westpac Reward Plan Type of Equity Commencement Date1 Test Date Cash EPS CAGR Performance Vested % Lapsed % Performance share rights 1 October 2012 1 October 2015 Performance share rights 1 October 2012 1 October 2015 4.94% 4.94% 72 72 28 28 1 Commencement date refers to the commencement of the performance period. 2 CEO Performance Plan refers to awards made to Gail Kelly. 2012 Cash EPS CAGR hurdle The Cash EPS CAGR hurdle and vesting profile over the three year vesting period for the 2012 LTI grant was: a minimum of 4.1% CAGR for 50% to vest; 6% CAGR for 100% to vest; and straight-line vesting between 4.1% and 6% CAGR. The Cash EPS CAGR range was developed prior to the allocation in December 2012, and reflected stretch targets in the context of both consensus analyst forecasts and the Westpac strategic plan and business forecasting. The performance range also reflected the forecast market and operating conditions in late 2012. 56 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 57 1 4.3. Remuneration outcomes for the CEO and Group 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 2015 performance year either as cash or in the case of prior equity awards, the value which has vested in 2015 (see note 5 below). Details in this table supplement the statutory requirements in Section 6.2 of this report. Unlike the statutory table, which represents remuneration outcomes prepared in accordance with Australian Accounting Standards (AAS), this table shows the actual remuneration value received by executives and is not prepared in accordance with AAS. Fixed 1 Remuneration 2015 STI Cash Payment2 Other Short-Term Benefits3 2015 Total Cash Payments4 Prior Year Equity Awards5 Vested during 2015 Prior Year Equity Awards5 Forfeited during 2015 Managing Director & Chief Executive Officer Brian Hartzer6 2,442,623 1,245,960 $ $ Group Executives John Arthur Lyn Cobley6 Philip Coffey Brad Cooper David Curran George Frazis6 Alexandra Holcomb Peter King David Lindberg6 David McLean6 Christine Parker 1,150,235 77,719 1,335,525 1,096,259 984,092 1,161,549 981,564 968,511 272,415 782,164 853,179 728,000 - 734,400 816,000 547,400 928,000 499,800 522,580 151,725 430,580 508,500 $ - - 1,100,000 - - - - - - - - - $ $ 3,688,583 436,856 1,878,235 1,177,719 2,069,925 1,912,259 1,531,492 2,089,549 1,481,364 1,491,091 424,140 1,212,744 1,361,679 1,856,504 - 2,940,393 3,166,210 - 2,522,158 1,028,774 921,140 315,312 450,062 897,932 $ - 443,315 - 746,062 816,052 - 621,718 192,259 165,230 - 79,436 123,083 Former Managing Director & Chief Executive Officer Gail Kelly6 1,048,750 1,200,000 - 2,248,750 9,509,812 4,288,845 Base and Committee fees Former Group Executives Rob Whitfield6 Jason Yetton6 1 Fixed remuneration includes cash salary, annual leave accrual and salary sacrificed items plus employer superannuation contributions. 2 With the exception of Gail Kelly, the cash STI payment represents 50% of the 2015 STI outcome and will be paid in December 2015. The remaining 3,631,892 1,117,365 1,651,376 - 1,413,849 690,281 2,767,061 1,111,753 566,667 427,084 689,260 198,003 3 50% is deferred in the form of equity granted in December 2015 which will vest in equal tranches in October 2016 and 2017. Includes payments made on cessation of employment or other contracted amounts. The payment to Lyn Cobley reflects annual incentive foregone from her previous employer. The payment to Rob Whitfield after nearly 30 years’ service includes a payment in lieu of notice in accordance with his contract provisions. 4 This is the addition of the first, second and third columns. 5 Prior year equity awards include both deferred STI and LTI allocations subject to performance hurdles which have vested in 2015. The equity value has been calculated as the number of securities that vested or were forfeited during the year ended 30 September 2015, multiplied by the five day volume weighted average price of Westpac ordinary shares at the time they vested or were forfeited, less any exercise price payable. 6 Refer Section 2 of this Report for details. 5. Non-executive Director remuneration 5.1. 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. 58 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 59 Directors’ report Committee fees Cash Additional fees are paid to Non-executive Directors for chairing or participating in Board Committees. Employer superannuation Superannuation Reflects statutory superannuation contributions which are capped at the contributions Subsidiary Board and Advisory Board fees superannuation maximum contributions base as prescribed under the Superannuation Guarantee legislation. 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 2015 Non-executive Director fee review – effective 1 October 2014 The Board reviewed the Non-executive Director fee framework in late 2014. On the basis of market data provided by Guerdon Associates, the Board approved a 2.4% increase to the Chairman and Non-executive Director annual base fees effective 1 October 2014. Remuneration Committee fees for both the Chairman and members increased by 7.8%. No other Committee fees were increased. Non-executive Director fees were last increased in 2013. Changes to Board and Committee composition The following changes were made to Board and Committee composition: Craig Dunn was appointed as a Non-executive Director to the Westpac Board effective 1 June 2015 and appointed to the Remuneration and Risk & Compliance Committees effective 5 June 2015; and 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 2015, $2.94 million (65%) of this fee pool was used. The fee pool is inclusive of employer Ann Pickard retired effective 12 December 2014. Fee pool superannuation contributions. Fee framework This section details the current Non-executive Director fee framework. The following table sets out the Board and standing Committee fees: Base Fee Chairman Non-executive Directors Committee Chairman Fees Audit Committee Risk & Compliance Committee Remuneration Committee Technology Committee Committee Membership Fees Audit Committee Risk & Compliance Committee Remuneration Committee Technology Committee Annual Rate $ 795,000 225,000 60,000 60,000 56,000 30,000 30,000 30,000 28,000 15,000 Committee fees are not payable to the Chairman of the Board and members of the Nominations Committee. Employer superannuation contributions The Group pays superannuation contributions to Non-executive Directors of up to 9.5% of their fees. The contributions are capped at the maximum compulsory superannuation contributions base prescribed under the Superannuation Guarantee legislation. Employer contributions are paid into an eligible superannuation fund nominated by the Director. Subsidiary Board and Advisory Board fees Advisory Board. Throughout the reporting period, additional fees of $35,000 were paid to Peter Hawkins as a member of the Bank of Melbourne 4.3. Remuneration outcomes for the CEO and Group 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 2015 performance year either as cash or in the case of prior equity awards, the value which has vested in 2015 (see note 5 below). Details in this table supplement the statutory requirements in Section 6.2 of this report. Unlike the statutory table, which represents remuneration outcomes prepared in accordance with Australian Accounting Standards (AAS), this table shows the actual remuneration value received by executives and is not prepared in accordance with AAS. Fixed 2015 STI Cash Other Short-Term 2015 Total Cash Prior Year Equity Awards5 Prior Year Equity Awards5 Remuneration Payment2 Benefits3 Payments4 Vested during 2015 Forfeited during 2015 Managing Director & Chief Executive Officer Brian Hartzer6 2,442,623 1,245,960 3,688,583 436,856 1 $ 1,150,235 77,719 1,335,525 1,096,259 984,092 1,161,549 981,564 968,511 272,415 782,164 853,179 $ - 728,000 734,400 816,000 547,400 928,000 499,800 522,580 151,725 430,580 508,500 Group Executives John Arthur Lyn Cobley6 Philip Coffey Brad Cooper David Curran George Frazis6 Alexandra Holcomb Peter King David Lindberg6 David McLean6 Christine Parker $ 1,878,235 1,177,719 2,069,925 1,912,259 1,531,492 2,089,549 1,481,364 1,491,091 424,140 1,212,744 1,361,679 $ - - 1,856,504 2,940,393 3,166,210 2,522,158 1,028,774 921,140 315,312 450,062 897,932 $ - - - - - - - - - - - - - $ - - - - 443,315 746,062 816,052 621,718 192,259 165,230 79,436 123,083 689,260 198,003 Former Managing Director & Chief Executive Officer Gail Kelly6 1,048,750 1,200,000 2,248,750 9,509,812 4,288,845 Former Group Executives Rob Whitfield6 Jason Yetton6 1,413,849 690,281 566,667 427,084 1,651,376 3,631,892 1,117,365 2,767,061 1,111,753 1 Fixed remuneration includes cash salary, annual leave accrual and salary sacrificed items plus employer superannuation contributions. 2 With the exception of Gail Kelly, the cash STI payment represents 50% of the 2015 STI outcome and will be paid in December 2015. The remaining 50% is deferred in the form of equity granted in December 2015 which will vest in equal tranches in October 2016 and 2017. 3 Includes payments made on cessation of employment or other contracted amounts. The payment to Lyn Cobley reflects annual incentive foregone from her previous employer. The payment to Rob Whitfield after nearly 30 years’ service includes a payment in lieu of notice in accordance with his contract provisions. 4 This is the addition of the first, second and third columns. 5 Prior year equity awards include both deferred STI and LTI allocations subject to performance hurdles which have vested in 2015. The equity value has been calculated as the number of securities that vested or were forfeited during the year ended 30 September 2015, multiplied by the five day volume weighted average price of Westpac ordinary shares at the time they vested or were forfeited, less any exercise price payable. 6 Refer Section 2 of this Report for details. 5. Non-executive Director remuneration 5.1. 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. Directors’ report Committee fees Cash Employer superannuation contributions Superannuation Additional fees are paid to Non-executive Directors for chairing or participating in Board Committees. 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 2015 Non-executive Director fee review – effective 1 October 2014 The Board reviewed the Non-executive Director fee framework in late 2014. On the basis of market data provided by Guerdon Associates, the Board approved a 2.4% increase to the Chairman and Non-executive Director annual base fees effective 1 October 2014. Remuneration Committee fees for both the Chairman and members increased by 7.8%. No other Committee fees were increased. Non-executive Director fees were last increased in 2013. 1,100,000 Changes to Board and Committee composition The following changes were made to Board and Committee composition: Craig Dunn was appointed as a Non-executive Director to the Westpac Board effective 1 June 2015 and appointed to the Remuneration and Risk & Compliance Committees effective 5 June 2015; and Ann Pickard retired effective 12 December 2014. 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 2015, $2.94 million (65%) 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 Non-executive Directors Committee Chairman Fees Audit Committee Risk & Compliance Committee Remuneration Committee Technology Committee Committee Membership Fees Audit Committee Risk & Compliance Committee Remuneration Committee Technology Committee Annual Rate $ 795,000 225,000 60,000 60,000 56,000 30,000 30,000 30,000 28,000 15,000 Committee fees are not payable to the Chairman of the Board and members of the Nominations Committee. Employer superannuation contributions The Group pays superannuation contributions to Non-executive Directors of up to 9.5% of their fees. The contributions are capped at the maximum compulsory superannuation contributions base prescribed under the Superannuation Guarantee legislation. Employer contributions are paid into an eligible superannuation fund nominated by the Director. Subsidiary Board and Advisory Board fees Throughout the reporting period, additional fees of $35,000 were paid to Peter Hawkins as a member of the Bank of Melbourne Advisory Board. 58 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 59 1 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. 6.2. Remuneration details – CEO and other Group Executives This section sets out details of remuneration for the CEO and Group Executives for the 2015 financial year, calculated in accordance with AAS. Directors’ report 6. Required remuneration disclosures 6.1. 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 Westpac Banking Corporation Board Fees1 $ Subsidiary and Advisory Board Fees $ Superannuation $ Total $ 795,000 780,000 313,000 314,677 311,000 288,361 270,000 133,519 94,892 320,701 331,792 315,000 310,000 322,299 288,635 57,688 276,000 2,799,580 2,987,280 - - - - - - - - - - - 35,000 35,000 - - - - 35,000 35,000 18,989 18,107 18,989 18,107 18,989 18,107 18,989 9,297 813,989 798,107 331,989 332,784 329,989 306,468 288,989 142,816 6,569 101,461 18,989 18,107 18,916 18,038 18,989 18,107 3,860 18,107 143,279 150,085 339,690 349,899 368,916 363,038 341,288 306,742 61,548 294,107 2,977,859 3,172,365 Name Current Non-executive Directors Lindsay Maxsted, Chairman 2015 2014 Elizabeth Bryan 2015 2014 Ewen Crouch 2015 2014 Alison Deans 2015 2014 Craig Dunn2 2015 Robert Elstone 2015 2014 Peter Hawkins 2015 2014 Peter Marriott 2015 2014 Former Non-executive Director Ann Pickard2 2015 2014 Total fees 2015 3 2014 Includes fees paid to the Chairman and members of Board Committees. 1 2 Refer Section 2 of this Report for details. 3 The total fees for 2014 reflect the prior year remuneration for the 2014 reported Non-executive Directors. Short-Term Benefits Post-Employment Benefits Share-Based Payments Fixed Remu- neration1 STI (Cash)2 Other Superann- Non- Monetary Benefits3 Short-Term Benefits4 Name $ $ $ $ Managing Director & Chief Executive Officer Brian Hartzer9,10 uation Benefits5 $ Long Service Leave $ Restricted Shares6 $ Options7 $ Share Rights7 $ Total8 $ 2,413,205 2,234,087 1,245,960 1,162,500 66,063 3,169 29,418 24,705 57,016 33,487 1,143,466 500,913 5,737,629 4,549,345 - - 1,024,117 - 2,002,204 1,126,050 1,204,085 728,000 943,800 14,971 14,664 24,185 23,337 18,265 18,260 647,634 667,095 1,153,998 746,669 3,713,103 3,617,910 71,006 - 1,100,000 6,713 1,252,975 782,501 590,484 978,087 75,256 792,211 931,706 803,641 958,854 - - 797,145 845,403 - - 20,628 21,079 16,679 24,585 14,420 907 22,909 15,221 36,253 27,359 35,682 31,114 22,429 5,380 36,022 27,260 35,460 4,876 29,789 15,412 Brian Hartzer: Remuneration impact relating to recruitment Group Executives John Arthur, Chief Operating Officer Lyn Cobley, Chief Executive, Westpac Institutional Bank9 - - Philip Coffey, Deputy Chief Executive Officer 1,299,272 1,387,582 734,400 1,120,080 Brad Cooper, Chief Executive Officer, BT Financial Group David Curran, Chief Information Officer 1,060,577 1,053,638 816,000 1,123,200 961,663 60,827 547,400 George Frazis, Chief Executive, Consumer Bank9 1,125,527 928,000 923,004 1,161,600 15,266 13,488 Alexandra Holcomb, Chief Risk Officer Peter King, Chief Financial Officer 946,104 132,303 499,800 101,864 938,722 418,016 522,580 337,212 3,425 3,169 3,374 2,052 2,359 - 2,359 214 2,359 1,203 2015 2014 2014 2015 2014 2015 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2015 2015 2014 - - - - - - - - - - - - - - - - - - - - - (2,240) 463 525,239 86,361 496,155 38,656 2,502,877 364,737 14,960 56,731 372,877 212,434 504,705 87,707 2,385,992 1,128,715 David Lindberg, Chief Executive, Commercial & Business Bank9 David McLean, Chief Executive Officer, Westpac New Zealand Limited9 Christine Parker, Group Executive, Human Resources & Corporate Affairs 264,138 151,725 2,610 8,277 5,961 129,810 83,045 645,566 712,605 430,580 75,392 69,559 - 35,687 264,417 1,588,240 830,035 758,661 508,500 702,000 2,649 2,052 23,144 21,086 16,025 12,177 478,785 483,827 641,184 267,532 2,500,322 2,247,335 - - 1,262,936 876,119 4,149,125 4,367,094 1,130,678 874,737 3,866,631 4,068,180 216,485 1,764,756 - 67,114 770,797 641,432 3,695,666 3,627,408 - - - - - - - - - - - - - - - - - - - - - - 60 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 61 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. 6.2. Remuneration details – CEO and other Group Executives This section sets out details of remuneration for the CEO and Group Executives for the 2015 financial year, calculated in accordance with AAS. Directors’ report Short-Term Benefits Post-Employment Benefits Share-Based Payments Fixed Remu- neration1 $ STI (Cash)2 $ Name Managing Director & Chief Executive Officer Brian Hartzer9,10 Non- Monetary Benefits3 $ Other Short-Term Benefits4 $ Superann- uation Benefits5 $ Long Service Leave $ Restricted Shares6 $ Options7 $ Share Rights7 $ Total8 $ 2015 2014 2,413,205 2,234,087 1,245,960 1,162,500 66,063 3,169 Brian Hartzer: Remuneration impact relating to recruitment 1,024,117 2014 - - Group Executives John Arthur, Chief Operating Officer 2015 1,126,050 728,000 2014 1,204,085 943,800 14,971 14,664 - - - - - 29,418 24,705 57,016 33,487 782,501 590,484 - - 978,087 24,185 23,337 18,265 18,260 647,634 667,095 Lyn Cobley, Chief Executive, Westpac Institutional Bank9 2015 71,006 - - 1,100,000 6,713 - 75,256 Philip Coffey, Deputy Chief Executive Officer 734,400 1,299,272 2015 2014 1,387,582 1,120,080 3,425 3,169 Brad Cooper, Chief Executive Officer, BT Financial Group 3,374 2015 1,060,577 816,000 6,569 101,461 2014 1,053,638 1,123,200 2,052 David Curran, Chief Information Officer 2015 961,663 547,400 2014 60,827 - George Frazis, Chief Executive, Consumer Bank9 2015 1,125,527 928,000 2014 923,004 1,161,600 Alexandra Holcomb, Chief Risk Officer 2015 946,104 499,800 2014 132,303 101,864 Peter King, Chief Financial Officer 2015 938,722 2014 418,016 522,580 337,212 2,359 - 15,266 13,488 2,359 214 2,359 1,203 David Lindberg, Chief Executive, Commercial & Business Bank9 2015 264,138 151,725 2,610 David McLean, Chief Executive Officer, Westpac New Zealand Limited9 2015 712,605 430,580 75,392 Christine Parker, Group Executive, Human Resources & Corporate Affairs 2015 830,035 508,500 2,649 2014 758,661 702,000 2,052 - - - - - - - - - - - - - - - - 36,253 27,359 35,682 31,114 22,429 5,380 36,022 27,260 35,460 4,876 29,789 15,412 20,628 21,079 16,679 24,585 14,420 907 22,909 15,221 792,211 931,706 803,641 958,854 - - 797,145 845,403 (2,240) 463 525,239 86,361 14,960 56,731 372,877 212,434 8,277 5,961 129,810 69,559 - 35,687 23,144 21,086 16,025 12,177 478,785 483,827 - - - - - - - - - - - - - - - - - - - - - - 1,143,466 500,913 5,737,629 4,549,345 - 2,002,204 1,153,998 746,669 3,713,103 3,617,910 - 1,252,975 1,262,936 876,119 4,149,125 4,367,094 1,130,678 874,737 3,866,631 4,068,180 216,485 1,764,756 - 67,114 770,797 641,432 3,695,666 3,627,408 496,155 38,656 2,502,877 364,737 504,705 87,707 2,385,992 1,128,715 83,045 645,566 264,417 1,588,240 641,184 267,532 2,500,322 2,247,335 6. Required remuneration disclosures 6.1. 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 Westpac Banking Subsidiary and Corporation Board Fees1 Advisory Board Fees Superannuation $ Total $ Current Non-executive Directors Lindsay Maxsted, Chairman Elizabeth Bryan Name 2015 2014 2015 2014 2015 2014 2015 2014 2015 2015 2014 2015 2014 2015 2014 Ewen Crouch Alison Deans Craig Dunn2 Robert Elstone Peter Hawkins Peter Marriott Ann Pickard2 2015 2014 2015 3 2014 Total fees Former Non-executive Director $ 795,000 780,000 313,000 314,677 311,000 288,361 270,000 133,519 94,892 320,701 331,792 315,000 310,000 322,299 288,635 57,688 276,000 2,799,580 2,987,280 $ - - - - - - - - - - - - - - - 35,000 35,000 35,000 35,000 1 Includes fees paid to the Chairman and members of Board Committees. 2 Refer Section 2 of this Report for details. 3 The total fees for 2014 reflect the prior year remuneration for the 2014 reported Non-executive Directors. 18,989 18,107 18,989 18,107 18,989 18,107 18,989 9,297 18,989 18,107 18,916 18,038 18,989 18,107 3,860 18,107 143,279 150,085 813,989 798,107 331,989 332,784 329,989 306,468 288,989 142,816 339,690 349,899 368,916 363,038 341,288 306,742 61,548 294,107 2,977,859 3,172,365 60 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 61 1 STI Target Maximum STI1 STI Portion Paid in Cash2 STI Portion Deferred3 $ $ $ Managing Director & Chief Executive Officer Brian Hartzer4 2,307,334 1,245,960 1,245,960 Group Executives John Arthur Lyn Cobley4 Philip Coffey Brad Cooper David Curran George Frazis4 Alexandra Holcomb Peter King David Lindberg4 David McLean4 Christine Parker 1,300,000 - 1,360,000 1,600,000 952,000 1,600,000 952,000 986,000 289,000 797,371 900,000 1,200,000 1,333,333 854,167 Former Managing Director & Chief Executive Officer Former Group Executives Gail Kelly4 Rob Whitfield4 Jason Yetton4 % 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 % 50 50 50 50 50 50 50 50 50 50 50 50 50 50 728,000 - 734,400 816,000 547,400 928,000 499,800 522,580 151,725 430,581 508,500 566,667 427,084 Directors’ report % 50 50 50 50 50 50 50 50 50 50 50 50 50 50 728,000 - 734,400 816,000 547,400 928,000 499,800 522,580 151,725 430,581 508,500 566,667 427,084 100 1,200,000 - - 1 The maximum STI potential is 150% of the individual STI Target. 2 50% of the STI outcome for the year is paid as cash in December 2015. The part year STI outcome for Gail Kelly has been paid 100% cash. 3 50% of the actual STI outcome is deferred in the form of restricted shares or share rights, half vesting on 1 October 2016 and the remainder vesting on 1 October 2017. 4 Refer Section 2 of this Report for details. Short-Term Benefits Post-Employment Benefits Share-Based Payments This section sets out details of STI awards for the CEO and Group Executives for the 2015 financial year: 6.3. STI allocations for the CEO and Group Executives Fixed Remu- neration1 STI (Cash)2 Non- Monetary Benefits3 Other Short- Term Benefits4 Name $ $ $ Former Managing Director & Chief Executive Officer Gail Kelly9 2015 1,039,892 1,200,000 7,679 2014 3,001,511 2,743,200 9,853 Former Group Executives Rob Whitfield, Group Executive, Westpac Institutional Bank9 2,650 2015 1,383,619 566,667 2014 1,783,045 1,152,000 95,335 Superann- uation Benefits5 $ 8,858 26,585 $ - - Long Service Leave Restricted Shares6 Options7 $ $ $ - 642,436 51,170 1,957,830 Jason Yetton, Group Executive, Westpac Retail & Business Banking9 2015 675,726 427,084 2,359 933,333 14,555 17,033 327,217 1,651,376 - 30,230 28,764 - 27,398 614,800 900,285 Share Rights7 $ Total8 $ 891,410 3,790,275 3,192,579 10,982,728 623,110 699,784 4,872,452 4,686,611 693,518 3,090,825 - - - - - 2014 2,666,189 1 Fixed remuneration is the total cost of salary, salary sacrificed benefits (including motor vehicles, parking, etc., and any associated fringe benefits tax 938,553 470,082 485,976 702,000 45,038 21,371 3,169 - - (FBT)) and an accrual for annual leave entitlements. 2 2015 STI figures reflect annual cash performance awards accrued but not yet paid in respect of the year ended 30 September 2015. 3 Non-monetary benefits are determined on the basis of the cost to the Group (including associated FBT, where applicable) and include annual health 4 checks, provision of taxation advice, relocation costs, living away from home expenses and allowances. Includes payments made on cessation of employment or other contracted amounts. The payment to Lyn Cobley reflects annual incentive foregone from her previous employer. The payment to Rob Whitfield after nearly 30 years’ service includes a payment in lieu of notice in accordance with his contract provisions. The amount for Jason Yetton after 23 years’ service will be paid on cessation less any period of notice served. 5 The CEO and Group Executives are provided with insurance cover under the Westpac Group Plan at no cost. Superannuation benefits have been calculated consistent with AASB 119 Employee Benefits. 6 The value of restricted shares is amortised over the applicable vesting period, and the amount shown is the amortisation relating to the 2015 reporting year (and 2014 year as comparison). 7 Equity-settled remuneration is based on the amortisation over the vesting period (normally three or four 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 2015. Details of prior years’ grants have been disclosed in previous Annual Reports. The value of share rights for 2015 includes both the 2014 and 2015 LTI awards on transition to the revised LTI plan. The values for David McLean and Rob Whitfield include 2% and 39% respectively attributed to deferred STI. 8 The percentage of the total remuneration which is performance related (i.e. STI cash plus share-based payments) was: Brian Hartzer 55%, John Arthur 68%, Lyn Cobley 6%, Philip Coffey 67%, Brad Cooper 71%, David Curran 43%, George Frazis 68%, Alexandra Holcomb 61%, Peter King 59%, David Lindberg 56%, David McLean 46%, Christine Parker 65%, and for former KMP: Gail Kelly 72%, Rob Whitfield 37% and Jason Yetton 47%. The percentage of total remuneration delivered in the form of options (including share rights) was: Brian Hartzer 20%, John Arthur 31%, Lyn Cobley 0%, Philip Coffey 30%, Brad Cooper 29%, David Curran 12%, George Frazis 21%, Alexandra Holcomb 20%, Peter King 21%, David Lindberg 13%, David McLean 17%, Christine Parker 26%, and for former KMP: Gail Kelly 24%, Rob Whitfield 13% and Jason Yetton 22%. 9 Refer Section 2 of this Report for details. Remuneration details for newly appointed KMP are from the date of appointment. The STI cash figure for Brian Hartzer is the outcome pro-rated for the periods as Chief Executive, AFS and CEO. Brian Hartzer also received a pro-rated 2015 LTI award for the period he was Chief Executive, AFS. 10 Brian Hartzer’s remuneration for 2014 has been separated into two elements. The first line represents his remuneration as the Chief Executive, AFS for 2014 and the second line represents the elements which have been incurred as a result of the buy-out of equity forfeited on his resignation from his previous employer including $542,834 in relocation benefits and $481,283 FBT expenses on his relocation from London. 62 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 63 Short-Term Benefits Post-Employment Benefits Share-Based Payments Fixed Remu- neration1 STI (Cash)2 Monetary Other Short- Benefits3 Term Benefits4 Non- Superann- uation Benefits5 Name $ $ $ $ $ Former Managing Director & Chief Executive Officer Long Service Leave $ Restricted Shares6 Options7 $ $ Share Rights7 $ Total8 $ 1,039,892 3,001,511 1,200,000 2,743,200 7,679 9,853 8,858 26,585 642,436 51,170 1,957,830 891,410 3,790,275 3,192,579 10,982,728 Gail Kelly9 2015 2014 2015 2014 2015 2014 Former Group Executives Rob Whitfield, Group Executive, Westpac Institutional Bank9 1,383,619 1,783,045 566,667 1,152,000 2,650 95,335 1,651,376 Jason Yetton, Group Executive, Westpac Retail & Business Banking9 675,726 938,553 427,084 702,000 2,359 3,169 933,333 30,230 28,764 14,555 21,371 - - - - - - 27,398 17,033 45,038 - - - - - - 614,800 900,285 327,217 485,976 623,110 699,784 4,872,452 4,686,611 693,518 470,082 3,090,825 2,666,189 1 Fixed remuneration is the total cost of salary, salary sacrificed benefits (including motor vehicles, parking, etc., and any associated fringe benefits tax (FBT)) and an accrual for annual leave entitlements. 2 2015 STI figures reflect annual cash performance awards accrued but not yet paid in respect of the year ended 30 September 2015. 3 Non-monetary benefits are determined on the basis of the cost to the Group (including associated FBT, where applicable) and include annual health checks, provision of taxation advice, relocation costs, living away from home expenses and allowances. 4 Includes payments made on cessation of employment or other contracted amounts. The payment to Lyn Cobley reflects annual incentive foregone from her previous employer. The payment to Rob Whitfield after nearly 30 years’ service includes a payment in lieu of notice in accordance with his contract provisions. The amount for Jason Yetton after 23 years’ service will be paid on cessation less any period of notice served. 5 The CEO and Group Executives are provided with insurance cover under the Westpac Group Plan at no cost. Superannuation benefits have been 6 The value of restricted shares is amortised over the applicable vesting period, and the amount shown is the amortisation relating to the 2015 calculated consistent with AASB 119 Employee Benefits. reporting year (and 2014 year as comparison). 7 Equity-settled remuneration is based on the amortisation over the vesting period (normally three or four 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 2015. Details of prior years’ grants have been disclosed in previous Annual Reports. The value of share rights for 2015 includes both the 2014 and 2015 LTI awards on transition to the revised LTI plan. The values for David McLean and Rob Whitfield include 2% and 39% respectively attributed to deferred STI. 8 The percentage of the total remuneration which is performance related (i.e. STI cash plus share-based payments) was: Brian Hartzer 55%, John Arthur 68%, Lyn Cobley 6%, Philip Coffey 67%, Brad Cooper 71%, David Curran 43%, George Frazis 68%, Alexandra Holcomb 61%, Peter King 59%, David Lindberg 56%, David McLean 46%, Christine Parker 65%, and for former KMP: Gail Kelly 72%, Rob Whitfield 37% and Jason Yetton 47%. The percentage of total remuneration delivered in the form of options (including share rights) was: Brian Hartzer 20%, John Arthur 31%, Lyn Cobley 0%, Philip Coffey 30%, Brad Cooper 29%, David Curran 12%, George Frazis 21%, Alexandra Holcomb 20%, Peter King 21%, David Lindberg 13%, David McLean 17%, Christine Parker 26%, and for former KMP: Gail Kelly 24%, Rob Whitfield 13% and Jason Yetton 22%. 9 Refer Section 2 of this Report for details. Remuneration details for newly appointed KMP are from the date of appointment. The STI cash figure for Brian Hartzer is the outcome pro-rated for the periods as Chief Executive, AFS and CEO. Brian Hartzer also received a pro-rated 2015 LTI award for the period he was Chief Executive, AFS. 10 Brian Hartzer’s remuneration for 2014 has been separated into two elements. The first line represents his remuneration as the Chief Executive, AFS for 2014 and the second line represents the elements which have been incurred as a result of the buy-out of equity forfeited on his resignation from his previous employer including $542,834 in relocation benefits and $481,283 FBT expenses on his relocation from London. 6.3. STI allocations for the CEO and Group Executives This section sets out details of STI awards for the CEO and Group Executives for the 2015 financial year: STI Target $ Maximum STI1 % STI Portion Paid in Cash2 % $ STI Portion Deferred3 % $ Directors’ report Managing Director & Chief Executive Officer Brian Hartzer4 2,307,334 Group Executives John Arthur Lyn Cobley4 Philip Coffey Brad Cooper David Curran George Frazis4 Alexandra Holcomb Peter King David Lindberg4 David McLean4 Christine Parker 1,300,000 - 1,360,000 1,600,000 952,000 1,600,000 952,000 986,000 289,000 797,371 900,000 150 150 150 150 150 150 150 150 150 150 150 150 50 50 50 50 50 50 50 50 50 50 50 50 1,245,960 728,000 - 734,400 816,000 547,400 928,000 499,800 522,580 151,725 430,581 508,500 Former Managing Director & Chief Executive Officer Gail Kelly4 1,200,000 150 100 1,200,000 - Former Group Executives Rob Whitfield4 Jason Yetton4 1,333,333 854,167 150 150 50 50 566,667 427,084 50 50 50 50 50 50 50 50 50 50 50 50 50 50 1,245,960 728,000 - 734,400 816,000 547,400 928,000 499,800 522,580 151,725 430,581 508,500 - 566,667 427,084 1 The maximum STI potential is 150% of the individual STI Target. 2 50% of the STI outcome for the year is paid as cash in December 2015. The part year STI outcome for Gail Kelly has been paid 100% cash. 3 50% of the actual STI outcome is deferred in the form of restricted shares or share rights, half vesting on 1 October 2016 and the remainder vesting on 1 October 2017. 4 Refer Section 2 of this Report for details. 62 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 63 1 6.4. Movement in equity-settled instruments during the year This table shows the details of movements during 2015 in the number and value of equity instruments for the CEO and Group Executives under the relevant plans: Name Type of Equity-Based Instrument Managing Director & Chief Executive Officer Brian Hartzer7 Performance share rights Shares under Restricted Share Plan Number Granted1 Number Vested2 Number Exercised3 Value Granted4 $ Value Exercised5 $ Value Forfeited or Lapsed5,6 $ 129,547 24,150 - 13,676 - - 2,713,522 769,547 - - - - Group Executives John Arthur Lyn Cobley7 Philip Coffey Performance share rights Shares under Restricted Share Plan 122,943 19,607 29,310 27,954 Shares under Restricted Share Plan 54,011 - 29,310 2,531,083 1,011,994 443,315 - - 624,783 1,629,579 - - - - 48,362 3,298,589 1,669,807 746,062 - 741,474 - - 196,785 - 1,643,682 - - 54,957 2,952,953 1,897,515 816,052 - - 743,545 1,264,621 - - - - 40,302 1,926,925 1,391,518 621,718 - 768,973 - - 31,697 - 12,456 1,779,688 - 350,741 457,835 430,072 - - - 192,259 - 10,991 2,064,879 379,489 165,230 - - - 348,829 248,330 - - - - - - - 6,151 32,406 643,414 203,319 333,017 1,071,170 79,436 - 8,646 1,969,122 298,523 123,083 - 464,692 - - 48,362 42,278 54,957 42,560 - 40,302 37,480 12,456 19,387 10,991 17,467 - 9,679 6,151 6,432 8,646 19,212 160,725 23,269 - 143,434 23,334 63,519 94,372 24,132 - 87,679 11,007 101,206 10,947 12,476 - 35,662 11,569 95,880 14,583 Performance share rights Shares under Restricted Share Plan Brad Cooper Performance options Performance share rights Shares under Restricted Share Plan David Curran George Frazis7 Performance share rights Performance share rights Shares under Restricted Share Plan Alexandra Holcomb Performance options Performance share rights Shares under Restricted Share Plan Peter King Performance share rights Shares under Restricted Share Plan David Lindberg7 Performance share rights Shares under Restricted Share Plan David McLean7 Performance share rights Unhurdled share rights Christine Parker Performance share rights Shares under Restricted Share Plan Former Managing Director & Chief Executive Officer Gail Kelly7 CEO Performance share rights Shares under the CEO Restricted Share Plan Former Group Executives Rob Whitfield7 Performance share rights Unhurdled share rights Shares under Restricted Share Plan Jason Yetton7 Performance share rights Shares under Restricted Share Plan - 197,848 197,848 - 6,741,595 4,288,845 56,988 83,812 - 1,815,939 - - Termination payments to be made on CEO and all Group Executives Deferred STI and LTI awards vest 81,961 18,780 23,932 123,202 14,583 43,966 43,966 1,687,370 1,518,026 689,260 - 41,376 12,823 21,607 - - 564,953 762,600 - - - - 12,823 2,531,603 442,743 198,003 - 464,692 - - 1 No performance options were granted in 2015. The number of performance share rights granted in 2015 includes both the 2014 and 2015 LTI awards on transition to the revised LTI plan. 2 72% of hurdled share rights granted in 2011 vested in October 2014 as assessed against the TSR and EPS performance hurdle. Post-employment restraints CEO and all Group Executives 12 month non-solicitation restraint 1 Payment in lieu of notice may in certain circumstances be approved by the Board for some or all of the notice period. 64 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 65 Directors’ report 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 performance share rights, the value granted represents the number of securities granted multiplied by the fair value per instrument as set out in the table in the sub-section titled ‘Fair value of LTI grants made during the year’ below. The value of performance share rights granted in 2015 includes both the 2014 and 2015 LTI awards on transition to the revised LTI plan. 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 Group Executives in 2015, do not reconcile with the amount shown in the table in Section 6.2 of this Report, 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. 7 Refer Section 2 of this Report for details. Fair value of LTI grants made during the year The table below provides a summary of the fair value of LTI awards granted to Group Executives during 2015 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 Hurdle Granted to Grant Date Test Date Expiry Instrument Performance Commencement Date1 Westpac Reward Plan Relative TSR 3 December 2014 1 October 2014 1 October 2017 1 October 2024 Cash EPS CAGR All Group 3 December 2014 1 October 2014 1 October 2017 1 October 2024 Relative TSR Cash EPS CAGR Executives 3 December 2014 1 October 2014 1 October 2018 1 October 2024 3 December 2014 1 October 2014 1 October 2017 1 October 2024 Fair Value2 per $15.06 $28.23 $13.89 $26.76 1 The commencement date is the start of the performance period. 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 AASB 2 Share-based Payment. 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 which for the rights valued at $26.76 is 4 years to the 1 October 2018 vesting date. 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. 7. Employment agreements The remuneration and other terms of employment for the CEO and Group Executives are formalised in their employment agreements. Each of these employment agreements provides for the payment of fixed and performance-based remuneration, employer superannuation contributions 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 Group Executives Ongoing until notice given by either party Notice to be provided by the executive CEO and Group Executives or the Group to terminate the employment agreement Phil Coffey 12 months1 Six months termination without cause Termination for cause CEO and all other Group Executives Brad Cooper and Phil Coffey according to the applicable equity plan rules Immediately for misconduct Three months’ notice for poor performance Immediately for misconduct Contractual notice period for poor performance 6.4. Movement in equity-settled instruments during the year This table shows the details of movements during 2015 in the number and value of equity instruments for the CEO and Group Executives under the relevant plans: Number Granted1 Number Vested2 Number Exercised3 Granted4 Exercised5 $ $ Lapsed5,6 $ Value Value Value Forfeited or Peter King Performance share rights 10,991 2,064,879 379,489 165,230 Name Type of Equity-Based Instrument Managing Director & Chief Executive Officer Brian Hartzer7 Performance share rights Shares under Restricted Share Plan 13,676 129,547 24,150 Group Executives John Arthur Lyn Cobley7 Philip Coffey Performance share rights Shares under Restricted Share Plan 122,943 19,607 29,310 27,954 Shares under Restricted Share Plan 54,011 Performance share rights Shares under Restricted Share Plan 160,725 23,269 48,362 42,278 Brad Cooper Performance options Performance share rights Shares under Restricted Share Plan David Curran George Frazis7 Performance share rights Performance share rights Shares under Restricted Share Plan Alexandra Holcomb Performance options Performance share rights Shares under Restricted Share Plan Shares under Restricted Share Plan David Lindberg7 Performance share rights Shares under Restricted Share Plan David McLean7 Performance share rights Unhurdled share rights Christine Parker Performance share rights Former Managing Director & Chief Executive Officer Gail Kelly7 CEO Performance share rights Shares under the CEO Restricted 143,434 23,334 63,519 94,372 24,132 87,679 11,007 101,206 10,947 12,476 - - - 35,662 11,569 95,880 14,583 - - - - - - 54,957 42,560 40,302 37,480 12,456 19,387 10,991 17,467 9,679 6,151 6,432 8,646 19,212 29,310 2,531,083 1,011,994 443,315 48,362 3,298,589 1,669,807 746,062 196,785 - 1,643,682 54,957 2,952,953 1,897,515 816,052 40,302 1,926,925 1,391,518 621,718 31,697 457,835 430,072 12,456 1,779,688 192,259 2,713,522 769,547 624,783 1,629,579 741,474 743,545 1,264,621 768,973 - - 350,741 348,829 248,330 6,151 32,406 643,414 203,319 79,436 333,017 1,071,170 8,646 1,969,122 298,523 123,083 Shares under Restricted Share Plan 464,692 - 197,848 197,848 - 6,741,595 4,288,845 Share Plan 56,988 83,812 1,815,939 Former Group Executives Rob Whitfield7 Performance share rights Unhurdled share rights Shares under Restricted Share Plan Shares under Restricted Share Plan 81,961 18,780 23,932 123,202 14,583 - 41,376 12,823 21,607 564,953 762,600 464,692 43,966 43,966 1,687,370 1,518,026 689,260 Jason Yetton7 Performance share rights 12,823 2,531,603 442,743 198,003 1 No performance options were granted in 2015. The number of performance share rights granted in 2015 includes both the 2014 and 2015 LTI awards on transition to the revised LTI plan. 2 72% of hurdled share rights granted in 2011 vested in October 2014 as assessed against the TSR and EPS performance hurdle. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Directors’ report 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 performance share rights, the value granted represents the number of securities granted multiplied by the fair value per instrument as set out in the table in the sub-section titled ‘Fair value of LTI grants made during the year’ below. The value of performance share rights granted in 2015 includes both the 2014 and 2015 LTI awards on transition to the revised LTI plan. 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 Group Executives in 2015, do not reconcile with the amount shown in the table in Section 6.2 of this Report, 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. 7 Refer Section 2 of this Report for details. Fair value of LTI grants made during the year The table below provides a summary of the fair value of LTI awards granted to Group Executives during 2015 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 Westpac Reward Plan Performance Hurdle Relative TSR Cash EPS CAGR Relative TSR Cash EPS CAGR Granted to Grant Date Commencement Date1 Test Date Expiry All Group Executives 3 December 2014 3 December 2014 3 December 2014 3 December 2014 1 October 2014 1 October 2017 1 October 2024 1 October 2014 1 October 2017 1 October 2024 1 October 2014 1 October 2018 1 October 2024 1 October 2014 1 October 2017 1 October 2024 Fair Value2 per Instrument $15.06 $28.23 $13.89 $26.76 1 The commencement date is the start of the performance period. 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 AASB 2 Share-based Payment. 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 which for the rights valued at $26.76 is 4 years to the 1 October 2018 vesting date. 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. 7. Employment agreements The remuneration and other terms of employment for the CEO and Group Executives are formalised in their employment agreements. Each of these employment agreements provides for the payment of fixed and performance-based remuneration, employer superannuation contributions 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 Duration of agreement Notice to be provided by the executive or the Group to terminate the employment agreement Termination payments to be made on termination without cause Who CEO and Group Executives CEO and Group Executives Phil Coffey Conditions Ongoing until notice given by either party 12 months1 Six months CEO and all Group Executives Deferred STI and LTI awards vest Termination for cause CEO and all other Group Executives Brad Cooper and Phil Coffey according to the applicable equity plan rules Immediately for misconduct Three months’ notice for poor performance Immediately for misconduct Contractual notice period for poor performance 64 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 65 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 Group Executives 12 month non-solicitation restraint 1 8. Non-executive Directors, CEO and Group Executives – Additional disclosures 8.2. Details of Westpac equity holdings of Key Management Personnel 8.1. Details of Westpac ordinary shares held by Non-executive Directors Shareholdings The following table sets out details of relevant interests in Westpac ordinary shares held by Non-executive Directors (including their related parties) during the year ended 30 September 20151: The following table sets out details of Westpac equity held by the CEO and Group Executives (including their related parties) for the year ended 30 September 20151: Name Current Non-executive Directors Lindsay Maxsted Elizabeth Bryan Ewen Crouch2 Alison Deans Craig Dunn3 Robert Elstone Peter Hawkins4 Peter Marriott Former Non-executive Director Ann Pickard 3,5 Number Held at Start of the Year Other Changes During the Year Number Held at End of the Year Name Instrument of the Year Remuneration Year Year Year of the Year Year Type of Equity-based Held at Start During the Year as During the During the During the Held at End End of the Number Number Granted Exercised Lapsed Changes Number Exercisable at 17,283 26,801 38,176 9,000 n/a 10,000 15,218 20,000 13,800 594 - 320 - 8,500 291 - - - 17,877 26,801 38,496 9,000 8,500 10,291 15,218 20,000 n/a In addition to holdings of ordinary shares, Ewen Crouch and his related parties held interests in 250 Westpac Capital Notes 2 at year end. 1 None of these shares include non-beneficially held shares. 2 3 The information relates to the period these individuals were Non-executive Directors. Refer Section 2 of this Report for details. 4 In addition to holdings of ordinary shares, Peter Hawkins and his related parties held interests in 1,370 Convertible Preference Shares and 850 Westpac Capital Notes 3 at year end. 5 Ann Pickard's relevant interests arose through holding 13,800 American Depositary Shares (ADS). One ADS represents one Westpac fully paid ordinary share. 66 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 67 Brad Cooper Ordinary shares 23,334 251,742 (366,645) 37,582 (196,785) 143,434 (54,957) (24,001) 251,914 Directors’ report Received on Exercise and/or Number Other Number Vested and 24,150 129,547 19,607 122,943 54,011 23,269 160,725 - - - - - 63,519 24,132 94,372 11,007 87,679 10,947 101,206 12,476 35,662 11,569 14,583 95,880 - - - - - - - 29,310 8,189 (29,310) (13,040) 48,362 (49,993) (48,362) (21,948) 40,302 (182,938) (40,302) (18,290) (69,053) 44,153 (31,697) (12,456) 10,991 (5,656) 38,557 (6,151) (32,406) 8,646 (8,646) (2,334) (3,619) (39,884) (30,361) (43,966) (20,279) (83,024) 23,932 81,961 18,780 14,583 123,202 43,966 - 12,823 - - - - - - - - - - - - - - - - - - - - - - - - - 49,571 246,155 264,156 251,163 54,011 305,555 282,039 - - 63,519 36,774 173,597 46,708 38,847 120,060 73,894 122,900 26,747 64,984 2,654 42,972 11,569 22,044 144,970 n/a n/a n/a n/a n/a n/a n/a - - - - - - - - - - - - - - - - - - - - - - 38,847 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Managing Director & Chief Executive Officer Brian Hartzer Ordinary shares Performance share rights Group Executives John Arthur2 Ordinary shares Performance share rights Lyn Cobley3 Philip Coffey4 Ordinary shares Ordinary shares Performance share rights Performance options Performance share rights David Curran5 Ordinary shares Performance share rights George Frazis Ordinary shares Performance share rights Alexandra Holcomb Ordinary shares Performance options Performance share rights Peter King Ordinary shares David Lindberg3 Ordinary shares Performance share rights David McLean3 Ordinary shares Performance share rights Unhurdled share rights Christine Parker Ordinary shares Performance share rights Former Group Executives Rob Whitfield3 Ordinary shares Performance share rights Unhurdled share rights Jason Yetton3 Ordinary shares 25,421 116,608 207,050 170,570 n/a 283,917 191,624 129,151 196,785 187,438 - - 155,278 137,817 60,601 70,544 50,493 , 51,956 37,545 n/a n/a 3,981 15,795 32,406 29,176 61,355 290,971 151,029 - 160,209 109,468 Performance share rights (10,991) (4,860) Former Managing Director & Chief Executive Officer Gail Kelly3 Ordinary shares Performance share rights 1,542,459 713,264 56,988 197,848 - (197,848) (124,882) Performance share rights (12,823) (5,825) 1 The highest number of shares held by an individual in the above tables is 0.0096% of total Westpac ordinary shares outstanding as at 30 September 2015. Notes 2 at year-end. 2 4 Capital Notes 3 at year-end. In addition to holdings of ordinary shares, John Arthur and his related parties held interests in 1,000 Westpac Capital Notes and 885 Westpac Capital 3 This information relates to the period these individuals were Key Management Personnel. Refer Section 2 of the Remuneration Report for details. In addition to holdings of ordinary shares, Philip Coffey and his related parties held interests in 200,000 Westpac Capital Notes 2 and 3,000 Westpac 5 David Curran and his related parties held interests in 965 Westpac Convertible Preference Shares at year-end. 8. Non-executive Directors, CEO and Group Executives – Additional disclosures 8.1. Details of Westpac ordinary shares held by Non-executive Directors Shareholdings The following table sets out details of relevant interests in Westpac ordinary shares held by Non-executive Directors (including their related parties) during the year ended 30 September 20151: Current Non-executive Directors Name Lindsay Maxsted Elizabeth Bryan Ewen Crouch2 Alison Deans Craig Dunn3 Robert Elstone Peter Hawkins4 Peter Marriott Former Non-executive Director Ann Pickard 3,5 Number Held at Start of the Year Other Changes During the Year Number Held at End of the Year 17,283 26,801 38,176 9,000 n/a 10,000 15,218 20,000 13,800 594 320 8,500 291 - - - - - 17,877 26,801 38,496 9,000 8,500 10,291 15,218 20,000 n/a 1 None of these shares include non-beneficially held shares. 2 4 In addition to holdings of ordinary shares, Ewen Crouch and his related parties held interests in 250 Westpac Capital Notes 2 at year end. 3 The information relates to the period these individuals were Non-executive Directors. Refer Section 2 of this Report for details. In addition to holdings of ordinary shares, Peter Hawkins and his related parties held interests in 1,370 Convertible Preference Shares and 850 5 Ann Pickard's relevant interests arose through holding 13,800 American Depositary Shares (ADS). One ADS represents one Westpac fully paid Westpac Capital Notes 3 at year end. ordinary share. 8.2. Details of Westpac equity holdings of Key Management Personnel The following table sets out details of Westpac equity held by the CEO and Group Executives (including their related parties) for the year ended 30 September 20151: Directors’ report Number Held at Start of the Year Number Granted During the Year as Remuneration Received on Exercise and/or Exercised During the Year Number Lapsed During the Year Other Changes During the Year Number Held at End of the Year Number Vested and Exercisable at End of the Year Name Type of Equity-based Instrument Managing Director & Chief Executive Officer Brian Hartzer Ordinary shares Performance share rights Group Executives John Arthur2 Lyn Cobley3 Philip Coffey4 Brad Cooper David Curran5 George Frazis Ordinary shares Performance share rights Ordinary shares Ordinary shares Performance share rights Ordinary shares Performance options Performance share rights Ordinary shares Performance share rights Ordinary shares Performance share rights Alexandra Holcomb Ordinary shares Peter King David Lindberg3 David McLean3 Christine Parker Performance options Performance share rights Ordinary shares Performance share rights Ordinary shares Performance share rights Ordinary shares Performance share rights Unhurdled share rights Ordinary shares Performance share rights 25,421 116,608 207,050 170,570 n/a 283,917 191,624 129,151 196,785 187,438 - - 155,278 137,817 60,601 70,544 50,493 , 51,956 37,545 n/a n/a 3,981 15,795 32,406 29,176 61,355 24,150 129,547 19,607 122,943 54,011 23,269 160,725 23,334 - 143,434 - 63,519 24,132 94,372 11,007 - 87,679 10,947 101,206 - 12,476 - 35,662 11,569 14,583 95,880 - - - - - - 49,571 246,155 29,310 (29,310) - (13,040) 8,189 - 264,156 251,163 - - - 54,011 48,362 (48,362) 251,742 (196,785) (54,957) - (21,948) - - (24,001) (49,993) - (366,645) - - - - 40,302 (40,302) 44,153 (31,697) (12,456) 10,991 (10,991) - - 38,557 (6,151) (32,406) 8,646 (8,646) - - - - - (18,290) (182,938) - - - (5,656) - (4,860) - - - (2,334) - - (3,619) (69,053) - - - - - - (39,884) - - (30,361) - - - - - - - - - - - - - - - - 38,847 - - - - - - - - - - - - - - - - - 305,555 282,039 37,582 - 251,914 - 63,519 36,774 173,597 46,708 38,847 120,060 73,894 122,900 26,747 64,984 2,654 42,972 11,569 22,044 144,970 n/a n/a n/a n/a n/a n/a n/a Former Managing Director & Chief Executive Officer Gail Kelly3 Ordinary shares Performance share rights 1,542,459 713,264 56,988 - 197,848 (197,848) - (124,882) - - Former Group Executives Rob Whitfield3 Ordinary shares Performance share rights Unhurdled share rights Jason Yetton3 Ordinary shares Performance share rights 290,971 151,029 - 160,209 109,468 23,932 81,961 18,780 14,583 123,202 43,966 (43,966) - 12,823 (12,823) - (20,279) - - (5,825) (83,024) - - - - 66 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 67 1 The highest number of shares held by an individual in the above tables is 0.0096% of total Westpac ordinary shares outstanding as at 2 30 September 2015. In addition to holdings of ordinary shares, John Arthur and his related parties held interests in 1,000 Westpac Capital Notes and 885 Westpac Capital Notes 2 at year-end. 3 This information relates to the period these individuals were Key Management Personnel. Refer Section 2 of the Remuneration Report for details. 4 In addition to holdings of ordinary shares, Philip Coffey and his related parties held interests in 200,000 Westpac Capital Notes 2 and 3,000 Westpac Capital Notes 3 at year-end. 5 David Curran and his related parties held interests in 965 Westpac Convertible Preference Shares at year-end. 1 8.3. Loans to Directors and other Key Management Personnel disclosures All financial instrument transactions that have occurred during the financial year between Directors or other Key Management Personnel (KMP) and the Group are in the ordinary course of business on 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. Details of loans to Directors and other KMP (including their related parties) of the Group are: Directors Other KMP Balance at Start of the Year $ Interest Paid and Payable for the Year $ Interest Not Charged During the Year $ Balance at End of the Year $ Number in Group at End of the Year 3,866,378 14,575,662 18,442,040 219,776 647,788 867,564 - - - 4,663,312 10,782,076 15,445,388 2 8 10 Individuals (including their related parties) with loans above $100,000 during the 2015 financial year are: b. no contraventions of any applicable code of professional conduct in relation to the audit. Directors Lindsay Maxsted Ewen Crouch Other KMP Brian Hartzer John Arthur Philip Coffey Brad Cooper George Frazis Alexandra Holcomb David McLean Christine Parker Rob Whitfield1 Jason Yetton1 Balance at Start of the Year $ Interest Paid and Payable for the Year $ Interest Not Charged During the Year $ Balance at End of the Year $ Highest Indebtedness during the Year $ 2,341,735 1,524,643 27,995 - 2,394,000 3,996,192 228,225 2,918,498 - 1,960,298 2,750,454 300,000 142,419 77,357 4,842 41,235 118,312 87,777 7,653 132,203 50,293 125,061 55,915 24,497 - - - - - - - - - - - - 3,248,220 1,415,092 63,063 1,463,544 2,394,000 266,534 - 3,964,352 31,975 2,598,608 n/a n/a 3,265,910 1,524,643 106,127 1,490,000 2,394,000 4,041,548 228,225 4,071,467 1,358,144 3,455,895 2,750,454 1,790,558 1 This information relates to the period these individuals were Key Management Personnel. Refer Section 2 of the Remuneration Report for details. 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: Directors’ report Auditor’s Independence Declaration As lead auditor for the audit of Westpac Banking Corporation for the year ended 30 September 2015, 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 This declaration is in respect of Westpac Banking Corporation and the entities it controlled during the period. Michael Codling Partner PricewaterhouseCoopers Sydney 2 November 2015 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 2014 and 2015 financial years are set out in Note 39 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 $9.9 million in total (2014 $7.9 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 Westpac’s Corporate Governance Statement and in 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 2015 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, which is of the view that 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 Accountants. 68 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 69 Directors Other KMP Directors Lindsay Maxsted Ewen Crouch Other KMP Brian Hartzer John Arthur Philip Coffey Brad Cooper George Frazis Alexandra Holcomb David McLean Christine Parker Rob Whitfield1 Jason Yetton1 Balance at Start of Payable for the Charged During Balance at End Interest Paid and Interest Not the Year $ 3,866,378 14,575,662 18,442,040 Year $ 219,776 647,788 867,564 the Year of the Year Number in Group $ at End of the Year 4,663,312 10,782,076 15,445,388 2 8 10 Balance at Start of Payable for the Charged During Balance at End Indebtedness Interest Paid and Interest Not Highest the Year of the Year during the Year $ $ the Year $ 2,341,735 1,524,643 27,995 - - 2,394,000 3,996,192 228,225 2,918,498 1,960,298 2,750,454 300,000 Year $ 142,419 77,357 4,842 41,235 118,312 87,777 7,653 132,203 50,293 125,061 55,915 24,497 3,248,220 1,415,092 63,063 1,463,544 2,394,000 266,534 - 3,964,352 31,975 2,598,608 n/a n/a 3,265,910 1,524,643 106,127 1,490,000 2,394,000 4,041,548 228,225 4,071,467 1,358,144 3,455,895 2,750,454 1,790,558 $ - - - $ - - - - - - - - - - - - 1 This information relates to the period these individuals were Key Management Personnel. Refer Section 2 of the Remuneration Report for details. 8.3. Loans to Directors and other Key Management Personnel disclosures All financial instrument transactions that have occurred during the financial year between Directors or other Key Management Personnel (KMP) and the Group are in the ordinary course of business on 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. Details of loans to Directors and other KMP (including their related parties) of the Group are: 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: Directors’ report Individuals (including their related parties) with loans above $100,000 during the 2015 financial year are: 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. Auditor’s Independence Declaration As lead auditor for the audit of Westpac Banking Corporation for the year ended 30 September 2015, 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 Michael Codling Partner PricewaterhouseCoopers Sydney 2 November 2015 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 2014 and 2015 financial years are set out in Note 39 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 $9.9 million in total (2014 $7.9 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 Westpac’s Corporate Governance Statement and in 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 2015 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, which is of the view that 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 Accountants. 68 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 69 1 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 2015, which have been prepared in accordance with the accounting policies described in Note 1 to the consolidated financial statements, being in accordance with Australian Accounting Standards (AAS), 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 2 November 2015 Brian Hartzer Managing Director & Chief Executive Officer 2 November 2015 70 2015 Westpac Group Annual Report Five year summary Reading this report Review of Group operations Divisional performance Risk and risk management Other Westpac business information 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 2015, which have been prepared in accordance with the accounting policies described in Note 1 to the consolidated financial statements, being in accordance with Australian Accounting Standards (AAS), 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 2 November 2015 Brian Hartzer 2 November 2015 Managing Director & Chief Executive Officer 70 2015 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 $m unless otherwise indicated) Income statements for the years ended 30 September2 Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Net profit attributable to owners of Westpac Banking Corporation Balance sheet as at 30 September2 Loans Other assets Total assets Deposits and other borrowings Debt issues Loan capital Other liabilities Total liabilities Total shareholders’ equity and non-controlling interests Key financial ratios Shareholder value Dividends per ordinary share (cents) Special dividends per ordinary share (cents) Dividend payout ratio (%)3 Return on average ordinary equity (%) Basic earnings per share (cents) Net tangible assets per ordinary share ($)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 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) 2015 2014 2013 2012 2011 Disclosure regarding forward-looking statements Reading this report 14,267 7,375 21,642 (9,473) (753) 11,416 (3,348) (56) 8,012 623,316 188,840 812,156 475,328 171,054 13,840 98,019 758,241 53,915 187 - 73.4 16.2 256.3 13.08 40.07 29.10 29.70 43.8 2.09 6.6 6.8 9.5 11.4 13.3 1.8 53 13,542 6,395 19,937 (8,547) (650) 10,740 (3,115) (64) 7,561 580,343 190,499 770,842 460,822 152,251 10,858 97,574 721,505 49,337 182 - 74.7 16.3 243.7 11.57 35.99 30.00 32.14 42.9 2.09 6.4 6.7 9.0 10.6 12.3 2.5 60 12,821 5,774 18,595 (7,976) (847) 9,772 (2,947) (74) 6,751 536,164 164,933 701,097 424,482 144,133 9,330 75,615 653,560 47,537 174 20 79.7 15.2 218.3 11.09 34.79 24.23 32.73 42.9 2.14 6.8 6.9 9.1 10.7 12.3 4.1 73 12,502 5,481 17,983 (7,957) (1,212) 8,814 (2,812) (66) 5,936 514,445 164,167 678,612 394,991 147,847 9,537 79,972 632,347 46,265 166 - 85.3 13.9 194.7 10.49 24.99 19.00 24.85 44.2 2.16 6.8 6.9 8.2 10.3 11.7 5.6 82 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 43,808 156 - 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 6.3 88 Other information Full-time equivalent employees (number at financial year end)7 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 33,418 33,045 32,620 33,586 33,898 and may differ from results previously reported. 2 The above income statement extracts for 2015, 2014 and 2013 and balance sheet extracts for 2015 and 2014 are derived from the consolidated financial statements included in this Annual Report. The above income statement extracts for 2012 and 2011 and balance sheet extracts for 2013, 2012 and 2011 are derived from financial statements previously published. 3 Excludes special dividends and adjusted for Treasury shares. 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 comparative is presented for 2011. For further information, refer to Note 33 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 33 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. 72 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 73 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; the conduct, behaviour or practices of Westpac or its staff; 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; information security breaches, including cyberattacks; 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 Westpac’s risk management policies, including our internal processes, systems and employees; the incidence or severity of Westpac insured events; 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 Westpac’s reputation; changes to the value of Westpac’s intangible assets; changes in political, social or economic conditions in any of the major markets in which Westpac or its customers or the success of strategic decisions involving diversification or innovation, in addition to business expansion and integration of counterparties operate; 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 Westpac, refer to ‘Risk factors’ under the section ‘Risk and risk management’. When relying on forward-looking statements to make decisions with respect to Westpac, investors and others should carefully consider the foregoing factors and other uncertainties 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. For a discussion of significant developments impacting the Group, refer to ‘Significant developments’ under ‘Information on and events. Significant developments Westpac’ in Section 1. Total shareholders’ equity and non-controlling interests 53,915 49,337 47,537 46,265 43,808 Five year summary1 (in $m unless otherwise indicated) Income statements for the years ended 30 September2 Net operating income before operating expenses and impairment charges Profit attributable to non-controlling interests Net profit attributable to owners of Westpac Banking Corporation Balance sheet as at 30 September2 Net interest income Non-interest income Operating expenses Impairment charges Profit before income tax Income tax expense Deposits and other borrowings Loans Other assets Total assets Debt issues Loan capital Other liabilities Total liabilities Key financial ratios Shareholder value Dividends per ordinary share (cents) Special dividends per ordinary share (cents) Dividend payout ratio (%)3 Return on average ordinary equity (%) Basic earnings per share (cents) Net tangible assets per ordinary share ($)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 Credit quality (basis points) Other information 2015 2014 2013 2012 2011 14,267 7,375 21,642 (9,473) (753) 11,416 (3,348) (56) 8,012 623,316 188,840 812,156 475,328 171,054 13,840 98,019 13,542 6,395 19,937 (8,547) (650) 10,740 (3,115) (64) 7,561 580,343 190,499 770,842 460,822 152,251 10,858 97,574 12,821 5,774 18,595 (7,976) (847) 9,772 (2,947) (74) 6,751 536,164 164,933 701,097 424,482 144,133 9,330 75,615 12,502 5,481 17,983 (7,957) (1,212) 8,814 (2,812) (66) 5,936 514,445 164,167 678,612 394,991 147,847 9,537 79,972 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 82,038 758,241 721,505 653,560 632,347 626,420 187 - 73.4 16.2 256.3 13.08 40.07 29.10 29.70 43.8 2.09 6.6 6.8 9.5 11.4 13.3 1.8 53 182 - 74.7 16.3 243.7 11.57 35.99 30.00 32.14 42.9 2.09 6.4 6.7 9.0 10.6 12.3 2.5 60 174 20 79.7 15.2 218.3 11.09 34.79 24.23 32.73 42.9 2.14 6.8 6.9 9.1 10.7 12.3 4.1 73 166 - 85.3 13.9 194.7 10.49 24.99 19.00 24.85 44.2 2.16 6.8 6.9 8.2 10.3 11.7 5.6 82 156 - 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 6.3 88 Net impaired assets to equity and collectively assessed provisions (%) Total provisions for impairment on loans and credit commitments to total loans Full-time equivalent employees (number at financial year end)7 32,620 33,586 33,045 33,418 33,898 and may differ from results previously reported. 2 The above income statement extracts for 2015, 2014 and 2013 and balance sheet extracts for 2015 and 2014 are derived from the consolidated financial statements included in this Annual Report. The above income statement extracts for 2012 and 2011 and balance sheet extracts for 2013, 2012 and 2011 are derived from financial statements previously published. 3 Excludes special dividends and adjusted for Treasury shares. 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 comparative is presented for 2011. For further information, refer to Note 33 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 33 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), to the financial statements. overtime, temporary and contract staff. 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; the conduct, behaviour or practices of Westpac or its staff; 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; information security breaches, including cyberattacks; 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 Westpac’s risk management policies, including our internal processes, systems and employees; the incidence or severity of Westpac insured events; 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 Westpac’s reputation; changes to the value of Westpac’s intangible assets; 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 diversification or innovation, in addition to business expansion and integration of 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 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 Westpac, refer to ‘Risk factors’ under the section ‘Risk and risk management’. When relying on forward-looking statements to make decisions with respect to Westpac, 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. 72 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 73 2 Currency of presentation, exchange rates and certain definitions In this Annual Report, ‘financial statements’ means our audited consolidated balance sheets as at 30 September 2015 and 30 September 2014 and income statements, statements of comprehensive income, changes in equity and cash flows for each of the years ended 30 September 2015, 2014 and 2013 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 2015 is referred to as 2015 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$0.7020, 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 Wednesday, 30 September 2015. The Australian dollar equivalent of New Zealand dollars at 30 September 2015 was A$1.00 = NZ$1.098, 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 2011 to 30 September 2015. Any discrepancies between totals and sums of components in tables contained in this Annual Report are due to rounding. Selected consolidated financial and operating data We have derived the following selected financial information as of, and for the financial years ended, 30 September 2015, 2014, 2013, 2012 and 2011 from our audited consolidated financial statements and related notes. This information should be read together with our audited consolidated financial statements and the accompanying notes Review of Group operations included elsewhere in this Annual Report. Accounting standards Accounting Standards Board (IASB). financial statements. Recent accounting developments Critical accounting estimates 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 (AAS). Compliance with AAS ensures that the financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International The financial statements have been prepared in accordance with the accounting policies described in the Notes to the For a discussion of recent accounting developments refer to Note 1 to the financial statements. Our reported results are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of the income statement and the balance sheet. Note 1(d) includes a description of our critical accounting assumptions and estimates. We have discussed each of the assumptions and estimates with our Board Audit Committee (BAC). The following is a summary of the areas we consider involve our most critical accounting estimates. Fair value of financial instruments Financial instruments classified as held-for-trading (including derivatives) or designated at fair value through income statement 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 2015, the fair value of trading securities and financial assets designated at fair value through profit or loss, loans designated at fair value, available-for-sale securities and life insurance assets was $102,455 million (2014: $102,254 million). The value of other 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 $76,342 million (2014: $88,051 million). The fair value of outstanding derivatives was a net liability of $131 million (2014: $1,865 million net asset). The fair value of financial assets and financial liabilities determined by valuation models that use unobservable market prices was $1,969 million (2014: $1,815 million) and $57 million (2014: $48 million), respectively. The fair value of other 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. 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 credit impairment represent management’s best estimate of the impairment charges 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 amount and timing of 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, current economic conditions, expected default and timing of recovery 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 2015, gross loans to customers were $626,344 million (2014: $583,516 million) and the provision for impairment on loans was $3,028 million (2014: $3,173 million). 74 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 75 Currency of presentation, exchange rates and certain definitions In this Annual Report, ‘financial statements’ means our audited consolidated balance sheets as at 30 September 2015 and 30 September 2014 and income statements, statements of comprehensive income, changes in equity and cash flows for each of the years ended 30 September 2015, 2014 and 2013 together with accompanying notes which are included in this Annual Report. Our financial year ends on 30 September. As used throughout this Annual Report, the financial year ended 30 September 2015 is referred to as 2015 and other financial years are referred to in a corresponding manner. We publish our consolidated financial statements in Australian dollars. In this Annual Report, unless otherwise stated or the context otherwise requires, references to ‘dollars’, ‘dollar amounts’, ‘$’, ‘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$0.7020, 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 Wednesday, 30 September 2015. The Australian dollar equivalent of New Zealand dollars at 30 September 2015 was A$1.00 = NZ$1.098, 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 2011 to 30 September 2015. Any discrepancies between totals and sums of components in tables contained in this Annual Report are due to rounding. 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 2015, 2014, 2013, 2012 and 2011 from our audited consolidated financial statements and related notes. 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 (AAS). Compliance with AAS ensures that the financial statements 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 the Notes 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. Note 1(d) includes a description of our critical accounting assumptions and estimates. We have discussed each of the assumptions and estimates with our Board Audit Committee (BAC). The following is a summary of the areas we consider involve our most critical accounting estimates. Fair value of financial instruments Financial instruments classified as held-for-trading (including derivatives) or designated at fair value through income statement 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 2015, the fair value of trading securities and financial assets designated at fair value through profit or loss, loans designated at fair value, available-for-sale securities and life insurance assets was $102,455 million (2014: $102,254 million). The value of other 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 $76,342 million (2014: $88,051 million). The fair value of outstanding derivatives was a net liability of $131 million (2014: $1,865 million net asset). The fair value of financial assets and financial liabilities determined by valuation models that use unobservable market prices was $1,969 million (2014: $1,815 million) and $57 million (2014: $48 million), respectively. The fair value of other 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. 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 credit impairment represent management’s best estimate of the impairment charges 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 amount and timing of 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, current economic conditions, expected default and timing of recovery 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 2015, gross loans to customers were $626,344 million (2014: $583,516 million) and the provision for impairment on loans was $3,028 million (2014: $3,173 million). 74 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 75 2 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 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. 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 2015, the carrying value of goodwill was $8,809 million (2014: $9,112 million). Refer to Note 26 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 aggregate superannuation deficits across all our plans as at 30 September 2015 was $192 million (2014: $315 million). One plan had a superannuation surplus as at 30 September 2015 of $18 million (2014: $nil). 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. For these circumstances, we hold appropriate provisions. 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. 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. Review of Group operations Income statement review Consolidated income statement1 As at 30 September (in $m unless otherwise indicated) Interest income Interest expense Net interest income Non-interest income impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Net profit for the year Net operating income before operating expenses and Profit attributable to non-controlling interests Net profit attributable to owners of Westpac Banking Corporation Weighted average number of ordinary shares (millions) Basic earnings per ordinary share (cents) Diluted earnings per share (cents)3 Dividends per ordinary share (cents) Special dividends per ordinary share (cents) Dividend payout ratio (%)4 2015 US$2 2015 A$ 2014 A$ 2013 A$ 2012 A$ 2011 A$ 22,671 32,295 32,248 33,009 36,873 38,098 (12,656) (18,028) (18,706) (20,188) (24,371) (26,102) 10,015 5,177 14,267 7,375 13,542 6,395 12,821 5,774 12,502 5,481 11,996 4,917 15,192 (6,650) (529) 8,013 (2,350) 5,663 (39) 5,624 3,124 179.9 175.0 131 - 73.4 21,642 (9,473) (753) 11,416 (3,348) 8,068 (56) 8,012 3,124 256.3 249.3 187 - 73.4 19,937 (8,547) (650) 10,740 (3,115) 7,625 (64) 7,561 3,098 243.7 238.7 182 - 74.7 18,595 (7,976) (847) 9,772 (2,947) 6,825 (74) 6,751 3,087 218.3 213.5 174 20 79.7 17,983 (7,957) (1,212) 8,814 (2,812) 6,002 (66) 5,936 3,043 194.7 189.4 166 - 85.3 16,913 (7,406) (993) 8,514 (1,455) 7,059 (68) 6,991 2,997 233.0 223.6 156 - 67.0 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 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$0.7020, the noon and may differ from results previously reported. buying rate in New York City on 30 September 2015. 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 and adjusted for Treasury shares. Overview of performance – 2015 v 2014 Net profit attributable to owners for 2015 was $8,012 million, an increase of $451 million or 6% compared to 2014. There were a number of significant infrequent items that in aggregate increased net profit. These included the partial sale of the Group’s shareholding in BT Investment Management Limited (BTIM)1 which generated an after tax gain of $665 million, several tax recoveries of $121 million, partially offset by higher technology expenses of $354 million (post-tax) following changes to accounting for technology investment spending and derivative valuation methodologies changes which resulted in an $85 million2 (post-tax) charge. Net interest income increased $725 million or 5% compared to 2014, with total loan growth of 7% and customer deposit growth of 4%. Net interest margin was stable at 2.09%, with lower Treasury income, reduced asset spreads and higher liquidity costs offset by reduced cost of funds from both deposit products and wholesale funding. Non-interest income increased $980 million or 15% compared to 2014 primarily due to the gain associated with the sale of BTIM shares ($1,036 million). Excluding this item, non-interest income reduced $56 million or 1% from lower trading income2 and lower insurance income reflecting higher insurance claims mostly associated with severe weather events. Operating expenses increased $926 million or 11% compared to 2014. This included $505 million related to changes to accounting for technology investment spending. Excluding this item, operating expenses increased $421 million or 5% primarily due to higher investment related costs, including increased software amortisation and foreign currency translation impacts. Impairment charges increased $103 million compared to 2014 mostly due to a reduced benefit from credit quality improvements while direct write-offs were also higher. Overall asset quality improved during the year with stressed exposures as a percentage of total committed exposures reducing from 1.24% to 0.99%. The effective tax rate of 29.3% in 2015 was marginally higher than the 29.0% recorded in 2014. 2015 basic earnings per share were 256.3 cents per share compared to 243.7 cents per share in 2014. Refer to divisional results of BT Financial Group (Australia) for more detail. 1 2 In 2015 changes were made to derivative valuation methodologies, which include the first time adoption of a Funding Valuation Adjustment (FVA) to the fair value of derivatives. The impact of these changes resulted in a $122 million (pre-tax) charge which reduced non-interest income. 76 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 77 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 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. 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 2015, the carrying value of goodwill was $8,809 million (2014: $9,112 million). Refer to Note 26 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 aggregate superannuation deficits across all our plans as at 30 September 2015 was $192 million (2014: $315 million). One plan had a superannuation surplus as at 30 September 2015 of $18 million (2014: $nil). 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. For these circumstances, we hold appropriate provisions. 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. 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. Income statement review Consolidated income statement1 As at 30 September (in $m unless otherwise indicated) Interest income Interest expense Net interest income Non-interest income Review of Group operations 2015 US$2 22,671 (12,656) 10,015 5,177 2015 2014 2013 2012 2011 A$ 32,295 (18,028) 14,267 7,375 A$ 32,248 (18,706) 13,542 6,395 A$ 33,009 (20,188) 12,821 5,774 A$ 36,873 (24,371) 12,502 5,481 A$ 38,098 (26,102) 11,996 4,917 15,192 (6,650) (529) 21,642 (9,473) (753) 19,937 (8,547) (650) 18,595 (7,976) (847) 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 Weighted average number of ordinary shares (millions) Basic earnings per ordinary share (cents) Diluted earnings per share (cents)3 Dividends per ordinary share (cents) Special dividends per ordinary share (cents) Dividend payout ratio (%)4 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 5,936 3,043 194.7 189.4 166 - 6,751 3,087 218.3 213.5 174 20 7,561 3,098 243.7 238.7 182 - 8,012 3,124 256.3 249.3 187 - 5,624 3,124 179.9 175.0 131 - 6,991 2,997 233.0 223.6 156 - 8,814 (2,812) 6,002 (66) 9,772 (2,947) 6,825 (74) 10,740 (3,115) 7,625 (64) 8,514 (1,455) 7,059 (68) 11,416 (3,348) 8,068 (56) 8,013 (2,350) 5,663 (39) 17,983 (7,957) (1,212) 16,913 (7,406) (993) 73.4 73.4 79.7 85.3 74.7 67.0 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$0.7020, the noon buying rate in New York City on 30 September 2015. 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 and adjusted for Treasury shares. Overview of performance – 2015 v 2014 Net profit attributable to owners for 2015 was $8,012 million, an increase of $451 million or 6% compared to 2014. There were a number of significant infrequent items that in aggregate increased net profit. These included the partial sale of the Group’s shareholding in BT Investment Management Limited (BTIM)1 which generated an after tax gain of $665 million, several tax recoveries of $121 million, partially offset by higher technology expenses of $354 million (post-tax) following changes to accounting for technology investment spending and derivative valuation methodologies changes which resulted in an $85 million2 (post-tax) charge. Net interest income increased $725 million or 5% compared to 2014, with total loan growth of 7% and customer deposit growth of 4%. Net interest margin was stable at 2.09%, with lower Treasury income, reduced asset spreads and higher liquidity costs offset by reduced cost of funds from both deposit products and wholesale funding. Non-interest income increased $980 million or 15% compared to 2014 primarily due to the gain associated with the sale of BTIM shares ($1,036 million). Excluding this item, non-interest income reduced $56 million or 1% from lower trading income2 and lower insurance income reflecting higher insurance claims mostly associated with severe weather events. Operating expenses increased $926 million or 11% compared to 2014. This included $505 million related to changes to accounting for technology investment spending. Excluding this item, operating expenses increased $421 million or 5% primarily due to higher investment related costs, including increased software amortisation and foreign currency translation impacts. Impairment charges increased $103 million compared to 2014 mostly due to a reduced benefit from credit quality improvements while direct write-offs were also higher. Overall asset quality improved during the year with stressed exposures as a percentage of total committed exposures reducing from 1.24% to 0.99%. The effective tax rate of 29.3% in 2015 was marginally higher than the 29.0% recorded in 2014. 2015 basic earnings per share were 256.3 cents per share compared to 243.7 cents per share in 2014. 1 2 Refer to divisional results of BT Financial Group (Australia) for more detail. In 2015 changes were made to derivative valuation methodologies, which include the first time adoption of a Funding Valuation Adjustment (FVA) to the fair value of derivatives. The impact of these changes resulted in a $122 million (pre-tax) charge which reduced non-interest income. 76 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 77 2 The Board has determined a final dividend of 94 cents per ordinary share. The full year ordinary dividends of 187 cents represent an increase of 3% over ordinary dividends declared in 2014 and a pay-out ratio of 73.4%. The full year ordinary dividend is fully franked. Income statement review – 2015 v 2014 Net interest income – 2015 v 2014 $m 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 2015 32,295 (18,028) 14,267 878 (153) 725 2014 32,248 (18,706) 13,542 802 (81) 721 2013 33,009 (20,188) 12,821 430 (111) 319 Net interest income increased $725 million or 5% compared to 2014. Key features include: net interest income excluding Treasury and Markets increased $863 million or 7%, reflecting 6% growth in average interest- earning assets and a 2 basis point increase in Group net interest margin excluding Treasury and Markets; and in aggregate, Treasury and Markets net interest income decreased $138 million or 25% due to lower returns in Treasury related to the liquid asset portfolio and balance sheet management activities. Total loans were $43.0 billion or 7% higher than 2014. Excluding foreign exchange translation impacts, total loans increased $38.7 billion or 7%. Key features of total loan growth were: Australian housing loans increased $24.8 billion or 7% at 0.8x system1. New lending volumes increased 13% during the year. Excluding the impact of customer switching to owner occupied lending, investor property lending growth was under 10%2; Australian personal loans and cards increased $1.0 billion or 5%, with growth across auto finance and personal lending; Australian business loans increased $8.6 billion or 6% at 1.2x system1. Growth in institutional lending was mainly in infrastructure and financial services segments. Westpac RBB and St.George increased 4%, with new lending 11% higher; New Zealand lending increased NZ$4.6 billion or 7%. Mortgages grew at 6% (0.8x system3), and business lending increased 8% (in line with system); and other overseas loans increased $3.2 billion or 23%. Excluding the impact of foreign currency translation, other overseas loans increased $0.1 billion. Growth in term lending was offset by lower trade finance volumes. Total customer deposits were $17.9 billion or 4% higher than 2014. Excluding foreign exchange translation impacts, customer deposits increased $14.7 billion or 4%. Key features of total customer deposit growth were: Australian customer deposits increased $17.2 billion or 5%. Household deposits grew at system4 in the year. Growth in financial corporation and non-financial corporation deposits was modest as pricing was adjusted to reflect relative Liquidity Coverage Ratio (LCR) value. Australian non-interest bearing deposits increased from growth in mortgage offset accounts; New Zealand customer deposits increased NZ$2.5 billion or 5%, with a focus on higher quality deposits; and other overseas customer deposits decreased $2.4 billion. Certificates of deposits decreased $3.4 billion or 7%, reflecting decreased short term wholesale funding in this form. Interest spread and margin – 2015 v 2014 $m Group Net interest income Average interest earning assets Average interest bearing liabilities Average net non-interest bearing assets, liabilities and equity Benefit of net non-interest bearing assets, liabilities and equity2 Interest spread1 Net interest margin3 1 Review of Group operations 2015 2014 2013 14,267 683,814 640,628 43,186 1.91% 0.18% 2.09% 13,542 647,362 606,553 40,809 1.90% 0.19% 2.09% 12,821 599,869 560,470 39,399 1.90% 0.24% 2.14% Interest spread is the difference between the average yield on all interest earning assets and the average yield on all interest bearing liabilities. 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 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 2.09% in 2015, remaining flat compared to 2014. Key drivers of the margin were: a 8 basis point decline from asset spreads. The primary driver was increased competition in mortgages. Business, institutional, and unsecured lending spreads were also lower; a 2 basis point decline from Treasury and Markets, reflecting lower returns from the management of the liquids portfolio and balance sheet management in Treasury; a 2 basis point decline from increased holdings of high quality liquid assets to meet the new LCR requirement from 1 January 2015 and the Committed Liquidity Facility (CLF) fee of 15 basis points; and a 1 basis point decline from capital and other due to the impact of lower hedge rates on capital returns in relation to 2014, partially offset by increased capital from the 2015 interim dividend DRP and partial DRP underwrite; offset by a 13 basis point increase from lower funding costs. This comprised: – a 3 basis point increase from lower term funding costs, as pricing for new term senior issuances was lower than – a 10 basis point increase from customer deposit impacts, mostly from improved spreads on term deposits and maturing deals; and savings accounts. Non-interest income – 2015 v 2014 Wealth management and insurance income $m Fees and commissions Trading income Other income Non-interest income 2015 2,942 2,228 964 1,241 7,375 2014 2,926 2,254 1,017 198 6,395 2013 2,723 1,944 1,069 38 5,774 Non-interest income was $7,375 million in 2015, an increase of $980 million or 15% compared to 2014. The increase was primarily driven by the partial sale of an interest in BTIM and higher fees and commissions, partially offset by a decline in wealth management and insurance income and trading income. Fees and commissions income was $2,942 million in 2015, an increase of $16 million or 1% compared to 2014. This increase was primarily due to growth in business lending fees, institutional fees and the full period impact of the Lloyds acquisition. Credit card income was lower mostly reflecting promotional point awards associated with the launch of the Westpac New Zealand Airpoints loyalty program. This decrease was primarily due to: Wealth management and insurance income was $2,228 million in 2015, a decrease of $26 million or 1% compared to 2014. funds management and life insurance revenue grew as a result of the benefit of positive net flows, higher average FUM and FUA balances and growth in net earned premiums of 14% on life insurance. This was offset by the lower BTIM income associated with the partial sale and move to equity accounting1, lower performance fee income, a slightly higher loss ratio and increased claims which is consistent with growth in the book; and general insurance income decreased from higher insurance claims mostly related to severe weather events ($65 million). This was partly offset by gross written premium growth of 6% driven by home and contents sales. 1 2 3 4 Source: Reserve Bank of Australia (RBA). As measured under APRA’s 10% growth rate threshold for investor property lending. Source: Reserve Bank of New Zealand (RBNZ). Source: APRA. 1 Refer to divisional results of BT Financial Group (Australia) for more detail. 78 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 79 Interest spread and margin – 2015 v 2014 Review of Group operations 2013 2014 2015 2.09% 1.90% 0.19% 1.90% 2.09% 0.18% 1.91% 0.24% 2.14% 14,267 683,814 640,628 43,186 13,542 647,362 606,553 40,809 12,821 599,869 560,470 39,399 Interest spread is the difference between the average yield on all interest earning assets and the average yield on all interest bearing liabilities. $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 The Board has determined a final dividend of 94 cents per ordinary share. The full year ordinary dividends of 187 cents represent an increase of 3% over ordinary dividends declared in 2014 and a pay-out ratio of 73.4%. The full year ordinary dividend is fully franked. Income statement review – 2015 v 2014 Net interest income – 2015 v 2014 $m 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 2015 32,295 (18,028) 14,267 878 (153) 725 2014 32,248 (18,706) 13,542 802 (81) 721 2013 33,009 (20,188) 12,821 430 (111) 319 Net interest income increased $725 million or 5% compared to 2014. Key features include: net interest income excluding Treasury and Markets increased $863 million or 7%, reflecting 6% growth in average interest- earning assets and a 2 basis point increase in Group net interest margin excluding Treasury and Markets; and in aggregate, Treasury and Markets net interest income decreased $138 million or 25% due to lower returns in Treasury related to the liquid asset portfolio and balance sheet management activities. Total loans were $43.0 billion or 7% higher than 2014. Excluding foreign exchange translation impacts, total loans increased $38.7 billion or 7%. Key features of total loan growth were: Australian housing loans increased $24.8 billion or 7% at 0.8x system1. New lending volumes increased 13% during the year. Excluding the impact of customer switching to owner occupied lending, investor property lending growth was under 10%2; Australian personal loans and cards increased $1.0 billion or 5%, with growth across auto finance and personal lending; Australian business loans increased $8.6 billion or 6% at 1.2x system1. Growth in institutional lending was mainly in infrastructure and financial services segments. Westpac RBB and St.George increased 4%, with new lending 11% higher; New Zealand lending increased NZ$4.6 billion or 7%. Mortgages grew at 6% (0.8x system3), and business lending increased 8% (in line with system); and other overseas loans increased $3.2 billion or 23%. Excluding the impact of foreign currency translation, other overseas loans increased $0.1 billion. Growth in term lending was offset by lower trade finance volumes. Total customer deposits were $17.9 billion or 4% higher than 2014. Excluding foreign exchange translation impacts, customer deposits increased $14.7 billion or 4%. Key features of total customer deposit growth were: Australian customer deposits increased $17.2 billion or 5%. Household deposits grew at system4 in the year. Growth in financial corporation and non-financial corporation deposits was modest as pricing was adjusted to reflect relative Liquidity Coverage Ratio (LCR) value. Australian non-interest bearing deposits increased from growth in mortgage offset accounts; New Zealand customer deposits increased NZ$2.5 billion or 5%, with a focus on higher quality deposits; and other overseas customer deposits decreased $2.4 billion. Certificates of deposits decreased $3.4 billion or 7%, reflecting decreased short term wholesale funding in this form. 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 2.09% in 2015, remaining flat compared to 2014. Key drivers of the margin were: a 8 basis point decline from asset spreads. The primary driver was increased competition in mortgages. Business, institutional, and unsecured lending spreads were also lower; a 2 basis point decline from Treasury and Markets, reflecting lower returns from the management of the liquids portfolio and balance sheet management in Treasury; a 2 basis point decline from increased holdings of high quality liquid assets to meet the new LCR requirement from 1 January 2015 and the Committed Liquidity Facility (CLF) fee of 15 basis points; and a 1 basis point decline from capital and other due to the impact of lower hedge rates on capital returns in relation to 2014, partially offset by increased capital from the 2015 interim dividend DRP and partial DRP underwrite; offset by a 13 basis point increase from lower funding costs. This comprised: – a 3 basis point increase from lower term funding costs, as pricing for new term senior issuances was lower than maturing deals; and – a 10 basis point increase from customer deposit impacts, mostly from improved spreads on term deposits and savings accounts. Non-interest income – 2015 v 2014 $m Fees and commissions Wealth management and insurance income Trading income Other income Non-interest income 2015 2,942 2,228 964 1,241 7,375 2014 2,926 2,254 1,017 198 6,395 2013 2,723 1,944 1,069 38 5,774 Non-interest income was $7,375 million in 2015, an increase of $980 million or 15% compared to 2014. The increase was primarily driven by the partial sale of an interest in BTIM and higher fees and commissions, partially offset by a decline in wealth management and insurance income and trading income. Fees and commissions income was $2,942 million in 2015, an increase of $16 million or 1% compared to 2014. This increase was primarily due to growth in business lending fees, institutional fees and the full period impact of the Lloyds acquisition. Credit card income was lower mostly reflecting promotional point awards associated with the launch of the Westpac New Zealand Airpoints loyalty program. Wealth management and insurance income was $2,228 million in 2015, a decrease of $26 million or 1% compared to 2014. This decrease was primarily due to: funds management and life insurance revenue grew as a result of the benefit of positive net flows, higher average FUM and FUA balances and growth in net earned premiums of 14% on life insurance. This was offset by the lower BTIM income associated with the partial sale and move to equity accounting1, lower performance fee income, a slightly higher loss ratio and increased claims which is consistent with growth in the book; and general insurance income decreased from higher insurance claims mostly related to severe weather events ($65 million). This was partly offset by gross written premium growth of 6% driven by home and contents sales. Source: Reserve Bank of Australia (RBA). As measured under APRA’s 10% growth rate threshold for investor property lending. Source: Reserve Bank of New Zealand (RBNZ). Source: APRA. 1 2 3 4 78 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 79 1 Refer to divisional results of BT Financial Group (Australia) for more detail. 2 Review of Group operations The improvement in asset quality through 2015, including low levels of new impaired assets, has led to impairment charges relative to average gross loans remaining modest at 12 basis points. While the level of impairment charges was low, they increased over the year from higher collectively assessed provision charges. Balance sheet provisions were broadly maintained, with collective provisions rising $49 million and individually assessed provisions are lower from the work out of existing impaired assets, down $198 million. Economic overlays were little changed ($1 million) over 2015 with a balance of Impairment charges of $753 million were up $103 million when compared to 2014. $388 million at 30 September 2015. Key movements included: lower compared to 2014; and new Individually Assessed Provisions (IAP) reduced by $118 million offset by lower write-backs and recoveries, $111 million total new Collectively Assessed Provisions (CAP) were $110 million higher than 2014. Write-offs increased $91 million due to the reclassification from new IAPs to write-offs for the Lloyds portfolio and growth in the Westpac RBB unsecured portfolio. Other changes in CAPs were a smaller benefit as portfolio quality improved at a slower rate. Income tax expense – 2015 v 2014 $m Income tax expense Tax as a percentage of profit before income tax expense (effective tax rate) 2015 3,348 29.3% 2014 3,115 29.0% 2013 2,947 30.2% Income tax expense was $3,348 million in 2015, an increase of $233 million or 7% compared to 2014. The effective tax rate increased to 29.3% in 2015, from 29.0% in 2014. The increase was largely due to the finalisation of prior period taxation matters in 2014 that was not repeated in 2015. Trading income was $964 million in 2015, a decrease of $53 million or 5% compared to 2014. This decrease reflects the $122 million charge from methodology changes to derivative valuation adjustments1 which more than offset higher Market sales and trading income. The contribution to trading income from Westpac Pacific was also lower following the introduction of exchange rate controls in PNG which reduced foreign exchange income. Other income was $1,241 million in 2015, an increase of $1,043 million or 527% compared to 2014. This increase was primarily driven by the partial sale of an interest in BTIM which delivered a realised gain of $1,036 million and a rise in income from asset sales. Operating expenses – 2015 v 2014 $m Salaries and other staff expenses Equipment and occupancy expenses Technology expenses Other expenses Total operating expenses Total operating expenses to net operating income ratio 1 Prior comparative period has been restated to reflect business structure changes in 2015. 2015 4,704 954 2,288 1,527 9,473 43.8% 20141 4,571 904 1,574 1,498 8,547 42.9% 2013 4,269 873 1,406 1,428 7,976 42.9% Operating expenses increased $926 million or 11% compared to 2014. The key factors of the result were: changes to the accounting approach for technology investment spend resulted in an increase in the technology and IT equipment expenses by $505 million or 32%, with a further $118 million or 1% higher than 2014 due to higher investment related expenses; foreign currency translation contributed $51 million or 1%; partially offset by lower BTIM expenses associated with the partial sale and move to equity accounting2; and delivery of productivity benefits of $239 million or 3%. Salaries and other staff expenses were $4,704 million, an increase of $133 million or 3% compared to 2014. This result reflects the full year impact of annual salary increases, partially offset by a reduction in FTE from productivity initiatives and lower BTIM expenses associated with the partial sale and move to equity accounting. Equipment and occupancy costs were $954 million, an increase of $50 million or 6% compared to 2014. This increase was due to: rental expenses increased as a result of the Group moving from landlord to tenant following the sale of property and relocation to Barangaroo with a fixed rent lease3; and investment in an additional 12 Bank of Melbourne branches. Technology expenses were $2,288 million, an increase of $714 million or 45%. This was driven by: higher technology expenses, IT equipment depreciation and impairment expenses of $623 million or 40%, including the impact of changes to the accounting for technology investments ($505 million); and higher software licensing and volume related costs. Other expenses were $1,527 million, $29 million or 2% higher compared to 2014. This increase was due to: higher non lending losses of $97 million due mainly to higher credit card and digital fraud and the release of $75 million provision in 2014 related to Bell litigation not repeated; and professional service costs associated with higher outsourced operational costs; partially offset by Westpac Bicentennial Foundation grant of $100 million in 2014 not repeated in 2015. Impairment charges – 2015 v 2014 $m Impairment charges Impairment charges to average gross loans (basis points) 2015 753 12 2014 650 12 2013 847 16 1 2 3 In 2015 changes were made to derivative valuation methodologies, which include the first time adoption of a Funding Valuation Adjustment (FVA) to the fair value of derivatives. The impact of these changes resulted in a $122 million (pre-tax) charge which reduced non-interest income. Refer to divisional results of BT Financial Group (Australia) for more detail. Accounting standards require any lease with fixed rent increases to be “Straight-lined”, spreading the fixed annual rental increases evenly over the term of the lease. This adjustment brings forward future increases in cash rent, creating a flat profile over the life of the lease. 80 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 81 Review of Group operations The improvement in asset quality through 2015, including low levels of new impaired assets, has led to impairment charges relative to average gross loans remaining modest at 12 basis points. While the level of impairment charges was low, they increased over the year from higher collectively assessed provision charges. Balance sheet provisions were broadly maintained, with collective provisions rising $49 million and individually assessed provisions are lower from the work out of existing impaired assets, down $198 million. Economic overlays were little changed ($1 million) over 2015 with a balance of $388 million at 30 September 2015. Impairment charges of $753 million were up $103 million when compared to 2014. Key movements included: new Individually Assessed Provisions (IAP) reduced by $118 million offset by lower write-backs and recoveries, $111 million lower compared to 2014; and total new Collectively Assessed Provisions (CAP) were $110 million higher than 2014. Write-offs increased $91 million due to the reclassification from new IAPs to write-offs for the Lloyds portfolio and growth in the Westpac RBB unsecured portfolio. Other changes in CAPs were a smaller benefit as portfolio quality improved at a slower rate. Income tax expense – 2015 v 2014 $m Income tax expense Tax as a percentage of profit before income tax expense (effective tax rate) 2015 3,348 29.3% 2014 3,115 29.0% 2013 2,947 30.2% Operating expenses increased $926 million or 11% compared to 2014. The key factors of the result were: changes to the accounting approach for technology investment spend resulted in an increase in the technology and IT equipment expenses by $505 million or 32%, with a further $118 million or 1% higher than 2014 due to higher investment Income tax expense was $3,348 million in 2015, an increase of $233 million or 7% compared to 2014. The effective tax rate increased to 29.3% in 2015, from 29.0% in 2014. The increase was largely due to the finalisation of prior period taxation matters in 2014 that was not repeated in 2015. 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 81 Trading income was $964 million in 2015, a decrease of $53 million or 5% compared to 2014. This decrease reflects the $122 million charge from methodology changes to derivative valuation adjustments1 which more than offset higher Market sales and trading income. The contribution to trading income from Westpac Pacific was also lower following the introduction of exchange rate controls in PNG which reduced foreign exchange income. Other income was $1,241 million in 2015, an increase of $1,043 million or 527% compared to 2014. This increase was primarily driven by the partial sale of an interest in BTIM which delivered a realised gain of $1,036 million and a rise in income from asset sales. Operating expenses – 2015 v 2014 $m Salaries and other staff expenses Equipment and occupancy expenses Technology expenses Other expenses Total operating expenses Total operating expenses to net operating income ratio 1 Prior comparative period has been restated to reflect business structure changes in 2015. 2015 4,704 954 2,288 1,527 9,473 43.8% 20141 4,571 904 1,574 1,498 8,547 42.9% 2013 4,269 873 1,406 1,428 7,976 42.9% related expenses; foreign currency translation contributed $51 million or 1%; partially offset by lower BTIM expenses associated with the partial sale and move to equity accounting2; and delivery of productivity benefits of $239 million or 3%. Salaries and other staff expenses were $4,704 million, an increase of $133 million or 3% compared to 2014. This result reflects the full year impact of annual salary increases, partially offset by a reduction in FTE from productivity initiatives and lower BTIM expenses associated with the partial sale and move to equity accounting. Equipment and occupancy costs were $954 million, an increase of $50 million or 6% compared to 2014. This increase was due to: rental expenses increased as a result of the Group moving from landlord to tenant following the sale of property and relocation to Barangaroo with a fixed rent lease3; and investment in an additional 12 Bank of Melbourne branches. Technology expenses were $2,288 million, an increase of $714 million or 45%. This was driven by: higher technology expenses, IT equipment depreciation and impairment expenses of $623 million or 40%, including the impact of changes to the accounting for technology investments ($505 million); and higher software licensing and volume related costs. Other expenses were $1,527 million, $29 million or 2% higher compared to 2014. This increase was due to: higher non lending losses of $97 million due mainly to higher credit card and digital fraud and the release of $75 million provision in 2014 related to Bell litigation not repeated; and professional service costs associated with higher outsourced operational costs; partially offset by Westpac Bicentennial Foundation grant of $100 million in 2014 not repeated in 2015. Impairment charges – 2015 v 2014 $m Impairment charges Impairment charges to average gross loans (basis points) 2015 753 12 2014 650 12 2013 847 16 In 2015 changes were made to derivative valuation methodologies, which include the first time adoption of a Funding Valuation Adjustment (FVA) to the fair value of derivatives. The impact of these changes resulted in a $122 million (pre-tax) charge which reduced non-interest income. Refer to divisional results of BT Financial Group (Australia) for more detail. Accounting standards require any lease with fixed rent increases to be “Straight-lined”, spreading the fixed annual rental increases evenly over the term of the lease. This adjustment brings forward future increases in cash rent, creating a flat profile over the life of the lease. 1 2 3 80 2 Balance sheet review Selected consolidated balance sheet data1 The detailed components of the balance sheet are set out in the notes to the financial statements. As at 30 September Cash and balances with central banks Receivables due from other financial institutions Derivative financial instruments Trading securities and financial assets designated at fair value and available-for-sale securities Loans Life insurance assets All other assets Total assets Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance liabilities All other liabilities Total liabilities excluding loan capital Total loan capital3 Total liabilities Net assets Total equity attributable to owners of Westpac Banking Corporation Non-controlling interests 2015 US$m2 10,369 6,727 33,817 57,765 437,568 9,214 14,673 570,133 13,149 333,680 6,477 33,909 120,080 8,114 7,160 522,569 2015 A$m 14,770 9,583 48,173 82,287 623,316 13,125 20,902 812,156 18,731 475,328 9,226 48,304 171,054 11,559 10,199 744,401 2014 A$m 25,760 7,424 41,404 81,933 580,343 11,007 22,971 770,842 18,636 460,822 19,236 39,539 152,251 9,637 10,526 710,647 2013 A$m 11,699 11,210 28,356 79,100 536,164 13,149 21,419 701,097 8,836 424,482 10,302 32,990 144,133 11,938 11,549 644,230 2012 A$m 12,523 10,228 35,489 71,739 514,445 11,907 22,281 678,612 7,564 394,991 9,964 38,935 147,847 10,875 12,634 622,810 2011 A$m 16,258 8,551 49,145 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 9,716 13,840 10,858 9,330 9,537 8,173 532,285 37,848 37,274 574 758,241 53,915 53,098 817 53,915 721,505 49,337 48,456 881 49,337 653,560 47,537 46,674 863 632,347 46,265 44,295 1,970 626,420 43,808 41,826 1,982 Total shareholders’ equity and non-controlling interests Average balances Total assets Loans and other receivables4 Total equity attributable to owners of Westpac Banking Corporation Non-controlling interests 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 798,703 594,200 737,124 559,789 34,651 600 49,361 854 44,350 1,972 42,605 1,964 39,378 1,921 46,477 862 560,690 516,482 688,295 417,128 665,804 501,118 628,428 476,083 37,848 43,808 47,537 46,265 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$0.7020, the noon cash and balances with central banks decreased $11.0 billion or 43% reflecting lower liquid assets held in this form; buying rate in New York City on 30 September 2015. 3 This includes Westpac Capital Notes 3 (Westpac CN3) in 2015, Westpac Capital Notes 2 (Westpac CN2) in 2014, Westpac Capital Notes (Westpac CN), Westpac Convertible Preference Shares (Westpac CPS) and 2004 Trust Preferred Securities (2004 TPS) in 2015, 2014 and 2013; Westpac Stapled Preferred Securities II (SPS II) 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. 4 Other receivables include other assets, cash and balances with central banks. 82 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 83 Summary of consolidated ratios As at 30 September (in $m unless otherwise indicated) Profitability ratios (%) Net interest margin2 Return on average assets3 Return on average ordinary equity4 Return on average total equity5 Average total equity to average total assets Capital ratio (%) Tier 1 ratio6 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 (%) Credit quality ratios Review of Group operations 2015 US$1 2015 A$ 2014 A$ 2013 A$ 2012 A$ 2011 A$ 2.09 1.00 16.2 16.0 6.3 11.4 13.3 179.9 175.0 131 - 73.4 2.09 1.00 16.2 16.0 6.3 11.4 13.3 256.3 249.3 187 - 73.4 2.09 1.03 16.3 16.0 6.4 10.6 12.3 243.7 238.7 182 - 74.7 2.14 0.98 15.2 14.6 6.7 10.7 12.3 218.3 213.5 174 20 79.7 2.16 0.89 13.9 13.3 6.7 10.3 11.7 194.7 189.4 166 - 85.3 2.19 1.11 17.8 16.9 6.6 9.7 11.0 233.0 223.6 156 - 67.0 Impairment charges on loans written off (net of recoveries) 777 1,107 1,302 1,323 1,604 1,867 Impairment charges on loans written off (net of recoveries) to average loans (bps) 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$0.7020, the noon 18 18 23 25 32 38 buying rate in New York City on 30 September 2015. 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 Basel III was not effective in Australia until 1 January 2014. Comparatives are presented on a Basel II basis. For further information, refer to Note 33 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. Balance sheet review Assets – 2015 v 2014 Total assets as at 30 September 2015 were $812.2 billion, an increase of $41.3 billion or 5% compared to 30 September 2014. Significant movements during the year included: receivables due from other financial institutions increased $2.2 billion or 29% due to higher collateral posted with derivative counterparties, mainly related to foreign currency swaps and forwards; trading securities, other financial assets designated at fair value and available-for-sale securities increased $0.4 billion or 0.4%. Holdings of liquid assets for LCR purposes increased $4.7 billion, partially offset by a reduction of $4.3 billion in bonds held for trading purposes; derivative assets increased $6.8 billion or 16% mainly due to foreign currency translation impacts on cross currency swaps and forward contracts, offset by an increase in netting for centrally cleared trades; loans grew $43.0 billion or 7%. Refer to Loan Quality below for further information; and life insurance assets increased by $2.1 billion or 19%, as two additional managed funds were consolidated. The detailed components of the balance sheet are set out in the notes to the financial statements. Balance sheet review Selected consolidated balance sheet data1 As at 30 September Cash and balances with central banks Receivables due from other financial institutions Derivative financial instruments Trading securities and financial assets designated at fair value and available-for-sale securities Loans Life insurance assets All other assets Total assets Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance liabilities All other liabilities Total liabilities excluding loan capital Total loan capital3 Total liabilities Net assets Non-controlling interests Average balances Total assets Loans and other receivables4 Non-controlling interests Total equity attributable to owners of Westpac Banking Corporation Total shareholders’ equity and non-controlling interests Total equity attributable to owners of Westpac Banking Corporation 2015 US$m2 10,369 6,727 33,817 2015 A$m 14,770 9,583 48,173 2014 A$m 25,760 7,424 41,404 2013 A$m 11,699 11,210 28,356 2012 A$m 12,523 10,228 35,489 2011 A$m 16,258 8,551 49,145 57,765 82,287 81,933 79,100 71,739 69,006 437,568 623,316 580,343 536,164 514,445 496,609 9,214 14,673 13,125 20,902 11,007 22,971 13,149 21,419 11,907 22,281 7,916 22,743 570,133 812,156 770,842 701,097 678,612 670,228 13,149 18,731 18,636 8,836 7,564 14,512 333,680 475,328 460,822 424,482 394,991 370,278 6,477 33,909 120,080 8,114 7,160 9,226 48,304 19,236 39,539 10,302 32,990 9,964 38,935 9,803 39,405 171,054 152,251 144,133 147,847 165,931 11,559 10,199 9,637 10,526 11,938 11,549 10,875 12,634 7,002 11,316 522,569 744,401 710,647 644,230 622,810 618,247 9,716 13,840 10,858 9,330 9,537 8,173 532,285 758,241 721,505 653,560 632,347 626,420 37,848 37,274 574 53,915 53,098 817 49,337 48,456 881 47,537 46,674 863 37,848 53,915 49,337 47,537 46,265 44,295 1,970 46,265 43,808 41,826 1,982 43,808 560,690 417,128 798,703 594,200 737,124 559,789 688,295 665,804 628,428 516,482 501,118 476,083 34,651 49,361 46,477 600 854 862 44,350 1,972 42,605 1,964 39,378 1,921 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 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$0.7020, the noon and may differ from results previously reported. buying rate in New York City on 30 September 2015. 3 This includes Westpac Capital Notes 3 (Westpac CN3) in 2015, Westpac Capital Notes 2 (Westpac CN2) in 2014, Westpac Capital Notes (Westpac CN), Westpac Convertible Preference Shares (Westpac CPS) and 2004 Trust Preferred Securities (2004 TPS) in 2015, 2014 and 2013; Westpac Stapled Preferred Securities II (SPS II) 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. 4 Other receivables include other assets, cash and balances with central banks. Summary of consolidated ratios As at 30 September (in $m 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 ratio6 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 (%) Credit quality ratios Impairment charges on loans written off (net of recoveries) Review of Group operations 2015 US$1 2015 A$ 2014 A$ 2013 A$ 2012 A$ 2011 A$ 2.09 1.00 16.2 16.0 6.3 11.4 13.3 179.9 175.0 131 - 73.4 2.09 1.00 16.2 16.0 6.3 11.4 13.3 256.3 249.3 187 - 73.4 2.09 1.03 16.3 16.0 6.4 10.6 12.3 243.7 238.7 182 - 74.7 2.14 0.98 15.2 14.6 6.7 10.7 12.3 218.3 213.5 174 20 79.7 2.16 0.89 13.9 13.3 6.7 10.3 11.7 194.7 189.4 166 - 85.3 2.19 1.11 17.8 16.9 6.6 9.7 11.0 233.0 223.6 156 - 67.0 777 1,107 1,302 1,323 1,604 1,867 Impairment charges on loans written off (net of recoveries) to average loans (bps) 38 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$0.7020, the noon 18 25 18 23 32 buying rate in New York City on 30 September 2015. 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 Basel III was not effective in Australia until 1 January 2014. Comparatives are presented on a Basel II basis. For further information, refer to Note 33 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. Balance sheet review Assets – 2015 v 2014 Total assets as at 30 September 2015 were $812.2 billion, an increase of $41.3 billion or 5% compared to 30 September 2014. Significant movements during the year included: cash and balances with central banks decreased $11.0 billion or 43% reflecting lower liquid assets held in this form; receivables due from other financial institutions increased $2.2 billion or 29% due to higher collateral posted with derivative counterparties, mainly related to foreign currency swaps and forwards; trading securities, other financial assets designated at fair value and available-for-sale securities increased $0.4 billion or 0.4%. Holdings of liquid assets for LCR purposes increased $4.7 billion, partially offset by a reduction of $4.3 billion in bonds held for trading purposes; derivative assets increased $6.8 billion or 16% mainly due to foreign currency translation impacts on cross currency swaps and forward contracts, offset by an increase in netting for centrally cleared trades; loans grew $43.0 billion or 7%. Refer to Loan Quality below for further information; and life insurance assets increased by $2.1 billion or 19%, as two additional managed funds were consolidated. 82 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 83 2 Liabilities and equity – 2015 v 2014 Total liabilities as at 30 September 2015 were $758.2 billion, an increase of $36.7 billion or 5% compared to 30 September 2014. Significant movements during the year included: deposits and other borrowings increased $14.5 billion or 3%; Australian deposits increased $17.2 billion, New Zealand deposit increased $3.1 billion, other overseas deposits decreased $2.4 billion and certificates of deposits decreased $3.4 billion; other financial liabilities at fair value through the income statement decreased $10.0 billion or 52% due to reduced funding of securities through repurchase agreements; derivative liabilities increased $8.8 billion or 22% mainly due to foreign currency translation impacts on cross currency swaps and forward contracts, offset by an increase in netting for centrally cleared trades; debt issues increased $18.8 billion or 12% ($8 billion or 5% increase excluding foreign currency translation impacts) reflecting additional long term and short term issuances; life insurance liabilities increased by $1.9 billion or 20%, as two additional managed funds were consolidated; and loan capital increased $3.0 billion or 27% reflecting the Westpac Capital Notes 3 (Additional Tier 1 capital) issuance of $1.3 billion, subordinated debt issuances of $1.0 billion and foreign currency translation impacts. Equity increased $4.6 billion or 9% reflecting retained profits less dividends paid, profit on the partial sale of an interest in BTIM and shares issued under both the 2014 final DRP and 2015 interim DRP and partial underwrite. Loan quality 2015 v 2014 $m 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 2015 2014 2013 626,344 583,516 539,806 526,378 62,508 15,906 604,792 492,670 58,428 13,125 564,223 467,835 50,112 8,807 526,754 Total gross loans represented 77% of the total assets of the Group as at 30 September 2015, compared to 76% in 2014. Australia and New Zealand average gross loans were $588.9 billion in 2015, an increase of $37.8 billion or 7% from $551.1 billion in 2014. This increase was primarily due to growth in Australian housing lending and business lending. Other overseas average loans were $15.9 billion in 2015, an increase of $2.8 billion or 21% from $13.1 billion in 2014. This was primarily due to growth in term lending. Approximately 14.0% of the loans at 30 September 2015 mature within one year and 23.1% mature between one year and five years. Retail lending comprises the majority of the loan portfolio maturing after five years. $m Impaired loans Non-performing loans1: Impairment provisions Restructured loans: Impairment provisions Gross Net Gross Net Gross Net Impairment provisions Net impaired loans Overdrafts, personal loans and revolving credit greater than 90 days past due: 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 Review of Group operations As at 30 September 2015 2014 2013 2012 2011 3,249 (1,363) 1,886 4,034 (1,463) 2,571 4,287 (1,487) 2,800 1,593 (689) 904 39 (16) 23 263 (172) 91 1,018 669 2,663 3,332 2,030 (862) 1,168 93 (44) 49 217 (141) 76 1,293 867 2,614 3,481 156 (56) 100 195 (135) 60 2,046 1,364 2,585 3,949 46.3% 0.30% 0.53% 44.8% 0.40% 0.60% 43.2% 0.67% 0.73% 175.8% 148.8% 109.7% 1.2% 1.3% 1.4% 153 (44) 109 199 (134) 65 2,745 1,470 2,771 4,241 37.4% 0.85% 0.82% 96.7% 1.6% 129 (29) 100 200 (147) 53 2,953 1,461 2,953 4,414 36.0% 0.92% 0.88% 95.6% 1.7% 1 Non-performing loans are loans with an impaired internal risk grade, excluding restructured assets. 2 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 $208 million as at 30 September 2015 (2014: $180 million, 2013: $190 million, 2012: $171 million, 2011: $202 million). This sum is compared to the total gross impaired loans to determine this ratio. The quality of our loan portfolio improved during 2015, with total impaired loans as a percentage of total gross loans of 0.30% at 30 September 2015, a decrease of 0.10% from 0.40% at 30 September 2014. At 30 September 2015, we had 3 impaired counterparties with exposure greater than $50 million, collectively accounting for 15% of total impaired loans. This compares to 5 impaired counterparties with exposure greater than $50 million in 2014 accounting for 22% of total impaired loans. There were 9 impaired exposures at 30 September 2015 that were less than $50 million and greater than $20 million (2014: 9 impaired exposures). At 30 September 2015, 77% of our exposure was to either investment grade or secured consumer mortgage segment (2014: 77%, 2013: 77%, 2012: 76%) and 95% of our exposure as at 30 September 2015 was in Australia, New Zealand and the Pacific region (2014: 95%, 2013: 97%, 2012: 97%). We believe that Westpac remains appropriately provisioned with total impairment provisions for impaired loans to total impaired loans coverage at 46.3% at 30 September 2015 compared to 44.8% at 30 September 2014. Total provisions for impairment on loans and credit commitments to total impaired loans represented 175.8% of total impaired loans as at 30 September 2015, up from 148.8% at 30 September 2014. Total provisions for impairments on loans and credit commitments to total loans was 0.53% at 30 September 2015, down from 0.60% at 30 September 2014 (2013: 0.73%). Consumer mortgage loans 90 days past due at 30 September 2015 were 0.42% of outstandings, down from 0.45% of outstandings at 30 September 2014 (2013: 0.51%). Other consumer loan delinquencies (including credit card and personal loan products) were 1.07% of outstandings as at 30 September 2015, an increase of 8 basis points from 0.99% of outstandings as at 30 September 2014 (2013: 1.04%). Potential problem loans as at 30 September 2015 amounted to $923 million, a decrease of 35% from $1,421 million at 30 September 2014. 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 84 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 85 Liabilities and equity – 2015 v 2014 Total liabilities as at 30 September 2015 were $758.2 billion, an increase of $36.7 billion or 5% compared to 30 September 2014. Significant movements during the year included: deposits and other borrowings increased $14.5 billion or 3%; Australian deposits increased $17.2 billion, New Zealand deposit increased $3.1 billion, other overseas deposits decreased $2.4 billion and certificates of deposits other financial liabilities at fair value through the income statement decreased $10.0 billion or 52% due to reduced funding of decreased $3.4 billion; securities through repurchase agreements; derivative liabilities increased $8.8 billion or 22% mainly due to foreign currency translation impacts on cross currency swaps and forward contracts, offset by an increase in netting for centrally cleared trades; debt issues increased $18.8 billion or 12% ($8 billion or 5% increase excluding foreign currency translation impacts) reflecting additional long term and short term issuances; life insurance liabilities increased by $1.9 billion or 20%, as two additional managed funds were consolidated; and loan capital increased $3.0 billion or 27% reflecting the Westpac Capital Notes 3 (Additional Tier 1 capital) issuance of $1.3 billion, subordinated debt issuances of $1.0 billion and foreign currency translation impacts. Equity increased $4.6 billion or 9% reflecting retained profits less dividends paid, profit on the partial sale of an interest in BTIM and shares issued under both the 2014 final DRP and 2015 interim DRP and partial underwrite. Loan quality 2015 v 2014 $m Total gross loans1 Average gross loans Australia New Zealand Other overseas As at 30 September 2015 2014 2013 626,344 583,516 539,806 526,378 62,508 15,906 604,792 492,670 58,428 13,125 564,223 467,835 50,112 8,807 526,754 Total average gross loans 1 Gross loans are stated before related provisions for impairment. Total gross loans represented 77% of the total assets of the Group as at 30 September 2015, compared to 76% in 2014. Australia and New Zealand average gross loans were $588.9 billion in 2015, an increase of $37.8 billion or 7% from $551.1 billion in 2014. This increase was primarily due to growth in Australian housing lending and business lending. Other overseas average loans were $15.9 billion in 2015, an increase of $2.8 billion or 21% from $13.1 billion in 2014. This was primarily due to growth in term lending. Approximately 14.0% of the loans at 30 September 2015 mature within one year and 23.1% mature between one year and five years. Retail lending comprises the majority of the loan portfolio maturing after five years. Review of Group operations As at 30 September 2015 2014 2013 2012 2011 3,249 (1,363) 1,886 4,034 (1,463) 2,571 4,287 (1,487) 2,800 $m 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 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 1,593 (689) 904 39 (16) 23 263 (172) 91 1,018 669 2,663 3,332 2,030 (862) 1,168 93 (44) 49 217 (141) 76 1,293 867 2,614 3,481 156 (56) 100 195 (135) 60 2,046 1,364 2,585 3,949 46.3% 0.30% 0.53% 44.8% 0.40% 0.60% 43.2% 0.67% 0.73% 153 (44) 109 199 (134) 65 2,745 1,470 2,771 4,241 37.4% 0.85% 0.82% 96.7% 1.6% 129 (29) 100 200 (147) 53 2,953 1,461 2,953 4,414 36.0% 0.92% 0.88% 95.6% 1.7% 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. 2 175.8% 1.2% 148.8% 1.3% 109.7% 1.4% 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 $208 million as at 30 September 2015 (2014: $180 million, 2013: $190 million, 2012: $171 million, 2011: $202 million). This sum is compared to the total gross impaired loans to determine this ratio. The quality of our loan portfolio improved during 2015, with total impaired loans as a percentage of total gross loans of 0.30% at 30 September 2015, a decrease of 0.10% from 0.40% at 30 September 2014. At 30 September 2015, we had 3 impaired counterparties with exposure greater than $50 million, collectively accounting for 15% of total impaired loans. This compares to 5 impaired counterparties with exposure greater than $50 million in 2014 accounting for 22% of total impaired loans. There were 9 impaired exposures at 30 September 2015 that were less than $50 million and greater than $20 million (2014: 9 impaired exposures). At 30 September 2015, 77% of our exposure was to either investment grade or secured consumer mortgage segment (2014: 77%, 2013: 77%, 2012: 76%) and 95% of our exposure as at 30 September 2015 was in Australia, New Zealand and the Pacific region (2014: 95%, 2013: 97%, 2012: 97%). We believe that Westpac remains appropriately provisioned with total impairment provisions for impaired loans to total impaired loans coverage at 46.3% at 30 September 2015 compared to 44.8% at 30 September 2014. Total provisions for impairment on loans and credit commitments to total impaired loans represented 175.8% of total impaired loans as at 30 September 2015, up from 148.8% at 30 September 2014. Total provisions for impairments on loans and credit commitments to total loans was 0.53% at 30 September 2015, down from 0.60% at 30 September 2014 (2013: 0.73%). Consumer mortgage loans 90 days past due at 30 September 2015 were 0.42% of outstandings, down from 0.45% of outstandings at 30 September 2014 (2013: 0.51%). Other consumer loan delinquencies (including credit card and personal loan products) were 1.07% of outstandings as at 30 September 2015, an increase of 8 basis points from 0.99% of outstandings as at 30 September 2014 (2013: 1.04%). Potential problem loans as at 30 September 2015 amounted to $923 million, a decrease of 35% from $1,421 million at 30 September 2014. 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 84 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 85 2 Westpac’s regulatory capital ratios as at 30 September are summarised in the table below: Review of Group operations $m 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 Market risk Operational risk Other assets Interest rate risk in the banking book 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 2015 51,972 (17,903) 34,069 6,729 40,798 6,942 (206) 6,736 47,534 310,342 10,074 31,010 2,951 4,203 9.5% 1.9% 11.4% 1.9% 13.3% 2014 47,137 (17,413) 29,724 5,273 34,997 5,902 (198) 5,704 40,701 281,459 8,975 29,340 7,316 4,297 9.0% 1.6% 10.6% 1.7% 12.3% 358,580 331,387 Refer to ‘Significant developments’ in Section 1 for a discussion on future regulatory developments that may impact upon capital requirements. 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 for 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. 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 and that of other financial institutions. 86 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 87 problem loans are identified using established credit frameworks and policies, which include the ongoing monitoring of facilities Westpac’s regulatory capital ratios as at 30 September are summarised in the table below: Review of Group operations $m 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 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 2015 51,972 (17,903) 34,069 6,729 40,798 6,942 (206) 6,736 47,534 310,342 10,074 31,010 2,951 4,203 358,580 9.5% 1.9% 11.4% 1.9% 13.3% 2014 47,137 (17,413) 29,724 5,273 34,997 5,902 (198) 5,704 40,701 281,459 8,975 29,340 7,316 4,297 331,387 9.0% 1.6% 10.6% 1.7% 12.3% Refer to ‘Significant developments’ in Section 1 for a discussion on future regulatory developments that may impact upon capital requirements. 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 for 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. 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 and that of other financial institutions. 86 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 87 2 Divisional performance Divisional performance – 2015 v 2014 In 2015 our operations comprised five primary customer-facing business divisions: Westpac Retail & Business Banking, which we refer to as Westpac RBB; St.George Banking Group, which we refer to as St.George; BT Financial Group (Australia), which we refer to as BTFG; Westpac Institutional Bank, which we refer to as WIB; and Westpac New Zealand. Although Westpac announced in June 2015 that it would implement a new organisational structure for its Australian retail and business banking operations, up to 30 September 2015 the accounting and financial performance continued to be reported (both internally and externally) on the basis of the existing structure. From 1 October 2015, Westpac will report under the new structure, comprising the following five primary customer-facing business divisions: Consumer Bank: responsible for all Australian consumer relationships across all brands; Commercial & Business Bank: responsible for all Australian business and commercial consumer relationships across all brands; BT Financial Group: the Group's wealth management, insurance and private banking businesses; Westpac Institutional Bank: responsible for the relationship with institutional and corporate customers, along with the Group's over time; International operations including Asia and the Pacific; and Westpac New Zealand: responsible for all customer segments in New Zealand. Other divisions in the Group include Customer & Business Services, Treasury, Group Technology and Core Support. determining income; 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 financial performance, including divisional results, Westpac 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 AAS. To calculate cash earnings, the specific adjustments to the net profit attributable to owners of Westpac Banking Corporation include both cash and non-cash items and are outlined below. Cash earnings is viewed as a measure of the level of profit that is generated by ongoing operations and is therefore available for distribution 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. A reconciliation of cash earnings to net profit attributable to owners of Westpac Banking Corporation for each business division is set out in Note 2 to the financial statements. 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 consistent manner; shares and economic hedging impacts; and accounting reclassifications between individual line items that do not impact statutory results. 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 cash earnings adjustments to the reported result: partial sale of BTIM – During 2015 the Group recognised a significant gain following the partial sale and deconsolidation of the Group’s shareholding in BTIM. This gain has been treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations; capitalised technology cost balances – Following changes to the Group’s technology and digital strategy, rapid changes in technology and evolving regulatory requirements, a number of accounting changes have been introduced, including moving to an accelerated amortisation methodology for most existing assets with a useful life of greater than 3 years, writing off the capitalised cost of regulatory program assets where the regulatory requirements have changed and directly expensing more project costs. The expense recognised this year to reduce the carrying value of impacted assets has been treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations; amortisation of intangible assets – The merger with St.George, the acquisition of J O Hambro Capital Management (JOHCM) and the acquisition of Lloyds resulted in the recognition of identifiable intangible assets. The commencement of equity accounting for BTIM also resulted in the recognition of notional identifiable intangible assets within the investments in associate’s carrying value. The intangible assets recognised relate to core deposits, customer relationships, management contracts and distribution relationships. These intangible items are amortised over their useful life, ranging between four and Divisional performance twenty years. The amortisation of these 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; acquisition, transaction and integration expenses – Costs associated with the acquisition of Lloyds have been treated as a cash earnings adjustment as they do not reflect the earnings expected from the acquired businesses following the integration period; Lloyds tax adjustments – Tax adjustments arising from the acquisition of Lloyds have been treated as a cash earnings adjustment in line with our treatment of Lloyds acquisition and integration costs; fair value on economic hedges (which do not qualify for hedge accounting under AAS) comprise: – 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 they may create a material timing difference on reported results but do not affect the Group’s cash earnings over the life of the hedge; and – the unrealised fair value (gain)/loss on hedges of accrual accounted term funding transactions are reversed in deriving cash earnings as they may create a material timing difference on reported results but do not affect the Group’s cash earnings over the life of the hedge. 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 Treasury shares – Under AAS, Westpac shares held by the Group in the managed funds and life businesses are deemed to be Treasury shares and the results of holding these shares are not permitted to be recognised as income in the reported 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 buyback of Government guaranteed debt – The Group has 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 reported result, the cost incurred was recognised at the time of the buyback. In cash earnings, the cost incurred was 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 reported results and Westpac Bicentennial Foundation grant – During 2014, the Group provided a grant to establish the Westpac Bicentennial Foundation. The grant was treated as a cash earnings adjustment due to its size and because it does not reflect ongoing cash earnings; operations; prior period tax provisions – During 2011, the Group raised provisions for certain tax positions for transactions previously undertaken by the Group. A number of these matters have now been resolved, resulting in a release of the provisions which were no longer required. As the provisions raised were treated as a cash earnings adjustment, the release was treated in a Bell litigation provision – During 2012, the Group recognised additional provisions in respect of the long running Bell litigation. This was treated as a cash earnings adjustment at the time due to its size, historical nature and because it did not reflect ongoing operations. In 2014, the Bell litigation was settled and the release of provisions no longer required was treated as a cash earnings adjustment; 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; and accounting reclassifications between individual line items that do not impact reported results comprise: – policyholder tax recoveries – Income and tax amounts that are grossed up to comply with the AAS accounting standard covering Life Insurance Business (policyholder tax recoveries) are reversed in deriving income and taxation expense on a cash earnings basis; and earnings basis. presenting this information. – operating leases – Under AAS rental income on operating leases is presented gross of the depreciation of the assets subject to the lease. These amounts are offset in deriving non-interest income and operating expenses on a cash The guidance provided in Australian Securities and Investments Commission Regulatory Guide 230 has been followed when 88 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 89 Divisional performance Divisional performance – 2015 v 2014 In 2015 our operations comprised five primary customer-facing business divisions: Westpac Retail & Business Banking, which we refer to as Westpac RBB; St.George Banking Group, which we refer to as St.George; BT Financial Group (Australia), which we refer to as BTFG; Westpac Institutional Bank, which we refer to as WIB; and Westpac New Zealand. Although Westpac announced in June 2015 that it would implement a new organisational structure for its Australian retail and business banking operations, up to 30 September 2015 the accounting and financial performance continued to be reported (both internally and externally) on the basis of the existing structure. From 1 October 2015, Westpac will report under the new structure, comprising the following five primary customer-facing business divisions: Consumer Bank: responsible for all Australian consumer relationships across all brands; Commercial & Business Bank: responsible for all Australian business and commercial consumer relationships across all brands; BT Financial Group: the Group's wealth management, insurance and private banking businesses; Westpac Institutional Bank: responsible for the relationship with institutional and corporate customers, along with the Group's International operations including Asia and the Pacific; and Westpac New Zealand: responsible for all customer segments in New Zealand. Other divisions in the Group include Customer & Business Services, Treasury, Group Technology 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 financial performance, including divisional results, Westpac 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 AAS. To calculate cash earnings, the specific adjustments to the net profit attributable to owners of Westpac Banking Corporation include both cash and non-cash items and are outlined below. Cash earnings is viewed as a measure of the level of profit that is generated by ongoing operations and is therefore available for distribution 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. A reconciliation of cash earnings to net profit attributable to owners of Westpac Banking Corporation for each business division is set out in Note 2 to the financial statements. 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. 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 cash earnings adjustments to the reported result: partial sale of BTIM – During 2015 the Group recognised a significant gain following the partial sale and deconsolidation of the Group’s shareholding in BTIM. This gain has been treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations; capitalised technology cost balances – Following changes to the Group’s technology and digital strategy, rapid changes in technology and evolving regulatory requirements, a number of accounting changes have been introduced, including moving to an accelerated amortisation methodology for most existing assets with a useful life of greater than 3 years, writing off the capitalised cost of regulatory program assets where the regulatory requirements have changed and directly expensing more project costs. The expense recognised this year to reduce the carrying value of impacted assets has been treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations; amortisation of intangible assets – The merger with St.George, the acquisition of J O Hambro Capital Management (JOHCM) and the acquisition of Lloyds resulted in the recognition of identifiable intangible assets. The commencement of equity accounting for BTIM also resulted in the recognition of notional identifiable intangible assets within the investments in associate’s carrying value. The intangible assets recognised relate to core deposits, customer relationships, management contracts and distribution relationships. These intangible items are amortised over their useful life, ranging between four and Divisional performance twenty years. The amortisation of these 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; acquisition, transaction and integration expenses – Costs associated with the acquisition of Lloyds have been treated as a cash earnings adjustment as they do not reflect the earnings expected from the acquired businesses following the integration period; Lloyds tax adjustments – Tax adjustments arising from the acquisition of Lloyds have been treated as a cash earnings adjustment in line with our treatment of Lloyds acquisition and integration costs; fair value on economic hedges (which do not qualify for hedge accounting under AAS) comprise: – 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 they may create a material timing difference on reported results but do not affect the Group’s cash earnings over the life of the hedge; and – the unrealised fair value (gain)/loss on hedges of accrual accounted term funding transactions are reversed in deriving cash earnings as they may create a material timing difference on reported results but do not affect the Group’s cash earnings over the life of the hedge. 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; Treasury shares – Under AAS, Westpac shares held by the Group in the managed funds and life businesses are deemed to be Treasury shares and the results of holding these shares are not permitted to be recognised as income in the reported 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; buyback of Government guaranteed debt – The Group has 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 reported result, the cost incurred was recognised at the time of the buyback. In cash earnings, the cost incurred was 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 reported results and cash earnings; Westpac Bicentennial Foundation grant – During 2014, the Group provided a grant to establish the Westpac Bicentennial Foundation. The grant was treated as a cash earnings adjustment due to its size and because it does not reflect ongoing operations; prior period tax provisions – During 2011, the Group raised provisions for certain tax positions for transactions previously undertaken by the Group. A number of these matters have now been resolved, resulting in a release of the provisions which were no longer required. As the provisions raised were treated as a cash earnings adjustment, the release was treated in a consistent manner; Bell litigation provision – During 2012, the Group recognised additional provisions in respect of the long running Bell litigation. This was treated as a cash earnings adjustment at the time due to its size, historical nature and because it did not reflect ongoing operations. In 2014, the Bell litigation was settled and the release of provisions no longer required was treated as a cash earnings adjustment; 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; and accounting reclassifications between individual line items that do not impact reported results comprise: – policyholder tax recoveries – Income and tax amounts that are grossed up to comply with the AAS accounting standard covering Life Insurance Business (policyholder tax recoveries) are reversed in deriving income and taxation expense on a cash earnings basis; and – operating leases – Under AAS rental income on operating leases is presented gross of the depreciation of the assets subject to the lease. These amounts are offset in deriving non-interest income and operating expenses on a cash earnings basis. The guidance provided in Australian Securities and Investments Commission Regulatory Guide 230 has been followed when presenting this information. 88 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 89 2 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 2015, 2014 and 2013. Refer to Note 2 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 $m Westpac Retail & Business Banking St.George Banking Group BT Financial Group (Australia) Westpac Institutional Bank Westpac New Zealand Other divisions Total Cash Earnings 1 Prior comparative period has been restated to reflect business structure changes in 2015. Total assets by business division $bn 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 2015 2,788 1,688 904 1,286 851 303 7,820 20141 2,583 1,575 900 1,467 790 313 7,628 Years Ended 30 September 2015 291.6 188.1 35.8 123.7 71.5 101.5 812.2 2014 276.6 175.3 31.8 118.9 65.9 102.3 770.8 2013 2,360 1,387 778 1,570 632 336 7,063 2013 261.9 159.7 32.2 97.3 61.5 88.5 701.1 In presenting divisional results on a management reporting basis, internal charges and transfer pricing adjustments are included in the performance of each division reflecting the management structure rather than the legal entity (these results cannot be compared to results for individual legal entities). Where management reporting structures or accounting classifications have changed, financial results for comparative periods 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. Westpac Retail & Business Banking Westpac Retail & Business Banking (Westpac RBB) is responsible for sales and service to consumer, SME, commercial and agribusiness customers (with turnover of up to around $100 million) in Australia under the Westpac brand. Activities are conducted through Westpac RBB’s network of branches, call centres, ATMs, EFTPOS terminals, internet and mobile banking services, business banking centres and via the division’s specialised consumer and business relationship managers. Support is also provided by cash flow, trade finance, transactional banking, financial markets, property finance and wealth specialists. Westpac RBB also works in an integrated way with BTFG and WIB in the sales and service of select financial services products. Much of the associated revenue from these products is retained by the product originators, BTFG and WIB. Divisional performance 2015 6,395 1,457 7,852 (3,397) (471) 3,984 (1,196) 2,788 - 2,788 $bn 173.8 286.0 291.6 2014 5,953 1,441 7,394 (3,266) (436) 3,692 (1,109) 2,583 - 2,583 $bn 162.5 270.7 276.6 2013 5,649 1,359 7,008 (3,153) (485) 3,370 (1,010) 2,360 - 2,360 $bn 149.2 256.4 261.9 Net operating income before operating expenses and impairment charges Net profit attributable to owners of Westpac Banking Corporation Performance of Westpac RBB $m Net interest income Non-interest income Operating expenses Impairment charges Profit before income tax Income tax expense Cash earnings for the year Net cash earnings adjustments Deposits and other borrowings Loans Total assets 2015 v 2014 interest margins: Total operating expenses to net operating income ratio 43.3% 44.2% 45.0% Westpac RBB increased cash earnings $205 million or 8%. Net interest income increased 7% from a 4% rise in average interest-earning assets and a 7 basis point improvement in net the rise in margins was due to improved deposit spreads as term deposit and savings rates were repriced. Margins were also assisted by favourable deposit mix movements, together with lower wholesale funding costs; asset spreads were lower from competition for new lending, across mortgages and business; lending increased $15.3 billion or 6%. Mortgages were the main driver of the increase, rising $13.1 billion or 6%. Business lending increased 4% with SME up 7%, while other lending was up $0.1 billion as growth in personal loans offset a decline in credit card balances; and deposits increased $11.3 billion or 7%, with growth in consumer and business transaction and online account balances partially offset by a decline in term deposits. Mortgage offset accounts continued to grow, up 27%. Non-interest income increased $16 million or 1% with most of the rise due to more consumers and businesses actively managing their foreign exchange risks and an increase in business line fees from growth in business lending. The increases were partly offset by lower credit card income following repricing in 2014. Operating expenses increased 4% with most of the rise related to investment spending, including higher amortisation. Salary and other annual increases were largely offset by productivity savings. There were further improvements in asset quality with total stressed assets falling, and consumer delinquencies declining. Impairment charges were up $35 million from lower write-backs and portfolio growth. ROTE decreased 180 basis points as capital allocated to Westpac RBB increased 16%. The higher capital reflects modelling changes to the amount of capital being applied to mortgages. St.George Banking Group St.George Banking Group (St.George) is responsible for sales and service to consumer, SME and corporate customers (businesses with facilities up to $150 million) in Australia under the St.George, BankSA, Bank of Melbourne and RAMS brands. Activities are conducted through St.George’s network of branches, third party distributors, call centres, ATMs, EFTPOS terminals, internet and mobile banking services, business banking centres and specialised consumer and business relationship managers. Support is provided by cash flow, trade finance, transactional banking, automotive and equipment finance, financial markets, property finance, and wealth specialists. St.George also works in an integrated way with BTFG and WIB in the sales and service of select financial services products. Much of the associated revenue from these products is retained by the product originators, BTFG and WIB. 90 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 91 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 2015, 2014 and 2013. Refer to Note 2 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. Performance of Westpac RBB $m Net interest income Non-interest income Years Ended 30 September 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 2015 v 2014 Westpac RBB increased cash earnings $205 million or 8%. Divisional performance 2015 6,395 1,457 7,852 (3,397) (471) 3,984 (1,196) 2,788 - 2,788 $bn 173.8 286.0 291.6 43.3% 2014 5,953 1,441 7,394 (3,266) (436) 3,692 (1,109) 2,583 - 2,583 $bn 162.5 270.7 276.6 44.2% 2013 5,649 1,359 7,008 (3,153) (485) 3,370 (1,010) 2,360 - 2,360 $bn 149.2 256.4 261.9 45.0% Net interest income increased 7% from a 4% rise in average interest-earning assets and a 7 basis point improvement in net interest margins: the rise in margins was due to improved deposit spreads as term deposit and savings rates were repriced. Margins were also assisted by favourable deposit mix movements, together with lower wholesale funding costs; asset spreads were lower from competition for new lending, across mortgages and business; lending increased $15.3 billion or 6%. Mortgages were the main driver of the increase, rising $13.1 billion or 6%. Business lending increased 4% with SME up 7%, while other lending was up $0.1 billion as growth in personal loans offset a decline in credit card balances; and deposits increased $11.3 billion or 7%, with growth in consumer and business transaction and online account balances partially offset by a decline in term deposits. Mortgage offset accounts continued to grow, up 27%. Non-interest income increased $16 million or 1% with most of the rise due to more consumers and businesses actively managing their foreign exchange risks and an increase in business line fees from growth in business lending. The increases were partly offset by lower credit card income following repricing in 2014. Operating expenses increased 4% with most of the rise related to investment spending, including higher amortisation. Salary and other annual increases were largely offset by productivity savings. There were further improvements in asset quality with total stressed assets falling, and consumer delinquencies declining. Impairment charges were up $35 million from lower write-backs and portfolio growth. ROTE decreased 180 basis points as capital allocated to Westpac RBB increased 16%. The higher capital reflects modelling changes to the amount of capital being applied to mortgages. St.George Banking Group St.George Banking Group (St.George) is responsible for sales and service to consumer, SME and corporate customers (businesses with facilities up to $150 million) in Australia under the St.George, BankSA, Bank of Melbourne and RAMS brands. Activities are conducted through St.George’s network of branches, third party distributors, call centres, ATMs, EFTPOS terminals, internet and mobile banking services, business banking centres and specialised consumer and business relationship managers. Support is provided by cash flow, trade finance, transactional banking, automotive and equipment finance, financial markets, property finance, and wealth specialists. St.George also works in an integrated way with BTFG and WIB in the sales and service of select financial services products. Much of the associated revenue from these products is retained by the product originators, BTFG and WIB. 1 Prior comparative period has been restated to reflect business structure changes in 2015. Cash earnings by business division $m 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 $bn Westpac Retail & Business Banking St.George Banking Group BT Financial Group (Australia) Westpac Institutional Bank Westpac New Zealand Other divisions Total assets 2015 2,788 1,688 904 1,286 851 303 7,820 2015 291.6 188.1 35.8 123.7 71.5 101.5 812.2 20141 2,583 1,575 900 1,467 790 313 7,628 2014 276.6 175.3 31.8 118.9 65.9 102.3 770.8 Years Ended 30 September 2013 2,360 1,387 778 1,570 632 336 7,063 2013 261.9 159.7 32.2 97.3 61.5 88.5 701.1 In presenting divisional results on a management reporting basis, internal charges and transfer pricing adjustments are included in the performance of each division reflecting the management structure rather than the legal entity (these results cannot be compared to results for individual legal entities). Where management reporting structures or accounting classifications have changed, financial results for comparative periods 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. Westpac Retail & Business Banking Westpac Retail & Business Banking (Westpac RBB) is responsible for sales and service to consumer, SME, commercial and agribusiness customers (with turnover of up to around $100 million) in Australia under the Westpac brand. Activities are conducted through Westpac RBB’s network of branches, call centres, ATMs, EFTPOS terminals, internet and mobile banking services, business banking centres and via the division’s specialised consumer and business relationship managers. Support is also provided by cash flow, trade finance, transactional banking, financial markets, property finance and wealth specialists. Westpac RBB also works in an integrated way with BTFG and WIB in the sales and service of select financial services products. Much of the associated revenue from these products is retained by the product originators, BTFG and WIB. 90 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 91 2 Performance of St.George $m 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 2015 3,768 555 4,323 (1,629) (280) 2,414 (726) 1,688 (126) 1,562 $bn 96.2 181.1 188.1 37.7% 2014 3,531 515 4,046 (1,559) (236) 2,251 (676) 1,575 (125) 1,450 $bn 93.5 168.3 175.3 38.5% 2013 3,210 466 3,676 (1,401) (293) 1,982 (595) 1,387 (128) 1,259 $bn 88.6 152.6 159.7 38.1% BTFG’s brands include Advance, Ascalon Capital Managers, Asgard, Licensee Select, BT Select and Securitor, as well as the Advice, Private Banking and Insurance operations of Westpac, St.George, Bank of Melbourne and BankSA. BTIM is 31% owned by the Westpac Group and following the partial sale during 2015 is equity accounted in BTFG’s Funds Management Divisional performance Net operating income before operating expenses and impairment charges (1,304) (1,323) (1,207) Profit attributable to non-controlling interests Cash earnings for the year Net cash earnings adjustments Net profit attributable to owners of Westpac Banking Corporation 2015 v 2014 St.George delivered cash earnings of $1,688 million, up 7%, driven by solid volume growth, well managed net interest margins and the full period impact of Lloyds ($16 million). Net interest income was up $237 million or 7%, supported by a 7% rise in average interest-earning assets with net interest margin steady at 2.29%: margins were unchanged over the year with improved deposit spreads (particularly term deposits) offset by a reduction in Total operating expenses to net operating income ratio asset spreads; lending increased $12.8 billion or 8%: – Mortgages increased $10.6 billion (or 8%). Growth was achieved across all brands and proprietary channels, particularly in Bank of Melbourne which has continued to grow above system in Victoria; – Investor property lending has eased in line with regulatory requirements; – Business lending increased 4% over the period mostly from commercial property and SME; and – Other lending increased 8% from growth in auto loans and credit cards. deposits were up $2.7 billion or 3%, with most of the increase in at call savings and transaction accounts, including mortgage offset accounts. Balance growth was more modest over the year as the division focused on maintaining margins and prioritising growth in high LCR value deposits. This contributed to lower business term deposits. Non-interest income was up $40 million or 8%, with around half of the rise due to an increase in business line fees. Other lending fees were also up including the benefit of the full period impact of the Lloyds acquisition. Operating expenses increased $70 million or 4%, with the full period impact of Lloyds contributing $29 million to the rise. Run cost increases were offset by productivity benefits, with most of the expense increase due to higher investment including: Bank of Melbourne expansion, which added around $32 million to expenses over the year including 12 new branches, increased employee numbers and a rise in depreciation; and roll-out of new branch formats (FreshStart) and the Business Connect model for serving SME customers. Impairment charges were up $44 million or 19% with most of the rise reflecting lower write-backs and higher write-offs. Overall asset quality improved further over the year, with total stressed assets to total committed exposure falling 49 basis points. ROTE decreased 69 basis points as capital allocated to St.George increased 11%. The higher capital reflects modelling changes to the amount of capital being applied to mortgages. BT Financial Group (Australia) BT Financial Group (BTFG) is the wealth management arm of the Westpac Group providing customers with a range of wealth services. BTFG’s funds management operations include the manufacturing and distribution of investment, superannuation, retirement products, platforms including BT Wrap and Asgard, financial advice, private banking, margin lending and broking. BTFG’s insurance covers the manufacturing and distribution of life, general and lenders mortgage insurance. The partial sale of BTIM in June 2015 reduced the Group’s ownership to 31%. In considering the impact of the partial BTIM sale, the contribution to cash earnings of the BTIM shares sold was $24 million in 2015. This contribution was wholly in the Funds Management business. BTIM is now equity accounted with the share of BTIM’s profit recorded in non-interest income, less tax Westpac is required BTFG increased cash earnings by $4 million, with 7% growth in funds management cash earnings more than offset by a 13% decline in insurance cash earnings due to a rise in insurance claims; Funds management cash earnings were up $35 million or 7%, driven by higher FUM and FUA related income and growth in Private Wealth. Average FUM (excluding BTIM) and FUA balances were up 14% and 12% respectively. The spot FUM balance declined 48% with the partial sale of BTIM; insurance cash earnings declined $42 million, or 13% from the impact of higher claims with more severe weather events occurring in 2015 including, three major weather events (Brisbane hail storm, Cyclone Marcia, and a major NSW storm). Catastrophe claims were $65 million higher than 2014. Net earned premiums increased $106 million, with Life Insurance in- force premiums up 13% and a rise in gross written premiums of 6%; and cash earnings from Capital and other increased $11 million, as higher stamp duty costs incurred in 2014 were not repeated. business from July 2015. Performance of BTFG $m Net interest income Non-interest income Operating expenses Impairment (charges)/benefits Profit before income tax Income tax expense Deposits and other borrowings Loans Total assets Funds under management Funds under administration Cash earnings $m Funds management business Insurance Capital and other Total cash earnings to pay. 2015 v 2014 2015 448 2,192 2,640 4 1,340 (404) (32) 904 (23) 881 $bn 23.4 17.2 35.8 46.3 2015 555 282 67 904 2014 406 2,257 2,663 2 1,342 (403) (39) 900 (22) 878 $bn 22.4 15.9 31.8 89.0 2014 520 324 56 900 2013 402 1,930 2,332 (1) 1,124 (328) (18) 778 (22) 756 $bn 20.3 14.6 32.2 76.2 102.7 51.8% 2013 420 273 85 778 121.9 49.4% 112.7 49.7% 92 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 93 Net operating income before operating expenses and impairment charges Performance of St.George $m Net interest income Non-interest income Operating expenses Impairment charges Profit before income tax Income tax expense Cash earnings for the year Net cash earnings adjustments Deposits and other borrowings Loans Total assets 2015 v 2014 Net profit attributable to owners of Westpac Banking Corporation Total operating expenses to net operating income ratio 2015 3,768 555 4,323 (1,629) (280) 2,414 (726) 1,688 (126) 1,562 $bn 96.2 181.1 188.1 37.7% 2014 3,531 515 4,046 (1,559) (236) 2,251 (676) 1,575 (125) 1,450 $bn 93.5 168.3 175.3 38.5% 2013 3,210 466 3,676 (1,401) (293) 1,982 (595) 1,387 (128) 1,259 $bn 88.6 152.6 159.7 38.1% St.George delivered cash earnings of $1,688 million, up 7%, driven by solid volume growth, well managed net interest margins and the full period impact of Lloyds ($16 million). Net interest income was up $237 million or 7%, supported by a 7% rise in average interest-earning assets with net interest margins were unchanged over the year with improved deposit spreads (particularly term deposits) offset by a reduction in margin steady at 2.29%: asset spreads; lending increased $12.8 billion or 8%: – Mortgages increased $10.6 billion (or 8%). Growth was achieved across all brands and proprietary channels, particularly in Bank of Melbourne which has continued to grow above system in Victoria; – Investor property lending has eased in line with regulatory requirements; – Business lending increased 4% over the period mostly from commercial property and SME; and – Other lending increased 8% from growth in auto loans and credit cards. deposits were up $2.7 billion or 3%, with most of the increase in at call savings and transaction accounts, including mortgage offset accounts. Balance growth was more modest over the year as the division focused on maintaining margins and prioritising growth in high LCR value deposits. This contributed to lower business term deposits. Non-interest income was up $40 million or 8%, with around half of the rise due to an increase in business line fees. Other lending fees were also up including the benefit of the full period impact of the Lloyds acquisition. Operating expenses increased $70 million or 4%, with the full period impact of Lloyds contributing $29 million to the rise. Run cost increases were offset by productivity benefits, with most of the expense increase due to higher investment including: Bank of Melbourne expansion, which added around $32 million to expenses over the year including 12 new branches, increased employee numbers and a rise in depreciation; and roll-out of new branch formats (FreshStart) and the Business Connect model for serving SME customers. Impairment charges were up $44 million or 19% with most of the rise reflecting lower write-backs and higher write-offs. Overall asset quality improved further over the year, with total stressed assets to total committed exposure falling 49 basis points. ROTE decreased 69 basis points as capital allocated to St.George increased 11%. The higher capital reflects modelling changes to the amount of capital being applied to mortgages. BT Financial Group (Australia) wealth services. BT Financial Group (BTFG) is the wealth management arm of the Westpac Group providing customers with a range of BTFG’s funds management operations include the manufacturing and distribution of investment, superannuation, retirement products, platforms including BT Wrap and Asgard, financial advice, private banking, margin lending and broking. BTFG’s insurance covers the manufacturing and distribution of life, general and lenders mortgage insurance. BTFG’s brands include Advance, Ascalon Capital Managers, Asgard, Licensee Select, BT Select and Securitor, as well as the Advice, Private Banking and Insurance operations of Westpac, St.George, Bank of Melbourne and BankSA. BTIM is 31% owned by the Westpac Group and following the partial sale during 2015 is equity accounted in BTFG’s Funds Management business from July 2015. Divisional performance Performance of BTFG $m Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment (charges)/benefits 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 Cash earnings $m Funds management business Insurance Capital and other Total cash earnings 2015 448 2,192 2,640 (1,304) 4 1,340 (404) (32) 904 (23) 881 $bn 23.4 17.2 35.8 46.3 121.9 49.4% 2015 555 282 67 904 2014 406 2,257 2,663 (1,323) 2 1,342 (403) (39) 900 (22) 878 $bn 22.4 15.9 31.8 89.0 112.7 49.7% 2014 520 324 56 900 2013 402 1,930 2,332 (1,207) (1) 1,124 (328) (18) 778 (22) 756 $bn 20.3 14.6 32.2 76.2 102.7 51.8% 2013 420 273 85 778 The partial sale of BTIM in June 2015 reduced the Group’s ownership to 31%. In considering the impact of the partial BTIM sale, the contribution to cash earnings of the BTIM shares sold was $24 million in 2015. This contribution was wholly in the Funds Management business. BTIM is now equity accounted with the share of BTIM’s profit recorded in non-interest income, less tax Westpac is required to pay. 2015 v 2014 BTFG increased cash earnings by $4 million, with 7% growth in funds management cash earnings more than offset by a 13% decline in insurance cash earnings due to a rise in insurance claims; Funds management cash earnings were up $35 million or 7%, driven by higher FUM and FUA related income and growth in Private Wealth. Average FUM (excluding BTIM) and FUA balances were up 14% and 12% respectively. The spot FUM balance declined 48% with the partial sale of BTIM; insurance cash earnings declined $42 million, or 13% from the impact of higher claims with more severe weather events occurring in 2015 including, three major weather events (Brisbane hail storm, Cyclone Marcia, and a major NSW storm). Catastrophe claims were $65 million higher than 2014. Net earned premiums increased $106 million, with Life Insurance in- force premiums up 13% and a rise in gross written premiums of 6%; and cash earnings from Capital and other increased $11 million, as higher stamp duty costs incurred in 2014 were not repeated. 92 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 93 2 Funds management business $m Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment (charges)/benefits 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 Total operating expenses to net operating income ratio 2015 402 1,664 2,066 (1,214) 4 856 (269) (32) 555 (23) 532 58.8% 2014 365 1,692 2,057 (1,233) 2 826 (267) (39) 520 (22) 498 59.9% 2013 339 1,426 1,765 (1,127) (1) 637 (199) (18) 420 (22) 398 63.9% Cash earnings increased $35 million or 7%. Net interest income was up 10% from higher lending and deposit volumes and improved margins. Non-interest income decreased $28 million, or 2%: BTIM performance fees were $84 million lower compared to 2014; impacts associated with the partial sale of BTIM and move to equity accounting; partly offset by FUM related revenue excluding BTIM increased $24 million, reflecting positive flows in BT Super for Life (Retail) and Advance; and FUA related revenue increased $27 million, driven by higher net flows on BT Wrap and Asgard platforms. Operating expenses decreased $19 million or 2%, from a $45 million decrease in performance fee related payments in BTIM and the partial sale of BTIM and move to equity accounting. These benefits were partly offset by higher investment related costs associated with compliance programs and the continued development of the Panorama platform. Tax and other non-controlling interests decreased $5 million or 2%, from the partial sale of BTIM and move to equity accounting. Insurance business $m Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses 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 Total operating expenses to net operating income ratio 2015 4 487 491 (89) 402 (120) 282 - 282 18.1% 2014 6 534 540 (77) 463 (139) 324 - 324 14.3% 2013 6 446 452 (60) 392 (119) 273 - 273 13.3% Cash earnings decreased $42 million, or 13% due to higher General Insurance claims from severe weather events, partly offset by increased revenue from net earned premiums. Net operating income decreased $49 million or 9%: general insurance claims were $95 million higher. This was mostly due to the three severe events in 2015 being significantly larger than events experienced in 2014; life insurance net earned premiums increased $77 million, with in-force premiums rising 13%. General Insurance net earned premium revenue increased $45 million with gross written premiums rising 6% from growth in home and contents sales; higher premiums in Life Insurance were partially offset by a rise in claims consistent with the larger portfolio and a higher loss ratio; and Divisional performance Lenders Mortgage Insurance (LMI) income increased from changes to LMI arrangements for mortgages where the LVR ratio Operating expenses increased $12 million or 16%, in line with increased volumes and claims activity. is >90%. Westpac Institutional Bank Westpac Institutional Bank (WIB) delivers a broad range of financial products and services to retail, 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, US, UK and Asia. Net operating income before operating expenses and impairment charges Performance of WIB $m Net interest income Non-interest income Operating expenses Impairment (charges)/benefit Profit before income tax Income tax expense Cash earnings for the year Net cash earnings adjustments Deposits and other borrowings1 Loans Total assets 2015 v 2014 Net profit attributable to owners of Westpac Banking Corporation Total operating expenses to net operating income ratio 1 Refers to total customer deposits in this table and excludes Certificates of Deposit. (1,289) (1,174) (1,086) 2015 1,645 1,458 3,103 39 1,853 (567) 1,286 - 1,286 $bn 77.4 74.4 123.7 41.5% 2014 1,658 1,470 3,128 135 2,089 (622) 1,467 - 1,467 $bn 78.1 66.2 118.9 37.5% 2013 1,646 1,584 3,230 88 2,232 (662) 1,570 - 1,570 $bn 73.7 56.6 97.3 33.6% WIB delivered cash earnings of $1,286 million, down $181 million, or 12%. The lower result was largely due to methodology changes to derivative valuations, which reduced revenue by $122 million, and a $96 million lower impairment benefit. These items reduced cash earnings by $153 million. Net interest income decreased $13 million, or 1%, with a 7% increase in average interest-earning assets offset by a 15 basis point decline in net interest margin: institutional margins continue to be impacted by higher levels of liquidity from global quantitative easing. This has contributed to tightening asset spreads for new lending. Deposits spreads have tightened from competition for high quality LCR deposits. Interest income on capital was also lower; lending increased $8.2 billion or 12%, mainly from growth in Asia, securitisation deals and infrastructure; and deposits were 1% lower with reductions in short term deposit balances offset by an increase in transactional balances as the business sought to move towards deposits that are more efficient for LCR purposes. Non-interest income decreased $12 million. 2015 included a $122 million negative impact from methodology changes to derivative valuations. Excluding this impact, non-interest income was up $110 million reflecting: a 4% rise in markets sales income from improved customer flows. Foreign exchange sales income increased, driven by increased currency volatility encouraging more customers to actively manage their risks. Fixed income sales increased, driven by a number of large project finance transactions; higher trading income, particularly in the first half of the year; Hastings non-interest income increased $54 million; partly offset by a $22 million negative movement in CVA. 94 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 95 Net operating income before operating expenses and impairment charges Funds management business $m Net interest income Non-interest income Operating expenses Impairment (charges)/benefits 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 Total operating expenses to net operating income ratio (1,214) (1,233) (1,127) 2015 402 1,664 2,066 4 856 (269) (32) 555 (23) 532 2014 365 1,692 2,057 2 826 (267) (39) 520 (22) 498 2013 339 1,426 1,765 (1) 637 (199) (18) 420 (22) 398 58.8% 59.9% 63.9% Cash earnings increased $35 million or 7%. Net interest income was up 10% from higher lending and deposit volumes and improved margins. Non-interest income decreased $28 million, or 2%: BTIM performance fees were $84 million lower compared to 2014; impacts associated with the partial sale of BTIM and move to equity accounting; partly offset by FUM related revenue excluding BTIM increased $24 million, reflecting positive flows in BT Super for Life (Retail) and Advance; and FUA related revenue increased $27 million, driven by higher net flows on BT Wrap and Asgard platforms. Operating expenses decreased $19 million or 2%, from a $45 million decrease in performance fee related payments in BTIM and the partial sale of BTIM and move to equity accounting. These benefits were partly offset by higher investment related costs associated with compliance programs and the continued development of the Panorama platform. Tax and other non-controlling interests decreased $5 million or 2%, from the partial sale of BTIM and move to equity accounting. Insurance business $m Net interest income Non-interest income Operating expenses Profit before income tax Income tax expense Cash earnings for the year Net cash earnings adjustments Net operating income before operating expenses and impairment charges Net profit attributable to owners of Westpac Banking Corporation Total operating expenses to net operating income ratio by increased revenue from net earned premiums. Net operating income decreased $49 million or 9%: Cash earnings decreased $42 million, or 13% due to higher General Insurance claims from severe weather events, partly offset general insurance claims were $95 million higher. This was mostly due to the three severe events in 2015 being significantly larger than events experienced in 2014; life insurance net earned premiums increased $77 million, with in-force premiums rising 13%. General Insurance net earned premium revenue increased $45 million with gross written premiums rising 6% from growth in home and contents sales; higher premiums in Life Insurance were partially offset by a rise in claims consistent with the larger portfolio and a higher loss ratio; and Divisional performance Lenders Mortgage Insurance (LMI) income increased from changes to LMI arrangements for mortgages where the LVR ratio is >90%. Operating expenses increased $12 million or 16%, in line with increased volumes and claims activity. Westpac Institutional Bank Westpac Institutional Bank (WIB) delivers a broad range of financial products and services to retail, 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, US, UK and Asia. Performance of WIB $m Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment (charges)/benefit 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 borrowings1 Loans Total assets Total operating expenses to net operating income ratio 1 Refers to total customer deposits in this table and excludes Certificates of Deposit. 2015 1,645 1,458 3,103 (1,289) 39 1,853 (567) 1,286 - 1,286 $bn 77.4 74.4 123.7 41.5% 2014 1,658 1,470 3,128 (1,174) 135 2,089 (622) 1,467 - 1,467 $bn 78.1 66.2 118.9 37.5% 2013 1,646 1,584 3,230 (1,086) 88 2,232 (662) 1,570 - 1,570 $bn 73.7 56.6 97.3 33.6% 2015 4 487 491 (89) 402 (120) 282 - 282 2014 6 534 540 (77) 463 (139) 324 - 324 2013 6 446 452 (60) 392 (119) 273 - 273 2015 v 2014 WIB delivered cash earnings of $1,286 million, down $181 million, or 12%. The lower result was largely due to methodology changes to derivative valuations, which reduced revenue by $122 million, and a $96 million lower impairment benefit. These items reduced cash earnings by $153 million. Net interest income decreased $13 million, or 1%, with a 7% increase in average interest-earning assets offset by a 15 basis point decline in net interest margin: institutional margins continue to be impacted by higher levels of liquidity from global quantitative easing. This has contributed to tightening asset spreads for new lending. Deposits spreads have tightened from competition for high quality LCR deposits. Interest income on capital was also lower; lending increased $8.2 billion or 12%, mainly from growth in Asia, securitisation deals and infrastructure; and deposits were 1% lower with reductions in short term deposit balances offset by an increase in transactional balances as the business sought to move towards deposits that are more efficient for LCR purposes. 18.1% 14.3% 13.3% Non-interest income decreased $12 million. 2015 included a $122 million negative impact from methodology changes to derivative valuations. Excluding this impact, non-interest income was up $110 million reflecting: a 4% rise in markets sales income from improved customer flows. Foreign exchange sales income increased, driven by increased currency volatility encouraging more customers to actively manage their risks. Fixed income sales increased, driven by a number of large project finance transactions; higher trading income, particularly in the first half of the year; Hastings non-interest income increased $54 million; partly offset by a $22 million negative movement in CVA. 94 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 95 2 Operating expenses increased $115 million or 10% from: ongoing investment in Asia; regulatory and compliance costs; and investments in customer systems to drive improved service. Asset quality improved over 2015, although the high level of write backs in 2014 was not repeated. WIB recorded an impairment benefit of $39 million, compared to a $135 million benefit in 2014. ROTE decreased 302 basis points from a 12% reduction in cash earnings and a 5% increase in capital allocated to WIB. The higher capital is in line with growth in total committed exposures. 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 (New Zealand Branch), which is incorporated in Australia. Westpac New Zealand 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 brand while insurance and wealth products are provided under Westpac Life and BT brands, respectively. New Zealand also has its own infrastructure, including technology, operations and treasury. Performance of Westpac New Zealand $m 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 borrowings1 Loans Total assets Funds under management Funds under administration Total operating expenses to net operating income ratio 1 Refers to total customer deposits in this table. 2015 1,590 457 2,047 (832) (44) 1,171 (317) (3) 851 - 851 $bn 47.3 62.8 71.5 5.9 1.8 40.6% 2014 1,455 438 1,893 (776) (24) 1,093 (300) (3) 790 - 790 $bn 44.1 57.7 65.9 4.9 1.5 41.0% 2013 1,281 389 1,670 (697) (97) 876 (241) (3) 632 - 632 $bn 41.4 54.7 61.5 3.9 1.2 41.7% 2015 v 2014 Cash earnings increased $61 million or 8% with net profit before impairments and income tax up 9%. The results of Westpac New Zealand were positively affected by the decline in value of the NZ$ to the A$. Net interest income increased $135 million or 9%, with average interest-earning assets increasing 7% and net interest margin increasing 4 basis points. higher deposit spreads, lower wholesale funding costs and increased Treasury income were partly offset by lower asset spreads from competition and a rise in the proportion of lower spread fixed rate loans. total lending increased $5.1 billion or 9%: – mortgages increased $2.8 billion or 8%, growing at 0.8 times system1, as the division prioritised maintaining margins; and – business lending increased $2.2 billion or 11%, in line with system1, driven by growth across a number of sectors including in agricultural lending, and food manufacturing. deposits increased $3.2 billion, or 7%, with all growth in at call and transaction accounts. Divisional performance Non-interest income increased $19 million or 4% driven by: foreign exchange impacts of $6 million; an increase in gains on asset sales and asset recoveries; increased wealth income with FUM and FUA balances both up 20%; and this was partly offset by reduced cards income primarily in relation to the division’s implementation of the new Air New Zealand Airpoints loyalty program. higher depreciation and software amortisation. Operating expenses increased $56 million or 7%, from annual salary increases and higher investment related costs including Asset quality improved over the year across business and consumer segments. Despite this improvement, impairment charges increased $20 million, as the 2014 charge of $24 million was particularly low and was supported by write-back and recoveries that were not matched in 2015. Other divisions Other divisions comprise: Westpac Pacific Westpac Pacific provides banking services for retail and business customers in the Pacific. Branches, ATMs, telephone banking and internet banking channels are used to deliver business activities in Fiji, Papua New Guinea (PNG), Solomon Islands and Vanuatu. Westpac Pacific’s financial products include personal savings accounts, business transactional accounts, personal and business lending products, business services and a range of international products. Customer & Business Services, which encompasses banking operations, customer contact centres, product, marketing, Customer & Business Services4 compliance, legal and property services. Treasury Treasury, the primary focus of which is 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 Support comprises those functions performed centrally, including finance, risk and human resources. Core Support1 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. Group Technology1 applications development and business integration. Group Technology comprises functions responsible for technology strategy and architecture, infrastructure and operations, 96 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 97 Source: RBNZ. 1 4 Certain costs are allocated to other divisions in the Group. Divisional performance total lending increased $5.1 billion or 9%: – mortgages increased $2.8 billion or 8%, growing at 0.8 times system1, as the division prioritised maintaining margins; and – business lending increased $2.2 billion or 11%, in line with system1, driven by growth across a number of sectors including in agricultural lending, and food manufacturing. deposits increased $3.2 billion, or 7%, with all growth in at call and transaction accounts. Non-interest income increased $19 million or 4% driven by: foreign exchange impacts of $6 million; an increase in gains on asset sales and asset recoveries; increased wealth income with FUM and FUA balances both up 20%; and this was partly offset by reduced cards income primarily in relation to the division’s implementation of the new Air New Zealand Airpoints loyalty program. 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 (New Zealand Branch), which is incorporated Operating expenses increased $56 million or 7%, from annual salary increases and higher investment related costs including higher depreciation and software amortisation. Asset quality improved over the year across business and consumer segments. Despite this improvement, impairment charges increased $20 million, as the 2014 charge of $24 million was particularly low and was supported by write-back and recoveries that were not matched in 2015. Other divisions Other divisions comprise: Westpac Pacific Westpac Pacific provides banking services for retail and business customers in the Pacific. Branches, ATMs, telephone banking and internet banking channels are used to deliver business activities in Fiji, Papua New Guinea (PNG), Solomon Islands and Vanuatu. Westpac Pacific’s financial products include personal savings accounts, business transactional accounts, personal and business lending products, business services and a range of international products. Customer & Business Services4 Customer & Business Services, which encompasses banking operations, customer contact centres, product, marketing, compliance, legal and property services. Treasury Treasury, the primary focus of which is 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. Group Technology1 Group Technology comprises functions responsible for technology strategy and architecture, infrastructure and operations, applications development and business integration. Operating expenses increased $115 million or 10% from: ongoing investment in Asia; regulatory and compliance costs; and investments in customer systems to drive improved service. Asset quality improved over 2015, although the high level of write backs in 2014 was not repeated. WIB recorded an impairment benefit of $39 million, compared to a $135 million benefit in 2014. ROTE decreased 302 basis points from a 12% reduction in cash earnings and a 5% increase in capital allocated to WIB. The higher capital is in line with growth in total committed exposures. Westpac New Zealand is responsible for sales and service of banking, wealth and insurance products for consumers, business Westpac New Zealand and institutional customers in New Zealand. in Australia. Westpac New Zealand 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 brand while insurance and wealth products are provided under Westpac Life and BT brands, respectively. New Zealand also has its own infrastructure, including technology, operations and treasury. Performance of Westpac New Zealand Net operating income before operating expenses and impairment charges $m Net interest income Non-interest income 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 borrowings1 Loans Total assets Funds under management Funds under administration Total operating expenses to net operating income ratio 1 Refers to total customer deposits in this table. 2015 v 2014 2015 1,590 457 2,047 (832) (44) 1,171 (317) (3) 851 - 851 $bn 47.3 62.8 71.5 5.9 1.8 2014 1,455 438 1,893 (776) (24) 1,093 (300) (3) 790 - 790 $bn 44.1 57.7 65.9 4.9 1.5 2013 1,281 389 1,670 (697) (97) 876 (241) (3) 632 - 632 $bn 41.4 54.7 61.5 3.9 1.2 40.6% 41.0% 41.7% Cash earnings increased $61 million or 8% with net profit before impairments and income tax up 9%. The results of Westpac New Zealand were positively affected by the decline in value of the NZ$ to the A$. Net interest income increased $135 million or 9%, with average interest-earning assets increasing 7% and net interest margin increasing 4 basis points. higher deposit spreads, lower wholesale funding costs and increased Treasury income were partly offset by lower asset spreads from competition and a rise in the proportion of lower spread fixed rate loans. 96 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 97 1 4 Source: RBNZ. Certain costs are allocated to other divisions in the Group. 2 Performance of other divisions $m 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 2015 v 2014 Other divisions’ cash earnings were $303 million in 2015, down $10 million. 2015 393 182 575 (184) (1) 390 (64) (23) 303 341 644 2014 493 203 696 (148) (91) 457 (120) (24) 313 80 393 2013 724 193 917 (215) (59) 643 (252) (55) 336 (162) 174 Net operating income before operating expenses and impairment charges reduced $121 million compared with 2014, with a reduction in Treasury income ($114 million decrease) related to lower returns on the liquid asset portfolio and balance sheet management activities. Operating expenses were $36 million higher in 2015 due to increased restructuring costs. Impairment charges were lower in 2015 due to a large increase in central economic overlay provisions experienced in 2014, not repeated in 2015. The effective tax rate was lower in 2015 due to the finalisation of prior period taxation matters. Risk and risk management Risk factors Our business is subject to risks that can adversely impact our financial performance, financial condition and future performance. If any of the following risks occur, our business, prospects, financial performance or financial condition 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 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, the United Kingdom, the United States and Asia. We are also supervised by a number of different regulatory and supervisory authorities which have broad administrative powers 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 US Securities and Exchange Commission (SEC). In the United Kingdom, we are subject to supervision and regulation by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). In Asia, we are subject to supervision and regulation by local authorities, including the Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA). In other jurisdictions in which we operate, including various Pacific countries, 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 is the risk of legal or regulatory sanction, financial or reputational loss, arising from our failure to abide by compliance obligations required of us. In Australia, 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). Other regulators also have the power to investigate, including looking into past conduct. In recent years, there have been significant increases in the nature and scale of regulatory investigations, enforcement actions and the quantum of fines issued by global regulators. The nature of these reviews can be wide ranging and, for example, currently include industry-wide investigations into potential manipulation in financial markets. During the year, Westpac has received notices and requests for information from its regulators. Regulatory investigations, fines, penalties or restrictions or regulator imposed conditions 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, conduct and prudential regulation, anti-bribery and corruption, anti-money laundering and counter-terrorism financing and trade sanctions. 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 standards for the management of liquidity risk. APRA has now incorporated much of the framework into its prudential standards. Further details on the Basel III framework are set out in ‘Significant developments' in Section 1. During the year ended 30 September 2015, 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 new accounting and reporting standards which have been finalised, global OTC derivatives reform and the US Dodd- Frank legislation, including the Volcker Rule promulgated thereunder. The latter 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 non-US banks like Westpac. Other areas of proposed or potential change that could impact us include changes to tax legislation, including franking, regulation relating to remuneration, consumer protection and competition legislation, privacy and data protection, anti- bribery and corruption, anti-money laundering and counter-terrorism financing laws and trade sanctions. In addition, further changes may occur driven by policy, prudential or political factors. In 2013, the Australian Government commissioned a Financial System Inquiry with broad terms of reference. The FSI’s Final Report made 44 recommendations relating to a broad number of matters across the financial sector. On 20 October 2015, the Government announced its final response to the FSI’s recommendations. The Government endorsed the overwhelming majority of the recommendations across the five key areas the FSI considered: Resilience; Superannuation; Innovation; Consumer Outcomes; and the Regulatory System. The Government will establish a number of consultation processes to consider detailed implementation. The final impact of the FSI is difficult to predict but may result in substantial regulatory changes, including changes to capital requirements which could 98 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 99 Performance of other divisions $m Net interest income Non-interest income Operating expenses Impairment charges Profit before income tax Income tax expense Net operating income before operating expenses and impairment charges Profit attributable to non-controlling interests Cash earnings for the year Net cash earnings adjustments Net profit attributable to owners of Westpac Banking Corporation 2015 v 2014 Other divisions’ cash earnings were $303 million in 2015, down $10 million. 2015 393 182 575 (184) (1) 390 (64) (23) 303 341 644 2014 493 203 696 (148) (91) 457 (120) (24) 313 80 393 2013 724 193 917 (215) (59) 643 (252) (55) 336 (162) 174 Net operating income before operating expenses and impairment charges reduced $121 million compared with 2014, with a reduction in Treasury income ($114 million decrease) related to lower returns on the liquid asset portfolio and balance sheet management activities. repeated in 2015. Operating expenses were $36 million higher in 2015 due to increased restructuring costs. Impairment charges were lower in 2015 due to a large increase in central economic overlay provisions experienced in 2014, not The effective tax rate was lower in 2015 due to the finalisation of prior period taxation matters. Risk and risk management Risk factors Our business is subject to risks that can adversely impact our financial performance, financial condition and future performance. If any of the following risks occur, our business, prospects, financial performance or financial condition 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 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, the United Kingdom, the United States and Asia. We are also supervised by a number of different regulatory and supervisory authorities which have broad administrative powers 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 US Securities and Exchange Commission (SEC). In the United Kingdom, we are subject to supervision and regulation by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). In Asia, we are subject to supervision and regulation by local authorities, including the Monetary Authority of Singapore (MAS) and the Hong Kong Monetary Authority (HKMA). In other jurisdictions in which we operate, including various Pacific countries, 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 is the risk of legal or regulatory sanction, financial or reputational loss, arising from our failure to abide by compliance obligations required of us. In Australia, 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). Other regulators also have the power to investigate, including looking into past conduct. In recent years, there have been significant increases in the nature and scale of regulatory investigations, enforcement actions and the quantum of fines issued by global regulators. The nature of these reviews can be wide ranging and, for example, currently include industry-wide investigations into potential manipulation in financial markets. During the year, Westpac has received notices and requests for information from its regulators. Regulatory investigations, fines, penalties or restrictions or regulator imposed conditions 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, conduct and prudential regulation, anti-bribery and corruption, anti-money laundering and counter-terrorism financing and trade sanctions. 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 standards for the management of liquidity risk. APRA has now incorporated much of the framework into its prudential standards. Further details on the Basel III framework are set out in ‘Significant developments' in Section 1. During the year ended 30 September 2015, 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 new accounting and reporting standards which have been finalised, global OTC derivatives reform and the US Dodd- Frank legislation, including the Volcker Rule promulgated thereunder. The latter 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 non-US banks like Westpac. Other areas of proposed or potential change that could impact us include changes to tax legislation, including franking, regulation relating to remuneration, consumer protection and competition legislation, privacy and data protection, anti- bribery and corruption, anti-money laundering and counter-terrorism financing laws and trade sanctions. In addition, further changes may occur driven by policy, prudential or political factors. In 2013, the Australian Government commissioned a Financial System Inquiry with broad terms of reference. The FSI’s Final Report made 44 recommendations relating to a broad number of matters across the financial sector. On 20 October 2015, the Government announced its final response to the FSI’s recommendations. The Government endorsed the overwhelming majority of the recommendations across the five key areas the FSI considered: Resilience; Superannuation; Innovation; Consumer Outcomes; and the Regulatory System. The Government will establish a number of consultation processes to consider detailed implementation. The final impact of the FSI is difficult to predict but may result in substantial regulatory changes, including changes to capital requirements which could 98 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 99 2 have a material impact on our business, prospects, financial performance or financial condition. Further details on the FSI are set out in ‘Significant developments' in Section 1. 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 changes 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 restrictions on the businesses we conduct,(including limiting our ability to provide products and services to certain customers), require us to amend our corporate structure or require us to alter our product or 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 can experience periods of extreme volatility, disruption and decreased liquidity as was demonstrated during the Global Financial Crisis. While there have now been extended periods of stability in these markets, the environment has become more volatile and unpredictable. The main risks we face are 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 2015, approximately 33% of our total funding originated from domestic and international wholesale markets, of this around 61% was sourced outside Australia and New Zealand. effectively to any such event. A shift in investment preferences of businesses and consumers away from bank deposits towards other asset or investment classes could increase our need for funding from other, potentially 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 financial performance, 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 selling liquid securities. 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 ‘Funding and Liquidity risk management’ in this section and in Note 22 to the financial statements. Sovereign risk may destabilise financial markets adversely Sovereign risk is the risk that foreign governments will default on their debt obligations, will be unable to refinance their debts as they fall due, or will nationalise parts of their economy including assets of financial institutions such as Westpac. Risk and risk management 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 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 As outlined above, during the past decade 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. A shock to one of the major global economies could again result in currency and interest rate fluctuations and operational disruptions that negatively impact financial systems. 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, 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 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 also impact our wealth management business. Earnings in our wealth management business are, in part, dependent on asset values because we typically 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 our profitability and financial condition. 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, business and consumer sentiment, levels of employment, interest rates and trade flows in the countries in which we operate. We 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 Australian and New Zealand housing valuations could adversely impact our home lending activities because borrowers with loans in excess of their property value show a higher propensity to default and in the event of defaults our security would be eroded, causing us to incur higher credit losses. The demand for our home lending products may also decline due to buyer concerns about decreases in values. 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 our 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 100 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 101 have a material impact on our business, prospects, financial performance or financial condition. Further details on the FSI are set out in ‘Significant developments' in Section 1. 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 changes 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 restrictions on the businesses we conduct,(including limiting our ability to provide products and services to certain customers), require us to amend our corporate structure or require us to alter our product or 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 can experience periods of extreme volatility, disruption and decreased liquidity as was demonstrated during the Global Financial Crisis. While there have now been extended periods of stability in these markets, the environment has become more volatile and unpredictable. The main risks we face are 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 2015, approximately 33% of our total funding originated from domestic and international wholesale markets, of this around 61% 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 could increase our need for funding from other, potentially 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 financial performance, 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 selling liquid securities. 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 ‘Funding and Liquidity risk management’ in this section and in Note 22 to the financial statements. Sovereign risk may destabilise financial markets adversely Sovereign risk is the risk that foreign governments will default on their debt obligations, will be unable to refinance their debts as they fall due, or will nationalise parts of their economy including assets of financial institutions such as Westpac. Risk and risk management 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 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, during the past decade 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. A shock to one of the major global economies could again result in currency and interest rate 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, 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 also impact our wealth management business. Earnings in our wealth management business are, in part, dependent on asset values because we typically 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 our profitability and financial condition. 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, business and consumer sentiment, levels of employment, interest rates and trade flows in the countries in which we operate. We 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 Australian and New Zealand housing valuations could adversely impact our home lending activities because borrowers with loans in excess of their property value show a higher propensity to default and in the event of defaults our security would be eroded, causing us to incur higher credit losses. The demand for our home lending products may also decline due to buyer concerns about decreases in values. 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 our 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 100 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 101 2 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 the risk of financial loss where a customer or counterparty fails to meet their financial obligations to Westpac. It is a significant risk and arises primarily from our lending and derivatives activities. We establish provisions for credit impairment based on current information. 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 22 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 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. Digital technologies are changing consumer behaviour and the competitive environment. The use of digital channels by customers to conduct their banking continues to rise and emerging competitors are increasingly utilising new technologies and seeking to disrupt existing business models, including in relation to digital payment services. The Group faces competition from established providers of financial services as well as the threat of competition from banking businesses developed by non-financial services companies. 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 or reduce lending. 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 other, potentially less stable or more expensive 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. This 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, such as the risk to interest income from a mismatch between the duration of assets and liabilities that arises in the normal course of business activities. 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 conduct risk Conduct risk is the risk arising from unfair or inappropriate behaviour or practices of the Westpac Group or its staff. We are highly dependent on the conduct of our employees, contractors and external service providers. We could, for example, be adversely affected in the event that an employee, contractor or external service provider engages in unfair or inappropriate conduct. This could include losses from a failure to meet a professional obligation to specific clients, including fiduciary and suitability requirements, or from the nature or design of a product. While we have policies and processes to manage employee, contractor or external service provider misconduct, these policies and processes may not always be effective. We could suffer losses due to operational risks Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It also includes, among other things, technology risk, model risk and outsourcing risk. While we have policies and processes to manage the risk of human error these policies and processes may not always be effective. Risk and risk management We could incur losses from incorrect or fraudulent payments and settlements, particularly real-time payments. 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 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 data and 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 data or 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. Entities within the Group may be involved from time to time in legal proceedings arising from the conduct of their business. The Group’s material contingent liabilities are described in Note 31 to the financial statements. There is a risk that these contingent liabilities may be larger than anticipated or that additional litigation or other contingent liabilities may arise. For a discussion of our risk management procedures, including the management of operational risk, refer to the ‘Risk management’ section. We could suffer information security risks, including cyberattacks 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 and our external service providers. While Westpac has systems in place to detect and respond to cyberattacks, these systems may not always be effective and there can be no assurance that we will not suffer losses from cyberattacks or other information security breaches in the future. Our operations rely on the secure processing, storage and transmission of information on our computer systems and networks, and the systems and networks of external suppliers. Although we implement measures to protect the security, integrity 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, malicious software, external attacks or internal breaches that could have an adverse impact on our confidential information or that of our customers and counterparties. Major banks in other jurisdictions have suffered security breaches from sophisticated cyberattacks. Our external service providers or other parties that facilitate our business activities (e.g. vendors, exchanges, clearing houses, central depositories and financial intermediaries) are also subject to the risk of cyberattacks. Any such security breach could result in the loss of customers and business opportunities, significant disruption to Westpac’s operations, misappropriation of Westpac’s confidential information and/or that of our customers and damage to Westpac’s computers or systems and/or those of our customers. Such a security breach could also result in reputational damage, claims for compensation and regulatory investigations and penalties, which could adversely affect our business, prospects, financial performance, or financial condition. Our risk and exposure to such threats remains heightened because of the evolving nature of technology, Westpac’s prominence within the financial services industry, the prominence of our customers (including government, mining and health) and our plans to continue to improve and expand our internet and mobile banking infrastructure. We continue to seek to strengthen and enhance our cybersecurity systems and investigate or remediate information security vulnerabilities, investing additional resources to endeavour to counter new and emerging threats as they continue to evolve. We could suffer losses due to technology failures The reliability and security of our information and technology infrastructure 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. 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 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 governance or risk management strategies We have implemented risk management strategies and internal controls involving processes and procedures intended to identify, monitor and manage the risks to which we are subject, including liquidity risk, credit risk, market risk (such as interest 102 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 103 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 the risk of financial loss where a customer or counterparty fails to meet their financial obligations to Westpac. It is a significant risk and arises primarily from our lending and derivatives activities. We establish provisions for credit impairment based on current information. 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 22 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 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. Digital technologies are changing consumer behaviour and the competitive environment. The use of digital channels by customers to conduct their banking continues to rise and emerging competitors are increasingly utilising new technologies and seeking to disrupt existing business models, including in relation to digital payment services. The Group faces competition from established providers of financial services as well as the threat of competition from banking businesses developed by non-financial services companies. 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 or reduce lending. 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 other, potentially less stable or more expensive 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. This 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, such as the risk to interest income from a mismatch between the duration of assets and liabilities that arises in the normal course of business activities. 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 conduct risk Conduct risk is the risk arising from unfair or inappropriate behaviour or practices of the Westpac Group or its staff. We are highly dependent on the conduct of our employees, contractors and external service providers. We could, for example, be adversely affected in the event that an employee, contractor or external service provider engages in unfair or inappropriate conduct. This could include losses from a failure to meet a professional obligation to specific clients, including fiduciary and suitability requirements, or from the nature or design of a product. While we have policies and processes to manage employee, contractor or external service provider misconduct, these policies and processes may not always be effective. We could suffer losses due to operational risks Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It also includes, among other things, technology risk, model risk and outsourcing risk. While we have policies and processes to manage the risk of human error these policies and processes may not always be effective. Risk and risk management We could incur losses from incorrect or fraudulent payments and settlements, particularly real-time payments. 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 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 data and 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 data or 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. Entities within the Group may be involved from time to time in legal proceedings arising from the conduct of their business. The Group’s material contingent liabilities are described in Note 31 to the financial statements. There is a risk that these contingent liabilities may be larger than anticipated or that additional litigation or other contingent liabilities may arise. For a discussion of our risk management procedures, including the management of operational risk, refer to the ‘Risk management’ section. We could suffer information security risks, including cyberattacks 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 and our external service providers. While Westpac has systems in place to detect and respond to cyberattacks, these systems may not always be effective and there can be no assurance that we will not suffer losses from cyberattacks or other information security breaches in the future. Our operations rely on the secure processing, storage and transmission of information on our computer systems and networks, and the systems and networks of external suppliers. Although we implement measures to protect the security, integrity 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, malicious software, external attacks or internal breaches that could have an adverse impact on our confidential information or that of our customers and counterparties. Major banks in other jurisdictions have suffered security breaches from sophisticated cyberattacks. Our external service providers or other parties that facilitate our business activities (e.g. vendors, exchanges, clearing houses, central depositories and financial intermediaries) are also subject to the risk of cyberattacks. Any such security breach could result in the loss of customers and business opportunities, significant disruption to Westpac’s operations, misappropriation of Westpac’s confidential information and/or that of our customers and damage to Westpac’s computers or systems and/or those of our customers. Such a security breach could also result in reputational damage, claims for compensation and regulatory investigations and penalties, which could adversely affect our business, prospects, financial performance, or financial condition. Our risk and exposure to such threats remains heightened because of the evolving nature of technology, Westpac’s prominence within the financial services industry, the prominence of our customers (including government, mining and health) and our plans to continue to improve and expand our internet and mobile banking infrastructure. We continue to seek to strengthen and enhance our cybersecurity systems and investigate or remediate information security vulnerabilities, investing additional resources to endeavour to counter new and emerging threats as they continue to evolve. We could suffer losses due to technology failures The reliability and security of our information and technology infrastructure 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. 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 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 governance or risk management strategies We have implemented risk management strategies and internal controls involving processes and procedures intended to identify, monitor and manage the risks to which we are subject, including liquidity risk, credit risk, market risk (such as interest 102 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 103 2 rate, foreign exchange and equity risk), compliance risk, conduct risk, insurance risk, sustainability risk, related entity (contagion) risk and operational risk; all of which may impact the Group’s reputation. 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 governance or 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. 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 our life insurance, general insurance and lenders mortgage insurance businesses, which may adversely affect our business, operations and financial condition. Insurance risk is 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. 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 and contents insurance claim amounts. Further details on environmental risk factors are discussed below. In the lenders mortgage insurance business, insurance risk arises primarily from an unexpected downturn in economic conditions. We could also suffer losses if our reinsurance arrangements are not effective. We could suffer losses due to environmental factors We and our customers operate businesses and hold assets in a diverse range of geographic locations. Any significant environmental change or external event (including fire, storm, flood, earthquake, pandemic or terrorism events) 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. The risk of loss 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. Reputation risk is the risk to earnings or capital arising from negative public opinion resulting from the loss of reputation or public trust and standing. It arises where there are differences between stakeholders’ current and emerging perceptions, beliefs and expectations and our current and planned activities, performance and behaviours. There are various potential sources of reputational damage, including failure to effectively manage risks in accordance with our risk management frameworks, potential conflicts of interest, pricing policies, failure to comply with legal and regulatory requirements, failure to meet our market disclosure obligations, regulatory investigations into past conduct, making inaccurate public statements, environmental, social and ethical issues, engagement and conduct of external suppliers, failure to comply with anti-money laundering and anti-bribery and corruption laws, trade sanctions and counter-terrorism finance legislation or privacy laws, litigation, failure of information security systems, improper sales and trading practices, failure to comply with personnel and supplier policies, improper conduct of companies in which we hold strategic investments, technology failures and security breaches. Our reputation could also be adversely affected by the actions of the financial services industry in general or from the actions of customers, suppliers and other counterparties. Failure, or perceived failure, to appropriately address issues that could or do give rise to reputational risk could also impact the regulatory change agenda, give rise to additional legal risk, subject us to regulatory investigations, regulatory enforcement actions, fines and penalties, class actions 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. Risk and risk management We could suffer losses due to impairment of 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 2015, Westpac carried goodwill principally related to its investments in Australia, other 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 or wherever an indicator of impairment exists. For this purpose Westpac uses a discounted cash flow calculation. Changes in the methodology or 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 or on indication of impairment. 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, an impairment will be recorded, adversely impacting the Group’s financial condition. The estimates and assumptions used in assessing the useful life of an asset can be affected by a range of factors including changes in strategy and the rate of external changes in technology and regulatory requirements. 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 implement strategic decisions and objectives including diversification, innovation, divestment or business expansion initiatives, including acquisitions of businesses. 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 prosper and grow. Westpac’s vision is to be one of the world’s great service companies, helping our customers, communities and people to 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 as a fundamental activity, performed at all levels of the Group. The Risk Management Strategy is approved by the Board and reviewed by the Board Risk and Compliance Committee (BRCC) on an annual basis or more frequently where required by a material business or strategy change or a material change to the Group’s risk profile. It is owned by the Chief Executive Officer. For further information regarding the role and responsibilities of the BRCC and other Board committees in managing risk, refer to Westpac’s Corporate Governance Statement. 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. We adopt a Three Lines of Defence approach to risk management which reflects our culture of ‘risk is everyone’s business’ and that all employees are responsible for identifying and managing risk and operating within the Group’s desired risk profile. For a discussion of the risks to which Westpac is exposed, and its policies to manage these risks, refer to Westpac’s Corporate Governance Statement and Note 22 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 to Westpac. We have a 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 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, 104 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 105 rate, foreign exchange and equity risk), compliance risk, conduct risk, insurance risk, sustainability risk, related entity (contagion) risk and operational risk; all of which may impact the Group’s reputation. 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 governance or 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. 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 our life insurance, general insurance and lenders mortgage insurance businesses, which may adversely affect our business, operations and financial condition. Insurance risk is 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. 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 and contents insurance claim amounts. Further details on environmental risk factors are discussed below. In the lenders mortgage insurance business, insurance risk arises primarily from an unexpected downturn in economic conditions. We could also suffer losses if our reinsurance arrangements are not effective. We could suffer losses due to environmental factors We and our customers operate businesses and hold assets in a diverse range of geographic locations. Any significant environmental change or external event (including fire, storm, flood, earthquake, pandemic or terrorism events) 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. The risk of loss 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. Reputation risk is the risk to earnings or capital arising from negative public opinion resulting from the loss of reputation or public trust and standing. It arises where there are differences between stakeholders’ current and emerging perceptions, beliefs and expectations and our current and planned activities, performance and behaviours. There are various potential sources of reputational damage, including failure to effectively manage risks in accordance with our risk management frameworks, potential conflicts of interest, pricing policies, failure to comply with legal and regulatory requirements, failure to meet our market disclosure obligations, regulatory investigations into past conduct, making inaccurate public statements, environmental, social and ethical issues, engagement and conduct of external suppliers, failure to comply with anti-money laundering and anti-bribery and corruption laws, trade sanctions and counter-terrorism finance legislation or privacy laws, litigation, failure of information security systems, improper sales and trading practices, failure to comply with personnel and supplier policies, improper conduct of companies in which we hold strategic investments, technology failures and security breaches. Our reputation could also be adversely affected by the actions of the financial services industry in general or from the actions of customers, suppliers and other counterparties. Failure, or perceived failure, to appropriately address issues that could or do give rise to reputational risk could also impact the regulatory change agenda, give rise to additional legal risk, subject us to regulatory investigations, regulatory enforcement actions, fines and penalties, class actions 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. Risk and risk management We could suffer losses due to impairment of 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 2015, Westpac carried goodwill principally related to its investments in Australia, other 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 or wherever an indicator of impairment exists. For this purpose Westpac uses a discounted cash flow calculation. Changes in the methodology or 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 or on indication of impairment. 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, an impairment will be recorded, adversely impacting the Group’s financial condition. The estimates and assumptions used in assessing the useful life of an asset can be affected by a range of factors including changes in strategy and the rate of external changes in technology and regulatory requirements. 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 implement strategic decisions and objectives including diversification, innovation, divestment or business expansion initiatives, including acquisitions of businesses. 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 Westpac’s vision is to be one of the world’s great service companies, helping our customers, communities and people to prosper and grow. 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 as a fundamental activity, performed at all levels of the Group. The Risk Management Strategy is approved by the Board and reviewed by the Board Risk and Compliance Committee (BRCC) on an annual basis or more frequently where required by a material business or strategy change or a material change to the Group’s risk profile. It is owned by the Chief Executive Officer. For further information regarding the role and responsibilities of the BRCC and other Board committees in managing risk, refer to Westpac’s Corporate Governance Statement. 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. We adopt a Three Lines of Defence approach to risk management which reflects our culture of ‘risk is everyone’s business’ and that all employees are responsible for identifying and managing risk and operating within the Group’s desired risk profile. For a discussion of the risks to which Westpac is exposed, and its policies to manage these risks, refer to Westpac’s Corporate Governance Statement and Note 22 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 to Westpac. We have a 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 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, 104 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 105 2 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 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 22 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 2015, our exposure to consumers comprised 71% (2014: 71%, 2013: 71%) of our on-balance sheet loans and 57% (2014: 57%, 2013: 57%) of total credit commitments. At 30 September 2015, 90% (2014: 90%, 2013: 90%) 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. We also control the concentration risks that can arise from large exposures to individual borrowers. 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 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 offset or eliminate a position at the market price. The Westpac Group has a liquidity risk management framework designed with the objective of meeting cash flow obligations under a wide range of market conditions, including name specific and market-wide scenarios as well as meeting the requirements of the Liquidity Coverage Ratio (LCR). Refer to Note 22 to the financial statements for a more detailed discussion of our liquidity risk management policies. company, and Westpac NZ Covered Bond Limited. Westpac debt programs and issuing shelves and issuing shelves as at 30 September 2015: Access in a timely and flexible manner to a diverse range of debt markets and investors is provided by the following programs Risk and risk management Australia No limit Euro Market USD 7.5 billion USD 40 billion EUR 5 billion Japan JPY 750 billion JPY 750 billion United States No limit No limit New Zealand parent company. Market risk Program Limit Issuer(s) Program/Issuing Shelf Type WBC Debt Issuance Program USD 2.5 billion WBC Euro Transferable Certificate of Deposit Program USD 20 billion WBC/WSNZL1 Euro Commercial Paper and Certificate of Deposit Program USD 70 billion WBC Euro Medium Term Note Program WSNZL1 WBC2 WSNZL3 WBC WBC Euro Medium Term Note Program Global Covered Bond Program Global Covered Bond Program Samurai shelf Uridashi shelf USD 45 billion WBC US Commercial Paper Program USD 10 billion WSNZL1 US Commercial Paper Program USD 35 billion WBC US MTN Program WBC (NY Branch) Certificate of Deposit Program WBC US Securities and Exchange Commission registered shelf 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 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 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 22 to the financial statements for a more detailed discussion of our market risk management policies. 106 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 107 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 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 22 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 2015, our exposure to consumers comprised 71% (2014: 71%, 2013: 71%) of our on-balance sheet loans and 57% (2014: 57%, 2013: 57%) of total credit commitments. At 30 September 2015, 90% (2014: 90%, 2013: 90%) 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. We also control the concentration risks that can arise from large exposures to individual borrowers. Liquidity risk potentially arise as a result of: Liquidity risk is the risk that the Group will be unable to fund assets and meet obligations as they become due. This risk could an inability to meet 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 offset or eliminate a position at the market price. The Westpac Group has a liquidity risk management framework designed with the objective of meeting cash flow obligations under a wide range of market conditions, including name specific and market-wide scenarios as well as meeting the requirements of the Liquidity Coverage Ratio (LCR). Refer to Note 22 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 2015: Risk and risk management 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 40 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 No limit No limit New Zealand WBC (NY Branch) Certificate of Deposit Program WBC US Securities and Exchange Commission registered shelf No limit 1 Notes issued under this program by Westpac Securities NZ Limited, London branch are guaranteed by Westpac New Zealand Limited, its Medium Term Note and Registered Certificate of Deposit Program WNZL 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. 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 22 to the financial statements for a more detailed discussion of our market risk management policies. 106 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 107 2 The table below depicts the aggregate Value at Risk (VaR), by risk type, for the year ended 30 September: Includes electricity risk. Includes prepayment risk and credit spread risk (exposure to movements in generic credit rating bands). Consolidated and Parent Entity $m Interest rate risk Foreign exchange risk Equity risk Commodity risk1 Other market risks2 Diversification effect Net market risk 1 2 2015 2014 2013 High 18.1 11.8 0.6 5.7 6.7 n/a 23.5 Low Average 11.4 3.6 0.3 7.0 0.5 0.1 1.7 2.9 n/a 9.0 3.1 4.6 (7.2) 15.8 High 30.7 7.6 0.7 2.9 11.3 n/a 40.2 Low Average 15.6 3.0 0.3 6.3 1.2 0.1 1.3 5.4 n/a 9.5 2.0 9.2 (8.2) 22.0 High 30.8 5.7 0.8 6.1 13.0 n/a 35.4 Low Average 16.7 2.1 0.3 9.1 0.5 0.1 1.2 5.8 n/a 12.5 2.9 7.9 (10.7) 19.2 Risk and risk management 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 Westpac’s Corporate Governance Statement for information on our management of operational and compliance risk. The Group’s Operational Risk Management Framework and Compliance Management Framework assists all divisions to achieve their objectives through the effective identification, assessment, measurement, management, monitoring, reporting, control and mitigation of their risks. The Operational Risk Management Framework defines the organisational and governance structures, roles and responsibilities, principles, policies, processes and systems that we use to manage operational risk. The Compliance Management Framework sets out the approach of Westpac Group to managing compliance obligations and mitigating compliance risk, in order to operate within our compliance appetite and achieve our compliance objective. This is discussed in further detail in Note 22 to the financial statements. Other risks Business risk Conduct risk The risk associated with the vulnerability of a line of business to changes in the business environment. The Westpac Group Code of Conduct describes the standards of conduct expected of our people, both employees and contractors. It is supported by policies and procedures to manage conduct-related risks including through our dealings in financial markets, and through managing our statutory and professional obligations to specific clients, including fiduciary and suitability requirements, and product management and design. Sustainability 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 Sustainability 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, Climate Change and Environment Position Statement and Action Plan and sensitive sector position statements, and Sustainable Supply Chain Management Code of Conduct and Framework, many of which are publicly available. The Sustainability Risk Management Framework was reviewed and updated in 2014. 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 Principles for Responsible Investment covering investment analysis. Equity risk The potential for financial loss arising from movements in equity values. Equity risk may be direct, indirect or contingent. 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 arises from movements in the equity markets that affect business performance e.g. income derived as a result of managing or administering equity investments on behalf of other parties where fee income is based on the amount of Our contingent equity risk arises from normal lending activities secured by or with recourse to listed and/or unlisted equities and the borrower, or to another equity like source of risk protection. Contingent risk materialises when there is a default, and a subsequent shortfall from the realisation of equity related assets that is not covered from other sources of recourse. 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 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 in the Westpac Group. The risk that problems arising in other Westpac Group members compromise the financial and operational position of the ADI The graph below compares the actual profit and loss from trading activities on a daily basis to VaR1 over the reporting period: The risk arising from unfair or inappropriate behaviour or practices of the Westpac Group or its staff. Traded Risk: Actual Profit and Loss vs. VaR 01 October 2014 to 30 September 2015 30 20 10 - (10) (20) ) m $ ( s s o L d n a t i f o r P y l i a D l a u t c A (30) 5 10 15 20 25 Daily Value at Risk ($m) funds under management. 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). 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 and 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 or reputational loss, arising from our failure to abide by the compliance obligations required of us. 1 Westpac estimates VaR as the potential loss in earnings from adverse market movements and is calculated over a 1-day time horizon to a 99% confidence level using 1 year of historical data. 108 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 109 The table below depicts the aggregate Value at Risk (VaR), by risk type, for the year ended 30 September: Consolidated and Parent Entity 2015 2014 2013 $m Interest rate risk Foreign exchange risk Equity risk Commodity risk1 Other market risks2 Diversification effect Net market risk Includes electricity risk. 1 2 Low Average Low Average Low Average High 18.1 11.8 0.6 5.7 6.7 n/a 23.5 7.0 0.5 0.1 1.7 2.9 n/a 9.0 11.4 3.6 0.3 3.1 4.6 (7.2) 15.8 High 30.7 7.6 0.7 2.9 11.3 n/a 40.2 6.3 1.2 0.1 1.3 5.4 n/a 9.5 15.6 3.0 0.3 2.0 9.2 (8.2) 22.0 High 30.8 5.7 0.8 6.1 13.0 n/a 35.4 9.1 0.5 0.1 1.2 5.8 n/a 12.5 16.7 2.1 0.3 2.9 7.9 (10.7) 19.2 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 VaR1 over the reporting period: Traded Risk: Actual Profit and Loss vs. VaR 01 October 2014 to 30 September 2015 30 20 10 - (10) (20) ) m $ ( s s o L d n a t i f o r P y l i a D l a u t c A (30) 5 1 108 10 15 20 25 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). 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 and reputation risk. It also includes, among other things, technology risk, model risk and outsourcing risk. financial performance and our reputation. compliance obligations required of us. The way operational risk is managed has the potential to positively or negatively impact our customers, our employees, our Compliance risk is the risk of legal or regulatory sanction, financial or reputational loss, arising from our failure to abide by the Westpac estimates VaR as the potential loss in earnings from adverse market movements and is calculated over a 1-day time horizon to a 99% confidence level using 1 year of historical data. Risk and risk management 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 Westpac’s Corporate Governance Statement for information on our management of operational and compliance risk. The Group’s Operational Risk Management Framework and Compliance Management Framework assists all divisions to achieve their objectives through the effective identification, assessment, measurement, management, monitoring, reporting, control and mitigation of their risks. The Operational Risk Management Framework defines the organisational and governance structures, roles and responsibilities, principles, policies, processes and systems that we use to manage operational risk. The Compliance Management Framework sets out the approach of Westpac Group to managing compliance obligations and mitigating compliance risk, in order to operate within our compliance appetite and achieve our compliance objective. This is discussed in further detail in Note 22 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. Conduct risk The risk arising from unfair or inappropriate behaviour or practices of the Westpac Group or its staff. The Westpac Group Code of Conduct describes the standards of conduct expected of our people, both employees and contractors. It is supported by policies and procedures to manage conduct-related risks including through our dealings in financial markets, and through managing our statutory and professional obligations to specific clients, including fiduciary and suitability requirements, and product management and design. Sustainability 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 Sustainability 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, Climate Change and Environment Position Statement and Action Plan and sensitive sector position statements, and Sustainable Supply Chain Management Code of Conduct and Framework, many of which are publicly available. The Sustainability Risk Management Framework was reviewed and updated in 2014. 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 Principles for Responsible Investment covering investment analysis. Equity risk The potential for financial loss arising from movements in equity values. Equity risk may be direct, indirect or contingent. 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 arises from movements in the equity markets that affect business performance e.g. income derived as a result of managing or administering equity investments on behalf of other parties where fee income is based on the amount of funds under management. Our contingent equity risk arises from normal lending activities secured by or with recourse to listed and/or unlisted equities and the borrower, or to another equity like source of risk protection. Contingent risk materialises when there is a default, and a subsequent shortfall from the realisation of equity related assets that is not covered from other sources of recourse. 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 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. 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 109 2 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 2015, we administered one significant conduit (2014: one), that was created prior to 1 February 2003, with commercial paper outstanding of $0.8 billion (2014: $1.4 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 $86 million as at 30 September 2015 (2014: $147 million). Risk and risk management The conduit is consolidated by the Group. Refer to Note 25 to the financial statements for further details. Structured finance transactions We have entered into transactions with structured entities 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. Refer to Note 38 to the financial statements for details of our superannuation plans and Note 31 for details of our contingent Other off-balance sheet arrangements 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 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 2015. 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 2015 that has been identified that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 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. 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 Reputation 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. Structured entities We are associated with a number of structured entities in the ordinary course of business, primarily to provide funding and financial services products to our customers. Structured entities are typically set up for a single, pre-defined purpose, have a limited life, generally are not operating entities and do not have employees. The most common form of structured entity involves the acquisition of financial assets by the structured entity 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 structured entity. Under AAS, a structured entity is consolidated and reported as part of the Group if it is controlled by the parent entity in line with AASB 10 Consolidated Financial Statements. The definition of control is based on the substance rather than the legal form. Refer to Note 36 to the financial statements for a description of how we apply the requirements to evaluate whether to consolidate structured entities and for information on both consolidated and unconsolidated structured entities. In the ordinary course of business, we have established or sponsored the establishment of structured entities in relation to securitisation, as detailed below. 30 September 2015. Covered bond guarantors Through our covered bond programs we assign our equitable interests in residential mortgage loans to a structured entity 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 2015, the carrying value of assets pledged for the covered bond programs for the Group was $40.3 billion (2014: $39.3 billion). Refer to Note 25 to the financial statements for further details. Securitisation structured entities 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 structured entities, which issue securities to investors. We provide arm’s length interest rate swaps and liquidity facilities to the structured entities 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 2015, our assets securitised through a combination of privately or publicly placed issues to Australian, New Zealand, European and United States investors was $12.1 billion (2014: $11.6 billion). Under AAS substantially all of the structured entities involved in our loan securitisation programs are consolidated by the Group. Refer to Note 25 to the financial statements for further details. 110 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 111 Risk and risk management 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 2015, we administered one significant conduit (2014: one), that was created prior to 1 February 2003, with commercial paper outstanding of $0.8 billion (2014: $1.4 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 $86 million as at 30 September 2015 (2014: $147 million). The conduit is consolidated by the Group. Refer to Note 25 to the financial statements for further details. Structured finance transactions We have entered into transactions with structured entities 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. Other off-balance sheet arrangements Refer to Note 38 to the financial statements for details of our superannuation plans and Note 31 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 2015. 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 2015. 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 2015 that has been identified that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 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. Reputation risk and standing. The risk to earnings or capital arising from negative public opinion resulting from the loss of reputation or public trust 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 Reputation 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. Structured entities financial services products to our customers. We are associated with a number of structured entities in the ordinary course of business, primarily to provide funding and Structured entities are typically set up for a single, pre-defined purpose, have a limited life, generally are not operating entities and do not have employees. The most common form of structured entity involves the acquisition of financial assets by the structured entity 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 structured entity. Under AAS, a structured entity is consolidated and reported as part of the Group if it is controlled by the parent entity in line with AASB 10 Consolidated Financial Statements. The definition of control is based on the substance rather than the legal form. Refer to Note 36 to the financial statements for a description of how we apply the requirements to evaluate whether to consolidate structured entities and for information on both consolidated and unconsolidated structured entities. In the ordinary course of business, we have established or sponsored the establishment of structured entities in relation to securitisation, as detailed below. Covered bond guarantors Through our covered bond programs we assign our equitable interests in residential mortgage loans to a structured entity 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 As at 30 September 2015, the carrying value of assets pledged for the covered bond programs for the Group was $40.3 billion transaction documents. (2014: $39.3 billion). Refer to Note 25 to the financial statements for further details. Securitisation structured entities 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 structured entities, which issue securities to investors. We provide arm’s length interest rate swaps and liquidity facilities to the structured entities 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. the Group. As at 30 September 2015, our assets securitised through a combination of privately or publicly placed issues to Australian, New Zealand, European and United States investors was $12.1 billion (2014: $11.6 billion). Under AAS substantially all of the structured entities involved in our loan securitisation programs are consolidated by Refer to Note 25 to the financial statements for further details. 110 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 111 2 Other Westpac business information Employees The number of employees in each area of business as at 30 September1: Westpac RBB St.George BTFG WIB Westpac New Zealand Other Total employees 1 Total employees includes full-time, pro-rata part-time, overtime, temporary and contract staff. 2 Prior comparative periods have been restated to reflect business structures changes in 2015. 2015 9,397 5,396 4,041 1,710 4,375 10,322 35,241 20132 9,992 5,185 4,076 1,546 4,481 10,317 35,597 20142 10,052 5,492 4,062 1,643 4,342 10,782 36,373 Other Westpac business information Auditor’s remuneration, including goods and services tax, to the external auditor for the years ended 30 September 2015 and Auditor’s remuneration 2014 is provided in Note 39 to the financial statements. 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 2015, 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. 2015 v 2014 Total employees decreased by 1,132 compared to 30 September 2014, from the partial sale and subsequent deconsolidation of BTIM (237), the sale of operations in Cook Islands, Samoa and Tonga (201), and delivery of productivity programs. These were partially offset by expansion in Asia (62) and additional Bank of Melbourne employees (79). Property We occupy premises primarily in Australia, New Zealand and the Pacific Islands including 1,430 branches, (2014: 1,534) as at 30 September 2015. As at 30 September 2015, we owned approximately 2.0% (2014: 2.0%) of the premises we occupied in Australia, none (2014: none) in New Zealand and 38% (2014: 54%) in the Pacific Islands. The remainder of premises are held under commercial lease with the terms generally averaging five years. As at 30 September 2015, the carrying value of our directly owned premises and sites was approximately $113 million (2014: $228 million). Westpac Place in the Sydney CBD is the Group’s head office. A new 12 year lease is currently under negotiation to continue to occupy 275 Kent Street and to allow the early exit of levels 24-32. We continue a corporate presence in Kogarah, in the Sydney metro area, which is a key corporate office of St.George. The Kogarah office has a 2,319 seat capacity and is home to “The Hive”, our innovation centre. A lease commitment at this site extends to 2021 with five five-year options to extend. In November 2011, an Agreement for Lease for part of 150 Collins Street, Melbourne, was executed. The term of the lease is 12 years. Westpac’s first fully Agile workspace environment was opened in October 2015, with 1,000 staff now occupying our new Melbourne Head Office. In June 2013, an Agreement for Lease was executed with Westpac as anchor tenant for the T2 Tower at the Barangaroo South development. The term of the lease is 15 years. Two major construction milestones have been achieved which resulted in handing to Westpac the Ground Floor and Levels 1-15 and levels 17-28. Relocation to Barangaroo began in early August 2015. By the end of February 2016 close to 6,000 personnel are expected to move to Barangaroo. ‘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 24,510 square metres of office space across two buildings and has a capacity of approximately 2,110 seats. A lease commitment at this site extends to 2021, with two six-year options to extend. Significant long term agreements Westpac has no individual contracts, other than contracts entered into in the ordinary course of business, that would constitute a material contract. 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 the Remuneration Report included in the Directors’ Report. 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 to the financial statements and the Remuneration Report, 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. 112 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 113 Other Westpac business information Auditor’s remuneration Auditor’s remuneration, including goods and services tax, to the external auditor for the years ended 30 September 2015 and 2014 is provided in Note 39 to the financial statements. 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 2015, 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. Other Westpac business information Employees The number of employees in each area of business as at 30 September1: 2015 9,397 5,396 4,041 1,710 4,375 10,322 35,241 20142 10,052 5,492 4,062 1,643 4,342 10,782 36,373 20132 9,992 5,185 4,076 1,546 4,481 10,317 35,597 Westpac RBB St.George BTFG WIB Other Westpac New Zealand Total employees 2015 v 2014 Property 1 Total employees includes full-time, pro-rata part-time, overtime, temporary and contract staff. 2 Prior comparative periods have been restated to reflect business structures changes in 2015. Total employees decreased by 1,132 compared to 30 September 2014, from the partial sale and subsequent deconsolidation of BTIM (237), the sale of operations in Cook Islands, Samoa and Tonga (201), and delivery of productivity programs. These were partially offset by expansion in Asia (62) and additional Bank of Melbourne employees (79). We occupy premises primarily in Australia, New Zealand and the Pacific Islands including 1,430 branches, (2014: 1,534) as at 30 September 2015. As at 30 September 2015, we owned approximately 2.0% (2014: 2.0%) of the premises we occupied in Australia, none (2014: none) in New Zealand and 38% (2014: 54%) in the Pacific Islands. The remainder of premises are held under commercial lease with the terms generally averaging five years. As at 30 September 2015, the carrying value of our directly owned premises and sites was approximately $113 million (2014: $228 million). Westpac Place in the Sydney CBD is the Group’s head office. A new 12 year lease is currently under negotiation to continue to occupy 275 Kent Street and to allow the early exit of levels 24-32. We continue a corporate presence in Kogarah, in the Sydney metro area, which is a key corporate office of St.George. The Kogarah office has a 2,319 seat capacity and is home to “The Hive”, our innovation centre. A lease commitment at this site extends to 2021 with five five-year options to extend. In November 2011, an Agreement for Lease for part of 150 Collins Street, Melbourne, was executed. The term of the lease is 12 years. Westpac’s first fully Agile workspace environment was opened in October 2015, with 1,000 staff now occupying our new Melbourne Head Office. In June 2013, an Agreement for Lease was executed with Westpac as anchor tenant for the T2 Tower at the Barangaroo South development. The term of the lease is 15 years. Two major construction milestones have been achieved which resulted in handing to Westpac the Ground Floor and Levels 1-15 and levels 17-28. Relocation to Barangaroo began in early August 2015. By the end of February 2016 close to 6,000 personnel are expected to move to Barangaroo. ‘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 24,510 square metres of office space across two buildings and has a capacity of approximately 2,110 seats. A lease commitment at this site extends to 2021, with two six-year options to extend. Westpac has no individual contracts, other than contracts entered into in the ordinary course of business, that would constitute Significant long term agreements a material contract. 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 the Remuneration Report included in the Directors’ Report. 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 to the financial statements and the Remuneration Report, 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. 112 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 113 2 This page is intentionally left blank 114 2015 Westpac Group Annual Report Note 1 Basis of preparation and critical accounting Note 24 Offsetting financial assets and financial liabilities Financial statements Income statements Statements of comprehensive income Balance sheets Statements of changes in equity Cash flow statements Notes to the financial statements assumptions and estimates Financial performance Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 Note 8 Note 9 Segment reporting Net interest income Non-interest income Operating expenses Impairment charges Income tax Earnings per share Average balance sheet and interest rates Financial assets and financial liabilities Note 10 Receivables due from other financial institutions Note 11 Trading securities and financial assets designated at fair value Note 12 Available-for-sale securities Note 13 Loans Note 14 Provisions for impairment charges Note 15 Life insurance assets and life insurance liabilities Note 16 Payables due to other financial institutions Note 17 Deposits and other borrowings Note 18 Other financial liabilities at fair value through income statement Note 19 Debt issues Note 20 Loan capital Note 21 Derivative financial instruments Note 22 Financial risk Note 23 Fair values of financial assets and financial liabilities 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 and collateral arrangements Note 25 Securitisation and covered bonds Other assets, other liabilities, commitments and contingencies Note 26 Goodwill and other intangible assets Note 27 Other assets Note 28 Provisions Note 29 Other liabilities Note 30 Operating lease commitments Note 31 Contingent liabilities, contingent assets and credit commitments Capital and dividends Note 32 Shareholders’ equity Note 33 Capital adequacy Note 34 Dividends Group structure Note 35 Investments in subsidiaries and associates Note 36 Structured entities Employee benefits Note 37 Share-based payments Note 38 Superannuation commitments Other Note 39 Auditor’s remuneration Note 40 Related party disclosures Note 41 Notes to the cash flow statements Note 42 Subsequent events This page is intentionally left blank 114 2015 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 Basis of preparation and critical accounting assumptions and estimates Financial performance Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 Note 8 Note 9 Segment reporting Net interest income Non-interest income Operating expenses Impairment charges Income tax Earnings per share Average balance sheet and interest rates Financial assets and financial liabilities Note 10 Receivables due from other financial institutions Note 11 Trading securities and financial assets designated at fair value Note 12 Available-for-sale securities Note 13 Loans Note 14 Provisions for impairment charges Note 15 Life insurance assets and life insurance liabilities Note 16 Payables due to other financial institutions Note 17 Deposits and other borrowings Note 18 Other financial liabilities at fair value through income statement Note 19 Debt issues Note 20 Loan capital Note 21 Derivative financial instruments Note 22 Financial risk Note 23 Fair values of financial assets and financial liabilities 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 Note 24 Offsetting financial assets and financial liabilities and collateral arrangements Note 25 Securitisation and covered bonds Other assets, other liabilities, commitments and contingencies Note 26 Goodwill and other intangible assets Note 27 Other assets Note 28 Provisions Note 29 Other liabilities Note 30 Operating lease commitments Note 31 Contingent liabilities, contingent assets and credit commitments Capital and dividends Note 32 Shareholders’ equity Note 33 Capital adequacy Note 34 Dividends Group structure Note 35 Note 36 Structured entities Investments in subsidiaries and associates Employee benefits Note 37 Share-based payments Note 38 Superannuation commitments Other Note 39 Auditor’s remuneration Note 40 Related party disclosures Note 41 Notes to the cash flow statements Note 42 Subsequent events 3 Financial statements Income statements for the years ended 30 September Westpac Banking Corporation $m 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 Consolidated Parent Entity Note 2015 2014 2013 2015 2014 $m Statements of comprehensive income for the years ended 30 September Westpac Banking Corporation 3 3 4 5 6 7 8 8 32,295 32,248 33,009 32,043 32,076 (18,028) (18,706) (20,188) (20,502) (21,012) Net profit for the year Other comprehensive income 14,267 7,375 21,642 (9,473) (753) 11,416 (3,348) 8,068 (56) 8,012 13,542 6,395 19,937 (8,547) (650) 10,740 (3,115) 7,625 (64) 7,561 256.3 249.3 243.7 238.7 12,821 5,774 18,595 (7,976) (847) 9,772 11,541 5,722 17,263 (7,773) (622) 8,868 11,064 5,905 16,969 (6,939) (561) 9,469 (2,947) (2,121) (2,235) 6,747 7,234 - - 6,747 7,234 6,825 (74) 6,751 218.3 213.5 The above income statements should be read in conjunction with the accompanying notes. Financial statements Consolidated Parent Entity Note 2015 8,068 2014 7,625 2013 6,825 2015 6,747 2014 7,234 (148) (73) (59) (131) 15 67 54 - 5 160 111 1 263 (94) (197) 41 61 (52) 47 - - 11 (47) 33 57 (104) (51) (234) 114 15 85 (11) - 44 247 162 (152) (21) 140 (167) 33 53 8 - - 160 115 169 8,069 7,658 6,987 6,916 7,289 8,013 7,594 6,913 6,916 7,289 56 64 74 - 8,069 7,658 6,987 6,916 7,289 222 9 (239) 90 14 (48) 45 11 (49) 55 - - - 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 instruments: Recognised in equity Transferred to income statements Exchange differences on translation of foreign operations Income tax on items taken to or transferred from equity: Available-for-sale securities reserve Cash flow hedging reserve Foreign currency translation reserve Share of associates' other comprehensive income Items that will not be reclassified subsequently to profit or loss Own credit adjustment on financial liabilities designated at fair value (net of tax) Remeasurement of defined benefit obligation 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 Total comprehensive income for the year The above statements of comprehensive income should be read in conjunction with the accompanying notes. 116 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 117 Financial statements Income statements for the years ended 30 September Westpac Banking Corporation $m Interest income Interest expense Net interest income Non-interest income Operating expenses Impairment charges Profit before income tax Income tax expense Net profit for the year Earnings per share (cents) Basic Diluted Net operating income before operating expenses and impairment charges Profit attributable to non-controlling interests Net profit attributable to owners of Westpac Banking Corporation 3 3 4 5 6 7 8 8 11,541 5,722 17,263 (7,773) (622) 8,868 11,064 5,905 16,969 (6,939) (561) 9,469 6,747 7,234 - - 6,747 7,234 (2,947) (2,121) (2,235) 14,267 7,375 21,642 (9,473) (753) 11,416 (3,348) 8,068 (56) 8,012 13,542 6,395 19,937 (8,547) (650) 10,740 (3,115) 7,625 (64) 7,561 256.3 249.3 243.7 238.7 12,821 5,774 18,595 (7,976) (847) 9,772 6,825 (74) 6,751 218.3 213.5 The above income statements should be read in conjunction with the accompanying notes. Consolidated Parent Entity Note 2015 2014 2013 2015 2014 $m 32,295 32,248 33,009 32,043 32,076 (18,028) (18,706) (20,188) (20,502) (21,012) Net profit for the year Other comprehensive income Statements of comprehensive income for the years ended 30 September Westpac Banking Corporation 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 instruments: Recognised in equity Transferred to income statements Exchange differences on translation of foreign operations Income tax on items taken to or transferred from equity: Available-for-sale securities reserve Cash flow hedging reserve Foreign currency translation reserve Share of associates' other comprehensive income Items that will not be reclassified subsequently to profit or loss Own credit adjustment on financial liabilities designated at fair value (net of tax) Remeasurement of defined benefit obligation 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 Total comprehensive income for the year Financial statements Consolidated Parent Entity Note 2015 8,068 2014 7,625 2013 6,825 2015 6,747 2014 7,234 (148) (73) (59) (131) 15 67 54 - 5 160 111 1 263 (94) 41 (197) 61 (52) 47 - - 11 (47) 33 57 (104) (51) (234) 114 15 85 (11) - 44 247 162 (152) (21) 140 (167) 33 53 8 - - 160 115 169 222 9 90 (239) 14 (48) 45 - - 11 (49) 55 8,069 7,658 6,987 6,916 7,289 8,013 7,594 6,913 6,916 7,289 56 64 74 - - 8,069 7,658 6,987 6,916 7,289 The above statements of comprehensive income should be read in conjunction with the accompanying notes. 116 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 117 3 Balance sheets as at 30 September Westpac Banking Corporation $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans Life insurance assets Regulatory deposits with central banks overseas Due from subsidiaries Investments in subsidiaries Investments in associates Property 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 Other 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 Consolidated Parent Entity Consolidated Note 2015 2014 2015 2014 Statements of changes in equity as at 30 September Westpac Banking Corporation 41 10 11 21 12 13 15 35 7 26 27 16 17 18 21 19 15 28 7 29 20 32 32 32 32 32 14,770 9,583 27,454 48,173 54,833 25,760 7,424 45,909 41,404 36,024 13,372 8,741 24,896 47,540 50,344 23,400 5,483 44,324 41,307 32,009 623,316 580,343 546,075 505,604 13,125 1,309 - - 756 1,592 1,377 11,574 4,294 11,007 1,528 - 1,152 - 1,389 - - - 1,452 1,397 12,606 5,988 145,560 140,098 4,585 - 1,354 1,463 9,180 3,294 4,687 - 1,113 1,322 9,715 5,017 812,156 770,842 857,556 815,468 18,731 475,328 9,226 48,304 171,054 539 11,559 - 1,489 55 8,116 744,401 13,840 758,241 53,915 29,280 (385) 1,031 23,172 - 53,098 817 53,915 18,636 460,822 19,236 39,539 152,251 662 9,637 18,133 425,509 9,226 48,050 144,715 518 - 18,411 414,183 19,155 39,141 127,846 614 - - 143,885 135,066 1,618 55 8,191 710,647 10,858 721,505 49,337 26,943 (304) 1,176 20,641 - 48,456 881 49,337 1,332 - 6,433 797,801 13,840 811,641 45,915 1,403 - 6,409 762,228 10,858 773,086 42,382 29,280 26,943 (308) 940 15,248 755 45,915 - (239) 921 14,002 755 42,382 - 45,915 42,382 Exercise of employee share options and rights The above balance sheets should be read in conjunction with the accompanying notes. Financial statements Share capital (Note 32) 26,163 Reserves (Note 32) Retained Banking profits Corporation interests (Note 32) 958 17,174 44,295 1,970 Total equity attributable to owners Total shareholders' Non- equity and of Westpac controlling non- controlling interests - - - - - - - - - - - - - - - - - - - - - - 531 124 173 (162) (61) 605 26,768 49 (127) (51) (129) 26,639 1,412 1,000 - 16 (91) (81) 2,256 28,895 (129) (129) - - - - - - - - - - - - - - - - - - - - - - - 130 (6) 124 953 - 69 69 156 (2) 154 1,176 (270) (270) 141 (16) 125 1,031 6,751 291 7,042 (5,249) (310) 296 (5,263) 18,953 7,561 (36) 7,525 (5,527) (310) (5,837) 20,641 8,012 271 8,283 - - - - - - - - - - - - - - - - - - - - - 6,751 162 6,913 (5,249) (310) 531 296 130 124 173 (162) (61) - (6) (4,534) 46,674 7,561 33 7,594 (5,527) (310) 156 49 (127) (51) (2) (5,812) 48,456 8,012 1 8,013 1,412 1,000 141 16 (91) (81) - (16) (5,752) (5,752) (5,752) 23,172 (3,371) 53,098 (1,137) (44) (1,181) 863 64 64 74 74 - - - - - - - - - - - - - - - - - - - - - - - - - (46) (46) 881 56 56 (105) (15) (120) 817 46,265 6,825 162 6,987 (5,249) (310) 531 296 130 124 173 (162) (61) (1,137) (50) (5,715) 47,537 7,625 33 7,658 (5,527) (310) 156 49 (127) (51) (48) (5,858) 49,337 8,068 1 8,069 (5,752) 1,412 1,000 141 16 (91) (81) (105) (31) (3,491) 53,915 $m Balance at 1 October 2012 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Special dividends on ordinary shares2 Dividend reinvestment plan Realised gain on redemption of 2003 TPS Other equity movements Share based payment arrangements Exercise of employee share options and rights Redemption of Westpac SPS Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Redemption of 2003 TPS Other Total contributions and distributions Balance at 30 September 2013 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Special dividends on ordinary shares2 Other equity movements Share based payment arrangements Exercise of employee share options and rights Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Other Total contributions and distributions Balance at 30 September 2014 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Dividend reinvestment plan Dividend reinvestment plan underwrite Other equity movements Share based payment arrangements Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Disposal of controlled entities Other Total contributions and distributions Balance at 30 September 2015 118 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 119 1 2015 comprises 2015 interim dividend 93 cents and 2014 final dividend 92 cents per share (2014: 2014 interim dividend 90 cents and 2013 final dividend 88 cents, 2013: 2013 interim dividend 86 cents and 2012 final dividend 84 cents), all fully franked at 30%. 2 2015 comprises nil cents per share (2014: 10 cents per share, 2013: 10 cents per share) fully franked at 30%. Balance sheets as at 30 September Westpac Banking Corporation $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value Regulatory deposits with central banks overseas Derivative financial instruments Available-for-sale securities Loans Life insurance assets Due from subsidiaries Investments in subsidiaries Investments in associates Property 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 Other financial liabilities at fair value through income statement Derivative financial instruments Total liabilities excluding loan capital Debt issues Current tax liabilities Life insurance liabilities Due to subsidiaries Provisions Deferred tax liabilities Other liabilities Loan capital Total liabilities Net assets Shareholders’ equity Share capital: Ordinary share capital Reserves Retained profits Convertible debentures Non-controlling interests Treasury shares and RSP treasury shares Total equity attributable to owners of Westpac Banking Corporation 623,316 580,343 546,075 505,604 812,156 770,842 857,556 815,468 171,054 152,251 144,715 127,846 - 143,885 135,066 1,332 1,403 41 10 11 21 12 13 15 35 7 26 27 16 17 18 21 19 15 28 7 29 20 32 32 32 32 32 14,770 9,583 27,454 48,173 54,833 13,125 1,309 - - 756 1,592 1,377 11,574 4,294 18,731 475,328 9,226 48,304 539 11,559 - 1,489 55 8,116 744,401 13,840 758,241 53,915 29,280 (385) 1,031 23,172 - 53,098 817 53,915 25,760 7,424 45,909 41,404 36,024 11,007 1,528 - - - 1,452 1,397 12,606 5,988 18,636 460,822 19,236 39,539 662 9,637 1,618 55 8,191 710,647 10,858 721,505 49,337 26,943 (304) 1,176 20,641 - 48,456 881 49,337 13,372 8,741 24,896 47,540 50,344 23,400 5,483 44,324 41,307 32,009 1,152 1,389 145,560 140,098 4,585 4,687 1,354 1,463 9,180 3,294 1,113 1,322 9,715 5,017 18,133 425,509 9,226 48,050 18,411 414,183 19,155 39,141 518 614 - - - - - - - - 6,433 797,801 13,840 811,641 45,915 6,409 762,228 10,858 773,086 42,382 29,280 26,943 (308) 940 15,248 755 45,915 - (239) 921 14,002 755 42,382 - Consolidated Parent Entity Consolidated Note 2015 2014 2015 2014 Statements of changes in equity as at 30 September Westpac Banking Corporation $m Balance at 1 October 2012 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Special dividends on ordinary shares2 Dividend reinvestment plan Realised gain on redemption of 2003 TPS Other equity movements Share based payment arrangements Exercise of employee share options and rights Redemption of Westpac SPS Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Redemption of 2003 TPS Other Total contributions and distributions Balance at 30 September 2013 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Special dividends on ordinary shares2 Other equity movements Share based payment arrangements Exercise of employee share options and rights Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Other Total contributions and distributions Balance at 30 September 2014 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Dividend reinvestment plan Dividend reinvestment plan underwrite Other equity movements Share based payment arrangements Total shareholders’ equity and non-controlling interests 45,915 42,382 Exercise of employee share options and rights The above balance sheets should be read in conjunction with the accompanying notes. Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Disposal of controlled entities Other Total contributions and distributions Share capital (Note 32) 26,163 - - - - - 531 - - 124 173 (162) (61) - - 605 26,768 - - - - - - 49 (127) (51) - (129) 26,639 - - - - 1,412 1,000 - 16 (91) (81) - - 2,256 Financial statements Total equity attributable to owners of Westpac Banking Corporation Total shareholders' equity and non- controlling interests Non- controlling interests (Note 32) Reserves (Note 32) Retained profits 958 - (129) (129) - - - - 130 - - - - - (6) 124 953 - 69 69 - - 156 - - - (2) 154 1,176 - (270) (270) - - - 141 - - - - (16) 125 17,174 44,295 1,970 6,751 291 7,042 6,751 162 6,913 (5,249) (5,249) (310) - 296 - - - - - - - (5,263) 18,953 7,561 (36) 7,525 (5,527) (310) - - - - - (5,837) 20,641 8,012 271 8,283 (310) 531 296 130 124 173 (162) (61) - (6) (4,534) 46,674 7,561 33 7,594 (5,527) (310) 156 49 (127) (51) (2) (5,812) 48,456 8,012 1 8,013 (5,752) (5,752) - - - - - - - - 1,412 1,000 141 16 (91) (81) - (16) (5,752) (3,371) 74 - 74 - - - - - - - - - (1,137) (44) (1,181) 863 64 - 64 - - - - - - (46) (46) 881 56 - 56 - - - - - - - (105) (15) (120) 46,265 6,825 162 6,987 (5,249) (310) 531 296 130 124 173 (162) (61) (1,137) (50) (5,715) 47,537 7,625 33 7,658 (5,527) (310) 156 49 (127) (51) (48) (5,858) 49,337 8,068 1 8,069 (5,752) 1,412 1,000 141 16 (91) (81) (105) (31) (3,491) 118 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 119 dividend 88 cents, 2013: 2013 interim dividend 86 cents and 2012 final dividend 84 cents), all fully franked at 30%. 2 2015 comprises nil cents per share (2014: 10 cents per share, 2013: 10 cents per share) fully franked at 30%. Balance at 30 September 2015 1 2015 comprises 2015 interim dividend 93 cents and 2014 final dividend 92 cents per share (2014: 2014 interim dividend 90 cents and 2013 final 23,172 53,098 28,895 1,031 817 53,915 3 Statements of changes in equity as at 30 September (continued) Westpac Banking Corporation Parent $m Balance at 1 October 2013 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Special dividends on ordinary shares2 Distributions on convertible debentures Other equity movements Share based payment arrangements Exercise of employee share options and rights Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Total contributions and distributions Balance at 30 September 2014 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Dividend reinvestment plan Dividend reinvestment plan underwrite Distributions on convertible debentures Other equity movements Share based payment arrangements Exercise of employee share options and rights Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Total contributions and distributions Share capital (Note 32) 26,840 - - - - - - - 49 (127) (58) (136) 26,704 - - - - 1,412 1,000 - - 16 (91) (69) 2,268 Reserves (Note 32) Retained profits Total equity attributable to owners of Westpac Banking Corporation 40,197 7,234 55 7,289 12,666 7,234 (38) 7,196 (5,534) (5,534) (310) (16) - - - - (5,860) 14,002 6,747 275 7,022 (310) (16) 137 49 (127) (58) (5,859) 41,627 6,747 169 6,916 (5,762) (5,762) - - (14) - - - - 1,412 1,000 (14) 125 16 (91) (69) Total shareholders' equity and other equity instruments 40,952 7,234 55 7,289 (5,534) (310) (16) 137 49 (127) (58) (5,859) 42,382 6,747 169 6,916 (5,762) 1,412 1,000 (14) 125 16 (91) (69) (3,383) Convertible debentures (Note 32) 755 - - - - - - - - - - - 755 - - - - - - - - - - - - 691 - 93 93 - - - 137 - - - 137 921 - (106) (106) - - - - 125 - - - 125 (5,776) (3,383) Balance at 30 September 2015 1 2015 comprises 2015 interim dividend 93 cents and 2014 final dividend 92 cents per share (2014: 2014 interim dividend 90 cents and 2013 final 28,972 15,248 45,160 755 940 45,915 dividend 88 cents), all fully franked at 30%. 2 2015 comprises nil cents per share (2014: 10 cents per share) fully franked at 30%. Both of the above statements of changes in equity should be read in conjunction with the accompanying notes. 120 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 121 Cash flows from operating activities before changes in operating assets and liabilities 7,753 7,091 Cash flow statements1 for the years ended 30 September Westpac Banking Corporation Cash flows from operating activities $m 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 Income tax paid Payments to policyholders and suppliers Net (increase)/decrease in: Trading securities and financial assets designated at fair value Loans Receivables due from other financial institutions Life insurance assets and liabilities Regulatory deposits with central banks overseas Derivative financial instruments Other assets Net increase/(decrease) in: Other financial liabilities at fair value through income statement Deposits and other borrowings Payables due to other financial institutions Other liabilities 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 and equipment Proceeds from disposal of property and equipment Purchase of controlled entity, net of cash acquired Proceeds from disposal of controlled entities, net of cash disposed Cash flows from financing activities Issue of loan capital (net of issue costs) Redemption of loan capital Net increase/(decrease) in debt issues Dividend reinvestment plan underwrite Proceeds from exercise of employee options Purchase of shares on exercise of employee options and rights Shares purchased for delivery of employee share plan 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/(used in) 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 Financial statements Consolidated Parent Entity Note 2015 2014 2013 2015 2014 32,377 32,136 33,048 32,151 32,029 (18,319) (18,743) (20,520) (20,803) (21,051) 12 11 10 5,289 5,732 6,618 1,519 3,985 1,651 2,766 (7,502) (7,327) (7,139) (6,072) (5,848) (3,322) (2,660) (2,691) (3,027) (2,456) 1,921 1,694 1,759 33 328 48 297 45 301 (1,754) (1,723) (1,912) (104) 8,959 (123) 9,342 (109) 9,410 - - - - - - - - - - 21,538 1,724 (319) 22,668 1,083 (39,569) (35,734) (15,667) (38,270) (33,659) (1,000) (191) 497 3,932 (156) 126 (511) (154) 489 (2,108) 3,966 - 511 - 145 11,730 (3,329) 9,126 11,497 (3,028) 95 121 425 729 667 (10,027) 9,079 266 (9,945) 8,992 8,526 34,229 22,155 6,548 32,244 (1,194) 95 9,419 (382) 363 (3) (1,544) 158 9,280 (423) 8,471 6,768 5,043 4,993 4,910 (26,551) (12,443) (11,802) (22,779) (10,299) - - (630) (677) 24 - 648 - - - (664) (515) 17 (7,744) 41 41 - - 7 - - 102 173 3,288 (5,341) (738) (304) (582) (633) 5 - 16 6,155 1,000 16 (73) (27) (69) - - - - 2,244 1,768 1,958 2,244 - (385) (2,244) 3,678 (14,005) 6,826 1,000 16 (73) (27) (69) (12) (52) - - 49 (113) (27) (59) 8 (48) - 124 (174) - - (68) 7 (50) (805) (4,340) (5,837) (5,028) (4,364) (5,860) 5,513 (966) (20,285) 4,882 (2,107) (13,743) 12,824 (2,499) (12,711) 12,714 2,753 1,237 1,675 2,683 25,760 11,699 12,523 23,400 1,177 9,509 41 14,770 25,760 11,699 13,372 23,400 (594) (397) 11 - - 1,768 (385) 2,519 - 49 (113) (27) (59) 1 - - Net cash (used in)/provided by operating activities 41 (541) 28,371 25,580 (2,003) 26,358 Net cash (used in)/provided by investing activities (18,715) (14,581) (7,794) (15,590) (11,537) 1 Certain cash flows have been reclassified between operating activities and we have revised comparatives for 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 (used in)/provided by operating activities to net profit for the year are provided in Note 41. Statements of changes in equity as at 30 September (continued) Westpac Banking Corporation Parent $m Balance at 1 October 2013 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Special dividends on ordinary shares2 Distributions on convertible debentures Other equity movements Share based payment arrangements Exercise of employee share options and rights Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Total contributions and distributions Balance at 30 September 2014 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Dividends on ordinary shares1 Dividend reinvestment plan Dividend reinvestment plan underwrite Distributions on convertible debentures Other equity movements Share based payment arrangements Exercise of employee share options and rights Purchase of shares (net of issue costs) (Acquisition)/Disposal of treasury shares Total contributions and distributions Balance at 30 September 2015 Total equity attributable to owners Total shareholders' Reserves (Note 32) Retained Banking debentures other equity profits Corporation (Note 32) instruments of Westpac Convertible equity and 691 - 93 93 137 137 921 (106) (106) 125 - - - - - - - - - - - - - - (5,534) (5,534) 12,666 7,234 (38) 7,196 (310) (16) (5,860) 14,002 6,747 275 7,022 (14) - - - - - - - - - - 40,197 7,234 55 7,289 (310) (16) 137 49 (127) (58) (5,859) 41,627 6,747 169 6,916 1,412 1,000 (14) 125 16 (91) (69) (5,762) (5,762) 755 755 - - - - - - - - - - - - - - - - - - - - - - - 40,952 7,234 55 7,289 (5,534) (310) (16) 137 49 (127) (58) (5,859) 42,382 6,747 169 6,916 (5,762) 1,412 1,000 (14) 125 16 (91) (69) (3,383) 45,915 Share capital (Note 32) 26,840 - - - - - - - - - - - - - 49 (127) (58) (136) 26,704 1,412 1,000 16 (91) (69) 2,268 28,972 1 2015 comprises 2015 interim dividend 93 cents and 2014 final dividend 92 cents per share (2014: 2014 interim dividend 90 cents and 2013 final dividend 88 cents), all fully franked at 30%. 2 2015 comprises nil cents per share (2014: 10 cents per share) fully franked at 30%. Both of the above statements of changes in equity should be read in conjunction with the accompanying notes. 125 940 (5,776) 15,248 (3,383) 45,160 755 Cash flow statements1 for the years ended 30 September Westpac Banking Corporation $m 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 securities and financial assets designated at fair value Loans Receivables due from other financial institutions Life insurance assets and liabilities Regulatory deposits with central banks overseas Derivative financial instruments Other assets Net increase/(decrease) in: Other financial liabilities at fair value through income statement Deposits and other borrowings Payables due to other financial institutions Other liabilities Financial statements Consolidated Parent Entity Note 2015 2014 2013 2015 2014 32,377 32,136 33,048 32,151 32,029 (18,319) (18,743) (20,520) (20,803) (21,051) 12 11 10 5,289 5,732 6,618 1,519 3,985 1,651 2,766 (7,502) (7,327) (7,139) (6,072) (5,848) (3,322) (2,660) (2,691) (3,027) (2,456) 1,921 1,694 1,759 33 328 48 297 45 301 (1,754) (1,723) (1,912) (104) 8,959 (123) 9,342 (109) 9,410 - - - - - - - - - - 7,753 7,091 21,538 1,724 (319) 22,668 1,083 (39,569) (35,734) (15,667) (38,270) (33,659) (1,000) (191) 497 3,932 (156) 126 (511) (154) 489 (2,108) 3,966 - 511 - 145 11,730 (3,329) 9,126 11,497 (3,028) 95 121 425 729 667 (10,027) 9,079 266 (9,945) 8,992 8,526 34,229 22,155 6,548 32,244 (1,194) 95 9,419 (382) 363 (3) (1,544) 158 9,280 (423) Net cash (used in)/provided by operating activities 41 (541) 28,371 25,580 (2,003) 26,358 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 and equipment Proceeds from disposal of property and equipment Purchase of controlled entity, net of cash acquired Proceeds from disposal of controlled entities, net of cash disposed 8,471 6,768 5,043 4,993 4,910 (26,551) (12,443) (11,802) (22,779) (10,299) - - (630) (677) 24 - 648 - - (664) (515) 17 (7,744) - - - 102 173 3,288 (5,341) (738) (304) (582) (633) 7 - - 5 - 16 (594) (397) 11 - - 41 41 Net cash (used in)/provided by investing activities (18,715) (14,581) (7,794) (15,590) (11,537) Cash flows from financing activities Issue of loan capital (net of issue costs) Redemption of loan capital Net increase/(decrease) in debt issues Dividend reinvestment plan underwrite Proceeds from exercise of employee options Purchase of shares on exercise of employee options and rights Shares purchased for delivery of employee share plan 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/(used in) 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 2,244 1,768 1,958 2,244 - (385) (2,244) 6,826 1,000 16 (73) (27) (69) (12) 3,678 (14,005) - 49 (113) (27) (59) 8 - 124 (174) - (68) 7 - 6,155 1,000 16 (73) (27) (69) - 1,768 (385) 2,519 - 49 (113) (27) (59) 1 (4,340) (5,837) (5,028) (4,364) (5,860) (52) - (48) - (50) (805) - - 5,513 (13,743) (966) 12,824 (20,285) (2,499) 4,882 (12,711) 2,753 1,237 1,675 2,683 25,760 11,699 12,523 23,400 - - (2,107) 12,714 1,177 9,509 120 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 121 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 (used in)/provided by operating activities to net profit for the year are provided in Note 41. Cash and cash equivalents as at the end of the year 23,400 1 Certain cash flows have been reclassified between operating activities and we have revised comparatives for consistency. These changes have had 13,372 14,770 25,760 11,699 41 3 Note 1. Basis of preparation and critical accounting assumptions and estimates 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 2015 was authorised for issue by the Board of Directors on 2 November 2015. The Directors have the power to amend and reissue the financial report. The principal accounting policies adopted in the preparation of the financial report are set out below and in the relevant notes to the financial statements. These policies have been consistently applied to all the financial years presented, unless otherwise stated. a. Basis of preparation (i) Basis of accounting This financial report is a general purpose financial report prepared in accordance with the requirements for an authorised deposit-taking institution under the Banking Act 1959 (as amended), Australian Accounting Standards (AAS) and Interpretations as issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Westpac Banking Corporation is a for-profit entity for the purposes of preparing this financial report. The financial report also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and Interpretations as issued by the IFRS Interpretations Committee (IFRIC). This financial report also includes additional disclosures required for foreign registrants by the United States Securities and Exchange Commission. The Group’s significant accounting policies relating to specific financial statement items are set out under the relevant notes. Accounting policies that affect the financial statements as a whole and details of critical accounting assumptions and estimates are set out below. Details of changes in accounting standards impacting the financial statements are set out in Note (a) (v) below. (ii) 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 securities, and financial assets and liabilities (including derivative instruments) classified at fair value through income statement. (iii) Comparative revisions Comparative information has been revised where appropriate to conform to changes in presentation in the current year to enhance comparability. (iv) Rounding of amounts All amounts have been rounded in accordance with ASIC Class Order 98/100, to the nearest million dollars, unless otherwise stated. (v) Changes in accounting standards The following standards and amendments have been adopted in the 2015 financial year: AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities The amendment was applied by the Group from 1 October 2014 and adds application guidance to AASB 132 Financial Instruments: Presentation. It clarified the conditions for applying the offsetting criteria of AASB 132 including what constitutes a currently legally enforceable right of set-off and the circumstances in which gross settlement systems may be considered the equivalent to net settlement. The application of AASB 2012-3 has not resulted in any material changes to the netting of balances presented on the Group's balance sheet. AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 AASB 2015-2 was issued on 28 January 2015 and is applicable for the 2017 financial year end unless early adopted. The amendments clarify that preparers of financial statements should apply professional judgement in determining what information is disclosed and the order of presentation in the financial statements. Westpac has early adopted the amendments and as a result has changed the location of certain accounting policies within the notes, changed the order of certain notes and removed or aggregated certain immaterial disclosures. In applying materiality to financial statement disclosures, we consider both the amount and nature of each item. Comparatives have been restated where relevant. b. Principles of consolidation Westpac controls and accordingly consolidates an entity (subsidiaries) when it is exposed to, or has rights to, variable returns from its involvement with the entity, and has the ability to affect those returns through its power over the entity. All transactions between Group entities are eliminated. Non-controlling interests and equity of non-wholly-owned subsidiaries are shown separately in the consolidated Income statement, Statement of comprehensive income, Balance sheet and Statement of changes in equity. Subsidiaries are fully consolidated from the date on which control commences and are de- consolidated from the date that control ceases. Notes to the financial statements Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) (i) Business combinations Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition is measured as the aggregate of the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of acquisition. Acquisition-related costs are expensed as incurred (except for those arising on the issue of equity instruments which are recognised directly in equity). Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value on the acquisition date. Goodwill is measured as the excess of the total consideration transferred, the amount of any non- controlling interest and the fair value of any previous Westpac equity interest in the acquiree, over the fair value of the identifiable net assets acquired. (ii) Foreign currency translation Functional and presentational currency The consolidated financial statements are presented in Australian dollars which is the Parent Entity’s functional and presentation currency. The functional currency of offshore entities is usually the main currency of the economy it operates in. 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 statement, except when deferred in other comprehensive income for qualifying cash flow hedges and qualifying net investment hedges. Foreign operations 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. The resulting exchange differences are recognised in the foreign currency translation reserve. On consolidation, exchange differences arising from the translation of borrowings and other foreign currency instruments designated as hedges of the net investment in foreign operations are reflected in the foreign currency translation reserve. When all or part of a foreign operation is disposed 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 disposal or repayment Purchases and sales of financial assets, except for loans and receivables, are recognised on trade-date; the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognised on settlement date, when cash is of borrowing. c. Financial assets and financial liabilities (i) Recognition advanced to the borrowers. Financial liabilities are recognised when an obligation arises. (ii) Classification and measurement The Group classifies its financial assets in the following categories: financial assets at fair value through income statement, derivatives financial instruments, loans and receivables and available-for-sale securities. The Group has not classified any of its financial assets as held-to-maturity investments. The Group classifies significant financial liabilities in the following categories: payables due to other financial institutions, deposits and other borrowings, other financial liabilities at fair value through income statement, derivative financial instruments, debt issues and loan capital. Financial assets and financial liabilities measured at fair value through income statement are recognised initially at fair value. All other financial assets and financial liabilities are recognised initially at fair value plus directly attributable transaction costs. The accounting policy for each category of financial asset or financial liability mentioned above is set out in the note for the The Group’s policies for determining the fair value of financial assets and financial liabilities are set out in Note 23. relevant item. (iii) Derecognition Financial assets are derecognised when the rights to receive cash flows from the asset have expired, or when the Group has either transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full under a ‘pass through’ arrangement together with the transfer of substantially all the risks and rewards of ownership. Where the Group has neither transferred nor retained substantially all the risks and rewards of ownership but has retained control, the asset continues to be recognised on the balance sheet to the extent of the Group’s continuing involvement in the asset. 122 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 123 Note 1. Basis of preparation and critical accounting assumptions and estimates 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 2015 was authorised for issue by the Board of Directors on 2 November 2015. The Directors have the power to amend and reissue the financial report. The principal accounting policies adopted in the preparation of the financial report are set out below and in the relevant notes to the financial statements. These policies have been consistently applied to all the financial years presented, unless otherwise stated. a. Basis of preparation (i) Basis of accounting This financial report is a general purpose financial report prepared in accordance with the requirements for an authorised deposit-taking institution under the Banking Act 1959 (as amended), Australian Accounting Standards (AAS) and Interpretations as issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Westpac Banking Corporation is a for-profit entity for the purposes of preparing this financial report. The financial report also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and Interpretations as issued by the IFRS Interpretations Committee (IFRIC). This financial report also includes additional disclosures required for foreign registrants by the United States Securities and Exchange Commission. The Group’s significant accounting policies relating to specific financial statement items are set out under the relevant notes. Accounting policies that affect the financial statements as a whole and details of critical accounting assumptions and estimates are set out below. Details of changes in accounting standards impacting the financial statements are set out in The financial report has been prepared under the historical cost convention, as modified by applying fair value accounting to available-for-sale securities, and financial assets and liabilities (including derivative instruments) classified at fair value through Comparative information has been revised where appropriate to conform to changes in presentation in the current year to Note (a) (v) below. (ii) Historical cost convention income statement. (iii) Comparative revisions enhance comparability. (iv) Rounding of amounts otherwise stated. All amounts have been rounded in accordance with ASIC Class Order 98/100, to the nearest million dollars, unless (v) Changes in accounting standards The following standards and amendments have been adopted in the 2015 financial year: AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities The amendment was applied by the Group from 1 October 2014 and adds application guidance to AASB 132 Financial Instruments: Presentation. It clarified the conditions for applying the offsetting criteria of AASB 132 including what constitutes a currently legally enforceable right of set-off and the circumstances in which gross settlement systems may be considered the equivalent to net settlement. The application of AASB 2012-3 has not resulted in any material changes to the netting of balances presented on the Group's balance sheet. AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 AASB 2015-2 was issued on 28 January 2015 and is applicable for the 2017 financial year end unless early adopted. The amendments clarify that preparers of financial statements should apply professional judgement in determining what information is disclosed and the order of presentation in the financial statements. Westpac has early adopted the amendments and as a result has changed the location of certain accounting policies within the notes, changed the order of certain notes and removed or aggregated certain immaterial disclosures. In applying materiality to financial statement disclosures, we consider both the amount and nature of each item. Comparatives have been restated where relevant. b. Principles of consolidation Westpac controls and accordingly consolidates an entity (subsidiaries) when it is exposed to, or has rights to, variable returns from its involvement with the entity, and has the ability to affect those returns through its power over the entity. All transactions between Group entities are eliminated. Non-controlling interests and equity of non-wholly-owned subsidiaries are shown separately in the consolidated Income statement, Statement of comprehensive income, Balance sheet and Statement of changes in equity. Subsidiaries are fully consolidated from the date on which control commences and are de- consolidated from the date that control ceases. Notes to the financial statements Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) (i) Business combinations Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition is measured as the aggregate of the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of acquisition. Acquisition-related costs are expensed as incurred (except for those arising on the issue of equity instruments which are recognised directly in equity). Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at fair value on the acquisition date. Goodwill is measured as the excess of the total consideration transferred, the amount of any non- controlling interest and the fair value of any previous Westpac equity interest in the acquiree, over the fair value of the identifiable net assets acquired. (ii) Foreign currency translation Functional and presentational currency The consolidated financial statements are presented in Australian dollars which is the Parent Entity’s functional and presentation currency. The functional currency of offshore entities is usually the main currency of the economy it operates in. 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 statement, except when deferred in other comprehensive income for qualifying cash flow hedges and qualifying net investment hedges. Foreign operations 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. The resulting exchange differences are recognised in the foreign currency translation reserve. On consolidation, exchange differences arising from the translation of borrowings and other foreign currency instruments designated as hedges of the net investment in foreign operations are reflected in the foreign currency translation reserve. When all or part of a foreign operation is disposed 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 disposal or repayment of borrowing. c. Financial assets and financial liabilities (i) Recognition Purchases and sales of financial assets, except for loans and receivables, are recognised on trade-date; the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognised on settlement date, when cash is advanced to the borrowers. Financial liabilities are recognised when an obligation arises. (ii) Classification and measurement The Group classifies its financial assets in the following categories: financial assets at fair value through income statement, derivatives financial instruments, loans and receivables and available-for-sale securities. The Group has not classified any of its financial assets as held-to-maturity investments. The Group classifies significant financial liabilities in the following categories: payables due to other financial institutions, deposits and other borrowings, other financial liabilities at fair value through income statement, derivative financial instruments, debt issues and loan capital. Financial assets and financial liabilities measured at fair value through income statement are recognised initially at fair value. All other financial assets and financial liabilities are recognised initially at fair value plus directly attributable transaction costs. The accounting policy for each category of financial asset or financial liability mentioned above is set out in the note for the relevant item. The Group’s policies for determining the fair value of financial assets and financial liabilities are set out in Note 23. (iii) Derecognition Financial assets are derecognised when the rights to receive cash flows from the asset have expired, or when the Group has either transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full under a ‘pass through’ arrangement together with the transfer of substantially all the risks and rewards of ownership. Where the Group has neither transferred nor retained substantially all the risks and rewards of ownership but has retained control, the asset continues to be recognised on the balance sheet to the extent of the Group’s continuing involvement in the asset. 122 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 123 3 Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) Financial liabilities are derecognised when the obligation 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, the exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, with the difference in the respective carrying amounts recognised in profit or loss through the Income statement. (iv) Repurchase and reverse repurchase agreements (including securities borrowed and lent) Where securities are sold subject to an agreement to repurchase at a predetermined price (‘repos’), they remain recognised on balance sheet in their original category (i.e. ‘Trading securities’ or ‘Available-for-sale’). A liability (‘Securities sold under agreement to repurchase’) is recognised in respect of the cash consideration received. Where the underlying securities are part of a trading portfolio, the associated liability is recognised as part of ‘Other financial liabilities at fair value through income statement’. Where the underlying securities are classified as ‘Available-for-sale’, the associated liability is recognised in either ‘Payables due to other financial institutions’ or ‘Deposits and other borrowings’, depending on the counterparty. Securities purchased under agreements to resell (‘reverse repos’) are not recognised on the balance sheet and the cash consideration paid is recorded as part of ‘Trading securities and financial assets designated at fair value’. As part of its trading activities, the Group also lends and borrows securities on a collateralised basis. Securities lent remain on the Group’s balance sheet and securities borrowed are not reflected on the Group’s balance sheet, as the risk and rewards of ownership remain with the initial holder. Where cash is provided as collateral, the amount advanced to or received from third parties is recognised as a receivable or borrowing respectively. Fees and interest relating to these transactions are recognised in interest income and interest expense using the effective interest rate method, over the expected life of the agreements. Any fair value movements are recorded in trading income. d. 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 significant assumptions and estimates used are noted below. (i) Fair value of financial instruments Financial instruments classified as held-for-trading (including derivatives) or designated at fair value through income statement and financial assets classified as available-for-sale are recognised in the financial statements at fair value. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. 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. 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. Various factors influence the availability of observable inputs and these may vary from product to product and change over time. Factors include the depth of activity in the relevant market, the type of product, whether the product is new and not widely traded in the marketplace, the maturity of market modelling and the nature and complexity of the transaction (bespoke or generic). To the extent that valuation is based on models or inputs that are not observable in the market, the determination of fair value can require more judgement, dependent on the significance of the unobservable input to the overall valuation. Unobservable inputs are determined based on the best information available. These inputs are generally derived and extrapolated from other relevant market data and calibrated against industry standards, economic models and observed transaction prices. In order to determine a reliable fair value for a financial instrument, 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. In determining the fair value of derivatives, the Group adjusts the mid-market valuations produced by derivative pricing models to the appropriate exit price valuation. These adjustments incorporate bid/offer spreads and credit valuation adjustments. They also include funding valuation adjustments on the uncollateralised derivative portfolio. The fair value of financial instruments is provided in Note 23 as well as the mechanism by which fair value has been derived. Notes to the financial statements Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) (ii) Provisions for impairment charges on loans and credit commitments Provisions for credit impairment represent management’s estimate of the impairment charges incurred in the loan portfolios and on undrawn contractually committed credit facilities and guarantees provided as at the balance sheet date. Changes to the provisions are reported in the income statement as part of impairment charges on loans. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce differences between loss estimates and actual loss experience. 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, 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 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 and security, past loss experience, current economic conditions, expected defaults and timing of recovery 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 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 consumer spending, unemployment levels, payment behaviour and bankruptcy rates. Details on the Group’s impairment charges are provided in Notes 6 and 14. (iii) Goodwill the acquisition. 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 To determine if goodwill is impaired, the carrying value of the identified Cash Generating Unit (CGU) to which the goodwill is allocated, is compared to its recoverable amount, which is determined on a value-in-use basis. Value in use is the present value of expected future cash flows from the CGU, and the determination of the appropriate cash flows and discount rates to use is subjective. The key assumptions applied to determine if any impairment exists are outlined in Note 26. (iv) Superannuation obligations The Group operates a number of defined benefit plans as described in Note 38. For each of these plans, independent actuarial valuations of the plan’s obligations using the projected unit credit method and the fair value measurements of the plan’s assets are performed at least annually. 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. Different assumptions could significantly alter the amount of the difference between plan assets and obligations, and the superannuation cost charged to the income statement. In the current year the discount rate applied to the Australian superannuation fund changed from a blended interest rate of government bonds to the yield on high quality corporate bonds that have terms to maturity approximating the terms of the superannuation liabilities. (v) Provisions (other than loan impairment) Provisions are held in respect of a range of obligations such as employee entitlements, restructuring costs, litigation provisions, 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. In the current year the relevant discount rate used changed from a blended interest rate of government bonds to the yield on high quality corporate bonds that have terms to maturity approximating the terms of the liabilities. 124 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 125 Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) Financial liabilities are derecognised when the obligation 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, the exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, with the difference in the respective carrying amounts recognised in profit or loss through the Income statement. (iv) Repurchase and reverse repurchase agreements (including securities borrowed and lent) Where securities are sold subject to an agreement to repurchase at a predetermined price (‘repos’), they remain recognised on balance sheet in their original category (i.e. ‘Trading securities’ or ‘Available-for-sale’). A liability (‘Securities sold under agreement to repurchase’) is recognised in respect of the cash consideration received. Where the underlying securities are part of a trading portfolio, the associated liability is recognised as part of ‘Other financial liabilities at fair value through income statement’. Where the underlying securities are classified as ‘Available-for-sale’, the associated liability is recognised in either ‘Payables due to other financial institutions’ or ‘Deposits and other borrowings’, depending on the counterparty. Securities purchased under agreements to resell (‘reverse repos’) are not recognised on the balance sheet and the cash consideration paid is recorded as part of ‘Trading securities and financial assets designated at fair value’. As part of its trading activities, the Group also lends and borrows securities on a collateralised basis. Securities lent remain on the Group’s balance sheet and securities borrowed are not reflected on the Group’s balance sheet, as the risk and rewards of ownership remain with the initial holder. Where cash is provided as collateral, the amount advanced to or received from third parties is recognised as a receivable or borrowing respectively. Fees and interest relating to these transactions are recognised in interest income and interest expense using the effective interest rate method, over the expected life of the agreements. Any fair value movements are recorded in trading income. d. 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 significant assumptions and estimates used are noted below. (i) Fair value of financial instruments Financial instruments classified as held-for-trading (including derivatives) or designated at fair value through income statement and financial assets classified as available-for-sale are recognised in the financial statements at fair value. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. 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. 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. Various factors influence the availability of observable inputs and these may vary from product to product and change over time. Factors include the depth of activity in the relevant market, the type of product, whether the product is new and not widely traded in the marketplace, the maturity of market modelling and the nature and complexity of the transaction (bespoke or generic). To the extent that valuation is based on models or inputs that are not observable in the market, the determination of fair value can require more judgement, dependent on the significance of the unobservable input to the overall valuation. Unobservable inputs are determined based on the best information available. These inputs are generally derived and extrapolated from other relevant market data and calibrated against industry standards, economic models and observed transaction prices. In order to determine a reliable fair value for a financial instrument, 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. In determining the fair value of derivatives, the Group adjusts the mid-market valuations produced by derivative pricing models to the appropriate exit price valuation. These adjustments incorporate bid/offer spreads and credit valuation adjustments. They also include funding valuation adjustments on the uncollateralised derivative portfolio. The fair value of financial instruments is provided in Note 23 as well as the mechanism by which fair value has been derived. Notes to the financial statements Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) (ii) Provisions for impairment charges on loans and credit commitments Provisions for credit impairment represent management’s estimate of the impairment charges incurred in the loan portfolios and on undrawn contractually committed credit facilities and guarantees provided as at the balance sheet date. Changes to the provisions are reported in the income statement as part of impairment charges on loans. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce differences between loss estimates and actual loss experience. 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, 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 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 and security, past loss experience, current economic conditions, expected defaults and timing of recovery 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 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 consumer spending, unemployment levels, payment behaviour and bankruptcy rates. Details on the Group’s impairment charges are provided in Notes 6 and 14. (iii) Goodwill 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. To determine if goodwill is impaired, the carrying value of the identified Cash Generating Unit (CGU) to which the goodwill is allocated, is compared to its recoverable amount, which is determined on a value-in-use basis. Value in use is the present value of expected future cash flows from the CGU, and the determination of the appropriate cash flows and discount rates to use is subjective. The key assumptions applied to determine if any impairment exists are outlined in Note 26. (iv) Superannuation obligations The Group operates a number of defined benefit plans as described in Note 38. For each of these plans, independent actuarial valuations of the plan’s obligations using the projected unit credit method and the fair value measurements of the plan’s assets are performed at least annually. 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. Different assumptions could significantly alter the amount of the difference between plan assets and obligations, and the superannuation cost charged to the income statement. In the current year the discount rate applied to the Australian superannuation fund changed from a blended interest rate of government bonds to the yield on high quality corporate bonds that have terms to maturity approximating the terms of the superannuation liabilities. (v) Provisions (other than loan impairment) Provisions are held in respect of a range of obligations such as employee entitlements, restructuring costs, litigation provisions, 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. In the current year the relevant discount rate used changed from a blended interest rate of government bonds to the yield on high quality corporate bonds that have terms to maturity approximating the terms of the liabilities. 124 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 125 3 Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) (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, based on the Group’s understanding of the relevant tax law. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax outcome is unclear. For these circumstances, we hold appropriate provisions. 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 7 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. e. 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 (December 2014) will replace AASB 139 Financial Instruments: Recognition and Measurement. It includes a revised classification and measurement model, a forward looking ‘expected loss’ impairment model and modifies the approach to hedge accounting. Unless early adopted the standard is effective for the 30 September 2019 financial year end. The major changes under the standard are: replaces the multiple classification and measurement models in AASB 139 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; requires more timely recognition of expected credit losses using a three stage approach. For financial assets where there has been no significant increase in credit risk since origination a provision for 12 months expected credit losses is required. For financial assets where there has been a significant increase in credit risk or where the asset is credit impaired a provision for full lifetime expected losses is required; interest is calculated on the gross carrying amount of a financial assets, except where the asset is credit impaired; 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; 126 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 127 Notes to the financial statements Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) 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; where the fair value option is used for valuing financial liabilities the change in fair value relating to the entity’s own credit risk is presented in other comprehensive income, except where it would create an accounting mismatch. If such a mismatch is created or enlarged, all changes in fair value (including the effects of changes in the credit risk) is recognised in profit or loss. The Group early adopted this amendment from 1 October 2013; and aligns hedge accounting more closely with risk management activities by increasing the eligibility of both hedged items and hedging instruments and introducing a more principles-based approach to assessing hedge effectiveness. AASB 9 will impact the classification and measurement of the Group’s financial instruments when the remainder of the standard is adopted. statements has not yet been determined. The Group is in the process of assessing the full impact of the application of AASB 9. The financial impact on the financial AASB 15 Revenue from Contracts with Customers was issued on 28 May 2014 and will be effective for the 30 September 2019 financial year. The standard provides a single comprehensive model for revenue recognition. It replaces AASB 118 Revenue and related interpretations. The application of AASB 15 is not expected to have a material impact on the Group. FINANCIAL PERFORMANCE Note 2. Segment reporting Accounting policy Operating segments are presented on a basis that is consistent with information provided internally to Westpac’s key decision makers and reflects the management of the business, rather than the legal structure of the Group. In assessing the financial performance of its divisions internally, Westpac uses a measure of performance it refers 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 AAS. 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 therefore available for distribution 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. 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 In February 2015 following the appointment of Brian Hartzer as Chief Executive Officer, the Australian Financial Services segment was discontinued. The three businesses which comprised this segment being Westpac Retail & Business Banking, St.George Banking Group and BT Financial Group (Australia) are now individual reportable segments. Although Westpac announced in June 2015 that it would implement a new organisational structure for its Australian Retail and Business Banking operations, up to 30 September 2015 the accounting and financial performance continued to be reported (both internally and externally) on the basis of the existing structure. Refer to Section 2 for further details. The operating segments are defined by the customers they service and the services they provide: Westpac Retail & Business Banking (Westpac RBB), which is responsible for sales and service for consumer, small-to- medium enterprise (SME), commercial and agribusiness customers (with turnover of up to $100 million) in Australia under the Westpac brand; Notes to the financial statements Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) 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; where the fair value option is used for valuing financial liabilities the change in fair value relating to the entity’s own credit risk is presented in other comprehensive income, except where it would create an accounting mismatch. If such a mismatch is created or enlarged, all changes in fair value (including the effects of changes in the credit risk) is recognised in profit or loss. The Group early adopted this amendment from 1 October 2013; and aligns hedge accounting more closely with risk management activities by increasing the eligibility of both hedged items and hedging instruments and introducing a more principles-based approach to assessing hedge effectiveness. AASB 9 will impact the classification and measurement of the Group’s financial instruments when the remainder of the standard is adopted. 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 Group is in the process of assessing the full impact of the application of AASB 9. The financial impact on the financial statements has not yet been determined. AASB 15 Revenue from Contracts with Customers was issued on 28 May 2014 and will be effective for the 30 September 2019 financial year. The standard provides a single comprehensive model for revenue recognition. It replaces AASB 118 Revenue and related interpretations. The application of AASB 15 is not expected to have a material impact on the Group. FINANCIAL PERFORMANCE Note 2. Segment reporting Accounting policy Operating segments are presented on a basis that is consistent with information provided internally to Westpac’s key decision makers and reflects the management of the business, rather than the legal structure of the Group. In assessing the financial performance of its divisions internally, Westpac uses a measure of performance it refers 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 AAS. 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 therefore available for distribution 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: Note 1. Basis of preparation and critical accounting assumptions and estimates (continued) (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, based on the Group’s understanding of the relevant tax law. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax outcome is unclear. For these circumstances, we hold appropriate provisions. 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 7 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. 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. e. 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 (December 2014) will replace AASB 139 Financial Instruments: Recognition and Measurement. It includes a revised classification and measurement model, a forward looking ‘expected loss’ impairment model and modifies the approach to hedge accounting. Unless early adopted the standard is effective for the 30 September 2019 financial year end. The major changes under the standard are: replaces the multiple classification and measurement models in AASB 139 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; or significantly reduces an accounting mismatch; if a financial asset is eligible for amortised cost measurement, an entity can elect to measure it at fair value if it eliminates requires more timely recognition of expected credit losses using a three stage approach. For financial assets where there has been no significant increase in credit risk since origination a provision for 12 months expected credit losses is required. For financial assets where there has been a significant increase in credit risk or where the asset is credit impaired a provision for full lifetime expected losses is required; interest is calculated on the gross carrying amount of a financial assets, except where the asset is credit impaired; 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; Reportable operating segments In February 2015 following the appointment of Brian Hartzer as Chief Executive Officer, the Australian Financial Services segment was discontinued. The three businesses which comprised this segment being Westpac Retail & Business Banking, St.George Banking Group and BT Financial Group (Australia) are now individual reportable segments. Although Westpac announced in June 2015 that it would implement a new organisational structure for its Australian Retail and Business Banking operations, up to 30 September 2015 the accounting and financial performance continued to be reported (both internally and externally) on the basis of the existing structure. Refer to Section 2 for further details. The operating segments are defined by the customers they service and the services they provide: Westpac Retail & Business Banking (Westpac RBB), which is responsible for sales and service for consumer, small-to- medium enterprise (SME), commercial and agribusiness customers (with turnover of up to $100 million) in Australia under the Westpac brand; 126 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 127 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. 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. material items that key decision makers at Westpac believe do not reflect ongoing operations; 3 Note 2. Segment reporting (continued) St.George Banking Group (St.George), which is responsible for sales and service to consumer, SME and corporate customers (businesses with facilities of up to $150 million) in Australia under the St.George, BankSA, Bank of Melbourne and RAMS brands; BT Financial Group (Australia) (BTFG), which is Westpac’s Australian wealth division. Its operations include the provision of funds management, insurance, financial advice, margin lending, private banking and broking services. BTFG’s brands include Advance, Ascalon Capital Managers, Asgard, Licensee Select, BT Select, and Securitor, as well as the Advice, Private Banking and Insurance operations of Westpac, St.George, Bank of Melbourne and BankSA. BTFG also incorporates the activities of BT Investment Management, which following Westpac’s partial sale is equity accounted from July 2015; Westpac Institutional Bank (WIB), which 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, US, UK and Asia; and Westpac New Zealand, which 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 brand, while insurance and wealth products are provided under Westpac Life and BT brands respectively. Other divisions in the Group include: Westpac Pacific provides banking services for retail and business customers in four Pacific Island Nations. Prior to July 2015, Westpac Pacific also provided these services to customers in Samoa, Cook Islands and Tonga. On 10 July 2015, Westpac sold its interest in these operations; 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; 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; Customer & Business Services, which encompasses banking operations, customer contact centres, product, marketing, compliance, legal and property services; Group Technology, which comprises functions responsible for technology strategy and architecture, infrastructure and operations, applications development and business integration; and Core Support, which comprises those functions performed centrally including finance, risk and human resources. Comparative changes Prior period comparatives were restated for the following business structure transfers: Private Bank Asia operations undertaken in Westpac Institutional Bank (WIB) to Westpac Retail & Business Banking (Westpac RBB); Relationship management of a number of clients from WIB to Westpac RBB; BankSA general insurance activities from St.George to BT Financial Group (Australia); and The presentation of depreciation, amortisation and impairments by segments for 2014 and 2013 have been restated to conform with current year. Note 2. Segment reporting (continued) The tables below present the segment results on a cash earnings basis: Notes to the financial statements 2015 $m 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 assets1 Total liabilities Additions of property and equipment, goodwill and other intangible assets Westpac Retail & St. BT George Financial Westpac Westpac Business Banking Group Institutional New Other Banking Group (Australia) Bank Zealand Divisions 6,395 1,457 3,768 555 448 2,192 1,645 1,458 1,590 457 Net cash Net profit earnings for the adjustment year 28 14,267 1,074 7,375 7,852 (3,397) (471) 3,984 (1,196) 2,788 - - 4,323 (1,629) (280) 2,414 (726) - 1,688 (126) 2,640 (1,304) 4 1,340 (404) (32) 904 (23) 881 3,103 (1,289) 39 1,853 (567) 1,286 - - 1,286 2,047 (832) (44) 1,171 (317) (3) 851 - 851 2,788 1,562 644 8,012 1,102 (838) - 264 (74) 2 192 21,642 (9,473) (753) 11,416 (3,348) (56) 8,012 Total 14,239 6,301 20,540 (8,635) (753) 11,152 (3,274) (58) 7,820 192 393 182 575 (184) (1) 390 (64) (23) 303 341 (5) (16) (42) (123) (93) (1,180) (1,459) 291,647 186,032 188,094 97,677 35,813 37,168 123,735 124,603 71,538 63,490 101,329 812,156 249,271 758,241 1 Total assets for BT Financial Group (Australia) include the equity accounted carrying value of the investment in BTIM of $756 million. 15 13 73 261 58 893 1,313 128 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 129 Note 2. Segment reporting (continued) St.George Banking Group (St.George), which is responsible for sales and service to consumer, SME and corporate customers (businesses with facilities of up to $150 million) in Australia under the St.George, BankSA, Bank of Melbourne and RAMS brands; BT Financial Group (Australia) (BTFG), which is Westpac’s Australian wealth division. Its operations include the provision of funds management, insurance, financial advice, margin lending, private banking and broking services. BTFG’s brands include Advance, Ascalon Capital Managers, Asgard, Licensee Select, BT Select, and Securitor, as well as the Advice, Private Banking and Insurance operations of Westpac, St.George, Bank of Melbourne and BankSA. BTFG also incorporates the activities of BT Investment Management, which following Westpac’s partial sale is equity accounted from July 2015; Westpac Institutional Bank (WIB), which 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, US, UK and Asia; and Westpac New Zealand, which 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 brand, while insurance and wealth products are provided under Westpac Life and BT brands respectively. Other divisions in the Group include: Westpac Pacific provides banking services for retail and business customers in four Pacific Island Nations. Prior to July 2015, Westpac Pacific also provided these services to customers in Samoa, Cook Islands and Tonga. On 10 July 2015, Westpac sold its interest in these operations; 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; 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; Customer & Business Services, which encompasses banking operations, customer contact centres, product, marketing, compliance, legal and property services; Group Technology, which comprises functions responsible for technology strategy and architecture, infrastructure and operations, applications development and business integration; and Core Support, which comprises those functions performed centrally including finance, risk and human resources. Comparative changes Prior period comparatives were restated for the following business structure transfers: Private Bank Asia operations undertaken in Westpac Institutional Bank (WIB) to Westpac Retail & Business Banking (Westpac RBB); Relationship management of a number of clients from WIB to Westpac RBB; BankSA general insurance activities from St.George to BT Financial Group (Australia); and The presentation of depreciation, amortisation and impairments by segments for 2014 and 2013 have been restated to conform with current year. Note 2. Segment reporting (continued) The tables below present the segment results on a cash earnings basis: Notes to the financial statements 2015 $m 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 assets1 Total liabilities Westpac Retail & Business Banking 6,395 1,457 St. George Banking Group 3,768 555 BT Financial Group (Australia) 448 2,192 7,852 (3,397) (471) 3,984 (1,196) - 2,788 - 4,323 (1,629) (280) 2,414 (726) - 1,688 (126) 2,788 1,562 2,640 (1,304) 4 1,340 (404) (32) 904 (23) 881 Westpac Institutional Bank Westpac New Zealand Other Divisions Net cash earnings adjustment Net profit for the year 28 14,267 1,074 7,375 1,102 (838) - 264 (74) 2 192 21,642 (9,473) (753) 11,416 (3,348) (56) 8,012 Total 14,239 6,301 20,540 (8,635) (753) 11,152 (3,274) (58) 7,820 192 393 182 575 (184) (1) 390 (64) (23) 303 341 644 8,012 1,645 1,458 1,590 457 3,103 (1,289) 39 1,853 (567) - 1,286 - 1,286 2,047 (832) (44) 1,171 (317) (3) 851 - 851 (5) (16) (42) (123) (93) (1,180) (1,459) 291,647 186,032 188,094 97,677 35,813 37,168 123,735 124,603 71,538 63,490 101,329 812,156 249,271 758,241 Additions of property and equipment, goodwill and other intangible assets 1 Total assets for BT Financial Group (Australia) include the equity accounted carrying value of the investment in BTIM of $756 million. 1,313 893 261 13 73 15 58 128 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 129 3 Note 2. Segment reporting (continued) Note 2. Segment reporting (continued) 2014 $m 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 Additions of property and equipment, goodwill and other intangible assets Westpac Institutional Bank Westpac New Zealand Other Divisions Westpac Retail & Business Banking 5,953 1,441 St. George Banking Group 3,531 515 BT Financial Group (Australia) 406 2,257 7,394 (3,266) (436) 3,692 (1,109) - 2,583 - 4,046 (1,559) (236) 2,251 (676) - 1,575 (125) 2,583 1,450 2,663 (1,323) 2 1,342 (403) (39) 900 (22) 878 1,658 1,470 1,455 438 3,128 (1,174) 135 2,089 (622) - 1,467 - 1,467 1,893 (776) (24) 1,093 (300) (3) 790 - 790 Net cash earnings adjustment Net profit for the year 46 71 13,542 6,395 117 (301) 19,937 (8,547) - (650) (184) 115 10,740 (3,115) 2 (67) (64) 7,561 Total 13,496 6,324 19,820 (8,246) (650) 10,924 (3,230) (66) 7,628 (67) 493 203 696 (148) (91) 457 (120) (24) 313 80 393 7,561 2,360 1,259 174 6,751 (3) (17) (45) (83) (80) (575) (803) (3) (15) (44) (47) (51) (523) (683) 276,648 176,281 175,302 94,818 31,803 34,288 118,892 130,178 65,874 57,568 102,323 770,842 228,372 721,505 261,903 166,122 159,652 90,141 32,210 33,932 97,342 116,230 61,469 53,882 88,521 701,097 193,253 653,560 68 325 72 196 80 799 1,540 66 28 82 104 117 645 1,042 Notes to the financial statements Westpac Retail & St. BT George Financial Westpac Westpac Business Banking Group Institutional New Other Banking Group (Australia) Bank Zealand Divisions 5,649 1,359 3,210 466 402 1,930 1,646 1,584 1,281 389 Net cash Net profit earnings for the adjustment year (91) (147) 12,821 5,774 Total 12,912 5,921 18,833 (7,759) (847) 10,227 (3,088) (76) 7,063 (312) 724 193 917 (215) (59) 643 (252) (55) 336 (162) (238) (217) (455) - 2 (312) 18,595 (7,976) (847) 9,772 (74) 6,751 141 (2,947) 7,008 (3,153) (485) 3,370 (1,010) 2,360 - - 3,676 (1,401) (293) 1,982 (595) - 1,387 (128) 2,332 (1,207) (1) 1,124 (328) (18) 778 (22) 756 3,230 (1,086) 88 2,232 (662) 1,570 - - 1,570 1,670 (697) (97) 876 (241) (3) 632 - 632 2013 $m 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 Additions of property and equipment, goodwill and other intangible assets 130 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 131 Note 2. Segment reporting (continued) Note 2. Segment reporting (continued) Notes to the financial statements 2014 $m 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 Additions of property and equipment, goodwill and other intangible assets Westpac Retail & St. BT George Financial Westpac Westpac Business Banking Group Institutional New Other Banking Group (Australia) Bank Zealand Divisions 5,953 1,441 3,531 515 406 2,257 1,658 1,470 1,455 438 Net cash Net profit earnings for the adjustment year 46 71 13,542 6,395 7,394 (3,266) (436) 3,692 (1,109) 2,583 - - 4,046 (1,559) (236) 2,251 (676) - 1,575 (125) 2,663 (1,323) 2 1,342 (403) (39) 900 (22) 878 3,128 (1,174) 135 2,089 (622) 1,467 - - 1,467 1,893 (776) (24) 1,093 (300) (3) 790 - 790 2,583 1,450 393 7,561 117 (301) 19,937 (8,547) - (650) (184) 115 10,740 (3,115) 2 (67) (64) 7,561 Total 13,496 6,324 19,820 (8,246) (650) 10,924 (3,230) (66) 7,628 (67) 493 203 696 (148) (91) 457 (120) (24) 313 80 (3) (17) (45) (83) (80) (575) (803) 276,648 176,281 175,302 94,818 31,803 34,288 118,892 130,178 65,874 57,568 102,323 770,842 228,372 721,505 68 325 72 196 80 799 1,540 2013 $m 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 Additions of property and equipment, goodwill and other intangible assets Westpac Retail & Business Banking 5,649 1,359 St. George Banking Group 3,210 466 BT Financial Group (Australia) 402 1,930 7,008 (3,153) (485) 3,370 (1,010) - 2,360 - 3,676 (1,401) (293) 1,982 (595) - 1,387 (128) 2,360 1,259 2,332 (1,207) (1) 1,124 (328) (18) 778 (22) 756 Westpac Institutional Bank Westpac New Zealand Other Divisions Net cash earnings adjustment Net profit for the year (91) (147) 12,821 5,774 (238) (217) - (455) 18,595 (7,976) (847) 9,772 141 (2,947) 2 (312) (74) 6,751 Total 12,912 5,921 18,833 (7,759) (847) 10,227 (3,088) (76) 7,063 (312) 724 193 917 (215) (59) 643 (252) (55) 336 (162) 174 6,751 1,646 1,584 1,281 389 3,230 (1,086) 88 2,232 (662) - 1,570 - 1,570 1,670 (697) (97) 876 (241) (3) 632 - 632 (3) (15) (44) (47) (51) (523) (683) 261,903 166,122 159,652 90,141 32,210 33,932 97,342 116,230 61,469 53,882 88,521 701,097 193,253 653,560 66 28 82 104 117 645 1,042 130 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 131 3 Note 2. Segment reporting (continued) Reconciliation of cash earnings to net profit $m Cash earnings for the year Cash earnings adjustments: Partial sale of BTIM Capitalised technology cost balances Amortisation of intangible assets Acquisition, transaction and integration expenses Lloyds tax adjustments Fair value gain/(loss) on economic hedges Ineffective hedges Treasury shares Buyback of government guaranteed debt Westpac Bicentennial Foundation grant Prior year tax provisions Bell litigation provision Fair value amortisation of financial instruments TPS revaluations 2015 7,820 665 (354) (149) (66) 64 33 (1) (1) 1 - - - - - 2014 7,628 - - (147) (51) - 105 (46) (7) 42 (70) 70 54 (17) - Total Cash earnings adjustments Net profit attributable to owners of Westpac Banking Corporation 192 8,012 (67) 7,561 2013 7,063 - - (150) - - (21) 20 (42) (43) - - - (67) (9) (312) 6,751 Further details of the above cash earnings adjustments, which are all net of tax is provided in Section 2. Revenue from products and services Details of revenue from external customers by product or service are disclosed in Notes 3 and 4. 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: Revenue Australia New Zealand Other1 Total Non-current assets2 Australia New Zealand Other1 2015 $m 33,991 4,937 742 39,670 11,949 751 466 % 85.7 12.4 1.9 100.0 90.8 5.7 3.5 2014 $m 32,880 4,738 1,025 38,643 12,828 797 433 Total 1 Other includes Pacific Islands, Asia, the Americas and Europe. 2 Non-current assets include property and equipment, goodwill and other intangible assets. 13,166 100.0 14,058 % 85.1 12.3 2.6 100.0 91.2 5.7 3.1 100.0 2013 $m 34,159 3,885 739 38,783 12,324 786 405 13,515 % 88.1 10.0 1.9 100.0 91.2 5.8 3.0 100.0 Notes to the financial statements Note 3. Net interest income Accounting policy Interest income and expense for all interest bearing financial assets and liabilities (including those instruments measured at fair value) is recognised using the effective interest rate method. Net income related to treasury’s interest rate and liquidity management activities is included in net interest income. The effective interest rate method calculates the amortised cost of a financial instrument and allocates the interest income or interest expense over its expected life. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument, or when appropriate, a shorter period, to the net carrying amount of the financial asset or 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 (e.g. loan establishment fees), 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 or for a variable rate loan, the current effective interest rate. This rate is also used to discount the future cash flows for the purpose of measuring impairment charges. Interest income on finance leases is brought to account progressively over the life of the lease, consistent with the outstanding investment and unearned income balance. $m Interest income Cash and balances with central banks Receivables due from other financial institutions Net ineffectiveness on qualifying hedges Trading securities and financial assets designated at fair value Available-for-sale securities Loans Regulatory deposits with central banks overseas Payables due to other financial institutions Deposits and other borrowings Due from subsidiaries Other interest income Total interest income1 Interest expense Trading liabilities Debt issues Due to subsidiaries Loan capital Other interest expense Total interest expense2 Net interest income Consolidated Parent Entity 2015 2014 2013 2015 2014 219 87 (13) 1,032 1,634 12 - 17 225 84 (58) 1,482 1,386 18 - 7 102 113 31 1,732 1,226 23 - 1 29,307 29,104 29,781 (304) (300) (190) (10,669) (11,499) (12,555) (2,475) (3,908) - (535) (137) (2,523) (3,813) - (490) (81) (2,806) (4,008) - (529) (100) 170 50 (8) 956 1,445 24,468 4,933 12 17 (304) (9,008) (2,476) (3,205) (4,873) (495) (141) 182 35 (61) 1,413 1,231 24,666 18 4,585 7 (299) (10,029) (2,268) (3,096) (4,791) (458) (71) 32,295 32,248 33,009 32,043 32,076 (18,028) (18,706) (20,188) (20,502) (21,012) 14,267 13,542 12,821 11,541 11,064 1 Total interest income for financial assets that are not at fair value through profit or loss is $31,276 million (2014: $30,824 million, 2013: $31,246 million) for the Group and $31,095 million (2014: $30,724 million) for the Parent Entity. 2 Total interest expense for financial liabilities that are not at fair value through profit or loss is $14,363 million (2014: $14,996 million, 2013: $16,116 million) for the Group and $16,923 million (2014: $17,636 million) for the Parent Entity. 132 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 133 Note 2. Segment reporting (continued) Reconciliation of cash earnings to net profit $m Cash earnings for the year Cash earnings adjustments: Partial sale of BTIM Capitalised technology cost balances Amortisation of intangible assets Acquisition, transaction and integration expenses Lloyds tax adjustments Fair value gain/(loss) on economic hedges Ineffective hedges Treasury shares Buyback of government guaranteed debt Westpac Bicentennial Foundation grant Prior year tax provisions Bell litigation provision Fair value amortisation of financial instruments TPS revaluations Total Cash earnings adjustments Revenue from products and services to greater than 10% of the Group’s revenue. Geographic segments 2015 7,820 665 (354) (149) (66) 64 33 (1) (1) 1 - - - - - 192 8,012 % 85.1 12.3 2.6 100.0 91.2 5.7 3.1 100.0 2014 7,628 - - - (147) (51) 105 (46) (7) 42 (70) 70 54 (17) - (67) 7,561 34,159 3,885 739 38,783 12,324 786 405 13,515 2013 7,063 (150) (21) 20 (42) (43) - - - - - - - (67) (9) (312) 6,751 % 88.1 10.0 1.9 100.0 91.2 5.8 3.0 100.0 Net profit attributable to owners of Westpac Banking Corporation Further details of the above cash earnings adjustments, which are all net of tax is provided in Section 2. Details of revenue from external customers by product or service are disclosed in Notes 3 and 4. No single customer amounts Geographic segments are based on the location of the office in which the following items are recognised: 2015 $m 2014 $m 2013 $m Revenue Australia New Zealand Other1 Total Australia New Zealand Other1 Total Non-current assets2 % 85.7 12.4 1.9 100.0 90.8 5.7 3.5 100.0 32,880 4,738 1,025 38,643 12,828 797 433 14,058 33,991 4,937 742 39,670 11,949 751 466 13,166 1 Other includes Pacific Islands, Asia, the Americas and Europe. 2 Non-current assets include property and equipment, goodwill and other intangible assets. Notes to the financial statements Note 3. Net interest income Accounting policy Interest income and expense for all interest bearing financial assets and liabilities (including those instruments measured at fair value) is recognised using the effective interest rate method. Net income related to treasury’s interest rate and liquidity management activities is included in net interest income. The effective interest rate method calculates the amortised cost of a financial instrument and allocates the interest income or interest expense over its expected life. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument, or when appropriate, a shorter period, to the net carrying amount of the financial asset or 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 (e.g. loan establishment fees), 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 or for a variable rate loan, the current effective interest rate. This rate is also used to discount the future cash flows for the purpose of measuring impairment charges. Interest income on finance leases is brought to account progressively over the life of the lease, consistent with the outstanding investment and unearned income balance. $m Interest income Cash and balances with central banks Receivables due from other financial institutions Net ineffectiveness on qualifying hedges Trading securities and 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 Deposits and other borrowings Trading liabilities Debt issues Due to subsidiaries Loan capital Other interest expense Total interest expense2 Consolidated Parent Entity 2015 2014 2013 2015 2014 219 87 (13) 1,032 1,634 225 84 (58) 1,482 1,386 102 113 31 1,732 1,226 29,307 29,104 29,781 12 - 17 18 - 7 23 - 1 170 50 (8) 956 1,445 24,468 12 4,933 17 182 35 (61) 1,413 1,231 24,666 18 4,585 7 32,295 32,248 33,009 32,043 32,076 (304) (300) (190) (10,669) (11,499) (12,555) (2,475) (3,908) - (535) (137) (2,523) (3,813) - (490) (81) (2,806) (4,008) - (529) (100) (304) (9,008) (2,476) (3,205) (4,873) (495) (141) (299) (10,029) (2,268) (3,096) (4,791) (458) (71) (18,028) (18,706) (20,188) (20,502) (21,012) Net interest income 11,541 1 Total interest income for financial assets that are not at fair value through profit or loss is $31,276 million (2014: $30,824 million, 2013: 13,542 12,821 14,267 11,064 $31,246 million) for the Group and $31,095 million (2014: $30,724 million) for the Parent Entity. 2 Total interest expense for financial liabilities that are not at fair value through profit or loss is $14,363 million (2014: $14,996 million, 2013: $16,116 million) for the Group and $16,923 million (2014: $17,636 million) for the Parent Entity. 132 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 133 3 Note 4. Non-interest income Accounting policy Fees and commission income is recognised as follows: Income earned on the execution of a significant act is recognised when the act has been completed (for example, advisory or arrangement services, placement services and underwriting services); Income earned for providing ongoing services is recognised as the services are provided (for example, maintaining and administering existing facilities); and Income which forms an integral part of the effective interest rate of a financial instrument is recognised using the effective interest method and recorded in interest income (for example, loan origination fees). Premium income Life insurance premiums with a regular due date are recognised as revenue on an accrual basis. Premiums with no due date are recognised on a cash received basis. Life investment premiums include a management fee component which is recognised as funds management income over the period the service is provided. The deposit components of life insurance and investment contracts are not revenue and are treated as movements in life insurance policy liabilities. General insurance premium comprises amounts charged to policyholders, including fire service levies, but excludes taxes collected on behalf of third parties. The earned portion of premiums received and receivable is recognised as revenue. General insurance premium revenue is earned from the date of attachment of risk and over the term of the policies written, based on actuarial assessment of the likely pattern in which risk will emerge. The portion not yet earned based on the pattern assessment is recognised as unearned premium liability. Claims expense Life and general insurance contract claims are recognised as an expense when a liability has been established. Claims incurred in respect of life investment contracts represent withdrawals and are recognised as a reduction in life insurance liabilities. Trading income Realised and unrealised gains or losses arising from changes in the fair value of trading assets, liabilities and derivatives are recognised in the period in which they arise except day one profits or losses which are deferred where certain valuation inputs are unobservable. Dividend income on the trading portfolio is recorded as part of trading income. Net income related to treasury’s interest rate and liquidity management activities is included in net interest income. 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. Rental income on operating leases Operating lease rental income is recognised on a straight line basis over the lease term. Note 4. Non-interest income (continued) $m Fees and commissions 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 Net gain/(loss) on hedging overseas operations Net gain/(loss) on derivatives held for risk management purposes1 Net gain/(loss) on financial instruments designated at fair value Trading income Foreign exchange income Other trading products 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 Gain on disposal of controlled entities Rental income on operating leases Share of associates net profit Other Total other income Total non-interest income Funds management income Life insurance premium income Notes to the financial statements Consolidated Parent Entity 2015 2014 2013 2015 2014 1,287 1,025 501 417 1,265 1,030 312 514 2,942 2,926 2,723 3,230 3,121 1,017 1,069 1,509 1,643 1,329 1,254 343 - 2,000 254 2,254 530 487 11 97 - - 12 (27) (14) 32 - - 87 198 1,253 1,160 310 - 1,738 206 1,944 440 629 (118) 32 - 10 67 (1) (6) - - - 54 38 1,342 1,247 353 - 2,033 195 2,228 708 256 964 - 12 103 2 (1) (27) (10) 54 5 62 1,041 1,241 7,375 1,334 1,002 530 (833) 453 - - - 622 275 897 10 95 2 (77) (27) 11 30 - - 42 - - - - - - - - - - - 407 520 927 8 127 - 18 (27) 18 - 1 - 69 - - - - - - - - 1,595 5,722 1,857 5,905 Wealth management and insurance income comprised 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 6,395 5,774 1,337 881 639 (857) 426 1,149 761 1,125 (1,297) 402 30 22 25 (288) 2,228 (194) 2,254 (221) 1,944 1 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. 134 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 135 Note 4. Non-interest income Accounting policy Fees and commission income is recognised as follows: Income earned on the execution of a significant act is recognised when the act has been completed (for example, advisory or arrangement services, placement services and underwriting services); Income earned for providing ongoing services is recognised as the services are provided (for example, maintaining and administering existing facilities); and Income which forms an integral part of the effective interest rate of a financial instrument is recognised using the effective interest method and recorded in interest income (for example, loan origination fees). Premium income are recognised on a cash received basis. Life insurance premiums with a regular due date are recognised as revenue on an accrual basis. Premiums with no due date Life investment premiums include a management fee component which is recognised as funds management income over the period the service is provided. The deposit components of life insurance and investment contracts are not revenue and are treated as movements in life insurance policy liabilities. General insurance premium comprises amounts charged to policyholders, including fire service levies, but excludes taxes collected on behalf of third parties. The earned portion of premiums received and receivable is recognised as revenue. General insurance premium revenue is earned from the date of attachment of risk and over the term of the policies written, based on actuarial assessment of the likely pattern in which risk will emerge. The portion not yet earned based on the pattern assessment is recognised as unearned premium liability. Life and general insurance contract claims are recognised as an expense when a liability has been established. Claims incurred in respect of life investment contracts represent withdrawals and are recognised as a reduction in life Claims expense insurance liabilities. Trading income Realised and unrealised gains or losses arising from changes in the fair value of trading assets, liabilities and derivatives are recognised in the period in which they arise except day one profits or losses which are deferred where certain valuation inputs are unobservable. Dividend income on the trading portfolio is recorded as part of trading income. Net income related to treasury’s interest rate and liquidity management activities is included in net interest income. Dividends on quoted shares are recognised on the ex-dividend date. Dividends on unquoted shares are recognised when the Dividend income company’s right to receive payment is established. Rental income on operating leases Operating lease rental income is recognised on a straight line basis over the lease term. Note 4. Non-interest income (continued) $m Fees and commissions 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 products 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 purposes1 Net gain/(loss) on financial instruments designated at fair value Gain on disposal of controlled entities Rental income on operating leases Share of associates net profit 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 Notes to the financial statements Consolidated Parent Entity 2015 2014 2013 2015 2014 1,342 1,247 353 - 1,329 1,254 343 - 1,253 1,160 310 - 1,287 1,025 501 417 1,265 1,030 312 514 2,942 2,926 2,723 3,230 3,121 2,033 195 2,228 708 256 964 - 12 103 2 (1) (27) (10) 1,041 54 5 62 1,241 7,375 1,334 1,002 530 (833) 453 2,000 254 2,254 530 487 1,738 206 1,944 440 629 1,017 1,069 - 11 97 - 12 (27) (14) - 32 - 87 198 6,395 1,337 881 639 (857) 426 - 10 67 (1) (6) (118) 32 - - - 54 38 5,774 1,149 761 1,125 (1,297) 402 30 22 25 (288) 2,228 (194) 2,254 (221) 1,944 - - - 622 275 897 - - - 407 520 927 1,509 1,643 10 95 2 (77) (27) 11 - 30 - 42 8 127 - 18 (27) 18 - 1 - 69 1,595 5,722 1,857 5,905 - - - - - - - - - - - - - - - - Total wealth management and insurance income 1 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. 134 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 135 3 Note 5. Operating expenses Accounting policy Operating expenses are recognised as the relevant service is rendered or asset is consumed or once a liability is incurred. Salaries and other staff expenses Salaries and wages are recognised over the period the employee renders the service to receive the benefit. The accounting policies for share-based payments and superannuation benefits are included in Note 37 and Note 38 respectively. The accounting policies for other employee benefits are included in Note 28. Operating lease rentals 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. Depreciation, amortisation and impairment Useful lives for each category of assets are as follows: Premises and sites Leasehold improvements Furniture and equipment IT equipment Assets under lease Computer software Core deposit intangible Other intangibles Computer software assets and directly related hardware are amortised over their useful life of 3 to 10 years using either the straight-line or the diminishing balance method (using the Sum of Years Digits). The useful life and amortisation method applied are based on an assessment of the benefits expected to be received from each asset. Up to 50 years Up to 10 years 3 to 15 years 3 to 5 years Up to 7 years 3 to 10 years 9 years 3 to 8 years Depreciation and amortisation for all other asset categories is calculated using the straight-line method to allocate the cost of assets less any residual value over their estimated useful lives. In the current period the Group reviewed both the depreciation method and useful life of certain technology assets. This resulted in increased depreciation, amortisation and impairment of technology assets in the current period of $505 million which otherwise would have been recognised over the forthcoming 8 years. An impairment charge is recognised as part of operating expenses whenever the carrying amount of the asset exceeds its recoverable amount. Wealth management acquisition costs Deferred acquisition costs are the variable costs that are directly related to and incremental to the acquisition of new business principally in relation to the Group’s life insurance and retail funds management 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. Note 5. Operating expenses (continued) Notes to the financial statements Consolidated Parent Entity 2015 2014 2013 2015 2014 $m Salaries and other staff expenses Employee remuneration, entitlements and on-costs Superannuation expense1 Equity based compensation Restructuring costs Total salaries and other staff expenses Equipment and occupancy expenses Operating lease rentals Depreciation of property and equipment Other Total equipment and occupancy expenses Technology expenses Depreciation and impairment of IT equipment Amortisation and impairment of software assets Software maintenance and licences Technology services Data processing Telecommunications Total technology expenses Other expenses Amortisation and impairment of intangible assets and deferred expenditure Impairment on investments in subsidiaries Non-lending losses Credit card loyalty programs Professional services Postage and stationery Advertising Westpac Bicentennial Foundation grant Other expenses Total other expenses Operating expenses2 for consistency. Note 6. Impairment charges Accounting policy 3,990 336 184 61 4,571 565 199 140 904 105 493 199 541 69 167 223 - (23) 136 580 205 159 100 118 3,762 324 155 28 4,269 565 183 125 873 94 403 220 483 64 142 224 - 43 135 526 222 164 - 114 3,199 294 119 71 3,683 507 190 113 810 152 927 181 432 65 178 207 19 64 134 425 159 117 - 220 3,120 272 133 57 3,582 481 156 111 748 91 413 159 442 68 139 207 22 (33) 136 377 158 114 100 216 2,288 1,574 1,406 1,935 1,312 4,094 362 174 74 4,704 586 229 139 954 170 1,051 221 575 67 204 221 - 74 134 615 204 150 - 129 1,527 9,473 1 Refer to Note 38 for details of defined benefit expense. 2 The presentation of operating expenses has been revised to better reflect the nature of our business and we have revised comparatives 1,498 8,547 1,428 7,976 1,345 7,773 1,297 6,939 The Group assesses at each balance date whether there is any objective evidence of impairment of its loan portfolio. An impairment charge is incurred if there is objective evidence of impairment as a result of one or more loss events which have an impact on the estimated cash flows of the financial asset that can be reliably estimated. Objective evidence includes significant financial difficulties of an obligor, adverse changes in the payment status of borrowers or national, local economic conditions that correlate with defaults on a group of loans. The amount of the charge is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the loan’s original effective interest rate. The carrying amount of the loan is reduced through the use of a provision account which is either individually assessed or collectively assessed (refer Note 14) and the amount of the loss is recognised in the income statement. If a loan has a variable interest rate, the discount rate for measuring any impairment is the current effective interest rate. 136 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 137 Operating expenses are recognised as the relevant service is rendered or asset is consumed or once a liability is incurred. $m Note 5. Operating expenses (continued) Salaries and other staff expenses Employee remuneration, entitlements and on-costs Superannuation expense1 Equity based compensation Restructuring costs Total salaries and other staff expenses Equipment and occupancy expenses Operating lease rentals Depreciation of property and equipment Other Total equipment and occupancy expenses Technology expenses Depreciation and impairment of IT equipment Amortisation and impairment of software assets Software maintenance and licences Technology services Data processing Telecommunications Notes to the financial statements Consolidated Parent Entity 2015 2014 2013 2015 2014 4,094 362 174 74 4,704 586 229 139 954 170 1,051 221 575 67 204 3,990 336 184 61 4,571 565 199 140 904 105 493 199 541 69 167 3,762 324 155 28 4,269 565 183 125 873 94 403 220 483 64 142 3,199 294 119 71 3,683 507 190 113 810 152 927 181 432 65 178 3,120 272 133 57 3,582 481 156 111 748 91 413 159 442 68 139 Total technology expenses 2,288 1,574 1,406 1,935 1,312 Note 5. Operating expenses Accounting policy Salaries and other staff expenses Salaries and wages are recognised over the period the employee renders the service to receive the benefit. The accounting policies for share-based payments and superannuation benefits are included in Note 37 and Note 38 respectively. The accounting policies for other employee benefits are included in Note 28. Operating lease rentals 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. Depreciation, amortisation and impairment Useful lives for each category of assets are as follows: Premises and sites Leasehold improvements Furniture and equipment IT equipment Assets under lease Computer software Core deposit intangible Other intangibles Up to 50 years Up to 10 years 3 to 15 years 3 to 5 years Up to 7 years 3 to 10 years 9 years 3 to 8 years Computer software assets and directly related hardware are amortised over their useful life of 3 to 10 years using either the straight-line or the diminishing balance method (using the Sum of Years Digits). The useful life and amortisation method applied are based on an assessment of the benefits expected to be received from each asset. Depreciation and amortisation for all other asset categories is calculated using the straight-line method to allocate the cost of assets less any residual value over their estimated useful lives. In the current period the Group reviewed both the depreciation method and useful life of certain technology assets. This resulted in increased depreciation, amortisation and impairment of technology assets in the current period of $505 million which otherwise would have been recognised over the forthcoming 8 years. An impairment charge is recognised as part of operating expenses whenever the carrying amount of the asset exceeds its recoverable amount. Wealth management acquisition costs Deferred acquisition costs are the variable costs that are directly related to and incremental to the acquisition of new business principally in relation to the Group’s life insurance and retail funds management 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. Other expenses Amortisation and impairment of intangible assets and deferred expenditure Impairment on investments in subsidiaries Non-lending losses Credit card loyalty programs Professional services Postage and stationery Advertising Westpac Bicentennial Foundation grant Other expenses 221 - 74 134 615 204 150 - 129 223 - (23) 136 580 205 159 100 118 224 - 43 135 526 222 164 - 114 207 19 64 134 425 159 117 - 220 Total other expenses Operating expenses2 1 Refer to Note 38 for details of defined benefit expense. 2 The presentation of operating expenses has been revised to better reflect the nature of our business and we have revised comparatives for consistency. Note 6. Impairment charges Accounting policy The Group assesses at each balance date whether there is any objective evidence of impairment of its loan portfolio. An impairment charge is incurred if there is objective evidence of impairment as a result of one or more loss events which have an impact on the estimated cash flows of the financial asset that can be reliably estimated. Objective evidence includes significant financial difficulties of an obligor, adverse changes in the payment status of borrowers or national, local economic conditions that correlate with defaults on a group of loans. The amount of the charge is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the loan’s original effective interest rate. The carrying amount of the loan is reduced through the use of a provision account which is either individually assessed or collectively assessed (refer Note 14) and the amount of the loss is recognised in the income statement. If a loan has a variable interest rate, the discount rate for measuring any impairment is the current effective interest rate. 136 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 137 207 22 (33) 136 377 158 114 100 216 1,297 6,939 1,345 1,428 1,527 1,498 8,547 7,773 7,976 9,473 3 Note 7. Income tax (continued) The determination of the provision for income taxes is one of the Group’s critical accounting assumptions and estimates as Notes to the financial statements detailed in Note 1d(vi). Income tax expense $m before income tax as follows Profit before income tax The income tax expense for the year is reconciled to the profit 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 rate Dividend adjustments Life insurance: Tax adjustment on policyholder earnings Adjustment for life business tax rates Hybrid capital distributions Other non-assessable items Other non-deductible items Adjustment for overseas tax rates Income tax (over)/under provided in prior years Other items1 Total income tax expense in the income statement Income tax expense attributable to profit from ordinary activities comprised: Under/(over) provision in prior years Total income tax expense attributable to profit from ordinary activities Income tax analysis Current income tax Deferred income tax Total Australia Total Overseas Consolidated Parent Entity 2015 2014 2013 2015 2014 11,416 3,425 10,740 3,222 9,772 2,932 8,868 2,660 9,469 2,841 (453) (493) 11 - - (4) 46 (52) 25 (27) (88) 12 1 7 3 (4) 36 (22) 46 (22) (14) (2) (2) 24 (8) 26 37 - (7) (18) 3,348 (138) 3,115 (35) 2,947 3,347 2,704 2,566 89 (88) 3,348 2,964 384 3,348 425 (14) 3,115 2,694 421 3,115 388 (7) 2,947 2,595 352 2,947 - - 1 46 (23) 19 3 (76) (56) 2,121 2,329 (132) (76) 2,121 2,117 4 2,121 1 - 1 36 (22) 39 10 (15) (163) 2,235 1,923 327 (15) 2,235 2,172 63 2,235 Total income tax expense attributable to profit from ordinary activities 1 2014 includes the release of provisions no longer required following the finalisation of prior period taxation matters. The effective tax rate was 29.3% in 2015 (29.0% in 2014). Note 6. Impairment charges (continued) When a loan or part of a loan is uncollectable, it is written off against the related provision for 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. $m Reconciliation of impairment charges Individually assessed provisions raised Write-backs Recoveries Collectively assessed provisions raised Impairment charges Consolidated Parent Entity 2015 566 (297) (131) 615 753 2014 684 (433) (106) 505 650 2013 1,112 (479) (76) 290 847 2015 457 (274) (82) 521 622 2014 550 (373) (73) 457 561 Refer to Note 14 for further details on Provisions for impairment charges. Note 7. Income tax Accounting policy The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised in the statement of other comprehensive income. Current tax is the expected tax payable on the taxable income for the financial year using tax rates and laws 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 amounts attributed to those assets and liabilities for taxation purposes. Deferred tax is not recognised for: temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither the accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is determined using the tax rates and laws enacted or substantively enacted for each jurisdiction at the balance sheet date which are expected to apply in the periods in which the assets will be realised or the liabilities settled. 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. Deferred tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority on the same taxable entity or different entities in the same taxable group and where we have a legal right and intention to settle on a net basis. The Parent Entity and its wholly owned, Australian-controlled entities are part of a tax consolidated group under Australian tax law. The Parent Entity is the head entity in the tax consolidated group. 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. 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’. 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). 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. 138 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 139 Note 6. Impairment charges (continued) When a loan or part of a loan is uncollectable, it is written off against the related provision for 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. Consolidated Parent Entity 2015 566 (297) (131) 615 753 2014 684 (433) (106) 505 650 2013 1,112 (479) (76) 290 847 2015 457 (274) (82) 521 622 2014 550 (373) (73) 457 561 Reconciliation of impairment charges Individually assessed provisions raised $m Write-backs Recoveries Collectively assessed provisions raised Impairment charges Note 7. Income tax Accounting policy of other comprehensive income. previous years. Refer to Note 14 for further details on Provisions for impairment charges. The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised in the statement Current tax is the expected tax payable on the taxable income for the financial year using tax rates and laws that have been enacted or substantively enacted for each jurisdiction at the balance date, and any adjustment to tax payable in respect of 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 amounts attributed to those assets and liabilities for taxation purposes. Deferred tax is not recognised for: temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither the accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is determined using the tax rates and laws enacted or substantively enacted for each jurisdiction at the balance sheet date which are expected to apply in the periods in which the assets will be realised or the liabilities settled. 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. a net basis. Deferred tax assets and liabilities have been offset where they relate to income taxes levied by the same taxation authority on the same taxable entity or different entities in the same taxable group and where we have a legal right and intention to settle on The Parent Entity and its wholly owned, Australian-controlled entities are part of a tax consolidated group under Australian tax law. The Parent Entity is the head entity in the tax consolidated group. 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. 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’. 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). 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. Note 7. Income tax (continued) The determination of the provision for income taxes is one of the Group’s critical accounting assumptions and estimates as detailed in Note 1d(vi). Notes to the financial statements Income tax expense $m The income tax expense for the year is reconciled to the profit before income tax as follows Consolidated Parent Entity 2015 2014 2013 2015 2014 Profit before income tax Prima facie income tax based on the Australian company tax rate of 30% 11,416 3,425 10,740 3,222 9,772 2,932 8,868 2,660 9,469 2,841 The effect of amounts which are not deductible (assessable) in calculating taxable income Change in tax rate Dividend adjustments Life insurance: Tax adjustment on policyholder earnings Adjustment for life business tax rates Hybrid capital distributions Other non-assessable items Other non-deductible items Adjustment for overseas tax rates Income tax (over)/under provided in prior years Other items1 Total income tax expense in the income statement Income tax analysis Income tax expense attributable to profit from ordinary activities comprised: Current income tax Deferred income tax Under/(over) provision in prior years Total income tax expense attributable to profit from ordinary activities Total Australia Total Overseas - 11 - (4) 46 (52) 25 (27) (88) 12 3,348 1 7 3 (4) 36 (22) 46 (22) (14) (2) (2) 24 (8) 26 (18) 37 - (7) (138) 3,115 (35) 2,947 3,347 2,704 2,566 89 (88) 3,348 2,964 384 425 (14) 3,115 2,694 421 388 (7) 2,947 2,595 352 2,947 - (453) 1 (493) - 1 46 (23) 19 3 (76) (56) 2,121 2,329 (132) (76) 2,121 2,117 4 2,121 - 1 36 (22) 39 10 (15) (163) 2,235 1,923 327 (15) 2,235 2,172 63 2,235 Total income tax expense attributable to profit from ordinary activities 1 2014 includes the release of provisions no longer required following the finalisation of prior period taxation matters. 3,348 3,115 The effective tax rate was 29.3% in 2015 (29.0% in 2014). 138 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 139 3 Note 7. Income tax (continued) Deferred tax assets $m 2015 2014 2015 2014 $m Consolidated Parent Entity Consolidated Parent Entity 2015 2014 2015 2014 The balance comprises temporary differences attributable to: Amounts recognised in income statements Provisions for impairment charges on loans Provision for long service leave, annual leave and other employee benefits Financial instruments Property and equipment Other provisions Other liabilities Amounts recognised directly in other comprehensive income Available-for-sale securities Defined benefit deficit 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 assets pursuant to set-off provisions1 906 299 269 235 182 334 926 311 180 227 184 340 726 274 221 222 164 326 756 271 163 217 169 324 Financial instruments Finance lease transactions Property and equipment Life insurance assets Other assets 2,225 2,168 1,933 1,900 Amounts recognised directly in other comprehensive income 12 62 74 (922) 1,377 430 947 1,397 886 16 (922) (55) 113 58 (829) 1,397 376 1,021 1,773 484 (31) (829) 18 61 79 (549) 1,463 492 971 1,322 689 1 (549) (35) 113 78 (656) 1,322 349 973 1,632 374 (28) (656) Note 7. Income tax (continued) Deferred tax liabilities The balance comprises temporary differences attributable to: Amounts recognised in income statements Cash flow hedges Set-off of deferred tax liabilities 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 within the same taxable group. Unrecognised deferred tax liabilities Notes to the financial statements (922) (829) 249 142 112 73 385 961 16 55 25 30 55 975 (53) (922) 55 135 142 223 53 262 815 69 55 24 31 22 909 (47) (829) 55 204 41 116 - 132 493 56 (549) - - - - - 557 (8) (549) 156 34 217 - 185 592 64 (656) - - - - - 701 (45) (656) 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 Deferred tax liabilities relating to aggregate temporary differences of $49 million (2014: $44 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. different entities within the same taxable group. Unrecognised deferred tax assets Deferred tax assets relating to certain tax losses have not been recognised because it is not considered probable that future taxable profit will be available against which they can be realised. $m Tax losses on revenue account Consolidated Parent Entity 2015 80 2014 82 2015 72 2014 73 140 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 141 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 1,397 1,463 1,377 1,322 $m 2015 2014 2015 2014 $m Consolidated Parent Entity Consolidated Parent Entity 2015 2014 2015 2014 Note 7. Income tax (continued) Deferred tax liabilities Notes to the financial statements The balance comprises temporary differences attributable to: Amounts recognised in income statements Financial instruments Finance lease transactions Property and equipment Life insurance assets Other assets 2,225 2,168 1,933 1,900 Amounts recognised directly in other comprehensive income Cash flow hedges Set-off of deferred tax liabilities 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 249 142 112 73 385 961 16 (922) 55 25 30 55 975 (53) (922) 135 142 223 53 262 815 69 (829) 55 24 31 22 909 (47) (829) 204 41 116 - 132 493 56 (549) - - - - 557 (8) (549) 156 34 217 - 185 592 64 (656) - - - - 701 (45) (656) Note 7. Income tax (continued) Deferred tax assets The balance comprises temporary differences attributable to: Amounts recognised in income statements Provisions for impairment charges on loans Provision for long service leave, annual leave and other employee benefits Financial instruments Property and equipment Other provisions Other liabilities Available-for-sale securities Defined benefit deficit Amounts recognised directly in other comprehensive income 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 assets pursuant to set-off provisions1 Closing balance as at end of the year different entities within the same taxable group. Unrecognised deferred tax assets 906 299 269 235 182 334 12 62 74 (922) 1,377 430 947 1,397 886 16 (922) 1,377 926 311 180 227 184 340 (55) 113 58 (829) 1,397 376 1,021 1,773 484 (31) (829) 1,397 726 274 221 222 164 326 18 61 79 (549) 1,463 492 971 1,322 689 1 (549) 1,463 756 271 163 217 169 324 (35) 113 78 (656) 1,322 349 973 1,632 374 (28) (656) 1,322 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 Deferred tax assets relating to certain tax losses have not been recognised because it is not considered probable that future taxable profit will be available against which they can be realised. $m Tax losses on revenue account Consolidated Parent Entity 2015 80 2014 82 2015 72 2014 73 within the same taxable group. Unrecognised deferred tax liabilities Deferred tax liabilities relating to aggregate temporary differences of $49 million (2014: $44 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. 140 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 141 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 55 55 - - 3 Note 8. Earnings per share Accounting policy Basic earnings per share (EPS) is calculated by dividing the net profit attributable to equity holders, excluding costs of servicing other equity instruments, by the weighted average number of ordinary shares on issue 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 the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. Refer to Note 20 Loan capital and Note 37 Share-based payments for further information on the potential dilutive instruments. Note 9. 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: Notes to the financial statements 2015 Average Balance Interest Income $m $m Average Average Average Average Rate Balance % $m Rate Balance % $m 2014 Interest Income $m 2013 Interest Income $m Average Rate % Consolidated $m Reconciliation of earnings used in the calculation of earnings per ordinary share Net profit attributable to owners of Westpac Banking Corporation Restricted Share Plan (RSP) treasury shares distributions1 Distributions relating to convertible loan capital instruments Net profit attributable to owners of Westpac Banking Corporation adjusted for the effect of dilution Weighted average number of ordinary shares (millions) Weighted average number of ordinary shares Effect of own shares held Potential dilutive adjustment: 2015 2014 2013 Basic Diluted Basic Diluted Basic Diluted 8,012 8,012 7,561 7,561 6,751 6,751 (6) - - 184 (10) - - 165 (12) - - 161 8,006 8,196 7,551 7,726 6,739 6,912 3,134 (10) 3,134 (10) 3,109 (11) 3,109 (11) 3,100 (13) Exercise of options and share rights and vesting of restricted shares Convertible loan capital instruments - - 6 157 - - 9 130 - - Total weighted average number of ordinary shares 3,124 3,287 3,098 3,237 3,087 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 249.3 218.3 238.7 256.3 243.7 3,100 (13) 14 137 3,238 213.5 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. 142 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 143 Trading securities and other financial assets designated at fair value: Consolidated Assets Interest earning assets Receivables due from other financial institutions: Australia New Zealand Overseas Australia New Zealand Overseas Australia New Zealand Overseas Australia New Zealand Overseas Available-for-sale securities: Regulatory deposits: Other overseas Loans and other receivables1: 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 central banks that are interest earning. 2 offset accounts. 1,970 49,400 11,590 51,929 114,889 798,703 2,542 359 7,005 28,077 3,812 4,772 2,886 2,040 63 6 18 822 138 72 130 82 2.5 1.7 0.3 2.9 3.6 1.5 3.8 4.5 4.0 2,433 294 5,151 60 5 19 32,877 4,358 10,134 1,226 132 124 2,384 1,351 107 49 2.5 1.7 0.4 3.7 3.0 1.2 4.5 4.5 3.6 2,852 338 5,959 3,309 6,262 2,085 1,089 36,974 1,422 27,222 1,230 21,475 1,107 38,506 1,560 1,147 12 1.0 1,369 18 1.3 1,512 86 5 22 88 84 93 26 23 502,474 25,280 63,349 28,377 3,818 432 5.0 6.0 1.5 474,570 25,498 59,240 25,979 3,449 331 5.4 5.8 1.3 449,405 26,712 50,801 16,276 2,924 279 683,814 32,295 4.7 647,362 32,248 5.0 599,869 33,009 3.0 1.5 0.4 4.1 2.7 1.3 5.2 4.5 2.4 1.5 5.9 5.8 1.7 5.5 1,513 28,866 13,687 45,696 89,762 737,124 723 33,967 12,713 41,023 88,426 688,295 1 Loans and receivables are stated net of provisions for impairment charges on loans. Other receivables include other assets and cash with Includes property and equipment, goodwill and intangibles, other assets, deferred tax and non-interest bearing loans relating to mortgage Note 8. Earnings per share Accounting policy Basic earnings per share (EPS) is calculated by dividing the net profit attributable to equity holders, excluding costs of servicing other equity instruments, by the weighted average number of ordinary shares on issue 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 the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential Refer to Note 20 Loan capital and Note 37 Share-based payments for further information on the potential dilutive instruments. ordinary shares. Consolidated $m per ordinary share Reconciliation of earnings used in the calculation of earnings Restricted Share Plan (RSP) treasury shares distributions1 Distributions relating to convertible loan capital instruments Net profit attributable to owners of Westpac Banking Corporation adjusted for the effect of dilution 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 Convertible loan capital instruments Total weighted average number of ordinary shares Earnings per ordinary share (cents) 2015 2014 2013 Basic Diluted Basic Diluted Basic Diluted (6) - - 184 (10) - - 165 (12) - - 161 8,006 8,196 7,551 7,726 6,739 6,912 3,134 (10) - - 3,124 256.3 3,134 (10) 6 157 3,287 249.3 3,109 (11) - - 3,098 243.7 3,109 (11) 9 130 3,237 238.7 3,100 (13) - - 3,087 218.3 3,100 (13) 14 137 3,238 213.5 Net profit attributable to owners of Westpac Banking Corporation 8,012 8,012 7,561 7,561 6,751 6,751 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. Note 9. 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: Notes to the financial statements Consolidated Assets Interest earning assets Receivables due from other financial institutions: Australia New Zealand Overseas Trading securities and other financial assets designated at fair value: Australia New Zealand Overseas Available-for-sale securities: Australia New Zealand Overseas Regulatory deposits: Other overseas Loans and other receivables1: Australia New Zealand Overseas 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 Average Balance $m 2015 Interest Income $m Average Rate % Average Balance $m 2014 Interest Income $m Average Rate % Average Balance $m 2013 Interest Income $m Average Rate % 2,542 359 7,005 28,077 3,812 4,772 63 6 18 822 138 72 36,974 1,422 2,886 2,040 130 82 2.5 1.7 0.3 2.9 3.6 1.5 3.8 4.5 4.0 2,433 294 5,151 60 5 19 32,877 4,358 10,134 1,226 132 124 27,222 1,230 2,384 1,351 107 49 2.5 1.7 0.4 3.7 3.0 1.2 4.5 4.5 3.6 2,852 338 5,959 86 5 22 38,506 1,560 3,309 6,262 88 84 21,475 1,107 2,085 1,089 93 26 23 1,147 12 1.0 1,369 18 1.3 1,512 502,474 25,280 63,349 28,377 3,818 432 5.0 6.0 1.5 474,570 25,498 59,240 25,979 3,449 331 5.4 5.8 1.3 449,405 26,712 50,801 16,276 2,924 279 683,814 32,295 4.7 647,362 32,248 5.0 599,869 33,009 1,970 49,400 11,590 51,929 114,889 1,513 28,866 13,687 45,696 89,762 723 33,967 12,713 41,023 88,426 3.0 1.5 0.4 4.1 2.7 1.3 5.2 4.5 2.4 1.5 5.9 5.8 1.7 5.5 Total assets 1 Loans and receivables are stated net of provisions for impairment charges on loans. Other receivables include other assets and cash with 737,124 688,295 798,703 2 central banks that are interest earning. Includes property and equipment, goodwill and intangibles, other assets, deferred tax and non-interest bearing loans relating to mortgage offset accounts. 142 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 143 3 Note 9. Average balance sheet and interest rates (continued) Note 9. Average balance sheet and interest rates (continued) Consolidated Liabilities Interest bearing liabilities Payables due to other financial institutions: Australia New Zealand Overseas Deposits and other borrowings: Australia New Zealand Overseas Loan capital: Australia Overseas Other interest bearing liabilities1: Australia New Zealand Overseas Total interest bearing liabilities and interest expense Non-interest bearing liabilities Deposits and payables due to other financial institutions: Australia New Zealand 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 Includes net impact of Treasury balance sheet management activities. Includes other liabilities, provisions, current and deferred tax liabilities. Average Balance $m 2015 Interest Income $m Average Rate % Average Balance $m 2014 Interest Income $m Average Rate % Average Balance $m 2013 Interest Income $m Average Rate % 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 11,839 584 5,417 357,199 45,555 30,760 10,888 753 247 14 43 8,815 1,643 211 492 43 164,075 5,856 12,842 716 661 3 2.1 2.4 0.8 2.5 3.6 0.7 4.5 5.7 3.6 5.1 0.4 10,253 547 4,767 342,385 42,444 29,347 8,729 1,358 250 11 39 9,850 1,453 196 424 66 151,742 5,824 12,364 2,617 552 41 2.4 2.0 0.8 2.9 3.4 0.7 4.9 4.9 3.8 4.5 1.6 4,218 458 4,648 131 7 52 325,634 11,141 35,674 25,368 1,214 200 7,183 2,436 144,777 10,073 1 414 115 6,353 561 - 640,628 18,028 2.8 606,553 18,706 3.1 560,470 20,188 3.1 1.5 1.1 3.4 3.4 0.8 5.8 4.7 4.4 5.6 - 3.6 29,948 3,531 1,061 51,808 10,035 11,477 107,860 748,488 49,361 854 50,215 798,703 23,826 3,169 812 31,172 12,359 11,894 83,232 689,785 46,477 862 47,339 737,124 19,173 2,578 783 35,542 11,574 11,853 81,503 641,973 44,350 1,972 46,322 688,295 $m Interest earning assets Receivables due from other financial institutions: Trading securities and other financial assets designated at fair value: the total. Consolidated Australia New Zealand Overseas Australia New Zealand Overseas Australia New Zealand Overseas Australia New Zealand Overseas Australia New Zealand Overseas Australia New Zealand Overseas Loan capital: Australia Overseas Australia New Zealand Overseas Australia New Zealand Overseas Available-for-sale securities: Regulatory deposits: Overseas Loans and other receivables: Total change in interest income Interest bearing liabilities Payables due to other financial institutions: Deposits and other borrowings: Other interest bearing liabilities: Total change in interest expense Change in net interest income: Total change in net interest income Notes to the financial statements 2015 Change Due to 2014 Change Due to Volume Rate Total Volume Rate Total 1,499 (1,717) (218) 1,496 (2,710) (1,214) 2,004 (1,957) 2,297 (3,058) (761) 3 1 7 (179) (17) (66) 441 23 25 (3) 239 31 39 1 5 426 106 9 105 (29) 473 21 (30) 721 118 39 878 - - (8) (225) 23 14 (249) - 8 (3) 130 70 (42) 2 (1) 84 6 (37) 6 (441) 88 (8) (210) (21) 78 (153) 3 1 (1) (404) 6 (52) (13) (1) (3) (229) 28 54 192 23 33 (6) 369 101 47 (3) 3 4 190 15 68 (23) 32 109 (38) 511 97 117 725 296 13 6 (2) 486 166 187 1 1 573 230 31 89 (51) 306 128 - 395 167 240 802 (13) 1 - (105) 16 (14) (173) 1 17 (3) 39 (114) (68) 3 (14) 9 (35) (79) 2 (835) (137) 41 (155) 182 (108) (81) 1,126 (1,804) (678) 1,495 (2,977) (1,482) (1,461) (1,035) (1,864) (1,291) (26) - (3) (334) 44 40 123 14 23 (5) 525 52 119 4 (13) 239 (4) 10 (49) (529) (9) 41 240 349 132 721 145 144 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 247 14 43 8,815 1,643 211 492 43 661 3 2.1 2.4 0.8 2.5 3.6 0.7 4.5 5.7 3.6 5.1 0.4 250 11 39 9,850 1,453 196 424 66 552 41 2.4 2.0 0.8 2.9 3.4 0.7 4.9 4.9 3.8 4.5 1.6 4,218 458 4,648 131 7 52 325,634 11,141 35,674 25,368 1,214 200 7,183 2,436 144,777 10,073 1 414 115 6,353 561 - 3.1 1.5 1.1 3.4 3.4 0.8 5.8 4.7 4.4 5.6 - 3.6 640,628 18,028 2.8 606,553 18,706 3.1 560,470 20,188 Other interest bearing liabilities1: 164,075 5,856 151,742 5,824 Consolidated Liabilities Interest bearing liabilities Payables due to other financial institutions: Deposits and other borrowings: Australia New Zealand Overseas Australia New Zealand Overseas Loan capital: Australia Overseas Australia New Zealand Overseas Total interest bearing liabilities and interest expense Non-interest bearing liabilities Deposits and payables due to other financial institutions: Australia New Zealand 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 11,839 584 5,417 357,199 45,555 30,760 10,888 753 12,842 716 29,948 3,531 1,061 51,808 10,035 11,477 107,860 748,488 49,361 854 50,215 798,703 1 2 Includes net impact of Treasury balance sheet management activities. Includes other liabilities, provisions, current and deferred tax liabilities. 10,253 547 4,767 342,385 42,444 29,347 8,729 1,358 12,364 2,617 23,826 3,169 812 31,172 12,359 11,894 83,232 689,785 46,477 862 47,339 737,124 19,173 2,578 783 35,542 11,574 11,853 81,503 641,973 44,350 1,972 46,322 688,295 Note 9. Average balance sheet and interest rates (continued) 2015 Average Balance Interest Income $m $m Average Average Average Average Rate Balance % $m Rate Balance % $m 2014 Interest Income $m 2013 Interest Income $m Average Rate % Notes to the financial statements Note 9. 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. Consolidated $m Interest earning assets Receivables due from other financial institutions: Australia New Zealand Overseas Trading securities and other financial assets designated at fair value: Australia New Zealand Overseas Available-for-sale securities: Australia New Zealand Overseas Regulatory deposits: Overseas Loans and other receivables: Australia New Zealand Overseas Total change in interest income Interest bearing liabilities Payables due to other financial institutions: Australia New Zealand Overseas Deposits and other borrowings: Australia New Zealand Overseas Loan capital: Australia Overseas Other interest bearing liabilities: Australia New Zealand Overseas Total change in interest expense Change in net interest income: Australia New Zealand Overseas Total change in net interest income 2015 Change Due to 2014 Change Due to Volume Rate Total Volume Rate Total 3 1 7 (179) (17) (66) 441 23 25 (3) - - (8) (225) 23 14 (249) - 8 (3) 3 1 (1) (404) 6 (52) 192 23 33 (6) (13) (1) (3) (229) 28 54 296 13 6 (2) (13) 1 - (105) 16 (14) (173) 1 17 (3) (26) - (3) (334) 44 40 123 14 23 (5) 1,499 (1,717) (218) 1,496 (2,710) (1,214) 239 31 130 70 2,004 (1,957) 369 101 47 (3) 3 4 (42) 2 (1) (1,461) (1,035) 84 6 (37) 6 (441) 88 (8) 190 15 68 (23) 32 109 (38) 39 1 5 426 106 9 105 (29) 473 21 (30) 486 166 39 (114) 525 52 2,297 (3,058) (761) 187 1 1 573 230 31 89 (51) 306 128 - (68) 3 (14) 119 4 (13) (1,864) (1,291) 9 (35) (79) 2 (835) (137) 41 239 (4) 10 (49) (529) (9) 41 1,126 (1,804) (678) 1,495 (2,977) (1,482) 721 118 39 878 (210) (21) 78 (153) 511 97 117 725 395 167 240 802 (155) 182 (108) (81) 240 349 132 721 144 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 145 3 8,741 7,424 9,583 5,483 Total receivables due from other financial institutions 1 Further information on conduit assets is disclosed in Note 25. Conduit assets are only available to meet associated conduit liabilities disclosed in FINANCIAL ASSETS AND FINANCIAL LIABILITIES Note 10. Receivables due from other financial institutions Accounting policy Receivables due from other financial institutions are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They include conduit assets, collateral placed and interbank lending. These financial assets are initially recognised at fair value plus directly attributable transaction costs and subsequently measured at amortised cost using the effective interest rate method. $m Conduit assets1 Cash collateral Interbank lending Consolidated Parent Entity 2015 823 7,602 1,158 2014 1,417 3,830 2,177 2015 - 7,586 1,155 2014 - 3,686 1,797 Notes to the financial statements Note 11. Trading securities and financial assets designated at fair value (continued) The Group has total holdings of debt securities from three Australian State Governments (Queensland Treasury Corporation: $13,447 million and NSW Treasury Corporation: $9,065 million and Treasury Corporation of Victoria: $5,706 million) the aggregate book and market value, each of which exceeded 10% of the Group total shareholders’ equity at 30 September 2015. The Group holds $8,473 million of US Government treasury notes (2014: $4,559 million, 2013: $4,978 million). Both of the above are recognised in the categories trading securities and other financial assets designated at fair value and available-for-sale securities (Note 12) at 30 September 2015. Note 12. Available-for-sale securities Accounting policy Available-for-sale financial assets are held at fair value with gains and losses included in other comprehensive income. This classification is used for debt or equity securities that are not held for trading purposes or designated at fair value through the Income statement or loans and receivables. The Group assesses at each reporting date whether there is objective evidence of impairment. Impairment exists if there is objective evidence of impairment as a result of one or more loss events which have an impact on the estimated cash flows of the available-for-sale security that can be reliably estimated. For debt instruments classified as available-for-sale, evidence of impairment includes significant financial difficulties or adverse changes in the payment status of an issuer or national, local economic conditions that correlate with defaults on a group of financial assets. 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 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 an available-for-sale debt increases and the increase can be objectively related to an event occurring after the impairment event, 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. $m 1 Available-for-sale securities Government and semi-government securities Debt securities Equity securities1 Total available-for-sale securities Consolidated Parent Entity 2015 2014 2013 2015 2014 41,112 13,672 49 22,573 13,241 210 19,941 9,868 202 38,182 12,133 29 19,858 12,127 24 54,833 36,024 30,011 50,344 32,009 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. 2015: $33 million (2014: $16 million). The following table shows the maturities of the Group’s available-for-sale securities and their weighted-average yield as at 30 September 2015. There are no tax-exempt securities. Within 1 Year Over 1 Year Over 5 Years Over No Specific to 5 Years to 10 Years 10 Years Maturity Total Weighted Average $m % $m % $m % $m % $m % $m % 2015 Carrying amount Debt securities Equity securities Total by maturity Government and semi-government securities 12,002 3.5% 16,097 4.2% 13,013 3.2% 1,403 2.7% 11,183 3.4% 1,086 3.7% - - - - - - 13,405 27,280 14,099 - - - - - - - - - 49 49 - - - 41,112 13,672 49 54,833 3.8% 3.3% - The maturity profile is determined based upon contractual terms for available-for-sale instruments. Note 19. Note 11. Trading securities and financial assets designated at fair value Accounting policy Trading securities are acquired principally for the purpose of selling in the near term or are 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. It includes debt and equity instruments which are actively traded. Financial assets designated at fair value at inception include securities purchased under agreement to resell that are part of a trading portfolio, and other financial assets which either contain an embedded derivative, are managed on a fair value basis, or reduce or eliminate an accounting mismatch. A portfolio of retail fixed rate bills which have been designated at fair value to reduce an accounting mismatch have, due to their nature, been presented within the loans category in the Balance sheet (refer Note 13). These financial assets are recognised at fair value with gains and losses included in the Income statement. Interest earned on Government and other debt securities is recognised within Net interest income (Note 3) and dividends earned on equity securities are recorded in Non-interest income – other income (Note 4). $m Trading securities Securities purchased under agreement to resell Other financial assets designated at fair value Consolidated Parent Entity 2015 20,170 3,982 3,302 2014 36,881 6,275 2,753 2013 39,448 6,882 2,759 2015 18,272 3,982 2,642 2014 35,794 6,275 2,255 Total trading securities and other financial assets designated at fair value 27,454 45,909 49,089 24,896 44,324 Trading securities include the following: $m Government and semi-government securities Debt securities Equity securities Other Total trading securities Other financial assets designated at fair value include: $m Debt securities Equity securities Total other financial assets designated at fair value Consolidated Parent Entity 2015 12,545 7,555 20 50 2014 25,275 11,519 44 43 2013 20,518 18,883 22 25 2015 11,937 6,265 20 50 2014 25,244 10,463 44 43 20,170 36,881 39,448 18,272 35,794 Consolidated Parent Entity 2015 2,900 402 3,302 2014 2,447 306 2,753 2013 2,471 288 2,759 2015 2,531 111 2,642 2014 2,117 138 2,255 146 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 147 FINANCIAL ASSETS AND FINANCIAL LIABILITIES Note 10. Receivables due from other financial institutions Accounting policy Receivables due from other financial institutions are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They include conduit assets, collateral placed and interbank lending. These financial assets are initially recognised at fair value plus directly attributable transaction costs and subsequently measured at amortised cost using the effective interest rate method. Consolidated Parent Entity 2015 823 7,602 1,158 9,583 2014 1,417 3,830 2,177 7,424 2015 - 7,586 1,155 8,741 2014 - 3,686 1,797 5,483 $m Conduit assets1 Cash collateral Interbank lending Note 19. Accounting policy Total receivables due from other financial institutions 1 Further information on conduit assets is disclosed in Note 25. Conduit assets are only available to meet associated conduit liabilities disclosed in Note 11. Trading securities and financial assets designated at fair value Trading securities are acquired principally for the purpose of selling in the near term or are 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. It includes debt and equity instruments which are actively traded. Financial assets designated at fair value at inception include securities purchased under agreement to resell that are part of a trading portfolio, and other financial assets which either contain an embedded derivative, are managed on a fair value basis, or reduce or eliminate an accounting mismatch. A portfolio of retail fixed rate bills which have been designated at fair value to reduce an accounting mismatch have, due to their nature, been presented within the loans category in the Balance sheet (refer Note 13). These financial assets are recognised at fair value with gains and losses included in the Income statement. Interest earned on Government and other debt securities is recognised within Net interest income (Note 3) and dividends earned on equity securities are recorded in Non-interest income – other income (Note 4). Total trading securities and other financial assets designated at fair value 27,454 45,909 49,089 24,896 44,324 $m Trading securities Securities purchased under agreement to resell Other financial assets designated at fair value Trading securities include the following: Government and semi-government securities $m Debt securities Equity securities Other Total trading securities Other financial assets designated at fair value include: $m Debt securities Equity securities Total other financial assets designated at fair value Consolidated Parent Entity 2015 2014 2013 2015 2014 20,170 36,881 39,448 18,272 35,794 3,982 3,302 6,275 2,753 6,882 2,759 3,982 2,642 6,275 2,255 Consolidated Parent Entity 2015 12,545 7,555 20 50 2014 25,275 11,519 44 43 2013 20,518 18,883 22 25 2015 11,937 6,265 20 50 2014 25,244 10,463 44 43 20,170 36,881 39,448 18,272 35,794 Consolidated Parent Entity 2015 2,900 402 3,302 2014 2,447 306 2,753 2013 2,471 288 2,759 2015 2,531 111 2,642 2014 2,117 138 2,255 Notes to the financial statements Note 11. Trading securities and financial assets designated at fair value (continued) The Group has total holdings of debt securities from three Australian State Governments (Queensland Treasury Corporation: $13,447 million and NSW Treasury Corporation: $9,065 million and Treasury Corporation of Victoria: $5,706 million) the aggregate book and market value, each of which exceeded 10% of the Group total shareholders’ equity at 30 September 2015. The Group holds $8,473 million of US Government treasury notes (2014: $4,559 million, 2013: $4,978 million). Both of the above are recognised in the categories trading securities and other financial assets designated at fair value and available-for-sale securities (Note 12) at 30 September 2015. Note 12. Available-for-sale securities Accounting policy Available-for-sale financial assets are held at fair value with gains and losses included in other comprehensive income. This classification is used for debt or equity securities that are not held for trading purposes or designated at fair value through the Income statement or loans and receivables. The Group assesses at each reporting date whether there is objective evidence of impairment. Impairment exists if there is objective evidence of impairment as a result of one or more loss events which have an impact on the estimated cash flows of the available-for-sale security that can be reliably estimated. For debt instruments classified as available-for-sale, evidence of impairment includes significant financial difficulties or adverse changes in the payment status of an issuer or national, local economic conditions that correlate with defaults on a group of financial assets. 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 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 an available-for-sale debt increases and the increase can be objectively related to an event occurring after the impairment event, 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. $m Available-for-sale securities Government and semi-government securities Debt securities Equity securities1 Total available-for-sale securities 1 Consolidated Parent Entity 2015 2014 2013 2015 2014 41,112 13,672 49 22,573 13,241 210 19,941 9,868 202 38,182 12,133 29 19,858 12,127 24 54,833 36,024 30,011 50,344 32,009 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. 2015: $33 million (2014: $16 million). The following table shows the maturities of the Group’s available-for-sale securities and their weighted-average yield as at 30 September 2015. There are no tax-exempt securities. 2015 Carrying amount Within 1 Year Over 1 Year to 5 Years Over 5 Years to 10 Years Over 10 Years No Specific Maturity Weighted Average Total $m % $m % $m % $m % $m % $m % Government and semi-government securities 12,002 3.5% 16,097 4.2% 13,013 3.2% Debt securities Equity securities Total by maturity 1,403 2.7% 11,183 3.4% 1,086 3.7% - - - - - - 13,405 27,280 14,099 - - - - - - - - - 49 49 - - - 41,112 13,672 49 54,833 3.8% 3.3% - The maturity profile is determined based upon contractual terms for available-for-sale instruments. 146 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 147 3 Note 13. Loans (continued) The following table shows loans presented based on their industry classification: Notes to the financial statements Consolidated $m Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Property, property services and business services Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Services1 Trade2 Utilities3 Retail lending Other Total Australia Overseas Transport and storage Manufacturing4 Mining4 Services1 Trade2,4 Utilities3 Transport and storage Retail lending Other Total overseas Total loans Provisions on loans Total net loans 2015 2014 2013 2012 2011 7,690 7,741 6,114 16,054 794 9,538 4,441 59,337 11,756 16,038 10,002 3,549 390,592 2,009 545,655 652 7,938 1,447 6,643 432 6,402 1,203 2,774 6,161 2,439 1,820 29,029 77 80,689 626,344 (3,028) 623,316 7,447 7,224 6,416 14,644 784 9,269 3,293 55,150 10,874 15,616 9,330 3,272 365,822 2,114 511,255 562 6,938 1,184 3,880 389 5,091 2,010 2,486 6,127 1,730 1,764 27,462 190 72,261 583,516 (3,173) 580,343 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 2,416 474,144 585 6,506 1,367 2,960 639 4,484 1,335 2,651 5,435 1,528 1,476 25,363 108 65,662 539,806 (3,642) 536,164 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 2,298 463,014 594 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 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 1,330 448,482 580 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 Property, property services and business services 13,672 12,448 11,225 Note 13. Loans Accounting policy Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus directly attributable transaction costs. Subsequent to initial recognition, loans are measured at amortised cost using the effective interest rate method and are presented net of any provisions for impairment. 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 as they do not meet the criteria to be offset. Interest earned on this product is presented on a net basis in the income statement as this reflects how the customer is charged. Included within loans are leases that have been classified as finance leases. In its capacity as a lessor, the Group primarily offers finance leases. A finance lease is a lease where substantially all the risks and rewards of the leased asset transfer to the lessee. Assets held under finance lease are recognised 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. The following table shows loans disaggregated by type of product. Loans are classified based on the location of the booking office: $m Australia Housing Personal (loans and cards) Business Margin lending Other Total Australia New Zealand Housing Personal (loans and cards) Business Other Total New Zealand Other overseas Trade finance Other Total other overseas Total loans Provisions on loans (refer to Note 14) Total net loans1,2 1 Consolidated Parent Entity 2015 2014 2015 2014 375,848 22,234 145,481 1,980 112 351,037 21,242 136,903 1,960 113 375,826 16,321 138,478 1,987 112 351,009 14,080 128,241 1,984 113 545,655 511,255 532,724 495,427 38,351 1,800 23,485 93 63,729 5,639 11,321 16,960 626,344 (3,028) 623,316 35,465 1,636 21,279 90 58,470 6,147 7,644 13,791 583,516 (3,173) 580,343 - - 328 - 328 5,639 9,857 15,496 548,548 (2,473) 546,075 - - 305 - 305 6,146 6,315 12,461 508,193 (2,589) 505,604 Included in net loans is $7,076 million (2014: $9,330 million) of loans designated at fair value to reduce an accounting mismatch. The cumulative fair value adjustment for credit risk is a decrease of $41 million (2014: $62 million decrease) for the Group and Parent Entity. The change in fair value of loans attributable to credit risk recognised during the period is $21 million (2014: $36 million) for the Group and Parent Entity. 2 The presentation of loans has been revised to better reflect the nature of our business and we have restated comparatives to improve comparability. 1 Services include education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities include electricity, gas and water and communication services. 4 Comparatives have been restated to improve comparability. 148 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 149 Note 13. Loans (continued) The following table shows loans presented based on their industry classification: Notes to the financial statements 2015 2014 2013 2012 2011 Note 13. Loans Accounting policy is charged. booking office: $m Australia Housing Business Margin lending Other Total Australia New Zealand Housing Personal (loans and cards) Personal (loans and cards) Business Other Total New Zealand Other overseas Trade finance Other Total other overseas Total loans Provisions on loans (refer to Note 14) Total net loans1,2 1 Included in net loans is $7,076 million (2014: $9,330 million) of loans designated at fair value to reduce an accounting mismatch. The cumulative fair value adjustment for credit risk is a decrease of $41 million (2014: $62 million decrease) for the Group and Parent Entity. The change in fair value of loans attributable to credit risk recognised during the period is $21 million (2014: $36 million) for the Group and Parent Entity. 2 The presentation of loans has been revised to better reflect the nature of our business and we have restated comparatives to improve comparability. Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus directly attributable transaction costs. Subsequent to initial recognition, loans are measured at amortised cost using the effective interest rate method and are presented net of any provisions for impairment. 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 as they do not meet the criteria to be offset. Interest earned on this product is presented on a net basis in the income statement as this reflects how the customer Included within loans are leases that have been classified as finance leases. In its capacity as a lessor, the Group primarily offers finance leases. A finance lease is a lease where substantially all the risks and rewards of the leased asset transfer to the lessee. Assets held under finance lease are recognised 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. The following table shows loans disaggregated by type of product. Loans are classified based on the location of the Consolidated $m 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 Overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing4 Mining4 Property, property services and business services Services1 Trade2,4 Transport and storage Utilities3 Retail lending Other Total overseas Total loans Provisions on loans Consolidated Parent Entity 2015 2014 2015 2014 545,655 511,255 532,724 495,427 375,848 22,234 145,481 1,980 112 38,351 1,800 23,485 93 63,729 5,639 11,321 16,960 626,344 (3,028) 623,316 351,037 21,242 136,903 1,960 113 35,465 1,636 21,279 90 58,470 6,147 7,644 13,791 583,516 (3,173) 580,343 375,826 16,321 138,478 1,987 112 - - - 328 328 5,639 9,857 15,496 548,548 (2,473) 546,075 351,009 14,080 128,241 1,984 113 - - - 305 305 6,146 6,315 12,461 508,193 (2,589) 505,604 7,690 7,741 6,114 16,054 794 9,538 4,441 59,337 11,756 16,038 10,002 3,549 390,592 2,009 545,655 652 7,938 1,447 6,643 432 6,402 1,203 7,447 7,224 6,416 14,644 784 9,269 3,293 55,150 10,874 15,616 9,330 3,272 365,822 2,114 511,255 562 6,938 1,184 3,880 389 5,091 2,010 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 2,416 474,144 585 6,506 1,367 2,960 639 4,484 1,335 13,672 12,448 11,225 2,774 6,161 2,439 1,820 29,029 77 80,689 626,344 (3,028) 2,486 6,127 1,730 1,764 27,462 190 72,261 583,516 (3,173) 2,651 5,435 1,528 1,476 25,363 108 65,662 539,806 (3,642) 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 2,298 463,014 594 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) 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 1,330 448,482 580 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 Total net loans 1 Services include education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities include electricity, gas and water and communication services. 4 Comparatives have been restated to improve comparability. 580,343 536,164 623,316 514,445 148 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 149 3 Note 13. Loans (continued) The following table shows the consolidated contractual maturity distribution of all loans by type of customer as at 30 September 2015: 2015 $m Loans by type of customer in 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 Total overseas Up to 1 Year 1 to 5 Years Over 5 Years Total Gross investment in finance leases, receivable: 2,306 2,808 1,364 5,591 44 3,260 795 4,739 4,063 3,627 6,536 302 4,940 1,959 18,838 32,015 1,560 5,912 1,377 94 18,665 975 63,589 24,011 7,729 8,322 6,795 2,582 43,332 907 127,848 17,150 645 870 1,123 3,927 448 1,338 1,687 8,484 2,467 1,804 1,830 873 328,595 127 354,218 39,528 7,690 7,741 6,114 16,054 794 9,538 4,441 59,337 11,756 16,038 10,002 3,549 390,592 2,009 545,655 80,689 Total loans 1 Some mortgage lending to customers with business banking relationships is included in loans over 5 years categorised by the industry of the 144,998 393,746 87,600 626,344 associated business. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. Consolidated $m 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 2015 Loans at Fixed Interest Rates 394,307 18,641 412,948 87,759 38,037 125,796 Loans at Variable Interest Rates 2014 Loans at Fixed Interest Rates 353,625 16,244 369,869 94,316 34,746 129,062 Total 482,066 56,678 538,744 Total 447,941 50,990 498,931 150 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 151 Note 13. Loans (continued) Loans include the following finance lease receivables: $m Due after one year but not later than five years Due within one year Due after five years Unearned future finance income on finance leases Net investment in finance leases Accumulated allowance for uncollectable minimum lease payments Net investment in finance leases after accumulated allowance The net investment in finance leases may be analysed as follows: Due after one year but not later than five years Due within one year Due after five years Total net investment in finance leases Note 14. Provisions for impairment charges Accounting policy described in Note 1d(ii). $m Collectively assessed provisions Balance as at beginning of the year Net provisions raised 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 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 28) Total provisions for impairment charges on loans 2,614 615 (793) 190 37 2,663 867 566 (297) (445) (22) - 669 3,332 (304) 3,028 Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 743 4,668 419 (804) 5,026 (10) 5,016 713 4,000 313 5,026 2,585 505 (702) 189 37 2,614 1,364 684 (433) (706) (34) (8) 867 3,481 (308) 3,173 904 5,039 689 (958) 5,674 (26) 5,648 868 4,305 501 5,674 2,771 290 (708) 196 36 2,585 1,470 1,112 (479) (691) (75) 27 1,364 3,949 (307) 3,642 388 2,228 303 (315) 2,604 (7) 2,597 375 1,991 238 2,604 2,148 521 (627) 156 5 2,203 719 457 (274) (338) (24) 3 543 2,746 (273) 2,473 416 2,059 312 (327) 2,460 (9) 2,451 402 1,822 236 2,460 2,107 457 (585) 151 18 2,148 1,123 550 (373) (532) (36) (13) 719 2,867 (278) 2,589 The Group has individually assessed provisions and collectively assessed provisions. Individually assessed provisions are made against loans that exceed specified thresholds and which have been individually assessed as impaired. If the Group determines that no objective evidence of impairment exists for an individually assessed loan, it includes that loan in a group of loans with similar credit risk characteristics and collectively assesses them for impairment. Loans that are individually assessed and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. The determination of the provision for impairment is one of the Group’s critical accounting assumptions and estimates as Consolidated Parent Entity 2015 2014 2013 2015 2014 Property, property services and business services 18,838 32,015 Note 13. Loans (continued) 30 September 2015: 2015 $m Loans by type of customer in Australia1 Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Transport and storage Manufacturing Mining Services2 Trade3 Utilities4 Retail lending Other Total Australia Total overseas Total loans associated business. Consolidated 2,306 2,808 1,364 5,591 44 3,260 795 1,560 5,912 1,377 94 18,665 975 63,589 24,011 87,600 Total 482,066 56,678 538,744 4,739 4,063 3,627 6,536 302 4,940 1,959 7,729 8,322 6,795 2,582 43,332 907 127,848 17,150 144,998 645 870 1,123 3,927 448 1,338 1,687 8,484 2,467 1,804 1,830 873 328,595 127 354,218 39,528 393,746 Loans at Variable Interest Rates 2014 Loans at Fixed Interest Rates 353,625 16,244 369,869 94,316 34,746 129,062 7,690 7,741 6,114 16,054 794 9,538 4,441 59,337 11,756 16,038 10,002 3,549 390,592 2,009 545,655 80,689 626,344 Total 447,941 50,990 498,931 1 Some mortgage lending to customers with business banking relationships is included in loans over 5 years categorised by the industry of the 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. $m 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 2015 Loans at Fixed Interest Rates 394,307 18,641 412,948 87,759 38,037 125,796 The following table shows the consolidated contractual maturity distribution of all loans by type of customer as at Note 13. Loans (continued) Loans include the following finance lease receivables: Up to 1 Year 1 to 5 Years Over 5 Years Total Gross investment in finance leases, receivable: $m 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 uncollectable 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 Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 743 4,668 419 (804) 5,026 (10) 5,016 713 4,000 313 5,026 904 5,039 689 (958) 5,674 (26) 5,648 868 4,305 501 5,674 388 2,228 303 (315) 2,604 (7) 2,597 375 1,991 238 2,604 416 2,059 312 (327) 2,460 (9) 2,451 402 1,822 236 2,460 Note 14. Provisions for impairment charges Accounting policy The Group has individually assessed provisions and collectively assessed provisions. Individually assessed provisions are made against loans that exceed specified thresholds and which have been individually assessed as impaired. If the Group determines that no objective evidence of impairment exists for an individually assessed loan, it includes that loan in a group of loans with similar credit risk characteristics and collectively assesses them for impairment. Loans that are individually assessed and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. The determination of the provision for impairment is one of the Group’s critical accounting assumptions and estimates as described in Note 1d(ii). $m Collectively assessed provisions Balance as at beginning of the year Net provisions raised 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 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 28) Total provisions for impairment charges on loans Consolidated Parent Entity 2015 2014 2013 2015 2014 2,614 615 (793) 190 37 2,663 867 566 (297) (445) (22) - 669 3,332 (304) 3,028 2,585 505 (702) 189 37 2,614 1,364 684 (433) (706) (34) (8) 867 3,481 (308) 3,173 2,771 290 (708) 196 36 2,585 1,470 1,112 (479) (691) (75) 27 1,364 3,949 (307) 3,642 2,148 521 (627) 156 5 2,203 719 457 (274) (338) (24) 3 543 2,746 (273) 2,473 2,107 457 (585) 151 18 2,148 1,123 550 (373) (532) (36) (13) 719 2,867 (278) 2,589 150 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 151 3 Note 14. Provisions for impairment charges (continued) The following table presents provisions for impairment charges on loans by industry classification for the past five years: Note 14. Provisions for impairment charges (continued) The following table shows details of loan write-offs by industry classifications for the past five years: Consolidated 2015 2014 2013 2012 2011 $m % $m % $m % $m % $m % 2015 2014 2013 2012 2011 Notes to the financial statements 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 Total other overseas Total individually assessed provisions Total collectively assessed provisions 38 23 20 23 41 11 224 20 39 54 - 57 3 1.1 0.7 0.6 0.7 1.2 0.3 6.8 0.6 1.2 1.6 - 1.7 0.1 47 47 61 24 36 15 283 32 70 12 2 60 2 1.4 1.4 1.8 0.7 1.0 0.4 8.1 0.9 2.0 0.3 0.1 1.7 0.1 59 80 66 24 108 4 428 48 116 45 29 76 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 53 46 73 38 116 2 518 121 87 47 22 67 7 1.2 1.1 1.7 0.9 2.7 0.1 45 28 63 58 90 2 1.0 0.6 1.4 1.3 2.0 - 12.2 559 12.7 2.9 2.1 1.1 0.5 1.6 0.2 96 97 38 23 74 7 2.2 2.2 0.9 0.5 1.7 0.2 553 16.6 691 19.9 1,089 27.6 1,197 28.3 1,180 26.7 - 6 1 - 33 13 43 2 1 - - 8 107 9 669 2,663 - 0.2 - - 1.0 0.4 1.3 0.1 - - - 0.2 3.2 0.3 20.1 79.9 - 6 1 - 33 36 38 1 2 1 - 10 128 48 867 2,614 - 0.2 - - 0.9 1.0 1.1 - 0.1 - - 0.3 3.6 1.4 24.9 75.1 1 17 6 9 6 37 71 40 2 - 1 - 0.4 0.2 0.2 0.2 0.9 1.8 1.0 0.1 - - 5 20 2 9 16 - 116 35 3 - - 0.1 0.5 0.1 0.2 0.4 - 2.7 0.8 0.1 - - 2 20 4 3 29 1 112 6 7 - - 17 207 68 1,364 2,585 0.4 5.2 1.7 34.5 65.5 14 220 53 1,470 2,771 0.3 5.2 1.2 34.7 65.3 27 211 70 1,461 2,953 - 0.5 0.1 0.1 0.7 - 2.5 0.1 0.2 - - 0.6 4.8 1.6 33.1 66.9 Property, property services and business services (174) (232) (340) Accommodation, cafes and restaurants Agriculture, forestry and fishing Consolidated $m Write-offs Australia Construction Finance and insurance Manufacturing Mining Transport and storage Services1 Trade2 Utilities3 Retail lending Other Total Australia New Zealand Construction Finance and insurance Manufacturing Mining Transport and storage Services1 Trade2 Utilities3 Retail lending Other Total New Zealand Total other overseas Total write-offs Write-offs in relation to: Accommodation, cafes and restaurants Agriculture, forestry and fishing Property, property services and business services (658) (13) (1,110) (603) (14) (1,209) (545) (9) (1,217) (597) (11) (1,423) (661) (21) (1,579) (40) (36) (40) (12) (20) (17) (18) (56) (24) (2) (3) (1) (28) (18) (1) (4) - - - - - - (26) (60) (37) (10) (85) (4) (22) (70) (43) (3) (2) (10) (5) (10) (1) (10) (41) (37) (3) - - - (31) (30) (46) (14) (50) (5) (58) (69) (18) (2) (1) (7) (4) (13) (3) - (94) (5) (4) (1) (46) - - (24) (11) (106) (11) (45) (1) (453) (41) (53) (37) (33) (2) (23) (9) (2) (17) (1) (105) (5) (3) (1) - (59) (1) (228) (57) (34) (23) (27) (5) (134) (15) (507) (28) (57) (60) (7) (3) (59) (24) (1) (12) (126) (4) (15) - - (13) (84) (1) (342) (6) (55) (49) (110) (18) (1,238) (793) (445) (1,238) (168) (31) (1,408) (702) (706) (1,408) (178) (4) (1,399) (708) (691) (1,399) (1,708) (1,927) (756) (952) (1,708) (739) (1,188) (1,927) Total provisions for impairment charges and credit commitments 3,332 1 Services include education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities include electricity, gas and water and communication services. 4,414 100.0 Collectively assessed provisions Individually assessed provisions Total write-offs 1 Services include education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities include electricity, gas and water and communication services. 100.0 100.0 3,481 100.0 3,949 4,241 100.0 152 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 153 Note 14. Provisions for impairment charges (continued) The following table presents provisions for impairment charges on loans by industry classification for the past five years: Note 14. 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 Consolidated 2015 2014 2013 2012 2011 $m % $m % $m % $m % $m % Property, property services and business services 224 283 10.9 12.2 559 12.7 Individually assessed provisions by industry Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Mining Transport and storage Services1 Trade2 Utilities3 Retail lending Other Total Australia New Zealand Construction Finance and insurance Manufacturing Mining Services1 Trade2 Transport and storage Utilities3 Retail lending Total New Zealand Total other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Property, property services and business services Total individually assessed provisions Total collectively assessed provisions Total provisions for impairment charges and 2 Trade includes wholesale trade and retail trade. 3 Utilities include electricity, gas and water and communication services. 553 16.6 691 19.9 1,089 27.6 1,197 28.3 1,180 26.7 1.1 0.7 0.6 0.7 1.2 0.3 6.8 0.6 1.2 1.6 - 1.7 0.1 0.2 1.0 0.4 1.3 0.1 - - - - - - 47 47 61 24 36 15 32 70 12 2 60 2 33 36 38 - 6 1 - 1 2 1 - 1.4 1.4 1.8 0.7 1.0 0.4 8.1 0.9 2.0 0.3 0.1 1.7 0.1 0.2 0.9 1.0 1.1 0.1 - - - - - - 59 80 66 24 108 4 428 48 116 45 29 76 6 1 17 6 9 6 37 71 40 2 - 1 38 23 20 23 41 11 20 39 54 - 57 3 33 13 43 - 6 1 - 2 1 - - 8 9 0.2 3.2 0.3 20.1 79.9 10 128 48 867 2,614 0.3 3.6 1.4 24.9 75.1 17 207 68 1,364 2,585 0.4 5.2 1.7 34.5 65.5 107 669 2,663 1.5 2.0 1.7 0.6 2.7 0.1 1.2 2.9 1.1 0.8 1.9 0.2 - 0.4 0.2 0.2 0.2 0.9 1.8 1.0 0.1 - - 53 46 73 38 116 2 518 121 87 47 22 67 7 5 20 2 9 16 - 116 35 3 - - 14 220 53 1,470 2,771 1.2 1.1 1.7 0.9 2.7 0.1 2.9 2.1 1.1 0.5 1.6 0.2 0.1 0.5 0.1 0.2 0.4 - 2.7 0.8 0.1 - - 45 28 63 58 90 2 96 97 38 23 74 7 2 20 4 3 1 6 7 - - 29 112 1.0 0.6 1.4 1.3 2.0 - 2.2 2.2 0.9 0.5 1.7 0.2 - 0.5 0.1 0.1 0.7 - 2.5 0.1 0.2 - - 0.3 5.2 1.2 34.7 65.3 27 211 70 1,461 2,953 0.6 4.8 1.6 33.1 66.9 100.0 Consolidated $m 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 Total other overseas Total write-offs Write-offs in relation to: 2015 2014 2013 2012 2011 (40) (36) (40) (12) (20) (17) (174) (18) (56) (24) (2) (658) (13) (1,110) - (3) - - (1) (28) (18) (1) (4) - - (55) - (110) (18) (26) (60) (37) (10) (85) (4) (232) (22) (70) (43) (3) (603) (14) (1,209) (2) (10) (5) (10) (1) (10) (41) (37) (3) - - (49) - (168) (31) (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) (4) (1,238) (1,408) (1,399) (1,708) (24) (11) (106) (11) (45) (1) (453) (41) (53) (37) (33) (597) (11) (1,423) (2) (23) (9) (2) (17) (1) (34) (23) (27) (5) (134) (15) (507) (28) (57) (60) (7) (661) (21) (1,579) (3) (59) (24) (1) (12) - (105) (126) (5) (3) (1) - (59) (1) (228) (57) (4) (15) - (13) (84) (1) (342) (6) (1,927) (739) (1,188) (1,927) credit commitments 3,332 100.0 3,481 100.0 3,949 100.0 4,241 100.0 4,414 1 Services include education, health and community services, cultural and recreational services and personal and other services. Collectively assessed provisions Individually assessed provisions (793) (445) (702) (706) (708) (691) (756) (952) Total write-offs 1 Services include education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities include electricity, gas and water and communication services. (1,238) (1,399) (1,408) (1,708) 152 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 153 3 Note 14. Provisions for impairment charges (continued) The following table shows details of recoveries of loans by industry classifications for the past five years: 2015 2014 2013 2012 2011 The determination of life insurance liabilities is also one of the Group’s critical accounting assumptions and estimates described Consolidated $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 - - 4 8 3 17 1 1 - - 78 1 - - 2 8 3 12 - 1 - 2 62 2 1 1 1 3 8 11 - 1 1 - 41 - - - 1 2 5 23 1 1 1 - 61 1 - - - - - 9 - - - - 46 - 55 5 60 (1,927) (1,867) Total Australia Total New Zealand Total recoveries Total write-offs Net write-offs and recoveries 1 Services include education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities include electricity, gas and water and communication services. 68 8 76 (1,399) (1,323) 113 18 131 (1,238) (1,107) 92 14 106 (1,408) (1,302) 96 8 104 (1,708) (1,604) Note 15. Life insurance assets and life insurance liabilities Accounting policy Assets held by the life insurance companies and their subsidiaries, including investments in funds managed by the Group, are designated at fair value through income statement 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. 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 which have been determined to support either the life insurance or life investment contracts. Life investment contract liabilities Life investment contract liabilities are designated at fair value through income statement. Fair value is based on the higher of the valuation of linked assets, or the minimum current surrender value. 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 Prudential Standard LPS 340 Valuation of Policy Liabilities. 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. 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 income statement. 154 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 155 Note 15. Life insurance assets and life insurance liabilities (continued) The determination of the fair value of life insurance assets uses the same judgements as other financial assets which are described in the critical accounting assumptions and estimates in Note 1d(vii). Notes to the financial statements 2015 2014 4,350 7,448 621 51 655 13,125 5,063 4,889 621 65 369 11,007 Total 2015 9,637 368 875 (1,183) (129) 1,991 11,559 2014 7,428 456 831 (1,298) (140) 2,360 9,637 in Note 1d(vii). Life insurance assets Consolidated $m Investments held directly and in unit trusts Equities Debt Property Loans Other Total life insurance assets Life insurance liabilities Consolidated $m Opening balance Movements in policy liabilities reflected in the income statement Contract contributions recognised in policy liabilities Contract withdrawals recognised in policy liabilities Contract fees, expenses and tax recoveries Change in non-controlling interest of managed investment schemes Closing balance rate method. $m Cash collateral Offshore central bank deposits Interbank borrowing Securities sold under agreements to repurchase1 Total payables due to other financial institutions There were no life insurance assets in the Parent Entity as at 30 September 2015 (2014: nil). Reconciliation of movements in policy liabilities Life investment contracts Life insurance contracts 2015 10,378 463 875 (1,183) (129) 1,991 12,395 2014 8,080 545 831 (1,298) (140) 2,360 10,378 2015 (741) 2014 (652) (95) (89) - - - - - - - - (836) (741) There were no life insurance liabilities in the Parent Entity as at 30 September 2015 (2014: nil). Note 16. Payables due to other financial institutions Accounting policy Payables due to other financial institutions include interbank borrowing, securities sold under agreements to repurchase, cash collateral and deposits (including vostro, settlement and clearing account balances) due to central and other banks. These financial liabilities are initially recognised at fair value and subsequently measured at amortised cost using the effective interest 1 Securities sold under agreements to repurchase are not derecognised from the balance sheet, as set out in Note 1(c)(iv). The carrying value of securities pledged under repurchase agreements for the Group and the Parent Entity is $6,998 million (2014: $8,099 million). Consolidated Parent Entity 2015 4,037 3,922 5,271 5,501 2014 3,876 3,039 5,478 6,243 2015 3,445 3,922 5,265 5,501 2014 3,842 3,039 5,287 6,243 18,731 18,636 18,133 18,411 Note 14. Provisions for impairment charges (continued) The following table shows details of recoveries of loans by industry classifications for the past five years: Property, property services and business services 17 12 11 23 Accommodation, cafes and restaurants Agriculture, forestry and fishing Consolidated $m Recoveries Australia Construction Finance and insurance Manufacturing Services1 Trade2 Transport and storage Utilities3 Retail lending Other Total Australia Total New Zealand Total recoveries Total write-offs 2015 2014 2013 2012 2011 - - 4 8 3 1 1 - - 78 1 113 18 131 (1,238) (1,107) - - 2 8 3 - 1 - 2 62 2 92 14 1 1 1 3 8 - 1 1 - 41 - 68 8 76 - - 1 2 5 1 1 1 - 61 1 96 8 9 - - - - - - - - - - 46 55 5 60 Net write-offs and recoveries 1 Services include education, health and community services, cultural and recreational services and personal and other services. 2 Trade includes wholesale trade and retail trade. 3 Utilities include electricity, gas and water and communication services. 106 (1,408) (1,302) (1,399) (1,323) 104 (1,708) (1,604) (1,927) (1,867) Note 15. Life insurance assets and life insurance liabilities Accounting policy Assets held by the life insurance companies and their subsidiaries, including investments in funds managed by the Group, are designated at fair value through income statement 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. 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 which have been determined to support either the life insurance or life investment contracts. Life investment contract liabilities Life insurance contract liabilities Life investment contract liabilities are designated at fair value through income statement. Fair value is based on the higher of the valuation of linked assets, or the minimum current surrender value. 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 Prudential Standard LPS 340 Valuation of Policy Liabilities. 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. income statement. 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 Notes to the financial statements Note 15. Life insurance assets and life insurance liabilities (continued) The determination of the fair value of life insurance assets uses the same judgements as other financial assets which are described in the critical accounting assumptions and estimates in Note 1d(vii). The determination of life insurance liabilities is also one of the Group’s critical accounting assumptions and estimates described in Note 1d(vii). Life insurance assets Consolidated $m Investments held directly and in unit trusts Equities Debt Property Loans Other Total life insurance assets 2015 2014 4,350 7,448 621 51 655 13,125 5,063 4,889 621 65 369 11,007 There were no life insurance assets in the Parent Entity as at 30 September 2015 (2014: nil). Life insurance liabilities Consolidated Reconciliation of movements in policy liabilities $m Opening balance Movements in policy liabilities reflected in the income statement Contract contributions recognised in policy liabilities Contract withdrawals recognised in policy liabilities Contract fees, expenses and tax recoveries Change in non-controlling interest of managed investment schemes Closing balance Life investment contracts Life insurance contracts 2015 10,378 463 875 (1,183) (129) 1,991 12,395 2014 8,080 545 831 (1,298) (140) 2,360 10,378 2015 (741) 2014 (652) (95) (89) - - - - - - - - (836) (741) Total 2015 9,637 368 875 (1,183) (129) 1,991 11,559 2014 7,428 456 831 (1,298) (140) 2,360 9,637 There were no life insurance liabilities in the Parent Entity as at 30 September 2015 (2014: nil). Note 16. Payables due to other financial institutions Accounting policy Payables due to other financial institutions include interbank borrowing, securities sold under agreements to repurchase, cash collateral and deposits (including vostro, settlement and clearing account balances) due to central and other banks. These financial liabilities are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method. $m Cash collateral Offshore central bank deposits Interbank borrowing Securities sold under agreements to repurchase1 Consolidated Parent Entity 2015 4,037 3,922 5,271 5,501 2014 3,876 3,039 5,478 6,243 2015 3,445 3,922 5,265 5,501 2014 3,842 3,039 5,287 6,243 Total payables due to other financial institutions 1 Securities sold under agreements to repurchase are not derecognised from the balance sheet, as set out in Note 1(c)(iv). The carrying value of 18,731 18,133 18,636 18,411 securities pledged under repurchase agreements for the Group and the Parent Entity is $6,998 million (2014: $8,099 million). 154 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 155 3 Note 17. Deposits and other borrowings Accounting policy Deposits and other borrowings include certificates of deposit, at-call and term deposits, other related interest-bearing financial instruments and securities sold under agreements to repurchase. Subsequent to initial recognition at fair value, deposits and other borrowings are measured at either amortised cost using the effective interest rate method or at fair value through the income statement where they are designated as such on initial recognition. The Group designates certain deposits and other borrowings at fair value when those liabilities are managed on a fair value basis (as part of a trading portfolio), where an accounting mismatch is eliminated or reduced (which arises from associated derivatives executed for risk management purposes), or where the instrument contains an embedded derivative. These liabilities are measured at fair value with changes in fair value (except own credit) recognised through the Income statement in the period in which they arise. The change in the portion of the fair value that is attributable to Westpac’s own credit risk is recognised in other comprehensive income except where it would create an accounting mismatch, in which case it is also recognised through the Income statement. Interest expense incurred is recorded within net interest income using the effective interest rate method. $m Australia Certificates of deposit Non-interest bearing, repayable at call Other interest bearing at call Other interest bearing term Total Australia New Zealand Certificates of deposit Non-interest bearing, repayable at call Other interest bearing at call Other interest bearing term Total New Zealand Overseas Certificates of deposit Non-interest bearing, repayable at call Other interest bearing at call Other interest bearing term Total overseas Total deposits and other borrowings Deposits and other borrowings at fair value1 Deposits and other borrowings at amortised cost Consolidated Parent Entity 2015 2014 2015 2014 32,156 33,030 209,755 122,071 397,012 974 3,671 21,735 21,863 48,243 15,054 1,009 1,752 12,258 30,073 475,328 46,239 429,089 35,481 25,773 187,904 133,972 383,130 1,031 3,217 18,418 22,500 45,166 15,065 914 1,694 14,853 32,526 460,822 49,636 411,186 32,223 33,030 209,638 122,071 396,962 35,538 25,773 187,876 133,972 383,159 - - - - - 15,054 431 1,211 11,851 28,547 425,509 45,331 380,178 - - - - - 15,065 355 1,204 14,400 31,024 414,183 48,661 365,522 Total deposits and other borrowings 1 The amount that would be contractually required to be paid at maturity to the holders of the financial liabilities designated at fair value through income 475,328 414,183 460,822 425,509 statement for the Group is $46,284 million (2014: $49,614 million) and for the Parent Entity is $45,372 million (2014: $48,632 million). 156 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 157 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 out below: Consolidated 2015 Note 17. 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 Consolidated 2015 2014 2013 Average Balance $m 29,201 32,201 199,107 125,891 386,400 4,514 16,617 22,427 37,271 80,829 Average Rate % 2.5% 2.0% 3.2% 0.6% 3.0% 2.9% Average Balance $m 23,082 31,793 182,046 128,546 365,467 3,926 15,717 20,354 35,720 75,717 Average Rate % 2.7% 2.5% 3.5% 0.5% 3.1% 2.6% Average Balance $m 18,399 29,352 162,748 133,534 344,033 3,345 15,259 16,483 29,300 64,387 Average Rate % 3.1% 3.1% 3.9% 0.6% 2.9% 2.9% 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 $m Certificates of deposit greater than US$100,000 Term deposits greater than US$100,000 Less Than 3 Months 21,196 59,854 Between 3 and 6 Months 10,823 22,421 Between 6 Months and 1 Year 5 12,792 Over 1 Year 132 7,679 Total 32,156 102,746 Note 18. Other financial liabilities at fair value through income statement Accounting policy Other financial liabilities at fair value through income statement includes trading securities sold short and securities sold under repurchase agreements which have been designated at fair value on initial recognition. Subsequent to initial recognition, these liabilities are measured at fair value with changes in fair value (except as noted below) recognised through the income statement in the period in which they arise. For financial liabilities that have been designated at fair value, the change in the portion of the fair value that is attributable to Westpac’s own credit risk is recognised in other comprehensive income except where it would create an accounting mismatch, in which case it is recognised through the Income statement. Interest expense incurred is recorded within net interest income using the effective interest rate method. $m Securities sold under agreements to repurchase1 Securities sold short Consolidated Parent Entity 2015 8,407 819 9,226 2014 17,277 1,959 19,236 2015 8,407 819 9,226 2014 17,196 1,959 19,155 Total other financial liabilities at fair value through income statement 1 Securities sold under agreements to repurchase are not derecognised from the balance sheet, as set out in Note 1(c)(iv). The carrying value of securities pledged under repurchase agreements for the Group is $8,653 million (2014: $17,879 million) and for the Parent Entity is $8,653 million (2014: $17,798 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 is $9,141 million (2014: $19,111 million) and for the Parent Entity is $9,141 million (2014: $19,030 million). Note 17. Deposits and other borrowings Accounting policy Deposits and other borrowings include certificates of deposit, at-call and term deposits, other related interest-bearing financial instruments and securities sold under agreements to repurchase. Subsequent to initial recognition at fair value, deposits and other borrowings are measured at either amortised cost using the effective interest rate method or at fair value through the income statement where they are designated as such on initial recognition. The Group designates certain deposits and other borrowings at fair value when those liabilities are managed on a fair value basis (as part of a trading portfolio), where an accounting mismatch is eliminated or reduced (which arises from associated derivatives executed for risk management purposes), or where the instrument contains an embedded derivative. These liabilities are measured at fair value with changes in fair value (except own credit) recognised through the Income statement in the period in which they arise. The change in the portion of the fair value that is attributable to Westpac’s own credit risk is recognised in other comprehensive income except where it would create an accounting mismatch, in which case it is also recognised through the Income statement. Interest expense incurred is recorded within net interest income using the effective interest rate method. $m Australia Certificates of deposit Non-interest bearing, repayable at call Non-interest bearing, repayable at call Other interest bearing at call Other interest bearing term Total Australia New Zealand Certificates of deposit Other interest bearing at call Other interest bearing term Total New Zealand Overseas Certificates of deposit Other interest bearing at call Other interest bearing term Total overseas Non-interest bearing, repayable at call Total deposits and other borrowings Deposits and other borrowings at fair value1 Deposits and other borrowings at amortised cost Total deposits and other borrowings Consolidated Parent Entity 2015 2014 2015 2014 32,156 33,030 209,755 122,071 397,012 974 3,671 21,735 21,863 48,243 15,054 1,009 1,752 12,258 30,073 475,328 46,239 429,089 475,328 35,481 25,773 187,904 133,972 383,130 1,031 3,217 18,418 22,500 45,166 15,065 914 1,694 14,853 32,526 460,822 49,636 411,186 460,822 32,223 33,030 209,638 122,071 396,962 35,538 25,773 187,876 133,972 383,159 - - - - - 15,054 431 1,211 11,851 28,547 425,509 45,331 380,178 425,509 - - - - - 15,065 355 1,204 14,400 31,024 414,183 48,661 365,522 414,183 1 The amount that would be contractually required to be paid at maturity to the holders of the financial liabilities designated at fair value through income statement for the Group is $46,284 million (2014: $49,614 million) and for the Parent Entity is $45,372 million (2014: $48,632 million). Note 17. 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 Consolidated 2015 2014 2013 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 Average Balance $m 29,201 32,201 199,107 125,891 386,400 4,514 16,617 22,427 37,271 80,829 Average Rate % 2.5% 2.0% 3.2% 0.6% 3.0% 2.9% Average Balance $m 23,082 31,793 182,046 128,546 365,467 3,926 15,717 20,354 35,720 75,717 Average Rate % 2.7% 2.5% 3.5% 0.5% 3.1% 2.6% Average Balance $m 18,399 29,352 162,748 133,534 344,033 3,345 15,259 16,483 29,300 64,387 Average Rate % 3.1% 3.1% 3.9% 0.6% 2.9% 2.9% 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: Consolidated 2015 $m Certificates of deposit greater than US$100,000 Term deposits greater than US$100,000 Less Than 3 Months 21,196 59,854 Between 3 and 6 Months 10,823 22,421 Between 6 Months and 1 Year 5 12,792 Over 1 Year 132 7,679 Total 32,156 102,746 Note 18. Other financial liabilities at fair value through income statement Accounting policy Other financial liabilities at fair value through income statement includes trading securities sold short and securities sold under repurchase agreements which have been designated at fair value on initial recognition. Subsequent to initial recognition, these liabilities are measured at fair value with changes in fair value (except as noted below) recognised through the income statement in the period in which they arise. For financial liabilities that have been designated at fair value, the change in the portion of the fair value that is attributable to Westpac’s own credit risk is recognised in other comprehensive income except where it would create an accounting mismatch, in which case it is recognised through the Income statement. Interest expense incurred is recorded within net interest income using the effective interest rate method. $m Securities sold under agreements to repurchase1 Securities sold short Consolidated Parent Entity 2015 8,407 819 2014 17,277 1,959 2015 8,407 819 2014 17,196 1,959 securities pledged under repurchase agreements for the Group is $8,653 million (2014: $17,879 million) and for the Parent Entity is $8,653 million (2014: $17,798 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 is $9,141 million (2014: $19,111 million) and for the Parent Entity is $9,141 million (2014: $19,030 million). 156 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 157 Total other financial liabilities at fair value through income statement 1 Securities sold under agreements to repurchase are not derecognised from the balance sheet, as set out in Note 1(c)(iv). The carrying value of 19,236 9,226 9,226 19,155 3 Note 19. Debt issues Accounting policy Debt issues are bonds, notes, commercial paper and debentures that have been issued by entities in the Group. Debt issues also include acceptances, which are bills of exchange initially accepted and discounted by the Group that have been subsequently rediscounted into the market. Bill financing provided to customers by accepting and discounting of bills of exchanges is reported as part of loans. Subsequent to initial recognition, debt issues are measured at either amortised cost using the effective interest rate method or at fair value through income statement where they are designated as such on initial recognition. The Group designates certain debt issues at fair value to reduce or eliminate an accounting mismatch which arises from associated derivatives executed for risk management purposes, or where the instrument contains an embedded derivative. These financial liabilities are measured at fair value with changes in fair value (except own credit) recognised through the income statement in the period in which they arise. The change in the fair value that is attributable to Westpac’s own credit risk is recognised in other comprehensive income except where it would create an accounting mismatch, in which case it is also recognised through the Income statement. Interest expense incurred is recorded within net interest income using the effective interest rate method. Presented in the following table are the Group and Parent Entity’s debt issues at 30 September 2015 and 2014. The distinction between short-term and long-term debt is based on the maturity of the underlying security at origination. $m Debt issues Short-term debt: Own issuances Customer conduits1 Acceptances 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 value2 Debt issues at amortised cost Consolidated Parent Entity 2015 2014 2015 2014 34,943 823 97 35,863 35,062 87,645 12,034 - 450 135,191 171,054 9,318 161,736 30,302 1,418 101 31,821 26,168 82,377 11,277 27 581 120,430 152,251 9,542 142,709 32,470 27,562 - 97 - 101 32,567 27,663 31,401 80,747 23,167 77,016 - - - 112,148 144,715 6,415 138,300 - - - 100,183 127,846 6,315 121,531 Total debt issues 1 Further information on customer conduits is disclosed in Note 25. 2 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 loss for the Group is $9,372 million (2014: $9,529 million) and for the Parent Entity is $6,483 million (2014: $6,324 million). Included in the carrying value of debt issues at fair value is a decrease for cumulative changes in own credit spreads of $218 million (2014: $58 million) for the Group and Parent Entity. 127,846 144,715 171,054 152,251 158 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Note 19. Debt issues (continued) Consolidated $m Short-term debt US commercial paper Asset backed commercial paper (by currency): Total asset backed commercial paper NZD promissory notes Acceptances Total short-term debt Long-term debt (by currency): AUD USD AUD CHF EUR GBP JPY NZD USD Other Total long-term debt Consolidated $m 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 Group’s hedge accounting are in Note 21. Note 20. Loan capital Accounting policy $m Loan capital Additional Tier 1 loan capital Convertible debentures and Trust preferred securities Convertible preference shares Westpac capital notes Total Additional Tier 1 loan capital Tier 2 loan capital Subordinated notes Subordinated perpetual notes Total Tier 2 loan capital Total loan capital Notes to the financial statements 2015 2014 34,943 30,259 35,863 31,821 823 823 - - 97 41,706 1,912 27,278 7,067 4,272 2,991 48,145 1,820 135,191 1,301 117 1,418 43 101 39,356 2,130 20,522 3,785 7,557 2,969 41,808 2,303 120,430 2015 2014 2013 38,774 35,482 0.3% 0.3% 35,173 31,130 0.3% 0.3% 35,727 30,158 0.4% 0.4% Consolidated Parent Entity 2015 2014 2015 2014 765 1,182 3,981 5,928 7,408 504 7,912 13,840 633 1,180 2,669 4,482 5,974 402 6,376 10,858 765 1,182 3,981 5,928 7,408 504 7,912 13,840 633 1,180 2,669 4,482 5,974 402 6,376 10,858 159 The Group manages foreign exchange exposure from debt issuances as part of its hedging activities. Further details of the Loan capital are instruments issued by the Group with terms and conditions that qualify for inclusion as regulatory capital under APRA Prudential Standards. Loan capital is recognised as a financial liability initially measured at fair value plus directly attributable transaction costs and subsequently measured at amortised cost using the effective interest rate method. Note 19. Debt issues Accounting policy Debt issues are bonds, notes, commercial paper and debentures that have been issued by entities in the Group. Debt issues also include acceptances, which are bills of exchange initially accepted and discounted by the Group that have been subsequently rediscounted into the market. Bill financing provided to customers by accepting and discounting of bills of exchanges is reported as part of loans. Subsequent to initial recognition, debt issues are measured at either amortised cost using the effective interest rate method or at fair value through income statement where they are designated as such on initial recognition. The Group designates certain debt issues at fair value to reduce or eliminate an accounting mismatch which arises from associated derivatives executed for risk management purposes, or where the instrument contains an embedded derivative. These financial liabilities are measured at fair value with changes in fair value (except own credit) recognised through the income statement in the period in which they arise. The change in the fair value that is attributable to Westpac’s own credit risk is recognised in other comprehensive income except where it would create an accounting mismatch, in which case it is also recognised through the Income statement. Interest expense incurred is recorded within net interest income using the effective interest rate method. Presented in the following table are the Group and Parent Entity’s debt issues at 30 September 2015 and 2014. The distinction between short-term and long-term debt is based on the maturity of the underlying security at origination. $m Debt issues Short-term debt: Own issuances Customer conduits1 Acceptances 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 value2 Debt issues at amortised cost Total debt issues Consolidated Parent Entity 2015 2014 2015 2014 34,943 823 97 35,863 35,062 87,645 12,034 - 450 135,191 171,054 9,318 161,736 171,054 30,302 1,418 101 31,821 26,168 82,377 11,277 27 581 120,430 152,251 9,542 142,709 152,251 32,470 27,562 - 101 32,567 27,663 31,401 80,747 23,167 77,016 - 97 - - - - - - 100,183 127,846 6,315 121,531 127,846 112,148 144,715 6,415 138,300 144,715 Note 19. Debt issues (continued) Consolidated $m Short-term debt US commercial paper Asset backed commercial paper (by currency): AUD USD Total asset backed commercial paper NZD promissory notes Acceptances Total short-term debt Long-term debt (by currency): AUD CHF EUR GBP JPY NZD USD Other Total long-term debt Consolidated $m 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 Notes to the financial statements 2015 2014 34,943 30,259 823 - 823 - 97 1,301 117 1,418 43 101 35,863 31,821 41,706 1,912 27,278 7,067 4,272 2,991 48,145 1,820 135,191 39,356 2,130 20,522 3,785 7,557 2,969 41,808 2,303 120,430 2015 2014 2013 38,774 35,482 0.3% 0.3% 35,173 31,130 0.3% 0.3% 35,727 30,158 0.4% 0.4% 1 Further information on customer conduits is disclosed in Note 25. 2 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 loss for the Group is $9,372 million (2014: $9,529 million) and for the Parent Entity is $6,483 million (2014: $6,324 million). Included in the carrying value of debt issues at fair value is a decrease for cumulative changes in own credit spreads of $218 million (2014: $58 million) for the Group and Parent Entity. The Group manages foreign exchange exposure from debt issuances as part of its hedging activities. Further details of the Group’s hedge accounting are in Note 21. Note 20. Loan capital Accounting policy Loan capital are instruments issued by the Group with terms and conditions that qualify for inclusion as regulatory capital under APRA Prudential Standards. Loan capital is recognised as a financial liability initially measured at fair value plus directly attributable transaction costs and subsequently measured at amortised cost using the effective interest rate method. 158 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report $m Loan capital Additional Tier 1 loan capital Convertible debentures and Trust preferred securities Convertible preference shares Westpac capital notes Total Additional Tier 1 loan capital Tier 2 loan capital Subordinated notes Subordinated perpetual notes Total Tier 2 loan capital Total loan capital Consolidated Parent Entity 2015 2014 2015 2014 765 1,182 3,981 5,928 7,408 504 7,912 13,840 633 1,180 2,669 4,482 5,974 402 6,376 10,858 765 1,182 3,981 5,928 7,408 504 7,912 13,840 633 1,180 2,669 4,482 5,974 402 6,376 10,858 159 3 Note 20. Loan capital (continued) Additional Tier 1 loan capital A summary of the key terms of certain Additional Tier 1 (AT1) instruments is provided in the following table1. Note 20. Loan capital (continued) Common features of Additional Tier 1 instruments tabled above Payment conditions Convertible preference shares Capital notes Instrument $1,189 million Convertible Preference Shares (CPS) i) $1,384 million Westpac Capital Notes (WCN) ii) $1,311 million Westpac Capital Notes 2 (WCN 2) iii) $1,324 million Westpac Capital Note 3 (WCN 3) Face value A$100 Issue date 23 March 2012 Dividend/ distribution payment dates2 31 March, 30 September Dividend/ distribution rate2 (180 day bank bill rate + 3.25% per annum) x (1 – Australian corporate tax rate) Potential scheduled conversion dates3 31 March 2020 and each dividend payment date thereafter Optional call date 31 March 2018 and each dividend payment date thereafter or in certain other limited circumstances A$100 (all) i) 8 March 2013 ii) 23 June 2014 iii) 8 September 2015 8 March, 8 June, 8 September, 8 December i) ii) 23 March, 23 June, 23 September, 23 December iii) 22 March, 22 June, 22 September, 22 December i) ii) iii) (90 day bank bill rate + 3.20% per annum) x (1 - Australian corporate tax rate) (90 day bank bill rate + 3.05% per annum) x (1 - Australian corporate tax rate) (90 day bank bill rate + 4.00% per annum) x (1 - Australian corporate tax rate) 8 March 2021 and each payment date thereafter i) ii) 23 September 2024 and each payment date thereafter iii) 22 March 2023 and each payment date thereafter i) 8 March 2019 or in certain other limited circumstances ii) 23 September 2022 or in certain other limited circumstances iii) 22 March 2021 or in certain other limited circumstances Capital trigger / Non-viability trigger Maximum conversion number4,5 Capital trigger only i) Capital trigger and non-viability trigger 24.0038 Westpac ordinary shares per CPS ii) 16.7280 Westpac ordinary shares per WCN ii) 14.5476 Westpac ordinary shares per WCN 2 iii) 16.0102 Westpac ordinary shares per WCN 3 Basel III capital treatment Transitional treatment as Additional Tier 1 capital Fully compliant Additional Tier 1 capital (all) event) on broadly similar terms to a scheduled conversion, described above. 1 Excludes convertible debentures and Trust preferred securities (TPS 2004). 2 Dividends are applicable to CPS only. 3 Conversion on these dates is subject to the satisfaction of the scheduled conversion conditions. 4 Based on the initial face value of A$100. 5 Maximum conversion number applicable to a capital trigger event or non-viability trigger event. APRA regulations for the purposes of measuring capital adequacy. 2 On a Level 2 basis only for CPS. 3 CPS does not contain a non-viability trigger event. 4 Excludes CPS. 5 Excludes WCN. 160 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 161 Notes to the financial statements Dividends are discretionary and only payable subject to a dividend payment test. The dividend payment test requires that dividends will only be paid if the Westpac directors determine to pay a dividend, the dividend payment does not exceed the distributable profits of Westpac (unless APRA gives its prior written approval), and APRA does not object to the payment of the dividend. Distributions are discretionary and are only payable subject to the 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. If for any reason a dividend or distribution has not been paid in full on the relevant dividend or distribution payment date, broadly Westpac must not (other than in certain limited circumstances) determine or pay any dividends on Westpac ordinary shares or undertake a discretionary buy back or capital reduction of Westpac ordinary shares, unless the unpaid dividend or distribution is paid in full within 20 business days or in certain other circumstances. The AT1 instruments convert into Westpac ordinary shares in the following circumstances: Scheduled Conversion On the applicable scheduled conversion date, it is expected that the relevant AT1 instrument will be converted into a variable number of Westpac ordinary shares, provided certain conversion conditions are satisfied. For the relevant AT1 instrument converted, holders will receive a number of Westpac ordinary shares calculated using the formula described in the terms of the instrument. 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. Capital Trigger Event or Non-Viability Trigger Event Westpac may be required to convert some or all AT1 instruments into a variable number of Westpac ordinary shares upon the occurrence of 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 basis1,2). A non-viability trigger event will occur when APRA notifies Westpac in writing that it believes conversion of some or all AT1 instruments (or conversion or write-down of other capital instruments of the Westpac Group) or a public sector injection of capital, or equivalent support, is necessary because, without it, Westpac would become non-viable3. No conversion conditions apply in these circumstances. For the applicable AT1 instrument converted, holders will receive a number of Westpac ordinary shares calculated using the formula described in the terms of the AT1 instrument, but subject to a maximum conversion number. 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. For each instrument, 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. Following the occurrence of a capital trigger event or non-viability trigger event, if conversion of an AT1 instrument does not occur for any reason within five business days, holder’s rights in relation to the AT1 instrument will be terminated4. Early conversion If Westpac elects to convert an AT1 instrument on its optional call date5, conversion occurs on broadly similar terms as to scheduled conversion, described above. Early conversion may also occur in certain other limited circumstances (such as following an acquisition, tax or regulatory Convertible debentures and Trust preferred securities (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. Proceeds from the issue of TPS were ultimately invested in convertible debentures issued by Westpac in an aggregate amount of US$525,001,000. 2004 TPS qualify for transitional treatment as Additional Tier 1 capital of Westpac under APRA’s Basel III capital adequacy framework. 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 Note 20. Loan capital (continued) Additional Tier 1 loan capital A summary of the key terms of certain Additional Tier 1 (AT1) instruments is provided in the following table1. Convertible preference shares Capital notes Instrument $1,189 million Convertible Preference Shares (CPS) i) $1,384 million Westpac Capital Notes (WCN) ii) $1,311 million Westpac Capital Notes 2 (WCN 2) iii) $1,324 million Westpac Capital Note 3 (WCN 3) Face value A$100 Issue date 23 March 2012 Dividend/ distribution payment dates2 31 March, 30 September Dividend/ distribution rate2 x (1 – Australian corporate tax rate) (180 day bank bill rate + 3.25% per annum) A$100 (all) i) 8 March 2013 ii) 23 June 2014 iii) 8 September 2015 i) 8 March, 8 June, 8 September, 8 December ii) 23 March, 23 June, 23 September, 23 December iii) 22 March, 22 June, 22 September, 22 December i) (90 day bank bill rate + 3.20% per annum) x (1 - Australian corporate tax rate) ii) (90 day bank bill rate + 3.05% per annum) x (1 - Australian corporate tax rate) iii) (90 day bank bill rate + 4.00% per annum) x (1 - Australian corporate tax rate) iii) 22 March 2023 and each payment date thereafter i) 8 March 2019 or in certain other limited ii) 23 September 2022 or in certain other limited iii) 22 March 2021 or in certain other limited circumstances circumstances circumstances Potential scheduled conversion dates3 31 March 2020 and each dividend payment ii) 23 September 2024 and each payment date thereafter date thereafter 31 March 2018 and each dividend payment Optional call date date thereafter or in certain other limited circumstances Capital trigger / Non-viability trigger Maximum conversion number4,5 Capital trigger only i) Capital trigger and non-viability trigger 24.0038 Westpac ordinary shares per CPS ii) 16.7280 Westpac ordinary shares per WCN ii) 14.5476 Westpac ordinary shares per WCN 2 iii) 16.0102 Westpac ordinary shares per WCN 3 Basel III capital Transitional treatment as Additional treatment Tier 1 capital Fully compliant Additional Tier 1 capital (all) 1 Excludes convertible debentures and Trust preferred securities (TPS 2004). 2 Dividends are applicable to CPS only. 3 Conversion on these dates is subject to the satisfaction of the scheduled conversion conditions. 4 Based on the initial face value of A$100. 5 Maximum conversion number applicable to a capital trigger event or non-viability trigger event. Notes to the financial statements Note 20. Loan capital (continued) Common features of Additional Tier 1 instruments tabled above Payment conditions Dividends are discretionary and only payable subject to a dividend payment test. The dividend payment test requires that dividends will only be paid if the Westpac directors determine to pay a dividend, the dividend payment does not exceed the distributable profits of Westpac (unless APRA gives its prior written approval), and APRA does not object to the payment of the dividend. Distributions are discretionary and are only payable subject to the 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. If for any reason a dividend or distribution has not been paid in full on the relevant dividend or distribution payment date, broadly Westpac must not (other than in certain limited circumstances) determine or pay any dividends on Westpac ordinary shares or undertake a discretionary buy back or capital reduction of Westpac ordinary shares, unless the unpaid dividend or distribution is paid in full within 20 business days or in certain other circumstances. The AT1 instruments convert into Westpac ordinary shares in the following circumstances: Scheduled Conversion On the applicable scheduled conversion date, it is expected that the relevant AT1 instrument will be converted into a variable number of Westpac ordinary shares, provided certain conversion conditions are satisfied. For the relevant AT1 instrument converted, holders will receive a number of Westpac ordinary shares calculated using the formula described in the terms of the instrument. 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. i) 8 March 2021 and each payment date thereafter Capital Trigger Event or Non-Viability Trigger Event Westpac may be required to convert some or all AT1 instruments into a variable number of Westpac ordinary shares upon the occurrence of 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 basis1,2). A non-viability trigger event will occur when APRA notifies Westpac in writing that it believes conversion of some or all AT1 instruments (or conversion or write-down of other capital instruments of the Westpac Group) or a public sector injection of capital, or equivalent support, is necessary because, without it, Westpac would become non-viable3. No conversion conditions apply in these circumstances. For the applicable AT1 instrument converted, holders will receive a number of Westpac ordinary shares calculated using the formula described in the terms of the AT1 instrument, but subject to a maximum conversion number. 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. For each instrument, 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. Following the occurrence of a capital trigger event or non-viability trigger event, if conversion of an AT1 instrument does not occur for any reason within five business days, holder’s rights in relation to the AT1 instrument will be terminated4. Early conversion If Westpac elects to convert an AT1 instrument on its optional call date5, conversion occurs on broadly similar terms as to scheduled conversion, described above. Early conversion may also occur in certain other limited circumstances (such as following an acquisition, tax or regulatory event) on broadly similar terms to a scheduled conversion, described above. Convertible debentures and Trust preferred securities (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. Proceeds from the issue of TPS were ultimately invested in convertible debentures issued by Westpac in an aggregate amount of US$525,001,000. 2004 TPS qualify for transitional treatment as Additional Tier 1 capital of Westpac under APRA’s Basel III capital adequacy framework. 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. 2 On a Level 2 basis only for CPS. 3 CPS does not contain a non-viability trigger event. 4 Excludes CPS. 5 Excludes WCN. 160 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 161 3 Note 20. Loan capital (continued) 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 an 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. 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 preference share 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. Note 20. Loan capital (continued) Tier 2 loan capital $m Basel III transitional subordinated notes US$75 million subordinated notes due 20151 US$400 million subordinated notes due 20152,3 US$350 million subordinated notes due 20184 A$500 million subordinated notes due 20225 A$1,676 million subordinated notes due 20226 US$800 million subordinated notes due 20237 Basel III fully compliant subordinated notes A$925 million subordinated notes due 20238 A$1,000 million subordinated notes due 20248 CNY 1,250 million subordinated notes due 20258 A$350 million subordinated notes due 20278 S$325 million subordinated notes due 20278 Total subordinated notes 1 Fixed 5.00%. 2 Fixed 5.30%. 3 Redeemed on 15 October 2015. 4 Fixed 4.625%. 5 Floating 90 day bank bill rate + 3.00% pa. 6 Floating 90 day bank bill rate + 2.75% pa. 8 Refer to table following for interest terms. Basel III transitional subordinated notes 7 Fixed 3.625%; 5 year up to but excluding 28 February 2018 thereafter fixed rate equal to 5 year US treasury rate + 2.90% pa. These subordinated notes qualify for transitional treatment as Tier 2 capital of Westpac under APRA’s Basel III capital adequacy framework, do not contain non-viability loss absorption requirements and have non-discretionary, cumulative distributions. Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 108 572 540 500 1,670 1,147 919 999 288 348 317 89 476 436 500 1,667 898 916 992 - - - 108 572 540 500 1,670 1,147 919 999 288 348 317 89 476 436 500 1,667 898 916 992 - - - 7,408 5,974 7,408 5,974 162 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 163 Note 20. Loan capital (continued) 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 an 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. 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 preference share 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. these instruments. The holders of the convertible debentures, 2004 Funding TPS and 2004 TPS do not have an option to require redemption of Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 108 572 540 500 1,670 1,147 89 476 436 500 1,667 898 108 572 540 500 1,670 1,147 919 999 288 348 317 89 476 436 500 1,667 898 916 992 - - - 7,408 5,974 Note 20. Loan capital (continued) Tier 2 loan capital $m Basel III transitional subordinated notes US$75 million subordinated notes due 20151 US$400 million subordinated notes due 20152,3 US$350 million subordinated notes due 20184 A$500 million subordinated notes due 20225 A$1,676 million subordinated notes due 20226 US$800 million subordinated notes due 20237 916 919 Basel III fully compliant subordinated notes A$925 million subordinated notes due 20238 A$1,000 million subordinated notes due 20248 CNY 1,250 million subordinated notes due 20258 A$350 million subordinated notes due 20278 S$325 million subordinated notes due 20278 Total subordinated notes 1 Fixed 5.00%. 2 Fixed 5.30%. 3 Redeemed on 15 October 2015. 4 Fixed 4.625%. 5 Floating 90 day bank bill rate + 3.00% pa. 6 Floating 90 day bank bill rate + 2.75% pa. 7 Fixed 3.625%; 5 year up to but excluding 28 February 2018 thereafter fixed rate equal to 5 year US treasury rate + 2.90% pa. 8 Refer to table following for interest terms. 7,408 5,974 288 317 348 992 999 - - - Basel III transitional subordinated notes These subordinated notes qualify for transitional treatment as Tier 2 capital of Westpac under APRA’s Basel III capital adequacy framework, do not contain non-viability loss absorption requirements and have non-discretionary, cumulative distributions. 162 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 163 3 Note 20. Loan capital (continued) Basel III fully compliant subordinated notes Further details regarding Basel III fully compliant subordinated notes (including non-viability loss absorption) which have been issued by Westpac are as follows: Note 20. Loan capital (continued) Common features of Basel III fully compliant subordinated notes These subordinated notes qualify as Tier 2 capital of Westpac under APRA’s Basel III capital adequacy framework. Notes to the financial statements Instrument Face value Issue date Interest payment dates Interest rate Basel III fully compliant subordinated notes i) A$925 million Subordinated Notes II due 2023 ii) A$1,000 million subordinated notes due 2024 iii) CNY 1,250 million subordinated notes due 2025 iv) A$350 million subordinated notes due 2027 v) S$325 million subordinated notes due 2027 i) A$100 ii) A$100,000 iii) CNY 1,000,000 and CNY 10,000 thereafter1 iv) A$200,000 and A$2,000 thereafter1 v) S$250,000 i) 22 August 2013 ii) 14 March 2014 iii) 9 February 2015 iv) 11 March 2015 v) 12 August 2015 22 February, 22 May, 22 August and 22 November i) ii) 14 March, 14 June, 14 September and 14 December iii) 9 February and 9 August iv) 11 March v) 12 February and 12 August i) 90-day bank bill rate + 2.30% per annum ii) 90-day bank bill rate + 2.05% per annum iii) 4.85% p.a. until but excluding 9 February 2020. Thereafter, if not called, a fixed rate per annum equal to the one-year CNH HIBOR reference rate + 0.8345% p.a. iv) 4.50% p.a. until but excluding 11 March 2022. Thereafter, if not called, a fixed rate per annum equal to the five-year A$ semi-quarterly mid-swap reference rate + 1.95% p.a., the sum of which will be annualised v) 4.00% p.a. until but excluding 12 August 2022. Thereafter, if not called, a fixed rate per annum equal to the five-year S$ swap offer rate + 1.54% p.a. Maturity date Optional call date i) 22 August 2023 ii) 14 March 2024 iii) 9 February 2025 iv) 11 March 2027 v) 12 August 2027 i) 22 August 2018 or in certain other limited circumstances ii) 14 March 2019 or in certain other limited circumstances iii) 9 February 2020 or in certain other limited circumstances iv) 11 March 2022 or in certain other limited circumstances v) 12 August 2022 or in certain other limited circumstances Non-viability trigger Yes for (i) to (v) Maximum conversion number i) 16.1551 Westpac ordinary shares per subordinated note ii) 14,938.75112 Westpac ordinary shares per subordinated note iii) 30,116.4958 Westpac ordinary shares per subordinated note iv) 26,546.3233 Westpac ordinary shares per subordinated note v) 36,083.0340 Westpac ordinary shares per subordinated note Interest payments on the subordinated notes are subject to Westpac being solvent at the time of the interest payment and Payment conditions immediately following the interest payment. Non-Viability Trigger Event Westpac may be required to convert some or all subordinated notes into a variable number of Westpac ordinary shares upon the occurrence of a non-viability trigger event. A non-viability trigger event will occur when APRA notifies Westpac in writing that it believes conversion of some or all subordinated notes (or conversion or write-down of other capital instruments of the Westpac Group) or a public sector injection of capital, or equivalent support, is necessary because, without it, Westpac would become non-viable. For each subordinated note converted, holders will receive a number of Westpac ordinary shares calculated using the formula described in the terms of the subordinated notes, but subject to a maximum conversion number. 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 to the non-viability trigger event and includes a 1% discount. 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 notes. If Westpac is unable to convert the relevant subordinated notes for any reason, holder’s rights in relation to the notes will be terminated. 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. Note 21. Derivative financial instruments Accounting policy Derivative financial instruments are instruments whose values derive from the value of an underlying asset, reference rate or index and include forwards, futures, swaps and options. Derivatives are recognised initially and subsequently measured at fair value with gains or losses recognised through the income statement in the period in which they arise, unless the derivative is designated into a cashflow or net investment hedge relationship. at balance date is negative. Derivatives are presented as an asset where they have a positive fair value at balance date or as a liability where the fair value The Group uses derivative instruments for both trading (primarily customer related activity) and hedging purposes. As a trader, the Group’s primary objective is to derive income as a market maker from the sale of derivatives to meet Westpac’s customers’ needs. The market making process provides liquidity in key markets in which the Group operates. The Group also trades on its own account to take advantage of market opportunities, which represent a limited part of the Group’s derivative activities. Derivatives are also used by the Group as part of its asset and liability management activities, mainly to hedge its exposures to interest rates, foreign currency and credit risk, including exposures arising from forecast transactions. The Group uses hedge accounting techniques where possible to eliminate the volatility which would otherwise arise due to accounting mismatches. This activity is principally carried out by Treasury within the risk management framework of limits, practices and procedures set and overseen by the Westpac Group Executive Risk Committee (RISKCO). Where the criteria for hedge accounting as defined under AASB 139 Financial Instruments: Recognition and Measurement are met, the Group designates these derivatives into one of three hedge accounting relationships: fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. These hedging designations and associated accounting are as follows: Fair value hedges 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 attributable to the hedged risk. The changes in the fair value of the hedged asset and liability are adjusted against their carrying value. 1 These subordinated notes are issued in multiple denominations and therefore there may be more than one face value. 164 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 165 Note 20. Loan capital (continued) Basel III fully compliant subordinated notes issued by Westpac are as follows: Further details regarding Basel III fully compliant subordinated notes (including non-viability loss absorption) which have been Basel III fully compliant subordinated notes i) A$925 million Subordinated Notes II due 2023 ii) A$1,000 million subordinated notes due 2024 iii) CNY 1,250 million subordinated notes due 2025 iv) A$350 million subordinated notes due 2027 v) S$325 million subordinated notes due 2027 Face value i) A$100 ii) A$100,000 iii) CNY 1,000,000 and CNY 10,000 thereafter1 iv) A$200,000 and A$2,000 thereafter1 Instrument Issue date v) S$250,000 i) 22 August 2013 ii) 14 March 2014 iii) 9 February 2015 iv) 11 March 2015 v) 12 August 2015 iii) 9 February and 9 August iv) 11 March v) 12 February and 12 August Interest payment dates i) 22 February, 22 May, 22 August and 22 November ii) 14 March, 14 June, 14 September and 14 December Interest rate i) 90-day bank bill rate + 2.30% per annum ii) 90-day bank bill rate + 2.05% per annum iii) 4.85% p.a. until but excluding 9 February 2020. Thereafter, if not called, a fixed rate per annum equal to the one-year CNH HIBOR reference rate + 0.8345% p.a. iv) 4.50% p.a. until but excluding 11 March 2022. Thereafter, if not called, a fixed rate per annum equal to the five-year A$ semi-quarterly mid-swap reference rate + 1.95% p.a., the sum of which will be annualised v) 4.00% p.a. until but excluding 12 August 2022. Thereafter, if not called, a fixed rate per annum equal to the five-year S$ swap offer rate + 1.54% p.a. Maturity date Optional call date i) 22 August 2023 ii) 14 March 2024 iii) 9 February 2025 iv) 11 March 2027 v) 12 August 2027 i) 22 August 2018 or in certain other limited circumstances ii) 14 March 2019 or in certain other limited circumstances iii) 9 February 2020 or in certain other limited circumstances iv) 11 March 2022 or in certain other limited circumstances v) 12 August 2022 or in certain other limited circumstances Non-viability trigger Yes for (i) to (v) Maximum conversion i) 16.1551 Westpac ordinary shares per subordinated note number ii) 14,938.75112 Westpac ordinary shares per subordinated note iii) 30,116.4958 Westpac ordinary shares per subordinated note iv) 26,546.3233 Westpac ordinary shares per subordinated note v) 36,083.0340 Westpac ordinary shares per subordinated note Notes to the financial statements Note 20. Loan capital (continued) Common features of Basel III fully compliant subordinated notes These subordinated notes qualify as Tier 2 capital of Westpac under APRA’s Basel III capital adequacy framework. Payment conditions Interest payments on the subordinated notes are subject to Westpac being solvent at the time of the interest payment and immediately following the interest payment. Non-Viability Trigger Event Westpac may be required to convert some or all subordinated notes into a variable number of Westpac ordinary shares upon the occurrence of a non-viability trigger event. A non-viability trigger event will occur when APRA notifies Westpac in writing that it believes conversion of some or all subordinated notes (or conversion or write-down of other capital instruments of the Westpac Group) or a public sector injection of capital, or equivalent support, is necessary because, without it, Westpac would become non-viable. For each subordinated note converted, holders will receive a number of Westpac ordinary shares calculated using the formula described in the terms of the subordinated notes, but subject to a maximum conversion number. 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 to the non-viability trigger event and includes a 1% discount. 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 notes. If Westpac is unable to convert the relevant subordinated notes for any reason, holder’s rights in relation to the notes will be terminated. 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. Note 21. Derivative financial instruments Accounting policy Derivative financial instruments are instruments whose values derive from the value of an underlying asset, reference rate or index and include forwards, futures, swaps and options. Derivatives are recognised initially and subsequently measured at fair value with gains or losses recognised through the income statement in the period in which they arise, unless the derivative is designated into a cashflow or net investment hedge relationship. Derivatives are presented as an asset where they have a positive fair value at balance date or as a liability where the fair value at balance date is negative. The Group uses derivative instruments for both trading (primarily customer related activity) and hedging purposes. As a trader, the Group’s primary objective is to derive income as a market maker from the sale of derivatives to meet Westpac’s customers’ needs. The market making process provides liquidity in key markets in which the Group operates. The Group also trades on its own account to take advantage of market opportunities, which represent a limited part of the Group’s derivative activities. Derivatives are also used by the Group as part of its asset and liability management activities, mainly to hedge its exposures to interest rates, foreign currency and credit risk, including exposures arising from forecast transactions. The Group uses hedge accounting techniques where possible to eliminate the volatility which would otherwise arise due to accounting mismatches. This activity is principally carried out by Treasury within the risk management framework of limits, practices and procedures set and overseen by the Westpac Group Executive Risk Committee (RISKCO). Where the criteria for hedge accounting as defined under AASB 139 Financial Instruments: Recognition and Measurement are met, the Group designates these derivatives into one of three hedge accounting relationships: fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. These hedging designations and associated accounting are as follows: Fair value hedges 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 attributable to the hedged risk. The changes in the fair value of the hedged asset and liability are adjusted against their carrying value. 1 These subordinated notes are issued in multiple denominations and therefore there may be more than one face value. 164 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 165 3 Note 21. Derivative financial instruments (continued) If the hedge no longer meets the criteria for hedge accounting, it is discontinued and any previous adjustment to the carrying value of a hedged item is amortised to the income statement over the period to maturity. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in the cash flow hedge reserve through 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 hedged item affects profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the income statement. Hedges 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 through 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. Where the criteria for hedge accounting are not met these hedging relationships 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. a. Fair value hedges The Group hedges a proportion of its interest rate risk and foreign exchange risk from 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 a $308 million loss (2014: $287 million gain) while the change in the fair value of hedged items attributed to the hedge risk was a $317 million gain (2014: $323 million loss). For the Parent Entity, the change in the fair value of hedging instruments designated in fair value hedges was a $80 million loss (2014: $304 million gain) while the change in the fair value of hedged items attributed to the hedge risk was a $88 million gain (2014: $342 million loss). All gains or losses associated with the ineffective portion of fair value hedge relationships are recognised as ‘interest income’ in the income statement. The amount recognised for this year was a $9 million gain (2014: $36 million loss) for the Group and a $8 million gain (2014: $38 million loss) for the Parent Entity. 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 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: 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 2015 Cash inflows (assets) Cash outflows (liabilities) 20141 Cash inflows (assets) 1.9% 1.9% 0.6% Cash outflows (liabilities) 1 Comparatives have been revised to improve comparability. 0.7% 2.8% 2.9% 8.7% 9.6% 28.4% 29.9% 20.2% 20.7% 17.6% 18.4% 25.4% 26.1% 12.6% 12.4% 14.0% 14.4% 11.2% 10.4% 11.1% 10.1% 14.4% 14.0% 7.0% 6.7% 9.6% 8.5% 14.4% 13.4% Notes to the financial statements Note 21. Derivative financial instruments (continued) For the Group, a loss on cashflow hedges of $22 million was recognised due to hedge ineffectiveness (2014: $22 million loss). For the Parent Entity, a loss on cashflow hedges of $16 million was recognised due to hedge ineffectiveness (2014: $23 million loss). Both were recognised immediately in interest income in the income statement. c. Dual fair value and cash flow hedges Fixed rate foreign currency denominated 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 For both the Group and Parent Entity, ineffectiveness arising from hedges of net investments in foreign operations and recognised in non-interest income in the income statement amounted to nil (2014: nil). The Group hedges the majority of the currency translation risk of net investments in foreign operations through foreign exchange forward contracts. 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 2015 Interest rate contracts Futures contracts1 Forward rate agreements Swap agreements2 Cross currency swap agreements2 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps $m Amount Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Notional Trading Fair Value Cash Flow Net Investment Fair Value Fair Value Hedging Total Spot and forward contracts 674,114 10,002 (8,653) (27) (216) 10,002 (8,896) 147,368 517,297 - 154 - (156) Options 90,074 576 (683) Total interest rate contracts 2,769,368 26,567 (25,149) 739 (2,995) 1,212 (1,301) 2,014,629 25,837 (24,310) 739 (2,995) 1,212 (1,301) Foreign exchange contracts - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 154 - (156) - 27,788 (28,606) 576 (683) - 28,518 (29,445) 472 9 143 (409) (10) (150) (9,505) 10,367 435,465 12,687 (18,782) 1,094 124 4,102 (414) 34,956 651 (689) - 17,883 (19,072) 651 (689) 1,144,535 23,340 (28,124) 1,094 124 4,102 (441) (216) 28,536 (28,657) 6,398 216 33,181 472 9 143 (409) (10) (150) Total of gross derivatives 3,953,698 50,531 (53,842) 1,833 (2,871) 5,314 (1,742) (216) 57,678 (58,671) Impact of netting arrangements3 - (9,505) 10,367 Total of net derivatives 3,953,698 41,026 (43,475) 1,833 (2,871) 5,314 (1,742) (216) 48,173 (48,304) 1 The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 30 September. 2 The unrealised foreign exchange gains or loss on derivatives in hedge relationships are substantially offset by the retranslation at spot exchange rates of the foreign currency denominated debt being hedged, which affects profit and loss in the current year. 3 Primarily consists of derivative trades settled directly with central clearing counterparties and associated variation margin. Westpac became a direct clearing member of LCH.Clearnet Limited during the 2015 year. 166 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 167 Note 21. Derivative financial instruments (continued) If the hedge no longer meets the criteria for hedge accounting, it is discontinued and any previous adjustment to the carrying value of a hedged item is amortised to the income statement over the period to maturity. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in the cash flow hedge reserve through 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 hedged item affects profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the income statement. Hedges 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 through 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. Where the criteria for hedge accounting are not met these hedging relationships 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. a. Fair value hedges The Group hedges a proportion of its interest rate risk and foreign exchange risk from 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 a $308 million loss (2014: $287 million gain) while the change in the fair value of hedged items attributed to the hedge risk was a $317 million gain (2014: $323 million loss). (2014: $342 million loss). For the Parent Entity, the change in the fair value of hedging instruments designated in fair value hedges was a $80 million loss (2014: $304 million gain) while the change in the fair value of hedged items attributed to the hedge risk was a $88 million gain All gains or losses associated with the ineffective portion of fair value hedge relationships are recognised as ‘interest income’ in the income statement. The amount recognised for this year was a $9 million gain (2014: $36 million loss) for the Group and a $8 million gain (2014: $38 million loss) for the Parent Entity. b. Cash flow hedges through the use of interest rate derivatives. cross-currency derivatives. Exposure to the volatility of interest cash flows from floating rate customer deposits, at call balances and loans is hedged Exposure to foreign currency principal and interest cash flows from floating rate debt issuances is hedged through the use of Underlying cash flows from cash flow hedges are, as a proportion of total cash flows, expected to occur in the following periods: Cash inflows (assets) Cash outflows (liabilities) 2015 20141 Cash inflows (assets) Cash outflows (liabilities) 1 Comparatives have been revised to improve comparability. Less Than 1 Month to 3 Months 1 Year to 2 Years to 3 Years to 4 Years to Over 1 Month 3 Months to 1 Year 2 Years 3 Years 4 Years 5 Years 5 Years 1.9% 1.9% 0.6% 0.7% 2.8% 2.9% 8.7% 9.6% 28.4% 29.9% 20.2% 20.7% 17.6% 18.4% 25.4% 26.1% 12.6% 12.4% 14.0% 14.4% 11.2% 10.4% 11.1% 10.1% 14.4% 14.0% 7.0% 6.7% 9.6% 8.5% 14.4% 13.4% Notes to the financial statements Note 21. Derivative financial instruments (continued) For the Group, a loss on cashflow hedges of $22 million was recognised due to hedge ineffectiveness (2014: $22 million loss). For the Parent Entity, a loss on cashflow hedges of $16 million was recognised due to hedge ineffectiveness (2014: $23 million loss). Both were recognised immediately in interest income in the income statement. c. Dual fair value and cash flow hedges Fixed rate foreign currency denominated 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 For both the Group and Parent Entity, ineffectiveness arising from hedges of net investments in foreign operations and recognised in non-interest income in the income statement amounted to nil (2014: nil). The Group hedges the majority of the currency translation risk of net investments in foreign operations through foreign exchange forward contracts. 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 2015 Fair Value Hedging Notional Trading Fair Value Cash Flow Net Investment Total Fair Value $m Amount Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Interest rate contracts Futures contracts1 Forward rate agreements Swap agreements2 Options 147,368 517,297 - 154 - (156) - - - - - - - - 2,014,629 25,837 (24,310) 739 (2,995) 1,212 (1,301) 90,074 576 (683) - - - - Total interest rate contracts 2,769,368 26,567 (25,149) 739 (2,995) 1,212 (1,301) Foreign exchange contracts Spot and forward contracts Cross currency swap agreements2 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps 674,114 10,002 (8,653) - - - (27) 435,465 12,687 (18,782) 1,094 124 4,102 (414) 34,956 651 (689) - - - - 1,144,535 23,340 472 6,398 (28,124) (409) 1,094 - 124 - 4,102 - 216 33,181 9 143 (10) (150) - - - - - - (441) - - - - - - - - - - - - - - - Total of gross derivatives Impact of netting arrangements3 Total of net derivatives 1 The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 3,953,698 50,531 (9,505) - (53,842) 10,367 (216) 57,678 (9,505) 3,953,698 41,026 (1,742) - (2,871) - 5,314 - 1,833 - (216) 48,173 (43,475) (2,871) (1,742) 1,833 5,314 - - - - - - - 154 - (156) - 27,788 (28,606) - 576 (683) - 28,518 (29,445) (216) 10,002 (8,896) - 17,883 (19,072) - 651 (689) (216) 28,536 472 - (28,657) (409) - - 9 143 (10) (150) (58,671) 10,367 (48,304) 30 September. 2 The unrealised foreign exchange gains or loss on derivatives in hedge relationships are substantially offset by the retranslation at spot exchange rates of the foreign currency denominated debt being hedged, which affects profit and loss in the current year. 3 Primarily consists of derivative trades settled directly with central clearing counterparties and associated variation margin. Westpac became a direct clearing member of LCH.Clearnet Limited during the 2015 year. 166 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 167 3 Note 21. Derivative financial instruments (continued) Note 21. Derivative financial instruments (continued) Consolidated 2014 Notional Trading Fair Value Fair Value1 Hedging Cash Flow Net Investment Total Fair Value Notional Trading Fair Value Cash Flow Net Investment Fair Value Fair Value1 Hedging Total $m Amount Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities $m Amount Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Interest rate contracts Futures contracts2 Forward rate agreements Swap agreements3 Options 94,187 159,695 - 15 - (14) - - - - 1,998,785 14,722 (13,888) 402 (2,199) 106,950 311 (339) - - Total interest rate contracts 2,359,617 15,048 (14,241) 402 (2,199) - - 996 - 996 - - (591) - (591) - - - - - - - - 15 - (14) - 16,120 (16,678) - 311 (339) - 16,446 (17,031) 600,690 10,092 (8,873) - - - - 59 (52) 10,151 (8,925) Spot and forward contracts 597,789 10,073 (8,831) 54 (50) 10,127 (8,881) Foreign exchange contracts Spot and forward contracts Cross currency swap agreements3 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps 385,410 11,784 (10,261) 34,144 498 (486) 1,020,244 22,374 133 3,426 (19,620) (137) 313 32,684 6 205 (4) (223) 821 - 821 - - - 186 1,360 (2,658) - - - 186 - 1,360 - (2,658) - - - - - - - Total of gross derivatives Impact of netting arrangements 3,416,284 37,766 - - (34,225) - Total of net derivatives 3,416,284 37,766 (34,225) 1,223 - 1,223 (2,013) - (2,013) 2,356 - 2,356 (3,249) - (3,249) - - 59 - - - 59 - 59 - 13,965 (12,733) - 498 (486) (52) 24,614 133 - (22,144) (137) - - 6 205 (4) (223) (52) 41,404 - - (39,539) - (52) 41,404 (39,539) Parent Entity 2015 Fair Value Hedging Notional Trading Fair Value Cash Flow Net Investment Total Fair Value 3 The unrealised foreign exchange gains or loss on derivatives in hedge relationships are substantially offset by the retranslation at spot exchange rates of the foreign currency denominated debt being hedged, which affects profit and loss in the current year. $m Amount Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Notes to the financial statements Parent Entity 2014 Interest rate contracts Futures contracts2 Forward rate agreements Swap agreements3 Cross currency swap agreements3 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps Impact of netting arrangements 30 September. Credit derivatives the Parent Entity: Credit protection bought1 Credit protection sold $m Total Note 22. Financial risk 94,187 159,695 - 15 - (14) Options 106,925 311 (339) Total interest rate contracts 2,356,632 15,090 (14,306) 398 (2,109) 952 (532) 1,995,825 14,764 (13,953) 398 (2,109) 952 (532) Foreign exchange contracts - 15 - (14) - 16,114 (16,594) 311 (339) - 16,440 (16,947) 379,869 11,789 (10,416) 810 19 1,299 (2,066) 34,144 498 (486) - 13,898 (12,463) 498 (486) 1,011,802 22,360 (19,733) 810 19 1,299 (2,066) 54 (50) 24,523 (21,830) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 54 54 - - - - - - - - 133 6 205 - (137) (4) (223) - Total of gross derivatives 3,404,856 37,794 (34,403) 1,208 (2,090) 2,251 (2,598) (50) 41,307 (39,141) Total of net derivatives 3,404,856 37,794 (34,403) 1,208 (2,090) 2,251 (2,598) (50) 41,307 (39,141) 1 Comparatives have been revised to improve comparability. 2 The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 3,425 313 32,684 133 6 205 - (137) (4) (223) - 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. 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 table for both the Group and Notional Amount 16,849 16,332 33,181 2015 Fair value 2014 Fair value Asset Liability Notional Asset Liability 44 99 143 (107) (43) (150) 16,703 15,981 32,684 6 199 205 (212) (11) (223) 1 Counterparties to derivatives relating to credit protection bought are predominantly financial institutions. The Board is responsible for reviewing and approving our overall risk management strategy, including determining our appetite for risk. The Board has delegated authority to the Board Risk & Compliance Committee (BRCC) to approve the Westpac Group Risk Appetite Statement, which sets the Group’s overall risk appetite within the context of the strategy determined by the Board. 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. Interest rate contracts Futures contracts2 Forward rate agreements Swap agreements3 Options 147,368 517,297 - 154 - (156) - - - - - - - - 2,010,895 25,890 (24,726) 722 (2,689) 1,155 (1,015) 90,049 575 (683) - - - - Total interest rate contracts 2,765,609 26,619 (25,565) 722 (2,689) 1,155 (1,015) Foreign exchange contracts Spot and forward contracts Cross currency swap agreements3 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps 672,295 9,976 (8,621) - 427,053 12,691 (18,840) 1,004 34,956 651 (689) - 1,134,304 23,318 472 3,843 (28,150) (409) 1,004 - 216 33,181 9 143 (10) (150) - - - 56 - 56 - - - - (27) 3,603 (256) - - 3,603 - - - (283) - - - - - - - - - - - - - - - 3,937,153 50,561 Total of gross derivatives Impact of netting arrangements4 Total of net derivatives 1 Comparatives have been revised to improve comparability. 2 The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 3,937,153 41,056 (43,917) (54,284) (2,633) (9,505) (2,633) (1,298) (1,298) 10,367 1,726 1,726 4,758 4,758 - - - - - - - - - (202) 57,045 (202) 47,540 (9,505) 30 September. 3 The unrealised foreign exchange gains or loss on derivatives in hedge relationships are substantially offset by the retranslation at spot exchange rates of the foreign currency denominated debt being hedged, which affects profit and loss in the current year. 4 Primarily consists of derivative trades settled directly with central clearing counterparties and associated variation margin. Westpac became a direct clearing member of LCH.Clearnet Limited during the 2015 year. 168 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 169 - - - 154 - (156) - 27,767 (28,430) - 575 (683) - 28,496 (29,269) (202) 9,976 (8,850) - 17,298 (19,040) - 651 (689) (202) 27,925 472 - (28,579) (409) - - 9 143 (10) (150) (58,417) 10,367 (48,050) Note 21. Derivative financial instruments (continued) Note 21. Derivative financial instruments (continued) Notional Trading Fair Value Cash Flow Net Investment Fair Value Notional Trading Fair Value Fair Value1 Hedging Total Parent Entity 2014 Notes to the financial statements Fair Value1 Hedging Cash Flow Net Investment Total Fair Value $m Amount Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities $m Amount Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Interest rate contracts Futures contracts2 Forward rate agreements Swap agreements3 Options 94,187 159,695 - 15 - (14) - - - - 1,995,825 14,764 (13,953) 398 (2,109) 106,925 311 (339) - - Total interest rate contracts 2,356,632 15,090 (14,306) 398 (2,109) Foreign exchange contracts Spot and forward contracts Cross currency swap agreements3 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps 597,789 10,073 (8,831) - 379,869 11,789 (10,416) 34,144 498 (486) 1,011,802 22,360 133 3,425 (19,733) (137) 313 32,684 6 205 (4) (223) 810 - 810 - - - - 19 - 19 - - - Consolidated 2014 Interest rate contracts Futures contracts2 Forward rate agreements Swap agreements3 Foreign exchange contracts Cross currency swap agreements3 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps Parent Entity 2015 Interest rate contracts Futures contracts2 Forward rate agreements Swap agreements3 Foreign exchange contracts Cross currency swap agreements3 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps 94,187 159,695 - 15 - (14) Options 106,950 311 (339) Total interest rate contracts 2,359,617 15,048 (14,241) 402 (2,199) 996 (591) 1,998,785 14,722 (13,888) 402 (2,199) 996 (591) Spot and forward contracts 600,690 10,092 (8,873) 59 (52) 10,151 (8,925) 385,410 11,784 (10,261) 821 186 1,360 (2,658) 34,144 498 (486) - 13,965 (12,733) 498 (486) 1,020,244 22,374 (19,620) 821 186 1,360 (2,658) 59 (52) 24,614 (22,144) 3,426 313 32,684 133 6 205 (137) (4) (223) Total of gross derivatives 3,416,284 37,766 (34,225) 1,223 (2,013) 2,356 (3,249) (52) 41,404 (39,539) Impact of netting arrangements - - - Total of net derivatives 3,416,284 37,766 (34,225) 1,223 (2,013) 2,356 (3,249) (52) 41,404 (39,539) - - - - - - - - - - - - - - - - - - Fair Value Hedging - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 59 59 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 15 - (14) - 16,120 (16,678) 311 (339) - 16,446 (17,031) 133 6 205 - (137) (4) (223) - Total - 154 - (156) - 27,767 (28,430) 575 (683) - 28,496 (29,269) 472 9 143 (409) (10) (150) (9,505) 10,367 $m Amount Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities 147,368 517,297 - 154 - (156) Options 90,049 575 (683) Total interest rate contracts 2,765,609 26,619 (25,565) 722 (2,689) 1,155 (1,015) 2,010,895 25,890 (24,726) 722 (2,689) 1,155 (1,015) Spot and forward contracts 672,295 9,976 (8,621) (27) (202) 9,976 (8,850) 427,053 12,691 (18,840) 1,004 56 3,603 (256) 34,956 651 (689) - 17,298 (19,040) 651 (689) 1,134,304 23,318 (28,150) 1,004 56 3,603 (283) (202) 27,925 (28,579) 3,843 216 33,181 472 9 143 (409) (10) (150) Total of gross derivatives 3,937,153 50,561 (54,284) 1,726 (2,633) 4,758 (1,298) (202) 57,045 (58,417) Impact of netting arrangements4 - (9,505) 10,367 Total of net derivatives 3,937,153 41,056 (43,917) 1,726 (2,633) 4,758 (1,298) (202) 47,540 (48,050) 1 Comparatives have been revised to improve comparability. 2 The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 30 September. 3 The unrealised foreign exchange gains or loss on derivatives in hedge relationships are substantially offset by the retranslation at spot exchange rates of the foreign currency denominated debt being hedged, which affects profit and loss in the current year. 4 Primarily consists of derivative trades settled directly with central clearing counterparties and associated variation margin. Westpac became a direct clearing member of LCH.Clearnet Limited during the 2015 year. Notional Trading Fair Value Cash Flow Net Investment Fair Value rates of the foreign currency denominated debt being hedged, which affects profit and loss in the current year. 30 September. 3 The unrealised foreign exchange gains or loss on derivatives in hedge relationships are substantially offset by the retranslation at spot exchange 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. 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 table for both the Group and the Parent Entity: $m Credit protection bought1 Credit protection sold Notional Amount 16,849 16,332 Total 1 Counterparties to derivatives relating to credit protection bought are predominantly financial institutions. 33,181 (150) 143 2015 Fair value 2014 Fair value Asset Liability Notional Asset Liability 44 99 (107) (43) 16,703 15,981 32,684 6 199 205 (212) (11) (223) Note 22. Financial risk The Board is responsible for reviewing and approving our overall risk management strategy, including determining our appetite for risk. The Board has delegated authority to the Board Risk & Compliance Committee (BRCC) to approve the Westpac Group Risk Appetite Statement, which sets the Group’s overall risk appetite within the context of the strategy determined by the Board. 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. 168 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 169 - - 952 - 952 - - - (532) - (532) - - - - - - - - 15 - (14) - 16,114 (16,594) - 311 (339) - 16,440 (16,947) - 54 (50) 10,127 (8,881) 1,299 (2,066) - - 1,299 - (2,066) - - - - - - - 54 - - - 54 - - 13,898 (12,463) - 498 (486) (50) 24,523 133 - (21,830) (137) - - 6 205 (50) 41,307 - - (4) (223) (39,141) - (39,141) Total of gross derivatives Impact of netting arrangements 3,404,856 37,794 - (34,403) - 1,208 - (2,090) - 2,251 - (2,598) - Total of net derivatives 1 Comparatives have been revised to improve comparability. 2 The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 3,404,856 37,794 (34,403) (2,090) (2,598) 1,208 2,251 (50) 41,307 54 3 Note 22. Financial risk (continued) 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; Other related risks 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 – 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; conduct risk – the risk arising from unfair or inappropriate behaviour or practices of the Westpac Group or its staff; and compliance risk – the risk of legal or regulatory sanction, financial or reputational loss, arising from our failure to abide by the compliance obligations required of us. business risk – the risk associated with the vulnerability of a line of business to changes in the business environment; sustainability risk – the risk of reputational or financial loss 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 institution 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. Note 22 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 22 comprises the following: 22.1 22.2 22.3 22.4 170 Approach to risk management Credit Risk Management 22.2.1 Credit Risk Management Policy 22.2.2 Provision and Impairment Policy 22.2.3 Internal Credit Risk Ratings System 22.2.4 Credit risk mitigation, collateral and other credit enhancements 22.2.5 Credit risk concentrations 22.2.6 Credit quality of financial assets 22.2.7 Financial assets that are neither past due nor impaired 22.2.8 Financial assets that are past due, but not impaired 22.2.9 Items 90 days past due, or otherwise in default and not impaired 22.2.10 Impaired loans Funding and liquidity risk management 22.3.1 Liquidity modelling 22.3.2 Sources of liquidity 22.3.3 Contractual maturity of financial liabilities 22.3.4 Expected maturity Market risk 22.4.1 Traded market risk 22.4.2 Non-traded market risk 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 171 Notes to the financial statements Note 22. Financial risk (continued) 22.1 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 BRCC responsibility for providing recommendations to the Board on the Westpac Group’s risk-reward strategy, setting risk appetite, approving framework and policies for managing risk, and determining whether to accept risks beyond management’s approval discretion. The BRCC 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 BRCC receives regular reports from management on the effectiveness of our management of Westpac’s material business risks. More detail about the role of the BRCC is set out in the Westpac risk management governance structure table. 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. Westpac adopts a Three Lines of Defence approach to risk management which reflects our culture of 'risk is everyone's business' and that all employees are responsible for identifying and managing risk and operating within the Group's desired risk profile. Effective risk management enables us to: accurately measure our risk profile and balance risk and reward within our risk appetite, increasing financial growth opportunities and mitigating potential loss or damage; protect Westpac's depositors, policyholders and investors by maintaining a strong balance sheet; embed adequate controls to guard against excessive risk or undue risk concentration; and meet our regulatory and compliance obligations. 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 and compliance advisory, control and monitoring function which establishes frameworks, policies, limits and processes for the management, monitoring and reporting of risk. The 2nd line of Defence may approve risks outside the authorities granted to the 1st Line, and 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. The 3rd Line of Defence – independent assurance Our Group Audit 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. Board Risk & Compliance Committee (BRCC) provides recommendations to the Board on the Westpac Group’s risk-reward strategy; sets risk appetite; reviews and approves frameworks for managing 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 authority; 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. Note 22. Financial risk (continued) 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; become due; liquidity risk – the risk that the Group will be unable to fund assets and meet obligations as they Other related risks business environment; 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 – 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; conduct risk – the risk arising from unfair or inappropriate behaviour or practices of the Westpac Group or its staff; and compliance risk – the risk of legal or regulatory sanction, financial or reputational loss, arising from our failure to abide by the compliance obligations required of us. business risk – the risk associated with the vulnerability of a line of business to changes in the sustainability risk – the risk of reputational or financial loss 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 institution in the Westpac Group; and of reputation or public trust and standing. reputation risk – the risk to earnings or capital arising from negative public opinion resulting from the loss Note 22 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 22 comprises the following: 22.1 22.2 Approach to risk management Credit Risk Management 22.2.1 Credit Risk Management Policy 22.2.2 Provision and Impairment Policy 22.2.3 Internal Credit Risk Ratings System 22.2.4 Credit risk mitigation, collateral and other credit enhancements 22.2.5 Credit risk concentrations 22.2.6 Credit quality of financial assets 22.2.7 Financial assets that are neither past due nor impaired 22.2.8 Financial assets that are past due, but not impaired 22.2.9 Items 90 days past due, or otherwise in default and not impaired 22.3 Funding and liquidity risk management 22.2.10 Impaired loans 22.3.1 Liquidity modelling 22.3.2 Sources of liquidity 22.3.3 Contractual maturity of financial liabilities 22.3.4 Expected maturity 22.4 Market risk 22.4.1 Traded market risk 22.4.2 Non-traded market risk Notes to the financial statements Note 22. Financial risk (continued) 22.1 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 BRCC responsibility for providing recommendations to the Board on the Westpac Group’s risk-reward strategy, setting risk appetite, approving framework and policies for managing risk, and determining whether to accept risks beyond management’s approval discretion. The BRCC 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 BRCC receives regular reports from management on the effectiveness of our management of Westpac’s material business risks. More detail about the role of the BRCC is set out in the Westpac risk management governance structure table. 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. Westpac adopts a Three Lines of Defence approach to risk management which reflects our culture of 'risk is everyone's business' and that all employees are responsible for identifying and managing risk and operating within the Group's desired risk profile. Effective risk management enables us to: accurately measure our risk profile and balance risk and reward within our risk appetite, increasing financial growth opportunities and mitigating potential loss or damage; protect Westpac's depositors, policyholders and investors by maintaining a strong balance sheet; embed adequate controls to guard against excessive risk or undue risk concentration; and meet our regulatory and compliance obligations. 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 and compliance advisory, control and monitoring function which establishes frameworks, policies, limits and processes for the management, monitoring and reporting of risk. The 2nd line of Defence may approve risks outside the authorities granted to the 1st Line, and 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. The 3rd Line of Defence – independent assurance Our Group Audit 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. Board Risk & Compliance Committee (BRCC) provides recommendations to the Board on the Westpac Group’s risk-reward strategy; sets risk appetite; reviews and approves frameworks for managing 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 authority; 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. 170 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 171 3 Note 22. Financial risk (continued) Other Board Committees with a risk focus Board Audit Committee oversees the integrity of financial statements and financial reporting systems, and matters relating to taxation risks. Board Remuneration Committee reviews any matters raised by the BRCC with respect to risk-adjusted remuneration. Board Technology Committee oversees the technology strategy, implementation, and risks associated with major technology programs. Executive Team monitors key risks within each business unit, capital adequacy and the Group’s reputation. executes the Board-approved strategy; delivers the Group’s various strategic and performance goals within the approved risk appetite; and Executive risk committees Westpac Group Executive Risk Committee leads the management and oversight of material risks across the Westpac Group within the context of the risk appetite determined by the BRCC; oversees the embedding of the Risk Management Strategy in the Group’s approach to risk governance; oversees risk-related management frameworks and key supporting policies; oversees the Group’s credit, operational, compliance, and market risk profiles; oversees Reputation Risk and Sustainability Risk Management Frameworks and key supporting policies; and identifies emerging credit, operational, compliance and market risks and allocates responsibility for assessing impacts and implementing appropriate actions to address these. Westpac Group Asset & Liability Committee leads the optimisation of funding and liquidity risk-reward across the Group; reviews the level and quality of capital so 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 Credit Risk Committee leads the optimisation of credit risk-reward across the Group; reviews and oversees the Credit Risk-related Risk Management Frameworks and key supporting policies; oversees Westpac’s credit risk profile; identifies emerging credit risks, allocates responsibility for assessing impacts, and responds as appropriate; and facilitates continuous improvement in credit risk management by providing a forum for testing risk tolerances and debating alternate approaches. Westpac Group Remuneration Oversight Committee 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. 172 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 173 Notes to the financial statements Note 22. Financial risk (continued) Risk and compliance functions Risk Function monitors emerging risk issues. Compliance Function reports on compliance standards. Independent internal review Group Audit Divisional business units Business Units policies; and 22.2 Credit Risk Management 22.2.1 Credit Risk Management Policy develops Group-level Risk Management Frameworks for approval by the BRCC; directs the review and development of key policies supporting the Risk Management Frameworks; develops division-specific policies, risk appetite statements, controls, procedures, and monitoring and reporting capability that align to the frameworks approved by the BRCC; establishes risk concentration limits and monitors risk concentrations; and develops the Group-level compliance framework for approval by the BRCC; directs the review and development of compliance policies, compliance plans, controls and procedures; monitors compliance and regulatory obligations and emerging regulatory developments; and reviews the adequacy and effectiveness of management controls for risk. responsible for identifying, evaluating and managing the risks that they originate within approved risk appetite establish and maintain appropriate risk management controls, resources and self-assurance processes. Credit risk is the risk of financial loss where a customer or counterparty fails to meet their financial obligations. Westpac maintains a Credit Risk Management Framework and a number of supporting policies that 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. commercial property); and individual countries. the organisation. by Risk. management teams. 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 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 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 Westpac has a 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 for compliance with the prudential requirements prescribed by APRA. Note 22. Financial risk (continued) Risk and compliance functions Notes to the financial statements Risk Function monitors emerging risk issues. develops Group-level Risk Management Frameworks for approval by the BRCC; directs the review and development of key policies supporting the Risk Management Frameworks; develops division-specific policies, risk appetite statements, controls, procedures, and monitoring and reporting capability that align to the frameworks approved by the BRCC; establishes risk concentration limits and monitors risk concentrations; and oversees the integrity of financial statements and financial reporting systems, and matters relating to taxation risks. Board Remuneration Committee Board Technology Committee reviews any matters raised by the BRCC with respect to risk-adjusted remuneration. oversees the technology strategy, implementation, and risks associated with major technology programs. 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. Note 22. Financial risk (continued) Other Board Committees with a risk focus Board Audit Committee Executive Team executes the Board-approved strategy; Executive risk committees Westpac Group Executive Risk Committee determined by the BRCC; leads the management and oversight of material risks across the Westpac Group within the context of the risk appetite oversees risk-related management frameworks and key supporting policies; oversees the Group’s credit, operational, compliance, and market risk profiles; oversees Reputation Risk and Sustainability Risk Management Frameworks and key supporting policies; and identifies emerging credit, operational, compliance and market risks and allocates responsibility for assessing impacts and implementing appropriate actions to address these. Westpac Group Asset & Liability Committee leads the optimisation of funding and liquidity risk-reward across the Group; reviews the level and quality of capital so 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 Credit Risk Committee leads the optimisation of credit risk-reward across the Group; reviews and oversees the Credit Risk-related Risk Management Frameworks and key supporting policies; oversees Westpac’s credit risk profile; identifies emerging credit risks, allocates responsibility for assessing impacts, and responds as appropriate; and facilitates continuous improvement in credit risk management by providing a forum for testing risk tolerances and debating alternate approaches. Westpac Group Remuneration Oversight Committee 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. oversees the embedding of the Risk Management Strategy in the Group’s approach to risk governance; Divisional business units Independent internal review Group Audit reviews the adequacy and effectiveness of management controls for risk. develops the Group-level compliance framework for approval by the BRCC; 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. 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. 22.2 Credit Risk Management Credit risk is the risk of financial loss where a customer or counterparty fails to meet their financial obligations. 22.2.1 Credit Risk Management Policy Westpac maintains a Credit Risk Management Framework and a number of supporting policies that 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. commercial 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 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 a 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 for compliance with the prudential requirements prescribed by APRA. 172 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 173 3 Note 22. Financial risk (continued) 22.2.2 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 take 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, repayment behaviour and bankruptcy rates. 22.2.3 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 a tiered scale of risk grades for both non-defaulted customers and 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. Loans – business1 Financial Statement Disclosure Westpac CRG Moody’s Rating Aaa – Aa3 A1 – A3 S&P Rating AAA – AA– A+ – A– Strong Good/satisfactory Weak A B C D E F Weak/default/non-performing G – H Baa1 – Baa3 BBB+ – BBB– underlying properties is held. Ba1 – B1 BB+ – B+ 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 BRCC, RISKCO 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 RISKCO). 174 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 175 Notes to the financial statements Note 22. Financial risk (continued) 22.2.4 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 These exposures are generally considered to be low risk due to the nature of the with central banks, including counterparties. Collateral is generally not sought on these balances. regulatory deposits Receivables due from other These exposures are mainly to relatively lower risk banks (Rated A or better). Collateral is financial institutions 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. Derivative transactions are increasingly being cleared through central clearers. Trading securities and financial These exposures are carried at fair value which reflects the credit risk. No collateral is sought assets designated at fair value directly from the issuer or counterparty; however this may be implicit in the terms of the instrument (such as an asset-backed security). 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 the form of guarantees and deposits. Personal lending (including credit cards and overdrafts) is predominantly unsecured. Where security is taken for non-housing personal lending, it is restricted to eligible motor vehicles, caravans, campers, motor homes and boats. 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. Life insurance assets 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 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 or better rated sovereign governments; and credit-linked notes (provided the proceeds are invested in cash or other eligible collateral described above). 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 Risk transfer underlying obligor: sovereign entities; public sector entities in Australia and New Zealand; ADIs and overseas banks with a minimum risk grade equivalent of A- / A3; and other entities with a minimum risk grade equivalent of A3 / A–. Note 22. Financial risk (continued) 22.2.2 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 take 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, repayment behaviour and bankruptcy rates. 22.2.3 Internal credit risk ratings system is exposed. The principal objective of the credit risk rating system is to produce a reliable assessment of the credit risk to which the Group 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 a tiered scale of risk grades for both non-defaulted customers and 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. high-level CRG groupings are shown. The table below shows the current alignment between Westpac’s CRGs and the corresponding external rating. Note that only Financial Statement Disclosure Westpac CRG Moody’s Rating Strong Good/satisfactory Weak A B C D E F Aaa – Aa3 A1 – A3 Ba1 – B1 Baa1 – Baa3 BBB+ – BBB– S&P Rating AAA – AA– A+ – A– BB+ – B+ Watchlist Special Mention Substandard/Default Weak/default/non-performing G – H 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 BRCC, RISKCO 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 RISKCO). Notes to the financial statements Note 22. Financial risk (continued) 22.2.4 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 lower risk banks (Rated A 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. Derivative transactions are increasingly being cleared through central clearers. Trading securities and financial assets designated at fair value 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 (such as an asset-backed security). 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 for non-housing personal lending, it is restricted to eligible motor vehicles, caravans, campers, motor homes and boats. 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 or better rated sovereign governments; and credit-linked notes (provided the proceeds are invested in cash or other eligible collateral described above). 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 with a minimum risk grade equivalent of A- / A3; and other entities with a minimum risk grade equivalent of A3 / A–. 174 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 175 3 Note 22. Financial risk (continued) Management of risk mitigation Westpac facilitates the management of these risks through controls covering: collateral valuation and management; credit portfolio management; netting; and central clearing. 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. Central clearing Westpac increasingly executes derivative transactions through central clearing counterparties. Westpac’s credit exposure to central clearing counterparties is mitigated through the risk management framework employed by the central clearing counterparties which includes stringent membership requirements, initial margin collected on all trades and the structure of the default waterfall. 22.2.5 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. 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. Note 22. 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 Notes to the financial statements Trading Securities Loans - & Financial Available Housing Assets Designated -For-Sale and Loans - at Fair Value Securities Personal Business Derivatives1 Total (On Life Credit Insurance Balance Commit- Assets Sheet) ments Entity’s disclosure. Consolidated 2015 $m Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Property, property services and business services Manufacturing Mining Services2 Trade3 Utilities4 Retail Lending Other Total Australia New Zealand Transport and storage Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Transport and storage Services2 Trade3 Utilities4 Retail lending Other 4,547 54,790 61,030 19,848 19,970 49,223 400,174 145,481 42,545 12,956 670,349 151,788 6,183 12,475 11,286 37,700 2,803 13,251 35,710 10,032 - 4 42 244 110 105 100 146 142 307 112 - - - 10 - 2 - - 10 52 - 8 244 127 515 1 218 34 944 593 99 42 - 359 541 839 620 10 444 17 16 193 28 390,007 6,908 1,146 1,244 246 77 27,793 - 42 - - - - - - - - - - - - - - - - - - - - 7,446 7,614 5,599 793 9,320 4,407 10,812 15,445 9,903 3,507 585 2,009 182 6,829 361 1,726 292 2,110 408 6,223 1,175 2,019 1,094 1,021 45 - 1,880 1,865 11 991 2,081 22 63 57 1,112 1,340 774 915 405 206 817 932 25 167 1 61 4 338 118 1 89 57 22 45 439 6 24 3,758 51 18 - - 746 302 673 442 201 171 275 - 45 128 28 - 4 - 3 - - 1 - - - - 5 390,729 80,230 2,249 816 7,763 7,808 6,231 79,265 52,081 11,868 5,627 12,719 16,591 11,325 5,063 542 7,445 1,204 9,103 4,614 2,686 426 13,222 2,379 3,285 1,395 1,636 27,844 32 1,305 1,924 3,958 10,344 912 7,294 3,943 5,982 7,752 4,112 3,368 105 697 565 2,073 611 1,497 76 2,382 1,106 1,464 916 1,382 8,118 26 Total New Zealand 3,838 3,114 40,244 23,485 4,963 169 75,813 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 21,018 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 176 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 177 Note 22. Financial risk (continued) Management of risk mitigation Westpac facilitates the management of these risks through controls covering: collateral valuation and management; credit portfolio management; netting; and central clearing. 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. Central clearing Westpac increasingly executes derivative transactions through central clearing counterparties. Westpac’s credit exposure to central clearing counterparties is mitigated through the risk management framework employed by the central clearing counterparties which includes stringent membership requirements, initial margin collected on all trades and the structure of the default waterfall. 22.2.5 Credit risk concentrations economic or other conditions. 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 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. 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. Specific industries 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. Notes to the financial statements Note 22. 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 2015 $m 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 Trading Securities & Financial Assets Designated at Fair Value Available -For-Sale Securities Loans - Housing and Personal Loans - Business Derivatives1 Life Insurance Assets Total (On Balance Sheet) Credit Commit- ments - 4 42 6,183 12,475 244 110 105 100 146 142 307 112 - - - - 11,286 37,700 - - 244 127 515 2,803 1 218 34 7,446 7,614 5,599 13,251 793 9,320 4,407 - 16 - 193 - - 28 4,547 54,790 944 593 99 42 390,007 - 10,812 15,445 9,903 3,507 585 2,009 22 63 57 35,710 1,112 1,340 774 915 405 206 817 932 25 167 51 - 18 10,032 - 746 302 7,763 7,808 6,231 79,265 52,081 11,868 5,627 1,305 1,924 3,958 10,344 912 7,294 3,943 673 442 201 171 275 - 45 61,030 19,848 12,719 16,591 11,325 5,063 390,729 2,249 5,982 7,752 4,112 3,368 80,230 816 19,970 49,223 400,174 145,481 42,545 12,956 670,349 151,788 - 10 - 1,880 1,865 11 - 2 - - 10 52 - 8 - - - 991 2,081 - - - - - - 42 - - 359 541 839 620 10 444 17 6,908 1,146 1,244 246 77 27,793 - 182 6,829 361 1,726 292 2,110 408 6,223 1,175 2,019 1,094 1,021 45 - 1 61 4 3,758 338 118 1 89 57 22 45 439 6 24 - 4 - 128 28 3 - - 1 - - 5 - - 542 7,445 1,204 9,103 4,614 2,686 426 13,222 2,379 3,285 1,395 1,636 27,844 32 105 697 565 2,073 611 1,497 76 2,382 1,106 1,464 916 1,382 8,118 26 21,018 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 176 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 177 Total New Zealand 3,114 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 40,244 75,813 23,485 3,838 4,963 169 3 Note 22. Financial risk (continued) Consolidated 2015 $m 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 Trading Securities & Financial Assets Designated at Fair Value Available -For-Sale Securities Loans - Housing and Personal Loans - Business Derivatives1 Life Insurance Assets Total (On Balance Sheet) Credit Commit- ments - - - 1,458 2,072 92 - - - - - 24 - - - - - 1,009 1,487 - - - - - - - - - 4 1 7 1 - 4 - 62 5 8 4 - 1,123 30 107 567 240 4,296 130 3,844 778 479 448 2,890 1,095 722 68 47 3,646 2,496 1,249 15,711 - 19 - 562 - 7 - - 1 - 76 - - - 665 - - - - - - - - - - - - - - - 111 587 247 7,326 3,689 3,947 778 541 454 2,898 1,175 746 1,191 77 13 491 138 3,764 47 5,438 3,378 559 231 3,631 710 313 38 36 23,767 18,787 9,583 1,309 Total gross credit risk 54,833 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 780,821 441,667 184,677 13,125 48,173 27,454 191,593 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 178 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 179 Note 22. Financial risk (continued) Consolidated 2014 Notes to the financial statements Trading Securities & Financial Assets Available Housing Loans - Designated -For-Sale and Loans - at Fair Value Securities Personal Business Derivatives1 Total (On Life Credit Insurance Balance Commit- Assets Sheet) ments $m Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Property, property services and business services Manufacturing Mining Services2 Trade3 Utilities4 Retail Lending Other Total Australia New Zealand Transport and storage Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Transport and storage Services2 Trade3 Utilities4 Retail lending Other 4,178 50,972 56,386 17,149 36,076 31,573 374,352 136,903 37,367 10,797 627,068 146,318 10,824 24,126 11,746 19,492 2,295 12,349 33,883 7,143 - - 3 73 81 54 187 114 47 427 140 - - 2 - 4 - 3 8 - 12 60 - 1 191 125 365,334 - - - - - 2 9 - - 8 - - - - - - - - - - 39 37 185 124 474 4 189 39 841 562 91 36 - 275 474 702 715 5 357 18 6,034 1,075 1,001 173 59 26,300 3 7,262 7,100 5,942 780 9,080 3,254 10,033 15,054 9,239 3,236 488 2,114 160 5,999 362 1,159 349 1,848 484 5,984 998 1,878 868 1,004 51 135 1,659 1,392 555 2,100 11 19 31 371 484 168 477 131 223 544 867 43 115 - 27 2 3,059 147 55 - 163 4 10 26 241 - 1 69 31 - - 1,185 599 703 403 206 63 389 137 53 - 6 1 2 1 4 1 - 2 - - - - 9 366,005 75,427 2,243 1,077 7,527 7,243 6,481 78,240 44,773 11,011 4,141 11,604 16,159 10,175 5,080 436 6,504 1,067 7,284 4,046 2,268 503 2,087 2,889 1,079 1,412 26,351 177 1,081 1,699 3,648 11,838 1,366 7,114 2,948 6,162 8,241 4,824 3,744 80 685 452 1,754 916 1,611 60 799 1,363 415 1,473 6,982 248 12,184 2,340 Total New Zealand 3,141 2,731 37,191 21,279 3,735 210 68,287 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 19,178 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. Note 22. Financial risk (continued) Note 22. Financial risk (continued) Notes to the financial statements Consolidated 2015 $m 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 Transport and storage Services2 Trade3 Utilities4 Retail lending Other Total other overseas Other risk concentrations Amounts due from financial institutions Regulatory deposits Total gross credit risk 1,458 2,072 92 1,009 1,487 - - - - - - - - - - 24 - - - - - - - - - - - - 4 1 7 1 - 4 - 5 8 4 - 62 1,123 30 107 567 240 4,296 130 3,844 778 479 448 2,890 1,095 722 68 47 19 - - 562 - 7 - - 1 - - - - 76 Total (On 111 587 247 7,326 3,689 3,947 778 541 454 2,898 1,175 746 1,191 77 9,583 1,309 - - - - - - - - - - - - - - - 13 491 138 3,764 47 5,438 3,378 3,631 559 231 710 313 38 36 3,646 2,496 1,249 15,711 665 23,767 18,787 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 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 27,454 54,833 441,667 184,677 48,173 13,125 780,821 191,593 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. Trading Securities Loans - & Financial Available Housing Assets Designated -For-Sale and Loans - at Fair Value Securities Personal Business Derivatives1 Life Credit Insurance Balance Commit- Assets Sheet) ments Consolidated 2014 $m 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 Trading Securities & Financial Assets Designated at Fair Value Available -For-Sale Securities Loans - Housing and Personal Loans - Business Derivatives1 Life Insurance Assets Total (On Balance Sheet) Credit Commit- ments - - 3 - - - 185 124 474 7,262 7,100 5,942 11 19 31 69 - 31 10,824 24,126 11,746 19,492 73 81 54 187 114 47 427 140 - - - 2 9 - 191 125 - 8 2,295 12,349 33,883 7,143 4 189 39 780 9,080 3,254 4,178 50,972 841 562 91 36 365,334 - 10,033 15,054 9,239 3,236 488 2,114 371 484 168 477 131 223 544 867 43 115 - 1,185 599 703 403 206 63 389 - 6 7,527 7,243 6,481 78,240 44,773 11,011 4,141 1,081 1,699 3,648 11,838 1,366 7,114 2,948 56,386 17,149 11,604 16,159 10,175 5,080 6,162 8,241 4,824 3,744 366,005 75,427 2,243 1,077 36,076 31,573 374,352 136,903 37,367 10,797 627,068 146,318 - 2 - - - - 1,659 1,392 555 2,100 4 - 3 8 - 12 60 - 1 - - - - - - 39 - 37 275 474 702 715 5 357 18 6,034 1,075 1,001 173 59 26,300 3 160 5,999 362 1,159 349 1,848 484 5,984 998 1,878 868 1,004 51 135 - 27 2 3,059 147 55 - 163 4 10 26 241 - 1 1 2 1 137 53 4 1 - 2 - - 9 - - 436 6,504 1,067 7,284 4,046 2,268 503 80 685 452 1,754 916 1,611 60 12,184 2,340 2,087 2,889 1,079 1,412 26,351 177 799 1,363 415 1,473 6,982 248 19,178 Total New Zealand 2,731 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 37,191 68,287 21,279 3,141 3,735 210 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 178 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 179 3 Note 22. Financial risk (continued) Consolidated 2014 $m 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 Trading Securities & Financial Assets Designated at Fair Value Available -For-Sale Securities Loans - Housing and Personal Loans - Business Derivatives1 Life Insurance Assets Total (On Balance Sheet) Credit Commit- ments - - - 2,188 4,418 31 43 - - - - 12 - - - - - 717 986 - - - - - - 17 - - 3 1 8 1 1 3 - 58 6 8 4 - 1,052 12 124 464 112 2,005 34 2,883 1,508 372 407 3,240 685 701 59 40 - - - 285 4 11 2 - - - - - - - 6,692 1,720 1,157 12,634 302 - - - - - - - - - - - - - - - 127 465 120 32 179 157 5,196 2,437 5,443 2,928 1,553 430 413 51 4,264 1,188 368 21 3,248 1,455 689 730 1,111 52 187 203 38 76 22,505 10,656 7,424 1,528 Total gross credit risk 36,024 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 726,812 412,700 170,816 45,909 41,404 11,007 176,152 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 180 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 181 Note 22. Financial risk (continued) Parent Entity 2015 Notes to the financial statements Trading Securities & Financial Assets Available Housing Loans - Designated -For-Sale and Loans - at Fair Value Securities Personal Business Derivatives1 Total (On Life Credit Insurance Balance Commit- Assets Sheet) ments $m Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Property, property services and business services Manufacturing Mining Services2 Trade3 Utilities4 Retail Lending Other Total Australia New Zealand Transport and storage Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property, property services and business services Transport and storage Services2 Trade3 Utilities4 Retail lending Other 4,242 53,314 58,576 19,831 19,310 49,024 394,246 138,478 42,502 5,551 12,474 11,286 37,699 2,805 13,101 35,667 - 4 42 244 107 105 100 146 118 307 112 - - - - 2 - - 7 - 8 10 10 842 1,050 11 16 15 8 - - - - - - - - - - - - - - - - - - - - - - - - 244 127 510 1 215 33 943 589 97 41 384,399 - - - - - - - - - - - - - - - - 7,295 7,376 4,605 736 8,869 4,256 10,124 14,783 9,211 3,470 1,338 - - 2 5 - 1 - 7 3 2 - - - 90 218 22 63 57 1,112 1,340 774 915 405 206 817 932 25 167 1 61 4 338 118 1 89 57 22 45 439 6 24 3,195 384,536 80,230 1,513 811 643,560 151,697 7,561 7,570 5,214 68,410 52,022 10,668 5,170 11,588 15,724 10,258 4,750 1 73 9 4,037 1,389 219 1 98 60 240 57 446 6 32 1,305 1,921 3,957 10,344 912 7,292 3,942 5,959 7,723 4,102 3,368 - 6 13 61 24 116 - 37 4 209 209 204 14 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total New Zealand 1,940 328 4,400 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 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 6,668 897 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. Note 22. Financial risk (continued) Consolidated 2014 Trading Securities & Financial Assets Available Housing Loans - Designated -For-Sale and Loans - at Fair Value Securities Personal Business Derivatives1 Life Credit Insurance Balance Commit- Assets Sheet) ments $m 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 Transport and storage Services2 Trade3 Utilities4 Retail lending Other Total other overseas Other risk concentrations Amounts due from financial institutions Regulatory deposits Total gross credit risk 2,188 4,418 31 43 - - - - - - - - - 717 986 - - - - - - - - - - - 3 1 8 1 1 3 - 6 8 4 - 58 1,052 12 124 464 112 2,005 34 2,883 1,508 3,240 372 407 685 701 59 40 12 17 285 4 11 2 - - - - - - - - - - Total (On 127 465 120 5,443 2,928 1,553 430 413 689 730 1,111 52 7,424 1,528 5,196 2,437 3,248 1,455 32 179 157 51 4,264 1,188 368 21 187 203 38 76 - - - - - - - - - - - - - - - 6,692 1,720 1,157 12,634 302 22,505 10,656 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 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 45,909 36,024 412,700 170,816 41,404 11,007 726,812 176,152 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. Note 22. Financial risk (continued) Notes to the financial statements Trading Securities & Financial Assets Designated at Fair Value Available -For-Sale Securities Loans - Housing and Personal Loans - Business Derivatives1 Life Insurance Assets Total (On Balance Sheet) Credit Commit- ments Parent Entity 2015 $m 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 - 4 42 - - - 244 127 510 7,295 7,376 4,605 22 63 57 5,551 12,474 11,286 37,699 244 107 105 100 146 118 307 112 - - - - 16 - 15 - - 8 2,805 13,101 35,667 1 215 33 736 8,869 4,256 4,242 53,314 943 589 97 41 384,399 10,124 14,783 9,211 3,470 - - 1,338 1,112 1,340 774 915 405 206 817 932 25 167 19,310 49,024 394,246 138,478 42,502 - 10 - 842 1,050 11 - 2 - - 10 7 - 8 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 5 - 1 90 - 7 3 218 2 - - - 1 61 4 3,195 338 118 1 89 57 22 45 439 6 24 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7,561 7,570 5,214 68,410 52,022 10,668 5,170 1,305 1,921 3,957 10,344 912 7,292 3,942 58,576 19,831 11,588 15,724 10,258 4,750 5,959 7,723 4,102 3,368 384,536 80,230 1,513 811 643,560 151,697 1 73 9 4,037 1,389 219 1 98 60 240 57 446 6 32 - 6 13 61 24 116 - 37 4 209 209 204 14 - 897 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 6,668 4,400 1,940 328 - - - default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 180 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 181 3 Note 22. Financial risk (continued) Parent Entity 2015 $m 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 Trading Securities & Financial Assets Designated at Fair Value Available -For-Sale Securities Loans - Housing and Personal Loans - Business Derivatives1 Life Insurance Assets Total (On Balance Sheet) Credit Commit- ments - - - 1,458 2,072 92 - - - - - 24 - - - - - 801 519 - - - - - - - - - 3,646 1,320 3 1 5 1 - 3 - 34 3 7 3 - 573 30 663 90 566 199 4,250 130 3,814 777 279 412 2,745 780 702 44 45 14,833 - 19 - 536 - 6 - - 1 - 76 - - - 638 - - - - - - - - - - - - - - - 93 586 204 13 491 132 7,046 3,763 2,721 3,915 777 313 416 47 5,290 3,360 536 230 2,752 3,469 Transport and storage 859 726 617 75 685 308 25 6 21,100 18,355 8,741 1,152 Total gross credit risk 50,344 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 681,221 394,909 153,639 47,540 24,896 170,949 - default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 182 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 183 Note 22. Financial risk (continued) Parent Entity 2014 Notes to the financial statements Trading Securities & Financial Assets Available Housing Loans - Designated -For-Sale and Loans - at Fair Value Securities Personal Business Derivatives1 Total (On Life Credit Insurance Balance Commit- Assets Sheet) ments $m Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Property, property services and business services Manufacturing Mining Services2 Trade3 Utilities4 Retail Lending Other Total Australia New Zealand Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other Total New Zealand 4,177 48,605 53,315 17,144 10,373 24,119 11,736 19,491 2,295 12,054 33,879 15 358,167 35,578 31,261 367,186 128,241 37,362 - - - - - 2 9 - - - 8 - - - - - - - - - - - - - 6,855 6,586 4,966 708 8,595 3,113 9,137 14,004 8,553 3,199 462 1,404 81 196 6 4 1 4 4 5 4 - - - 185 124 474 4 189 40 841 562 91 37 - - - - - - - - - - - - - - 11 19 31 371 484 168 477 130 223 544 867 43 115 27 2 147 55 163 4 10 26 241 - 1 2,992 73 65 54 187 114 23 427 140 - - 3 - 2 - 4 3 8 - 873 1,129 12 22 - 1 2,054 358,812 75,427 1,527 1,071 599,628 146,147 7,051 6,729 5,474 70,337 44,693 9,341 3,386 10,304 14,903 9,226 4,530 35 6 3,866 1,280 140 170 17 206 42 263 - 2 1,080 1,699 3,647 11,838 1,366 7,114 2,947 6,156 8,095 4,819 3,744 14 11 74 113 120 30 5 231 43 226 13 1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 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 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 305 3,668 6,027 881 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. Note 22. Financial risk (continued) Notes to the financial statements Trading Securities & Financial Assets Designated at Fair Value Available -For-Sale Securities Loans - Housing and Personal Loans - Business Derivatives1 Life Insurance Assets Total (On Balance Sheet) Credit Commit- ments Note 22. Financial risk (continued) Parent Entity 2015 Trading Securities & Financial Assets Available Housing Loans - Designated -For-Sale and Loans - at Fair Value Securities Personal Business Derivatives1 Total (On Life Credit Insurance Balance Commit- Assets Sheet) ments $m 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 Transport and storage Services2 Trade3 Utilities4 Retail lending Other Total other overseas Other risk concentrations Amounts due from financial institutions Regulatory deposits Total gross credit risk 1,458 2,072 92 - - - - - - - - - - 24 801 519 - - - - - - - - - - - - 90 566 199 4,250 130 3,814 777 2,745 279 412 780 702 44 45 3 1 5 1 - 3 - 3 7 3 - 34 573 30 663 19 - - 536 - 6 - - 1 - - - - 76 - - - - - - - - - - - - - - - 93 586 204 13 491 132 7,046 3,763 2,721 3,915 777 47 5,290 3,360 2,752 3,469 536 230 685 308 25 6 313 416 859 726 617 75 8,741 1,152 3,646 1,320 14,833 638 21,100 18,355 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 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. Parent Entity 2014 $m 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 Agriculture, forestry and fishing Construction Finance and insurance 24,896 50,344 394,909 153,639 47,540 - 681,221 170,949 Government, administration and defence Manufacturing Property, property services and business services Services2 Trade3 Transport and storage Utilities4 Retail lending Other - - 3 - - - 185 124 474 6,855 6,586 4,966 11 19 31 10,373 24,119 11,736 19,491 73 65 54 187 114 23 427 140 - - - 2 9 - 15 - - 8 2,295 12,054 33,879 4 189 40 708 8,595 3,113 4,177 48,605 841 562 91 37 358,167 - 9,137 14,004 8,553 3,199 462 1,404 371 484 168 477 130 223 544 867 43 115 35,578 31,261 367,186 128,241 37,362 2 - 873 1,129 4 3 8 - 12 22 - 1 - - - - - - - - - - - - - - - - - - - - - - - - 6 4 1 4 81 4 5 196 4 - - - 27 2 2,992 147 55 163 4 10 26 241 - 1 - - - - - - - - - - - - - - - - - - - - - - - - - - - 7,051 6,729 5,474 70,337 44,693 9,341 3,386 1,080 1,699 3,647 11,838 1,366 7,114 2,947 53,315 17,144 10,304 14,903 9,226 4,530 6,156 8,095 4,819 3,744 358,812 75,427 1,527 1,071 599,628 146,147 35 6 3,866 1,280 140 170 17 206 42 263 - 2 14 11 74 113 120 30 5 231 43 226 13 1 881 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 3,668 6,027 2,054 305 - - - default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 182 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 183 3 Note 22. Financial risk (continued) Parent Entity 2014 $m 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 Trading Securities & Financial Assets Designated at Fair Value Available -For-Sale Securities Loans - Housing and Personal Loans - Business Derivatives1 Life Insurance Assets Total (On Balance Sheet) Credit Commit- ments - - - 2,188 4,418 31 43 - - - - 12 - - - - - 377 371 - - - - - - - - - 6,692 748 3 1 5 1 - 2 - 25 3 5 3 - 543 9 600 92 461 84 1,970 34 2,817 1,501 178 373 3,112 509 665 28 37 - - - 271 4 - 2 - - - - - - - 11,861 277 - - - - - - - - - - - - - - - 95 462 89 32 178 150 4,807 2,436 4,827 2,850 1,546 203 376 51 4,147 1,173 349 20 3,117 1,325 512 677 571 46 166 202 30 3 20,178 10,262 Trading securities and financial assets 5,483 1,389 Total gross credit risk 32,009 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 140,407 367,786 632,705 41,307 44,324 157,290 - default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 22.2.6 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. 184 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 185 Note 22. Financial risk (continued) Financial assets of the Group at 30 September can be disaggregated as follows: Notes to the financial statements Past Due But Not Impaired Impaired Total Provision Impairment Carrying Consolidated 2015 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and 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 $m Consolidated 2014 Cash and balances with central banks Receivables due from other financial institutions designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Life insurance assets Other financial assets Total Parent Entity 2015 $m designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Due from subsidiaries Other financial assets Total Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets Regulatory deposits with central banks overseas Neither Past Due Nor Impaired 14,770 9,583 27,454 48,173 54,833 426,731 179,809 13,121 1,309 3,041 Neither Past Due Nor Impaired 25,760 7,424 45,908 41,404 36,024 397,583 165,458 11,002 1,528 5,049 13,372 8,741 24,896 47,540 50,344 381,795 149,756 1,152 145,560 2,429 825,585 14,439 3,470 497 1,398 (1,197) (1,831) 778,824 17,946 1,898 798,668 (3,028) Past Due But Not Impaired Impaired Total Provision Impairment Carrying 4 - 33 5 - 39 - - - - - - - - - - - - - - - - - 27 - - - - - - - 3 - - 1 - - - - 5 - - - - - - - 2 14,770 9,583 27,454 48,173 54,833 441,667 184,677 13,125 1,309 3,077 25,760 7,424 45,909 41,404 36,024 412,700 170,816 11,007 1,528 5,093 13,372 8,741 24,896 47,540 50,344 394,909 153,639 1,152 145,560 2,458 12,750 2,832 364 1,051 (993) (1,480) 15,609 1,417 842,611 (2,473) Total Value 14,770 9,583 27,454 48,173 54,833 440,470 182,846 13,125 1,309 3,077 795,640 Total Value 25,760 7,424 45,909 41,404 36,024 411,583 168,760 11,007 1,528 5,093 754,492 Total Value 13,372 8,741 24,896 47,540 50,344 393,916 152,159 1,152 145,560 2,458 840,138 - - - - - - - - - - - - - - - - - - - - - - - - 14,649 3,486 468 1,872 (1,117) (2,056) Regulatory deposits with central banks overseas Financial assets of the Parent Entity at 30 September can be disaggregated as follows: 737,140 18,179 2,346 757,665 (3,173) Neither Past Due Nor Impaired Past Due But Not Impaired Impaired Total Provision Impairment Carrying Trading Securities & Financial Assets Available Housing Loans - Designated -For-Sale and Loans - at Fair Value Securities Personal Business Derivatives1 Total (On Life Credit Insurance Balance Commit- Assets Sheet) ments 2,188 4,418 31 43 - - - - - - - - - 12 377 371 - - - - - - - - - - - - 3 1 5 1 - 2 - 3 5 3 - 9 25 543 92 461 84 1,970 34 2,817 1,501 3,112 178 373 509 665 28 37 - - - 4 - 2 - - - - - - - 271 4,807 2,436 - - - - - - - - - - - - - - - 95 462 89 32 178 150 4,827 2,850 1,546 51 4,147 1,173 3,117 1,325 349 20 166 202 30 3 203 376 512 677 571 46 5,483 1,389 6,692 748 600 11,861 277 20,178 10,262 $m 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 Transport and storage Services2 Trade3 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 default of the referenced entity. See Note 21 for further details regarding credit derivative exposures. 2 Services include education, health and community services, cultural and recreational services and personal and other services. 44,324 32,009 367,786 140,407 41,307 - 632,705 157,290 3 Trade includes wholesale trade and retail trade. 4 Utilities include electricity, gas and water and communication services. 22.2.6 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. Note 22. Financial risk (continued) Parent Entity 2014 Note 22. Financial risk (continued) Financial assets of the Group at 30 September can be disaggregated as follows: Notes to the financial statements Consolidated 2015 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and 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 Consolidated 2014 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and 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 Past Due But Not Impaired Impaired 14,770 9,583 27,454 48,173 54,833 426,731 179,809 13,121 1,309 3,041 - - - - - - - - - - 14,439 3,470 497 1,398 4 - 33 - - 3 Total 14,770 9,583 27,454 48,173 54,833 441,667 184,677 13,125 1,309 3,077 Impairment Provision - - - - - (1,197) (1,831) - - - 778,824 17,946 1,898 798,668 (3,028) Neither Past Due Nor Impaired Past Due But Not Impaired Impaired 25,760 7,424 45,908 41,404 36,024 397,583 165,458 11,002 1,528 5,049 - - - - - - - 1 - - 14,649 3,486 468 1,872 5 - 39 - - 5 Total 25,760 7,424 45,909 41,404 36,024 412,700 170,816 11,007 1,528 5,093 Impairment Provision - - - - - (1,117) (2,056) - - - 737,140 18,179 2,346 757,665 (3,173) Financial assets of the Parent Entity at 30 September can be disaggregated as follows: Parent Entity 2015 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets Total Neither Past Due Nor Impaired Past Due But Not Impaired Impaired - - - - - - - - - - 12,750 2,832 364 1,051 - - 27 - - 2 Total 13,372 8,741 24,896 47,540 50,344 394,909 153,639 1,152 145,560 2,458 Impairment Provision - - - - - (993) (1,480) - - - 15,609 1,417 842,611 (2,473) 13,372 8,741 24,896 47,540 50,344 381,795 149,756 1,152 145,560 2,429 825,585 Total Carrying Value 14,770 9,583 27,454 48,173 54,833 440,470 182,846 13,125 1,309 3,077 795,640 Total Carrying Value 25,760 7,424 45,909 41,404 36,024 411,583 168,760 11,007 1,528 5,093 754,492 Total Carrying Value 13,372 8,741 24,896 47,540 50,344 393,916 152,159 1,152 145,560 2,458 840,138 184 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 185 3 15,836 1,901 800,730 (2,589) Neither Past Due Nor Impaired Past Due But Not Impaired Impaired 23,400 5,483 44,323 41,307 32,009 354,597 135,897 1,389 140,098 4,490 782,993 Total Carrying Value 23,400 5,483 44,324 41,307 32,009 366,897 138,707 1,389 140,098 4,527 798,141 - - - - - - - 1 - - 12,809 2,994 380 1,516 - - 33 - - 4 Total 23,400 5,483 44,324 41,307 32,009 367,786 140,407 1,389 140,098 4,527 Impairment Provision - - - - - (889) (1,700) - - - Note 22. Financial risk (continued) Parent Entity 2014 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets Total Note 22. Financial risk (continued) Parent Entity $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets1 Total financial assets Notes to the financial statements Strong Satisfactory Weak Strong Satisfactory Weak Total 13,372 23,400 8,741 5,439 24,896 47,540 50,344 44,134 40,008 31,974 109 21 2014 Good/ - 44 187 1,253 18 2015 Good/ - - 113 926 22 6 - 256 - - 2 - 7 13,372 8,741 24,781 46,505 50,301 305,373 75,366 1,042 145,560 2,166 75,388 71,329 1,034 3,061 381,795 298,686 149,756 66,898 54,892 65,217 1,019 3,782 354,597 135,897 104 1,152 1,300 145,560 140,098 2,429 4,225 6 - 255 1,389 140,098 4,490 Total 23,400 5,483 44,323 41,307 32,009 - - 2 46 17 83 - 10 1 Other financial assets includes accrued interest of $927 million (2014: $1,029 million) which is allocated to the relevant credit quality classifications in proportionate to the loan balances to which it relates. Securities sold not yet delivered of $725 million (2014: $2,765 million) is also included in this balance which is allocated proportionately based on the trading securities balance classifications. 673,207 148,040 4,338 825,585 656,162 121,872 4,959 782,993 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 following table, 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%. Consolidated % Fully secured Partially secured Unsecured Total Parent Entity % Fully secured Partially secured Unsecured Total Loans – Housing and Personal 96.1 1.4 2.5 100.0 97.5 0.3 2.2 100.0 Loans – Housing and Personal 2015 Loans – Business 51.3 24.8 23.9 100.0 2015 Loans – Business 51.5 23.7 24.8 100.0 Loans – Housing and Personal 95.5 1.8 2.7 100.0 97.3 0.4 2.3 100.0 Loans – Housing and Personal Total 82.8 8.4 8.8 100.0 Total 84.6 6.9 8.5 100.0 2014 Loans – Business 52.3 24.5 23.2 100.0 2014 Loans – Business 52.5 23.5 24.0 100.0 Total 82.8 8.5 8.7 100.0 Total 84.9 6.8 8.3 100.0 187 22.2.7 Financial assets that are neither past due nor impaired1 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: Consolidated 2015 Good/ $m Cash and balances with central banks Strong 14,770 Satisfactory Weak - - Total 14,770 Strong 25,760 Receivables due from other financial institutions Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Life insurance assets2 9,583 27,325 47,137 53,951 317,870 83,938 13,073 - 127 927 861 - 2 109 21 9,583 7,380 27,454 48,173 54,833 45,684 40,105 35,355 107,349 92,020 1,512 3,851 179,809 426,731 312,648 48 - 13,121 74,323 10,934 2014 Good/ Satisfactory - 44 222 1,253 652 83,672 86,438 68 Weak - Total 25,760 - 7,424 2 46 17 45,908 41,404 36,024 1,263 4,697 397,583 165,458 - 11,002 1,042 Regulatory deposits with central banks overseas Other financial assets3 Total financial assets 201,860 1 The classification of mortgage exposures into risk categories was updated over the year following the implementation of new risk scoring models. 2 Life insurance assets include $6,480 million (2014: $8,951 million) of unit linked investment contract assets and $191 million (2014: $170 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 is directly linked to the performance of these assets. The investments in managed schemes and mortgages are predominantly managed by the BT Financial Group. 558,157 571,355 778,824 172,862 737,140 5,609 4,665 1,303 5,049 1,528 2,666 6,121 3,041 1,309 163 104 365 371 142 10 13 83 3 Other financial assets includes accrued interest of $1,108 million (2014: $1,214 million) which is allocated to the relevant credit quality classifications in proportion to the loan balances to which it relates. Securities sold not yet delivered of $740 million (2014: $2,768 million) is also included in this balance which is allocated proportionately based on the trading securities balance classifications. 186 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Notes to the financial statements 8,741 24,781 46,505 50,301 - 113 926 22 - 2 109 21 8,741 5,439 24,896 47,540 50,344 44,134 40,008 31,974 Receivables due from other financial institutions Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Regulatory deposits with central banks overseas 2014 Good/ Satisfactory - 44 187 1,253 18 Weak - Total 23,400 - 2 46 17 5,483 44,323 41,307 32,009 305,373 75,366 75,388 71,329 1,034 3,061 381,795 298,686 149,756 66,898 54,892 65,217 1,019 3,782 354,597 135,897 1,042 6 104 1,152 1,300 6 83 1,389 Note 22. Financial risk (continued) Parent Entity 2015 Good/ $m Cash and balances with central banks Strong 13,372 Satisfactory Weak - - Total 13,372 Strong 23,400 Note 22. Financial risk (continued) Parent Entity 2014 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Due from subsidiaries Other financial assets Total Regulatory deposits with central banks overseas Neither Past Due Nor Impaired 23,400 5,483 44,323 41,307 32,009 354,597 135,897 1,389 140,098 4,490 782,993 Past Due But Not Impaired Impaired Total Provision Impairment Carrying - - - - - - - 33 - - 1 - - - - 4 23,400 5,483 44,324 41,307 32,009 367,786 140,407 1,389 140,098 4,527 12,809 2,994 380 1,516 (889) (1,700) 15,836 1,901 800,730 (2,589) Total Value 23,400 5,483 44,324 41,307 32,009 366,897 138,707 1,389 140,098 4,527 798,141 - - - - - - - - 22.2.7 Financial assets that are neither past due nor impaired1 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: Consolidated $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans: Loans – housing and personal Loans – business Life insurance assets2 Regulatory deposits with central banks overseas Other financial assets3 Total financial assets Strong Satisfactory Weak Strong Satisfactory Weak 2015 Good/ - - 127 927 861 48 163 365 14,770 9,583 27,325 47,137 53,951 317,870 83,938 13,073 1,042 2,666 Total 14,770 25,760 9,583 7,380 27,454 48,173 54,833 45,684 40,105 35,355 - - 2 109 21 107,349 92,020 1,512 3,851 426,731 312,648 179,809 - 13,121 74,323 10,934 104 10 1,309 3,041 1,303 4,665 2014 Good/ - 44 222 1,253 652 83,672 86,438 68 142 371 Total 25,760 7,424 45,908 41,404 36,024 - - 2 46 17 1,263 4,697 397,583 165,458 - 11,002 83 13 1,528 5,049 1 The classification of mortgage exposures into risk categories was updated over the year following the implementation of new risk scoring models. 2 Life insurance assets include $6,480 million (2014: $8,951 million) of unit linked investment contract assets and $191 million (2014: $170 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 is directly linked to the performance of these assets. The investments in managed schemes and mortgages are predominantly managed by 571,355 201,860 5,609 778,824 558,157 172,862 6,121 737,140 the BT Financial Group. 3 Other financial assets includes accrued interest of $1,108 million (2014: $1,214 million) which is allocated to the relevant credit quality classifications in proportion to the loan balances to which it relates. Securities sold not yet delivered of $740 million (2014: $2,768 million) is also included in this balance which is allocated proportionately based on the trading securities balance classifications. Due from subsidiaries Other financial assets1 Total financial assets 1 Other financial assets includes accrued interest of $927 million (2014: $1,029 million) which is allocated to the relevant credit quality classifications in proportionate to the loan balances to which it relates. Securities sold not yet delivered of $725 million (2014: $2,765 million) is also included in this balance which is allocated proportionately based on the trading securities balance classifications. 656,162 140,098 673,207 782,993 121,872 825,585 148,040 140,098 145,560 145,560 4,338 4,490 4,225 2,166 4,959 2,429 256 255 10 7 - - - - 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 following table, 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%. Consolidated % Fully secured Partially secured Unsecured Total Parent Entity % Fully secured Partially secured Unsecured Total Loans – Housing and Personal 96.1 1.4 2.5 100.0 Loans – Housing and Personal 97.5 0.3 2.2 100.0 2015 Loans – Business 51.3 24.8 23.9 100.0 2015 Loans – Business 51.5 23.7 24.8 100.0 Loans – Housing and Personal 95.5 1.8 2.7 100.0 Loans – Housing and Personal 97.3 0.4 2.3 100.0 Total 82.8 8.4 8.8 100.0 Total 84.6 6.9 8.5 100.0 2014 Loans – Business 52.3 24.5 23.2 100.0 2014 Loans – Business 52.5 23.5 24.0 100.0 186 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Total 82.8 8.5 8.7 100.0 Total 84.9 6.8 8.3 100.0 187 3 Note 22. Financial risk (continued) 22.2.8 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 following table. 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: Consolidated $m Loans: Loans – housing and personal Loans – business Life insurance assets Other financial assets Total Parent Entity $m Loans: Loans – housing and personal Loans – business Other financial assets Total 2015 2014 These include financial assets that are: 1-5 days 6-89 days 90+ days Total 1-5 days 6-89 days 90+ days Total currently 90 days or more past due but well secured; 3,997 838 - 9 8,867 2,151 4 20 1,575 14,439 481 3,470 - 4 4 33 4,253 780 - 11 8,872 2,274 5 24 1,524 14,649 432 3,486 - 4 5 39 4,844 11,042 2,060 17,946 5,044 11,175 1,960 18,179 2015 2014 1-5 days 6-89 days 90+ days Total 1-5 days 6-89 days 90+ days Total 3,648 640 8 7,573 1,860 16 1,529 12,750 3,797 332 2,832 3 27 570 9 7,557 2,052 20 1,455 12,809 372 4 2,994 33 4,296 9,449 1,864 15,609 4,376 9,629 1,831 15,836 Note 22. Financial risk (continued) Notes to the financial statements Loans – Housing and Personal 95.4 0.7 3.9 100.0 2015 Loans – Business 47.5 26.2 26.3 100.0 Loans – Housing and Personal 95.3 0.7 4.0 100.0 Total 86.8 5.3 7.9 100.0 2014 Loans – Business 51.0 27.8 21.2 100.0 Total 87.0 5.8 7.2 100.0 22.2.9 Items 90 days past due, or otherwise in default and not impaired 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 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). Consolidated Australia New Zealand Other Overseas $m Gross Amount 2015 2,149 2014 2,134 2013 2,329 2015 130 2014 85 2013 136 2015 13 2014 22 2013 22 2015 2,292 Total 2014 2,241 2013 2,487 22.2.10 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 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. In the following table, 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%. Consolidated % Fully secured Partially secured Unsecured Total Loans – Housing and Personal 92.5 2.6 4.9 100.0 2015 Loans – Business 48.6 27.7 23.7 100.0 Loans – Housing and Personal 91.2 3.1 5.7 100.0 Total 84.1 7.4 8.5 100.0 2014 Loans – Business 52.1 27.2 20.7 100.0 Total 83.8 7.7 8.5 100.0 Parent Entity % Fully secured Partially secured Unsecured Total in the tables below: Consolidated $m 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 Parent Entity $m 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 188 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Loans – Housing and Personal 2015 Loans – Business Loans – Housing and Total Personal 2014 Loans – Business Loans – Housing and Personal 2015 Loans – Business Loans – Housing and Total Personal 2014 Loans – Business 168 (88) 80 329 (178) 151 497 (266) 231 110 (64) 46 254 (141) 113 364 (205) 159 1,287 (581) 706 111 (30) 81 1,398 (611) 787 946 (479) 467 105 (28) 77 1,051 (507) 544 1,455 (669) 786 440 (208) 232 1,895 (877) 1,018 1,056 (543) 513 359 (169) 190 1,415 (712) 703 202 (96) 106 266 (150) 116 468 (246) 222 153 (72) 81 227 (127) 100 380 (199) 181 1,785 (771) 1,014 87 (30) 57 1,872 (801) 1,071 1,430 (647) 783 86 (24) 62 1,516 (671) 845 Total 1,987 (867) 1,120 353 (180) 173 2,340 (1,047) 1,293 Total 1,583 (719) 864 313 (151) 162 1,896 (870) 1,026 189 22.2.9 Items 90 days past due, or otherwise in default and not impaired These include financial assets that are: Note 22. Financial risk (continued) 22.2.8 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 following table. 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 Financial assets that were past due, but not impaired can be disaggregated based on days overdue at 30 September Note 22. Financial risk (continued) Parent Entity % Fully secured Partially secured Unsecured Total Notes to the financial statements Loans – Housing and Personal 95.4 0.7 3.9 100.0 2015 Loans – Business 47.5 26.2 26.3 100.0 Loans – Housing and Personal 95.3 0.7 4.0 100.0 Total 86.8 5.3 7.9 100.0 2014 Loans – Business 51.0 27.8 21.2 100.0 Total 87.0 5.8 7.2 100.0 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 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). and the timing of weekends. as follows: Consolidated $m Loans: Loans – housing and personal Loans – business Life insurance assets Other financial assets Total Parent Entity $m Loans: Loans – housing and personal Loans – business Other financial assets Total 2015 2014 1-5 days 6-89 days 90+ days Total 1-5 days 6-89 days 90+ days Total 3,997 838 - 9 8,867 2,151 4 20 1,575 14,439 481 3,470 - 4 4 33 4,253 780 - 11 8,872 2,274 5 24 1,524 14,649 432 3,486 - 4 5 39 4,844 11,042 2,060 17,946 5,044 11,175 1,960 18,179 2015 2014 1-5 days 6-89 days 90+ days Total 1-5 days 6-89 days 90+ days Total 3,648 640 8 7,573 1,860 16 1,529 12,750 3,797 332 2,832 3 27 570 9 7,557 2,052 20 1,455 12,809 372 4 2,994 33 4,296 9,449 1,864 15,609 4,376 9,629 1,831 15,836 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. In the following table, 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%. Consolidated % Fully secured Partially secured Unsecured Total Loans – Housing and Personal 92.5 2.6 4.9 100.0 2015 Loans – Business 48.6 27.7 23.7 100.0 Loans – Housing and Personal 91.2 3.1 5.7 100.0 Total 84.1 7.4 8.5 100.0 2014 Loans – Business 52.1 27.2 20.7 100.0 Total 83.8 7.7 8.5 100.0 Consolidated $m Gross Amount Australia New Zealand Other Overseas 2015 2,149 2014 2,134 2013 2,329 2015 130 2014 85 2013 136 2015 13 2014 22 2013 22 2015 2,292 Total 2014 2,241 2013 2,487 22.2.10 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: Consolidated $m 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 Parent Entity $m 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 Loans – Housing and Personal 2015 Loans – Business 168 (88) 80 329 (178) 151 497 (266) 231 1,287 (581) 706 111 (30) 81 1,398 (611) 787 Loans – Housing and Personal 2015 Loans – Business 110 (64) 46 254 (141) 113 364 (205) 159 946 (479) 467 105 (28) 77 1,051 (507) 544 Loans – Housing and Personal 2014 Loans – Business 202 (96) 106 266 (150) 116 468 (246) 222 1,785 (771) 1,014 87 (30) 57 1,872 (801) 1,071 Loans – Housing and Personal 2014 Loans – Business 153 (72) 81 227 (127) 100 380 (199) 181 1,430 (647) 783 86 (24) 62 1,516 (671) 845 Total 1,455 (669) 786 440 (208) 232 1,895 (877) 1,018 Total 1,056 (543) 513 359 (169) 190 1,415 (712) 703 188 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Total 1,987 (867) 1,120 353 (180) 173 2,340 (1,047) 1,293 Total 1,583 (719) 864 313 (151) 162 1,896 (870) 1,026 189 3 Note 22. 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 following table, 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%. Consolidated % Fully secured Partially secured Unsecured Total Parent Entity % Fully secured Partially secured Unsecured Total Loans – Housing and Personal 59.2 16.3 24.5 100.0 Loans – Housing and Personal 67.6 6.9 25.5 100.0 2015 Loans – Business 23.2 34.8 42.0 100.0 2015 Loans – Business 17.3 34.7 48.0 100.0 Loans – Housing and Personal 61.1 10.9 28.0 100.0 Loans – Housing and Personal 66.2 8.6 25.2 100.0 Total 32.6 29.9 37.5 100.0 Total 30.2 27.6 42.2 100.0 2014 Loans – Business 25.1 24.8 50.1 100.0 2014 Loans – Business 25.9 23.3 50.8 100.0 Total 32.3 22.0 45.7 100.0 Total 33.6 20.5 45.9 100.0 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 $m Gross amount Impairment provision Net Australia New Zealand Other Overseas 2015 1,220 (572) 648 2014 1,580 (697) 883 2013 2,574 (1,099) 1,475 2015 348 (104) 244 2014 397 (130) 267 2013 586 (210) 376 2015 25 (13) 12 2014 53 (35) 18 2013 89 (54) 35 2015 1,593 (689) 904 Total 2014 2,030 (862) 1,168 2013 3,249 (1,363) 1,886 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 $m Gross amount Impairment provision Net Australia New Zealand Other Overseas 2015 252 (164) 88 2014 203 (132) 71 2013 181 (126) 55 2015 10 (7) 3 2014 13 (9) 4 2013 14 (9) 5 2015 1 (1) - 2014 1 - 1 2013 - - - 2015 263 (172) 91 Total 2014 217 (141) 76 2013 195 (135) 60 Parent Entity Gross amount Impairment provision Consolidated 2015 Interest received Interest forgone $m Net $m Net $m Notes to the financial statements Note 22. Financial risk (continued) 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 New Zealand Other Overseas Total 2015 2014 2013 2015 2014 2013 2015 2014 2013 2015 2014 2013 Gross amount Impairment provision 22 (12) 10 34 (23) 11 34 (23) 11 17 (4) 13 - - - - - - - - - 59 (21) 38 122 (33) 89 39 (16) 23 93 (44) 49 156 (56) 100 Restructured financial assets of the Parent Entity as at 30 September were: 2015 22 (12) 10 2014 92 (44) 48 Australia Overseas 8 98 14 4 Total 22 102 The following table summarises the interest received and forgone on impaired and restructured financial assets: 22.3 Funding and liquidity risk management potentially arise as a result of: Liquidity risk is the risk that the Group will be unable to fund assets and meet obligations as they become due. This risk could an inability to meet 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 offset or eliminate a position at the market price. The Group has a liquidity risk management framework designed with the objective of meeting cash flow obligations under a wide range of market conditions, including name specific and market-wide stress scenarios as well as meeting the regulatory requirements of the Liquidity Coverage Ratio ("LCR"). The annual review of the liquidity risk management framework encompasses the funding scenarios modelled, the modelling approach, wholesale funding capacity, limit determination and minimum holdings of liquid assets. The liquidity risk management framework is reviewed by ALCO prior to approval by the BRCC. Responsibility for managing the Group's liquidity and funding positions in accordance with the Group's Liquidity Risk Management Framework is delegated to Treasury, under the oversight of ALCO. Daily liquidity risk reports are circulated to, and reviewed by, local and senior staff in both Treasury and the Liquidity Risk team. Liquidity reports are presented to ALCO monthly and to the BRCC quarterly. Treasury is responsible for monitoring and managing our funding base so that it is prudently maintained, stable and adequately diversified. Treasury 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 BRCC. Treasury maintains 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 defines a committee of senior executives to manage a crisis and allocates responsibility to individuals for key tasks. The plan is reviewed and approved by ALCO and is aligned with Westpac's broader Liquidity Crisis Management Policy which is approved annually by the BRCC. 190 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 191 Note 22. 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 following table, 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%. Consolidated % Fully secured Partially secured Unsecured Total Parent Entity % Fully secured Partially secured Unsecured Total Loans – Housing and Personal Loans – Housing and Total Personal 2015 Loans – Business 23.2 34.8 42.0 100.0 2015 Loans – Business 17.3 34.7 48.0 100.0 59.2 16.3 24.5 100.0 67.6 6.9 25.5 100.0 32.6 29.9 37.5 100.0 30.2 27.6 42.2 100.0 2014 Loans – Business 25.1 24.8 50.1 100.0 2014 Loans – Business 25.9 23.3 50.8 100.0 61.1 10.9 28.0 100.0 66.2 8.6 25.2 100.0 Total 32.3 22.0 45.7 100.0 Total 33.6 20.5 45.9 100.0 Loans – Housing and Personal Loans – Housing and Total Personal Impaired loans comprise non-performing loans, overdrafts, personal loans, revolving credit facilities greater than 90 days past due and restructured loans. Non-performing loans following geographical segments: Non-performing loans are loans with an impaired internal risk grade, excluding restructured assets. These were attributed to the Consolidated Australia New Zealand Other Overseas Gross amount Impairment provision 2015 1,220 (572) 648 2014 1,580 (697) 883 2013 2,574 (1,099) 1,475 2015 348 (104) 244 2014 397 (130) 267 2013 586 (210) 376 2015 2014 2013 25 (13) 12 53 (35) 18 89 (54) 35 2015 1,593 (689) 904 Total 2014 2,030 (862) 1,168 2013 3,249 (1,363) 1,886 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 New Zealand Other Overseas Gross amount Impairment provision 2015 252 (164) 88 2014 203 (132) 71 2013 181 (126) 55 2015 2014 2013 2015 2014 2013 10 (7) 3 13 (9) 4 14 (9) 5 1 (1) - 1 - 1 - - - Total 2014 217 (141) 76 2015 263 (172) 91 2013 195 (135) 60 $m Net $m Net Notes to the financial statements Note 22. Financial risk (continued) 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 $m Gross amount Impairment provision Net Australia New Zealand Other Overseas 2015 22 (12) 10 2014 34 (23) 11 2013 34 (23) 11 2015 17 (4) 13 2014 - - - 2013 - - - 2015 - - - 2014 59 (21) 38 2013 122 (33) 89 Total 2014 93 (44) 49 2015 39 (16) 23 2013 156 (56) 100 Restructured financial assets of the Parent Entity as at 30 September were: Parent Entity $m Gross amount Impairment provision Net 2015 22 (12) 10 2014 92 (44) 48 The following table summarises the interest received and forgone on impaired and restructured financial assets: Consolidated 2015 $m Interest received Interest forgone Australia 8 98 Overseas 14 4 Total 22 102 22.3 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 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 offset or eliminate a position at the market price. The Group has a liquidity risk management framework designed with the objective of meeting cash flow obligations under a wide range of market conditions, including name specific and market-wide stress scenarios as well as meeting the regulatory requirements of the Liquidity Coverage Ratio ("LCR"). The annual review of the liquidity risk management framework encompasses the funding scenarios modelled, the modelling approach, wholesale funding capacity, limit determination and minimum holdings of liquid assets. The liquidity risk management framework is reviewed by ALCO prior to approval by the BRCC. Responsibility for managing the Group's liquidity and funding positions in accordance with the Group's Liquidity Risk Management Framework is delegated to Treasury, under the oversight of ALCO. Daily liquidity risk reports are circulated to, and reviewed by, local and senior staff in both Treasury and the Liquidity Risk team. Liquidity reports are presented to ALCO monthly and to the BRCC quarterly. Treasury is responsible for monitoring and managing our funding base so that it is prudently maintained, stable and adequately diversified. Treasury 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 BRCC. Treasury maintains 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 defines a committee of senior executives to manage a crisis and allocates responsibility to individuals for key tasks. The plan is reviewed and approved by ALCO and is aligned with Westpac's broader Liquidity Crisis Management Policy which is approved annually by the BRCC. 190 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 191 3 Note 22. Financial risk (continued) 22.3.1 Liquidity modelling As required under APRA's liquidity prudential standard, the Group maintains a 'going concern' model with reports issued and reviewed on a daily basis. Under the 'going concern' model 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. Maturity concentrations are measured against a Board approved limit structure; with limits, set at intervals from one week to 15 months. Stress testing is carried out to assess Westpac's ability to meet cash flow obligations under a range of market conditions, including name specific and market wide stress scenarios. These scenarios inform liquidity limits and strategic planning. The LCR requires banks to hold sufficient high-quality liquid assets, as defined, to withstand 30 days under a regulator-defined acute stress scenario. The LCR came into effect on 1 January 2015. Westpac maintains a buffer over the regulatory minimum of 100%. The Group's LCR as at 30 September 2015, including the Committed Liquidity Facility (CLF) of $66 billion, was 121% and the average monthly LCR for the quarter ending 30 September 2015 was 121%. 22.3.2 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; and fee income. Wholesale funding The Group monitors the composition and stability of its funding so that it remains within the Group's funding risk appetite. This includes targeting a Stable Funding Ratio (SFR) of greater than 75%. Stable funding includes customer deposits, wholesale term funding with residual maturity greater than 12 months, securitisation and equity. In 2015, the Group continued to focus on funding asset growth through stable sources, ending the year with the Stable Funding Ratio at 83.8%, up 68bps from 30 September 2014. The Group's overall funding composition was relatively unchanged, with customer deposits representing 59.3% of the Group's total funding at 30 September 2015 (30 September 2014: 60.2%), a further 1.7% from securitisation (30 September 2014: 1.7%), 15.4% from long term funding with a residual maturity greater than one year (30 September 2014: 14.2%) and 7.4% from equity (30 September 2014: 7.1%). At 30 September 2015, the Group had $116.6 billion of wholesale funding with a residual maturity within one year representing 16.2% of the Group’s total funding (30 September 2014: 16.8%). This short term funding has a weighted average maturity of 130 days and is more than covered by the $135.6 billion of repo-eligible liquid assets held by the Group. $m Cash Maintaining a diverse funding base with the capacity and flexibility to access a wide range of funding markets, debt investors, currencies and products is an important part of managing liquidity risk. In 2015, the Group raised $31.3 billion of term wholesale funding with a weighted average maturity of 4.9 years (excluding securitisation). The Group executed benchmark senior bond trades in US$ and A$, benchmark covered bond trades in Euro and US$, RMBS transactions and an auto ABS transaction in A$, as well as smaller senior bond trades in Swiss Franc and Sterling. Westpac is the only major Australian bank with an active Auto ABS capability, the only Australian bank with access to the US SEC registered market and a regular issuer of RMBS. The Group took advantage of these capabilities in 2015. New term issuance also included $2.2 billion of Basel III compliant Additional Tier 1 and Tier 2 capital during the year. Borrowings and outstandings from existing debt programs and issuing shelves at 30 September 2015 can be found in various notes to the financial statements including Note 16, Note 17, Note 19 and Note 20. Note 22. Financial risk (continued) Credit ratings As at 30 September 2015 the Parent Entity's credit ratings were: 2015 Standard & Poor’s Moody’s Investors Services Fitch Ratings Notes to the financial statements Short-term Long-term Outlook A-1+ P-1 F1+ AA- Aa2 AA- Stable Stable Stable As of 30 September 2015, approximately 33% 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 be lowered 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 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 $1.2 billion to $135.6 billion over the last 12 months. Given the limited amount of government debt in Australia, the Reserve Bank of Australia (RBA), jointly with the Australian Prudential Regulation Authority (APRA), has made available to Australian Deposit-taking Institutions (ADIs) a CLF that subject to satisfaction of qualifying conditions, can be accessed to help meet the LCR requirement. In order to access the CLF, ADIs are required to pay a fee of 15 basis points (0.15%) per annum to the RBA on the approved facility. Westpac has received approval from APRA for a CLF of $58.6 billion for the 2016 calendar year (2015: $66.0 billion). A summary of liquid asset holdings is as follows: 2015 2014 Actual 14,375 11 10,968 52,815 57,249 201 Average 18,159 355 16,898 43,098 61,111 269 Actual 22,497 655 18,272 34,205 58,448 368 Average 19,017 1,090 24,317 31,097 55,650 449 135,619 139,890 134,445 131,620 Receivables due from other financial institutions Trading securities and financial assets designated at fair value Available-for-sale securities Loans1 Regulatory deposits with central banks Total liquid assets Bank of New Zealand. 1 Loans are self-originated AAA rated mortgage backed securities which are eligible for repurchase with the Reserve Bank of Australia and Reserve 22.3.3 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 financial 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 financial year. 192 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 193 Note 22. Financial risk (continued) 22.3.1 Liquidity modelling As required under APRA's liquidity prudential standard, the Group maintains a 'going concern' model with reports issued and reviewed on a daily basis. Under the 'going concern' model 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. Maturity concentrations are measured against a Board approved limit structure; with limits, set at intervals from one week to 15 months. Stress testing is carried out to assess Westpac's ability to meet cash flow obligations under a range of market conditions, including name specific and market wide stress scenarios. These scenarios inform liquidity limits and strategic planning. The LCR requires banks to hold sufficient high-quality liquid assets, as defined, to withstand 30 days under a regulator-defined acute stress scenario. The LCR came into effect on 1 January 2015. Westpac maintains a buffer over the regulatory minimum of 100%. The Group's LCR as at 30 September 2015, including the Committed Liquidity Facility (CLF) of $66 billion, was 121% and the average monthly LCR for the quarter ending 30 September 2015 was 121%. Sources of liquidity are regularly reviewed to maintain a wide diversification by currency, geography, product and term. Sources 22.3.2 Sources of liquidity 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; and fee income. Wholesale funding The Group monitors the composition and stability of its funding so that it remains within the Group's funding risk appetite. This includes targeting a Stable Funding Ratio (SFR) of greater than 75%. Stable funding includes customer deposits, wholesale term funding with residual maturity greater than 12 months, securitisation and equity. In 2015, the Group continued to focus on funding asset growth through stable sources, ending the year with the Stable Funding Ratio at 83.8%, up 68bps from 30 September 2014. The Group's overall funding composition was relatively unchanged, with customer deposits representing 59.3% of the Group's total funding at 30 September 2015 (30 September 2014: 60.2%), a further 1.7% from securitisation (30 September 2014: 1.7%), 15.4% from long term funding with a residual maturity greater than one year (30 September 2014: 14.2%) and 7.4% from equity (30 September 2014: 7.1%). At 30 September 2015, the Group had $116.6 billion of wholesale funding with a residual maturity within one year representing 16.2% of the Group’s total funding (30 September 2014: 16.8%). This short term funding has a weighted average maturity of 130 days and is more than covered by the $135.6 billion of repo-eligible liquid assets held by the Group. Maintaining a diverse funding base with the capacity and flexibility to access a wide range of funding markets, debt investors, currencies and products is an important part of managing liquidity risk. In 2015, the Group raised $31.3 billion of term wholesale funding with a weighted average maturity of 4.9 years (excluding securitisation). The Group executed benchmark senior bond trades in US$ and A$, benchmark covered bond trades in Euro and US$, RMBS transactions and an auto ABS transaction in A$, as well as smaller senior bond trades in Swiss Franc and Sterling. Westpac is the only major Australian bank with an active Auto ABS capability, the only Australian bank with access to the US SEC registered market and a regular issuer of RMBS. The Group took advantage of these capabilities in 2015. New term issuance also included $2.2 billion of Basel III compliant Additional Tier 1 and Tier 2 capital during the year. Borrowings and outstandings from existing debt programs and issuing shelves at 30 September 2015 can be found in various notes to the financial statements including Note 16, Note 17, Note 19 and Note 20. Note 22. Financial risk (continued) Credit ratings As at 30 September 2015 the Parent Entity's credit ratings were: 2015 Standard & Poor’s Moody’s Investors Services Fitch Ratings Notes to the financial statements Short-term A-1+ Long-term AA- P-1 F1+ Aa2 AA- Outlook Stable Stable Stable As of 30 September 2015, approximately 33% 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 be lowered 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 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 $1.2 billion to $135.6 billion over the last 12 months. Given the limited amount of government debt in Australia, the Reserve Bank of Australia (RBA), jointly with the Australian Prudential Regulation Authority (APRA), has made available to Australian Deposit-taking Institutions (ADIs) a CLF that subject to satisfaction of qualifying conditions, can be accessed to help meet the LCR requirement. In order to access the CLF, ADIs are required to pay a fee of 15 basis points (0.15%) per annum to the RBA on the approved facility. Westpac has received approval from APRA for a CLF of $58.6 billion for the 2016 calendar year (2015: $66.0 billion). A summary of liquid asset holdings is as follows: $m Cash Receivables due from other financial institutions Trading securities and financial assets designated at fair value Available-for-sale securities Loans1 Regulatory deposits with central banks 2015 2014 Actual 14,375 11 10,968 52,815 57,249 201 Average 18,159 355 16,898 43,098 61,111 269 Actual 22,497 655 18,272 34,205 58,448 368 Average 19,017 1,090 24,317 31,097 55,650 449 Total liquid assets 131,620 1 Loans are self-originated AAA rated mortgage backed securities which are eligible for repurchase with the Reserve Bank of Australia and Reserve 139,890 135,619 134,445 Bank of New Zealand. 22.3.3 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 financial 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 financial year. 192 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 193 3 Note 22. Financial risk (continued) 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. Other 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: Up to 1 Month Over 1 Month to 3 Months Over 3 Months to 1 Year Over 1 Year to 5 Years Over 5 Years Total Consolidated 2015 $m Liabilities Payables due to other financial institutions Deposits and other borrowings Other 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 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 Consolidated 2014 $m Liabilities Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments: Held for trading1 Held for hedging purposes (net settled) Held for hedging purposes (gross settled): Cash outflow1 Cash inflow Debt issues Other financial liabilities Total liabilities excluding loan capital Loan capital2 Total undiscounted financial liabilities Total contingent liabilities and commitments Commitments to extend credit Other commitments 14,941 306,518 5,941 43,475 129 3,687 (3,580) 5,369 1,289 377,769 5,795 383,564 174,391 184 2,331 78,744 2,250 - 221 4,152 (3,965) 12,930 563 97,226 169 97,395 - - 14,716 290,569 17,811 34,225 103 113 (80) 2,751 1,395 361,603 3,897 365,500 159,131 763 2,865 79,225 1,436 - 154 4,304 (3,899) 10,710 462 95,257 64 95,321 - - 1,221 79,312 251 - 1,050 5,621 (5,393) 49,385 2,533 349 12,998 432 - 18,842 233 372 477,805 9,246 - - 43,475 2,743 333 4,476 2,466 (2,197) 992 16,918 (977) (16,112) 98,791 13,750 180,225 - - 4,385 133,980 115,582 14,703 739,260 740 6,573 1,484 14,761 134,720 122,155 16,187 754,021 859 79,770 242 15,145 - 18,682 377 465,086 - - - - - - 456 1,945 316 19,247 34,225 2,974 3,853 (3,314) 47,730 2,078 19,926 2,103 30,299 (17,405) (1,888) (26,586) 81,488 20,758 163,437 - - 3,935 131,432 101,341 21,666 711,299 218 7,087 599 11,865 131,650 108,428 22,265 723,164 - - - - - - 159,131 763 159,894 Up to 1 Month Over 1 Month to 3 Months Over 3 Months to 1 Year Over 1 Year to 5 Years Over 5 Years Total Total undiscounted contingent liabilities and commitments 1 Comparatives have been revised to improve comparability. 2 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. 159,894 - - - - 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. 174,575 - - - - - - - - - 174,391 184 174,575 Parent Entity 2014 $m Liabilities Up to Over 1 Month Over 3 Months Over 1 Year Over 1 Month to 3 Months to 1 Year to 5 Years 5 Years Total Notes to the financial statements Up to Over 1 Month Over 3 Months Over 1 Year Over 1 Month to 3 Months to 1 Year to 5 Years 5 Years Total Total undiscounted contingent liabilities and commitments 154,559 1 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. Note 22. Financial risk (continued) Parent Entity 2015 $m Liabilities Payables due to other financial institutions Deposits and other borrowings Other 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 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 Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments: Held for trading1 Held for hedging purposes (net settled) Held for hedging purposes (gross settled): Cash outflow1 Cash inflow Debt issues Due to Subsidiaries Other financial liabilities Total liabilities excluding loan capital Loan capital2 Total undiscounted financial liabilities Total contingent liabilities and commitments Commitments to extend credit Other commitments 14,490 279,413 5,941 43,917 109 3,631 (3,526) 4,817 144,650 1,243 494,685 5,795 500,480 154,375 184 14,526 263,657 17,811 34,403 86 49 (28) 1,676 135,066 1,248 468,494 3,897 472,391 140,909 763 2,332 66,983 2,250 - 192 3,586 (3,444) 10,568 - 491 82,958 169 83,127 - - - - - - 2,865 71,248 1,436 - 132 4,413 (3,748) 8,669 - 381 85,396 64 85,460 1,221 69,461 251 - 801 5,511 (5,306) 42,765 2,210 116,914 201 11,183 432 18,244 427,273 9,246 233 372 2,431 324 43,917 3,857 778 (745) 176 13,682 (169) (13,190) 83,412 10,683 152,245 144,650 3,944 97,692 11,619 803,868 740 6,573 1,484 14,761 117,654 104,265 13,103 818,629 859 69,240 207 13,222 377 417,744 426 1,862 308 10,746 1,796 19,471 (8,950) (1,600) (16,284) 67,528 14,440 136,384 2,467 (1,958) 44,071 1,715 116,820 84,615 15,321 770,646 218 7,087 599 11,865 117,038 91,702 15,920 782,511 - - - - - - - - - - - - - - - 154,375 184 154,559 18,457 19,247 34,403 2,814 135,066 3,344 140,909 763 141,672 - - - - - - - - - - - - - - - - - - - - - - - Total undiscounted contingent liabilities and commitments 141,672 1 Comparatives have been revised to improve comparability. 2 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. 194 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 195 Note 22. Financial risk (continued) 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 Other 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: Up to Over 1 Month Over 3 Months Over 1 Year Over 1 Month to 3 Months to 1 Year to 5 Years 5 Years Total interest payments. Consolidated 2015 $m Liabilities Total undiscounted contingent liabilities and commitments 174,575 1 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. Up to Over 1 Month Over 3 Months Over 1 Year Over 1 Month to 3 Months to 1 Year to 5 Years 5 Years Total Payables due to other financial institutions Deposits and other borrowings Other 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 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 Consolidated 2014 $m Liabilities Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments: Held for trading1 Held for hedging purposes (net settled) Held for hedging purposes (gross settled): Cash outflow1 Cash inflow Debt issues Other financial liabilities Total liabilities excluding loan capital Loan capital2 Total undiscounted financial liabilities Total contingent liabilities and commitments Commitments to extend credit Other commitments 14,941 306,518 5,941 43,475 129 3,687 (3,580) 5,369 1,289 377,769 5,795 383,564 174,391 184 14,716 290,569 17,811 34,225 103 113 (80) 2,751 1,395 361,603 3,897 365,500 159,131 763 2,331 78,744 2,250 - 221 4,152 (3,965) 12,930 563 97,226 169 97,395 - - - - - - 2,865 79,225 1,436 - 154 4,304 (3,899) 10,710 462 95,257 64 95,321 1,221 79,312 251 - 1,050 5,621 (5,393) 49,385 2,533 349 12,998 432 233 372 - - 18,842 477,805 9,246 43,475 4,476 2,743 333 2,466 (2,197) 992 16,918 (977) (16,112) 98,791 13,750 180,225 - 4,385 133,980 115,582 14,703 739,260 740 6,573 1,484 14,761 134,720 122,155 16,187 754,021 - - - - - - - - - 174,391 184 174,575 18,682 19,247 34,225 2,974 159,131 763 159,894 859 79,770 242 15,145 456 1,945 316 3,853 (3,314) 47,730 2,078 19,926 2,103 30,299 (17,405) (1,888) (26,586) 81,488 20,758 163,437 - 3,935 131,432 101,341 21,666 711,299 218 7,087 599 11,865 131,650 108,428 22,265 723,164 - - - - - - - - - - - - - - - - - - - Total undiscounted contingent liabilities and commitments 159,894 1 Comparatives have been revised to improve comparability. 2 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. Note 22. Financial risk (continued) Parent Entity 2015 $m Liabilities Payables due to other financial institutions Deposits and other borrowings Other 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 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 Parent Entity 2014 $m Liabilities Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments: Held for trading1 Held for hedging purposes (net settled) 377 465,086 Held for hedging purposes (gross settled): Cash outflow1 Cash inflow Debt issues Due to Subsidiaries Other financial liabilities Total liabilities excluding loan capital Loan capital2 Total undiscounted financial liabilities Total contingent liabilities and commitments Commitments to extend credit Other commitments Notes to the financial statements Up to 1 Month Over 1 Month to 3 Months Over 3 Months to 1 Year Over 1 Year to 5 Years Over 5 Years Total 14,490 279,413 5,941 43,917 109 3,631 (3,526) 4,817 144,650 1,243 494,685 5,795 500,480 154,375 184 2,332 66,983 2,250 - 192 3,586 (3,444) 10,568 - 491 82,958 169 83,127 - - 14,526 263,657 17,811 34,403 86 49 (28) 1,676 135,066 1,248 468,494 3,897 472,391 140,909 763 2,865 71,248 1,436 - 132 4,413 (3,748) 8,669 - 381 85,396 64 85,460 - - 1,221 69,461 251 - 801 5,511 (5,306) 42,765 - 2,210 116,914 201 11,183 432 - 18,244 233 372 427,273 9,246 - - 43,917 2,431 324 3,857 778 (745) 176 13,682 (169) (13,190) 83,412 10,683 152,245 - - - - 144,650 3,944 97,692 11,619 803,868 740 6,573 1,484 14,761 117,654 104,265 13,103 818,629 - - - - - - 154,375 184 154,559 859 69,240 207 13,222 - 18,457 377 417,744 - - - - - - 426 1,862 308 19,247 34,403 2,814 2,467 (1,958) 44,071 - 1,715 116,820 10,746 1,796 19,471 (8,950) (1,600) (16,284) 67,528 14,440 136,384 - - - - 135,066 3,344 84,615 15,321 770,646 218 7,087 599 11,865 117,038 91,702 15,920 782,511 - - - - - - 140,909 763 141,672 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. 154,559 - - - Up to 1 Month Over 1 Month to 3 Months Over 3 Months to 1 Year Over 1 Year to 5 Years Over 5 Years Total Total undiscounted contingent liabilities and commitments 1 Comparatives have been revised to improve comparability. 2 Where the terms of loan capital instruments include contingent settlement clauses, amounts due have been disclosed as up to one month. 141,672 - - - - 194 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 195 3 Note 22. Financial risk (continued) 22.3.4 Expected maturity The tables below present the balance sheet based on expected maturity dates based on historical behaviours. The liability balances in the following tables will not agree to the contractual maturity tables (22.3.3 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 following table, on a contractual basis, however as part of our normal banking operations we would expect a large proportion of these balances to be retained. Consolidated 2015 $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and 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 Investments in associates All other assets Total assets Liabilities Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance liabilities All other liabilities Total liabilities excluding loan capital Loan capital Total liabilities Net assets/(net liabilities) Due within 12 Months Greater than 12 Months 14,770 9,583 19,613 36,479 13,687 86,049 6,730 1,309 - 5,608 193,828 18,437 463,473 9,226 33,511 62,076 770 9,375 596,868 1,446 598,314 (404,486) - - 7,841 11,694 41,146 537,267 6,395 - 756 13,229 618,328 294 11,855 - 14,793 108,978 10,789 824 147,533 12,394 159,927 458,401 Total 14,770 9,583 27,454 48,173 54,833 623,316 13,125 1,309 756 18,837 812,156 18,731 475,328 9,226 48,304 171,054 11,559 10,199 744,401 13,840 758,241 53,915 196 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Note 22. Financial risk (continued) Consolidated 2014 $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and 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 Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance liabilities All other liabilities Total liabilities excluding loan capital Loan capital Total liabilities Net assets/(net liabilities) Parent Entity 2015 $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value Regulatory deposits with central banks overseas Derivative financial instruments Available-for-sale securities Loans (net of provisions) Due from subsidiaries Investments in subsidiaries All other assets Total assets Liabilities Payables due to other financial institutions Deposits and other borrowings Other 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) Notes to the financial statements Due within 12 Months Greater than 12 Months Due within 12 Months Greater than 12 Months 25,760 7,424 31,234 32,248 2,101 83,089 2,518 529 6,278 191,181 18,394 446,099 19,236 29,514 59,203 9,480 581,934 8 - 581,934 (390,753) 13,372 8,741 17,883 36,417 12,138 70,477 1,152 145,560 - 4,745 310,485 17,987 415,334 9,226 33,457 56,002 143,885 7,539 683,430 1,446 684,876 (374,391) - - 14,675 9,156 33,923 497,254 8,489 999 15,165 579,661 242 14,723 - 10,025 93,048 9,629 1,046 128,713 10,858 139,571 440,090 - - - - - - 7,013 11,123 38,206 475,598 4,585 10,546 547,071 146 10,175 14,593 88,713 744 114,371 12,394 126,765 420,306 49,337 Total 25,760 7,424 45,909 41,404 36,024 580,343 11,007 1,528 21,443 770,842 18,636 460,822 19,236 39,539 152,251 9,637 10,526 710,647 10,858 721,505 Total 13,372 8,741 24,896 47,540 50,344 546,075 1,152 145,560 4,585 15,291 857,556 18,133 425,509 9,226 48,050 144,715 143,885 8,283 797,801 13,840 811,641 45,915 197 Notes to the financial statements Note 22. Financial risk (continued) 22.3.4 Expected maturity The tables below present the balance sheet based on expected maturity dates based on historical behaviours. The liability balances in the following tables will not agree to the contractual maturity tables (22.3.3 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 following table, on a contractual basis, however as part of our normal banking operations we would expect a large proportion of these balances to be retained. Due within 12 Months Greater than 12 Months Consolidated 2015 $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and 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 Investments in associates All other assets Total assets Liabilities Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance liabilities All other liabilities Total liabilities excluding loan capital Loan capital Total liabilities Net assets/(net liabilities) 14,770 9,583 19,613 36,479 13,687 86,049 6,730 1,309 - 5,608 193,828 18,437 463,473 9,226 33,511 62,076 770 9,375 596,868 1,446 598,314 (404,486) - - 7,841 11,694 41,146 537,267 6,395 - 756 13,229 618,328 294 11,855 - 14,793 108,978 10,789 824 147,533 12,394 159,927 458,401 Total 14,770 9,583 27,454 48,173 54,833 623,316 13,125 1,309 756 18,837 812,156 18,731 475,328 9,226 48,304 171,054 11,559 10,199 744,401 13,840 758,241 53,915 Note 22. Financial risk (continued) Consolidated 2014 $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and 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 Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance liabilities All other liabilities Total liabilities excluding loan capital Loan capital Total liabilities Net assets/(net liabilities) Parent Entity 2015 $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and 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 Other 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 Greater than 12 Months 25,760 7,424 31,234 32,248 2,101 83,089 2,518 529 6,278 191,181 18,394 446,099 19,236 29,514 59,203 8 9,480 581,934 - 581,934 (390,753) Due within 12 Months 13,372 8,741 17,883 36,417 12,138 70,477 1,152 145,560 - 4,745 310,485 17,987 415,334 9,226 33,457 56,002 143,885 7,539 683,430 1,446 684,876 (374,391) - - 14,675 9,156 33,923 497,254 8,489 999 15,165 579,661 242 14,723 - 10,025 93,048 9,629 1,046 128,713 10,858 139,571 440,090 Greater than 12 Months - - 7,013 11,123 38,206 475,598 - - 4,585 10,546 547,071 146 10,175 - 14,593 88,713 - 744 114,371 12,394 126,765 420,306 196 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Total 25,760 7,424 45,909 41,404 36,024 580,343 11,007 1,528 21,443 770,842 18,636 460,822 19,236 39,539 152,251 9,637 10,526 710,647 10,858 721,505 49,337 Total 13,372 8,741 24,896 47,540 50,344 546,075 1,152 145,560 4,585 15,291 857,556 18,133 425,509 9,226 48,050 144,715 143,885 8,283 797,801 13,840 811,641 45,915 197 3 Note 22. Financial risk (continued) Parent Entity 2014 $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and 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 Other 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 Greater than 12 Months 23,400 5,483 29,989 32,219 743 67,949 389 140,098 - 5,349 305,619 18,204 401,236 19,155 29,451 52,802 135,066 7,478 663,392 - 663,392 (357,773) - - 14,335 9,088 31,266 437,655 1,000 - 4,687 11,818 509,849 207 12,947 - 9,690 75,044 - 948 98,836 10,858 109,694 400,155 Total 23,400 5,483 44,324 41,307 32,009 505,604 1,389 140,098 4,687 17,167 815,468 18,411 414,183 19,155 39,141 127,846 135,066 8,426 762,228 10,858 773,086 42,382 22.4 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. 22.4.1 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 23. 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. 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. 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 seeks to take 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, RISKCO has approved separate VaR sub-limits for the trading activities of Financial Markets and Treasury. 198 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Notes to the financial statements Note 22. Financial risk (continued) Daily backtesting of VaR results is performed to support model integrity. A review of both the potential profit and loss outcomes is also undertaken to monitor any skew created by the historical data. 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 RISKCO. Stress and scenario tests include historical market movements, those defined by RISKCO or Financial Markets and Treasury Risk (FMTR) and independent scenarios developed by Westpac’s economics department. Profit or loss notification framework The BRCC 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. Backtesting Stress testing 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 23 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; legal counsel approves documentation for compliance with relevant laws and regulations; daily profit and loss reviews/attribution; and reconciliations. The table below depicts the aggregate VaR, by risk type, for the year ended 30 September: Consolidated and Parent Entity 2015 2014 2013 $m Interest rate risk Foreign exchange risk Equity risk Commodity risk1 Other market risks2 Diversification effect Net market risk Includes electricity risk. High 18.1 11.8 0.6 5.7 6.7 n/a 23.5 Low Average Low Average Low Average 7.0 0.5 0.1 1.7 2.9 n/a 9.0 11.4 3.6 0.3 3.1 4.6 (7.2) 15.8 High 30.7 7.6 0.7 2.9 11.3 n/a 40.2 6.3 1.2 0.1 1.3 5.4 n/a 9.5 15.6 3.0 0.3 2.0 9.2 (8.2) 22.0 High 30.8 5.7 0.8 6.1 13.0 n/a 35.4 9.1 0.5 0.1 1.2 5.8 n/a 12.5 Includes prepayment risk and credit spread risk (exposure to movements in generic credit rating bands). 1 2 16.7 2.1 0.3 2.9 7.9 (10.7) 19.2 199 Note 22. Financial risk (continued) Parent Entity 2014 $m Assets Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value Regulatory deposits with central banks overseas Derivative financial instruments Available-for-sale securities Loans (net of provisions) Due from subsidiaries Investments in subsidiaries All other assets Total assets Liabilities Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments Total liabilities excluding loan capital Debt issues Due to subsidiaries All other liabilities Loan capital Total liabilities Net assets/(net liabilities) 22.4 Market risk business activities. 22.4.1 Traded market risk Approach Due within 12 Months Greater than 12 Months 23,400 5,483 29,989 32,219 743 67,949 389 140,098 - 5,349 305,619 18,204 401,236 19,155 29,451 52,802 135,066 7,478 663,392 - 663,392 (357,773) - - - - - 14,335 9,088 31,266 437,655 1,000 4,687 11,818 509,849 207 12,947 9,690 75,044 948 98,836 10,858 109,694 400,155 Total 23,400 5,483 44,324 41,307 32,009 505,604 1,389 140,098 4,687 17,167 815,468 18,411 414,183 19,155 39,141 127,846 135,066 8,426 762,228 10,858 773,086 42,382 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 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 23. 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 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. volatility risk. 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 seeks to take 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, RISKCO has approved separate VaR sub-limits for the trading activities of Financial Markets and Treasury. Notes to the financial statements Note 22. Financial risk (continued) Backtesting Daily backtesting of VaR results is performed to support model integrity. A review of both the potential profit and 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 RISKCO. Stress and scenario tests include historical market movements, those defined by RISKCO or Financial Markets and Treasury Risk (FMTR) and independent scenarios developed by Westpac’s economics department. Profit or loss notification framework The BRCC 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 23 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; legal counsel approves documentation for compliance with relevant laws and regulations; daily profit and loss reviews/attribution; and reconciliations. The table below depicts the aggregate VaR, by risk type, for the year ended 30 September: Consolidated and Parent Entity 2015 2014 2013 $m Interest rate risk Foreign exchange risk Equity risk Commodity risk1 Other market risks2 Diversification effect Net market risk 1 2 High 18.1 11.8 0.6 5.7 6.7 n/a 23.5 Low Average 11.4 7.0 0.5 0.1 1.7 2.9 n/a 9.0 3.6 0.3 3.1 4.6 (7.2) 15.8 High 30.7 7.6 0.7 2.9 11.3 n/a 40.2 Low Average 15.6 6.3 1.2 0.1 1.3 5.4 n/a 9.5 3.0 0.3 2.0 9.2 (8.2) 22.0 High 30.8 5.7 0.8 6.1 13.0 n/a 35.4 Low Average 16.7 9.1 0.5 0.1 1.2 5.8 n/a 12.5 2.1 0.3 2.9 7.9 (10.7) 19.2 Includes electricity risk. Includes prepayment risk and credit spread risk (exposure to movements in generic credit rating bands). 198 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 199 3 Note 22. Financial risk (continued) 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). Carbon trading activities includes Australian, New Zealand and European carbon units and Renewable Energy Certificates (RECs). CCE also includes the Structured Commodities Finance (SCF) desk which facilitates financing for commodity clients. The total fair value of commodity, carbon and energy contracts outstanding as at 30 September 2015 was $151 million (2014: $14 million). 22.4.2 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 RISKCO and conducted within a risk framework and appetite set down by the BRCC. 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. 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. NaR limit The BRCC 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 BRCC 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. Notes to the financial statements Note 22. Financial risk (continued) 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. Assets held as Available-for-Sale 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 value of these assets and are regularly reviewed by management. Whilst the fair value of individual securities classified as available-for-sale can fluctuate considerably, the overall impact to the Group is not material. 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 RISKCO and the BRCC 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: $m Consolidated As at 2.7 2015 High 5.9 Low 0.8 Average 2.9 As at 3.1 2014 High 10.7 Low 1.2 Average 4.7 As at 30 September 2015 the Value at Risk – IRRBB for the Parent Entity was $19.3 million (2014: $25.1 million). Net interest income-at-risk (NaR) reported net interest income: The table below depicts NaR assuming a 100 basis point shock (decrease) over the next 12 months as a percentage of % Consolidated Parent Entity 2015 2014 Maximum Minimum Average Exposure Exposure Exposure 0.66 0.41 (0.26) (0.50) 0.23 0.04 As at 0.12 (0.11) As at 0.27 0.10 Maximum Exposure Minimum Exposure Average Exposure 0.66 0.82 (0.12) (0.25) 0.20 0.17 200 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 201 Notes to the financial statements Note 22. Financial risk (continued) 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. Assets held as Available-for-Sale 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 value of these assets and are regularly reviewed by management. Whilst the fair value of individual securities classified as available-for-sale can fluctuate considerably, the overall impact to the Group is not material. Note 22. Financial risk (continued) 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). Carbon trading activities includes Australian, New Zealand and European carbon units and Renewable Energy Certificates (RECs). CCE also includes the Structured Commodities Finance (SCF) desk which facilitates financing for commodity clients. The total fair value of commodity, carbon and energy contracts outstanding as at 30 September 2015 was $151 million (2014: $14 million). 22.4.2 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 RISKCO and conducted within a risk framework and appetite set down by the BRCC. 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. 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. NaR limit VaR limit The BRCC 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. The BRCC 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 Australian dollars. 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 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 RISKCO and the BRCC 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: $m Consolidated As at 2.7 2015 High 5.9 Low 0.8 Average 2.9 As at 3.1 2014 High 10.7 Low 1.2 Average 4.7 As at 30 September 2015 the Value at Risk – IRRBB for the Parent Entity was $19.3 million (2014: $25.1 million). 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 2015 2014 Maximum Exposure Minimum Exposure Average Exposure 0.66 0.41 (0.26) (0.50) 0.23 0.04 As at 0.12 (0.11) As at 0.27 0.10 Maximum Exposure Minimum Exposure Average Exposure 0.66 0.82 (0.12) (0.25) 0.20 0.17 200 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 201 3 Note 23. Fair values of financial assets and financial liabilities Accounting policy The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. On initial recognition, the transaction price generally represents the fair value of the financial instrument unless there is observable information available in an active market to the contrary. If fair value can be evidenced by comparison with other observable current market transactions in the same instrument, without modification or repackaging, or is based on a valuation technique whose inputs include only data from observable markets, then the instrument is recognised at the fair value derived from such observable market data. The difference between the transaction price and fair value is recognised as a gain or loss (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. For financial liabilities measured at fair value, the carrying amount reflects the effect on fair value of changes in own credit spreads derived from observable market data. Subsequent measurement of the fair value of a financial instrument is, wherever possible, determined by reference to a quoted market price for that instrument. Where quoted prices are not 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 valuation 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. The determination of the fair value of financial assets and liabilities is one of the Group’s critical accounting assumptions and estimates as detailed in Note 1d(i). Fair Valuation Control Framework The Group’s control environment uses a Fair Valuation Control Framework where the 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 WIB Revaluation Committee, comprising senior valuation specialists from within the Group. The WIB Revaluation Committee review the application of the agreed policies and procedures to assess that 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. 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 Commonwealth of Australia and New Zealand government bonds, 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 (excluding Australian and New Zealand government bonds), Australian state government bonds, corporate fixed rate bonds and floating rate bonds; and – derivatives – including interest rate swaps, interest rate futures, credit default swaps, foreign exchange swaps, foreign exchange futures and forwards, foreign exchange options and equity options. Notes to the financial statements Note 23. Fair values of financial assets and financial liabilities (continued) 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 include some asset-backed products and non-Australian dollar- denominated government securities issued by governments where there are no observable secondary markets. 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 Group applies market accepted valuation techniques in determining the fair valuation of Over the Counter (OTC) derivatives. This includes credit valuation adjustments (CVA) and funding valuation adjustments (FVA), which incorporates credit risk and funding costs and benefits that arise in relation to uncollateralised derivative positions, respectively. 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 derivative products These are products linked to interest rates (e.g. Bank Bill Swap Rate (BBSW) or London Interbank Offered 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. 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. Foreign exchange products In general, interest rate derivatives are classified as Level 2 instruments. These are products linked to the foreign exchange market. This includes FX spot and future 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 unobservable. Trading volumes 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. 202 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 203 Note 23. Fair values of financial assets and financial liabilities Accounting policy The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. On initial recognition, the transaction price generally represents the fair value of the financial instrument unless there is observable information available in an active market to the contrary. If fair value can be evidenced by comparison with other observable current market transactions in the same instrument, without modification or repackaging, or is based on a valuation technique whose inputs include only data from observable markets, then the instrument is recognised at the fair value derived from such observable market data. The difference between the transaction price and fair value is recognised as a gain or loss (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. For financial liabilities measured at fair value, the carrying amount reflects the effect on fair value of changes in own credit spreads derived from observable market data. Subsequent measurement of the fair value of a financial instrument is, wherever possible, determined by reference to a quoted market price for that instrument. Where quoted prices are not 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 valuation 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. The determination of the fair value of financial assets and liabilities is one of the Group’s critical accounting assumptions and estimates as detailed in Note 1d(i). Fair Valuation Control Framework The Group’s control environment uses a Fair Valuation Control Framework where the 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 WIB Revaluation Committee, comprising senior valuation specialists from within the Group. The WIB Revaluation Committee review the application of the agreed policies and procedures to assess that 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. Fair value hierarchy Level 1 The Group categorises all fair value instruments according to the following hierarchy: 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 Commonwealth of Australia and New Zealand government bonds, spot and exchange traded derivatives for equities, foreign exchange, commodities and interest rate products. Level 2 market participants. 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 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 (excluding Australian and New Zealand government bonds), Australian state government bonds, corporate fixed rate bonds and floating rate bonds; and – derivatives – including interest rate swaps, interest rate futures, credit default swaps, foreign exchange swaps, foreign exchange futures and forwards, foreign exchange options and equity options. Notes to the financial statements Note 23. Fair values of financial assets and financial liabilities (continued) 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 include some asset-backed products and non-Australian dollar- denominated government securities issued by governments where there are no observable secondary markets. 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 Group applies market accepted valuation techniques in determining the fair valuation of Over the Counter (OTC) derivatives. This includes credit valuation adjustments (CVA) and funding valuation adjustments (FVA), which incorporates credit risk and funding costs and benefits that arise in relation to uncollateralised derivative positions, respectively. 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 derivative products These are products linked to interest rates (e.g. Bank Bill Swap Rate (BBSW) or London Interbank Offered 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. 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 future 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 unobservable. Trading volumes 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. 202 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 203 3 Note 23. Fair values of financial assets and financial liabilities (continued) Note 23. Fair values of financial assets and financial liabilities (continued) The fair value of Offshore RMBS is determined using consensus data. These are classified as Level 2 instruments. Life insurance assets 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. The Group has no material exposure to CDOs. 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 There are observable markets for Australian and New Zealand government bonds in which Westpac is a primary dealer. Australian government bonds are valued using unadjusted quoted market yields. New Zealand government bonds are valued using unadjusted quoted market prices. These products are classified as Level 1 instruments. 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 products are classified as Level 2 instruments, with the exception of government securities where there are no observable secondary markets which are classified as Level 3 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 instruments. 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 is determined using a discounted cash flow analysis using markets rates offered for deposits of similar remaining maturities. Certificates of deposit 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. Notes to the financial statements These assets represent investments which back life insurance policy liabilities. This includes listed equities, exchange traded and over the counter derivatives, investment grade corporate bonds and units in unlisted unit trusts. Listed equities and exchange traded derivatives are traded in liquid, active markets where prices are readily observable. No modelling or assumptions are used in the valuation. They are classified as Level 1 instruments. Investment grade corporate bonds, over the counter derivatives, units in unlisted unit trusts and certain listed equities subject to transfer restrictions are valued utilising observable market prices or other widely used and accepted valuation techniques utilising observable market inputs. They are classified as Level 2 instruments. 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. These are valued utilising observable market prices or other widely used and accepted valuation techniques utilising observable market inputs. Short sales of listed equities within controlled managed investment schemes are traded in liquid, active markets where prices are readily observable. No modelling or assumptions are used in the valuation. They are classified as Level 1 instruments. All other instruments are classified as Level 2. Where a quoted price is not available the fair value of fixed rate bills 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 creditworthiness based on market observable inputs. These are classified as Level 2 instruments. The table below summarises the attribution of financial instruments carried at fair value to the fair value hierarchy: Loans at fair value Consolidated 2015 Valuation Valuation Quoted Techniques Techniques Market (Market (Non-Market Prices Observable) Observable) 2014 Valuation Valuation Quoted Techniques Techniques Market (Market (Non-Market Prices Observable) Observable) $m (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3) Total Financial assets measured at fair value on a recurring basis Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans Life insurance assets Total assets carried at fair value Financial liabilities measured at fair value on a recurring basis Deposits and other borrowings at fair value Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues at fair value Life insurance liabilities 139,543 1,969 150,628 11,546 130,297 1,815 143,658 2,446 39 2,071 4,560 9,116 - - 414 35 - 775 24,001 48,090 51,811 7,076 8,565 46,239 8,812 48,230 9,300 10,784 1,007 44 918 - - - - - 39 18 27,454 48,173 54,800 7,076 13,125 46,239 9,226 48,304 9,318 11,559 5,258 51 1,765 4,472 1,134 37 - - - - 39,663 41,348 33,421 9,330 6,535 49,636 18,102 39,472 9,524 9,637 988 45,909 5 41,404 822 36,008 9,330 11,007 - - - - - 30 18 49,636 19,236 39,539 9,542 9,637 Total liabilities carried at fair value 1,224 123,365 57 124,646 1,171 126,371 48 127,590 204 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 205 Note 23. Fair values of financial assets and financial liabilities (continued) The fair value of Offshore RMBS is determined using consensus data. These are classified as Level 2 instruments. 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. The Group has no material exposure to CDOs. 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 There are observable markets for Australian and New Zealand government bonds in which Westpac is a primary dealer. Australian government bonds are valued using unadjusted quoted market yields. New Zealand government bonds are valued using unadjusted quoted market prices. These products are classified as Level 1 instruments. 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 products are classified as Level 2 instruments, with the exception of government securities where there are no observable secondary markets which are classified as Level 3 instruments. Equity products equity warrants. Commodity products This category includes cash equities and equity indices, exchange traded equity options, OTC equity options and OTC 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 instruments. 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. 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 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. Notes to the financial statements Note 23. Fair values of financial assets and financial liabilities (continued) Life insurance assets These assets represent investments which back life insurance policy liabilities. This includes listed equities, exchange traded and over the counter derivatives, investment grade corporate bonds and units in unlisted unit trusts. Listed equities and exchange traded derivatives are traded in liquid, active markets where prices are readily observable. No modelling or assumptions are used in the valuation. They are classified as Level 1 instruments. Investment grade corporate bonds, over the counter derivatives, units in unlisted unit trusts and certain listed equities subject to transfer restrictions are valued utilising observable market prices or other widely used and accepted valuation techniques utilising observable market inputs. They are classified as Level 2 instruments. 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. These are valued utilising observable market prices or other widely used and accepted valuation techniques utilising observable market inputs. Short sales of listed equities within controlled managed investment schemes are traded in liquid, active markets where prices are readily observable. No modelling or assumptions are used in the valuation. They are classified as Level 1 instruments. All other instruments are classified as Level 2. Loans at fair value Where a quoted price is not available the fair value of fixed rate bills 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 creditworthiness based on market observable inputs. These are classified as Level 2 instruments. The table below summarises the attribution of financial instruments carried at fair value to the fair value hierarchy: Consolidated 2015 2014 $m Financial assets measured at fair value on a recurring basis Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans Life insurance assets Total assets carried at fair value Financial liabilities measured at fair value on a recurring basis Deposits and other borrowings at fair value Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues at fair value Life insurance liabilities Quoted Market Prices (Level 1) Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) Quoted Market Prices (Level 1) Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) Total Total 2,446 39 2,071 - 4,560 9,116 24,001 48,090 51,811 7,076 8,565 1,007 44 918 - - 27,454 48,173 54,800 7,076 13,125 5,258 51 1,765 - 4,472 39,663 41,348 33,421 9,330 6,535 988 45,909 5 41,404 822 36,008 - - 9,330 11,007 139,543 1,969 150,628 11,546 130,297 1,815 143,658 - 46,239 414 35 - 775 8,812 48,230 9,300 10,784 - - 39 18 - 46,239 - 49,636 9,226 48,304 9,318 11,559 1,134 37 - - 18,102 39,472 9,524 9,637 - - 30 18 - 49,636 19,236 39,539 9,542 9,637 The fair value of certificates of deposit is determined using a discounted cash flow analysis using markets rates offered for deposits of similar remaining maturities. Certificates of deposit are classified as Level 2 instruments. Total liabilities carried at fair value 1,224 123,365 57 124,646 1,171 126,371 48 127,590 204 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 205 3 Note 23. Fair values of financial assets and financial liabilities (continued) Note 23. Fair values of financial assets and financial liabilities (continued) Parent Entity 2015 2014 Consolidated 2014 Quoted Market Prices (Level 1) Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) Quoted Market Prices (Level 1) Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) Total Total $m Financial assets measured at fair value on a recurring basis Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans 2,446 39 598 - 21,729 47,457 49,654 7,076 721 44 79 - 24,896 47,540 50,331 7,076 5,260 51 - - 38,285 41,251 31,823 9,330 Total assets carried at fair value 3,083 125,916 844 129,843 5,311 120,689 Financial liabilities measured at fair value on a recurring basis Deposits and other borrowings at fair value Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues at fair value Total liabilities carried at fair value - 45,331 414 35 - 449 8,812 47,978 6,415 108,536 - - 37 - 45,331 - 48,661 9,226 48,050 6,415 1,134 37 - 18,021 39,074 6,315 37 109,022 1,171 112,071 779 44,324 5 41,307 170 31,993 - 9,330 954 126,954 - - 48,661 19,155 30 39,141 - 6,315 30 113,272 Analysis of movements between Fair Value Hierarchy Levels During the period there were no material transfers between levels of the fair value hierarchy. Transfers into or out of Level 3 are discussed in the following table. Significant unobservable inputs Sensitivities to reasonably possible changes in non-market observable valuation assumptions would not have a material impact on the Group’s reported results. Day one profit or loss The closing balance of unrecognised day one profit for both the Group and the Parent Entity for the period was $6 million (30 September 2014: $6 million profit). Reconciliation of non-market observables The table below summarises the changes in financial instruments carried at fair value derived from non-market observable valuation techniques (Level 3): Consolidated 2015 $m Balance as at beginning of year Gains/(losses) on assets/(gains)/ losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions and issues Disposals and settlements Transfers into or out of non-market observables Foreign currency translation impacts Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2015 Trading Securities and Financial Assets Designated at Fair Value Derivatives 5 988 Available- for-Sale Securities 822 Total Assets Derivatives 30 1,815 Debt Issues at Fair Value 18 Total Liabilities 48 8 - 403 (512) 13 107 1,007 11 1 - 23 (7) 22 - 44 23 5 (1) 14 (1) 2,303 2,729 (2,299) (2,818) - 88 35 195 918 1,969 - 34 28 - 5 (41) 17 - 39 20 - - - - - - 18 - 28 - 5 (41) 17 - 57 20 206 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report $m Balance as at beginning of year Gains/(losses) on assets/(gains)/ losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions and issues Disposals and settlements Transfers into or out of non-market observables Foreign currency translation impacts Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2014 Parent Entity 2015 $m Balance as at beginning of year Gains/(losses) on assets/(gains)/ losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions and issues Disposals and settlements Transfers into or out of non-market observables Foreign currency translation impacts Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2015 Parent Entity 2014 $m Balance as at beginning of year Gains/(losses) on assets/(gains)/ losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions and issues Disposals and settlements Transfers into or out of non-market observables Foreign currency translation impacts Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2014 Notes to the financial statements Trading Securities and Financial Assets Designated at Available- for-Sale Total Debt Issues at Fair Total Fair Value Derivatives Securities Assets Derivatives Value Liabilities 790 1,332 24 13 37 538 (7) - 634 (204) 24 3 988 14 779 (5) - 319 (484) 13 99 721 1 292 5 - 628 (174) 24 4 779 5 4 - - 2 - - 5 1 5 1 - 23 (7) 22 - 44 23 4 - - 2 - - 5 1 1,524 2,160 (1) (1,583) (1,788) 822 1,815 - 15 Available- for-Sale Total 170 954 - 18 - 73 - (1) 68 - 26 79 (7) 18 24 76 (4) (1) 410 (675) 35 125 844 (1) (108) - (2) 72 170 - 8 - 5 (2) 702 (283) 24 12 954 6 Trading Securities and Financial Assets Designated at Fair Value Derivatives Securities Assets Derivatives Total Liabilities (184) (41) Trading Securities and Financial Assets Designated at - 24 Available- for-Sale Total Fair Value Derivatives Securities Assets Derivatives 200 496 24 Total Liabilities 24 6 - - - - 6 (1) 18 (16) 24 (2) - - - 30 (8) 30 26 - 5 17 - 37 18 (16) 24 (2) - - - 30 (8) (10) 24 (3) - - - 48 (2) 30 26 - 5 17 - 37 (41) 18 (16) 24 (2) - - - 30 (8) 207 Note 23. Fair values of financial assets and financial liabilities (continued) Parent Entity 2015 Valuation Valuation Quoted Techniques Techniques Market (Market (Non-Market Prices Observable) Observable) 2014 Valuation Valuation Quoted Techniques Techniques Market (Market (Non-Market Prices Observable) Observable) $m (Level 1) (Level 2) (Level 3) Total (Level 1) (Level 2) (Level 3) Total Total assets carried at fair value 3,083 125,916 844 129,843 5,311 120,689 954 126,954 2,446 39 598 - - 414 35 - 449 21,729 47,457 49,654 7,076 45,331 8,812 47,978 6,415 108,536 721 44 79 - 24,896 47,540 50,331 7,076 5,260 51 - - - 45,331 9,226 1,134 37 48,050 6,415 37 - - - - 38,285 41,251 31,823 9,330 48,661 18,021 39,074 6,315 779 44,324 5 41,307 170 31,993 9,330 - - - - 48,661 19,155 30 39,141 6,315 Total liabilities carried at fair value 37 109,022 1,171 112,071 30 113,272 Analysis of movements between Fair Value Hierarchy Levels During the period there were no material transfers between levels of the fair value hierarchy. Transfers into or out of Level 3 are Sensitivities to reasonably possible changes in non-market observable valuation assumptions would not have a material impact The closing balance of unrecognised day one profit for both the Group and the Parent Entity for the period was $6 million The table below summarises the changes in financial instruments carried at fair value derived from non-market observable Financial assets measured at fair value on a recurring basis Trading securities and financial assets designated at fair value Derivative financial instruments Available-for-sale securities Loans Financial liabilities measured at fair value on a recurring basis Deposits and other borrowings at fair value Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues at fair value discussed in the following table. Significant unobservable inputs on the Group’s reported results. Day one profit or loss (30 September 2014: $6 million profit). Reconciliation of non-market observables valuation techniques (Level 3): Consolidated 2015 $m Balance as at beginning of year Gains/(losses) on assets/(gains)/ losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions and issues Disposals and settlements Transfers into or out of non-market observables Foreign currency translation impacts Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2015 Trading Securities and Financial Assets Designated at Available- for-Sale Total Debt Issues at Fair Fair Value Derivatives Securities Assets Derivatives Value Liabilities 822 1,815 30 18 988 8 - 403 (512) 13 107 1,007 11 5 1 - 23 (7) 22 - 44 23 2,303 2,729 (2,299) (2,818) (41) 5 (1) - 88 14 (1) 35 195 - 34 28 - 5 17 - 39 20 - - - - - - - 918 1,969 18 Total 48 28 - 5 17 - 57 (41) 20 Notes to the financial statements Note 23. Fair values of financial assets and financial liabilities (continued) Consolidated 2014 Trading Securities and Financial Assets Designated at Fair Value Derivatives 4 538 Available- for-Sale Securities 790 Total Assets Derivatives 24 1,332 Debt Issues at Fair Value 13 Total Liabilities 37 $m Balance as at beginning of year Gains/(losses) on assets/(gains)/ losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions and issues Disposals and settlements Transfers into or out of non-market observables Foreign currency translation impacts Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2014 Parent Entity 2015 $m Balance as at beginning of year Gains/(losses) on assets/(gains)/ losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions and issues Disposals and settlements Transfers into or out of non-market observables Foreign currency translation impacts Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2015 Parent Entity 2014 $m Balance as at beginning of year Gains/(losses) on assets/(gains)/ losses on liabilities recognised in: Income statements Available-for-sale reserve Acquisitions and issues Disposals and settlements Transfers into or out of non-market observables Foreign currency translation impacts Balance as at end of year Unrealised gains/(losses) recognised in the income statements for financial instruments held as at 30 September 2014 (7) - 634 (204) 24 3 988 14 - - 2 - 18 (7) 18 1,524 2,160 (1) (1,583) (1,788) - - 5 1 - 73 24 76 822 1,815 - 15 (16) - 24 (2) - - 30 (8) 6 - - (1) - - 18 6 (10) - 24 (3) - - 48 (2) Trading Securities and Financial Assets Designated at Fair Value Derivatives 5 779 Available- for-Sale Securities 170 Total Assets Derivatives 30 954 Total Liabilities 30 (5) - 319 (484) 13 99 721 1 1 - 23 (7) 22 - 44 23 - (1) 68 (184) - 26 79 (4) (1) 410 (675) 35 125 844 - 24 26 - 5 (41) 17 - 37 18 26 - 5 (41) 17 - 37 18 Trading Securities and Financial Assets Designated at Fair Value Derivatives 4 292 Available- for-Sale Securities 200 Total Assets Derivatives 24 496 Total Liabilities 24 5 - 628 (174) 24 4 779 5 - - 2 (1) - - 5 1 - (2) 72 (108) - 8 170 5 (2) 702 (283) 24 12 954 - 6 (16) - 24 (2) - - 30 (8) (16) - 24 (2) - - 30 (8) 207 206 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 3 Note 23. Fair values of financial assets and financial liabilities (continued) 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. Transfers in and transfers out are reported using the end of period fair values. Financial instruments not measured at fair value For financial instruments not measured at fair value on a recurring basis 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. The following table summarises the estimated fair value and fair value hierarchy of financial instruments not measured at fair value: Consolidated $m Financial assets not measured at fair value Cash and balances with central banks Receivables due from other financial institutions Available-for-sale securities Loans Regulatory deposits with central banks overseas Other financial assets Total financial assets Financial liabilities not measured at fair value Payables due to other financial institutions Deposits and other borrowings Debt issues Loan capital Other financial liabilities Total financial liabilities Quoted Market Prices (Level 1) 14,770 7,602 - - - - Carrying Amount 14,770 9,583 33 616,240 1,309 3,077 645,012 22,372 18,731 429,089 161,736 13,840 6,861 630,257 4,037 - - - - 4,037 2015 Fair Value Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) Total 14,770 9,583 33 - 823 33 617,250 617,250 - - 1,309 3,077 618,106 646,022 - 3,303 - - - 3,303 18,731 430,029 162,107 13,495 6,861 631,223 - 1,158 - - 1,309 3,077 5,544 14,694 426,726 162,107 13,495 6,861 623,883 Note 23. Fair values of financial assets and financial liabilities (continued) Consolidated 571,273 571,273 610,834 29,590 572,706 611,094 Notes to the financial statements 2014 Fair Value Valuation Valuation Techniques Techniques (Market (Non-Market Observable) Observable) (Level 2) (Level 3) Total Quoted Market Prices (Level 1) 25,760 3,830 3,876 Quoted Market Prices (Level 1) 13,372 7,586 20,958 3,445 - - - - - - - - - - - - - - - - - - 3,876 3,434 2015 Fair Value Valuation Valuation Techniques Techniques (Market (Non-Market Observable) Observable) (Level 2) (Level 3) Total - - - 2,177 1,528 5,093 8,798 14,760 408,398 144,337 10,858 6,852 585,205 1,155 1,152 2,458 4,765 - - - - - 14,688 379,681 138,628 13,495 6,105 552,597 1,417 16 3,434 - - - - - - - - - - - - - - - 13 539,451 145,560 685,024 1,349 143,885 25,760 7,424 16 1,528 5,093 18,636 411,832 144,337 10,858 6,852 592,515 13,372 8,741 13 539,451 1,152 145,560 2,458 710,747 18,133 381,030 138,628 143,885 13,495 6,105 701,276 3,445 145,234 Carrying Amount 25,760 7,424 16 571,013 1,528 5,093 18,636 411,186 142,709 10,858 6,852 590,241 Carrying Amount 13,372 8,741 13 538,999 1,152 145,560 2,458 710,295 18,133 380,178 138,300 143,885 13,840 6,105 700,441 $m Financial assets not measured at fair value Cash and balances with central banks Receivables due from other financial institutions Regulatory deposits with central banks overseas Available-for-sale securities Loans Other financial assets Total financial assets Financial liabilities not measured at fair value Payables due to other financial institutions Deposits and other borrowings Debt issues Loan capital Other financial liabilities Total financial liabilities Parent Entity $m Financial assets not measured at fair value Cash and balances with central banks Receivables due from other financial institutions Regulatory deposits with central banks overseas Available-for-sale securities Loans Due from subsidiaries Other financial assets Total financial assets Financial liabilities not measured at fair value Payables due to other financial institutions Deposits and other borrowings Debt issues Due to subsidiaries Loan capital Other financial liabilities Total financial liabilities 208 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 209 Note 23. Fair values of financial assets and financial liabilities (continued) 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. Transfers in and transfers out are reported using Note 23. Fair values of financial assets and financial liabilities (continued) Consolidated 2014 Fair Value Notes to the financial statements the end of period fair values. Financial instruments not measured at fair value as follows: Loans For financial instruments not measured at fair value on a recurring basis in the balance sheet, fair value has been derived 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. The following table summarises the estimated fair value and fair value hierarchy of financial instruments not measured at fair value: Consolidated $m Financial assets not measured at fair value Cash and balances with central banks Receivables due from other financial institutions Regulatory deposits with central banks overseas Available-for-sale securities Loans Other financial assets Total financial assets Financial liabilities not measured at fair value Payables due to other financial institutions Deposits and other borrowings Debt issues Loan capital Other financial liabilities Total financial liabilities 2015 Fair Value Valuation Valuation Techniques Techniques (Market (Non-Market Observable) Observable) (Level 2) (Level 3) Total - - - 1,158 1,309 3,077 5,544 14,694 426,726 162,107 13,495 6,861 623,883 617,250 617,250 823 33 - - - - - - - 3,303 14,770 9,583 33 1,309 3,077 18,731 430,029 162,107 13,495 6,861 631,223 Quoted Market Prices (Level 1) 14,770 7,602 - - - - - - - - 4,037 4,037 3,303 Carrying Amount 14,770 9,583 33 616,240 1,309 3,077 18,731 429,089 161,736 13,840 6,861 630,257 645,012 22,372 618,106 646,022 $m Financial assets not measured at fair value Cash and balances with central banks Receivables due from other financial institutions Available-for-sale securities Loans Regulatory deposits with central banks overseas Other financial assets Total financial assets Financial liabilities not measured at fair value Payables due to other financial institutions Deposits and other borrowings Debt issues Loan capital Other financial liabilities Total financial liabilities Parent Entity $m Financial assets not measured at fair value Cash and balances with central banks Receivables due from other financial institutions Available-for-sale securities Loans Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets Total financial assets Financial liabilities not measured at fair value Payables due to other financial institutions Deposits and other borrowings Debt issues Due to subsidiaries Loan capital Other financial liabilities Total financial liabilities Quoted Market Prices (Level 1) 25,760 3,830 - - - - Carrying Amount 25,760 7,424 16 571,013 1,528 5,093 610,834 29,590 18,636 411,186 142,709 10,858 6,852 590,241 Carrying Amount 13,372 8,741 13 538,999 1,152 145,560 2,458 710,295 18,133 380,178 138,300 143,885 13,840 6,105 700,441 3,876 - - - - 3,876 Quoted Market Prices (Level 1) 13,372 7,586 - - - - - 20,958 3,445 - - - - - 3,445 Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) - 2,177 - - 1,528 5,093 8,798 14,760 408,398 144,337 10,858 6,852 585,205 - 1,417 16 - 3,434 - - - 3,434 2015 Fair Value Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) - 1,155 - - 1,152 - 2,458 4,765 14,688 379,681 138,628 - - 13 539,451 - 145,560 - 685,024 - 1,349 - - 143,885 13,495 6,105 552,597 - - 145,234 Total 25,760 7,424 16 18,636 411,832 144,337 10,858 6,852 592,515 Total 13,372 8,741 13 539,451 1,152 145,560 2,458 710,747 18,133 381,030 138,628 143,885 13,495 6,105 701,276 571,273 571,273 - - 1,528 5,093 572,706 611,094 208 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 209 3 Note 23. Fair values of financial assets and financial liabilities (continued) Parent Entity 2014 Fair Value $m Financial assets not measured at fair value Cash and balances with central banks Receivables due from other financial institutions Available-for-sale securities Loans Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets Total financial assets Financial liabilities not measured at fair value Payables due to other financial institutions Deposits and other borrowings Debt issues Due to subsidiaries Loan capital Other financial liabilities Total financial liabilities Quoted Market Prices (Level 1) 23,400 3,686 - - - - - 27,086 3,842 - - - - - 3,842 Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) - 1,797 - - 1,389 - 4,527 7,713 14,569 364,946 123,024 - - 16 496,485 - 140,098 - 636,599 - 1,183 - - 135,066 10,858 5,948 519,345 - - 136,249 Carrying Amount 23,400 5,483 16 496,274 1,389 140,098 4,527 671,187 18,411 365,522 121,531 135,066 10,858 5,948 657,336 Total 23,400 5,483 16 496,485 1,389 140,098 4,527 671,398 18,411 366,129 123,024 135,066 10,858 5,948 659,436 Derivative financial instruments 57,678 (9,505) (33,696) (4,046) 10,309 Notes to the financial statements Note 24. Offsetting financial assets and financial liabilities and collateral arrangements Accounting policy liability simultaneously. 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 The following tables provide information on the impact of offsetting, as well as amounts subject to enforceable master netting agreements or similar arrangements that do not qualify for offsetting in the balance sheets. The tables exclude amounts not subject to offsetting or enforceable netting arrangements and therefore may not tie back to the balance sheet. The amounts presented in this note do not represent the credit risk exposure of the Group or Parent Entity. Refer to Note 22.2 for information on credit risk management. The offsetting and collateral arrangements and other credit risk mitigation strategies used by the Group are further explained in the ‘Management of risk mitigation’ section of Note 22.2.4. Effects of Offsetting on Balance Sheet Amounts Subject to Enforecable Netting Arrangments But Not Offset Gross Amounts Amounts Offset Net Amounts Reported on the Balance Other Recognised Financial Financial Cash Instrument Net Sheet Instruments Collateral Collateral Amount Consolidated $m 2015 Assets Receivables due from other financial institutions1 Securities purchased under agreement to resell2 Loans3 Other assets4 Total assets Liabilities Securities sold under agreement to repurchase5 Deposits and other borrowings3 Other liabilities4 Total liabilities 2014 Assets Receivables due from other financial institutions1 Derivative financial instruments Securities purchased under agreement to resell2 Loans3 Other assets4 Total assets Liabilities Derivative financial instruments Securities sold under agreement to repurchase5 Deposits and other borrowings3 Total liabilities Derivative financial instruments 58,671 (10,367) 48,304 (33,696) (7,973) (1,854) 4,781 52,788 (33,696) (4,057) (4,123) 10,912 97,053 (26,221) 70,832 (33,696) (7,979) (15,756) 13,401 (15,757) (959) (26,221) (15,757) (97) - - - - - - - - - 31 3,982 15,949 1,369 79,009 13,908 24,369 105 28 41,404 6,275 90 39,539 23,520 18,031 81,090 11,898 (11,801) 31 48,173 3,982 192 410 13,908 8,612 8 28 41,404 6,275 97 90 23,520 6,230 69,289 - - - - - - - - - - - - - (30) (122) (11) (3,971) (6) (13,902) - - - - - - - - - 192 410 1 - - 8 8,612 - 97 90 - 6,230 13,029 - - - - - - - (27,241) (3,866) (26) (92) 2 10,205 (22) (6,253) 59,695 (11,801) 47,894 (27,241) (3,888) (6,371) 10,394 39,539 (27,241) (3,861) (1,638) 6,799 (11,801) (11,801) (33) (23,487) (27,241) (3,894) (25,125) 1 Consists of stock borrowing arrangements, reported as part of Cash collateral in Note 10 Receivables due from other financial institutions. 2 Securities purchased under agreement to resell forms part of Note 11 Trading securities and financial assets designated at fair value. 3 Consists of debt and interest set-off accounts which meet the requirements for offsetting as described above. These accounts form part of Business loans in Note 13 Loans, and part of Deposits and other borrowings at amortised costs in Note 17 Deposits and other borrowings. 4 Gross amounts consists of initial and variation margin held directly with Central Clearing Counterparties, reported as part of Other in Note 27 Other assets. Where variation margin is payable it is reported as part of Other in Note 29 Other liabilities (2014: nil). Amounts offset relate to variation margin. 5 Securities sold under agreement to repurchase forms part of Note 16 Payables due to other financial institutions, recognised at amortised cost, and part of Note 18 Other financial liabilities at fair value through income statement. 210 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 211 Note 23. Fair values of financial assets and financial liabilities (continued) Parent Entity $m Financial assets not measured at fair value Cash and balances with central banks Receivables due from other financial institutions Regulatory deposits with central banks overseas Available-for-sale securities Loans Due from subsidiaries Other financial assets Total financial assets Financial liabilities not measured at fair value Payables due to other financial institutions Deposits and other borrowings Debt issues Due to subsidiaries Loan capital Other financial liabilities Total financial liabilities 2014 Fair Value Valuation Valuation Techniques Techniques (Market (Non-Market Observable) Observable) (Level 2) (Level 3) Total 1,797 1,389 4,527 7,713 - - - - - 14,569 364,946 123,024 10,858 5,948 519,345 16 496,485 140,098 636,599 1,183 135,066 - - - - - - - - 23,400 5,483 16 496,485 1,389 140,098 4,527 671,398 18,411 366,129 123,024 135,066 10,858 5,948 659,436 Quoted Market Prices (Level 1) 23,400 3,686 27,086 3,842 - - - - - - - - - - 3,842 136,249 Carrying Amount 23,400 5,483 16 496,274 1,389 140,098 4,527 671,187 18,411 365,522 121,531 135,066 10,858 5,948 657,336 Notes to the financial statements Note 24. Offsetting financial assets and financial liabilities and collateral arrangements Accounting policy 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. The following tables provide information on the impact of offsetting, as well as amounts subject to enforceable master netting agreements or similar arrangements that do not qualify for offsetting in the balance sheets. The tables exclude amounts not subject to offsetting or enforceable netting arrangements and therefore may not tie back to the balance sheet. The amounts presented in this note do not represent the credit risk exposure of the Group or Parent Entity. Refer to Note 22.2 for information on credit risk management. The offsetting and collateral arrangements and other credit risk mitigation strategies used by the Group are further explained in the ‘Management of risk mitigation’ section of Note 22.2.4. Consolidated $m 2015 Assets Receivables due from other financial institutions1 Derivative financial instruments Securities purchased under agreement to resell2 Loans3 Other assets4 Total assets Liabilities Derivative financial instruments Securities sold under agreement to repurchase5 Deposits and other borrowings3 Other liabilities4 Total liabilities 2014 Assets Receivables due from other financial institutions1 Derivative financial instruments Securities purchased under agreement to resell2 Loans3 Other assets4 Total assets Liabilities Derivative financial instruments Securities sold under agreement to repurchase5 Deposits and other borrowings3 Total liabilities Effects of Offsetting on Balance Sheet Amounts Subject to Enforecable Netting Arrangments But Not Offset Gross Amounts Amounts Offset Net Amounts Reported on the Balance Sheet Other Recognised Financial Instruments Cash Collateral Financial Instrument Collateral Net Amount 31 - 57,678 (9,505) 3,982 15,949 1,369 79,009 - (15,757) (959) (26,221) 31 48,173 3,982 192 410 - - (33,696) (4,046) (30) (122) 1 10,309 - - - (11) (3,971) - - - - - 192 410 52,788 (33,696) (4,057) (4,123) 10,912 58,671 (10,367) 48,304 (33,696) (7,973) (1,854) 4,781 13,908 24,369 105 - (15,757) (97) 13,908 8,612 8 - - - (6) - - (13,902) - - - 8,612 8 97,053 (26,221) 70,832 (33,696) (7,979) (15,756) 13,401 28 41,404 6,275 - - - 11,898 (11,801) 90 - 28 41,404 6,275 97 90 - (27,241) - (3,866) (26) (92) 2 10,205 - - - (22) (6,253) - - - - - 97 90 59,695 (11,801) 47,894 (27,241) (3,888) (6,371) 10,394 39,539 23,520 18,031 81,090 - - (11,801) (11,801) 39,539 (27,241) (3,861) (1,638) 6,799 23,520 6,230 69,289 - - (33) - (23,487) - (27,241) (3,894) (25,125) - 6,230 13,029 1 Consists of stock borrowing arrangements, reported as part of Cash collateral in Note 10 Receivables due from other financial institutions. 2 Securities purchased under agreement to resell forms part of Note 11 Trading securities and financial assets designated at fair value. 3 Consists of debt and interest set-off accounts which meet the requirements for offsetting as described above. These accounts form part of Business loans in Note 13 Loans, and part of Deposits and other borrowings at amortised costs in Note 17 Deposits and other borrowings. 4 Gross amounts consists of initial and variation margin held directly with Central Clearing Counterparties, reported as part of Other in Note 27 Other assets. Where variation margin is payable it is reported as part of Other in Note 29 Other liabilities (2014: nil). Amounts offset relate to variation margin. 5 Securities sold under agreement to repurchase forms part of Note 16 Payables due to other financial institutions, recognised at amortised cost, and part of Note 18 Other financial liabilities at fair value through income statement. 210 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 211 3 Note 24. Offsetting financial assets and financial liabilities and collateral arrangements (continued) Note 24. Offsetting financial assets and financial liabilities and collateral arrangements (continued) Parent Entity $m 2015 Assets Receivables due from other financial institutions1 Derivative financial instruments Securities purchased under agreement to resell2 Loans3 Other assets4 Total assets Liabilities Derivative financial instruments Securities sold under agreement to repurchase5 Deposits and other borrowings3 Other liabilities4 Total liabilities 2014 Assets Receivables due from other financial institutions1 Derivative financial instruments Securities purchased under agreement to resell2 Loans3 Other assets4 Total assets Liabilities Derivative financial instruments Securities sold under agreement to repurchase5 Deposits and other borrowings3 Total liabilities Effects of Offsetting on Balance Sheet Amounts Subject to Enforecable Netting Arrangments But Not Offset Gross Amounts Amounts Offset Net Amounts Reported on the Balance Sheet Other Recognised Financial Instruments Cash Collateral Financial Instrument Collateral Net Amount 31 - 57,045 (9,505) 3,982 15,949 1,369 78,376 - (15,757) (959) (26,221) 31 47,540 3,982 192 410 - - (33,510) (3,454) (30) (122) 1 10,454 predetermined events occur. - - - (11) (3,971) - - - - - 192 410 52,155 (33,510) (3,465) (4,123) 11,057 58,417 (10,367) 48,050 (33,510) (7,958) (1,854) 4,728 13,908 24,369 105 - (15,757) (97) 13,908 8,612 8 - - - (6) - - (13,902) - - - 8,612 8 96,799 (26,221) 70,578 (33,510) (7,964) (15,756) 13,348 28 41,307 6,275 - - - 11,898 (11,801) 90 - 28 41,307 6,275 97 90 - - (27,086) (3,831) (26) (92) 2 10,298 - - - (22) (6,253) - - - - - 97 90 59,598 (11,801) 47,797 (27,086) (3,853) (6,371) 10,487 39,141 23,439 18,031 80,611 - - (11,801) (11,801) 39,141 (27,086) (3,717) (1,638) 6,700 23,439 6,230 68,810 - - (33) - (23,406) - (27,086) (3,750) (25,044) - 6,230 12,930 1 Consists of stock borrowing arrangements, reported as part of Cash collateral in Note 10 Receivables due from other financial institutions. 2 Securities purchased under agreement to resell forms part of Note 11 Trading securities and financial assets designated at fair value. 3 Consists of debt and interest set-off accounts which meet the requirements for offsetting as described above. These accounts form part of Business loans in Note 13 Loans, and part of Deposits and other borrowings at amortised costs in Note 17 Deposits and other borrowings. 4 Gross amounts consists of initial and variation margin held directly with Central Clearing Counterparties, reported as part of Other in Note 27 Other assets. Where variation margin is payable it is reported as part of Other in Note 29 Other liabilities (2014: nil). Amounts offset relate to variation margin. 5 Securities sold under agreement to repurchase forms part of Note 16 Payables due to other financial institutions, recognised at amortised cost, and part of Note 18 Other financial liabilities at fair value through income statement. Effects of offsetting on balance sheet Amounts offset are in accordance with the criteria described in the accounting policy and are limited to the gross carrying values of the financial instrument. Notes to the financial statements Amounts subject to enforceable netting arrangements but not offset Other recognised financial instruments Other recognised financial instruments discloses financial assets and liabilities recognised on balance sheet that are not offset but are subject to enforceable master netting agreements whereby the rights of set-off and close-out netting can be applied in the event of default, or if other predetermined events occur. Cash collateral and financial instrument collateral Cash collateral and financial instrument collateral discloses amounts received or pledged in relation to the gross amount of assets and liabilities. Financial instrument collateral typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default; they are reflected at fair value. These forms of collateral are also subject to enforceable netting arrangements but are not offset due to the collateral being realised only in the event of default or if other For the purpose of disclosure, the amounts subject to enforceable netting arrangements but not offset has been limited to the net amounts of financial assets/(liabilities) presented on the balance sheet so to not include over-collateralisation. As a result, the amounts for cash collateral and financial instrument collateral may not equal the table disclosed below. Assets pledged In addition to assets supporting securitisation and covered bond programs disclosed in Note 25, 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: $m Cash Cash deposit on stock borrowed Securities (including certificates of deposit) Securities pledged under repurchase agreements Total amount pledged to secure liabilities Collateral received Consolidated Parent Entity 2015 8,079 31 1,854 15,651 25,615 2014 3,894 28 1,638 25,978 31,538 2015 8,064 31 1,854 15,651 25,600 2014 3,750 28 1,638 25,897 31,313 Cash held as collateral, recognised on the Group’s balance sheet as at 30 September 2015 was $4,057 million in 2015 (2014: $3,888 million) and for the Parent Entity’s was $3,465 million in 2015 (2014: $3,853 million). Securities received as collateral under reverse repurchase agreements as at 30 September 2015 was $3,983 million (2014: $6,463 million). A further $152 million (2014: $118 million) of securities were received as collateral under derivatives and stock borrowing. Securities received as collateral are not recognised on the Group’s balance sheet. Note 25. 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 liquify 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, trust management and operational services, the originated assets remain recognised on the balance sheet for accounting purposes. These securitisation vehicles are consolidated as Westpac is exposed or has the right to variable returns and has the ability to effect its returns through its power over these securitisation vehicles. Customer funding conduits The Group arranges funding for certain customer transactions through a securitisation conduit (Waratah Receivables Corporation Limited and other related structured entities) that provides customers with access to funding from commercial paper markets. Given that Westpac provides liquidity, credit enhancements, foreign exchange facilities, management and operational services, it is deemed to have exposure to the associated risks and rewards. The conduits are consolidated as the Group is exposed or has the right to variable returns and has the ability to effect its returns through its power over the conduits. 212 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 213 Note 24. Offsetting financial assets and financial liabilities and collateral arrangements (continued) Effects of Offsetting on Balance Sheet Amounts Subject to Enforecable Netting Arrangments But Not Offset Gross Amounts Amounts Offset Net Amounts Reported on the Balance Other Recognised Financial Financial Cash Instrument Net Sheet Instruments Collateral Collateral Amount Parent Entity $m 2015 Assets Receivables due from other financial institutions1 Securities purchased under agreement to resell2 Loans3 Other assets4 Total assets Liabilities Derivative financial instruments Securities sold under agreement to repurchase5 Deposits and other borrowings3 Other liabilities4 Total liabilities 2014 Assets Receivables due from other financial institutions1 Derivative financial instruments Securities purchased under agreement to resell2 Loans3 Other assets4 Total assets Liabilities Derivative financial instruments Securities sold under agreement to repurchase5 Deposits and other borrowings3 Total liabilities Derivative financial instruments 57,045 (9,505) (33,510) (3,454) 10,454 (30) (122) (11) (3,971) 52,155 (33,510) (3,465) (4,123) 11,057 58,417 (10,367) 48,050 (33,510) (7,958) (1,854) 4,728 (15,757) (959) (26,221) (15,757) (97) - - - - - - - - - 31 3,982 15,949 1,369 78,376 13,908 24,369 105 28 41,307 6,275 90 39,141 23,439 18,031 80,611 11,898 (11,801) 31 47,540 3,982 192 410 13,908 8,612 8 28 41,307 6,275 97 90 23,439 6,230 68,810 - - - - - - - - - - - - - - - - - - - - - - 192 410 1 - - 8 2 - 97 90 - - - - - - - (27,086) (3,831) 10,298 (26) (92) (22) (6,253) 59,598 (11,801) 47,797 (27,086) (3,853) (6,371) 10,487 39,141 (27,086) (3,717) (1,638) 6,700 (11,801) (11,801) (33) (23,406) - 6,230 12,930 (27,086) (3,750) (25,044) 1 Consists of stock borrowing arrangements, reported as part of Cash collateral in Note 10 Receivables due from other financial institutions. 2 Securities purchased under agreement to resell forms part of Note 11 Trading securities and financial assets designated at fair value. 3 Consists of debt and interest set-off accounts which meet the requirements for offsetting as described above. These accounts form part of Business loans in Note 13 Loans, and part of Deposits and other borrowings at amortised costs in Note 17 Deposits and other borrowings. 4 Gross amounts consists of initial and variation margin held directly with Central Clearing Counterparties, reported as part of Other in Note 27 Other assets. Where variation margin is payable it is reported as part of Other in Note 29 Other liabilities (2014: nil). Amounts offset relate to variation margin. 5 Securities sold under agreement to repurchase forms part of Note 16 Payables due to other financial institutions, recognised at amortised cost, and part of Note 18 Other financial liabilities at fair value through income statement. Effects of offsetting on balance sheet values of the financial instrument. Amounts offset are in accordance with the criteria described in the accounting policy and are limited to the gross carrying Notes to the financial statements Note 24. Offsetting financial assets and financial liabilities and collateral arrangements (continued) Amounts subject to enforceable netting arrangements but not offset Other recognised financial instruments Other recognised financial instruments discloses financial assets and liabilities recognised on balance sheet that are not offset but are subject to enforceable master netting agreements whereby the rights of set-off and close-out netting can be applied in the event of default, or if other predetermined events occur. Cash collateral and financial instrument collateral Cash collateral and financial instrument collateral discloses amounts received or pledged in relation to the gross amount of assets and liabilities. Financial instrument collateral typically comprises highly liquid securities which are legally transferred and can be liquidated in the event of counterparty default; they are reflected at fair value. These forms of collateral are also subject to enforceable netting arrangements but are not offset due to the collateral being realised only in the event of default or if other predetermined events occur. For the purpose of disclosure, the amounts subject to enforceable netting arrangements but not offset has been limited to the net amounts of financial assets/(liabilities) presented on the balance sheet so to not include over-collateralisation. As a result, the amounts for cash collateral and financial instrument collateral may not equal the table disclosed below. Assets pledged In addition to assets supporting securitisation and covered bond programs disclosed in Note 25, 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: 96,799 (26,221) 70,578 (33,510) (7,964) (15,756) 13,348 (6) (13,902) 8,612 $m Cash Cash deposit on stock borrowed Securities (including certificates of deposit) Securities pledged under repurchase agreements Total amount pledged to secure liabilities Consolidated Parent Entity 2015 8,079 31 1,854 15,651 25,615 2014 3,894 28 1,638 25,978 31,538 2015 8,064 31 1,854 15,651 25,600 2014 3,750 28 1,638 25,897 31,313 Collateral received Cash held as collateral, recognised on the Group’s balance sheet as at 30 September 2015 was $4,057 million in 2015 (2014: $3,888 million) and for the Parent Entity’s was $3,465 million in 2015 (2014: $3,853 million). Securities received as collateral under reverse repurchase agreements as at 30 September 2015 was $3,983 million (2014: $6,463 million). A further $152 million (2014: $118 million) of securities were received as collateral under derivatives and stock borrowing. Securities received as collateral are not recognised on the Group’s balance sheet. Note 25. 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 liquify 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, trust management and operational services, the originated assets remain recognised on the balance sheet for accounting purposes. These securitisation vehicles are consolidated as Westpac is exposed or has the right to variable returns and has the ability to effect its returns through its power over these securitisation vehicles. Customer funding conduits The Group arranges funding for certain customer transactions through a securitisation conduit (Waratah Receivables Corporation Limited and other related structured entities) that provides customers with access to funding from commercial paper markets. Given that Westpac provides liquidity, credit enhancements, foreign exchange facilities, management and operational services, it is deemed to have exposure to the associated risks and rewards. The conduits are consolidated as the Group is exposed or has the right to variable returns and has the ability to effect its returns through its power over the conduits. 212 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 213 3 Note 25. Securitisation and covered bonds (continued) 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 $823 million at 30 September 2015 (30 September 2014: $1,416 million). Similarly undrawn funding and liquidity facilities of $492 million were provided by Westpac (30 September 2014: $371 million) for the securitisation of its own assets. The following table presents assets securitised by the Group: Consolidated $m Residential mortgage Own Assets 10,209 Auto and equipment finance Other1 Total 1 This reflects cash held by the own asset securitisation vehicles. 1,358 487 12,054 2015 Customer Conduits 823 - - Total Own Assets 9,572 11,032 1,358 487 823 12,877 1,348 665 11,585 2014 Customer Conduits 1,417 - - 1,417 Total 10,989 1,348 665 13,002 The following table presents assets securitised by the Parent Entity: Parent Entity $m Residential mortgage Other2 Total 1 Own assets securitised by the Parent Entity include internal mortgage backed securitisation of $86,300 million (2014: $79,500 million) which are Total Own Assets 83,090 90,416 98,201 98,201 92,661 5,540 5,540 7,326 - - - - - - Total 83,090 7,326 90,416 Own Assets1 92,661 2015 Customer Conduits 2014 Customer Conduits Notes to the financial statements Note 25. Securitisation and covered bonds (continued) The following table presents the underlying liabilities of the Parent Entity as a result of the securitisation of assets: Parent Entity $m Due to subsidiaries Own Assets 96,797 Total Own Assets - 96,797 89,135 Total 89,135 2014 Customer Conduits - 2015 Customer Conduits 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. The following table presents the fair value of own assets securitised and underlying liabilities as a result of the securitisation of assets for the Group and Parent Entity: Residential mortgage Auto and equipment finance $m Other Fair value of assets securitised Notes issued Net fair value Fair value of underlying liabilities Covered bonds Consolidated Parent Entity 2015 10,217 1,394 487 12,098 12,016 12,016 82 2014 9,580 1,374 665 11,619 11,295 11,295 324 2015 92,726 - 5,540 98,266 96,708 96,708 1,558 2014 83,143 - 7,326 90,469 90,232 90,232 237 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 structured entities. These 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 structured entities. The Group has continuing involvement with the covered bond structured entities 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 structured entities). Accordingly, for accounting purposes, the structured entities are consolidated entities of the Group. As at 30 September 2015, the carrying value of covered bonds on issue was $35,062 million (2014: $26,168 million) for the Group and $31,401 million (2014: $23,167 million) for the Parent Entity. The carrying value of assets pledged for the covered bond programs was $40,263 million (2014: $39,314 million) for the Group and $36,225 million (2014: $35,276 million) for the Parent Entity. 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. available for external issuance and $80,276 million (2014: $73,950 million) qualifies for repurchase with the RBA. 2 This reflects cash held by the own asset securitisation vehicles. The following table presents the underlying liabilities of the Group as a result of the securitisation of assets: Consolidated $m Notes Issued 2015 Customer Conduits 823 Own Assets 12,034 Total Own Assets 11,276 12,857 2014 Customer Conduits 1,418 Total 12,694 214 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 215 Note 25. Securitisation and covered bonds (continued) Westpac receives a market-based fee or margin in return for its services as trust manager, servicer, foreign exchange Revenue from securitisation structures Fee income counterparty and facilities provider. Securitisation risk management Credit exposure by Westpac. Market risk 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 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 $823 million at 30 September 2015 (30 September 2014: $1,416 million). Similarly undrawn funding and liquidity facilities of $492 million were provided by Westpac (30 September 2014: $371 million) for the securitisation of its The following table presents assets securitised by the Group: own assets. Consolidated Residential mortgage Auto and equipment finance $m Other1 Total $m Other2 Total Parent Entity Residential mortgage Consolidated $m Notes Issued Own Assets Total Own Assets 10,209 1,358 487 12,054 11,032 1,358 487 9,572 1,348 665 823 12,877 11,585 1,417 1 This reflects cash held by the own asset securitisation vehicles. The following table presents assets securitised by the Parent Entity: Own Assets1 92,661 5,540 98,201 Total Own Assets 92,661 5,540 98,201 83,090 7,326 90,416 1 Own assets securitised by the Parent Entity include internal mortgage backed securitisation of $86,300 million (2014: $79,500 million) which are available for external issuance and $80,276 million (2014: $73,950 million) qualifies for repurchase with the RBA. 2 This reflects cash held by the own asset securitisation vehicles. The following table presents the underlying liabilities of the Group as a result of the securitisation of assets: Total 10,989 1,348 665 13,002 Total 83,090 7,326 90,416 2014 Customer Conduits 1,417 2014 Customer Conduits - - - - - 2014 Customer Conduits 2015 Customer Conduits 823 2015 Customer Conduits - - - - - 2015 Customer Conduits Own Assets Total Own Assets 12,034 823 12,857 11,276 1,418 Total 12,694 Notes to the financial statements Note 25. Securitisation and covered bonds (continued) The following table presents the underlying liabilities of the Parent Entity as a result of the securitisation of assets: Parent Entity $m Due to subsidiaries 2015 Customer Conduits - Own Assets 96,797 Total Own Assets 89,135 96,797 2014 Customer Conduits - Total 89,135 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. The following table presents the fair value of own assets securitised and underlying liabilities as a result of the securitisation of assets for the Group and Parent Entity: $m Residential mortgage Auto and equipment finance Other Fair value of assets securitised Notes issued Fair value of underlying liabilities Net fair value Consolidated Parent Entity 2015 10,217 1,394 487 12,098 12,016 12,016 82 2014 9,580 1,374 665 11,619 11,295 11,295 324 2015 92,726 - 5,540 98,266 96,708 96,708 1,558 2014 83,143 - 7,326 90,469 90,232 90,232 237 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 structured entities. These 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 structured entities. The Group has continuing involvement with the covered bond structured entities 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 structured entities). Accordingly, for accounting purposes, the structured entities are consolidated entities of the Group. As at 30 September 2015, the carrying value of covered bonds on issue was $35,062 million (2014: $26,168 million) for the Group and $31,401 million (2014: $23,167 million) for the Parent Entity. The carrying value of assets pledged for the covered bond programs was $40,263 million (2014: $39,314 million) for the Group and $36,225 million (2014: $35,276 million) for the Parent Entity. 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. 214 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 215 3 Note 26. Goodwill and other intangible assets (continued) OTHER ASSETS, OTHER LIABILITIES, COMMITMENTS AND CONTINGENCIES Note 26. Goodwill and other intangible assets Accounting policy Goodwill Goodwill arises on the acquisition of businesses and 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 net identifiable assets acquired. All goodwill is considered to have an indefinite life. Goodwill is allocated to CGUs for the purpose of impairment testing based on management’s analysis of where the synergies resulting from an acquisition are expected to arise. It is tested for impairment annually and whenever there is an indication of impairment, and is carried at cost or deemed cost less accumulated impairment. An impairment charge is recognised whenever the carrying amount of a CGU to which goodwill is allocated exceeds its recoverable amount, which is determined on a value-in-use basis. Gains or losses on the disposal of a business include the carrying amount of goodwill relating to the business sold. The determination of goodwill and any impairment is one of the Group’s critical accounting assumptions and estimates as detailed in Note 1d(iii). Other Intangible Assets Intangible assets are identifiable non-monetary assets without physical substance. Intangible assets are recognised when they are separable or arise from contractual or other legal rights, when their cost can be measured reliably and where it is probable that future economic benefits attributable to the assets will flow from their use. Other intangible assets include computer software, brands, core deposit intangibles, financial planner distribution relationships, credit card customer relationships, dealer networks, value in force business and service contracts. Computer software includes purchased and internally generated software. The capitalised cost of internally generated software comprises only costs that are directly attributable to development of the software. Costs incurred in the research phase or in ongoing maintenance of the software are expensed as incurred. Computer software is capitalised at cost and classified as property and equipment where it is integral to the operation of the associated hardware. Brands are recognised on the acquisition of businesses and represent the value attributed to brand names associated with those businesses. Brand intangibles are indefinite life intangible assets as there is no foreseeable limit to the period over which they are expected to generate net cash flows. Core deposits were recognised as part of the merger with St.George and represent the value, or avoided cost, of the deposit base acquired that provides a valuable source of funding. Financial planner distribution relationships, credit card customer relationships and dealer networks were recognised as part of business acquisitions and represent the value attributable to future revenue from these relationships. All intangibles are measured at cost less any accumulated amortisation and any impairment losses. Finite life intangible assets are amortised over their estimated useful lives using the method set out in Note 5. All finite life intangibles are tested for impairment if there is indication that the carrying amount may be greater than the recoverable amount. An assessment is made at each reporting date to determine if any such indicators exist. Brands are not amortised but tested for impairment annually or more frequently when indicators of impairment are identified. An impairment charge is recognised whenever the carrying amount of the intangible exceeds its recoverable amount, which is determined on a value-in-use basis. $m Goodwill Balance as at beginning of the year Additions through business combination Disposals of controlled entities1 Exchange rate and other adjustments Balance as at end of the year Computer software Balance as at beginning of the year Additions Impairment Amortisation Cost Carrying amount Brand Names Exchange rate and other adjustments Balance as at end of the year Accumulated amortisation and impairment 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 combination Disposals of controlled entities1 Impairment Amortisation Exchange rate and other adjustments Balance as at end of the year Cost Accumulated amortisation and impairment Carrying amount Total goodwill and other intangible assets disclosed in Note 41. Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 8,868 6,653 6,653 9,112 6,653 6,653 9,112 - (343) 40 8,809 2,070 630 (131) (920) 5 1,654 3,944 (2,290) 1,654 670 670 670 519 (167) 352 1,494 (1,142) 352 235 - - (107) (51) 12 89 394 (305) 89 11,574 225 - 19 1,897 664 (28) (465) 2 2,070 3,671 (1,601) 2,070 670 670 670 685 (166) 519 1,494 (975) 519 221 56 - (2) (49) 9 235 622 (387) 235 12,606 - - - - - - - 1,856 582 (110) (817) 1 1,512 3,283 (1,771) 1,512 636 636 636 519 (167) 352 1,279 (927) 352 27 160 (133) 27 9,180 - - - - - - - - 1,675 594 (28) (385) 1,856 2,733 (877) 1,856 636 636 636 685 (166) 519 1,279 (760) 519 51 226 (175) 51 9,715 51 76 (24) (25) 1 Current year is attributable to the partial sale of BTIM and the sale of banking operations in three Pacific Island nations. Further information is 216 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 217 Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 8,868 6,653 6,653 225 - 19 - - - - - - 9,112 6,653 6,653 OTHER ASSETS, OTHER LIABILITIES, COMMITMENTS AND Note 26. Goodwill and other intangible assets (continued) $m Goodwill Balance as at beginning of the year Additions through business combination Disposals of controlled entities1 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 and other adjustments Balance as at end of the year Cost Accumulated amortisation and impairment Carrying amount Brand Names Balance as at beginning of the year Balance as at end of the year Other intangible assets include computer software, brands, core deposit intangibles, financial planner distribution relationships, 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 combination Disposals of controlled entities1 Impairment Amortisation Exchange rate and other adjustments Balance as at end of the year Cost Accumulated amortisation and impairment Carrying amount CONTINGENCIES Note 26. Goodwill and other intangible assets Accounting policy Goodwill Goodwill arises on the acquisition of businesses and 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 net identifiable assets acquired. All goodwill is considered to have an indefinite life. Goodwill is allocated to CGUs for the purpose of impairment testing based on management’s analysis of where the synergies resulting from an acquisition are expected to arise. It is tested for impairment annually and whenever there is an indication of impairment, and is carried at cost or deemed cost less accumulated impairment. An impairment charge is recognised whenever the carrying amount of a CGU to which goodwill is allocated exceeds its recoverable amount, which is determined on a value-in-use basis. Gains or losses on the disposal of a business include the carrying amount of goodwill relating to the business sold. The determination of goodwill and any impairment is one of the Group’s critical accounting assumptions and estimates as detailed in Note 1d(iii). Other Intangible Assets Intangible assets are identifiable non-monetary assets without physical substance. Intangible assets are recognised when they are separable or arise from contractual or other legal rights, when their cost can be measured reliably and where it is probable that future economic benefits attributable to the assets will flow from their use. credit card customer relationships, dealer networks, value in force business and service contracts. Computer software includes purchased and internally generated software. The capitalised cost of internally generated software comprises only costs that are directly attributable to development of the software. Costs incurred in the research phase or in ongoing maintenance of the software are expensed as incurred. Computer software is capitalised at cost and classified as property and equipment where it is integral to the operation of the associated hardware. Brands are recognised on the acquisition of businesses and represent the value attributed to brand names associated with those businesses. Brand intangibles are indefinite life intangible assets as there is no foreseeable limit to the period over which they are expected to generate net cash flows. Core deposits were recognised as part of the merger with St.George and represent the value, or avoided cost, of the deposit base acquired that provides a valuable source of funding. Financial planner distribution relationships, credit card customer relationships and dealer networks were recognised as part of business acquisitions and represent the value attributable to future revenue from these relationships. All intangibles are measured at cost less any accumulated amortisation and any impairment losses. Finite life intangible assets are amortised over their estimated useful lives using the method set out in Note 5. All finite life intangibles are tested for impairment if there is indication that the carrying amount may be greater than the recoverable amount. An assessment is made at each reporting date to determine if any such indicators exist. Brands are not amortised but tested for impairment annually or more frequently when indicators of impairment are identified. An impairment charge is recognised whenever the carrying amount of the intangible exceeds its recoverable amount, which is determined on a value-in-use basis. 9,112 - (343) 40 8,809 2,070 630 (131) (920) 5 1,654 3,944 (2,290) 1,654 670 670 670 519 (167) 352 1,494 (1,142) 352 235 - (107) - (51) 12 89 394 (305) 89 1,897 664 (28) (465) 2 2,070 3,671 (1,601) 2,070 670 670 670 685 (166) 519 1,494 (975) 519 221 56 - (2) (49) 9 235 622 (387) 235 1,856 582 (110) (817) 1 1,512 3,283 (1,771) 1,512 636 636 636 519 (167) 352 1,279 (927) 352 51 - - - (24) - 27 160 (133) 27 1,675 594 (28) (385) - 1,856 2,733 (877) 1,856 636 636 636 685 (166) 519 1,279 (760) 519 76 - - - (25) - 51 226 (175) 51 9,715 Total goodwill and other intangible assets 1 Current year is attributable to the partial sale of BTIM and the sale of banking operations in three Pacific Island nations. Further information is 12,606 11,574 9,180 disclosed in Note 41. 216 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 217 3 Note 26. Goodwill and other intangible assets (continued) Goodwill has been allocated to the following Cash Generating Units (CGUs): $m Westpac Retail & Business Banking St.George Banking Group Westpac Institutional Bank BT Financial Group (Australia) Hambro New Zealand Retail Banking BT New Zealand Hastings Bank of Tonga Total goodwill Consolidated Parent Entity 2015 980 4,691 487 2,048 - 471 12 120 - 2014 980 4,689 487 2,103 249 459 12 120 13 2015 980 4,351 487 835 - - - - - 2014 980 4,351 487 835 - - - - - 8,809 9,112 6,653 6,653 Key assumptions used in recoverable amount calculations The recoverable amount of a CGU is determined based on value-in-use calculations which require the use of assumptions. 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% (2014: 11.0%), adjusted to a pre-tax rate of 15.7% for Australia and 15.3% for New Zealand (2014: 15.7% for Australia, 15.3% for New Zealand and 13.8% for the United Kingdom). All future cash flows are based on management approved two year forecasts (2014: two years). For each significant CGU, cash flows beyond the two year forecast period have an assumed growth rate of zero for the purpose of goodwill impairment testing. The strategic business plan assumes certain economic conditions and business performance in determining the forecast, 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. Sensitivity to changes in assumptions There are no reasonably possible changes in assumptions for any significant CGU that would result in an indication of impairment or have a material impact on the Group’s reported results. Note 27. Other assets $m Accrued interest receivable Securities sold not delivered Deferred acquisition costs Trade debtors Prepayments Accrued fees and commissions Other Total other assets Consolidated Parent Entity 2015 1,143 740 119 902 199 229 962 2014 1,258 2,768 129 716 177 210 730 2015 957 725 2 505 149 96 860 2014 1,065 2,765 - 363 146 95 583 4,294 5,988 3,294 5,017 218 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Notes to the financial statements Note 28. Provisions Accounting policy Employee benefits Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefit will be necessary to settle the obligation, which can be reliably estimated. Provisions for wages and salaries, including non-monetary benefits, annual leave, accumulating sick leave and any associated on-costs (i.e. payroll tax) expected to be settled within 12 months of the balance date are recognised 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. Provisions for long service leave expected to be settled within 12 months of the balance date are measured at the amounts expected to be paid when the liabilities are settled. Provisions for long service leave expected to be settled more than 12 months from the balance date 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 high quality corporate bonds with terms that match as closely as possible the estimated timing of future cash flows. The discount rate used was changed in the current year from a blended interest rate of government bonds to the yield on high quality corporate bonds that have terms to maturity approximating the terms of the liabilities. 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. Provision for impairment on credit commitments A provision for impairment is recognised on undrawn contractually committed facilities and guarantees provided if it is probable that the facility will be drawn and result in the recognition of an asset at an amount less than the amount advanced. The amount is calculated using the same methodology as the provision for impairment charges on loans (refer to Note 14). Provision for leasehold premises The provision for leasehold premises covers unavoidable costs in relation to making good property to the same or similar state as when the lease was entered into at the end of the lease period or 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. Provision for restructuring A provision for restructuring (including termination benefits) 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. The majority of restructuring provisions are expected to be settled within 12 months and 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 present value of the estimated cash outflows, where the effect of discounting is material. Financial guarantees Financial guarantee contracts are recognised as financial liabilities and recorded in provisions 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. The measurement of provisions is one of the Group’s critical accounting assumptions and estimates as detailed in Note 1d(v). $m Long service leave Annual leave and other employee benefits Litigation and non-lending losses Leasehold premises Restructuring provisions Total provisions Provision for impairment on credit commitments (refer to Note 14) Consolidated Parent Entity 2015 2014 2015 2014 348 755 28 304 28 26 357 852 18 308 62 21 320 677 16 273 28 18 1,489 1,618 1,332 1,403 328 699 15 278 62 21 219 Note 26. Goodwill and other intangible assets (continued) Goodwill has been allocated to the following Cash Generating Units (CGUs): Key assumptions used in recoverable amount calculations The recoverable amount of a CGU is determined based on value-in-use calculations which require the use of assumptions. 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% (2014: 11.0%), adjusted to a pre-tax rate of 15.7% for Australia and 15.3% for New Zealand (2014: 15.7% for Australia, 15.3% for New Zealand and 13.8% for the United Kingdom). All future cash flows are based on management approved two year forecasts (2014: two years). For each significant CGU, cash flows beyond the two year forecast period have an assumed growth rate of zero for the purpose of goodwill impairment testing. The strategic business plan assumes certain economic conditions and business performance in determining the forecast, 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. Sensitivity to changes in assumptions There are no reasonably possible changes in assumptions for any significant CGU that would result in an indication of impairment or have a material impact on the Group’s reported results. Consolidated Parent Entity 2015 980 4,691 487 2,048 471 12 120 - - 2014 980 4,689 487 2,103 249 459 12 120 13 2015 980 4,351 487 835 - - - - - 2014 980 4,351 487 835 - - - - - 8,809 9,112 6,653 6,653 Consolidated Parent Entity 2015 1,143 740 119 902 199 229 962 2014 1,258 2,768 129 716 177 210 730 2015 957 725 2 505 149 96 860 2014 1,065 2,765 - 363 146 95 583 4,294 5,988 3,294 5,017 $m Westpac Retail & Business Banking St.George Banking Group Westpac Institutional Bank BT Financial Group (Australia) Hambro New Zealand Retail Banking BT New Zealand Hastings Bank of Tonga Total goodwill Note 27. Other assets $m Accrued interest receivable Securities sold not delivered Deferred acquisition costs Trade debtors Prepayments Accrued fees and commissions Other Total other assets Notes to the financial statements Note 28. Provisions Accounting policy Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefit will be necessary to settle the obligation, which can be reliably estimated. Employee benefits Provisions for wages and salaries, including non-monetary benefits, annual leave, accumulating sick leave and any associated on-costs (i.e. payroll tax) expected to be settled within 12 months of the balance date are recognised 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. Provisions for long service leave expected to be settled within 12 months of the balance date are measured at the amounts expected to be paid when the liabilities are settled. Provisions for long service leave expected to be settled more than 12 months from the balance date 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 high quality corporate bonds with terms that match as closely as possible the estimated timing of future cash flows. The discount rate used was changed in the current year from a blended interest rate of government bonds to the yield on high quality corporate bonds that have terms to maturity approximating the terms of the liabilities. 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. Provision for impairment on credit commitments A provision for impairment is recognised on undrawn contractually committed facilities and guarantees provided if it is probable that the facility will be drawn and result in the recognition of an asset at an amount less than the amount advanced. The amount is calculated using the same methodology as the provision for impairment charges on loans (refer to Note 14). Provision for leasehold premises The provision for leasehold premises covers unavoidable costs in relation to making good property to the same or similar state as when the lease was entered into at the end of the lease period or 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. Provision for restructuring A provision for restructuring (including termination benefits) 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. The majority of restructuring provisions are expected to be settled within 12 months and 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 present value of the estimated cash outflows, where the effect of discounting is material. Financial guarantees Financial guarantee contracts are recognised as financial liabilities and recorded in provisions 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. The measurement of provisions is one of the Group’s critical accounting assumptions and estimates as detailed in Note 1d(v). $m Long service leave Annual leave and other employee benefits Litigation and non-lending losses Provision for impairment on credit commitments (refer to Note 14) Leasehold premises Restructuring provisions Total provisions Consolidated Parent Entity 2015 348 755 28 304 28 26 2014 357 852 18 308 62 21 2015 320 677 16 273 28 18 2014 328 699 15 278 62 21 1,489 1,618 1,332 1,403 218 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 219 3 Note 28. Provisions (continued) $m Consolidated Balance as at beginning of the year Disposals of controlled entities1 Additions Utilised Unutilised reversed 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 1 Attributable to the partial sale of BTIM. Note 29. Other liabilities $m 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 38 for more details. Annual Leave and Other Employee Benefits Long Service Leave Litigation and Non- Lending Losses Provision for Impairment on Credit Commitments Leasehold Premises Restructuring Provisions Total 1,618 (85) 1,188 21 - 44 357 (2) 77 (38) (46) - - 348 328 74 (36) (46) - - 852 (83) 1,010 (1,000) (24) - - 755 699 900 (899) (23) - - 320 677 18 - 39 (22) (7) - - 28 15 26 (19) (6) - - 16 308 - - - - 12 (16) 304 278 - - - 11 (16) 273 62 - 18 (52) - - - 28 62 18 (52) - - - 28 (39) (1,151) Due after one year but not later than five years - - - 26 21 36 (77) 12 (16) 1,489 1,403 1,054 (39) (1,045) - - - 18 (75) 11 (16) 1,332 Consolidated Parent Entity Accounting policy 2015 343 284 192 2,626 274 1,007 1,276 2,114 8,116 2014 341 225 315 2,917 299 1,164 1,030 1,900 8,191 2015 - - 175 2,301 - 998 958 2,001 6,433 2014 - - 306 2,602 - 1,057 761 1,683 6,409 Note 30. Operating lease commitments Accounting policy An operating lease is a lease where substantially all the risks and rewards of the leased asset remain with the lessor. Where the Group provides operating leases, the assets are recognised in the balance sheet as property and equipment at cost, and depreciated to their residual value on a straight-line basis over their estimated useful life. Operating lease rentals are recognised in the income statement in non-interest income basis over the lease term. 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 within operating expenses over the lease term. 220 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 221 Note 30. Operating leases commitments (continued) Details of the lease commitments at 30 September are as follows: $m Lease commitments Premises and sites Furniture and equipment Total lease commitments Due within one year Due after five years Total lease commitments Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 3,356 24 3,380 553 1,391 1,436 3,380 3,480 26 3,506 528 1,534 1,444 3,506 2,857 19 2,876 480 1,189 1,207 2,876 3,112 20 3,132 452 1,323 1,357 3,132 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. 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. As at 30 September 2015, the total future minimum lease payments expected to be received by the Group and Parent Entity from non-cancellable sub-leases was $10 million (2014: $14 million) and $10 million (2014: $14 million) respectively. Note 31. Contingent liabilities, contingent assets and credit commitments Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only by uncertain future events that are not wholly within the control of the Group; or are present obligations arising from past events where the transfer of economic resources is uncertain or cannot be reliably measured. Contingent liabilities are not recognised on the balance sheet but are disclosed unless the outflow of economic resources is remote. 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. As a significant proportion of these financial instruments are expected to expire without being drawn upon, the contract or notional amounts do not necessarily reflect future liquidity requirements. sheet instruments. the counterparty. The Group uses the same credit policies in making commitments and conditional obligations as it does for on-balance 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 Note 28. Provisions (continued) Note 30. Operating leases commitments (continued) Details of the lease commitments at 30 September are as follows: $m Lease commitments 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 Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 3,356 24 3,380 553 1,391 1,436 3,380 3,480 26 3,506 528 1,534 1,444 3,506 2,857 19 2,876 480 1,189 1,207 2,876 3,112 20 3,132 452 1,323 1,357 3,132 Balance as at end of the year 1 Attributable to the partial sale of BTIM. 320 677 18 1,332 As at 30 September 2015, the total future minimum lease payments expected to be received by the Group and Parent Entity from non-cancellable sub-leases was $10 million (2014: $14 million) and $10 million (2014: $14 million) respectively. 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. 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. Note 31. Contingent liabilities, contingent assets and credit commitments Accounting policy Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only by uncertain future events that are not wholly within the control of the Group; or are present obligations arising from past events where the transfer of economic resources is uncertain or cannot be reliably measured. Contingent liabilities are not recognised on the balance sheet but are disclosed unless the outflow of economic resources is remote. 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. As a significant proportion of these financial instruments are expected to expire without being drawn upon, the contract or notional amounts do not necessarily reflect future liquidity requirements. 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. $m Consolidated Balance as at beginning of the year Disposals of controlled entities1 Unutilised reversed Increase on unwinding of discount Balance as at end of the year Parent Entity Balance as at beginning of the year Additions Utilised Other Additions Utilised Other Unutilised reversed Increase on unwinding of discount Note 29. Other liabilities $m 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 38 for more details. Annual Leave Litigation Provision for Long and Other and Non- Impairment Service Employee Lending on Credit Leasehold Restructuring Leave Benefits Losses Commitments Premises Provisions Total 357 (2) 77 (38) (46) 348 328 74 (36) (46) - - - - 852 (83) 1,010 (1,000) (24) 755 699 900 (899) (23) - - - - 18 - 39 (22) (7) - - 28 15 26 (19) (6) - - 16 308 62 - - - - - - - 12 (16) 304 278 11 (16) 273 18 (52) 28 62 18 (52) - - - - - - - 28 21 44 (39) - - - - - - - 26 21 36 1,618 (85) 1,188 (1,151) (77) 12 (16) 1,489 1,403 1,054 (75) 11 (16) (39) (1,045) Consolidated Parent Entity 2015 2014 2015 343 284 192 2,626 274 1,007 1,276 2,114 8,116 2014 341 225 315 2,917 299 1,164 1,030 1,900 8,191 - - - 175 2,301 998 958 2,001 6,433 - - - 306 2,602 1,057 761 1,683 6,409 Note 30. Operating lease commitments Accounting policy An operating lease is a lease where substantially all the risks and rewards of the leased asset remain with the lessor. Where the Group provides operating leases, the assets are recognised in the balance sheet as property and equipment at cost, and depreciated to their residual value on a straight-line basis over their estimated useful life. Operating lease rentals are recognised in the income statement in non-interest income basis over the lease term. 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 within operating expenses over the lease term. 220 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 221 3 184 184 763 763 8,948 2,893 9,205 4,549 4,092 2,961 9,431 2,945 4,642 8,699 2,914 4,005 154,375 159,131 174,391 140,909 170,949 191,593 176,152 Credit risk-related instruments Standby letters of credit and financial guarantees1 Trade letters of credit2 Non-financial guarantees3 Commitments to extend credit4 Other commitments5 Total credit risk-related instruments 157,290 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. Note 31. Contingent liabilities, contingent assets and credit commitments (continued) Off-balance sheet credit risk-related financial instruments excluding derivatives at 30 September are as follows: Note 31. Contingent liabilities, contingent assets and credit commitments (continued) Adequate provision has been made for these liabilities in the provision for annual leave and other employee benefits (refer $m Consolidated Parent Entity 2015 2014 2015 2014 Notes to the financial statements to Note 28). Litigation where appropriate. 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 Since 2011, Westpac has been served with three class action proceedings brought on behalf of customers seeking to recover exception fees paid by those customers. 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 pending further developments in the litigation against one of those other banks. In April 2015, the Full Court of the Federal Court unanimously found all of the exception fees charged by that other bank to be lawful. The plaintiffs are currently appealing certain aspects of that judgment to the High Court of Australia. The appeal is scheduled to be heard in February 2016; and 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 Globally, regulators continue to progress various reviews involving the financial services sector. The nature of these reviews can be wide ranging and, for example, currently include investigations into potential manipulation in financial markets. During the year, Westpac has received notices and requests for information from its regulators. The outcomes and total costs estimate any potential liability at this stage. Industry reviews by regulators associated with such reviews are uncertain. Settlement risk The Group is subject to a credit risk exposure in the event that another financial institution fails to settle for its payments clearing activities. We seek to minimise credit risk arising from settlement risk in the payments system by aligning our processing method with the legal certainty of settlement in the relevant clearing system. 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. 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 2015 was $15 million (2014: $16 million). Contingent tax risk business activities. The ATO is reviewing the taxation treatment of certain transactions undertaken by the Group in the course of normal 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. Parent Entity guarantees and undertakings In addition to the above, 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 that those subsidiaries continue to meet their obligations; 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. 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 commitments disclosed above at 30 September 2015, the Group offered $9.3 billion (2014: $8.0 billion) of facilities to customers, which had not yet been accepted. 5 Other commitments include underwriting facilities. Consolidated 2015 $m 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 1,705 2,642 5,081 67,700 164 77,292 Over 1 to 3 Years Over 3 to 5 Years 1,627 303 1,903 33,861 - 37,694 429 - 361 20,622 20 21,432 Over 5 Years 881 - 2,086 52,208 - 55,175 Total 4,642 2,945 9,431 174,391 184 191,593 Contingent assets The credit commitments shown in the table above also constitute contingent assets. These commitments would be classified as loans 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 2015: $16 million (2014: $19 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); $13 million (2014: $13 million) based on actuarial assessment as a self-insurer under the Accident Compensation Act 1985 (Victoria); $4 million (2014: $7 million) based on actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1986 (South Australia); $1 million (2014: $2 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Rehabilitation Act 2003 (Queensland); $1 million (2014: $2 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation Act 1951 (Australian Capital Territory); $1 million (2014: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Injury Management Act 1981 (Western Australia); and $1 million (2014: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1988 (Tasmania). 222 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 223 Note 31. Contingent liabilities, contingent assets and credit commitments (continued) Off-balance sheet credit risk-related financial instruments excluding derivatives at 30 September are as follows: 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 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 guarantees issued. 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 commitments disclosed above at 30 September 2015, the Group offered $9.3 billion (2014: $8.0 billion) of facilities to customers, which had not yet been accepted. $m Credit risk-related instruments Standby letters of credit and financial guarantees1 Trade letters of credit2 Non-financial guarantees3 Commitments to extend credit4 Other commitments5 Total credit risk-related instruments 5 Other commitments include underwriting facilities. Consolidated 2015 $m Standby letters of credit and financial guarantees Trade letters of credit Non-financial guarantees Commitments to extend credit Other commitments Total commercial commitments Contingent assets Consolidated Parent Entity 2015 2014 2015 2014 4,642 2,945 9,431 4,092 2,961 9,205 4,549 2,893 8,948 4,005 2,914 8,699 174,391 159,131 154,375 140,909 184 763 184 763 191,593 176,152 170,949 157,290 Up to 1 Year 1,705 2,642 5,081 67,700 164 77,292 Over 1 Over 3 to 3 Years to 5 Years 1,627 303 1,903 33,861 - 37,694 429 - 361 20,622 20 21,432 Over 5 Years 881 - - 2,086 52,208 55,175 Total 4,642 2,945 9,431 174,391 184 191,593 The credit commitments shown in the table above also constitute contingent assets. These commitments would be classified as loans 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 2015: $16 million (2014: $19 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); $13 million (2014: $13 million) based on actuarial assessment as a self-insurer under the Accident Compensation Act 1985 (Victoria); $4 million (2014: $7 million) based on actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1986 (South Australia); $1 million (2014: $2 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Rehabilitation Act 2003 (Queensland); 1951 (Australian Capital Territory); $1 million (2014: $2 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation Act $1 million (2014: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Injury Management Act 1981 (Western Australia); and $1 million (2014: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1988 (Tasmania). Notes to the financial statements Note 31. Contingent liabilities, contingent assets and credit commitments (continued) Adequate provision has been made for these liabilities in the provision for annual leave and other employee benefits (refer to Note 28). 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. Since 2011, Westpac has been served with three class action proceedings brought on behalf of customers seeking to recover exception fees paid by those customers. 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 pending further developments in the litigation against one of those other banks. In April 2015, the Full Court of the Federal Court unanimously found all of the exception fees charged by that other bank to be lawful. The plaintiffs are currently appealing certain aspects of that judgment to the High Court of Australia. The appeal is scheduled to be heard in February 2016; and 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. Industry reviews by regulators Globally, regulators continue to progress various reviews involving the financial services sector. The nature of these reviews can be wide ranging and, for example, currently include investigations into potential manipulation in financial markets. During the year, Westpac has received notices and requests for information from its regulators. The outcomes and total costs associated with such reviews are uncertain. Settlement risk The Group is subject to a credit risk exposure in the event that another financial institution fails to settle for its payments clearing activities. We seek to minimise credit risk arising from settlement risk in the payments system by aligning our processing method with the legal certainty of settlement in the relevant clearing system. 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. 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 2015 was $15 million (2014: $16 million). 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. Parent Entity guarantees and undertakings In addition to the above, 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 that those subsidiaries continue to meet their obligations; 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. 222 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 223 3 CAPITAL AND DIVIDENDS Note 32. Shareholders’ equity (continued) Note 32. Shareholders’ equity Accounting policy Share capital Ordinary shares are recognised at the amount paid up per ordinary share net of directly attributable issue costs. Where the Parent Entity or other members of the 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. Other equity instruments Convertible debentures issued by the Parent Entity in respect of the 2006 Trust Preferred Securities (2006 TPS) are recognised in the Parent Entity balance sheet at the amount of consideration received net of issue costs. Distributions on them are recognised when entitlements are determined in accordance with the terms of the convertible debentures. 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 2006 TPS are also classified as non-controlling interests in the Group balance sheet. Reserves Foreign currency translation reserve Exchange differences arising on translation of the Group’s foreign operations, any offsetting gains or losses on hedging the net investment and any associated tax effect are reflected in the foreign currency translation reserve. A cumulative credit balance in this reserve would not normally be regarded as being available for payment of dividends until such gains are realised on sale or disposal of the foreign operation. Available-for-sale securities reserve This comprises the changes in the fair value of available-for-sale financial securities, net of tax. These changes are transferred to non-interest income in the income statement 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, net of tax. 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 relates to certain historic internal group restructurings performed at fair value. This reserve is eliminated on consolidation. Other reserves for the Group consist of transactions relating to change in the Parent Entity’s ownership of a subsidiary that do 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. $m Contributed equity Ordinary shares 3,183,907,786 (2014: 3,109,048,309) each fully paid Restricted Share Plan (RSP) treasury shares 4,478,150 (2014: 6,327,116) Other treasury shares 5,423,555 (2014: 5,121,966) Treasury and RSP treasury shares Share capital Other equity instruments Convertible notes issued on 21 June 2006 A$762,737,500 (with net issue costs of A$8 million) Non-controlling interests1 Trust preferred securities 7,627,375 2006 TPS of A$100 each (with net issue costs of A$8 million) Other Total non-controlling interests 1 Total distributions to Non-controlling interests were $52 million (2014: $48 million). Consolidated Parent Entity 2015 2014 2015 2014 29,280 26,943 29,280 26,943 (304) (81) (385) (235) (69) (304) (304) (4) (308) (235) (4) (239) 28,895 26,639 28,972 26,704 - - 755 755 755 62 817 755 126 881 - - - - - - 224 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report Current movement due to changes in other comprehensive income: Net gains/(losses) from changes in fair value Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 79 (104) 129 (148) 46 (73) 21 (25) 1,076 141 1,217 (59) 14 (131) 40 26 15 (175) (1) (16) (17) 5 12 263 (79) (94) 27 129 920 156 1,076 41 (12) (197) 59 162 61 (190) 1 (2) (1) - (152) 47 (21) 6 (41) 983 125 1,108 140 (42) (167) 50 131 33 (299) 41 41 - - 940 222 (69) 9 21 79 846 137 983 254 90 (27) (239) 72 150 14 (332) 41 41 - - 921 Reserves $m Available-for-sale securities reserve Balance as at beginning of the year 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 Balance as at end of the year Cash flow hedging reserve Balance as at beginning of the year 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 net of associated hedges 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 Ordinary shares no par value. Number of shares on issue Consolidated and Parent (number) Opening balance Issue of shares Dividend reinvestment plan1 Dividend reinvestment plan underwrite2 Issued shares for the year Closing balance was $32.08. Current movement due to transactions with employees Current movement due to changes in other comprehensive income: Net gains/(losses) from changes in fair value 162 271 150 Current movement due to exchange differences on translation of foreign operations, (190) (251) (332) (346) Share of other comprehensive income (expense) of associates 1,031 1,176 In accordance with the Corporations Act 2001, Westpac does not have authorised capital and all ordinary shares issued have 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. Details of ordinary shares issued or purchased during the year ended 30 September 2015 are set out in the tables below: 1 The average price for the issuance of shares in relation to the dividend reinvestment plan for the 2014 final dividend and 2015 interim dividend 2 The average price for the issuance of shares in relation to the 2015 interim dividend reinvestment plan underwrite was $32.40. 2015 2014 3,109,048,309 3,109,048,309 43,999,852 30,859,625 74,859,477 3,183,907,786 3,109,048,309 - - - 225 CAPITAL AND DIVIDENDS Note 32. Shareholders’ equity Accounting policy Share capital Ordinary shares are recognised at the amount paid up per ordinary share net of directly attributable issue costs. Where the Parent Entity or other members of the 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. Other equity instruments Convertible debentures issued by the Parent Entity in respect of the 2006 Trust Preferred Securities (2006 TPS) are recognised in the Parent Entity balance sheet at the amount of consideration received net of issue costs. Distributions on them are recognised when entitlements are determined in accordance with the terms of the convertible debentures. 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 2006 TPS are also classified as non-controlling interests in the Group Non-controlling interests balance sheet. Reserves Foreign currency translation reserve or disposal of the foreign operation. Available-for-sale securities reserve Cash flow hedging reserve instruments, net of tax. Share-based payment reserve Other reserves Exchange differences arising on translation of the Group’s foreign operations, any offsetting gains or losses on hedging the net investment and any associated tax effect are reflected in the foreign currency translation reserve. A cumulative credit balance in this reserve would not normally be regarded as being available for payment of dividends until such gains are realised on sale This comprises the changes in the fair value of available-for-sale financial securities, net of tax. These changes are transferred to non-interest income in the income statement when the asset is either derecognised or impaired. This comprises the fair value gains and losses associated with the effective portion of designated cash flow hedging This comprises the fair value of share-based payments recognised as an expense. Other reserves for the Parent Entity relates to certain historic internal group restructurings performed at fair value. This reserve is eliminated on consolidation. Other reserves for the Group consist of transactions relating to change in the Parent Entity’s ownership of a subsidiary that do 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. Ordinary shares 3,183,907,786 (2014: 3,109,048,309) each fully paid 29,280 26,943 29,280 26,943 $m Contributed equity Restricted Share Plan (RSP) treasury shares 4,478,150 (2014: 6,327,116) Other treasury shares 5,423,555 (2014: 5,121,966) Treasury and RSP treasury shares Share capital Other equity instruments (with net issue costs of A$8 million) Non-controlling interests1 Convertible notes issued on 21 June 2006 A$762,737,500 Trust preferred securities 7,627,375 2006 TPS of A$100 each (with net issue costs of A$8 million) Other Total non-controlling interests 1 Total distributions to Non-controlling interests were $52 million (2014: $48 million). Consolidated Parent Entity 2015 2014 2015 2014 (304) (81) (385) (235) (69) (304) (304) (4) (308) (235) (4) (239) 28,895 26,639 28,972 26,704 - - 755 755 755 62 817 755 126 881 - - - - - - Note 32. Shareholders’ equity (continued) Reserves $m Available-for-sale securities reserve Balance as at beginning of the year Current 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 Share-based payment reserve Balance as at beginning of the year Current 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 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 Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 79 (104) 129 (148) 46 (73) 21 (25) 1,076 141 1,217 12 263 (79) (94) 27 129 920 156 1,076 (152) 47 (21) 6 (41) 983 125 1,108 162 271 150 (59) 14 (131) 40 26 41 (12) (197) 59 162 140 (42) (167) 50 131 222 (69) 9 21 79 846 137 983 254 90 (27) (239) 72 150 (190) (251) (332) (346) Current movement due to exchange differences on translation of foreign operations, net of associated hedges 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 Share of other comprehensive income (expense) of associates 15 (175) (1) (16) (17) 5 61 (190) 1 (2) (1) - Total reserves 1,031 1,176 33 (299) 41 - 41 - 940 14 (332) 41 - 41 - 921 Ordinary shares In accordance with the Corporations Act 2001, 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. Details of ordinary shares issued or purchased during the year ended 30 September 2015 are set out in the tables below: 224 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 225 was $32.08. 2 The average price for the issuance of shares in relation to the 2015 interim dividend reinvestment plan underwrite was $32.40. Closing balance 1 The average price for the issuance of shares in relation to the dividend reinvestment plan for the 2014 final dividend and 2015 interim dividend 3,183,907,786 Number of shares on issue Consolidated and Parent (number) Opening balance Issue of shares Dividend reinvestment plan1 Dividend reinvestment plan underwrite2 Issued shares for the year 2015 2014 3,109,048,309 3,109,048,309 43,999,852 30,859,625 74,859,477 - - - 3,109,048,309 3 34.33 197,848 4,976,392 CEOPP - exercise of share rights Total ordinary shares purchased on market2 1 The average exercise price received was $22.02 on the exercise of the WPP options (2014: $20.86) and $27.55 on the exercise of the WRP options Note 32. Shareholders’ equity (continued) Ordinary shares purchased on market Consolidated and Parent Employee share plan Restricted share plan WPP - exercise of options1 WPP - exercise of share rights and performance share rights WRP - exercise of options1 WRP - exercise of share rights 2015 Number 823,869 2,067,941 202,255 436,407 402,814 845,258 2015 Average Price ($) 32.77 32.81 36.54 33.23 36.27 34.74 Notes to the financial statements Note 32. Shareholders’ equity (continued) 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 33. Capital adequacy APRA has responsibility for the prudential supervision of ADIs, life and general insurance companies and superannuation funds in Australia. Westpac Banking Corporation 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 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 capital ratio of at least 4.5%, Tier 1 capital ratio of 6.0% and Total Regulatory Capital ratio 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. Tier 1 Capital is the sum of Common Equity Tier 1 capital and Additional Tier 1 capital. Additional Tier 1 capital comprises high quality components of capital that consists of securities not included in Common Equity Tier 1 capital but which include loss absorbing characteristics. Total Regulatory Capital is the sum of Tier 1 and Tier 2 capital. Tier 2 capital includes other components of capital that, to varying degrees, fall short of the quality of Tier 1 capital, but nonetheless contribute to the overall strength of an ADI and its capacity to absorb losses. 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: contingency plans; the development of a capital management strategy, including preferred capital range, capital buffers and 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. (2014: $27.35). 2 The purchase of existing ordinary shares in respect of employee share plans resulted in a tax benefit of $10.3 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 Other 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 928,162 treasury shares were purchased at an average price of $36.31 (2014: 99,342 shares at an average price of $33.38) and 626,573 treasury shares were sold at an average price of $33.34 (2014: 399,882 shares at an average price of $33.24). 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. 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 2015). 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 may exceed the aggregate amount of the distributions to be made on 2006 TPS. Any 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. 226 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 227 Note 32. Shareholders’ equity (continued) Ordinary shares purchased on market Consolidated and Parent Employee share plan Restricted share plan WPP - exercise of options1 WPP - exercise of share rights and performance share rights WRP - exercise of options1 WRP - exercise of share rights CEOPP - exercise of share rights Total ordinary shares purchased on market2 2015 Number 823,869 2,067,941 202,255 436,407 402,814 845,258 197,848 4,976,392 Average Price ($) 2015 32.77 32.81 36.54 33.23 36.27 34.74 34.33 1 The average exercise price received was $22.02 on the exercise of the WPP options (2014: $20.86) and $27.55 on the exercise of the WRP options 2 The purchase of existing ordinary shares in respect of employee share plans resulted in a tax benefit of $10.3 million being recognised as (2014: $27.35). contributed equity. Ordinary shares allocated to eligible employees under the RSP are classified as treasury shares until unconditional ownership Restricted Share Plan treasury shares of the shares vest at the end of the restriction period. Other treasury shares Other 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 928,162 treasury shares were purchased at an average price of $36.31 (2014: 99,342 shares at an average price of $33.38) and 626,573 treasury shares were sold at an average price of $33.34 (2014: 399,882 shares at an average price of $33.24). 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. 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 2015). 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 may exceed the aggregate amount of the distributions to be made on 2006 TPS. Any 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. Notes to the financial statements Note 32. Shareholders’ equity (continued) 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 33. Capital adequacy APRA has responsibility for the prudential supervision of ADIs, life and general insurance companies and superannuation funds in Australia. Westpac Banking Corporation 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 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 capital ratio of at least 4.5%, Tier 1 capital ratio of 6.0% and Total Regulatory Capital ratio 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. Tier 1 Capital is the sum of Common Equity Tier 1 capital and Additional Tier 1 capital. Additional Tier 1 capital comprises high quality components of capital that consists of securities not included in Common Equity Tier 1 capital but which include loss absorbing characteristics. Total Regulatory Capital is the sum of Tier 1 and Tier 2 capital. Tier 2 capital includes other components of capital that, to varying degrees, fall short of the quality of Tier 1 capital, but nonetheless contribute to the overall strength of an ADI and its capacity to absorb losses. 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. 226 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 227 3 Note 34. Dividends Accounting policy A provision for dividends is recognised when dividends are declared, determined or publicly recommended by the Directors but not distributed as at the balance date. $m Dividends not recognised at year end Since year end the Directors have recommended the payment of the following dividends on ordinary shares: Ordinary shares 94 cents per share (2014: 92 cents per share, 2013: 88 cents per share) all fully franked at 30% Consolidated Parent Entity 2015 2014 2013 2015 2014 2,988 2,856 2,733 2,993 2,860 Special dividend nil cents per share (2014: nil, 2013: 10 cents per share) fully franked at 30% - - 310 - - Total dividends not recognised at year end 2,988 2,856 3,043 2,993 2,860 The Board has determined to satisfy the DRP for the 2015 final dividend by issuing Westpac ordinary shares. The DRP will not include a discount. Australian franking credits Australian franking credits available to the Parent Entity for subsequent financial years after adjusting the franking account balance as at the end of the financial year for franking credits that will arise from the payment of income tax payable on Australian profits for the 2015 year, and franking debits that will arise from the payment of the proposed 2015 final dividends is $793 million (2014: $565 million, 2013: $585 million). New Zealand imputation credits The Parent Entity is able to attach available New Zealand imputation credits to dividends paid. As a result, New Zealand imputation credits of NZ$0.06 (2014: NZ$0.06, 2013: NZ$0.074) per share will be attached to the final 2015 ordinary dividend payable by the Company. New Zealand imputation credits available for subsequent financial years after adjusting the franking account balance as at the end of the financial year for franking credits that will arise from the payment of income tax on New Zealand profits for the year, and franking debits that will arise from the payment of the proposed 2015 final dividend is NZ$522 million (2014: NZ$562 million, 2013: NZ$605 million). GROUP STRUCTURE Note 35. Investments in subsidiaries and associates Accounting policy Subsidiaries Westpac controls and accordingly consolidates an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity, and has the ability to affect those returns through its power over the entity. The Group reassesses whether it controls an entity if facts and circumstances indicate that there have been changes to its power, its rights to variable returns or its ability to use its power to affect the amount of its returns. 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. 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. In the Parent Entity’s financial statements, investments in subsidiaries are initially recorded at cost and are subsequently held at the lower of cost and recoverable amount. Associates Associates are entities in which the Group has significant influence, but not control, over the operating and financial policies. The Group recognises investments in associates using the equity method. They are initially recognised at cost (except where recognised at fair value due to a loss of control of a subsidiary), and increased (or decreased) each year by the Group’s share of post acquisition profit (or loss) of the associate. Dividends received from the associate reduce the carrying amount of the investment in associate. The Group as at 30 September 2015 includes the material controlled entities in the following table. Notes to the financial statements Note 35. Investments in subsidiaries and associates (continued) 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 number of unit trusts where the group is exposed to, or has rights to, variable returns from its involvement with the trusts, and has the ability to affect those returns through its power over the trusts. These investment vehicles are excluded from the table. Name Advance Asset Management Limited Asgard Capital Management Limited Asgard Wealth Solutions Limited BT Financial Group Pty Limited BT Funds Management Limited BT Portfolio Services Limited Capital Finance Australia Limited Hastings Funds Management Limited Hastings Management Pty Limited RAMS Financial Group Pty Limited St.George Finance Limited St.George Life Limited Westpac Equity Holdings Pty Limited Country of Incorporation Name Australia Westpac Financial Services Limited Australia Westpac General Insurance Limited Australia Westpac General Insurance Services Limited Australia Westpac Lenders Mortgage Insurance Limited Australia Westpac Overseas Holdings Pty Limited Australia Westpac Securities Limited Australia Westpac Securitisation Holdings Pty Limited Australia BT Funds Management (NZ) Limited Australia Westpac Financial Services Group-NZ-Limited Australia Westpac Life-NZ-Limited Australia Westpac New Zealand Limited Australia Westpac NZ Operations Limited Australia Westpac Bank-PNG-Limited Country of Incorporation Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Papua New Guinea USA Westpac Financial Services Group Limited Australia Hastings Funds Management (USA) Inc. In addition to the above controlled entities, the following entities have been granted relief from compliance with the balance date synchronisation provisions in the Corporations Act 2001: Sixty Martin Place (Holdings) Pty Limited Australia Westpac New Zealand Group Limited The following material controlled entities are not wholly owned: Westpac Cash PIE Fund Westpac Notice Saver PIE Fund Westpac Term PIE Fund Percentage Owned Hastings Management Pty Limited1 Westpac Bank-PNG-Limited of this change was not material. Non-controlling interests Details of non-controlling interests are set out in Note 32. Significant restrictions 1 The change in ownership did not result in a loss of control. The effect on equity attributable to owners of the Westpac Banking Corporation as a result 2015 95.9% 89.9% 2014 97.2% 89.9% There were no significant restrictions on the ability to transfer cash or other assets, pay dividends or other capital distributions, provide or repay loans and advances between the entities within the Group. There were also no significant restrictions on Westpac’s ability to access or use the assets and settle the liabilities of the Group resulting from protective rights of non- controlling interests. Associates in BTIM. On 23 June 2015, the Group lost control of BT Investment Management Limited (BTIM), a company incorporated in Australia. As at 30 September 2014 the Group held 60.8% of issued shares and consolidated the investment. The Group now holds 31.0% and the investment is equity accounted. The following table summarises the financial information of BTIM as presented in its financial statements and reconciles the summarised financial information to the carrying amount of the Group’s investment 228 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 229 Note 34. Dividends Accounting policy not distributed as at the balance date. A provision for dividends is recognised when dividends are declared, determined or publicly recommended by the Directors but $m Dividends not recognised at year end on ordinary shares: all fully franked at 30% Since year end the Directors have recommended the payment of the following dividends Ordinary shares 94 cents per share (2014: 92 cents per share, 2013: 88 cents per share) Special dividend nil cents per share (2014: nil, 2013: 10 cents per share) fully franked at 30% - - 310 - - Total dividends not recognised at year end 2,988 2,856 3,043 2,993 2,860 2,988 2,856 2,733 2,993 2,860 The Board has determined to satisfy the DRP for the 2015 final dividend by issuing Westpac ordinary shares. The DRP will not Consolidated Parent Entity 2015 2014 2013 2015 2014 include a discount. Australian franking credits Australian franking credits available to the Parent Entity for subsequent financial years after adjusting the franking account balance as at the end of the financial year for franking credits that will arise from the payment of income tax payable on Australian profits for the 2015 year, and franking debits that will arise from the payment of the proposed 2015 final dividends is $793 million (2014: $565 million, 2013: $585 million). New Zealand imputation credits The Parent Entity is able to attach available New Zealand imputation credits to dividends paid. As a result, New Zealand imputation credits of NZ$0.06 (2014: NZ$0.06, 2013: NZ$0.074) per share will be attached to the final 2015 ordinary dividend payable by the Company. New Zealand imputation credits available for subsequent financial years after adjusting the franking account balance as at the end of the financial year for franking credits that will arise from the payment of income tax on New Zealand profits for the year, and franking debits that will arise from the payment of the proposed 2015 final dividend is NZ$522 million (2014: NZ$562 million, 2013: NZ$605 million). GROUP STRUCTURE Note 35. Investments in subsidiaries and associates Accounting policy Subsidiaries Westpac controls and accordingly consolidates an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity, and has the ability to affect those returns through its power over the entity. The Group reassesses whether it controls an entity if facts and circumstances indicate that there have been changes to its power, its rights to variable returns or its ability to use its power to affect the amount of its returns. 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. 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. In the Parent Entity’s financial statements, investments in subsidiaries are initially recorded at cost and are subsequently held at the lower of cost and recoverable amount. Associates Associates are entities in which the Group has significant influence, but not control, over the operating and financial policies. The Group recognises investments in associates using the equity method. They are initially recognised at cost (except where recognised at fair value due to a loss of control of a subsidiary), and increased (or decreased) each year by the Group’s share of post acquisition profit (or loss) of the associate. Dividends received from the associate reduce the carrying amount of the investment in associate. The Group as at 30 September 2015 includes the material controlled entities in the following table. Notes to the financial statements Note 35. Investments in subsidiaries and associates (continued) 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 number of unit trusts where the group is exposed to, or has rights to, variable returns from its involvement with the trusts, and has the ability to affect those returns through its power over the trusts. These investment vehicles are excluded from the table. Name Advance Asset Management Limited Asgard Capital Management Limited Asgard Wealth Solutions Limited BT Financial Group Pty Limited BT Funds Management Limited BT Portfolio Services Limited Capital Finance Australia Limited Hastings Funds Management Limited Hastings Management Pty Limited RAMS Financial Group Pty Limited Sixty Martin Place (Holdings) Pty Limited St.George Finance Limited St.George Life Limited Westpac Equity Holdings Pty Limited Westpac Financial Services Group Limited Country of Incorporation Name Australia Westpac Financial Services Limited Australia Westpac General Insurance Limited Australia Westpac General Insurance Services Limited Australia Westpac Lenders Mortgage Insurance Limited Australia Westpac Overseas Holdings Pty Limited Australia Westpac Securities Limited Australia Westpac Securitisation Holdings Pty Limited Australia BT Funds Management (NZ) Limited Australia Westpac Financial Services Group-NZ-Limited Australia Westpac Life-NZ-Limited Australia Westpac New Zealand Group Limited Australia Westpac New Zealand Limited Australia Westpac NZ Operations Limited Australia Westpac Bank-PNG-Limited Australia Hastings Funds Management (USA) Inc. Country of Incorporation Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Papua New Guinea USA In addition to the above controlled entities, the following entities have been granted relief from compliance with the balance date synchronisation provisions in the Corporations Act 2001: Westpac Cash PIE Fund Westpac Notice Saver PIE Fund Westpac Term PIE Fund The following material controlled entities are not wholly owned: Percentage Owned Hastings Management Pty Limited1 97.2% Westpac Bank-PNG-Limited 89.9% 1 The change in ownership did not result in a loss of control. The effect on equity attributable to owners of the Westpac Banking Corporation as a result 89.9% 95.9% 2014 2015 of this change was not material. Non-controlling interests Details of non-controlling interests are set out in Note 32. Significant restrictions There were no significant restrictions on the ability to transfer cash or other assets, pay dividends or other capital distributions, provide or repay loans and advances between the entities within the Group. There were also no significant restrictions on Westpac’s ability to access or use the assets and settle the liabilities of the Group resulting from protective rights of non- controlling interests. Associates On 23 June 2015, the Group lost control of BT Investment Management Limited (BTIM), a company incorporated in Australia. As at 30 September 2014 the Group held 60.8% of issued shares and consolidated the investment. The Group now holds 31.0% and the investment is equity accounted. The following table summarises the financial information of BTIM as presented in its financial statements and reconciles the summarised financial information to the carrying amount of the Group’s investment in BTIM. 228 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 229 3 Note 35. Investments in subsidiaries and associates (continued) Consolidated $m Summarised results Revenue for the period Net profit for the period Other comprehensive income for the period Total comprehensive income (100%) Group's share of net profit (31%) Equity accounting adjustments Group's share in net profit recognised in the income statement Group's share of other comprehensive income (31%) Tax effect on Group's share of other comprehensive income Share of total comprehensive income recognised by the Group Dividends received from associates during the period Summarised balance sheet Total assets Total liabilities Total net assets (100%) Group's share of total net assets (31%) Other equity accounting adjustments Fair value adjustments (including notional goodwill) on acquisition (net of amortisation) Carrying amount of interest in BTIM Fair value of investment 3 months ended 30 September 2015 Note 36. Structured entities (continued) Group managed funds 120 33 19 52 10 (5) 5 6 (1) 10 - 990 (228) 762 236 (6) 526 756 868 Note 36. Structured entities Accounting policy A structured entity is one which has been designed such that voting or similar rights are not the dominant factor in determining who controls the entity (for example, when voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements). Structured entities are generally created to achieve a specific and well defined objective with restrictions over their ongoing activities. Where structured entities are used to facilitate the purchase of specific assets, they are commonly financed by issuing debt or equity securities that are collateralised by and/or indexed to those underlying assets. The debt and equity securities issued by structured entities may include tranches with varying levels of subordination. The Group engages in various transactions with both consolidated and unconsolidated structured entities that are mainly involved in securitisations, asset-backed and other financing structures and managed investment funds. Structured entities are assessed for consolidation in accordance with the accounting policy set out in Note 35. As voting rights are often not the decisive factor in decisions over the relevant activities, the assessment of control may involve assessing the purpose and design of the entity, and consideration as to whether the Group, or another involved party with power over the relevant activities, is acting as a principal in its own right or as an agent on behalf of others. The Group may have an interest in or sponsor a structured entity but not consolidate it. The details below provide information on both consolidated and unconsolidated structured entities. Consolidated structured entities Securitisation and asset-backed conduit vehicles The Group uses structured entities as conduits for the purposes of providing its customers with access to funding from commercial paper markets and to undertake securitisation of its own pool of financial assets. For further details, including contractual arrangements to provide financial support, refer to Note 25. Covered bonds The Group has two covered bond programs whereby selected pools of residential mortgages it originates are assigned to bankruptcy remote structured entities. For further details, including contractual arrangements to provide financial support, refer to Note 25. Notes to the financial statements The Group has established a number of investment management funds for which it acts as the responsible entity and/or fund manager. The Group consolidates those funds where it is deemed to be acting as a principal rather than agent in its role of investment manager. The principal vs. agent decision requires judgment to be exercised in concluding whether the Group has sufficient exposure to variable returns. The Group does not have any contractual arrangements to provide financial support to these entities. Non-contractual financial support does not anticipate providing such support in the future. Unconsolidated structured entities The Group has not provided any non-contractual financial support during the period to consolidated structured entities and The Group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions, for liquidity management purposes and for specific investment opportunities. Its interests in structured entities comprise any form of contractual or non-contractual involvement which creates variability in returns arising from the performance of the entity for the Group. These include holdings of debt or equity instruments, guarantees, liquidity and other credit support arrangements, lending, loan commitments, derivatives that transfer financial risks from the entity to the Group and investment management agreements. Interests do not include derivatives that are not complex (e.g. interest rate swaps and currency swaps), instruments that are deemed to create rather than absorb variability in the unconsolidated structured entity (e.g. purchase of credit protection under a credit default swap), and lending arrangements to a structured entity where recourse on default is to a wider operating entity rather than secured only on the underlying assets of the entity. The main types of interests held by the Group in unconsolidated structured entities generally comprise the following: trading securities: the Group buys and sells interests in structured entities as part of its normal trading activities and includes mortgage or other asset-backed securities. These securities are typically held as part of a larger trading portfolio and the Group would normally have no other involvement with the structured entity. The Group derives interest income on these securities, and also recognises realised and unrealised gains or losses arising from a change in fair value through trading income; available-for-sale securities: the Group holds mortgage-backed securities as part of its liquidity portfolio which provides a buffer against unforseen funding requirements. These assets are highly rated investment grade paper and are 100% eligible for repurchase agreements with the Reserve Bank of Australia or another central bank. As with its securities held in trading portfolios, the Group would normally have no other involvement with the issuing structured entity. The Group recognises interest income on these securities and net gains or losses arising from the sale of these assets (recorded as part of non-interest income); loans and other credit commitments: the Group provides lending facilities to unconsolidated structured entities in the normal course of its lending business to earn income in the form of interest and lending fees. The structured entities mainly comprise property trusts, and those associated with project and property financing transactions where the primary source of debt service, security and repayment is derived from the underlying assets of the entity. Other structured entities include those unconsolidated securitisation trusts established as part of the Group’s customer securitisation program. All loans and credit commitments are subject to the Group’s credit approval process with collateral specific to the circumstances of each loan; investment management agreements: as part of its normal funds management activities, the Group establishes and manages a number of funds that provide customers with investment opportunities. The Group also manages superannuation funds established for its employees. As the fund manager, the Group is entitled to receive on-going management and performance fee income based on the value and performance of the assets under management; and the Group may also retain units in these funds, which are primarily held by its consolidated life insurance entities. The Group derives fund distribution income from these holdings and recognises fair value movements (through non-interest income) where the instruments are held at fair value through the income statement. The following table shows the Group’s interests in unconsolidated structured entities and its maximum exposure to loss in relation to those interests. The maximum exposure to loss represents the maximum loss that the Group could incur as a result of its involvement in the structured entities regardless of the probability of the loss being incurred. The amount does not take into account the effects of any collateral or hedges undertaken to reduce the risk of loss. In this respect: for debt and equity instruments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value of these interests at reporting date; and for off-balance sheet instruments including liquidity facilities, loan and other credit commitments and guarantees, the maximum exposure to loss is reflected by the notional amounts. 230 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 231 Note 35. Investments in subsidiaries and associates (continued) Consolidated $m Summarised results Revenue for the period Net profit for the period Other comprehensive income for the period Total comprehensive income (100%) Group's share of net profit (31%) Equity accounting adjustments Group's share in net profit recognised in the income statement Group's share of other comprehensive income (31%) Tax effect on Group's share of other comprehensive income Share of total comprehensive income recognised by the Group Dividends received from associates during the period Summarised balance sheet Total assets Total liabilities Total net assets (100%) Group's share of total net assets (31%) Other equity accounting adjustments Carrying amount of interest in BTIM Fair value of investment Note 36. Structured entities Accounting policy Fair value adjustments (including notional goodwill) on acquisition (net of amortisation) 3 months ended 30 September 2015 120 33 19 52 10 (5) 5 6 (1) 10 - 990 (228) 762 236 (6) 526 756 868 A structured entity is one which has been designed such that voting or similar rights are not the dominant factor in determining who controls the entity (for example, when voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements). Structured entities are generally created to achieve a specific and well defined objective with restrictions over their ongoing activities. Where structured entities are used to facilitate the purchase of specific assets, they are commonly financed by issuing debt or equity securities that are collateralised by and/or indexed to those underlying assets. The debt and equity securities issued by structured entities may include tranches with varying levels of subordination. The Group engages in various transactions with both consolidated and unconsolidated structured entities that are mainly involved in securitisations, asset-backed and other financing structures and managed investment funds. Structured entities are assessed for consolidation in accordance with the accounting policy set out in Note 35. As voting rights are often not the decisive factor in decisions over the relevant activities, the assessment of control may involve assessing the purpose and design of the entity, and consideration as to whether the Group, or another involved party with power over the relevant activities, is acting as a principal in its own right or as an agent on behalf of others. The Group may have an interest in or sponsor a structured entity but not consolidate it. The details below provide information on both consolidated and unconsolidated structured entities. Consolidated structured entities Securitisation and asset-backed conduit vehicles The Group uses structured entities as conduits for the purposes of providing its customers with access to funding from commercial paper markets and to undertake securitisation of its own pool of financial assets. For further details, including contractual arrangements to provide financial support, refer to Note 25. Covered bonds to Note 25. The Group has two covered bond programs whereby selected pools of residential mortgages it originates are assigned to bankruptcy remote structured entities. For further details, including contractual arrangements to provide financial support, refer Notes to the financial statements Note 36. Structured entities (continued) Group managed funds The Group has established a number of investment management funds for which it acts as the responsible entity and/or fund manager. The Group consolidates those funds where it is deemed to be acting as a principal rather than agent in its role of investment manager. The principal vs. agent decision requires judgment to be exercised in concluding whether the Group has sufficient exposure to variable returns. The Group does not have any contractual arrangements to provide financial support to these entities. Non-contractual financial support The Group has not provided any non-contractual financial support during the period to consolidated structured entities and does not anticipate providing such support in the future. Unconsolidated structured entities The Group enters into transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions, for liquidity management purposes and for specific investment opportunities. Its interests in structured entities comprise any form of contractual or non-contractual involvement which creates variability in returns arising from the performance of the entity for the Group. These include holdings of debt or equity instruments, guarantees, liquidity and other credit support arrangements, lending, loan commitments, derivatives that transfer financial risks from the entity to the Group and investment management agreements. Interests do not include derivatives that are not complex (e.g. interest rate swaps and currency swaps), instruments that are deemed to create rather than absorb variability in the unconsolidated structured entity (e.g. purchase of credit protection under a credit default swap), and lending arrangements to a structured entity where recourse on default is to a wider operating entity rather than secured only on the underlying assets of the entity. The main types of interests held by the Group in unconsolidated structured entities generally comprise the following: trading securities: the Group buys and sells interests in structured entities as part of its normal trading activities and includes mortgage or other asset-backed securities. These securities are typically held as part of a larger trading portfolio and the Group would normally have no other involvement with the structured entity. The Group derives interest income on these securities, and also recognises realised and unrealised gains or losses arising from a change in fair value through trading income; available-for-sale securities: the Group holds mortgage-backed securities as part of its liquidity portfolio which provides a buffer against unforseen funding requirements. These assets are highly rated investment grade paper and are 100% eligible for repurchase agreements with the Reserve Bank of Australia or another central bank. As with its securities held in trading portfolios, the Group would normally have no other involvement with the issuing structured entity. The Group recognises interest income on these securities and net gains or losses arising from the sale of these assets (recorded as part of non-interest income); loans and other credit commitments: the Group provides lending facilities to unconsolidated structured entities in the normal course of its lending business to earn income in the form of interest and lending fees. The structured entities mainly comprise property trusts, and those associated with project and property financing transactions where the primary source of debt service, security and repayment is derived from the underlying assets of the entity. Other structured entities include those unconsolidated securitisation trusts established as part of the Group’s customer securitisation program. All loans and credit commitments are subject to the Group’s credit approval process with collateral specific to the circumstances of each loan; investment management agreements: as part of its normal funds management activities, the Group establishes and manages a number of funds that provide customers with investment opportunities. The Group also manages superannuation funds established for its employees. As the fund manager, the Group is entitled to receive on-going management and performance fee income based on the value and performance of the assets under management; and the Group may also retain units in these funds, which are primarily held by its consolidated life insurance entities. The Group derives fund distribution income from these holdings and recognises fair value movements (through non-interest income) where the instruments are held at fair value through the income statement. The following table shows the Group’s interests in unconsolidated structured entities and its maximum exposure to loss in relation to those interests. The maximum exposure to loss represents the maximum loss that the Group could incur as a result of its involvement in the structured entities regardless of the probability of the loss being incurred. The amount does not take into account the effects of any collateral or hedges undertaken to reduce the risk of loss. In this respect: for debt and equity instruments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value of these interests at reporting date; and for off-balance sheet instruments including liquidity facilities, loan and other credit commitments and guarantees, the maximum exposure to loss is reflected by the notional amounts. 230 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 231 3 Note 36. Structured entities (continued) Consolidated 2015 $m Assets Receivables due from other financial institutions Trading securities and financial assets designated at fair value Available-for-sale securities Loans Life insurance assets Other assets Total on-balance sheet exposures Total notional amounts of off-balance sheet exposures Investment in Third Party Mortgage and Other Asset-Backed Securities1 Financing to Securitisation Vehicles Group Managed Funds Interests in Other Structured Entities Total - 823 2,902 5,173 - 132 10 8,217 - - - 16,091 - - 16,914 4,256 - 20 - 9 282 54 365 59 - 823 2,973 - 23,203 2,165 - 28,341 7,789 5,895 5,173 39,303 2,579 64 53,837 12,104 Maximum exposure to loss Size of structured entities2 1 Of the Group’s total interests held in third party mortgage and other asset-backed securities, $8,217 million represents the senior tranche of notes 65,941 294,142 148,085 67,148 36,130 57,739 21,170 21,170 8,217 424 and are investment grade rated. 2 Represented either by the total assets or market capitalisation of the entity, or if not available the Group’s total committed exposure (for lending arrangements and external debt and equity holdings), funds under management (for Group managed funds) or the total value of notes on issue (for investments in third-party asset-backed securities). Consolidated 2014 $m Assets Receivables due from other financial institutions Trading securities and financial assets designated at fair value Available-for-sale securities Loans Life insurance assets Other assets Total on-balance sheet exposures Total notional amounts of off-balance sheet exposures Investment in Third Party Mortgage and Other Asset-Backed Securities1 Financing to Securitisation Vehicles Group Managed Funds Interests in Other Structured Entities Total shares and deducted from shareholders’ equity. - 1,417 3,262 4,428 127 - 11 7,828 - - - 13,478 - - 14,895 4,543 - 123 104 57 2,209 39 2,532 78 - 1,417 2,974 - 23,638 1,544 4 28,160 7,377 6,359 4,532 37,300 3,753 54 53,415 11,998 Maximum exposure to loss Size of structured entities2 1 Of the Group’s total interests held in third party mortgage and other asset-backed securities, $7,809 million represents the senior tranche of notes 65,413 362,745 111,350 144,873 87,084 35,537 19,438 19,438 7,828 2,610 issued and $19 million represents the subordinated tranche of notes issued. All notes are investment grade rated. 2 Represented either by the total assets or market capitalisation of the entity, or if not available the Group’s total committed exposure (for lending arrangements and external debt and equity holdings), funds under management (for Group managed funds) or the total value of notes on issue (for investments in third-party asset-backed securities). Non-contractual financial support The Group has not provided any non-contractual financial support during the period to unconsolidated structured entities and does not anticipate providing such support in the future. Sponsored entities The Group would be deemed to sponsor an entity where it is involved in its creation or establishment and promotion (including use of the Group’s name in the name of the entity or on the products issued by the entity), and facilitates its on-going success through the transfer of assets (if any), or the provision of explicit or implicit financial, operational or other support. In addition to the sponsored entities in which the Group has an interest, the Group also sponsors entities in which it has no interest. These primarily comprise the Group’s charitable trusts. No income is earned from these entities nor does the Group transfer any assets to them. 232 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 233 Notes to the financial statements EMPLOYEE BENEFITS Note 37. Share-based payments Accounting policy by employees. Options and share rights increase in equity. The Group enters into various share-based payment arrangements with its employees as compensation for services provided Options and share rights are equity-settled share-based payment arrangements. The fair value of the options and share rights is measured at grant date and is recognised as an expense 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, with a corresponding 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. Restricted share plan (RSP) 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. The RSP is a share-based payment transaction in which the terms of the arrangement provide Westpac with the choice of whether to settle in cash (by buying shares on market) or by issuing new shares to employees. As Westpac does not have a present obligation to settle in cash, the RSP is accounted for as an equity- settled share-based payment transaction. 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 with a corresponding increase in equity. 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 Employee share plan (ESP) Under the Employee Share Plan (ESP), Westpac ordinary shares may be allocated at no cost to employees subject to the Board’s discretion. The value of shares expected to be issued to employees for nil consideration under the 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. Options and/or share rights are granted to the CEO, selected executives and key senior employees under the Executive and Senior Officer equity plans following schemes. (i) Westpac Long Term Incentive Plan The Westpac Long Term Incentive Plan (LTI) provides a mechanism for rewarding the most senior management in Australia and overseas on the basis of superior long-term Group performance. Under the LTI senior managers may be invited to receive an award of performance options or performance share rights. An option or share right under the LTI 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 2014 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). The TSR hurdle is a weighted, composite TSR index (the composite TSR index) for a peer group (the peer group) comprising the ten top financial services companies other than Westpac. Within the peer group, each of the other three major banks has been allocated a 16.67% weighting, with the other seven companies each weighted to 7.14%. 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. 1 Of the Group’s total interests held in third party mortgage and other asset-backed securities, $8,217 million represents the senior tranche of notes 57,739 148,085 294,142 2 Represented either by the total assets or market capitalisation of the entity, or if not available the Group’s total committed exposure (for lending arrangements and external debt and equity holdings), funds under management (for Group managed funds) or the total value of notes on issue (for investments in third-party asset-backed securities). Note 36. Structured entities (continued) Consolidated 2015 $m Assets Receivables due from other financial institutions Trading securities and financial assets designated at fair value Available-for-sale securities Loans Life insurance assets Other assets Total on-balance sheet exposures Total notional amounts of off-balance sheet exposures Maximum exposure to loss Size of structured entities2 and are investment grade rated. Consolidated 2014 $m Assets Receivables due from other financial institutions Trading securities and financial assets designated at fair value Available-for-sale securities Loans Life insurance assets Other assets Total on-balance sheet exposures Total notional amounts of off-balance sheet exposures Maximum exposure to loss Size of structured entities2 Investment in Third Party Mortgage and Other Asset-Backed Securities1 - - - 2,902 5,173 132 10 8,217 8,217 67,148 Investment in Third Party Mortgage and Other Asset-Backed Securities1 - - - 3,262 4,428 127 11 7,828 7,828 111,350 - - - - - - - - 823 16,091 16,914 4,256 21,170 21,170 1,417 13,478 14,895 4,543 19,438 19,438 Financing to Securitisation Group Interests in Other Managed Structured Vehicles Funds Entities Total - 20 - 9 282 54 365 59 424 - - - 2,973 23,203 2,165 28,341 7,789 36,130 823 5,895 5,173 39,303 2,579 64 53,837 12,104 65,941 Financing to Securitisation Group Interests in Other Managed Structured Vehicles Funds Entities Total - 123 104 57 2,209 2,532 39 78 2,610 87,084 - - 4 2,974 23,638 1,544 28,160 7,377 35,537 144,873 1,417 6,359 4,532 37,300 3,753 54 53,415 11,998 65,413 362,745 1 Of the Group’s total interests held in third party mortgage and other asset-backed securities, $7,809 million represents the senior tranche of notes issued and $19 million represents the subordinated tranche of notes issued. All notes are investment grade rated. 2 Represented either by the total assets or market capitalisation of the entity, or if not available the Group’s total committed exposure (for lending arrangements and external debt and equity holdings), funds under management (for Group managed funds) or the total value of notes on issue (for investments in third-party asset-backed securities). Non-contractual financial support does not anticipate providing such support in the future. Sponsored entities The Group has not provided any non-contractual financial support during the period to unconsolidated structured entities and The Group would be deemed to sponsor an entity where it is involved in its creation or establishment and promotion (including use of the Group’s name in the name of the entity or on the products issued by the entity), and facilitates its on-going success through the transfer of assets (if any), or the provision of explicit or implicit financial, operational or other support. In addition to the sponsored entities in which the Group has an interest, the Group also sponsors entities in which it has no interest. These primarily comprise the Group’s charitable trusts. No income is earned from these entities nor does the Group transfer any assets to them. Notes to the financial statements EMPLOYEE BENEFITS Note 37. Share-based payments Accounting policy The Group enters into various share-based payment arrangements with its employees as compensation for services provided by employees. Options and share rights Options and share rights are equity-settled share-based payment arrangements. The fair value of the options and share rights is measured at grant date and is recognised as an expense 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, with a corresponding increase in equity. 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. Restricted share plan (RSP) 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. The RSP is a share-based payment transaction in which the terms of the arrangement provide Westpac with the choice of whether to settle in cash (by buying shares on market) or by issuing new shares to employees. As Westpac does not have a present obligation to settle in cash, the RSP is accounted for as an equity- settled share-based payment transaction. 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 with a corresponding increase in equity. 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. Employee share plan (ESP) Under the Employee Share Plan (ESP), Westpac ordinary shares may be allocated at no cost to employees subject to the Board’s discretion. The value of shares expected to be issued to employees for nil consideration under the 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. Executive and Senior Officer equity plans Options and/or share rights are granted to the CEO, selected executives and key senior employees under the following schemes. (i) Westpac Long Term Incentive Plan The Westpac Long Term Incentive Plan (LTI) provides a mechanism for rewarding the most senior management in Australia and overseas on the basis of superior long-term Group performance. Under the LTI senior managers may be invited to receive an award of performance options or performance share rights. An option or share right under the LTI 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 2014 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). The TSR hurdle is a weighted, composite TSR index (the composite TSR index) for a peer group (the peer group) comprising the ten top financial services companies other than Westpac. Within the peer group, each of the other three major banks has been allocated a 16.67% weighting, with the other seven companies each weighted to 7.14%. 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. 232 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 233 3 Note 37. Share-based payments (continued) The composite TSR index is calculated by multiplying each peer group member’s TSR for the four year performance period by its weighting, and then adding together the results of those ten calculations. Westpac’s TSR for the four year period is then compared to the composite TSR index. For 50% of the TSR tranche to vest, Westpac’s TSR must at least equal the composite TSR index. For 100% to vest, Westpac’s TSR must exceed the composite TSR index by an amount that, when added to the composite TSR index, simulates historic 75th percentile performance within the peer group (ie: an additional 21.55, reflecting an extra 5% compound annual growth in TSR over the four year period). If Westpac’s TSR is between the composite TSR index and the composite TSR index plus 21.55, TSR Performance Securities will vest from 50% up to a possible 100% on a straight line basis between the composite TSR index and the composite TSR plus index 21.55. Any securities remaining unvested after the performance period lapse immediately. 100% of the Cash EPS CAGR hurdled share rights will quality for vesting 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. The Cash EPS CAGR hurdled share rights are subject to a single test at the end of the three year performance period. At the end of the three year EPS performance period, the EPS Share Rights which qualify for vesting will be subject to a one year restriction period, and will vest on the fourth anniversary of the commencement of the performance period. Any securities remaining unvested after the performance period lapse immediately. For awards made from October 2011 to October 2014 all awards 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 and the Cash EPS CAGR hurdle. Both hurdles are tested at the third anniversary of the commencement of the performance period. Any securities remaining unvested after the performance period lapse immediately. 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 their 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. LTI – outstanding performance options and performance share rights The following table sets out details of outstanding performance options and performance share rights under the LTI: Outstanding at 1 October 2014 Granted During the Year Exercised During the Year Lapsed During the Year Outstanding at 30 September 2015 Outstanding and Exercisable at 30 September 2015 Performance options Weighted average exercise price 991,690 $27.58 - - 402,814 $27.55 - - Performance share rights 3,318,750 2,557,968 845,258 398,983 Total 2014 Performance options Weighted average exercise price Performance share rights 1,699,136 $27.49 - - 707,446 $27.35 - - 3,176,241 1,004,234 666,890 194,835 588,876 $27.61 4,632,477 991,690 $27.58 3,318,750 588,876 $27.61 2,584 991,690 $27.58 802 The weighted average remaining contractual life of outstanding performance options at 30 September 2015 was 2.5 years (2014: 3.5 years). The weighted average remaining contractual life of outstanding performance share rights at 30 September 2015 was 8.3 years (2014: 7.8 years). The weighted average fair value at grant date of LTI performance share rights issued during the year was $20.52 (2014: $19.82). (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 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. Notes to the financial statements Note 37. Share-based payments (continued) 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. WPP – outstanding performance options and performance share rights No performance options or performance share rights were granted under the WPP during the year. The following table sets out details of outstanding performance options and performance share rights granted under the WPP in previous years: Outstanding at Granted Exercised 1 October During During Lapsed During Outstanding at and Exercisable at Outstanding 2014 the Year the Year the Year 30 September 2015 30 September 2015 Performance options Weighted average exercise price Performance share rights Two-year initial testing period Three-year initial testing period Total performance share rights Total 2014 Performance options Weighted average exercise price Performance share rights 336,468 $22.57 63,501 105,880 169,381 1,752,693 $21.15 308,665 - - - - - - - 191,560 $21.91 46,685 77,510 124,195 - 1,416,225 $20.82 139,284 - - - - - - - - 144,908 $23.44 16,816 28,370 45,186 336,468 $22.57 169,381 144,908 $23.44 16,816 28,370 45,186 336,468 $22.57 169,381 The weighted average remaining contractual life of outstanding performance options at 30 September 2015 was 1.0 years (2014: 1.7 years). The weighted average remaining contractual life of outstanding performance share rights at 30 September 2015 was 0.3 years (2014: 1.0 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. The following table sets out details of outstanding unhurdled options and unhurdled share rights granted under the WPP: Options Total 2015 Share rights One-year vesting period Two-year vesting period Three-year vesting period Total 2015 Total 2014 Options Share rights Exercise Outstanding at During During Outstanding at Granted Exercised Lapsed During Outstanding and Excercisable at Price 1 October 2014 the Year the Year the Year 30 September 2015 30 September 2015 $23.98 nil nil nil 24,063 24,063 71,985 161,675 370,283 603,943 - - 10,695 10,695 94,239 96,531 20,693 211,463 58,111 78,695 175,406 312,212 $23.98 nil 42,779 - 18,716 756,111 120,841 261,886 11,123 - - - - 897 1,201 2,098 13,368 13,368 108,113 178,614 214,369 501,096 24,063 603,943 13,368 13,368 17,984 29,073 61,654 108,711 24,063 150,243 The weighted average fair value at grant date of unhurdled share rights issued during the year was $30.10 per right (2014: $29.89 per right). The weighted average remaining contractual life of outstanding unhurdled options and unhurdled share rights at 30 September 2015 was 7.5 years (2014: 7.1 years). (iii) Chief Executive Officer Performance Plan No performance share rights were allocated to Gail Kelly during the year. The former CEO continues to hold performance share rights received under the Chief Executive Officer Performance Plan. As at 30 September 2015 there were 390,534 performance share rights outstanding (2014: 713,264). As at 30 September 2015, no outstanding share rights issued to the former CEO were exercisable. The remaining weighted average contractual life of outstanding performance share rights was 7.3 years (2014: 7.6 years). 234 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 235 Note 37. Share-based payments (continued) The composite TSR index is calculated by multiplying each peer group member’s TSR for the four year performance period by its weighting, and then adding together the results of those ten calculations. Westpac’s TSR for the four year period is then compared to the composite TSR index. For 50% of the TSR tranche to vest, Westpac’s TSR must at least equal the composite TSR index. For 100% to vest, Westpac’s TSR must exceed the composite TSR index by an amount that, when added to the composite TSR index, simulates historic 75th percentile performance within the peer group (ie: an additional 21.55, reflecting an extra 5% compound annual growth in TSR over the four year period). If Westpac’s TSR is between the composite TSR index and the composite TSR index plus 21.55, TSR Performance Securities will vest from 50% up to a possible 100% on a straight line basis between the composite TSR index and the composite TSR plus index 21.55. Any securities remaining unvested after the performance period lapse immediately. 100% of the Cash EPS CAGR hurdled share rights will quality for vesting 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. The Cash EPS CAGR hurdled share rights are subject to a single test at the end of the three year performance period. At the end of the three year EPS performance period, the EPS Share Rights which qualify for vesting will be subject to a one year restriction period, and will vest on the fourth anniversary of the commencement of the performance period. Any securities remaining unvested after the performance period lapse immediately. For awards made from October 2011 to October 2014 all awards 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 and the Cash EPS CAGR hurdle. Both hurdles are tested at the third anniversary of the commencement of the performance period. Any securities remaining unvested after the performance period lapse immediately. 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 their 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. LTI – outstanding performance options and performance share rights The following table sets out details of outstanding performance options and performance share rights under the LTI: Performance share rights 3,318,750 2,557,968 845,258 398,983 Performance options Weighted average exercise price Total 2014 Performance options Weighted average exercise price Performance share rights Outstanding at During During During Outstanding at and Exercisable at 1 October 2014 the Year the Year the Year 30 September 2015 30 September 2015 991,690 $27.58 1,699,136 $27.49 - - - - 402,814 $27.55 707,446 $27.35 - - - - 3,176,241 1,004,234 666,890 194,835 588,876 $27.61 4,632,477 991,690 $27.58 3,318,750 588,876 $27.61 2,584 991,690 $27.58 802 The weighted average remaining contractual life of outstanding performance options at 30 September 2015 was 2.5 years (2014: 3.5 years). The weighted average remaining contractual life of outstanding performance share rights at 30 September 2015 was 8.3 years (2014: 7.8 years). The weighted average fair value at grant date of LTI performance share rights issued during the year was $20.52 (2014: $19.82). (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 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. Notes to the financial statements Note 37. Share-based payments (continued) 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. WPP – outstanding performance options and performance share rights No performance options or performance share rights were granted under the WPP during the year. The following table sets out details of outstanding performance options and performance share rights granted under the WPP in previous years: Outstanding at 1 October 2014 Granted During the Year Exercised During the Year Lapsed During the Year Outstanding at 30 September 2015 Outstanding and Exercisable at 30 September 2015 Performance options Weighted average exercise price Performance share rights Two-year initial testing period Three-year initial testing period Total performance share rights Total 2014 Performance options Weighted average exercise price Performance share rights 336,468 $22.57 63,501 105,880 169,381 1,752,693 $21.15 308,665 - - - - - 191,560 $21.91 46,685 77,510 124,195 - 1,416,225 - - $20.82 139,284 - - - - - - - - 144,908 $23.44 16,816 28,370 45,186 336,468 $22.57 169,381 144,908 $23.44 16,816 28,370 45,186 336,468 $22.57 169,381 The weighted average remaining contractual life of outstanding performance options at 30 September 2015 was 1.0 years (2014: 1.7 years). The weighted average remaining contractual life of outstanding performance share rights at 30 September 2015 was 0.3 years (2014: 1.0 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. Granted Exercised Lapsed Outstanding The following table sets out details of outstanding unhurdled options and unhurdled share rights granted under the WPP: Exercise Price Outstanding at 1 October 2014 Granted During the Year Exercised During the Year Lapsed During the Year Outstanding at 30 September 2015 Outstanding and Excercisable at 30 September 2015 Options Total 2015 Share rights One-year vesting period Two-year vesting period Three-year vesting period Total 2015 Total 2014 Options Share rights $23.98 nil nil nil 24,063 24,063 71,985 161,675 370,283 603,943 - - 10,695 10,695 94,239 96,531 20,693 211,463 58,111 78,695 175,406 312,212 - - - 897 1,201 2,098 $23.98 nil 42,779 - 18,716 - 756,111 120,841 261,886 11,123 13,368 13,368 108,113 178,614 214,369 501,096 24,063 603,943 13,368 13,368 17,984 29,073 61,654 108,711 24,063 150,243 The weighted average fair value at grant date of unhurdled share rights issued during the year was $30.10 per right (2014: $29.89 per right). The weighted average remaining contractual life of outstanding unhurdled options and unhurdled share rights at 30 September 2015 was 7.5 years (2014: 7.1 years). (iii) Chief Executive Officer Performance Plan No performance share rights were allocated to Gail Kelly during the year. The former CEO continues to hold performance share rights received under the Chief Executive Officer Performance Plan. As at 30 September 2015 there were 390,534 performance share rights outstanding (2014: 713,264). As at 30 September 2015, no outstanding share rights issued to the former CEO were exercisable. The remaining weighted average contractual life of outstanding performance share rights was 7.3 years (2014: 7.6 years). 234 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 235 3 Note 37. Share-based payments (continued) (iv) CEO Long Term Incentive Plan (Brian Hartzer) No performance share rights under the CEO Long Term Incentive Plan were allocated to Brian Hartzer during the year. (v) 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. 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 share rights under the WRP and WPP include a risk free interest rate of 2.5% on share rights with three-year vesting period, a risk free rate of 2.9% for share rights with four-year vesting period, a dividend yield on Westpac ordinary shares of 5.5% and a volatility in the Westpac share price of 19.1%; 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. (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. The fair value of the shares allocated is the share price on the date of the grant. 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 Granted prior to October 2009 Granted subsequent to October 2009 Total 2015 Total 2014 Outstanding at 1 October 2014 Granted During the Year Released 1,487,642 6,190,519 7,678,161 9,438,791 - 272,115 2,143,382 3,877,414 2,143,382 2,070,312 4,149,529 3,647,664 Forfeited During the Year - 104,596 104,596 183,278 Outstanding at 30 September 2015 1,215,527 4,351,891 5,567,418 7,678,161 In addition to the above restricted shares were also allocated to the former CEO Gail Kelly under the Chief Executive Officer RSP (CEO RSP). There were 85,667 shares outstanding as at 30 September 2015 (112,491 as at 30 September 2014). (vii) 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, subject to Board discretion. The maximum annual award value under the ESP is $1,000 per employee per year. The number of shares employees receive (if any) is calculated by dividing the award value by the prevailing market price of Westpac’s ordinary shares when the shares are granted. The shares must normally remain within the ESP for three years from granting unless the employee leaves Westpac. Participants are entitled to full dividend and 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 2014 ESP award was satisfied through the purchase of shares on market. The following table provides details of shares issued under the ESP during the years ended 30 September: Notes to the financial statements Note 37. Share-based payments (continued) Allocation Number of of Shares Allocated Date Participants per Participant 2015 2014 4 December 2014 5 December 2013 27,657 26,877 30 30 of Shares Allocated 829,710 806,310 Market Price per Share $32.68 $32.93 Total Fair Value $27,114,923 $26,551,788 Average Number Total Number The liability accrued in respect of the ESP at 30 September 2015 is $28 million (2014: $28 million) and is provided for as other employee benefits. (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. of allotment. (ix) General information on share-based plans 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 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. 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. Note 38. Superannuation commitments Accounting policy 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 pre-tax future cash flows using interest rates of high quality long dated corporate bonds. The superannuation expense relating to the defined benefit superannuation plan comprises of service cost (including current and past service cost and gains and losses on curtailments and settlements) and net interest expense (income). Remeasurements (including actuarial gains and losses and the difference between the interest income and the return on plan assets) are recognised in other comprehensive income. The determination of the defined benefit obligation/surplus is one of the Group’s critical accounting assumptions and estimates as described in Note 1d(iv). Westpac had the following defined benefit plans at 30 September 2015: Name of Plan Westpac Group Plan (WGP)1 Type Form of Benefit Defined benefit and Indexed pension and 30 June 2012 accumulation lump sum Date of Last Actuarial Assessment of the Funding Status Westpac New Zealand Superannuation Defined benefit and Indexed pension and 30 June 2014 Scheme (WNZS) accumulation lump sum Westpac Banking Corporation UK Staff Superannuation Scheme (UKSS)1 Defined benefit Indexed pension and 5 April 2012 lump sum Westpac UK Medical Benefits Scheme Defined benefit Medical benefits Not applicable 1 The triennial valuation reports of the funding status of the WGP and UKSS have not been completed for 2015. All of the defined benefit sections of the schemes are closed to new members. 236 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 237 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. 2015 2014 4 December 2014 5 December 2013 27,657 26,877 30 30 829,710 806,310 $32.68 $32.93 Note 37. Share-based payments (continued) Allocation Date Number of Participants Average Number of Shares Allocated per Participant Total Number of Shares Allocated Market Price per Share Total Fair Value $27,114,923 $26,551,788 Notes to the financial statements The liability accrued in respect of the ESP at 30 September 2015 is $28 million (2014: $28 million) and is provided for as other employee benefits. (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. (ix) General information on share-based plans 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. 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. Note 38. Superannuation commitments Accounting policy 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 pre-tax future cash flows using interest rates of high quality long dated corporate bonds. The superannuation expense relating to the defined benefit superannuation plan comprises of service cost (including current and past service cost and gains and losses on curtailments and settlements) and net interest expense (income). Remeasurements (including actuarial gains and losses and the difference between the interest income and the return on plan assets) are recognised in other comprehensive income. The determination of the defined benefit obligation/surplus is one of the Group’s critical accounting assumptions and estimates as described in Note 1d(iv). Westpac had the following defined benefit plans at 30 September 2015: Note 37. Share-based payments (continued) (iv) CEO Long Term Incentive Plan (Brian Hartzer) (v) Fair value assumptions No performance share rights under the CEO Long Term Incentive Plan were allocated to Brian Hartzer during the year. 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. 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 share rights under the WRP and WPP include a risk free interest rate of 2.5% on share rights with three-year vesting period, a risk free rate of 2.9% for share rights with four-year vesting period, a dividend yield on Westpac ordinary shares of 5.5% and a volatility in the Westpac share price of 19.1%; 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. (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. The fair value of the shares allocated is the share price on the date of the grant. 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 Granted prior to October 2009 Granted subsequent to October 2009 Total 2015 Total 2014 Outstanding at 1 October 2014 Granted During the Year Released the Year 30 September 2015 Outstanding at Forfeited During - 104,596 104,596 183,278 1,215,527 4,351,891 5,567,418 7,678,161 1,487,642 6,190,519 7,678,161 9,438,791 - 272,115 2,143,382 3,877,414 2,143,382 2,070,312 4,149,529 3,647,664 In addition to the above restricted shares were also allocated to the former CEO Gail Kelly under the Chief Executive Officer RSP (CEO RSP). There were 85,667 shares outstanding as at 30 September 2015 (112,491 as at 30 September 2014). (vii) 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, subject to Board discretion. The maximum annual award value under the ESP is $1,000 per employee per year. The number of shares employees receive (if any) is calculated by dividing the award value by the prevailing market price of Westpac’s ordinary shares when the shares are granted. The shares must normally remain within the ESP for three years from granting unless the employee leaves Westpac. Participants are entitled to full dividend and 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 2014 ESP award was satisfied through the purchase of shares on market. The following table provides details of shares issued under the ESP during the years ended 30 September: Name of Plan Westpac Group Plan (WGP)1 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)1 Defined benefit Indexed pension and lump sum Date of Last Actuarial Assessment of the Funding Status 30 June 2012 30 June 2014 5 April 2012 Not applicable Medical benefits Westpac UK Medical Benefits Scheme 1 The triennial valuation reports of the funding status of the WGP and UKSS have not been completed for 2015. Defined benefit 236 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 237 All of the defined benefit sections of the schemes are closed to new members. 3 Note 38. Superannuation commitments (continued) WGP is the Group’s principal defined benefit plan. The WGP is an employer sub-plan within BT Super for Life, which is itself a plan within retirement Wrap. The Trustee of WGP is BT Funds Management Limited. Members of the WGP are either Accumulation Members or Defined Benefit Members depending on the nature of their entitlements. Defined Benefit Members include pensioners. The defined benefit liabilities are primarily influenced by member contribution rates, salary growth and length of membership in case of active members, and price inflation in the case of pensioners. The WGP is managed and administered in accordance with the terms of its trust deed and relevant legislation in Australia. The level of supporting assets depends on a range of factors including the level of contribution and level of investment return. In respect of defined benefit liabilities, the Group bears the investment risk. An investment strategy which is framed to take a long-term view will often adopt relatively high levels of equity investment in order to: secure attractive long term investment returns; and provide an opportunity for capital appreciation and dividend growth, which gives some protection against inflation. There are a number of risks that the WGP exposes the Group to. The more significant risks are: investment risk – the risk that investment returns will be lower than assumed and the Group will need to increase contributions to offset the shortfall; mortality risk – the risk that members of the plan will live longer than assumed, increasing the number of pension payments The change in the fair value of plan assets is as follows: and thereby requiring additional contributions by the Group; and legislative risk – the risk that legislative changes could be made which increase the cost of providing defined benefits. The plan’s investment strategy is determined after taking into consideration the market risk inherent in the investments and its consequential impact on potential future contributions. A benchmark is established for the allocation of the defined benefit plan assets between asset classes. Contributions Funding recommendations are made based on actuarial triennial funding valuations using the Attained Age Method, which impacts the timing of contribution requirements and assumes that the plans will not be discontinued. The assumptions used in the funding valuation are based on the guidance in Australian Accounting Standard AAS 25 Financial Reporting by Superannuation Plans. These assumptions differ from the AASB 119 Employee Benefits assumptions used for measurement, recognition and disclosure of the defined benefit superannuation balances in the financial statements due to different valuation dates, discount rates and assumptions linked to expected returns on assets. The following table 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: $m 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 2014 (WNZS). 2 Calculated as at 30 June 2012 (WGP) and 5 April 2012 (UKSS). Consolidated 20151 1,795 1,764 31 20141 1,760 1,722 38 Parent Entity 20152 1,725 1,694 31 20142 1,692 1,654 38 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. Defined benefit superannuation balances recognised The balances disclosed in the remainder of this note are based on the measurement, recognition and disclosure requirements of AASB 119. The amount recognised in the income statement is as follows: $m Current service cost Net interest cost on net benefit liability Total defined benefit expense Consolidated Parent Entity 2015 49 12 61 2014 46 11 57 2013 53 17 70 2015 49 11 60 2014 46 10 56 Note 38. Superannuation commitments (continued) Change in benefit obligation The change in the present value of the defined benefit obligation is as follows: Notes to the financial statements Benefit obligation at beginning of the year $m Service cost Interest cost Member contributions Actuarial losses/(gains) from changes in demographic assumptions Actuarial losses/(gains) from changes in financial assumptions Actuarial losses/(gains) from changes in experience Benefits paid Exchange rate and other items Benefit obligation at end of the year Change in plan assets Fair value of plan assets at beginning of the year Return on plan assets excluding interest income $m Interest income Employer contributions Member contributions Benefits paid Exchange rate and other items Fair value of plan assets at end of the year Net surplus/(deficit) Defined benefit surplus (Note 27) Defined benefit deficit (Note 29) Consolidated Parent Entity 2015 2,408 49 92 14 3 (62) (15) (155) 46 2,380 2015 2,093 80 79 51 14 44 2,206 (174) 18 (192) (174) 2014 2,216 46 97 14 - 148 27 (158) 18 2,408 2014 1,971 86 115 49 14 16 2,093 (315) - (315) (315) 2015 2,332 48 89 14 4 (68) (14) (149) 41 2,297 2015 2,026 78 79 50 14 42 2,140 (157) 18 (175) (157) 2014 2,134 46 94 14 - 145 28 (149) 20 2,332 2014 1,901 84 112 48 14 16 2,026 (306) - (306) (306) (155) (158) (149) (149) Consolidated Parent Entity The asset ceiling has no impact on the net defined benefit surplus/(deficit). The average duration of the defined benefit obligation is approximately 12 years. Assumptions used in the AASB 119 accounting calculations Consolidated and Parent Entity Discount rate Expected increase in average salary of plan members Rate of increase for pensions 2015 2014 Australian Overseas Australian Overseas Funds 4.2% 3.3% 2.3% Funds 3.3-3.4% 3.0-4.7% 2.2-3.1% Funds Funds 4.0% 3.4% 2.4% 4.2–4.6% 3.0–5.1% 2.3–3.6% During the year, the discount rate applied to the WGP was changed from a blended interest rate of government bonds that have terms to maturity approximating the terms of the superannuation liabilities, to the yield on high quality corporate bonds. The impact of the change was a reduction in the defined benefit obligation of $267 million, which was recorded through other comprehensive income. The sensitivity of the Group’s defined benefit obligation to the significant assumptions as at 30 September 2015 is shown in the following table. In the table a negative percentage change represents a reduction in the defined benefit obligation. 238 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 239 Note 38. Superannuation commitments (continued) WGP is the Group’s principal defined benefit plan. The WGP is an employer sub-plan within BT Super for Life, which is itself a plan within retirement Wrap. The Trustee of WGP is BT Funds Management Limited. Members of the WGP are either Accumulation Members or Defined Benefit Members depending on the nature of their entitlements. Defined Benefit Members include pensioners. The defined benefit liabilities are primarily influenced by member contribution rates, salary growth and length of membership in case of active members, and price inflation in the case of pensioners. The WGP is managed and administered in accordance with the terms of its trust deed and relevant legislation in Australia. The level of supporting assets depends on a range of factors including the level of contribution and level of investment return. In respect of defined benefit liabilities, the Group bears the investment risk. An investment strategy which is framed to take a long-term view will often adopt relatively high levels of equity investment in order to: secure attractive long term investment returns; and provide an opportunity for capital appreciation and dividend growth, which gives some protection against inflation. There are a number of risks that the WGP exposes the Group to. The more significant risks are: investment risk – the risk that investment returns will be lower than assumed and the Group will need to increase contributions to offset the shortfall; mortality risk – the risk that members of the plan will live longer than assumed, increasing the number of pension payments and thereby requiring additional contributions by the Group; and legislative risk – the risk that legislative changes could be made which increase the cost of providing defined benefits. The plan’s investment strategy is determined after taking into consideration the market risk inherent in the investments and its consequential impact on potential future contributions. A benchmark is established for the allocation of the defined benefit plan assets between asset classes. Contributions Funding recommendations are made based on actuarial triennial funding valuations using the Attained Age Method, which impacts the timing of contribution requirements and assumes that the plans will not be discontinued. The assumptions used in the funding valuation are based on the guidance in Australian Accounting Standard AAS 25 Financial Reporting by Superannuation Plans. These assumptions differ from the AASB 119 Employee Benefits assumptions used for measurement, recognition and disclosure of the defined benefit superannuation balances in the financial statements due to different valuation dates, discount rates and assumptions linked to expected returns on assets. The following table 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: $m Market value of assets Present value of accrued benefits Surplus/(deficit) Consolidated Parent Entity 20151 1,795 1,764 31 20141 1,760 1,722 38 20152 1,725 1,694 31 20142 1,692 1,654 38 1 Calculated as at 30 June 2012 (WGP), 5 April 2012 (UKSS) and 30 June 2014 (WNZS). 2 Calculated as at 30 June 2012 (WGP) and 5 April 2012 (UKSS). 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. Defined benefit superannuation balances recognised The balances disclosed in the remainder of this note are based on the measurement, recognition and disclosure requirements of AASB 119. The amount recognised in the income statement is as follows: $m Current service cost Net interest cost on net benefit liability Total defined benefit expense Consolidated Parent Entity 2015 2014 2013 2015 2014 49 12 61 46 11 57 53 17 70 49 11 60 46 10 56 Note 38. Superannuation commitments (continued) Change in benefit obligation The change in the present value of the defined benefit obligation is as follows: Notes to the financial statements $m Benefit obligation at beginning of the year Service cost Interest cost Member contributions Actuarial losses/(gains) from changes in demographic assumptions Actuarial losses/(gains) from changes in financial assumptions Actuarial losses/(gains) from changes in experience Benefits paid Exchange rate and other items Benefit obligation at end of the year Change in plan assets The change in the fair value of plan assets is as follows: $m Fair value of plan assets at beginning of the year Interest income Return on plan assets excluding interest income Employer contributions Member contributions Benefits paid Exchange rate and other items Fair value of plan assets at end of the year Net surplus/(deficit) Defined benefit surplus (Note 27) Defined benefit deficit (Note 29) Consolidated Parent Entity 2015 2,408 49 92 14 3 (62) (15) (155) 46 2,380 2014 2,216 46 97 14 - 148 27 (158) 18 2,408 2015 2,332 48 89 14 4 (68) (14) (149) 41 2,297 Consolidated Parent Entity 2015 2,093 80 79 51 14 (155) 44 2,206 (174) 18 (192) (174) 2014 1,971 86 115 49 14 (158) 16 2,093 (315) - (315) (315) 2015 2,026 78 79 50 14 (149) 42 2,140 (157) 18 (175) (157) 2014 2,134 46 94 14 - 145 28 (149) 20 2,332 2014 1,901 84 112 48 14 (149) 16 2,026 (306) - (306) (306) The asset ceiling has no impact on the net defined benefit surplus/(deficit). The average duration of the defined benefit obligation is approximately 12 years. Assumptions used in the AASB 119 accounting calculations Consolidated and Parent Entity Discount rate Expected increase in average salary of plan members Rate of increase for pensions 2015 Australian Funds 4.2% 3.3% 2.3% Overseas Funds 3.3-3.4% 3.0-4.7% 2.2-3.1% 2014 Australian Funds 4.0% 3.4% 2.4% Overseas Funds 4.2–4.6% 3.0–5.1% 2.3–3.6% During the year, the discount rate applied to the WGP was changed from a blended interest rate of government bonds that have terms to maturity approximating the terms of the superannuation liabilities, to the yield on high quality corporate bonds. The impact of the change was a reduction in the defined benefit obligation of $267 million, which was recorded through other comprehensive income. The sensitivity of the Group’s defined benefit obligation to the significant assumptions as at 30 September 2015 is shown in the following table. In the table a negative percentage change represents a reduction in the defined benefit obligation. 238 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 239 3 Note 38. Superannuation commitments (continued) Discount rate Expected increase in average salary of plan members Rate of increase for pensions Change in assumption 0.5% (0.5%) Change in obligation (6.0%) 1.1% 5.6% 6.8% (1.0%) (5.0%) In addition to the financial assumptions presented above, the mortality assumptions for our principal fund the WGP for 2015 are that a 60-year-old male pensioner is assumed to have a remaining life expectancy of 30.9 years and a 60-year-old female pensioner is assumed to have a remaining life expectancy of 34.0 years. These assumptions are age related and allowances are made for future mortality improvements. Asset allocation Asset allocation at 30 September was: Consolidated and Parent Entity Cash Equity instruments Debt instruments Property Other assets1 2015 2014 Australian Funds Overseas Funds Australian Funds Overseas Funds 2% 51% 20% 9% 18% 5% 28% 49% 10% 8% 2% 51% 21% 8% 18% 4% 47% 39% 8% 2% 100% 100% 100% 100% 1 Other assets comprise alternative asset classes including investments in infrastructure funds and private equity funds. These assets are predominantly unquoted. Equity and debt instruments are predominantly quoted assets while property assets are predominantly unquoted. Investments held in Westpac and related entities $m Value of plan assets invested in debt and equity securities of Westpac Value of plan assets invested in related parties of Westpac Total Consolidated Parent Entity 2015 3 - 3 2014 11 1 12 2015 - - - 2014 - 1 1 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 2015. 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: OTHER Note 39. Auditor’s remuneration $'000 Audit and audit related fees Audit fees PwC Australian firm Related practices of PwC Total audit fees paid to PwC Audit related fees PwC Australian firm Related practices of PwC Tax fees PwC Australian firm Related practices of PwC Total tax fees paid to PwC All other fees PwC Australian firm Related practices of PwC Total all other fees paid to PwC Total remuneration paid to PwC Total audit related fees paid to PwC Total audit and audit related fees paid to PwC Notes to the financial statements Consolidated Parent Entity 2015 2014 2015 2014 17,426 3,018 20,444 933 127 1,060 21,504 441 3 444 1,574 - 1,574 23,522 16,459 3,446 19,905 917 310 1,227 21,132 600 11 611 2,407 81 2,488 24,231 16,867 439 17,306 18,032 726 - 726 22 - 22 888 - 888 18,942 15,910 444 16,354 877 126 1,003 17,357 600 - 600 2,226 37 2,263 20,220 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 year end audit 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 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 assurance on the development of an upgraded Wealth platform, data controls review and global analysis of regulatory expectations on Trade Surveillance Technology. 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 $9.9 million in total (2014: $7.9 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. Note 40. Related party disclosures Accounting policy Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operating decisions, or one other party controls both. The definition includes subsidiaries, associates, joint ventures and superannuation plans as well as key management personnel, and persons connected with key management personnel. Ultimate parent Westpac Banking Corporation is the ultimate parent company of the Group. 240 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 241 In addition to the financial assumptions presented above, the mortality assumptions for our principal fund the WGP for 2015 are that a 60-year-old male pensioner is assumed to have a remaining life expectancy of 30.9 years and a 60-year-old female pensioner is assumed to have a remaining life expectancy of 34.0 years. These assumptions are age related and allowances Discount rate Expected increase in average salary of plan members Rate of increase for pensions are made for future mortality improvements. Asset allocation Asset allocation at 30 September was: Consolidated and Parent Entity Cash Equity instruments Debt instruments Property Other assets1 Change in assumption 0.5% (0.5%) Change in obligation (6.0%) 1.1% 5.6% 6.8% (1.0%) (5.0%) 2015 2014 Australian Overseas Australian Overseas Funds Funds Funds Funds 2% 51% 20% 9% 18% 5% 28% 49% 10% 8% 2% 51% 21% 8% 18% 4% 47% 39% 8% 2% 100% 100% 100% 100% 1 Other assets comprise alternative asset classes including investments in infrastructure funds and private equity funds. These assets are predominantly unquoted. Equity and debt instruments are predominantly quoted assets while property assets are predominantly unquoted. 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 $m Total Consolidated Parent Entity 2015 2014 2015 2014 3 - 3 11 1 12 - - - - 1 1 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 2015. Note 38. Superannuation commitments (continued) OTHER Notes to the financial statements Note 39. 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: $'000 Audit and audit related fees Audit fees PwC Australian firm Related practices of PwC Total audit fees paid to PwC Audit related fees PwC Australian firm Related practices of PwC Total audit related fees paid to PwC Total audit and audit related fees paid to PwC Tax fees PwC Australian firm Related practices of PwC Total tax fees paid to PwC All other fees PwC Australian firm Related practices of PwC Total all other fees paid to PwC Total remuneration paid to PwC Consolidated Parent Entity 2015 2014 2015 2014 17,426 3,018 20,444 933 127 1,060 21,504 441 3 444 1,574 - 1,574 23,522 16,459 3,446 19,905 917 310 1,227 21,132 600 11 611 2,407 81 2,488 24,231 16,867 439 17,306 726 - 726 18,032 22 - 22 888 - 888 18,942 15,910 444 16,354 877 126 1,003 17,357 600 - 600 2,226 37 2,263 20,220 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 year end audit 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 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 assurance on the development of an upgraded Wealth platform, data controls review and global analysis of regulatory expectations on Trade Surveillance Technology. 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 $9.9 million in total (2014: $7.9 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. Note 40. Related party disclosures Accounting policy Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operating decisions, or one other party controls both. The definition includes subsidiaries, associates, joint ventures and superannuation plans as well as key management personnel, and persons connected with key management personnel. Ultimate parent Westpac Banking Corporation is the ultimate parent company of the Group. 240 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 241 3 Note 40. Related party disclosures (continued) Subsidiaries Details of the Group’s subsidiaries are presented in Note 35. Transactions between the Parent Entity and its subsidiaries during 2015 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 subsidiaries, in the form of dividends or interest, are set out in Note 3 and Note 4. 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 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. Balances due from and due to subsidiaries are disclosed in the balance sheet on page 118. The details of the agreements entered into between the Parent Entity and its wholly owned Australian subsidiaries as a result of the tax consolidation legislation are set out in Note 7. The details of Parent Entity guarantees and undertakings extended by the Parent Entity to entities in the Group are set out in Note 31. Associates Transactions between the Parent Entity and its associates during 2015 have included the provision of a wide range of banking and other financial facilities and funds management activities on commercial terms and conditions. Details of the Group’s associates are presented in Note 35. Superannuation plans Details of Group’s defined benefit plans and the contributions made to these plans are detailed in Note 38. Contributions made by the Group to defined contribution plans were $300 million (2014: $279 million). Key management personnel Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of Westpac, directly or indirectly, including any director (whether executive or otherwise). Compensation of directors and other key management personnel Total compensation of all key management personnel, including Non-executive Directors, the CEO and other key management personnel: $ Consolidated 2015 2014 Parent Entity 2015 2014 Short-term Benefits Post Employment Benefits Termination Benefits Share-based Payments Total 28,494,588 32,629,048 27,276,010 31,449,374 553,853 433,456 2,584,709 - 16,901,143 19,010,878 48,534,293 52,073,382 484,294 429,955 2,584,709 - 16,601,039 18,632,631 46,946,052 50,511,960 Detailed remuneration disclosures of Non-executive Directors, the CEO and other key management personnel are included in the Remuneration report in Section 1. Financial transactions with Directors and other key management personnel disclosures All financial instrument transactions that have occurred during the financial year between the Directors or other key management personnel and the Group are in the ordinary course of business on normal terms and conditions (including interest and collateral) as apply for comparable transactions with other persons including employees and did not involve more than the normal risk of repayment or present other unfavourable features. These transactions consisted principally of normal personal banking and financial investment services. Details of loans to Directors and other key management personnel (including their related parties) of the Group are: Notes to the financial statements Note 40. Related party disclosures (continued) Options and share rights holdings1 For compliance with SEC disclosure requirements, the following table sets out certain details of the performance options, performance share rights and unhurdled share rights held at 30 September 2015 by the CEO and other key management personnel (including their related parties): Managing Director & Chief Executive Officer Latest Date for Exercise Number of Number Exercise Price Share Rights of Options of Options Alexandra Holcomb Ranges from 1 October 2020 to 1 October 2024 38,847 $30.10 - - - - - - - - - - - - - - n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Brian Hartzer Group Executives John Arthur Philip Coffey Brad Cooper David Curran George Frazis Peter King David Lindberg David McLean Christine Parker Gail Kelly Rob Whitfield Jason Yetton Ranges from 1 October 2022 to 1 October 2024 Ranges from 1 October 2020 to 1 October 2024 Ranges from 1 October 2020 to 1 October 2024 Ranges from 1 October 2020 to 1 October 2024 1 October 2014 Ranges from 1 October 2020 to 1 October 2024 17 December 2017 Ranges from 1 October 2020 to 1 October 2024 Ranges from 1 October 2023 to 1 October 2024 Ranges from 1 October 2020 to 1 September 2025 Ranges from 1 October 2020 to 1 October 2024 Ranges from 1 October 2020 to 1 October 2023 Ranges from 1 October 2020 to 1 July 2025 Ranges from 1 October 2020 to 1 October 2024 246,155 251,163 282,039 251,914 63,519 173,597 120,060 - 122,900 64,984 54,541 144,970 390,534 187,525 214,022 Former Managing Director & Chief Executive Officer Former Group Executives 1 Lyn Cobley has not yet been awarded any options or share rights. Note 41. Notes to the cash flow statements Accounting policy Further details of the equity holdings of key management personnel are included in the Remuneration report in Section 1. Cash and balances with central banks include 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. Cash and cash equivalents $m Cash on hand Balances with central banks Total cash and cash equivalents Consolidated Parent Entity 2015 9,282 5,488 14,770 2014 19,582 6,178 25,760 2013 9,862 1,837 2015 8,575 4,797 11,699 13,372 2014 18,952 4,448 23,400 $ 2015 2014 242 Balance at Start of Year 18,442,040 14,837,949 Interest Paid and Payable for the Year 867,564 884,631 Interest Not Charged Balance at End of Year - - 15,445,388 18,442,040 Number in Group at End of Year 10 10 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 243 Note 40. Related party disclosures (continued) Subsidiaries Details of the Group’s subsidiaries are presented in Note 35. Transactions between the Parent Entity and its subsidiaries during 2015 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 subsidiaries, in the form of dividends or interest, are set out in Note 3 and Note 4. 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 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. Balances due from and due to subsidiaries are disclosed in the balance sheet on page 118. The details of the agreements entered into between the Parent Entity and its wholly owned Australian subsidiaries as a result of the tax consolidation legislation are set out in Note 7. The details of Parent Entity guarantees and undertakings extended by the Parent Entity to entities in the Group are set out in Note 31. Associates associates are presented in Note 35. Superannuation plans Transactions between the Parent Entity and its associates during 2015 have included the provision of a wide range of banking and other financial facilities and funds management activities on commercial terms and conditions. Details of the Group’s Details of Group’s defined benefit plans and the contributions made to these plans are detailed in Note 38. Contributions made by the Group to defined contribution plans were $300 million (2014: $279 million). Key management personnel Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of Westpac, directly or indirectly, including any director (whether executive or otherwise). Compensation of directors and other key management personnel Total compensation of all key management personnel, including Non-executive Directors, the CEO and other key management personnel: Short-term Post Employment Termination Share-based Benefits Benefits Benefits Payments Total 28,494,588 32,629,048 27,276,010 31,449,374 553,853 433,456 484,294 429,955 2,584,709 16,901,143 48,534,293 19,010,878 52,073,382 2,584,709 16,601,039 46,946,052 18,632,631 50,511,960 - - Detailed remuneration disclosures of Non-executive Directors, the CEO and other key management personnel are included in the Remuneration report in Section 1. Financial transactions with Directors and other key management personnel disclosures All financial instrument transactions that have occurred during the financial year between the Directors or other key management personnel and the Group are in the ordinary course of business on normal terms and conditions (including interest and collateral) as apply for comparable transactions with other persons including employees and did not involve more than the normal risk of repayment or present other unfavourable features. These transactions consisted principally of normal personal banking and financial investment services. Details of loans to Directors and other key management personnel (including their related parties) of the Group are: Interest Paid Number in Balance at and Payable Interest Not Balance at Group at End Start of Year for the Year Charged End of Year of Year 18,442,040 14,837,949 867,564 884,631 - - 15,445,388 18,442,040 10 10 Consolidated Parent Entity $ 2015 2014 2015 2014 $ 2015 2014 242 Notes to the financial statements Note 40. Related party disclosures (continued) Options and share rights holdings1 For compliance with SEC disclosure requirements, the following table sets out certain details of the performance options, performance share rights and unhurdled share rights held at 30 September 2015 by the CEO and other key management personnel (including their related parties): Managing Director & Chief Executive Officer Brian Hartzer Ranges from 1 October 2022 to 1 October 2024 Latest Date for Exercise Group Executives John Arthur Philip Coffey Brad Cooper David Curran George Frazis Ranges from 1 October 2020 to 1 October 2024 Ranges from 1 October 2020 to 1 October 2024 Ranges from 1 October 2020 to 1 October 2024 1 October 2014 Ranges from 1 October 2020 to 1 October 2024 Alexandra Holcomb Ranges from 1 October 2020 to 1 October 2024 Peter King David Lindberg David McLean Christine Parker 17 December 2017 Ranges from 1 October 2020 to 1 October 2024 Ranges from 1 October 2023 to 1 October 2024 Ranges from 1 October 2020 to 1 September 2025 Ranges from 1 October 2020 to 1 October 2024 Former Managing Director & Chief Executive Officer Gail Kelly Ranges from 1 October 2020 to 1 October 2023 Former Group Executives Rob Whitfield Ranges from 1 October 2020 to 1 July 2025 Jason Yetton 1 Lyn Cobley has not yet been awarded any options or share rights. Ranges from 1 October 2020 to 1 October 2024 Number of Share Rights Number of Options Exercise Price of Options 246,155 251,163 282,039 251,914 63,519 173,597 120,060 - 122,900 64,984 54,541 144,970 390,534 187,525 214,022 - - - - - - - n/a n/a n/a n/a n/a n/a n/a 38,847 $30.10 - - - - - - - n/a n/a n/a n/a n/a n/a n/a Further details of the equity holdings of key management personnel are included in the Remuneration report in Section 1. Note 41. Notes to the cash flow statements Accounting policy Cash and balances with central banks include 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. Cash and cash equivalents $m Cash on hand Balances with central banks Total cash and cash equivalents Consolidated Parent Entity 2015 9,282 5,488 14,770 2014 19,582 6,178 25,760 2013 9,862 1,837 2015 8,575 4,797 11,699 13,372 2014 18,952 4,448 23,400 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 243 3 Note 41. Notes to the cash flow statements (continued) Reconciliation of net cash (used in)/provided by operating activities to net profit for the year is set out below: Note 41. Notes to the cash flow statements (continued) Details of assets and liabilities of controlled entities and business acquired Notes to the financial statements Consolidated Parent Entity 2015 2014 2013 2015 2014 8,068 7,625 6,825 6,747 7,234 Fair value of assets and liabilities of controlled entities and businesses acquired Consolidated 2015 2014 2013 $m Reconciliation of net cash (used in)/provided by operating activities to net profit for the year1 Net profit for the year Adjustments: Depreciation, amortisation and impairment Impairment charges Other non-cash items Net (increase)/decrease in derivative financial instruments 11,730 (3,329) Net (decrease)/increase in current and deferred tax Net (increase)/decrease in life insurance assets and liabilities (Increase)/decrease in other operating assets: Accrued interest receivable Trading securities and financial assets designated at fair value Loans Receivables due from other financial institutions Regulatory deposits with central banks overseas Other assets (Decrease)/increase in other operating liabilities: Accrued interest payable Provisions Other financial liabilities at fair value through income statement Deposits and other borrowings Payables due to other financial institutions Other liabilities (78) (191) 115 21,538 (39,569) (1,000) 497 95 (291) (1,137) (10,027) 8,526 (1,194) 95 1,671 884 (273) 1,020 756 900 904 923 2,212 9,126 147 (154) 84 (319) 332 (156) (64) 1,724 (35,734) (15,667) 3,932 126 121 (53) (1,174) 9,079 34,229 9,419 (382) (511) 489 425 (376) (1,309) 266 22,155 363 (3) 1,476 704 970 11,497 (906) - 108 22,668 (38,270) (2,108) 511 729 (301) (1,045) (9,945) 6,548 (1,544) 158 867 634 (359) (3,028) (221) - (47) 1,083 (33,659) 3,966 145 667 (55) (962) 8,992 32,244 9,280 (423) Net cash (used in)/provided by operating activities 26,358 1 The presentation has been revised to better reflect the nature of our business. Certain cash flows have been reclassified between operating activities (2,003) 25,580 28,371 (541) and comparatives have been revised for consistency. Changes did not have an impact on the reported net increase/decrease in cash and cash equivalents. Business acquired Acquisition of selected business of Lloyds On 31 December 2013 the Group acquired 100% of the share capital in Capital Finance Australia Ltd (CFAL) and BOS International Australia Ltd (BOSI). The business acquired adds scale and geographic diversity to the Group’s motor vehicle finance business, expands the Group’s capability and reach within equipment finance and creates opportunities to deepen customer relationships with the opportunity to cross sell other Westpac Group products. The provisional goodwill recognised of $225 million primarily reflects the value of synergies expected to arise as a result of the acquisition. 244 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 245 $m Assets acquired: Cash and balances with central banks Derivative financial instruments Loans Identifiable intangible assets Property and equipment Other assets Total assets acquired Liabilities acquired: Provisions Deferred tax liabilities Debt issues Borrowings Other liabilities Total liabilities acquired Goodwill Total Cash consideration Purchase of shares Fair value of identifiable net assets acquired Replacement of intergroup funding Total cash consideration Cash consideration Less cash and cash equivalents acquired Cash paid (net of cash acquired) - - - - - - - - - - - - - - - - - - - - - - 149 30 7,895 8,216 56 80 6 11 25 488 6,368 24 6,916 1,300 225 1,525 1,525 6,368 7,893 7,893 (149) 7,744 - - - - - - - - - - - - - - - - - - - - - - Businesses disposed Partial sale of BT Investment Management Limited (BTIM) Westpac sold 28% of its interest in BT Investment Management (BTIM) via both an Institutional Offer (19%) and Retail Offer (9%) priced at $8.20 per share. Following settlement of the institutional offer transaction on 23 June 2015 the Group lost control of BTIM. Following the completion of the retail offer on 16 July 2015, Westpac now holds 31% of BTIM. A gain on sale of $1,036 million was recognised in non-interest income. This gain consists of both the realised gain on the 28% of BTIM sold ($492 million) and also an unrealised gain on the 31% retained ($544 million). The remaining 31% investment in BTIM was initially recognised at $745 million being its fair value on the transaction date. Subsequently, the investment will be accounted for using the equity method. Refer Note 35 for further details regarding the The total consideration received, net of transaction costs, was $654 million, satisfied in cash. retained ownership interest. Pacific Islands Westpac sold its banking operations in Samoa, Cook Islands, and Tonga to the Bank of South Pacific Limited (BSP). Settlement occurred on 10 July 2015, with a loss of $3 million recognised in operating expenses. The total consideration received, net of transaction costs, was $85 million, satisfied in cash. The Warehouse Financial Services Limited interest income. Westpac sold The Warehouse Financial Services Limited on 30 September 2015, with a gain of $3 million recognised in non- The total consideration received, net of transaction costs, was $4 million, satisfied in cash. Net (increase)/decrease in derivative financial instruments 11,730 (3,329) $m Reconciliation of net cash (used in)/provided by operating activities to net profit for the year1 Net profit for the year Adjustments: Impairment charges Other non-cash items Depreciation, amortisation and impairment Net (decrease)/increase in current and deferred tax Net (increase)/decrease in life insurance assets and liabilities (Increase)/decrease in other operating assets: Accrued interest receivable Trading securities and financial assets designated at fair value Loans Other assets Receivables due from other financial institutions Regulatory deposits with central banks overseas (Decrease)/increase in other operating liabilities: Accrued interest payable Provisions Other financial liabilities at fair value through income statement Deposits and other borrowings Payables due to other financial institutions Other liabilities cash equivalents. Business acquired Acquisition of selected business of Lloyds Net cash (used in)/provided by operating activities 25,580 (2,003) 1 The presentation has been revised to better reflect the nature of our business. Certain cash flows have been reclassified between operating activities and comparatives have been revised for consistency. Changes did not have an impact on the reported net increase/decrease in cash and On 31 December 2013 the Group acquired 100% of the share capital in Capital Finance Australia Ltd (CFAL) and BOS International Australia Ltd (BOSI). The business acquired adds scale and geographic diversity to the Group’s motor vehicle finance business, expands the Group’s capability and reach within equipment finance and creates opportunities to deepen customer relationships with the opportunity to cross sell other Westpac Group products. The provisional goodwill recognised of $225 million primarily reflects the value of synergies expected to arise as a result of the acquisition. Note 41. Notes to the cash flow statements (continued) Reconciliation of net cash (used in)/provided by operating activities to net profit for the year is set out below: Note 41. Notes to the cash flow statements (continued) Details of assets and liabilities of controlled entities and business acquired Consolidated Parent Entity 2015 2014 2013 2015 2014 $m Consolidated 2015 2014 2013 Fair value of assets and liabilities of controlled entities and businesses acquired Assets acquired: Notes to the financial statements 8,068 7,625 6,825 6,747 7,234 (35,734) (15,667) 1,671 884 (273) (78) (191) 115 21,538 (39,569) (1,000) 497 95 (291) (1,137) (10,027) 8,526 (1,194) 95 (541) 1,020 756 900 332 (156) (64) 1,724 3,932 126 121 (53) (1,174) 9,079 34,229 9,419 (382) 28,371 904 923 2,212 9,126 147 (154) 84 (319) (511) 489 425 (376) (1,309) 266 22,155 363 (3) 1,476 704 970 11,497 (906) - 108 22,668 (38,270) (2,108) 511 729 (301) (1,045) (9,945) 6,548 (1,544) 158 867 634 (359) (3,028) (221) - (47) 1,083 (33,659) 3,966 145 667 (55) (962) 8,992 32,244 9,280 (423) 26,358 Cash and balances with central banks Derivative financial instruments Loans Identifiable intangible assets Property and equipment Other assets Total assets acquired Liabilities acquired: Provisions Deferred tax liabilities Debt issues Borrowings Other liabilities Total liabilities acquired Fair value of identifiable net assets acquired Goodwill Total Cash consideration Purchase of shares Replacement of intergroup funding Total cash consideration Cash consideration Less cash and cash equivalents acquired Cash paid (net of cash acquired) - - - - - - - - - - - - - - - - - - - - - - 149 30 7,895 56 80 6 8,216 11 25 488 6,368 24 6,916 1,300 225 1,525 1,525 6,368 7,893 7,893 (149) 7,744 - - - - - - - - - - - - - - - - - - - - - - Businesses disposed Partial sale of BT Investment Management Limited (BTIM) Westpac sold 28% of its interest in BT Investment Management (BTIM) via both an Institutional Offer (19%) and Retail Offer (9%) priced at $8.20 per share. Following settlement of the institutional offer transaction on 23 June 2015 the Group lost control of BTIM. Following the completion of the retail offer on 16 July 2015, Westpac now holds 31% of BTIM. A gain on sale of $1,036 million was recognised in non-interest income. This gain consists of both the realised gain on the 28% of BTIM sold ($492 million) and also an unrealised gain on the 31% retained ($544 million). The remaining 31% investment in BTIM was initially recognised at $745 million being its fair value on the transaction date. Subsequently, the investment will be accounted for using the equity method. Refer Note 35 for further details regarding the retained ownership interest. The total consideration received, net of transaction costs, was $654 million, satisfied in cash. Pacific Islands Westpac sold its banking operations in Samoa, Cook Islands, and Tonga to the Bank of South Pacific Limited (BSP). Settlement occurred on 10 July 2015, with a loss of $3 million recognised in operating expenses. The total consideration received, net of transaction costs, was $85 million, satisfied in cash. The Warehouse Financial Services Limited Westpac sold The Warehouse Financial Services Limited on 30 September 2015, with a gain of $3 million recognised in non- interest income. The total consideration received, net of transaction costs, was $4 million, satisfied in cash. 244 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 245 3 Notes to the financial statements Note 42. Subsequent events (continued) Shares for the institutional component of the entitlement offer were issued on 29 October 2015 raising approximately $1.6 billion. Shares for the retail component for the remaining approximately $1.9 billion are scheduled to be issued on 20 No other matters have arisen since the year ended 30 September 2015 which is not otherwise dealt with in this report, that has significantly affected or may significantly affect the operations of the Group, the results of its operations or the state of affairs of the Group in subsequent periods. Note 41. Notes to the cash flow statements (continued) Details of the assets and liabilities over which control was lost $m Assets: Cash and balances with central banks Trading securities and financial assets designated at fair value Available-for-sale securities Loans Regulatory deposits with central banks overseas Property and equipment Deferred tax assets Goodwill and other intangible assets Other assets Total assets Liabilities: Deposits and other borrowings Debt issues Current tax liabilities Provisions Deferred tax liabilities Other liabilities Total liabilities Net assets Non-controlling interests Total equity attributable to owners of Westpac Banking Corporation Cash proceeds (net of transaction costs) Fair value of retained interest Total consideration Reserves recycled to income statement Gain/(loss) on disposal Reconciliation of cash proceeds from disposal Cash proceeds received Less: Cash deconsolidated Cash consideration received (net of transaction costs and cash held) Non-cash financing activities Consolidated Parent Entity 2015 2014 2013 2015 2014 November 2015. 95 75 90 226 8 11 36 450 84 1,075 267 20 14 98 23 55 477 598 (84) 514 743 745 1,488 62 1,036 743 (95) 648 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6 - - 72 - 2 3 - 22 105 90 - - - - - 90 15 - 15 22 - 22 (2) 5 22 (6) 16 Consolidated Parent Entity - - - - - - - - - - - - - - - - - - - - - - - - - - - - $m Shares issued under the dividend reinvestment plan1 Issuance of loan capital2 Shares issued on redemption of Westpac SPS - 1 The dividend reinvestment plan for 2014: interim dividend and 2013 final and special dividends ($1,022 million) (2013: interim dividend $543 million) 1,412 1,412 2013 2014 2015 2015 2014 173 332 531 529 529 - - - - - - - 2 was satisfied in full through purchase of existing shares and transfer of shares to participating shareholders. In 2014, amounts relate to holders of Westpac SPS II who participated in the reinvestment offer to subscribe for Westpac Capital Notes 2. In 2013, amounts relate to holders of Westpac SPS who participated in the reinvestment offer to subscribe for Westpac Subordinates Notes II. Restricted cash The amount of cash and cash equivalents not available for use at 30 September 2015 was $132 million (2014: $35 million) for the Group. Note 42. Subsequent events On 14 October 2015, Westpac announced a fully underwritten, pro rata accelerated renounceable entitlement offer to raise approximately $3.5 billion of share capital. The capital raised responds to changes in mortgage risk weights that will increase the amount of capital required to be held against mortgages by more than 50%, with increased regulatory requirement to be applied from 1 July 2016. New shares issued under the entitlement offer will not be entitled to the 2015 final dividend of 94 cents per share. 246 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 247 Notes to the financial statements Note 42. Subsequent events (continued) Shares for the institutional component of the entitlement offer were issued on 29 October 2015 raising approximately $1.6 billion. Shares for the retail component for the remaining approximately $1.9 billion are scheduled to be issued on 20 November 2015. No other matters have arisen since the year ended 30 September 2015 which is not otherwise dealt with in this report, that has significantly affected or may significantly affect the operations of the Group, the results of its operations or the state of affairs of the Group in subsequent periods. Note 41. Notes to the cash flow statements (continued) Details of the assets and liabilities over which control was lost $m Assets: Cash and balances with central banks Trading securities and financial assets designated at fair value Available-for-sale securities Loans Regulatory deposits with central banks overseas Property and equipment Deferred tax assets Goodwill and other intangible assets Other assets Total assets Liabilities: Deposits and other borrowings Debt issues Current tax liabilities Provisions Deferred tax liabilities Other liabilities Total liabilities Net assets Non-controlling interests Total equity attributable to owners of Westpac Banking Corporation Cash proceeds (net of transaction costs) Fair value of retained interest Total consideration Reserves recycled to income statement Gain/(loss) on disposal Reconciliation of cash proceeds from disposal Cash proceeds received Less: Cash deconsolidated Cash consideration received (net of transaction costs and cash held) Non-cash financing activities 226 95 75 90 8 11 36 450 84 1,075 267 20 14 98 23 55 477 598 (84) 514 743 745 1,488 62 1,036 743 (95) 648 2015 1,412 - - Consolidated Parent Entity 2015 2014 2013 2015 2014 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 72 6 - - - 2 3 - 22 105 90 - - - - - - - 90 15 15 22 22 (2) 5 22 (6) 16 - - - - - - - - - - - - - - - - - - - - - - - - - - - - Consolidated Parent Entity 2014 529 - - 2013 531 332 173 2015 1,412 - - 2014 529 - - Shares issued under the dividend reinvestment plan1 Issuance of loan capital2 Shares issued on redemption of Westpac SPS $m 2 Restricted cash the Group. Note 42. Subsequent events 1 The dividend reinvestment plan for 2014: interim dividend and 2013 final and special dividends ($1,022 million) (2013: interim dividend $543 million) was satisfied in full through purchase of existing shares and transfer of shares to participating shareholders. In 2014, amounts relate to holders of Westpac SPS II who participated in the reinvestment offer to subscribe for Westpac Capital Notes 2. In 2013, amounts relate to holders of Westpac SPS who participated in the reinvestment offer to subscribe for Westpac Subordinates Notes II. The amount of cash and cash equivalents not available for use at 30 September 2015 was $132 million (2014: $35 million) for On 14 October 2015, Westpac announced a fully underwritten, pro rata accelerated renounceable entitlement offer to raise approximately $3.5 billion of share capital. The capital raised responds to changes in mortgage risk weights that will increase the amount of capital required to be held against mortgages by more than 50%, with increased regulatory requirement to be applied from 1 July 2016. New shares issued under the entitlement offer will not be entitled to the 2015 final dividend of 94 cents per share. 246 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 247 3 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 2015’ 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 2015 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. 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 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 2015 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control-Integrated Framework. Based on this assessment, management has concluded that Westpac’s internal control over financial reporting as of 30 September 2015 was effective. The effectiveness of Westpac’s internal control over financial reporting as of 30 September 2015 has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, as stated in their report which is included herein. Lindsay Maxsted Chairman Sydney 2 November 2015 Brian Hartzer Managing Director & Chief Executive Officer 248 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 249 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 2015’ 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 2015 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 Note 1(a) confirms that the financial report also complies with International Financial Reporting Standards as issued by the and payable. International Accounting Standards Board. 295A of the Corporations Act 2001. The Directors have been given the declaration by the Chief Executive Officer and the Chief Financial Officer required by section This declaration is made in accordance with a resolution of the Directors. For and on behalf of the Board. 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 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 2015 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control-Integrated Framework. Based on this assessment, management has concluded that Westpac’s internal control over financial reporting as of 30 September 2015 was effective. The effectiveness of Westpac’s internal control over financial reporting as of 30 September 2015 has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, as stated in their report which is included herein. Lindsay Maxsted Chairman Sydney 2 November 2015 Brian Hartzer Managing Director & Chief Executive Officer 248 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 249 3 Statutory statements Report on the Remuneration Report We have audited the Remuneration Report included in Section 1 of the Annual Report for the year ended 30 September 2015. 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 Westpac Banking Corporation for the year ended 30 September 2015 complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Michael Codling Partner Sydney 2 November 2015 Andrew Wilson Partner 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 2015, the income statements, statements of comprehensive income, 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 Consolidated Entity. The Consolidated Entity comprises the Corporation and the entities it controlled at 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 statements comply 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. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. 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 Westpac Banking Corporation is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Corporation's and Consolidated Entity's financial position as at 30 September 2015 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. 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. 250 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 251 Statutory statements Report on the Remuneration Report We have audited the Remuneration Report included in Section 1 of the Annual Report for the year ended 30 September 2015. 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 Westpac Banking Corporation for the year ended 30 September 2015 complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Michael Codling Partner Sydney 2 November 2015 Andrew Wilson Partner 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 2015, the income statements, statements of comprehensive income, 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 Consolidated Entity. The Consolidated Entity comprises the Corporation and the entities it controlled at 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 statements comply 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. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. (a) the financial report of Westpac Banking Corporation is in accordance with the Corporations Act 2001, (i) giving a true and fair view of the Corporation's and Consolidated Entity's financial position as at 30 September 2015 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. opinions. Independence Auditor's opinion In our opinion: including: 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. 250 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 251 3 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 2015 and 30 September 2014, and the results of their operations and their cash flows for each of the three years in the period ended 30 September 2015 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 2015, based on criteria established in Internal Control - Integrated Framework (2013) 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 financial statements. 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 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. Statutory statements 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. 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 2 November 2015 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 report 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 2014 and approved by the New South Wales Professional Standards Council pursuant to the Professional Standards Act (the NSW Accountants Scheme). For matters occurring on or prior to 8 October 2014, the liability of PwC Australia may be subject to the limitations set forth in predecessor schemes. The current NSW Accountants Scheme expires on 8 October 2019 unless further extended or replaced. The Professional Standards Act and the NSW Accountants Scheme may limit the liability of PwC Australia for damages with respect to certain civil claims arising in, or governed by the laws of, New South Wales directly or vicariously from anything done or omitted to be done in the performance of its professional services for us, including, without limitation, its audits of our financial statements. The extent of the limitation depends on the timing of the relevant matter and is: in relation to matters occurring on or after 8 October 2013, a maximum liability for audit work of A$75 million; or in relation to matters occurring on or prior to 7 October 2013, the lesser of (in the case of audit services) ten times the reasonable charge for the service provided and a maximum liability for audit work of A$75 million; or in relation to matters occurring on or prior to 7 October 2007, the lesser of (in the case of audit services) ten times the reasonable charge for the service provided and a maximum liability (in the case of audit work) of A$20 million. The limitations do not apply to claims for breach of trust, fraud or dishonesty. 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. Accordingly, liability for acts or omissions by PwC Australia in Australian states or territories other than New South Wales may be limited in a manner similar to that in New South Wales. 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 might be applied by the courts and the effect of the limitation on the enforcement of foreign judgments are untested. 252 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 253 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 2015 and 30 September 2014, and the results of their operations and their cash flows for each of the three years in the period ended 30 September 2015 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 2015, based on criteria established in Internal Control - Integrated Framework (2013) 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 financial statements. 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 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. Statutory statements 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. 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 2 November 2015 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 report 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 2014 and approved by the New South Wales Professional Standards Council pursuant to the Professional Standards Act (the NSW Accountants Scheme). For matters occurring on or prior to 8 October 2014, the liability of PwC Australia may be subject to the limitations set forth in predecessor schemes. The current NSW Accountants Scheme expires on 8 October 2019 unless further extended or replaced. The Professional Standards Act and the NSW Accountants Scheme may limit the liability of PwC Australia for damages with respect to certain civil claims arising in, or governed by the laws of, New South Wales directly or vicariously from anything done or omitted to be done in the performance of its professional services for us, including, without limitation, its audits of our financial statements. The extent of the limitation depends on the timing of the relevant matter and is: in relation to matters occurring on or after 8 October 2013, a maximum liability for audit work of A$75 million; or in relation to matters occurring on or prior to 7 October 2013, the lesser of (in the case of audit services) ten times the reasonable charge for the service provided and a maximum liability for audit work of A$75 million; or in relation to matters occurring on or prior to 7 October 2007, the lesser of (in the case of audit services) ten times the reasonable charge for the service provided and a maximum liability (in the case of audit work) of A$20 million. The limitations do not apply to claims for breach of trust, fraud or dishonesty. 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. Accordingly, liability for acts or omissions by PwC Australia in Australian states or territories other than New South Wales may be limited in a manner similar to that in New South Wales. 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 might be applied by the courts and the effect of the limitation on the enforcement of foreign judgments are untested. 252 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 253 3 This page is intentionally left blank Shareholding information Additional information Information for shareholders Glossary of abbreviations and defined terms Contact us 254 2015 Westpac Group Annual Report This page is intentionally left blank Shareholding information Additional information Information for shareholders Glossary of abbreviations and defined terms Contact us 254 2015 Westpac Group Annual Report 4 Shareholding information Westpac ordinary shares Top 20 ordinary shareholders as at 2 October 2015 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited Cogent Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited AMP Life Limited Australian Foundation Investment Company Limited UBS Wealth Management Australia Nominees Pty Ltd Bond Street Custodians Limited Argo Investments Limited Milton Corporation Limited BNP Paribas Navigator Australia Ltd Questor Financial Services Limited Nulis Nominees (Australia) Limited Invia Custodian Pty Limited Netwealth Investments Limited ANZ Executors & Trustee Company JMB Pty Ltd Total of Top 20 registered shareholders Number of Fully Paid Ordinary Shares 577,884,330 358,040,748 312,571,318 192,467,775 70,328,517 37,906,118 21,142,289 17,135,000 12,894,086 12,097,288 10,653,569 10,451,306 9,277,263 7,543,706 5,468,023 4,793,797 4,255,481 2,956,951 2,951,148 2,676,208 1,673,494,921 % Held 18.15 11.25 9.82 6.05 2.21 1.19 0.66 0.54 0.40 0.38 0.33 0.33 0.29 0.24 0.17 0.15 0.13 0.09 0.09 0.08 52.56 As at 2 October 2015 there were 615,493 holders of our ordinary shares compared to 595,907 in 2014 and 579,695 in 2013. Ordinary shareholders with a registered address in Australia held approximately 98% of our fully paid share capital at 2 October 2015 (approximately 98% in 2014 and 98% in 2013). Substantial shareholders as at 2 October 2015 As at 2 October 2015 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 There have been no significant changes in ordinary share ownership of substantial shareholders during the full year ended 30 September 2015. 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 2015, our Directors and Executive Officers owned beneficially, directly or indirectly, an aggregate of 1,065,879 (0.0335%) of the fully paid ordinary shares outstanding. 256 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report There were nine security holders holding less than a marketable parcel ($500) of Westpac CPS based on a market price of $97.85 at the close of trading on 2 October 2015. Shareholding information Analysis by range of holdings of ordinary shares as at 2 October 2015 Number of Shares % Ordinary Shares Number of Holders of Fully Paid Ordinary Shares 346,829 207,919 36,413 23,689 643 615,493 56.35 33.78 5.92 3.85 0.10 100.00 Number of Fully Paid 141,421,520 475,688,809 256,130,946 498,689,229 1,811,977,282 3,183,907,786 % 4.44 14.94 8.04 15.66 56.91 100.00 Number of Holders of Share Options and Rights 14 75 19 99 53 260 There were 11,218 shareholders holding less than a marketable parcel ($500) based on a market price of $29.75 at the close – – – – 1,000 5,000 10,000 100,000 1 1,001 5,001 10,001 Totals 100,001 and over of trading on 2 October 2015. 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 Convertible Preference Shares (Westpac CPS) Top 20 holders of Westpac CPS as at 2 October 2015 Number of Westpac CPS % Held UBS Wealth Management Australia HSBC Custody Nominees BT Portfolio Services Limited Navigator Australia Limited Questor Financial Services Limited Nulis Nominees (Australia) Limited National Nominees Limited Netwealth Investments Limited Avanteos Investments Limited J P Morgan Nominees Australia Ltd Austrust Limited Dimbulu Pty Ltd Mrs Linda Anne van Lieshout RBC Dexia Investor Services Australia Nominees Pty Limited Asgard Capital Management Ltd Eastcote Pty Ltd Finot Pty Ltd JMB Pty Ltd Randazzo C & G Developments Pty Ltd Citicorp Nominees Pty Limited Total of Top 20 registered holders Analysis by range of holdings of Westpac CPS as at 2 October 2015 Number of Securities – – – – 1,000 5,000 10,000 100,000 1 1,001 5,001 10,001 Totals 100,001 and over Number of Holders of Westpac CPS 18,035 1,182 92 53 7 % 93.11 6.10 0.47 0.27 0.04 19,369 100.00 471,443 311,206 233,672 233,488 212,166 206,942 204,275 149,984 126,726 109,417 96,633 70,000 60,000 50,845 50,000 50,000 50,000 50,000 50,000 46,779 Number of Westpac CPS 5,402,137 2,578,428 718,085 1,504,200 1,690,755 11,893,605 3.96 2.62 1.96 1.96 1.78 1.74 1.72 1.26 1.07 0.92 0.81 0.59 0.50 0.43 0.42 0.42 0.42 0.42 0.42 0.39 % 45.42 21.68 6.04 12.65 14.22 100.00 257 2,833,576 23.82 – – – – 1,000 5,000 10,000 100,000 Totals 615,493 100.00 3,183,907,786 100.00 Number of Shares 1 1,001 5,001 10,001 100,001 and over Number of Holders of Share Options and Rights 14 75 19 99 53 260 Analysis by range of holdings of ordinary shares as at 2 October 2015 Shareholding information Number of Holders of Fully Paid Ordinary Shares 346,829 207,919 36,413 23,689 643 % 56.35 33.78 5.92 3.85 0.10 Number of Fully Paid Ordinary Shares 141,421,520 475,688,809 256,130,946 498,689,229 1,811,977,282 % 4.44 14.94 8.04 15.66 56.91 Shareholding information Westpac ordinary shares Top 20 ordinary shareholders as at 2 October 2015 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited Cogent Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited AMP Life Limited Australian Foundation Investment Company Limited UBS Wealth Management Australia Nominees Pty Ltd Bond Street Custodians Limited Argo Investments Limited Milton Corporation Limited BNP Paribas Navigator Australia Ltd Questor Financial Services Limited Nulis Nominees (Australia) Limited Invia Custodian Pty Limited Netwealth Investments Limited ANZ Executors & Trustee Company JMB Pty Ltd Fully Paid Ordinary Shares Number of 577,884,330 358,040,748 312,571,318 192,467,775 70,328,517 37,906,118 21,142,289 17,135,000 12,894,086 12,097,288 10,653,569 10,451,306 9,277,263 7,543,706 5,468,023 4,793,797 4,255,481 2,956,951 2,951,148 2,676,208 % Held 18.15 11.25 9.82 6.05 2.21 1.19 0.66 0.54 0.40 0.38 0.33 0.33 0.29 0.24 0.17 0.15 0.13 0.09 0.09 0.08 Total of Top 20 registered shareholders 1,673,494,921 52.56 As at 2 October 2015 there were 615,493 holders of our ordinary shares compared to 595,907 in 2014 and 579,695 in 2013. Ordinary shareholders with a registered address in Australia held approximately 98% of our fully paid share capital at 2 October 2015 (approximately 98% in 2014 and 98% in 2013). Substantial shareholders as at 2 October 2015 As at 2 October 2015 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 There have been no significant changes in ordinary share ownership of substantial shareholders during the full year ended 30 September 2015. Control of registrant limits on equity holdings. 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 At 30 September 2015, our Directors and Executive Officers owned beneficially, directly or indirectly, an aggregate of 1,065,879 (0.0335%) of the fully paid ordinary shares outstanding. There were 11,218 shareholders holding less than a marketable parcel ($500) based on a market price of $29.75 at the close of trading on 2 October 2015. 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 Convertible Preference Shares (Westpac CPS) Top 20 holders of Westpac CPS as at 2 October 2015 UBS Wealth Management Australia HSBC Custody Nominees BT Portfolio Services Limited Navigator Australia Limited Questor Financial Services Limited Nulis Nominees (Australia) Limited National Nominees Limited Netwealth Investments Limited Avanteos Investments Limited J P Morgan Nominees Australia Ltd Austrust Limited Dimbulu Pty Ltd Mrs Linda Anne van Lieshout RBC Dexia Investor Services Australia Nominees Pty Limited Asgard Capital Management Ltd Eastcote Pty Ltd Finot Pty Ltd JMB Pty Ltd Randazzo C & G Developments Pty Ltd Citicorp Nominees Pty Limited Total of Top 20 registered holders Analysis by range of holdings of Westpac CPS as at 2 October 2015 Number of Securities – 1 1,000 1,001 5,001 10,001 – – – 5,000 10,000 100,000 100,001 and over Totals Number of Holders of Westpac CPS 18,035 1,182 92 53 7 % 93.11 6.10 0.47 0.27 0.04 19,369 100.00 Number of Westpac CPS 471,443 % Held 3.96 311,206 233,672 233,488 212,166 206,942 204,275 149,984 126,726 109,417 96,633 70,000 60,000 50,845 50,000 50,000 50,000 50,000 50,000 46,779 2,833,576 Number of Westpac CPS 5,402,137 2,578,428 718,085 1,504,200 1,690,755 11,893,605 2.62 1.96 1.96 1.78 1.74 1.72 1.26 1.07 0.92 0.81 0.59 0.50 0.43 0.42 0.42 0.42 0.42 0.42 0.39 23.82 % 45.42 21.68 6.04 12.65 14.22 100.00 256 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 257 There were nine security holders holding less than a marketable parcel ($500) of Westpac CPS based on a market price of $97.85 at the close of trading on 2 October 2015. 4 Westpac Capital Notes Top 20 holders of Westpac Capital Notes as at 2 October 2015 Westpac Capital Notes 2 Top 20 holders of Westpac Capital Notes 2 as at 2 October 2015 UBS Wealth Management Australia HSBC Custody Nominees BT Portfolio Services Limited National Nominees Limited J P Morgan Nominees Australia Ltd Citicorp Nominees Pty Limited Pejr Pty Ltd Questor Financial Services Limited Austrust Limited Tandom Pty Ltd Williambury Pty Ltd V S Access Pty Ltd Netwealth Investments Limited Cogent Nominees Pty Limited Navigator Australia Limited Nulis Nominees (Australia) Limited Bond Street Custodians Limited Northern Metropolitan Cemeteries Royal Freemasons Benevolent Institution Mr Alexander Shaw Total of Top 20 registered holders Analysis by range of holdings of Westpac Capital Notes as at 2 October 2015 Number of Securities – 1 1,000 1,001 5,001 10,001 – – – 5,000 10,000 100,000 100,001 and over Totals Number of Holders of Westpac Capital Notes 16,729 1,607 117 60 9 % 90.32 8.68 0.63 0.32 0.05 18,522 100.00 Number of Westpac Capital Notes 5,535,181 3,475,299 953,564 1,809,276 2,062,370 13,835,690 Number of Westpac Capital Notes 610,038 % Held 4.41 315,508 246,417 217,696 208,890 189,989 184,462 137,143 125,101 100,000 100,000 90,000 75,761 74,350 71,638 59,573 52,874 50,000 50,000 50,000 3,009,440 2.28 1.78 1.57 1.51 1.37 1.33 0.99 0.90 0.72 0.72 0.65 0.55 0.54 0.52 0.43 0.38 0.36 0.36 0.36 21.75 % 40.01 25.12 6.89 13.08 14.91 100.00 BT Portfolio Services Limited Pejr Pty Ltd HSBC Custody Nominees (Australia) Limited UBS Wealth Management Australia Nominees Pty Ltd National Nominees Limited Navigator Australia Limited Invia Custodian Pty Limited Nulis Nominees (Australia) Limited Questor Financial Services Limited Netwealth Investments Limited Mrs Eva Maria Lederer Paul Lederer Pty Ltd Bond Street Custodians Limited Pershing Australia Nominees Pty Ltd J P Morgan Nominees Australia Ltd Rakio Pty Ltd Alsop Pty Ltd Dimbulu Pty Ltd Bayswater Car Rental Pty Ltd Domer Mining Co P/L Ms Sarah Louise Haddrick Royal Freemasons Benevolent Institution Randazzo C & G Developments Pty Ltd Total of Top 20 registered holders 2,920,631 22.29 Analysis by range of holdings of Westpac Capital Notes 2 as at 2 October 2015 Number of Securities Westpac Capital Notes 2 % Westpac Capital Notes 2 Number of Holders of – – – – 1,000 5,000 10,000 100,000 1 1,001 5,001 10,001 Totals 100,001 and over 14,451 88.88 1,593 127 81 7 9.80 0.78 0.50 0.04 16,259 100.00 There were four security holders holding less than a marketable parcel ($500) of Westpac Capital Notes 2 based on a market price of $90.00 at the close of trading on 2 October 2015. Shareholding information Number of Westpac Capital Notes 2 % Held 448,226 352,774 277,652 212,001 190,287 140,957 129,386 124,850 111,429 109,532 100,000 90,540 73,198 71,429 64,370 63,000 60,000 51,000 50,000 50,000 50,000 50,000 50,000 Number of 4,856,514 3,528,507 993,363 2,194,518 1,532,803 13,105,705 3.42 2.69 2.12 1.62 1.45 1.08 0.99 0.95 0.85 0.84 0.76 0.69 0.56 0.55 0.49 0.48 0.46 0.39 0.38 0.38 0.38 0.38 0.38 % 37.06 26.92 7.58 16.74 11.70 100.00 There were six security holders holding less than a marketable parcel ($500) of Westpac Capital Notes based on a market price of $96.20 at the close of trading on 2 October 2015. 258 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 259 Shareholding information Number of Westpac Capital Notes 2 448,226 % Held 3.42 Westpac Capital Notes Top 20 holders of Westpac Capital Notes as at 2 October 2015 Westpac Capital Notes 2 Top 20 holders of Westpac Capital Notes 2 as at 2 October 2015 Number of Westpac Capital Notes % Held BT Portfolio Services Limited Pejr Pty Ltd HSBC Custody Nominees (Australia) Limited UBS Wealth Management Australia Nominees Pty Ltd National Nominees Limited Navigator Australia Limited Invia Custodian Pty Limited Nulis Nominees (Australia) Limited Questor Financial Services Limited Netwealth Investments Limited Mrs Eva Maria Lederer Paul Lederer Pty Ltd Bond Street Custodians Limited Pershing Australia Nominees Pty Ltd J P Morgan Nominees Australia Ltd Rakio Pty Ltd Alsop Pty Ltd Dimbulu Pty Ltd Bayswater Car Rental Pty Ltd Domer Mining Co P/L Ms Sarah Louise Haddrick Royal Freemasons Benevolent Institution Randazzo C & G Developments Pty Ltd Total of Top 20 registered holders UBS Wealth Management Australia HSBC Custody Nominees BT Portfolio Services Limited National Nominees Limited J P Morgan Nominees Australia Ltd Citicorp Nominees Pty Limited Pejr Pty Ltd Questor Financial Services Limited Austrust Limited Tandom Pty Ltd Williambury Pty Ltd V S Access Pty Ltd Netwealth Investments Limited Cogent Nominees Pty Limited Navigator Australia Limited Nulis Nominees (Australia) Limited Bond Street Custodians Limited Northern Metropolitan Cemeteries Royal Freemasons Benevolent Institution Mr Alexander Shaw Total of Top 20 registered holders Number of Securities – – – – 1,000 5,000 10,000 100,000 1 1,001 5,001 10,001 Totals 100,001 and over Analysis by range of holdings of Westpac Capital Notes as at 2 October 2015 Number of Holders of Westpac Capital Notes Westpac Capital Notes 3,009,440 21.75 16,729 1,607 117 60 9 % 90.32 8.68 0.63 0.32 0.05 18,522 100.00 There were six security holders holding less than a marketable parcel ($500) of Westpac Capital Notes based on a market price of $96.20 at the close of trading on 2 October 2015. 610,038 315,508 246,417 217,696 208,890 189,989 184,462 137,143 125,101 100,000 100,000 90,000 75,761 74,350 71,638 59,573 52,874 50,000 50,000 50,000 Number of 5,535,181 3,475,299 953,564 1,809,276 2,062,370 13,835,690 4.41 2.28 1.78 1.57 1.51 1.37 1.33 0.99 0.90 0.72 0.72 0.65 0.55 0.54 0.52 0.43 0.38 0.36 0.36 0.36 % 40.01 25.12 6.89 13.08 14.91 100.00 Analysis by range of holdings of Westpac Capital Notes 2 as at 2 October 2015 Number of Securities – 1 1,000 1,001 5,001 10,001 – – – 5,000 10,000 100,000 100,001 and over Totals Number of Holders of Westpac Capital Notes 2 14,451 1,593 127 81 7 % 88.88 9.80 0.78 0.50 0.04 16,259 100.00 Number of Westpac Capital Notes 2 4,856,514 3,528,507 993,363 2,194,518 1,532,803 13,105,705 352,774 277,652 212,001 190,287 140,957 129,386 124,850 111,429 109,532 100,000 90,540 73,198 71,429 64,370 63,000 60,000 51,000 50,000 50,000 50,000 50,000 50,000 2,920,631 2.69 2.12 1.62 1.45 1.08 0.99 0.95 0.85 0.84 0.76 0.69 0.56 0.55 0.49 0.48 0.46 0.39 0.38 0.38 0.38 0.38 0.38 22.29 % 37.06 26.92 7.58 16.74 11.70 100.00 There were four security holders holding less than a marketable parcel ($500) of Westpac Capital Notes 2 based on a market price of $90.00 at the close of trading on 2 October 2015. 258 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 259 4 Number of Westpac Capital Notes 3 % Held Voting rights of Westpac CPS, Westpac Capital Notes, Exchange controls and other limitations affecting Westpac Capital Notes 2 and Westpac Capital Notes 3 security holders Shareholding information Westpac Capital Notes 3 Top 20 holders of Westpac Capital Notes 3 as at 2 October 2015 UBS Wealth Management Australia Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited JDB Services Pty Ltd Navigator Australia Limited Citicorp Nominees Pty Limited National Nominees Limited Invia Custodian Pty Limited Nulis Nominees (Australia) Limited Balanced Property Pty Ltd Tandom Pty Ltd Netwealth Investments Limited V S Access Pty Ltd RBC Dexia Investor Services Australia Nominees Pty Limited Bob Spargo Investments Pty Ltd Barob Pty Limited Dimbulu Pty Ltd JMB Pty Ltd KMJ Pty Ltd Randazzo C & G Developments Pty Ltd The Walter and Eliza Hall Institute of Medical Research Total of Top 20 registered holders Analysis by range of holdings of Westpac Capital Notes 3 as at 2 October 2015 Number of Securities 1 – 1,001 – 5,001 – 10,001 – 100,001 and over Totals 1,000 5,000 10,000 100,000 Number of Holders of Westpac Capital Notes 3 11,886 1,437 128 91 7 13,549 % 87.73 10.61 0.94 0.67 0.05 100.00 Number of Westpac Capital Notes 3 4,290,941 3,416,888 1,098,461 2,480,816 1,957,174 13,244,280 698,826 382,898 272,000 209,070 174,701 148,528 126,430 109,540 100,000 100,000 72,075 60,000 55,683 51,670 50,000 50,000 50,000 50,000 50,000 50,000 2,861,421 5.28 2.89 2.05 1.58 1.32 1.12 0.95 0.83 0.76 0.76 0.54 0.45 0.42 0.39 0.38 0.38 0.38 0.38 0.38 0.38 21.60 % 32.40 25.80 8.29 18.73 14.78 100.00 There was one security holder holding less than a marketable parcel ($500) of Westpac Capital Notes 3 based on a market price of $97.80 at the close of trading on 2 October 2015. 260 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 261 In accordance with the terms of issue, holders of 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 CPS; – 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 CPS; c. during a period in which a dividend (or part of a dividend) in respect of Westpac CPS 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 CPS are entitled to exercise one vote on a show of hands and one vote for each Westpac CPS held on a poll. Holders of 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, Westpac Capital Notes 2 and Westpac Capital Notes 3 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 CPS, Westpac Capital Notes, Westpac Capital Notes 2 or Westpac Capital Notes 3 (as applicable) will become holders of Westpac ordinary shares and have the voting rights that attach to Westpac ordinary shares. 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 indicted within the jurisdiction of the International Criminal Tribunal for the former Yugoslavia; – persons or entities engaged in 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 former Qadhafi regime in Libya; – certain individuals and entities associated with the – certain individuals and entities supporting the Syrian Myanmar military; regime; and – persons who have been instrumental in the threat to the sovereignty and territorial integrity of Ukraine, without the prior approval of the Minister for Foreign Affairs. 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; and Westpac Capital Notes 3 Top 20 holders of Westpac Capital Notes 3 as at 2 October 2015 UBS Wealth Management Australia Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited Number of Westpac Capital Notes 3 % Held JDB Services Pty Ltd Navigator Australia Limited Citicorp Nominees Pty Limited National Nominees Limited Invia Custodian Pty Limited Nulis Nominees (Australia) Limited Balanced Property Pty Ltd Tandom Pty Ltd Netwealth Investments Limited V S Access Pty Ltd Barob Pty Limited Dimbulu Pty Ltd JMB Pty Ltd KMJ Pty Ltd RBC Dexia Investor Services Australia Nominees Pty Limited Bob Spargo Investments Pty Ltd Randazzo C & G Developments Pty Ltd The Walter and Eliza Hall Institute of Medical Research Total of Top 20 registered holders Analysis by range of holdings of Westpac Capital Notes 3 as at 2 October 2015 2,861,421 21.60 Number of Holders of Westpac Capital Notes 3 Westpac Capital Notes 3 Number of Securities – – – – 1,000 5,000 10,000 100,000 1 1,001 5,001 10,001 Totals 100,001 and over 11,886 1,437 128 91 7 % 87.73 10.61 0.94 0.67 0.05 13,549 100.00 There was one security holder holding less than a marketable parcel ($500) of Westpac Capital Notes 3 based on a market price of $97.80 at the close of trading on 2 October 2015. 698,826 382,898 272,000 209,070 174,701 148,528 126,430 109,540 100,000 100,000 72,075 60,000 55,683 51,670 50,000 50,000 50,000 50,000 50,000 50,000 Number of 4,290,941 3,416,888 1,098,461 2,480,816 1,957,174 13,244,280 5.28 2.89 2.05 1.58 1.32 1.12 0.95 0.83 0.76 0.76 0.54 0.45 0.42 0.39 0.38 0.38 0.38 0.38 0.38 0.38 % 32.40 25.80 8.29 18.73 14.78 100.00 Shareholding information Voting rights of Westpac CPS, Westpac Capital Notes, Westpac Capital Notes 2 and Westpac Capital Notes 3 In accordance with the terms of issue, holders of 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 CPS; – 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 CPS; 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; c. during a period in which a dividend (or part of a dividend) in respect of Westpac CPS is in arrears; or b. 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 CPS are entitled to exercise one vote on a show of hands and one vote for each Westpac CPS held on a poll. Holders of 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, Westpac Capital Notes 2 and Westpac Capital Notes 3 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 CPS, Westpac Capital Notes, Westpac Capital Notes 2 or Westpac Capital Notes 3 (as applicable) will become holders of Westpac ordinary shares and have the voting rights that attach to Westpac ordinary shares. 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 indicted within the jurisdiction of the International Criminal Tribunal for the former Yugoslavia; – persons or entities engaged in 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 former Qadhafi regime in Libya; – certain individuals and entities associated with the Myanmar military; – certain individuals and entities supporting the Syrian regime; and – persons who have been instrumental in the threat to the sovereignty and territorial integrity of Ukraine, without the prior approval of the Minister for Foreign Affairs. 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; and 260 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 261 4 – 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 American Depositary Receipts (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. 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 Shares (ADSs) agreement There is a Deposit Agreement between The Bank of New York Mellon as Depositary, and us, and the record holders from time to time of all ADSs. Holders of our ADSs are subject to the foregoing limitations on the rights of non- residents or non-citizens of Australia to own or vote Westpac shares. Record holders of ADSs are required by the Deposit Agreement to comply with our requests for information as to the capacity in which such holders own ADSs and related ordinary shares as well as to the identity of any other person interested in such ADSs 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 are held and the extent to which the shareholder is ‘at risk’ in Convention between the Government of Australia and the relation to their shareholding. Shareholding information Taxation of dividends Under the Australian dividend imputation system, Australian indexation formula. 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. 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. 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. income tax. 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 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 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 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 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, 262 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 263 – Country-based sanctions Under the Charter of the United Nations Act 1945 Corporations Act, a person is required to give a notice to us and to the ASX providing certain prescribed information, and associated regulations, UNSC financial sanctions including their name, address and details of their relevant have been implemented. It is an offence to use or deal with funds, financial assets or economic resources of persons or entities associated with 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% certain countries designated by the UNSC. It is also a in their holding. Such notice must, generally, be provided criminal offence to make assets available to such within two business days after the person becomes aware of persons or entities. that information. Limitations affecting security holders A person will have a substantial holding if the total votes The following Australian laws impose limitations on the right attached to our voting shares in which they or their of non-residents or non-citizens of Australia to hold, own or associates have relevant interests is 5% or more of the total vote Westpac shares. All these limitations apply to the holders of the American Depositary Receipts (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. 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 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 Shares (ADSs) agreement There is a Deposit Agreement between The Bank of New York Mellon as Depositary, and us, and the record holders from time to time of all ADSs. Holders of our ADSs are subject to the foregoing limitations on the rights of non- residents or non-citizens of Australia to own or vote Westpac shares. Record holders of ADSs are required by the Deposit Agreement to comply with our requests for information as to the capacity in which such holders own ADSs and related ordinary shares as well as to the identity of any other person interested in such ADSs 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. The Corporations Act 2001 (Cth) prohibits any person Taxation (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 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. 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 Shareholding information 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 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, 262 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 263 4 Shareholding information 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. 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. 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. 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 In addition to regular US federal income tax, certain US holders that are individuals, estates or trusts 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 sale, exchange or other 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 264 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 265 Shareholding information 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. 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. persons that have a ‘functional currency’ other than the ordinary income or loss and will not be eligible for the special US dollar, persons that own 10% or more (by voting power) tax rate applicable to qualified dividend income. This gain or of our stock, persons that generally mark their securities to loss generally will be income from sources within the US for market for US federal income tax purposes or persons that foreign tax credit limitation purposes. Distributions on an receive ordinary shares as compensation). As this is a ordinary share in excess of current and accumulated complex area, we recommend investors consult their own earnings and profits, as determined for US federal income tax advisers concerning the US federal, state and/or local tax purposes, will be treated as a non-taxable return of implications of owning and disposing of ordinary shares. capital to the extent of your basis in such ordinary share and For the purposes of this discussion you are a US holder if thereafter as capital gain. you are a beneficial owner of ordinary shares and you are Subject to certain limitations, Australian tax withheld in 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. 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 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 In addition to regular US federal income tax, certain US holders that are individuals, estates or trusts 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 sale, exchange or other 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 264 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 265 4 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. The rights attaching to our ordinary shares are set out in the Corporations Act and in our constitution, and may be (ii) if, under the Banking Act 1959 (Cth), we are directed by APRA not to pay a dividend; 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 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. Additional information 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 preceding 12 consecutive months to which they relate, would cause the aggregate of such dividend payments to exceed our after tax earnings for the preceding 12 consecutive months, as reflected in our relevant audited consolidated financial statements; and (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. 266 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 267 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: that of auditor; a. hold any office or place of profit in our company, except 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. 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); g. 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 b. hold any office or place of profit in any other company, relating to such an indemnity; or 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; h. 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. d. participate in any association, institution, fund, trust or If there are not enough Directors to form a quorum for the 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 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. that acts in a professional capacity) for our company, Under clause 9.7 of our constitution, the maximum 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 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. 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. Additional information 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 preceding 12 consecutive months to which they relate, would cause the aggregate of such dividend payments to exceed our after tax earnings for the preceding 12 consecutive months, 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. 266 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 267 4 Additional information Exchange rates For each of the years indicated, the high, low, average and year-end noon buying rates1 for Australian dollars were: 2016² 2015 2014 2013 2012 2011 Year Ended 30 September (US$ per A$1.00) High Low Average3 Close (on 30 September)4 0.7328 0.7025 n/a n/a 0.8904 0.6917 0.7781 0.7020 0.9705 0.8715 0.9155 0.8737 For each of the months indicated, the high and low noon buying rates for Australian dollars were: October 2015² September 2015 0.7328 0.7025 0.7222 0.6917 Month August 2015 0.7419 0.7087 (US$ per A$1.00) High Low of New York. 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 2 Through to 23 October 2015. On 23 October 2015, the noon buying rate was A$1.00 = US$0.7215. 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. 1.0579 0.8901 0.9885 0.9342 July 2015 0.7664 0.7278 1.0806 0.9453 1.0371 1.0388 June 2015 0.7831 0.7613 1.1026 0.9594 1.0318 0.9744 May 2015 0.8118 0.7631 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. 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. 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 U.S. Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file Annual Reports with, and furnish other information to, the US Securities & Exchange Commission (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. 268 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 269 High 0.7328 0.7222 0.7419 0.7664 0.7831 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 Additional information 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 2016² 0.7328 0.7025 n/a n/a Year Ended 30 September 2014 2013 2015 (US$ per A$1.00) 2012 2011 0.8904 0.6917 0.7781 0.7020 0.9705 0.8715 0.9155 0.8737 1.0579 0.8901 0.9885 0.9342 1.0806 0.9453 1.0371 1.0388 1.1026 0.9594 1.0318 0.9744 For each of the months indicated, the high and low noon buying rates for Australian dollars were: October 2015² September 2015 Month August 2015 (US$ per A$1.00) July 2015 June 2015 May 2015 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. 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. 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 U.S. Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file Annual Reports with, and furnish other information to, the US Securities & Exchange Commission (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. of New York. 2 Through to 23 October 2015. On 23 October 2015, the noon buying rate was A$1.00 = US$0.7215. 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. 268 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 269 0.8118 0.7631 0.6917 0.7278 0.7613 0.7087 0.7025 4 Westpac Subordinated Notes II (ASX code: WBCHB) Record date for quarterly interest payment 13 November 20151 Payment date for quarterly interest payment 23 November 20152 Payment date for quarterly interest payment 22 February 2016 Record date for quarterly interest payment 13 May 20161 Payment date for quarterly interest payment 23 May 20162 Record date for quarterly interest payment 12 August 20161 Payment date for quarterly interest payment 22 August 2016 1 Immediately preceding business day when a record date falls on a non-ASX 2 Next business day when a payment due falls on a non-ASX business day. Annual General Meeting The Westpac Annual General Meeting (AGM) will be held in the Grand Ballroom at the Sofitel Sydney Wentworth, Level 3, 61- 101 Phillip Street, Sydney, on Friday, 11 December 2015, commencing at 10.00am (Sydney time). 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. Information for shareholders Financial calendar Westpac Ordinary Shares (ASX code: WBC) Westpac Capital Notes 2 (ASX code: WBCPE) Record date for final dividend 13 November 20151 Record date for quarterly distribution 15 December 2015 Annual General Meeting 11 December 2015 Payment date for quarterly distribution 23 December 2015 Final dividend payable Financial Half Year end 21 December 2015 Record date for quarterly distribution 15 March 2016 Record date for quarterly interest payment 12 February 20161 31 March 2016 Payment date for quarterly distribution 23 March 2016 Interim results and dividend announcement 2 May 2016 Record date for quarterly distribution 15 June 2016 Ex-dividend date for interim dividend Record date for interim dividend Interim dividend payable 12 May 20163 13 May 20162,3 4 July 20163 Payment date for quarterly distribution 23 June 2016 Record date for quarterly distribution 15 September 2016 Payment date for quarterly distribution 23 September 2016 Information for shareholders Financial Year end 30 September 2016 Final results and dividend announcement 7 November 2016 Ex-dividend date for final dividend Record date for final dividend Annual General Meeting 14 November 20164,7 15 November 20165,7 9 December 20166 Final dividend payable 1 Record date for 2015 final dividend in New York – 12 November 2015. 2 Record date for 2016 interim dividend in New York – 12 May 2016. 3 Dates will be confirmed at the time of announcing the 2016 interim results. 4 Ex-dividend date for 2016 final dividend in New York – 10 21 December 20167 November 2016. 5 Record date for 2016 final dividend in New York – 14 November 2016. 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 2016. 7 Dates will be confirmed at the time of announcing the 2016 final results. Westpac Convertible Preference Shares (ASX code: WBCPC) Record date for semi-annual dividend 23 March 2016 Westpac Capital Notes 3 (ASX code: WBCPF) Record date for quarterly distribution 14 December 2015 Payment date for quarterly distribution 22 December 2015 business day. Record date for quarterly distribution 11 March 20161 Payment date for quarterly distribution 22 March 2016 Record date for quarterly distribution 14 June 2016 Payment date for quarterly distribution 22 June 2016 Record date for quarterly distribution 14 September 2016 22 September 2016 Payment date for quarterly distribution 1 Immediately preceding business day when a record date falls on a non-ASX business day. Westpac Subordinated Notes (ASX code: WBCHA) Record date for quarterly interest payment 13 November 20151 Payment date for quarterly interest payment 23 November 2015 Payment date for semi-annual dividend 31 March 2016 Record date for quarterly interest payment 15 February 2016 Record date for semi-annual dividend 22 September 2016 Payment date for semi-annual dividend 30 September 2016 Payment date for quarterly interest payment 23 February 2016 Westpac Capital Notes (ASX code: WBCPD) Record date for quarterly distribution 30 November 2015 Payment date for quarterly distribution 8 December 2015 Record date for quarterly distribution 29 February 2016 Payment date for quarterly distribution 8 March 2016 Record date for quarterly distribution 31 May 2016 Payment date for quarterly distribution 8 June 2016 Record date for quarterly distribution 31 August 2016 Payment date for quarterly distribution 8 September 2016 Record date for quarterly interest payment 13 May 20161 Payment date for quarterly interest payment 23 May 2016 Record date for quarterly interest payment 15 August 2016 Payment date for quarterly interest payment 1 Immediately preceding business day when a record date falls on a non-ASX business day. 23 August 2016 270 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 271 21 December 2015 Record date for quarterly distribution 15 March 2016 Record date for quarterly interest payment 12 February 20161 Westpac Subordinated Notes II (ASX code: WBCHB) Record date for quarterly interest payment 13 November 20151 Payment date for quarterly interest payment 23 November 20152 Information for shareholders Payment date for quarterly interest payment 22 February 2016 Record date for quarterly interest payment 13 May 20161 Payment date for quarterly interest payment 23 May 20162 Record date for quarterly interest payment 12 August 20161 Payment date for quarterly interest payment 1 Immediately preceding business day when a record date falls on a non-ASX business day. 2 Next business day when a payment due falls on a non-ASX business day. 22 August 2016 Annual General Meeting The Westpac Annual General Meeting (AGM) will be held in the Grand Ballroom at the Sofitel Sydney Wentworth, Level 3, 61- 101 Phillip Street, Sydney, on Friday, 11 December 2015, commencing at 10.00am (Sydney time). 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. Information for shareholders Financial calendar Westpac Ordinary Shares (ASX code: WBC) Westpac Capital Notes 2 (ASX code: WBCPE) Record date for final dividend 13 November 20151 Record date for quarterly distribution 15 December 2015 Annual General Meeting 11 December 2015 Payment date for quarterly distribution 23 December 2015 Final dividend payable Financial Half Year end 31 March 2016 Payment date for quarterly distribution 23 March 2016 Interim results and dividend announcement 2 May 2016 Record date for quarterly distribution 15 June 2016 Ex-dividend date for interim dividend Record date for interim dividend Interim dividend payable 12 May 20163 13 May 20162,3 4 July 20163 Payment date for quarterly distribution 23 June 2016 Record date for quarterly distribution 15 September 2016 Payment date for quarterly distribution 23 September 2016 Financial Year end 30 September 2016 Final results and dividend announcement 7 November 2016 Ex-dividend date for final dividend Record date for final dividend Annual General Meeting Final dividend payable 14 November 20164,7 15 November 20165,7 9 December 20166 21 December 20167 1 Record date for 2015 final dividend in New York – 12 November 2015. 2 Record date for 2016 interim dividend in New York – 12 May 2016. 3 Dates will be confirmed at the time of announcing the 2016 interim results. 4 Ex-dividend date for 2016 final dividend in New York – 10 November 2016. 5 Record date for 2016 final dividend in New York – 14 November 2016. 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 2016. 7 Dates will be confirmed at the time of announcing the 2016 final results. Westpac Capital Notes 3 (ASX code: WBCPF) Record date for quarterly distribution 14 December 2015 Payment date for quarterly distribution 22 December 2015 Record date for quarterly distribution 11 March 20161 Payment date for quarterly distribution 22 March 2016 Record date for quarterly distribution 14 June 2016 Payment date for quarterly distribution 22 June 2016 Record date for quarterly distribution 14 September 2016 Payment date for quarterly distribution 22 September 2016 1 Immediately preceding business day when a record date falls on a non-ASX business day. Westpac Subordinated Notes (ASX code: WBCHA) Westpac Convertible Preference Shares Record date for quarterly interest payment 13 November 20151 (ASX code: WBCPC) Record date for semi-annual dividend 23 March 2016 Payment date for quarterly interest payment 23 November 2015 Payment date for semi-annual dividend 31 March 2016 Record date for quarterly interest payment 15 February 2016 Record date for semi-annual dividend 22 September 2016 Payment date for semi-annual dividend 30 September 2016 Payment date for quarterly interest payment 23 February 2016 Record date for quarterly interest payment 13 May 20161 Payment date for quarterly interest payment 23 May 2016 Record date for quarterly interest payment 15 August 2016 Payment date for quarterly interest payment 23 August 2016 Payment date for quarterly distribution 8 March 2016 1 Immediately preceding business day when a record date falls on a non-ASX business day. Westpac Capital Notes (ASX code: WBCPD) Record date for quarterly distribution 30 November 2015 Payment date for quarterly distribution 8 December 2015 Record date for quarterly distribution 29 February 2016 Record date for quarterly distribution 31 May 2016 Payment date for quarterly distribution 8 June 2016 Record date for quarterly distribution 31 August 2016 Payment date for quarterly distribution 8 September 2016 270 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 271 4 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. 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 ‘Download a form’ under ‘Manage your shareholding’, 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 7, Zurich House 21 Queen Street Auckland 1010, New Zealand Postal address: P.O. Box 91976, Auckland 1142, 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: enquiries@linkmarketservices.co.nz 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 30170 College Station, TX 77842-3170, 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 Asset-backed securities Dodd-Frank Act Dodd-Frank Wall Street Reform and Westpac Group Asset & Liability Committee FATCA Foreign Account Tax Compliance Act ANZSIC Australian and New Zealand Standard Glossary of abbreviations and defined terms Advanced IRB Advanced Internal Ratings Based AUSTRAC Australian Transaction Reports and Analysis 6MMA AAS AASB ABS ACCC ADI ADRs ADS AFS AGM AIRB ALCO ALM AMA APRA ASIC ASX ASXCGC ATMs ATO BAC BCBS BankSA BBSW BOSI bps BRCC BTFG BTIM CAPs CCE CDO CDS CEO CFAL CFO CFTC CGU CHF CLF CPM CRG CRO Six month moving average Australian Accounting Standards Australian Accounting Standards Board Australian Competition and Consumer Commission Authorised Deposit-taking Institution American Depositary Receipts American Depositary Shares Australian Financial Services Annual General Meeting Advanced Internal Ratings Based Asset and Liability Management Advanced Measurement Approach Industrial Classification Australian Prudential Regulation Authority Australian Securities and Investments Commission Australian Securities Exchange ASX Limited’s Corporate Governance Council Automatic teller machines Australian Taxation Office Centre Board Audit Committee Bank of South Australia Bank Bills Swap Rate Basel Committee on Banking Supervision BOS International Australia Limited Basis points Board Risk and Compliance Committee BT Financial Group (Australia) BT Investment Management Limited Collectively Assessed Provisions Commodity, Carbon and Energy trading Collateralised debt obligations Credit default swap Chief Executive Officer Capital Finance Australia Limited Chief Financial Officer Commodity Futures Trading Commission Cash-Generating Unit Swiss franc Committed Liquidity Facility Treadway Commission Credit Portfolio Management Customer Risk Grade Chief Risk Officer CRS CVA DFAT DRP D-SIBS EAD EFTPOS EMIR EPS ESG ESP FCA FCS FFIs FMA FMCA FMTR FOFA FSB FTE FUA FUM FVA FX GHG G-SIBS G-SIFI HKD HKMA IAPs IASB ICAAP IFRS IGA IRS IOSCO IRRBB IRS ISDA JOHCM LCR LGBTI LGD LIBOR LTI Plan LTIFR LVR MFI Cash EPS Cash earnings per share Cash EPS CAGR Compound Annual Growth in Cash EPS CEOPP CEO RSP Chief Executive Officer Performance Plan Chief Executive Officer Restricted Share Plan Corporations Act Corporations Act 2001 COSO Committee of Sponsoring Organizations of the Common Reporting Standard Credit valuation adjustment Department of Foreign Affairs and Trade Consumer Protection Act Dividend Reinvestment Plan Domestic Systemically Important Banks Exposure at default Electronic Funds Transfer Point Of Sale European Market Infrastructure Regulations Earnings per share Environmental, social and governance Employee Share Plan Financial Conduct Authority Financial Claims Scheme Foreign Financial Institutions Financial Markets Authority 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 Valuation Adjustment Foreign Exchange Greenhouse gas Global Systemically Important Banks Global Systemically Important Financial Institution Hong Kong dollar Hong Kong Monetary Authority Individually Assessed Provisions International Accounting Standards Board 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 J O Hambro Capital Management Liquidity Coverage Ratio Lesbian, gay, bisexual, transgender and intersex Loss given default London InterBank Offer Rate Westpac Long Term Incentive Plan Lost Time Injury Frequency Rate Loan to value ratio Main Financial Institution Hastings Hastings Funds Management Limited 272 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 273 Useful information Key sources of information for shareholders Westpac Investor Relations We report our full year performance to shareholders, in late Information other than that relating to your shareholding can October or early November, in two forms: an Annual Review be obtained from: and Sustainability Report, and an Annual Report. 6MMA AAS AASB ABS ACCC ADI ADRs ADS Westpac Group Asset & Liability Committee FATCA Foreign Account Tax Compliance Act Glossary of abbreviations and defined terms Six month moving average Australian Accounting Standards Australian Accounting Standards Board CRS CVA DFAT Asset-backed securities Dodd-Frank Act Advanced IRB Advanced Internal Ratings Based Australian Competition and Consumer Commission Authorised Deposit-taking Institution American Depositary Receipts American Depositary Shares Australian Financial Services Annual General Meeting Advanced Internal Ratings Based Asset and Liability Management Advanced Measurement Approach Australian and New Zealand Standard Industrial Classification Australian Prudential Regulation Authority 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 Board Audit Committee Basel Committee on Banking Supervision Bank of South Australia Bank Bills Swap Rate BOS International Australia Limited Basis points Board Risk and Compliance Committee BT Financial Group (Australia) BT Investment Management Limited Collectively Assessed Provisions AFS AGM AIRB ALCO ALM AMA ANZSIC APRA ASIC ASX ASXCGC ATMs ATO AUSTRAC BAC BCBS BankSA BBSW BOSI bps BRCC BTFG BTIM CAPs Cash EPS Cash earnings per share Cash EPS CAGR Compound Annual Growth in Cash EPS CCE CDO CDS CEO Commodity, Carbon and Energy trading Collateralised debt obligations Credit default swap Chief Executive Officer CEOPP CEO RSP Chief Executive Officer Performance Plan Chief Executive Officer Restricted Share Plan CFAL CFO CFTC CGU CHF CLF Capital Finance Australia Limited Chief Financial Officer Commodity Futures Trading Commission Cash-Generating Unit Swiss franc Committed Liquidity Facility Corporations Act Corporations Act 2001 COSO CPM CRG CRO Committee of Sponsoring Organizations of the Treadway Commission Credit Portfolio Management Customer Risk Grade Chief Risk Officer Common Reporting Standard 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 Exposure at default Electronic Funds Transfer Point Of Sale European Market Infrastructure Regulations Earnings per share Environmental, social and governance Employee Share Plan DRP D-SIBS EAD EFTPOS EMIR EPS ESG ESP FCA FCS FFIs FMA FMCA FMTR FOFA FSB FTE FUA FUM FVA FX GHG G-SIBS G-SIFI Financial Conduct Authority Financial Claims Scheme Foreign Financial Institutions Financial Markets Authority 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 Valuation Adjustment Foreign Exchange Greenhouse gas Global Systemically Important Banks Global Systemically Important Financial Institution Hastings Hastings Funds Management Limited HKD HKMA IAPs IASB ICAAP IFRS IGA IRS IOSCO IRRBB IRS ISDA JOHCM LCR LGBTI LGD LIBOR LTI Plan LTIFR LVR MFI Hong Kong dollar Hong Kong Monetary Authority Individually Assessed Provisions International Accounting Standards Board 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 J O Hambro Capital Management Liquidity Coverage Ratio Lesbian, gay, bisexual, transgender and intersex Loss given default London InterBank Offer Rate Westpac Long Term Incentive Plan Lost Time Injury Frequency Rate Loan to value ratio Main Financial Institution Electronic communications Shareholders can elect to receive the following communications electronically: Annual Review and Annual Report; Westpac’s Dividend Reinvestment Plan (DRP); Notices of Meetings and proxy forms; and Shareholder Newsletters and major company announcements. Dividend statements when paid by direct credit or via Share registrars Shareholders who wish to register their email address should amend their address. go to www.westpac.com.au/investorcentre and click on ‘Download a form’ under ‘Manage your shareholding’, 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 provides: Westpac’s New Zealand internet site www.westpac.co.nz 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 Level 20, 275 Kent Street Sydney NSW 2000 Australia Telephone: +61 2 8253 3143 Facsimile: +61 2 8253 1207 Email: investorrelations@westpac.com.au 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 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 7, Zurich House 21 Queen Street Auckland 1010, New Zealand Postal address: P.O. Box 91976, Auckland 1142, 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: enquiries@linkmarketservices.co.nz 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 30170 College Station, TX 77842-3170, 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 272 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 273 4 Notes MiFID II Moody’s NaR NII NPS NYSE NZSX NZX OBR OCC OFAC OTC PD PFIC PNG RAMS RBA RBNZ RECs Markets in Financial Instruments Directive Moody’s Investors Service Net interest income-at-risk Net interest income Net Promoter Score New York Stock Exchange New Zealand Stock Exchange New Zealand Exchange Open Bank Resolution Office of the Comptroller of the Currency Office of Foreign Assets Control Over the counter Probability of default Passive foreign investment company Papua New Guinea RAMS Home Loans Reserve Bank of Australia Reserve Bank of New Zealand Renewable Energy Certificates RISKCO RMBS Westpac Group Executive Risk Committee Residential Mortgage Backed Securities RSP RWA S&P SCF SEC SFR SIFIs SME SOx SPS SRAs St.George The Group TLAC 2003 TPS 2004 TPS 2006 TPS TSR UKSS UNSC US VaR Restricted Share Plan Risk-weighted assets Standard & Poor’s Structured Commodities Finance US Securities and Exchange Commission Stable Funding Ratio Systemically Important Financial Institutions Small to medium enterprises Sarbanes- Oxley Act of 2002 Stapled Preferred Securities Settlement Residue Auctions St.George Banking Group Westpac Banking Corporation Group Total Loss Absorbing Capacity 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 Value at Risk Westpac CN Westpac Capital Notes Westpac CPS Westpac Convertible Preference Shares WGP Westpac Group Plan Westpac RBB Westpac Retail & Business Banking WHS WIB WNZL WNZS WPP WRP WSNZL 274 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 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 275 RISKCO RMBS Westpac Group Executive Risk Committee Residential Mortgage Backed Securities Markets in Financial Instruments Directive Moody’s Investors Service Net interest income-at-risk Net interest income Net Promoter Score New York Stock Exchange New Zealand Stock Exchange New Zealand Exchange Open Bank Resolution Office of the Comptroller of the Currency Office of Foreign Assets Control Over the counter Probability of default Papua New Guinea RAMS Home Loans Passive foreign investment company Reserve Bank of Australia Reserve Bank of New Zealand Renewable Energy Certificates Restricted Share Plan Risk-weighted assets Standard & Poor’s Structured Commodities Finance US Securities and Exchange Commission Stable Funding Ratio Systemically Important Financial Institutions Small to medium enterprises Sarbanes- Oxley Act of 2002 Stapled Preferred Securities Settlement Residue Auctions St.George Banking Group Westpac Banking Corporation Group Total Loss Absorbing Capacity 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 Value at Risk Westpac CN Westpac Capital Notes Westpac CPS Westpac Convertible Preference Shares Westpac RBB Westpac Retail & Business Banking Westpac Group Plan 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 MiFID II Moody’s NaR NII NPS NYSE NZSX NZX OBR OCC OFAC OTC PD PFIC PNG RAMS RBA RBNZ RECs RSP RWA S&P SCF SEC SFR SIFIs SME SOx SPS SRAs St.George The Group TLAC 2003 TPS 2004 TPS 2006 TPS TSR UKSS UNSC US VaR WGP WHS WIB WNZL WNZS WPP WRP WSNZL 274 Notes 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 275 4 Notes Notes 276 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 277 Notes Notes 276 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 277 4 Notes Notes 278 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 279 Notes Notes 278 2015 Westpac Group Annual Report 2015 Westpac Group Annual Report 279 4 Notes The Westpac Group Annual Report 2015 is printed on PEFC certified paper. Compliance with the certification criteria set out by the Programme for the Endorsement of Forest Certification schemes (PEFC) means that the paper fibre is sourced from sustainable forests. 280 2015 Westpac Group Annual Report WESTPAC GROUP HEAD OFFICE 275 Kent Street Sydney NSW 2000 Australia Telephone +61 2 9374 7113 Facsimile +61 2 8253 4128 International payments +61 2 9806 4032 Email online@westpac.com.au www.westpac.com.au/westpacgroup Telephone – Consumer 132 032 Telephone – Business 132 142 From outside Australia +61 2 9293 9270 Email online@westpac.com.au www.westpac.com.au ST.GEORGE BANK St.George House 4-16 Montgomery Street Kogarah NSW 2217 Australia Mail Locked Bag 1 Kogarah NSW 1485 Australia Telephone +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 Telephone 13 22 66 From outside Australia +61 3 9982 4186 Facsimile +61 3 9296 4371 Email www.bankofmelbourne.com.au info@bankofmelbourne.com.au GLOBAL LOCATIONS Specific 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. BANKSA 97 King William Street Adelaide SA 5000 Australia Mail GPO Box 399 Adelaide SA 5001 Australia Telephone 131 376 From outside Australia +61 2 9553 5233 Email banksa@banksa.com.au www.banksa.com.au RAMS RAMS Financial Group Pty Ltd Level 7, 17 York Street Sydney NSW 2000 Australia Mail GPO Box 4008 Sydney NSW 2001 Australia Telephone +61 2 8218 7000 Facsimile +61 2 8218 7171 Email communications@rams.com.au www.rams.com.au BT FINANCIAL GROUP 275 Kent Street Sydney NSW 2000 Australia Telephone 132 135 From outside Australia +61 2 8222 7154 Email customer.relations@btfinancialgroup.com www.bt.com.au WESTPAC INSTITUTIONAL BANK Telephone 132 032 Facsimile +61 2 8254 6938 Email www.westpac.com.au institutionalbank@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 EST. 1861 WESTPAC NEW ZEALAND 16 Takutai Square Auckland 1010 New Zealand Telephone +64 9 912 8000 Email customer_solutions@westpac.co.nz www.westpac.co.nz WESTPAC PACIFIC Telephone 132 032 From outside Australia +61 2 9293 9270 Facsimile +61 2 8253 1193 Email online@westpac.com.au www.westpac.com.au/pacific Pacific Banking locations Fiji — Suva Papua New Guinea — Port Moresby Vanuatu — Port Vila SHARE REGISTRAR Link Market Services Limited 680 George Street Sydney NSW 2000 Australia Mail Locked Bag A6015 Sydney South NSW 1235 Telephone 1800 804 255 Facsimile +61 2 9287 0303 Email westpac@linkmarketservices.com.au www.linkmarketservices.com.au investorrelations@westpac.com.au WESTPAC INVESTOR RELATIONS Email Telephone +61 2 8253 3143 www.westpac.com.au/investorcentre WESTPAC GROUP SUSTAINABILITY For further information on the Westpac Group’s sustainability policies and performance: Email sustainability@westpac.com.au www.westpac.com.au/sustainability Telephone +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 Affairs & Sustainability via the above details. www.westpac.com.au
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