Westpac Banking
Annual Report 2016

Plain-text annual report

W E S T P A C G R O U P A n n u a l R e p o r t 2 0 1 6 Proudly Supporting Australia 2016 Westpac Group Annual Report Herb Smith. Founder of Dreamtime Tuka and Westpac customer. Proudly Supporting Australia For almost 200 years, Westpac has supported Australia and New Zealand. As Australia’s oldest company, we’ve been a constant thread, through the ups and downs of economic cycles as a partner in the country’s development. Our story is one of innovation, growth, resilience, and adaptation. It’s why we’ve been in business for 200 years. As we approach our third century we’re continuing to transform. The community wants more from banks. And Westpac is responding: we’ve strengthened our balance sheet; we’re digitally transforming our operations and we’re reviewing our policies, processes and incentives to further drive our service culture. In doing so, customers can trust we have their interests at heart and if we make a mistake we will set things right. It’s this attitude that will help us support customers, shareholders, employees and the community into the next 200 years. The Westpac Group Annual Report, Annual Review & Sustainability Report, and 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. W E S T P A C G R O U P A n n u a l R e p o r t 2 0 1 6 Proudly Supporting Australia 2016 Westpac Group Annual Report Proudly Supporting Australia 2016 Westpac Group Annual Review & Sustainability Report Proudly Supporting Australia 2016 Westpac Group Sustainability Performance Report Westpac employee Kate Holloway and her son Carter. Herb Smith. Founder of Dreamtime Tuka and Westpac customer. Bob Mac Smith. Fifth generation farmer and Westpac customer. 2016 Annual Report 2016 Annual Review & Sustainability Report 2016 Sustainability Performance Report ON THE COVER Herb Smith, founder of Dreamtime Tuka and Westpac customer. Read Herb’s story online at 2016annualreport. westpacgroup.com.au THIS PAGE Herb Smith's hometown of Wellington, NSW www.westpac.com.au/ investorcentre Visit Westpac’s Investor Centre for the complete suite of full year reporting material. 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 Outlook Significant developments 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 Consumer Bank Business Bank BT Financial Group (Australia) Westpac Institutional Bank Westpac New Zealand Group Businesses Risk and risk management Risk factors Risk management Credit risk Liquidity risk Market risk Operational risk and compliance risk Other risks Westpac’s approach to sustainability Sustainability performance Five year non-financial summary 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 1 2 3 4 2 3 4 8 14 14 16 18 25 39 67 68 69 71 73 78 82 84 87 88 89 91 92 93 94 94 100 101 101 102 103 104 107 107 112 114 117 118 124 237 249 250 261 265 268 inside back cover 2016 Westpac Group Annual Report 1 Performance highlights Net profit after tax $7,445 million, down 7% Dividends $1.88 up 1%2 Net profit after tax1 ($m) Dividends per ordinary share (cents) Special dividends 6 4 3 , 6 1 9 9 , 6 1 5 7 , 6 6 3 9 , 5 2 1 0 , 8 5 4 4 , 7 1 6 5 , 7 2 4 1 1 3 1 9 3 1 6 1 1 0 2 4 7 1 2 8 1 7 8 1 8 8 1 6 6 1 6 5 1 9 5 8 , 3 1 5 4 , 3 6 4 4 , 3 07 08 09 10 11 12 13 14 15 16 07 08 09 10 11 12 13 14 15 16 Cash earnings $7,822 million, flat Returns 14.0%, down 185bps Cash earnings3,4,5 ($m) Cash earnings to average ordinary equity3,4,5 (%) 1 0 3 , 6 4 6 5 , 6 9 7 8 , 5 3 6 0 , 7 8 2 6 , 7 0 2 8 , 7 2 2 8 , 7 7 4 0 , 5 5 7 6 , 4 7 0 5 , 3 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 0 . 4 1 07 08 09 10 11 12 13 14 15 16 07 08 09 10 11 12 13 14 15 16 Cash earnings per ordinary share, down 5% Cash earnings per ordinary share3,4,5,7 (cents) 4 . 9 8 1 3 . 8 9 1 7 . 3 6 1 3 . 9 0 2 8 . 4 1 2 8 . 7 9 1 8 . 7 2 2 4 . 5 4 2 2 . 8 4 2 5 . 5 3 2 07 08 09 10 11 12 13 14 15 16 2 0 16 % c ha nge 2 0 15 2 0 16 / 2 0 15 R e p o rte d e a rn in g s Net profit after tax1($m) Earnings per share (c ents) Dividends per share (c ents) Return on equity6 (%) Expense to inc ome ratio (%) Common Equity Tier 1 c apital ratio (%) C a sh e a rn in g s b a sis 3 Cash earnings ($m) Cash earnings per share (c ents) Cash earnings return on equity6 (%) Ec onomic profit8 ($m) 7,445 224.6 8,012 255.0 188 13.3 43.9 9.5 187 16.2 43.8 9.5 7,822 7,820 235.5 14.0 3,774 248.2 15.8 4,418 (7%) (12%) 1% 291bps 15bps (2bps) - (5%) (185bps) (15%) 1 Net profit attributable to ordinary equity holders. 2 Excluding special dividends but including dividends determined in 2016. 3 The adjustments to our reported results to derive cash earnings are described in Note 2 of our 2016 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 2010 Annual Report. 6 Return on average ordinary equity. 7 2015 cash earnings per ordinary share have been restated for consistency with 2016. Periods prior to 2015 have not been restated for the bonus element of the 2015 share entitlement offer. 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 2016 Results (incorporating the requirements of Appendix 4E) lodged with the ASX on 7 November 2016 (the ‘ASX Announcement’). 2 2016 Westpac Group Annual Report Chairman’s report Chief Executive Officer’s report Information on Westpac Directors’ report (including Remuneration Report) 1Chairman’s report Lindsay Maxsted Chairman Materially strengthening our balance sheet and delivering sound returns It has been another significant year for Westpac with the company making good progress on its strategy, materially strengthening its balance sheet and delivering sound returns. Statutory net profit was lower over the year, principally because 2015 included some positive infrequent items, including asset sales. Cash earnings (our preferred measure of performance) for the year ended 30 September 2016 were little changed compared to 2015, with disciplined growth across the business contributing to 3% revenue growth. This increase was largely offset by higher impairment charges, mostly related to a small number of larger companies being downgraded to impaired early in the year. While we have achieved much in 2016, the year has been somewhat overshadowed by increasing public criticism of Australia’s banks. It is fair to say there have been recent examples of poor behaviour in the industry and in some instances the industry has fallen short of community expectations. We work hard to win customers’ business and maintain returns for shareholders, and we must also continually work hard to maintain the trust of the community as a whole. That is why Australia’s banks are implementing a comprehensive suite of measures to further protect customer interests and increase transparency and accountability. These include ensuring there are no conflicts in the way staff are incentivised, further protecting whistleblowers and enhancing the handling of complaints. However, we also need to be proud of the important role banks play for Australians. The sector has not relied on capital from the government, nor has it weighed down economic activity – in fact the reverse is true. It is regrettable that the debate and coverage around banks has not acknowledged these benefits and, at times, has comprised broad and ill-informed accusations. Before I share my observations on the year that has been, I would first like to offer some balance to this debate, so that shareholders are more fully informed and equipped to form their own views and contribute to the debate. As Westpac’s Chairman, I see firsthand the overwhelming benefit Australian banks bring to the economy – at a macro level, supporting Australia’s investment requirements and needs for foreign capital, and at a micro level, supporting customers to meet their financial goals. It has been globally acknowledged that Australia and New Zealand have been well served by their major banks, both during and since the GFC. You need only look at other global markets, such as the UK, parts of Europe and the US to appreciate the devastating impact poorly performing banks can have on customers and economies over extended periods. Australia’s major banks have been well managed, have not relied on government support, and have overwhelmingly contributed positively to the nation. Here are some facts about the banking sector:    The Australian banking sector was not bailed out during the GFC. Unlike many other developed nations, no taxpayer funds were injected into the Australian banks. In fact, the sector paid $4.5 billion in fees for a guarantee that was never called upon, and continued to lend and support the economy through the crisis. Australian banks pay the most income tax of any industry in Australia. With over $14 billion paid in taxes or levies in 2015, tax paid by banks accounted for nearly half of all income tax paid by companies in the ASX200. At Westpac, our effective tax rate this year was 29.9% - it is clear that we pay our fair share of tax. Profitability of the Australian banks is consistent with a sector that needs to be seen as “unquestionably strong”. Australian banks need to be unquestionably strong to: – continue to support households and businesses through economic cycles; – support Australia’s current account deficit by raising funds offshore; and – invest in innovation and create a better experience for customers. Suggestions that banks should accept lower returns or pay additional levies are misguided. These measures would only weaken the system and its ability to support the economy in economic downturns, as well as reducing the banks’ competitiveness in a global market. Indeed, healthy profitability is one of the key measures that international rating agencies look at when assessing a company’s rating – which in turn impacts 4 2016 Westpac Group Annual Report the cost and availability of overseas funding to support the economy. behaviour but these are isolated and, where problems have been found, the company has committed to put things right. Chairman’s report   Returns of Australian banks are in-line with other leading banking systems and the market. The average return on equity (ROE) of the Australian major banks is currently around 12-15%, broadly similar to other high quality banking markets such as Canada or the Scandinavian countries. That return is above the return of the ASX200 of closer to 11% but below returns of other service industries. Australian major bank returns are above markets such as the UK, parts of Europe and in the US. These markets are underperforming and in many respects are still recovering from the GFC, and as such are delivering performances to which we should not aspire. Separately, while Australian banks make large profits, these profits are in line with their size. Westpac, for example, has an asset base of around $840 billion and we make less than 1% return on those assets. Customers are paying less for their banking. There is a perception that Australian banks are charging customers more for lending and paying less for deposits today than prior to the GFC. The net interest margin is the best aggregate measure of the value banks generate from their lending and borrowing activities and that margin has been declining. For Westpac, the facts are that in 2000 our net interest margin was 3.10%, in 2006 it was 2.29% and in 2016 it was 2.13%. On 8 April 2017, Westpac will become the first company in Australia to celebrate 200 years. This is something that makes the Board, management and all our 40,000 employees incredibly proud. Westpac has supported Australia and New Zealand through the ups and downs of wars, depressions, crises and economic booms. Indeed our fortunes have mirrored those cycles. Westpac’s success depends on the success of Australia and New Zealand. We have never lost sight of this. We work with this in mind by supporting the needs of customers, employees and communities as well as working in the long-term interests of shareholders. Building a service culture The Board plays an important role in building a deeper service culture across the organisation. It starts with our own behaviours and of course extends to holding the Group to account in how it supports customers and responds to issues. There is no doubt we have made significant progress in this respect. The 31% reduction in complaints across Australian operations over the year demonstrates that our plans are working. The Board has closely monitored recent industry issues and, together with management, has sought to ensure that your company remains strongly placed. As an example, following some industry issues in financial planning and life insurance, we have asked external reviewers to look closely at our own operations, assessing our policies and practices and our actions and responses. Not surprisingly, with a business of our size, we have had a small number of examples of poor 2016 performance Turning to performance, 2016 was a sound year in challenging circumstances. Westpac reported statutory net profit of $7,445 million, down 7% over the year. The decline in net profit was principally because 2015 included some positive infrequent items, including $665 million in gains (net of tax) associated with the partial sale of BT Investment Management. Because of the size and nature of these items, they were excluded from the calculation of cash earnings. Westpac reported cash earnings of $7,822 million for the year ended 30 September 2016, which was little changed from the 2015 financial year. The Group uses cash earnings as a key metric for assessing performance, and is the basis on which executive performance is also determined. The Group generated solid growth through the year, with lending rising 6% and customer deposits increasing 9%. These gains were, however, partially offset by a reduction in non-interest income, higher expenses, and a rise in impairment charges, or bad debts. The 3% rise in expenses through the year was principally related to an increase in investment and higher regulatory and compliance spending. Business-as-usual expenses were largely offset by productivity gains. Within expenses, I know there is much interest in our approach to executive remuneration. Similar to recent years, the Board has ensured that the starting salaries of new ‘key management personnel’ are below those of the prior incumbents. Two new executives became ‘key management personnel’ this year although as their start date was 1 October 2016, their salaries will not appear in our remuneration tables until next year. In addition, because of this year’s earnings performance, short-term incentives for the executive team are down, on average, 11% on the prior year. At the same time, long-term executive incentives did not vest this year as the hurdles set by the Board were not achieved. These long-term incentives make up around one third of each executive’s remuneration. Higher impairment charges principally related to a small number of larger companies being classified as impaired in the first half of the year. We monitor asset quality trends closely and Westpac’s Board and management believe that the deterioration of these larger names is not indicative of a more widespread deterioration in asset quality. Where additional stress has emerged, it is principally related to those sectors and regions whose fortunes have been closely tied to the mining investment cycle. Additional stress has also emerged in New Zealand dairy, to which our exposure is modest. Reflecting this trend, we have increased provisioning levels and our provisioning ratios remain strong. For example, the ratio of gross impaired asset provisions to gross impaired assets is 49% and leads the sector. This means our individual provisions cover almost half of our total impaired assets. 2016 Westpac Group Annual Report 5 1While on the topic of results, I must acknowledge the performance of the new management team and structure. Brian Hartzer has led Westpac as CEO for his first full year and our new operating structure and executive team have been in place for just over a year. The Board has been pleased with the team’s performance. In particular, there has undoubtedly been a further improvement in the Group’s service culture and the digital transformation of the company is gaining traction. Importantly, the team has maintained the disciplines and strengths that are hallmarks of Westpac. This includes the effective management of capital, leading the market on changing pricing for more capital, appropriately provisioning for new impaired assets, as well as proactively responding to community calls for change. Capital and dividends The 2016 year saw the further strengthening of our balance sheet through both additional capital and an enhanced liquidity position. After raising around $6 billion in capital in the 2015 calendar year, the Group’s common equity Tier 1 capital ratio of 9.48% is above our preferred range. On an internationally comparable basis, this comfortably puts us in the top quartile of banks globally. On liquidity, global regulators have been gradually introducing new measures to enhance banks’ ability to remain liquid in times of stress. The Australian regulator is seeking to be ahead of global trends, having already required compliance with the Liquidity Coverage Ratio in January 2015, and is looking for banks to meet the new Net Stable Funding Ratio from 1 January 2018. Today, based on current standards, Westpac is meeting both these requirements. As I indicated in last year’s report, this strengthening of our balance sheet has come at a cost, increasing our shareholders’ equity, lifting shares on issue and incurring additional costs associated with our strengthened liquidity. These changes have impacted earnings and particularly Westpac’s ROE and earnings per share. Reflecting the significant increase in shares on issue through the year, our cash earnings per share of 235.5 cents was down 5% over the year, while the Group’s ROE was 14.0%, down from 15.8% in 2015. The Group’s earnings, combined with our strong capital position (the common equity Tier 1 ratio of 9.48% is some 23 basis points above the top of the Group’s preferred range of 8.75 – 9.25%) has enabled the Board to determine a final ordinary dividend of 94 cents per share, fully franked. This dividend rate was unchanged from the 2016 interim ordinary dividend of 94 cents per share. Full year dividends totalled 188 cents per share up 1 cent or 0.5% relative to Full Year 2015. The final ordinary dividend represents a payout ratio of 80.3% (Full Year 2016 80.3%). Allowing for shares to be issued under the DRP, the percentage of second half 2016 cash earnings paid out is estimated to be around 72%. The 94 cent per share dividend represents a dividend yield of 6.4% based on the closing share price at 30 September 2016 of $29.51, or over 9% after adjusting for franking. The final ordinary dividend will be paid on 21 December 2016 with the record date of 15 November 2016. We recognise the importance of dividends for shareholders, and the franking credits attached to those dividends. Our approach is to continue to make dividend payments that are sustainable in the long-term; that is, ensuring we retain enough of our earnings to hold our capital levels while also retaining sufficient capital for growth. It is also about maximising the payment to distribute franking credits. We are prepared to wear some volatility in the payout ratio to give shareholders some consistency in dividend payments but we must continue to anchor our decision to a long-term sustainable position. Board composition The Board and management teams have been stable over the year. There were no changes to the Board, although subsequent to 30 September 2016, Elizabeth Bryan has decided that she will retire at the conclusion of our 2016 Annual General Meeting on 9 December 2016. Elizabeth has made an outstanding contribution to the Board over her 10 year tenure. She was a source of stability through the financial crisis, including serving on the important Board Risk Management Committee (now the Board Risk & Compliance Committee). Elizabeth has been an exceptional Chairman of this key Committee since 2010. In addition to Elizabeth’s director experience, her deep understanding of the wealth management industry has also been a great asset to the Board. Succession planning for new directors is continually discussed by the Board. We expect to be able to conclude discussions and announce the appointment of two non- executive directors in the first half of 2017, who will add further strength and diversity to your Board. Outlook Our outlook for the Australian and New Zealand economies remains positive and while growth remains a little uneven across States, the fundamentals remain sound. The relatively low level of the Australian dollar, and low interest rates, have supported good growth in the services sector (particularly health, education and tourism), a rise in residential and infrastructure investment and improved net exports. These gains have offset the slowdown in mining investment. These trends are expected to broadly continue in the year ahead with Australia’s GDP growth expected to grow a little ahead of 3% with unemployment likely to hold below 6%. These settings, combined with persistent low inflation and low interest rates, will likely lead to similar system lending and deposit activity in 2017 as in 2016. How growth evolves for banks will also depend on regulatory requirements including for capital and liquidity. Asset quality is expected to remain sound in the year ahead, although it is likely that additional stress will continue to emerge in sectors and regions undergoing some structural change. 6 2016 Westpac Group Annual Report Chairman’s report With the banking sector in strong shape, competition is also expected to remain intense. Summary It has been a challenging year for the banking sector given the evolving operating environment. This has included changes to capital and liquidity requirements, strong competition and increased criticism of how customers have been treated. Westpac has responded to these changes by materially strengthening our balance sheet for capital and liquidity purposes while working diligently to respond to community expectations and rebuild trust. 2017 will be an exciting year for Westpac. In addition to the significant changes taking place in banking, 2017 will mark our 200th anniversary – a milestone that is generating great excitement and pride across the Group. We approach our 200th anniversary in great shape, a position of which our past Chairmen would be proud. Westpac is strong, our strategy is delivering, our operating divisions are well placed and our 40,000 employees are passionate about helping customers reach their financial goals. With this foundation, we expect to continue generating long-term value and sound returns for shareholders for many years to come. . LINDSAY MAXSTED Chairman 2016 Westpac Group Annual Report 7 1Chief Executive Officer’s report Brian Hartzer Chief Executive Officer Australia’s first bank Dear fellow shareholders, Two hundred years ago this month, on the 22nd of November 1816, a group of prominent Sydney business people met formally for the first time to consider Governor Lachlan Macquarie’s request that they advise him on how to create a local currency for the still-new colony. The request reflected Governor Macquarie’s desire to build a strong, independent economy—an objective that was not shared by his colonial overseers in London. The group’s response—that to have a currency, the colony needed its own bank—led to the founding in April 1817 of the Bank of New South Wales: Australia’s first company, and first bank. Since that first meeting 200 years ago, the company we now call Westpac has always recognised that our success is inexorably tied to the prosperity of the local economy, through the success of our customers. As our home communities of Australia and New Zealand have faced and responded to many challenges over the centuries— economic, environmental, demographic, cultural, and political—so too we at Westpac have constantly adapted to support the economic development of these nations. We reflect this role in our vision statement: “To be one of the world’s great service companies, helping our customers, communities and people to prosper and grow.” In last year’s letter I outlined our strategy to fulfil this vision, and why we believe that a strategy focused on service is the right response to our rapidly changing environment. Our strategy has not changed, and because we have the right business mix and are not burdened with major underperforming or non-core businesses we’ve been firmly focused on implementation. This year my aim, once again, is to give you a candid assessment of our performance, as well as update you on our strategic progress and provide my perspective on the challenges and priorities for the next period. And, given all the negative political and media attention paid to the banking industry in recent months, I’d like to add a few further thoughts to those of our Chairman on the industry’s reputation and what we are doing to close what I’ve been referring to as the ‘trust gap’. 2016 Financial Performance As in every year, our highest priority is to maintain the strength of our balance sheet. This financial year we took significant steps to increase our equity capital base— through an entitlement offer raising $3.5 billion—which followed other initiatives last financial year, including the underwritten dividend reinvestment plan in May 2015 and the partial sale of BT Investment Management (BTIM). As a result, our common equity Tier 1 ratio stands at 9.5%, or 14.4% on an internationally comparable basis—one of the highest ratios of any large bank in the world. We strengthened our funding mix, with customer deposits rising 9% to comprise 70.5% of loans. The average tenor of wholesale funding raised this year was 5.4 years, up from less than 5 years in 2015, and our Liquidity Coverage Ratio (LCR) reached 134%—an important regulatory measure of our ability to absorb market shocks. We also assessed our Net Stable Funding Ratio (NSFR) as exceeding 100%—a milestone set by APRA (our key prudential regulator) that all banks must achieve by the beginning of the 2018 calendar year. Profitability Turning to profit, cash earnings for the Westpac Group—our preferred performance measure—was $7,822 million compared to $7,820 million for Full Year 2015. Earnings per share fell 5% to 235.5 cents, reflecting the significant increase in capital issued over the last 12 months. Return on Equity (ROE) was also lower at 14.0%, down from 15.8% in 2015. On a reported basis, Westpac’s net profit was $7,445 million, down 7% over the year. The difference between cash earnings and reported profit reflects a number of infrequent items that, in aggregate, boosted reported profit by $375 million in 2015 (but were excluded from the calculation of cash earnings in that year). These items included gains associated with the partial sale of BTIM and tax benefits linked to the acquisition of Lloyds Australia in 2014, partially offset by a reduction in capitalised software charges following a review of how we account for some technology investments. While these results are lower than we’d like, the flat cash earnings growth masks the fact that below the surface we were doing a lot of paddling—and making real progress. 8 2016 Westpac Group Annual Report It’s also worth noting that these results took place in an environment that was difficult for banks, with more financial headwinds than we expected at the start of the year. Interest rates were lower, which is a significant drag on earnings for a bank like Westpac. Global financial market conditions also contributed to reduced customer activity for our institutional business. At the same time, regulatory and legal costs were higher, as we responded to an increased number of requests by regulators both at home and abroad. And, after a number of years of very low credit losses—indeed, net write-backs—in our Institutional business, we saw a small number of relatively large ‘names’ get into difficulty. This meant that we increased our credit provisions substantially in Westpac Institutional Bank (WIB)—an occasional feature of being in this business, but a drag on earnings nonetheless. Revenue performance1 Looking within the result, operating income for the group increased 3%, with net interest income growth of 8% partially offset by lower non-interest income. The growth in net interest income was driven by loan growth of 6%, customer deposit growth of 9%, and a 5 basis point improvement in our net interest margin. It’s worth noting that the net interest margin picture is complex; encompassing changes across our entire suite of lending, deposit, and wholesale borrowing costs, as well as changing capital and liquidity requirements from our regulators. Although there has been a lot of media and political attention on our pricing of late, the fact remains that our margin has come down over the last ten years. Ten years ago the net interest margin was 2.29%; five years ago it was 2.22%, and this year it averaged 2.13%—while the second half margin was a bit lower still at 2.11%. The perception that we have repriced loans to lift the overall margin fails to consider all the movements across our entire balance sheet, and how we seek to balance the impact of these movements across borrowers, depositors, and shareholders. Setting aside the margin picture, net interest income growth reflected strong performance in our Consumer and Business Bank divisions. Australian mortgages grew $28 billion, or 8% year-on-year. We grew our share in mortgages, despite the imposition by APRA of a cap on investor property lending and certain other regulatory adjustments to underwriting standards. The net result of these and other changes was to more evenly balance home loan growth across owner- occupied and investor lending. Small business lending—one of our key focus areas—also grew strongly, with loans up 8% over the year. This reflects the benefit from our new online loan origination platform, LOLA, and the use of video conferencing to immediately connect customers with business specialists in areas like transaction banking, trade, and merchant (credit card) processing. New Zealand’s loan book grew strongly across both business and consumer lending, at 9%2 over the year. This 1 On a cash earnings basis. 2 In New Zealand dollars. Chief Executive Officer’s report growth was broad-based across industries and regions. However, a highly competitive market for both deposits and loans put significant pressure on the net interest margin in New Zealand, which fell sharply in the first half (although there are signs of stabilisation in the second half of the year). In WIB, the ongoing phenomenon of ‘quantitative easing’ by central banks around the world has continued to put pressure on margins for institutional lending here in Australia—as global banks from markets with low to zero interest rates seek higher returns elsewhere. In this environment, we are focusing on managing return and margins while preserving our most important long-term transactional and lending relationships. As a consequence, we stood back from a number of large transactions in the market (especially in commercial property and trade finance), and overall lending fell 3%—an outcome we are comfortable with. The other key driver of our revenue result was non-interest income, which was down $446 million over the year. Much of the decline was due to lower gains on asset sales, the partial sale of our investment in BTIM, as well as reduced customer activity in WIB. At the same time, the Consumer Bank experienced a regulated reduction in interchange income on credit cards. Expense performance and investment in growth Given the lower revenue environment this year, we’ve remained disciplined on our expenses while continuing to invest in ways that will drive a step-change in long-term productivity. Essentially our goal is to neutralise ordinary expense growth through disciplined productivity initiatives, so that most of the net growth in expenses is investment-related. This year we achieved $263 million in productivity savings (3% of our cost base), including through digitising processes, further reconfiguring our network and renegotiating major contracts. Given our flat financial performance, this included a reduction of around 10% in the overall variable incentives paid to our senior employees. At the same time, we materially increased our strategic investments in service and productivity, with an annual spend of $1.2 billion against last year’s total of around $1 billion. This meant that total expenses grew 3% and our cost-to-income ratio was maintained at 42%—a number that we aim to drive below 40% in coming years. We are also investing in technology to transform customer experiences and further strengthen our core infrastructure. In New Zealand, after a significant upgrade to our online platform last year, we’ve rolled out several new innovations—most recently the CashNAV mobile app developed in conjunction with fintech leader Moven. This app allows customers to better track and manage their spending. We also achieved a significant technology milestone this year with the upgrade of our deposit and transaction system for St.George—called Celeriti. This system will ultimately serve as our single transaction and deposit platform for all our consumer and business relationships. 2016 Westpac Group Annual Report 9 1 In BTFG, our new wealth platform, Panorama, has achieved a number of development milestones, and balances are beginning to grow on the platform. We believe this system will give us a significant functionality and cost advantage in the high-growth wealth business in years to come. With a wide variety of fintech firms emerging we are keeping an eye on developments and are selectively investing in new models that have the potential to disrupt traditional banking. We are partnering with businesses in areas as diverse as blockchain, quantum security, and digital mortgage broking. We have also separately invested $100 million in Reinventure, a venture capital fund that directly invests in fintech businesses with the potential to make a significant impact in Australia. The fund currently has 11 investments, including data marketplace platform Data Republic, employee platform provider Flare HR, peer-to-peer lender Society One, and crime prevention software provider Auror. Credit costs and asset quality The other major impact on our earnings was credit provisions, with impairment charges up 49% to $1,124 million. Much of the rise was due to single ‘names’ mentioned earlier. We take a conservative approach to such facilities and therefore significantly increased the provisioning associated with each. Setting aside these large impairments, overall asset quality is in good shape: stressed assets to total committed exposures were low at 1.20%. This is more than 60% below financial crisis levels in 2010. There has been a small rise in stress through the year in certain sectors and regions impacted by the slowing in mining investment along with some challenges in New Zealand dairy, but in our judgement these trends don’t indicate a broader deterioration in quality. Although there has been some commentary recently about credit risks in commercial property and housing, we remain very comfortable with our book, thanks in part to actions we took in previous years. In commercial property, for example, back in 2012 we identified regions where residential apartment supply looked to be increasing too rapidly, and in response we further tightened our lending criteria. Those decisions have proven to be prudent, with those same regions now being flagged as oversupplied. There is no doubt that house prices are high and customers are more leveraged. But we believe that, with a few localised exceptions, market conditions reflect the impact of lower interest rates along with genuine supply and demand imbalances, rather than being fuelled by excessive speculation or an easing in lending standards. Therefore, we do not subscribe to the view that there is a housing bubble. Elsewhere in the portfolio we have had some concerns on the New Zealand dairy industry given depressed global milk prices, but efforts of farmers to re-align their cost bases— along with recent improvements in milk prices—have alleviated some of our concern. In consumer lending, we have seen a small rise in mortgage 90+ day delinquencies, but these tend to be concentrated in regions affected by the slowdown in mining investment mentioned above, and overall remain within our normal tolerance levels. In fact, of the 1.5 million mortgages we have outstanding, there are only 262 houses that are currently in possession—which is a very low level in absolute terms and relative to history. Summary—Financial Performance Taking all of these factors into account, the combination of earnings and capital/funding actions meant that we finished the year with a much stronger balance sheet than we started. For our shareholders, this meant that we have continued to grow the net tangible assets per share by 7% or 88 cents per share—an important measure of intrinsic value. Including total dividends paid and share price movements, total shareholder return for the 2016 financial year was 6.3%. This compares with the average total return for the banking sector of 6.2% over the same period. Customer and Market Performance As part of our service strategy we changed our organisational structure in 2015 to better align with our customer segments. This led to the creation of two new divisions: Consumer Bank, with end-to-end accountability for consumer banking relationships across both Westpac and our regional brands; and Business Bank, which serves commercial and small business customers. The structures of BT Financial Group (BTFG), WIB, and Westpac New Zealand remained largely unchanged. This is the first year we are reporting under our new structure and comparative financials have been restated to compare like for like. The Consumer Bank performed strongly this year. In total, more than 500,000 new customers joined us, contributing to net customer growth of 3% and helping to lift cash earnings by 14%. From a service point of view, the outcomes were mixed. Customer satisfaction for the Consumer Bank was down a little, from 83.8% to 81.3%1. When we look beneath that overall survey result—which has almost certainly been negatively impacted by the general media climate for banks—we see substantial improvements in how customers rate their direct experience with us. For example, the net promoter score (NPS) across our call centres rose from 65.5 to 68.1 and branch NPS2 for St.George, Bank of Melbourne and BankSA for instance grew from 55 to 57 over the year. Complaints in the Consumer Bank reduced by 29%, and over the last quarter we recorded three times as many compliments as complaints in our branch network. One particular area of focus has been on digital service, where we saw an increase in digital logins of 11%; digital channels now represent 23% of sales. Our Westpac Live mobile application was rated No.1 in the world by Forrester Research, reflecting the work underway to transform our digital capabilities and position Westpac as the best in class digital customer service bank. In fact, we introduced more 1 Source: Roy Morgan Research, September 2015 – 2016, 6MMA. Westpac Group Main Financial Institution (as defined by the customer). Satisfaction ratings are based on the relationship with the financial institution. Customers must have at least a Deposit/Transaction account relationship with the institution and are aged 14 or over. Satisfaction is the percentage of customers who answered ‘Very’ or ‘Fairly satisfied’ with their overall relationship with their MFI. 2 Internal NPS, September 2015 – 2016, 6MMA. 10 2016 Westpac Group Annual Report than 180 new features and enhancements across our digital channels this year. For example, customers can now activate a credit card using their phone’s camera, or manage a term deposit rollover, all without having to visit a branch. The Business Bank also performed well, with core earnings growth of 5% over the year. Market share increased across SME and in the merchant credit cards, to the point where around 50% of Australian businesses now have a banking relationship with the Westpac Group. While customer satisfaction1 in the Business Bank was down slightly from 7.4 to 7.3, we continue to be ranked number 1 for total Business in NPS.2 During the year we rolled out a new online banking system for St.George business customers, significantly improving service, and our online loan origination platform, LOLA, is now processing two out of every three eligible loans. We also rolled out around 127,000 merchant terminals which are all enabled with market-leading contactless tap and go functionality. Despite the good core earnings growth, higher impairment charges meant that cash earnings in this business rose by a more modest 1%. The main driver of the increased provisions was the fact that we had lower write-backs than in previous years; we also had an increase in provisions in auto finance. Overall, however, credit quality in this business remains sound. BTFG continued to see good underlying growth in its business, with FUM and FUA balances growing 5% and 7% respectively, while insurance premiums were also higher. However a number of specific issues reduced reported cash earnings by 4%; adjusting for the partial sale of BTIM, cash earnings would have been down 2%. The other issues holding back BTFG’s earnings this year included the impact of higher claims and lower renewals in Insurance, currency movements in Ascalon (our boutique funds management investor), and higher regulatory costs. As discussed earlier, WIB cash earnings were down $245 million, reflecting higher impairment charges and our decision to focus on return rather than growth in a difficult market. Despite this, WIB grew its core customer base this year, continuing to invest in service quality and grow its leading position in transaction banking. WIB changed its operating model to increase the focus on service and reduce its cost base—which has set the business up for improved performance in the years ahead. 1 Source: DBM Consultants Business Financial Services Monitor, September 2015 – 2016, 6MMA. MFI customers, all businesses. The Customer Satisfaction score is an average of customer satisfaction ratings of the customer’s main financial institution for business banking on a scale of 0 to 10 (0 means ‘extremely dissatisfied’ and 10 means ‘extremely satisfied’). 2 Source: DBM Consultants Business Financial Services Monitor, September 2015 – 2016, 6MMA. Westpac Group, MFI customers, all businesses. Net Promoter Score measures the net likelihood of recommendation to others of the customer’s main financial institution. Net Promoter ScoreSM is a trademark of Bain & Co Inc., Satmetrix Systems, Inc., and Mr Frederick Reichheld. 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). The ranking refers to Westpac Group’s position relative to the other three major Australian banking groups (ANZ Group, CBA Group and NAB Group). Chief Executive Officer’s report Full Year 2016 has been a year of change for Westpac New Zealand with the start of a major transformation program and the relaunch of its brand. Cash earnings for the division were lower over the year, down 4%3, principally due to the highly competitive market for home loans, and costs associated with its transformation program. While the overall financial result is below what we would like, I am confident that David McLean and his refreshed management team are taking the steps necessary to deliver a significant lift in service and cost efficiency in the years ahead. In summary, we are well underway with our ‘Service Revolution’, taking real steps towards delivering world-class service, digitising our business, and building a culture that puts a dedication to helping at the heart of a truly sustainable business. Creating a workforce for the future The environment in which our 40,000 people are working is changing. This includes how customers wish to interact with us, changes in daily work tasks, and expectations around diversity and flexibility. Public scrutiny of culture across the sector has also intensified. With this in mind, we have been working hard to find new ways to build the workforce of the future: where people with diverse backgrounds can adapt to change and, importantly, maintain a relentless focus on providing exceptional service. As part of this, our flagship initiative during the year was the introduction of Our Service Promise, a set of principles and practices that clearly defines our expectations of what it means to deliver great service—consistently. During the year, we conducted a survey which showed an employee engagement score of 69%. While this was a good outcome, it is below the high bar of global best practice – a benchmark to which we aspire. Given the amount of change in our organisation this year, the result was not a surprise; but nevertheless we’ve listened to feedback and are already rolling out a number of actions to address those areas our employees told us needed to improve. Our new city-based corporate offices are now providing more than 10,000 employees with some of the world’s best physical environments, tools, and technologies, and a new way of working that is driving greater agility, mobility, and productivity. We also continued to foster a more diverse and inclusive workplace, delivering some excellent results during the year. This included an increase in the number of women in leadership positions to 48%—up from 46% last year—which brings us closer to our target of 50% by 2017; and an increase in the cultural diversity of our employees. Notably, the percentage of employees who self-identify as Indigenous Australians increased to more than 4%, which is greater than the proportion in the broader Australian population. That leads me to the final issue I wanted to address in this year’s letter. 3 In New Zealand dollars. 2016 Westpac Group Annual Report 11 1 Bridging the trust gap Trust is fundamental to the service we provide. For us to fulfil our role, customers need to trust that we are acting in their interests; that our advice is honest; and that their money is safe. We recognise that there have been times when we have not met customers’ expectations and this has contributed to a trust gap between the community and the banking sector. We are working hard to rebuild that trust. There has been an increase in public and political scrutiny, with calls for further regulation and investigations into Australian banking activity—including a potential Royal Commission on conduct in the banking and financial services sector. A number of banks also face individual challenges, such as the civil proceedings in Federal Court commenced by ASIC in April this year, which allege manipulation of the Bank Bill Swap Rate between the period 6 April 2010 and 6 June 2012. We don’t accept ASIC’s allegations against Westpac and think this complex matter is now best resolved by the Courts. In our Code of Conduct we commit to doing the right thing by customers. Given the changing environment and need to build trust we’re implementing a number of programs to ensure our products, policies, reward frameworks and processes are even more closely aligned to customers’ interests. As part of this program we have:    appointed an independent customer advocate, Adrian Ahern, who is empowered to resolve customer issues and overturn decisions made by our dispute resolution processes; introduced new criteria to be applied to our products to confirm they’re fair for customers. A new governance committee assesses the application of these criteria; and reviewed our Whistleblower Protection Policy and approach, to ensure people feel comfortable to speak up and question practices when they don’t seem right, and provide a safe environment for them to do so. Westpac’s principles are clear: when something doesn’t measure up, we change it. When we find a problem, we fix it, so that it doesn’t happen again. And we’re open about the issues we find. At an employee level, we’re changing our remuneration frameworks to ensure we reward our people based on the value and outcomes delivered to customers. In November 2016, we were the first bank to remove all product related incentives across our 2,000 tellers in the Westpac branch network. Their incentives are now based entirely on the quality of service customers receive. We have increased transparency in financial planning and remain the only company to invite customers to publicly rate the service provided by our financial planners via the online Adviser View. We were also early movers in removing commissions paid to financial planners back in 2014, and are now revisiting the way we reward other specialised sales roles. Similarly, we have led the market on educational standards for financial advisers, and our current requirements are above the new standards recently proposed by the Federal Government. Over the year, a range of financial issues emerged for some of our peers across financial planning and insurance. We have thoroughly investigated our own operations and while we are not perfect, I can assure you that our record in this area is strong: BTFG has been a role model in seeking to genuinely help customers manage and protect their wealth. At an industry-level, we publicly committed to implement six areas of industry reform – the Australian Bankers’ Association’s (ABA) 6-point plan. The plan’s aim is to protect customer interests and increase transparency and accountability across the industry. As CEO, I know our people overwhelmingly set out to do the right thing by customers, and I want customers and the community to be confident of that too. The contract we hold with customers is one we’ve never taken for granted: customers trust us to help them live the lives they want; to grow; to be more secure; and to be better off. By focusing on customer needs, delivering world-class service, and measuring our success on customers’ success, I believe we have a business strategy that will, in time, help us to restore trust. History and our future As I mentioned at the outset, Westpac is fast approaching its 200th anniversary. It’s an exciting time to be part of this organisation; a time to reflect on our past and recognise our successes. But more importantly, we are looking to the future and positioning Westpac for its third century. That means ensuring our business is strong, our strategy is right, and that we are continuing to support our customers, shareholders, employees and the broader community. It also means taking a leadership role in tackling emerging issues that we believe will affect future prosperity. It’s this approach that has contributed to Westpac being named—for the third year in a row—the most sustainable bank in the world in the Dow Jones Sustainability Indices Review. This marks the ninth time we have topped this global annual index. During the year we invested in the people, businesses, and community organisations that are helping to shape our nation. Our $100 million Westpac Bicentennial Foundation is on track to award its 200th scholarship and will continue to add 100 scholars to the alumni every year, in perpetuity. We also launched the Westpac Businesses of Tomorrow program to identify 200 promising businesses that will receive direct support and intellectual capital from some of Australia’s leading business people. At the same time, the grants awarded by the Westpac Foundation have helped create more than 2,900 employment pathways for Australians experiencing disadvantage, and the number of businesses set up or expanded with support from Westpac’s microfinance partner, Many Rivers, exceeded 1,000. Our total committed exposure to the CleanTech and environmental services sector reached $6.2 billion, directed to activities such as generating renewable energy and 12 2016 Westpac Group Annual Report Chief Executive Officer’s report developing green buildings. Over the past five years, we have increased the proportion of renewable energy financing in our total electricity generation portfolio from 45% to 59%. We also brought to market a $500 million Westpac Climate Bond and an Energy Efficiency Finance Program. These are important steps in supporting the shift to a more sustainable economic model that is less dependent on fossil fuels. This demonstrates our commitment to supporting the transition to an economy that limits global warming to less than two degrees above pre-industrial levels. Our lending to help grow the stock of social and affordable housing grew to $1.05 billion, as we look to play our part in addressing the shortage of affordable housing. Summary It is an exciting time to be in banking. The industry is highly competitive, our operating environment remains challenging and we face increased regulatory and public scrutiny. However, with change comes opportunity and we are already responding and adapting across all elements of the business. Our service-led strategy is right for the times. We have strengthened our business and are committed to transforming our operations in ways that will give us a sustainable competitive advantage and bring benefits to all of our stakeholders. As we enter our third century of business, my executive team and I are proud to lead a company that is dedicated to serving our customers and our communities and is committed to operating with courage and integrity. As a result we’re confident that we will continue to deliver growth, returns, and stability that increases the value of your shares and makes you proud of your decision to invest in the Westpac Group. With warm regards, BRIAN HARTZER Chief Executive Officer Westpac Group 2016 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 consumer,1 business and institutional banking and wealth management services. We have branches, affiliates and controlled entities2 throughout Australia, New Zealand, Asia and in the Pacific region, and maintain branches and offices in some of the key financial centres around the world.3 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). At 30 September 2016, our market capitalisation was $99 billion4 and we had total assets of $839 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 building deep and enduring customer relationships, being a leader in the community, being a place where the best people want to work and, in so doing, delivering superior returns for shareholders. In delivering on our strategy, we are focused on our core markets, including Australia and New Zealand, where we provide a comprehensive range of financial products and services that assist us in meeting the financial services needs of customers. With our strong position in these markets, and over 13 million customers,5 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. As 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. 2016 has been a year of delivery and building momentum against our Service Revolution strategy. The Service Revolution is seeking to: provide a truly personal service for customers while better anticipating their needs; put customers in control of their finances; respond to the increased pace of innovation, disruption and changing customer behaviours through digitisation and increasing our capacity for innovation; and innovate and simplify to reinvent the customer experience. As part of our delivery of the Service Revolution, we have developed an integrated, multi-year plan that will be executed across the Group. In 2016, we pursued a number of transformation programs focused on the digitisation of the company through the design and development of a single bank technology infrastructure. We expect this will significantly transform customer experiences and drive operational efficiency. At the same time, our Consumer Bank and Business Bank transformation programs continued to deliver market-leading customer services, while lowering the cost to serve. Over the year, substantial work has also been undertaken on conduct and culture, with work focused on creating a common understanding and approach to managing conduct across the Group. In addition, we have worked with the industry in the setup and implementation of the Australian Bankers’ Association action plan designed to protect consumer interests, increase transparency and accountability and build trust and confidence in banks. Sustainability is part of our strategy of seeking 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 makes sustainability part of the way we do business, embedded in our strategy, values, culture and processes. Supporting our customer-focused strategy is a strong set of company-wide values, which are embedded in our culture. These are: 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 2016. 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 2016. 5 All customers with an active relationship (excludes channel only and potential relationships) as at 30 September 2016.      delighting customers; one team; integrity; courage; and achievement. 14 2016 Westpac Group Annual Report Strategic priorities In delivering our strategy, we have five strategic priorities that help guide our activities: Organisational structure Our operations comprise the following key customer-facing business divisions operating under multiple brands: Information on Westpac a)    Service leadership provide a seamless customer experience across all channels; deepen relationships through context-based customer experiences using our portfolio of brands; and acquire new customers by making it simpler, easier and better for customers to choose us. b)  Digital transformation create a 21st century, digitised bank with multi- brand capabilities;   c)  simplify products and processes by digitising end-to- end; and drive efficiency opportunities from digitisation and consolidation of systems. 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 meeting new liquidity requirements; and  maintain a high quality portfolio of assets, coupled with strong provisioning. Targeted growth focus on stronger growth in small to medium enterprises and wealth; and d)   e)     be targeted in specific business segments. Workforce revolution focus on a customer-centric 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. Consumer Bank is responsible for sales and service to consumer customers in Australia under the Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands. Activities are conducted through a dedicated team of specialist consumer relationship managers along with an extensive network of branches, call centres and ATMs. Customers are also supported by a range of internet and mobile banking solutions. Consumer Bank works in an integrated way with BTFG and WIB in the sales and service of select financial services and products, including in wealth management and foreign exchange. Business Bank is responsible for sales and service to micro, SME and commercial business customers for facilities up to approximately $150 million. The division operates under the Westpac, St.George, BankSA and Bank of Melbourne brands. Customers are provided with a wide range of banking and financial products and services to support their lending, payments and transaction needs. In addition, specialist services are provided for cash flow finance, trade finance, automotive and equipment finance, property finance and treasury services. The division is also responsible for certain consumer customers with auto finance loans. Business Bank works in an integrated way with BTFG and WIB in the sales and service of select financial services and products, including corporate superannuation, foreign exchange and interest rate hedging. BT Financial Group (BTFG) is Westpac’s wealth management and insurance arm of the Westpac Group providing a broad range of associated services. BTFG’s funds management operations include the manufacturing and distribution of investment, superannuation, retirement products, wealth administration platforms, private banking, margin lending and equities broking. BTFG’s insurance business covers the manufacturing and distribution of life, general and lenders mortgage insurance. The division also uses third parties for the manufacture of certain general insurance products as well as actively reinsuring its risk using external providers across all insurance classes. BTFG operates a range of wealth, funds management (including Ascalon, which is a boutique incubator of emerging fund managers) and financial advice brands and operates under the banking brands of Westpac, St.George, Bank of Melbourne and BankSA for Private Wealth and Insurance. BT Investment Management Limited (BTIM) is 29.5% owned by BTFG (following a partial sale in June 2015) with the business being equity accounted from July 2015. BTFG works in an integrated way with all the Group’s Australian divisions in supporting the insurance and wealth needs of customers. Westpac Institutional Bank (WIB) delivers a broad range of financial products and services to commercial, corporate, institutional and government customers with connections to Australia and New Zealand. WIB operates through dedicated industry relationship and specialist product teams, with expert knowledge in transactional banking, financial and debt capital markets, specialised capital and alternative investment solutions. Customers are supported throughout Australia as well as branches and subsidiaries located in 2016 Westpac Group Annual Report 15 1New Zealand, US, UK and Asia. WIB is also responsible for Westpac Pacific currently providing a range of banking services in Fiji and PNG. WIB works in an integrated way with all the Group’s divisions in the provision of more complex financial needs, including across foreign exchange and fixed interest solutions. Westpac New Zealand is responsible for sales and service of banking, wealth and insurance products for consumers, business and institutional customers in New Zealand. Westpac conducts its New Zealand banking business through two banks in New Zealand:  Westpac New Zealand Limited, which is incorporated in New Zealand; and  Westpac Banking Corporation (NZ 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. Group Businesses include:  Treasury, which is responsible for the management of the Group’s balance sheet, including wholesale funding, capital and management of liquidity. Treasury also manages the interest rate risk and foreign exchange risks inherent in the balance sheet, including managing the mismatch between Group assets and liabilities. Treasury’s earnings are primarily sourced from managing the Group’s balance sheet and interest rate risk, within set risk limits;  Group Technology, which comprises functions responsible for technology strategy and architecture, infrastructure and operations, applications development and business integration; and  Core Support, which comprises functions performed centrally, including Australian banking operations, property services, strategy, finance, risk, compliance, legal 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. Competition The 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 Group competes with other financial services industry players for customers, by 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 focused on specific regions or products. Our competitors include financial services and advisory companies such as banks, investment banks, credit unions, building societies, mortgage originators, credit card issuers, brokerage firms, fund and asset management companies, insurance companies and internet-based financial services providers. 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 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 partly driven by clearer global regulatory requirements for liquidity management. 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 gearing. 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 change. 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 delivered solid growth over the year ended June 2016, with real GDP growing 3.3%, supported by low interest rates and the low Australian dollar. This outcome was above expectations of around 2.75% growth and was achieved despite the still challenging international backdrop. The transition of the economy continues to progress as the downturn in mining investment has been offset by rising commodity and services exports, strong residential construction and solid growth in public demand. 1 All data and opinions under ‘Outlook’ are generated by our internal economists and management. 16 2016 Westpac Group Annual Report Information on Westpac constrained by uncertainty ahead of the July Federal election. Similar to recent years, there has been no growth in other consumer credit. Given the economic backdrop, financial system credit growth in the year to September 2017 is expected to be broadly in line with the current year at around 5.5%. Housing-related activity may ease a little over the year as price growth slows and business credit will potentially strengthen a little over the year as it rebounds from the current soft-spot. The underlying economics of the wealth industry continues to be sound. In addition to mandatory superannuation contributions, the ageing of the population is expected to see a higher portion of funds directed to retirement savings. We will continue executing our strategy of creating a great service company with our five strategic priorities assisting to guide this transformation. These include:  maintaining our performance disciplines – continuing to be prudent in the management of capital, managing returns effectively and maintaining the strength in our capital, funding and liquidity positions;     through service leadership, continue to grow customer numbers reaching 1 million additional customers between 2015 and 2017, while also increasing the depth of customer relationships; digital transformation – utilising technology to materially improve efficiency and reduce the Group’s cost to income ratio to below 40% over the next 2 years; wealth, small and medium business enterprises are our areas of targeted growth. These include commercialising our investment in the Group’s new wealth management system, called Panorama, and using new technologies to make business banking more accessible to customers; 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 experience significant regulatory change and scrutiny. Globally, this includes the expected release of a revised capital framework by the Basel Committee on Banking Supervision, and further developments on the implementation of the Net Stable Funding Ratio and Total Loss Absorbing Capacity. Given the strength of our business, and our balance sheet, we are well placed to respond to any additional regulatory requirements. 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. The health of the economy is also reflected in the unemployment rate, which has fallen from around 6% to 5.6%. Growth in national income has been soft, reflecting the drag from recent declines in commodity prices. This in turn has weighed on wages, profits and the government’s fiscal position. Falling commodity prices, overcapacity and rising competition are reflected in low inflation with headline CPI inflation sitting at just 1%. The modest level of inflation (below the RBA’s target range), and expectations that inflation will remain below the target for an extended period, has seen the RBA reduce the cash rate by 50 basis points over the year to 1.5%. Unfortunately, the current mix of growth is creating a divide between those states and regions that have been impacted by the slowdown in mining investment (Western Australia and regional Queensland) and those that have not. In Western Australia in particular, we are seeing weaker employment outcomes, softening house prices and more restrained spending. Growth in New South Wales and Victoria, on the other hand, has been stronger, as these states have experienced the majority of construction activity and have a more services based economy. In New Zealand, the economy has also been sound, with a large pipeline of construction projects, strong population growth and low interest rates supporting growth. This has been despite some pressure on export returns. The international outlook softened over the year, with growth across our major trading partners a little below recent averages. Growth in China has continued to ease with excess capacity in many industries. Growth in the US economy was also lower over the past year, reflecting weak productivity growth, although there has been some pick-up in activity more recently. European growth has remained relatively modest. The international economy carries risks. In particular, the potential for disruption to the Chinese economy remains real given the sharp rise in debt in recent years, ‘unbalanced’ conditions across housing markets and slowing growth. In Europe, Britain’s decision to leave the EU, stagnant growth, uncomfortably low inflation and renewed concerns about the banks could also continue to affect conditions. In the US, growth continues to be overly dependent on the consumer with business investment remaining lacklustre. Within Australia, the 2017 outlook is for real GDP to grow at around 3%, which remains a little above medium-term expectations. This growth reflects expectations for higher household spending, as income growth lifts, although prospects for a decent lift in non-mining investment seem remote. There are expected to be ongoing contributions from exports (both resources and services) and from public demand, including public infrastructure. Based on recent approvals, residential construction is expected to remain sound. With the end of the mining investment downturn in sight, its drag on growth is also expected to reduce. The mix of growth (more services-led) is more labour intensive and is expected to be supportive of sound employment growth overall. Lead indicators point to the unemployment rate remaining little changed over the year. Financial system credit grew by 5.4% in the year to September 2016, with system housing credit rising 6.4% and system business credit expanding by 4.7%, a result 2016 Westpac Group Annual Report 17 1Significant developments Corporate significant developments Inquiry into Australia’s Financial System In 2013, the Federal Government established an inquiry into Australia’s financial system (FSI). The FSI examined how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth. On 7 December 2014, the FSI released its Final Report, which made 44 recommendations relating to a broad number of matters across the financial sector. Westpac supported the majority of the FSI’s recommendations. On 20 October 2015, the Government announced its formal response to the FSI’s recommendations, and in doing so, endorsed the majority of the recommendations. The Government continues to consult on the detailed implementation of a number of these recommendations and Westpac is actively contributing to these consultations. Australian Securities and Investments Commission (ASIC) reform package On 20 April 2016, the Federal Government announced a package of policy reforms designed primarily to strengthen the powers and funding of ASIC. As part of this package, the Government announced that it would accelerate the implementation of certain recommendations made by the FSI, including:    granting ASIC a product intervention power; introducing a new ‘principles-based’ product design and distribution obligation on issuers and distributors; and reviewing ASIC’s enforcement regime (including the penalties available). On 19 October 2016, the Government released the terms of reference for the ASIC Enforcement Review Taskforce, which will assess the suitability of ASIC’s existing regulatory tools and whether they need to be strengthened. The taskforce is scheduled to report to the Government in 2017. In addition, the Government is expected to establish consultation processes to consider the detailed implementation of the product-related reforms in the near future. BBSW proceedings As part of ASIC’s ongoing industry-wide investigations into the interbank short-term money market and its impact on the setting of the bank bill swap reference rate (BBSW), on 5 April 2016, ASIC commenced civil proceedings against Westpac in the Federal Court of Australia, alleging certain misconduct including market manipulation and unconscionable conduct. The conduct that is the subject of the proceedings is alleged to have occurred between 6 April 2010 and 6 June 2012. Westpac is defending these proceedings. ASIC is seeking from the court declarations that Westpac breached various provisions of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth), pecuniary penalties of unspecified amounts and orders requiring Westpac to implement a comprehensive compliance program for persons involved in Westpac’s trading in the relevant market. In August 2016, a class action was filed in the United States District Court for the Southern District of New York against Westpac and a large number of other Australian and international banks alleging misconduct in relation to BBSW. These proceedings are at an early stage and the level of damages sought has not been specified. Westpac is defending these proceedings. Exception fees Between 2011 and 2014, Westpac was served with three class action proceedings seeking refunds of certain exception fees paid by customers. In September 2016, the law firm representing the class members notified Westpac that it intends to discontinue all of those class actions. One of the class actions, in the Supreme Court of New South Wales, was formally discontinued in October 2016. The other two class actions, in the Federal Court of Australia, will be discontinued in the near future once certain procedural formalities have been completed. Issue of Additional Tier 1 capital securities On 30 June 2016, Westpac issued approximately $1.7 billion of securities known as Westpac Capital Notes 4, which qualify as Additional Tier 1 capital under APRA’s capital adequacy framework. Redemption of Additional Tier 1 capital securities On 31 March 2016, all outstanding Trust Preferred Securities (US$525 million) of Westpac Capital Trust IV (TPS 2004) were redeemed. On 30 June 2016, all outstanding Westpac Trust Preferred Securities (Westpac TPS) ($763 million) were redeemed by Westpac RE Limited, the responsible entity of the Westpac TPS Trust. TPS 2004 and Westpac TPS qualified for transitional treatment as Additional Tier 1 capital. Australian Bankers’ Association (ABA) action plan and industry reviews On 21 April 2016, the ABA announced an action plan to protect consumer interests, increase transparency and accountability and build trust and confidence in banks. The plan includes a number of industry-led initiatives including:     a review of product-based sales commissions; a review of the Code of Banking Practice; implementation of an industry register which would extend existing identification of rogue advisers to any bank employees, including customer-facing and non- customer facing roles; and an evaluation of the establishment of an industry wide, mandatory last resort compensation scheme covering financial advisers. Westpac is currently participating in these ongoing initiatives, which may lead to further reform in these areas. House of Representatives Standing Committee on Economics Review of the Four Major Banks and other industry reviews On 16 September 2016, the Chairman of the House of Representatives Standing Committee on Economics 18 2016 Westpac Group Annual Report announced that the committee had commenced its Review of the Four Major Banks (Parliamentary Review). The terms of reference for the Parliamentary Review are wide-ranging, with one area of focus being how individual banks and the industry as a whole are responding to issues identified through other inquiries, including through the ABA action plan. Westpac attended a public hearing of the Parliamentary Review on 6 October 2016. In addition, there are a number of other reviews underway that may impact upon Westpac and the financial services sector, including:   an inquiry into business lending to be conducted by the Australian Small Business and Family Enterprise Ombudsman; and a review into external dispute resolution schemes, which will also consider the design, operation and powers of a proposed banking tribunal. Professional standards for financial advisers On 17 October 2016, the Federal Government announced that it would introduce legislation mandating professional standards for financial advisers. The new legislation may include reforms such as:     compulsory education requirements for new and existing advisers; supervision requirements for new advisers; the introduction of a code of ethics; and the establishment of an industry-funded independent body charged with governing the professional standing of the financial advice industry. The Government is expected to introduce this legislation before the end of 2016 following final consultations with industry and consumer groups. The new regime is scheduled to commence on 1 January 2019 with a transitional compliance period applying to existing financial advisers. Financial benchmarks reform In October 2016, the Federal Government announced a package of measures designed to strengthen the regulation of financial benchmarks. The measures were recommended to the Government by the Council of Financial Regulators, who recently concluded a consultation process on financial benchmark reform. The key measures announced include:    ASIC will be empowered to develop enforceable rules for administrators and entities that make submissions to significant benchmarks (such as Westpac), including the power to compel submissions to benchmarks in the case that other calculation mechanisms fail; administrators of significant benchmarks will be required to hold a new ‘benchmark administration’ licence issued by ASIC (unless granted an exemption); and the manipulation of any financial benchmark or financial product used to determine a financial benchmark (such as Negotiable Certificates of Deposit) will be made a specific criminal and civil offence. Information on Westpac These measures are expected to be introduced over the next 18 months. Brexit On 23 June 2016, the United Kingdom European Union membership referendum was held, which saw UK citizens vote to leave the European Union (EU). The UK Government subsequently confirmed that it will invoke Article 50 of the Lisbon Treaty, which triggers a two year negotiation period under which the UK and EU will negotiate the terms of the UK’s departure. A recent UK High Court decision, which may be appealed by the UK Government, has indicated that any decision to invoke Article 50 must be made by Parliament. At this stage, it is difficult to predict the timing and full impact of Brexit on Westpac and the broader global financial services industry. Proposed reduction to the corporate tax rate On 1 September 2016, the Australian Government introduced legislation to reduce the corporate tax rate progressively from 30% to 25% over the next 10 years. If the legislation is passed in its current form, the benefit of the reduced corporate tax rate for Westpac will begin to take effect from the 2023-24 financial year. Accordingly, the proposed reduction to the corporate tax rate will not significantly impact Westpac in the short term. A reduction to the corporate tax rate will reduce the value of imputation credits attached to franked dividends and distributions to security holders. Taxation of cross-border financing arrangements The Australian Government has decided to implement the Organisation for Economic Co-operation and Development’s (OECD) proposals relating to the taxation treatment of cross- border financing arrangements. These proposals may affect the taxation arrangements for ‘hybrid’ regulatory capital instruments issued by Westpac. The Board of Taxation has been asked to make recommendations to the Government about implementing the OECD proposals. If implemented without grandfathering, the potential effect of the OECD proposals is to increase the after-tax cost of certain previously issued hybrid capital securities. The New Zealand Government has also commenced a public consultation process to consider whether the OECD proposals could be implemented in New Zealand. Sale of Westpac’s operations in five Pacific Island nations On 1 July 2016, Westpac completed the sale of its banking business in Vanuatu to Bank of South Pacific Limited (BSP). This was the fifth and final banking business to be sold to BSP, after the previous sale of Westpac’s operations in the Cook Islands, Samoa, Tonga and Solomon Islands. Regulatory significant developments FSI’s recommendations on bank capital The Australian Government’s response to the FSI has endorsed APRA’s actions in implementing the FSI’s capital- related recommendations, and has confirmed APRA’s responsibility for implementing the remaining capital proposals. 2016 Westpac Group Annual Report 19 1To date, APRA has formally responded to two of the FSI’s recommendations:   Capital levels On 4 July 2016, APRA released a comparison of Australian banks’ capital ratios relative to internationally- active banks using a common method of calculation. The comparison was based on a quantitative impact study (QIS) published by the Basel Committee on Banking Supervision (BCBS). The QIS included the capital ratios of internationally-active banks as of 30 June 2015, with APRA using capital ratios as of 31 December 2015 for the Australian banks. APRA concluded that the relative positioning of the major Australian banks’ Common Equity Tier 1 ratios was broadly in line with the benchmark suggested by the FSI of capital ratios in the top quartile of internationally- active banks. Narrow mortgage risk weight differences On 20 July 2015, APRA announced an interim change to how risk weighted assets (RWA) would 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. This change led to the ratio of mortgage RWA to mortgage exposures for the Group increasing to approximately 24% on 1 July 2016. In August 2016, APRA reaffirmed its objective of a risk weight for Australian residential mortgages of an average of at least 25%, measured across all Advanced IRB banks. Further changes to regulatory capital requirements for Australian banks were also proposed by the FSI – these are likely to result from current international regulatory reviews being undertaken by the 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 in the context of Australia’s circumstances and their final impact on Westpac will depend on APRA’s implementation. Macro-prudential regulation From December 2014, APRA has made use of macro prudential measures targeting a number of segments of mortgage lending that continue to impact lending practices in Australia. The measures include constraining growth in investment property lending within a benchmark of 10% and imposing additional levels of conservatism in serviceability assessments. Basel Committee on Banking Supervision Regulatory reforms and significant developments arising in relation to changes initiated by the BCBS and the FSB include: Increased loss absorbency In November 2015, the FSB issued a final paper for enhancing the TLAC for G-SIBs to operate alongside the Basel III capital requirements. At the same time, a consultation paper on TLAC holdings was issued by the BCBS. These proposals form part of the G20’s initiatives aimed at ‘ending too-big-to-fail’ and ensuring that the resolution of a failing Global Systemically Important Financial Institution can be carried out without causing systemic disruption or resorting to taxpayer support. In October 2016, the BCBS issued a final standard for TLAC holdings of G-SIBs. This standard will take effect from 1 January 2019 for most G-SIBs. The FSI 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 implementation of the recommendation by APRA 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. Since then, the BCBS has released two further consultation papers related to the risk based capital framework. The first was released in December 2015, which put forward possible amendments to the Standardised Approach for Credit Risk and the second was released in March 2016, which proposed constraints on the use of internal models for the calculation of risk weighted assets. In March 2016, the BCBS also released a consultation paper covering the Standardised Measurement Approach for Operational Risk. This paper proposed the removal of the use of internal model approaches to measure operational risk capital and replacement of these with a revised framework based on the proposed Standardised Measurement Approach. The revised standards for the Minimum Capital Requirements for Market Risk were released by the BCBS in January 2016. In combination, these reform measures are intended to improve the consistency and comparability of bank capital ratios. However, finalisation of the remaining BCBS changes is not expected before the end of 2016, 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. In April 2016, the BCBS published a consultation paper requiring a minimum leverage ratio of 3% as a Pillar 1 requirement from January 2018. Further details of Westpac’s other regulatory disclosures required in accordance with prudential standard APS 330 can be accessed at www.westpac.com.au/aboutwestpac/investor- centre/financial-information/regulatorydisclosures. 20 2016 Westpac Group Annual Report Other regulatory developments Liquidity APRA released a revised draft of the prudential standard on liquidity (APS 210) on 29 September 2016. This draft prudential standard included the Net Stable Funding Ratio (NSFR) requirement, a measure designed to encourage longer-term funding resilience. APRA has indicated that the final APS 210, inclusive of the NSFR, will commence from 1 January 2018 in line with the BCBS’s effective date. Westpac is taking steps to comply with the NSFR from 1 January 2018. Committed Liquidity Facility (CLF) annual revision The Reserve Bank of Australia makes available to ADIs a CLF that, subject to qualifying conditions, can be accessed to meet Liquidity Coverage Ratio requirements under APS 210. This amount is reviewed annually. Westpac has received approval for a CLF of $49.1 billion for the 2017 calendar year (2016 calendar year: $58.6 billion). OECD Common Reporting Standard The OECD has developed Common Reporting Standard (CRS) rules for the automatic exchange of customer tax residency and financial account information amongst participating CRS countries. CRS will require the Westpac Group to identify the tax residency of all customers and to report the tax residency and financial account details of non-resident customers to the relevant authorities in jurisdictions with which Australia has entered into an exchange of information agreement. Australian financial institutions will have to collect customer tax residency information from 1 July 2017 and will have to report these details and associated financial account information from July 2018. Implementation of the rules will impose additional costs and operational burdens on Westpac. Certain countries (such as the UK and India) have implemented the rules with effect from 1 January 2016. Westpac has implemented changes to its business operations to comply with the CRS requirements in these countries from 1 January 2016. OTC derivatives reform International regulatory reforms relating to over-the-counter (OTC) derivatives continue to be implemented by financial regulators across the globe, with the focus moving to implementing margin requirements for non-centrally cleared derivatives. Globally, there has been significant progress developing requirements to implement the final policy framework for the margining of uncleared OTC derivatives as published by the BCBS and the International Organization of Securities Commissions (IOSCO) in September 2013. Requirements for variation and initial margin commenced on 1 September 2016 in the US, Canada and Japan, while authorities in Asia and the EU are currently developing proposals. On 17 October 2016, APRA published prudential standard CPS 226, containing its final rules for margining and risk mitigation for non-centrally cleared derivatives. APRA did not, however, publish a commencement date for these obligations. Information on Westpac Westpac is now taking steps to ensure that it is in a position to comply with these global margin reforms. In addition, Westpac continues to work with ASIC and industry associations in relation to the reporting and clearing of OTC derivative trades and the implementation of various rules. Westpac has been implementing OTC derivatives trade reporting regulations imposed by the Monetary Authority of Singapore, Hong Kong Monetary Authority and various provincial financial regulators in Canada. Certain aspects of trade reporting have commenced in these jurisdictions and continue to be implemented and enhanced in phases. Westpac has also been implementing clearing requirements in relation to interest rate derivatives under Australian, US and European rules and credit default swaps under European rules. New Zealand Regulatory reforms and significant developments in New Zealand include: Reserve Bank of New Zealand (RBNZ) – macro prudential policy framework Since October 2013, restrictions on high loan-to-value-ratio (LVR) lending have been part of the RBNZ’s macro- prudential policy framework. In September 2016, the RBNZ introduced changes to LVR restrictions that apply to residential property lending throughout New Zealand. From October 2016, residential property investment lending where the LVR is greater than 60% cannot exceed 5% of a bank’s new residential mortgage lending for that category, carried out in the three month measurement period which applies to WNZL. In addition, non-property investment residential lending where the LVR is greater than 80% cannot comprise more than 10% of that new residential mortgage lending in the relevant measurement period. The RBNZ is also investigating the case for restrictions on the total debt-to- income ratios of borrowers. RBNZ – Review of Outsourcing Policy In August 2015, the RBNZ released a consultation paper proposing revisions to its Outsourcing Policy that would have prohibited banks from outsourcing certain key functions to its related parties. The paper specifically highlighted the general ledger, SWIFT gateway and licence and regulatory reporting as three areas where outsourcing would be prohibited. These revisions were designed to support the RBNZ’s approach to bank resolution, as set out in its Open Bank Resolution policy. In May 2016, the RBNZ released a second consultation paper that clarified that there may be other bank functions that are integral to its approach to bank resolution that will need to be addressed in the Outsourcing Policy. However, the RBNZ also noted that an outright prohibition on outsourcing may not be required if a bank has appropriate standby capability. Submissions on this consultation paper closed in August 2016 and the RBNZ has indicated it will release an exposure draft of the new policy towards the end of 2016 or early in 2017. RBNZ Regulatory stocktake The RBNZ is undertaking a stocktake of the regulatory framework applying to banks with the aim of improving the efficiency, clarity and consistency of regulatory 2016 Westpac Group Annual Report 21 1requirements. The RBNZ released its first consultation document on potential changes to the prudential regime arising out of the stocktake in July 2015 and published a summary of submissions and its policy decisions in December 2015. One of the key issues considered was the RBNZ’s off-quarter disclosure requirements. The RBNZ announced that it had decided to recommend to the Minister of Finance that the requirement for overseas incorporated registered banks to publish off-quarter disclosure information should be removed. In September 2016, the RBNZ released a consultation paper that proposed an option which would involve the RBNZ publishing a quarterly electronic “dashboard” of key financial information submitted by individual locally incorporated banks, which would replace the existing off-quarter disclosure statement requirements for these banks. The paper also considered the RBNZ’s less preferred option which involves locally incorporated banks publishing a shorter disclosure statement providing essential information on capital and asset quality plus liquidity. Changes to the off-quarter disclosure regime are expected to take effect in 2017. Financial Advisers Act (FAA) The New Zealand Government announced plans for changes to the FAA regime in July 2016. A bill is expected to be introduced next year after consultation on an exposure draft of the legislation. The changes to the FAA will simplify the regime by removing unnecessary complexity and regulatory boundaries. Other key changes include:   enabling the provision of automated digital advice without the direct involvement of a human adviser (robo- advice); requiring all individuals or robo-advice platforms providing financial advice to: – place the interests of the consumer first; – only provide advice where competent to do so; – be licensed; and  making disclosure requirements more meaningful to improve consumer understanding and transparency. Supervision and regulation Australia Within Australia, we are subject to supervision and regulation by six principal agencies: the Australian Prudential Regulation Authority (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, re-insurance, life insurance and private health 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 auditor also has 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 Commonwealth 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 (Cth) 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 (Shareholdings) Act 1998 (Cth), the Australian 22 2016 Westpac Group Annual Report Government’s Treasurer must approve an entity acquiring a stake of more than 15% in a particular financial sector company. acceptances, but excluding accrued expenses, and amounts due and other liabilities to other branches, agencies and subsidiaries of the foreign bank). Information on Westpac 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 (Cth). 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 (Cth) and the Financial Transaction Reports Act 1988 (Cth). 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 Reserve Bank of New Zealand (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 RBNZ is currently considering changes to the requirements applying to off-quarter disclosure statements. The Financial Markets Authority (FMA) is a financial conduct regulator whose 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. 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 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. As of 22 June 2016, we elected to be treated as a financial holding company in the US pursuant to the Bank Holding Company Act of 1956 and Federal Reserve Board Regulation Y. Our election will remain effective so long as we meet certain capital and management standards prescribed by the US Federal Reserve. 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 and 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 (Cth). 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 Westpac Capital Markets LLC maintain an anti-money laundering compliance program designed to address US legal requirements. US economic and trade sanctions, as administered by the Office of Foreign Assets Control (OFAC), prohibit or significantly restrict US financial institutions, including the US branches and operations of foreign banks, and other US persons from doing business with certain persons, entities and jurisdictions. Westpac’s New York branch and Westpac Capital Markets LLC maintain compliance programs designed to comply with OFAC sanctions programs, and Westpac has a Group-wide program to ensure adequate compliance. 2016 Westpac Group Annual Report 23 1Legal proceedings Our entities are defendants from time to time in legal proceedings arising from the conduct of our business. 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 we see 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 (third edition) published by the ASX Limited’s Corporate Governance Council. Westpac’s 2016 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 this Westpac Annual Report 2016, Annual Review and Sustainability Report, 2016 Sustainability Performance Report and investor discussion packs and presentations can be accessed at www.westpac.com.au/investorcentre 24 2016 Westpac Group Annual Report Directors’ report Our Directors present their report together with the financial statements of the Group for the financial year ended 30 September 2016. 1. Directors The names of the persons who have been Directors, or appointed as Directors, during the period since 1 October 2015 and up to the date of this report are: Lindsay Philip Maxsted, Brian Charles Hartzer, Elizabeth Blomfield Bryan, Ewen Graham Wolseley Crouch, Catriona Alison Deans (Alison Deans), Craig William Dunn, Robert George Elstone, Peter John Oswin Hawkins and Peter Ralph Marriott. 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 2016 and the period for which each directorship has been held, are set out below. Name: Lindsay Maxsted, DipBus (Gordon), FCA, FAICD Age: 62 Term of office: Director since March 2008 and Chairman since December 2011. 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 principal directorships: Managing Director of Align Capital Pty Ltd and Director of Baker IDI Heart and Diabetes Institute Holdings Limited. Other interests: Nil. 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 2001 to 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: 49 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 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. 2016 Westpac Group Annual Report 25 1Name: Elizabeth Bryan AM, BA (Econ.), MA (Econ.) Other principal directorships: Nil. Age: 70 Term of office: Director since November 2006. Date of next scheduled re-election: Not applicable. Elizabeth Bryan will retire following the 2016 AGM. Independent: Yes. Current directorships of listed entities and dates of office: Insurance Australia Group Limited (Chairman since March 2016 and previously Deputy Chairman from June 2015 to March 2016) and Virgin Australia Holdings Limited (Chairman since May 2015). Name: Ewen Crouch AM, BEc (Hons.), LLB, FAICD Age: 60 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 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, Other Westpac related entities directorships and dates of office: Nil. Skills, experience and expertise: Ewen was a Partner at Allens from 1988 to 2013, where he was one of Australia’s most accomplished mergers and acquisitions lawyers. He served as a member of the firm’s board for 11 years, including four years as Chairman of Partners. His other roles at Allens included Co- Head Mergers and Acquisitions and Equity Capital Markets, Executive Partner, Asian offices and Deputy Managing Partner. He is now a Consultant to Allens. From 2010 to 2015, Ewen was a member of the Takeovers Panel. 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: Caltex Australia Limited (July 2002 to December 2015). 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. 26 2016 Westpac Group Annual Report Directors’ report Alison was an Independent Director of Social Ventures Australia from September 2007 to April 2013. 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. Name: Alison Deans, BA, MBA, GAICD Age: 48 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: Senior Advisor, McKinsey & Company. 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 consulting roles focused on e-commerce, media and financial services in Australia. During this time, Alison has held a number of senior executive roles including as the CEO of eCorp Limited, Hoyts Cinemas and eBay, Australia and New Zealand. She was the CEO of the technology-based investment company netus Pty Ltd, which was acquired by Fairfax Media Limited in 2012. Name: Craig Dunn, BCom, FCA Age: 53 Term of office: Director since June 2015. Date of next scheduled re-election: December 2018. Independent: Yes. Current directorships of listed entities and dates of office: Telstra Corporation Limited (since April 2016). Other principal directorships: Financial Literacy Australia Limited, Chairman of The Australian Ballet and Chairman of Stone and Chalk Limited. Other interests: Member of the ASIC External Advisory Panel, Board member of each of the New South Wales Government’s Financial Services Knowledge Hub and Jobs for New South Wales and Consultant to King & Wood Mallesons. Other Westpac related entities directorships and dates of office: Nil. Craig is currently the Chairman of the Australian Government’s Fintech Advisory Group. 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). Skills, experience and expertise: Craig has more than 20 years’ experience in financial services, including as CEO of AMP Limited from 2008 to 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 Forum, the Consumer and Financial Literacy Taskforce and a Panel member of the Australian Government’s Financial System Inquiry. 2016 Westpac Group Annual Report 27 1Name: Robert Elstone, BA (Hons.), MA (Econ.), MCom Age: 63 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. 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. Name: Peter Hawkins, BCA (Hons.), SF Fin, FAIM, ACA (NZ), FAICD Age: 62 Term of office: Director since December 2008. Date of next scheduled re-election: December 2017. 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 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. Name: Peter Marriott, BEc (Hons.), FCA Age: 59 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. Peter has 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. 28 2016 Westpac Group Annual Report Directors’ report Company Secretary Our Company Secretaries as at 30 September 2016 were 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 held 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. John resigned as Company Secretary of Westpac effective 30 September 2016.1 Tim Hartin (LLB (Hons.)) was appointed Group Company Secretary in November 2011. Before that appointment, Tim was Head of Legal - Risk Management & Workouts, Counsel & Secretariat and prior to that, he was Counsel, Corporate Core. Before joining Westpac in 2006, Tim was a Consultant with Gilbert + Tobin, where he provided corporate advisory services to ASX listed companies. Tim was previously a lawyer at Henderson Boyd Jackson W.S. in Scotland and in London in Herbert Smith’s corporate and corporate finance division. 2. Executive Team As at 30 September 2016 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 Alexandra Holcomb Chief Risk Officer Peter King David Lindberg David McLean Christine Parker Gary Thursby Chief Financial Officer Chief Executive, 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. 1 Rebecca Lim, Westpac’s Group General Counsel & Chief Compliance Officer, was appointed Company Secretary of Westpac effective 1 October 2016. 2016 Westpac Group Annual Report 29 1 Brian Hartzer BA, CFA. Age 49 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 is a Director of the Australian Bankers’ Association and was formerly the Chairman until December 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 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. He first joined Westpac in 1996 as Head of Foreign Exchange. Philip was appointed as a Director of Hastings Management Pty Limited in July 2016. In April 2014, he was appointed the inaugural Chairman of Westpac Bicentennial Foundation, a $100 million scholarship fund with an exclusive focus on Australian education and leadership. 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 Stanford University Executive Program. John Arthur LLB (Hons.). Age 61 Chief Operating Officer John was appointed Chief Operating Officer in November 2011. He had 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. John retired as Chief Operating Officer effective 30 September 2016. 30 2016 Westpac Group Annual Report Directors’ report Lyn Cobley BEc, SF FIN, GAICD. Age 53 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 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 is a member of both the Australian Financial Markets Association (AFMA) and the Westpac Foundation. She is also a member of Chief Executive Women. 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. Brad Cooper DipBM, MBA. Age 54 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 51 Chief Information Officer Dave was appointed Chief Information Officer in September 2014. Dave has almost 30 years of experience with proven expertise in IT and financial services and the implementation of large, complex projects. Dave has been on the Board of the Westpac Bicentennial Foundation, a $100 million scholarship fund with exclusive focus on Australian education and leadership since 2015. Before joining Westpac, Dave 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 52 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. 2016 Westpac Group Annual Report 31 1Alexandra Holcomb BA, MBA, MA. Age 55 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 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. Peter King BEc, FCA. Age 46 Chief Financial Officer Peter was appointed Chief Financial Officer in April 2014, with responsibility for Westpac’s Finance, Group Audit, Tax 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 41 Chief Executive, Business Bank David was appointed Chief Executive, 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 in Australia. 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 58 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. 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 ‐ 32 2016 Westpac Group Annual Report Directors’ report Christine Parker BGDipBus (HRM). Age 56 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. Gary Thursby BEc, DipAcc, FCA. Age 54 Chief Strategy Officer Gary Thursby has been Chief Strategy Officer since February 2015, with responsibility for the Group’s strategy and mergers & acquisition portfolios. Prior to this role, Gary was Chief Financial Officer, Australian Financial Services, where his responsibilities included Westpac’s Australian retail banking and wealth management businesses. Before joining Westpac in 2008, Gary held a number of senior finance roles at Commonwealth Bank of Australia (CBA) including Deputy CFO and CFO Retail Bank. Gary has over 20 years’ experience in financial services, covering finance, M&A and large scale program delivery. He 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 2016 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, interest rate risk management and foreign exchange services. There have been no significant changes in the nature of the principal activities of the Group during 2016. Operating and financial review b) The net profit attributable to equity holders of Westpac for the financial year ended 30 September 2016 was $7,445 million, a decrease of $567 million or 7% compared to 2015. Key features of this result were:    a 3% decrease in net operating income before operating expenses and impairment charges with: – net interest income of $15,148 million, an increase of $881 million or 6% compared to 2015, with loan growth of 6%, customer deposit growth of 9% and a 1 basis point increase in net interest margin to 2.10%; and – non-interest income of $5,837 million, a decrease of $1,538 million or 21% compared to 2015, primarily due to large infrequent items in 2015. Infrequent items included the profit on the partial sale of BT Investment Management Limited (BTIM) and the impact of the move to equity accounting for the remaining BTIM shareholding ($1,316 million), lower profit on the sale of assets ($102 million) and lower performance fees ($24 million), partly offset by the derivative methodology adjustment of $122 million. Excluding these items, non-interest income reduced $218 million or 4% with reduced fees in Westpac Institutional Bank from lower activity and reduced credit cards income in Consumer Bank which included the impact of lower interchange rates; operating expenses were $9,217 million, a decrease of $256 million or 3% compared to 2015, which included $505 million of higher technology expenses related to changes to accounting for technology investment spending. Excluding this item, operating expenses increased $249 million or 3% primarily from the impact of the Group’s investment programs, higher compliance and regulatory expenses and higher occupancy expenses relating to operating leases in the auto and equipment finance businesses, partly offset by productivity benefits and the impact of the partial sale of BTIM; and impairment charges were $1,124 million, an increase of $371 million or 49% compared to 2015. Overall asset quality remained sound, with stressed exposures as a percentage of total committed exposures at 1.20% while total impaired loans to total loans were 0.32%. The increase in impairment charges was primarily due to additional provisioning following the downgrade of a small number of institutional customers to impaired in First Half of 2016, a rise in write-offs in the auto finance portfolio and lower write-backs. 2016 Westpac Group Annual Report 33 1A review of the operations of the Group and its divisions and their results for the financial year ended 30 September 2016 is set out in Section 2 of the Annual Report under the sections ‘Review of Group operations’, ‘Divisional performance’ and ‘Risk and risk management’, 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 this Annual Report, which form part of this report. Dividends c) Since 30 September 2016, Westpac has announced a final ordinary dividend of 94 cents per Westpac ordinary share, totalling approximately $3,145 million for the year ended 30 September 2016 (2015 final ordinary dividend of 94 cents per Westpac ordinary share, totalling approximately $2,993 million). The dividend will be fully franked and will be paid on 21 December 2016. An interim ordinary dividend for the current financial year of 94 cents per Westpac ordinary share for the half year ended 31 March 2016, totalling $3,136 million, was paid as a fully franked dividend on 4 July 2016 (2015 interim ordinary dividend of 93 cents per Westpac ordinary share, totalling $2,902 million). Significant changes in state of affairs and events during and since the end of the 2016 financial year d) Significant changes in the state of affairs of the Group were:      the issuance of $3.5 billion of share capital in October and November 2015; the issuance of approximately $1.7 billion of securities known as Westpac Capital Notes 4; the redemption of all outstanding Trust Preferred Securities (USD $525 million) of Westpac Capital Trust IV (TPS 2004); the redemption of all outstanding Westpac Trust Preferred Securities (Westpac TPS) ($763 million) by Westpac RE Limited, the responsible entity of the Westpac TPS Trust; 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 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. Business strategies, developments and expected results e) 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 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 Directors’ interests in securities a) 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 2016 and in the tables below:     34 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. 2016 Westpac Group Annual Report Directors’ interests in Westpac and related bodies corporate as at 7 November 2016 Num ber of Relevant Interests in Westpac Ordinary Shares Num ber of Westpac Share Rights Westpac CPS 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 19,472 53,722 1 27,967 36,431 3 9,392 8,869 11,384 15,880 4 20,870 - 453,162 2 - - - - - - - - - - - - - - 1,370 - 1 Brian Hartzer’s interest in Westpac ordinary shares includes 19,745 restricted shares held under the CEO Restricted Share Plan. 2 Share rights issued under the CEO Long Term Incentive Plan and Long Term Incentive 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, 850 Westpac Capital Notes 3 and 882 Westpac Capital Notes 4. 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). 2016 Westpac Group Annual Report 35 1  Indemnities and insurance b) 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 2016, the Group has insurance cover which, in certain circumstances, will provide reimbursement for amounts which we 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. Options and share rights outstanding c) As at the date of this report there are 657,112 share options outstanding and 4,930,154 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 $27.18. The latest dates for exercise of the share rights range between 15 December 2016 and 1 October 2030. 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. Proceedings on behalf of Westpac d) 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. 36 2016 Westpac Group Annual Report 5. Environmental disclosure 6. Rounding of amounts Directors’ report Westpac is an entity to which ASIC Corporations Instrument 2016/191 dated 24 March 2016, relating to the rounding of amounts in directors’ reports and financial reports, applies. Pursuant to this Instrument, 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 2016. In Australia, political expenditure for the financial year ended 30 September 2016 was $196,555. This 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. There was no expenditure on political activities in New Zealand for the financial year ended 30 September 2016. 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 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/sustainability. 1 Formerly known as the Carbon Disclosure Project. 2 Westpac implemented energy efficiency opportunities that are expected to result in estimated energy savings of 580GJ, carbon savings of 3,847tCO2e and cost savings of $399,564 per year. 2016 Westpac Group Annual Report 37 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 2016: Notes Board Audit Committee Risk & Compliance Committee Nominations Committee Remuneration Committee Technology Committee Number of meetings held during the year Director Lindsay Maxsted Brian Hartzer Elizabeth Bryan Ewen Crouch Alison Deans Craig Dunn Robert Elstone Peter Hawkins Peter Marriott 1 2 3 4 5 6 7 8 9 A 9 9 9 9 9 9 9 9 9 B 9 9 9 9 9 9 9 9 9 A 6 - - - - - 6 6 6 B 5 - - - - - 6 6 6 C 1 - - - - - - - - A 4 - 4 4 4 4 4 4 4 B 4 - 4 4 4 4 4 4 4 A 4 - 4 4 - - - 4 4 B 4 - 4 4 - - - 4 4 A - - 6 6 - 6 6 - - B - - 6 6 - 6 6 - - A - 3 - - 3 - - 3 3 B - 3 - - 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 2015. 1 Chairman of the Board Nominations Committee. Member of the Board Audit Committee and the Board Risk & Compliance Committee. 2 Member of the Board Technology Committee. 3 Chairman of the Board Risk & Compliance Committee. Member of the Board Nominations Committee and the Board Remuneration Committee. 4 Chairman of the Board Remuneration Committee. Member of the Board Nominations Committee and the Board Risk & Compliance Committee. 5 Member of the Board Risk & Compliance Committee and the Board Technology Committee. 6 Member of the Board Remuneration Committee and Board Risk & Compliance Committee. 7 Member of the Board Remuneration Committee, the Board Risk & Compliance Committee and the Board Audit Committee. 8 Chairman of the Board Technology Committee. Member of the Board Audit Committee, the Board Nominations Committee and the Board Risk & Compliance Committee. 9 Chairman of the Board Audit Committee. Member of the Board Risk & Compliance Committee, the Board Technology Committee and the Board Nominations Committee. 38 2016 Westpac Group Annual Report Directors’ report 9. Remuneration Report Introduction from the Chairman of the Board Remuneration Committee Dear Shareholder, We are pleased to present Westpac’s 2016 Remuneration Report (Report). 2016 Remuneration outcomes Each year the Board assesses a number of factors when determining remuneration outcomes. In addition to balanced scoreboards including financial results, the Committee assesses other elements of performance such as the quality of the results, key performance drivers, meeting customer needs, the risk and operating environment and effectiveness of implementation of strategic initiatives to determine if the scoreboard outcomes adequately reflect actual performance and return to shareholders. This year the Group performance was sound. Although our cash earnings were flat on last year, we have finished the year with a stronger balance sheet in terms of both capital and liquidity. The higher capital and associated number of shares on issue combined with the flat cash earnings result has impacted the earnings per share as well as the Group’s return on equity. It is against these outcomes that the short and long-term incentives were finalised. Short-term incentive outcomes during the year for the CEO and the Group Executive team averaged 95% of target, down by an average of 11% on last year, and were within a range of 85% to 106%. Different incentive outcomes across the Group Executive team reflect the performance of each division and the quality of the performance delivered. In 2016, the 2013 Long Term Incentive (LTI) reached the test date. As the minimum performance vesting thresholds were not met, none of the 2013 LTI will vest. More specifically:  Westpac’s LTI plan Total Shareholder Return (TSR) over the last three years was 15.2%. While we ranked second amongst the four major Australian banks over the performance period, this outcome was below the 50th percentile vesting threshold so none of the 2013 TSR hurdled rights vested. This is the second consecutive year where the TSR hurdle has not been met.  Westpac’s Cash Earnings per Share (EPS) growth over the last three years was also below the vesting threshold of 12.5% (4.0% compound annual growth), so none of the 2013 EPS hurdled rights vested. The Committee considered that while EPS outcomes were negatively impacted by regulatory changes which led Westpac to raise more capital and increase the number of shares on issue, we did not feel the impact warranted any change in the vesting of rights against this performance hurdle. The 2013 grant required growth of 19.1% (6% compound annual growth) for all of this tranche to vest. Remuneration frameworks The Committee remains focused on assessing whether Westpac’s remuneration frameworks continue to be appropriate in the context of the competitive market in which we operate, the interests of shareholders and the external environment. The Board has decided that the growth based Cash EPS LTI hurdle is no longer the appropriate hurdle alongside the TSR hurdle for assessing the Group’s long-term performance. Accordingly, the Board has determined to replace the Cash EPS LTI hurdle with a return on equity based performance hurdle for LTI awards commencing in 2017. The new hurdle is the average cash earnings return on average ordinary equity (average Cash ROE) over the three year performance period from FY17 to FY19 inclusive. This hurdle aims to reward achievement of returns comfortably above the Group’s cost of capital while generating shareholder value and further improving how efficiently the Group uses its limited capital resources within the Group’s risk appetite. This hurdle will provide an appropriate counterbalance to TSR as a market reference for our share price and dividend performance. The performance range for the 2017 LTI is an average Cash ROE of between 13.5% and 14.5%. Below 13.5% none of the grant will vest and between 13.5% and 14.5%, 50% to 100% will vest on a straight line basis. Full details of this new hurdle are contained within the Report. 2016 Westpac Group Annual Report 39 1Remuneration Changes Two new Group Executive (Key Management Personnel – KMP) appointments have been made at starting remuneration levels lower than that of longer serving KMP: Rebecca Lim as the Group General Counsel & Chief Compliance Officer and Gary Thursby taking on the role of Group Executive, Strategy & Enterprise Services. As the appointments are effective 1 October 2016 and the roles designated as KMP, the remuneration details will be disclosed in the 2017 Report. Remuneration increases in 2016 were directed to those newly appointed executives who have demonstrated their capacity to deliver the required business outcomes. The average adjustment across the executive team in FY16 was below 2%. We are confident that the recent changes to our remuneration framework will support the delivery of sustainable outcomes in the best interests of our shareholders. Ewen Crouch Chairman – Board Remuneration Committee 40 2016 Westpac Group Annual Report 1. Governance and risk management This section details the Group’s approach to governance and risk management as they relate to remuneration. Governance 1.1. The Group’s remuneration policies and practices strive to fairly and responsibly reward employees for achieving high performance and delivering superior long-term results for customers and shareholders, having regard to 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 accountability 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 Board Remuneration Committee 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 March 2016. Members of the Remuneration Committee during 2016 All members of the Remuneration Committee are independent Non-executive Directors. During 2016, the members were:     Ewen Crouch (Chairman); Elizabeth Bryan; Craig Dunn; and Robert Elstone. Independent remuneration consultant In 2016, the Board retained Guerdon Associates as its independent consultant to provide specialist information on executive remuneration and other remuneration matters. These services are provided directly to the Remuneration Committee independent of management. The Chairman of the Remuneration Committee oversees the engagement and costs of the independent consultant. Work undertaken by Guerdon Associates during 2016 included information relating to the benchmarking of Non- executive Director and CEO remuneration and analysis of the Group’s Earnings per Share (EPS) long term incentive (LTI) performance hurdle. No remuneration recommendations, as prescribed under the Corporations Act, were made by Guerdon Associates in 2016. Directors’ report Internal governance structure The Westpac governance structure includes three levels of Remuneration Oversight Committees (ROCs) which focus on the appropriateness and consistency of remuneration arrangements and outcomes within 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. Risk management 1.2. The Group aims to integrate effective risk management into the remuneration framework throughout the organisation. The Chairman of the Board Risk and Compliance Committee is also a member of the Remuneration Committee, and members of the Remuneration Committee are also members of the Board Risk and 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 the Group operates. The performance of each division is reviewed and measured with reference to how risk is managed and the results influence remuneration outcomes. The Executive Total Reward Framework (outlined in Section 3 of this Report) 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 while retaining sufficient capital for growth. The primary financial indicator used is economic profit, which measures cash earnings adjusted for a capital charge. A range of other metrics are also considered including cash earnings, return on equity (ROE), cash EPS and dividends. Short-term incentive (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 outcomes for economic profit, core earnings growth and ROE accounted for 40% of the CEO’s scoreboard for 2016. Similarly, Group Executive scoreboards had 45% of their STI determined 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. 2016 Westpac Group Annual Report 41 1Approval of remuneration decisions The Group follows 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 required 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 remuneration. For Group Executives, the expected minimum shareholding 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 awards. 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. 42 2016 Westpac Group Annual Report Directors’ report 2. Key Management Personnel remuneration disclosed in this Report The remuneration of Key Management Personnel (KMP) for the Group is disclosed in this Report. In 2016, 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 Term as KMP Brian Hartzer Managing Director & Chief Executive Officer Full Year Group Executives Philip Coffey John Arthur1 Deputy Chief Executive Officer Chief Operating Officer Lyn Cobley Chief Executive, Westpac Institutional Bank Brad Cooper Chief Executive Officer, BT Financial Group David Curran Chief Information Officer George Frazis Chief Executive, Consumer Bank Alexandra Holcomb Chief Risk Officer Peter King Chief Financial Officer David Lindberg Chief Executive, Business Bank David McLean Chief Executive Officer, Westpac New Zealand Limited Christine Parker Group Executive, Human Resources, Corporate Affairs & Sustainability Non-executive Directors Name Position Lindsay Maxsted Chairman Elizabeth Bryan Director Ewen Crouch Alison Deans Craig Dunn Director Director Director Robert Elstone Director Peter Hawkins Director Peter Marriott 1 John Arthur ceased to be a KMP effective 1 October 2016. Director Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Term as KMP Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year 2016 Westpac Group Annual Report 43 13. Remuneration snapshot 2016 This section provides an overview of the Group’s remuneration arrangements during the 2016 financial year. Remuneration strategy, principles and framework 3.1. 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 At Risk Remuneration (Variable Reward) (66%) Short-term Incentive (STI) 34% Long-term Incentive (LTI) 32% Fixed Remuneration (34%) Comprises:  cash salary;  salary sacrificed items; and  employer superannuation Maximum opportunity = 150% of Target STI contributions in line with statutory obligations. 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. 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 in 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 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 Remuneration structure and policy 4.1. a) Fixed remuneration comprises cash salary, salary sacrificed items and employer superannuation contributions. Fixed remuneration The Group provides superannuation contributions in line with statutory obligations. Fixed remuneration is reviewed annually taking into consideration:    44 role and accountabilities; relevant market benchmarks within the financial services industry; and the attraction, motivation and retention of key executives. 2016 Westpac Group Annual Report Directors’ report Short-term incentive (STI) b) 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 strategy. STI targets Brian Hartzer’s STI target for 2016 was $2,686,000, unchanged from 2015. 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 2016 performance year did not increase for those Group Executives whose fixed remuneration was unchanged in 2016. 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 the 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 2016 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 Cash STI Deferred STI Deferred STI Equity Delivered 50% of the 2016 STI outcome will be paid as cash in December 2016. 50% of the 2016 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 2017. Half of deferred STI will vest in October 2018. Executive Type of Equity1 Equity Plan CEO Westpac ordinary shares2 CEO Restricted Share Plan Group Executives in Australia Group Executives outside Australia Westpac share rights3 Restricted Share Plan Westpac Performance Plan 1 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 the on-market purchase of shares. 2 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. 3 Rights to ordinary shares entitle the holder to Westpac ordinary shares at the time of vesting. 2016 Westpac Group Annual Report 45 1By deferring a portion of the STI as restricted equity, incentive payments are better aligned with the interests of shareholders as the ultimate value of the deferred portion is tied to the share price at the end of the restriction period. The deferred STI awards recognise past performance and are not subject to further performance conditions and receive dividends over the vesting period. If an executive resigns or retires, or otherwise leaves the Group before their securities vest, the Board has discretion as to how those securities are treated. If the executive leaves to join another organisation, or is terminated for cause, their securities are generally forfeited. In other circumstances, the Board may 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 and exercised during the year ended 30 September 2016 are included in Section 6.4 of this Report. Long-Term Incentive (LTI) c) The CEO and Group Executives are also eligible for an LTI award. LTI structure 2016 The following diagram and table set out the key features of the 2016 LTI awards made in December 2015 to the CEO under the CEO LTI Plan and to Group Executives under the Westpac LTI Plan: LTI Structure 2016 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 as at 30 September 2019, and any rights capable of vesting will vest on 30 September 2019. Cash EPS Compound Annual Growth Rate (CAGR) – measured as at 30 September 2018, and any rights capable of vesting will vest on 30 September 2019. Composite TSR index and vesting profile At the end of the performance period, 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% TSR index vesting 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 46 2016 Westpac Group Annual Report Directors’ report LTI structure 2017 - ROE to replace Cash EPS CAGR Commencing in 2017, a Return on Equity (ROE) based hurdle will replace Cash EPS CAGR for 50% of the allocation. Participants will continue to receive performance share rights (share rights) which, if they qualify for vesting, will convert to ordinary shares on a 1:1 basis at the vesting date. Share rights which do not qualify for vesting at the single test date will lapse. The ROE performance hurdle measures the average cash return on average ordinary equity (average Cash ROE) over the three year performance period. Share rights that qualify for vesting will have a one year holding lock applied and will vest at the completion of the four year term from the commencement date. For the 2017 grant, the share rights will be tested against the performance hurdles on 30 September 2019. If Westpac’s average Cash ROE for the three years (FY17 to FY19 inclusive) is equal to 13.5%, 50% of the share rights will qualify for vesting. If Westpac’s average Cash ROE is at or above 14.5%, 100% of the share rights will qualify for vesting. If Westpac’s average ROE is between 13.5% and 14.5%, the number of share rights eligible for vesting will increase on a straight line basis from 50% to 100% of the share rights awarded. Share rights that qualify for vesting will have a one year holding lock applied and will vest on 30 September 2020. LTI award opportunities The CEO was granted an LTI award of $2,528,000 in the form of share rights for 2016 under the CEO LTI 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. CEO LTI Plan and Westpac LTI Plan – Granted after 1 October 2015 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 Committee applies a maximum discount of 60% (including the impact of dividends forgone) to the market price of Westpac shares when determining the value of share rights. The value of a TSR hurdled share right may be different to an EPS hurdled share right. Performance hurdles The CEO and Group Executives generally only receive value from their LTI awards where performance hurdles are achieved. The two hurdles for the December 2015 grants were Westpac’s relative TSR and Cash EPS CAGR 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. 2016 Westpac Group Annual Report 47 1Performance hurdles (cont.) CEO LTI Plan and Westpac LTI Plan – Granted after 1 October 2015 2016 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 companies in the 2016 peer groups for the Westpac Reward Plan are:   AMP Limited; Australia and New Zealand Banking Group Limited; Bank of Queensland; Bendigo and Adelaide Bank Limited; Challenger Limited; Commonwealth Bank of Australia;      Macquarie Group Limited;    National Australia Bank Limited; Perpetual Limited; and Suncorp Group Limited. Targets are set for stretch performance The Board considers the vesting profile appropriate as 100% vesting will only occur where Westpac’s TSR equals or exceeds the growth of the composite index plus 21.55. Who measures the performance hurdle outcomes? 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. The Cash EPS CAGR measure focuses on growth in cash earnings over a three year performance period. 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. 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 earnings 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. The expensed value of the December 2014, 2015 and 2016 grants in Table 6.2 of this Report have been reduced 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 has been no re-testing on LTI awards made since 2011. No award currently on foot is subject to re- testing. Accordingly, securities that have not vested after the measurement period lapse immediately. 48 2016 Westpac Group Annual Report Directors’ report Treatment of securities CEO LTI Plan and Westpac LTI Plan – Granted after 1 October 2015 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 their obligations under the relevant equity plan, unexercised performance share rights (whether vested or unvested) will lapse unless the Board determines otherwise. 2016 Westpac Group Annual Report 49 1 Linking reward and performance 4.2. 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 the Group’s 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 2016 financial year, with commentary on key highlights are provided below: Category Weighting Measure1 Performance Highlights Performance disciplines 30% Economic profit 10% Core earnings growth 10% Capital management 10% Adherence to Group Risk Appetite Statement (RAS) 10% Service revolution Driving strategic change 10% Building growth highways                   Delivered economic profit (EP) of $3,774 million, down on 2015. EP was impacted by the increased capital charge as a result of a 13% increase in average ordinary equity. Cash Earnings remain unchanged. Return on Equity was a solid 14%, with all divisions achieving returns above their cost of capital despite difficult operating conditions and increased capital requirements. Core earnings increased 3.4%. Revenues grew 3% underpinned by 6% growth in lending, and 9% growth in customer deposits. Costs rose 3% due to increased investment and higher regulatory and compliance costs. Strengthened the balanced sheet ahead of regulatory change and managed the raising of capital well. Led the market in ensuring lending rates partly reflected higher capital requirements. Common equity tier 1 ratio of 9.48% above preferred range. Proactive in tightening credit standards in commercial property market. Further improvements in credit, operational, and compliance risk management. Cyber risk control a focus with a new security incident and event monitoring system in place monitoring 1.9 billion events per day. An ongoing focus on strengthening the compliance and control environment and doing the right thing by our customers including in relation to product governance and an overall conduct risk framework. Substantial work has been undertaken on conduct, focused on creating a common understanding and approach to managing conduct across the Group. Launched the Group-wide Service Promise to build a stronger culture of service leadership. This program has seen substantial support from employees and contributing to rising compliments and falling complaints. Customer complaints down 30% over the year. Enhanced the value of the customer franchise, customer numbers increasing by 350,000 in Australia. Continued sound growth in Wealth and SME. In Wealth, funds under administration up 7%, funds under management up 9%. Insurance premiums also higher. SME business lending up 8%.   Market conditions in Asia leading us to wind back investment   ambitions for that region. Actively managed growth and return outcomes which saw margins higher over the year. Home lending increased just above target and system while managing margins well.  Growth in household deposits exceeded expectations (and system). 50 2016 Westpac Group Annual Report Weighting Measure1 Performance Highlights Directors’ report 10% Digital transformation Category Driving strategic change (cont.)        Further improvement in digital capabilities improving the customer experience, employee productivity and risk management. Updates to Westpac’s online banking saw the platform rated No.1 globally by Forrester Global Mobile Banking Functionality Benchmark, in which 46 global banks were reviewed. Launched a new business banking platform for St.George customers, and upgraded the Group’s business loan origination platform (LOLA). Digitised 7 of the top 10 manual transactions improving the experience for customers and time spend by employees. These included credit card activation and blocking and unblocking credit cards. Significant enhancements to technology infrastructure with the Customer Service Hub now in development, the upgrade of the St.George deposit and transaction platform and major releases to the Group’s wealth platform Panorama, with digital sales increasing by 30%. Retained the Group’s position as the most sustainable bank globally in the 2016 Dow Jones Sustainability Indices (DJSI) Review with highest score ever. The number of women in leadership grew to 48% on track to meet our 2017 target of 50%. Further reduction in the Lost Time Injury Frequency Rate, ahead of targets. Total recordable injuries have now fallen 17% since 2014.  We have made good progress on the Workforce Revolution program focused on transforming our culture and improving the quality and capability of our leaders to deliver on our Service Revolution strategy. People 10% People and sustainability 1 Individual measures will differ for each Group Executive. 2016 Westpac Group Annual Report 51 1The Group’s 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 2016 reflects the Board’s view of performance across all balanced scoreboard measures relative to planned outcomes, and the value the Group has delivered for shareholders. Aligning pay with performance and shareholder return Graph 1 shows the CEO STI payments 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 150 5,200 ) m $ ( t i f o r i P c m o n o c E 4,700 4,200 3,700 3,200 2,700 2,200 1,700 ) % ( O E C r o f d r a w A I T S 140 130 120 110 100 90 80 70 60 50 2013 2014 2015 Economic Profit ($m) 2016 STI Award for CEO Graph 2: Return on Equity (ROE) 2013 to 2016 ) % ( y t i u q E n o n r u t e R 17 16 15 14 13 12 11 10 ) m ( t n u o C e r a h S e g a r e v A 3,300 3,100 2,900 2,700 2,500 2013 2014 2015 2016 Return on Equity Average Share Count (m) Graph 3: Total Shareholder Return (TSR) 2012 to 2016 Graph 4: Cash Earnings per Share (EPS) 2013 to 2016 90 80 70 60 50 40 30 20 10 ) % ( n r u t e R l r e d o h e r a h S l a t o T 0 Oct 12 Oct 13 Oct 14 Oct 15 WBC Peer 1 Peer 2 Oct 16 Peer 3 e r a h S r e p s t n e C 255 250 245 240 235 230 225 220 215 8 . 7 2 2 2013 4 . 5 4 2 2 . 8 4 2 5 . 5 3 2 3,300 3,100 2,900 2,700 2,500 2015 2014 Cash Earnings per Share (cents per share) Average Share Count (m) 2016 ) m ( t n u o C e r a h S e g a r e v A 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 relevant 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  52 any other relevant under or over performance or other matter not captured. 2016 Westpac Group Annual Report Directors’ report The process ensures that financial measures such as economic profit 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 impacts future earnings. 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. LTI performance outcomes The following table provides the Group’s TSR, dividends per share, cash earnings per share and share price performance each year from 2012 to 2016: 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 2016 15.24% 100.72% 188 $2.35 $33.74 $27.57 $29.51 Years Ended 30 Septem ber 2015 62.30% 92.78% 187 $2.48 $40.07 $29.10 $29.70 2014 102.03% 103.74% 182 $2.45 $35.99 $30.00 $32.14 2013 66.09% 90.91% 174 $2.29 $34.79 $24.23 $32.73 2012 25.61% 20.03% 166 $2.15 $24.99 $19.00 $24.85 1 Does not include $0.20 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 Equity Instrum ent CEO Performance Plan2 Westpac Long Term Incentive Plan Performance share rights Performance share rights Type of Equity Com mencement Date 1 Test Date 1 October 2013 1 October 20163 1 October 2013 1 October 20163 1 Commencement date refers to the commencement of the performance period. 2 CEO Performance Plan refers to awards made to Gail Kelly. 3 There is no re-testing and any unvested share rights lapse. TSR Percentile in Vested Lapsed % Ranking Group % 20th percentile 20th percentile - - 100 100 Cash EPS CAGR hurdle vesting outcomes Equity Instrum ent CEO Performance Plan2 Performance share rights Westpac Long Term Incentive Plan Performance share rights Type of Equity Com mencement Date 1 Test Date Cash EPS CAGR Vested Lapsed % Perform ance % 1 October 2013 1 October 2013 1 October 2016 1 October 2016 1.10% 1.10% - - 100 100 1 Commencement date refers to the commencement of the performance period. 2 CEO Performance Plan refers to awards made to Gail Kelly. 2013 Cash EPS CAGR hurdle The Cash EPS CAGR hurdle and vesting profile over the three year vesting period for the 2013 LTI grant was:    a minimum of 4% CAGR for 50% to vest; 6% CAGR for 100% to vest; and straight-line vesting between 4% and 6% CAGR. The Cash EPS CAGR range was developed prior to the allocation in December 2013, 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 2013. 2016 Westpac Group Annual Report 53 1 Remuneration outcomes for the CEO and Group Executives – Linking reward and performance 4.3. The following table has been prepared to provide shareholders with an outline of the remuneration which has been received for the 2016 performance year either as cash or in the case of prior equity awards, the value which has vested in 2016 (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 (unaudited) received by executives and is not prepared in accordance with AAS. Fixe d Re mune ra tion 1 2 0 16 S TI Ca sh P a yme nt 2 2 0 16 Tota l Ca sh P a yme nts 3 P rior Y e a r Equity Awa rds 4 V e ste d during 2 0 16 P rior Y e a r Equity Awa rds 4 Forfe ite d during 2 0 16 $ $ $ $ $ Managing Director & Chief Executive Officer Brian Hartzer 2,811,402 1,302,710 4,114,112 1,003,809 625,247 Group Executives John Arthur Lyn Cobley Philip Coffey Brad Cooper David Curran George Frazis Alexandra Holcomb Peter King David Lindberg David McLean Christine Parker 1,222,005 1,124,889 1,331,293 1,097,162 940,826 1,168,631 986,607 1,072,417 903,399 836,941 873,835 585,000 492,500 597,500 735,000 467,500 815,000 492,500 545,000 477,500 363,050 450,000 1,807,005 1,617,389 1,928,793 1,832,162 1,408,326 1,983,631 1,479,107 1,617,417 1,380,899 1,199,991 1,323,835 1,275,467 553,866 1,392,992 1,336,930 - 1,150,603 662,184 458,612 326,656 259,469 703,239 1,559,657 - 1,479,487 1,348,357 - 979,045 366,806 269,630 - 154,014 583,476 1 Fixed remuneration includes cash salary, annual leave accrual and salary sacrificed items plus employer superannuation contributions. 2 The cash STI payment represents 50% of the 2016 STI outcome and will be paid in December 2016. The remaining 50% is deferred in the form of equity granted in December 2016 which will vest in equal tranches in October 2017 and 2018. 3 This is the addition of the first and second columns. 4 Prior year equity awards include both deferred STI and LTI allocations subject to performance hurdles which have vested in 2016. The equity value has been calculated as the number of securities that vested or were forfeited during the year ended 30 September 2016, 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. 5. Non-executive Director remuneration Structure and policy 5.1. 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 performance and the creation of shareholder value, fees for Non- executive Directors are not related to the Group’s short-term results and Non-executive Directors do not receive performance- based remuneration. 54 2016 Westpac Group Annual Report Directors’ report Non-executive Director remuneration consists of the following components: Remuneration Component Paid as Detail Base fee Committee fees Cash Cash Employer superannuation contributions Superannuation This fee is for service on the Westpac Banking Corporation Board. The base fee for the Chairman covers all responsibilities, including all Board Committees. Additional fees are paid to other 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. Non-executive Director remuneration in 2016 Non-executive Director fee review – Effective 1 October 2015 The Board reviewed the Non-executive Director fee framework in late 2015. On the basis of market data provided by Guerdon Associates, the Board approved an increase to the Board Chairman fee and an increase to the Chairman and member fees across the Board Committees recognising the workload associated with these key roles. The Non-executive Director base fee was unchanged. Changes to Board and Committee composition No changes were made to Board or Committee composition during the 2016 remuneration period. 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 2016, $3.16 million (70%) 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 Com m ittee Chairm an Fees Audit Committee Risk & Compliance Committee Remuneration Committee Technology Committee Com m ittee Mem bership Fees Audit Committee Risk & Compliance Committee Remuneration Committee Technology Committee Annual Rate $ 810,000 225,000 70,400 70,400 63,800 35,200 32,000 32,000 29,000 16,000 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 During the reporting period, additional fees of $35,000 were paid to Peter Hawkins as a member of the Bank of Melbourne Advisory Board. 2016 Westpac Group Annual Report 55 1Equity participation Non-executive Directors have 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. Required remuneration disclosures Details of Non-executive Director remuneration 6.1. Details of Non-executive Director remuneration are set out in the table below: Na me Current Non-executive Directors Lindsay Maxsted, Chairman 2016 2015 Elizabeth Bryan 2016 2015 Ewen Crouch 2016 2015 Alison Deans 2016 2015 Craig Dunn 2016 2015 Robert Elstone 2016 2015 Peter Hawkins 2016 2015 Peter Marriott 2016 2015 Total fees 2016 20152 S hort- Te rm Be ne fits P ost- Employme nt Be ne fits We stpa c Ba nking Corpora tion Boa rd Fe e s 1 $ S ubsidia ry a nd Advisory Boa rd Fe e s $ S upe ra nnua tion $ Tota l $ 810,000 795,000 324,400 313,000 320,800 311,000 273,000 270,000 286,000 94,892 318,000 320,701 324,200 315,000 343,400 322,298 2,999,800 2,799,580 - - - - - - - - - - - - 35,000 35,000 - - 35,000 35,000 19,540 18,989 19,540 18,989 19,540 18,989 19,540 18,989 19,540 6,569 19,540 18,989 19,465 18,916 19,540 18,989 829,540 813,989 343,940 331,989 340,340 329,989 292,540 288,989 305,540 101,461 337,540 339,690 378,665 368,916 362,940 341,287 156,245 143,279 3,191,045 2,977,859 1 Includes fees paid to the Chairman and members of Board Committees. 2 The total fees for 2015 reflect the prior year remuneration for the 2015 reported Non-executive Directors. 56 2016 Westpac Group Annual Report  Remuneration details – CEO and Group Executives 6.2. This section sets out details of remuneration for the CEO and Group Executives for the 2016 financial year, calculated in accordance with AAS. Directors’ report P ost- O th e r Lon g- Emplo yme nt Be ne fits Te rm Be ne fits S ha re - Ba se d P a yme n ts O the r S ho rt- Te rm Be ne fits 4 S upe ra nn- u a tion Be n e fits 5 Lo ng S e rvic e Le a ve Re stric te d S ha re s 6 O ptions 7 S ha re Rights 7 $ $ $ $ $ Tota l 8 $ $ - - - - - S hort- Te rm Be ne fits Non- Fixe d Re mu - ne ra tion 1 S TI (Ca sh) 2 Mone ta ry Be ne fits 3 Na me $ $ $ Ma n a ging Dire c tor & Chie f Exe c utive O ffic e r Brian Hartzer 2016 2015 2,774,879 1,302,710 2,413,205 1,245,960 21,349 66,063 G ro up Exe c utive s John Arthur, Chief Operating Offic er 2016 2015 1,197,909 1,126,050 585,000 728,000 15,651 14,971 Lyn Cobley, Chief Exec utive, Westpac Institutional Bank 1,097,409 492,500 1,850 2016 20159 71,006 - - 1,100,000 Philip Coffey, Deputy Chief Exec utive Offic er 2016 2015 1,289,796 1,299,272 597,500 734,400 4,105 3,425 Brad Cooper, Chief Exec utive Offic er, BT Financ ial Group 2016 2015 1,060,435 1,060,577 735,000 816,000 David Curran, Chief Information Offic er 2016 2015 914,905 961,663 467,500 547,400 4,089 3,374 4,089 2,359 George Frazis, Chief Exec utive, Consumer Bank 2016 2015 1,131,541 1,125,527 815,000 928,000 3,039 15,266 Alexandra Holc omb, Chief Risk Offic er 2016 2015 949,671 946,104 492,500 499,800 Peter King, Chief Financ ial Offic er 2016 2015 1,041,344 938,722 545,000 522,580 3,039 2,359 4,089 2,359 David Lindberg, Chief Exec utive, Business Bank 2016 20159 880,296 264,138 477,500 151,725 17,070 2,610 David Mc Lean, Chief Exec utive Offic er, Westpac New Zealand Limited 2016 20159 760,848 712,605 363,050 430,580 33,753 75,392 - - - - - - - - - - - - - - - - 36,522 29,418 40,722 57,016 1,128,139 782,501 24,096 24,185 27,480 6,713 41,497 36,253 36,727 35,682 25,921 22,429 37,090 36,022 36,936 35,460 31,072 29,789 23,103 8,277 76,093 69,559 18,271 18,265 731,628 647,634 17,005 - 977,182 75,256 20,678 20,628 766,988 792,211 16,730 16,679 14,424 14,420 831,388 803,641 428,244 - 17,451 22,909 925,520 797,145 16,199 (2,240) 587,415 525,239 48,728 14,960 499,345 372,877 15,069 5,961 403,624 129,810 - - 14,322 35,687 - - - - - - - - - - - - - - - - - - - - - - - - 1,447,696 1,143,466 6,752,017 5,737,629 659,272 1,153,998 3,231,827 3,713,103 307,514 - 2,920,940 1,252,975 913,187 1,262,936 3,633,751 4,149,125 800,145 1,130,678 3,484,514 3,866,631 461,898 216,485 2,316,981 1,764,756 591,094 770,797 3,520,735 3,695,666 566,909 496,155 2,652,699 2,502,877 661,789 504,705 2,831,367 2,385,992 464,140 83,045 2,280,802 645,566 932,957 264,417 558,680 641,184 2,181,023 1,588,240 2,400,526 2,500,322 Christine Parker, Group Exec utive, Human Resourc es, Corporate Affairs & Sustainability 2016 2015 849,556 830,035 450,000 508,500 4,650 2,649 - - 24,279 23,144 (5,013) 16,025 518,374 478,785 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 2016 STI figures reflect annual cash performance awards accrued but not yet paid in respect of the year ended 30 September 2016. 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 on cessation of employment or other contracted amounts. The payment to Lyn Cobley in 2015 reflects annual incentive forgone from her previous employer. 5 The CEO and Group Executives are provided with life 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 2016 reporting year (and 2015 year as comparison). Restricted shares held by Lyn Cobley represent an allocation made in substitution for forgone unvested equity on joining the Westpac Group. The restricted shares replicate the vesting periods of the equity forgone. 2016 Westpac Group Annual Report 57 1 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 2016. Details of prior years’ grants have been disclosed in previous Annual Reports. The value for David McLean includes 65% 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 57%, John Arthur 61%, Lyn Cobley 61%, Philip Coffey 63%, Brad Cooper 68%, David Curran 59%, George Frazis 66%, Alexandra Holcomb 62%, Peter King 60%, David Lindberg 59%, David McLean 60% and Christine Parker 64%. The percentage of total remuneration delivered in the form of share rights was: Brian Hartzer 21%, John Arthur 20%, Lyn Cobley 11%, Philip Coffey 25%, Brad Cooper 23%, David Curran 20%, George Frazis 17%, Alexandra Holcomb 21%, Peter King 23%, David Lindberg 20%, David McLean 43% and Christine Parker 23%. 9 2015 remuneration details are from the date of appointment. 58 2016 Westpac Group Annual Report Directors’ report STI outcomes for the CEO and Group Executives1 6.3. This section sets out details of STI awards for the CEO and Group Executives for the 2016 financial year: S TI Ta rge t Ma ximum S TI 2 S TI P ortion P a id in Ca sh 3 S TI P ortion De fe rre d 4 Managing Director & Chief Executive Officer Brian Hartzer 2,686,000 $ Group Executives John Arthur Lyn Cobley Philip Coffey Brad Cooper David Curran George Frazis Alexandra Holcomb Peter King David Lindberg David McLean Christine Parker 1,300,000 1,122,000 1,360,000 1,600,000 952,000 1,600,000 1,003,000 1,088,000 901,000 854,565 900,000 % 150 150 150 150 150 150 150 150 150 150 150 150 % 50 50 50 50 50 50 50 50 50 50 50 50 $ 1,302,710 585,000 492,500 597,500 735,000 467,500 815,000 492,500 545,000 477,500 363,050 450,000 % 50 50 50 50 50 50 50 50 50 50 50 50 $ 1,302,710 585,000 492,500 597,500 735,000 467,500 815,000 492,500 545,000 477,500 363,050 450,000 1 STI outcomes during the year for the CEO and Group Executives averaged 95% of target, and ranged between 85% and 106%. 2 The maximum STI potential is 150% of the individual STI target. 3 50% of the STI outcome for the year is paid as cash in December 2016. 4 50% of the actual STI outcome is deferred in the form of restricted shares or share rights, half vesting on 1 October 2017 and the remainder vesting on 1 October 2018. 2016 Westpac Group Annual Report 59 1 Movement in equity-settled instruments during the year 6.4. This table shows the details of movements during 2016 in the number and value of equity instruments for the CEO and Group Executives under the relevant plans: Na me T ype o f Equ ity- Ba se d Instru me nt Managing Director & Chief Executive Officer Numbe r G ra nte d 1 Numbe r V e ste d 2 Numbe r Exe rc ise d 3 V a lue G ra nte d 4 $ V a lue Exe rc ise d 5 $ V a lue Forfe ite d or La pse d 5 , 6 $ Brian Hartzer CEO Performance share rights 323,615 - - 6,048,804 - - Performance share rights - 9,824 9,824 - 311,746 625,247 CEO Restricted Share Plan 39,491 - Shares under Restricted Share Plan - 23,820 - - 1,235,349 - - - - - Group Executives John Arthur Performance share rights Shares under Restricted Share Plan Lyn Cobley Performance share rights 72,702 23,074 90,914 22,673 20,076 - Shares under Restricted Share Plan - 19,200 Philip Coffey Performance share rights Shares under Restricted Share Plan Brad Cooper Performance share rights Shares under Restricted Share Plan David Curran Performance share rights Shares under Restricted Share Plan George Frazis Performance share rights Shares under Restricted Share Plan Alexandra Holcomb Performance share rights Shares under Restricted Share Plan Peter King Performance share rights Shares under Restricted Share Plan David Lindberg Performance share rights Shares under Restricted Share Plan David McLean Performance share rights Unhurdled share rights Shares under Restricted Share Plan Christine Parker Performance share rights Shares under Restricted Share Plan 103,400 23,277 84,820 25,863 72,379 17,350 80,781 29,413 76,257 15,841 82,720 16,563 68,502 11,391 64,798 18,935 - 60,585 16,117 21,414 25,274 18,894 25,915 - - 13,856 24,708 5,290 17,119 3,779 11,592 - 10,915 2,148 5,147 1,327 8,817 14,753 22,673 1,446,839 719,484 1,559,657 - - - 721,796 1,809,275 - - - - - - - 21,414 2,057,759 679,532 1,479,487 - 728,146 - - 18,894 1,687,993 599,565 1,348,357 - - - 809,041 1,440,408 542,739 - - - - - - 13,856 1,607,613 439,694 979,045 - 920,091 - - 5,290 1,517,591 167,868 366,806 - 495,535 - - 3,779 1,646,205 119,919 269,630 - - - - - - 518,120 1,363,250 356,331 1,289,544 574,542 - - - - - - - - - - 154,014 - - 8,817 1,205,700 279,791 583,476 - 504,169 - - 1 No performance options were granted in 2016. 2 36% of hurdled share rights granted in 2012 vested in October 2015 as assessed against the TSR and EPS performance hurdles. 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. 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 2016, do not reconcile with the amount shown in the table in Section 6.2 of this Report, which shows the amount amortised in the current year 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. 60 2016 Westpac Group Annual Report Directors’ report Fair value of LTI grants made during the year The table below provides a summary of the fair value of LTI awards granted to the CEO and Group Executives during 2016 calculated in accordance with 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 Instrume nt G ra nte d to CEO Long Term Incentive Plan Brian Hartzer P e rforma nc e Hurdle Relative TSR Cash EPS CAGR Relative TSR Cash EPS CAGR G ra nt Da te Comme nc e me nt Da te 1 Te st Da te Expiry 11 December 2015 11 December 2015 11 December 2015 11 December 2015 1 October 2014 1 October 2018 1 October 2029 1 October 2014 1 October 2017 1 October 2029 1 October 2015 1 October 2019 1 October 2030 1 October 2015 1 October 2018 1 October 2030 Westpac Long Term Incentive Plan All Group Executives Relative TSR Cash EPS CAGR 2 December 2015 2 December 2015 1 October 2015 1 October 2019 1 October 2030 1 October 2015 1 October 2018 1 October 2030 Fa ir V a lue 2 pe r Instrume nt $11.17 $26.70 $12.93 $25.20 $13.75 $26.51 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 $26.51 is four years to the 1 October 2019 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 Duration of agreement CEO and Group Executives Notice to be provided by the executive or the Group to terminate the employment agreement1 Termination payments to be made on termination without cause2 CEO and Group Executives (excluding Philip Coffey) Philip Coffey CEO and all Group Executives Termination for cause CEO and Group Executives (excluding Brad Cooper and Philip Coffey) Brad Cooper and Philip Coffey Post-employment restraints CEO and all Group Executives Conditions  Ongoing until notice given by either party         12 months 6 months Deferred STI and LTI awards vest according to the applicable equity plan rules Immediately for misconduct 3 months’ notice for poor performance Immediately for misconduct Contractual notice period for poor performance 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. 2 The maximum liability for termination benefits for the CEO and KMP at 30 September 2016 was $13 million (2015: $15 million). 2016 Westpac Group Annual Report 61 18. Non-executive Directors, CEO and Group Executives – Additional disclosures Details of Westpac ordinary shares held by Non-executive Directors 8.1. 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 20161: Na me Current Non-executive Directors Lindsay Maxsted Elizabeth Bryan Ewen Crouch2 Alison Deans Craig Dunn Robert Elstone Peter Hawkins 3 Peter Marriott Numb e r He ld a t S ta rt of th e Y e a r O the r Cha n ge s Du ring the Y e a r Nu mbe r He ld a t En d o f the Y e a r 17,877 26,801 38,496 9,000 8,500 10,291 15,218 20,000 1,673 1,166 1,749 392 369 1,093 662 870 19,550 27,967 40,245 9,392 8,869 11,384 15,880 20,870 1 None of these share interests include non-beneficially held shares. 2 3 In addition to holdings of ordinary shares, Ewen Crouch and his related parties held interests in 250 Westpac Capital Notes 2 at year end. In addition to holdings of ordinary shares, Peter Hawkins and his related parties held interests in 1,370 Convertible Preference Shares, 850 Westpac Capital Notes 3 and 882 Westpac Capital Notes 4 at year end. 62 2016 Westpac Group Annual Report Directors’ report Details of Westpac equity holdings of Key Management Personnel 8.2. 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 20161: Na me Type of Equity- ba se d In strume nt Managing Director & Chief Executive Officer Brian Hartzer Ordinary shares CEO Performance share rights Performance share rights Group Executives John Arthur3 Lyn Cobley Philip Coffey4 Brad Cooper David Curran George Frazis Ordinary shares Performance share rights Ordinary shares Performance share rights Ordinary shares Performance share rights Ordinary shares Performance share rights Ordinary shares Performance share rights Ordinary shares Performance share rights Alexandra Holcomb Ordinary shares Peter King David Lindberg David McLean 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 Numbe r He ld a t S ta rt of the Y e a r 2 Nu mbe r G ra nte d During the Y e a r a s Re mune ra tion Re c e ive d on Exe rc ise a nd/ or Exe rc ise d During the Y e a r Numbe r La pse d Du ring the Y e a r O the r Cha nge s During the Y e a r Numbe r He ld a t End of the Y e a r Numbe r V e ste d a nd Exe rc isa ble a t End o f the Y e a r 49,571 - 246,155 264,156 251,163 57,011 - 305,555 282,039 37,582 251,914 - 63,519 162,062 173,597 46,708 38,847 120,060 73,894 122,900 38,811 64,984 9,212 42,972 11,569 22,044 144,970 39,491 323,615 - 23,074 72,702 - 90,914 23,277 103,400 25,863 84,820 17,350 72,379 29,413 80,781 15,841 - 76,257 16,563 82,720 11,391 68,502 - 64,798 18,935 16,117 60,585 9,824 - (9,824) - - (20,956) (45,164) - - 53,722 323,615 215,375 22,673 (22,673) - (52,274) 15,383 - 325,286 248,918 - - - - (651) - 56,360 90,914 21,414 (21,414) 18,894 (18,894) - (49,587) - (45,192) - - - - 7 - 1,634 - - - 13,856 (13,856) - (32,814) (69,064) - 5,290 - (5,290) 3,779 (3,779) - - (12,294) (40,651) - - - (9,037) (32,913) - - - - - - - - (9,000) - - (5,162) - 401 - - 8,817 (8,817) - (19,556) (23,570) - 350,253 314,438 83,973 272,648 17,350 135,898 136,267 207,708 27,188 38,847 178,733 61,323 192,804 41,202 133,486 9,613 102,608 30,504 23,408 177,182 - - - - - - - - - - - - - - - - 38,847 - - - - - - 2,148 5,147 - - 1 The highest number of shares held by an individual in the table is 0.0105% of total Westpac ordinary shares outstanding as at 30 September 2016. 2 Some opening balances in relation to ordinary shares have been restated to include additional individual and related party shares. 3 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. In addition to holdings of ordinary shares, Philip Coffey and his related parties held interests in 2,000 Westpac Capital Notes 2, 3,000 Westpac Capital Notes 3 and 3,407 Westpac Capital Notes 4 at year end. 4 2016 Westpac Group Annual Report 63 1  Loans to Non-executive Directors and other Key Management Personnel disclosures 8.3. All financial instrument transactions that 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: Directors Other KMP Ba la nc e a t S ta rt of the Y e a r 1 $ Inte re st P a id a nd P a ya ble for the Y e a r $ 4,663,312 10,799,188 15,462,500 194,311 514,927 709,238 Inte re st Not Cha rge d During the Y e a r $ - - - Ba la nc e a t End of the Y e a r $ 3,932,987 12,290,415 16,223,402 Numbe r in G roup a t End of the Y e a r 2 7 9 Individuals (including their related parties) with loans above $100,000 during the 2016 financial year: Directors Lindsay Maxsted Ewen Crouch Other KMP John Arthur Philip Coffey Brad Cooper Alexandra Holcomb David McLean Christine Parker Ba la nc e a t S ta rt of the Y e a r 1 $ Inte re st P a id a nd P a ya ble for the Y e a r $ In te re st No t Cha rge d During the Y e a r $ Ba la nc e a t End of the Y e a r $ Hig he st In de b te d ne ss du rin g th e Y e a r $ 3,248,220 1,415,092 1,463,544 2,394,000 266,534 3,964,352 49,087 2,598,608 127,718 66,593 70,296 117,882 15,164 188,063 12,065 109,070 - - - - - - - - 2,598,160 1,334,827 2,327,105 2,394,000 766,060 3,665,374 475,551 2,619,094 3,248,220 1,804,687 3,179,717 2,394,000 766,060 3,964,632 478,372 2,801,835 1 Some opening balances have been restated to include additional individual loans. 64 2016 Westpac Group Annual Report 10. Auditor a) Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act is below: Directors’ report Auditor’s Independence Declaration As lead auditor for the audit of Westpac Banking Corporation for the year ended 30 September 2016, I declare that, to the best of my knowledge and belief, there have been: a. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b. no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Westpac Banking Corporation and the entities it controlled during the period. Michael Codling Partner PricewaterhouseCoopers Sydney 7 November 2016 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 2016 Westpac Group Annual Report 65 1 Non-audit services b) 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 2015 and 2016 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 $8.1 million in total (2015 $9.9 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 2016 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 based on Board quarterly independence declarations made by PwC to the Board Audit Committee, none of the services undermine the general principles relating to auditor independence including reviewing or auditing PwC’s own work, acting in a management or a decision-making capacity for the company, acting as advocate for the company or jointly sharing economic risk and rewards. 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 2016, 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 7 November 2016 Brian Hartzer Managing Director & Chief Executive Officer 7 November 2016 66 2016 Westpac Group Annual Report 02 Five year summary Reading this report Review of Group operations Divisional performance Risk and risk management Westpac’s approach to sustainability Other Westpac business information 2Five year summary1 (in $m unless otherwise indicated) Income statements for the years ended 30 September2 Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests Net profit attributable to owners of Westpac Banking Corporation Balance sheet as at 30 September2 Loans Other assets Total assets Deposits and other borrowings Debt issues Loan capital Other liabilities Total liabilities Total shareholders’ equity and non-controlling interests Key financial ratios Shareholder value Dividends per ordinary share (cents) Special dividends per ordinary share (cents) Dividend payout ratio (%)3 Return on average ordinary equity (%) Basic earnings per share (cents)4 Net tangible assets per ordinary share ($)5 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 (%)6 Tier 1 ratio (%)7 Total capital ratio (%)7 Credit quality Net impaired assets to equity and collectively assessed provisions (%) Total provisions for impairment on loans and credit commitments to total loans (basis points) Other information Full-time equivalent employees (number at financial year end)8 2016 2015 2014 2013 2012 15,148 5,837 20,985 (9,217) (1,124) 10,644 (3,184) (15) 7,445 661,926 177,276 839,202 513,071 169,902 15,805 82,243 781,021 58,181 188 - 84.2 13.3 224.6 13.96 33.74 27.57 29.51 43.9 2.10 6.9 6.9 9.5 11.2 13.1 1.8 54 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 16.2 255.0 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 16.3 242.5 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 15.2 217.2 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 13.9 193.7 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 32,190 32,620 33,586 33,045 33,418 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised and may differ from results previously reported. 2 The above income statement extracts for 2016, 2015 and 2014 and balance sheet extracts for 2016 and 2015 are derived from the consolidated financial statements included in this Annual Report. The above income statement extracts for 2013 and 2012 and balance sheet extracts for 2014, 2013 and 2012 are derived from financial statements previously published. 3 Excludes special dividends and adjusted for Treasury shares. 4 Comparative information has been restated to incorporate the bonus element of the share entitlement offer in the weighted average number of shares. 5 Total equity attributable to owners of Westpac Banking Corporation, after deducting intangible assets divided by the number of ordinary shares outstanding, less Treasury shares held. 6 Basel III was not effective in Australia until 1 January 2013. The 2012 ratio has been presented on a proforma Basel III basis. For further information, refer to Capital resources and Note 33 to the financial statements. 7 Basel III was not effective in Australia until 1 January 2013. The 2012 ratio has been presented on a Basel II basis. For further information, refer to Capital resources and Note 33 to the financial statements. 8 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. 68 2016 Westpac Group Annual Report Reading this report Disclosure regarding forward-looking statements This Annual Report contains statements that constitute ‘forward-looking statements’ within the meaning of Section 21E of the US Securities Exchange Act of 1934. Forward-looking statements are statements about matters that are not historical facts. Forward-looking statements appear in a number of places in this Annual Report and include statements regarding Westpac’s intent, belief or current expectations with respect to its business and operations, market conditions, results of operations and financial condition, including, without limitation, future loan loss provisions and financial support to certain borrowers. Words such as ‘will’, ‘may’, ‘expect’, ‘intend’, ‘seek’, ‘would’, ‘should’, ‘could’, ‘continue’, ‘plan’, ‘estimate’, ‘anticipate’, ‘believe’, ‘probability’, ‘risk’, ‘aim’ or other similar words are used to identify forward-looking statements. These forward-looking statements reflect Westpac’s current views with respect to future events and are subject to change, certain risks, uncertainties and assumptions which are, in many instances, beyond Westpac’s control, and have been made based upon management’s expectations and beliefs concerning future developments and their potential effect upon Westpac. There can be no assurance that future developments will be in accordance with Westpac’s expectations or that the effect of future developments on Westpac will be those anticipated. Actual results could differ materially from those expected, 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; regulatory investigations, litigation, fines, penalties, restrictions or other regulator imposed conditions; the stability of Australian and international financial systems and disruptions to financial markets and any losses or business impacts Westpac or its customers or counterparties may experience as a result;  market volatility, including uncertain conditions in funding, equity and asset markets;   adverse asset, credit or capital market conditions; changes in investment preferences of businesses and consumers away from bank deposits towards other assets or investment classes; changes to Westpac’s credit ratings or to the methodology used by credit rating agencies; 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, Asia and in other countries and regions in which Westpac or its customers or counterparties conduct their operations and Westpac’s 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 conduct, behaviour or practices of Westpac or its staff; 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 internal processes, systems and employees; the occurrence of environmental change or external events in countries in which Westpac or its customers or counterparties conduct their operations; the incidence or severity of Westpac insured events; 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 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. 2016 Westpac Group Annual Report 69 2 Significant developments For a discussion of significant developments impacting the Group, refer to ‘Significant developments’ under ‘Information on Westpac’ in Section 1. Currency of presentation, exchange rates and certain definitions In this Annual Report, ‘financial statements’ means our audited consolidated balance sheets as at 30 September 2016 and 30 September 2015 and income statements, statements of comprehensive income, changes in equity and cash flows for each of the years ended 30 September 2016, 2015 and 2014 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 2016 is referred to as 2016 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$0.7667, 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 Friday, 30 September 2016. The Australian dollar equivalent of New Zealand dollars at 30 September 2016 was A$1.00 = NZ$1.049, 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 2012 to 30 September 2016. Any discrepancies between totals and sums of components in tables contained in this Annual Report are due to rounding. 70 2016 Westpac Group Annual Report Review of Group operations Selected consolidated financial and operating data We have derived the following selected financial information as of, and for the financial years ended, 30 September 2016, 2015, 2014, 2013 and 2012 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(b) includes details of the areas of our critical accounting assumptions and estimates and a reference to the relevant note in the financial statements providing further information. Each of the assumptions and estimates have been discussed at our Board Audit Committee (BAC). The following is a summary of the areas involving 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, judgements and estimation may be required. As at 30 September 2016, the fair value of trading securities and financial assets designated at fair value through profit or loss, available-for-sale securities, loans designated at fair value, life insurance assets and regulatory deposits with central banks overseas was $102,595 million (2015: $103,400 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 $67,643 million (2015: $76,342 million). The fair value of outstanding derivatives was a net liability of $3,849 million (2015: $131 million net liability). The fair value of financial assets and financial liabilities determined by valuation models that use unobservable market prices was $1,587 million (2015: $1,969 million) and $17 million (2015: $57 million), respectively. The fair value of 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 judgements and estimates used are reasonable in the current market. However, a change in these judgements 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). IAPs are raised where loans exceeding specified thresholds are assessed as impaired. 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 judgements 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. CAPs are raised for impaired loans below specified thresholds and for all loans which are not individually identified as impaired. 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 2016, gross loans to customers were $665,256 million (2015: $626,344 million) and the provision for impairment on loans was $3,330 million (2015: $3,028 million). 2016 Westpac Group Annual Report 71 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 judgement. 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 2016, the carrying value of goodwill was $8,829 million (2015: $8,809 million). Superannuation obligations The actuarial valuation of our defined benefit plan obligations are dependent upon a series of assumptions, the key ones being price inflation, salary growth, mortality, morbidity, discount rate and investment returns. Different assumptions could significantly alter the amount of the difference between plan assets and defined benefit obligations and the amount recognised directly in retained profits. The aggregate superannuation deficits across all our plans as at 30 September 2016 were $282 million (2015: $192 million). One plan had a superannuation surplus as at 30 September 2016 of $32 million (2015: $18 million). Provisions (other than loan impairment charges) Provisions are held in respect of a range of obligations such as employee entitlements, restructuring costs, litigation provisions, non-lending losses, impairment charges on credit commitments and surplus lease space. Some of the provisions involve significant judgement 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 judgement 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 administering the contracts, mortality and morbidity experience, discontinuance experience and the rate at which projected future cash flows are discounted. 72 2016 Westpac Group Annual Report Income statement review Consolidated income statement 1 For the years ended 30 September (in $m unless otherwise indicated) Interest income Interest expense Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Net profit for the year Profit attributable to non-controlling interests Review of Group operations 2016 US$2 24,398 (12,784) 11,614 4,475 16,089 (7,066) (862) 8,161 (2,441) 5,720 (12) 2016 2015 2014 2013 2012 A$ 31,822 (16,674) 15,148 5,837 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 20,985 (9,217) (1,124) 10,644 (3,184) 7,460 (15) 21,642 (9,473) (753) 11,416 (3,348) 8,068 (56) 19,937 (8,547) (650) 10,740 (3,115) 7,625 (64) 18,595 (7,976) (847) 9,772 (2,947) 6,825 (74) 17,983 (7,957) (1,212) 8,814 (2,812) 6,002 (66) 5,936 Net profit attributable to owners of Westpac Banking Corporation Weighted average number of ordinary shares (millions)5 3,059 Basic earnings per ordinary share (cents)5 193.7 Diluted earnings per share (cents)3,5 188.5 166 Dividends per ordinary share (cents) - Special dividends per ordinary share (cents) Dividend payout ratio (%)4 85.3 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 5,708 3,313 172.2 167.0 144 - 7,445 3,313 224.6 217.8 188 - 8,012 3,140 255.0 248.2 187 - 7,561 3,114 242.5 237.6 182 - 6,751 3,103 217.2 212.5 174 20 84.2 73.4 74.7 79.7 84.2 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$0.7667, the noon buying rate in New York City on 30 September 2016. 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 Excludes special dividends and adjusted for Treasury shares. 5 Comparative information has been restated to incorporate the bonus element of the share entitlement offer in the weighted average number of shares. Overview of performance – 2016 v 2015 Net profit attributable to owners for 2016 was $7,445 million, a decrease of $567 million or 7% compared to 2015. The 7% reduction reflected higher impairment charges in 2016 compared to 2015 and a number of significant infrequent items1 in 2015 which in aggregate added $347 million to Net profit attributable to owners which were not repeated in 2016. Net interest income increased $881 million or 6% compared to 2015, with total loan growth of 6% and customer deposit growth of 9%. Net interest margin increased 1 basis point to 2.10%, with repricing of mortgages including for increased regulatory capital requirements, improved customer deposit spreads and higher Treasury income, partly offset by higher wholesale funding costs, economic hedge volatility and broad based lending competition. Non-interest income decreased $1,538 million or 21% compared to 2015 primarily due to large infrequent items in the prior year. Infrequent items included the profit on the partial sale of BTIM and the impact of the move to equity accounting the remaining BTIM shareholding ($1,316 million), lower profit on the sale of assets ($102 million) and lower performance fees ($24 million), partly offset by the derivative valuation methodology adjustment of $122 million. Excluding these items, non-interest income declined $218 million or 4% with reduced fees in Westpac Institutional Bank (WIB) from lower activity and reduced credit cards income in Consumer Bank (CB) which included the impact of lower interchange rates. Operating expenses reduced $256 million or 3% compared to 2015. 2015 included $505 million of higher technology expenses related to changes to accounting treatment for technology investment spending. Excluding this item, operating expenses increased $249 million or 3% primarily from the impact of the Group’s investment programs, higher compliance and regulatory expenses and higher occupancy expenses relating to operating leases in the auto and equipment finance businesses, partly offset by productivity benefits and the impact of the partial sale of BTIM. 1 2015 included the profit on the partial sale of the Group’s shareholding in BT Investment Management Limited (BTIM) of $665 million and several tax recoveries of $121 million, partially offset by higher technology expenses of $354 million and a charge of $85 million for derivative valuation methodology changes. 2016 Westpac Group Annual Report 73 2 Impairment charges increased $371 million or 49% compared to 2015. Overall asset quality remained sound, with stressed exposures as a percentage of total committed exposures (TCE) at 1.20% while total impaired loans to total loans were 0.32%. The increase in impairment charges was primarily due to additional provisioning following the downgrade of a small number of institutional customers to impaired in first half of 2016, a rise in write-offs in the auto finance portfolio and lower write-backs. The effective tax rate of 29.9% in 2016 was higher than the 29.3% recorded in 2015. 2016 basic earnings per share were 224.6 cents per share compared to 255.0 cents per share in 2015. The Board has determined a final dividend of 94 cents per ordinary share. The full year ordinary dividends of 188 cents represent an increase of 1% over ordinary dividends declared in 2015 and a pay-out ratio of 84.2%. The full year ordinary dividend is fully franked. Income statement review – 2016 v 2015 Net interest income – 2016 v 2015 $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 2016 31,822 (16,674) 15,148 1,313 (432) 881 2015 32,295 (18,028) 14,267 878 (153) 725 2014 32,248 (18,706) 13,542 802 (81) 721 Net interest income increased $881 million or 6% compared to 2015. Key features include:  6% increase in average interest-earning assets, primarily from growth in Australian housing.  Group net interest margin increased 1 basis point primarily due to improved deposit spreads and Australian mortgage repricing, including for additional regulatory capital requirements, partly offset by higher wholesale funding costs, economic hedge volatility and the impact of lower interest rates. Total loans increased $38.6 billion or 6% compared to 2015. Excluding foreign exchange translation impacts, total loans increased $36.7 billion or 6%. Key features of total loan growth were:  Australian housing loans increased $28.3 billion or 8%, with new lending volumes up 7% and run-off increasing 3%. Following the introduction of regulatory caps on the growth in investor property lending and the introduction of differential pricing, there was some switching of mortgage loans to more appropriately reflect their current purpose. Adjusting for these movements, owner occupied lending grew a little faster than investor property lending;  Australian business loans increased $4.7 billion or 3%, primarily in the Business Bank (BB), with growth in SME and diversified industries and lower growth in the property segment;  New Zealand lending increased $8.7 billion or 14%, with business lending increasing 17% largely due to growth in property, electricity and gas and financial services. Housing increased 12% largely in facilities with a loan to value ratio (LVR) of less than 80%; and  Other overseas loans decreased $3.4 billion or 20% mainly from a decline in trade finance in Asia as the institutional division sought to reduce lower returning assets. Total customer deposits increased $39.5 billion or 9% compared to 2015, fully funding lending growth during the year. Excluding foreign exchange translation impacts, customer deposits increased $38.9 billion or 9%. Key features of customer deposits growth were:  Australian customer deposits increased $32.2 billion or 9%, with above system1 growth in household deposits (term deposits up 22%) and institutional deposits largely from the State Government sector. In addition, customers continued to direct funds to mortgage offset accounts, leading to a 14% growth in Australian non-interest bearing deposits; and  New Zealand customer deposits increased $7.6 billion or 16%. Term deposits grew 27%, as customers moved funds to higher rate fixed term products in a falling interest rate environment. Certificates of deposits declined $1.7 billion or 4%, reflecting reduced reliance on wholesale funding in this form. 1 Source: Australian Prudential Regulation Authority (APRA) 74 2016 Westpac Group Annual Report Interest spread and margin – 2016 v 2015 Review of Group operations 2.09% 2015 2016 2014 2.10% 2.09% 0.19% 1.91% 0.18% 1.91% 0.19% 1.90% 13,542 647,362 606,553 40,809 14,267 683,814 640,628 43,186 15,148 721,843 667,276 54,567 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 Impairment charges increased $371 million or 49% compared to 2015. Overall asset quality remained sound, with stressed exposures as a percentage of total committed exposures (TCE) at 1.20% while total impaired loans to total loans were 0.32%. The increase in impairment charges was primarily due to additional provisioning following the downgrade of a small number of institutional customers to impaired in first half of 2016, a rise in write-offs in the auto finance portfolio and lower write-backs. The effective tax rate of 29.9% in 2016 was higher than the 29.3% recorded in 2015. 2016 basic earnings per share were 224.6 cents per share compared to 255.0 cents per share in 2015. The Board has determined a final dividend of 94 cents per ordinary share. The full year ordinary dividends of 188 cents represent an increase of 1% over ordinary dividends declared in 2015 and a pay-out ratio of 84.2%. The full year ordinary dividend is fully franked. Income statement review – 2016 v 2015 Net interest income – 2016 v 2015 $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 2016 31,822 (16,674) 15,148 1,313 (432) 881 2015 32,295 (18,028) 14,267 878 (153) 725 2014 32,248 (18,706) 13,542 802 (81) 721 Net interest income increased $881 million or 6% compared to 2015. Key features include:  6% increase in average interest-earning assets, primarily from growth in Australian housing.  Group net interest margin increased 1 basis point primarily due to improved deposit spreads and Australian mortgage repricing, including for additional regulatory capital requirements, partly offset by higher wholesale funding costs, economic hedge volatility and the impact of lower interest rates. Total loans increased $38.6 billion or 6% compared to 2015. Excluding foreign exchange translation impacts, total loans increased $36.7 billion or 6%. Key features of total loan growth were:  Australian housing loans increased $28.3 billion or 8%, with new lending volumes up 7% and run-off increasing 3%. Following the introduction of regulatory caps on the growth in investor property lending and the introduction of differential pricing, there was some switching of mortgage loans to more appropriately reflect their current purpose. Adjusting for these movements, owner occupied lending grew a little faster than investor property lending;  Australian business loans increased $4.7 billion or 3%, primarily in the Business Bank (BB), with growth in SME and diversified industries and lower growth in the property segment;  New Zealand lending increased $8.7 billion or 14%, with business lending increasing 17% largely due to growth in property, electricity and gas and financial services. Housing increased 12% largely in facilities with a loan to value ratio (LVR) of less  Other overseas loans decreased $3.4 billion or 20% mainly from a decline in trade finance in Asia as the institutional division than 80%; and sought to reduce lower returning assets. Total customer deposits increased $39.5 billion or 9% compared to 2015, fully funding lending growth during the year. Excluding foreign exchange translation impacts, customer deposits increased $38.9 billion or 9%. Key features of customer deposits growth were:  Australian customer deposits increased $32.2 billion or 9%, with above system1 growth in household deposits (term deposits up 22%) and institutional deposits largely from the State Government sector. In addition, customers continued to direct funds to mortgage offset accounts, leading to a 14% growth in Australian non-interest bearing deposits; and  New Zealand customer deposits increased $7.6 billion or 16%. Term deposits grew 27%, as customers moved funds to higher rate fixed term products in a falling interest rate environment. Certificates of deposits declined $1.7 billion or 4%, reflecting reduced reliance on 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 2.10% in 2016, up 1 basis point compared to 2015. Key drivers of the margin increase were:  a 4 basis point increase from higher customer deposit spreads across term deposits, online accounts and savings deposits, partly offset by the impact of lower interest rates on transactional deposit spreads;  a 2 basis point increase from asset spreads. Australian mortgage repricing, including for additional regulatory capital requirements and business lending repricing were partly offset by broad based lending competition, including continued elevated levels of global liquidity impacting institutional margins and higher short term funding costs; partly offset by  a 3 basis point decline from term wholesale funding spreads reflecting the lengthening of the average tenor in preparation for the implementation of the Net Stable Funding Ratio (NSFR) and investors requiring increased spreads for new issuance. This saw new issuance spreads above maturing deals; and  a 2 basis point decline from Treasury and Markets mainly due to economic hedge volatility partly offset by improved results relating to Treasury’s interest rate risk management and increased earnings from higher capital balances held centrally. Non-interest income – 2016 v 2015 $m Fees and commissions Wealth management and insurance income Trading income Other income Non-interest income 2016 2,755 1,899 1,124 59 5,837 2015 2,942 2,228 964 1,241 7,375 2014 2,926 2,254 1,017 198 6,395 Non-interest income was $5,837 million in 2016, a decrease of $1,538 million or 21% compared to 2015 with infrequent items having a large impact. Infrequent items included the profit on the partial sale of BTIM and the impact of the move to equity accounting ($1,316 million), lower profit on the sale of assets ($102 million) and lower performance fees ($24 million), partly offset by the derivative valuation methodology adjustment of $122 million1. Excluding these items, non-interest income decreased $218 million or 4% as underlying growth was more than offset by reduced fees in WIB from lower activity and reduced Australian credit cards income in CB related to regulatory changes to interchange rates. Fees and commissions decreased $187 million or 6% compared to 2015, largely due to:  lower institutional fees ($92 million) from subdued lending activity and reduced debt market issuance;  lower Australian credit card income ($70 million), including regulation impacts on interchange rates effective 1 November 2015; and  lower BT Financial Group (Australia) (BTFG) fees from reduced activity; partly offset by  higher business lending fees and transactional deposit fees from balance sheet growth. Wealth management and insurance income decreased $329 million or 15% compared to 2015 mainly due to the impact of the partial sale of BTIM ($310 million) in 2015. 1 Source: Australian Prudential Regulation Authority (APRA) 1 In 2015 changes were made to derivative valuation methodologies, which included 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 reduction in non-interest income. 74 2016 Westpac Group Annual Report 2016 Westpac Group Annual Report 75 2 Excluding this item, wealth management and insurance income was little changed:  lower contribution from Ascalon ($42 million) as both lower asset markets and foreign currency translation impacted returns from overseas funds managed by this business;  lower Hastings performance fees ($24 million); and  life insurance income was flat, as net earned premium growth and repricing was offset by a rise in the number of claims which increased the claims ratio by 2% to 36%. Lapses were also higher; partly offset by  Funds under management (FUM)/funds under administration (FUA) income increased $21 million, or 3% from positive flows;  General insurance income grew 15% primarily from lower insurance claims related to weather events and was supported by a 2% increase in gross written premiums from growth in home and contents sales; and  Lenders Mortgage Insurance (LMI) income increased $17 million related to the transitional arrangements with Arch Capital for the insurance of mortgages where the loan to value ratio (LVR) is above 90%. Trading income increased $160 million or 17% compared to 2015, with the $122 million impact from methodology changes to derivative valuation adjustments in 2015 not repeated1. Excluding this item, trading income was up $38 million, primarily in WIB markets. Other income was $59 million in 2016, a decrease of $1,182 million or 95% compared to 2015. This decrease reflected gains from the partial sale of BTIM ($1,036 million) in 2015 that did not repeat, lower income from asset sales ($102 million) and the impact of hedging New Zealand future earnings. Operating expenses – 2016 v 2015 $m Staff expenses Occupancy expenses Technology expenses Other expenses Total operating expenses Total operating expenses to net operating income ratio 2016 4,601 1,032 1,929 1,655 9,217 43.9% 2015 4,704 954 2,288 1,527 9,473 43.8% 2014 4,571 904 1,574 1,498 8,547 42.9% Operating expenses decreased $256 million or 3% compared to 2015. 2015 included $505 million of higher technology expenses related to changes to accounting treatment for technology investment spending not repeated in 2016. Excluding this item, operating expenses increased $249 million or 3%.The key factors of the result were:      higher investment related expenses of $143 million primarily due to a 20% increase in spend on Group’s investment programs; and growth in regulation and compliance expenses of $90 million; higher occupancy expenses of $73 million relating to operating leases in the auto and equipment finance businesses; partly offset by lower BTIM expenses associated with the partial sale and move to equity accounting2; and delivery of productivity benefits of $263 million. Staff expenses were $4,601 million, a decrease of $103 million or 2% compared to 2015. A reduction in average FTE from productivity initiatives related to digitising processes and simplifying the organisation and the removal of BTIM salary expenses were partly offset by higher restructuring costs ($18 million) and annual salary increases. Occupancy expenses increased $78 million or 8% compared to 2015 due to higher occupancy expenses of $73 million relating to operating leases in the auto and equipment finance businesses and rental expenses related to the relocation of various Sydney locations to new premises at Barangaroo. This was partly offset by the benefit of corporate property consolidation and branch network optimisation. Technology expense decreased $359 million or 16% compared to 2015. 2015 included $505 million related to changes to accounting treatment for technology investment spending not repeated in 2016. Excluding this item, technology expense increased $146 million or 8% due to higher investment spending, and directly expensing a higher proportion of that spending, which drove an increase to technology services expenses of $97 million. Software maintenance and licence costs were higher ($56 million) from volume increases and investment related licenses following delivery of enhancements to Westpac Live, BT Panorama and other digital innovations. In 2015 changes were made to derivative valuation methodologies, which included the first time adoption of a FVA to the fair value of derivatives. 1 2 Refer to divisional results of BTFG for more detail. 76 2016 Westpac Group Annual Report Other expenses increased $128 million or 8% compared to 2015 largely from an increase in professional and processing services costs ($126 million) related to the Group’s investment programs, higher outsourced operational costs from increased volumes and increased regulation and compliance related expenses. Review of Group operations Impairment charges – 2016 v 2015 $m Impairment charges Impairment charges to average gross loans (basis points) 2016 1,124 17 2015 753 12 2014 650 12 Asset quality was sound in 2016 with stressed assets to TCE increasing to 1.20%, but still remaining relatively low. The rise in stress mostly reflects the impact from a slowdown in mining investment, along with a weakening of global milk prices impacting the New Zealand dairy portfolio. Total impaired loans to total loans also remained low at 0.32%, up 2 basis points over the year. The higher impaired assets principally reflect the downgrade of a small number of institutional customers in the first half of the year. These trends were reflected in impairment charges, which increased to 17 basis points of average gross loans, but still low by historical experience. Impairment charges of $1,124 million were up by $371 million or 49% compared to 2015. Key movements included:  total new IAPs less write-backs and recoveries were $242 million higher than 2015. New IAPs increased $161 million primarily from the downgrade of a small number of institutional customers, partially offset by lower new impairments in Business Bank and in Westpac New Zealand. 2015 also benefited from a larger number of write-backs and recoveries, which were $81 million higher than 2016; and  total new CAPs were $129 million higher due to a $109 million increase in write-offs, principally for the auto finance portfolio. The impact from other changes in CAPs was also lower, adding $20 million to the impairment charge. Total economic overlays were $1 million higher compared to 2015 with a balance of $389 million. Income tax expense – 2016 v 2015 $m Income tax expense Tax as a percentage of profit before income tax expense (effective tax rate) 2016 3,184 29.9% 2015 3,348 29.3% 2014 3,115 29.0% The effective tax rate of 29.9% in 2016 was marginally higher than the 2015 effective tax rate of 29.3%. This increase was largely due to lower benefits following the finalisation of prior period taxation matters in 2016. 2016 Westpac Group Annual Report 77 2 Balance sheet review Selected consolidated balance sheet data1 The detailed components of the balance sheet are set out in the notes to the financial statements. As at 30 September Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value and available-for-sale securities Derivative financial instruments Loans Life insurance assets All other assets Total assets Payables due to other financial institutions Deposits and other borrowings Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues Life insurance liabilities All other liabilities Total liabilities excluding loan capital Total loan capital Total liabilities Net assets Total equity attributable to owners of Westpac Banking Corporation Non-controlling interests 2016 US$m2 13,045 7,629 62,741 24,709 507,499 10,881 16,912 643,416 13,961 393,372 3,643 27,659 130,264 9,477 8,315 586,691 2016 A$m 17,015 9,951 81,833 32,227 661,926 14,192 22,058 839,202 18,209 513,071 4,752 36,076 169,902 12,361 10,845 765,216 2015 A$m 14,770 9,583 82,287 48,173 623,316 13,125 20,902 812,156 18,731 475,328 9,226 48,304 171,054 11,559 10,199 744,401 2014 A$m 25,760 7,424 81,933 41,404 580,343 11,007 22,971 770,842 18,636 460,822 19,236 39,539 152,251 9,637 10,526 710,647 2013 A$m 11,699 11,210 79,100 28,356 536,164 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 71,739 35,489 514,445 11,907 22,281 678,612 7,564 394,991 9,964 38,935 147,847 10,875 12,634 622,810 12,118 15,805 13,840 10,858 9,330 9,537 598,809 44,607 44,560 47 781,021 58,181 58,120 61 58,181 758,241 53,915 53,098 817 53,915 721,505 49,337 48,456 881 653,560 47,537 46,674 863 632,347 46,265 44,295 1,970 Total shareholders’ equity and non-controlling interests Average balances Total assets Loans and other receivables3 42,605 Total equity attributable to owners of Westpac Banking Corporation 1,964 Non-controlling interests 1 Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have been revised 798,703 594,200 843,555 629,159 46,477 862 55,896 575 49,361 854 42,855 441 44,350 1,972 559,789 688,295 482,376 646,754 737,124 516,482 665,804 501,118 44,607 49,337 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$0.7667, the noon buying rate in New York City on 30 September 2016. 3 Other receivables include cash and balances with central banks and other interest earning assets. 78 2016 Westpac Group Annual Report 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 Common equity Tier 1 (%)6 Tier 1 ratio7 Total capital ratio7 Earnings ratios Basic earnings per ordinary share (cents)8,10 Diluted earnings per ordinary share (cents)9,10 Dividends per ordinary share (cents) Special dividends per ordinary share (cents) Review of Group operations 2016 US$1 2016 A$ 2015 A$ 2014 A$ 2013 A$ 2012 A$ 2.10 0.88 13.3 13.2 6.7 9.5 11.2 13.1 172.2 167.0 144 - 2.10 0.88 13.3 13.2 6.7 9.5 11.2 13.1 224.6 217.8 188 - 2.09 1.00 16.2 16.0 6.3 9.5 11.4 13.3 255.0 248.2 187 - 2.09 1.03 16.3 16.0 6.4 9.0 10.6 12.3 242.5 237.6 182 - 2.14 0.98 15.2 14.6 6.7 9.1 10.7 12.3 217.2 212.5 174 20 2.16 0.89 13.9 13.3 6.7 8.2 10.3 11.7 193.7 188.5 166 - Dividend payout ratio (%) Credit quality ratios Impairment charges on loans written off (net of recoveries) Impairment charges on loans written off (net of recoveries) to average loans (bps) 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$0.7667, the noon 1,107 1,302 1,052 1,323 84.2 79.7 74.7 73.4 84.2 807 16 16 25 23 18 1,604 85.3 32 buying rate in New York City on 30 September 2016. 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 2013. The 2012 ratio has been presented on a proforma Basel III basis. For further information, refer to Capital resources and Note 33 to the financial statements. 7 Basel III was not effective in Australia until 1 January 2013. The 2012 ratio has been presented on a Basel II basis. For further information, refer to Capital resources and Note 33 to the financial statements. 8 Based on the weighted average number of fully paid ordinary shares. 9 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. 10 Comparative information has been restated to incorporate the bonus element of the share entitlement offer in the weighted average number of shares. Balance sheet review Assets – 2016 v 2015 Total assets as at 30 September 2016 were $839.2 billion, an increase of $27.0 billion or 3% compared to 30 September 2015. Significant movements during the year included:  cash and balances with central banks increased $2.2 billion or 15% reflecting higher liquid assets held in this form;  receivables due from other financial institutions increased $0.4 billion or 4% due to higher interbank lending, partly offset by lower 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 decreased $0.5 billion or 1%. Trading securities and other financial assets designated at fair value decreased $6.3 billion, partially offset by an increase of $5.8 billion in available-for-sale high quality liquid assets for Liquidity Coverage Ratio (LCR) requirements;  derivative assets decreased $15.9 billion or 33% mainly due to foreign currency translation impacts on cross currency swaps and forward contracts;  loans grew $38.6 billion or 6%, mainly due to an increase in Australian housing and New Zealand lending. Refer to Loan Quality – 2016 v 2015 below for further information; and  life insurance assets increased by $1.1 billion or 8% as a result of net fund inflows and higher equity markets. 2016 Westpac Group Annual Report 79 2 Liabilities and equity – 2016 v 2015 Total liabilities as at 30 September 2016 were $781.0 billion, an increase of $22.8 billion or 3% compared to 30 September 2015. Significant movements during the year included:  payables due to other financial institutions decreased $0.5 billion or 3% reflecting a reduction in collateral received from derivative counterparties, partly offset by higher offshore central bank deposits and interbank borrowing;  deposits and other borrowings increased $37.7 billion or 8%, largely from growth in household and non-financial corporation segments;  other financial liabilities at fair value through the income statement decreased $4.5 billion or 48% due to reduced funding of securities through repurchase agreements;  derivative liabilities decreased $12.2 billion or 25% mainly due to foreign currency translation impacts on cross currency swaps and forward contracts;  debt issues decreased $1.2 billion or 1% ($5.4 billion or 3% increase excluding foreign currency translation impacts);  life insurance liabilities increased by $0.8 billion or 7% as a result of net fund inflows and higher equity markets; and  loan capital increased $2.0 billion or 14% reflecting the issue of Westpac Capital Notes 4 (Additional Tier 1 capital) of $1.7 billion and growth in subordinated debt outstandings of $0.3 billion including foreign currency translation impacts. Equity attributable to owners increased $5.0 billion or 9% reflecting shares issued under the Share Entitlement Offer, 2015 final dividend reinvestment plan (DRP), 2016 interim DRP and retained profits, less dividends paid during the year. Loan quality – 2016 v 2015 $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 2016 2015 2014 665,256 626,344 583,516 562,633 67,686 15,112 645,431 526,378 62,508 15,906 604,792 492,670 58,428 13,125 564,223 Total gross loans represented 79% of the total assets of the Group as at 30 September 2016, compared to 77% in 2015. Australia average gross loans were $562.6 billion, an increase of $36.3 billion or 7% from $526.4 million. This increase was primarily due to growth in housing and business lending. New Zealand average gross loans were $67.7 billion, an increase of $5.2 billion or 8% from $62.5 billion in 2015. This increase was primarily due to growth in housing lending. Other overseas average loans were $15.1 billion in 2016, a decrease of $0.8 billion or 5% from $15.9 billion in 2015. This was primarily due to a decline in trade finance in Asia, as WIB sought to reduce lower returning assets. Approximately 13.6% of the loans at 30 September 2016 mature within one year and 21.8% mature between one year and five years. Retail lending comprises the majority of the loan portfolio maturing after five years. 80 2016 Westpac Group Annual Report $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 Review of Group operations As at 30 September 2016 2015 2014 2013 2012 3,249 (1,363) 1,886 4,034 (1,463) 2,571 1,851 (885) 966 31 (16) 15 277 (166) 111 1,092 869 2,733 3,602 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 49.4% 0.32% 0.54% 46.3% 0.30% 0.53% 44.8% 0.40% 0.60% 43.2% 0.67% 0.73% 175.8% 1.2% 148.8% 1.3% 109.7% 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% 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. 2 166.8% 1.2% Impairment provisions relating to impaired loans include IAP plus the proportion of the CAP that relate to impaired loans. The proportion of the CAP that relates to impaired loans was $198 million as at 30 September 2016 (2015: $208 million, 2014: $180 million, 2013: $190 million, 2012: $171 million). This sum is compared to the total gross impaired loans to determine this ratio. The credit quality of the portfolio continued to be sound over 2016, with total stressed exposures to TCE remaining low. Total impaired loans as a percentage of total gross loans were 0.32% at 30 September 2016, an increase of 0.02% from 0.30% at 30 September 2015. At 30 September 2016, we had 4 impaired counterparties with exposure greater than $50 million, collectively accounting for 30% of total impaired loans. This compares to 3 impaired counterparties with exposure greater than $50 million in 2015 accounting for 15% of total impaired loans. There were 7 impaired exposures at 30 September 2016 that were less than $50 million and greater than $20 million (2015: 9 impaired exposures). At 30 September 2016, 78% of our exposure was to either investment grade or secured consumer mortgage segment (2015: 77%, 2014: 77%, 2013: 77%) and 96% of our exposure as at 30 September 2016 was in Australia, New Zealand and the Pacific region (2015: 95%, 2014: 95%, 2013: 97%). We believe that Westpac remains appropriately provisioned. Total impairment provisions for impaired loans to total impaired loans coverage at 49.4% at 30 September 2016 compared to 46.3% at 30 September 2015. Total provisions for impairment on loans and credit commitments to total impaired loans represented 166.8% of total impaired loans as at 30 September 2016, down from 175.8% at 30 September 2015. Total provisions for impairments on loans and credit commitments to total loans were 0.54% at 30 September 2016, up from 0.53% at 30 September 2015 (2014: 0.60%). Group mortgage loans 90 days past due at 30 September 2016 were 0.61% of outstandings, up from 0.42% of outstandings at 30 September 2015 (2014: 0.45%). Group other consumer loan delinquencies (including credit card and personal loan products) were 1.11% of outstandings as at 30 September 2016, an increase of 4 basis points from 1.07% of outstandings as at 30 September 2015 (2014: 0.99%). Potential problem loans as at 30 September 2016 amounted to $1,436 million, an increase of 56% from $923 million at 30 September 2015. The increase in potential problem loans was mainly due to the downgrade of loans that were impacted by the downturn in the New Zealand dairy portfolio. 2016 Westpac Group Annual Report 81 2 Potential problem loans are facilities that are performing and no loss is expected, but the customer demonstrates significant weakness in debt servicing or security cover that could jeopardise repayment of debt on current terms if not rectified. Potential problem loans are identified using established credit frameworks and policies, which include the ongoing monitoring of facilities through the use of watchlists. Capital resources Under APRA’s implementation of Basel III, Australian banks are required to maintain a minimum Common Equity Tier 1 (CET1) ratio of at least 4.5%, Tier 1 ratio of 6.0% and Total Regulatory Capital of 8.0%. In addition, a capital conservation buffer (CCB) requirement of 3.5% applies which is to be wholly met with CET1 capital. Should the CET1 capital ratio fall within the CCB, restrictions on distributions apply. Distributions for this purpose are defined as payment of dividends, discretionary bonuses and Additional Tier 1 capital distributions. Subject to certain limitations, Common Equity Tier 1 capital consists of paid-up share capital, retained profits and certain reserves, less certain intangible assets, capitalised expenses and retained profits 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. 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 Authorised Deposit-taking Institution (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. Westpac’s preferred range for its CET1 capital ratio is 8.75% – 9.25%. 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 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. The application of these discretions acts to reduce reported capital ratios relative to those reported in other jurisdictions. 82 2016 Westpac Group Annual Report 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 2016 57,235 (18,360) 38,875 6,910 45,785 8,201 (218) 7,983 53,768 358,812 7,861 33,363 5,373 4,644 410,053 9.5% 1.7% 11.2% 1.9% 13.1% 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% Refer to ‘Significant developments’ in Section 1 for a discussion on future regulatory developments that may impact upon capital requirements. 2016 Westpac Group Annual Report 83 2 Divisional performance Divisional performance – 2016 v 2015 In June 2015, Westpac announced a new operating structure to better align the Group’s divisional structure to customer-facing segments. The new structure has seen the Group’s Australian retail and business banking operation reorganised under two divisions, Consumer Bank and Business Bank. A key rationale for the change has been to improve accountability for the end- to-end customer experience while maintaining the Group’s unique portfolio of brands. In 2015, Westpac commenced the sale of certain Pacific island operations which was completed in 2016. In light of this change, Westpac Pacific is no longer reported under Group Businesses (previously called Other Divisions). Its results are now included under Westpac Institutional Bank consistent with its line of reporting. In addition to the operating structure change, the Group has adjusted its expense allocation methodology and cost of funds transfer pricing. As a result of these changes, comparatives have been restated (refer to Note 2 to the financial statements for the disclosure of the Group’s reportable operating segments and revisions to expense allocation and cost of funds transfer pricing). Westpac now reports under the new structure, comprising the following five primary customer-facing business divisions:  Consumer Bank, which we refer to as CB: responsible for all Australian consumer relationships across all brands;  Business Bank, which we refer to as BB: responsible for all Australian business and commercial consumer relationships across all brands;  BT Financial Group (Australia), which we refer to as BTFG: responsible for the Group's wealth management, insurance and private banking businesses;  Westpac Institutional Bank, which we refer to as WIB: 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. Group Businesses include 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 considered in assessing distributions. 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 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:    84 partial sale of BTIM – During 2015 the Group recognised a significant gain following the partial sale 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 were introduced in 2015, including moving to an accelerated amortisation methodology for most existing assets with a useful life of greater than three 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 to reduce the carrying value of impacted assets was 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 select Australian businesses of Lloyds Banking Group (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 2016 Westpac Group Annual Report Divisional performance       items are amortised over their useful lives, ranging between four and 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 unrealised (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 previously 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 year 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 in 2014 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 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 (ASIC) Regulatory Guide 230 has been followed when presenting this information. 2016 Westpac Group Annual Report 85 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 2016, 2015 and 2014. 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 Consumer Bank Business Bank BT Financial Group (Australia) Westpac Institutional Bank Westpac New Zealand Group Businesses Total cash earnings Total assets by business division $bn Consumer Bank Business Bank BT Financial Group (Australia) Westpac Institutional Bank Westpac New Zealand Group Businesses Total assets 2016 2,981 1,999 876 1,098 812 56 7,822 2016 351.5 156.8 38.2 110.4 82.1 100.2 839.2 2015 2,620 1,979 914 1,343 841 123 7,820 2015 328.6 149.3 35.8 127.3 71.5 99.7 812.2 2014 2,392 1,881 910 1,519 779 147 7,628 2014 308.5 141.3 31.8 122.2 65.9 101.1 770.8 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. 86 2016 Westpac Group Annual Report Consumer Bank Consumer Bank (CB) is responsible for sales and service to consumer customers in Australia under the Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands. Activities are conducted through a dedicated team of specialist consumer relationship managers along with an extensive network of branches, call centres and ATMs. Customers are also supported by a range of internet and mobile banking solutions. CB also works in an integrated way with BTFG and WIB in the sales and service of select financial services and products including in wealth and foreign exchange. The revenue from these products is mostly retained by the product originators. Divisional performance Performance of Consumer Bank $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 Net loans Total assets Total operating expenses to net operating income ratio 2016 v 2015 CB increased cash earnings by $361 million or 14%. 2016 7,171 850 8,021 (3,270) (492) 4,259 (1,278) 2,981 (116) 2,865 $bn 180.6 344.8 351.5 40.8% 2015 6,396 940 7,336 (3,113) (478) 3,745 (1,125) 2,620 (116) 2,504 $bn 168.2 320.7 328.6 42.4% 2014 5,917 934 6,851 (3,007) (424) 3,420 (1,028) 2,392 (116) 2,276 $bn 153.6 301.0 308.5 43.9% Net interest income increased $775 million or 12% due to a 6% rise in average interest-earning assets and a 12 basis point improvement in net interest margin:  the rise in net interest margin was predominantly due to higher asset spreads from mortgage repricing including for increased regulatory capital requirements, along with higher rates on investor property lending. Partly offsetting these benefits were higher wholesale funding costs and intense competition across both lending and deposits;  mortgages increased 8%, with growth higher in the first half of 2016. Other lending (mostly credit cards) grew 4%; and  deposits increased $12.4 billion or 7%, primarily from term deposits growth. The rise can be traced back to a preference for growing deposits with a higher LCR value and from customers looking for higher relative yields in a low interest rate environment. Non-interest income decreased $90 million or 10%, mostly from reduced credit cards revenue, including regulation changes to interchange rates following the scheduled three year review by the RBA that reset average and maximum interchange rates. Renegotiation and modification of the reward program introduced in the second half of 2016 partly offset these impacts. Operating expenses increased $157 million or 5% mostly from higher investment related expenses including increased depreciation and software amortisation. Investment spending has been directed to transforming the customer experience including completing the digitisation of the top 7 manual service transactions. This contributed to productivity savings of $119 million. Impairment charges increased $14 million or 3% due to higher mortgage delinquencies including from changes in the measurement and reporting of customers in hardship arrangements and a deterioration in those states and regions impacted by the slowing mining investment cycle. 2016 Westpac Group Annual Report 87 2 Business Bank Business Bank (BB) is responsible for sales and service to micro, SME and commercial business customers for facilities up to approximately $150 million. The division operates under the Westpac, St.George, BankSA and Bank of Melbourne brands. Customers are provided with a wide range of banking and financial products and services to support their lending, payments and transaction needs. In addition, specialist services are provided for cash flow finance, trade finance, automotive and equipment finance, property finance and treasury services. The division is also responsible for certain consumer customers with auto finance loans. BB works in an integrated way with BTFG and WIB in the sales and service of select financial services and products including corporate superannuation, foreign exchange and interest rate hedging. The revenue from these products is mostly retained by the product originators. Performance of Business Bank $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 Net loans Total assets Total operating expenses to net operating income ratio 2016 v 2015 BB cash earnings increased by $20 million or 1%. 2016 3,959 1,104 5,063 (1,796) (410) 2,857 (858) 1,999 (10) 1,989 $bn 110.6 153.4 156.8 35.5% 2015 3,767 1,068 4,835 (1,731) (273) 2,831 (852) 1,979 (10) 1,969 $bn 101.8 146.4 149.3 35.8% 2014 3,567 1,022 4,589 (1,653) (248) 2,688 (807) 1,881 (9) 1,872 $bn 102.4 138.0 141.3 36.0% Net interest income increased by $192 million or 5% due to a 6% rise in average interest-earning assets, partly offset by a 2 basis point decline in net interest margin:  BB has continued to focus on returns and as a result margin contraction was limited to 2 basis points. Increased funding costs and compression in lending spreads were partly offset by pricing changes across the portfolio;  net loans increased $7 billion or 5%: – mortgages increased $3.4 billion or 6%; – business lending increased $3.5 billion or 4%, diversified across the health, professional services and agriculture segments; and – other lending increased 2% primarily from growth in auto finance; and  deposits increased $8.8 billion or 9%, more than funding the growth in lending and contributing to a 256 basis point increase in the deposit to loan ratio to 72.1%. Most of the growth in deposits was in term deposits (up $7 billion) with the remainder in transaction accounts. Non-interest income increased by $36 million or 3% mainly due to higher facility fees in business lending. Operating expenses increased by $65 million or 4% due to technology costs and investments to transform BB's capability. This growth was partly offset by productivity benefits including changes to the operating model to better align bankers and customers. Asset quality was broadly stable over the year, however a reduction in write-backs combined with the lift in auto finance delinquencies in the first half of 2016 led to impairment charges increasing $137 million. 88 2016 Westpac Group Annual Report Divisional performance BT Financial Group (Australia) BT Financial Group (Australia) is the wealth management and insurance arm of the Westpac Group providing a broad range of associated services. BTFG’s funds management operations include the manufacturing and distribution of investment, superannuation, retirement products, wealth administration platforms, private banking, margin lending and equities broking. BTFG’s insurance business covers the manufacturing and distribution of life, general and lenders mortgage insurance. The division also uses third parties for the manufacture of certain general insurance products as well as actively reinsuring its risk using external providers across all insurance classes. BTFG operates a range of wealth, funds management (including Ascalon which is a boutique incubator of emerging fund managers), and financial advice brands and operates under the banking brands of Westpac, St.George, Bank of Melbourne and BankSA for Private Wealth and Insurance. BT Investment Management Limited (BTIM) is 29.5% owned by BTFG (following a partial sale in 2015) with the business being equity accounted from July 2015. BTFG works in an integrated way with all the Group’s Australian divisions in supporting the insurance and wealth needs of customers. Performance of BTFG $m Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment 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 Net 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 2016 498 1,908 2,406 (1,160) - 1,246 (370) - 876 (32) 844 $bn 25.5 18.6 38.2 48.4 130.8 48.2% 2016 520 309 47 876 2015 445 2,192 2,637 (1,286) 4 1,355 (409) (32) 914 (23) 891 $bn 23.4 17.2 35.8 46.3 121.9 48.8% 2015 560 291 63 914 2014 403 2,257 2,660 (1,305) 2 1,357 (408) (39) 910 (22) 888 $bn 22.4 15.9 31.8 89.0 112.7 49.1% 2014 524 333 53 910 2016 v 2015 BTFG cash earnings decreased by $38 million or 4% due to a decline in funds management income mostly attributed to the partial sale of BTIM ($24 million), along with higher regulatory and compliance expenses. These were partly offset by growth in lending, FUA and insurance premiums:   Funds management business cash earnings decreased by $40 million or 7%. Excluding the impact from the partial sale of BTIM, the Funds management business cash earnings decreased by $16 million or 3%. Private Wealth income was higher and average FUM and FUA were up 2% and 4%, respectively, although these increases were more than offset by lower advice income and a reduction in the value of investments in Ascalon funds due to weaker markets and rise in the Australian dollar. Regulatory and compliance costs also increased significantly during the year; Insurance cash earnings increased by $18 million or 6% with growth in premiums and lower general insurance claims partially offset by higher life insurance benefits paid to customers. Revenue growth was supported by a higher LMI contribution mostly due to transitional arrangements with Arch Capital. Life insurance in-force premiums were up 9% and general insurance gross written premiums rose 2%; and  Capital and other cash earnings decreased by $16 million reflecting lower returns on invested capital and higher regulatory and compliance costs. 2016 Westpac Group Annual Report 89 2 Funds management business $m Net interest income Non-interest income Net operating income before operating expenses and impairment charges Operating expenses Impairment 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 2016 474 1,334 1,808 (1,067) - 741 (221) - 520 (32) 488 59.0% 2015 416 1,663 2,079 (1,219) 4 864 (272) (32) 560 (23) 537 58.6% 2014 378 1,691 2,069 (1,238) 2 833 (270) (39) 524 (22) 502 59.8% The partial sale of BTIM in June 2015 reduced the Group’s ownership to 31% at that time. 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. Cash earnings decreased by $40 million or 7%. Net interest income was up $58 million or 14% primarily due to an 8% increase in lending, a 9% rise in deposits and improved margins in Private Wealth. Non-interest income decreased $329 million or 20%. Excluding the impact of the partial sale of BTIM and move to equity accounting, non-interest income was down by $49 million with the key drivers being:   the contribution from Ascalon was $42 million lower due to the revaluation of investments from weaker markets and a rise in the Australian dollar; partly offset by advice income was down $33 million from a reduction in activity;  increased FUA revenues from higher net flows and good management of margins. Operating expenses decreased by $152 million or 12%. Excluding the partial sale of BTIM and the move to equity accounting, expenses were $32 million or 3% higher. The increase was due to higher regulatory related costs associated with remediation and compliance programs, and increased investment costs including higher software amortisation as new modules of the Panorama platform went live. Tax and non-controlling interests decreased by $83 million or 27% associated with the lower earnings and the move to equity accounting for BTIM reducing the value of non-controlling interests. Insurance business The insurance business result includes the Westpac and St.George Life Insurance, General Insurance and LMI businesses. $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 2016 5 525 530 (88) 442 (133) 309 - 309 16.6% 2015 6 488 494 (79) 415 (124) 291 - 291 16.0% 2014 9 535 544 (68) 476 (143) 333 - 333 12.5% Cash earnings increased by $18 million or 6%, with lower general insurance claims and increased LMI revenue, partly offset by higher life insurance claims. Net operating income increased by $36 million or 7%:  general insurance net earned premiums increased $17 million with gross written premiums rising 2% from growth in home and contents sales. Net claims decreased $22 million, mostly from a reduction in significant weather events during the year; 90 2016 Westpac Group Annual Report Divisional performance   LMI income increased $18 million related to the transitional arrangements with Arch Capital for the insurance for mortgages where the LVR is above 90%; and life insurance net earned premiums increased $70 million, with in-force premiums rising 9%, offset by a rise in the number of benefits paid to customers, which increased the claims ratio to 36% and a 22% increase in lapses resulting in deferred acquisition costs being written off during the year. Operating expenses increased $9 million or 11% due to an increase in volumes and higher employee costs to support the larger portfolio and costs of linking systems with Allianz following the establishment of a strategic partnership last year. Westpac Institutional Bank Westpac Institutional Bank (WIB) delivers a broad range of financial products and services to commercial, corporate, institutional and government customers with connections to Australia and New Zealand. WIB operates through dedicated industry relationship and specialist product teams, with expert knowledge in transactional banking, financial and debt capital markets, specialised capital and alternative investment solutions. Customers are supported throughout Australia as well as branches and subsidiaries located in New Zealand, the US, UK and Asia. WIB is also responsible for Westpac Pacific currently providing a range of banking services in Fiji and PNG. WIB works in an integrated way with all the Group’s divisions in the provision of more complex financial needs including across foreign exchange and fixed interest solutions. 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 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 Net 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. 2016 1,562 1,536 3,098 (1,347) (177) 1,574 (469) (7) 1,098 - 1,098 $bn 88.4 73.8 110.4 43.5% 2015 1,638 1,578 3,216 (1,319) 38 1,935 (584) (8) 1,343 - 1,343 $bn 80.3 76.3 127.3 41.0% 2014 1,624 1,626 3,250 (1,202) 126 2,174 (646) (9) 1,519 - 1,519 $bn 80.8 68.0 122.2 37.0% 2016 v 2015 WIB cash earnings decreased by $245 million or 18% due to a $215 million increase in impairment charges and a 7 basis point decline in net interest margin. net loans decreased 3% mostly from lower trade finance balances, predominantly in Asia; Net interest income decreased by $76 million or 5% from a $0.4 billion decrease in average interest-earning assets and a 7 basis point decline in net interest margin:    institutional margins continue to be impacted by higher levels of global liquidity. This has contributed to tightening asset spreads for new lending. deposits increased 10% mainly in term deposits; and Non-interest income decreased $42 million or 3%. 2015 included a $122 million negative impact from methodology changes to derivative valuations. Excluding this impact, non-interest income was down $164 million from a decline in fee income due to lower corporate and institutional activity and lower fees from Hastings. Operating expenses increased $28 million or 2% mostly from further investment to meet additional regulatory and compliance requirements. This increase was partially offset by disciplined expense management, including benefits from changes to the WIB operating model and the sale of certain Pacific Island operations. Asset quality remains sound and the business has maintained its focus on origination standards and portfolio diversification. Impairments have moved to a charge of $177 million in 2016 compared to an impairment benefit of $38 million in 2015, predominantly due to increased provisions associated with the deterioration of a small number of individual names which were downgraded in first half of 2016. 2016 Westpac Group Annual Report 91 2 Westpac New Zealand Westpac New Zealand is responsible for sales and service of banking, wealth and insurance products for consumers, business and institutional customers in New Zealand. Westpac conducts its New Zealand banking business through two banks in New Zealand: Westpac New Zealand Limited, which is incorporated in New Zealand and Westpac Banking Corporation (NZ 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. Westpac 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 Net 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. 2016 v 2015 Cash earnings decreased by $29 million or 3%. 2016 1,588 449 2,037 (856) (54) 1,127 (315) - 812 2 814 $bn 54.9 71.7 82.1 7.1 2.0 42.0% 2015 1,552 457 2,009 (808) (44) 1,157 (313) (3) 841 - 841 $bn 47.3 62.8 71.5 5.9 1.8 40.2% 2014 1,420 438 1,858 (756) (24) 1,078 (296) (3) 779 - 779 $bn 44.1 57.7 65.9 4.9 1.5 40.7% Net interest income increased by $36 million or 2% due to a 9% rise in average interest-earning assets, partly offset by a 12 basis point decline in net interest margin:  the decline in net interest margin was principally due to: – lower asset spreads due to heightened competition for mortgages and a further customer preference for lower spread fixed rate loans which now represent 77% of portfolio, up 3% from 2015; – lower Treasury income; – higher wholesale funding costs included increased term issuance costs and the higher costs of shorter term funding; partially offset by   – improved spread on deposits principally from changed interest rates on online savings accounts; lending increased $8.9 billion or 14%: – mortgages increased $4.8 billion or 12%. This growth was a little lower than the system1 as the division was more prioritised on return over growth especially in the second half of 2016; and – business lending increased $4.0 billion or 18% with the key sectors of agriculture, energy and financial services contributing to the growth; and deposits increased $7.6 billion or 16%, with growth broadly spread across the portfolio. Term deposits dominated growth as customers sought fixed returns in a falling interest rate environment and online savings deposits were repriced. Non-interest income decreased $8 million or 2%. The decline was principally due to lower asset sales which contributed $21 million to income in 2015. This was partly offset by higher wealth and insurance income. Customers with a wealth product increased 27 basis points to 28.4%. This is reflected in FUM balances which rose 20% over the year. 1 Source: RBNZ. 92 2016 Westpac Group Annual Report Operating expenses increased $48 million or 6% mostly due to investment in the division’s transformation program, costs of relaunching the brand and higher depreciation and software amortisation. Overall asset quality metrics remain sound, although stressed assets to TCE increased 94 basis points to 2.54% mostly reflecting additional stress in the dairy sector. Impairment charges increased $10 million due to higher stress in the dairy portfolio and a lower level of write-backs and recoveries. Divisional performance Group Businesses This segment comprises:  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 the Group’s operating segments, earnings from non-core asset sales and certain other head office items such as centrally raised provisions;  Treasury is responsible for the management of the Group’s balance sheet including wholesale funding, capital and management of liquidity. Treasury also manages the interest rate risk and foreign exchange risks inherent in the balance sheet, including managing the mismatch between Group assets and liabilities. Treasury’s earnings are primarily sourced from managing the Group’s balance sheet and interest rate risk, within set risk limits;  Group Technology1 which comprises functions responsible for technology strategy and architecture, infrastructure and operations, applications development and business integration; and  Core Support1 which comprises functions performed centrally, including Australian banking operations, property services, strategy, finance, risk, compliance, legal and human resources. Performance of Group Businesses $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)/benefit Profit attributable to non-controlling interests Cash earnings for the year Net cash earnings adjustments Net profit attributable to owners of Westpac Banking Corporation 2016 v 2015 Group Businesses cash earnings decreased by $67 million or 54%. 2016 570 8 578 (469) 9 118 (54) (8) 56 (221) (165) 2015 441 66 507 (378) - 129 9 (15) 123 341 464 2014 565 47 612 (323) (82) 207 (45) (15) 147 80 227 Net interest income increased $129 million or 29% due to improved Treasury performance related to interest rate risk management and increased earnings from higher capital balances held centrally. This was partially offset by additional funding costs incurred to further strengthen the balance sheet in preparation for NSFR and lower interest rates. Non-interest income decreased $58 million or 88% reflecting a gain on asset sale in 2015 that did not repeat. Operating expenses increased $91 million or 24% due to an increase in restructuring costs, higher regulation and compliance costs and an increase in employee provisions. Impairment benefit of $9 million is primarily due to a reduction in the centrally held economic overlay provision. The effective tax rate of 46% is higher than the Group average primarily due to the impact of hybrid distributions that are non- deductible for taxation purposes. 1 Costs are partially allocated to other divisions in the Group, with costs attributed to enterprise activity retained in Group Businesses. 2016 Westpac Group Annual Report 93 2 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 various jurisdictions in 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 or financial or reputational loss, arising from our failure to abide by the 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 (Cth) 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 may result in litigation, fines, penalties, revocation, suspension or variation of conditions of relevant regulatory licences or other administrative action by regulators. For example, in April 2016, ASIC commenced civil proceedings against Westpac in the Federal Court of Australia, alleging certain misconduct in relation to the setting of the BBSW in the period April 2010 to June 2012, including market manipulation and unconscionable conduct. Westpac is defending the proceedings. During the year ended 30 September 2016, Westpac has received other notices and requests for information from its regulators. Regulatory investigations, litigation, fines, penalties, 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 economic 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, increased the required quality and quantity of capital held by banks and introduced new standards for the management of liquidity risk. The BCBS continues to refine this framework and APRA is expected to incorporate the majority of these changes 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 2016, 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. Other areas of proposed or potential change that could impact us include changes to accounting and reporting standards, derivatives reform, tax legislation including dividend imputation, 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. For example, since the Financial System Inquiry (FSI) handed down its final report, the Australian Government has consulted on the detailed implementation of a number of the FSI’s recommendations. The Australian Government or other regulators may also initiate further reviews (such as the House of Representatives Standing Committee on Economics ‘Review of Australia’s Four Major 94 2016 Westpac Group Annual Report Risk and risk management Banks’), or commissions of inquiry, which could lead to additional regulatory change. The final impact of the FSI, and the impact of any additional reviews or inquiries is difficult to predict, but may result in further substantial regulatory changes which could have a material impact on our business, prospects, financial performance or financial condition. 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. The powers exercisable by our regulators may also be expanded in the future. For example, on 20 April 2016, the Australian Government announced that it would accelerate the implementation of certain recommendations made by the FSI, including the recommendation that ASIC be granted a product intervention power. Further details on the Australian Government’s reform package are set out in ‘Significant developments’ in Section 1. Regulatory changes and the timing of their introduction continue to evolve and we 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 are an important part of our planning processes. 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 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 and funding 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 or depositor preferences may significantly affect our ability to meet funding and liquidity needs and may increase our cost of funding We rely on deposits and 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 remains 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 2016, approximately 31% of our total funding originated from domestic and international wholesale markets. Of this, around 61% was sourced outside Australia and New Zealand. Customer deposits provide around 61% of total funding. Customer deposits held by Westpac are comprised of both term deposits which can be withdrawn after a certain period of time and at call deposits which can be withdrawn at any time. A shift in investment preferences could result in deposit withdrawals by customers which 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, there may also be a loss of confidence in bank deposits and we could experience unexpected deposit withdrawals. In this situation 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, 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. 2016 Westpac Group Annual Report 95 2 For a more detailed description of liquidity risk, refer to ‘Funding and liquidity risk management’ 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. Sovereign defaults could negatively impact the value of our holdings of high quality liquid assets. There may also 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 can 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 a downgrade of the Australian Government, 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. Credit ratings agencies Standard & Poor’s and Moody’s both revised their outlook on Australia’s major banks (including Westpac) from ‘stable’ to ‘negative’ during the year ended 30 September 2016. Failure to maintain our high 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 competitors 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, global economic conditions and political developments (such as Brexit). 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. 96 2016 Westpac Group Annual Report Risk and risk management 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 adverse changes in taxation or buyer concerns about decreases in values. Adverse changes to 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 economic relationship between Australia and China, particularly in the mining and resources sectors, a slowdown in China’s economic growth could negatively impact the Australian economy. Changes in commodity prices and broader 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 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, clearing and settlement 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, commodity prices, equity prices and interest rates including the potential for negative interest rates. 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. 2016 Westpac Group Annual Report 97 2 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. We could incur losses from fraudulent applications for loans or 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 losses 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 attackers (including organised crime and state-sponsored actors) 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 (such as 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 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. 98 2016 Westpac Group Annual Report Risk and risk management We could suffer losses due to conduct risk Conduct risk is the risk that our provision of services and products results in unsuitable or unfair outcomes for our stakeholders or undermines market integrity. 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 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 risks including liquidity risk, credit risk, market risk (such as interest 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 and Note 22 to the financial statements. 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 of loss of reputation, stakeholder confidence, 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, economic and 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. 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, civil unrest 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. 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. 2016 Westpac Group Annual Report 99 2 In the life insurance business, insurance risk arises primarily through mortality (death) and morbidity (illness and injury) risks, and the costs of claims relating to those risks, being greater than was anticipated when pricing those risks. In the general insurance business, insurance risk arises mainly through environmental factors (including storms, 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 above. In the lenders mortgage insurance business, insurance risk arises primarily from unexpected downturn in economic conditions leading to higher levels of mortgage defaults from unemployment or other economic factors. If our reinsurance arrangements are not effective, this could also lead to greater risks, and more losses than anticipated. 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 2016, 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 its value has been reduced or that its estimated useful life has declined, 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 including a sound risk culture is one of the keys to achieving our vision as it influences our customers’ experiences, the public’s perceptions, our financial performance, our reputation and our shareholders’ expectations. It is critical to our future success. We regard managing risk as a core function performed at all levels of the Group. The Risk Management Strategy is approved by the Board and reviewed by the Board Risk & 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 (CEO). For further information regarding the role and responsibilities of the BRCC and other Board committees in managing risk, refer to Westpac’s 2016 Corporate Governance Statement available at www.westpac.com.au/corpgov. 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’ in which 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 2016 Corporate Governance Statement and Note 22 to the financial statements. 100 2016 Westpac Group Annual Report Risk and risk management 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, 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 14 to the financial statements. Credit risk concentrations We monitor our credit portfolio to manage risk concentrations. At 30 September 2016, our exposure to consumers comprised 72% (2015: 71%, 2014: 71%) of our on-balance sheet loans and 58% (2015: 57%, 2014: 57%) of total credit commitments. At 30 September 2016, 91% (2015: 90%, 2014: 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 cash flows 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 which seeks to meet 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 LCR. Refer to Note 22 to the financial statements for a more detailed discussion of our liquidity risk management policies. 2016 Westpac Group Annual Report 101 2 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 2016: Program Limit Issuer(s) Program/Issuing Shelf Type Australia No limit Euro Market USD 2.5 billion USD 20 billion USD 70 billion USD 10 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 Medium Term Note Program USD 15 billion WBC (NY Branch) US Medium Term Deposit Note 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 or 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. 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. 102 2016 Westpac Group Annual Report The table below depicts the aggregate Value at Risk (VaR), by risk type, for traded risk for the year ended 30 September: Risk and risk management Consolidated and Parent Entity $m Interest rate risk Foreign exchange risk Equity risk Commodity risk1 Other market risks2 Diversification effect Net market risk 1 2 2016 2015 2014 High 14.0 12.2 2.9 4.5 6.0 n/a 18.7 Low Average 8.8 5.1 0.3 4.6 1.4 0.1 1.4 2.6 n/a 7.7 2.7 3.6 (8.0) 12.5 High 18.1 11.8 0.6 5.7 6.7 n/a 23.5 Low Average 11.4 3.6 0.3 7.0 0.5 0.1 1.7 2.9 n/a 9.0 3.1 4.6 (7.2) 15.8 High 30.7 7.6 0.7 2.9 11.3 n/a 40.2 Low Average 15.6 3.0 0.3 6.3 1.2 0.1 1.3 5.4 n/a 9.5 2.0 9.2 (8.2) 22.0 Includes electricity risk. Include prepayment risk and credit spread risk (exposure to movements in generic credit rating bands). The graph below compares the actual profit and loss from trading activities on a daily basis to VaR1 over the reporting period: Traded Risk: Actual Profit and Loss vs. VaR 01 October 2015 to 30 September 2016 Actual Profit and Loss ($m) 20 15 10 5 - (5) (10) (15) (20) - 5 10 15 20 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. This definition is aligned to regulatory (Basel II) definition, including legal and regulatory 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. For information on our management of operational and compliance risk, refer to Westpac’s 2016 Corporate Governance Statement, available at www.westpac.com.au/corpgov. 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. 2016 Westpac Group Annual Report 103 2 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 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 that our provision of services and products results in unsuitable or unfair outcomes for our stakeholders or undermines market integrity. 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 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. The Group has in place a Sustainability Risk Management Framework that is supported by a suite of key policies and position statements. These include the Principles for Doing Business, Principles for Responsible Lending, Responsible Investment Position Statement, Environmental, Social and Governance (ESG) Credit Risk Policy, Climate Change and Environment Position Statement and Action Plan, Human Rights 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 2016. Westpac is also a signatory to a number of voluntary principles-based frameworks that guide the integration of ESG-related issues into banking, lending and investment analysis. These include the Equator Principles, covering project finance activities and the Principles for Responsible Investments, 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 the administration of equity investments on behalf of other parties where fee income is based on the value of funds under management. Our contingent equity risk arises from normal lending activities secured by, or with recourse to, listed and/or unlisted equities or to another equity-like source of risk protection. This 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 which seek to manage these risks and the conflicts of interest that can potentially arise. 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. 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 reinsurance arrangements in place to reduce risk, including from catastrophic events. They are capitalised to a level that exceeds the minimum required by the relevant regulator. Related entity (contagion) risk The risk that problems arising in other Westpac Group members compromise the financial and operational position of the ADI in the Westpac Group. The Group has in place a Risk Management Framework and a suite of supporting policies and procedures governing the control of dealings with, and activities that may be undertaken by, Group members. Controls include the measurement, 104 2016 Westpac Group Annual Report Risk and risk management 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 of the loss of reputation, stakeholder confidence, 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. The Reputation Risk Management Framework was reviewed and updated in 2016. 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 is 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 transaction documents. As at 30 September 2016, the carrying value of assets pledged for the covered bond programs for the Group was $45.4 billion (2015: $40.3 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, unless 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 2016, our assets securitised through a combination of privately or publicly placed issues to Australian, New Zealand, European and United States investors was $9.5 billion (2015: $12.1 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. 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 2016, we administered one significant conduit (2015: one), that 2016 Westpac Group Annual Report 105 2 was created prior to 1 February 2003, with commercial paper outstanding of $0.9 billion (2015: $0.8 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 $97 million as at 30 September 2016 (2015: $86 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 loans, 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 2016. 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 2016. 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 2016 that has been identified and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 106 2016 Westpac Group Annual Report Westpac’s approach to sustainability Sustainability performance Westpac’s approach to sustainability The Group’s approach to operating sustainably is designed to anticipate, respond to and shape the most pressing emerging topics (issues and opportunities) that have the potential to materially impact customers, employees, suppliers, shareholders and communities, where the Group has the skills and experience to make a meaningful, positive impact. This view is embedded within our core business activities, and aligns with the priorities set out in the Group’s strategy. Guiding our approach Accountability for the Group’s Sustainability Strategy starts with the Board and flows through to all employees. The Board has responsibility for considering the social, ethical and environmental impact of the Group’s activities, setting standards and monitoring compliance with sustainability policies and practices. The Westpac Sustainability Council, comprising senior leaders from across the business and meeting four times a year, oversees strategic progress and guides the Group’s approach. Progress against the sustainability strategy is reported to and discussed with the Executive Team and Board twice each year, with other items discussed on an as needs basis. Westpac’s 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 identifying topics and developing our strategy – Inclusivity;  Evaluating all topics 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 topics identified – Responsiveness. Frameworks and policies Westpac responds to enduring and emerging material topics through frameworks and policies that are complementary to the business strategy and form part of the Group’s overall approach to risk management. Collectively, they help to guide decisions, manage risk and drive action. Key frameworks and policies include:  Our Principles for Doing Business – which sets out the behaviours the Group expects to be judged against in pursuit of the vision, and the framework to embed sustainable practices throughout the business in the areas of: governance and ethics; customer practices; employee practices; care for the environment; community involvement; and supply chain management;  Our Sustainability and Reputation Risk Management Frameworks – which set out how the Group manages these risks – in operations, lending and investment decisions, and the supply chain – provides a clear guide on roles and responsibilities within the organisation, reflecting the Group’s ‘three lines of defence’ risk management approach; and  A suite of policies that embed the principles and management requirements into day to day operations. These include internal and external sensitive sector position statements, as well as Group-wide issue-based positions. Sustainability leadership Leadership in sustainability is regularly acknowledged and validated by a number of third party ratings and awards. During 2016, these included:  Assessed as the most sustainable bank globally in the 2016 Dow Jones Sustainability Indices (DJSI) achieving the Group’s highest ever score of 95. Westpac has been among the global banking sector leaders annually for 15 years in a row, including being the top ranked bank nine times, most recently for three consecutive years from 2014 to 2016;  Ranked as one of the 2016 Global 100 Most Sustainable Corporations in the World by Corporate Knights, announced at the World Economic Forum in January 2016. Westpac has featured in the Global 100 for 10 of the last 11 years; and  Recognised in the 2016 CDP1 Climate A list, reflecting the Group’s achievement of the highest possible CDP score for its response to climate change. This puts Westpac among the top 9% of companies globally to receive this recognition. 1 Formerly the Carbon Disclosure Project. 2016 Westpac Group Annual Report 107 2 Material sustainability topics Westpac identifies the most material sustainability topics through regular assessments of industry trends, internal reports, information from stakeholder engagement and independent research. The table below outlines those topics considered material for the Group and its stakeholders, as further detailed in Westpac’s 2016 Sustainability Performance Report. Prioritisation of material topics continues to be subject to annual independent external assurance by Ernst & Young. Material sustainability topic Customer experience, support and access Customers’ needs are becoming more complex, and at the same time they want banking to be simpler and more efficient. Information security and data privacy Digital product and service transformation Maintaining customer confidentiality and the security of our systems is paramount, and the potential inherent exposure to cyberattacks remains high due to the evolving nature of technology and Westpac’s prominence within the industry. Digitisation offers opportunities to improve efficiency and deliver services in new ways, including new fintech business models which we are embracing to better meet changing customer expectations. Changing regulatory landscape Conduct and culture Supervision and regulation in jurisdictions Westpac operates continues to evolve, creating uncertainty in the operating environment. Conduct and culture are vital for maintaining the trust of customers, shareholders and regulators. Full year responses and achievements  Launched ‘Our Service Promise', an enhanced customer service and culture program to help employees deliver the Group’s service revolution;  Reduced customer complaints in Australia by more than 30% by addressing customer pain points and, in the second half of the year, our branch network received three times as many compliments as complaints;    Invested in innovative product design, for example a new ‘One Click’ opening of saving accounts for existing customers via digital channels; and Launched a new credit card reminder service in St.George where customers can receive and pay directly from an email, SMS and/or push notification 5 days out from a payment date, making it easy to stay on top of due dates and avoid late fees. Invested in additional dedicated resources to counter new and emerging threats;  Enhanced the resilience and security of systems to protect the confidentiality, integrity and availability of customer information and sensitive commercial data; and  Recorded a significant decline in the number of customers becoming victims of cybercrime in 2016, reflecting the effectiveness of these controls.  Westpac’s mobile banking platform, Westpac Live, ranked as number one by global research house, Forrester, in its 2016 Global Mobile Banking Functionality Benchmark;  Introduced 188 new features and enhancements across our digital banking platforms, including the ability to activate cards using a smartphone camera, change card pin, put a card temporarily on hold, obtain proof of balance and statements as well as management of term deposits online with ability to renew at maturity (via internet banking);  Continued to help incubate and partner with a number of fintech startups to offer new services for customers now and in the future; and    Launched a new facility across St.George, Bank of Melbourne and BankSA, that allows customers to contact the call centre directly from their mobile banking app, reducing average call times by around one minute. Invested over $278 million during the year to enhance existing and implement new processes to comply with recent regulatory changes; and For further detail, see Section 1 ‘Information on Westpac’.  Developed a Group-wide conduct operating principles and key framework elements, to ensure the consistent management of conduct across the Group;  Reviewed Westpac branch teller incentives to ensure that they align with our customer-focused strategy, including incentives only for service, not sales;  Finalised and commenced operationalising a revised Group-wide Product and Service Lifecycle Policy, which includes customer fairness and suitability criteria;  Established Product Governance Committees to actively review the design and communication of our products and services for fairness and suitability, fixing issues where they are identified; and  Actively participated in industry initiatives, in particular through our commitment to the ABA 6 Point Plan. 108 2016 Westpac Group Annual Report Material sustainability topic Governance, risk and remuneration Clear governance practices, active management of risk, commitment to compliance, and fair remuneration in our operations, supplier and partner relationships is critical to the longevity and financial wellbeing of the Group. Financial and economic performance Maintaining a healthy financial performance and strong balance sheet is vital to the Group’s long term sustainability. Climate change transition and opportunities As a major financial institution, Westpac has an important role to play in supporting the transition to a sustainable economy model aligned to a two degree economy. Value chain sustainability risks Inclusion and diversity Talent attraction and retention Responsible banking, investment and insurance require a risk-driven approach that considers the range of sustainability risks (including climate change and human rights), and our suppliers have an important role in helping us manage them effectively. As the population ages and becomes more culturally diverse, Westpac needs to think creatively about how to find, develop and retain the right employees and tailor services that consider diverse customer needs. Attracting, retaining and developing the right people requires innovative recruitment strategies and working conditions to match changing employee expectations.                  Westpac’s approach to sustainability Full year responses and achievements For further detail, see Westpac’s 2016 Corporate Governance Statement available at www.westpac.com.au/corpgov, our Remuneration report in Section 1 and ‘Risk and risk management’ in Section 2. Delivered another sound performance with a cash return on equity of 14% supported by good business growth and well managed margins; Strengthened the balance sheet with an additional $3.5 billion in 2016 in ordinary equity raised, increasing capital ratios to the upper end of peers globally. Other elements of balance sheet remain similarly strong; and Maintained relatively stable asset quality but increased provisions for some companies, sectors and regions showing signs of stress. Published an updated position statement, Financing a Sustainable Energy System, which reaffirms the bank's commitment to support an economy, through its financing activities in the energy system, in a manner consistent with limiting global warming to below two degrees Celsius above pre-industrial levels; Undertook scenario analysis to understand the longer term impacts, including risks and opportunities for Westpac, of limiting global warming to below two degrees Celsius, meaning the Australian economy reaches net zero emissions by 2050; and Continued to report climate related disclosures in our annual Sustainability Performance Report. Continued to apply the Group’s Sustainability Risk Management Framework to the identification, assessment and management of sustainability risks across our organisation – including to decisions related to our customers and suppliers; Released the BTFG Responsible Investment Position Statement, articulating BTFG’s approach to responsible investing and providing a framework for understanding and managing environmental, social and corporate governance (ESG) impacts, risks and opportunities across the portfolios within BTFG; and After releasing portfolio carbon footprints for the first time in 2015, BTFG deepened its analysis to give greater clarity for our stakeholders. Made it standard operating procedure to recognise a customer’s paid parental leave and return to work income in their borrowing capacity for home lending; Introduced an Inclusion Index, measured through our employee engagement survey, to better track the effectiveness of our Inclusion and Diversity action plans; and Recorded a proportion of Australian-based employees who identify as Indigenous Australian larger than that in the broader Australian population. Retained the Employer of Choice for Gender Equality citation awarded by the Workplace Gender Equality Agency; Launched Personal Leader Journey for top 100 leaders, a leadership development program designed to positively influence organisational culture and deepen our focus on creating a world class service experience; Increased the number of people accessing our new learning and development approach, LearningBank, to approximately 14,000 employees during the year; and Conducted a Group-wide survey of our employees’ level of engagement during the year, which resulted in a number of specific enterprise-wide actions identified to address feedback, with a strong emphasis on empowering employees to deliver exceptional service. For further detail, please see our Annual Review and Sustainability Report and Sustainability Performance Report at www.westpac.com.au/sustainability. 2016 Westpac Group Annual Report 109 2Sustainability objectives Our 2013-2017 Sustainability Strategy sets measureable objectives against the following three priority areas:  Embracing societal change: helping improve the way people work and live, as our society changes;  Environmental solutions: helping find solutions to environmental challenges; and  Better financial futures: helping customers to have a better relationship with money, for a better life. Performance against sustainability objectives1 Priority Objectives Full year 2016 performance Help improve the way people work and live, as our society changes Ensure our workforce is representative of the community  Proportion of leadership roles held by women moved closer to our 2017 target of 50%, increasing to 48%, up from 46% last year.  Recruited an additional 140 people who identify as Aboriginal and Torres Strait Islander, bringing to 290 those recruited against our goal of 500 by 2017.  Financial wellbeing of 40+ women improved during 2016 in comparison with the total Australian retail banking population.  Participation of mature aged workers (50+) is 21.5%, up from 20.8% a year ago. Extend length and quality of working lives  Mean employee retirement age was 60.5 years, down compared to a year ago.  Workplace wellbeing, as measured by the WorkAbility Index, improved in 2016. Anticipate the future product and service needs of ageing and culturally diverse customers   Launched Ruby Connection’s financial education social media campaign to engage women over 35 in relation to their evolving product and service needs. Increased convenience for multi-cultural customers by enabling foreign currency accounts in core currencies to be opened via Westpac Live online banking. Provide products and services to help customers adapt to environmental challenges  Since 2013 launched six unique products/services, including the May 2016 issuance of the Westpac Climate Bond and introduction of our Energy Efficiency Financing Program for commercial banking customers. Increase lending and investment in CleanTech and environmental services  Increased committed exposure to the CleanTech and environmental services sector relative to FY15, taking total committed exposure to $6.2 billion, 3% ahead of the 2017 target. Reduce our environmental footprint  Maintained carbon neutral status and reduction of more than 15% in office paper consumption. Help find solutions to environmental challenges  Received highest Green Star rating (6 Star) for the Sydney Kent Street office and St.George retail branch at Barangaroo, reflecting leading eco-efficient practices.  Achieved 2017 power usage effectiveness target of 1.6 and surpassed the 2017 energy efficiency target with 180 kWh/m2.  Recycling rates and water consumption in Sydney head offices improved to 73% and 140,708 kL respectively, ahead of 2016 targets. 1 All results as at 30 September 2016 except environmental footprint which is as at 30 June 2016. Refer to www.westpac.com.au/sustainability for glossary of terms and metric definitions. 110 2016 Westpac Group Annual Report Westpac’s approach to sustainability Priority Objectives Full year 2016 performance Help customers to have a better relationship with money, for a better life Ensure all our customers have access to the right advice to achieve a secure retirement  Revised metrics in 2016 to more accurately reflect key activities driving customer access to the right advice.  BT Advice customer satisfaction rating was 4.89 for 2016, compared to a target of 4.9 out of 5. Help our customers meet their financial goals in retirement Increase access to financial services in the Pacific  The proportion of Group customers with Group superannuation decreased to 7.8% from 8.1% in 2015.  Wealth Review tool launched as an engagement and retention initiative to assist customers in better understanding their current and future financial position.  Revised 2016 and 2017 in-store transaction volume targets in Westpac Pacific following the sale of operations in five Pacific countries that were key users of the in-store channel. In-store transactional volumes were over 220,000.  Met the Group’s 2016 targets with over 290,000 customers brought into the banking system and over 100,000 mobile banking activations. Help people gain access to social and affordable housing and services  Lent over $1.05 billion to the social and affordable housing sector, up from $1.02 billion as at 30 September 2015. 2016 Westpac Group Annual Report 111 2 Five year non-financial summary1 Key trends across a range of non-financial areas of performance are provided in the following five year non-financial summary, with a more detailed account of sustainability performance included in our Annual Review and Sustainability Report and Sustainability Performance Report. Customer Total customers (millions)2 Digitally active customers (millions)3 Branches Branches with 24/7 capability (%)4 ATMs Smart ATMs (%)5 Change in consumer complaints (%) - Australia Change in consumer complaints (%) - NZ6 Wealth customer penetration (%)7 Employees Total core (permanent) full-time equivalent staff Employee voluntary attrition (%)8 New starter retention (%)9 High performer retention (%)10 Employee engagement index (%)11 Lost Time Injury Frequency Rate (LTIFR)12 Women as a percentage of the total workforce (%) Women in leadership (%)13 Environment Total Scope 1 and 2 emissions - Aust and NZ (tonnes CO2-e)14 Total Scope 3 emissions - Aust and NZ (tonnes CO2-e)15 Paper consumption - Aust and NZ (tonnes)16 Sustainable lending and investment Proportion of electricity generation financing in renewables including hydro - Aust and NZ (%)17 Electricity generation portfolio emissions intensity (tonnes CO2-e/MWh)18 Finance assessed under the Equator Principles - Group ($m)19 Responsible investment funds under management ($m)20 Social impact Community investment ($m)21, 22 Community investment as a percentage of pre-tax profits - Group (%)22 Community investment as a percentage of pre-tax operating profit (cash earnings basis)22 Financial education (participants)23, 24 Supply chain Top suppliers self-assessed - Australia (%)25 Spend with indigenous Australian suppliers - Australia ($ million)26 2016 2015 2014 2013 2012 13.4 4.9 1,309 27 3,757 37 (31) (7) 19.1 13.1 4.9 1,429 22 3,850 31 (31) (18) 19.7 12.8 4.7 1,534 15 3,890 24 (27) (16) 20.0 12.2 4.2 1,544 - 11.8 4.0 1,538 - 3,814 3,639 17 (15) 19 18.7 - - - 18.4 32,190 32,620 33,586 33,045 33,418 10.6 85.5 94.8 69 0.8 58 48 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 40 154,339 173,437 175,855 180,862 183,937 63,016 3,304 67,899 4,857 73,871 5,334 85,013 5,762 91,855 - 59 0.38 617 18,723 148 1.39 1.32 61 0.38 1,065 15,017 149 1.30 1.33 59 0.41 851 - 217 2.02 1.99 55 0.44 268 - 131 1.33 1.28 52 - 1,140 - 133 1.50 1.41 59,596 65,538 49,812 32,577 36,182 100 1.6 100 1.2 100 - 98 - 94 - 112 2016 Westpac Group Annual Report Westpac’s approach to sustainability 1 All data represents Group performance as at 30 September unless otherwise stated. 2 All customers with an active relationship (excludes channel only and potential relationships). 3 Unique customers who have successfully authenticated (including Quickzone) into the digital banking platforms within 90 days. Figures prior to 2016 are not comparable. 4 Branches that allow customers to self-serve 24/7 via a range of devices that allow them to withdraw and deposit cash, coin exchange etc. (not all these services would be available at every 24/7 zone). Access determined by individual location (i.e. shopping centre opening hours may prevent 24/7 access). 5 ATMs with deposit taking functionality. Excludes old style envelope deposit machines. 6 Prior years’ figures restated to align with Australian calculation methodology. 7 Data based on Roy Morgan Research, respondents aged 14+; 12 month average to September. Wealth customer penetration is defined as the proportion of Australians who have a Deposit or Transaction Account, Mortgage, Personal Lending or Major Card with the Group and also have Managed Investments, Superannuation or Insurance with the Group. 8 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). Westpac Pacific figures included since FY15. 9 Voluntary new starter retention over the 12 month rolling new starter headcount for the period (includes full time and part time permanent employees). Westpac Pacific figures included since FY15. 10 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). Westpac Pacific figures included since FY15. 11 New employee engagement survey conducted in 2016 and prior data not included due to change in survey methodology. 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. Westpac Pacific figures included since FY16. 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. Westpac Pacific figures included since FY15. 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 by 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. 2015 restated. 16 Total copy paper purchased (in tonnes) by the Group as reported by its suppliers. 17 Measured as the percentage of indirect and direct financing (total committed exposure) 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 emissions intensity is calculated by weighting each loan (total committed exposures) by the emissions intensity of each company. 19 The Equator Principles is a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing. 20 BTFG funds applying an 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 2015 figure restated to reflect updates in calculation methodology. 23 Total number of employees, customers and general public attending financial education courses offered by the Westpac Group during the year (including online webinars). In Australia financial education covers personal, business and social sector content inclusive of modules on financial basics, owning your home, building wealth, retirement planning, starting and growing a business and financials for non-profit organisations. New Zealand and Pacific businesses deliver locally tailored programs. 24 Number of financial education participants in 2015 restated. 25 Refers to top 80 suppliers to Westpac Australia by spend. 26 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. 2016 Westpac Group Annual Report 113 2 Other Westpac business information Employees The number of employees in each area of business as at 30 September: Consumer Bank Business Bank BTFG WIB Westpac New Zealand Other Total employees1 1 Total employees include full-time, pro-rata part-time, overtime, temporary and contract staff. 2 Prior comparative periods have been restated to reflect business structure changes in 2016. 2016 9,207 3,186 4,153 2,693 4,145 11,896 35,280 20142 9,785 3,217 4,062 2,932 4,342 12,035 36,373 20152 9,240 3,060 4,045 2,846 4,375 11,675 35,241 2016 v 2015 Total employees increased by 39 compared to 30 September 2015 from higher resourcing to support higher investment in growth and productivity initiatives and regulation and compliance programs and additional Bank of Melbourne employees (30). These were partially offset by productivity initiatives across the Group and the sale of operations in the Solomon Islands and Vanuatu (138). Property We occupy premises primarily in Australia, New Zealand and the Pacific Islands including 1,309 branches (2015: 1,429) as at 30 September 2016. As at 30 September 2016, we owned approximately 1.6% (2015: 2.0%) of the premises we occupied in Australia, none (2015: none) in New Zealand and 40% (2015: 38%) in the Pacific Islands. The remainder of premises are held under commercial lease with terms generally averaging three to five years. As at 30 September 2016, the carrying value of our directly owned premises and sites was approximately $102 million (2015: $113 million). Westpac Place in the Sydney CBD is the Group’s head office. In December 2015, an Agreement for Lease was executed for 275 Kent Street, allowing for Westpac’s continued occupation of levels 1-23 until 2030, and for an earlier exit of levels 24-32. This site currently has capacity for over 6,000 staff which will reduce to 5,700 once the upper levels are vacated and the refurbishment to provide an agile work environment is completed. We continue a corporate presence in Kogarah, in the Sydney metro area. The Kogarah office has a 2,650 seat capacity and is home to ‘The Hive’, our innovation centre. A lease commitment at this site extends to 2034 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 International Towers Sydney (Barangaroo) occupying levels 1-28. Relocation to this site began in August 2015 and now has the capacity for over 6,000 personnel in an agile environment. The lease term extends until 2030 with three five-year options. ‘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. 114 2016 Westpac Group Annual Report Other Westpac business information 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. 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 they apply to other employees and certain customers in accordance with established policy. These loans do not involve more than the normal risk of collectability or present any other unfavourable features. Auditor’s remuneration Auditor’s remuneration, including goods and services tax, to the external auditor for the years ended 30 September 2016 and 2015 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 2016, 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. 2016 Westpac Group Annual Report 115 2 This page has been intentionally left blank. 116 2016 Westpac Group Annual Report 03 Note 24 Offsetting financial assets and financial liabilities Note 25 Securitisation, covered bonds and other transferred assets Intangible assets Other assets, other liabilities, commitments and contingencies Note 26 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 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 Financial performance Segment reporting Note 2 Net interest income Note 3 Note 4 Non-interest income Note 5 Operating expenses Impairment charges Note 6 Income tax Note 7 Earnings per share Note 8 Average balance sheet and interest rates Note 9 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 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 2016 2015 2014 2016 2015 3 3 4 5 6 7 8 8 31,822 32,295 32,248 31,803 32,043 (16,674) (18,028) (18,706) (19,182) (20,502) 15,148 14,267 13,542 12,621 11,541 5,837 7,375 6,395 4,617 5,722 20,985 21,642 19,937 17,238 17,263 (9,217) (1,124) (9,473) (8,547) (7,572) (7,773) (753) (650) (922) (622) 10,644 11,416 10,740 8,744 8,868 (3,184) (3,348) (3,115) (2,437) (2,121) 7,460 8,068 7,625 6,307 6,747 (15) (56) (64) - - 7,445 8,012 7,561 6,307 6,747 224.6 217.8 255.0 248.2 242.5 237.6 The above income statements should be read in conjunction with the accompanying notes. 118 2016 Westpac Group Annual Report Statements of comprehensive income for the years ended 30 September Westpac Banking Corporation $m Net profit for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Gains/(losses) on available-for-sale securities: Recognised in equity Transferred to income statements Gains/(losses) on cash flow hedging 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 Share of associates' other comprehensive income (net of tax) 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 2016 2015 2014 2016 2015 7,460 8,068 7,625 6,307 6,747 56 (8) (304) 21 (238) (13) 85 (17) (54) (47) (519) (148) (73) (59) (131) 15 67 54 5 160 111 1 263 (94) 41 (197) 61 71 (1) (193) (106) (105) (52) (19) 47 - 11 (47) 33 90 - (54) (42) (359) (152) (21) 140 (167) 33 53 8 - 160 115 169 6,941 8,069 7,658 5,948 6,916 6,926 8,013 7,594 5,948 6,916 15 56 64 - - 6,941 8,069 7,658 5,948 6,916 The above statements of comprehensive income should be read in conjunction with the accompanying notes. 2016 Westpac Group Annual Report 119 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 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 Note 2016 2015 2016 2015 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 17,015 9,951 21,168 32,227 60,665 14,770 9,583 27,454 48,173 54,833 15,186 8,325 18,562 32,090 56,161 13,372 8,741 24,896 47,540 50,344 661,926 623,316 579,739 546,075 14,192 1,390 - - 726 1,737 1,552 11,520 5,133 13,125 1,309 - - 756 1,592 1,377 11,574 4,294 - 1,269 - 1,152 143,549 145,560 4,622 - 1,458 1,590 9,114 4,055 4,585 - 1,354 1,463 9,180 3,294 839,202 812,156 875,720 857,556 18,209 18,731 18,141 18,133 513,071 475,328 455,742 425,509 4,752 36,076 9,226 48,304 4,371 35,209 9,226 48,050 169,902 171,054 145,576 144,715 385 12,361 - 1,420 36 9,004 765,216 15,805 781,021 58,181 539 11,559 314 - 518 - - 142,808 143,885 1,489 55 8,116 744,401 13,840 758,241 53,915 1,267 - 7,286 810,714 15,805 826,519 49,201 1,332 - 6,433 797,801 13,840 811,641 45,915 33,469 29,280 33,469 29,280 (455) 727 24,379 - 58,120 61 58,181 (385) 1,031 23,172 - 53,098 817 53,915 (369) 790 15,311 - 49,201 - (308) 940 15,248 755 45,915 - 49,201 45,915 The above balance sheets should be read in conjunction with the accompanying notes. 120 2016 Westpac Group Annual Report Financial statements Statements of changes in equity for the years ended 30 September Westpac Banking Corporation Consolidated $m Share capital (Note 32) Reserves (Note 32) Retained profits Total equity attributable to owners of Westpac Banking Corporation Total shareholders' equity and non- controlling interests Non- controlling interests (Note 32) 47,537 7,625 33 7,658 - - - - - - (310) (310) (5,527) (5,527) 953 - 69 69 863 64 - 64 46,674 7,561 33 7,594 26,768 - - - 18,953 7,561 (36) 7,525 - - - - (46) (46) 881 56 - 56 156 - - - (2) 154 1,176 - (270) (270) - 49 (127) (51) - (129) 26,639 - - - - - - - - (5,837) 20,641 8,012 271 8,283 156 49 (127) (51) (2) (5,812) 48,456 8,012 1 8,013 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 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 Exercise of employee share options and rights 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 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 Share entitlement offer 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 Other3 Total contributions and distributions Balance at 30 September 2016 1 2016 comprises 2016 interim dividend 94 cents and 2015 final dividend 94 cents per share (2015: 2015 interim dividend 93 cents and 2014 final - - - - - - (5,752) 23,172 7,445 (101) 7,344 141 16 (91) (81) - (16) (3,371) 53,098 7,445 (519) 6,926 - 16 (91) (81) - - 2,256 28,895 - - - 141 - - - - (16) 125 1,031 - (418) (418) - - - - (105) (15) (120) 817 15 - 15 (9) (6,137) 24,379 (11) (1,904) 58,120 (5,752) - - (5,752) 1,412 1,000 (6,128) - - (6,128) 726 3,510 - 4,119 33,014 116 2 (49) (70) - 1,412 1,000 - 726 3,510 - 2 (49) (70) (771) (771) 61 116 - - - (2) 114 727 - - - - - - - - - - - - - - - - - - - - (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 7,460 (519) 6,941 (6,128) 726 3,510 116 2 (49) (70) (782) (2,675) 58,181 dividend 92 cents, 2014: 2014 interim dividend 90 cents and 2013 final dividend 88 cents), all fully franked at 30%. 2 2016 comprises nil cents per share (2015: nil cents per share, 2014: 10 cents per share) fully franked at 30%. 3 On 30 June 2016 the 2006 TPS were redeemed in full. The above statements of changes in equity should be read in conjunction with the accompanying notes. 2016 Westpac Group Annual Report 121 3 Statements of changes in equity for the years ended as at 30 September (continued) Westpac Banking Corporation Parent Entity $m Balance at 1 October 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 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 Share entitlement offer 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 Other2 Share capital (Note 32) 26,704 - - - - 1,412 1,000 - - 16 (91) (69) 2,268 28,972 - - - - 726 3,510 - - 2 (49) (61) - Total equity attributable to owners of Westpac Banking Corporation Total shareholders' equity and other equity instruments Convertible debentures (Note 32) Reserves (Note 32) Retained profits 14,002 41,627 755 42,382 921 - (106) (106) - - - - 125 - - - 125 940 - (263) (263) - - - - 113 - - - - 6,747 275 7,022 6,747 169 6,916 (5,762) (5,762) - - (14) - - - - (5,776) 15,248 6,307 (96) 6,211 1,412 1,000 (14) 125 16 (91) (69) (3,383) 45,160 6,307 (359) 5,948 (6,129) (6,129) - - (11) - - - - (8) 726 3,510 (11) 113 2 (49) (61) (8) - - - - - - - - - - - - 755 - - - - - - - - - - - (755) (755) 6,747 169 6,916 (5,762) 1,412 1,000 (14) 125 16 (91) (69) (3,383) 45,915 6,307 (359) 5,948 (6,129) 726 3,510 (11) 113 2 (49) (61) (763) (2,662) Total contributions and distributions 4,128 113 (6,148) (1,907) Balance at 30 September 2016 1 2016 comprises 2016 interim dividend 94 cents and 2015 final dividend 94 cents per share (2015: 2015 interim dividend 93 cents and 2014 final 15,311 49,201 33,100 790 - 49,201 dividend 92 cents), all fully franked at 30%. 2 On 30 June 2016 the 2006 TPS were redeemed in full. The above statements of changes in equity should be read in conjunction with the accompanying notes. 122 2016 Westpac Group Annual Report Cash flow statements 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 Net cash (used in)/provided by operating activities 41 5,497 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 Net cash (used in)/provided by investing activities Cash flows from financing activities Issue of loan capital (net of issue costs) Redemption of loan capital Net increase/(decrease) in debt issues Proceeds from Share Entitlement Offer 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 2006 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 41 41 41 Financial statements Consolidated Parent Entity Note 2016 2015 2014 2016 2015 31,817 (16,721) 43 5,050 (8,106) (3,373) 1,893 30 348 (1,642) (96) 9,243 6,755 (38,082) (896) (253) (209) (5,107) (476) (4,488) 38,771 (73) 312 32,377 (18,319) 12 5,289 (7,502) (3,322) 1,921 33 328 (1,754) (104) 8,959 21,538 (39,569) (1,000) (191) 497 11,730 95 (10,027) 8,526 (1,194) 95 (541) 32,136 (18,743) 11 5,732 (7,327) (2,660) 1,694 48 297 (1,723) (123) 9,342 31,812 (19,221) 960 3,426 (6,496) (3,143) 32,151 (20,803) 1,519 3,985 (6,072) (3,027) - - - - - - - - - - 7,338 7,753 1,724 6,706 (35,734) (35,852) 3,932 (156) 126 (3,329) 121 9,079 34,229 9,419 (382) 28,371 (128) - (219) (3,796) 4 (4,861) 33,508 459 284 3,443 18,779 (24,724) 8,471 6,768 (26,551) (12,443) 14,357 (20,149) - - (707) (521) 32 - (104) (7,245) 3,596 (1,444) 5,213 3,510 - 2 (24) (27) (62) (8) - - (630) (677) 24 - 648 - - (664) (515) 17 (7,744) - (18,715) (14,581) 2,244 - 6,826 - 1,000 16 (73) (27) (69) (12) 1,768 (385) 3,678 - - 49 (113) (27) (59) 8 (37) 888 (625) (441) 17 - (104) (6,094) 3,596 (1,444) 5,674 3,510 - 2 (24) (27) (62) 1 (5,402) (4,340) (5,837) (5,414) (4,364) (18) (763) 4,573 2,825 (580) 14,770 17,015 (52) - 5,513 (13,743) 2,753 25,760 14,770 (48) - (966) 12,824 1,237 11,699 25,760 - (763) 5,049 2,398 (584) 13,372 15,186 - - 4,882 (12,711) 2,683 23,400 13,372 22,668 (38,270) (2,108) - 511 11,497 729 (9,945) 6,548 (1,544) 158 (2,003) 4,993 (22,779) 102 3,288 (582) (633) 5 - 16 (15,590) 2,244 - 6,155 - 1,000 16 (73) (27) (69) - The above cash flow statements should be read in conjunction with the accompanying notes. 2016 Westpac Group Annual Report 123 3 Notes to the financial statements Note 1. Basis of preparation 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 2016 was authorised for issue by the Board of Directors on 7 November 2016. The Directors have the power to amend and reissue the financial report. The principal accounting policies are set out below and in the relevant notes to the financial statements. The accounting policy for the recognition and derecognition of financial assets and financial liabilities precedes Note 10. These accounting policies provide details of the accounting treatments adopted for complex balances and where accounting standards provide policy choices. These policies have been consistently applied to all the 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). It also includes additional disclosures required for foreign registrants by the United States Securities and Exchange Commission (US SEC). All amounts have been rounded in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, to the nearest million dollars, unless otherwise stated. (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) measured at fair value through income statement or in other comprehensive income. (iii) Comparative revisions Comparative information has been revised where appropriate to conform to changes in presentation in the current year and to enhance comparability. (iv) Changes in accounting standards No new accounting standards or amendments have been adopted for the year ended 30 September 2016. (v) Business combinations Business combinations are accounted for using the acquisition method of accounting. Acquisition cost is measured as the aggregate of the fair value at the date of acquisition of the assets given, equity instruments issued or liabilities incurred or assumed. Acquisition-related costs are expensed as incurred (except for those costs 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 acquisition cost, 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. (vi) 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 of the relevant branch or subsidiary 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. 124 2016 Westpac Group Annual Report Notes to the financial statements Note 1. Basis of preparation (continued) Foreign operations Assets and liabilities of foreign 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 year. Other equity balances are translated at historical exchange rates. The resulting exchange differences are recognised in the foreign currency translation reserve and in other comprehensive income. 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 and in other comprehensive income. 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 is recognised in the income statement as part of the gain or loss on disposal or repayment of borrowing. b. Critical accounting assumptions and estimates Applying the Group’s accounting policies requires the use of judgement, assumptions and estimates which impact the financial information. The significant assumptions and estimates used are discussed in the relevant notes below:  Note 7  Note 14  Note 15  Note 23  Note 26  Note 28  Note 38 Income tax Provisions for impairment charges Life insurance assets and life insurance liabilities Fair values of financial assets and financial liabilities Intangible assets Provisions Superannuation commitments c. 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) (AASB 9) will replace AASB 139 Financial Instruments: Recognition and Measurement (AASB 139). It includes a forward looking ‘expected credit loss’ impairment model, revised classification and measurement model and modifies the approach to hedge accounting. Unless early adopted the standard is effective for the 30 September 2019 year end. Whilst it is not yet practical to reliably estimate the financial impact on the financial statements, the major changes under the standard are outlined below. Impairment AASB 9 introduces a revised impairment model which requires entities to recognise expected credit losses based on unbiased forward looking information, replacing the existing incurred loss model which only recognises impairment if there is objective evidence that a loss has been incurred. Key elements of the new impairment model are:    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; expected credit losses are probability-weighted amounts determined by evaluating a range of possible outcomes and taking into account the time value of money, past events, current conditions and forecasts of future economic conditions. This will involve a greater use of judgement than the existing impairment model; and interest is calculated on the gross carrying amount of a financial asset, except where the asset is credit impaired. Classification and measurement AASB 9 replaces the classification and measurement model in AASB 139 with a new model that categorises financial assets based on a) the business model within which the assets are managed, and b) whether the contractual cash flows under the instrument solely represent the payment of principal and interest. Financial assets will be measured at:   amortised cost where the business model is to hold the financial assets in order to collect contractual cash flows and those cash flows represent solely payments of principal and interest; fair value through other comprehensive income where the business model is to both collect contractual cash flows and sell financial assets and the cash flows represent solely payments of principal and interest. Non-traded equity instruments can also be measured at fair value through other comprehensive income; or 2016 Westpac Group Annual Report 125 3 Note 1. Basis of preparation (continued)  fair value through profit or loss if they are held for trading or if the cash flows on the asset do not solely represent payments of principal and interest. An entity can also elect to measure a financial asset at fair value through profit or loss if it eliminates or reduces an accounting mismatch. The accounting for financial liabilities is largely unchanged. Hedging AASB 9 will change hedge accounting by increasing the eligibility of both hedged items and hedging instruments and introducing a more principles-based approach to assessing hedge effectiveness. Adoption of the new hedge accounting model is optional and current hedge accounting under AASB 139 can continue to be applied until the IASB completes its accounting for dynamic risk management project. The Group is yet to determine whether to apply the new hedge accounting model when AASB 9 is adopted. 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 (AASB 15) 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. AASB 16 Leasing was issued on 24 February 2016 and will be effective for the 30 September 2020 financial year. The main changes under the standard are:   all operating leases of greater than 12 months duration will be required to be presented on balance sheet. The net present value of these leases will be recognised as an asset and a liability; and all leases on balance sheet will give rise to a combination of interest expense on the lease liability and depreciation of the lease asset. The impact of the standard will be determined by the level of operating lease commitments greater than 12 months duration at adoption and is not yet practicable to determine. AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 was issued on 23 March 2016 and will be effective for the 30 September 2018 year end unless early adopted. Comparatives are not required on first application. The standard requires additional disclosures regarding both cash and non-cash changes in liabilities arising from financing activities. The standard 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 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. Internally, Westpac uses ‘cash earnings’ in assessing the financial performance of its divisions. Management believes this allows the Group to:  more effectively assess current year performance against prior years;   compare performance across business divisions; and compare performance across peer companies. Cash earnings is viewed as a measure of the level of profit that is generated by ongoing operations and is therefore considered in assessing distributions. Cash earnings is neither a measure of cash flow nor net profit determined on a cash accounting basis, as it includes both cash and non-cash adjustments to statutory net profit. To determine cash earnings, three categories of adjustments are made to statutory results:  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. 126 2016 Westpac Group Annual Report Notes to the financial statements Note 2. Segment reporting (continued) Reportable operating segments Westpac announced in June 2015 a new operating structure to better align the Group’s divisional structure to customer segments, up to 30 September 2015 the accounting and financial performance continued to be reported (both internally and externally) on the basis of the previous structure. The new operating structure has seen the Group’s Australian retail and business banking operations reorganised under two divisions, Consumer Bank and Business Bank. A key rationale for the change has been to improve accountability for the end-to-end customer experience while maintaining the Group’s unique portfolio of brands. In 2015, Westpac also commenced the sale of certain Pacific island operations. In light of this change, Westpac Pacific is no longer reported under Group Businesses (previously called Other Divisions). Its results are now included under Westpac Institutional Bank consistent with its line of reporting. Refer to Divisional performance in Section 2 for further details. Comparatives have been restated to reflect the new organisational structure. The operating segments are defined by the customers they service and the services they provide:  Consumer Bank (CB): - responsible for sale and service of banking and financial products and services; - customer base is consumer customers in Australia; - operates under the Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands.  Business Bank (BB): - responsible for sales and service of banking and financial products and services; - customer base is micro, SME and commercial business customers for facilities up to approximately $150 million; - operates under the Westpac, St.George, BankSA and Bank of Melbourne brands.  BT Financial Group (Australia) (BTFG): - Westpac’s Australian wealth management and insurance division; - services include the provision of funds management, insurance, financial advice, margin lending, private banking and broking services; - operates under the Advance, Ascalon Capital Managers, Asgard, Licensee Select, BT Select, and Securitor brands, as well as the Advice, Private Banking and Insurance operations of Westpac, St.George, Bank of Melbourne and BankSA brands; - includes the share of the Group’s interest in BT Investment Management (BTIM) which, following Westpac’s partial sale (see Note 35), has been equity accounted from July 2015.  Westpac Institutional Bank (WIB): - Westpac’s institutional financial services division delivering a broad range of financial products and services; - customer base includes commercial, corporate, institutional and government customers in Australia and New Zealand; - supports customers through branches and subsidiaries located in Australia, New Zealand, US, UK and Asia; - also responsible for Westpac Pacific, providing a range of banking services in Fiji and Papua New Guinea (PNG).  Westpac New Zealand: - responsible for sales and service of banking, wealth and insurance products to customers in New Zealand; - customer base includes consumers, business, institutional and government customers; - operates under the Westpac brand for banking products, the Westpac Life brand for life insurance products and the BT brand for wealth products. 2016 Westpac Group Annual Report 127 3 Note 2. Segment reporting (continued) Group Businesses include: - 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 the Group’s operating segments, earnings from non-core asset sales and certain other head office items such as centrally raised provisions; - Treasury is responsible for the management of the Group’s balance sheet including wholesale funding, capital and management of liquidity. Treasury also manages the interest rate risk and foreign exchange risks inherent in the balance sheet, including managing the mismatch between Group assets and liabilities. Treasury’s earnings are primarily sourced from managing the Group’s balance sheet and interest rate risk, within set risk limits; - Group Technology1 which comprises functions responsible for technology strategy and architecture, infrastructure and operations, applications development and business integration; and - Core Support and enterprise services2, which comprises functions performed centrally, including Australian banking operations, property services, strategy, finance, risk, compliance, legal, and human resources. Revisions to expense allocations and cost of funds transfer pricing Consistent with Westpac’s objective of improving divisional accountability, in 2015 the Group has adjusted its expense allocation methodology and cost of funds transfer pricing, as outlined below. Expense allocation Internal expense allocation methodologies have been adjusted to increase the responsibility of the Group’s divisions for expenses that they control. This has seen changes to some cost allocations (particularly related to resource usage and investment) with a portion of Group costs (mostly relating to finance, HR and risk functions) retained in the Group Businesses division. Cost of funds transfer pricing changes Following implementation of the Liquidity Coverage Ratio and other changes to the management of the balance sheet, the Group has adjusted its cost of funds transfer pricing. The changes included:   improved allocation of liquidity costs to better reflect the funding mix and deposit quality of divisions; and changes to the allocation of wholesale funding costs to divisions, including incorporating the credit costs associated with Tier 1 and Tier 2 capital instruments. The net impact of expense and cost of funds transfer pricing changes has led to a smaller contribution from the Group Businesses division and WIB, and larger contributions from CB and BB. The comparative restatements impact all divisional results but have no impact on the Group’s reported results or cash earnings. The following tables present the segment results on a cash earnings basis: 1 Costs are fully allocated to other divisions in the Group. 2 Costs are partially allocated to other divisions in the Group, with costs attributed to enterprise activity retained in Group Businesses. 128 2016 Westpac Group Annual Report Note 2. Segment reporting (continued) Notes to the financial statements 2016 $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 Westpac Institutional Bank Westpac New Zealand Group Businesses Consumer Bank Business Bank 7,171 850 3,959 1,104 BT Financial Group (Australia) 498 1,908 8,021 (3,270) (492) 4,259 (1,278) - 2,981 (116) 5,063 (1,796) (410) 2,857 (858) - 1,999 (10) 2,865 1,989 2,406 (1,160) - 1,246 (370) - 876 (32) 844 1,562 1,536 1,588 449 3,098 (1,347) (177) 1,574 (469) (7) 1,098 - 1,098 2,037 (856) (54) 1,127 (315) - 812 2 814 Net cash earnings adjustment Income Statement (200) (18) 15,148 5,837 (218) (319) - (537) 160 20,985 (9,217) (1,124) 10,644 (3,184) - (15) (377) 7,445 Total 15,348 5,855 21,203 (8,898) (1,124) 11,181 (3,344) (15) 7,822 (377) 570 8 578 (469) 9 118 (54) (8) 56 (221) (165) 7,445 (116) (36) (43) (115) (97) (524) (931) Balance Sheet Total assets1 Total liabilities Additions of property and equipment and intangible assets 1 Total assets for BT Financial Group (Australia) include the equity accounted carrying value of the investment in BTIM of $718 million. 116,804 100,166 781,021 120,653 351,528 839,202 110,416 156,804 244,817 186,629 72,408 38,217 39,710 82,071 1,321 178 459 417 88 83 96 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 Consumer Bank Business Bank 6,396 940 3,767 1,068 BT Financial Group (Australia) 445 2,192 7,336 (3,113) (478) 3,745 (1,125) - 2,620 (116) 4,835 (1,731) (273) 2,831 (852) - 1,979 (10) 2,504 1,969 2,637 (1,286) 4 1,355 (409) (32) 914 (23) 891 Westpac Institutional Bank Westpac New Zealand Group Businesses 1,638 1,578 1,552 457 3,216 (1,319) 38 1,935 (584) (8) 1,343 - 2,009 (808) (44) 1,157 (313) (3) 841 - 441 66 507 (378) - 129 9 (15) 123 341 Net cash earnings adjustment Income Statement 28 1,074 14,267 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 1,343 841 464 8,012 (118) (27) (42) (132) (93) (1,047) (1,459) Balance Sheet Total assets1 Total liabilities Additions of property and equipment and intangible assets 1 Total assets for BT Financial Group (Australia) include the equity accounted carrying value of the investment in BTIM of $756 million. 108,589 175,247 149,346 328,566 758,241 246,147 812,156 127,600 127,316 99,577 71,538 63,490 37,168 35,813 1,313 768 282 90 42 73 58 2016 Westpac Group Annual Report 129 3 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 and intangible assets Consumer Bank Business Bank 5,917 934 3,567 1,022 BT Financial Group (Australia) 403 2,257 6,851 (3,007) (424) 3,420 (1,028) - 2,392 (116) 4,589 (1,653) (248) 2,688 (807) - 1,881 (9) 2,276 1,872 2,660 (1,305) 2 1,357 (408) (39) 910 (22) 888 Westpac Institutional Bank Westpac New Zealand Group Businesses 1,624 1,626 1,420 438 3,250 (1,202) 126 2,174 (646) (9) 1,519 - 1,858 (756) (24) 1,078 (296) (3) 779 - 565 47 612 (323) (82) 207 (45) (15) 147 80 Net cash earnings adjustment Income Statement 46 71 13,542 6,395 117 (301) - (184) 115 2 (67) 19,937 (8,547) (650) 10,740 (3,115) (64) 7,561 Total 13,496 6,324 19,820 (8,246) (650) 10,924 (3,230) (66) 7,628 (67) 1,519 779 227 7,561 (91) (25) (45) (93) (80) (469) (803) 308,537 160,638 141,253 110,192 31,803 34,288 122,190 132,965 65,874 57,568 101,185 770,842 225,854 721,505 86 287 72 227 89 779 1,540 130 2016 Westpac Group Annual Report 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 Total Cash earnings adjustments Net profit attributable to owners of Westpac Banking Corporation Notes to the financial statements 2016 7,822 - - (158) (15) - (203) 9 (10) - - - - - 2015 7,820 665 (354) (149) (66) 64 33 (1) (1) 1 - - - - (377) 7,445 192 8,012 2014 7,628 - - (147) (51) - 105 (46) (7) 42 (70) 70 54 (17) (67) 7,561 Further details of the above cash earnings adjustments, which are all net of tax, are provided in Divisional performance 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 amounted to greater than 10% of the Group’s revenue. Geographic segments Geographic segments are based on the location of the office where the following items were recognised: Revenue Australia New Zealand Other1 Total Non-current assets2 Australia New Zealand Other1 2016 $m 32,868 4,158 633 37,659 12,406 774 77 % 87.3 11.0 1.7 100.0 93.6 5.8 0.6 Total 1 Other included Pacific Islands, Asia, the Americas and Europe. 2 Non-current assets included property and equipment and intangible assets. 13,257 100.0 2015 $m 33,991 4,937 742 39,670 11,949 751 466 13,166 % 85.7 12.4 1.9 100.0 90.8 5.7 3.5 100.0 2014 $m 32,880 4,738 1,025 38,643 12,828 797 433 14,058 % 85.1 12.3 2.6 100.0 91.2 5.7 3.1 100.0 2016 Westpac Group Annual Report 131 3 Note 3. Net interest income Accounting policy Interest income and expense for all interest earning financial assets and interest bearing financial liabilities, detailed within the table below, are recognised using the effective interest rate method. Net income from 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 by discounting the financial instrument’s estimated future cash receipts or payments to their present value and allocates the interest income or interest expense, including any fees, costs, premiums or discounts integral to the instrument, over its expected life. $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 income 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 expense Net interest income Consolidated Parent Entity 2016 2015 2014 2016 2015 260 100 12 645 1,808 28,953 13 - 31 219 87 (13) 1,032 1,634 225 84 (58) 1,482 1,386 228 64 8 585 1,625 170 50 (8) 956 1,445 29,307 29,104 24,641 24,468 12 - 17 18 - 7 13 4,608 31 12 4,933 17 31,822 32,295 32,248 31,803 32,043 (345) (9,369) (2,520) (3,737) - (589) (114) (304) (300) (10,669) (11,499) (2,475) (3,908) - (535) (137) (2,523) (3,813) - (490) (81) (344) (8,074) (2,206) (3,101) (4,788) (571) (98) (304) (9,008) (2,476) (3,205) (4,873) (495) (141) (16,674) (18,028) (18,706) (19,182) (20,502) 15,148 14,267 13,542 12,621 11,541 Of the amounts noted in total interest income and total interest expense, the amounts related to financial instruments not measured at fair value through income statement were as follows: $m Interest income Interest expense Consolidated Parent Entity 2016 30,941 13,101 2015 31,276 14,363 2014 30,824 14,996 2016 30,986 15,993 2015 31,095 16,923 132 2016 Westpac Group Annual Report Notes to the financial statements Note 4. Non-interest income Accounting policy Fees and commissions Fees and commission income are recognised as follows:  Facility fees are primarily earned for the provision of credit and other facilities to customers and are recognised as the services were provided;  Transaction fees are earned for facilitating transactions and are recognised once the transaction is executed;  Other non-risk fee income includes advisory and underwriting fees which are recognised when the related service is completed. 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). Funds management income Funds management fees earned for the ongoing management of customer funds and investments are recognised over the period of management. Premium income Premium income includes premiums earned for life insurance, life investment and general insurance products:   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 included 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 were treated as movements in life insurance policy liabilities.  General insurance premium comprises amounts charged to policyholders, excluding taxes and is recognised based on the likely pattern in which the insured risk is likely to 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 the liability is 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 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, refer to Note 23). Those relating to foreign exchange related products are recognised in foreign exchange income, the remaining gains and losses are recognised in other trading products.  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. 2016 Westpac Group Annual Report 133 3 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 income1 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 purposes2 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 Consolidated Parent Entity 2016 2015 2014 2016 1,297 1,177 281 - 1,342 1,247 353 - 1,329 1,254 343 - 1,256 965 252 426 20153 1,287 1,025 323 595 2,755 2,942 2,926 2,899 3,230 1,657 242 1,899 760 364 1,124 - 7 1 - (6) (88) (6) 1 109 30 11 59 5,837 1,006 1,114 386 (849) 455 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 - - - 713 299 1,017 1,012 - - - 622 275 897 - 11 97 - 12 (27) (14) - 32 - 87 198 6,395 1,337 881 639 (857) 426 954 1,509 6 - - (241) (88) - 1 74 - - 10 95 2 (77) (27) 11 - 30 - 42 706 4,617 1,595 5,722 - - - - - - - - - - - - - - - 70 30 22 (283) (288) (194) Total wealth management and insurance income 1 Trading income represents a component of total markets income from our WIB markets business, Westpac Pacific and Treasury foreign exchange 2,254 1,899 2,228 - operations in Australia and New Zealand. Income from derivatives held for risk management purposes reflected the impact of economic hedges of foreign currency capital and earnings. 2 3 Comparatives have been revised for consistency. 134 2016 Westpac Group Annual Report Note 5. Operating expenses $m Staff expenses Employee remuneration, entitlements and on-costs Superannuation expense1 Share-based payments Restructuring costs Total staff expenses Occupancy expenses Operating lease rentals Depreciation of property and equipment Other Total occupancy expenses Technology expenses Amortisation and impairment of software assets2 Depreciation and impairment of IT equipment2 Technology services Software maintenance and licences Telecommunications Data processing Total technology expenses Other expenses Professional and processing services3 Amortisation and impairment of intangible assets and deferred expenditure Postage and stationery Advertising Credit card loyalty programs Westpac Bicentennial Foundation grant Non-lending losses (Reversal of impairment)/impairment on investments in subsidiaries Other expenses Total other expenses Notes to the financial statements Consolidated Parent Entity 2016 2015 2014 2016 2015 4,005 369 135 92 4,601 622 285 125 1,032 571 156 672 277 181 72 4,094 362 174 74 4,704 586 229 139 954 1,051 170 575 221 204 67 3,990 336 184 61 4,571 565 199 140 904 493 105 541 199 167 69 3,233 304 108 89 3,734 554 225 105 884 503 136 518 235 160 70 3,199 294 119 71 3,683 507 190 113 810 927 152 432 181 178 65 1,929 2,288 1,574 1,622 1,935 741 216 217 156 144 - 81 - 100 615 221 204 150 134 - 74 - 129 1,655 1,527 580 223 205 159 136 100 (23) - 118 1,498 535 197 175 110 144 - 74 (4) 101 1,332 425 207 159 117 134 - 64 19 220 1,345 Operating expenses 7,773 1 Superannuation expense includes both defined contribution and defined benefit expense. Further details of the Group's defined benefit plans are in 7,572 9,473 8,547 9,217 2 Note 38. In 2015, the Group reviewed the depreciation method and useful lives of certain technology assets, resulting in increased depreciation, amortisation and impairment of $505 million which otherwise would have been recognised over the following 8 years. Refer to Note 26 for further details on Intangible assets. 3 Professional and processing services relates to services provided by external suppliers and includes costs associated with professional contractors, legal and audit services, consultants and costs associated with operations processing. 2016 Westpac Group Annual Report 135 3 Note 6. Impairment charges Accounting policy Impaired loans A loan, or group of loans, is impaired when there is objective evidence that its principal or interest repayments may not be recoverable. An impairment charge is recognised when the financial impact of the non-recoverable loan can be reliably measured. At each balance sheet date, the Group assesses whether any loans are impaired, recognising an impairment charge if required. Objective evidence of impairment could include a breach of contract with the Group such as a default on interest or principal payments, a borrower experiencing significant financial difficulties or observable economic conditions that correlate to defaults on a group of loans. If a loan is impaired, the impairment charge is measured as the difference between the loan’s current carrying amount and the present value of its estimated future cash flows. The estimated future cash flows exclude any expected future credit losses which have not yet occurred and are discounted to their present value using the loan’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment is the current effective interest rate. The impairment charge is recognised in the income statement with a corresponding reduction of the carrying value of the loan through an offsetting provision account (see Note 14). In subsequent periods, objective evidence may indicate that an impairment charge should be reversed. Objective evidence could include a borrower’s credit rating or financial circumstances improving. The impairment charge is reversed in the income statement of that future period and the related provision for impairment is reduced. Uncollectable loans An impaired loan may become uncollectable in full or part if, after following the Group’s loan recovery procedures, the Group remains unable to collect that loan’s contractual repayments. Uncollectable loans are written off against their related provision for impairment, after all possible recoveries have been made. The Group may subsequently be able to recover cash flows from loans written off. In the period which these recoveries are made, they are recognised in the income statement. Critical accounting assumptions and estimates relating to impairment charges are included in Note 14. $m Individually assessed provisions raised Write-backs Recoveries Collectively assessed provisions raised Impairment charges Consolidated Parent Entity 2016 727 (210) (137) 744 1,124 2015 566 (297) (131) 615 753 2014 684 (433) (106) 505 650 2016 694 (188) (94) 510 922 2015 457 (274) (82) 521 622 Refer to Note 14 for further details on Provisions for impairment charges. 136 2016 Westpac Group Annual Report Notes to the financial statements Note 7. Income tax Accounting policy The tax expense for the year 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 tax payable for the year using enacted or substantively enacted tax rates and laws for each jurisdiction. Current tax also includes adjustments to tax payable for previous years. Deferred tax accounts for temporary differences between the carrying amounts of assets and liabilities in the financial statements and their values for taxation purposes. Deferred tax is determined using the enacted or substantively enacted tax rates and laws for each jurisdiction which are expected to apply when the assets will be realised or the liabilities settled. Deferred tax assets and liabilities have been offset where they relate to the same taxation authority, the same taxable entity or group, and where there is a legal right and intention to settle on a net basis. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available to utilise the assets. Deferred tax is not recognised for the following temporary differences:    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; the initial recognition of goodwill in a business combination; retained earnings in subsidiaries which the Parent Entity does not intend to distribute for the foreseeable future. The Parent Entity is the head entity of a tax consolidated group with its wholly owned, Australian subsidiaries. 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 in the case of a default by the Parent Entity. Tax expense and income deferred tax balances arising from temporary differences are recognised using a ‘group allocation basis’. As head entity, the Parent Entity recognises all current tax balances and deferred tax assets arising from unused tax losses and relevant tax credits for the tax-consolidated group. The Parent Entity fully compensates/is compensated by the other members for these balances. Critical accounting assumptions and estimates The Group operates in multiple tax jurisdictions and significant judgement is required in determining the worldwide current tax liability. There are many transactions with uncertain tax outcomes and provisions are held to reflect these tax uncertainties. 2016 Westpac Group Annual Report 137 3 Note 7. Income tax (continued) Income tax expense The income tax expense for the year reconciles to the profit before income tax as follows: $m Profit before income tax Tax at the Australian company tax rate of 30% The effect of amounts which are not deductible (assessable) in calculating taxable income Hybrid capital distributions Life insurance: Tax adjustment on policyholder earnings Adjustment for life business tax rates Dividend adjustments 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 Income tax analysis Income tax expense comprises: Current income tax Movement in deferred tax Income tax (over)/under provision in prior years Total income tax expense Total Australia Total Overseas Consolidated Parent Entity 2016 2015 2014 10,644 3,193 11,416 3,425 10,740 3,222 2016 8,744 2,623 2015 8,868 2,660 50 46 36 (2) - (4) (10) 35 (26) (65) 13 - (4) 11 (52) 25 (27) (88) 12 3,184 3,348 3 (4) 7 (22) 46 (21) (14) (138) 3,115 50 - 1 (286) (5) 27 (4) (65) 96 46 - 1 (453) (23) 19 3 (76) (56) 2,437 2,121 3,351 3,347 2,704 2,540 2,329 (102) (65) 3,184 2,835 349 89 (88) 3,348 2,964 384 425 (14) 3,115 2,694 421 3,115 (38) (65) 2,437 2,426 11 2,437 (132) (76) 2,121 2,117 4 2,121 Total income tax expense 1 2014 includes the release of provisions no longer required following the finalisation of prior year taxation matters. 3,348 3,184 The effective tax rate was 29.9% in 2016 (2015: 29.3%, 2014: 29.0%). 138 2016 Westpac Group Annual Report Note 7. Income tax (continued) Deferred tax assets The balance comprises temporary differences attributable to: $m Amounts recognised in the 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 Notes to the financial statements Consolidated Parent Entity 2016 2015 2016 2015 983 300 49 234 173 356 906 299 269 235 182 334 793 272 8 220 163 356 726 274 221 222 164 326 Total amounts recognised in the income statements 2,095 2,225 1,812 1,933 Amounts recognised directly in other comprehensive income Available-for-sale securities Defined benefit deficit Total amounts recognised directly in other comprehensive income Gross deferred tax assets Set-off of deferred tax assets and deferred tax liabilities Net deferred tax assets Movements Opening balance Recognised in the income statements Recognised in other comprehensive income Set-off of deferred tax assets and deferred tax liabilities Closing balance Deferred tax liabilities The balance comprises temporary differences attributable to: $m Amounts recognised in the income statements Financial instruments Finance lease transactions Property and equipment Life insurance assets Other assets Total amounts recognised in the income statements Amounts recognised directly in other comprehensive income Cash flow hedges Gross deferred tax liabilities Set-off of deferred tax assets and deferred tax liabilities Net deferred tax liabilities Movements Opening balance Recognised in the income statements Recognised in other comprehensive income Set-off of deferred tax assets and deferred tax liabilities Closing balance (1) 82 81 2,176 (624) 1,552 1,377 792 7 (624) 1,552 12 62 74 2,299 (922) 1,377 1,397 886 16 (922) 1,377 (1) 79 78 1,890 (300) 1,590 1,463 428 (1) (300) 1,590 18 61 79 2,012 (549) 1,463 1,322 689 1 (549) 1,463 Consolidated Parent Entity 2016 2015 2016 2015 42 134 181 79 293 729 (69) 660 (624) 36 55 690 (85) (624) 36 249 142 112 73 385 961 16 977 (922) 55 55 975 (53) (922) 55 2 78 183 - 71 334 (34) 300 (300) - - 390 (90) (300) - 204 41 116 - 132 493 56 549 (549) - - 557 (8) (549) - 2016 Westpac Group Annual Report 139 3 Note 7. Income tax (continued) Unrecognised deferred tax balances The following potential deferred tax balances have not been recognised. The values shown are the gross balances and not tax effected. The tax effected balances would be approximately 30% of the values shown. $m Unrecognised deferred tax asset Tax losses on revenue account Unrecognised deferred tax liability Gross retained earnings of subsidiaries which the Parent Entity does not intend to distribute in the foreseeable future Consolidated Parent Entity 2016 204 51 2015 80 49 2016 180 - 2015 72 - Note 8. Earnings per share Accounting policy Basic earnings per share (EPS) is calculated by dividing the net profit attributable to shareholders, by the weighted average number of ordinary shares on issue during the year, adjusted for treasury shares. Diluted EPS is calculated by adjusting the basic earnings per share by assuming all dilutive potential ordinary shares (share based payments – Note 37 and convertible loan capital – Note 20) are converted. Consolidated $m Net profit attributable to shareholders Adjustment for RSP dividends1 Adjustment for potential dilution: Distributions to convertible loan capital holders2 Adjusted net profit attributable to shareholders Weighted average number of ordinary shares (millions)3 2016 2015 2014 Basic Diluted Basic Diluted Basic Diluted 7,445 7,445 8,012 8,012 7,561 7,561 (5) - 7,440 - 222 7,667 (6) - 8,006 - (10) - 184 8,196 - 7,551 165 7,726 Weighted average number of ordinary shares on issue 3,322 3,322 3,150 3,150 3,125 3,125 Treasury shares (including RSP share rights) (9) (9) (10) (10) (11) (11) Adjustment for potential dilution: Share-based payments Convertible loan capital2 - - 4 203 - - 6 157 - - 9 130 Adjusted weighted average number of ordinary shares Earnings per ordinary share (cents)3 1 RSP share rights are explained in Note 37. Some RSP share rights have not vested and are not ordinary shares but do receive dividends. These 3,114 242.5 255.0 224.6 3,140 3,303 3,313 248.2 3,520 217.8 3,253 237.6 RSP dividends are deducted to show the profit attributable to ordinary shareholders. 2 The Group has issued convertible loan capital which is expected to convert into ordinary shares in the future (see Note 20 for further details). These convertible loan capital instruments are all dilutive and diluted EPS is therefore calculated as if the instruments had already been converted. 3 Comparative information has been restated to incorporate the bonus element of the share entitlement offer in the weighted average number of ordinary shares. 140 2016 Westpac Group Annual Report Note 9. Average balance sheet and interest rates The daily average balances of the Group’s interest earning assets and interest bearing liabilities are shown below along with their interest income or expense. Notes to the financial statements Consolidated Assets Interest earning assets Receivables due from other financial institutions: Australia New Zealand Overseas Trading securities and 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 2016 Interest Income $m Average Rate % Average Balance $m 2015 Interest Income $m Average Rate % Average Balance $m 2014 Interest Income $m Average Rate % 9,616 449 1,292 18,632 4,105 3,339 84 6 10 481 118 46 48,151 1,581 3,193 2,710 141 86 0.9 1.3 0.8 2.6 2.9 1.4 3.3 4.4 3.2 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 1,197 13 1.1 1,147 12 1.0 1,369 18 532,172 25,162 68,370 28,617 3,617 477 4.7 5.3 1.7 502,474 25,280 63,349 28,377 3,818 432 5.0 6.0 1.5 474,570 25,498 59,240 25,979 3,449 331 721,843 31,822 4.4 683,814 32,295 4.7 647,362 32,248 2.5 1.7 0.4 3.7 3.0 1.2 4.5 4.5 3.6 1.3 5.4 5.8 1.3 5.0 2,431 48,666 12,702 57,913 121,712 1,970 49,400 11,590 51,929 114,889 1,513 28,866 13,687 45,696 89,762 Total assets 1 Loans and other receivables are stated net of provisions for impairment charges on loans. Other receivables include cash and balances with central 737,124 798,703 843,555 banks and other interest earning assets. Includes property and equipment, intangibles, deferred tax, non-interest bearing loans relating to mortgage offset accounts and other assets. 2 2016 Westpac Group Annual Report 141 3 Note 9. Average balance sheet and interest rates (continued) Consolidated 2016 2015 2014 Average Balance $m Interest Expense $m Average Rate % Average Balance $m Interest Expense $m Average Rate % Average Balance $m Interest Expense $m Average Rate % Liabilities Interest bearing liabilities Payables due to other financial institutions: Australia New Zealand 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 16,570 567 2,811 376,115 48,251 29,336 12,150 1,687 301 10 34 7,801 1,280 288 513 76 164,871 5,574 14,067 851 787 10 1.8 1.8 1.2 2.1 2.7 1.0 4.2 4.5 3.4 5.6 1.2 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 41 667,276 16,674 2.5 640,628 18,028 2.8 606,553 18,706 2.4 2.0 0.8 2.9 3.4 0.7 4.9 4.9 3.8 4.5 1.6 3.1 36,594 4,105 1,023 55,956 10,985 11,145 119,808 787,084 55,896 575 56,471 843,555 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 Total liabilities and equity 1 2 Include net impact of Treasury balance sheet management activities. Include other liabilities, provisions, current and deferred tax liabilities. 142 2016 Westpac Group Annual Report Notes to the financial statements Note 9. Average balance sheet and interest rates (continued) Net interest income may vary from year to year due to changes in the volume of, and interest rates associated with, interest earning assets and interest bearing liabilities. The table below allocates the change in net interest income between changes in volume and interest rate for those assets and liabilities. Calculation of variances  Volume changes are determined based on the movements in average asset and liability balances.  Interest rate changes are determined based on the change in interest rate associated with those assets and liabilities. Where variances arise due to a combination of volume and interest rate changes, the absolute dollar value of each change is allocated in proportion to their impact on the total change. Consolidated $m Interest earning assets Receivables due from other financial institutions: Australia New Zealand Overseas Trading securities and 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 2016 Change Due to 2015 Change Due to Volume Rate Total Volume Rate Total 3 1 7 (179) (17) (66) 441 23 25 - - (8) (225) 23 14 (249) - 8 3 1 (1) (404) 6 (52) 192 23 33 (3) (3) (6) 1,499 (1,717) (218) 239 31 130 70 2,004 (1,957) 175 2 (15) (277) 11 (22) 430 14 27 1 (154) (2) 7 (64) (31) (4) (271) (3) (23) - 1,494 (1,612) 303 4 (504) 41 2,147 (2,620) 21 - (8) (341) (20) (26) 159 11 4 1 (118) (201) 45 (473) 54 (4) (9) (1,461) (1,035) 99 - (21) 467 97 (10) 57 53 28 63 1 (45) (4) 12 (1,481) (1,014) (460) 87 (36) (20) (310) 63 6 (363) 77 21 33 (282) 126 7 39 1 5 426 106 9 105 (29) 473 21 (30) (42) 2 (1) 84 6 (37) 6 (441) 88 (8) 369 101 47 (3) 3 4 190 15 68 (23) 32 109 (38) (678) 511 97 117 725 143 834 (2,188) (1,354) 1,126 (1,804) 1,171 170 (28) 1,313 (229) (139) (64) (432) 942 31 (92) 881 721 118 39 878 (210) (21) 78 (153) 2016 Westpac Group Annual Report 3 FINANCIAL ASSETS AND FINANCIAL LIABILITIES Accounting policy 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. Classification and measurement The Group classifies its financial assets in the following categories: financial assets at fair value through income statement, derivative 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. 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 and transferred substantially all the risks and rewards of ownership. There may be situations where the Group has partially transferred the risks and rewards of ownership but has neither transferred nor retained substantially all the risks and rewards of ownership. In such situations, the asset continues to be recognised on the balance sheet to the extent of the Group’s continuing involvement in the asset. 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 the income statement. Note 10. Receivables due from other financial institutions Accounting policy Receivables due from other financial institutions are recognised initially at fair value and subsequently at amortised cost using the effective interest rate method. $m Conduit assets1 Cash collateral Interbank lending Consolidated Parent Entity 2016 936 7,128 1,887 2015 823 7,602 1,158 2016 - 6,441 1,884 2015 - 7,586 1,155 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 9,583 9,951 8,325 8,741 Note 19. 144 2016 Westpac Group Annual Report Notes to the financial statements Note 11. Trading securities and financial assets designated at fair value Accounting policy Trading securities Trading securities include actively traded debt (government and other) and equity instruments and those acquired for sale in the near term. 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 in “Other assets” or as a borrowing in “Other liabilities” respectively. Gains and losses on trading securities are recognised in the income statement. Interest received from government and other debt securities is recognised in net interest income (Note 3) and dividends on equity securities are recognised in non-interest income (Note 4). Securities purchased under agreements to resell (‘reverse repos’) Securities purchased under agreements to resell are not recognised on the balance sheet as Westpac has not obtained the risks and rewards of ownership. The cash consideration paid is recognised as an asset. Reverse repos which are part of a trading portfolio are designated at fair value. Gains and losses on these financial assets are recognised in non-interest income. Interest received under these agreements is recognised in interest income. Other financial assets designated at fair value Other financial assets designated at fair value either: contain an embedded derivative, are managed on a fair value basis, or are held at fair value to reduce or eliminate an accounting mismatch. Gains and losses on these financial assets are recognised as non-interest income. Interest received from these other financial assets is recognised in interest income. A portfolio of fixed rate bills designated at fair value to reduce an accounting mismatch have, due to their nature, been presented in loans (refer Note 13). $m Trading securities Securities purchased under agreement to resell Other financial assets designated at fair value Consolidated Parent Entity 2016 15,288 3,260 2,620 2015 20,170 3,982 3,302 2014 36,881 6,275 2,753 2016 13,258 3,260 2,044 2015 18,272 3,982 2,642 Total trading securities and financial assets designated at fair value 21,168 27,454 45,909 18,562 24,896 Trading securities included the following: $m Government and semi-government securities Other debt securities Equity securities Other Total trading securities Other financial assets designated at fair value included: $m Other debt securities Equity securities Total other financial assets designated at fair value Consolidated Parent Entity 2016 9,267 5,960 7 54 2015 2014 12,545 7,555 25,275 11,519 20 50 44 43 2016 8,601 4,596 7 54 2015 11,937 6,265 20 50 15,288 20,170 36,881 13,258 18,272 Consolidated Parent Entity 2016 2015 2014 2,319 301 2,620 2,900 402 3,302 2,447 306 2,753 2016 1,989 55 2,044 2015 2,531 111 2,642 2016 Westpac Group Annual Report 145 3 Note 12. Available-for-sale securities Accounting policy Available-for-sale debt (government and other) and equity securities are held at fair value with gains and losses recognised in other comprehensive income except for the following amounts recognised in the income statement: Interest on debt securities;   Dividends on equity securities; and  The cumulative gain or loss recognised in other comprehensive income is subsequently recognised in the income statement when the instrument is disposed. Impairment charges. At each reporting date, the Group assesses whether any available-for-sale securities are impaired. Impairment exists if one or more events have occurred which have a negative impact on the security's estimated cash flows. For debt instruments, evidence of impairment includes significant financial difficulties or adverse changes in the payment status of an issuer. For equity securities, a significant or prolonged decline in the fair value of the security below its cost is considered evidence of impairment. If impairment exists, the cumulative loss is removed from other comprehensive income and recognised in the income statement. Any subsequent reversals of impairment on debt securities are also recognised in the income statement. Subsequent reversal of impairment charges on equity instruments is not recognised in the income statement until the instrument is disposed. $m Available-for-sale securities Government and semi-government securities Other debt securities Equity securities1 Consolidated Parent Entity 2016 2015 2014 2016 2015 46,255 14,323 87 41,112 13,672 49 22,573 13,241 210 43,286 12,831 44 38,182 12,133 29 Total available-for-sale securities 1 Certain equity securities are measured at cost because their fair value cannot be reliably measured (there is no active market and quoted prices are 60,665 36,024 56,161 54,833 50,344 not available) 2016: $59 million (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 2016. There are no tax-exempt securities. 2016 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 11,344 Other debt securities Equity securities Total by maturity 2.8% 2.7% 22,972 11,663 3.6% 3.1% 2,153 - - - - 13,497 34,635 11,939 507 - 12,446 3.2% 2.9% - - - - - - - - - - 87 87 - - - 46,255 14,323 87 60,665 3.3% 3.0% - The maturity profile is determined based upon contractual terms for available-for-sale instruments. Included in available-for-sale securities (above) and trading securities and financial assets designated at fair value (Note 11) are:  US Government treasury notes of $8,593 million (2015: $8,473 million, 2014: $4,559 million); and  Total holdings of debt securities from the following entities, where the aggregate book value exceeds 10% of equity attributable to Westpac's owners: - Queensland Treasury Corporation of $13,178 million; - NSW Treasury Corporation of $9,731 million; and - Western Australia Treasury Corporation of $6,032 million. 146 2016 Westpac Group Annual Report Notes to the financial statements Note 13. Loans Accounting policy Loans are financial assets initially recognised at fair value plus directly attributable transaction costs. Except for a portfolio of fixed rate bills (see below), loans are subsequently measured at amortised cost using the effective interest rate method and are presented net of any provisions for impairment. Loan products that have both mortgage and deposit facilities are presented gross on the balance sheet, segregating the asset and liability component, because they do not meet the criteria to be offset. Interest earned on these products is presented on a net basis in the income statement as this reflects how the customer is charged. Finance leases, where the Group acts as lessor, are also included within loans. These are leases where substantially all the risks and rewards of the leased asset have been transferred to the lessee. Finance income is recognised on a basis reflecting a constant rate of return on the net investment in the finance lease. The net investment of a finance lease is the present value of future cash flows on the lease. Gross future cash flows are discounted using the interest rate implicit in the lease to determine their present value. The loan portfolio is disaggregated by location of booking office and product type, as follows: $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 Consolidated Parent Entity 2016 2015 2016 2015 404,190 22,825 150,209 1,912 108 375,848 22,234 145,481 1,980 112 404,173 19,199 144,562 1,912 108 375,826 16,321 138,478 1,987 112 579,244 545,655 569,954 532,724 43,035 1,865 27,499 96 72,495 2,358 11,159 13,517 665,256 (3,330) 661,926 38,351 1,800 23,485 93 63,729 5,639 11,321 16,960 626,344 (3,028) 623,316 - - 336 - 336 2,354 9,805 12,159 582,449 (2,710) 579,739 - - 328 - 328 5,639 9,857 15,496 548,548 (2,473) 546,075 Provisions for impairment charges on loans (refer to Note 14) Total net loans1 1 Included in net loans was $5,562 million (2015: $7,076 million) of fixed rate bills designated at fair value to reduce an accounting mismatch. The change in fair value of fixed rate bills attributable to credit risk recognised during the year was $12 million (2015: $21 million) for both the Group and Parent Entity. The cumulative change in fair value of the fixed rate bills attributable to credit risk was a decrease of $29 million (2015: $41 million decrease) for both the Group and Parent Entity. 2016 Westpac Group Annual Report 147 3 Note 13. Loans (continued) Loans included the following finance lease receivables: $m Gross investment in finance leases, receivable: Due within one year Due after one year but not later than five years Due after five years Unearned future finance income on finance leases Net investment in finance leases Accumulated allowance for 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 Consolidated Parent Entity 2016 2015 2016 2015 745 4,342 289 (718) 4,658 (7) 4,651 717 3,724 217 4,658 743 4,668 419 (804) 5,026 (10) 5,016 713 4,000 313 5,026 409 2,707 187 (455) 2,848 (3) 2,845 393 2,308 147 2,848 388 2,228 303 (315) 2,604 (7) 2,597 375 1,991 238 2,604 148 2016 Westpac Group Annual Report Note 13. Loans (continued) The following table shows loans presented based on their industry classification: Notes to the financial statements 2016 2015 2014 2013 2012 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 Services Trade Transport and storage Utilities 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 7,750 8,006 6,290 17,526 1,410 9,328 3,699 61,167 13,347 16,626 9,065 4,026 418,729 2,275 579,244 610 8,027 1,203 3,286 171 2,747 295 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 2,009 545,655 541 7,370 1,200 2,346 302 2,554 425 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 2,114 511,255 435 6,473 1,064 1,874 354 2,205 502 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 2,416 474,144 455 6,130 1,195 1,714 608 2,066 478 Property, property services and business services 14,468 13,131 12,018 10,863 Services Trade Transport and storage Utilities Retail lending Other Total New Zealand 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 Services Trade Transport and storage Utilities Retail lending Other Total overseas Total loans Provisions for impairment charges on loans Total net loans 2,524 3,558 1,490 1,671 32,182 263 72,495 118 12 53 2,767 4 2,619 535 1,099 99 3,463 1,186 442 1,120 - 2,321 3,263 1,340 1,098 27,838 - 63,729 111 568 247 4,297 130 3,848 778 812 182 2,898 1,099 722 1,191 77 2,073 2,879 1,041 1,063 26,351 138 58,470 127 465 120 2,006 35 2,886 1,617 492 242 3,248 689 701 1,111 52 13,517 665,256 (3,330) 661,926 16,960 626,344 (3,028) 623,316 13,791 583,516 (3,173) 580,343 2016 Westpac Group Annual Report 2,479 2,824 1,088 1,177 24,463 45 55,585 130 376 172 1,246 31 2,418 857 362 172 2,611 1,766 440 299 900 63 10,077 539,806 (3,642) 536,164 551 161 988 42 7,020 518,279 (3,834) 514,445 149 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 2,298 463,014 438 5,277 1,148 1,680 525 1,895 390 9,248 2,101 2,645 1,038 1,051 20,778 31 48,245 156 68 72 726 8 1,787 250 372 73 3 Note 13. Loans (continued) Parent Entity $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 Services Trade Transport and storage Utilities 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 Services Trade Transport and storage Utilities Retail lending Other Total New Zealand 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 Services Trade Transport and storage Utilities Retail lending Other Total other overseas Total loans Provisions for impairment charges on loans Total net loans 150 2016 Westpac Group Annual Report 2016 2015 7,633 7,826 5,490 17,412 1,345 8,954 3,606 59,728 12,640 16,103 8,505 3,994 414,631 2,087 569,954 - 2 6 - - 102 - 7 4 215 - - - - 336 100 11 41 2,762 152 2,462 535 851 164 7,539 7,503 5,115 15,906 737 9,084 4,289 57,556 11,067 15,372 9,308 3,511 384,399 1,338 532,724 - 2 5 - 1 90 - 7 3 218 2 - - - 328 93 567 204 4,251 130 3,817 777 584 144 3,142 2,752 953 430 556 - 12,159 582,449 (2,710) 579,739 783 702 617 75 15,496 548,548 (2,473) 546,075 Note 13. Loans (continued) The following table shows the consolidated contractual maturity distribution of all loans by type of customer as at 30 September 2016: Notes to the financial statements Up to 1 Year 1 to 5 Years Over 5 Years Total Consolidated 2016 $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 2,500 2,906 1,442 7,172 136 3,120 652 4,691 4,307 3,806 5,750 717 4,791 1,538 559 793 1,042 4,604 557 1,417 1,509 8,861 2,423 1,832 2,006 903 357,957 123 384,586 44,803 7,750 8,006 6,290 17,526 1,410 9,328 3,699 61,167 13,347 16,626 9,065 4,026 418,729 2,275 579,244 86,012 665,256 Property, property services and business services 20,294 32,012 Services Trade Transport and storage Utilities Retail lending Other Total Australia Total overseas 2,276 6,232 1,436 268 17,849 1,326 67,609 22,994 8,648 8,562 5,623 2,855 42,923 826 127,049 18,215 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 145,264 429,389 90,603 associated business. 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 2016 Loans at Fixed Interest Rates Loans at Variable Interest Rates 2015 Loans at Fixed Interest Rates Total Total 419,728 19,005 438,733 91,907 44,013 135,920 511,635 63,018 574,653 394,307 18,641 412,948 87,759 38,037 125,796 482,066 56,678 538,744 2016 Westpac Group Annual Report 151 3 Note 14. Provisions for impairment charges Accounting policy The Group recognises two types of impairment provisions for its loans, being provisions for loans which are:   individually assessed to be impaired; and collectively assessed to be impaired. Note 6 explains how impairment charges are determined. The Group assesses impairment as follows:   individually for loans that exceed specified thresholds. Where the loans are assessed as impaired, individually assessed provisions will be recognised; and if an individually assessed loan is not impaired, it is then included in a group of loans with similar risk characteristics and, along with those loans below the specified thresholds noted above, collectively assessed for impairment. If there is objective evidence that the group of loans is collectively impaired, collectively assessed provisions will be recognised. Critical accounting assumptions and estimates The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce differences between impairment provisions and actual loss experience. Individual component Key judgements include 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 recovering the loan. Judgements can change with time as new information becomes available or as loan recovery strategies evolve, which may result in revisions to the impairment provision. Collective component Key judgements include estimated loss rates and their related emergence periods. The emergence period for each loan type is determined through studies of loss emergence patterns. Loan files are reviewed to identify the average time period between observable loss indicator events and the loss becoming identifiable. Actual credit losses may differ materially from reported loan impairment provisions due to uncertainties including interest rates and their effect on consumer spending, unemployment levels, payment behaviour and bankruptcy rates. $m Individually assessed provisions Opening balance Provisions raised Write-backs Write-offs Interest adjustment Other adjustments Closing balance Collectively assessed provisions Opening balance Provisions raised Write-offs Interest adjustment Other adjustments Closing balance 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 2016 669 727 (210) (287) (13) (17) 869 2,663 744 (902) 193 35 2,733 3,602 (272) 3,330 2015 867 566 (297) (445) (22) - 669 2,614 615 (793) 190 37 2,663 3,332 (304) 3,028 2014 1,364 684 (433) (706) (34) (8) 867 2,585 505 (702) 189 37 2,614 3,481 (308) 3,173 2016 543 694 (188) (267) (13) (17) 752 2,203 510 (682) 156 11 2,198 2,950 (240) 2,710 2015 719 457 (274) (338) (24) 3 543 2,148 521 (627) 156 5 2,203 2,746 (273) 2,473 152 2016 Westpac Group Annual Report 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: Notes to the financial statements Consolidated 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 Services Trade Transport and storage Utilities 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 Services Trade Transport and storage Utilities Retail lending Total New Zealand Total other overseas Total individually assessed provisions Total collectively assessed provisions Total provisions for impairment charges and credit commitments 2016 $m 2015 2014 2013 2012 % $m % $m % $m % $m % 39 21 23 15 120 41 340 16 62 14 - 57 4 1.1 0.6 0.6 0.4 3.4 1.1 9.5 0.4 1.7 0.4 - 1.6 0.1 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 12.2 2.9 2.1 1.1 0.5 1.6 0.2 752 20.9 553 16.6 691 19.9 1,089 27.6 1,197 28.3 - 11 1 - 34 14 32 2 1 - - 4 99 18 869 2,733 - 0.3 - - 0.9 0.4 0.9 0.1 - - - 0.1 2.7 0.5 24.1 75.9 - 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 17 207 68 1,364 2,585 - 0.4 0.2 0.2 0.2 0.9 1.8 1.0 0.1 - - 0.4 5.2 1.7 34.5 65.5 5 20 2 9 16 - 116 35 3 - - 14 220 53 1,470 2,771 0.1 0.5 0.1 0.2 0.4 - 2.7 0.8 0.1 - - 0.3 5.2 1.2 34.7 65.3 3,602 100.0 3,332 100.0 3,481 100.0 3,949 100.0 4,241 100.0 2016 Westpac Group Annual Report 153 3 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 $m Write-offs Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Mining Property, property services and business services Services Trade Transport and storage Utilities 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 Services Trade Transport and storage Utilities Retail lending Other Total New Zealand Total other overseas Total write-offs Write-offs in relation to: Collectively assessed provisions Individually assessed provisions Total write-offs 2016 2015 2014 2013 2012 (17) (12) (20) (13) (21) (18) (87) (36) (30) (48) (1) (803) (13) (1,119) - (1) (1) - - - (12) - (1) - - (51) (1) (67) (3) (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) (24) (11) (106) (11) (45) (1) (453) (41) (53) (37) (33) (597) (11) (1,423) (2) (23) (9) (2) (17) (1) (105) (5) (3) (1) - (59) (1) (228) (57) (1,189) (1,238) (1,408) (1,399) (1,708) (902) (287) (1,189) (793) (445) (1,238) (702) (706) (1,408) (708) (691) (1,399) (756) (952) (1,708) 154 2016 Westpac Group Annual Report Note 14. Provisions for impairment charges (continued) The following table shows details of recoveries of loans by industry classifications for the past five years: Notes to the financial statements Consolidated $m Recoveries Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Manufacturing Mining Property, property services and business services Services Trade Transport and storage Utilities Retail lending Other Total Australia Total New Zealand Total other overseas Total recoveries Total write-offs Net write-offs and recoveries 2016 2015 2014 2013 2012 - - 1 34 1 - 5 2 1 1 - 84 2 - - 4 8 3 - 17 1 1 - - 78 1 131 6 - 137 (1,189) (1,052) 113 18 - 131 (1,238) (1,107) - - 2 8 3 - 12 - 1 - 2 62 2 92 14 - 1 1 1 3 8 - 11 - 1 1 - 41 - 68 8 - - - 1 2 5 - 23 1 1 1 - 61 1 96 8 - 106 (1,408) (1,302) 76 (1,399) (1,323) 104 (1,708) (1,604) Note 15. Life insurance assets and life insurance liabilities Accounting policy The Group conducts its life insurance business in Australia primarily through Westpac Life Insurance Services Limited and its subsidiaries, which are separate statutory funds and registered under the Life Insurance Act 1995 (Life Act) and; in New Zealand through Westpac Life-NZ-Limited which are separate statutory funds licensed under the Insurance (Prudential Supervision) Act 2010. Life insurance assets Life insurance assets, including investments in funds managed by the Group, are designated at fair value through income statement. Changes in fair value are recognised in non-interest income. The determination of fair value of life insurance assets involves the same judgements as other financial assets, which are described in the critical accounting assumptions and estimates in Note 23. The Life Act places restrictions on life insurance assets, including that they 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 a distribution, when the fund has met its solvency and capital adequacy requirements. Life insurance liabilities Life insurance liabilities primarily consist of life investment contract liabilities and life insurance contract liabilities. Claims incurred in respect of life investment contracts are withdrawals of customer deposits, and are recognised as a reduction in life insurance liabilities. Life investment contract liabilities Life investment contract liabilities are designated at fair value through income statement. Fair value is the higher of the valuation of life insurance assets linked to the life investment contract, or the minimum current surrender value (the minimum amount the Group would pay to a policyholder if their policy is voluntarily terminated before it matures or the insured event occurs). Changes in fair value are recognised in non-interest income. Life insurance contract liabilities The value of life insurance contract liabilities is calculated using the margin on services methodology (MoS), specified in the Prudential Standard LPS 340 Valuation of Policy Liabilities. 2016 Westpac Group Annual Report 155 3 Note 15. Life insurance assets and life insurance liabilities (continued) MoS accounts for the associated risks and uncertainties of each type of life insurance contract written. At each reporting date, planned profit margins and an estimate of future liabilities are calculated. Profit margins are released to non-interest income over the period that life insurance is provided to policyholders (Note 4). The cost incurred in acquiring specific insurance contracts is deferred provided that these amounts are recoverable out of planned profit margins. The deferred amounts are recognised as a reduction in life insurance policy liabilities and are amortised to non-interest income over the same period as the planned profit margins. External unit holder liabilities of managed investment schemes The life insurance statutory funds include controlling interests in managed investment schemes which are consolidated. When the managed investment scheme is consolidated, the external unit holder liabilities are recognised as a liability and included in life insurance liabilities. They are designated at fair value through income statement. Critical accounting assumptions and estimates The key factors that affect the estimation of life insurance liabilities and related assets are:  the cost of providing benefits and administering contracts;  mortality and morbidity experience, which includes policyholder benefits enhancements;   discontinuance rates, which affects the Group’s ability to recover the cost of acquiring new business over the life of the contracts; and the discount rate of projected future cash flows. Regulation, competition, interest rates, taxes, securities market conditions and general economic conditions also affect the estimation of life insurance liabilities. Life insurance assets Consolidated $m Investments held directly and in unit trusts Equities Debt securities Property Loans Other Total life insurance assets 2016 2015 4,403 8,628 763 37 361 14,192 4,350 7,448 621 51 655 13,125 There were no life insurance assets in the Parent Entity as at 30 September 2016 (2015: nil). Life insurance liabilities Consolidated Reconciliation of movements in policy liabilities $m $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 external unit holders of managed investment schemes Closing balance Life Investment Contracts Life Insurance Contracts Total 2016 12,395 416 780 (1,052) (112) 807 13,234 2015 10,378 463 875 (1,183) (129) 1,991 12,395 2016 (836) 2015 (741) (37) (95) - - - - - - - - (873) (836) 2016 11,559 379 780 (1,052) (112) 807 12,361 2015 9,637 368 875 (1,183) (129) 1,991 11,559 There were no life insurance liabilities in the Parent Entity as at 30 September 2016 (2015: nil). 156 2016 Westpac Group Annual Report Notes to the financial statements Note 16. Payables due to other financial institutions Accounting policy Payables due to other financial institutions are recognised initially at fair value and subsequently at amortised cost using the effective interest rate method. Security repurchase agreements Where securities are sold subject to an agreement to repurchase at a predetermined price, they remain recognised on the balance sheet in their original category (i.e. ‘Trading securities’ or ‘Available-for-sale’). The cash consideration received is recognised as a liability (‘Security repurchase agreements’). Security repurchase agreements are designated at fair value and recognised as part of ‘Other financial liabilities at fair value through income statement’ (refer to Note 18) where they are managed as part of a trading portfolio; otherwise they are measured on an amortised cost basis and recognised in ‘Payables due to other financial institutions’. $m Cash collateral Offshore central bank deposits Consolidated Parent Entity 2016 1,615 5,493 2015 4,037 3,922 2016 1,557 5,493 2015 3,445 3,922 Interbank borrowing Security repurchase agreements1 Total payables due to other financial institutions 1 The carrying value of the related securities’ assets pledged under repurchase agreements for the Group and the Parent Entity is $7,052 million 18,731 18,141 18,209 5,501 5,009 5,009 6,092 6,082 5,271 5,265 5,501 18,133 (2015: $6,998 million). 2016 Westpac Group Annual Report 157 3 Note 17. Deposits and other borrowings Accounting policy Deposits and other borrowings are initially recognised at fair value and subsequently either measured at amortised cost using the effective interest rate method or at fair value. Deposits and other borrowings are designated at fair value if they are managed on a fair value basis, reduce or eliminate an accounting mismatch or contain an embedded derivative. Where they are measured at fair value, any changes in fair value (except those due to changes in credit risk) are recognised as non-interest income. The change in the fair value that is due to changes in credit risk is recognised in other comprehensive income except where it would create an accounting mismatch, in which case it is also recognised in the income statement. Interest expense incurred is recognised in 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 2016 2015 2016 2015 29,774 37,491 210,666 148,876 426,807 1,192 4,407 22,642 27,826 56,067 15,497 845 1,441 12,414 30,197 513,071 44,227 468,844 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 29,910 37,491 210,397 148,876 426,674 32,223 33,030 209,638 122,071 396,962 - - - - - 15,497 391 1,050 12,130 29,068 455,742 43,171 412,571 - - - - - 15,054 431 1,211 11,851 28,547 425,509 45,331 380,178 425,509 Total deposits and other borrowings 1 The contractual outstanding amount payable at maturity for the Group is $44,326 million (2015: $46,351 million) and for the Parent Entity is 513,071 475,328 455,742 $43,270 million (2015: $45,443 million). 158 2016 Westpac Group Annual Report 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 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 2016 Average Balance $m Average Rate % 2015 Average Balance $m Average Rate % 2014 Average Balance $m Average Rate % 35,732 31,165 205,860 139,090 411,847 5,051 16,938 24,214 36,435 82,638 2.4% 1.9% 2.3% 0.9% 1.9% 2.6% 29,201 32,201 199,107 125,891 386,400 4,514 16,617 22,427 37,271 80,829 2.5% 2.0% 3.2% 0.6% 3.0% 2.9% 23,082 31,793 182,046 128,546 365,467 3,926 15,717 20,354 35,720 75,717 2.7% 2.5% 3.5% 0.5% 3.1% 2.6% 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 2016 $m Certificates of deposit greater than US$100,000 Term deposits greater than US$100,000 Less Than 3 Months 16,779 68,428 Between 3 and 6 Months 12,628 26,894 Between 6 Months and 1 Year 244 22,873 Over 1 Year 123 11,868 Total 29,774 130,063 Note 18. Other financial liabilities at fair value through income statement Accounting policy Other financial liabilities at fair value through income statement include trading securities sold short and security repurchase agreements which have been designated at fair value at initial recognition. The accounting policy for security repurchase agreements is consistent with that detailed in Note 16. Securities sold short reflect the obligation to deliver securities to a buyer for the sale of securities Westpac does not own at the time of sale but that are promised to be delivered to the buyer. Securities delivered to the buyer are usually borrowed and/or subsequently purchased. Subsequent to initial recognition, these liabilities are measured at fair value with changes in fair value (except credit risk) recognised through the income statement as they arise. The change in fair value that is attributable to 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 is recognised in net interest income using the effective interest rate method. $m Security repurchase agreements1 Securities sold short Consolidated Parent Entity 2016 4,363 389 2015 8,407 819 2016 3,982 389 2015 8,407 819 Total other financial liabilities at fair value through income statement 9,226 1 The carrying value of securities pledged under repurchase agreements for the Group is $4,595 million (2015: $8,653 million) and for the Parent Entity 4,371 4,752 9,226 is $4,213 million (2015: $8,653 million). At maturity, the Group is contractually required to pay $4,752 million (2015: $9,226 million), and the Parent Entity $4,371 million (2015: $9,226 million) to holders of these financial liabilities. 2016 Westpac Group Annual Report 159 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 exchange is reported as part of loans. Debt issues are initially measured at fair value and subsequently either measured at amortised cost using the effective interest rate method or at fair value. Debt issues are designated at fair value if they:   reduce or eliminate an accounting mismatch; or contain an embedded derivative. They are measured at fair value with changes in fair value (except those due to changes in credit risk) recognised as non- interest income. The change in the fair value that is due to credit risk is recognised in other comprehensive income except where it would create an accounting mismatch, in which case it is also recognised in the income statement. Interest expense incurred is recognised within net interest income using the effective interest rate method. In the table below, the distinction between short-term (less than 12 months) and long-term (greater than 12 months) debt is based on the original maturity of the underlying security. $m Short-term debt: Own issuances Customer conduits1 Acceptances Total short-term debt Long-term debt: Covered bonds Senior Securitisation Structured notes Total long-term debt Total debt issues Debt issues at fair value2 Debt issues at amortised cost Consolidated Parent Entity 2016 2015 2016 2015 18,931 34,943 16,633 32,470 936 12 823 97 - 12 - 97 19,879 35,863 16,645 32,567 33,529 106,626 9,445 423 150,023 169,902 6,303 163,599 35,062 87,645 12,034 450 135,191 171,054 9,318 161,736 30,211 98,720 - - 128,931 145,576 3,589 141,987 31,401 80,747 - - 112,148 144,715 6,415 138,300 144,715 Total debt issues 1 Further information on customer conduits is disclosed in Note 25. 2 The contractual outstanding amount payable at maturity for the Group is $6,185 million (2015: $9,372 million) and for the Parent Entity is 171,054 169,902 145,576 $3,484 million (2015: $6,483 million). Included in the carrying value of debt issues at fair value is a decrease for cumulative changes in own credit spreads of $165 million (2015: $218 million) for the Group and Parent Entity. 160 2016 Westpac Group Annual Report Note 19. Debt issues (continued) Consolidated $m Short-term debt US commercial paper Euro commercial paper Asset backed commercial paper (by currency): AUD Total asset backed commercial paper 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 2016 2015 18,683 248 18,931 936 936 12 34,943 - 34,943 823 823 97 19,879 35,863 42,946 2,294 20,267 12,134 4,333 3,422 61,788 2,839 150,023 41,706 1,912 27,278 7,067 4,272 2,991 48,145 1,820 135,191 2016 2015 2014 36,478 26,351 0.7% 0.9% 38,774 35,482 0.3% 0.3% 35,173 31,130 0.3% 0.3% 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 which qualify for inclusion as regulatory capital under Australian Prudential Regulation Authority (APRA) Prudential Standards. Loan capital is initially measured at fair value and subsequently measured at amortised cost using the effective interest rate method. Interest expense incurred is recognised in net interest income. $m 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 2016 2015 2016 2015 - 1,185 5,673 6,858 8,485 462 8,947 15,805 765 1,182 3,981 5,928 7,408 504 7,912 13,840 - 1,185 5,673 6,858 8,485 462 8,947 15,805 765 1,182 3,981 5,928 7,408 504 7,912 13,840 2016 Westpac Group Annual Report 161 3 Note 20. Loan capital (continued) Additional Tier 1 loan capital A summary of the key terms and common features of certain Additional Tier 1 (AT1) instruments are provided below1. Consolidated and Parent Entity $m Dividend/distribution rate Potential scheduled conversion date2 Optional call date3 2016 2015 Westpac convertible preference shares (CPS) $1,189 million CPS Total convertible preference shares Westpac capital notes (WCN) $1,384 million WCN $1,311 million WCN2 $1,324 million WCN3 $1,702 million WCN4 Total Westpac capital notes (180 day bank bill rate + 3.25% p.a.) x (1 - Australian corporate tax rate) 31 March 2020 31 March 20184 (90 day bank bill rate + 3.20% p.a.) x (1 - Australian corporate tax rate) (90 day bank bill rate + 3.05% p.a.) x (1 - Australian corporate tax rate) (90 day bank bill rate + 4.00% p.a.) x (1 - Australian corporate tax rate) (90 day bank bill rate + 4.90% p.a.) x (1 - Australian corporate tax rate) 8 March 2021 8 March 2019 23 September 2024 23 September 2022 22 March 2023 22 March 2021 20 December 2023 20 December 2021 1,185 1,185 1,375 1,302 1,310 1,686 5,673 1,182 1,182 1,372 1,301 1,308 - 3,981 Common features of AT1 instruments tabled above Distribution payment conditions Semi-annual dividends on the CPS are discretionary and only paid if the Directors determine to make a payment, the amount does not exceed Westpac’s distributable profits (unless APRA gives its prior written approval), and APRA does not object to the payment of the dividend. Quarterly distributions on the Westpac capital notes are at Westpac’s absolute discretion. Distributions cannot be paid if they will result in a breach of Westpac’s capital requirements under APRA’s prudential standards; result in Westpac becoming, or being likely to become, insolvent; or if APRA objects. Broadly, if for any reason a dividend or distribution has not been paid in full on the relevant distribution payment date, Westpac must not determine or pay any dividends on ordinary share or undertake a discretionary buy back or capital reduction of ordinary shares, unless the unpaid distribution is paid in full within 20 business days of the relevant distribution payment date or in certain other circumstances. The AT1 instruments convert into Westpac ordinary shares in the following circumstances: Scheduled Conversion On the scheduled conversion date, provided certain conversion conditions are satisfied, it is expected that the applicable AT1 instrument will be converted and holders will receive a variable number of Westpac ordinary shares. The conversion number of Westpac ordinary shares is 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 20 business day period prior to the scheduled conversion date and includes a 1% discount. Capital Trigger Event or Non-Viability Trigger Event Westpac will be required to convert some or all AT1 instruments into a variable number of Westpac ordinary shares upon the occurrence of a capital trigger event5 or non-viability trigger event6. No conversion conditions apply in these circumstances. A capital trigger event occurs when Westpac determines, or APRA notifies Westpac in writing that it believes, Westpac’s Common Equity Tier 1 Capital ratio is equal to or less than 5.125% (on a level 1 or level 2 basis7,8). 1 Excludes convertible debentures and Trust preferred securities (2004 TPS). 2 Conversion is subject to the satisfaction of the scheduled conversion conditions. If the conditions are not satisfied, conversion will not occur until the next distribution payment date on which the scheduled conversion conditions are satisfied. 3 Westpac may elect to redeem, subject to APRA’s prior written approval, convert (excluding WCN) or transfer the applicable AT1 instrument on the optional redemption/conversion/transfer date. 4 Each payment date on or after 31 March 2018. 5 All CPS must be converted upon the occurrence of a capital trigger event. 6 All Westpac capital notes contain a non-viability trigger event. CPS does not contain a non-viability trigger event. 7 Level 1 comprises Westpac Banking Corporation and subsidiaries approved by APRA as being part of a single ‘Extended Licenced Entity’ for the purposes of measuring capital adequacy. Level 2 includes all subsidiaries except those entities specifically excluded by APRA regulations for the purposes of measuring capital adequacy. 8 On a level 2 basis only for CPS. 162 2016 Westpac Group Annual Report Notes to the financial statements Note 20. Loan capital (continued) A non-viability trigger event will occur when APRA notifies Westpac in writing that it believes conversion of all or some AT1 instruments (or conversion or write-down of capital instruments of the Westpac Group), or public sector injection of capital (or equivalent support), is necessary because without it, Westpac would become non-viable. No conversion conditions apply in these circumstances. For each AT1 instrument converted, holders will receive a variable number of Westpac ordinary shares calculated using the formula described in the terms of the applicable AT1 instrument 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 5 business day period prior to the capital trigger event or non-viability trigger event and includes a 1% discount. For each AT1 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 event1, if conversion of an AT1 instrument does not occur within five business days, holders’ rights in relation to the AT1 instrument will be immediately and irrevocably terminated. Early conversion Westpac is able to elect to convert2, or may be required to convert, AT1 instruments early in certain circumstances. The terms of conversion and the conversion conditions are broadly similar to scheduled conversion. Convertible debentures and Trust preferred securities (2004 TPS) A Westpac subsidiary, Westpac Capital Trust IV issued 525,000 2004 TPS for US$1,000 each on 5 April 2004. Westpac Capital Trust IV also issued US$1,000 of common securities to a Westpac subsidiary. The sole assets of Westpac Capital Trust IV were US$525,001,000 2004 Funding TPS issued by Tavarua Funding Trust IV, a Westpac subsidiary. Tavarua Funding Trust IV also issued common securities with a total price of US$1,000 to Westpac. The assets of Tavarua Funding Trust IV were US$525,001,000 of convertible debentures issued by Westpac and US Government securities purchased with the proceeds of the common securities. On 31 March 2016, the convertible debentures, common securities, Funding TPS and 2004 TPS were redeemed in full for cash. 1 Excludes CPS. 2 Excludes WCN. 2016 Westpac Group Annual Report 163 3 Note 20. Loan capital (continued) Tier 2 loan capital A summary of the key terms and common features of Tier 2 instruments are provided below1. - - 483 500 1,673 1,052 921 1,000 252 108 572 540 500 1,670 1,147 919 999 288 Consolidated and Parent Entity $m Basel III transitional subordinated notes US$75 million subordinated notes Fixed 5.00% p.a. US$400 million subordinated notes Fixed 5.30% p.a. US$350 million subordinated notes Fixed 4.625% p.a. Interest rate2 Maturity date Optional call date3 2016 2015 30 December 2015 15 October 2015 1 June 2018 N/A N/A N/A A$500 million subordinated notes Floating 90 day bank bill rate + 3.00% p.a. 21 March 2022 21 March 2017 A$1,676 million subordinated notes Floating 90 day bank bill rate + 2.75% p.a. 23 August 2022 23 August 2017 US$800 million subordinated notes 3.625% p.a. until but excluding 28 February 2018. Thereafter, if not called, fixed rate equal to 5 year US Treasury rate + 2.90% p.a. 28 February 2023 28 February 2018 Basel III fully compliant subordinated notes A$925 million subordinated notes 90 day bank bill rate + 2.30% p.a. A$1,000 million subordinated notes 90 day bank bill rate + 2.05% p.a. CNY1,250 million subordinated notes A$350 million subordinated notes S$325 million subordinated notes A$175 million subordinated notes 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 plus 0.8345% p.a. 4.50% p.a. until but excluding 11 March 2022. Thereafter, if not called, a fixed rate per annum equal to the five year AUD semi- quarterly mid-swap reference rate plus 1.95% p.a., the sum of which will be annualised 4.00% p.a. until but excluding 12 August 2022. Thereafter, if not called, a fixed rate per annum equal to the five year SGD swap offer rate plus 1.54% p.a. 4.80% p.a. until but excluding 14 June 2023. Thereafter, if not called, a fixed rate per annum equal to the five year AUD semi-quarterly mid- swap reference rate plus 2.65% p.a., each of which will be annualised 22 August 2023 22 August 2018 14 March 2024 14 March 2019 9 February 2025 9 February 2020 11 March 2027 11 March 2022 361 348 12 August 2027 12 August 2022 322 317 14 June 2028 14 June 2023 179 US$100 million subordinated notes Fixed 5.00% p.a. 23 February 2046 NA A$700 million subordinated notes Floating 90 day bank bill rate + 3.10% p.a. 10 March 2026 10 March 2021 JPY20,000 million subordinated notes Fixed 1.16% p.a. JPY10,200 million subordinated notes Fixed 1.16% p.a. JPY10,000 million subordinated notes Fixed 0.76% p.a. NZ$400 million subordinated notes 4.6950% p.a. until but excluding 1 September 2021. Thereafter, if not called, a fixed rate per annum equal to the New Zealand 5 year swap rate on 1 September 2021 plus 2.60% p.a. 19 May 2026 2 June 2026 9 June 2026 NA NA NA 1 September 2026 1 September 2021 144 695 262 134 130 377 - - - - - - - Total subordinated notes 8,485 7,408 Common features of the Basel III transitional subordinated notes Interest payments are subject to Westpac being solvent at the time of, and immediately following, the interest payment. These subordinated notes do not contain non-viability loss absorption requirements and pay non-discretionary, cumulative interest. Common features of Basel III fully compliant subordinated notes Interest payments are subject to Westpac being solvent at the time of, and immediately following, the interest payment. 1 Excludes subordinated perpetual notes. 2 Interest payments are made periodically as set out in the terms of the subordinated notes. 3 Westpac may elect to redeem the applicable Tier 2 instrument on the optional call date, subject to APRA’s prior written approval. If not called, Westpac may elect to call the applicable Tier 2 instrument on any interest payment date after the first call date (except for A$500 million subordinated notes maturing 21 March 2022), subject to APRA’s prior written approval. 164 2016 Westpac Group Annual Report Notes to the financial statements Note 20. Loan capital (continued) Non-viability trigger event Westpac will be required to convert some or all subordinated notes into a variable number of Westpac ordinary shares upon the occurrence of a non-viability trigger event. A non-viability trigger event will occur on the same terms as described under Additional Tier 1 loan capital. For each subordinated note converted, holders will receive a variable number of Westpac ordinary shares calculated using the formula described in the terms of the applicable Tier 2 instrument but subject to a maximum conversion number. The price at which Westpac ordinary shares will be issued is similar to that described under Additional Tier 1 loan capital for a non-viability trigger event. For each Tier 2 instrument, the maximum conversion number is set using a Westpac ordinary share price which is broadly equivalent to 20% of the Westpac ordinary share price at the time of issue. Following the occurrence of a non-viability trigger event, if conversion of a Tier 2 instrument does not occur within five business days, holders’ rights in relation to the Tier 2 instrument will be immediately and irrevocably terminated. Subordinated perpetual notes These notes have no final maturity but Westpac can choose to redeem them at par, subject to APRA approval and certain other conditions. Interest is cumulative and payable on the notes semi-annually at a rate of 6 month US$ LIBOR plus 0.15% p.a., 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. These 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 creditors whose claims against Westpac rank equally with, or junior to, these notes. 2016 Westpac Group Annual Report 165 3 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. All derivatives are held at fair value. Changes in fair value are recognised in the income statement, unless designated in a cash flow 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 trading and also as part of its asset and liability risk management activities, which are discussed in Note 22. Derivatives used for risk management activities include designating derivatives into one of three hedge accounting relationships: fair value hedge; cash flow hedge; or hedge of a net investment in a foreign operation, where permitted under AASB 139. These hedge designations and associated accounting treatment are as follows: Fair value hedges Fair value hedges hedge the exposure to changes in the fair value of an asset or liability. Changes in the fair value of derivatives and the hedged asset or liability in fair value hedges are recognised in interest income. The carrying value of the hedged asset or liability is adjusted for the changes in fair value. If a hedge is discontinued, any fair value adjustments to the carrying value of the asset or liability are amortised to interest income over the period to maturity. If the asset or liability is sold, any unamortised adjustment is immediately recognised in interest income. Cash flow hedges Cash flow hedges hedge the exposure to variability of cash flows attributable to an asset, liability or future forecast transaction. For effective hedges, changes in the fair value of derivatives are recognised in the cash flow hedge reserve through other comprehensive income and subsequently recognised in interest income when the asset or liability that was hedged impacts the income statement. For hedges with some ineffectiveness, the changes in the fair value of the derivatives relating to the ineffective portion are immediately recognised in interest income. If a hedge is discontinued, any cumulative gain or loss remains in other comprehensive income. It is amortised to interest income over the period which the asset or liability that was hedged also impacts the income statement. If a hedge of a forecast transaction is no longer expected to occur, any cumulative gain or loss in other comprehensive income is immediately recognised in interest income. Net investment hedges Net investment hedges hedge foreign currency risks arising from a net investment of a foreign operation. They are accounted for similarly to cash flow hedges. For effective hedges, changes in the fair value of derivatives are recognised in the foreign currency translation reserve through other comprehensive income. For hedges with some ineffectiveness, the changes in the fair value of the derivatives relating to the ineffective portion are immediately recognised in non-interest income. If a foreign operation is disposed of, any cumulative gain or loss in other comprehensive income is immediately recognised in non-interest income. a. Fair value hedges The Group hedges a proportion of its interest rate risk and foreign exchange risk from debt issuances and fixed interest rate assets with single currency and cross currency interest rate derivatives. $m Change in fair value hedging instruments Change in fair value hedge items attributed to hedged risk Ineffectiveness in interest income Consolidated Parenty Entity 2016 (39) 47 8 2015 (308) 317 9 2016 (52) 62 10 2015 (80) 88 8 b. Cash flow hedges Exposure to the volatility of interest cash flows from floating rate customer deposits, at call balances and loans is hedged with 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. 166 2016 Westpac Group Annual Report Note 21. Derivative financial instruments (continued) Gross cash inflows and outflows on derivatives designated in cash flow hedges are, as a proportion of total gross cash flows, expected to occur in the following periods: Notes to the financial statements 2016 Cash inflows Cash outflows 2015 Cash inflows Cash outflows $m Cash flow hedge ineffectiveness 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 0.6% 0.7% 1.9% 1.9% 8.8% 8.9% 2.8% 2.9% 29.5% 30.4% 28.4% 29.9% 13.0% 13.2% 17.6% 18.4% 13.1% 12.3% 12.6% 12.4% 12.6% 12.4% 11.2% 10.4% 9.9% 10.1% 11.1% 10.1% 12.5% 12.0% 14.4% 14.0% Consolidated Parenty Entity 2016 4 2015 (22) 2016 (2) 2015 (16) 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 The Group uses foreign exchange forward contracts when hedging the currency translation risk of net investments in foreign operations. For both the Group and Parent Entity, ineffectiveness arising from net investments hedges was a loss of $6 million (2015: nil). 2016 Westpac Group Annual Report 167 3 - - 927 - 927 - - - 739 - 739 - - - - Note 21. Derivative financial instruments (continued) The notional amount and fair value of derivative instruments held for trading and designated in hedge relationships are set out in the following tables: Trading Fair Value Fair Value Hedging Cash Flow Net Investment Total Fair Value Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Consolidated 2016 $m Interest rate contracts Futures contracts1 Forward rate agreements Notional Amount 252,462 325,877 - 29 - (28) Swap agreements 2,556,563 27,734 (25,771) Options 82,534 412 (487) Total interest rate contracts 3,217,436 28,175 (26,286) Foreign exchange contracts Spot and forward contracts 652,452 5,380 (5,308) Cross currency swap agreements2 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps 10,979 106 17,565 Total of gross derivatives Impact of netting arrangements3 Total of net derivatives 4,372,054 - 4,372,054 Consolidated 2015 $m Interest rate contracts Futures contracts1 Forward rate agreements Notional Amount 147,368 517,297 449,954 23,562 6,295 212 (10,455) (219) 1,031 - 1,125,968 11,887 (15,982) 1,031 337 1 80 40,480 (11,982) 28,498 (276) - (76) (42,620) 12,459 (30,161) - - - 1,958 (362) 1,596 Trading Fair Value - - - - - - (3,819) 1,092 (1,387) - - - (3,819) 1,092 (1,387) - 213 - 213 - - - (3,606) 1,177 (2,429) - (40) 1,312 (2,405) - - 1,312 (2,445) - - - 2,404 (315) 2,089 - - - (3,832) 398 (3,434) Fair Value Hedging Cash Flow - - - - - 44 - - 44 - - - 44 - 44 - - - - - - 29 - (28) 29,753 (30,977) 412 (487) 30,194 (31,492) (52) 5,424 (5,400) - - 8,638 212 (12,647) (219) (52) 14,274 (18,266) - - - (52) - (52) 337 1 80 44,886 (12,659) 32,227 (276) - (76) (50,110) 14,034 (36,076) Net Investment Total Fair Value Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities - 154 - (156) Swap agreements 2,014,629 25,837 (24,310) Options 90,074 576 (683) Total interest rate contracts 2,769,368 26,567 (25,149) Foreign exchange contracts Spot and forward contracts 674,114 10,002 (8,653) Cross currency swap agreements2 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps Total of gross derivatives Impact of netting arrangements3 Total of net derivatives 1 435,465 34,956 12,687 (18,782) 1,094 651 (689) - 1,144,535 23,340 (28,124) 1,094 6,398 216 33,181 3,953,698 - 3,953,698 472 9 143 50,531 (9,505) 41,026 (409) (10) (150) (53,842) 10,367 (43,475) - - - - - - (2,995) 1,212 (1,301) - - - (2,995) 1,212 (1,301) - 124 - 124 - - - - (27) 4,102 - (414) - 4,102 (441) - - - - - - 1,833 (2,871) 5,314 (1,742) - - - - 1,833 (2,871) 5,314 (1,742) - - - - - - - - - - - - - - - - - - - - - 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 (28,657) - - - (216) - (216) 472 9 143 57,678 (9,505) 48,173 (409) (10) (150) (58,671) 10,367 (48,304) The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 30 September. 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. 2 3 Primarily consists of derivative trades settled directly with central clearing counterparties and their associated variation margin. Westpac became a direct clearing member of LCH.Clearnet Limited (LCH) during the 2015 year. Refer to Note 24. 168 2016 Westpac Group Annual Report - - 899 - 899 - 945 - 945 - - - - - 722 - 722 - Note 21. Derivative financial instruments (continued) Notes to the financial statements Trading Fair Value Fair Value Hedging Cash Flow Net Investment Total Fair Value Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Parent Entity 2016 $m Interest rate contracts Futures contracts1 Forward rate agreements Notional Amount 252,462 325,877 - 29 - (28) Swap agreements 2,552,413 27,796 (26,157) Options 81,620 411 (487) Total interest rate contracts 3,212,372 28,236 (26,672) Foreign exchange contracts Spot and forward contracts 651,469 5,379 (5,307) Cross currency swap agreements2 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps 442,606 23,562 6,297 212 (10,708) (219) 1,117,637 11,888 (16,234) 10,979 106 17,565 337 1 80 (276) - (76) (43,258) 12,459 (30,799) Total of gross derivatives Impact of netting arrangements3 Total of net derivatives 4,358,659 40,542 - 4,358,659 (11,982) 28,560 1,844 (362) 1,482 (3,344) 1,177 (2,167) - - - - - - (3,444) 1,026 (1,154) - - - (3,444) 1,026 (1,154) - 100 - 100 - - - - (40) 1,300 (1,395) - - 1,300 (1,435) - - - 2,326 (315) 2,011 - - - (2,589) 398 (2,191) Fair Value Hedging Cash Flow - - - - - 37 - - 37 - - - 37 - 37 - - - - - - 29 - (28) 29,721 (30,755) 411 (487) 30,161 (31,270) (52) 5,416 (5,399) - - 8,542 212 (12,003) (219) (52) 14,170 (17,621) - - - (52) - (52) 337 1 80 44,749 (12,659) 32,090 (276) - (76) (49,243) 14,034 (35,209) Net Investment Total Fair Value Trading Fair Value Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Parent Entity 2015 $m Interest rate contracts Futures contracts1 Forward rate agreements Notional Amount 147,368 517,297 - 154 - (156) Swap agreements 2,010,895 25,890 (24,726) Options 90,049 575 (683) Total interest rate contracts 2,765,609 26,619 (25,565) Foreign exchange contracts Spot and forward contracts 672,295 9,976 (8,621) Cross currency swap agreements2 Options Total foreign exchange contracts Commodity contracts Equities Credit default swaps 427,053 34,956 12,691 (18,840) 1,004 651 (689) - 1,134,304 23,318 (28,150) 1,004 3,843 216 33,181 472 9 143 (409) (10) (150) - - - - - - - - - (2,689) 1,155 (1,015) - - - (2,689) 1,155 (1,015) - 56 - 56 - - - - (27) 3,603 - (256) - 3,603 (283) - - - - - - - - - - - - - - - - - - - - - - - - 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 (28,579) - - - 472 9 143 (409) (10) (150) (58,417) 10,367 (48,050) Total of gross derivatives Impact of netting arrangements3 Total of net derivatives 1,726 1 The fair value differential of futures contracts are settled daily with the exchange. The notional balance represents open contracts as at 3,937,153 3,937,153 (54,284) (43,917) (9,505) (1,298) (2,633) (1,298) (2,633) 50,561 41,056 10,367 1,726 4,758 4,758 (202) (202) - - - - - - - - - 57,045 (9,505) 47,540 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. 3 Primarily consists of derivative trades settled directly with central clearing counterparties and their associated variation margin. Westpac became a direct clearing member of LCH during the 2015 year. Refer to Note 24. 2016 Westpac Group Annual Report 169 3 Note 21. Derivative financial instruments (continued) Credit default swaps The Group buys and sells credit protection through the use of credit default swap (CDS) derivatives. These CDSs either protect the Group (as a buyer) or expose it (as a seller) to the risk of default of the entity referenced by the CDS. The CDSs are predominantly executed with other financial institutions and are entered into to facilitate institutional customer transactions and to manage the Group’s credit risk exposures. The notional amount and fair value of CDSs are presented in the following table for both the Group and the Parent Entity: $m Credit protection bought Credit protection sold Total 2016 2015 Notional Amount Fair value Asset Liability Notional Amount Fair value Asset Liability 9,231 8,334 17,565 7 73 80 (75) (1) (76) 16,849 16,332 33,181 44 99 143 (107) (43) (150) Note 22. Financial risk Financial instruments are fundamental to the Group’s business of providing banking and financial services. The associated financial risks (including credit risk, funding and liquidity risk and market risk) are a significant proportion of the total risks faced by the Group. This note details the financial risk management policies, practices and quantitative information of the Group’s principal financial risk exposures. Principal financial risks Overview Credit risk The risk of financial loss where a customer or counterparty fails to meet their financial obligations. Note name Risk management frameworks Internal credit risk ratings system Note number 22.1 22.2.1 Credit risk mitigation, collateral and other credit enhancements 22.2.2 Credit risk concentrations Credit quality of financial assets Financial assets that are past due, but not impaired 22.2.3 22.2.4 22.2.5 Items 90 days past due, or otherwise in default, and not impaired 22.2.6 Funding and liquidity risk The risk that the Group will be unable to fund assets and meet obligations as they become due. Impaired loans Collateral held Liquidity modelling Sources of liquidity Assets pledged as collateral Contractual maturity of financial liabilities 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. Expected maturity Value-at-Risk (VaR) Traded market risk Non-traded market risk 22.2.7 22.2.8 22.3.1 22.3.2 22.3.3 22.3.4 22.3.5 22.4.1 22.4.2 22.4.3 170 2016 Westpac Group Annual Report Notes to the financial statements Note 22. Financial risk (continued) 22.1 Risk management frameworks The Board is responsible for approving the Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement and monitoring the effectiveness of risk management by the Westpac Group. The Board has delegated authority to the Board Risk and Compliance Committee (BRCC) to:     review and recommend the Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement to the Board for approval; set risk appetite consistent with the Group Risk Appetite Statement; approve frameworks, policies and processes for managing risk (consistent with the Westpac Group Risk Management Strategy and Westpac Group Risk Appetite Statement); and review and, where appropriate, approve risks beyond the approval discretion provided to management. For each of its primary financial risks, the Group maintains risk management frameworks and a number of supporting policies that define roles and responsibilities, acceptable practices, limits and key controls: Risk Credit risk Funding and liquidity risk Risk management framework and controls  The Credit Risk Management Framework describes the principles, methodologies, systems, roles and responsibilities, reports and key controls for managing credit risk. The BRCC, Westpac Group Executive Risk Committee (RISKCO) and Westpac Group Credit Risk Committee (CREDCO) monitor the risk profile, performance and management of the Group’s credit portfolio and the development and review of key credit risk policies. The Credit Risk Rating System Policy describes the credit risk rating system philosophy, design, key features and uses of rating outcomes.    All models materially impacting the risk rating process are periodically reviewed in accordance with Westpac’s model risk policies.  An annual review is performed of the Credit Risk Rating System by the BRCC, RISKCO and CREDCO.  Specific credit risk estimates (including probability of default (PD), loss given default (LGD) and exposure at default (EAD) levels) are overseen, reviewed annually and supported by the Credit Risk Estimates Committee (a subcommittee of RISKCO) prior to approval under delegated authority from the Chief Risk Officer.  Policies for the delegation of credit approval authorities and formal limits for the extension of credit are established throughout the Group.  Credit manuals are established throughout the Group including policies governing the origination, evaluation, approval, documentation, settlement and ongoing management of credit risks.  Sector policies guide credit extension where industry-specific guidelines are considered necessary    (e.g. acceptable financial ratios or permitted collateral). The Related Entity Risk Management Framework and supporting policies govern credit exposures to related entities, to minimise the spread of credit risk between Group entities and to comply with prudential requirements prescribed by APRA. The Liquidity Risk Management Framework sets out the liquidity risk appetite, roles and responsibilities, tools for measuring and managing liquidity risk, reporting procedures and supporting policies. It also documents the limits and targets for minimum liquid asset holdings, cash flow mismatch levels, wholesale funding and balance sheet ratios. It is reviewed by Westpac Asset and Liability Committee (ALCO) prior to approval by the BRCC. The Group’s Treasury function is responsible for managing funding and liquidity including managing the balance sheet against approved limits and targets and, managing the Group’s funding base so that it is appropriately maintained, stable and diversified.  Daily liquidity risk reports are reviewed by Treasury and the Liquidity risk teams. Liquidity reports are presented to ALCO monthly and to the BRCC quarterly.  An annual funding strategy is established by Treasury which includes consideration of trends in global markets, peer analysis, wholesale funding capacity, expected funding requirements and funding risk analysis. The strategy is continuously reviewed to take into account current market conditions.  A contingency funding plan is also maintained, which details actions to be taken in response to severe disruptions in the Group’s ability to conduct its activities in a timely manner and at a reasonable cost. The plan identifies the committee of senior executives to manage any crisis and their responsibilities. The plan is aligned with the Group’s broader Liquidity Crisis Management Policy. 2016 Westpac Group Annual Report 171 3 Note 22. Financial risk (continued) Risk Market risk Risk management framework and controls   The Market Risk Framework describes the Group’s approach to managing traded and non-traded market risk. Traded market risk includes interest rates, foreign exchange, commodity, equity prices, credit spread and volatility risks. Non-traded market risk includes interest rates and foreign exchange risks.  Market risk is managed using VaR limits, Net interest income at risk (NaR) and structural risk limits (including credit spread and interest rate basis point value limits) as well as scenario analysis and stress testing. The BRCC approves the VaR limits for traded and non-traded risks and the NaR limit for non- traded risk.   RISKCO has approved separate VaR sub-limits for the trading activities of Financial Markets and Treasury and for Asset and Liability Management (ALM) activities.  Market risk limits are assigned to business managers based upon business strategies, experience, and the consideration of market liquidity and the concentration of risks.  Market risk positions are managed by the trading desks and ALM consistent with their delegated authorities and the nature and scale of the market risks involved.  Daily monitoring of current exposure and limit utilisation is conducted independently by the market risk unit, which monitors market risk exposures against VaR and structural risk limits. Daily VaR position reports are produced by risk type, by product lines and by geographic region. Quarterly reports are produced for RISKCO and the BRCC.  Daily stress testing and backtesting of VaR results is performed to support model integrity and to analyse extreme or unexpected movements. A review of both the potential profit and loss outcomes is also undertaken to monitor any skew created by the historical data. RISKCO has ratified an approved escalation framework. The BRCC has approved a framework for profit or loss escalation which considers both single day and 20 day cumulative results. Treasury’s ALM unit is responsible for managing the non-traded interest rate risk including risk mitigation through hedge accounting. This is overseen by the market risk unit and reviewed by RISKCO and BRCC.   Further details regarding the Group’s principal risks including our strategic approach to their management is contained within the Corporate governance statement in Section 1 and the Risk and risk management section in Section 2. 22.2 Credit Risk 22.2.1 Credit risk ratings system The principal objective of the credit risk rating system is to reliably assess the credit risk to which the Group is exposed. The Group has two main approaches to this assessment. Transaction-managed customers The Group assigns a Customer Risk Grade (CRG) to each customer, corresponding to their expected PD. Each facility is assigned an LGD. The Group’s 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 S&P Global Ratings (S&P) external senior ranking unsecured ratings. 172 2016 Westpac Group Annual Report Notes to the financial statements Note 22. Financial risk (continued) Program-managed portfolio Customers that are not transaction-managed are grouped into pools of similar risk. Pools are created by analysing characteristics that have historically predicted that an account is likely to go into default. Customers grouped according to these predictive characteristics are assigned a PD and LGD relative to their pool. The table below maps the Group’s high level CRGs to their corresponding external rating. Financial statement disclosure Strong Westpac CRG A Good/satisfactory Weak Weak/default/non-performing B C D E F G H Moody’s Rating Aaa – Aa3 A1 – A3 Baa1 – Baa3 Ba1 – B1 S&P Rating AAA – AA– A+ – A– BBB+ – BBB– BB+ – B+ Westpac Rating Watchlist Special Mention Substandard/Default Default 22.2.2 Credit risk mitigation, collateral and other credit enhancements Westpac uses a variety of techniques to reduce the credit risk arising from its lending activities. This includes the Group establishing that it has direct, irrevocable and unconditional recourse to collateral and other credit enhancements through obtaining legally enforceable documentation. Collateral The table below describes the nature of collateral or security held for each relevant class of financial asset: Loans – housing and personal1 Housing loans are secured by a mortgage over property and additional security may take the Loans – business1 Trading securities, financial assets designated at fair value and derivatives form of guarantees and deposits. Personal lending (including credit cards and overdrafts) is predominantly unsecured. Where security is taken, it is restricted to eligible motor vehicles, caravans, campers, motor homes and boats. Business loans 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 security such as guarantees, standby letters of credit or derivative protection may also be taken as collateral, if appropriate. These exposures are carried at fair value which reflects the credit risk. For trading securities, 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. For derivatives, 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. 1 This includes collateral held in relation to associated credit commitments. 2016 Westpac Group Annual Report 173 3 Note 22. Financial risk (continued) Management of risk mitigation The Group mitigates credit risk through controls covering: Collateral and valuation management The estimated realisable value of collateral held in support of loans is based on a combination of: formal valuations currently held for such collateral; and   management’s assessment of the estimated realisable value of all collateral held. This analysis also takes into consideration any other relevant knowledge available to management at the time. Updated valuations are obtained when appropriate. The Group revalues collateral related to financial markets positions on a daily basis and has formal processes in place to promptly call for collateral top-ups, if required. The collaterisation arrangements are documented via the Credit Support Annex of the International Swaps and Derivatives Association (ISDA) dealing agreements. In relation to financial markets positions, Westpac only recognises collateral which is:  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 Aa3 / AA– or better rated sovereign governments. The Group only recognises guarantees, standby letters of credit, or credit derivative protection from the following entities (provided they are not related to the entity with which Westpac has a credit exposure):  Sovereign;  Australia and New Zealand public sector;  ADIs and overseas banks with a minimum risk grade equivalent of A3 / A–; and  Others with a minimum risk grade equivalent of A3 / A–. Credit Portfolio Management (CPM) manages the Group’s corporate, sovereign and bank credit portfolios through monitoring the exposure and any offsetting hedge positions. CPM purchases credit protection from entities meeting the criteria above and sells credit protection to diversify the Group’s credit risk. Creditworthy customers domiciled in Australia and New Zealand may enter into formal agreements with the Group, permitting the Group to set-off gross credit and debit balances in their nominated accounts. Cross-border set-offs are not permitted. Close-out netting is undertaken with counterparties with whom the Group has entered into a legally enforceable master netting agreement for their off-balance sheet financial market transactions in the event of default. Further details of offsetting are provided in Note 24. The Group increasingly executes derivative transactions through central clearing counterparties. Central clearing counterparties mitigate risk through stringent membership requirements, the collection of margin against all trades placed, the default fund, and an explicitly defined order of priority of payments in the event of default. Other credit enhancements Offsetting Central clearing (ASX/LCH) 174 2016 Westpac Group Annual Report Notes to the financial statements Note 22. Financial risk (continued) 22.2.3 Credit risk concentrations Credit risk is concentrated when a number of counterparties are engaged in similar activities, have similar economic characteristics and thus may be similarly affected by changes in economic or other conditions. The Group monitors its credit portfolio to manage risk concentrations and rebalance the portfolio. Individual customers or groups of related customers The Group 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 related Australian and New Zealand Standard Industrial Classification (ANZSIC) codes and are monitored against the Group’s industry risk appetite limits. Individual countries The Group has limits governing risks related to individual countries, such as political situations, government policies and economic conditions that may adversely affect either a customer’s ability to meet its obligations to the Group, or the Group’s ability to realise its assets in a particular country. Maximum exposure to credit risk The carrying amount of on-balance sheet financial assets (which comprises receivables due from financial institutions, trading securities and financial assets designated at fair value; derivatives; available-for-sale securities; loans; and regulatory deposits with central banks overseas) and undrawn credit commitments, represents the maximum exposure to credit risk (excluding any collateral received) as set out in the following tables. The following tables set out the credit risk concentrations to which the Group and the Parent Entity are exposed for on-balance sheet financial assets and for undrawn credit commitments. Life insurance assets are excluded as primarily the credit risk is passed on to the policyholder and backed by the policyholder liabilities. The balances for trading securities and financial assets designated at fair value and available-for-sale securities exclude equity securities as the primary financial risk is not credit risk. The credit concentrations for each significant class of financial asset are: Trading securities and financial assets designated at fair value (Note 11) Available-for-sale securities (Note12)       51% (2015: 48%) were issued by financial institutions for the Group; 50% (2015: 47%) for the Parent Entity. 45% (2015: 47%) were issued by government or semi-government authorities for the Group; 45% (2015: 48%) for the Parent Entity. 66% (2015: 72%) were held in Australia by the Group; 72% (2015: 77%) by the Parent Entity. 23% (2015: 24%) were issued by financial institutions for both the Group and Parent Entity. 77% (2015: 75%) were issued by government or semi-government authorities for the Group; 77% (2015: 76%) for the Parent Entity. 90% (2015: 90%) were held in Australia by the Group; 97% (2015: 97%) by the Parent Entity. Loans (Note 13)  Note 13 provides a detailed breakdown of loans by industry and geographic classification. Derivative financial instruments (Note 21)   74% (2015: 83%) were issued by financial institutions for both the Group and Parent Entity. 85% (2015: 88%) were held in Australia by the Group; 85% (2015: 89%) by the Parent Entity. 2016 Westpac Group Annual Report 175 3 Note 22. Financial risk (continued) 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 Services Trade Transport and storage Utilities 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 Services Trade Transport and storage Utilities Retail lending Other Total New Zealand 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 Services Trade Transport and storage Utilities Retail lending Other Total other overseas Total gross credit risk 1 Comparatives have been revised for consistency. 2016 Undrawn credit commit- ments Total on balance sheet Total on balance sheet1 Total 7,772 8,127 6,295 65,221 50,711 10,447 4,383 61,983 13,898 16,870 10,322 5,327 418,816 2,509 1,176 1,991 4,251 8,137 1,171 6,193 3,647 19,611 6,930 8,774 4,665 4,116 83,153 1,096 8,948 10,118 10,546 73,358 51,882 16,640 8,030 81,594 20,828 25,644 14,987 9,443 7,712 7,808 6,213 79,569 48,367 11,122 5,316 60,357 12,259 16,389 11,151 4,788 2015 Undrawn credit commit- ments 1,305 1,924 3,958 10,344 912 7,294 3,943 19,848 5,982 7,752 4,112 3,368 Total 9,017 9,732 10,171 89,913 49,279 18,416 9,259 80,205 18,241 24,141 15,263 8,156 501,969 390,617 80,230 470,847 3,605 2,176 816 2,992 682,681 154,911 837,592 663,844 151,788 815,632 610 8,080 1,207 10,692 4,410 2,864 301 14,576 2,652 3,600 1,557 2,370 32,192 264 85,375 118 52 53 7,435 3,798 2,661 590 1,099 99 3,464 1,231 485 1,120 1 119 818 541 1,728 849 1,758 249 3,161 1,259 1,660 1,083 1,437 8,780 17 729 8,898 1,748 12,420 5,259 4,622 550 542 7,441 1,204 9,166 4,548 2,683 426 17,737 13,222 3,911 5,260 2,640 3,807 40,972 281 2,378 3,285 1,395 1,631 27,844 32 105 697 565 2,073 611 1,497 76 2,382 1,106 1,464 916 1,382 8,118 26 647 8,138 1,769 11,239 5,159 4,180 502 15,604 3,484 4,749 2,311 3,013 35,962 58 23,459 108,834 75,797 21,018 96,815 15 1 259 3,838 38 4,454 2,015 405 96 3,409 315 193 38 35 133 53 312 11,273 3,836 7,115 2,605 1,504 195 6,873 1,546 678 1,158 36 111 587 247 11,143 3,689 3,947 778 812 183 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 36 124 1,078 385 14,907 3,736 9,385 4,156 1,371 414 6,529 1,885 1,059 1,229 113 22,206 790,262 15,111 193,481 37,317 983,743 27,584 767,225 18,787 191,593 46,371 958,818 176 2016 Westpac Group Annual Report Note 22. Financial risk (continued) Parent Entity $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 Services Trade Transport and storage Utilities 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 Services Trade Transport and storage Utilities Retail lending Other Total New Zealand 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 Services Trade Transport and storage Utilities Retail lending Other Total other overseas Total gross credit risk 1 Comparatives have been revised for consistency. Notes to the financial statements 2016 Undrawn credit commit- ments Total on balance sheet Total on balance sheet1 Total 7,655 7,947 5,495 63,837 50,646 10,073 4,290 60,544 13,191 16,347 9,762 5,295 414,718 2,321 1,176 1,989 4,250 8,137 1,171 6,191 3,646 19,603 6,929 8,747 4,660 4,116 83,154 1,096 8,831 9,936 9,745 71,974 51,817 16,264 7,936 80,147 20,120 25,094 14,422 9,411 7,561 7,570 5,214 78,214 48,308 10,668 5,161 58,576 11,570 15,723 10,255 4,750 2015 Undrawn credit commit- ments 1,305 1,921 3,957 10,344 912 7,292 3,942 19,831 5,959 7,723 4,102 3,368 Total 8,866 9,491 9,171 88,558 49,220 17,960 9,103 78,407 17,529 23,446 14,357 8,118 497,872 384,424 80,230 464,654 3,417 1,505 811 2,316 672,121 154,865 826,986 649,499 151,697 801,196 - 55 10 4,449 818 219 6 115 132 257 67 622 10 1 - 26 15 172 85 145 5 34 57 260 57 225 14 - - 81 25 4,621 903 364 11 149 189 517 124 847 24 1 1 73 9 4,212 1,351 219 1 98 60 240 57 446 6 32 6,761 1,095 7,856 6,805 100 51 41 7,176 3,230 2,500 585 851 164 3,143 998 473 556 - 14 1 253 3,821 38 4,357 2,001 396 95 3,284 297 191 30 5 114 52 294 10,997 3,268 6,857 2,586 1,247 259 6,427 1,295 664 586 5 93 586 204 10,703 2,721 3,915 777 584 145 2,752 859 726 617 75 - 6 13 61 24 116 - 37 4 209 209 204 14 - 897 13 491 132 3,763 47 5,290 3,360 536 230 3,469 685 308 25 6 1 79 22 4,273 1,375 335 1 135 64 449 266 650 20 32 7,702 106 1,077 336 14,466 2,768 9,205 4,137 1,120 375 6,221 1,544 1,034 642 81 19,868 698,750 14,783 170,743 34,651 869,493 24,757 681,061 18,355 170,949 43,112 852,010 2016 Westpac Group Annual Report 177 3 Note 22. Financial risk (continued) 22.2.4 Credit quality of financial assets An asset is considered to be past due when any payment under the contractual terms has been missed. The entire contractual balance is considered to be past due, rather than only the overdue portion. Assets may be overdue for a number of reasons, including late payments or incomplete documentation. Late payment may be influenced by the timing of weekends and holidays. This does not always align with the underlying basis by which credit risk is managed. 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. The credit quality of financial assets that are neither past due nor impaired is determined by reference to the credit risk ratings system (refer to Note 22.2.1). Consolidated 2016 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value1 Derivative financial instruments Available-for-sale securities1 Loans: Neither past due nor impaired Good/ Satisfactory Strong Weak Total Past due but not impaired Impaired Total Impairment provision Total carrying value 17,015 9,908 20,845 30,931 59,962 - 43 15 1,224 616 - - - 71 - 17,015 9,951 20,860 32,226 60,578 - - - - - - - - 1 - 17,015 9,951 20,860 32,227 60,578 - - - - - 17,015 9,951 20,860 32,227 60,578 Loans - housing and personal 338,648 119,094 Loans - business 86,959 93,226 1,960 4,472 459,702 184,657 15,067 3,671 515 475,284 (1,320) 473,964 1,644 189,972 (2,010) 187,962 Regulatory deposits with central banks overseas Other financial assets2 1,169 4,098 221 357 - 11 1,390 4,466 - 31 - 4 1,390 4,501 - - 1,390 4,501 Total 569,535 214,796 6,514 790,845 18,769 2,164 811,778 (3,330) 808,448 Neither past due nor impaired Good/ Satisfactory Strong Weak Total Past due but not impaired Impaired Total Impairment provision Total carrying value Consolidated 2015 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value1,3 Derivative financial instruments Available-for-sale securities1,3 Loans: 14,770 9,583 27,014 47,137 53,922 - - 16 927 841 Loans - housing and personal 317,870 107,349 Loans - business 83,938 92,020 Regulatory deposits with central banks overseas Other financial assets2 1,042 2,666 163 365 - - 2 109 21 1,512 3,851 104 10 14,770 9,583 27,032 48,173 54,784 - - - - - - - - - - 14,770 9,583 27,032 48,173 54,784 - - - - - 14,770 9,583 27,032 48,173 54,784 426,731 179,809 14,439 3,470 497 441,667 (1,197) 440,470 1,398 184,677 (1,831) 182,846 1,309 3,041 - 33 - 3 1,309 3,077 - - 1,309 3,077 Total 782,044 1 Equity securities are excluded from these balances and as result the total carrying value will not represent the balance reported on the balance sheet. 2 Other financial assets include accrued interest of $1,118 million (2015: $1,143 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 $1,195 million (2015: $740 million) are also included in this balance which is allocated proportionately based on the trading securities balance classifications. 765,232 785,072 557,942 201,681 (3,028) 17,942 5,609 1,898 3 Comparatives have been revised for consistency. 178 2016 Westpac Group Annual Report Notes to the financial statements Note 22. Financial risk (continued) Parent Entity 2016 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value1 Derivative financial instruments Available-for-sale securities1 Loans: Loans - housing and personal Loans - business Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets2 Neither past due nor impaired Good/ Satisfactory Strong Weak Total Past due but not impaired Impaired Total Impairment provision Total carrying value 15,186 8,282 18,491 30,796 56,111 320,916 73,671 1,169 143,549 3,449 - 43 9 1,222 6 89,510 75,651 100 - 269 - - - 71 - 1,509 2,533 - - 7 15,186 8,325 18,500 32,089 56,117 411,935 151,855 1,269 143,549 3,725 - - - - - 13,713 3,122 - - 27 - - - 1 - 15,186 8,325 18,500 32,090 56,117 - - - - - 15,186 8,325 18,500 32,090 56,117 425 426,073 (1,033) 425,040 1,399 156,376 (1,677) 154,699 - - 3 1,269 143,549 3,755 - - - 1,269 143,549 3,755 Total 671,620 166,810 4,120 842,550 16,862 1,828 861,240 (2,710) 858,530 Neither past due nor impaired Good/ Satisfactory Strong Weak Total Past due but not impaired Impaired Total Impairment provision Total carrying value - - 2 926 2 - - 2 109 21 13,372 8,741 24,765 47,540 50,315 - - - - - - - - - - 13,372 8,741 24,765 47,540 50,315 - - - - - 13,372 8,741 24,765 47,540 50,315 75,388 71,329 1,034 3,061 381,795 149,756 12,750 2,832 364 394,909 (993) 393,916 1,051 153,639 (1,480) 152,159 Parent Entity 2015 $m Cash and balances with central banks Receivables due from other financial institutions Trading securities and financial assets designated at fair value1,3 Derivative financial instruments Available-for-sale securities1,3 Loans: Loans - housing and personal Loans - business Regulatory deposits with central banks overseas Due from subsidiaries Other financial assets2 13,372 8,741 24,761 46,505 50,292 305,373 75,366 1,042 145,560 2,166 6 - 256 104 1,152 - 7 145,560 2,429 - - 27 - - 2 1,152 145,560 2,458 - - - 1,152 145,560 2,458 839,978 (2,473) 4,338 Total 1 Equity securities are excluded from these balances and as a result the total carrying value will not represent the balance reported on the 842,451 825,425 147,909 673,178 15,609 1,417 balance sheet. 2 Other financial assets include accrued interest of $948 million (2015: $957 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 $1,192 million (2015: $725 million) are also included in this balance which is allocated proportionately based on the trading securities balance classifications. 3 Comparatives have been revised for consistency. Details of collateral held in support of these balances are provided in Note 22.2.8. 2016 Westpac Group Annual Report 179 3 Note 22. Financial risk (continued) 22.2.5 Financial assets that are past due, but not impaired 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 Other financial assets Total1 1 Comparatives have been revised for consistency. 2016 2015 1-5 days 6-89 days 90+ days Total 1-5 days 6-89 days 90+ days Total 3,681 1,052 8 8,834 2,154 18 2,552 15,067 3,997 465 5 3,671 31 838 9 8,867 2,151 20 1,575 14,439 481 3,470 4 33 4,741 11,006 3,022 18,769 4,844 11,038 2,060 17,942 Parent Entity $m Loans: Loans – housing and personal Loans – business Other financial assets Total 2016 2015 1-5 days 6-89 days 90+ days Total 1-5 days 6-89 days 90+ days Total 3,258 878 7 7,951 1,869 15 2,504 13,713 3,648 375 5 3,122 27 640 8 7,573 1,860 16 1,529 12,750 332 2,832 3 27 4,143 9,835 2,884 16,862 4,296 9,449 1,864 15,609 Details of collateral held in support of these balances are provided in Note 22.2.8. 22.2.6 Items 90 days past due, or otherwise in default, and not impaired These include financial assets that are:    currently 90 days or more past due but well secured; assets that were, but are no longer 90 days past due but are yet to satisfactorily demonstrate sustained improvement to allow reclassification; and other assets in default and not impaired, including those where an order for bankruptcy or similar legal action has been taken (e.g. appointment of an Administrator or Receiver). Consolidated $m Australia New Zealand Other Overseas Total Gross amount 2016 3,075 89 17 2015 2,149 130 13 2014 2,134 85 22 3,181 2,292 2,241 22.2.7 Impaired loans The determination of the provision for impairment is one of the Group’s critical accounting assumptions and estimates. Details of this and the Group’s accounting policy for the provision for impairment charges are discussed in Notes 6 and 14. Impaired loans are those for which there is objective evidence that their principal or interest payments may not be recoverable. These include:  Non-performing loans (aligned to an impaired internal credit risk grade);  Unsecured facilities including overdrafts, personal loans and revolving credit facilities which are greater than 90 days past due; and  Restructured loans (the original contractual terms have been modified to provide for concessions for a customer facing financial difficulties). 180 2016 Westpac Group Annual Report Note 22. Financial risk (continued) 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: Notes to the financial statements 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 2016 Loans – Business 136 (76) 60 379 (173) 206 515 (249) 266 1,472 (793) 679 172 (25) 147 1,644 (818) 826 Loans – Housing and Personal 2016 Loans – Business 104 (63) 41 321 (146) 175 425 (209) 216 1,237 (689) 548 162 (24) 138 1,399 (713) 686 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 Total 1,608 (869) 739 551 (198) 353 2,159 (1,067) 1,092 Total 1,341 (752) 589 483 (170) 313 1,824 (922) 902 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 2016 Westpac Group Annual Report 181 3 Note 22. Financial risk (continued) The gross amount of impaired loans, along with the provision for impairment, by type and geography of impaired loans at 30 September, is summarised in the table below: Consolidated $m Australia Non-performing loans Gross amount Impairment provision Net Restructured loans Gross amount Impairment provision Net Overdrafts, personal loans and revolving credit facilities greater than 90 days past due Gross amount Impairment provision Net New Zealand Non-performing loans Gross amount Impairment provision Net Restructured loans Gross amount Impairment provision Net Overdrafts, personal loans and revolving credit facilities greater than 90 days past due Gross amount Impairment provision Net Other Overseas Non-performing loans Gross amount Impairment provision Net Restructured loans Gross amount Impairment provision Net Overdrafts, personal loans and revolving credit facilities greater than 90 days past due Gross amount Impairment provision Net Total net impaired assets 2016 2015 2014 2013 2012 1,589 (769) 820 13 (11) 2 267 (159) 108 218 (95) 123 16 (4) 12 10 (7) 3 44 (21) 23 2 (1) 1 1,220 (572) 648 22 (12) 10 252 (164) 88 348 (104) 244 17 (4) 13 10 (7) 3 25 (13) 12 - - - 1,580 (697) 883 34 (23) 11 203 (132) 71 397 (130) 267 - - - 13 (9) 4 53 (35) 18 59 (21) 38 2,574 (1,099) 1,475 3,212 (1,199) 2,013 34 (23) 11 181 (126) 55 586 (210) 376 - - - 14 (9) 5 89 (54) 35 122 (33) 89 43 (19) 24 186 (126) 60 743 (224) 519 - - - 12 (7) 5 79 (40) 39 110 (25) 85 - - - 1,092 1 (1) - 1,018 1 - 1 1,293 - - - 2,046 1 (1) - 2,745 Details of collateral held in support of these balances are provided in Note 22.2.8. 182 2016 Westpac Group Annual Report Note 22. Financial risk (continued) The following table summarises the interest received and forgone on non-performing loans and restructured financial assets: Notes to the financial statements Consolidated 2016 $m Interest received Interest forgone Australia 2 76 Overseas 12 2 Total 14 78 22.2.8 Collateral held Loans The Group analyses the coverage of the loan portfolio which is secured by the collateral that it holds. Coverage is measured as follows: Coverage Fully secured Partially secured Unsecured Secured loan to collateral value ratio Less than or equal to 100% Greater than 100% but not more than 150% Greater than 150%, or no security held (e.g. can include credit cards, personal loans, and exposure to highly rated corporate entities) The Group’s loan portfolio has the following coverage from collateral held: Neither past due nor impaired Consolidated % Fully secured Partially secured Unsecured Total Parent Entity % Fully secured Partially secured Unsecured Total Past due but not impaired Consolidated % Fully secured Partially secured Unsecured Total Loans – Housing and Personal 96.7 1.1 2.2 100.0 Loans – Housing and Personal 97.7 0.3 2.0 100.0 Loans – Housing and Personal 92.7 3.0 4.3 100.0 2016 Loans – Business 53.5 25.7 20.8 100.0 2016 Loans – Business 55.1 23.9 21.0 100.0 2016 Loans – Business 47.9 28.9 23.2 100.0 Loans – Housing and Personal 96.1 1.4 2.5 100.0 Loans – Housing and Personal 97.5 0.3 2.2 100.0 Total 84.3 8.2 7.5 100.0 Total 86.3 6.6 7.1 100.0 Loans – Housing and Personal 92.5 2.6 4.9 100.0 Total 84.0 8.0 8.0 100.0 2015 Loans – Business 51.3 24.8 23.9 100.0 2015 Loans – Business 51.5 23.7 24.8 100.0 2015 Loans – Business 48.6 27.7 23.7 100.0 Total 82.8 8.4 8.8 100.0 Total 84.6 6.9 8.5 100.0 Total 84.1 7.4 8.5 100.0 2016 Westpac Group Annual Report 183 3 Note 22. Financial risk (continued) Parent Entity % Fully secured Partially secured Unsecured Total Impaired Consolidated % Fully secured Partially secured Unsecured Total Parent Entity % Fully secured Partially secured Unsecured Total Loans – Housing and Personal 95.7 0.6 3.7 100.0 Loans – Housing and Personal 63.9 13.0 23.1 100.0 Loans – Housing and Personal 69.6 6.4 24.0 100.0 2016 Loans – Business 47.8 26.9 25.3 100.0 2016 Loans – Business 11.4 35.4 53.2 100.0 2016 Loans – Business 9.9 38.5 51.6 100.0 Loans – Housing and Personal 95.4 0.7 3.9 100.0 Total 86.8 5.5 7.7 100.0 Loans – Housing and Personal 59.2 16.3 24.5 100.0 Loans – Housing and Personal 67.6 6.9 25.5 100.0 Total 24.0 30.0 46.0 100.0 Total 23.8 31.0 45.2 100.0 2015 Loans – Business 47.5 26.2 26.3 100.0 2015 Loans – Business 23.2 34.8 42.0 100.0 2015 Loans – Business 17.3 34.7 48.0 100.0 Collateral held against financial assets other than loans Consolidated Parent Entity $m Cash, primarily for derivatives Securities under reverse repurchase agreements1 Securities under derivatives and stock borrowing1 2016 1,788 3,260 135 Total other collateral held 1 Securities received as collateral are not recognised on the Group’s balance sheet. 5,183 2015 4,057 3,983 152 8,192 2016 1,730 3,260 135 5,125 Total 86.8 5.3 7.9 100.0 Total 32.6 29.9 37.5 100.0 Total 30.2 27.6 42.2 100.0 2015 3,465 3,983 152 7,600 22.3 Funding and liquidity risk 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 and scenarios. These scenarios inform liquidity limits and strategic planning. The Liquidity Coverage Ratio (LCR) requires banks to hold sufficient high-quality liquid assets, as defined by APRA, 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%. 184 2016 Westpac Group Annual Report Note 22. Financial risk (continued) 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: Notes to the financial statements        deposits; debt issues; proceeds from sale of marketable securities; repurchase agreements with central banks; principal repayments on loans; interest income; and fee income. Group’s funding composition The Group monitors the composition and stability of its funding so that it remains within the Group's funding risk appetite. This includes targeting greater than 75% of total funding from stable sources. Stable sources include customer deposits, wholesale term funding with residual maturity greater than 12 months, securitisation and equity. The Group’s overall funding composition saw a 104 basis point increase in stable sources in 2016 due mainly to an increase in customer deposits and equity. % Customer deposits Wholesale term funding with residual maturity greater than 12 months Wholesale funding with a residual maturity less than 12 months Securitisation Equity Group's total funding 2016 60.9 15.0 15.2 1.2 7.7 100.0 2015 59.3 15.4 16.2 1.7 7.4 100.0 Movements in the Group’s funding composition in 2016 included:  Customer deposits increased by 161 basis points to 60.9% of the Group’s total funding at 30 September 2016, reflecting growth in term deposits.  Long term funding with a residual maturity greater than 12 months decreased, down 36 basis points to 15.0%, as did funding from securitisation, down 47 basis points to 1.2%.  Wholesale funding with a residual maturity less than 12 months also decreased, down 104 basis points to 15.2%. This portfolio had a weighted average maturity of 134 days and is more than covered by the $144.3 billion of unencumbered repo-eligible liquid assets and cash held by the Group.  Funding from equity increased by 27 basis points to 7.7% mainly due to impact of the Share Entitlement Offer in November 2015. Maintaining a diverse funding base with the capacity and flexibility to access a wide range of funding markets, debt investors, currencies, maturities and products is an important part of managing liquidity risk. 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 (See Note 19). In Full Year 2016 the Group raised $41.8 billion of term wholesale funding with a weighted average maturity of 5.4 years (excluding securitisation). This included benchmark senior and covered bond trades in all major currencies, an auto ABS transaction in A$, as well as smaller senior bond trades and private placements. New term issuance also included $3.6 billion of Basel III compliant Additional Tier 1 and Tier 2 capital (see Note 20). Borrowings and outstanding issuances from existing debt programs at 30 September 2016 can be found in Note 16, Note 17, Note 19 and Note 20. 2016 Westpac Group Annual Report 185 3 Note 22. Financial risk (continued) 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 (RBA) or another central bank and are held in cash, Government, State Government and highly rated investment grade securities. 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 a central bank (including internal securitisation) have increased by $5.3 billion to $126.3 billion over the last 12 months. Given the limited amount of government debt in Australia, the RBA, jointly with APRA, has made available to Australian 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%) p.a. to the RBA on the approved facility. The Group has received approval from APRA for a CLF of $49.1 billion for the 2017 calendar year (2016: $58.6 billion). A summary of the Group’s 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 2016 2015 Actual 16,221 1,088 10,062 60,193 56,057 663 Average 19,889 618 7,537 55,645 56,481 493 Actual 14,375 11 10,968 52,815 57,249 201 Average 18,159 355 16,898 43,098 61,111 269 Total liquid assets 139,890 1 Loans are self-originated AAA rated mortgage backed securities which are eligible for repurchase with the RBA and Reserve Bank of New Zealand. 144,284 135,619 140,663 Credit ratings As at 30 September 2016 the Parent Entity's credit ratings were: 2016 S&P Global Ratings Moody’s Investors Services Fitch Ratings Short-term A-1+ Long-term AA- P-1 F1+ Aa2 AA- Outlook Negative Negative Stable 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 currently paid on our wholesale borrowings. On 7 July 2016, S&P affirmed Westpac’s credit rating at AA-, however, as a result of S&P revising the outlook for the Australian sovereign rating to ‘negative’ from ‘stable’, Westpac’s outlook was also revised to ‘negative’ from ‘stable’. On 18 August 2016, Moody’s affirmed Westpac’s credit rating at Aa2, but revised the outlook to ‘negative’ from ‘stable’. The revision in outlook follows Moody’s revision of the Australian Macro Profile to ‘Very Strong-’ from ‘Very Strong’. 22.3.3 Assets pledged as collateral The Group and Parent Entity are required to provide collateral to other financial institutions, as part of standard terms, to secure liabilities. In addition to assets supporting securitisation and covered bond programs disclosed in Note 25, the carrying value of these financial assets pledged as collateral is: $m Cash1 Cash deposit on stock borrowed Securities (including certificates of deposit) Securities pledged under repurchase agreements Total amount pledged to secure liabilities 1 Primarily comprised of Receivables due from other financial institutions. Consolidated Parent Entity 2016 8,177 18 3,041 11,647 22,883 2015 8,079 31 1,854 15,651 25,615 2016 7,490 18 3,041 11,265 21,814 2015 8,064 31 1,854 15,651 25,600 186 2016 Westpac Group Annual Report Notes to the financial statements Note 22. Financial risk (continued) 22.3.4 Contractual maturity of financial liabilities The tables below present cash flows associated with financial liabilities, payable at the balance sheet date, by remaining contractual maturity. The amounts disclosed in the table are the future 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 over the remaining contractual term. Derivatives held for trading and certain liabilities classified in “Other financial liabilities at fair value through income statement” are not managed for liquidity purposes on the basis of their contractual maturity, and accordingly these liabilities are presented in the up to 1 month column. Only the liabilities that the Group manages based on their contractual maturity are presented on a contractual undiscounted basis in the tables below. Consolidated 2016 $m Financial 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 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 12,798 315,122 3,301 28,588 99 2,205 (2,137) 3,443 1,967 2,696 82,287 1,403 - 283 4,140 (3,641) 15,693 543 2,596 177 - 18,267 102,111 16,880 425 516,825 - - - - - - 4,704 28,588 1,140 3,196 498 5,216 9,958 (8,625) 44,516 2,443 6,418 722 23,443 (5,564) (628) (20,595) 100,127 14,306 178,085 - - 4,953 Total financial liabilities excluding loan capital 365,386 103,404 154,139 121,234 15,323 759,486 Loan capital - 85 257 4,353 13,275 17,970 Total undiscounted financial liabilities 365,386 103,489 154,396 125,587 28,598 777,456 Total contingent liabilities and commitments Letters of credit and guarantees Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments 16,435 176,811 235 193,481 - - - - - - - - - - - - - - - - 16,435 176,811 235 193,481 2016 Westpac Group Annual Report 187 3 Note 22. Financial risk (continued) Consolidated 2015 $m Financial 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 financial liabilities excluding loan capital Loan capital1 Total undiscounted financial liabilities1 Total contingent liabilities and commitments Letters of credit and guarantees1 Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments1 1 Comparatives have been revised for consistency. Parent Entity 2016 $m Financial 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 financial liabilities excluding loan capital Loan capital Total undiscounted financial liabilities Total contingent liabilities and commitments Letters of credit and guarantees Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments 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 14,941 306,518 5,941 43,475 129 3,687 (3,580) 5,369 1,289 377,769 573 378,342 17,018 174,391 184 191,593 2,331 78,744 2,250 - 221 4,152 (3,965) 12,930 563 97,226 171 97,397 - - - - 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 2,466 992 16,918 (2,197) (977) (16,112) 98,791 13,750 180,225 - - 4,385 133,980 115,582 14,703 739,260 231 2,805 11,710 15,490 134,211 118,387 26,413 754,750 - - - - - - - - - - - - 17,018 174,391 184 191,593 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 12,782 286,669 2,920 29,223 81 2,182 (2,127) 2,900 142,808 1,932 479,370 - 479,370 15,725 154,783 235 170,743 2,696 66,726 1,403 - 228 3,872 (3,464) 14,221 - 480 86,162 85 86,247 - - - - 2,544 89,864 177 - 18,199 15,181 405 458,845 - - - - - - 4,323 29,223 901 2,887 494 4,591 6,671 (5,889) 37,773 - 2,159 2,473 120 15,318 (2,329) (113) (13,922) 86,633 11,969 153,496 - - - - 142,808 4,571 134,023 105,022 12,875 817,452 257 4,353 13,275 17,970 134,280 109,375 26,150 835,422 - - - - - - - - - - - - 15,725 154,783 235 170,743 188 2016 Westpac Group Annual Report Note 22. Financial risk (continued) Parent Entity 2015 $m Financial 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 financial liabilities excluding loan capital Loan capital1 Total undiscounted financial liabilities1 Total contingent liabilities and commitments Letters of credit and guarantees1 Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments1 1 Comparatives have been revised for consistency. 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 1,243 494,685 573 495,258 16,390 154,375 184 170,949 2,332 66,983 2,250 - 192 3,586 (3,444) 10,568 - 491 82,958 171 83,129 - - - - 1,221 69,461 251 201 11,183 432 - 18,244 233 372 427,273 9,246 - 801 - - 43,917 2,431 324 3,857 5,511 (5,306) 42,765 - 2,210 778 (745) 176 13,682 (169) (13,190) 83,412 10,683 152,245 - - - - 144,650 3,944 116,914 97,692 11,619 803,868 231 2,805 11,710 15,490 117,145 100,497 23,329 819,358 - - - - - - - - - - - - 16,390 154,375 184 170,949 22.3.5 Expected maturity The tables below present the balance sheet based on expected maturity dates, except for deposits, based on historical behaviours. The liability balances in the following tables will not agree to the contractual maturity tables (Note 22.3.4) 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 securities 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, the Group would expect a large proportion of these balances to be retained. 2016 Westpac Group Annual Report 189 3 Note 22. Financial risk (continued) Consolidated 2016 $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 17,015 9,951 14,633 24,886 13,499 88,962 7,409 776 - 5,621 182,752 18,037 497,072 4,752 24,349 59,464 1,184 9,935 614,793 2,173 616,966 (434,214) - - 6,535 7,341 47,166 572,964 6,783 614 726 14,321 656,450 172 15,999 - 11,727 110,438 11,177 910 150,423 13,632 164,055 492,395 Total 17,015 9,951 21,168 32,227 60,665 661,926 14,192 1,390 726 19,942 839,202 18,209 513,071 4,752 36,076 169,902 12,361 10,845 765,216 15,805 781,021 58,181 190 2016 Westpac Group Annual Report Notes to the financial statements Note 22. Financial risk (continued) 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) Parent Entity 2016 $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 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 Due within 12 Months Greater than 12 Months 15,186 8,325 12,847 24,872 12,617 70,686 655 143,549 - 4,598 293,335 17,969 441,290 4,371 24,096 52,196 142,808 8,063 690,793 2,173 692,966 (399,631) - - 5,715 7,218 43,544 509,053 614 - 4,622 11,619 582,385 172 14,452 - 11,113 93,380 - 804 119,921 13,632 133,553 448,832 2016 Westpac Group Annual Report 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 Total 15,186 8,325 18,562 32,090 56,161 579,739 1,269 143,549 4,622 16,217 875,720 18,141 455,742 4,371 35,209 145,576 142,808 8,867 810,714 15,805 826,519 49,201 191 3 Note 22. Financial risk (continued) 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 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) - - 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 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 22.4 Market risk 22.4.1 Value-at-Risk The Group uses VaR as one of the mechanisms for controlling both traded and non-traded market risk. VaR is a statistical estimate of the potential loss in earnings over a specified period of time and to a given level of confidence based on historical market movements. The confidence level indicates the probability that the loss will not exceed the VaR estimate on any given day. VaR seeks to take account of all material market variables that may cause a change in the value of the portfolio, including interest rates, foreign exchange rates, price changes, volatility and the correlations between these variables. The key parameters of VaR are: Holding period Confidence level Period of historical data used Stressed VaR measures 1 day 99% 1 year 10 day, 99% confidence level 192 2016 Westpac Group Annual Report Note 22. Financial risk (continued) 22.4.2 Traded market risk The table below depicts the aggregate VaR, by risk type, for the year ended 30 September: Consolidated and Parent Entity 2016 2015 2014 Notes to the financial statements $m Interest rate risk Foreign exchange risk Equity risk Commodity risk1 Other market risks2 Diversification effect Net market risk 1 2 High 14.0 12.2 2.9 4.5 6.0 n/a 18.7 Low Average 8.8 4.6 1.4 0.1 1.4 2.6 n/a 7.7 5.1 0.3 2.7 3.6 (8.0) 12.5 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 Includes electricity risk. Include prepayment risk and credit spread risk (exposure to movements in generic credit rating bands). 22.4.3 Non-traded market risk Non-traded market risk includes interest rate risk in the banking book (IRRBB) – the risk to interest income from a mismatch between the duration of assets and liabilities that arises in the normal course of business activities. Net interest income (NII) sensitivity is managed in terms of the NaR. A simulation model is used to calculate Westpac’s potential NaR. This 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, over a three year time horizon using a 99% confidence interval, 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. 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 2016 2015 Maximum Exposure Minimum Exposure Average Exposure 1.08 0.85 0.14 (0.11) 0.47 0.23 As at 0.89 0.54 As at 0.12 (0.11) Maximum Exposure Minimum Exposure Average Exposure 0.66 0.41 (0.26) (0.50) 0.23 0.04 Value at Risk – IRRBB1 The table below depicts VaR for IRRBB: $m Consolidated As at 49.5 2016 High 53.6 Low 31.1 Average 39.4 As at 31.1 2015 High 37.5 Low 31.1 Average 34.3 As at 30 September 2016 the Value at Risk – IRRBB for the Parent Entity was $42.9 million (2015: $44.4 million). 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. The Group hedges its exposure to such interest rate risk using derivatives. Further details on the Group’s hedge accounting are discussed in Note 21. The same controls as used to monitor traded market risk allow management to continuously monitor and manage IRRBB. 1 IRRBB VaR includes interest rate risk, credit spread risk on liquid assets and other basis risks as used for internal management purposes. Comparatives have been revised for consistency. 2016 Westpac Group Annual Report 193 3 Note 22. Financial risk (continued) Structural foreign exchange risk Structural foreign exchange risk results from the generation of foreign currency denominated earnings and from Westpac’s capital deployed in offshore branches and subsidiaries, where it is denominated in currencies other than Australian dollars. As exchange rates move, the Australian dollar equivalent of offshore earnings and capital is subject to change that could introduce significant variability to the Bank’s reported financial results and capital ratios. To minimise this impact, Westpac manages offshore earnings and capital on the following basis:  New Zealand future earnings are overseen by Group Asset and Liability Committee (ALCO) and may be hedged as per policy approved by Group ALCO;  Permanent capital (capital permanently employed in an offshore jurisdiction to meet regulatory, prudential and/or strategic requirements) of subsidiaries and branches is not hedged. However, hedges on permanently deployed capital may still be considered in light of the cyclical nature of currency valuations;  Free capital (capital that can be repatriated at Westpac’s discretion), excluding capital denominated in minor currencies, may be fully hedged; and  Minor currencies may not be hedged because of liquidity, expensive pricing and materiality. 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 from an active market to the contrary. Where unobservable information is used, the difference between the transaction price and the fair value (day one profit or loss) is only recognised in the income statement when the inputs become observable, or over the life of the instrument. Critical accounting assumptions and estimates 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 availability of observable inputs is influenced by factors such as: product type;   depth of market activity;  maturity of market models; and  Where unobservable market data is used, more judgement is required to determine fair value. The significance of these judgements depends on the significance of the unobservable input to the overall valuation. Unobservable inputs are generally derived from other relevant market data and adjusted against: complexity of the transaction. economic models; and standard industry practice;    In order to determine a reliable fair value for a financial instrument, management may apply adjustments to the techniques previously described. These adjustments reflect the Group’s assessment of factors that market participants would consider in setting the fair value. observed transaction prices. These adjustments incorporate bid/offer spreads, credit valuation adjustments and funding valuation adjustments. Fair Valuation Control Framework The Group uses a Fair Valuation Control Framework where the fair value is either determined or validated by a function independent of the transaction. This framework formalises the policies and procedures used 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.     194 2016 Westpac Group Annual Report Notes to the financial statements Note 23. Fair values of financial assets and financial liabilities (continued) A key element of the Framework is the WIB Revaluation Committee, comprising senior valuation specialists from within the Group. The WIB Revaluation Committee reviews the application of the agreed policies and procedures to assess that a fair value measurement basis has been applied. The method of determining fair value differs depending on the information available. Fair value hierarchy A financial instrument’s categorisation within the valuation hierarchy is based on the lowest level input that is significant to the fair value measurement. The Group categorises all fair value instruments according to the hierarchy described below. 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: Level 1 instruments The fair value of financial instruments traded in active markets based on recent unadjusted quoted prices. These prices are based on actual arm’s length basis transactions. The valuations of Level 1 instruments require little or no management judgement. Instrument Exchange traded products Balance sheet category Derivatives Foreign exchange products Derivatives Commodity products Derivatives Derivatives Valuation Includes: Exchange traded interest rate futures and options FX spot and futures contracts Commodity, energy and carbon futures Equity products Trading securities and financial assets designated at fair value Other financial liabilities at fair value through income statement Trading securities and financial assets designated at fair value Listed equities and equity indices Non-asset backed debt instruments Available-for-sale securities Australian and New Zealand Commonwealth government bonds Other financial liabilities at fair value through income statement Life insurance assets and liabilities Life insurance assets Life insurance liabilities Listed equities, exchange traded derivatives and short sale of listed equities within controlled managed investment schemes All these instruments are traded in liquid, active markets where prices are readily observable. No modelling or assumptions are used in the valuation. 2016 Westpac Group Annual Report 195 3 Note 23. Fair values of financial assets and financial liabilities (continued) Level 2 instruments The fair value for financial instruments that are not actively traded are determined using valuation techniques which maximise the use of observable market prices. Valuation techniques include:    the use of market standard discounting methodologies; option pricing models; and other valuation techniques widely used and accepted by market participants. Instrument Balance sheet category Includes: Interest rate derivatives Derivatives Interest rate and inflation swaps, swaptions, caps, floors, collars and other non-vanilla interest rate derivatives Valuation Industry standard valuation models are used to calculate the expected future value of payments by product, which is discounted back to a present value. The model’s interest rate inputs are benchmark interest rates such as BBSW and active broker quoted interest rates in the swap, bond and futures markets. Interest rate volatilities are sourced through a consensus data provider. Foreign exchange products Derivatives FX swap, FX forward contracts, FX options and other non-vanilla FX derivatives Derived from market observable inputs or consensus pricing providers using industry standard models. Other credit products Derivatives Single Name and Index credit default swaps (CDS) Commodity products Derivatives Commodity, energy and carbon derivatives Equity products Derivatives Exchange traded equity options, OTC equity options and equity warrants Asset backed debt instruments Trading securities and financial assets designated at fair value Available-for-sale securities Australian residential mortgage backed securities (RMBS) denominated in Australian dollar, offshore RMBS and other asset backed securities (ABS). Valued using an industry standard model that incorporates the credit spread as its principal input. Credit spreads are obtained from consensus data providers. If consensus prices are not available, these are classified as level 3 instruments. Valued using industry standard models. The models calculate the expected future value of deliveries and payments and discounts them back to a present value. The model 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. If consensus prices are not available, these are classified as level 3 instruments. Due to low liquidity exchange traded options are level 2. Valued using industry standard models based on observable parameters such as stock prices, dividends, volatilities and interest rates. Valued using an industry approach to value floating rate debt with prepayment features. The main inputs to the model are the trading margin and the weighted average life (WAL) of the security. These inputs are sourced from a consensus data provider. If consensus prices are not available these are classified as level 3 instruments. 196 2016 Westpac Group Annual Report Note 23. Fair values of financial assets and financial liabilities (continued) Level 2 Instruments (continued) Notes to the financial statements Instrument Balance sheet category Includes: Trading securities and financial assets designated at fair value State and other government bonds, corporate bonds and commercial paper. Non-asset backed debt instruments Available-for-sale securities Regulatory deposits Other financial liabilities through income statement Security repurchase agreements and reverse repurchase agreements over non-asset backed debt securities. Loans at fair value Loans Fixed rate bills Certificates of deposit Deposits and other borrowings Certificates of deposit Debt issues at fair value Debt issues Debt issues Life insurance assets and liabilities Life insurance assets Life insurance liabilities Corporate bonds, over the counter derivatives, units in unlisted unit trusts, life insurance contract liabilities, life investment contract liabilities and external liabilities of managed investment schemes controlled by statutory life funds. Valuation Valued using observable market prices which are sourced from consensus pricing services, broker quotes or inter-dealer prices. 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. Discounted cash flow using market rates offered for deposits of similar remaining maturities. Discounted cash flows, 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. Valued using observable market prices or other widely used and accepted valuation techniques utilising observable market input. 2016 Westpac Group Annual Report 197 3 Note 23. Fair values of financial assets and financial liabilities (continued) Level 3 instruments Financial instruments valued where at least one input that could have a significant effect on the instrument’s valuation is not based on observable market data 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 historical transactions. These valuations are calculated using a high degree of management judgement. Instrument Balance sheet category Includes: Asset backed debt instruments Trading securities and financial assets designated at fair value Available-for-sale securities Australian issued RMBS denominated in foreign currency and synthetic collateralised debt obligations (CDO) Valuation Australian issued RMBS denominated in foreign currency is classified as level 3 as the trading margin is considered unobservable. Trading volumes in these instruments are low. Data from the Australian denominated RMBS market is used to derive the fair value for these instruments. Synthetic CDOs are valued using a model that uses a combination of established analytic and numerical approaches. The model calculates the fair value based on observable and unobservable parameters including credit spreads, recovery rates, correlations and interest rates. Some of the model inputs (e.g. correlations) are indirectly implied or unobservable. Non-asset backed debt instruments Trading securities and financial assets designated at fair value Available-for-sale securities Government securities (predominantly PNG government bonds) Government securities from illiquid markets are classified as level 3. Fair value is monitored by reference to recent issuances. 198 2016 Westpac Group Annual Report Note 23. Fair values of financial assets and financial liabilities (continued) The table below summarises the attribution of financial instruments carried at fair value to the fair value hierarchy: Consolidated 2016 2015 Notes to the financial statements 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 2,431 21 5,047 - 5,076 17,897 32,163 54,914 5,562 9,116 - 1,008 840 43 704 - - - 21,168 32,227 60,665 5,562 14,192 2,446 39 2,071 - 4,560 24,001 48,090 51,811 7,076 8,565 1,008 - 945 1,007 44 918 - - - 27,454 48,173 54,800 7,076 13,125 945 12,575 120,660 1,587 134,822 9,116 140,488 1,969 151,573 $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 Regulatory deposits with central banks overseas Total financial assets carried at fair value1 Financial liabilities measured at fair value on a recurring basis Deposits and other borrowings at fair value - 44,227 44,227 - 46,239 Other financial liabilities at fair value through income statement Derivative financial instruments Debt issues at fair value Life insurance liabilities Total financial liabilities carried at fair value 151 12 - 1,180 4,601 36,047 6,303 11,181 - - 4,752 17 36,076 - - 6,303 12,361 414 35 - 775 8,812 48,230 9,300 10,784 - - 39 18 - 46,239 9,226 48,304 9,318 11,559 1,343 102,359 17 103,719 1,224 123,365 57 124,646 Parent Entity 2016 2015 $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 Regulatory deposits with central banks overseas Total financial assets carried at fair value1 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 financial liabilities carried at fair value 1 Comparatives have been revised for consistency. 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 1,976 21 3,513 - - 15,996 32,027 52,598 5,562 1,008 590 42 50 - - 18,562 32,090 56,161 5,562 1,008 2,446 39 598 - - 21,729 47,457 49,654 7,076 945 721 44 79 - - 24,896 47,540 50,331 7,076 945 5,510 107,191 682 113,383 3,083 126,861 844 130,788 - 43,171 4,220 35,180 3,589 151 12 - 163 - - 17 - 43,171 - 45,331 4,371 35,209 3,589 414 35 - 8,812 47,978 6,415 - - 37 - 45,331 9,226 48,050 6,415 86,160 17 86,340 449 108,536 37 109,022 2016 Westpac Group Annual Report 199 3 Note 23. Fair values of financial assets and financial liabilities (continued) Analysis of movements between Fair Value Hierarchy Levels During the year there were no material transfers between levels of the fair value hierarchy. Transfers into and out of Level 3 are reported using the fair values at the end of year and are discussed in the following table. These have occurred due to changes in observability in the significant inputs in the valuation models. Reconciliation of non-market observables The tables below summarise the changes in financial instruments measured at fair value derived from non-market observable valuation techniques (level 3): Consolidated 2016 $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 2016 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 44 1,007 Available- for-Sale Securities 918 Total Level 3 Assets Derivatives 39 1,969 Debt Issues at Fair Value 18 Total Level 3 Liabilities 57 (1) - 83 (245) - (4) 840 (6) - 15 (11) 1 - 43 - 2 (7) 2 3,135 3,233 (3,215) (3,471) - (136) 704 1 (140) 1,587 (12) - 11 (17) (4) - 17 (9) 9 - - (1) 6 - - (24) - - - - (6) - 11 (41) (4) - 17 (1) Trading Securities and Financial Assets Designated at Fair Value Derivatives 5 988 Available- for-Sale Securities 822 Total Level 3 Assets Derivatives 30 1,815 Debt Issues at Fair Value 18 Total Level 3 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 20 200 2016 Westpac Group Annual Report Note 23. Fair values of financial assets and financial liabilities (continued) Notes to the financial statements Parent Entity 2016 $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 2016 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 Trading Securities and Financial Assets Designated at Fair Value Derivatives 44 721 8 - 72 (207) - (4) 590 (7) - 15 (11) 1 - 42 Available- for-Sale Securities 79 - 2 81 (109) - (3) 50 Total Level 3 Assets Derivatives 37 844 Total Level 3 Liabilities 37 1 2 168 (327) 1 (7) 682 (10) - 11 (17) (4) - 17 (10) - 11 (17) (4) - 17 (1) 1 8 - 9 (1) Trading Securities and Financial Assets Designated at Fair Value Derivatives 5 779 Available- for-Sale Securities 170 Total Level 3 Assets Derivatives 30 954 Total Level 3 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 2016 Westpac Group Annual Report 201 3 Note 23. Fair values of financial assets and financial liabilities (continued) 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 year was $6 million (30 September 2015: $6 million profit). Financial instruments not measured at fair value For financial instruments not measured at fair value on a recurring basis, fair value has been derived as follows: Instrument Loans Valuation Where available, the fair value of loans is based on observable market transactions; otherwise 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 are other borrowings 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. All other financial assets and liabilities For all other financial assets and liabilities, the carrying value approximates the fair value. These items are either short-term in nature, re-price frequently or are of a high credit rating. 202 2016 Westpac Group Annual Report Note 23. Fair values of financial assets and financial liabilities (continued) The following table summarises the estimated fair value and fair value hierarchy of financial instruments not measured at fair value: Notes to the financial statements 671,689 Total financial liabilities 1 The estimated fair value of debt issues includes the impact of changes in Westpac’s credit spreads since origination. 673,988 1,615 Consolidated $m Financial assets not measured at fair value Cash and balances with central banks Receivables due from other financial institutions 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 issues1 Loan capital Other financial liabilities 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 assets1 Financial liabilities not measured at fair value Payables due to other financial institutions Deposits and other borrowings Debt issues2 Loan capital Other financial liabilities 2016 Fair Value Quoted Market Prices (Level 1) Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) Carrying Amount 17,015 9,951 656,364 382 4,501 17,015 7,128 - 382 - 688,213 24,525 18,209 468,844 163,599 15,805 7,531 1,615 - - - - Carrying Amount 14,770 9,583 33 616,240 364 3,077 14,770 7,602 - - 364 - 644,067 22,736 18,731 429,089 161,736 13,840 6,861 4,037 - - - - - 1,887 - - 4,501 6,388 16,594 466,980 164,811 15,773 7,531 - 1,158 - - - 3,077 4,235 14,694 426,726 162,107 13,495 6,861 Total 17,015 9,951 657,594 382 4,501 - 936 657,594 - - 658,530 689,443 - 2,729 - - - 2,729 18,209 469,709 164,811 15,773 7,531 676,033 Total 14,770 9,583 33 - 823 33 617,250 617,250 - - 364 3,077 618,106 645,077 - 3,303 - - - 3,303 18,731 430,029 162,107 13,495 6,861 631,223 2015 Fair Value Quoted Market Prices (Level 1) Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) Total financial liabilities 1 Comparatives have been revised for consistency. 2 The estimated fair value of debt issues includes the impact of changes in Westpac’s credit spreads since origination. 630,257 4,037 623,883 2016 Westpac Group Annual Report 203 3 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 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 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 assets1 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 1 Comparatives have been revised for consistency. Carrying Amount 15,186 8,325 574,177 261 143,549 3,755 745,253 18,141 412,571 141,987 142,808 15,805 6,832 738,144 Carrying Amount 13,372 8,741 13 538,999 207 145,560 2,458 709,350 18,133 380,178 138,300 143,885 13,840 6,105 700,441 2016 Fair Value Quoted Market Prices (Level 1) Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) 15,186 6,441 - 261 - - 21,888 1,557 - - - - - - 1,884 - - - 3,755 5,639 16,584 412,289 143,116 - - 574,947 - 143,549 - 718,496 - 1,098 - - 142,808 15,773 6,832 - - 1,557 594,594 143,906 2015 Fair Value Valuation Techniques (Market Observable) (Level 2) Valuation Techniques (Non-Market Observable) (Level 3) - 1,155 - - - - 2,458 3,613 14,688 379,681 138,628 - - 13 - 145,560 - 685,024 - 1,349 - - 143,885 13,495 6,105 - - 3,445 552,597 145,234 Quoted Market Prices (Level 1) 13,372 7,586 - - 207 - - 21,165 3,445 - - - - - Total 15,186 8,325 574,947 261 143,549 3,755 746,023 18,141 413,387 143,116 142,808 15,773 6,832 740,057 Total 13,372 8,741 13 207 145,560 2,458 709,802 18,133 381,030 138,628 143,885 13,495 6,105 701,276 539,451 539,451 204 2016 Westpac Group Annual Report Notes to the financial statements Note 24. Offsetting financial assets and financial liabilities Accounting policy Financial assets and liabilities are presented net in the balance sheet when the Group has a legally enforceable right to offset them in all circumstances and there is an intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously. The gross assets and liabilities behind the net amounts reported in the balance sheet are disclosed in the table below. Some of the Group’s offsetting arrangements are not enforceable in all circumstances. The assets and liabilities under such agreements are also disclosed in the table below, to illustrate the net balance sheet amount if these future events should occur. The amounts in the tables below may not tie back to the balance sheet if there are balances which are not subject to offsetting arrangements. 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 22.2.2. Consolidated $m 2016 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 Security repurchase agreements5 Deposits and other borrowings3 Other liabilities4 Total liabilities 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 Security repurchase agreements5 Deposits and other borrowings3 Other liabilities4 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 18 - 44,886 (12,659) 3,260 22,036 2,926 73,126 50,110 9,372 29,706 773 - (21,963) (2,148) (36,770) (14,034) - (21,963) (773) 89,961 (36,770) 31 57,678 3,982 15,949 1,369 79,009 58,671 13,908 24,369 105 - (9,505) - (15,757) (959) (26,221) (10,367) - (15,757) (97) 18 32,227 3,260 73 778 36,356 36,076 9,372 7,743 - 53,191 31 48,173 3,982 192 410 52,788 48,304 13,908 8,612 8 - - (22,551) (1,774) (17) (118) - - - (14) (3,246) - - - - (22,551) (1,788) (3,381) (22,551) (8,031) - - - (1) - - (3,041) (9,371) - - 1 7,784 - 73 778 8,636 2,453 - 7,743 - (22,551) (8,032) (12,412) 10,196 - (33,696) - (4,046) (30) (122) 1 10,309 - - - (11) (3,971) - - - - - 192 410 (33,696) (4,057) (4,123) 10,912 (33,696) (7,973) (1,854) 4,781 - - - (6) - - (13,902) - - - 8,612 8 Total liabilities 70,832 1 Consist of stock borrowing arrangements, reported as part of cash collateral in Note 10. 2 Securities purchased under agreement to resell forms part of Note 11. 3 Consist of debt and interest set-off accounts which meet the requirements for offsetting as described above. These accounts form part of business (26,221) (33,696) (15,756) (7,979) 97,053 13,401 loans in Note 13 and part of deposits and other borrowings at amortised cost in Note 17. 4 Gross amounts consist of initial and variation margin held directly with central clearing counterparties, reported as part of Other in Note 27. Where variation margin is payable it is reported as part of Other in Note 29. Amounts offset relate to variation margin. 5 Security repurchase agreements form part of Note 16 recognised at amortised cost and part of Note 18 recognised at fair value through income statement. 2016 Westpac Group Annual Report 205 3 Note 24. Offsetting financial assets and financial liabilities (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 Sheet Other Recognised Financial Instruments Cash Collateral Financial Instrument Collateral Net Amount Parent Entity $m 2016 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 Security repurchase agreements5 Deposits and other borrowings3 Other liabilities4 Total liabilities 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 Security repurchase agreements5 Deposits and other borrowings3 Other liabilities4 Total liabilities 18 - 44,749 (12,659) 3,260 22,036 2,926 72,989 49,243 8,991 29,706 773 - (21,963) (2,148) (36,770) (14,034) - (21,963) (773) 88,713 (36,770) 31 57,045 3,982 15,949 1,369 78,376 58,417 13,908 24,369 105 96,799 - (9,505) - (15,757) (959) (26,221) (10,367) - (15,757) (97) (26,221) 18 32,090 3,260 73 778 36,219 35,209 8,991 7,743 - 51,943 31 47,540 3,982 192 410 52,155 48,050 13,908 8,612 8 70,578 - - (22,431) (1,716) (17) (118) - - - (14) (3,246) - - - - (22,431) (1,730) (3,381) (22,431) (7,344) - - - (1) - - (3,041) (8,990) - - 1 7,825 - 73 778 8,677 2,393 - 7,743 - (22,431) (7,345) (12,031) 10,136 - (33,510) - - - (33,510) - (3,454) (11) - - (3,465) (30) (122) 1 10,454 (3,971) - - 192 - (4,123) 410 11,057 (33,510) (7,958) (1,854) 4,728 - - - (33,510) (6) - - (7,964) (13,902) - - 8,612 - (15,756) 8 13,348 1 Consist of stock borrowing arrangements, reported as part of cash collateral in Note 10. 2 Securities purchased under agreement to resell form part of Note 11. 3 Consist 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 and part of deposits and other borrowings at amortised cost in Note 17. 4 Gross amounts consist of initial and variation margin held directly with central clearing counterparties, reported as part of other in Note 27. Where variation margin is payable it is reported as part of other in Note 29. Amounts offset relate to variation margin. 5 Security repurchase agreements form part of Note 16 recognised at amortised cost and part of Note 18 recognised at fair value through income statement. Other recognised financial instruments These financial assets and liabilities are subject to master netting agreements which are not enforceable in all circumstances, so they are recognised gross in the balance sheet. The offsetting rights of the master netting arrangements can only be enforced if a predetermined event occurs in the future, such as a counterparty defaulting. Cash collateral and financial instrument collateral These amounts are received or pledged under master netting arrangements against the gross amounts of assets and liabilities. Financial instrument collateral typically comprises securities which can be readily liquidated in the event of counterparty default. The offsetting rights of the master netting arrangement can only be enforced if a predetermined event occurs in the future, such as a counterparty defaulting. 206 2016 Westpac Group Annual Report Notes to the financial statements Note 25. Securitisation, covered bonds and other transferred assets The Group enters into transactions in the normal course of business by which financial assets are transferred to counterparties or structured entities. Depending on the circumstances, these transfers may result in derecognition of the assets in their entirety, partial derecognition or no derecognition of the assets subject to the transfer. For the Group’s accounting policy on derecognition of financial assets refer to the notes to the financial statements section before Note 10 titled ‘Financial assets and financial liabilities’. Securitisation Securitisation is the transferring of assets (or an interest in either the assets or the cash flows arising from the assets) to a structured entity which then issues interest bearing debt securities to third party investors. Own assets securitised Securitisation of its own assets is used by Westpac as a funding, liquidity and capital management tool. For securitisation structured entities which Westpac controls, as defined in Note 35, the structured entities are classified as subsidiaries and consolidated. When assessing whether Westpac controls a structured entity, it considers its exposure to and ability to affect variable returns. Westpac may have variable returns from a structured entity through ongoing exposures to the risks and rewards associated with the assets, the provision of derivatives, liquidity facilities, trust management and operational services. Undrawn funding and liquidity facilities of $503 million were provided by Westpac (30 September 2015: $492 million) for the securitisation of its own assets. Customer conduits Westpac also facilitates securitisation structures to arrange funding on behalf of customers in customer conduits through a subsidiary (Waratah Receivables Corporation Limited and its subsidiaries). The assets securitised are not assets of Westpac. The lending provided to the customer conduits is disclosed in Note 10 and the funding liability is disclosed in Note 19. Westpac provided undrawn liquidity facilities to the customer conduits of $936 million at 30 September 2016 (30 September 2015: $823 million). Covered bonds The Group has two covered bond programs relating to Australian residential mortgages (Australian Program) and New Zealand residential mortgages (New Zealand Program). Under these programs, selected pools of residential mortgages are assigned to bankruptcy remote structured entities which provide guarantees on the payments to bondholders. Through the guarantees and derivatives with the structured entities, Westpac has variable returns from these structured entities and consolidated them. Security repurchase agreements Where securities are sold subject to an agreement to repurchase at a predetermined price, they remain recognised on the balance sheet in their original category (i.e. Trading securities or Available-for-sale securities). The cash consideration received is recognised as a liability (Security repurchase agreements). Refer Notes 16 and 18 for further details. 2016 Westpac Group Annual Report 207 3 Note 25. Securitisation, covered bonds and other transferred assets (continued) The following table presents Westpac’s assets transferred and their associated liabilities: Consolidated $m 2016 Securitisation - own assets1 Covered bonds2 Repurchase agreements Total3 2015 Securitisation - own assets1 Covered bonds2 Repurchase agreements Total3 Parent Entity $m 2016 Securitisation - own assets1 Covered bonds2 Repurchase agreements Total 2015 Securitisation - own assets1 Covered bonds2 Repurchase agreements For those liabilities that only have recourse to the transferred assets: Carrying amount of transferred assets Carrying amount of associated liabilities Fair value of transferred assets Fair value of associated liabilities Net fair value position 9,503 45,409 11,265 66,177 12,054 40,263 15,651 67,968 9,445 33,529 9,372 52,346 12,034 35,062 13,908 61,004 9,557 n/a n/a 9,557 9,382 n/a n/a 9,382 12,098 12,016 n/a n/a n/a n/a 12,098 12,016 175 n/a n/a 175 82 n/a n/a 82 For those liabilities that only have recourse to the transferred assets: Carrying amount of transferred assets Carrying amount of associated liabilities Fair value of transferred assets Fair value of associated liabilities Net fair value position 94,853 38,237 11,265 94,364 30,211 8,991 94,944 91,794 n/a n/a n/a n/a 144,355 133,566 94,944 91,794 98,201 35,238 15,651 96,797 31,401 13,908 98,266 96,708 n/a n/a n/a n/a 3,150 n/a n/a 3,150 1,558 n/a n/a Total 1 The carrying amount of assets securitised exceeds the amount of notes issued primarily because the carrying amount includes both principal and 149,090 142,106 96,708 98,266 1,558 income received from the transferred assets. 2 The difference between the carrying values of covered bonds and the assets pledged reflects the over-collateralisation required to maintain the ratings of the covered bonds and also additional assets to allow immediate issuance of additional covered bonds if required. These additional assets can be repurchased by Westpac at its discretion, subject to the conditions set out in the transaction documents. 3 This table excludes securitisation – customer conduits as the assets securitised are not assets of Westpac. 208 2016 Westpac Group Annual Report Notes to the financial statements OTHER ASSETS, OTHER LIABILITIES, COMMITMENTS AND CONTINGENCIES Note 26. Intangible assets Accounting policy Indefinite life intangible assets Goodwill Goodwill acquired in a business combination is initially measured at cost, generally being the excess of: i) ii) the consideration paid; over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Subsequently, goodwill is not amortised but rather tested for impairment. Impairment is tested at least annually or whenever there is an indication of impairment. An impairment charge is recognised when a cash generating unit’s (CGU) carrying value exceeds its recoverable amount. Recoverable amount means the higher of the CGU’s fair value less costs to sell and its value- in-use. Brand names Brand names acquired in a business combination including St George, BT, Bank SA and RAMS, are recognised at cost. Subsequently brand names are not amortised but tested for impairment at least annually or whenever there is an indication of impairment. Finite life intangible assets Finite life intangibles including computer software and core deposits, are recognised initially at cost and subsequently at amortised cost less any impairment. Intangible Goodwill Brand names Useful life Indefinite Indefinite Depreciation method Not applicable Not applicable Computer software 3 to 10 years Straight-line or the diminishing balance method (using the Sum of the Years Digits) Core deposit intangibles Other intangibles 9 years 3 to 8 years Straight-line Straight-line Critical accounting assumptions and estimates Judgement is required in determining the fair value of assets and liabilities acquired in a business combination. A different assessment of fair values would have resulted in a different goodwill balance and different post-acquisition performance of the acquired entity. When assessing impairment of intangible assets, significant judgement is needed to determine the appropriate cash flows and discount rates to be applied to the calculations. The significant assumptions applied to the value-in-use calculations are outlined below. 2016 Westpac Group Annual Report 209 3 Note 26. Intangible assets (continued) $m Goodwill Opening balance Disposals of controlled entities1 Other adjustments Closing balance Computer software Opening balance Additions Impairment Amortisation Other adjustments Closing balance Cost Accumulated amortisation and impairment Carrying amount Brand Names Opening balance Closing balance Carrying amount Core deposit intangibles Opening balance Amortisation Closing balance Cost Accumulated amortisation Carrying amount Other intangible assets Opening balance Additions through business combination Disposals of controlled entities1 Amortisation Exchange rate and other adjustments Closing balance Cost Accumulated amortisation and impairment Carrying amount Consolidated Parent Entity 2016 2015 2016 2015 8,809 - 20 8,829 9,112 (343) 40 8,809 6,653 6,653 - - - - 6,653 6,653 1,654 2,070 1,512 1,856 696 (6) (565) 2 1,781 4,453 (2,672) 1,781 670 670 670 352 (165) 187 1,494 (1,307) 187 89 4 - (40) - 53 398 (345) 53 630 (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) 89 628 (6) (497) (2) 1,635 3,693 (2,058) 1,635 636 636 636 352 (165) 187 1,279 (1,092) 187 27 - - (24) - 3 160 (157) 3 582 (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 Total intangible assets 9,180 1 2015 attributable to the partial sale of BTIM and the sale of banking operations in the Pacific Island nations. Further information is disclosed in Note 11,574 11,520 9,114 35 and Note 41. 210 2016 Westpac Group Annual Report Note 26. Intangible assets (continued) Goodwill has been allocated to the following CGUs: $m Consumer Bank1 Business Bank1 Westpac Retail & Business Banking1 St.George Banking Group1 Westpac Institutional Bank BT Financial Group (Australia) New Zealand Retail Banking BT New Zealand Hastings Notes to the financial statements Consolidated Parent Entity 2016 3,244 2,427 - - 487 2,048 489 14 120 2015 - - 980 4,691 487 2,048 471 12 120 2016 3,039 2,292 - - 487 835 - - - 2015 - - 980 4,351 487 835 - - - Total goodwill 6,653 1 Goodwill has been reallocated to the new CGUs, Consumer Bank and Business Bank, as a result of the restructure of the Group’s Australian retail 8,829 6,653 8,809 and business banking operations. Significant assumptions used in recoverable amount calculations Assumptions are used to determine the CGU’s recoverable amount for goodwill, which is based on value-in-use calculations. Value-in-use refers to the present value of expected cash flows under its current use. The Group discounts the projected cash flows by its adjusted pre-tax equity rate.  Group’s equity rate was 11.0% (2015: 11.0%)  Group’s adjusted pre-tax equity rate for: o Australia was 15.7% (2015: 15.7%) o New Zealand was 15.3% (2015: 15.3%) For the purpose of goodwill impairment testing, the assumptions in the following table are made for each significant CGU. The forecasts applied by management are not reliant on any one particular assumption. Assumption Cash flows Based on: Zero growth rate beyond 2 year forecast Economic market conditions Current market expectations Business performance Observable historical information and current market expectations of the future 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 2016 1,118 1,195 101 744 216 171 1,588 5,133 2015 1,143 740 119 902 199 229 962 4,294 2016 948 1,192 1 305 148 71 1,390 4,055 2015 957 725 2 505 149 96 860 3,294 2016 Westpac Group Annual Report 211 3  Note 28. Provisions Accounting policy Provisions are recognised for present obligations arising from past events where a payment (or other economic transfer) is likely to be necessary to settle the obligation and can be reliably estimated. Employee benefits – long service leave Long service leave must be granted to employees in Australia and New Zealand. The provision is calculated based on the expected payments. When payments are expected to be more than one year in the future, the payments factor in expected employee service periods, average salary increases and are then discounted. Employee benefits – annual leave and other employee benefits The provision for annual leave and other employee benefits (including wages and salaries, inclusive of non-monetary benefits, and any associated on-costs (e.g. payroll tax)) is calculated based on expected payments. Provision for impairment on credit commitments The Group is committed to provide facilities and guarantees as explained in Note 31. If it is probable that a facility will be drawn and the resulting asset will be less than the drawn amount then a provision for impairment is recognised. The provision for impairment is calculated using the same methodology as the provision for impairment charges on loans (refer to Note 14). Critical accounting assumptions and estimates Some of the provisions involve significant judgement about the likely outcome of various events and estimated future cash flows. 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. Provisions carried for long service leave are supported by an independent actuarial report. $m Consolidated Balance at 1 October 2015 Disposals of controlled entities Additions Utilisation Reversal of unutilised provisions Unwinding of discount Other Balance at 30 September 2016 Parent Entity Balance at 1 October 2015 Disposals of controlled entities Additions Utilisation Reversal of unutilised provisions Unwinding of discount Other Balance at 30 September 2016 Long Service Leave Annual Leave and Other Employee Benefits Litigation and Non- Lending Losses Provision for Impairment on Credit Commitments Leasehold Premises Restructuring Provisions 348 - 71 (43) - - 3 379 320 - 66 (40) - - - 346 755 (1) 915 (961) (12) - - 696 677 (1) 860 (890) (12) - (18) 616 28 - 33 (28) (1) - - 32 16 - 26 (18) - - - 24 304 - - - - 8 (40) 272 273 - - - - 7 (40) 240 28 - 13 (14) - - - 27 28 - - (1) - - - 27 26 - 11 (20) (3) - - 14 18 - 11 (12) (3) - - 14 Total 1,489 (1) 1,043 (1,066) (16) 8 (37) 1,420 1,332 (1) 963 (961) (15) 7 (58) 1,267 Legislative liabilities The Group had the following assessed liabilities as at 30 September 2016:    212 $15 million (2015: $16 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); $11 million (2015: $13 million) based on actuarial assessment as a self-insurer under the Accident Compensation Act 1985 (Victoria); $4 million (2015: $4 million) based on actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1986 (South Australia); 2016 Westpac Group Annual Report Notes to the financial statements Note 28. Provisions (continued)  $2 million (2015: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Rehabilitation Act 2003 (Queensland);    $1 million (2015: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation Act 1951 (Australian Capital Territory); $1 million (2015: $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 (2015: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1988 (Tasmania). Adequate provision has been made for these liabilities in the provision for annual leave and other employee benefits above. 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. Consolidated Parent Entity 2016 388 331 282 2,579 255 1,695 1,124 2,350 9,004 2015 343 284 192 2,626 274 1,007 1,276 2,114 8,116 2016 - - 256 2,262 - 1,692 884 2,192 7,286 2015 - - 175 2,301 - 998 958 2,001 6,433 Note 30. Operating lease commitments Westpac leases various commercial and retail premises and related plant and equipment. The lease commitments at 30 September are as follows: $m Due within one year Due after one year but not later than five years Due after five years Total lease commitments Consolidated Parent Entity 2016 537 1,319 1,275 3,131 2015 553 1,391 1,436 3,380 2016 463 1,120 1,046 2,629 2015 480 1,189 1,207 2,876 Operating leases are entered into to meet the business needs of entities in the Group. 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. The future minimum lease payments receivable from non-cancellable sub-leases were $11 million (2015: $10 million) for both the Group and Parent Entity. 2016 Westpac Group Annual Report 213 3 Note 31. Contingent liabilities, contingent assets and credit commitments Undrawn credit commitments The Group enters into various arrangements with customers which are only recognised in the balance sheet when called upon. These arrangements include commitments to extend credit, bill endorsements, financial guarantees, standby letters of credit and underwriting facilities. They expose the Group to liquidity risk when called upon and also to credit risk if the customer fails to repay the amounts owed at the due date. The maximum exposure to credit loss is the contractual or notional amount of the instruments disclosed below. Some of the arrangements can be cancelled by the Group at any time and a significant portion is expected to expire without being drawn. The actual required liquidity and credit risk exposure is therefore less than the amounts disclosed. The Group uses the same credit policies when entering into these arrangements as it does for on-balance sheet instruments. Refer to Note 22 for further details of liquidity risk and credit risk management. Undrawn credit commitments excluding derivatives at 30 September are as follows: $m Undrawn credit commitments Letters of credit and guarantees1 Commitments to extend credit2 Other Consolidated Parent Entity 2016 2015 2016 2015 16,435 17,018 15,725 16,390 176,811 174,391 154,783 154,375 235 184 235 184 Total undrawn credit commitments 1 Letters of credit and guarantees are undertakings to pay, against presentation documents, an obligation in the event of a default by a customer. 193,481 191,593 170,743 170,949 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. 2 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 2016 the Group had offered $5.6 billion (2015: $9.3 billion) of facilities to customers, which had not yet been accepted. Consolidated 2016 $m Letters of credit and guarantees Commitments to extend credit Other Total undrawn credit commitments Up to 1 Year 9,063 66,728 63 75,854 Over 1 to 3 Years 3,479 35,090 - 38,569 Over 3 to 5 Years 1,027 21,085 73 22,185 Over 5 Years 2,866 53,908 99 56,873 Total 16,435 176,811 235 193,481 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. Contingent liabilities 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 provisions have been made where appropriate.  As part of ASIC’s ongoing industry-wide investigations into the interbank short-term money market and its impact on the setting of the bank bill swap reference rate (BBSW), on 5 April 2016, ASIC commenced civil proceedings against Westpac in the Federal Court of Australia, alleging certain misconduct including market manipulation and unconscionable conduct. The conduct that is the subject of the proceedings is alleged to have occurred between 6 April 2010 and 6 June 2012. Westpac is defending these proceedings. ASIC is seeking from the court declarations that Westpac breached various provisions of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth), pecuniary penalties of unspecified amounts and orders requiring Westpac to implement a comprehensive compliance program for persons involved in Westpac’s trading in the relevant market. In August 2016, a class action was filed in the United States District Court for the Southern District of New York against Westpac and a large number of other Australian and international banks alleging misconduct in relation to BBSW. These proceedings are at an early stage and the level of damages sought has not been specified. Westpac is defending these proceedings.  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 is defending these proceedings. 214 2016 Westpac Group Annual Report Notes to the financial statements Note 31. Contingent liabilities, contingent assets and credit commitments (continued) Regulatory reviews Globally, regulators continue to progress various reviews involving the financial services sector. The nature of these reviews can be wide ranging and, for example, in Australia currently include investigations by regulators into potential misconduct in financial services, including in relation to Spot FX trading and financial advice. During the year, Westpac has received various notices and requests for information from its regulators as part of both industry-wide and Westpac-specific reviews. The outcomes and total costs associated with such reviews remains uncertain. Financial Claims Scheme Under the Financial Claims Scheme (FCS) the Australian Government provides depositors a free guarantee of deposits in eligible ADIs up to and including $250,000. The FCS applies to an eligible ADI if APRA has applied for the winding up of the ADI and the responsible Australian Government minister has declared that the FCS applies to the ADI. The Financial Claims Scheme (ADIs) Levy Act 2008 provides for the imposition of a levy to fund the excess of certain APRA FCS costs connected to an ADI. The levy would be imposed on liabilities of eligible ADIs to their depositors and cannot be more than 0.5% of the amount of those liabilities. Contingent tax risk Tax authorities are 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 holds appropriate provisions. Settlement risk The Group is subject to a credit risk exposure in the event that another counterparty fails to settle for its payments clearing activities (including foreign exchange). The Group seeks 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 mechanism. Parent Entity guarantees and undertakings The Parent Entity makes the following guarantees and undertakings to subsidiaries:   letters of comfort for certain subsidiaries which recognise that Westpac has a responsibility that those subsidiaries continue to meet their obligations; and guarantees to certain wholly owned subsidiaries which are Australian financial services or credit licensees to comply with legislative requirements. Each guarantee is capped at $40 million per year and can only be utilised if the entity concerned becomes legally obliged to pay for a claim under the relevant licence. The Parent Entity has a right to recover any funds payable under the guarantees from the relevant subsidiary. 2016 Westpac Group Annual Report 215 3 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. Other equity instruments and non-controlling interests The convertible notes are presented in the Parent Entity balance sheet as equity in other equity instruments because Westpac has the discretion, but no obligation, to deliver cash or a variable number of shares in settlement of the notes during their term. The trust preferred securities are presented in the consolidated balance sheet as non-controlling interests because they are equity instruments issued by a subsidiary of the Group. 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 and recognised in the income statement 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 disposed of 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 equity-settled 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. The reserve is eliminated on consolidation. Other reserves for the Group consist of transactions relating to changes 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 Share capital Ordinary share capital, fully paid Restricted Share Plan (RSP) treasury shares held1 Other treasury shares held2 Total treasury shares held Total share capital Other equity instruments Convertible notes Non-controlling interests Trust preferred securities Other non-controlling interests Total non-controlling interests 1 2016: 3,472,010 shares held (2015: 4,478,150). 2 2016: 5,852,290 shares held (2015: 5,423,555). Consolidated Parent Entity 2016 2015 2016 2015 33,469 29,280 33,469 29,280 (366) (89) (455) (304) (81) (385) (366) (3) (369) (304) (4) (308) 33,014 28,895 33,100 28,972 - - 61 61 - 755 62 817 - - - - 755 - - - 216 2016 Westpac Group Annual Report Notes to the financial statements Note 32. Shareholders’ equity (continued) Ordinary shares Westpac does not have authorised capital and the ordinary shares have no par value. Ordinary shares entitle the holder to participate in dividends and, in the event of Westpac winding up, to a share of the proceeds in proportion to the number of and amounts paid on the shares held. Each ordinary share entitles the holder to one vote, either in person or by proxy, at a shareholder meeting. Reconciliation of movement in number of ordinary shares 2015 3,109,048,309 - 43,999,852 30,859,625 3,183,907,786 Consolidated and Parent Entity (number) Opening balance Share entitlement offer 1 Dividend reinvestment plan 2 Dividend reinvestment plan underwrite 3 2016 3,183,907,786 138,998,404 23,260,663 - Closing balance 1 The price for the issuance of shares in relation to the entitlement offer was $25.50. Net issue costs of $36 million were recognised in contributed 3,346,166,853 equity. 2 The price for the issuance of shares in relation to the dividend reinvestment plan for the 2015 final dividend was $31.83 and the 2016 interim dividend was $30.43. 3 The price for the issuance of shares in relation to the 2015 interim dividend reinvestment plan underwrite was $32.40. Ordinary shares purchased on market Consolidated and Parent Entity For share-based payment arrangements: Employee share plan (ESP) Restricted share plan (RSP)1 WPP - options exercised2 WPP - share rights exercised LTI - options exercised2 LTI - share rights exercised CEOPP - share rights exercised As treasury shares: Treasury shares purchased (excluding RSP)3 Treasury shares sold 2016 2016 Number Average Price ($) 890,112 1,919,802 84,182 289,807 5,858 334,095 68,020 1,234,152 (805,417) 30.45 32.46 30.97 30.70 31.11 31.44 31.45 28.84 29.06 Total ordinary shares purchased/(sold) on market4 1 Ordinary shares allocated to employees under the RSP are classified as treasury shares until the shares vest. During the year, 1,919,802 RSP 4,020,611 treasury shares were issued to employees. 2 The average exercise price received was $23.05 on the exercise of the WPP options and $29.96 on the exercise of the LTI options. 3 Treasury shares include ordinary shares held by statutory life funds and managed investment schemes and ordinary shares held by Westpac for equity derivatives sold to customers. 4 The purchase of ordinary shares on market resulted in a tax benefit of $2.1 million being recognised as contributed equity. For details of the share-based payment arrangements refer to Note 37. Convertible notes and 2006 Trust Preferred Securities (2006 TPS) In 2006, a Westpac controlled entity, Westpac TPS Trust, issued 7,627,375 2006 TPS at $100 each. The TPS were preferred units in the Westpac TPS Trust. The Westpac TPS Trust also issued one ordinary unit to Westpac at $100. The principal assets of Westpac TPS Trust were 7,627,375 convertible notes issued by Westpac for $762,737,500. On 30 June 2016, the convertible notes and 2006 TPS were redeemed in full for cash. 2016 Westpac Group Annual Report 217 3 Note 32. Shareholders’ equity (continued) Reconciliation of movement in reserves $m Available-for-sale securities reserve Opening balance Net gains/(losses) from changes in fair value Income tax effect Transferred to income statements Income tax effect Exchange differences Closing balance Share-based payment reserve Opening balance Share-based payment expense Closing balance Cash flow hedging reserve Opening balance Net gains/(losses) from changes in fair value Income tax effect Transferred to income statements Income tax effect Closing balance Foreign currency translation reserve Opening balance Exchange differences on translation of foreign operations (net of associated hedges) Closing balance Other reserves Opening balance Transactions with owners Closing balance Group's share of reserves of associates Total reserves Consolidated Parent Entity 2016 2015 2016 2015 (25) 53 (15) (8) 2 3 10 1,217 116 1,333 26 (304) 89 21 (4) (172) (175) (238) (413) (17) (2) (19) (12) 727 129 (148) 46 (73) 21 - (25) 1,076 141 1,217 162 (59) 14 (131) 40 26 (190) 15 (175) (1) (16) (17) 5 1,031 (41) 69 (19) (1) - 2 10 1,108 113 1,221 131 (193) 58 (106) 32 (78) (299) (105) (404) 41 - 41 - 790 79 (152) 47 (21) 6 - (41) 983 125 1,108 150 140 (42) (167) 50 131 (332) 33 (299) 41 - 41 - 940 218 2016 Westpac Group Annual Report Notes to the financial statements Note 33. Capital adequacy 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. 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 the 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 external stakeholders’ perspectives, including rating agencies, equity investors and debt investors. APRA supervises various financial services providers in Australia, including Westpac Banking Corporation. APRA’s capital adequacy regulations are generally consistent with, but more conservative than, the Basel Committee on Banking Supervision (BCBS)’s regulations. APRA’s minimum capital adequacy requirements under the Basel III framework are: Ratio Definition Common Equity Tier 1 capital ratio of at least 4.5% of risk weighted assets (RWA) Tier 1 capital ratio of at least 6.0% of RWA Total Regulatory Capital ratio of at least 8.0% of RWA Subject to certain limitations, paid-up share capital, retained profits and certain reserves, less certain intangible assets, capitalised expenses, and retained earnings in insurance and funds management subsidiaries. Common Equity Tier 1 capital plus AT1 capital; securities with loss absorbing characteristics that are not already included in Common Equity Tier 1 capital. Refer to Notes 20 and 32 for details. Tier 1 capital plus Tier 2 capital; other components of capital that have loss absorbing characteristics and contribute to Westpac’s capacity to absorb losses but are lower quality than Tier 1 capital. Refer to Note 20 for details. From 1 January 2016, APRA required Australian banks to hold capital buffers above minimum capital requirements. At 30 September 2016, the capital conservation buffer (CCB) applicable to Westpac totals 3.5% of RWA, and includes a base requirement of 2.5% and Westpac’s Domestic Systemically Important Banks (D-SIB) surcharge of 1%. At APRA’s discretion, a further countercyclical buffer of between 0% and 2.5% of RWA may be applied. The countercyclical buffer is currently set to zero in Australia and New Zealand. Westpac’s preferred range for its Common Equity Tier 1 capital Ratio is calibrated to provide a buffer above the sum of the 4.5% minimum Common Equity Tier 1 Capital requirement and 3.5% CCB, which together total 8% of RWA. Should Westpac’s Common Equity Tier 1 Capital Ratios fall within the CCB (currently between 4.5% and 8%), restrictions on distribution apply. Distributions for this purpose are defined as payment of dividends, discretionary bonuses and AT1 Capital distributions. Further details of Westpac's capital ratios are provided in Section 2 in the Review of Group Operations: Capital resources. 2016 Westpac Group Annual Report 219 3 Note 34. Dividends $m Dividends not recognised at year end Since year end the Directors have proposed the following dividends: Final dividend 94 cents per share (2015: 94 cents, 2014: 92 cents) all fully franked at 30% Total dividends not recognised at year end Consolidated Parent Entity 2016 2015 2014 2016 2015 3,142 3,142 2,988 2,988 2,856 2,856 3,145 3,145 2,993 2,993 Shareholders can choose to receive their dividends as cash or reinvest for an equivalent number of shares under the Dividend Reinvestment Plan (DRP). The Board has decided to issue new shares to satisfy the DRP for the 2016 final dividend. The DRP will not include a discount. Details of dividends recognised during the year are provided in the statement of changes in equity. Australian franking credits Australian franking credits available to the Parent Entity for subsequent years are $911 million (2015: $793 million; 2014: $565 million). This is calculated as the year end franking credit balance, adjusted for the Australian current tax liability and the proposed 2016 final dividend. New Zealand imputation credits New Zealand imputation credits of NZ$0.07 (2015: NZ$0.06, 2014: NZ$0.06) per share will be attached to the proposed 2016 final dividend. New Zealand imputation credits available to the Parent Entity for subsequent years are NZ$423 million (2015: NZ$522 million, 2014: NZ$562 million). This is calculated on the same basis as the Australian franking credits but using the New Zealand current tax liability. GROUP STRUCTURE Note 35. Investments in subsidiaries and associates Accounting policy Subsidiaries Westpac’s subsidiaries are entities which it controls and consolidates as it is exposed to, or has rights to, variable returns from the entity, and can affect those returns through its power over the entity. When the Group ceases to control a subsidiary, any retained interest in the entity is remeasured to fair value, with any resulting gain or loss recognised in the income statement. Changes in the Group’s ownership interest in a subsidiary which do not result in a loss of control are accounted for as transactions with equity holders in their capacity as equity holders. 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. All transactions between Group entities are eliminated on consolidation. Associates Associates are entities in which the Group has significant influence, but not control, over the operating and financial policies. The Group accounts for associates using the equity method. The investments 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 the associate’s profit (or loss). Dividends received from the associate reduce the investment in associate. 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 has variable returns from its involvement with the trusts, and has the ability to affect those returns through its power over the trusts. These unit trusts are excluded from the table. 220 2016 Westpac Group Annual Report Notes to the financial statements Note 35. Investments in subsidiaries and associates (continued) The following table includes the material controlled entities of the Group as at 30 September 2016. Country of Incorporation Name 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 Crusade ABS Series 2015-1 Trust Crusade Trust No.2P of 2008 Hastings Funds Management Limited Hastings Management Pty Limited Series 2008-1M WST Trust Series 2013-1 WST Trust Series 2013-2 WST Trust Series 2014-1 WST Trust Series 2014-2 WST Trust Series 2015-1 WST Trust St.George Finance Limited St.George Life Limited St.George Motor Finance Limited Waratah Receivables Corporation Pty Limited1 Waratah Securities Australia Limited1 1 The Group has funding agreements in place with these entities and is deemed to have exposure to the associated risks and rewards. These entities are consolidated where the Group 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. Australia Westpac Covered Bond Trust Australia Westpac Equity Holdings Pty Limited Australia Westpac Financial Services Group Limited Australia Westpac General Insurance Limited Australia Westpac General Insurance Services Limited Australia Westpac Lenders Mortgage Insurance Limited Australia Westpac Life Insurance Services Limited Australia Westpac Overseas Holdings Pty Limited Australia Westpac Securitisation Holdings Pty Limited Australia BT Funds Management (NZ) Limited Australia Westpac Cash PIE Fund1 Australia Westpac Financial Services Group-NZ-Limited Australia Westpac Group Investment-NZ-Limited Australia Westpac Life-NZ-Limited Australia Westpac New Zealand Group Limited Australia Westpac New Zealand Limited Australia Westpac NZ Covered Bond Limited2 Australia Westpac NZ Securitisation Limited2 Australia Westpac Securities NZ Limited Australia Westpac Term PIE Fund1 Australia Westpac Bank-PNG-Limited Australia Country of Incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Papua New Guinea 2 The Group indirectly owns 19% of Westpac NZ Covered Bond Limited (WNZCBL) and Westpac NZ Securitisation Limited (WNZSL), however, due to contractual and structural arrangements both WNZCBL and WNZSL are considered to be a controlled entity within the Group. The following material controlled entities have been granted relief from compliance with the balance date synchronisation provisions in the Corporations Act 2001:  Westpac Cash PIE Fund; and  Westpac Term PIE Fund. The following material controlled entities are not wholly owned: Percentage Owned St.George Motor Finance Limited Westpac Bank-PNG-Limited 2016 75.0% 89.9% 2015 75.0% 89.9% Non-controlling interests Details of the balance of non-controlling interests are set out in Note 32. There are no non-controlling interests that are material to the Group. 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 The Group’s material investments in associates balance is an investment in BTIM of $718 million (2015: $756 million). 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 of 29.5% at 30 September 2016 (31.0% at 30 September 2015). The Group lost control of BTIM on 23 June 2015. 2016 Westpac Group Annual Report 221 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 (29.5%) Equity accounting adjustments Group's share in net profit recognised in the income statement Group's share of other comprehensive income (29.5%) 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 (29.5%) 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 12 months ended 30 September 2016 3 months ended 30 September 2015 455 142 (83) 59 42 (22) 20 (24) 7 3 34 913 (169) 744 220 (6) 504 718 807 120 33 19 52 10 (5) 5 6 (1) 10 - 990 (228) 762 236 (6) 526 756 868 Changes in ownership of subsidiaries Businesses disposed during the year ending 30 September 2016 Pacific Islands Westpac sold its banking operations in Solomon Islands and Vanuatu to the Bank of South Pacific Limited (BSP). Settlement occurred on 30 October 2015 and 1 July 2016 respectively, with a gain of $1 million recognised in non-interest income. The total cash consideration paid, net of transaction costs and cash held, was $104 million. Businesses disposed during the year ending 30 September 2015 Partial sale of BT Investment Management Limited (BTIM) Westpac sold a 28% 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 held 31% of BTIM. A gain on sale of $1,036 million was recognised in non-interest income. This gain consisted 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 is accounted for using the equity method. The total cash consideration received, net of transaction costs, was $654 million. Pacific Islands Westpac sold its banking operations in Samoa, Cook Islands, and Tonga to the BSP. Settlement occurred on 10 July 2015, with a loss of $3 million recognised in operating expenses. The total cash consideration received, net of transaction costs, was $85 million. 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 cash consideration received, net of transaction costs, was $4 million. Details of the assets and liabilities over which control was lost are provided in Note 41. 222 2016 Westpac Group Annual Report Notes to the financial statements Note 36. Structured entities Accounting policy Structured entities are generally created to achieve a specific, defined objective and their operations are restricted such as only purchasing specific assets. Structured entities are commonly financed by debt or equity securities that are collateralised by and/or indexed to their underlying assets. The debt and equity securities issued by structured entities may include tranches with varying levels of subordination. Structured entities are classified as subsidiaries and consolidated if they meet the definition in Note 35. If the Group does not control a structured entity then it will not be consolidated. 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 funds. Consolidated structured entities Securitisation and covered bonds The Group uses structured entities to securitise its financial assets, including two covered bond programs to assign pools of residential mortgages to bankruptcy remote structured entities. The Group also uses structured entities to give its customers access to funding from commercial paper markets. Refer to Note 25 for further details. Group managed funds The Group acts as the responsible entity and/or fund manager for various investment management funds. As fund manager, if the Group is deemed to be acting as a principal rather than agent then it consolidates the fund. The principal vs. agent decision requires judgement of whether the Group has sufficient exposure to variable returns. Non-contractual financial support The Group does not provide non-contractual financial support to these consolidated structured entities. Unconsolidated structured entities The Group has interests in various unconsolidated structured entities including debt or equity instruments, guarantees, liquidity and other credit support arrangements, lending, loan commitments, certain derivatives and investment management agreements. Interests exclude non-complex derivatives (e.g. interest rate or currency swaps), instruments that create, rather than absorb, variability in the entity (e.g. credit protection under a credit default swap), and lending to a structured entity with recourse to a wider operating entity, not just the structured entity. The Group’s main interests in unconsolidated structured entities, which arise in the normal course of business, are: Trading securities Available-for-sale securities The Group actively trades interests in structured entities and normally has no other involvement with the structured entity. The Group earns interest income on these securities and also recognises fair value changes through trading income in non-interest income. The Group holds mortgage-backed securities for liquidity purposes and the Group normally has no other involvement with the structured entity. These assets are highly-rated, investment grade and eligible for repurchase agreements with the RBA or another central bank. The Group earns interest income and net gains or losses on selling these assets are recognised in the income statements. Loans and other credit commitments The Group lends to unconsolidated structured entities, subject to the Group’s collateral and credit approval processes, in order to earn interest and fee income. The structured entities are mainly property trusts, securitisation entities and those associated with project and property financing transactions. Investment management agreements The Group manages funds that provide customers with investment opportunities. The Group also manages superannuation funds for its employees. The Group earns management and performance fee income which is recognised in non-interest income. The Group may also retain units in these investment management funds, primarily through life insurance subsidiaries. The Group earns fund distribution income and recognises fair value movements through non-interest income. 2016 Westpac Group Annual Report 223 3 Note 36. Structured entities (continued) 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 does not take into account any collateral or hedges that will reduce the risk of loss.  For on-balance sheet instruments, including debt and equity instruments in and loans to unconsolidated structured entities, the maximum exposure to loss is the carrying value; and  For off-balance sheet instruments, including liquidity facilities, loan and other credit commitments and guarantees, the maximum exposure to loss is the notional amounts. Consolidated 2016 $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 s heet exposures Investment in Third Party Mortgage and Other Asset-Backed Securities1 Financing to Securitisation Vehicles Group Managed Funds Interests in Other Structured Entities - 1,955 4,253 - 90 3 6,301 - 936 - - 18,339 - - 19,275 3,469 - 4 - 111 291 55 461 62 - 1,870 - 23,673 2,450 - 27,993 7,078 Total 936 3,829 4,253 42,123 2,831 58 54,030 10,609 Maximum exposure to loss Size of structured entities2 1 The Group’s interests in third party mortgage and other asset-backed securities are senior tranches of notes 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 146,488 22,744 40,320 62,397 35,071 22,744 6,301 523 64,639 271,949 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 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 s heet exposures Investment in Third Party Mortgage and Other Asset-Backed Securities1 Financing to Securitisation Vehicles Group Managed Funds Interests in Other Structured Entities - 2,902 5,173 - 132 10 8,217 - 823 - - 16,091 - - 16,914 4,256 - 20 - 9 282 54 365 59 - 2,973 - 23,203 2,165 - 28,341 7,789 Total 823 5,895 5,173 39,303 2,579 64 53,837 12,104 Maximum exposure to loss Size of structured entities2 1 The Group’s interests in third party mortgage and other asset-backed securities are senior tranches of notes 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 148,085 21,170 36,130 57,739 67,148 21,170 8,217 424 65,941 294,142 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 does not provide non-contractual financial support to these unconsolidated structured entities. 224 2016 Westpac Group Annual Report 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 a component of overall compensation for services provided. Share-based payment arrangements comprise options to purchase shares at a pre-determined price (share options), rights to receive shares for free (share rights) and restricted shares (issued at no cost). Share-based payment arrangements typically require a specified period of continuing employment (the service period or vesting period) and may include performance targets (vesting conditions). Specific details of each arrangement are provided below. Share-based payments must be classified as either cash-settled or equity-settled arrangements. The Group’s significant arrangements are equity-settled, as the Group is not obliged to settle in cash. Options and share rights Options and share rights are equity-settled arrangements. The fair value is measured at grant date and is recognised as an expense over the service period, with a corresponding increase in the share-based payment reserve in equity. The fair value of share options and share rights is estimated at grant date using a binomial/Monte Carlo simulation pricing model which incorporates the vesting and market-related performance targets of the grants. The fair value of share options and rights excludes non-market vesting conditions such as employees’ continuing employment by the Group. The non-market vesting conditions are instead incorporated in estimating the number of share options and rights that are expected to vest and are therefore recognised as an expense. At each reporting date the non-market vesting assumptions are revised and the expense recognised each year takes into account the most recent estimates. The market-related assumptions are not revised each year as the fair value is not re-estimated after the grant date. Restricted share plan (RSP) The RSP is accounted for as an equity-settled arrangement. The fair value of shares allocated to employees for nil consideration is recognised as an expense over the vesting period with a corresponding increase in the share-based payments reserve 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. Employee share plan (ESP) The value of shares expected to be allocated to employees for nil consideration is recognised as an expense over the financial year and provided for as other employee benefits. The fair value of any ordinary shares issues to satisfy the obligation to employees is recognised in equity. Alternatively, shares may be purchased on market to satisfy the obligation to employees. Scheme name Westpac Long Term Incentive Plan (LTI) Westpac Performance Plan (WPP) Restricted Share Plan (RSP) Employee Share Plan (ESP) Type of share- based payment Share rights (allocated at no cost). Share rights (allocated at no cost). Share options (no longer issued since October 2009). Westpac ordinary shares (allocated at no cost). Westpac ordinary shares (allocated at no cost) of up to $1,000 per employee per year. How it is used Share options (no longer issued since October 2009). To incentivise senior management based on long-term performance. The mandatory deferral of a portion of short-term incentives for New Zealand employees and key employees based outside Australia. To reward key employees in respect of the previous financial year. To reward eligible Australian employees (unless they have already been provided instruments under another scheme for the previous year). Exercise price: Shares rights Nil. Nil. Share options The market price of Westpac shares at the start of the performance period. The market price of Westpac shares at the start of the performance period. n/a. n/a. n/a. n/a. 2016 Westpac Group Annual Report 225 3 Scheme name Performance targets Service conditions Vesting period (period over which expenses are recognised) Treatment at end of term Does the employee receive dividends and voting rights during the vesting period? Note 37. Share-based payments (continued) Westpac Long Term Incentive Plan (LTI) Westpac Performance Plan (WPP) Restricted Share Plan (RSP) Employee Share Plan (ESP) None. None. None. Relative total shareholder return (TSR) over a 4 year performance period and Cash EPS compound annual growth rate (CAGR) over a three year performance period plus 1 year holding lock, each applying to half of the award1 (for awards granted from October 2014)2. Continued employment throughout the vesting period or as determined by the Board. Continued employment throughout the vesting period or as determined by the Board. 4 years2 Defined period set out at time of grant. Lapse if not exercised. For those with performance targets, lapse if not exercised. Shares must normally remain within the ESP for three years from granting unless the employee leaves Westpac. 1 year Shares are released at the end of the restriction period or when the employee leaves Westpac. Continued employment throughout the restriction period or as determined by the Board. Defined period set out at time of grant. Vested shares are released from the RSP at the end of the vesting period. Shares granted prior to October 2009 may be held in the RSP for up to 10 years from the grant date. No No Yes Yes 1 Details of the TSR and CAGR performance targets are provided in the Remuneration Report in section 4.1(c). 2 For awards granted from October 2011 to October 2014 both the TSR and CAGR are subject to a three year performance period and vesting period. For awards granted before October 2011 all the awards were subject to a TSR hurdle over an initial three year performance period with subsequent performance testing possible at the fourth and fifth anniversaries however further vesting may only occur if the TSR ranking has improved. 226 2016 Westpac Group Annual Report Note 37. Share-based payments (continued) Each share-based payment scheme is quantified below: (i) Westpac Long Term Incentive Plan Notes to the financial statements Outstanding at 1 October 2015 Granted During the Year Exercised During the Year Lapsed During the Year Outstanding at 30 September 2016 Outstanding and Exercisable at 30 September 2016 2016 Share options Weighted average exercise price Weighted average remaining contractual life Share rights Weighted average remaining contractual life 2015 Share options Weighted average exercise price 588,876 $27.61 2.5 years - - 5,858 $29.96 - - 4,632,477 1,788,881 334,095 811,611 8.3 years 1 Oct 2014 991,690 $27.58 - - 402,814 $27.55 - - 583,018 $27.58 1.5 years 5,275,652 9.9 years 30 Sept 2015 588,876 $27.61 583,018 $27.58 6,648 588,876 $27.61 2,584 Performance share rights The weighted average fair value at grant date of LTI share rights issued during the year was $19.84 (2015: $20.52). 2,557,968 3,318,750 4,632,477 398,983 845,258 (ii) Westpac Performance Plan (WPP) 2016 Share options Weighted average exercise price Weighted average remaining contractual life Share rights One-year vesting period Two-year vesting period Three-year vesting period Total share rights Weighted average remaining contractual life 2015 Share options Weighted average exercise price Outstanding at 1 October 2015 Granted During the Year Exercised During the Year Lapsed During the Year Outstanding at 30 September 2016 Outstanding and Exercisable at 30 September 2016 158,276 $23.49 1.0 year 108,113 195,430 242,739 546,282 7.1 years 1 Oct 2014 360,531 $22.66 - - 84,182 $23.05 - - 74,672 74,892 18,590 168,154 68,469 73,337 148,001 289,807 22,068 9,462 1,596 33,126 - - 202,255 $22.02 - - 74,094 $23.98 0.2 years 92,248 187,523 111,732 391,503 7.7 years 30 Sept 2015 158,276 $23.49 74,094 $23.98 20,281 26,708 59,874 106,863 158,276 $23.49 Performance share rights 211,463 The weighted average fair value at grant date of unhurdled share rights issued during the year was $29.85 (2015: $30.10). 546,282 436,407 773,324 2,098 153,897 (iii) Restricted Share Plan (RSP) Allocation date1 Granted prior to October 2009 Granted subsequent to October 2009 Outstanding at 1 October 2015 1,215,527 4,437,558 Granted During the Year - 1,971,204 Released 221,477 2,923,644 Forfeited During the Year - 52,296 Outstanding at 30 September 2016 994,050 3,432,822 Total 2016 Total 2015 1 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 3,145,121 4,233,341 1,971,204 2,200,370 5,653,085 7,790,652 52,296 104,596 4,426,872 5,653,085 October 2009, shares are released from the RSP on vesting. (iv) Employee Share Plan (ESP) Allocation Date Number of Participants Average Number of Shares Allocated per Participant Total Number of Shares Allocated 2016 2015 18 November 2015 4 December 2014 27,816 27,657 32 30 890,112 829,710 Market Price per Share $30.32 $32.68 Total Fair Value $26,988,196 $27,114,923 2016 Westpac Group Annual Report 227 3 Note 37. Share-based payments (continued) The 2015 ESP award was satisfied through the purchase of shares on market. The liability accrued for the ESP at 30 September 2016 is $27 million (2015: $28 million) and is provided for as other employee benefits. (v) CEO plans Details of share-based payment arrangements held by the CEO, Brian Hartzer, which are on the same terms and conditions as described above for the relevant plan, are provided in the Remuneration report in Section 1. (vi) Other 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 in terms of expenses and dilution of earnings. The names of all persons who hold share options and/or 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. (vii) Fair value assumptions The fair values of share options and share rights have been independently calculated at their respective grant dates. The fair value of share rights with performance targets based on relative TSR also takes into account the average TSR outcome determined using a Monte Carlo simulation pricing model. The fair values of share rights without TSR based performance targets, including share rights with Cash EPS CAGR performance targets, 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. Other significant assumptions include:     a risk free rate of 2.1% for share rights with four-year vesting period (2.2% for share rights issued to the CEO); a dividend yield on Westpac shares of 5.7% (6.0% for share rights issued to the CEO); volatility in the Westpac share price of 18.8%; and volatilities of, and correlation factors between, share price movements of the comparator group and Westpac for TSR. Note 38. Superannuation commitments Accounting policy The Group recognises an asset or a liability for its defined benefit schemes, being the net of the defined benefit obligations and the fair value of the schemes’ assets. The defined benefit obligation is calculated as the present value of the estimated future cash flows, discounted using high-quality long dated corporate bond rates. The superannuation expense is recognised in operating expenses and remeasurements are recognised through other comprehensive income. Critical accounting assumptions and estimates The actuarial valuation of plan obligations is dependent upon a series of assumptions, principally price inflation, salary growth, mortality, morbidity, discount rate and investment returns. Different assumptions could significantly alter the valuation of the plan assets and obligations and the superannuation cost recognised in the income statement. 228 2016 Westpac Group Annual Report Notes to the financial statements Note 38. Superannuation commitments (continued) Westpac had the following defined benefit plans at 30 September 2016: Name of Plan Type Westpac Group Plan (WGP) Defined benefit and accumulation Westpac New Zealand Superannuation Scheme (WNZS) Defined benefit and accumulation Westpac Banking Corporation UK Staff Superannuation Scheme (UKSS) Defined benefit Form of Benefit Indexed pension and lump sum Indexed pension and lump sum Indexed pension and lump sum Date of Last Actuarial Assessment of the Funding Status 30 June 2015 30 June 2014 5 April 2015 Westpac UK Medical Benefits Scheme Defined benefit Medical benefits n/a The defined benefit sections of the schemes are closed to new members. The Group has no obligation beyond the annual contributions for the accumulation or defined contribution sections of the schemes. The WGP is the Group’s principal defined benefit plan and is managed and administered in accordance with the terms of its trust deed and relevant legislation in Australia. Its defined benefit liabilities are based on salary and length of membership for active members and inflation in the case of pensioners. The defined benefit schemes expose the Group to the following risks:    discount rate – reductions in the discount rate would increase the present value of the future payments; inflation rate – increases in the inflation rate would increase the payments to pensioners; investment risk – lower investment returns would increase the contributions needed to offset the shortfall;  mortality risk – members may live longer than expected extending the cash flows payable by the Group; and  legislative risk – legislative changes could be made which increase the cost of providing defined benefits. Investment risk is managed by setting benchmarks for the allocation of plan assets between asset classes. The long-term investment strategy 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. Funding recommendations for the WGP, WNZS and the UKSS are made based on triennial actuarial valuations. These valuations resulted in a funding surplus of $354 million for the year ended 30 September 2016 (2015: $31 million). Current contribution rates are as follows:  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 year. Contributions $m Employer contributions Member contributions Consolidated Parent Entity 2016 61 14 2015 51 14 2016 61 13 2015 50 14 Expected employer contributions for the year ended 30 September 2017 are $55 million. Expense recognised $m Current service cost Net interest cost on net benefit liability Total defined benefit expense Consolidated Parent Entity 2016 43 7 50 2015 49 12 61 2014 46 11 57 2016 42 7 49 2016 Westpac Group Annual Report 2015 49 11 60 229 3 Note 38. Superannuation commitments (continued) Defined benefit balances recognised Consolidated Parent Entity $m Benefit obligation at end of the year Fair value of plan assets at end of the year Net surplus/(deficit) Defined benefit surplus (Note 27) Defined benefit deficit (Note 29) 2016 2,476 2,226 (250) 32 (282) (250) 2015 2,380 2,206 (174) 18 (192) (174) 2016 2,385 2,160 (225) 32 (257) (225) 2015 2,297 2,140 (157) 18 (175) (157) Net surplus/(deficit) The average duration of the defined benefit obligation is 12 years (2015: 12 years). Significant assumptions Consolidated and Parent Entity Discount rate Salary increases Inflation rate (pensioners receive inflationary increases) Life expectancy of a 60-year-old male Life expectancy of a 60-year-old female 2016 Australian Funds 3.3% 2.8% 1.8% 30.6 33.5 Overseas Funds 2.3% 3%-4.8% 2%-3.2% 27.5-28.8 29.1-30.2 2015 Australian Funds 4.2% 3.3% 2.3% 30.9 34.0 Overseas Funds 3.3-3.4% 3.0-4.7% 2.2-3.1% 27.3-29.7 29.0-31.0 Sensitivity to changes in significant assumptions The table below shows the impact of changes in assumptions on the defined benefit obligation for the WGB. No reasonably possible changes in the assumptions of the Group’s other defined benefit plans would have a material impact on the defined benefit obligation. Change in assumption 0.5% decrease in discount rate 0.5% increase in annual salary increases 0.5% increase in inflation rate (pensioners receive inflationary increases) 1 year increase in life expectancy Increase in obligation 2015 136 2016 146 19 122 42 22 111 37 Asset allocation Consolidated and Parent Entity % Cash Equity instruments Debt instruments Property Other assets 2016 2015 Australian Funds 2% Overseas Funds 2% Australian Funds 2% Overseas Funds 5% 42% 26% 9% 21% 20% 59% 10% 9% 51% 20% 9% 18% 28% 49% 10% 8% 100% Total Equity and debt instruments are mainly quoted assets while property and other assets are mainly unquoted. Other assets include infrastructure funds and private equity funds. 100% 100% 100% 230 2016 Westpac Group Annual Report Notes to the financial statements OTHER Note 39. Auditor’s remuneration The fees payable to the auditor, PricewaterhouseCoopers (PwC), and overseas firms belonging to the PwC network of firms were: $'000 Audit and audit-related fees Audit fees PwC Australia Overseas PwC network firms Total audit fees Audit-related fees PwC Australia Overseas PwC network firms Total audit-related fees Total audit and audit-related fees Tax fees PwC Australia Overseas PwC network firms Total tax fees Other fees PwC Australia Overseas PwC network firms Total other fees Total audit and non-audit fees Consolidated Parent Entity 2016 2015 2016 2015 18,233 3,086 21,319 1,485 126 1,611 22,930 23 - 23 2,380 614 2,994 25,947 17,426 3,018 20,444 933 127 1,060 21,504 441 3 444 1,574 - 1,574 23,522 18,189 564 18,753 1,380 - 1,380 20,133 23 - 23 2,176 142 2,318 16,867 439 17,306 726 - 726 18,032 22 - 22 888 - 888 22,474 18,942 Fees payable to the auditor have been categorised as follows: Audit The year end audit, half-year review and comfort letters associated with debt issues and capital raisings. Audit-related Consultations regarding accounting standards and reporting requirements, regulatory compliance reviews and assurance related to debt and capital offerings. Tax Other Tax compliance and tax advisory services. Various services including systems assurance, compliance advice and controls reviews. It is Westpac’s policy to engage PwC 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. PwC also received fees of $8.1 million (2015: $9.9 million) for various entities which are related to Westpac but not consolidated. These non-consolidated entities include entities sponsored by the Group, trusts of which a Westpac Group entity is trustee, manager or responsible entity, superannuation funds and pension funds. Note 40. Related party disclosures Related parties Westpac’s related parties are those it controls or can exert significant influence over. Examples include subsidiaries, associates, joint ventures and superannuation plans as well as key management personnel and their related parties. Key management personnel (KMP) Key management personnel are those who, directly or indirectly, have authority and responsibility for planning, directing and controlling the activities of Westpac. This includes all Executive and Non-Executive Directors. 2016 Westpac Group Annual Report 231 3 Note 40. Related party disclosures (continued) Parent Entity Westpac Banking Corporation is the ultimate parent company of the Group. Subsidiaries - Note 35 The Parent Entity has the following related party transactions and balances with subsidiaries: Type of transaction/balance Details disclosed in Balances due to / from subsidiaries Dividend income / Fee and commission income Interest income Tax consolidated group transactions and undertakings Guarantees and undertakings Balance Sheet Note 4 Note 3 Note 7 Note 31 The balances due to / from subsidiaries include a wide range of banking and other financial facilities. The terms and conditions of related party transactions between the Parent Entity and subsidiaries are sometimes different to commercial terms and conditions. Related party transactions between the Parent Entity and subsidiaries eliminate on consolidation. Associates - Note 35 The Group provides a wide range of banking and other financial facilities and funds management activities to its associates on commercial terms and conditions. Superannuation plans The Group contributed $318 million (2015: $300 million) to defined contribution plans and $61 million to defined benefit plans (2015: $51 million; see Note 38). Remuneration of KMP Total remuneration of the KMP was: $ Consolidated 2016 2015 Parent Entity 2016 2015 Short-term Benefits Post Employment Benefits Other Long-term Benefits Termination Benefits Share-based Payments Total 24,423,422 28,292,932 23,265,771 27,074,354 577,061 553,853 500,968 484,294 220,264 - 16,177,450 41,398,197 201,656 2,584,709 16,901,143 48,534,293 220,264 - 15,230,171 201,656 2,584,709 16,601,039 39,217,174 46,946,052 Other transactions with KMP KMP receive personal banking and financial investment services from the Group in the ordinary course of business. The terms and conditions, for example interest rates and collateral, and the risks to Westpac are comparable to transactions with other employees and did not involve more than the normal risk of repayment or present other unfavourable features. Details of loans provided and the related interest charged to KMP and their related parties are as follows: $ Interest Payable for the Year Closing Loan Balance Number of KMP with Loans 2016 20151 1 Balances have been restated to include additional individual and related party loans as at 30 September 2015. 709,238 867,564 16,223,402 15,462,500 9 10 Further details of the KMP’s remuneration, share rights and options and other transactions with KMP are included in the Remuneration report in Section 1. 232 2016 Westpac Group Annual Report Notes to the financial statements Note 40. Related party disclosures (continued) Options and share rights holdings 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 2016 by the CEO and other key management personnel (including their related parties): Managing Director & Chief Executive Officer Brian Hartzer Ranges from 1 October 2023 to 1 October 2030 Latest Date for Exercise Group Executives John Arthur Lyn Cobley Philip Coffey Brad Cooper David Curran George Frazis Ranges from 1 October 2023 to 1 October 2030 1 October 2030 Ranges from 1 October 2023 to 1 October 2030 Ranges from 1 October 2023 to 1 October 2030 Ranges from 1 October 2024 to 1 October 2030 Ranges from 1 October 2023 to 1 October 2030 Alexandra Holcomb Ranges from 17 December 2017 to 1 October 2030 Peter King David Lindberg David McLean Christine Parker Ranges from 1 October 2023 to 1 October 2030 Ranges from 1 October 2023 to 1 October 2030 Ranges from 1 October 2022 to 1 October 2030 Ranges from 1 October 2023 to 1 October 2030 Number of Share Rights Number of Options Exercise Price of Options 538,990 248,918 90,914 314,438 272,648 135,898 207,708 178,733 192,804 133,486 133,112 177,182 - - - - - - - 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 Further details of the equity holdings of KMP are included in the Remuneration report in Section 1. Note 41. Notes to the cash flow statements Accounting policy Cash and cash equivalents includes cash held at branches and in ATMs, balances with overseas banks in their local currency and balances with central banks including accounts with the RBA and accounts with overseas central banks. Cash and balances with central banks $m Cash on hand Balances with central banks Total cash and balances with central banks Consolidated Parent Entity 2016 10,838 6,177 17,015 2015 9,282 5,488 14,770 2014 19,582 6,178 25,760 2016 10,229 4,957 15,186 2015 8,575 4,797 13,372 2016 Westpac Group Annual Report 233 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: Consolidated Parent Entity $m Net profit for the year Adjustments1: Depreciation, amortisation and impairment Impairment charges Net (decrease)/increase in current and deferred tax (Increase)/decrease in accrued interest receivable (Decrease)/increase in accrued interest payable (Decrease)/increase in provisions Other non-cash items Cash flows from operating activities before changes in operating assets and liabilities Net (increase)/decrease in derivative financial instruments Net (increase)/decrease in life insurance assets and liabilities (Increase)/decrease in other operating assets: 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: Other financial liabilities at fair value through income statement Deposits and other borrowings Payables due to other financial institutions Other liabilities Net cash (used in)/provided by operating activities 1 Comparatives have been revised for consistency. 2016 7,460 1,208 1,261 (285) 25 (47) (68) 2015 8,068 2014 7,625 1,671 1,020 884 (78) 115 (291) (31) 756 332 (64) (53) (24) (250) 9,342 (3,329) (156) 2016 6,307 1,061 1,016 (706) 9 (39) (64) (246) 7,338 (3,796) - (311) (1,379) 9,243 (5,107) (253) 6,755 (38,082) (896) (209) (476) (4,488) 38,771 (73) 312 5,497 8,959 11,730 (191) 21,538 (39,569) (1,000) 497 95 (10,027) 8,526 (1,194) 95 (541) 1,724 6,706 (35,734) (35,852) 3,932 126 121 9,079 34,229 9,419 (382) 28,371 (128) (219) 4 (4,861) 33,508 459 284 3,443 2015 6,747 1,476 704 (906) 108 (301) (71) (4) 7,753 11,497 - 22,668 (38,270) (2,108) 511 729 (9,945) 6,548 (1,544) 158 (2,003) 234 2016 Westpac Group Annual Report Notes to the financial statements Note 41. Notes to the cash flow statements (continued) Details of assets and liabilities of controlled entities and 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). $m Fair value of assets and liabilities of controlled entities and businesses acquired Assets acquired: Consolidated 2016 2015 2014 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 2016 Westpac Group Annual Report 235 3 Note 41. Notes to the cash flow statements (continued) Details of the assets and liabilities over which control was lost Details of the entities over which control was lost are provided in Note 35. $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 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 (net of transaction costs) Less: Cash deconsolidated Cash consideration (paid)/received (net of transaction costs and cash held) Non-cash financing activities Consolidated Parent Entity 2016 2015 2014 2016 2015 138 - 1 132 5 3 1 1 27 308 264 - 2 1 - 6 273 35 - 35 34 - 34 2 1 34 (138) (104) 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 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 138 - 1 132 5 3 1 1 27 308 264 - 2 1 - 6 273 35 - 35 34 - 34 2 1 34 (138) (104) 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 - 1 The dividend reinvestment plan for 2014 was satisfied in full through purchase of existing shares and transfer of shares to participating shareholders. 2 In 2014, amounts relate to holders of Westpac SPS II who participated in the reinvestment offer to subscribe for WCN2. 1,412 1,412 2015 2016 2015 2016 2014 529 726 726 - - - - Restricted cash The amount of cash and cash equivalents not available for use at 30 September 2016 was $48 million (2015: $132 million) for the Group and nil for the parent entity (2015: nil). Note 42. Subsequent events No matters have arisen since the year ended 30 September 2016 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. 236 2016 Westpac Group Annual Report Statutory statements Directors’ declaration In the Directors’ opinion: a. the financial statements and notes set out in ‘Section 3 – Financial report for the year ended 30 September 2016’ 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 2016 and of their performance 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) includes a statement that the financial report also complies with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declaration by the Chief Executive Officer and the Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. For and on behalf of the Board. Lindsay Maxsted Chairman Sydney 7 November 2016 Brian Hartzer Managing Director & Chief Executive Officer 2016 Westpac Group Annual Report 237 3 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 2016 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 2016 was effective. The effectiveness of Westpac’s internal control over financial reporting as of 30 September 2016 has been audited by PricewaterhouseCoopers, an independent registered public accounting firm, as stated in their report which is included herein. 238 2016 Westpac Group Annual Report Statutory statements Independent auditor’s report to the members of Westpac Banking Corporation Report on the audit of the Financial Report Our opinion In our opinion the accompanying Financial Report of Westpac Banking Corporation (the Parent Entity) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including:   giving a true and fair view of the Parent Entity’s and Group’s financial position as at 30 September 2016 and of their performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The accompanying Financial Report comprises:        the Consolidated and Parent Entity balance sheets as at 30 September 2016; the Consolidated and Parent Entity income statements for the year then ended; the Consolidated and Parent Entity statements of comprehensive income for the year then ended; the Consolidated and Parent Entity statements of changes in equity for the year then ended; the Consolidated and Parent Entity cash flow statements for the year then ended; the notes to the financial statements, which include explanations of significant accounting policies; and the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach Overview Set out below is an overview of our audit approach, highlighting key aspects including audit scope, materiality level, and Key Audit Matters of our audit of the Group. These are described in further detail later in this report. Audit scope The scope of our audit, and the nature, timing and extent of our audit procedures, were determined by our risk assessment, the financial significance of divisions and other  qualitative factors. We conducted:  an audit of the most significant operations of the Group, being the Consumer Bank, Business Bank and Westpac Institutional Bank (domestic) divisions; and specific audit procedures in relation to the Westpac New Zealand and BT Financial Group (Australia) divisions, the offshore operations of Westpac Institutional Bank and other account balances to ensure we obtained sufficient appropriate audit evidence to express an opinion on the Financial Report as a whole. 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. 2016 Westpac Group Annual Report 239 3 Materiality Key Audit Matters Audit scope For the purposes of our audit we used a threshold for overall Group materiality of $532 million, which represents 5% of the Group’s profit before tax. The Key Audit Matters, which are those matters which were of the most significance in our  audit, were:   Credit risk and provisions for impairment charges; Valuation of financial instruments held at fair value; and Operation of information technology (IT) systems and controls. As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the Financial Report. In particular, we considered where the directors made subjective judgements, for example, in respect of critical accounting assumptions and estimates that involved making assumptions and considering future events that are inherently uncertain. As in all our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit to enable us to provide an opinion on the Financial Report as a whole, taking into account the following factors: the geographic and management structure of the Group; the significance and risk profile of each division within the Group; the Group’s accounting processes and controls; and the financial services industry and broader economies in which the Group operates. We also ensured that the audit team included the appropriate skills and competencies which are needed for the audit of a complex banking group. This included industry expertise in consumer, business and institutional banking and wealth management services, as well as specialists and experts in IT, actuarial, tax, treasury and valuation. We conducted an audit of the most significant operations, being the Consumer Bank, Business Bank, and Westpac Institutional Bank (domestic) divisions. For the purpose of our audit, the Group’s treasury operations are included in the Westpac Institutional Bank division, given the commonality in systems and controls. In addition, we performed specific audit procedures in relation to the Westpac New Zealand and BT Financial Group (Australia) divisions, the offshore operations of Westpac Institutional Bank, and aspects of the Group Businesses division (in particular, provisions for impairment charges, technology balances and property). Further audit procedures were performed by the Group engagement team over the remaining balances and the consolidation process, including substantive and analytical procedures. The work carried out in the divisions, together with those additional procedures performed at the Group level, gave us sufficient coverage to express an opinion on the Financial Report as a whole. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to provide reasonable assurance about whether the Financial Report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the Financial Report as a whole set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the Financial Report as a whole. Overall Group materiality $532 million How we determined it 5% of the Group’s profit before tax Rationale for the materiality benchmark applied We chose ‘profit before tax’ as it is a key financial statement metric and commonly used benchmark for materiality. We selected 5% based on our professional judgement, noting that it is also within the range of commonly accepted profit-related thresholds. 240 2016 Westpac Group Annual Report Statutory statements Key Audit Matters Key Audit Matters for the Group and Parent Entity are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report for the current period. We have communicated the Key Audit Matters to the Board Audit Committee, but they are not a comprehensive reflection of all matters that were identified by our audit and that were discussed with the Committee. In the table below we have described the Key Audit Matters and have included a summary of the principal audit procedures we performed to address those matters. The Key Audit Matters were addressed in the context of the Financial Report as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key Audit Matter How the audit addressed the Key Audit Matter Credit risk and provisions for impairment charges We focused on this area because of the highly subjective and complex judgements made by management in determining the necessity for, and then estimating the size of, impairment provisions against loans. Provisions for impairment of loans that exceed specific thresholds are individually assessed by management with reference to the estimated future cash repayments and proceeds from the realisation of collateral held by the Group in respect of those loans. If an individually assessed loan is not impaired, it is then included in a group of loans with similar risk characteristics and, along with those loans below the specific thresholds noted above, is collectively assessed on a portfolio basis using models developed by management. Particularly important elements in the impairment provisioning processes include: • • • the identification of impaired loans, and the cash flow forecasts (including the expected realisable value of any collateral held), supporting the calculation of individually assessed provisions. We consider this to be the most significant inherent audit risk due to the subjectivity involved in assessing how much of the debt will be recovered from, in particular, large institutional impaired loans; the design of the models used in the collectively assessed provision calculations, and the appropriateness of the key assumptions used in those models, including the emergence periods (EP) for unidentified impairments, the probabilities of default (PD) and the loss given default (LGD) factors; and the economic overlays added to the model calculations, to reflect emerging trends or particular situations which are not captured by the models used, such as the current persisting downturn in various commodity prices. We assessed the design and tested the operating effectiveness of the controls over the loan impairment provisioning processes. The key controls included: • • • • governance, including the continuous re- assessment by management that impairment models are calibrated in a way which is appropriate for the credit risks in the Group’s loan portfolios; controls over identification of the deterioration in credit quality of individual loans; controls inherent in the IT systems that manage and transfer the data between underlying source systems and the impairment models; and the review and approval process for the outputs of the impairment models, and the adjustments and economic overlays that are applied to the modelled outputs. We determined that we could rely on controls over the loan impairment provisioning processes for the purposes of our audit. For a sample of individually assessed provisions, including the small number of large institutional names downgraded to impaired status during the year, we also: • • • considered the latest developments in relation to the borrower (as known to the Group) and the basis of measuring the impairment provision; examined the forecast cash flows from the impaired borrowers, as prepared by management, and in particular challenged the key assumptions in relation to both the amount and timing of recoveries; and compared the valuation of collateral held to external evidence (where available) and assessed whether any independent expert advice was: (i) up to date; (ii) consistent with the strategy being followed in respect of the particular borrower; (iii) appropriate for the purpose; and (iv) used in the 2016 Westpac Group Annual Report 241 3 Key Audit Matter Given the high level of subjectivity involved in estimating loan impairment provisions, one of our overriding audit objectives is to assess whether the calculations and underlying assumptions are consistent with those applied in the previous year, or that any changes are appropriate in the circumstances. See Note 14 to the financial statements which explains the critical accounting estimates and assumptions in determining provisions for impairment charges, including loss rates and emergence periods. How the audit addressed the Key Audit Matter impairment calculations. In relation to the collectively assessed provisions which were calculated using models, our work included: • • • critically examining management’s model monitoring processes and, on a sample basis, conducting in-depth reviews of models used to calculate the impairment provisions; using our knowledge of industry practice and the actual past experience of the Group’s loan portfolios to challenge the appropriateness of the key assumptions applied in the models, such as the EPs, PDs and LGDs; and performing analyses on key assumptions and considering key ratios, including provision-to- loan ratios at product and geographic levels. For economic overlays to model calculations, we considered the potential for impairment to be affected by events not captured by management’s models, and challenged management to provide objective evidence that the economic overlays (for example, in relation to the mining sector and the New Zealand dairy sector) were appropriate. We found that the Group’s approach to calculating loan impairment provisions was consistent with prior periods and that the underlying key assumptions, model outputs and overlays were considered to be reasonable. 242 2016 Westpac Group Annual Report Statutory statements How the audit addressed the Key Audit Matter We assessed the design and tested the operating effectiveness of the controls over the valuation of financial instruments held at fair value. The key controls included: • governance mechanisms and monitoring over the valuation process, including over derivative valuation adjustments; • • management’s process to ensure valuation models remain fit-for-purpose (‘model validation’); controls over the completeness and accuracy of inputs (including independent market data) to the valuation models; the Finance team’s processes to independently check certain valuations produced by the front office; and processes to approve new products. • • We determined that we could rely on controls over the valuation of financial instruments held at fair value for the purposes of our audit. In relation to the positions and valuations as at 30 September 2016, we also: Key Audit Matter Valuation of financial instruments held at fair value Financial instruments held at fair value are derivative assets and liabilities, trading securities, available-for- sale securities, life insurance assets and liabilities, various debt issues and some other assets and liabilities designated at fair value. The Group’s financial instruments predominantly relate to vanilla (non-structured) contracts and, as such, are categorised as ‘Level 1’ or ‘Level 2’ instruments in the disclosures in Note 23. This is consistent with the Group’s core institutional banking and treasury operations, being the provision of risk management products to customers (primarily interest rate and foreign exchange contracts), and the management of the Group’s borrowings and liquidity; as opposed to an investment bank which typically holds a much higher proportion of structured products. Further, the proportion of the Group’s ‘Level 3’ (or ‘harder to value’) positions has decreased this year, consistent with similar banks, in response to global regulatory and business model changes. Despite the above, there are two factors that led to our higher focus on this area. First, the magnitude of financial instruments held at fair value is material, being 16% of total assets and 13% of total liabilities. Second, judgement and inherent complexity is involved in estimating the fair value of financial instruments. In particular, the valuation of derivative contracts, including vanilla contracts, has become more complex in recent years as valuation models attempt to better capture credit risk and funding costs. • • • Particularly subjective aspects of the Level 2 valuation process are the adjustments applied to the uncollateralised derivative portfolio, such as credit and debit valuation adjustments (CVA and DVA) and funding valuation adjustments (FVA). The methods for calculating some of the adjustments continue to evolve across the banking industry. For CVA and DVA, the adjustments are sensitive to factors such as expected future market volatility and credit risks. For FVA, the adjustment is sensitive to funding rates observed in market transactions, which are difficult to isolate from other elements of pricing. See Note 23 to the financial statements which explains the ‘Levels’ and the valuation techniques used. challenged management to demonstrate the appropriateness of key inputs to models; investigated the drivers of movements in fair value adjustments, and tested certain inputs against external market observations; and for a sample of interest rate, foreign exchange, bond and debt positions, we compared the valuations to our own independently derived valuations. This involved sourcing independent inputs from market data providers, and using our own valuation models. We investigated variances where appropriate to assess whether a systemic bias or error existed. In those instances where external information supporting valuations was limited, we sought other information which, while not always directly comparable, might be indicative of appropriate valuation. For example, we: • • • examined the profit or loss on sales of less liquid trading positions during the year to assess whether, on balance, management’s prior judgements on valuations were close to actual market prices; examined collateral disputes to identify possibly inappropriate valuations; and compared the methods used for the uncollateralised derivative portfolio valuation adjustments with our understanding of current and emerging global market practice. We found that the Group’s approach to calculating the fair value of financial instruments was consistent with prior periods and that the valuations were considered to be reasonable. 2016 Westpac Group Annual Report 243 3 Key Audit Matter How the audit addressed the Key Audit Matter Operation of IT systems and controls We focused on this area because the Group is heavily dependent on complex IT systems for the processing and recording of significant volumes of transactions. Over 80% of the key financial controls we seek to rely on in our audit are related to IT systems and automated controls. For significant financial statement balances we gained an understanding of the business processes, key controls and IT systems used to generate and support those balances. We assessed the design and tested the operating effectiveness of the key controls over the continued integrity of the relevant IT systems. This involved assessing: In particular, in common with all banks, access rights to technology are important because they ensure that changes to applications and data are authorised and made appropriately. Ensuring staff have appropriate access to IT systems, and that access is monitored, are key controls in mitigating the potential for fraud or error as a result of a change to an application or underlying data. In addition, during the current year substantial changes were made to the Group’s technology as part of the Service Revolution, such as the commencement of an infrastructure transformation program which included: • • • outsourcing more services from third parties; continued replacement of some core systems; and continued refresh of some applications and databases. There are inherent risks associated with such large- scale changes to systems, data, processes and controls. • • • • • the technology control environment: i.e. the governance processes and controls used to monitor and enforce control consciousness throughout the Group’s technology teams and third party suppliers; change management: i.e. the process and controls used to make, test and authorise changes to the functionality within systems; security: i.e. the access controls designed to enforce a segregation of duties or ensure that data is only changed through authorised means; system development: i.e. the project disciplines which ensure that new systems are developed to meet a defined business need are appropriately tested before implementation, and that data is converted and transferred completely and accurately; and IT operations: i.e. the controls that ensure key operations occur when they should and that any issues that arise are managed to a successful conclusion. For in-scope IT operations where technology services are provided by a third party, we: • • obtained assurance from the third party’s auditors on the design and operating effectiveness of controls; and/or tested internal control design and operating effectiveness ourselves. We also carried out further direct tests of the operation of key programs to establish the accuracy of calculations, the correct generation of reports, and to assess the correct operation of automated controls and technology-dependent manual controls. In relation to the components of the Group’s infrastructure transformation program which are significant to the financial statements, we: • • • tested the design effectiveness and operating effectiveness of new key controls; visited new sites for third party service providers; and tested the completeness and accuracy of relevant data migration from old systems to new systems. While we noted some design and effectiveness issues with access controls and change controls, some of which are long-standing, the combination of compensating control tests and direct tests gave us sufficient evidence to rely on the continued and proper operation of the Group’s IT systems for the purposes of our audit. 244 2016 Westpac Group Annual Report Statutory statements We attended all four Board Audit Committee meetings held during the year, each of which included discussions without management present. Through these meetings and other interactions and correspondence, among other things we communicated with the Board Audit Committee members about: • • our audit plan for the year and in particular our areas of focus which, as required by auditing standards, included specific attention to the risk of management override of internal controls and the risk of fraud in revenue; our observations on controls over financial reporting, and how we had responded to any relevant control matters identified; • how we had assessed and challenged any alternative accounting treatments considered by • • management; the results of our audit work in relation to the Key Audit Matters, as described above; and the results of our audit work in relation to other areas of heightened focus, such as the application of hedge accounting, the capitalisation and amortisation of technology costs including software, any accounting and disclosure considerations related to conduct risk, and management’s other critical accounting estimates (identified in Note 1) including goodwill, superannuation obligations and life insurance contract liabilities. Directors’ responsibilities for the Financial Report The directors of the Parent Entity 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 gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the Financial Report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the planning and performance of the audit. The audit involves us: • • • • identifying and assessing the risks of material misstatement of the Financial Report, whether due to fraud or error, designing and performing audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; obtaining an understanding of internal control relevant to the audit 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 Group’s internal control; evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors; concluding on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Financial Report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern; 2016 Westpac Group Annual Report 245 3 • • evaluating the overall presentation, structure and content of the Financial Report, including the disclosures, and whether the Financial Report represents the underlying transactions and events in a manner that achieves fair presentation; and obtaining sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the Financial Report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. As described above, we communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the Financial Report of the current period and are therefore the Key Audit Matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Other information The directors are also responsible for the other information, being the information in the Annual Report other than the Financial Report and our report thereon. Our opinion on the Financial Report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the Financial Report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Financial Report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Report on the audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in Section 1 of the Annual Report for the year ended 30 September 2016. In our opinion, the Remuneration Report of Westpac Banking Corporation for the year ended 30 September 2016 complies with section 300A of the Corporations Act 2001. Responsibilities for the Remuneration Report The directors of the Company 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. PricewaterhouseCoopers Michael Codling Partner Sydney 7 November 2016 Andrew Wilson Partner 246 2016 Westpac Group Annual Report Statutory statements 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 Chartered Accountants Australia and New Zealand (NSW) scheme adopted by Chartered Accountants Australia and New Zealand 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 7 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 7 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. 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 judgement 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 judgements are untested. 2016 Westpac Group Annual Report 247 3 This page is intentionally left blank 248 2016 Westpac Group Annual Report Shareholding information Additional information Information for shareholders Glossary of abbreviations and defined terms 4Westpac ordinary shares Top 20 ordinary shareholders as at 4 October 2016 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Ltd National Nominees Limited Citicorp Nominees Pty Limited Cogent Nominees Pty Limited BNP Paribas RBC Dexia Investor Services Australia Nominees Pty Limited AMP Life Limited Australian Foundation Investment Company Limited Argo Investments Limited Bond Street Custodians Limited Milton Corporation Limited Navigator Australia Limited UBS Nominees Pty Ltd IOOF Investment Management Limited Nulis Nominees (Australia) Limited Invia Custodian Pty Limited ANZ Executors & Trustee Company Netwealth Investments Limited Share Direct Nominees Pty Limited Total of Top 20 registered shareholders Shareholding information Num ber of Fully Paid Ordinary Shares 649,907,415 % Held 19.42 411,679,271 243,646,379 211,759,963 75,156,046 43,910,962 33,938,295 18,538,627 15,545,000 11,116,768 10,878,684 10,451,306 8,329,536 6,425,953 4,899,645 4,742,274 4,300,779 3,690,216 3,657,556 3,460,191 1,776,034,866 12.30 7.28 6.33 2.25 1.31 1.01 0.55 0.46 0.33 0.33 0.31 0.25 0.19 0.15 0.14 0.13 0.11 0.11 0.10 53.06 As at 4 October 2016 there were 622,674 holders of our ordinary shares compared to 615,493 in 2015 and 595,907 in 2014. Ordinary shareholders with a registered address in Australia held approximately 98% of our fully paid share capital at 4 October 2016 (approximately 98% in 2015 and 98% in 2014). Substantial shareholders as at 4 October 2016 As at 4 October 2016 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 2016. 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 2016, our Directors and Executive Officers owned beneficially, directly or indirectly, an aggregate of 1,340,102 (0.04%) of the fully paid ordinary shares outstanding. 250 2016 Westpac Group Annual Report Shareholding information Analysis by range of holdings of ordinary shares as at 4 October 2016 Num ber of Shares – 1 – 1,001 – 5,001 – 10,001 100,001 and over 1,000 5,000 10,000 100,000 Totals Num ber of Holders of Fully Paid Ordinary Shares 340,466 217,549 38,613 25,366 680 Num ber of Fully Paid Ordinary Shares 132,698,863 486,034,508 266,961,784 531,995,339 1,928,476,359 % 54.68 34.94 6.20 4.07 0.11 % 3.97 14.52 7.98 15.90 57.63 622,674 100.00 3,346,166,853 100.00 Num ber of Holders of Share Options and Rights 19 64 19 82 19 203 There were 11,820 shareholders holding less than a marketable parcel ($500) based on a market price of $30.00 at the close of trading on 4 October 2016. 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 4 October 2016 HSBC Custody Nominees Navigator Australia Limited BT Portfolio Services Limited Nulis Nominees (Australia) Limited IOOF Investment Management Limited J P Morgan Nominees Australia Ltd Netwealth Investments Limited National Nominees Limited Austrust Limited The Australian National University Dimbulu Pty Ltd Mrs Linda Anne Van Lieshout Bond Street Custodians Limited Citicorp Nominees Pty Limited Eastcote Pty Ltd JMB Pty Ltd Randazzo C & G Developments Pty Ltd Invia Custodian Pty Limited Avanteos Investments Limited Mr Philip William Doyle Total of Top 20 registered holders Analysis by range of holdings of Westpac CPS as at 4 October 2016 Num ber of Securities 1 1,001 5,001 10,001 100,001 and over Totals 1,000 5,000 10,000 100,000 – – – – Num ber of Holders of Westpac CPS 18,020 1,306 103 51 7 19,487 % 92.47 6.70 0.53 0.26 0.04 100.00 Num ber of Westpac CPS 563,557 % Held 4.74 204,833 190,945 190,330 185,059 169,910 148,682 118,724 114,902 90,500 70,000 60,000 53,483 53,306 50,000 50,000 50,000 30,969 30,000 30,000 1.72 1.61 1.60 1.56 1.43 1.25 1.00 0.97 0.76 0.59 0.50 0.45 0.45 0.42 0.42 0.42 0.26 0.25 0.25 2,455,200 20.65 Num ber of Westpac CPS 5,472,719 2,794,284 796,872 1,404,349 1,425,381 11,893,605 % 46.02 23.49 6.70 11.81 11.98 100.00 There were eight security holders holding less than a marketable parcel ($500) of Westpac CPS based on a market price of $100.60 at the close of trading on 4 October 2016. 2016 Westpac Group Annual Report 251 4 Westpac Capital Notes Top 20 holders of Westpac Capital Notes as at 4 October 2016 HSBC Custody Nominees BT Portfolio Services Limited IOOF Investment Management Limited Pejr Pty Ltd Cogent Nominees Pty Limited Citicorp Nominees Pty Limited J P Morgan Nominees Australia Ltd National Nominees Limited Austrust Limited Netwealth Investments Limited Willimbury Pty Ltd V S Access Pty Ltd Navigator Australia Limited Nulis Nominees (Australia) Limited Tandom Pty Ltd Royal Freemasons Benevolent Institution Mr Alexander Shaw Bond Street Custodians Limited ADCO Constructions Pty Ltd RBC Dexia Investor Services Total of Top 20 registered holders Analysis by range of holdings of Westpac Capital Notes as at 4 October 2016 Num ber of Westpac Capital Notes 893,247 % Held 6.46 232,599 187,021 184,462 182,771 180,265 127,668 123,467 109,753 100,813 100,000 90,000 89,888 71,299 65,933 50,000 50,000 40,478 38,000 31,524 1.68 1.35 1.33 1.32 1.30 0.92 0.89 0.79 0.73 0.72 0.65 0.65 0.52 0.48 0.36 0.36 0.29 0.27 0.23 2,949,188 21.30 Num ber of Securities 1 1,001 5,001 10,001 100,001 and over Totals 1,000 5,000 10,000 100,000 – – – – Num ber of Holders of Westpac Capital Notes 17,382 1,714 120 49 10 19,275 % 90.18 8.89 0.62 0.26 0.05 100.00 Num ber of Westpac Capital Notes 5,710,305 3,564,480 960,875 1,428,163 2,171,867 13,835,690 % 41.27 25.76 6.95 10.32 15.70 100.00 There were eight security holders holding less than a marketable parcel ($500) of Westpac Capital Notes based on a market price of $99.50 at the close of trading on 4 October 2016. 252 2016 Westpac Group Annual Report Westpac Capital Notes 2 Top 20 holders of Westpac Capital Notes 2 as at 4 October 2016 HSBC Custody Nominees BT Portfolio Services Limited PEJR Pty Ltd Netwealth Investments Limited Navigator Australia Limited Invia Custodian Pty Limited Nulis Nominees (Australia) Limited EML Admin Pty Ltd RBC Dexia Investor Services Cogent Nominees Pty Limited Paul Lederer Pty Ltd IOOF Investment Management Limited National Nominees Limited Rakio Pty Ltd Bond Street Custodians Limited ALSOP Pty Ltd Dimbulu Pty Ltd Baysw ater Car Rental Pty Ltd Domer Mining Co P/L Ms Sarah Louise Haddrick Total of Top 20 registered holders Shareholding information Num ber of Westpac Capital Notes 2 533,615 % Held 4.07 408,882 352,774 153,154 149,929 132,630 128,749 100,000 94,226 92,131 90,540 89,574 88,044 63,000 60,060 60,000 51,000 50,000 50,000 50,000 3.12 2.69 1.17 1.14 1.01 0.98 0.76 0.72 0.70 0.69 0.68 0.67 0.48 0.46 0.46 0.39 0.38 0.38 0.38 2,798,308 21.33 Analysis by range of holdings of Westpac Capital Notes 2 as at 4 October 2016 Num ber of Securities 1 1,001 5,001 10,001 100,001 and over Totals 1,000 5,000 10,000 100,000 – – – – Num ber of Holders of Westpac Capital Notes 2 14,426 1,630 127 79 6 16,268 % 88.68 10.02 0.78 0.48 0.04 100.00 Num ber of Westpac Capital Notes 2 4,873,067 3,502,909 976,404 2,310,990 1,442,335 13,105,705 % 37.18 26.73 7.45 17.63 11.01 100.00 There were three security holders holding less than a marketable parcel ($500) of Westpac Capital Notes 2 based on a market price of $93.52 at the close of trading on 4 October 2016. 2016 Westpac Group Annual Report 253 4 Westpac Capital Notes 3 Top 20 holders of Westpac Capital Notes 3 as at 4 October 2016 HSBC Custody Nominees (Australia) Limited JDB Services Pty Ltd Navigator Australia Limited Citicorp Nominees Pty Limited Invia Custodian Pty Limited Nulis Nominees (Australia) Limited Balanced Property Pty Ltd National Nominees Limited Netwealth Investments Limited Tandom Pty Ltd Seymour Group Pty Ltd RBC Dexia Investor Services V S Access Pty Ltd 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 Num ber of Westpac Capital Notes 3 870,886 272,000 202,181 158,619 125,501 122,017 100,000 95,612 94,454 84,750 76,774 76,421 60,000 51,670 50,000 50,000 50,000 50,000 50,000 50,000 2,690,885 Analysis by range of holdings of Westpac Capital Notes 3 as at 4 October 2016 Num ber of Securities 1 1,001 5,001 10,001 100,001 and over Totals 1,000 5,000 10,000 100,000 – – – – Num ber of Holders of Westpac Capital Notes 3 13,160 1,455 131 92 5 14,843 % 88.66 9.80 0.89 0.62 0.03 100.00 Num ber of Westpac Capital Notes 3 4,618,255 3,318,841 1,096,864 2,643,918 1,566,402 13,244,280 % Held 6.58 2.05 1.53 1.20 0.95 0.92 0.76 0.72 0.71 0.64 0.58 0.58 0.45 0.39 0.38 0.38 0.38 0.38 0.38 0.38 20.34 % 34.87 25.06 8.28 19.96 11.83 100.00 There were two security holders holding less than a marketable parcel ($500) of Westpac Capital Notes 3 based on a market price of $100.00 at the close of trading on 4 October 2016. 254 2016 Westpac Group Annual Report Westpac Capital Notes 4 Top 20 holders of Westpac Capital Notes 4 as at 4 October 2016 Shareholding information BNP Paribas HSBC Custody Nominees J P Morgan Nominees Australia Ltd Citicorp Nominees Pty Limited PEJR Pty Ltd Goodridge Nominees Pty Ltd Netwealth Investments Limited Mutual Trust Pty Ltd National Nominees Limited Zashvin Pty Ltd Dimbulu Pty Ltd G Harvey Nominees Pty Ltd Tandom Pty Ltd Invia Custodian Pty Limited Navigator Australia Limited Willimbury Pty Ltd Nulis Nominees (Australia) Limited Austrust Limited V S Access Pty Ltd Grannette Pty Ltd Total of Top 20 registered holders Num ber of Westpac Capital Notes 4 3,000,000 952,016 262,372 230,412 218,450 200,000 169,445 123,513 110,755 104,000 100,000 100,000 80,000 76,324 64,558 60,000 56,236 51,748 51,570 50,000 6,061,399 Analysis by range of holdings of Westpac Capital Notes 4 as at 4 October 2016 Num ber of Securities 1 1,001 5,001 10,001 100,001 and over Totals 1,000 5,000 10,000 100,000 – – – – Num ber of Holders of Westpac Capital Notes 4 15,816 1,610 136 74 11 17,647 % 89.63 9.12 0.77 0.42 0.06 100.00 Num ber of Westpac Capital Notes 4 5,183,097 3,482,372 1,062,003 1,975,739 5,317,323 17,020,534 % Held 17.63 5.59 1.54 1.35 1.28 1.18 1.00 0.73 0.65 0.61 0.59 0.59 0.47 0.45 0.38 0.35 0.33 0.30 0.30 0.29 35.61 % 30.45 20.46 6.24 11.61 31.24 100.00 There was one security holder holding less than a marketable parcel ($500) of Westpac Capital Notes 4 based on a market price of $102.97 at the close of trading on 4 October 2016. 2016 Westpac Group Annual Report 255 4 Voting rights of Westpac CPS, Westpac Capital Notes, Westpac Capital Notes 2, Westpac Capital Notes 3 and Westpac Captial Notes 4 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, Westpac Capital Notes 3 and Westpac Capital Notes 4 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, Westpac Capital Notes 3 or Westpac Capital Notes 4 (as applicable) will become holders of Westpac ordinary shares and have the voting rights that attach to Westpac ordinary shares. Exchange controls and other limitations affecting security holders Australian exchange controls Australian laws control and regulate or permit the control and regulation of a broad range of payments and transactions involving non-residents of Australia. Pursuant to a number of exemptions, authorities and approvals, there are no general restrictions from transferring funds from Australia or placing funds to the credit of non-residents of Australia. However, Australian foreign exchange controls are implemented from time to time against prescribed countries, entities and persons. At the present time, these include: a. withholding taxes in relation to remittances or dividends (to the extent they are unfranked) and interest payments; b. the financial sanctions administered by the Department of Foreign Affairs and Trade (DFAT) in accordance with the Autonomous Sanctions Act 2011 and the Autonomous Sanctions Regulations 2011, specifically, in relation to transactions involving the transfer of funds or payments to, by the order of, or on behalf of individuals or entities including: – 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 persons or entities associated with the Democratic People’s Republic of Korea’s weapons of mass destruction program or missiles program; – certain 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 supporting the Syrian regime or that are responsible for human rights abuses in Syria; and – persons who have been instrumental or complicit 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 – 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 certain persons or entities associated with 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 persons that meet certain thresholds are required 256 2016 Westpac Group Annual Report to be notified to the Treasurer of Australia (through the Foreign Investment Review Board) and to obtain a no objections notification under 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 20% or more of the issued shares of an Australian company or the ability to control 20% or more of the total voting power. In addition, the legislation applies to any acquisition by a foreign government investor of 10% or more of the total voting power or ownership of an Australian company (or any interest if the foreign government investor acquires a control element – for example the right to appoint a director). 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 in the absence of a no objections notification, the Treasurer has the power to order divestment if he considers the acquisition to be contrary to Australia’s national interest. 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: Shareholding information 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 Westpac, 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 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. 2016 Westpac Group Annual Report 257 4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 depends upon the shareholder’s own circumstances, including the period during which the shares are held and the extent to which the shareholder is ‘at risk’ in relation to their shareholding. Gain or loss on disposition of shares Generally, any profit made by a resident shareholder on disposal of shares will be subject to capital gains tax. However, if the shareholder is regarded as a trader or speculator, or carries on a business of investing for profit, any profits may be taxed as ordinary income. A discount may be available on capital gains on shares held for 12 months or more by individuals, trusts or complying superannuation entities. The discount is one half for individuals and trusts, and one third for complying superannuation entities. Companies are not eligible for the capital gains tax discount. For shares acquired prior to 21 September 1999, an alternative basis of calculation of the capital gain may be available which allows the use of an indexation formula. Normal rates of income tax would apply to capital gains so calculated. Any capital loss can only be offset against capital gains. Excess capital losses can be carried forward for offset against future capital gains. Generally, subject to two exceptions, a non-resident disposing of shares in an Australian public company who holds those shares on capital account will be free from income tax in Australia. The main exceptions are:  shares held as part of a trade or business conducted through a permanent establishment in Australia. In such a case, any profit on disposal would be assessable to tax. Losses may give rise to capital losses or be otherwise deductible; and  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, brokers, tax-exempt entities, retirement plans, certain former citizens or residents of the US, persons holding ordinary shares as part of a straddle, hedge, conversion or other integrated transaction, 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 who 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; 258 2016 Westpac Group Annual Report  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. We have not maintained and do not plan to maintain calculations of earnings and profits for US federal income tax purposes, and as a result, you may need to include the entire amount of any distribution in income as a dividend. 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 Shareholding information 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, exchange 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 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 2016 Westpac Group Annual Report 259 4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. 260 2016 Westpac Group Annual Report 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 Additional information 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. 2016 Westpac Group Annual Report 261 4Directors’ borrowing powers Clause 10.2 of our constitution empowers our Directors, as a Board, to exercise all the powers of Westpac to borrow or raise money, to charge any property or business of Westpac or all or any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of Westpac or of any other person. Such powers may only be changed by amending the constitution, which requires a special resolution (that is, a resolution passed by at least 75% of the votes cast by members entitled to vote on the resolution and for which notice has been given in accordance with the Corporations Act). Minimum number of Directors Our constitution requires that the minimum number of Directors is determined in accordance with the Corporations Act or other regulations. Currently the Corporations Act prescribes three as a minimum number of Directors and APRA governance standards specify five as the minimum number of Directors for APRA regulated entities. Westpac’s current number of Directors is above these prescribed minimums. Share rights The rights attaching to our ordinary shares are set out in the Corporations Act and in our constitution, and may be summarised as follows: a) Profits and dividends Holders of ordinary shares are entitled to receive such dividends on those shares as may be determined by our Directors from time to time. Dividends that are paid but not claimed may be invested by our Directors for the benefit of Westpac until required to be dealt with in accordance with any law relating to unclaimed monies. Our constitution requires that dividends be paid out of our profits. In addition, under the Corporations Act, Westpac must not pay a dividend unless our assets exceed our liabilities immediately before the dividend is declared and the excess is sufficient for payment of the dividend. In addition, the payment must be fair and reasonable to the company’s shareholders and must not materially prejudice our ability to pay our creditors. Subject to the Corporations Act, the constitution, the rights of persons (if any) entitled to shares with special rights to dividend and any contrary terms of issue of or applying to any shares, our Directors may determine that a dividend is payable, fix the amount and the time for payment and authorise the payment or crediting by Westpac to, or at the direction of, each shareholder entitled to that dividend. If any dividends are returned unclaimed, we are generally obliged, under the Banking Act 1959 (Cth), to hold those amounts as unclaimed monies for a period of three years. If at the end of that period the monies remain unclaimed by the shareholder concerned, we must submit an annual unclaimed money return to the Australian Securities and Investment Commission by 31 March each year containing the unclaimed money as at 31 December of the previous year. Upon such payment being made, we are discharged from further liability in respect of that amount. Our Directors may, before paying any dividend, set aside out of our profits such sums as they think proper as reserves, to be applied, at the discretion of our Directors, for any purpose for which the profits may be properly applied. Our Directors may carry forward so much of the profits remaining as they consider ought not to be distributed as dividends without transferring those profits to a reserve. The following restrictions apply to our ability to declare and/or pay dividends: (i) if the payment of the dividend would breach or cause a breach by us of applicable capital adequacy or other supervisory requirements of APRA, including the capital conservation buffer. 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. 262 2016 Westpac Group Annual Report Under the Corporations Act, the election or re-election of each Director by shareholders at a general meeting of a public company must proceed as a separate item, unless the shareholders first resolve that the elections or re-elections may be voted on collectively. A resolution to allow collective voting in relation to elections or re-elections is effective only if no votes are cast against that resolution. Any resolution electing or re-electing two or more Directors in contravention of this requirement is void. d) Winding up Subject to any preferential entitlement of holders of preference shares on issue at the relevant time, holders of our ordinary shares are entitled to share equally in any surplus assets if we are wound up. e) Sinking fund provisions We do not have any class of shares on issue that is subject to any sinking fund provisions. Variation of rights attaching to our shares Under the Corporations Act, unless otherwise provided by the terms of issue of a class of shares, the terms of issue of a class of shares in Westpac can only be varied or cancelled in any way by a special resolution of Westpac and with either the written consent of our shareholders holding at least three quarters of the votes in that class of shares or with the sanction of a special resolution passed at a separate meeting of the holders of that class of shares. Convening general meetings Under our constitution, our Directors may convene and arrange to hold a general meeting of Westpac whenever they think fit and must do so if required to do so under the Corporations Act and ASX Listing Rules. Under the Corporations Act, our Directors must call and arrange to hold a general meeting of Westpac if requested to do so by our shareholders who hold at least 5% of the votes that may be cast at the general meeting. Shareholders who hold at least 5% of the votes that may be cast at a general meeting may also call and arrange to hold a general meeting of Westpac at their own expense. At least 28 days notice must be given of a meeting of our shareholders. Written notice must be given to all shareholders entitled to attend and vote at the meeting. All ordinary shareholders are entitled to attend and, subject to the constitution and the Corporations Act, to vote at general meetings of Westpac. Limitations on securities ownership A number of limitations apply in relation to the ownership of our shares, and these are more fully described in the section ‘Limitations affecting security holders’. Change in control restrictions Restrictions apply under the Corporations Act, the Financial Sector (Shareholdings) Act 1998 (Cth) and the Foreign Acquisitions and Takeovers Act 1975 (Cth). For more detailed descriptions of these restrictions, refer to the sections ‘Limitations affecting security holders’, Foreign Acquisitions and Takeovers Act 1975, Financial Sector (Shareholdings) Act 1998, and Corporations Act 2001. Additional information Substantial shareholder disclosure There is no provision in our constitution that requires a shareholder to disclose the extent of their ownership of our shares. Under the Corporations Act, however, any person who begins or ceases to have a substantial holding of our shares must notify us within two business days after they become aware of that information. A further notice must be given to us if there is an increase or decrease of 1% in a person’s substantial holding. Copies of these notices must also be given to the ASX. A person has a substantial holding of our shares if the total votes attached to our voting shares in which they or their associates have relevant interests is 5% or more of the total number of votes attached to all our voting shares. For more details, refer to the section ‘Corporations Act 2001’. We also have a statutory right under the Corporations Act to trace the beneficial ownership of our shares by giving a direction to a shareholder, or certain other persons, requiring disclosure to us of, among other things, their own relevant interest in our shares and the name and address of each other person who has a relevant interest in those shares, the nature and extent of that interest and the circumstances that gave rise to that other person’s interest. Such disclosure must, except in certain limited circumstances, be provided within two business days after the direction is received. Australian Company and Business Numbers All Australian companies have a unique nine-digit identifier, referred to as an Australian Company Number (ACN), which must be included on public documents, eligible negotiable instruments and the company’s common seal. In addition, entities can apply for registration on the Australian Business Register and be allocated a unique eleven-digit identifier known as an Australian Business Number (ABN). For Australian companies, the last nine digits of their ABN are identical to their ACN. The ABN may be quoted on documents in lieu of the ACN. Our ACN is 007 457 141 and our ABN is 33 007 457 141. Documents on display We are subject to the disclosure requirements of the 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. 2016 Westpac Group Annual Report 263 4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 2017² 0.7715 0.7545 n/a n/a Year Ended 30 Septem ber 2015 2014 2016 (US$ per A$1.00) 0.7817 0.6855 0.7385 0.7667 0.8904 0.6917 0.7781 0.7020 0.9705 0.8715 0.9155 0.8737 For each of the months indicated, the high and low noon buying rates for Australian dollars were: High Low October 2016² Septem ber 2016 0.7715 0.7545 0.7676 0.7470 Month August 2016 July 2016 (US$ per A$1.00) 0.7717 0.7516 0.7632 0.7453 2013 2012 1.0579 0.8901 0.9885 0.9342 June 2016 0.7598 0.7225 1.0806 0.9453 1.0371 1.0388 May 2016 0.7641 0.7184 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 of New York. 2 Through to 21 October 2016. On 21 October 2016, the noon buying rate was A$1.00 = US$0.7597. 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) to the financial statements. 264 2016 Westpac Group Annual Report Information for shareholders Financial calendar Westpac Ordinary Shares (ASX code: WBC) Westpac Capital Notes 2 (ASX code: WBCPE) Record date for final dividend 15 November 20161 Record date for quarterly distribution 15 December 2016 Annual General Meeting 9 December 2016 Payment date for quarterly distribution 23 December 2016 Final dividend payable Financial Half Year end 21 December 2016 Record date for quarterly distribution 15 March 2017 31 March 2017 Payment date for quarterly distribution 23 March 2017 Interim results and dividend announcement 8 May 2017 Record date for quarterly distribution 15 June 2017 Record date for interim dividend Interim dividend payable 19 May 20172,3 4 July 20173 Financial Year end 30 September 2017 Final results and dividend announcement 6 November 2017 Payment date for quarterly distribution 23 June 2017 Record date for quarterly distribution 15 September 2017 25 September 20171 Payment date for quarterly distribution 1 Next business day when a payment date falls on a non-ASX business day. Record date for final dividend Annual General Meeting Final dividend payable 1 14 November 20174,6 8 December 20175 22 December 20176 Westpac Capital Notes 3 (ASX code: WBCPF) Record date for quarterly distribution 14 December 2016 Payment date for quarterly distribution 22 December 2016 2 3 4 5 6 Record date for 2016 final dividend in New York – 14 November 2016. Record date for 2017 interim dividend in New York – 18 May 2017. Dates will be confirmed at the time of announcing the 2017 interim results. Record date for 2017 final dividend in New York – 13 November 2017. 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 2017. Dates will be confirmed at the time of announcing the 2017 final results. Westpac Convertible Preference Shares (ASX code: WBCPC) Record date for quarterly distribution 14 March 2017 Payment date for quarterly distribution 22 March 2017 Record date for quarterly distribution 14 June 2017 Payment date for quarterly distribution 22 June 2017 Record date for quarterly distribution 14 September 2017 Payment date for quarterly distribution 22 September 2017 Record date for semi-annual dividend 23 March 2017 Westpac Capital Notes 4 (ASX code: WBCPG) Payment date for semi-annual dividend 31 March 2017 Record date for quarterly distribution 22 December 2016 Record date for semi-annual dividend 22 September 2017 Payment date for quarterly distribution 30 December 2016 Payment date for semi-annual dividend 1 Next business day when a payment date falls on a non-ASX business day. 3 October 20171 Record date for quarterly distribution 22 March 2017 Payment date for quarterly distribution 30 March 2017 Westpac Capital Notes (ASX code: WBCPD) Record date for quarterly distribution 22 June 2017 Record date for quarterly distribution 30 November 2016 Payment date for quarterly distribution 30 June 2017 Payment date for quarterly distribution 8 December 2016 Record date for quarterly distribution 22 September 2017 Record date for quarterly distribution 28 February 2017 Payment date for quarterly distribution 8 March 2017 Record date for quarterly distribution 31 May 2017 Payment date for quarterly distribution 8 June 2017 Record date for quarterly distribution 31 August 2017 Payment date for quarterly distribution 8 September 2017 Payment date for quarterly distribution 1 Next business day when a payment date falls on a non-ASX business day. 3 October 20171 2016 Westpac Group Annual Report 265 4Westpac Subordinated Notes (ASX code: WBCHA) Westpac NZD Subordinated Notes (NZX code: WBC010) Record date for quarterly interest payment 15 November 2016 Record date for quarterly interest payment 21 November 2016 Payment date for quarterly interest payment 23 November 2016 Payment date for quarterly interest payment 1 December 2016 Record date for quarterly interest payment 15 February 2017 Record date for quarterly interest payment 17 February 20171 Payment date for quarterly interest payment 23 February 2017 Payment date for quarterly interest payment 1 March 2017 Record date for quarterly interest payment 15 May 2017 Record date for quarterly interest payment 22 May 2017 Payment date for quarterly interest payment 23 May 2017 Payment date for quarterly interest payment 1 June 2017 Record date for quarterly interest payment 15 August 2017 Record date for quarterly interest payment 22 August 2017 Payment date for quarterly interest payment 1 The first optional Redemption Date for Westpac Subordinated Notes will be 23 August 2017, subject to APRA’s prior written consent. There can be no certainty that APRA will provide its consent in respect of any early redemption. 23 August 20171 Payment date for quarterly interest payment 1 Immediately preceding business day when a record date does not fall on a day on which banks are open for general business in Wellington and Auckland, New Zealand and Sydney, Australia. 1 September 2017 Westpac Subordinated Notes II (ASX code: WBCHB) Record date for quarterly interest payment 14 November 2016 Payment date for quarterly interest payment 22 November 2016 Record date for quarterly interest payment 14 February 2017 Payment date for quarterly interest payment 22 February 2017 Record date for quarterly interest payment 12 May 20171 Payment date for quarterly interest payment 22 May 2017 Record date for quarterly interest payment 14 August 2017 Payment date for quarterly interest payment 1 Immediately preceding business day when a record date falls on a non-ASX business day. 22 August 2017 Annual General Meeting The Westpac Annual General Meeting (AGM) will be held in Hall L, Ground Floor, Adelaide Convention Centre, North Terrace, Adelaide, on Friday 9 December 2016, commencing at 10:00am (Adelaide 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 for viewing at a later time. 266 2016 Westpac Group Annual Report Useful information Key sources of information for shareholders We report our full year performance to shareholders, in late October or early November, in the following forms: an Annual Review & Sustainability Report; an Annual Report; a Sustainability Performance Report; an Investor Discussion Pack and earnings releases. Electronic communications Shareholders can elect to receive the following communications electronically:  Annual Review & Sustainability Report 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  Major company announcements. Opt for electronic communications by logging into Westpac’s Share Registrar’s Investor Centre at www.linkmarketservices.com.au. Online information Australia Westpac’s website 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, market releases and news; and corporate responsibility and Westpac in the community activities. Investors can access the Investor Centre at www.westpac.com.au/investorcentre. The Centre also includes the current Westpac share price 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; 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). Information for shareholders 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 Shareholders can check and update their information in Westpac’s Share Registrars’ Online Investor Centres, see details below. In Australia, broker sponsored holders must 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 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 11, Deloitte Centre 80 Queen Street Auckland 1010, New Zealand Postal address: P.O. Box 91976, Auckland 1142, New Zealand 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) ADS holder enquiries: Computershare 211 Quality Circle Suite 210 College Station TX 77845, USA Postal address: P.O. Box 30170 College Station, TX 77842-3170, USA Telephone: 1-888-BNY-ADRS (1-888-269-2377) (toll free number for domestic callers) International: +1 201 680 6825 Email: shrrelations@bnymellon.com www.bnymellon.com/shareowner 1 Each ADS represents one fully paid ordinary share 2016 Westpac Group Annual Report 267 4Glossary of abbreviations and defined terms 6MMA AAS AASB ABS ACCC ADI ADRs ADSs Six month moving average Australian Accounting Standards Australian Accounting Standards Board Asset-backed securities Australian Competition and Consumer Commission Authorised Deposit-taking Institution American Depositary Receipts American Depositary Shares Advanced IRB Advanced Internal Ratings Based AGM AIRB ALCO ALM AMA ANZSIC APRA ASIC ASX ASXCGC ATMs ATO AUSTRAC BAC BankSA BBSW BCBS BOSI bps BRCC BTFG BTIM CAPs Annual General Meeting Advanced Internal Ratings Based Westpac Asset & Liability Committee 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 Bank of South Australia Bank Bill Swap Reference Rate Basel Committee on Banking Supervision BOS International Australia Limited Basis points Board Risk & Compliance Committee BT Financial Group (Australia) BT Investment Management Limited Collectively Assessed Provisions Cash EPS Cash earnings per share Cash EPS CAGR Compound Annual Growth in Cash EPS CCB CDO CDS CEO CEOPP CEO RSP CFAL CFO CFTC CGU CHF CLF COSO CPM CRG CRO CRS 268 Chief Executive Officer Performance Plan Moody’s Capital Conservation Buffer Collateralised debt obligations Credit default swap Chief Executive Officer Chief Executive Officer Restricted Share Plan Capital Finance Australia Limited Chief Financial Officer Commodity Futures Trading Commission Cash Generating Unit Swiss franc Committed Liquidity Facility Committee of Sponsoring Organizations of the Treadway Commission Credit Portfolio Management Customer Risk Grade Chief Risk Officer Common Reporting Standard 2016 Westpac Group Annual Report Corporations Act Corporations Act 2001 (Cth) CVA DFAT DRP D-SIB EAD EPS ESG ESP FCA FCS FMA FSB FTE FUA FUM FVA FX GHG G-SIBs Hastings HKMA IAPs IASB ICAAP IFRS IOSCO IRRBB IRS ISDA JOHCM LCR LGBTI LGD LIBOR LTI Plan LTIFR LVR MFI NaR NII NYSE NSFR NZX OBR OCC OFAC OTC PD PFIC PNG RAMS RBA Credit valuation adjustment Department of Foreign Affairs and Trade Dividend Reinvestment Plan Domestic Systemically Important Banks Exposure at default Earnings per share Environmental, social and governance Employee Share Plan Financial Conduct Authority Financial Claims Scheme Financial Markets Authority Financial Stability Board Full time equivalent employees Funds under administration Funds under management Funding Valuation Adjustment Foreign Exchange Greenhouse gas Global Systemically Important Banks Hastings Funds Management Limited Hong Kong Monetary Authority Individually Assessed Provisions International Accounting Standards Board Internal Capital Adequacy Assessment Process International Financial Reporting Standards 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 Moody’s Investors Service Net interest income-at-risk Net interest income New York Stock Exchange Net Stable Funding Ratio New Zealand Exchange Limited 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 Glossary of abbreviations and defined terms RBNZ RISKCO RMBS ROE RSP RWA S&P SEC SME SOx SPS St.George TLAC 2004 TPS 2006 TPS TSR UKSS UNSC US VaR Reserve Bank of New Zealand Westpac Group Executive Risk Committee Residential Mortgage Backed Securities Return on equity Restricted Share Plan Risk-weighted assets Standard & Poor’s US Securities and Exchange Commission Small to medium enterprises Sarbanes-Oxley Act of 2002 Stapled Preferred Securities St.George Banking Group Total Loss Absorbing Capacity 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 CPS Westpac Convertible Preference Shares WGP WHS WIB WNZL WNZS WPP WRP WSNZL 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 2016 Westpac Group Annual Report 269 4Notes 270 2016 Westpac Group Annual Report Notes 2016 Westpac Group Annual Report 271 4Notes The Westpac Group Annual Report 2016 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. 272 2016 Westpac Group Annual Report PEFC/21-31-43 ANNUAL REPORT CONTACT US WESTPAC GROUP Head Office 275 Kent Street, Sydney NSW 2000 Australia Tel: +61 2 9374 7113 Facsimile: +61 2 8253 4128 International payments Tel: +61 2 9806 4032 www.westpac.com.au/westpacgroup Westpac Telephone – Consumer 132 032 Telephone – Business 132 142 From outside Australia: +61 2 9293 9270 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 RAMS RAMS Financial Group Pty Ltd Level 12, 321 Kent Street Sydney NSW 2000 Australia Mail: GPO Box 4008 Sydney NSW 2001 Australia Tel: +61 2 8218 7000 Fax: +61 2 8218 7171 Email: communications@rams.com.au www.rams.com.au BT Financial Group Level 20, 275 Kent Street, Sydney NSW 2000 Australia Tel: 132 135 From outside Australia: +61 2 8222 7154 Email: customer.relations@ btfinancialgroup.com www.bt.com.au Tel: +61 2 9553 5555 Facsimile: +612 9952 1000 Email: stgeorge@stgeorge.com.au www.stgeorge.com.au Westpac Institutional Bank Tel: 132 032 Email: institutionalbank@westpac.com.au www.westpac.com.au Bank of Melbourne Level 8, 530 Collins Street Melbourne VIC 3000 Australia Tel: 13 22 66 From outside Australia: +61 3 9982 4186 Facsimile: +61 3 9296 4371 Email: info@bankofmelbourne.com.au www.bankofmelbourne.com.au BankSA Level 8, 97 King William Street, Adelaide SA 5000 Australia Mail: GPO Box 399, Adelaide SA 5001 Australia Tel: 131 376 From outside Australia: +61 2 9553 5233 Email: banksa@banksa.com.au www.banksa.com.au Institutional Bank Locations Hong Kong India – Mumbai People’s Republic of China – Beijing – Shanghai Republic of Indonesia – Jakarta Republic of Singapore – Singapore United States of America – New York United Kingdom – London Westpac Pacific Tel: 132 032 From outside Australia: +61 2 9293 9270 www.westpac.com.au/pacific Pacific Banking Locations Fiji – Suva Papua New Guinea – Port Moresby Westpac New Zealand 16 Takutai Square, Auckland 1010 New Zealand Tel: +64 9 912 8000 Email: customer_solutions@westpac.co.nz www.westpac.co.nz F Global locations Specific contact details for the many locations globally can be located on our website at www.westpac.com.au. Select ‘About Us’, then ‘Global Locations’ from the drop down menu. Share Registrar Link Market Services Limited 680 George Street Sydney NSW 2000 Australia Mail: Locked Bag A6015, Sydney South NSW 1235 Tel: 1800 804 255 Facsimile: +61 2 9287 0303 Email: westpac@ linkmarketservices.com.au www.linkmarketservices.com.au Westpac Investor Relations Email: investorrelations@westpac. com.au Tel: +61 2 8253 3143 www.westpac.com.au/ investorcentre Sustainability Contacts Westpac Group Sustainability contacts For further information on the Westpac Group’s sustainability policies and performance: Email: sustainability@westpac. com.au Visit: www.westpac.com.au/ sustainability Tel: +61 2 8254 8488 For information on our compliance with International Agreements, including the United Nations Global Compact and Declaration on Human Rights, contact the General Manager of Group Corporate Affairs & Sustainability via the Sustainability team, details above. W E S T P A C G R O U P A n n u a l R e p o r t 2 0 1 6 www.westpac.com.au 

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