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OFG BancorpHelp when it matters.2019Annual Report Westpac Group’s 2019 Reporting Suite Westpac’s full 2019 reporting suite includes the Group’s Annual Report, Full Year Financial Results, Investor Discussion Pack, Annual Review and Sustainability Report, Sustainability Performance Report, Pillar 3 Report and other shareholder information including a financial calendar. For details, visit the Investor Centre at westpac.com.au/investorcentre.Annual ReportAnnual Review and Sustainability ReportSustainability Performance ReportHelp when it matters.2019Annual Report Help when it matters.2019Annual Review & Sustainability ReportHelp when it matters.2019Sustainability Performance ReportOur commitment to helping started in 1817 when Westpac first opened its doors, helping to build a fledgling colony’s diversified economy and its own currency.Helping is at the heart of what we do and is central to our vision to become one of the world’s great service companies. Whether it’s helping customers buy and pay off their homes, manage their finances or kick start a business – or by supporting them in times of change or difficulty – we are there to help in the moments that matter.By getting service right, customers benefit, the community benefits and shareholders benefit.Help when it matters.Cover image and this page: Westpac’s 2019 ‘Baker of Beirut’ campaign Westpac Banking Corporation ABN 33 007 457 141 Table of contents
Table of contents
Annual Report
Performance highlights
Section 1
Chairman’s report
Chief Executive Officer’s letter
Information on Westpac
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
Business
Westpac Institutional Bank
Westpac New Zealand
Group Businesses
Risk and risk management
Risk factors
Risk management
Credit risk
1
115
116
116
116
117
117
117
118
118
118
118
121
121
130
132
135
136
142
279
289
290
300
304
307
Funding and liquidity risk
Market risk
Operational risk
Conduct and compliance risk
Governance risk
Risk culture
Strategic risk
Capital adequacy
Cyber risk
Reputation risk
Sustainability risk
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
inside back cover
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3
4
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114
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.
2019 Westpac Group Annual Report12344Westpac Group’s 2019 Reporting Suite Westpac’s full 2019 reporting suite includes the Group’s Annual Report, Full Year Financial Results, Investor Discussion Pack, Annual Review and Sustainability Report, Sustainability Performance Report, Pillar 3 Report and other shareholder information including a financial calendar. For details, visit the Investor Centre at westpac.com.au/investorcentre.Annual ReportAnnual Review and Sustainability ReportSustainability Performance ReportHelp when it matters.2019Annual Report Help when it matters.2019Annual Review & Sustainability ReportHelp when it matters.2019Sustainability Performance ReportOur commitment to helping started in 1817 when Westpac first opened its doors, helping to build a fledgling colony’s diversified economy and its own currency.Helping is at the heart of what we do and is central to our vision to become one of the world’s great service companies. Whether it’s helping customers buy and pay off their homes, manage their finances or kick start a business – or by supporting them in times of change or difficulty – we are there to help in the moments that matter.By getting service right, customers benefit, the community benefits and shareholders benefit.Help when it matters.Cover image and this page: Westpac’s 2019 ‘Baker of Beirut’ campaign Westpac Banking Corporation ABN 33 007 457 141
Performance highlights
2
Performance highlights
Net profit after tax $6,784 million, down 16%
Dividends $1.74, down 14 cents
Net profit after tax1 ($m)
Dividends per ordinary share (cents)
Special dividends
1
9
9
,
6
6
4
3
,
6
1
5
7
,
6
6
3
9
,
5
2
1
0
,
8
1
6
5
,
7
5
4
4
,
7
0
9
9
,
7
5
9
0
,
8
4
8
7
,
6
6
6
1
6
5
1
9
3
1
0
2
4
7
1
2
8
1
7
8
1
8
8
1
8
8
1
8
8
1
4
7
1
10
11
12
13
14
15
16
17
18
19
10
11
12
13
14
15
16
17
18
19
Cash earnings $6,849 million, down 15%
Returns 10.8%, down 225bps
Cash earnings2 ($m)
Cash earnings to average ordinary equity2,3 (%)
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
2
6
0
,
8
5
6
0
,
8
9
4
8
6
,
1
.
6
1
0
.
6
1
4
.
5
1
9
.
5
1
4
.
6
1
8
.
5
1
0
.
4
1
8
.
3
1
0
.
3
1
8
.
0
1
10
11
12
13
14
15
16
17
18
19
10
11
12
13
14
15
16
17
18
19
Cash earnings per ordinary share, down 16%
Cash earnings per ordinary share2,4 (cents)
3
.
9
0
2
8
.
4
1
2
8
.
7
9
1
4
.
5
4
2
2
.
8
4
2
5
.
5
3
2
7
.
9
3
2
2
.
6
3
2
8
.
7
2
2
2
.
8
9
1
10
11
12
13
14
15
16
17
18
19
Reported earnings
Net profit after tax1 ($m)
Earnings per share (cents)
Dividends per share (cents)
Return on equity3 (%)
Expense to income ratio (%)
Common Equity Tier 1 capital ratio (%)
Cash earnings basis2
Cash earnings ($m)
Cash earnings per share (cents)
Cash earnings return on equity (%)3
Economic profit5 ($m)
2019
2018
2019/2018
% change
6,784 8,095
196.5
237.5
188
174
10.7
(16%)
(17%)
(7%)
13.1
(240bps)
48.9
43.8
Large
10.7
10.6
4bps
6,849 8,065
198.2 236.2
(15%)
(16%)
10.8
13.0
(225bps)
1,619 3,444
(53%)
1. Net profit attributable to ordinary equity holders.
2. The adjustments to our reported results to derive cash earnings are described in Note 2 of our 2019 financial statements.
3. Return on average ordinary equity.
4. Periods prior to 2015 have not been restated for the bonus element of the 2015 share entitlement offer.
5. 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 2019 Results (incorporating the
requirements of Appendix 4E) lodged with the ASX on 4 November 2019 (the’ASX Announcement’).
2019 Westpac Group Annual Report
3
01
Chairman’s report
Chief Executive Officer’s letter
Information on Westpac
(including Remuneration Report)
Directors’ report
2019 Westpac Group Annual Report1234
Five year summary1
4
Chairman’s report
This year
has been
a challenging
period
Lindsay Maxsted
Chairman
A challenging year
This year has been a challenging period for the financial
services sector, and for Westpac. At an industry
level, the repercussions from the Royal Commission
into Misconduct in the Banking, Superannuation and
Financial Services Industry (Royal Commission) have
continued, self-assessments into governance, culture
and accountability have been completed, and there has
been an increase in regulatory actions and remediation
costs. The operating environment has also become
more difficult with lower economic growth, historically
low interest rates, and even more competition from
international banks, non-banks and niche players.
Despite the challenges presented by the environment,
our capital remains above the Australian Prudential
Regulation Authority’s (APRA) unquestionably strong
benchmark, our funding and liquidity is sound, and
our customer franchise is healthy with a market share
of around 20% across most of the major segments in
which we operate. At the same time we have been rated
the most sustainable bank in Australia (and rated 9th in
world) by the Dow Jones Sustainability Index.
Noting our overall position, we do however face a
number of challenges. Over the last 12 months we have
faced into these, sought to work through the issues
and commenced a number of programs to further
strengthen our position – particularly in enhancing our
approach to governance and risk management. We will
continue to do so.
Royal Commission
Last year in my letter to you I spoke about the impact
of the Royal Commission and the lessons for Westpac.
These were:
(1) that we were slow to focus on non-financial risks
such as conduct, compliance and reputation;
(2) we did not fully appreciate the underlying risks in
the financial planning business; and
(3) that some remuneration arrangements inadvertently
contributed to poor behaviour.
Having identified many of our shortcomings last year,
our focus this year has been on fixing the issues and
beginning to restore the trust that you and customers
have placed in us. Dealing with these lessons in reverse
order, we have already made a number of changes
in remuneration across the organisation to reduce
potential conflicts and ensure the right incentives are
in place for employees. We’ve also made changes to
executive remuneration – which I discuss further below.
In relation to the second lesson, in March this year,
following a detailed review, we announced our decision
to exit the financial planning business. As part of this
change we ceased providing personal financial advice
by salaried financial advisers under our own brands
and discontinued the practice of enabling independent
advice groups to operate under our licence.
On non-financial risks, in addition to some of the
findings of the Royal Commission we completed a
detailed analysis through our Culture Governance and
Accountability (CGA) self-assessment. This report was
produced for the Board and APRA and provided a
thorough assessment of our strengths and weaknesses
in risk culture, governance and accountability. The
report was prepared by a dedicated team supported by
Oliver Wyman (a global independent expert in financial
services) and is available on our website.
The CGA self-assessment indicated that “Westpac’s
governance, accountability and culture settings, in their
totality generally support sound management of the
Group’s non-financial risks.” The report also highlighted
that “Westpac’s management of non-financial risks…
remains generally less mature than its management of
financial risks and this factor is likely near, or at the root
cause of many of Westpac’s non-financial risk related
issues.”
In other findings, the report indicated that some of
Westpac’s strengths had side effects that impacted the
Group’s culture. For example, the Group’s strong focus
on financial risk has contributed to an “organisational
imperative for safety” and a tendency to over-analyse
issues. On the face of it this could be a strength for a
large financial institution however, these characteristics
have also meant that we have tended to be slow in
decision-making and weak on execution.
Enhancing Governance
In response to the findings of our CGA self-assessment,
we have commenced a detailed program of work to
fix the issues. This work is also aligned with our Royal
Commission Response plan.
While there is still much to do we have nevertheless
made significant progress:
• Of the 45 recommendations in our CGA self-
assessment, 40% have now been implemented.
• Of the 49 Royal Commission recommendations that
require action by to us, 11 have been implemented
and progress is underway with a further 11. The
remaining 27 recommendations require further
clarity or legislative change before we can fully
progress but we are doing all we can now.
2019 Westpac Group Annual Report Chairman’s report
Reading this report
5
I want to highlight that the Board sees these changes
as a positive and necessary investment in Westpac’s
long term sustainability and we are monitoring progress
closely. However I do not want to underestimate the
task ahead of us. It is complex and it will take some
time before we can claim completion. That said, we are
determined to invest what is necessary to complete our
plans and build an even more sustainable organisation.
Shareholders should also be aware that the increase
in scrutiny may result in further regulatory action and
litigation against your company. We will continue to
investigate these matters fully and impartially and where
we recognise we have done the wrong thing we will
take responsibility; and if customers have been affected
we will put things right. There will at times however be
genuine disagreement with regulators and in those cases
we will continue to engage constructively.
Financial Performance
This year our financial performance was disappointing.
While we have continued to grow the balance sheet,
and customer numbers, the significant costs associated
with remediating customers, improving governance
and responding to regulatory change have contributed
to a reduction in earnings. Brian will deal with financial
performance in more detail in his letter but let me cover
the key points.
Reported net profit in Full Year 2019 was $6,784 million
down from $8,095 million in 2018. Cash earnings (our
preferred measure of performance) for the year ended
30 September 2019 was $6,849 million, 15% lower than
the 2018 financial year.
To put performance in perspective, of the $1,216 million
decline in cash earnings, $849 million was due to higher
costs associated with customer remediation and costs
associated with exiting financial planning, what we
have called ‘notable items’. The remaining decline was
mainly due to lower interest margins, a decline in wealth
management and insurance revenue and increased
regulatory and compliance costs.
On the balance sheet liquidity, funding and credit
quality remain strong. Our key liquidity ratios continue
to remain comfortably above regulatory minimums and
we have maintained a sound funding mix.
Credit quality has continued to be a highlight with
all elements of the portfolio in good shape. The ratio
of stressed assets to total committed exposures has
remained near cyclical lows at 1.20%, while impaired
assets represent just 0.25% of total lending. There has
been some increase in consumer delinquencies over the
last couple of years consistent with the softening in the
economy but this is not unexpected.
Capital
Reflecting our priority for strength, Westpac has
materially strengthened its capital position over many
years with our ordinary equity almost doubling since
2009 while our asset base has increased by closer to
50% - a material reduction in gearing. Our CET1 capital
ratio started the decade below 7% and at September
2019 was 10.67%.
Despite this position, the lower earnings and a variety
of changes in the calculation of the components of the
CET1 capital ratio (CET1 capital and risk weighted assets)
has meant that, absent any action on our behalf, we
would not have had a sufficient buffer above APRA’s
unquestionably strong benchmark of 10.5%. As a result,
the Board has taken the decision to raise capital through
an institutional placement and a share purchase plan to
raise around $2.5 billion.
The raising is expected to lift the Group’s capital ratios
by around 581 basis points giving us extra capacity to
support customers, including if the economy weakens,
while increasing the buffer for any additional factors
that may impact capital in the period ahead, including
regulatory actions, litigation or changes in APRA or
RBNZ capital requirements.
Dividends
The Board also took the difficult decision this half to
reduce the final 2019 dividend to 80 cents per share,
fully franked. This is a 15% reduction on both the final
2018 dividend and the interim 2019 dividend of 94 cents
per share. This dividend represents a final dividend pay
out ratio of 79% and a dividend yield of 5.4% (before
franking).
This brings the full year dividend to 174 cents per share,
down from 188 cents per share in 2018.
There were a number of factors that led to the decision
to reduce the dividend and we recognise the impact
on shareholders, but as a Board we must continue to
prioritise strength and make decisions that we believe
are in the best long term interests of the company.
In setting the dividend, the Group seeks to maintain
a payout ratio that is sustainable, which we currently
assess as being around 70-75%. While the final dividend
payout ratio is above this level, if we exclude the notable
items referred to earlier, the payout ratio, on a cash
earnings basis, is 71%.
1. Based on risk weighted assets as at 30 September 2019, a 46
basis point increase reflects the impact of the placement only of
$2 billion, while a 58 basis point increase reflects the impact of
both the placement and the share purchase plan, assuming the
share purchase plan raises $500 million (the basis point impacts
are net of issue costs).
2019 Westpac Group Annual Report1234 6
Chairman’s report
It is also worth highlighting that the Bank Levy has
continued to weigh on earnings and on returns to
shareholders. This year, the Bank Levy was equivalent to
around 8 cents per share (4 cents per share each half).
The Bank Levy is based on the size of certain liabilities,
not on earnings. Accordingly while earnings were lower
this year, the Bank Levy was higher.
The final ordinary dividend will be paid on 20 December
2019 with the record date of 13 November 2019.
Remuneration
At our 2018 AGM, we received a significant vote against
the adoption of our 2018 Remuneration Report and,
as a result, incurred a ‘first strike’. In accordance with
Australia’s Corporations Act, if we receive a ‘second
strike’ against our 2019 Remuneration Report, a
separate resolution must be put to shareholders at the
2019 AGM asking if they wish to hold an extraordinary
general meeting, known as a ‘spill meeting’.
The Board and I recognise that our decisions on
executive remuneration in 2018 were not in line
with shareholder expectations. In response, we
have consulted extensively over the year to better
understand shareholder views and act on their
feedback. We met with groups of individuals with
the help of the Australian Shareholders’ Association
and we held a number of meetings with institutional
shareholders and advisory groups. I have also received
significant correspondence from shareholders. I greatly
appreciate the time that shareholders have taken to
share their thoughts directly with me and your Board.
In my letter to shareholders accompanying the interim
dividend earlier this year, I explained that the key
concern of shareholders was that your Board did not
apply sufficient discretion to short-term variable reward
(STVR) outcomes in 2018, given Westpac’s flat financial
performance in 2018 and the significant risk and
reputation matters that arose.
Shareholders also provided feedback on the overall
quantum of executive pay, the use of a fair value
allocation methodology to determine the award value of
long-term variable reward and the lack of variability in
short-term variable reward to executives over time.
In response to this feedback, combined with your
Board’s assessment, we made a number of changes
to executive remuneration outcomes this year. The
remuneration report discusses these in more detail,
however the key features of remuneration in 2019
include:
• The CEO has not received any STVR this year. At the
same time, the CEO has had no increase in his base
pay, and indeed he has not had an increase in his
base pay since he commenced the role in 2015.
• Group Executives received between 0% and 83% of
their STVR.
• The Board used its discretion to apply downward
remuneration adjustments to two Group Executives
and two former Group Executives in response
to material risk and compliance matters that
impacted the Group. These adjustments reduced
2019 STVR outcomes to zero for the two former
Group Executives. Many of these adjustments
related to events from prior periods. In addition, the
Board exercised its discretion to apply downward
adjustments to a portion of deferred STVR for two
former Group Executives.
• No LTVR vested for the CEO and Group Executives
in 2019 as performance hurdles were not met.
These awards typically make up around one third
of each of the CEO’s or a Group Executive’s total
remuneration; and
• Director base fees were reduced by 20% for all
current Non-executive Directors for the 2019
financial year.
Changes have also been made to 2020 remuneration
structures including the removal of a fair value
allocation methodology (and moving to face value)
to determine the number of performance share
rights issued under the LTVR to the CEO and Group
Executives. This change contributes to a reduction in
the total target remuneration of the CEO and Group
Executives by 23% and 12.5%, respectively.
We will continue to assess our approach to
remuneration, taking into account shareholder feedback
and new requirements which are being developed by
APRA.
Further details on Westpac’s 2019 performance,
governance and remuneration outcomes, is available
in our 2019 Annual Report and our Annual Review and
Sustainability Report.
2019 Westpac Group Annual Report Chairman’s report
7
Board renewal
Over recent years, your Board has undergone
significant renewal and I am confident the Board has
the right mix of skills, experience and diversity to
guide our business. This year we welcomed two new
members to the Board: Margie Seale and Steve Harker.
Margie has already proven to be a valuable addition
to your Board with over 25 years of senior executive
experience in both Australia and internationally. With a
background in consumer goods and global publishing,
Margie also has direct experience in how digital can
disrupt traditional businesses, which is of great value to
your Board.
Steve Harker has strengthened the Board’s banking
and financial services skills, with a particular focus on
investment and institutional banking. Prior to joining
the Board, Steve was Vice Chairman of Morgan Stanley
Australia and was Managing Director of Morgan Stanley
Australia for almost 20 years.
The Board’s commitment
In closing, I would like to reiterate a point from last year’s
report that your Board is here to represent shareholders
and we shall unashamedly continue to do so, including
striving to provide you with the best possible returns on
your investment over the long-term.
We recognise that we still have work to do to rebuild the
platform that will improve Westpac’s sustainability and
restore the trust that you, the community and customers
have placed in us – our role will be to ensure that the
plans we have put in place will be followed through.
Finally, while the Board has been disappointed with the
findings of the Royal Commission and the CGA self-
assessment we recognise that Westpac is a truly special
company. Westpac is Australia’s oldest company with a
deep history of not only supporting its customers but
supporting the nation and the communities in which
we operate. A key part of Westpac’s progress is the
incredible people whose hard work and dedication I see
every day. It is these same people that will see Westpac
emerge from this environment as an even stronger,
sustainable company.
Lindsay Maxsted
Chairman
2019 Westpac Group Annual Report1234 8
Chief Executive Officer’s letter
Chief Executive Officer’s letter
The year ahead
will continue to be
challenging
Brian Hartzer
Chief Executive Officer
Dear Shareholder,
The 2019 financial year was a watershed year for the
banking industry, and for Westpac. In response to
the issues highlighted by the Royal Commission1 and
our Culture, Governance, and Accountability (CGA)
self-assessment2, various regulatory actions across
the industry, and a rapidly evolving competitive
environment, we have made significant changes to the
way we serve customers, to our business structure, and
in the technology we use to support our people and our
customers.
These changes include the implementation of the new
Banking Code of Practice; new policies and approaches
for supporting vulnerable customers; the decision to
exit our financial planning business; the implementation
of a number of new controls and compliance processes,
particularly in lending; and the roll-out of a major new
technology system—the Customer Service Hub—that
provides the foundation for improving both service
quality and cost over the next several years.
We also booked significant provisions for customer
remediation payments and costs associated with our
former financial planning network and various other
operational issues we identified as part of our ‘get it
right, put it right’ initiative.
Externally, we confronted the impact of significantly
lower interest rates and a substantial fall in demand for
lending. This coincided with increased competition from
both traditional and new competitors, many of whom
are being enabled by advances in digital and mobile
technology.
Due to these and other factors, our financial
performance for the year was disappointing. I am
acutely aware of the faith you place in us to look after
your investment and deliver acceptable returns—
including dividends. And I would like to assure you that,
despite the unusually large number of challenges we
faced this year, your management team is committed
to investing in the changes needed to build a more
sustainable business and deliver superior returns over
time.
As part of this commitment, we made further progress
on our aspiration to be one of the world’s great service
companies. This included improvements in service
quality, digital transformation, productivity, and service
culture. While much work remains, we finish this year
stronger than we started, with a clear plan and a high
quality, motivated workforce who are committed to
improving execution and getting things done.
1. Officially, “The Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry”
2. Westpac’s Culture, Governance and Accountability self-
assessment (CGA) was produced for the Westpac Board and
APRA. A copy is available on our website.
As in previous years, my goal with this letter is to
explain what happened this year, what we have
achieved, and where we have fallen short. I also want
to address the changing strategic environment that
we face and how we are adapting so we emerge from
this period as the best positioned bank to deliver
sustainable returns into the future.
I’ve organised this letter to respond to the following
questions:
(1) What drove financial performance this year?
(2) Why are we raising capital?
(3) How are we progressing on our key priorities?
(4) How are we improving non-financial risks, culture,
and governance?
(5) How is the market evolving, and what are our
priorities to respond?
(6) What is the outlook for 2020?
1. What drove financial performance this
year?
We consider financial performance across four
dimensions: strength, return, productivity, and growth.
To be sustainable, banks must strike the right balance
across all these dimensions – and we have had
reasonable success on each.
Balance sheet strength will always be our number
one priority. The lessons of the 1991 recession (the
importance of strong credit risk disciplines) and the
2008 Global Financial Crisis (the importance of strong
funding, liquidity, and capital) are alive and well.
Credit quality remained sound over the year, although
as expected we did see a moderate deterioration in
delinquencies on housing loans, with 0.88% of loan
balances more than 90 days past due. This mostly
reflects some increase in stress and a slowdown
in housing turnover in certain parts of the country,
increasing the time it takes for people to clear their
loans when they need to sell. Our institutional bank
impaired assets to total exposure remain very low at
just 0.08%, while in business lending, impaired assets to
total exposure were up just 3 basis points to 0.62% over
the last 6 months. In New Zealand, the picture is similar
with impaired assets to total exposure just 0.08%, with
the ratio almost halving over the year. The quality of our
credit book meant that impairment charges declined
2% to $794 million, representing 11 basis points of gross
loans.
We finished the year with a strong funding and liquidity
position, which provides resilience in the event of
market disruption. We fully funded new lending with
2019 Westpac Group Annual Report Chief Executive Officer’s letter
9
customer deposits, and our Net Stable Funding ratio
(which measures the proportion of our funding that
comes from ‘sticky’ deposits and other long-term
funding sources) was 112%—well above the 100%
regulatory minimum. At the end of September, we held
$144 billion in cash and other liquid assets, representing
127% of our short-term liabilities (the Liquidity Coverage
Ratio).
Our Common equity tier 1 capital ratio finished the year
at 10.7%, and above APRA’s ‘unquestionably strong’
benchmark (I will discuss our capital position in more
detail later in this letter).
Turning to returns, our overall financial result for FY19
was disappointing. Reported profit was down 16% to
$6,784 million and cash earnings were $6,849 million in
FY19, down 15% or $1,216 million.
Performance was significantly impacted by notable
items of $1,130 million (after tax) in FY19—$849 million
higher than the previous year and accounting for most
of the decline in cash earnings. These notable items
largely reflect provisions we’ve set aside for customer
remediation and costs associated with exiting our
financial planning business.
Excluding notable items, cash earnings were $367
million lower—down 4% compared to FY18. This decline
was mostly due to a 7 basis-point decline in margins to
2.16% as a consequence of a lower Treasury contribution
and an extremely competitive environment.
Earnings were also impacted by lower revenue in
wealth management, and insurance. In wealth, revenue
was down following the exit of our financial planning
business, the removal of grandfathered commissions,
the migration of MySuper accounts and the decision to
reprice platform margins—each of which hurts revenue
in the short term but supports customers and helps us
build a more sustainable business. The lower Insurance
income was primarily due to higher claims particularly
from the severe weather events (Qld storms and NSW
hailstorms) experienced early in 2019.
Given the challenging environment, productivity was
a major focus this year. We achieved our productivity
goal by delivering $405 million in savings. This reflected
the continued progress on our digital agenda—as
customers shift to self-service and we automate manual
processes—as well as better supplier management and
the implementation of a simpler management structure
across the Group.
Growth this year—particularly balance sheet growth—
was relatively slow, reflecting lower credit demand in
the economy, our risk appetite, and the decision to
prioritise margin. In housing, we also implemented a
number of changes to our loan assessment approach,
and unfortunately, did so in a way that made the
application process harder than it needed to be. Given
industry competition, some customers and brokers
diverted their business elsewhere – and our lending
slowed.
In response, we’re working hard to simplify our
processes, with a number of improvements already
rolled out. As a result, we expect home lending to
contract early in the year but to be growing in line with
the system by the end of the 2020 financial year.
Small business growth has also been affected by more
onerous lending requirements, given the links between
many small business customers’ personal and business
finances. Credit demand was also weaker among larger
customers—including corporates—but this was more
a function of weaker business sentiment and a softer
economic outlook.
The reduction in cash earnings, and an increase in the
strength of our capital base, meant that the return on
equity declined to 10.75%—down over 2 percentage
points over the year. Given the importance of capital
as a driver of return on equity, it is important to
understand why we are raising capital at this point.
2. Why are we raising capital?
Our common equity tier 1 (CET1) capital ratio of
10.7% remains well above the 8% minimum regulatory
requirement and is ahead of APRA’s unquestionably
strong benchmark. We hold around $46 billion in
common equity, up $7 billion over the last three years.
That capital provides the backing to absorb losses in
the event of a downturn and forms part of the funding
pool for our lending. In addition, banks with high capital
backing are generally rewarded with higher credit
ratings, which make it cheaper to borrow in capital
markets, particularly offshore.
The complexity comes in the way regulators assess our
capital position—usually through the ratio of capital
to risk-weighted assets (the CET1 capital ratio). From
time-to-time regulators recalibrate how they measure
risk-weighted assets, and what should be included, or
excluded, from the capital base. This in turn can reduce
the reported capital ratio, despite the actual dollar
amount of capital going up. In addition, earlier in the
year APRA applied a $500 million capital overlay to
Westpac (and other Major banks) until such time as we
complete the actions from our CGA self-assessment.
This overlay translated into a further reduction in our
CET1 capital ratio of 16 basis points.
At the end of September, our CET1 capital ratio would
have been around 75 basis points higher had it not
been for such developments. Looking ahead, we
face continued uncertainty around APRA’s capital
requirements, the potential for further regulatory
actions and costs, and the earnings headwinds of low
2019 Westpac Group Annual Report1234 10
Chief Executive Officer’s letter
interest rates and higher compliance costs. Furthermore,
the Reserve Bank of New Zealand is currently proposing
to significantly increase the capital requirements for
New Zealand Banks (although the amount of the
increase is yet to be finalised).
Given our priority for balance sheet strength, we
concluded that the prudent course of action was to
seek to raise $2.5 billion in capital, which increases
our CET1 capital ratio by around 581 basis points. This
capital is expected to increase our buffer above APRA’s
unquestionably strong benchmark of 10.5% and position
us to respond to potential future impacts on capital
(indicated above) and continue to lend and support the
economy in the event of a downturn.
Our decision to reduce the dividend to 80 cents per
share was not easy, as we know that many shareholders
rely on our dividends for income. In addition, we carry
a substantial balance of franking credits that we would
like to distribute to our shareholders. However, with
increased shares on issue and downward pressure on
returns, we felt it was prudent to bring our payout to
a range that allows us to retain sufficient capital to
support future growth.
3. How are we progressing on our
strategic priorities?
In my letter last year, I identified three priorities for the
year ahead:
• Deal with outstanding issues;
• Maintain momentum in our customer franchise; and
• Structural cost reduction.
Deal with outstanding issues
In recent years a number of issues have emerged
relating to past business practices, operational errors,
gaps in compliance, or changes in regulation. These
were identified through the Royal Commission, our CGA
self-assessment, ongoing product reviews, and various
regulatory actions. The faster we resolve these issues,
the sooner we can refocus investment and management
attention on delivering more for customers, thereby
increasing the value of our franchise.
The most significant change over the year was the
exit of our financial planning business and reducing
our operating divisions from five to four. The financial
planning business had been loss-making for some time
and so this change is expected to be EPS positive in
2020. Exiting the business came with an immediate
shut-down cost, but this will be quickly offset by cost
savings and reduced risk. Our remaining Insurance,
Superannuation, Investments, Platforms and Private
Wealth businesses have been integrated into our
Consumer and Business divisions.
Customer remediation was another area of focus. Over
the course of the year we continued to work through
a backlog of historical issues in our financial planning
and banking businesses and we continue to work with
regulators to agree on a fair and reasonable approach
to remediation.
1. Based on risk weighted assets as at 30 September 2019, a 46
basis point increase reflects the impact of the placement only of
$2 billion, while a 58 basis point increase reflects the impact of
both the placement and the share purchase plan, assuming the
share purchase plan raises $500 million (the basis point impacts
are net of issue costs).
The most significant of these issues is the so-called “fee
for no service” issue in financial planning.
Under the “Future of Financial Advice” (FOFA)
legislation introduced in 2012, financial planning
businesses were required to eliminate ‘conflicted
remuneration’ (commission) payments to planners and
move to a fee-for-service model. As part of this, BT
implemented systems (including new contracts, new
technology, and an annual fee disclosure statement)
seeking to ensure customers received the advice
services they were paying for. However, as with other
financial planning businesses, we identified some
incidences of advice not being provided and cases
where insufficient records were retained to meet
regulator expectations.
We have therefore been working through a process
to review our customer files and repay customers
where appropriate. This issue is more complex in the
case of aligned dealer group planners, who operated
separately, but under our licence. This was a standard
industry practice, where companies like BT provided
licensing and back-office services to planning groups.
In these cases, we face significant logistical challenges
in obtaining and checking all the historical files of those
non-Westpac advisers, particularly if they have left the
industry.
Other remediation matters include instances where
we didn’t meet certain reporting standards, or made
administrative or operational errors in certain products.
We have established a dedicated remediation hub
to streamline the process of refunding customers.
Currently there are around 750 staff dedicated to
remediation activities, and since 2017 we have paid out
$350m in compensation to customers.
Beyond remediation, our response to the findings of
the Royal Commission and our CGA self-assessment
are well underway. We have implemented 11
recommendations as part of our Royal Commission
program with a further 11 currently being implemented.
We have commenced work on most of the remaining 27
recommendations that presently apply to us, but we will
need to wait until the government passes the required
legislation before we can fully progress the bulk of
these. With our CGA action plan, we have implemented
40% of the recommendations and we expect to
implement the remainder by March 2021. Changes we
have made so far include centralising our complaints
management, enhancing consequence management
and remuneration governance, and introducing new
board and committee processes.
Maintaining momentum in our customer franchise
The long-term success of our business depends on the
strength and depth of our customer relationships. In
2019 we continued to improve our service offering and
the technology needed to deliver better service in the
future.
2019 Westpac Group Annual Report 11
These and other changes have materially improved
system stability with no major system outages in
FY19—a big step up when you consider just a few years
ago we experienced one or two major issues a month.
Further changes and upgrades are planned that will
further improve the experience for customers and
enable more efficient processes for our bankers.
At the same time, competition has intensified, especially
in the mortgage business. As I indicated earlier,
stepping out of line with the market quickly impacts
market share. This happened to us in the latter part of
the FY19, although we expect this to normalise through
the year ahead.
Increasing structural productivity
Using technology to drive down costs is an important
part of our strategy to remain competitive and deliver
good returns over time. This is increasingly important
in a low-rate, slow-growth environment where margins
are under pressure and regulatory and compliance costs
are rising. At the same time, emerging competitors
have no physical networks to support and have a cost
advantage in delivering some products.
This year our $405 million in productivity savings
through a company-wide focus on simplification,
automation, and digitisation was up one-third on
the productivity savings delivered last year. Part of
this reflects the benefits from prior investments in
digitisation and automation, while a continued shift of
customers from physical to digital channels allowed
us to rationalise 61 branches and reduce ATM numbers
by 375.
Physical presence continues to be important for
many customers and we are investing to upgrade our
branch network in high-volume locations. However,
changing customer traffic patterns into regional
centres and the increasing use of contactless cards
and mobile payments mean that we need fewer, well
located branches to meet demand. To further improve
efficiency, we have entered into an agreement to
sell most of our ‘off-site’ ATM network to a third-
party. This agreement materially retains the level of
service Westpac customers currently receive from our
ATM network but will allow us to benefit from scale
efficiencies that this third party can achieve with their
other cash processing.
Other cost initiatives during the year included
renegotiating supplier arrangements, further
automating back-office operations, and simplifying our
organisational structure. In total, these changes resulted
in a net 5% reduction in full-time equivalent headcount
across the company, despite adding significant
extra resources to support the remediation activities
described above.
Increased compliance, regulatory, and remediation costs
along with revenue headwinds mean that productivity
benefits are not yet visible in traditional measures of
bank productivity, such as the cost-to-income ratio.
However I am confident that, as these programs and
the related costs roll off over the next few years,
the improved efficiency and competitiveness of our
underlying business will become apparent.
Chief Executive Officer’s letter
In recent years we have built a strong service ethos
throughout the company. Employees participate at least
weekly in service ‘huddles’, where we review our service
standards, share stories and examples of good service,
and discuss where we can improve. This reinforces our
customer-first approach and is further supported by
embedding customer satisfaction and related service
metrics in individual scorecards and performance
rewards.
A focus this year was on improving our ability to
identify and support vulnerable customers. This
included setting up a new Customer Vulnerability
Council, making changes to various complaints policies,
and rolling out training to our people on how to identify
customers experiencing vulnerability. We promoted
this through our Westpac “Help when it matters”
advertising, with campaigns around relationship
breakdown, loss of a loved one, and the impact of
natural disasters.
Our continued focus on service has led to a 2% rise in
customers to 11.2 million in Australia. In business, we
held our #1 NPS1 ranking in each of our key segments
and increased our lead on #2 while in consumer, we
rank #3 on NPS1 and closed the gap to #1.
In technology, we delivered several new digital
innovations to make things better for customers. These
included our AI chat-bot ‘Red’, which can respond in
real time to customer enquiries, a fully digital mortgage
process for St.George customers, a new Digital
Institutional Bank platform, an online pricing platform
for term deposits, and an extensive rollout of the real
time New Payments Platform which has seen us process
around 40% of the flows on this platform. Around
40% of our digital sales are now completed online – a
material uplift from just a few years ago.
We have also completed major upgrades to our
technology infrastructure that have improved reliability
and will ultimately enable us to deliver even more for
customers. These include:
• Launching our ‘Customer Service Hub’, a modern
platform for originating and servicing mortgages
and other consumer banking products;
• Rolling out a new data platform that supports the
Government’s ‘Open Banking’ regulations and will
allow us to better understand customer needs;
• Completing the rollout of Panorama, our market-
leading investment platform for independent
financial advisors and their clients; and
• Renewing much of our underlying network and
data centre infrastructure. This included moving
over 600 applications to the new environment and
upgrading over 300 applications hosted on legacy
infrastructure.
1. For details on metric definition and provider please refer to the
2019 Full Year Results Presentation & Investor Discussion Pack
available at www.westpac.com.au
2. BEAR: The Bank Executive Accountability Regime, administered
by APRA
2019 Westpac Group Annual Report1234 12
Chief Executive Officer’s letter
4. How are we strengthening non-financial
risk, governance, and accountability?
The findings of the Royal Commission and our CGA
self-assessment highlighted a number of areas where
we need to improve non-financial risk management,
governance, and accountability. To address these,
several major programs of work are under way, with
specific actions being tracked and reported at both the
Group Executive level and to the Board.
Specific areas of focus include:
•
Improving the identification, escalation, and
resolution of non-financial risk issues across the
Group, with a particular focus on financial crime-
related issues;
• Enhancing our end-to-end lending processes;
• Providing more detailed reporting on operational
and compliance incidents to the Executive team and
Board;
•
Improving the efficiency and effectiveness of
committee meetings;
• Clarifying and strengthening resources under
the ‘Three Lines of Defence’ approach to risk
management;
• Clarifying individual accountability for all managers,
in line with the new BEAR2 regime; and
•
Improving awareness and protection for whistle-
blowers.
In addition, we continue to enhance and reinforce
general risk awareness across the Group.
5. How is the market evolving, and what
are our priorities to respond?
In 2015 we recognised that a once-in-a-generation
change in banking was underway, as a consequence
of changing customer behaviour, new technology, new
competitors, and increased community and regulatory
expectations. Over the past year, these trends have
accelerated. In particular, we see:
• An increasing shift to digital self-service among
customers;
•
Increased competition, especially in mortgages, from
foreign and regional banks who rely on mortgage
brokers for their sales;
• The rise of digital-only competitors;
• The growth of fintech businesses offering new, data-
driven services;
• Our ability to meet ever-rising regulatory
expectations; and
• Our ability to attract and retain top quality talent in
a small market, given our reputation as an employer
of choice.
We recognise that we are a service business: We’ve set
the goal for Westpac to be “one of the world’s great
service companies, helping our customers, communities
and our people to prosper and grow.”
To grow the long-term value of the company, our
strategy is to build scale in customer relationships
through the provision of world-class service; supported
by a strong balance sheet, great people, and a modern,
highly efficient technology platform, as well as a
network of partnerships among new, digitally-savvy
competitors and suppliers.
To bring this strategy to life, we are continuing to deliver
on a multi-year investment program we call the “Service
Revolution”, designed to strengthen our competitive
offers and reshape the capabilities and cost structure of
the company. This program is organised around three
themes:
• Performance disciplines: Prudently managing our
capital, funding, and liquidity; seeking to maintain a
superior ROE to the peer average while remaining
targeted and disciplined on asset growth and credit
quality;
• Service leadership: Continuing to grow the Group’s
customer base while increasing the quality and
depth of those relationships, as measured through
the number of customers who view us as their
main financial institution. We look to achieve this by
delivering world-class service levels (both personal
and digital), as measured by NPS; recognising that
a great service business requires a high quality, well-
trained, diverse, and engaged workforce; and
• Digital transformation: Using technology to
materially improve efficiency and reduce the Group’s
cost-to-income ratio below 40% in the medium-
term. This will include migrating more sales and
service activity to digital, reshaping the Group’s
distribution network, modernising underlying
technology platforms, and building an extensive
network of digital partnerships and data assets.
While we will continue to deliver this program of work
over several years, we have set a number of specific
priorities over the next couple of years. These are:
•
Increased compliance costs and capital requirements
across traditional banking businesses; and
1. Service leadership:
• Extend our #1 in NPS1 for business
• Continued reputational challenges for banks as
a result of issues identified through the Royal
Commission.
While these challenges are significant—particularly in
the short term—we believe the longer-term outlook for
a large bank like Westpac remains positive given:
• The size and strength of our balance sheet
(especially our deposit base and diverse funding
sources);
• The quality and scale of our customer franchise,
including our portfolio of brands and extensive data
assets;
• The financial resources and skills required to build
the technical innovations and partnerships required
in a digital world;
• Close the gap to the #1 major bank in consumer
2. Digital transformation:
• Complete roll-out of the Customer Service Hub
to all our mortgage bankers and to external
brokers
• Launch a new mobile banking app with improved
usability and functionality
• Launch Open Banking data capabilities
• Drive digital sales to 45% across the Group
1. For details on metric definition and provider please refer to the
2019 Full Year Results Presentation & Investor Discussion Pack
available at www.westpac.com.au
2019 Westpac Group Annual Report Chief Executive Officer’s letter
3. Performance discipline:
• Deliver $500 million in annual productivity
savings in FY20 (23% above FY19)
• Further reshape the network
•
Improve controls and risk management
capabilities to ensure Westpac is resilient for
the future, including further implementation of
the Royal Commission and CGA self-assessment
recommendation
We will report progress against each of these goals in
our regular market updates.
6. What is the outlook for 2020?
The economic outlook for Australia remains challenging,
in part reflecting a softer global environment.
Annualised growth in the June quarter of 2019 was only
1.4%, which is lower than population growth of 1.6%. The
dynamics of global trade, weak real wages growth, a
softer housing market, low interest rates and subdued
economic activity have all dampened consumer
confidence.
That said, overall GDP growth remains positive and the
economy continues to benefit from a strong resources
sector, a lower Australian dollar, large infrastructure
investments, and targeted income tax cuts. A slowdown
in residential construction over the last year, combined
with lower interest rates, should see a continued
recovery in house prices building on the momentum
we have seen in the September quarter, particularly
in Sydney and Melbourne. However GDP growth is
likely to remain below longer-term averages (which is ~
2.75%) at 2.3% for calendar 2019 and 2.4% for calendar
2020.
With consumer and business confidence relatively
weak, credit growth has been slow. Overall credit
growth for the Australian financial system slowed to
2.7% in the year to September 2019, down from 4.5%
a year ago. That included a decline in housing credit
growth from 5.4% to 3.1%; business from 3.8% to 3.3%
and personal credit contracting by 4.4% after declining
by 1% a year earlier.
We expect credit growth to lift slightly in 2020 to 3%
overall, with housing credit growth increasing to 3.5%.
Business credit growth is also expected to grow by
around 3%, while other personal credit is expected to
contract by around 2%.
Interest rates are expected to remain very low. The RBA
reduced the cash rate from 1.5% to 0.75% over the year,
and we expect a further rate cut to 0.5% in early 2020.
With rates at this level, there are limited options for the
RBA to cut further if the economy turns down; however
the Commonwealth Budget is set to return to surplus in
2019/20 and the Commonwealth government has the
scope for additional stimulus if required.
Economic conditions in New Zealand have also
softened, with sluggish consumer spending and weak
business confidence. We expect a small improvement
in 2020 supported by lower interest rates; some fiscal
stimulus; and the competitive (lower) New Zealand
dollar.
13
For banks, the environment remains challenging.
Interest rates at these low levels put significant pressure
on margins, as many deposits are essentially at a
‘floor’ beyond which they can’t be repriced down. In
addition, earnings on invested capital and liquidity are
progressively lower as the portfolio rolls-over to much
lower interest rates.
Regulatory actions—flowing from the Royal Commission
and other industry reviews and investigations—
will continue to require significant investment and
management attention. Regulators have substantially
stepped up their resources and enforcement activity,
leading to a dramatic increase in our own costs as we
respond to the various enquiries, make improvements in
our non-financial risk and control environment, and deal
with the consequences—including fines and other legal
fees—related to any adverse findings.
In addition, regulators in Australia and New Zealand
have a number of reviews underway, in many areas
including home loan pricing, remuneration, and capital/
risk weighted asset methodologies across the sector.
Further clarity on these reviews is expected in the year
ahead.
Conclusion
I want to conclude by thanking shareholders, on behalf
of the management team and all of our employees, for
your continued support this year. We recognise that
reputational issues, regulatory and legal issues, and
financial performance challenges have made this a
difficult year to be an investor in Westpac.
The year ahead will continue to be challenging, from
multiple perspectives—economic, competitive, legal,
reputational, and regulatory. I hope that my letter has
provided some useful context as to the nature of these
challenges and the clear-eyed way in which we are
responding to this environment. We recognise where
we have fallen short, and are absolutely committed to
executing better and delivering on our strategy for the
future.
Through everything that has happened this year, I
remain very proud of this company, and its people.
We are well positioned, with many talented, dedicated
bankers who come to work every day genuinely
seeking to deliver world-class service and innovation for
customers.
I believe Westpac’s future is very bright and 2019
will prove to be a watershed for us in confronting
the realities of a changed banking environment
and responding decisively in ways that set us up to
outperform in the future.
Once again, thank you for your continued support and
faith in the Westpac Group.
Brian Hartzer
Chief Executive Officer The Westpac Group
2019 Westpac Group Annual Report1234
Information on Westpac
14
Information on Westpac
Westpac is one of the four major banking organisations
in Australia and one of the largest banking organisations
in New Zealand. We provide a broad range of banking
and financial services in these markets, including
consumer1, business and institutional banking and
wealth management services.
We have branches, affiliates and controlled entities2
throughout Australia, New Zealand, Asia and 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 2019, our market capitalisation was
$103 billion4 and we had total assets of $907 billion.
Organisational structure
Our business is focused in Australia and New Zealand,
operating under multiple brands. The Group operates
through an extensive branch and ATM network,
significant online capability, and call centres supported
by specialist relationship and product managers. Our
operations comprise the following key divisions:
Consumer is responsible for sales and service to
consumer customers in Australia. Consumer is also
responsible for the Group’s insurance business which
covers the manufacture and distribution of life, general
and lenders mortgage insurances. The division also uses
a third party to manufacture certain general insurance
products. Banking products are provided under the
Westpac, St.George, BankSA, Bank of Melbourne, and
RAMS brands, while insurance products are provided
under Westpac and BT brands. Consumer works with
Business and WIB in the sales, service, and referral
of certain financial services and products including
superannuation, platforms, auto lending and foreign
exchange. The revenue from these products is mostly
retained by the product originators.
Business provides business banking and wealth facilities
and products for customers across Australia. Business is
responsible for manufacturing and distributing facilities
to SME and Commercial business customers (including
Agribusiness) generally for up to $150 million in
exposure. SME customers include relationship managed
and non-relationship managed SME customers
(generally between $100k-$250k facilities). The division
offers a wide range of banking products and services
to support their borrowing, payments and transaction
needs. In addition, specialist services are provided
for cash flow finance, trade finance, automotive and
equipment finance and property finance. The division is
1. A consumer is defined as a person who uses our products and
services. It does not include business entities.
2. Refer to Note 31 to the financial statements for a list of our
material controlled entities as at 30 September 2019.
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 2019.
also responsible for Private Wealth and the manufacture
and distribution of investments (including margin
lending and equities broking), superannuation and
retirement products as well as wealth administration
platforms. Business operates under the Westpac,
St.George, BankSA, Bank of Melbourne, and BT brands.
Business works with Consumer and WIB in the sale,
referral and service of select financial services and
risk management products (including corporate
superannuation, foreign exchange and interest rate
hedging). The revenue from these products is mostly
retained by the product originators.
Westpac Institutional Bank (WIB) delivers a broad
range of financial products and services to commercial,
corporate, institutional and government customers
operating in, or with connections to Australia and New
Zealand. WIB operates through dedicated industry
relationship and specialist product teams, with expert
knowledge in transactional banking, and financial
and debt capital markets. Customers are supported
throughout Australia and via branches and subsidiaries
located in New Zealand, the US, UK and Asia. WIB is
also responsible for Westpac Pacific providing a full
range of banking services in Fiji and PNG. WIB works
with all the Group’s divisions in the provision of markets
related financial needs including foreign exchange and
fixed interest solutions.
Westpac New Zealand is responsible for sales and
service of banking, wealth and insurance products for
consumer, business and institutional customers in New
Zealand. Westpac conducts its New Zealand banking
business through two banks: Westpac New Zealand
Limited, which is incorporated in New Zealand and
Westpac Banking Corporation (New Zealand Branch),
which is incorporated in Australia. Westpac New
Zealand operates via an extensive network of branches
and ATMs across both the North and South Islands.
Business and institutional customers are also served
through relationship and specialist product teams.
Banking products are provided under the Westpac
brand while insurance and wealth products are provided
under Westpac Life and BT brands, respectively. New
Zealand also maintains its own infrastructure, including
technology, operations and treasury.
Group Businesses include:
• Treasury, which is responsible for the management
of the Group’s balance sheet including wholesale
funding, capital and the 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, (excluding Westpac New
Zealand) within set risk limits;
• Group Technology, which is responsible for
technology strategy and architecture, infrastructure
and operations, applications development and
business integration in Australia;
• Core Support, which comprises functions performed
centrally, including Australian banking operations,
property services, strategy, finance, risk, compliance,
legal, human resources, and customer and corporate
relations; and
2019 Westpac Group Annual Report Information on Westpac
• Following the Group’s decision to restructure its
wealth operations and exit its Advice business
in March 2019, the residual Advice operations
(including associated remediation) and certain
support functions of BTFG Australia have been
transferred to Group Businesses.
Group Technology costs are fully allocated to other
divisions in the Group. Core Support costs are
partially allocated to other divisions, while Group
Head Office costs are retained in Group Businesses.
Group Businesses also includes earnings on capital not
allocated to divisions, certain intra-group transactions
that facilitate the presentation of the performance of
the Group’s divisions, gains/losses from most asset
sales, earnings and costs associated with the Group’s
Fintech investments, and certain other head office items
such as centrally raised provisions.
Significant developments
Westpac significant developments
Customer remediation
Through the Group’s ‘get it right, put it right’ initiative
we have continued to review products, processes
and policies to identify where we may not have got it
right for our customers. Where problems have been
identified, the Group has committed to fix them and
refund customers. These initiatives identified a number
of issues that require ongoing remediation.
The Group has undertaken steps designed to accelerate
the processing of customer refunds and centralise
oversight of certain remediation under the Chief
Operating Officer.
Further information in relation to compliance, reputation
and remediation provisions is included in Note 27 to the
financial statements.
Changes to wealth strategy
During the course of the year, Westpac reset its wealth
strategy and made a number of changes to its wealth
business. This resulted in the realignment of our major
BT Financial Group businesses into the Consumer and
Business divisions from 1 April 2019.
During the financial year ended 30 September 2019,
Westpac also completed the exit of its personal
financial advice business, which included completing a
sale with Viridian Advisory on 1 July 2019 and moving to
a referral model for financial advisers utilising a panel of
adviser firms.
First strike against remuneration report
On 12 December 2018 at Westpac’s Annual General
Meeting of shareholders, Westpac incurred a first strike
against its remuneration report. A strike occurs where a
company’s remuneration report receives a ‘no’ vote of
25% or more. If Westpac receives a second strike at its
2019 Annual General Meeting, a spill resolution will be
put to shareholders. If 50% or more of votes cast are in
favour of that spill resolution, a spill meeting is required
to be held within 90 days. At that spill meeting, certain
directors will be required to stand for re-election.
In response to the first strike and other feedback
received Westpac has made changes to both the
structure of remuneration and outcomes. Further detail
is included in the Remuneration Report included in the
Directors’ Report.
15
Financial crime
In an environment of ongoing legislative reform,
regulatory change and increased industry focus,
Westpac continues to progress a program of work
to improve its management of financial crime risks
(including Anti-Money Laundering and Counter-
Terrorism Financing (AML/CTF), sanctions, Anti-Bribery
and Corruption, FATCA and Common Reporting
Standards). This work includes a review of our AML/
CTF policies, the completeness of data feeding into
our AML/CTF systems and our AML/CTF processes
and controls. Westpac has been regularly updating
AUSTRAC on progress and continues to implement
a number of improvements to its AML/CTF Program,
governance, policies, systems and controls together
with related remediation work in respect of certain
controls and reporting practices. These efforts relate to
matters such as customer on-boarding, customer and
payment screening; ongoing customer due diligence,
transaction monitoring and regulatory reporting
(including in relation to International Funds Transfer
Instructions (IFTIs), Suspicious Matter Reports and
Threshold Transaction Reports).
As reported in the Group’s 2018 Annual Report, the
Group self-reported to AUSTRAC a failure to report
a large number of IFTIs (as required under Australia’s
AML/CTF Act). Under the Act, the ‘sender’ financial
institution of an IFTI transmitted out of Australia, or the
‘recipient’ financial institution of an IFTI transmitted into
Australia, is required to report the IFTI to AUSTRAC
within 10 business days of the instruction being sent
or received. The majority of the IFTIs which are the
subject of the Group’s engagement with AUSTRAC,
concern batch instructions received by Westpac
through one WIB product between 2009 and 2018 from
a small number of correspondent banks for payments
made predominantly to beneficiaries living in Australia
in Australian dollars, on behalf of clients of those
correspondent banks. The majority of the payments
were low value, recurring and made by foreign
government pension funds and corporates.
AUSTRAC has issued a number of detailed statutory
notices over the last year requiring information relating
to the Group’s processes, procedures and oversight.
These notices relate to a range of matters including
these IFTI reporting failures and associated potential
failings related to record keeping and obligations
to obtain and pass on certain data in funds transfer
instructions, as well as correspondent banking due
diligence, risk assessments and transaction monitoring.
Westpac has not yet received an indication from
AUSTRAC about the nature of any enforcement action
it may take. The Group is continuing to work with
AUSTRAC in relation to these matters.
Any enforcement action against Westpac may include
civil penalty proceedings and result in the payment of a
significant financial penalty, which Westpac is currently
unable to reliably estimate. Previous enforcement action
by AUSTRAC against other institutions has resulted
in a range of outcomes, depending on the nature and
severity of the relevant conduct and its consequences.
Further information about these matters is set out in
Note 27 to the financial statements. Details about the
consequences of failing to comply with financial crime
obligations is set out in ‘Risk Factors’ in section 2.
2019 Westpac Group Annual Report1234 16
Information on Westpac
Regulatory and Government focus
Royal Commission into the banking, superannuation
and financial services industries
On 14 December 2017, the Australian Government
established a Royal Commission into potential
misconduct in Australia’s banks and other financial
services entities. The Royal Commission’s Final Report
was released on 4 February 2019 and contained 76
express recommendations. In light of Westpac’s wealth
strategy reset and the Government’s signalled approach
to implementation, 49 of those recommendations
presently apply to Westpac. Of these 49
recommendations, 11 recommendations have now been
implemented, with Westpac either establishing new
practices and procedures to meet the recommendations
or having existing practices consistent with the
recommendation, and a further 11 recommendations are
in the process of being implemented. Some of these
recommendations will require legislative or regulatory
action before implementation can be completed.
The remaining 27 recommendations require legislative
or regulatory action before implementation work can
commence. Westpac is undertaking preparatory work
where possible, including through participation in
Government consultation.
The recommendations are broadly aimed at
protecting consumers against misconduct, providing
adequate redress and addressing asymmetries of
power and information between financial services
entities and their customers. Implementation of the
recommendations is likely to continue to have a
significant impact on banking and financial services
entities and their regulators. Some of the most
significant recommendations include those concerning
the regulation of mortgage brokers, the prohibition
of unsolicited sales of insurance and superannuation
products and removal of grandfathered commissions.
The Government has stated that it will take action on
all of the recommendations contained within the Final
Report. On 19 August 2019, the Government released its
Royal Commission implementation roadmap which sets
out a timeline for consultation and the introduction of
legislation which will implement the recommendations.
The implementation roadmap foreshadows that a large
number of legislative changes will be enacted into law
or introduced before Parliament by mid-2020.
Other impacts arising from the Royal Commission
include a number of claims being brought against
financial institutions in relation to certain matters
considered during the Royal Commission, and the
referral of several cases of misconduct to the financial
regulators by Commissioner Hayne.
APRA self-assessment
On 29 November 2018, Westpac submitted to APRA
its self-assessment on its frameworks and practices in
relation to governance, culture and accountability. A
copy of Westpac’s self-assessment is available on our
website.
On 22 May 2019, APRA released a report analysing
self-assessments carried out by 36 banks, insurers
and superannuation licensees. APRA noted a wide
variation in the quality of the self-assessments, however
consistent findings in the self-assessments included:
• non-financial risk management requires
improvement;
• accountabilities are not always clear, cascaded and
effectively enforced;
• acknowledged weaknesses are well-known and
some have been long-standing; and
•
risk culture is not well understood, and therefore
may not be reinforcing the desired behaviours.
Westpac has a program of work underway to
address the recommendations identified in the
self-assessment report which has oversight of the
Westpac Board. Westpac has implemented 40% of the
recommendations identified in the self-assessment and
expects to complete its program of work by March 2021.
Regulatory reviews and inquiries
Provision of credit - reviews by and engagement
with regulators
The provision and availability of credit for residential
mortgage holders, property investors and businesses
has continued to be a key area of Government, regulator
and industry focus throughout the financial year ended
30 September 2019. Regulatory focus on credit from
APRA has primarily been related to serviceability at
an industry level, while ASIC has continued to consult
on proposed changes to its regulatory guide on
responsible lending. Judicial guidance on the extent of
responsible lending obligations was also obtained from
the Federal Court in its judgment in ASIC’s responsible
lending test case against Westpac (with the judgment
currently under appeal). More information on these
proceedings is set out in this section below.
APRA has also been engaging with Westpac on the
adequacy of our credit risk management framework
including our controls, policies and operating systems.
Following feedback from APRA, the Group is making
a number of changes to its systems and controls to
improve its end-to-end approach in relation to its
mortgage and business lending portfolios, as well as
other key processes. This includes enhancing portfolio
management practices, systems upgrades (including
data collection and rationalisation), strengthening
collateral management processes and improving
assurance and oversight over our credit management
frameworks. This program of work also addresses issues
identified by Westpac’s internal assurance and audit
teams.
Westpac will continue its work to improve its end to end
credit processes and expects engagement with APRA in
this regard to continue throughout Full Year 2020.
2019 Westpac Group Annual Report Information on Westpac
17
Australian Competition and Consumer Commission
(ACCC) inquiry into home loan pricing
On 14 October 2019, the ACCC was directed by the
Treasurer of Australia to conduct an inquiry into home
loan pricing since 1 January 2019. The inquiry has been
established to:
•
investigate the prices charged for home loans across
the sector;
•
the Taskforce releasing a report on 2 October 2019.
The report sets out ASIC’s observations on director
and officer oversight of non-financial risk, how
directors and officers of large and complex financial
services companies are discharging their duties in
relation to oversight and monitoring of non-financial
risk, and ways that governance practices could be
improved.
• consider how banks make pricing decisions,
including their approach to passing on movements
in the official cash rate;
• examine differences in the prices paid by new and
existing customers;
• examine differences between the interest rates
published by suppliers and the interest rates paid by
customers; and
•
investigate barriers that may prevent consumers
from switching lenders.
An interim report is due by 30 March 2020 and a final
report is due by 30 September 2020.
ACCC residential mortgage products price inquiry
in relation to the Bank Levy
The ACCC undertook a specific inquiry into the pricing
of residential mortgages by those banks affected by
the Bank Levy (including Westpac), which included
monitoring the extent to which the Bank Levy was
passed on to customers. The final report was published
in December 2018 and made a number of findings
about the pricing or residential mortgages, including
that the banks that were the subject of the inquiry did
not change residential mortgage prices specifically to
recover the costs of the Bank Levy.
AFCA look back review
On 4 February 2019, the Australian Government
announced that, in response to the recommendations
contained in the Royal Commission’s Final Report, it
would expand the remit of the Australian Financial
Complaints Authority (AFCA) for 12 months so that it
can consider customer claims dating back to 1 January
2008 and award compensation where appropriate.
AFCA has expanded its jurisdiction to consider these
legacy complaints for an additional 12 month period to
30 June 2020.
Increased regulatory powers and oversight
Australian Securities and Investments Commission
(ASIC) Enforcement Review Taskforce
On 16 April 2018, the Australian Government agreed to
implement all of the recommendations made by the
ASIC Enforcement Review Taskforce in its review of the
suitability of ASIC’s existing regulatory tools.
Progress continues to be made in implementing these
recommendations, including:
•
the Australian Treasury releasing five draft Bills on 11
September 2019 for consultation which, if enacted,
would further strengthen ASIC’s enforcement
and supervision powers by implementing certain
recommendations relating to search warrants,
access to telecommunications interception
information, licensing and banning orders; and
Enhanced penalties for corporate and financial
sector misconduct
On 12 March 2019, the Treasury Laws Amendment
(Strengthening Corporate and Financial Sector
Penalties) Act 2019 (Cth) received royal assent. The Act
strengthens penalties for corporate and financial sector
misconduct consistent with the ASIC Enforcement
Review Taskforce recommendations.
Key aspects of the Act are to:
• update the penalties for certain criminal offences
in legislation administered by ASIC, including
tripling the maximum imprisonment penalties
for certain criminal offences (from 5 to 15 years),
introducing a formula to calculate financial penalties
for contraventions of civil penalty provisions
by individuals and companies, and removing
imprisonment as a penalty but increasing the
financial penalties for all strict and absolute liability
offences;
•
introduce ordinary criminal offences that sit
alongside strict and absolute liability offences;
• expand the civil penalty regime by making a wider
range of offences subject to civil penalties, such as
failures by Australian financial services licensees
to act efficiently, fairly and honestly, and failures
to report significant breaches within 10 days of
becoming aware of the breach or of circumstances
where they are likely to breach;
•
introduce a new test that applies to all dishonesty
offences under the Corporations Act 2001 (Cth); and
• ensure the Courts prioritise compensating victims
over ordering the payment of financial penalties.
ASIC’s close and continuous monitoring program
ASIC has continued to use a supervisory approach in
which ASIC officers are embedded in major financial
institutions, including Westpac, in order to actively
limit future financial harm to consumers, investors and
markets and to catalyse positive, consumer oriented,
behavioural change.
To date, the model adopted by ASIC is for officers
to make extended onsite visits to major financial
institutions. ASIC’s program is examining culture and
processes in major financial institutions through three
streams: Breach Reporting, Corporate Governance
and Internal Dispute Resolution (IDR). ASIC’s onsite
on Breach Reporting and engagement on Corporate
Governance is now complete. The IDR onsite for
Westpac commenced on 15 October 2019.
2019 Westpac Group Annual Report1234 18
Information on Westpac
Product design and distribution obligations and
product intervention power
On 5 April 2019, the Treasury Laws Amendment (Design
and Distribution Obligations and Product Intervention
Powers) Act 2019 (Cth) received royal assent. The
Act amends the Corporations Act 2001 (Cth) and the
National Consumer Credit Protection Act 2009 (Cth)
and grants ASIC a product intervention power and
introduces a new ‘principles-based’ product design and
distribution obligation on issuers and distributors.
Regulatory enforcement approach
On 15 April 2019, APRA released its Enforcement
Approach with immediate effect. The new Enforcement
Approach follows the results of its Enforcement Review,
released on the same day. The Enforcement Review
made seven recommendations which were designed to
help APRA better leverage its enforcement powers to
achieve prudential outcomes.
In response to the Enforcement Review, APRA stated
it would implement all recommendations including
increasing APRA’s enforcement appetite from a ‘last
resort’ to a ‘constructively tough’ approach. The new
enforcement approach sets out how APRA will use its
enforcement powers to prevent and address serious
prudential risks, and to hold entities and individuals to
account. APRA’s approach states that it may do this
well before the risks (whether financial, operational or
behavioural) present an immediate threat to financial
viability. Further, where entities or individuals are failing
to meet prudential obligations, APRA will act quickly
and forcefully, and will be willing to set public examples
to deter unacceptable practices from occurring in the
future.
On 26 February 2019, the ACCC outlined its compliance
and enforcement priorities in its annual Compliance and
Enforcement Policy refresh. The ACCC’s competition
enforcement approach and objectives are supported
by increased budget support from the Government
announced at the end of 2018.
In October 2018, ASIC committed to accelerating
enforcement activities, conducting more civil and
criminal enforcement actions against large financial
institutions and adopting a ‘why not litigate?’
enforcement stance. Following the release of the Royal
Commission’s Final Report, ASIC has established a
separate Office of Enforcement within ASIC.
Review into corporate criminal responsibility
regime
On 10 April 2019, the Australian Government
commissioned the Australian Law Reform Commission
(ALRC) to undertake a comprehensive review of the
corporate criminal responsibility regime. The review
is to consider reforms to the Criminal Code and other
relevant legislation to provide a simpler, stronger
and more cohesive regime for corporate criminal
responsibility. The ALRC’s report is to be provided to
the Australian Government by 30 April 2020.
General regulatory changes affecting our business
Banking Code of Practice
On 31 July 2018, ASIC approved the Banking Code of
Practice (the Code) with an implementation date of
1 July 2019 for each bank that has adopted the Code
(including Westpac). The Code introduces a range of
new measures including a commitment to take extra
care with vulnerable customers and train staff to help,
simplified loan contracts for small business written
in plain English, better protection for guarantors and
stronger enforcement of the Code.
The Code will be further updated with key amendments
in response to the recommendations contained in the
Royal Commission’s Final Report, which recommended
changes in relation to the protection of small businesses
and having a greater focus on customers in remote
areas and those with limited English. These changes
include banning informal overdrafts on basic accounts
without prior express agreement with the customer,
abolishing dishonour fees on basic bank accounts and
following AUSTRAC’s guidance on the identification
and verification of persons of Aboriginal or Torres Strait
Islander heritage. Subject to regulatory approvals, it
is expected that these updates will be effective from
1 March 2020.
Open banking regime
The Treasury Laws Amendment (Consumer Data Right)
Act 2019 (Cth) (CDR Act) received royal assent on 12
August 2019. The CDR Act amends the Competition and
Consumer Act 2010 (Cth), the Privacy Act 1988 (Cth)
and the Australian Information Commissioner Act 2010
(Cth) to introduce a consumer data right. The banking
sector is the first sector to which the consumer data
right will apply.
The introduction of a consumer data right in the
Australian economy signifies a shift in how data is
regulated. It will give customers in Australia a right
to direct that their data (starting with banking data)
be shared with accredited third parties and follows
a growing global trend to give consumers control
over their data. Data sharing is expected to facilitate
competition through easier product comparison and
switching. This will have significant implications for
consumers and banks.
On 2 September 2019, the ACCC released the final
Competition and Consumer (Consumer Data Right)
Rules 2019 (CDR Rules). The CDR Rules outline how
the consumer data right is to be implemented in the
banking sector. A revised timetable for the introduction
of open banking was included as part of the CDR Rules.
Both the CDR Act and CDR Rules contain new, detailed
privacy protections under 13 Privacy Safeguards. The
Privacy Safeguards deal with the disclosure, collection,
use, accuracy, storage, security and deletion of
consumer data right data. There are also 58 civil penalty
provisions under the CDR Rules. A breach of the
Privacy Safeguards or the CDR Rules could attract civil
penalties of up to the greater of $10 million, 3 times any
benefit obtained or 10% of 12 month annual turnover for
corporations.
Comprehensive Credit Reporting (CCR)
On 15 August 2019, an updated version of the National
Consumer Credit Protection Amendment (Mandatory
Comprehensive Credit Reporting) Bill 2018 (Cth) was
released for consultation by the Australian Treasury,
following the prior introduction of the Bill into the
House of Representatives in March 2018. It is expected
that this updated Bill will be introduced into Parliament
in late 2019.
2019 Westpac Group Annual Report Information on Westpac
Litigation
ASIC’s responsible lending litigation against
Westpac
On 1 March 2017, ASIC commenced Federal Court
proceedings against Westpac in relation to certain
home loans entered into between December 2011 and
March 2015, which were automatically approved by
Westpac’s systems as part of its broader processes.
The proceedings were heard in May 2019. On 13
August 2019, the Court handed down its judgment
in the proceedings, and dismissed ASIC’s case. On 10
September 2019 ASIC filed an appeal in relation to the
decision.
Outbound scaled advice division proceedings
On 22 December 2016, ASIC commenced Federal Court
proceedings against BT Funds Management Limited
(BTFM) and Westpac Securities Administration Limited
(WSAL) in relation to a number of superannuation
account consolidation campaigns conducted between
2013 and 2016. ASIC has alleged that in the course of
some of these campaigns, customers were provided
with personal advice in contravention of a number of
Corporations Act 2001 (Cth) provisions, and selected
15 specific customers as the focus of their claim. In
December 2018 the primary Court handed down a
judgment in which it held that no personal advice
had been provided and that BTFM and WSAL did not
contravene the relevant personal advice provisions
although it did make a finding that BTFM and WSAL
had each contravened section 912A(1)(a) of the
Corporations Act. In February 2019, ASIC filed an appeal
against this decision. On 28 October 2019, the Full
Federal Court handed down its decision in ASIC’s favour
and made findings that BTFM and WSAL each provided
personal advice on the relevant calls. Once formal
declarations of contravention are made, the matter will
be remitted for penalty.
ASIC’s proceedings against Westpac for poor
financial advice by a financial planner
On 14 June 2018, ASIC commenced proceedings in the
Federal Court against Westpac in relation to alleged
poor financial advice provided by a former financial
planner, Mr Sudhir Sinha. Mr Sinha was dismissed by
Westpac in November 2014 and subsequently banned
by ASIC. Westpac has proactively initiated remediation
to identify and compensate affected customers and has
completed remediation activities. ASIC’s proceedings
relate to advice provided by Mr Sinha in respect of four
specific customer files. The matter was heard by the
Court on 15 April 2019 and judgment has been reserved.
Class action against Westpac Banking Corporation
and Westpac Life Insurance Services Limited
On 12 October 2017, a class action was filed in the
Federal Court of Australia on behalf of customers
who, since February 2011, obtained insurance issued
by Westpac Life Insurance Services Limited (WLIS) on
the recommendation of financial advisers employed
within the Westpac Group. The plaintiffs have alleged
that aspects of the financial advice provided by those
advisers breached fiduciary and statutory duties
owed to the advisers’ clients, including the duty to
act in the best interests of the client, and that WLIS
was knowingly involved in those alleged breaches.
Westpac and WLIS are defending the proceedings.
19
These proceedings are currently stayed by order of the
Court, pending the outcome of an appeal concerning
a procedural issue unrelated to the substantive claims
made in the class action.
BBSW proceedings
Following ASIC’s 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. On 24 May 2018, Justice
Beach found that Westpac had not engaged in market
manipulation or misleading or deceptive conduct under
the Corporations Act 2001 (Cth). His Honour also found
that there was no ‘trading practice’ of manipulating the
BBSW rate. However, the Court found that Westpac
engaged in unconscionable conduct on 4 occasions
and that Westpac breached certain of its duties as a
financial services licensee. On 9 November 2018, the
Court ordered Westpac to pay a penalty of $3.3 million
and 50% of ASIC’s costs, and have an independent
expert review particular aspects of Westpac’s
compliance arrangements. Westpac has complied with
these orders. The amount of costs recoverable by ASIC
is still in the process of being determined.
In August 2016, a class action was filed in the United
States District Court for the Southern District of New
York against Westpac and large number of Australian
and international banks alleging misconduct in relation
to the bank bill swap reference rate. In April 2019, an
amended claim was filed by the Plaintiffs. Westpac is
defending the proceedings with a Motion to Dismiss
filed in May 2019.
Responsible lending class action
On 21 February 2019, a class action against Westpac
was filed in the Federal Court of Australia. As directed
by the Court, the Plaintiffs filed a Statement of Claim
on 22 May 2019 and an amended statement of claim
on 18 October 2019. The claims allege that Westpac
did not comply with its responsible lending obligations
and entered into certain home loans that it should
otherwise have assessed as unsuitable. The allegations
include that, during the period from 1 January 2011
to 17 February 2018, Westpac failed to: conduct
reasonable inquiries about the customers’ financial
situation, requirements and objectives; verify customer’s
financial situation; conduct assessments of suitability;
and act efficiently and fairly. Westpac is defending the
proceedings.
Cash in super class action
On 5 September 2019, a class action against BT Funds
Management Limited (BTFM) and Westpac Life
Insurance Services Limited (WLIS) was commenced
in relation to aspects of BTFM’s BT Super for Life cash
investment option. The claim follows other industry
class actions as part of Slater and Gordon’s ‘Get your
super back’ campaign.
It is alleged in the proceedings that BTFM failed to
adhere to a number of obligations under the general
law, the relevant trust deed and the Superannuation
Industry (Supervision) Act 1993 (Cth), and that WLIS
was knowingly concerned with BTFM’s alleged
contraventions. The damages sought by the claim
are unspecified. BTFM and WLIS are defending the
proceedings.
2019 Westpac Group Annual Report1234 Information on Westpac
20
Information on Westpac
Regulatory capital transactions
APRA regulatory changes
Capital raising
On 4 November 2019, Westpac announced that it will
be undertaking an underwritten placement of fully paid
ordinary shares in Westpac to institutional investors
to raise $2 billion. As further announced, following the
placement, Westpac will make a share purchase plan
available to shareholders to raise approximately $500
million, subject to scaleback, and with the ability to raise
less or more.
Issue of Westpac Capital Notes 6
On 18 December 2018, Westpac issued approximately
$1.42 billion of securities known as Westpac Capital
Notes 6 which qualify as Additional Tier 1 capital under
APRA’s capital adequacy framework.
Transfer and redemption of Westpac Capital Notes
On 18 December 2018, approximately $722 million
of Westpac Capital Notes were transferred to the
Westpac Capital Notes nominated party for $100 each
pursuant to the Westpac Capital Notes 6 reinvestment
offer. Those Westpac Capital Notes were subsequently
redeemed by Westpac.
On 8 March 2019, being the optional redemption/
transfer date of the Westpac Capital Notes, the
remaining $662 million of Westpac Capital Notes were
transferred to the Westpac Capital Notes nominated
party for $100 each. Those Westpac Capital Notes were
subsequently redeemed by Westpac.
Adoption of new accounting standards
Adoption of AASB 9 and AASB 15
The Group adopted the classification and measurement,
and impairment requirements of AASB 9: Financial
Instruments (AASB 9) on 1 October 2018. AASB
9 includes a forward looking ‘expected credit
loss’ impairment model, revised classification and
measurement model and modifies the approach to
hedge accounting.
The adoption of AASB 9 reduced the Group’s retained
earnings at 1 October 2018 by $722 million (net of tax)
primarily due to the increase in impairment provisions
under the new standard.
The Group also adopted AASB 15: Revenue from
Contracts with Customers (AASB 15) on 1 October 2018.
AASB 15 provides a systematic approach to revenue
recognition by introducing a five-step model governing
revenue measurement and recognition. The adoption
of AASB 15 reduced the Group’s retained earnings at
1 October 2018 by $5 million (net of tax).
Further details of the changes from the adoption of
AASB 9 and AASB 15 as well as details of accounting
standards that have been issued but are not yet
effective for the Group are included in Note 1 to the
financial statements.
Transition to AASB 16
AASB 16: Leases (AASB 16) replaced AASB 117: Leases
from 1 October 2019. AASB 16 requires all leases of
greater than 12 months duration to be presented on
balance sheet by the lessee as a right-of-use asset and
a lease liability. The application of AASB 16 is expected
to result in the recognition of a right-of-use asset of
$3.4 billion with a corresponding lease liability, with no
impact on retained earnings.
Further details of the changes under the new standard
are included in Note 1 to the financial statements.
APRA’s proposed changes to capital standards
On 19 July 2017, APRA released an Information Paper
titled ‘Strengthening Banking System Resilience -
Establishing Unquestionably Strong Capital Ratios’.
In its release, APRA concluded that the four major
Australian banks, including Westpac, need to have
a common equity tier 1 (CET1) capital ratio of at
least 10.5%, as measured under the existing capital
framework, to be considered ‘unquestionably strong’.
Banks are expected to meet this new benchmark by 1
January 2020.
APRA has commenced consultation on revisions to
the capital framework which includes proposals on
changes to risk weighted assets, including in relation
to residential mortgages as well as improving the
transparency, comparability and flexibility of the
framework.
As part of the proposals, APRA has proposed a
minimum Leverage Ratio requirement of 3.5% for ADIs,
such as Westpac, that use the internal ratings-based
approach to determine capital adequacy.
APRA has indicated that it expects to finalise the
suite of prudential standards to give effect to the
‘unquestionably strong’ benchmark in 2020-21, with
the revised prudential standards likely to come into
effect from 1 January 2022. In regards to the proposed
revisions to the capital treatment of operational risk,
APRA has proposed an earlier implementation date
of 1 January 2021 for advanced IRB banks, such as
Westpac.
APRA has announced that its revisions to the capital
framework are not intended to necessitate further
capital increases for the industry above the 10.5%
benchmark. However, given the proposals include higher
risk weights for certain mortgage products, such as
interest only loans and loans for investment purposes,
the impact on individual banks may vary. The proposals
are currently under consultation and final details remain
unclear, and it is therefore too soon to determine the
impact on Westpac.
Further details of Westpac’s other regulatory
disclosures required in accordance with prudential
standard APS 330 can be accessed at
https://www.westpac.com.au/about-westpac/investor-
centre/financial-information/regulatory-disclosures/.
APRA’s additional capital requirements
On 11 July 2019, Westpac received APRA’s response
to its self-assessment. In its response, APRA decided
to apply an additional $500 million to Westpac’s
operational risk capital requirement. This follows APRA
concluding that Westpac was required to improve its
management and oversight of non-financial risk. The
additional capital requirement will remain in place until
APRA is satisfied that Westpac has completed its action
plan.
The $500 million requirement, applied through an
increase in risk weighted assets, took effect from 30
September 2019. The change reduced Westpac’s Level
2 CET1 capital ratio by 16 basis points. Westpac’s CET1
capital ratio at 30 September 2019 was 10.67%.
2019 Westpac Group Annual Report Information on Westpac
APRA’s proposed revisions to subsidiary capital
investment treatment
On 15 October 2019, APRA released a discussion paper
on proposed changes to APS 111 Capital Adequacy:
Measurement of Capital. The key proposal is in relation
to a parent ADI’s treatment of its equity investments in
banking and insurance subsidiaries (Level 1). Westpac’s
largest investment in banking and insurance subsidiaries
is Westpac New Zealand Limited (WNZL). There is no
impact from this proposal on the calculation of the
Group’s reported regulatory capital ratios on a Level 2
basis. On a Level 1 basis, on a proforma basis as at 30
September 2019, it is estimated that applying APRA’s
proposed approach would reduce Westpac’s Level 1
CET1 ratio by approximately 40bps ($1.6 billion). APRA
has indicated that the updated standard will come into
effect from 1 January 2021.
Associations with Related Entities
On 20 August 2019, APRA released the finalised
prudential standard APS 222: Associations with Related
Entities. The revised standard is intended to strengthen
the ability of ADIs to monitor, limit and control risks
arising from transactions and other associations with
related entities. Key changes include revisions to the
limit for exposure to ADIs from 50% of Total Capital to
25% of Tier 1 capital. The revised standard is effective
from 1 January 2021.
Westpac’s largest exposure to a related entity is WNZL.
As at 30 September 2019, Westpac would remain within
the revised limits based on the current level of exposure
to WNZL.
Additional loss absorbing capacity
In response to the Financial System Inquiry
recommendations, the Australian Government agreed
to further reforms regarding crisis management and
establishing a framework for minimum loss-absorbing
and recapitalisation capacity.
On 9 July 2019, APRA announced a requirement for the
Australian major banks (including Westpac) to increase
their total capital requirements by three percentage
points of risk weighted assets (RWA) as measured
under the current capital adequacy framework. This
increase in total capital will take full effect from 1
January 2024.
Based on Westpac’s RWA of $429 billion at 30
September 2019, this represents around $13 billion
of additional capital over the four year transition
period. The additional capital is expected to be raised
through Tier 2 Capital and is likely to be offset by
a decrease in other forms of long term wholesale
funding. Westpac has commenced progress towards
the new requirements and in the financial year ended
30 September 2019 issued a total of $4.2 billion in Tier
2 capital.
APRA is still targeting an additional four to five
percentage points of loss-absorbing capacity. Over the
next four years, APRA will consider feasible alternative
methods for raising the remaining 1-2 percentage
points.
APRA intends to consult on a prudential framework
covering both recovery and resolution planning in 2020.
21
APRA’s proposed amendment to guidance on
mortgage lending
On 5 July 2019, APRA announced that it no longer
required ADIs to assess home loan applications using a
minimum interest rate of at least 7%. Instead, ADIs are
permitted to review and set their own minimum interest
rate floor for use in serviceability assessments and
utilise a revised interest rate buffer of at least 2.5% over
the loan’s interest rate. Also on 5 July 2019, APRA also
released its final version of Prudential Practice Guide
APG 223 – Residential Mortgage Lending.
APRA Prudential Standard CPS 234: Information
Security Management
On 1 July 2019, APRA’s Prudential Standard CPS 234:
Information Security came into effect, except for
information assets managed by a third party which will
come into effect from the earlier of the next contract
renewal date or 1 July 2020. The standard is aimed at
improving the ability of APRA-regulated entities to
detect cyber adversaries, ensure appropriate security
capabilities are in place commensurate to the risk of
the information assets including responding swiftly
and effectively in the event of an information security
incident. Westpac continues to enhance its systems and
processes to further mitigate cybersecurity risks.
APRA Prudential Standard CPS 511: Remuneration
On 23 July 2019, APRA released for consultation a new
draft prudential standard and supporting discussion
paper on remuneration. It is aimed at clarifying and
strengthening remuneration arrangements in APRA-
regulated entities. The new standard will replace
existing remuneration requirements under CPS/SPS 510
Governance with a proposed implementation date of
1 July 2021.
International developments affecting Westpac
Brexit
There continues to be uncertainty on the timing and
process for the United Kingdom’s (UK) withdrawal from
the European Union (EU).
As Westpac’s business and operations are based
predominantly in Australia and New Zealand, Westpac
expects that the direct impact of the UK’s departure
from the EU is unlikely to be material to Westpac.
However, it remains difficult to predict the impact
that Brexit may have on financial markets, the global
economy and the global financial services industry.
Westpac has contingency planning in place and has
been active in dialogue with affected customers.
OTC derivatives reform
International regulatory reforms relating to over-the-
counter (OTC) derivatives continue to be implemented
across the globe, with a current focus on initial margin
and risk mitigation practices for non-centrally cleared
derivatives.
As of 1 September 2019, Westpac is required to post
and collect collateral on a gross basis, held at third
party custodians. Global initial margin requirements will
continue to be introduced in phases until 1 September
2021.
2019 Westpac Group Annual Report1234 22
Information on Westpac
New Zealand
Reserve Bank of New Zealand (RBNZ) - Revised
Outsourcing Policy
As at 30 September 2019, WNZL is compliant with
the requirement in the RBNZ’s revised Outsourcing
Policy (BS11) (Revised Outsourcing Policy) to maintain
a compendium of outsourcing arrangements and work
is underway to comply with the other aspects of the
Revised Outsourcing Policy by 30 September 2022 in
line with the regulatory timeline.
As a result of complying with the Revised Outsourcing
Policy, the ongoing cost of operating the WNZL
business will increase, in addition to the costs of
implementing the changes.
RBNZ Capital Review
On 14 December 2018, the RBNZ released a consultation
paper to seek the public’s view on a proposal to set a
Tier 1 capital requirement equal to 16% of risk weighted
assets for banks deemed systemically important,
such as WNZL. The proposal of a Tier 1 ratio of 6%
of risk weighted assets as a regulatory minimum is
unchanged, and of this no more than 1.5% of risk
weighted assets can be contributed by Additional Tier
1 capital or redeemable preference shares. The RBNZ
has also proposed changes to risk weighted asset
measurements. The RBNZ has proposed a five year
transition period.
The proposed changes aim to further strengthen the
New Zealand banking system to protect the economy
and depositors from bank failure. WNZL would be
required to hold a further estimated NZ$2.3 – 2.9 billion
of Tier 1 capital (assuming a WNZL Tier 1 capital ratio of
16-17%) if the proposals were applied at 30 September
2019. WNZL is already strongly capitalised with a Tier 1
capital ratio of 13.9% at 30 September 2019.
On a pro-forma basis this change would also increase
Westpac’s Level 1 capital requirements by NZ$1.2-
$1.8 billion if the proposals were applied at 30
September 2019, assuming that some of WNZL’s
supplementary capital can be issued externally over
time and that APRA’s proposed revisions to subsidiary
capital investment treatment are implemented (more
information on these proposed revisions is set out
above). Further clarity on the proposals is expected
from the RBNZ in December 2019 with implementation
of any new rules starting from April 2020.
RBNZ - Review under section 95 of the Reserve
Bank of New Zealand Act 1989
In June 2019, in response to a review under section
95 of the Reserve Bank of New Zealand Act 1989 of
WNZL’s compliance with advanced internal rating based
aspects of the RBNZ’s ‘Capital Adequacy Framework
(Internal Models Based Approach)’ (BS2B), WNZL
presented the RBNZ with a submission providing an
overview of its credit risk rating system and activities
undertaken to address compliance issues and enhance
risk management practices.
On 30 October 2019, the RBNZ informed WNZL that it
had accepted the submission and measures undertaken
by WNZL to achieve satisfactory compliance with BS2B,
and that WNZL would retain its accreditation to use
internal models for credit risk in the calculation of its
regulatory capital requirements. It also advised WNZL
that, with effect from 31 December 2019, the RBNZ will
remove the requirement imposed on WNZL since 31
December 2017 to maintain minimum regulatory capital
ratios which are two percentage points higher than the
ratios applying to other locally incorporated banks.
Review of the Reserve Bank of New Zealand Act
In November 2017, the New Zealand Government
announced it would undertake a review of the Reserve
Bank of New Zealand Act 1989 (RBNZ Review). The
RBNZ Review will consist of two phases. The legislation
for the recommended Phase 1 related changes to New
Zealand’s monetary policy framework received royal
assent on 20 December 2018, and came into force on 1
April 2019.
The terms of reference for Phase 2 were released
in June 2018 and will consider the overarching
objectives of the RBNZ’s institutional governance and
decision-making, the macro-prudential framework, the
current prudential supervision model, trans-Tasman
coordination, supervision and enforcement and
resolution and crisis management. Final policy decisions
on all components of the review are expected to be
made in 2020.
RBNZ/Financial Markets Authority (FMA) -
Financial Services Conduct & Culture Review
In May 2018, the RBNZ and FMA commenced a review
in respect of New Zealand’s 10 major banks and 15
life insurers, including WNZL and Westpac Life-NZ-
Limited, to explain why conduct issues highlighted by
the Australian Royal Commission are not present in
New Zealand. An industry thematic review report for
the banks was released on 5 November 2018. WNZL
submitted a plan responding to recommendations in the
review report and in WNZL’s individual feedback letters
to the regulators on 29 March 2019.
The industry thematic review report into life insurers,
including Westpac Life-NZ-Limited, was released on
29 January 2019. The report identified extensive
weaknesses in life insurers’ systems and controls,
governance and management of conduct risks. Westpac
Life-NZ-Limited provided its plan to address the
findings to the regulators in June 2019.
Conduct of Financial Institutions Review
Following the developments and findings of the
Financial Services Conduct and Culture Review
and the Australian Royal Commission, the Minister
of Commerce announced a proposal to introduce
a conduct licensing regime for banks, insurers and
non-bank deposit takers in respect of their conduct
in relation to retail customers. The regime will require
licensed institutions to meet a fair treatment standard,
and implement effective policies, processes, systems
and controls to meet this standard. The regime will also
create obligations relating to remuneration and sales
incentives. Legislation is expected to be introduced to
parliament by the end of 2019.
Reform of Credit Contracts and Consumer Finance
Legislation
In April 2019, the Credit Contracts Legislation
Amendment Bill was introduced to parliament and
is currently before the select committee. The Bill
introduces a number of changes to the Credit Contracts
and Consumer Finance Act, including new duties for
directors and senior managers and increased penalties
and statutory damages. The Bill also introduces stricter
requirements around suitability and affordability
assessments as well as a cap for interest and fees of
‘high cost’ loans (being loans with annualised interest
exceeding 50%). The intention is that the Bill will come
into effect in March 2020.
2019 Westpac Group Annual Report Information on Westpac
Supervision and regulation
Australia
Within Australia, we are subject to supervision and
regulation by six principal agencies and bodies: 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. APRA has
recently received new and strengthened powers under
the Banking Executive Accountability Regime.
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 has resulted 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
and consumer protection within the financial sector.
Its primary responsibility is to regulate and enforce
company, consumer credit, financial markets and
financial products and 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.
ASIC has recently had its existing powers strengthened
to provide ASIC with a product intervention power. For
further information, refer to ‘Significant developments’
above.
23
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
(Cth). 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. ASX is now also the benchmark
administrator of BBSW.
The ACCC is the regulator 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 ASIC (for financial services) and
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 Government’s Treasurer must approve an
entity acquiring a stake of more than 15% in a particular
financial sector company.
Proposals for foreign acquisitions of a stake in
Australian banks are subject to the Australian
Government’s foreign investment policy and, where
required, approval by the Australian Government under
the Australian Foreign Acquisitions and Takeovers
Act 1975 (Cth). For further details refer to ‘Limitations
affecting security holders’ in Section 4.
AUSTRAC oversees the compliance of Australian
reporting entities (including Westpac) with 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 Australian
federal law enforcement, national security, human
services and revenue agencies, and certain international
counterparts.
New Zealand
The Reserve Bank of New Zealand (RBNZ) is
responsible for supervising New Zealand registered
banks and protects the financial stability of New
Zealand through the application of minimum prudential
obligations. The New Zealand prudential supervision
regime requires that registered banks publish 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.
2019 Westpac Group Annual Report1234 24
Information on Westpac
The Financial Markets Authority (FMA) and the New
Zealand Commerce Commission (NZCC) are the two
primary conduct and enforcement regulators. The FMA
and NZCC are responsible for ensuring that markets are
fair and transparent and are supported by confident
and informed investors and consumers. Regulation of
markets and their participants is undertaken through
a combination of market supervision, corporate
governance and licensing approvals.
In New Zealand, other relevant regulator mandates
include those relating to taxation, privacy and foreign
affairs and trade.
Banks in New Zealand are also subject to a number of
self- regulatory regimes. Examples include Payments
NZ, the New Zealand Bankers’ Association and the
Financial Services Council (FSC). Examples of industry
agreed codes include the New Zealand Bankers’
Association’s Code of Banking Practice and FSC’s Code
of Conduct.
United States
Our New York branch is a US federally licensed branch
and therefore is subject to supervision, examination and
regulation by the US Office of the Comptroller of the
Currency and the Board of Governors of the Federal
Reserve System (the US Federal Reserve) under the
US International Banking Act of 1978 (IBA) and related
regulations.
A US federal branch must maintain, with a US Federal
Reserve member bank, a capital equivalency deposit
as prescribed by the US Comptroller of the Currency,
which is at least equal to 5% of its total liabilities
(including acceptances, but excluding accrued
expenses, and amounts due and other liabilities to
other branches, agencies and subsidiaries of the foreign
bank).
In addition, a US federal branch is subject to
periodic onsite examination by the US Comptroller
of the Currency. Such examination may address risk
management, operations, asset quality, compliance with
the record-keeping and reporting, and any additional
requirements prescribed by the US Comptroller of the
Currency from time to time.
A US federal branch of a foreign bank is, by virtue of the
IBA, subject to the receivership powers exercisable by
the US Comptroller of the Currency.
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, the US
Commodity Futures Trading Commission and the
National Futures Association.
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.
Our Anti-Money Laundering and Counter-Terrorism
Financing Policy (AML/CTF Policy) sets out how the
Westpac Group complies with its legislative obligations.
The AML/CTF Policy applies to all business divisions
and employees (permanent, temporary and third party
providers) working in Australia, New Zealand and
overseas.
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.
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 27 to the financial statements and under
‘Significant developments’ above. Where appropriate
as required by the accounting standards, 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
9155 7713 and our international telephone number is
(+61) 2 9155 7700.
2019 Westpac Group Annual Report Information on Westpac
25
Information on Westpac
Corporate governance statement
Corporate governance is the framework of systems,
policies and processes by which we operate, make
decisions and hold people to account. The framework
establishes the roles and responsibilities of Westpac’s
Board and management. It also establishes the systems,
policies and processes for monitoring and evaluating
Board and management performance and the practices
for corporate reporting, disclosure, remuneration, risk
management and engagement of security holders.
Our approach to corporate governance is based on a
set of values and behaviours that underpin our day-
to-day activities, provide transparency and fair dealing
and seek to protect stakeholder interests. It includes
a commitment to maintaining the highest standards
of corporate governance, which Westpac sees as
fundamental to the sustainability of our business and
our performance.
We regularly review local and global developments in
corporate governance to assess their implications and
to respond to changes in the operating environment.
We also improve our systems, processes and policies
and look to strengthen our frameworks to reflect
changing expectations where appropriate.
We comply with the ASX Corporate Governance
Principles and Recommendations (third edition)
published by the ASX Limited’s Corporate Governance
Council. In addition, we already comply with a number
of the recommendations contained in the fourth edition
of the ASX Corporate Governance Principles and
Recommendations.
Westpac’s 2019 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
2019 Westpac Group Annual Report, the 2019 Westpac
Group Annual Review and Sustainability Report, the
2019 Westpac Group Sustainability Performance Report
and investor discussion packs and presentations can be
accessed at www.westpac.com.au/investorcentre.
2019 Westpac Group Annual Report1234 26
Directors’ report
Our Directors present
their report together
with the financial
statements of the Group
for the financial year
ended 30 September
2019.
1. Directors
The names of the persons
who have been Directors, or
appointed as Directors, during
the period since 1 October 2018
and up to the date of this report
are: Lindsay Philip Maxsted,
Brian Charles Hartzer, Nerida
Frances Caesar, Ewen Graham
Wolseley Crouch, Catriona
Alison Deans (Alison Deans),
Craig William Dunn, Yuen Mei
Anita Fung (Anita Fung), Steven
John Harker (Director from
1 March 2019), Peter John Oswin
Hawkins (retired as a Director on
12 December 2018), Peter Ralph
Marriott, Peter Stanley Nash and
Margaret Leone Seale (Director
from 1 March 2019).
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 three years immediately
before 30 September 2019
and the period for which each
directorship has been held, are
set out in the following pages.
Directors’ report
Name: Lindsay Maxsted,
DipBus (Gordon), FCA, FAICD
Age: 65
Term of office: Director since
March 2008 and Chairman since
December 2011.
Name: Brian Hartzer,
BA, CFA
Age: 52
Term of office: Managing Director &
Chief Executive Officer since
February 2015.
Date of next scheduled re-election:
December 2020.
Date of next scheduled re-election:
Not applicable.
Independent: Yes.
Independent: No.
Current directorships of listed
entities and dates of office:
Transurban Group (since March 2008
and Chairman since August 2010),
BHP Group Limited (since March 2011)
and BHP Group plc (since March 2011).
Other principal directorships:
Managing Director of Align Capital Pty
Ltd and Director of Baker Heart and
Diabetes Institute.
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.
Current directorships of listed
entities and dates of office: Nil.
Other principal directorships:
The Australian National University
Business and Industry Advisory
Board (Chairman since March 2017),
the Financial Markets Foundation
for Children and Australian Banking
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.
Directorships of other listed entities
over the past three years and dates
of office: Nil.
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.
2019 Westpac Group Annual Report Directors’ report
27
Name: Nerida Caesar,
BCom, MBA, GAICD
Age: 55
Term of office: Director since
September 2017.
Name: Ewen Crouch AM,
BEc (Hons.), LLB, FAICD
Age: 63
Term of office: Director since
February 2013.
Name: Alison Deans,
BA, MBA, GAICD
Age: 51
Term of office: Director since
April 2014.
Date of next scheduled re-election:
December 2019.
Date of next scheduled re-election:
December 2019.
Date of next scheduled re-election:
December 2020.
Independent: Yes.
Independent: Yes.
Independent: Yes.
Current directorships of listed
entities and dates of office: Nil.
Other principal directorships:
Workplace Giving Australia Limited
(Chairman since June 2019) and Spark
Investment Holdco Pty Ltd.
Other interests: Member of the
Advisory Board of IXUP Limited.
Advisor to Equifax Australia and
New Zealand.
Other Westpac related entities
directorships and dates of office: Nil.
Skills, experience and expertise:
Nerida has over 30 years of broad-
ranging commercial and business
management experience. She was
Group Managing Director and Chief
Executive Officer, Australia and New
Zealand, of Equifax (formerly Veda
Group Limited) from February 2011
to June 2017. Nerida is also a former
director of Genome.One Pty Ltd and
Stone and Chalk Limited.
Ms Caesar was formerly Group
Managing Director, Telstra Enterprise
and Government, responsible for
Telstra’s corporate, government and
large business customers in Australia
as well as the international sales
division. Nerida also worked as Group
Managing Director, Telstra Wholesale,
and, prior to that, held the position
of Executive Director Enterprise
& Government, where she was
responsible for managing products,
services, and customer relationships
throughout Australia.
Nerida also held several senior
management and sales positions with
IBM within Australia and internationally
over a 20-year period, including as
Vice President of IBM’s Intel Server
Division for the Asia Pacific region.
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.
Current directorships of listed
entities and dates of office: Corporate
Travel Management Limited (Chairman
since March 2019) and BlueScope
Steel Limited (since March 2013).
Current directorships of listed
entities and dates of office: Cochlear
Limited (since January 2015) and
Ramsay Health Care Limited (since
November 2018).
Other principal directorships: Sydney
Symphony Orchestra Holdings Pty
Limited and Jawun.
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
ASIC’s Director Advisory Panel.
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. Ewen served as a director of
Mission Australia from 1995 and as
Chairman from 2009, before retiring
in November 2016. From 2010 to 2015,
Ewen was a member of the Takeovers
Panel. 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
Risk & Compliance Committee.
Member of each of the Board Audit,
Board Nominations and Board
Remuneration Committees.
Directorships of other listed entities
over the past three years and dates
of office: Nil.
Other principal directorships:
SCEGGS Darlinghurst Limited, The
Observership Program Limited and
Deputy Group Pty Ltd.
Other interests: Senior Advisor,
McKinsey & Company and Investment
Committee member of the CSIRO
Innovation Fund (Main Sequence
Ventures).
Other Westpac related entities
directorships and dates of office: Nil.
Skills, experience and expertise:
Alison has more than 20 years’
experience in senior executive roles
focused on building digital businesses
and digital transformation across
e-commerce, media and financial
services. During this time, Alison
served as the CEO of eCorp Limited,
CEO of Hoyts Cinemas and CEO of
eBay, Australia and New Zealand. She
was the CEO of a technology-based
investment company netus Pty Ltd.
Alison was an Independent Director
of Social Ventures Australia from
September 2007 to April 2013 and a
director of kikki.K Holdings Pty Ltd
from October 2014 to June 2018.
Westpac Board Committee
membership: Chairman of the Board
Technology Committee. Member
of each of the Board Nominations,
Board Remuneration and Board Risk &
Compliance Committees.
Directorships of other listed entities
over the past three years and
dates of office: Insurance Australia
Group Limited (February 2013 –
October 2017).
2019 Westpac Group Annual Report1234 Directors’ report
28
Directors’ report
Name: Craig Dunn,
BCom, FCA
Name: Anita Fung,
BSocSc, MAppFin
Age: 56
Term of office: Director since
June 2015.
Age: 58
Term of office: Director since
October 2018.
Name: Steven Harker,
BEc (Hons.), LLB
Age: 64
Term of office: Director since
March 2019.
Date of next scheduled re-election:
December 2021.
Date of next scheduled re-election:
December 2021.
Date of next scheduled re-election:
December 2019.
Independent: Yes.
Independent: Yes.
Independent: Yes.
Current directorships of listed
entities and dates of office: Telstra
Corporation Limited (since April 2016).
Other principal directorships:
Chairman of The Australian Ballet.
Other interests: Chairman of the
International Standards Technical
Committee on Blockchain and
Distributed Ledger Technologies (ISO/
TC 307) and consultant to King &
Wood Mallesons.
Other Westpac related entities
directorships and dates of office: Nil.
Skills, experience and expertise: Craig
has more than 20 years’ experience
in financial services, including as
CEO of AMP Limited from 2008 to
2013. Craig was previously a director
of Financial Literacy Australia
Limited, a Board member of each
of the Australian Japanese Business
Cooperation Committee, Jobs for
New South Wales, and the New
South Wales Government’s Financial
Services Knowledge Hub. He is the
former Chairman of Stone and Chalk
Limited and of the Investment and
Financial Services Association (now
the Financial Services Council). Craig
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.
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.
Current directorships of listed
entities and dates of office: Hong
Kong Exchanges and Clearing Limited
(since April 2015, Hong Kong listed),
China Construction Bank Corporation
(since October 2016, Hong Kong
Listed) and Hang Lung Properties
Limited (since May 2015, Hong Kong
listed).
Other principal directorships: Board
member of the Airport Authority Hong
Kong.
Other interests: Member of the Hong
Kong Museum Advisory Committee.
Other Westpac related entities
directorships and dates of office:
Member of Westpac’s Asia Advisory
Board since October 2018.
Skills, experience and expertise:
Anita’s career in the banking industry
spans over 30 years, including 19 years
at HSBC.
During her time at HSBC, Anita held a
number of senior management roles
including Group General Manager,
HSBC Group and most recently as
Chief Executive Officer, Hong Kong
from 2011 to 2015.
Prior to joining HSBC, Anita held
various positions at Standard
Chartered Bank in its Treasury and
Capital markets business.
Westpac Board Committee
membership: Member of the Board
Risk & Compliance Committee.
Directorships of other listed entities
over the past three years and dates
of office: Nil.
Current directorships of listed
entities and dates of office: Nil.
Other principal directorships: The
Banking and Finance Oath Limited,
The Hunger Project Australia, ASX
Refinitiv Charity Foundation, New
South Wales Golf Club Foundation
Limited and Ascham School Ltd.
Other interests: Honorary Treasurer of
Ascham School.
Other Westpac related entities
directorships and dates of office: Nil.
Skills, experience and expertise:
Steve has over 35 years of experience
in investment banking. Steve was
formerly Managing Director and Chief
Executive Officer of Morgan Stanley
Australia from 1998 to 2016 and then
Vice Chairman until February 2019.
Prior to joining Morgan Stanley, he
spent fifteen years with Barclays de
Zoete Wedd (BZW, now Barclays
Investment Bank).
Steve is a former Chairman and
Director of Australian Financial
Markets Association Limited and a
former Director of Investa Property
Group. Steve also previously served
on the board of the Centre for
International Finance and Regulation.
He is also a former Guardian of the
Future Fund of Australia.
Westpac Board Committee
membership: 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.
2019 Westpac Group Annual Report Directors’ report
Directors’ report
29
Name: Peter Marriott,
BEc (Hons.), FCA
Age: 62
Term of office: Director since
June 2013.
Name: Peter Nash,
BCom, FCA, F Fin
Age: 57
Term of office: Director since
March 2018.
Name: Margaret (Margie) Seale,
BA, FAICD
Age: 59
Term of office: Director since
March 2019.
Date of next scheduled re-election:
December 2019.
Date of next scheduled re-election:
December 2021.
Date of next scheduled re-election:
December 2019.
Independent: Yes.
Independent: Yes.
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
Austraclear Limited.
Other interests: Member of Monash
University Council and Chairman of the
Monash University Council’s Resources
and Finance Committee.
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 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 Technology and Board Risk &
Compliance Committees.
Directorships of other listed entities
over the past three years and dates
of office: Nil.
Current directorships of listed
entities and dates of office: Johns
Lyng Group Limited (Chairman since
October 2017), Mirvac Group (since
November 2018) and ASX Limited
(since June 2019).
Other principal directorships:
Reconciliation Australia Limited and
Golf Victoria Limited.
Other interests: Board member
of the Koorie Heritage Trust and
Migration Council Australia. Member
of the University of Melbourne Centre
for Contemporary Chinese Studies
Advisory Board.
Other Westpac related entities
directorships and dates of office: Nil.
Skills, experience and expertise: Peter
was formerly a Senior Partner with
KPMG until September 2017, having
been admitted to the partnership
of KPMG Australia in 1993. He most
recently served as the National
Chairman of KPMG Australia from
2011 until August 2017, where he was
responsible for the overall governance
and strategic positioning of KPMG in
Australia. In this role, Peter also served
as a member of KPMG’s Global and
Regional Boards.
Peter has experience providing
advice on a range of topics
including business strategy, risk
management, internal controls,
business processes and regulatory
change. He has also provided both
financial and commercial advice to
many Government businesses at
both a Federal and State level. Peter
is a former member of the Business
Council of Australia and its Economic
and Regulatory Committee.
Westpac Board Committee
membership: 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.
Current directorships of listed
entities and dates of office: Telstra
Corporation Limited (since May 2012)
and Scentre Group Limited (since
February 2016).
Other principal directorships:
Australian Pacific (Holdings) Pty
Limited.
Other interests: Member of the
Australian Public Service Commission
Centre for Learning and Leadership
Advisory Board.
Other Westpac related entities
directorships and dates of office: Nil.
Skills, experience and expertise:
Margie has more than 25 years’
experience in senior executive
roles in Australia and overseas,
including in consumer goods, global
publishing, sales and marketing,
and the successful transition of
traditional business models to
digital environments. Prior to her
non-executive career, Margie was
the Managing Director of Random
House Australia and New Zealand
and President, Asia Development for
Random House Inc.
Margie is a former Director and
then Chair of Penguin Random
House Australia Pty Limited, and a
former Director of Ramsay Health
Care Limited, Bank of Queensland
Limited and the Australian Publishers’
Association. She also previously served
on the boards of Chief Executive
Women (chairing its Scholarship
Committee), the Powerhouse Museum,
and the Sydney Writers Festival.
Westpac Board Committee
membership: Member of each of the
Board Remuneration and Board Risk &
Compliance Committees.
Directorships of other listed entities
over the past three years and dates
of office: Ramsay Health Care Limited
(April 2015 to October 2018) and Bank
of Queensland Limited (January 2014
to June 2018).
2019 Westpac Group Annual Report1234 30
Directors’ report
Company Secretary
Our Company Secretaries as at 30 September 2019 were Rebecca Lim and Tim Hartin.
Rebecca Lim (B Econ, LLB (Hons.)) was appointed Group Executive, Compliance, Legal & Secretariat1 and
Company Secretary in October 2016. Rebecca joined Westpac in 2002 and has held a variety of senior leadership
roles including General Manager, Human Resources for St.George Bank and General Manager, St.George Private
Clients. She was appointed Group General Counsel in November 2011 and Chief Compliance Officer from 2013
to 2017. Rebecca held an in-house role in investment banking at Goldman Sachs in London before returning to
Australia and joining Westpac. Rebecca was previously with US firm Skadden Arps where she worked in the
Corporate Finance area in both New York and London. Prior to that she worked at Blake Dawson Waldron (now
Ashurst) as a solicitor.
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 2019 our Executive Team was:
Name
Brian Hartzer
Craig Bright
Lyn Cobley
Peter King
Rebecca Lim
David Lindberg
Carolyn McCann
David McLean
Christine Parker
David Stephen
Gary Thursby
Alastair Welsh
Position
Managing Director & Chief Executive Officer
Chief Information Officer
Chief Executive, Westpac Institutional Bank
Chief Financial Officer
Group Executive, Legal & Secretariat
Chief Executive, Consumer
Group Executive, Customer & Corporate Relations
Chief Executive Officer, Westpac New Zealand
Group Executive, Human Resources
Chief Risk Officer
Chief Operating Officer
Acting Chief Executive, Business
Year Joined
Group
Year
Appointed
to Position
2012
2018
2015
1994
2002
2012
2013
1999
2007
2018
2008
1992
2015
2018
2015
2014
2016
2019
2018
2015
2011
2018
2019
2019
There are no family relationships between or among any of our Directors or Executive Team members.
1. From 1 October 2018, Rebecca Lim’s role and title has been Group Executive, Legal & Secretariat.
2019 Westpac Group Annual Report Directors’ report
31
Brian Hartzer
BA, CFA.
Age: 52
Craig Bright
B.Comp.
Age: 54
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
Banking 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.
Chief Information Officer
Craig was appointed Group Chief
Information Officer in December
2018. Craig has more than 30 years’
experience in technology and financial
services. He has held divisional CIO
roles in retail banking, business
banking and investment banking and
led complex global scale technology
operations.
Prior to joining Westpac, Craig was
Chief Technology Officer, Global
Consumer Bank at Citigroup. He led
a division of technology employees
executing a cloud and mobile first
strategy supporting digital channels
and a mix of Citi Smart Banking
formats worldwide. Craig has also held
senior roles at Barclays in London,
National Australia Bank and Ernst &
Young.
Craig has a Bachelor of Computing
from Monash University and a
Computer Field Service Certificate
from Royal Melbourne Institute of
Technology.
Lyn Cobley
BEc, SF FIN, GAICD.
Age: 56
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
Westpac’s International and Pacific
Island businesses.
Lyn has over 27 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 also held senior roles at Barclays
Capital in Australia and Citibank in
Australia and Asia Pacific, and was
CEO of Trading Room (a joint venture
between Macquarie Bank and Fairfax).
Lyn is a Board member of the
Australian Financial Markets
Association (AFMA), the Banking
& Finance Oath and the Westpac
Foundation. She is Chairman of
Westpac’s Asia Advisory Board and
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.
2019 Westpac Group Annual Report1234 32
Directors’ report
Peter King
BEc, FCA.
Age: 49
Rebecca Lim
B Econ, LLB (Hons).
Age: 47
David Lindberg
HBA (Hons. Economics).
Age: 44
Chief Financial Officer
Group Executive, Legal & Secretariat
Chief Executive, Consumer
Peter was appointed Chief Financial
Officer in April 2014. Peter has
responsibility for Westpac’s Finance,
Tax, Treasury and Investor Relations
functions.
Prior to this appointment, Peter was
the Deputy Chief Financial Officer for
three years and has held other 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 Touche 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.
Rebecca was appointed as a Westpac
Group Executive in October 2016 and
is responsible for legal and secretariat
functions globally. She was appointed
Group General Counsel in November
2011 and was Chief Compliance Officer
from 2013 to 2017.
Rebecca joined Westpac in 2002
and has held a variety of other senior
leadership roles including General
Manager, Human Resources for
St.George Bank and General Manager,
St.George Private Clients.
Rebecca began her career at Blake
Dawson Waldron (now Ashurst) before
joining the US firm Skadden Arps
where she worked in both New York
and London. Rebecca then moved into
an in-house role in investment banking
at Goldman Sachs in London before
returning to Australia and joining
Westpac.
Rebecca is Deputy Chair of the GC100
Executive Committee and a member
of Chief Executive Women.
David was appointed Chief Executive,
Consumer in April 2019, responsible
for the end to end relationships with
consumer customers. This includes
all consumer distribution, digital,
marketing, banking and insurance
products and services under the
Westpac, St.George, BankSA, Bank
of Melbourne, BT, and RAMS brands.
Prior to this appointment, David was
Chief Executive, Business Bank from
June 2015, managing relationships
with business customers for the
Westpac, St.George, BankSA and Bank
of Melbourne brands.
Before this David was Chief Product
Officer for the Group’s retail and
business products, 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 Vice President and Head
of Australia for First Manhattan.
2019 Westpac Group Annual Report Directors’ report
33
David McLean
LLB (Hons.).
Age: 61
Chief Executive Officer, Westpac New
Zealand
David was appointed Chief Executive
Officer, Westpac New Zealand 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 from 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-house counsel for NatWest NZ from
1985.
Carolyn McCann
BBus (Com), BA, GradDipAppFin,
GAICD.
Age: 47
Group Executive, Customer &
Corporate Relations
Carolyn was appointed as Westpac’s
Group Executive, Customer &
Corporate Relations in June 2018.
This division brings together
management of the Group’s
customer resolution and reporting,
alongside our corporate affairs,
communications and sustainability
functions, recognising the importance
of setting high service standards and
quickly resolving customer issues in
managing the Group’s relationship
with its customers. Carolyn joined
the Westpac Group in 2013, as
General Manager, Corporate Affairs
& Sustainability, during which time
she played an instrumental role in
leading the Group’s bicentenary
program, including the launch of the
$100 million Westpac Scholars Trust
(formerly known as the Westpac
Bicentennial Foundation).
Prior to joining Westpac, Carolyn
spent 13 years at Insurance Australia
Group in various positions, including
Group General Manager, Corporate
Affairs & Investor Relations. Carolyn
began her career in consulting and
has extensive experience in financial
services.
Christine Parker
BGDipBus (HRM).
Age: 59
Group Executive, Human Resources
Christine was appointed to Westpac
Group’s Executive Team in October
2011. As Group Executive, Human
Resources, Christine leads the HR
function for the Group, responsible
for strengthening our service oriented
and inclusive culture, attracting and
retaining the best talent, developing
and helping our workforce to grow
skills for the future, rewarding and
recognising our people and ensuring
the health and wellbeing of our
people. Christine also oversees the
Group’s Customer Advocate function,
corporate communications, and
supports the CEO and Board on
culture and conduct. Christine also has
responsibility for Office of the Banking
Executive Accountability Regime.
Since joining Westpac in 2007,
Christine has held a variety of senior
leadership roles including Group
General Manager, Human Resources
and General Manager, Human
Resources for Westpac New Zealand
Limited. Before joining Westpac,
Christine held senior HR roles in a
number of high profile organisations
and across a range of industries,
including Carter Holt Harvey and
Restaurant Brands New Zealand.
Christine was previously a Director
of Women’s Community Shelters
and is a current member of Chief
Executive Women, Governor of
St.George Foundation and member
of the Veterans’ Employment Industry
Advisory Committee.
2019 Westpac Group Annual Report1234 34
Directors’ report
David Stephen
BBus.
Age: 55
Gary Thursby
BEc, DipAcc, FCA.
Age: 56
Alastair Welsh
MBA, BCA, CA.
Age: 54
Chief Risk Officer
Chief Operating Officer
Acting Chief Executive, Business
David was appointed Chief Risk Officer
in October 2018, with responsibility
for risk management and compliance
activities across the Group.
Prior to this, David was the Chief Risk
Officer for Royal Bank of Scotland
(RBS) from 2013, having first joined
RBS in 2010 as the Deputy Chief Risk
Officer. David has also previously held
other senior roles at both retail and
investment banks in the UK, USA,
Hong Kong and Australia, including
serving as Chief Risk Officer at ANZ
and Chief Credit Officer at Credit
Suisse Financial Products.
David has a Bachelor of Business in
Banking and Finance from Monash
University and is a Board member of
both the International Financial Risk
Institute and the Financial Services
Institute of Australia (FINSIA).
Alastair was appointed Acting Chief
Executive, Business in April 2019.
The Business division leads
relationships with Australia’s small,
commercial, corporate and agri
businesses providing a wide range of
banking services and support across
Westpac, St George, BankSA, Bank of
Melbourne and Capital Finance brands.
The division also supports customers’
wealth and investment needs including
Private Wealth, Superannuation,
Platforms, Investments and Operations
businesses through all of our brands.
Alastair holds more than 30 years’
experience in banking in the UK, New
Zealand and Australia. Since joining
Westpac NZ in 1992, he has held a
variety of roles from relationship
management through to leadership
positions for Small Business Banking,
BT Financial Group and Group
Customer Transformation. Prior to this
appointment, Alastair was General
Manager for the Westpac Commercial
Business Bank.
Gary was appointed Chief Operating
Officer in April 2019, having previously
been in the role of Group Executive,
Strategy & Enterprise Services since
October 2016. In addition to leading
the Group’s strategy function, his
role is designed to support delivery
of the Group’s Service Revolution
and provide services to support the
Group’s operating businesses.
Gary’s responsibilities also include
banking operations, advice
remediation, procurement, property,
analytics and enterprise investments.
In addition, Gary oversees the Group’s
corporate and business development
portfolios.
Before joining Westpac in 2008,
Gary held a number of senior finance
roles at Commonwealth Bank of
Australia 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 Touche 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.
2019 Westpac Group Annual Report 35
• Operating expenses increased $540 million or
6% compared to 2018. The increase was mainly
due to a $349 million increase in provisions for
estimated customer refunds, payments, associated
costs, and litigation, higher technology expenses
of $174 million, a rise in regulatory, compliance and
investment related spend of $170 million, partially
offset by the exit of the Hastings business in 2018 of
$158 million and a net productivity benefit.
•
Impairment charges were $84 million or 12% higher
compared to 2018. Asset quality remained sound,
with stressed exposures as a percentage of total
committed exposures at 1.20%, up 12 basis points
over the year.
A review of the operations of the Group and its
divisions and their results for the financial year ended
30 September 2019 is set out in Section 2 of the Annual
Report under the sections ‘Review of Group operations’
(see pages 79 to 92), ‘Divisional performance’ (see
pages 93 to 101) and ‘Risk and risk management’ (see
pages 102 to 120), 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 (see pages 135 to 288),
which form part of this report.
c) Dividends
Since 30 September 2019, Westpac has announced
a final ordinary dividend of 80 cents per Westpac
ordinary share, totalling approximately $2,791 million
for the year ended 30 September 2019 (2018 final
ordinary dividend of 94 cents per Westpac ordinary
share, totalling $3,227 million). The dividend will be fully
franked and will be paid on 20 December 2019.
An interim ordinary dividend for the current financial
year of 94 cents per Westpac ordinary share for the half
year ended 31 March 2019, totalling $3,239 million, was
paid as a fully franked dividend on 24 June 2019 (2018
interim ordinary dividend of 94 cents per Westpac
ordinary share, totalling $3,213 million). The payment
comprised direct cash disbursements of $2,080 million
with $1,159 million being reinvested by participants
through the DRP.
Further, in respect of the year ended 30 September
2018, a fully franked final dividend of 94 cents per
ordinary share totalling $3,227 million was paid on 20
December 2018. The payment comprised direct cash
disbursements of $2,897 million with $330 million, being
reinvested by participants through the DRP.
New shares were issued under the DRP for each of
the 2018 final ordinary dividend and the 2019 interim
ordinary dividend.
Directors’ report
3. Report on the business
a) Principal activities
The principal activities of the Group during the
financial year ended 30 September 2019 were the
provision of financial services including lending, deposit
taking, payments services, investment platforms,
superannuation and funds management, insurance
services, leasing finance, general finance, interest rate
risk management and foreign exchange services.
From 30 June 2019 and 30 September 2019 respectively,
Westpac ceased to provide personal financial advice
through its salaried BT Financial Group planners or its
authorised representatives. Other than this change, there
have been no significant changes in the nature of the
principal activities of the Group during 2019.
b) Operating and financial review
The net profit attributable to owners of Westpac
Banking Corporation for 2019 was $6,784 million, a
decrease of $1,311 million or 16% compared to 2018. Key
features of this result were:
• Net interest income increased $402 million or 2%
compared to 2018 driven by an increase of $686
million due to the reclassification of line fees from
net fee income to interest income, partly offset by
$239 million increase in provisions for estimated
customer refunds, payments, associated costs, and
litigation. Excluding the impact of these items, net
interest income was flat compared to 2018. Average
interest earning assets grew 3% primarily from
Australian and New Zealand housing, broadly offset
by a lower margin. Reported net interest margin
decreased 1 basis point to 2.12%.
• Net fee income decreased $769 million or
32% compared to 2018 primarily due to the
reclassification of line fees to net interest income
($667 million in 2018) and $126 million increase
in provisions for estimated customer refunds,
payments, associated costs and litigation.
• Net wealth management and insurance income
decreased $1,032 million or 50% compared to 2018
primarily due to additional provisions for estimated
customer refunds, payments, associated costs, and
litigation of $531 million, higher general insurance
claims from severe weather events $69 million,
cessation of grandfathered advice commissions $42
million, lower wealth management income due to
changes in platform pricing structure, and exit of the
Hastings business in 2018.
• Trading income decreased $16 million or 2%
compared to 2018. The decline mainly relates to
a change in methodology in derivative valuation
adjustments partially offset by higher non-customer
income.
• Other income is up $57 million or 79% compared
to 2018, primarily due to the non-repeat of a 2018
impairment charge on an equity holding of $104
million.
2019 Westpac Group Annual Report1234 36
Directors’ report
d) Significant changes in state of affairs and events
during and since the end of the 2019 financial year
Throughout the financial year ended 30 September
2019, the Group has operated in a challenging external
environment, which has included ongoing and
heightened scrutiny across the industry (including as
a result of the Royal Commission into Misconduct in
the Banking, Superannuation and Financial Services
Industry and self-assessments into governance, culture
and accountability), as well as challenging economic
conditions (refer to the section ‘External environment’
for more details).
In this environment, significant changes in the state of
affairs of the Group were:
• changes to Westpac’s wealth strategy, which
resulted in major BT Financial Group businesses
being realigned into the Consumer and Business
divisions and exiting the provision of personal
financial advice by Westpac Group salaried financial
advisers and authorised representatives;
• compliance, reputation and remediation provisions;
• APRA applying an additional $500 million to
Westpac’s operational risk capital requirement as a
result of Westpac’s self-assessment into its culture,
governance and accountability;
•
the issuance of approximately A$1.42 billion AT1
securities, known as Westpac Capital Notes 6, which
qualify as Additional Tier 1 capital under APRA’s
capital adequacy framework, as well as the transfer
and redemption of approximately A$1.38 billion
Westpac Capital Notes; and
• ongoing regulatory changes and developments,
which have included changes relating to financial
services, the expansion of penalties for financial
sector misconduct, the provision of new powers
to regulators, accounting standards, access to
data, information security and other regulatory
requirements.
For a discussion of these matters, please refer to
‘Significant developments’ in Section 1 of the Annual
Report, which forms part of this report (see pages
15 to 22).
On 4 November 2019, Westpac announced that it will
be undertaking an underwritten placement of fully
paid ordinary shares in Westpac to sophisticated and
institutional investors to raise $2 billion. As further
announced, following the placement, Westpac will make
a share purchase plan available to eligible shareholders
and is targeting to raise approximately $500 million.
The proceeds received under the placement and share
purchase plan will be used to strengthen Westpac’s
regulatory capital position.
Other than set out above, the Directors are not aware
of any other matter or circumstance that has occurred
since 30 September 2019 that has significantly affected
or may significantly affect the operations of the Group,
the results of these operations or the state of affairs of
the Group in subsequent financial years.
e) Business strategies, developments and expected
results
Our business strategies, prospects and likely major
developments in the Group’s operations in future
financial years and the expected results of those
operations are discussed below and in ‘Significant
developments’ in Section 1 of the Annual Report
(see pages 15 to 22), which forms part of this report.
External environment
2019 has been another challenging period for financial
services companies, including Westpac. In particular,
the Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry,
combined with self-assessments into governance,
culture and accountability conducted across the
industry have brought to light examples of poor
behaviour affecting customers, shortcomings in the
management of non-financial risks, and weak risk
cultures. These have added to the erosion of public
sentiment and trust in the financial services industry.
Westpac has taken these developments very seriously
and is now working to respond to the findings of the
Royal Commission’s final report (released 1 February
2019) and its own CGA self-assessment. At the same
time, the Group has been focused on identifying where
we got it wrong for customers and putting things right.
These efforts aim to strengthen the Group’s focus on
leadership, governance and culture, and create better
outcomes for customers and shareholders.
These issues for Westpac, and the sector, have
been accompanied by a weakening in the economic
environment with lower GDP growth, continued weak
wages growth and subdued business and consumer
sentiment. At the same time, interest rates have fallen
to unprecedented lows. For financial services, this has
contributed to more cautious demand for lending,
a decline in deposit growth, lower house prices, and
structural pressures on net interest margins. While
credit growth has slowed, competition has remained
intense across the sector including from domestic and
international banks, and from non-banks.
Business Strategy
The changing environment in which we operate
has reinforced the need to deliver better customer
outcomes and experiences, and underlined the
importance of continuing to deliver on our vision and
strategy, including the Service Revolution.
Westpac’s vision is ‘To be one of the world’s great
service companies, helping our customers, communities
and people to prosper and grow’.
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 we believe assist us in meeting the
financial services needs of customers.
With over 14 million customers1, our focus is on organic
growth, growing customer numbers in our chosen
segments and building stronger and deeper customer
relationships.
1. All customers with an active relationship (excludes channel only and potential relationships) as at 30 September 2019.
2019 Westpac Group Annual Report 37
Directors’ report
A key element of this approach is our portfolio of
financial services brands, which we believe enables us
to appeal to a broader range of customers and provides
us with the 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 our financial position.
This has involved:
• maintaining the high level and quality of our capital;
• continuing to improve our funding and liquidity
position; and
• seeking to maintain a high level of asset quality and
appropriate provisioning.
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 better for our people. We believe
these improvement efforts deliver better customer
outcomes while also creating capacity for investment.
Throughout 2019 we continued our focus on seeking
to deliver positive outcomes for our customers
and shareholders through our Service Revolution
transformation.
The Service Revolution is seeking to:
Supporting our customer-focused strategy is a strong
set of company-wide values, which are embedded in
our culture. These are:
•
integrity;
• service;
• one team;
• courage; and
• achievement.
In delivering our strategy, we have a set of strategic
priorities that help guide our activities:
Customer Franchise
• Deliver great customer outcomes;
• Create best-in-class service experience;
• Enable channels to work together seamlessly; and
• Maintain strong and differentiated brand portfolio.
Digital transformation
•
Build out data infrastructure and capabilities;
•
•
Transform our platforms;
Strengthen partnerships to efficiently close
capability gaps; and
• provide a truly personal service for customers while
•
Create new digital experiences for customers.
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 2019, we continued to
deliver outcomes and milestones on a number of our
transformation programs focused on the digitisation
of the company through the design and development
of a single bank technology infrastructure. We expect
this will transform customer experiences and drive
operational efficiency. At the same time, we believe our
divisional transformation programs continue to deliver
market-leading customer services, while lowering the
cost to serve.
Over the year, substantial work has also continued on
conduct and culture, with work focused on continuing
to strengthen our conduct management across the
Group. Much of the effort this year has been focused
on improving customer outcomes and on our product
reviews, as well as working to ensure we meet customer
and community expectations. We are continuing to
make adjustments and improvements to our business.
In addition, work continues on ensuring that we are
responding to the changing regulatory and industry
landscape.
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.
Performance discipline
• Uplift risk management capability;
• Get it right;
• Enhance execution proficiency; and
• Drive structural cost reduction.
Competition
The Group operates in a highly competitive
environment.
We serve the banking, wealth and risk management
needs of customer segments from consumers and
small businesses through to large corporate and
institutional clients. The Group competes with other
financial services providers in every segment and every
product or service. Our competitors include financial
services and advisory companies such as banks (both
domestic and global), investment banks, credit unions,
building societies, mortgage originators, credit card
issuers, brokerage firms, fund and asset management
companies, insurance companies, online financial
services providers, and technology companies large and
small.
Like other financial services providers, our competitive
position across customer segments, products and
geographies is determined by a variety of factors. These
include:
•
the quality, range, innovation and pricing of products
and services offered;
• digital and technology solutions;
• customer service quality and convenience;
•
the effectiveness of, and access to, distribution
channels;
• brand reputation and preference;
•
•
the types of customers served; and
the talent and experience of our employees.
2019 Westpac Group Annual Report1234 38
Directors’ report
We also operate in an environment where digital
innovation is changing the competitive landscape.
We compete on our ability to offer new products and
services that align to evolving customer preferences.
The competitive nature of the industry means that if
we are not successful in developing or introducing new
products and services, or in responding or adapting to
changes in customer preferences and habits, we could
lose customers to our competitors.
Competition within Australia’s financial system is
evidenced by both the significant number of providers
and the range of products and services available
to customers. In Australia, competition for both
deposits and lending continues to be fierce, both from
established banks as well as new entrants, including
technology firms. Slowing growth in some sectors has
heightened competitive intensity as financial institutions
work to win new customers and retain existing ones.
In our wealth businesses, we expect the broader
competitive landscape to continue to undergo
significant change with ongoing consolidation in life
insurance, increased overseas interest and participation
in superannuation.
In New Zealand, the Group is experiencing strong
competition as banks vie for new customers and seek
to retain existing ones. Competition for deposits and
lending remains intense.
Outlook1
The Australian economy had a below-trend year with
annual growth to the June quarter 2019 at only 1.4%
which was below population growth of 1.6%.
Growth has been uneven as private spending
contracted over the year while government spending
and exports accounted for all of Australia’s growth.
Weakness in the private sector largely reflects a
contraction in building activity, particularly centred
around residential property, and continuing weakness
in wages which is constraining consumer spending. The
softer Australian growth combined with the slowdown
in the world economy is also impacting business
confidence and investment plans.
Progress in dealing with the shocks to the global
outlook from the trade disputes, particularly between
the US and China, will be important for the outlook for
the global economy and the flow-on effect on business
confidence and investment plans in Australia.
Looking ahead, the Group expects GDP growth to lift
somewhat through the remainder of 2019 and into
2020. This scenario is expected to be supported by
interest rate cuts, the lower Australian dollar, targeted
income tax cuts, and a recovery in housing sentiment.
Nevertheless, GDP growth is likely to remain below
longer term averages (of closer to 2.75%) at 2.3% for
calendar year 2019 and 2.4% for calendar year 2020.
Weakness in wage growth is likely to persist while the
contraction in the residential construction cycle will
extend well into 2020. The Group expects the recent
recovery in house prices, particularly in Sydney and
Melbourne, to extend into 2020, providing some boost
to households who, nevertheless, are likely to remain
cautious on further increasing debt levels.
With the Commonwealth budget expected to return
to surplus in 2019/20, the Commonwealth government
may initiate additional stimulus in 2020 to assist the
recovery as further stimulus from monetary policy
appears to be limited.
With the RBA cash rate having been reduced from 1.5%
to 0.75% over the course of 2019, one more rate cut is
expected in early 2020 to 0.5%. Following that move,
if further stimulus is required, the RBA may adopt
unconventional monetary policies which may include
asset purchases or long term funding for financial
institutions.
Credit growth for the Australian financial system slowed
to 2.7% in the year to September 2019, down from 4.5%
a year earlier. That included a slowdown in housing
credit to 3.1% from 5.4% and business to 3.3% from 3.8%
with personal credit contracting by 4.4% after declining
by 1% a year earlier.
For the year ending 30 September 2020, total system
credit growth is expected to lift to 3%, with housing
credit growth rising to 3.5%. The lift in housing credit
growth is expected to reflect the improving conditions
in major housing markets, particularly following
the more recent rise in lending approvals. Business
credit growth is likely to expand by 3% in the year to
30 September 2020 while other personal credit is
expected to contract by a further 2%.
Economic conditions in New Zealand have also softened
over the year; in part due to the deterioration in the
global back drop which has dampened conditions
in export sectors. Domestic New Zealand conditions
have also softened with sluggish consumer spending
and weak business confidence. Conditions in New
Zealand are likely to remain muted for the remainder
of 2019 followed by an expected improvement in 2020
supported by lower interest rates, some fiscal stimulus,
and the competitive (lower) New Zealand dollar.
The environment for financial services companies is
expected to continue to be impacted by the actions
flowing from the Royal Commission into Misconduct
in the Banking, Superannuation and Financial Services
Industry that released its final report in February 2019.
The sector will remain focused on implementing the
recommendations of the Royal Commission and other
company specific reviews. At the same time, regulators
have indicated that they will be taking a more active
position in prosecuting cases of misconduct as well
as stepping up supervisory actions. This will likely see
associated costs remain high for the sector in the period
ahead.
In addition, regulators in Australia and New Zealand
have a number of reviews underway, in many areas
including mortgage pricing, remuneration, and capital/
risk weighted asset methodologies across the sector.
Further clarity on these reviews is expected in the year
ahead.
1. All data and opinions under ‘Outlook’ are generated by our internal economists and management.
2019 Westpac Group Annual Report 39
Wealth management income is also expected to
be lower over the year, from our decisions to exit
financial planning, eliminate grandfathered commission
payments and change pricing on our wealth
administration platforms. The impact of regulatory
change may also reduce wealth and insurance income
in the year ahead.
On capital, our current capital raising will further
lift the Group’s CET1 capital ratio and, based on the
current outlook and our capital settings, the Group will
increase its buffer over APRA’s unquestionably strong
benchmark for CET1 capital ratio of over 10.5%.
Given the strength of our customer franchise, and
our balance sheet, we believe we are well placed to
respond to any changes in the operating environment
or regulatory requirements.
Looking ahead, with our strong positioning, disciplined
growth, solid portfolio of businesses, and good
progress on our strategic priorities, Westpac believes
it is well positioned to continue delivering sound
outcomes for shareholders and customers.
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.
f) Risks to our financial performance, position and
our operations
Our financial position, our future financial results,
our operations and the success of our strategy are
subject to a range of risks. These risks are set out and
discussed in Section 2 of this Annual Report under the
section ‘Risk and risk management’, which forms part of
this report (see pages 102 to 120).
Directors’ report
Westpac Group remains focused on executing our
vision of being one of the world’s great service
companies, with three strategic priorities assisting this
transformation. These are:
• Customer franchise - continuing to build the
Group’s customer base while also increasing the
depth of customer relationships. The Group seeks
to do this via superior service, as measured by NPS,
and by expanding our share of customers that call
us their main financial institution. The priority will
be supported by our strong portfolio of brands and
also recognises that leading in services requires a
high quality, diverse and engaged workforce;
• Digital transformation - utilising technology to
materially improve efficiency and reduce the
Group’s cost to income ratio to below 40% in the
medium term. This will include completing the
modernisation of the Group’s technology platforms,
and migrating more activity to digital that will
assist in the continued restructuring of the Group’s
distribution network and create new experiences for
customers. At the same time we’ve developed some
unique fintech partnerships that will provide new
services and close capability gaps; and
• Performance discipline – continuing to be prudent
in the management of capital, funding and liquidity;
managing returns effectively seeking to achieve a
superior ROE to the peer average and remaining
disciplined and targeted on asset growth. At the
same time the group is focused on improving
its ability to execute on its plans with a focus on
leadership.
In the period ahead, a key focus will be to resolve
outstanding issues, including our response to the
findings of the Royal Commission and our own CGA
self-assessment. At the same time we are looking to
enhance our processes and controls in areas such as
financial crime, end-to-end lending, compliance, and
risk management. As a result, investment across these
areas, is expected to lead to higher costs in 2020.
At the same time, we have already provided for
customer payments and refunds where we may not
have, or have not been able to sufficiently demonstrate
that we have, done the right thing for customers. Our
review of historical practices will continue into 2020
and further provisions may be required. We will also
focus on refunding customers as quickly as practical
where needed.
The low interest rate environment also has an impact
on bank earnings and should interest rates be reduced
further it is likely to place additional pressure on
earnings and returns, as the ability to fully reprice
lending and deposits to account for even lower interest
rates is limited.
Our lending growth is expected to be modest in the
year ahead, partly reflecting the low system growth
but also due to our decision to remain disciplined on
margins and from low mortgage growth. Mortgage
volume declined late in FY19 and are expected to ease
further in the early part of FY20. Growth should then
recover through the year as the resolution of some
process issues gradually sees new applications improve
and outflows slow.
2019 Westpac Group Annual Report1234 40
Directors’ report
4. Directors’ interests
a) Directors’ interests in securities
The following particulars for each Director are set out in the Remuneration Report in Section 10 of the Directors’
report for the year ended 30 September 2019 and in the tables below:
•
•
•
their relevant interests in our shares or the shares of any of our related bodies corporate;
their relevant interests in debentures of, or interests in, any registered managed investment scheme made
available by us or any of our related bodies corporate;
their rights or options over shares in, debentures of, or interests in, any registered managed investment scheme
made available by us or any of our related bodies corporate; and
• any contracts:
–
–
to which the Director is a party or under which they are entitled to a benefit; and
that confer a right to call for or deliver shares in, debentures of, or interests in, any registered managed
investment scheme made available by us or any of our related bodies corporate.
Directors’ interests in Westpac and related bodies corporate as at 4 November 2019
Number of Relevant
Interests in Westpac
Number of Westpac
Ordinary Shares
Share Rights
Westpac Banking Corporation
Current Directors
Lindsay Maxsted
Brian Hartzer
Nerida Caesar
Ewen Crouch
Alison Deans
Craig Dunn
Anita Fung
Steven Harker
Peter Marriott
Peter Nash
Margaret Seale
Former Directors
Peter Hawkins
23,602
151,4781
13,583
78,4503
14,392
8,869
-
10,365
20,870
8,020
21,7194
15,8805
-
636,5402
-
-
-
-
-
-
-
-
1. Brian Hartzer’s interest in Westpac ordinary shares includes 20,933 restricted shares held under the CEO Restricted Share Plan.
2. Share rights issued under the CEO Long Term Variable Plan.
3. Ewen Crouch and his related bodies corporate also hold relevant interests in 250 Westpac Capital Notes 2.
4. Margaret Seale and her related bodies corporate also hold relevant interests in 3,220 Westpac Capital Notes 2.
5. Figure displayed is as at Peter Hawkins’s retirement date of 12 December 2018, at which point Peter Hawkins and his related bodies
corporate also held relevant interests in 850 Capital Notes 3, 882 Westpac Capital Notes 4 and 1,370 Westpac Capital Notes 5.
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) or Advance Cash Multi-Blend Fund
(ARSN 094 113 050).
2019 Westpac Group Annual Report 41
For the year ended 30 September 2019, 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.
c) Share rights outstanding
As at the date of this report there are 4,225,250 share
rights outstanding in relation to Westpac ordinary
shares. The latest dates for exercise of the share rights
range between 1 October 2020 and 1 July 2034.
Holders of outstanding share rights in relation to
Westpac ordinary shares do not have any rights under
the share rights to participate in any share issue or
interest of Westpac or any other body corporate.
d) Proceedings on behalf of Westpac
No application has been made and no proceedings
have been brought or intervened in, on behalf of
Westpac under section 237 of the Corporations Act.
Directors’ report
b) Indemnities and insurance
Under the Westpac Constitution, unless prohibited
by statute, we indemnify each of the Directors and
Company Secretaries of Westpac and of each of
our related bodies corporate (except related bodies
corporate listed on a recognised stock exchange),
each employee of Westpac or our subsidiaries (except
subsidiaries listed on a recognised stock exchange),
and each person acting as a responsible manager
under an Australian Financial Services Licence of any
of Westpac’s wholly-owned subsidiaries against every
liability (other than a liability for legal costs) 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 on
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’ liability
insurance to Directors of Westpac and Directors of
Westpac’s wholly-owned subsidiaries.
2019 Westpac Group Annual Report1234 6. Human rights supply chain disclosure
Westpac’s overall approach to human rights is set out in
our Westpac Group Human Rights Position Statement,
and this references our Responsible Sourcing Code
of Conduct as the primary framework for managing
human rights in our supply chain.
The Group is subject to the United Kingdom’s
Transparency in Supply Chains provisions under the
Modern Slavery Act 2015, which came into effect in
March 2015. Westpac releases an annual statement
each year for the period ended 30 September to
disclose the steps taken during the year to help prevent
modern slavery from occurring within the Group’s
operations and supply chain.
The Group is subject to the Commonwealth of
Australia’s Modern Slavery Act 2018 (Cth), with the first
reporting year being 2020 and the first report being
due six months from the end of 30 September 2020.
7. Rounding of amounts
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.
8. Political engagement
In line with Westpac policy, no cash donations were
made to political parties during the financial year ended
30 September 2019.
In Australia, political expenditure for the financial year
ended 30 September 2019 was $166,650. 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.
In New Zealand, political expenditure for the financial
year ended 30 September 2019 was NZD$20,170.
42
Directors’ report
5. Environmental disclosure
As part of our 2019 Sustainability Strategy, we have set
targets for our environmental performance to 2020.
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 Sustainability Risk Management Framework;
• our Climate Change Position Statement and 2020
Action Plan;
• our Responsible Sourcing Code of Conduct; and
• public reporting of our environmental performance.
We also participate in a number of voluntary initiatives
including the Dow Jones Sustainability Index (#9
in global banking group and above our Australian
peers), CDP1, the Equator Principles, the Principles for
Responsible Banking, the Principles for Responsible
Investment and the United Nations Global Compact.
The National Greenhouse and Energy Reporting Act
2007 (Cth) (NGER) came into effect in July 2008. The
Group reports on greenhouse gas emissions, energy
consumption and production under the NGER for the
period 1 July through 30 June each year.
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.
Westpac has reported its performance against the
recommendations of the Task Force on Climate-
related Financial Disclosures (TCFD) in Section 2 of
this Annual Report under the sections titled ‘Risk and
risk management – climate change risk’ (see pages
118 to 120); and ‘Climate-related financial disclosures
(see page 127). Further information about Westpac’s
sustainability performance and approach is also
included in Section 2 of this Annual Report under
the sections ‘Risk and Risk Management’ (see pages
102 to 120) and ‘Westpac’s approach to sustainability’
(see pages 121 to 131).
Additional information about our environmental
performance, including information on our climate
change approach, details of our greenhouse gas
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.
2019 Westpac Group Annual Report Directors’ report
43
9. Directors’ meetings
Each Director attended the following meetings of the Board and Committees of the Board during the financial year
ended 30 September 2019:
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
Nerida Caesar
Ewen Crouch
Alison Deans
Craig Dunn
Anita Fung
Steven Harker
Peter Hawkins
Peter Marriott
Peter Nash
Margaret Seale
1
2
3
4
5
6
7
8
9
10
11
12
A
11
11
11
11
11
11
11
7
3
11
11
7
B
11
11
11
11
11
11
11
7
3
11
11
7
A
6
n/a
n/a
4
n/a
n/a
n/a
n/a
2
6
6
B
6
n/a
n/a
4
n/a
n/a
n/a
n/a
2
6
6
n/a
n/a
A
5
B
5
n/a
n/a
5
5
5
5
5
3
1
5
5
3
5
5
5
5
5
3
1
5
5
3
A
4
n/a
n/a
4
4
4
n/a
n/a
n/a
4
n/a
n/a
B
4
n/a
n/a
4
4
4
n/a
n/a
n/a
4
n/a
n/a
A
n/a
n/a
n/a
6
6
6
n/a
n/a
n/a
n/a
n/a
n/a
B
n/a
n/a
n/a
6
6
6
n/a
n/a
n/a
n/a
n/a
n/a
A
n/a
4
4
n/a
4
n/a
n/a
n/a
1
4
n/a
n/a
B
n/a
4
4
n/a
4
n/a
n/a
n/a
1
4
n/a
n/a
This table shows membership of standing Committees of the Board. From time to time the Board may form other
committees or request Directors to undertake specific extra duties.
A – Meetings eligible to attend as a member
B – Meetings attended as a member
Unless otherwise stated, each Director has been a member, or the Chairman, of the relevant Committee for the
whole of the period from 1 October 2018.
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. Member of the Board Risk & Compliance Committee and Board Technology Committee.
4. Chairman of the Board Risk & Compliance Committee. Member of the Board Nominations Committee and the Board Remuneration
Committee, and from 1 January 2019, a member of the Board Audit Committee.
5. Chairman of the Board Technology Committee. Member of the Board Nominations Committee, Board Remuneration Committee and
Board Risk & Compliance Committee.
6. Chairman of the Board Remuneration Committee. Member of the Board Risk & Compliance Committee and the Board Nominations
Committee.
7. Member of the Board Risk & Compliance Committee.
8. Steven Harker was appointed as a Director and member of the Board Risk & Compliance Committee on 1 March 2019.
9. Peter Hawkins retired from the Board and its Committees on 12 December 2018.
10. Chairman of the Board Audit Committee. Member of the Board Nominations Committee, Board Risk & Compliance Committee and the
Board Technology Committee.
11. Member of the Board Audit Committee and Board Risk & Compliance Committee.
12. Margaret Seale was appointed as a Director and member of the Board Risk & Compliance Committee on 1 March 2019.
2019 Westpac Group Annual Report1234 Directors’ report
44
Directors’ report
10.
Remuneration Report
Introduction from the Chairman of the Board Remuneration Committee
2019 was
a year of reflection
for the Company
and the Board
Craig Dunn, Chairman
Board Remuneration Committee
2019 remuneration outcomes
Westpac’s short term variable reward (STVR) is
designed to ensure a significant portion of remuneration
is variable, at-risk and linked to the delivery of agreed
plan targets for financial and non-financial measures.
The STVR outcome can range from 0% to 100%
depending on performance relative to targets agreed
at the beginning of the year, or exceed 100% when
exceptional performance is achieved.
The targets for STVR sign-post those areas of focus
that the Board regards as most critical for management
and which encourage the achievement of stretch
performance while operating within appropriate risk
settings. Long term variable reward (LTVR) is designed
to further align the interests of executives with those
of shareholders by rewarding the delivery of sustained
Group performance over the long term.
Key remuneration outcomes for 2019 include:
• The CEO’s STVR award was zero;
• The average 2019 STVR outcome for Group
Executives was 56% of the target opportunity, down
from 87% in 2018;
• The 2016 LTVR lapsed in full;
• The 2020 total target remuneration has been
reduced by 23% and 12.5% for the CEO and Group
Executives, respectively reflecting changes made to
LTVR; and
• Board fees were reduced by 20% as a one-off
measure.
Further detail regarding the key remuneration outcomes
for the CEO, Group Executives and Non-executive
Directors is provided on the following page, and in
sections 3, 6 and 7 of the Remuneration Report.
Dear shareholders,
On behalf of the Board, I am pleased to present
Westpac’s 2019 Remuneration Report.
2019 Group performance
As outlined in the Chairman’s report and the CEO’s
annual letter, 2019 has been another challenging period
for financial services companies, including Westpac.
Examples of poor behaviour affecting customers,
shortcomings in the management of non-financial
risks and poor risk cultures have been at the heart of
challenges faced by the industry.
These issues have been accompanied by slowing
economic activity, further falls in interest rates,
a decline in house prices and weak business and
consumer confidence. These operating conditions have
contributed to more cautious demand for lending, a
decline in deposit growth and intense competition as
more lenders target a smaller pool of new lending.
With this backdrop, Westpac reported cash earnings of
$6,849 million in 2019, a reduction of 15% compared to
the prior year. Our performance in 2019 was impacted
by estimated customer refunds, payments, associated
costs, and litigation, as well as costs incurred with the
restructuring of the Wealth business. Excluding these
items, cash earnings in 2019 were $7,979 million, down
4% relative to 2018.
While earnings were lower, our common equity tier 1
ratio was 10.67% at 30 September 2019 and our liquidity
ratios were well above regulatory minimums. Asset
quality has remained sound and the overall level of
stressed assets remained at low levels over the year.
Recognising that much work has commenced on
improving our approach to non-financial risks, progress
in resolving risk and compliance matters has fallen short
of our expectations. Resolution of these matters and
continued investment in non-financial risk management
remain a focus.
Through the year we have continued to improve service
for customers, particularly via new digital self-serve
options and an enhanced approach to capturing
and responding to complaints. Investments in our
technology infrastructure have improved the stability
and speed of our systems and improved availability for
customers.
2019 Westpac Group Annual Report Directors’ report
45
Chief
Executive
Officer
• The CEO recommended to the Board that he forego his STVR for this year. The Board separately
considered the matter and determined that a zero STVR outcome for 2019 for the CEO was
appropriate to reflect accountability for poor non-financial risk and financial outcomes, as well as
some poor customer outcomes, including those highlighted at the Royal Commission.
• The 2016 LTVR lapsed in full because the relative TSR and cash EPS performance hurdles were not
achieved. The CEO has not received a share-based payment under the LTVR for four consecutive
years, equating to $15.96 million worth of lapsed performance share rights over that period. This
result is aligned with shareholder outcomes over the period.
•
In 2019, the CEO received $2.69 million in fixed remuneration and $1.33 million in deferred STVR
awarded in prior years that vested during the year, equalling $4.02 million in total realised
remuneration (i.e. take-home pay). This outcome is 33% of the maximum remuneration he could
have received for the year.
• For 2020, the CEO’s total target remuneration (comprising fixed remuneration, target STVR and
LTVR opportunity at face value) has been reduced by 23% as a result of changes made to LTVR,
as outlined below.
• The CEO has not received a total target remuneration increase since his appointment in 2015.
• Group Executives received between 0% and 83% of their 2019 STVR target opportunity. The average
2019 STVR outcome for Group Executives was 56% of the target opportunity, down from 87% in 2018.
• The 2019 STVR scorecard outcome for non-financial risk measures was reduced to zero for Group
Executives. In addition, downward remuneration adjustments were applied to two Group Executives
and two former Group Executives in response to material risk and compliance matters that impacted
the Group, in some instances reducing 2019 STVR outcomes to zero. Many of these adjustments
related to events from prior periods which have continued to develop and, in some cases, for which
material remediation costs were accounted for in 2019.
• The Board exercised its discretion to apply downward adjustments to a portion of deferred STVR
awarded in prior years for two former Group Executives.
• The 2016 LTVR lapsed in full because the relative TSR and cash EPS performance hurdles were
not achieved.
Group
Executives
• For 2020, the total target remuneration for Group Executives has been reduced by 12.5%, as a result
of changes made to LTVR.
• Given the above remuneration adjustments to current year and deferred STVR, together with changes
made to the LTVR from 2020, the Board determined that further adjustments to the quantum of
2020 LTVR were not required.
• David McLean (Chief Executive Officer, Westpac New Zealand) and Gary Thursby (Chief Operating
Officer) received total target remuneration increases in 2019 of 10.3% and 10.4% respectively to align
their remuneration with the market. David Lindberg received a total target remuneration increase
in 2019 of 6% given the increased size and scale of his role on appointment as the Group Executive,
Consumer. No other Group Executives received total target remuneration increases during 2019.
• David Stephen (Chief Risk Officer) and Craig Bright (Chief Information Officer) were appointed as
Group Executives in 2019. To attract the best international talent, the Board approved remuneration
packages which are higher than those of their predecessors. The Board also approved buyout awards
to compensate these executives for awards forfeited on resignation from their previous employer.
All
employees
• The 2019 Group variable reward pool for all employees was reduced by $126 million from 2018 to
align with Group performance.
•
In addition to the remuneration adjustments for Group Executives, downward remuneration
adjustments were approved for 13 General Managers in response to material risk and compliance
matters impacting the Group, ranging from 10% to 100%.
• The Group managed 1,134 employee conduct matters in Australia in 2019, of which 163 employees
exited the business and 545 employees were subject to formal disciplinary outcomes. A range of
remuneration consequences were also applied for these matters, including ineligibility for STVR and
remuneration adjustments to STVR.
Non-
executive
Directors
• The Chairman and other Non-executive Director base fees for 2019 were reduced by 20% as a one-
off measure, which equated to a $162,000 reduction for the Chairman. The reduction was applied
to all current Non-executive Directors in recognition of our collective accountability as the Board
of Westpac for customer outcomes highlighted by the Royal Commission, shareholder sentiment
leading to the first strike at the 2018 Annual General Meeting and significant non-financial risk
matters.
12342019 Westpac Group Annual Report 46
Directors’ report
First strike
Westpac received a first strike at the 2018 Annual
General Meeting, with 64% of votes cast against the
adoption of the 2018 Remuneration Report. This was a
disappointing outcome.
In 2019, we significantly increased our engagement
across different shareholder and shareholder advisory
groups to better understand their concerns. In addition
to ongoing meetings with shareholder advisory groups
and feedback from shareholders in the normal course,
we had individual and group meetings with many of our
institutional shareholders and roundtable meetings with
representative retail shareholders co-facilitated with the
Australian Shareholders’ Association.
It is clear that our executive remuneration outcomes
in 2018 were not in line with shareholder expectations.
Based on the feedback from the 2018 Annual General
Meeting and our more extensive consultations, the key
concerns that led to the first strike included:
(1) 2018 STVR outcomes were not considered
reflective of performance. Shareholders felt that
the scorecard results did not reflect performance in
some areas, in particular non-financial risk, and the
Board did not apply enough downward discretion to
the outcomes.
(2) Remuneration was considered too high,
particularly for the CEO. LTVR granted to the CEO
and Group Executives in 2018 was viewed as high
relative to that of peers, which was partially driven
by the use of fair value to determine the number of
performance share rights to grant for LTVR.
•
(3) There was insufficient transparency in our
communication with shareholders. Shareholders
believed that further information was required to
explain how STVR outcomes were determined.
The Board and management value these insights and
appreciate your feedback and willingness to engage
constructively.
Changes to remuneration
We spent significant time in 2019 reflecting on your
feedback.
We completed a comprehensive review of executive
remuneration including the remuneration strategy,
frameworks, governance, decision-making processes,
and our approach to communication.
A key objective of our review was to identify
opportunities for improvement and to develop
balanced solutions that consider the expectations of
shareholders, shareholder advisory groups, regulators,
customers and the broader community.
As a result, we have:
• Changed the LTVR allocation approach from 2020.
The number of performance share rights granted to
executives is now determined by the face value of
shares at the grant date, instead of the fair value. We
believe this approach improves transparency and is
in line with changes in market practice.
•
• Reduced total target and maximum remuneration
for executives from 2020. The Board reduced the
face value of 2020 LTVR opportunities by 43% for
the CEO and 23% to 25% for Group Executives. As
a result, the 2020 total target remuneration has
been reduced by 23% for the CEO and 12.5% for
Group Executives. This means the CEO’s total target
remuneration becomes comparable to that of other
Australian major bank CEOs.
CEO target remuneration package ($'000)
FY20
FY19
$2,686
$2,686
$3,585
$2,686
$2,686
$6,320
Fixed remuneration
STVR
LTVR (face value)
• Reduced fees paid to Non-executive Directors
for 2019. The Chairman and other current
Non-executive Director base fees for 2019 were
reduced by 20% as a one-off measure to recognise
collective accountability as the Board of Westpac
for customer outcomes highlighted by the Royal
Commission, shareholder sentiment leading to the
first strike at the 2018 Annual General Meeting and
significant non-financial risk matters.
• Updated the CEO’s 2019 STVR scorecard.
The balanced scorecard was updated to place a
greater emphasis on non-financial risk management
and customer outcomes.
Improved our remuneration governance and
decision-making frameworks. We further improved
our approach to the assessment of material risk and
compliance matters and the flow of information
between Board Committees including to support
the Board in determining possible remuneration
adjustments.
• Enhanced our remuneration adjustment guidelines
to strengthen consequence management.
The guidelines build on existing policies and
practices to provide greater clarity and consistency
in the management of employee conduct and the
application of remuneration consequences.
•
Introduced clawback as an additional
remuneration adjustment tool. Clawback has been
introduced to enable the Board to recover deferred
variable remuneration after it has vested (to the
extent legally permissible) in circumstances such
as serious misconduct or other conduct that may
have a serious adverse impact on Westpac or its
reputation, customers or people which has resulted
in, or would justify, termination of employment or
where otherwise required by law. Clawback will
apply to variable remuneration awarded in respect
of performance periods commencing on or after
1 October 2019 where conduct warranting clawback
occurs after this date.
Improved disclosure in the Remuneration Report.
The Remuneration Report provides greater
transparency around the rationale for remuneration
decisions, seeks to clearly demonstrate the link
between performance and remuneration and
provides further detail in relation to Westpac’s
minimum shareholding requirement in section 5.
2019 Westpac Group Annual Report 47
Directors’ report
Other changes for 2020
In addition, the Board has selected relative TSR as
the performance hurdle for the 2020 LTVR plan
as it believes this measure best aligns executive
remuneration outcomes with long-term shareholder
value creation. In recent years, cash ROE has been
used as a LTVR performance hurdle in conjunction
with relative TSR. The Board considers that setting
an absolute cash ROE range over a three year period
has become increasingly difficult in light of current
uncertainties surrounding future regulatory capital
requirements and interest rates, which are at historically
low levels. The Board will review the 2021 LTVR
plan following the release of APRA’s final regulatory
framework for remuneration.
Regulatory developments
APRA is currently consulting on changes to the
regulatory framework for remuneration. The Board
recently provided a submission to APRA on the
proposed changes which sets out Westpac’s overall
support for a stronger, clearer and more consistent
set of requirements. Our submission also recommends
alternatives for consideration by the regulator in relation
to some material aspects of the draft changes, including
in relation to the proposed maximum weighting of
financial performance measures used to determine
variable remuneration. If enacted, some of the proposed
changes would require substantial amendment to
our remuneration arrangements for executives and
employees. The Board will continue to review the
remuneration design in 2020 following the release of
APRA’s final regulatory framework.
On behalf of the Board, I invite you to read our
Remuneration Report and welcome your feedback.
Craig Dunn, Chairman
Board Remuneration Committee
12342019 Westpac Group Annual Report 48
Directors’ report
In this Report
1. Key Management Personnel
2. Summary of the 2019 executive reward framework
3. 2019 remuneration outcomes and alignment to performance
4. Further detail on the executive variable reward structure
5. Remuneration governance
6. Non-executive Director remuneration
7. Statutory remuneration details
49
50
52
59
62
64
66
2019 Westpac Group Annual Report Directors’ report
49
Key Management Personnel
1.
The remuneration of Key Management Personnel (KMP) for the Group is disclosed in the Report. In 2019, KMP
comprised the CEO, Group Executives and Non-executive Directors as set out in the table below. KMP is defined as
those persons having authority and responsibility for planning, directing and controlling the activities of an entity,
directly or indirectly, including any director (whether executive or otherwise) of that entity.
Name
Position
Managing Director & Chief Executive Officer
Term as KMP
Brian Hartzer
Managing Director & Chief Executive Officer
Full Year
Chief Information Officer
Commenced in KMP role on 4 December 2018
Current Group Executives
Craig Bright
Lyn Cobley
Peter King
Rebecca Lim
Chief Executive, Westpac Institutional Bank
Chief Financial Officer
Group Executive, Legal & Secretariat
David Lindberg1
Chief Executive, Consumer
Carolyn McCann
Group Executive, Customer & Corporate Relations
David McLean
Chief Executive Officer, Westpac New Zealand
Christine Parker
Group Executive, Human Resources
Chief Risk Officer
Chief Operating Officer
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
David Stephen
Gary Thursby2
Alastair Welsh3
Former Group Executives
Brad Cooper
Dave Curran
George Frazis
Acting Chief Executive, Business
Commenced in KMP role on 1 April 2019
Chief Executive Officer, BT Financial Group
Ceased in KMP role on 1 April 2019
Chief Information Officer
Ceased in KMP role on 4 December 2018
Chief Executive, Consumer Bank
Ceased in KMP role on 1 April 2019
Current Non-executive Directors
Lindsay Maxsted
Chairman
Nerida Caesar
Ewen Crouch
Alison Deans
Craig Dunn
Anita Fung
Steven Harker
Peter Marriott
Peter Nash
Margaret Seale
Director
Director
Director
Director
Director
Director
Director
Director
Director
Former Non-executive Director
Peter Hawkins
Director
Full Year
Full Year
Full Year
Full Year
Full Year
Full Year
Commenced in KMP role on 1 March 2019
Full Year
Full Year
Commenced in KMP role on 1 March 2019
Retired on 12 December 2018 following the
completion of the 2018 Annual General Meeting
1. David Lindberg was the Chief Executive, Business Bank until 1 April 2019 when he was appointed as the Chief Executive, Consumer.
2. Gary Thursby’s role and title changed from Group Executive, Strategy & Enterprise Services to Chief Operating Officer on 1 April 2019.
3. Alastair Welsh was the General Manager, Commercial Banking until 1 April 2019 when he was appointed as the Acting Chief Executive,
Business.
12342019 Westpac Group Annual Report 50
Directors’ report
2.
The delivery of our vision and strategy is supported by our remuneration strategy, principles and frameworks.
Summary of the 2019 executive reward framework
Westpac’s vision and 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 our 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 sustainable returns for
shareholders.
Remuneration strategy
Westpac’s remuneration strategy is designed to attract and retain talented employees by rewarding them for achieving high
performance and delivering superior long-term results for our customers and shareholders, while adhering to sound risk
management and governance principles.
Remuneration principles
The remuneration strategy is underpinned by the following principles:
• Align remuneration with customer and shareholder interests.
• Support an appropriate risk culture and employee conduct.
• Differentiate pay for behaviour and performance in line with our vision and strategy.
• Provide market competitive and fair remuneration.
• Enable recruitment and retention of talented employees.
• Provide the ability to risk-adjust remuneration.
• Be simple, flexible and transparent.
Executive reward components
Fixed remuneration
STVR
LTVR
Purpose
Attract and retain high quality executives
through market competitive and fair
remuneration.
Delivery
Comprises cash salary, salary sacrificed
items and superannuation contributions.
Alignment to performance
Set with reference to market benchmarks
in the financial services industry in
Australia and globally as well as the size,
responsibilities and complexity of the
role, and the skills and experience of the
executive.
Individual performance impacts fixed
remuneration adjustments.
Alignment to shareholders
Minimum shareholding requirements
equivalent to five times annual fixed
remuneration excluding superannuation
for the CEO and $1.2 million for Group
Executives. These requirements must be
satisfied within five years of appointment
as the CEO or as a Group Executive.
Ensure a portion of remuneration is
variable, at-risk and linked to the delivery
of agreed plan targets for financial and
non-financial measures that support
Westpac’s strategic priorities. The STVR
outcome can range from 0% to 100% of
target depending on performance relative
to targets agreed at the beginning of the
year, or exceed 100% (up to a maximum
of 150% of target) when exceptional
performance is achieved.
Awarded in cash (50%) and restricted
shares1 (50%) based on an assessment
of performance over the preceding year.
Restricted shares vest in equal portions
after one and two years following
grant subject to continued service and
adjustment.
Align executive accountability and
remuneration with the long-term interests
of shareholders by rewarding the delivery
of sustained Group performance over the
long-term.
Awarded in performance share rights
which vest after four years subject to the
achievement of relative TSR and cash ROE
performance hurdles, continued service and
adjustment.
Performance is assessed using a balanced
scorecard comprising:
Performance is assessed against:
• Relative TSR2 (50%) which is a
•
•
financial and non-financial measures
linked to Westpac’s key strategic
priorities; and
comparative measure of Westpac’s
performance relative to peers (measured
over four years); and
a modifier to support the adjustment of
the outcome, upwards or downwards
(including to zero), for behaviour,
risk and reputation matters, people
management matters, and any other
matters as determined by the Board.
• Cash ROE3 (50%) which aims to reward
the achievement of returns above
the cost of capital while generating
shareholder value (measured over a
three year period with an additional one
year holding lock).
Half of the STVR award is deferred into
equity for a period of up to two years to
support alignment with shareholders over
the medium term.
The LTVR is fully delivered in equity and the
relative TSR and cash ROE performance
hurdles are aligned to long-term
shareholder returns and value creation.
1. The Group Executive outside Australia receives deferred STVR as unhurdled share rights.
2. For the 2020 LTVR plan, the performance hurdle will be relative TSR.
3. Cash ROE is return on equity on a cash earnings basis. Cash earnings are not prepared in accordance with AAS and have not been
subject to audit. Refer to Note 2 to the Financial Statements for a description of cash earnings.
2019 Westpac Group Annual Report Directors’ report
51
Risk
2.1.
Westpac’s remuneration arrangements are designed and managed to support effective risk management, the
generation of appropriate risk-based returns and the risk profile associated with our businesses which incorporate
products with varying complexity and maturity profiles.
• Remuneration outcomes: The performance of the Group and each division is reviewed and measured with
reference to how risk is managed in line with Westpac’s Risk Appetite Statement and the results of this
review and measurement influence remuneration outcomes. The key risks that are considered include capital,
credit, market, equity, liquidity, insurance, risk culture, reputation and sustainability, conduct, operational
and compliance risk and financial crime. In addition, STVR outcomes are influenced by relevant risk-related
matters through the Board’s application of the scorecard modifier, which is partly informed by individual risk
assessments for the CEO and each Group Executive.
• Variable reward pool: Each year, the Board determines the size of the variable reward pool which funds
outcomes across the Group. This is based on the Group’s performance for the year and an assessment of how
profit should be shared between shareholders and employees while retaining sufficient capital for growth. The
Group variable reward pool reflects financial performance including financial risk outcomes. A broad range
of financial and non-financial risk measures and customer outcomes may also be taken into account when
allocating the Group variable reward pool.
• Mandatory risk and compliance requirements: Individuals are only eligible to receive a fixed remuneration
adjustment, STVR and LTVR where an individual has satisfied minimum requirement gates which require that
behaviours are in line with Westpac’s Values and Code of Conduct and that the individual has met the risk and
compliance requirements for their role and business.
• Remuneration adjustments for prior period matters: The Board may adjust all forms of unvested deferred
variable reward downward, including to zero, for matters arising in a prior period if circumstances or information
come to light which mean that in the Board’s view all or part of the award was not appropriate. Having decided
that a downward adjustment is appropriate and determined the amount of any adjustment, typically the Board
will first apply that adjustment against the STVR for the current performance period. In instances where an
adjustment to current year STVR is insufficient or unavailable, the Board may apply the adjustment to unvested
deferred variable reward. Clawback provides an additional mechanism to recover vested deferred variable
reward in certain limited circumstances for awards made in respect of performance periods commencing on
or after 1 October 2019. It is the Board’s current intention that clawback will only be considered for relevant
conduct that occurred on or after 1 October 2019.
2.2.
2019 remuneration mix1
Chief Executive Officer and Group Executives
(excluding control function Group Executives)
Control function Group Executives²
32% LTVR
17% STVR
(deferred
component)
34% Fixed
remuneration
30% LTVR
17% STVR
(cash component)
15% STVR
(deferred
component)
40% Fixed
remuneration
15% STVR
(cash component)
1. Based on a fair value methodology for LTVR.
2.
Includes the Chief Risk Officer, the Group Executive, Legal & Secretariat, the Group Executive, Customer & Corporate Relations and the
Chief Financial Officer.
2.3.
Timeline of potential remuneration
2019
2020
2021
2022
2023
Fixed remuneration
Cash STVR award (50%)
Deferred STVR award (25%)
Deferred STVR award (25%)
LTVR award subject to relative TSR performance (50%) – measured over 4 years
LTVR award subject to cash ROE performance (50%) – measured over 3 years
+ 1 year holding lock
Date paid
Date granted
Date eligible for vesting
12342019 Westpac Group Annual Report
52
Directors’ report
3.
2019 remuneration outcomes and alignment to performance
3.1.
Snapshot of 2019 remuneration outcomes
The assessment of performance against the CEO’s 2019 scorecard focus areas resulted in an outcome
of 60% of target (40% of maximum) reflecting Group performance. This includes a zero outcome for
non-financial risk measures in the scorecard.
Notwithstanding this assessment, the CEO recommended to the Board that he forego his STVR for this
year. The Board separately considered the matter and determined that a zero STVR outcome for 2019
was appropriate to reflect accountability for poor non-financial risk and financial outcomes, as well
as some poor customer outcomes, including those highlighted at the Royal Commission. The Board
adjusted the CEO’s STVR award through the modifier, as outlined in section 3.5.
Westpac’s strategic priorities are cascaded from the CEO to Group Executives in combination with
other relevant divisional or functional measures. STVR outcomes for Group Executives ranged from 0%
to 83% of their 2019 STVR target opportunity.
The 2019 scorecard outcome for non-financial risk measures was also reduced to zero for Group
Executives. In addition, downward remuneration adjustments were applied to two Group Executives
and two former Group Executives in response to material risk and compliance matters impacting the
Group, in some instances reducing 2019 STVR outcomes to zero.
50% of the 2019 STVR awards remain subject to continued service and adjustment over a two year
period.
In addition, the Board exercised its discretion to apply downward adjustments to a portion of deferred
STVR awarded in prior years for two former Group Executives.
The relative TSR and cash EPS1 performance hurdles for the 2016 LTVR were not met and therefore
no LTVR vested during 2019. The Board considered that this outcome was appropriate given the
Group’s performance over the relevant period. This is the fourth consecutive year where LTVR has
not vested.
The table below shows the vesting outcome for the 2016 LTVR award to the CEO and Group
Executives that reached the end of its performance period in 2019.
Performance range
Performance
hurdle
Performance
start date
Test date
Threshold
Maximum
Outcome
% Vested
% Lapsed
TSR
50% of
award
EPS
50% of
award
1-Oct-15
1-Oct-19
Equal to
composite
TSR index
Exceeds
composite
TSR index by
21.55 (i.e. 5%
CAGR2)
Westpac:
14.508
Index:
17.549
1-Oct-15
1-Oct-183
4.0% CAGR 6.0% CAGR (1.6%) CAGR
0
0
100
100
Short
term
variable
reward
Long
term
variable
reward
1. Cash EPS is cash earnings per share. Cash earnings are not prepared in accordance with AAS and have not been subject to audit. Refer
to Note 2 to the Financial Statements for a description of cash earnings.
2. Compound annual growth rate.
3. The cash EPS hurdled performance share rights reached the end of their performance period on 30 September 2018 and were subject
to an additional one year holding lock through to 30 September 2019.
Group performance
3.2.
The table below summarises the key performance indicators for the Group and variable reward outcomes over the
last five years.
CEO STVR award (% of target)
Average Group Executive STVR (% of target)
LTVR award (% vested)
Cash earnings1 ($m)
Statutory earnings ($m)
Economic profit2 ($m)
Cash ROE
TSR – three years
TSR – five years
Dividends per Westpac share (cents)
Cash earnings per Westpac share
Share price – high
Share price – low
Share price – close
Years ended 30 September
2019
0%
56%
0%
6,849
6,784
1,619
10.75%
15.33%
14.58%
174
$1.98
$30.05
$23.30
$29.64
2018
77.50%
87%
0%
8,065
8,095
3,444
13.00%
8.27%
25.67%
188
$2.36
$33.68
$27.24
$27.93
2017
111%
109%
0%
8,062
7,990
3,774
13.77%
11.79%
81.32%
188
$2.40
$35.39
$28.92
$31.92
2016
97%
95%
0%
7,822
7,445
3,774
13.99%
15.24%
100.72%
188
$2.35
$33.74
$27.57
$29.51
2015
108%
106%
36%
7,820
8,012
4,418
15.84%
62.30%
92.78%
187
$2.48
$40.07
$29.10
$29.70
1. Cash earnings are not prepared in accordance with AAS and have not been subject to audit. Refer to Note 2 to the Financial Statements
for a description of cash earnings.
2. Economic profit is derived from cash earnings.
2019 Westpac Group Annual Report Directors’ report
53
Return on equity and LTVR vesting (2015 to 2019)
)
%
(
y
t
i
u
q
e
n
o
n
r
u
t
e
R
17%
16%
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
d
r
a
w
a
R
V
T
L
2015
2016
2017
2018
2019
Return on equity (%)
LTVR award (% vested)
Total shareholder return (from 1 October 2014)
)
%
(
n
r
u
t
e
r
l
r
e
d
o
h
e
r
a
h
s
l
a
t
o
T
30
20
10
0
(10)
(20)
(30)
Oct 14
Oct 15
Oct 16
Oct 17
Oct 18
Oct 19
Westpac
Peer 1
Peer 2
Peer 3
Cash earnings and CEO STVR award (2015 to 2019)
)
i
m
$
(
s
g
n
n
r
a
e
h
s
a
C
8,100
7,800
7,500
7,200
6,900
6,600
6,300
6,000
2015
2016
2017
2018
2019
Cash earnings ($m)
STVR award for the CEO (% of target)
150%
100%
75%
60%
45%
30%
15%
0%
O
E
C
e
h
t
r
o
f
d
r
a
w
a
R
V
T
S
12342019 Westpac Group Annual Report
54
Directors’ report
Total realised remuneration – Chief Executive Officer and Group Executives (unaudited)
3.3.
The charts below summarise the actual remuneration paid and the equity vested1 to the CEO and Group Executives
relative to the maximum remuneration that could have been received in 2019 and 2018, including:
•
fixed remuneration earned during the year;
• cash STVR awarded in respect of the year;
• deferred STVR awarded in prior years that vested during the year; and
• LTVR awarded in prior years that vested during the year.
The charts below also reference the maximum value of remuneration foregone in 2019, including cash STVR not
awarded in respect of the year (based on the maximum STVR opportunity) and deferred STVR and LTVR awarded
in prior years that was forfeited, adjusted or lapsed during the year.
The value of deferred STVR and LTVR is based on the number of restricted shares or share rights multiplied by the
five day volume weighted average share price (VWAP) up to and including the date of vesting. The value of equity
differs from the disclosure in section 7.
Total realised remuneration ($’000)
Fixed remuneration
Cash STVR payment
Vesting of prior year deferred STVR awards
Vesting of prior year LTVR awards
2019 maximum realisable remuneration
Managing Director & Chief Executive Officer
0
2,000
4,000
6,000
8,000
10,000
12,000
2019 Total Remuneration
2019
2,686
1,329
2018
2,686
1,041
1,218
Realised: 4,015
Foregone (max): 8,096
r
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0
1,000
2,000
3,000
4,000
5,000
2019 Total Remuneration
Current Group Executives
2
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t
a
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o
f
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t
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W
r
e
c
ffi
O
2019
1,008
381
2019
1,122
339
582
2018
1,122
466
494
2019
1,288
327
601
2018
1,288
517
506
i
f
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C
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v
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x
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f
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a
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S
&
l
a
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L
2019
950
263
409
2018
950
357
287
2019
1,124
516
516
125
2018
1,088
441
440
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e
m
u
s
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b
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i
Realised: 1,389
Foregone (max): 308
Realised: 2,043
Foregone (max): 3,211
Realised: 2,216
Foregone (max): 2,954
Realised: 1,622
Foregone (max): 805
Realised: 1,765
Foregone (max): 2,759
1. Equity that vested on 1 October 2019 is included in the 2019 figures. Equity that vested on 1 October 2018 is included in the 2018 figures.
2. The information relates to the period the individual was a KMP. Refer to section 1 for further details.
2019 Westpac Group Annual Report
Directors’ report
55
0
1,000
2,000
3,000
4,000
5,000
2019 Total Remuneration
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u
o
r
G
l
i
a
c
n
a
n
F
T
B
i
2019
740
195
260
2018
213
202
75
2019
1,029
427
538
2018
901
498
370
2019
884
315
501
2018
884
428
422
2019
1,800
466
2019
900
315
467
2018
840
396
369
135
2019
402
Former Group Executives
2019
553
615
2018
1,103
400
666
2019
190
571
2018
1,054
485
445
2019
577
701
2018
1,150
480
735
r
e
c
ffi
O
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n
a
B
r
e
m
u
s
n
o
C
Realised: 1,195
Foregone (max): 703
Realised: 1,994
Foregone (max): 2,275
Realised: 1,700
Foregone (max): 2,165
Realised: 2,266
Foregone (max): 547
Realised: 1,682
Foregone (max): 1,082
Realised: 537
Foregone (max): 165
Realised: 1,168
Foregone (max): 3,127
Realised: 761
Foregone (max): 2,156
Realised: 1,278
Foregone (max): 3,006
3.4. Other payments made and equity vested during 2019
Craig Bright had 39,827 restricted shares granted under the Restricted Share Plan which vested in August 2019.
David Stephen had 15,727 restricted shares granted under the Restricted Share Plan which vested in March 2019.
The restricted shares were allocated in respect of equity forfeited from their previous employers on joining Westpac.
In addition, Craig Bright received a one-off cash payment of $1,050,000 in lieu of variable reward forfeited from his
previous employer on joining Westpac.
12342019 Westpac Group Annual Report
w
56
Directors’ report
3.5.
2019 CEO and Group Executive short term variable reward outcomes
2019 CEO short term variable reward scorecard
The graphic below illustrates the CEO’s 2019 scorecard outcomes reflecting Group and individual performance.
Target Maximum Outcome
0%
100%
150%
[Non-financial]
21% of target
Group financial performance (40%)
Primary measures of performance include cash earnings and cash ROE against plan,
having regard to cost and margin outcomes.
• Cash earnings were $6,849 million, down $1,216 million (or 15%) compared to 2018
and 81% of the target of $8,411 million, resulting in a zero outcome for the cash
earnings score. Group financial performance was negatively impacted by increased
lending and deposit competition, economy wide slowing of credit growth and
higher regulatory and compliance costs.
• Cash earnings were also impacted by provisions for estimated customer refunds,
payments, associated costs, and litigation, as well as costs associated with
the restructuring of the Wealth business. Excluding the impact of these items,
Westpac’s cash earnings were $7,979 million, down $367 million (or 4%) compared
to 2018.
•
Impairment charges were slightly lower as asset quality remained sound. Excluding
the items outlined above, expenses were a little lower, down $16m on 2018, and
margin compression was limited to 4bps with the Group margin (excluding
Treasury & Markets) of 2.08%, resulting in a positive outcome for this focus area of
the scorecard.
• Delivered cash ROE of 10.75%, which is down from 13.00% in 2018 and lower than
Weighted outcome:
the 13.15% target, resulting in a zero outcome for the cash ROE score.
8% of target (6% of maximum)
Risk management (15%)
Financial risk management:
Performance measurement is based on operating performance relative to Westpac’s
Risk Appetite Statement as measured by Capital, Funding and Liquidity Management
and Credit Quality.
• Our common equity tier 1 ratio was 10.67%, Net Stable Funding Ratio was 112% and
the Liquidity Coverage Ratio was 127%.
• Maintained sound credit quality across the portfolio, with ratio of stressed assets
to total committed exposures at 1.20%.
Non-financial risk management:
Performance measurement is based on operating performance relative to Westpac’s
Risk Appetite Statement, improvements to the control environment and audit and
compliance issue resolution.
Financial
0%
100%
150%
0%
0%
100%
87% of target
150%
100%
150%
Non-financial
0%
100%
150%
•
Increased investment to improve non-financial risk management capability over
the year including through targeted hiring in critical roles.
0% of target
• Notwithstanding this improvement, progress in resolving risk and compliance
matters fell short of our expectations.
• Ongoing significant focus on resolving and remediating compliance, regulatory
and customer issues, including enhancing risk management of sales practices,
product design and maintenance and financial crime systems and processes.
Weighted outcome (combined):
7% of target (4% of maximum)
Customer outcomes (20%)
Primary measures of performance include net promoter scores (NPS) and complaints
handling.
•
•
Improved service quality for our customers resulting in solid customer growth and
an improvement in NPS. The Business division achieved its target to maintain the
Number 1 ranking on both Customer Satisfaction and NPS having widened the gap
to Number 2. The Consumer division narrowed the gap to Number 1 on NPS and
maintained the Number 2 ranking for the majority of the year.
Improved how we manage complaints across the Group, through rollout of Group-
wide Complaints Management Framework, refreshed training, simplified internal
processes, detailed root cause analysis and dedicated support for vulnerable
customers. This resulted in a 46% reduction in the average time taken to resolve
issues for customers (which exceeded the 10% target) and the closure of over 1,100
long dated complaints.
0%
100%
150%
[Non-financial]
99% of target
Weighted outcome:
20% of target (13% of maximum)
2019 Westpac Group Annual Report
w
Directors’ report
57
Customer service transformation (15%)
Primary measures of performance include delivery of strategic initiatives.
0%
100%
150%
• Delivered customer benefits and improved strategic capability through progress in
relation to Service Revolution Transformation milestones, including the Customer
Service Hub and Panorama.
• Significant investment in technology simplification and foundational platforms
improving stability, functionality and efficiency of the technology environment.
• Number of digitally active consumers up 4% and an increase in digital sales in the
Consumer and Business divisions.
• Achieved the target structural productivity of $405 million, a 33% uplift from 2018
and a net ~5% reduction in FTE over the year.
• Execution of the ‘Wealth Reset’ (including the exit of advice business), helping
to deliver a better and more integrated experience for customers and reducing
structural costs.
Culture and capability (10%)
Performance is measured based on delivery of key people initiatives that further drive
the organisation’s change agenda.
• Delivered key milestones as part of our people strategy within budget and on
schedule, including human capital management systems and the efficiency of the
organisation’s structure, for example, reducing layers between decision makers and
customers.
• Strengthened succession planning across our talent base following the structural
shifts made in the first half of the year.
•
Implemented a number of recommendations stemming from the Royal
Commission and our Culture, Governance and Accountability report.
100% of target
Weighted outcome:
15% of target (10% of maximum)
150%
0%
100%
0%
100%
150%
102% of target
• Employee engagement has remained stable in a challenging industry environment.
Monthly spot engagement numbers have increased during the year in line with the
delivery of our strategy and remediation activity.
Weighted outcome:
10% of target (7% of maximum)
Modifier and final outcome
The 2019 STVR outcome for the CEO was zero.
( Target STVR opportunity
$2,686,000
x
Scorecard focus areas outcome ) – Scorecard modifier reduction =
60% of target (40% of maximum)
Final outcome
Zero
The CEO recommended to the Board that he forego his STVR for this year. Notwithstanding the scorecard outcome
of 60% of target, the Board separately considered the matter and determined that a zero STVR outcome for 2019 for
the CEO was appropriate to reflect accountability for poor non-financial risk and financial outcomes, as well as some
poor customer outcomes, including those highlighted at the Royal Commission.
2019 Group Executive short term variable reward outcomes
The focus areas of the CEO scorecard are cascaded to Group Executives in combination with other relevant
divisional or functional measures.
2019 STVR outcomes for Group Executives ranged from 0% to 83% of the target opportunity (or 0% to 55% of the
maximum opportunity). The average 2019 STVR outcome for Group Executives was 56% of the target opportunity
(or 37% of the maximum opportunity), down from 87% in 2018.
The average 2019 STVR outcome for functional Group Executives was 70% of the target opportunity. The average
2019 STVR outcome for Australia based Group Executives leading major divisions (including Consumer, Business,
Westpac Institutional Bank and the former BT Financial Group) was 30% of the target opportunity.
The variability in outcomes reflects the lower weighting of financial and customer measures in scorecards for
functional Group Executives in line with the nature of their roles and responsibilities.
In addition, individual and divisional performance impacted STVR outcomes, as well as the application of
downward remuneration adjustments for material risk and compliance matters.
The 2019 STVR outcomes for the CEO and Group Executives are detailed in the following section.
12342019 Westpac Group Annual Report
58
Directors’ report
3.6.
The table below shows the variable reward awarded to the CEO and Group Executives in 2019, including:
Variable reward awarded in 2019 (unaudited)
• STVR outcomes for 20191 (including the cash and deferred equity components2); and
• equity granted under the 2019 LTVR plan3.
The final value of equity received by the CEO and Group Executives will depend on the share price at the time
of vesting and the number of restricted shares or share rights that vest, subject to performance hurdles (where
applicable), continued service and adjustment.
The value of equity differs from the disclosure in section 7 which provides the annualised accounting value for
unvested equity awards prepared in accordance with the AAS.
Name
Target
STVR
opportunity
Maximum
STVR
opportunity
STVR
award (as %
of target)
STVR
award
(as % of
maximum)
STVR
outcome2
Maximum
STVR
foregone
Fair value3
Face value4
Managing Director & Chief Executive Officer
Brian Hartzer
2,686,000
4,029,000
0%
0%
0 4,029,000
2,528,000
5,616,534
2019 STVR award
2019 LTVR award
918,000
1,377,000
83%
55%
762,000
615,000
864,000
2,082,651
1,122,000
1,683,000
60%
40%
677,000
1,006,000
1,056,000
2,346,148
1,088,000
1,632,000
60%
40%
653,000
979,000
1,024,000
2,275,045
750,000
1,125,000
70%
47%
525,000
600,000
700,000
1,555,172
1,124,000
1,686,000
22%
15%
250,000
1,436,000
1,052,000
2,344,576
555,000
832,500
70%
47%
389,000
443,500
555,000
1,233,059
1,028,900
1,543,350
83%
55%
853,949
689,401
941,090 2,090,840
900,000
1,350,000
70%
47%
630,000
720,000
816,000
1,812,901
1,350,000
2,025,000
69%
46%
932,000
1,093,000
1,012,500
2,516,258
900,000
1,350,000
70%
47%
630,000
720,000
850,000
1,888,451
400,000
600,000
68%
45%
270,000
330,000
-
-
Current Group Executives
Craig Bright5
Chief Information Officer
Lyn Cobley
Chief Executive,
Westpac Institutional Bank
Peter King
Chief Financial Officer
Rebecca Lim
Group Executive,
Legal & Secretariat
David Lindberg
Chief Executive,
Consumer
Carolyn McCann
Group Executive,
Customer & Corporate Relations
David McLean
Chief Executive Officer,
Westpac New Zealand
Christine Parker
Group Executive,
Human Resources
David Stephen
Chief Risk Officer
Gary Thursby
Chief Operating Officer
Alastair Welsh5
Acting Chief Executive, Business
Former Group Executives
Brad Cooper5
Chief Executive Officer,
BT Financial Group
Dave Curran5,6
Chief Information Officer
George Frazis5
Chief Executive, Consumer Bank
800,000
1,200,000
Average Group Executive STVR award (%)
800,000
1,200,000
-
-
0%
-
0%
56%
0%
-
0%
37%
0 1,200,000
1,050,000
2,332,807
-
-
-
-
0 1,200,000
1,000,000
2,221,730
1. The target STVR opportunity and STVR award have been apportioned for part year KMP to reflect their time as KMP.
2. The deferred STVR (granted as restricted shares or unhurdled share rights) is 50% of the total STVR award for the year. The number of
restricted shares granted is determined by reference to the five day VWAP up to and including the day before the grant date. This is
adjusted for non-payment of dividends over the vesting period for unhurdled share rights. The five day VWAP for the 2018 award was
$24.86.
3. The fair value of the performance share rights is shown as at the commencement of the performance period and is determined by an
independent valuer using a Monte Carlo simulation pricing model, taking into consideration the life of the awards, the performance
hurdles and likelihood of vesting, non-payment of dividends prior to vesting and appropriate discount rates. The Board Remuneration
Committee caps the valuation at a maximum discount of 60% of the share price. The fair value of the 2019 award was capped at $11.12.
4. The face value of the performance share rights is calculated by multiplying the number of performance share rights granted during the
year by the five day VWAP up to and including the grant date. For the 2019 awards, the five day VWAP was $24.71 except for Craig
Bright and David Stephen where the five day VWAP was $26.81 and $27.64 respectively.
5. The information relates to the period the individual was a KMP. Refer to section 1 for further details.
6. Dave Curran was not eligible to receive a 2019 STVR or 2019 LTVR award.
2019 Westpac Group Annual Report Directors’ report
59
4.
This section provides further details of the 2019 STVR and LTVR plans and changes for 2020.
Further detail on the executive variable reward structure
4.1.
The table below sets out the key design features of the 2019 STVR plan and changes for the 2020 STVR plan.
Short term variable reward
Plan structure
50% of STVR is awarded in cash and 50% is deferred into equity in the form of restricted shares
(or unhurdled share rights for the Group Executive based outside Australia).
Short term variable reward plan
One unhurdled share right entitles the holder to one ordinary share at the time of vesting with no
exercise cost.
One restricted share provides the holder with one ordinary share at no cost subject to trading restrictions
until the time of vesting.
Dividends are paid on restricted shares from the grant date.
Target and maximum
opportunity
The target opportunity for the CEO and Group Executives is expressed as a percentage of fixed
remuneration. The target opportunity is set by the Board following recommendation from the Board
Remuneration Committee which considers a range of factors including market competitiveness and the
nature of the role.
(100% of fixed remuneration for the CEO and between
75% and 145% of fixed remuneration for Group Executives
Target STVR
Maximum STVR
(150% of target STVR)
0%
100%
150%
Remuneration at-risk
Westpac’s STVR is designed to award the target opportunity on
delivery of agreed plan targets for financial and non-financial
measures that support Westpac’s strategic priorities. It is possible
for the outcome to fall below the target amount depending on
performance relative to targets agreed at the beginning of the
year.
Reward for exceptional
performance
There is the possibility to
award up to a maximum of
150% of the STVR target
in circumstances where
exceptional outcomes are
achieved that are also in line
with the Group’s risk appetite
and where an individual
has acted in a manner that
exemplifies the encouraged
behaviours.
Performance measures
STVR awards are determined based on performance against a balanced scorecard which is designed to
align with shareholder interests by setting challenging measures and seeks to ensure that our customers’
and employees’ needs are met and appropriate risk settings are maintained.
The scorecard is split into two sections:
• Focus areas: Performance is assessed against a balance of financial and non-financial metrics that are
imperative to supporting the effective execution of Westpac’s strategy; and
• Modifier: The Board and Board Remuneration Committee recognise that performance metrics may
not always appropriately reflect overall performance of the Group. The modifier supports adjustment
of the outcome, upwards or downwards (including to zero), for behaviour, risk and reputation matters,
people management matters, and any other matters that the Board feels are not fully reflected in the
focus areas.
Further information on focus areas and application of the modifier for the 2019 scorecard is provided in
section 3.
Deferred STVR awards recognise past performance and are subject to continued service and adjustment.
50% of STVR is deferred into equity for a period of up to two years, which aligns executive remuneration
with shareholder interests and acts as a retention mechanism. The deferral period also allows the Board
to apply discretion to reduce deferred components where necessary.
Deferred STVR vests in equal portions one and two years after the grant date, subject to continued
service and adjustment.
Deferral period
Delayed vesting
The Board also has discretion (subject to law) to delay vesting of equity-based awards if the individual is
under investigation for misconduct, the subject of or implicated in legal or regulatory proceedings, if the
Board is considering an adjustment or if otherwise required by law.
Remuneration adjustments for
prior period matters
Changes for 2020
The Board has discretion to adjust current year STVR.
The Board may also adjust unvested deferred STVR downwards, including to zero, if circumstances
or information come to light which mean that in the Board’s view all or part of the award was not
appropriate.
The Board will typically apply the adjustment to unvested STVR where an adjustment to current year
STVR is considered insufficient or unavailable.
Clawback will apply, to the extent legally permissible and practicable, to deferred STVR awarded in
respect of performance periods commencing on or after 1 October 2019 for up to seven years from
the date of grant. Clawback may occur in circumstances of serious or gross misconduct, fraud, bribery,
severe reputational damage, and any other deliberate, reckless or unlawful conduct that may have a
serious adverse impact on Westpac, its customers or its people which has resulted in dismissal or the
Board considers at its discretion would have justified the dismissal of the relevant executive or where
otherwise required by law. It is the Board’s current intention that clawback will only be considered for
relevant conduct that occurred on or after 1 October 2019.
12342019 Westpac Group Annual Report 60
Directors’ report
Long Term Variable Reward
4.2.
The table below sets out the key design features of the 2019 LTVR Plan awarded in December 2018 and changes
for the 2020 LTVR plan.
Plan structure
LTVR is awarded in performance share rights which vest after four years subject to the achievement of
performance hurdles, continued service and adjustment.
Long term variable reward plan
Award opportunity
Allocation methodology
One performance share right entitles the holder to one ordinary share at the time of vesting with no exercise
cost. Dividends are not accumulated on performance share rights.
The value of LTVR awarded to the CEO and Group Executives is expressed as a percentage of fixed
remuneration. The value of LTVR is set by the Board following recommendation from the Board
Remuneration Committee which considers a range of factors including market competitiveness and the
nature of the role.
The face value of the LTVR opportunity for the CEO for 2019 is 235% of fixed remuneration, and the face
value of LTVR opportunities for the Group Executives (excluding acting Group Executives) range between
185% and 240% of fixed remuneration.
Refer below for changes to apply for the 2020 LTVR award.
In 2019 and prior years, the number of performance share rights each executive received was determined
by dividing the dollar value of the LTVR award by the fair value of the share right at the beginning of the
performance period. This is valued by an independent valuer using a Monte Carlo simulation pricing model,
taking into consideration the life of the awards, the performance hurdles and likelihood of vesting, non-
payment of dividends prior to vesting and appropriate discount rates. The Board Remuneration Committee
caps the valuation at a maximum discount of 60% of the share price. The value of a relative TSR hurdled
performance share right may be different to the value of a cash ROE hurdled performance share right.
Refer below for changes to apply for the 2020 LTVR award.
Performance hurdles
LTVR performance hurdles represent a balance of internal and external measures that aims to achieve
long-term growth in shareholders’ value and support alignment between executive reward and shareholder
interests.
Relative Total Shareholder Return
50% of the award
Cash return on equity
50% of the award
Relative TSR hurdled performance share rights
only vest where Westpac’s TSR exceeds that of key
competitors.
Relative TSR is a measure of the total return
delivered to shareholders over the performance
period assuming dividends are reinvested, relative
to peers.
The performance hurdle measures Westpac’s TSR
performance over a four year period against a
composite index. The composite index is comprised
of a group of 10 peers with more weight placed on
the three other major Australian banks.
At the end of the performance period, TSR
performance of each index company is multiplied
by its index weighting, and the total of the 10 scores
determines the composite TSR index.
50% will vest if Westpac’s TSR performance
equals the composite TSR index. For 100% to vest,
Westpac’s TSR outcome must exceed the index by
21.55 (i.e. 5% compound annual growth over the four
year performance period) as illustrated below.
The performance hurdle measures the average cash
return on average ordinary equity over a three year
performance period (with an additional one year
holding lock).
The performance hurdle aims to reward the
achievement of returns above Westpac’s cost of
capital while generating shareholder value and
improving how efficiently the Group uses capital
resources within its risk appetite.
The performance period for cash ROE differs to the
TSR performance period because TSR is an external
measure that can be calculated on an ongoing basis
whereas cash ROE is an internal measure where
the hurdle reflects the time horizon of our financial
forecasting.
The graph below shows the performance levels
required for the cash ROE performance share rights
to vest.
Relative Total Shareholder Return vesting
Cash return on equity vesting
100
75
50
25
g
n
i
t
s
e
v
n
o
i
t
a
c
o
l
l
a
f
o
%
100
75
50
25
n
o
i
t
a
c
o
l
l
a
f
o
%
Index
Index exceeded by
21.55
13%
14%
Relative TSR performance
Cash ROE performance
The companies in the 2019 composite TSR index and their relative weightings are:
ANZ Banking Group
Commonwealth Bank
National Australia Bank
AMP
Bank of Queensland
16.67%
16.67%
16.67%
7.14%
7.14%
Bendigo and Adelaide Bank
Challenger
Macquarie Group
Perpetual
Suncorp Group
7.14%
7.14%
7.14%
7.14%
7.14%
Refer below for changes to apply for the 2020 LTVR award.
2019 Westpac Group Annual Report
61
Directors’ report
Assessment of
performance outcomes
No re-testing
Early vesting
Delayed vesting
Long term variable reward plan
Relative Total Shareholder Return
The relative TSR result is calculated independently
to ensure objectivity and external validation before
being provided to the Board to determine the vesting
outcome.
The Board may exercise discretion in determining the
final vesting outcome, for example where relative TSR
performance hurdles have been met but the absolute
TSR outcome is negative.
Performance share rights subject to relative TSR
performance will be tested against the performance
hurdle on 30 September 2022.
Cash return on equity
The cash ROE outcome is determined by the Board
based on cash ROE disclosed in the Group’s results
over the performance period.
The Board may exercise discretion in determining the
final vesting outcome.
Performance share rights subject to cash ROE
performance will be tested against the performance
hurdle on 30 September 2021 and will be subject
to an additional one year holding lock through to
30 September 2022.
There is no re-testing. Awards that have not vested after the measurement period lapse immediately.
Unvested awards may vest before a test date if the executive is no longer employed by the Group due to
death or disability (subject to law). In these cases, vesting is generally not subject to the performance hurdles
being met.
The Board also has discretion (subject to law) to delay vesting of equity-based awards if the individual is
under investigation for misconduct, the subject of or implicated in legal or regulatory proceedings, if the
Board is considering an adjustment or if otherwise required by law.
Treatment of awards on
cessation of employment
The Board has the discretion to determine the treatment of unvested performance share rights where the
CEO or a Group Executive resigns, retires or otherwise leaves the Group before vesting occurs.
Remuneration
adjustments for prior
period matters
Changes for 2020
The Board may choose to accelerate the vesting of performance share rights or leave the awards on foot for
the remainder of the performance period.
In exercising its discretion, the Board will consider relevant circumstances including those relating to the
departure.
The Board also has the ability to adjust the number of performance share rights downwards (including to
zero) in the event of misconduct resulting in significant financial and/or reputational impact to the Group and
in other circumstances considered appropriate.
Where an executive 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 be forfeited
unless the Board determines otherwise.
The Board has discretion to adjust LTVR which is awarded on a prospective basis.
The Board may also adjust unvested LTVR downwards, including to zero, if circumstances or information
come to light which mean that in the Board’s view all or part of the award was not appropriate.
The Board will typically apply the adjustment to unvested LTVR where an adjustment to current and deferred
STVR is considered insufficient or unavailable.
Allocation methodology: From the 2020 LTVR plan onwards, the number of performance share rights each
executive receives will be determined by dividing the dollar value of the LTVR award by the face value of
performance share rights. The face value is the five day VWAP up to the commencement of the performance
period (which is 1 October 2019 for the 2020 LTVR grant).
Award opportunity: The Board reduced the face value of 2020 LTVR opportunities by 43% for the CEO and
23% to 25% for Group Executives (excluding acting Group Executives). When setting LTVR opportunities
for the CEO and Group Executives, the Board took into account that no dividends are payable on LTVR
performance share rights, the minimum variable remuneration deferrals required by Banking Executive
Accountability Regime (BEAR) and the overall market positioning of the executives’ remuneration
(including adjusting from a fair value to face value allocation methodology). The face value of the 2020
LTVR opportunity for the CEO is 133% of fixed remuneration, and the 2020 LTVR opportunities for Group
Executives (excluding acting Group Executives) range between 140% and 180% of fixed remuneration. The
Board intends the same percentages of fixed remuneration to apply to the determination of LTVR grants at
face value in future years, subject to market benchmarking and any changes that may flow from the release
of APRA’s final regulatory framework for remuneration.
Performance hurdle: Relative TSR has been selected as the performance hurdle for the 2020 LTVR plan as
the Board believes this measure best aligns executive remuneration outcomes with long-term shareholder
value creation. The Board considers that setting an absolute cash ROE range over a three year period
has become increasingly difficult in light of current uncertainties surrounding future regulatory capital
requirements and interest rates, which are at historically low levels. The Board will review the 2021 LTVR plan
following the release of APRA’s final regulatory framework for remuneration.
Clawback: Clawback will apply, to the extent legally permissible and practicable, to LTVR awarded in respect
of performance periods commencing on or after 1 October 2019 for up to seven years from the date of grant.
Clawback may occur in circumstances of serious or gross misconduct, fraud, bribery, severe reputational
damage, and any other deliberate, reckless or unlawful conduct that may have a serious adverse impact on
Westpac, its customers or its people which has resulted in dismissal or the Board considers at its discretion
would have justified the dismissal of the relevant executive or where otherwise required by law. It is the
Board’s current intention that clawback will only be considered for relevant conduct that occurred on or after
1 October 2019.
The table below details other LTVR awards currently on foot.
Vesting date
Performance hurdles
2017 LTVR award 30 September 2020
• Relative TSR performance against a weighted composite index
of comparator companies (50%)
• Average cash ROE performance (50%)
2018 LTVR award 30 September 2021
• Relative TSR performance against a weighted composite index
of comparator companies (50%)
• Average cash ROE performance (50%)
Further detail
Refer to the 2017
Annual Report
Refer to the 2018
Annual Report
12342019 Westpac Group Annual Report 62
Directors’ report
5.
Remuneration governance
Remuneration policy and governance oversight
5.1.
Westpac’s remuneration policy sets out the mandatory requirements to be reflected in the design and
management of remuneration arrangements across Westpac.
The policy supports Westpac’s vision by requiring the design and management of remuneration to align with
stakeholder interests, support long-term financial soundness and encourage prudent risk management.
The policy is supported by an established governance structure, plans and frameworks, that are designed to
support remuneration decision-making across the Group.
Board
The Board provides strategic guidance for the Group and has oversight of management. The Board has overall
accountability for reviewing and approving executive remuneration as well as Non-executive Director Board and
Committee fees (subject to the Board fee pool approved by shareholders).
Without limiting its role, the Board approves (following recommendation from the Board Remuneration
Committee) performance targets for the CEO, the size of variable reward pools, remuneration (including variable
reward targets and performance outcomes) for the CEO, Group Executives, any other accountable persons
under the BEAR, other persons whose activities in the Board’s opinion affect the financial soundness of the
Group, any other person specified by APRA and any other person the Board determines.
The Board has the discretion to defer, adjust or withdraw aggregate and individual variable reward.
Further detail is contained in the Board and Committee Charters which are available on Westpac’s website.
Board Remuneration Committee
The Board Remuneration Committee assists the Board to fulfil its remuneration responsibilities to shareholders
by monitoring the remuneration policies and practices of the Group and their effectiveness, external
remuneration practices, market expectations and regulatory requirements in Australia and globally. The Board
Remuneration Committee reviews and makes recommendations to the Board in relation to the individual
remuneration levels of individuals outlined above, STVR and LTVR plans and outcomes for the Group Executives
and any other Accountable Persons under the BEAR as well as performance goals and objectives relevant to the
remuneration of the CEO and any and all equity based plans.
In carrying out its duties, the Board Remuneration Committee accesses risk and financial control personnel and
engages external advisers who are independent of management.
Members of the Board Remuneration Committee are independent Non-executive Directors.
Further detail is contained in the Board Remuneration Committee Charter which is available on Westpac’s website.
Interaction with other Board Committees
Management remuneration oversight committees
The Chairman of the Board Risk & Compliance
Committee is also a member of the Board
Remuneration Committee. Members of the Board
Remuneration Committee are all members of the
Board Risk & Compliance Committee. The cross
membership of both Committees supports alignment
between risk and reward.
The Board Remuneration Committee seeks feedback
from and considers matters raised by the Board
Risk & Compliance Committee and Board Audit
Committee with respect to remuneration outcomes,
adjustments to remuneration in light of relevant
matters and alignment of remuneration with the risk
management framework.
Divisional remuneration oversight committees
consider areas of risk within the divisions and
consider potential implications for remuneration.
These committees report to the Group Remuneration
Oversight Committee which in turn considers
consistency of remuneration across the Group and
provides information to the Board Remuneration
Committee and Board for review and decision-making
as appropriate.
During the financial year, remuneration governance
arrangements were reviewed and changes were
made to the Terms of Reference for the Group
Remuneration Oversight Committee. This included
an added responsibility for the Group Remuneration
Oversight Committee to review the design and
implementation of remuneration systems for front line
staff, annually, in line with Recommendation 5.4 from
the Royal Commission.
Remuneration consultants
In 2019, the Board retained Guerdon Associates as its independent consultant to provide specialist information
on executive remuneration and other remuneration matters. The services were provided directly to the Board
Remuneration Committee independent of management. The Chairman of the Board Remuneration Committee oversees
the engagement and associated costs. Work undertaken by Guerdon Associates during 2019 included the provision of
information relating to the benchmarking of Non-executive Director, CEO and Group Executive remuneration.
In 2019, no remuneration recommendations, as prescribed under the Corporations Act, were made by Guerdon
Associates.
2019 Westpac Group Annual Report Directors’ report
63
Executive minimum shareholding requirements and current compliance
5.2.
The CEO and Group Executives are required to build and maintain a significant Westpac shareholding within five
years of their appointment to strengthen alignment with shareholder interests.
At 30 September 2019, the CEO and all Group Executives comply with the requirement. The table below sets out
the minimum shareholding requirement for the CEO and Group Executives.
Chief Executive Officer
Five times annual fixed remuneration excluding superannuation, equivalent to $12.26 million
Group Executives
Equivalent to $1.2 million
Minimum shareholding requirement
The multiple for the CEO’s shareholding requirement is higher than that of his peers and reflects Westpac’s
approach to calculating the minimum shareholding requirement.
Since 2006, the following has been included for the purpose of calculating the minimum shareholding requirement:
• shares held outright in the individual’s name either solely or jointly with another person;
• shares held in an employee share plan (including deferred STVR); and
• 50% of any unvested performance share rights (including LTVR).
The assessment approach has included shares held in a family trust or self-managed super fund since 2012.
The minimum shareholding requirement will be reviewed in 2020 following the release of APRA’s final regulatory
framework for remuneration.
Hedging policy
5.3.
Participants in Westpac’s equity plans are forbidden from entering, either directly or indirectly, into hedging
arrangements for unvested awards in the STVR and LTVR plans. No financial products may be used to mitigate
the risk associated with these awards. Any attempt to hedge awards will result in forfeiture and the Board may
consider other disciplinary action. These restrictions satisfy the requirements of the Corporations Act which
prohibits hedging of unvested awards.
Employment agreements
5.4.
The remuneration and other terms of employment for the CEO and Group Executives are formalised in their
employment agreements. Each agreement provides for the payment of fixed and variable reward, employer
superannuation contributions and other benefits such as death and disablement insurance cover.
The table below details the key terms including termination provisions of the employment agreements for the CEO
and Group Executives in 2019.
Term
Who
Conditions
Duration of agreement
CEO and Group Executives
• Ongoing until notice given by either party
Notice (by the executive or the Group) to
terminate employment
Termination payments on termination
without cause2
CEO and Group Executives
CEO and Group Executives
•
12 months1
Termination for cause
CEO and Group Executives (excluding
Brad Cooper)
Brad Cooper3
• Deferred STVR and LTVR 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
Post-employment restraints
CEO and Group Executives
•
12 month non-solicitation restraint
1.
2.
3.
Payment in lieu of notice may in certain circumstances be approved by the Board for some or all of the notice period.
The maximum liability for termination benefits for the CEO and Group Executives at 30 September 2019 was $16.0 million
(2018: $14.1 million).
Brad Cooper ceased in his KMP role as the Chief Executive Officer, BT Financial Group on 1 April 2019.
12342019 Westpac Group Annual Report 64
Directors’ report
6.
Non-executive Director remuneration
Structure and policy
6.1.
Westpac’s Non-executive Director remuneration strategy is designed to attract and retain experienced, qualified
Board members and provide appropriate remuneration for their time and expertise.
Non-executive Director fees are not related to Westpac’s results. All fees are paid in cash and no discretionary
payments are made for performance. Non-executive Directors are required to build and maintain a minimum
shareholding to align their interests with those of shareholders (refer to section 6.4 for further details).
The table below sets out the components of Non-executive Director remuneration.
Non-executive Director remuneration
Base fee
Committee fees
Relates to service on the Westpac Banking Corporation Board. The base fee for the Chairman covers
all responsibilities, including for Board Committees.
Additional fees are paid to Non-executive Directors (other than the Board Chairman) for chairing or
participating in Board Committees other than the Board Nominations Committee.
Employer superannuation
contributions
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
Relates to service on Subsidiary Boards and Advisory Boards and are paid by the relevant subsidiary.
Non-executive Director remuneration in 2019
6.2.
The base fees payable to the Chairman and other Non-executive Directors were reduced by 20% for 2019 as a
one-off measure. The reduction was applied to all current Non-executive Directors in recognition of the collective
accountability as the Board of Westpac for customer outcomes highlighted by the Royal Commission, shareholder
sentiment leading to the first strike at the 2018 Annual General Meeting and significant non-financial risk matters.
In addition, the Board Risk & Compliance Committee Chairman fee was increased from $70,400 to $90,000
effective 1 October 2018 to reflect the significant increase in the workload of the Committee Chairman. The table
below sets out the annual Board and standing Committee fees and the changes for 2019.
The Non-executive Director fee pool of $4.5 million per annum was approved by shareholders at the 2008
Annual General Meeting. For 2019, $3.11 million (69%) of the fee pool was used. The fee pool includes employer
superannuation contributions.
Base and Committee fees
Chairman
Other Non-executive Directors
Committee Chairman fees
Board Audit Committee
Board Risk & Compliance Committee
Board Remuneration Committee
Board Technology Committee
Committee membership fees
Board Audit Committee
Board Risk & Compliance Committee
Board Remuneration Committee
Board Technology Committee
Annual fee
$
810,000
225,000
Changes for 2019
One-off reduction of
$162,000 to $648,000
One-off reduction of
$45,000 to $180,000
70,400
90,000
63,800
35,200
32,000
32,000
29,000
20,000
No change
Fee increase to
$90,000 (from $70,400)
effective 1 October 2018
No change
No change
No change
No change
No change
No change
Subsidiary Board and Advisory Board fees
During the reporting period, additional fees of $7,241 were paid to Peter Hawkins as a member of the Westpac
Group Victoria Advisory Board (formerly Bank of Melbourne Advisory Board) (during the period in which he was a
KMP) and additional fees of $83,146 were paid to Anita Fung as a member of the Westpac Asia Advisory Board.
2019 Westpac Group Annual Report
Directors’ report
65
6.3.
Changes to Board and Committee composition
The table below outlines the changes that were made to the Board and Committee composition during the year
ended 30 September 2019.
Name of Non-executive Director Change in position
Anita Fung
• Appointed Non-executive Director
Effective date
1 October 2018
• Appointed member of the Board Risk & Compliance Committee
Peter Hawkins
• Retired from the Board
12 December 2018 following
the completion of the 2018
Annual General Meeting
Ewen Crouch
Steven Harker
• Appointed member of the Board Audit Committee
• Appointed Non-executive Director
1 January 2019
1 March 2019
• Appointed member of the Board Risk & Compliance Committee
Margaret Seale
• Appointed Non-executive Director
1 March 2019
• Appointed member of the Board Risk & Compliance Committee
6.4. Non-executive Director minimum shareholding requirement
Non-executive Directors are required to build and maintain a holding in Westpac ordinary shares to align their
interests with those of shareholders. Each Non-executive Director is required to hold an interest in shares in
Westpac with a market value not less than the Board base fee, within five years of appointment to the Board.
At 30 September 2019, all Non-executive Directors comply with the requirement.
12342019 Westpac Group Annual Report 66
Directors’ report
7.
Statutory remuneration details
7.1.
The table below details Non-executive Director remuneration.
Details of Non-executive Director remuneration
Short-term benefits
Post-employment
benefits
Westpac Banking
Corporation Board
fees1
$
Name
Current Non-executive Directors
Lindsay Maxsted, Chairman
Subsidiary and
Advisory Board
fees
$
-
-
-
-
-
-
-
-
-
-
Non-
monetary
benefits3
$
Superannuation
$
Total
$
-
-
-
-
-
-
-
-
-
-
20,658
20,181
20,658
20,181
20,658
20,181
20,658
20,181
20,658
20,181
668,658
830,181
252,658
297,181
343,658
344,581
296,858
333,146
296,458
340,981
648,000
810,000
232,000
277,000
323,000
324,400
276,200
312,965
275,800
320,800
212,000
83,146
6,300
20,658
322,104
---------------------------------- Not a KMP in 2018----------------------------------
123,667
-
-
11,972
135,639
---------------------------------- Not a KMP in 2018----------------------------------
302,400
347,400
244,000
164,690
123,667
-
-
-
-
-
-
-
-
-
-
20,658
20,181
20,658
11,744
323,058
367,581
264,658
176,434
11,972
135,639
---------------------------------- Not a KMP in 2018----------------------------------
64,375
311,832
2,825,109
2,869,088
7,241
35,000
90,387
35,000
-
-
6,300
-
4,248
20,103
193,456
152,931
75,864
366,935
3,115,252
3,057,020
2019
2018
Nerida Caesar
2019
2018
Ewen Crouch
2019
2018
Alison Deans
2019
2018
Craig Dunn
2019
2018
Anita Fung
2019
2018
Steven Harker2
2019
2018
Peter Marriott
2019
2018
Peter Nash
2019
2018
Margaret Seale2
2019
2018
Former Non-executive Director
Peter Hawkins2
2019
2018
Total fees
2019
2018
Includes fees paid to the Chairman and members of Board Committees.
1.
2. The information relates to the period the individual was a KMP. Refer to section 1 for further details.
3. Non-monetary benefits are determined on the basis of the cost to the Group (including associated fringe benefits tax (FBT), where
applicable) and include provision of taxation advice.
2019 Westpac Group Annual Report Directors’ report
67
Remuneration details – Chief Executive Officer and Group Executives
7.2.
The table below sets out details of remuneration for the CEO and Group Executives calculated in accordance with
the AAS.
Short-term benefits
Post-
employment
benefits
Other
long-term
benefits
Share-based payments
Fixed
remuneration1
$
Cash
STVR
award2
$
Non-
monetary
benefits3
$
Other
short-term
benefits4
$
Superannuation
benefits5
$
Long
service
leave
$
Restricted
shares6
$
Share
rights7,8
$
Total9
$
Managing Director & Chief Executive Officer
Brian Hartzer
2019
2018
2,608,424
-
21,966
2,730,714
1,040,825
20,618
-
-
44,320
40,660
1,169,581
1,168,040
5,052,991
42,235
40,697
1,449,964
1,247,127
6,572,180
Current Group Executives
Craig Bright, Chief Information Officer10,11
2019
2018
1,022,829
381,000
309,495
1,050,000
23,818
15,137
2,075,911
170,797
5,048,987
------------------------------------------------------- Not a KMP in 2018 -------------------------------------------------------
Lyn Cobley, Chief Executive, Westpac Institutional Bank
2019
2018
1,108,830
338,500
4,948
1,085,585 465,500
4,039
Peter King, Chief Financial Officer
2019
2018
1,222,006
326,500
4,238
1,232,059
517,000
2,924
Rebecca Lim, Group Executive, Legal & Secretariat
2019
2018
950,128
262,500
4,981
903,728
356,500
2,924
David Lindberg, Chief Executive, Consumer
2019
2018
1,129,075
125,000
6,592
1,049,010 440,500
4,014
-
-
-
-
-
-
-
-
30,611
16,995
516,242
508,437
2,524,563
29,993
17,000
749,930
394,975
2,747,022
36,803
19,492
549,189
483,692
2,641,920
34,957
90,204
597,487
512,401
2,987,032
31,718
14,390
422,793
260,108
1,946,618
29,912
55,507
512,169
348,768
2,209,508
30,434
23,822
470,092
475,368
2,260,383
28,365
25,006
518,657
435,208
2,500,760
Carolyn McCann, Group Executive, Customer & Corporate Relations
2019
2018
731,367
194,500
4,828
241,365
74,500
1,915
David McLean, Chief Executive Officer, Westpac New Zealand
2019
2018
861,551
426,975
1,194
849,488 498,439
55,885
Christine Parker, Group Executive, Human Resources
2019
2018
875,430
315,000
3,123
865,802
427,500
2,924
David Stephen, Chief Risk Officer
1,816,090
466,000
263,844
-
-
-
-
-
-
-
21,579
11,198
445,723
186,563
1,595,758
5,579
12,665
144,344
25,395
505,763
87,710
81,444
-
-
-
907,580
2,285,010
-
785,206
2,270,462
27,420
(33,023)
456,373
384,005
2,028,328
26,848
(8,854)
500,697
399,535
2,214,452
25,900
27,265
2,023,326
732,611
5,355,036
------------------------------------------------------- Not a KMP in 2018 -------------------------------------------------------
Gary Thursby, Chief Operating Officer
2019
2018
881,655
315,000
3,123
794,889
395,500
2,924
Alastair Welsh, Acting Chief Executive, Business10
369,151
135,000
438
-
-
-
29,605
23,294
423,765
306,672
1,983,114
28,616
12,693
453,951
344,305
2,032,878
11,861
6,557
207,066
13,321
743,394
------------------------------------------------------- Not a KMP in 2018 -------------------------------------------------------
Former Group Executives
Brad Cooper, Chief Executive Officer, BT Financial Group10,12,14
2019
2018
1,553,160
-
27,860
1,136,073 400,000
17,861
-
-
95,640
14,402
608,215
1,826,972
4,126,249
29,366
16,700
778,096
538,531
2,916,627
Dave Curran, Chief Information Officer10,14,15
2019
2018
173,917
-
1,115
36,475
6,019
(45,839)
140,129
1,309,046
1,620,862
1,021,322 485,000
2,924
-
28,806
20,703
531,367
480,835
2,570,957
George Frazis, Chief Executive, Consumer Bank10,13,14
2019
2018
557,789
-
28,279
522,509
15,989
(97,778)
709,940
1,739,923
3,476,651
1,109,913 480,000
16,771
-
38,132
17,425
858,110
489,032
3,009,383
2019
2018
2019
2018
12342019 Westpac Group Annual Report 68
Directors’ report
1. Fixed remuneration is the total cost of salary, salary sacrificed benefits (including motor vehicles, parking and associated FBT) and an
accrual for annual leave entitlements.
2. 2019 STVR awards reflect annual cash performance awards accrued but not yet paid in respect of the year ended 30 September 2019.
STVR awards are paid in December.
3. Non-monetary benefits are determined on the basis of the cost to the Group (including associated FBT, where applicable) and include
annual health checks, provision of taxation advice, bank funded car parking, relocation costs, living away from home expenses and
allowances. In the 2018 and 2017 Remuneration Reports, non-monetary benefits were understated and 2018 values for two individuals
have been amended in the table above. For 2017, a total of $27,694 was understated reflecting additional car parking benefits.
Includes payments on cessation of employment or other contracted amounts.
4.
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 2019
(and 2018 for comparison). The restricted shares held by Craig Bright and David Stephen 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.
7. Equity-settled remuneration is based on the amortisation over the vesting period (normally one, two 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 2019.
Details of prior year grants are disclosed in previous Annual Reports. The 2019 value for David McLean includes 53% attributed to
deferred STVR awards. The 2019 value for David Stephen includes an allocation of hurdled share rights made in substitution for
unvested equity foregone on joining the Westpac Group, and is subject to Westpac’s 2018 LTVR performance hurdles and vesting
criteria.
8. The expensed value of the 2017 LTVR cash ROE hurdled performance share rights has been reduced to zero. The expensed value of the
2018 and 2019 LTVR cash ROE hurdled performance share rights have been reduced by 50%. This reflects the current assessment of the
probability of vesting.
9. The percentage of the total remuneration which is performance-related (i.e. cash STVR award plus share-based payments) was: Brian
Hartzer 46%, Craig Bright 52%, Lyn Cobley 54%, Peter King 51%, Rebecca Lim 49%, David Lindberg 47%, Carolyn McCann 52%, David
McLean 58%, Christine Parker 57%, David Stephen 60%, Gary Thursby 53%, Alastair Welsh 48%, Brad Cooper 59%, Dave Curran 89% and
George Frazis 70%. The percentage of total remuneration delivered in the form of options (including share rights) was: Brian Hartzer
23%, Craig Bright 3%, Lyn Cobley 20%, Peter King 18%, Rebecca Lim 13%, David Lindberg 21%, Carolyn McCann 12%, David McLean 40%,
Christine Parker 19%, David Stephen 14%, Gary Thursby 15%, Alastair Welsh 2%, Brad Cooper 44%, Dave Curran 81% and George Frazis
50%.
10. The information relates to the period the individual was a KMP. Refer to section 1 for further details.
11. Craig Bright received a one-off cash payment of $1,050,000 in lieu of variable reward forfeited from his previous employer on joining
the Westpac Group.
12. The information relates to Brad Cooper’s KMP role. This includes payments made or to be made during his 12 month notice period from
1 August 2019 to 31 July 2020, where Brad continues to receive fixed remuneration and superannuation. From 1 April 2019 to 31 July
2019, Brad acted as an advisor to the Group and received fixed remuneration of $371,730 (including superannuation), which has been
excluded from the table on the basis that it did not relate to his KMP role.
13. The information relates to George Frazis’ KMP role. From 1 April 2019 to 31 August 2019, George acted as an advisor to the Group and
received fixed remuneration of $480,709 (including superannuation), which has been excluded from the table on the basis that it did
not relate to his KMP role. The value of other short-term benefits relates to payments on cessation of employment, including 4 months’
pay in lieu of notice ($383,333) and annual leave and long service leave entitlements ($139,176).
14. The share based payment values for Brad Cooper, Dave Curran and George Frazis reflect the accruals for all unvested equity up to the
end of each performance period. For example, the 2019 LTVR will include the accrual for four years until the vesting date in lieu of a
single year accrual value for 2018. While the full value is being accrued for all unvested equity, the awards may or may not vest subject
to the relevant performance hurdles.
15. Dave Curran was not eligible to receive a 2019 STVR or 2019 LTVR award.
2019 Westpac Group Annual Report Directors’ report
69
Movement in equity-settled instruments during the year
7.3.
The table shows the movements in the number and value of equity instruments for the CEO and Group Executives
under the relevant plan during 2019.
Name
Type of equity-based instrument
Managing Director & Chief Executive Officer
Number
granted1
Number
vested2
Number
exercised3
Value
granted4
$
Value
exercised5
$
Value
forfeited or
lapsed5
$
Brian Hartzer
CEO Performance share rights
227,338
Performance share rights
-
-
-
Shares under the CEO Restricted
Share Plan
41,867
43,914
Current Group Executives
Craig Bright6
Performance share rights
77,696
-
Shares under Restricted Share Plan
132,151
39,827
Lyn Cobley
Performance share rights
Shares under Restricted Share Plan
Peter King
Performance share rights
Shares under Restricted Share Plan
Rebecca Lim
Performance share rights
Shares under Restricted Share Plan
David Lindberg
Performance share rights
94,964
18,724
92,086
20,796
62,948
14,340
94,602
-
17,817
-
18,234
-
17,343
-
Shares under Restricted Share Plan
17,719
15,875
Carolyn McCann
Performance share rights
49,910
-
Shares under Restricted Share Plan
9,818
10,541
David McLean
Performance share rights
Unhurdled share rights
Christine Parker
Performance share rights
84,630
22,059
73,380
-
13,351
-
Shares under Restricted Share Plan
17,196
15,210
David Stephen
Performance share rights
278,698
-
Shares under Restricted Share Plan
135,929
15,727
Gary Thursby
Performance share rights
76,438
-
Shares under Restricted Share Plan
15,909
13,296
Alastair Welsh6
Performance share rights
Shares under Restricted Share Plan
-
4,223
Former Group Executive
Brad Cooper6
Performance share rights
94,424
-
-
-
Shares under Restricted Share Plan
16,090
24,004
Dave Curran6
Performance share rights
Shares under Restricted Share Plan
George Frazis6
Performance share rights
Shares under Restricted Share Plan
-
-
89,928
19,308
-
16,038
-
26,518
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,350,962
-
1,034,352
1,224,953
3,542,324
1,399,769
462,589
1,357,348
513,779
927,854
354,279
1,398,440
437,760
735,673
242,560
1,247,446
502,783
1,081,621
424,838
4,461,892
3,644,447
1,126,696
393,042
-
116,704
1,391,810
397,514
-
-
1,325,539
477,017
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,176,443
910,932
-
-
-
-
-
1,749,043
-
367,504
-
784,008
-
376,943
-
948,126
-
1,413,548
-
-
-
452,315
-
-
-
1,978,989
-
1,688,745
-
1,548,156
-
1. No performance options were granted in 2019. Deferred STVR awards in the form of restricted shares or unhurdled share rights
(for David McLean based in New Zealand) are awarded in December. David McLean’s unhurdled share rights were granted on 19
December 2018 at a fair value of $23.37 (unhurdled share rights which vested on 1 October 2019) and $21.88 (unhurdled rights vesting
on 1 October 2020).
2. No hurdled share rights granted in 2014 vested in October 2018 when assessed against the relative TSR and cash EPS performance
hurdles.
3. Vested options and share rights that were awarded prior to October 2009 can be exercised up to a maximum of 10 years from their
commencement date. Vested share rights awarded between October 2009 and July 2015 are automatically exercised at vesting. Vested
share rights granted after July 2015 may be exercised at will up to a maximum of 15 years from their commencement date. For each
vested 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 zero.
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 Long Term Variable Reward awards made during the year’ below. For
restricted shares, the value granted represents the number of ordinary shares granted multiplied by the five day VWAP 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
the CEO and Group Executives in 2019, do not reconcile with the amount shown in the table in section 7.2 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 zero 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, forfeited or lapsed is calculated based on the five day VWAP of Westpac ordinary
shares on the date of exercise (or forfeiture or lapse), less the relevant exercise price (if any). Where the exercise price is greater than
the five day VWAP of Westpac ordinary shares, the value has been calculated as zero.
6. The information relates to the period the individual was a KMP. Refer to section 1 for further details.
12342019 Westpac Group Annual Report 70
Directors’ report
Fair value of Long Term Variable Reward awards made during the year
The table below provides a summary of the fair value of LTVR awards granted to the CEO and Group Executives
during 2019 calculated in accordance with AASB 2 Share-based Payment and is used for accounting purposes only.
LTVR awards will only vest if performance hurdles are achieved and service conditions are met in future years.
Plan name
Granted to
hurdle
Grant date
Performance
Commencement
date1
Test date
Expiry
Fair value2 per
instrument
CEO Long Term
Variable Reward Plan
Brian Hartzer Relative TSR 12 December
1 October 2018
1 October 2022
1 October 2033
$10.45
2018
Cash ROE
12 December
1 October 2018
1 October 2021
1 October 2033
$19.03
2018
Westpac Long Term
Variable Reward Plan
Group
Executives
Relative TSR 12 December
1 October 2018
1 October 2022
1 October 2033
$10.45
2018
Cash ROE
12 December
1 October 2018
1 October 2021
1 October 2033
$19.03
2018
Details of Westpac equity holdings of Non-executive Directors
7.4.
The table below 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 20193.
Name
Current Non-executive Directors
Lindsay Maxsted
Nerida Caesar
Ewen Crouch4
Alison Deans
Craig Dunn
Anita Fung
Steven Harker5
Peter Marriott6
Peter Nash
Margaret Seale5,7
Former Non-executive Director
Peter Hawkins5
Number held at
Changes
Number held at
start of the year
during the year
end of the year
22,095
9,985
82,264
14,392
8,869
-
n/a
41,072
8,020
n/a
1,585
3,598
-
-
-
-
10,365
(2,001)
-
1,068
23,680
13,583
82,264
14,392
8,869
-
11,930
39,071
8,020
37,439
15,880
-
n/a
1. The commencement date is the start of the performance period.
2. The fair values of performance share rights granted during the year have been independently calculated at their respective grant
dates based on the requirements of AASB 2 Share-based Payment. The fair value of performance share rights with cash ROE 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 performance share rights valued at $19.03 is four years to the 1 October 2022 vesting date. For
the purpose of allocating performance share rights with cash ROE hurdles, the valuation also takes into account the average cash
ROE outcome using a Monte Carlo pricing simulation model. The fair value of performance share rights with hurdles based on TSR
performance relative to that of a group of comparator companies also takes into account the average TSR outcome determined using a
Monte Carlo simulation pricing model.
3. Other than as disclosed below, no share interests include non-beneficially held shares.
4. Ewen Crouch holds 42,000 ordinary shares following the grant of probate in a deceased estate for which he is one of the executors. In
addition to holdings of ordinary shares, Ewen Crouch and his related parties held interests in 250 Westpac Capital Notes 2 at year end.
5. The information relates to the period the individual was a KMP. Refer to section 1 for further details.
6. Peter Marriott’s related party ceased to hold an interest in 2,001 ordinary shares following the realisation of assets in a deceased estate.
In addition to holdings of ordinary shares, Peter Marriott and his related parties held interests in 563 Westpac Capital Notes 2
at year end.
In addition to holding shares, Margaret Seale and her related parties held interests in 3,220 Westpac Capital Notes 2 at year end.
7.
2019 Westpac Group Annual Report Directors’ report
71
Details of Westpac equity holdings of Executive Key Management Personnel
7.5.
The table below details Westpac equity held (and movement in that equity) by the CEO and Group Executives
(including their related parties) for the year ended 30 September 20191.
Name
Type of equity-based
instrument
Managing Director & Chief Executive Officer
Number
held at
start of
the year
Number
granted
during the
year as
remuneration
Received
on exercise
and/or
exercised
during the
year
Number
forfeited
or lapsed
during the
year
Other
changes
during the
year
Number
held at end
of the year
Number
vested and
exercisable
at end of
the year
Brian Hartzer
Ordinary shares
109,611
41,867
CEO Performance share
rights
732,817
227,338
Performance share rights
34,263
-
Current Group Executives
Craig Bright2
Ordinary shares
Performance share rights
n/a
n/a
Lyn Cobley
Ordinary shares
91,993
132,151
77,696
18,724
Performance share rights
261,846
94,964
Peter King
Ordinary shares
97,791
20,796
Performance share rights
314,259
92,086
Rebecca Lim
Ordinary shares
30,876
14,340
Performance share rights
144,092
62,948
David Lindberg
Ordinary shares
64,952
17,719
Performance share rights
254,369
94,602
Carolyn McCann
Ordinary shares
49,435
9,818
Performance share rights
42,816
49,910
David McLean
Ordinary shares
9,613
-
Performance share rights
237,918
84,630
Unhurdled share rights
Christine Parker
Ordinary shares
57,218
27,431
22,059
17,196
Performance share rights
240,311
73,380
David Stephen
Ordinary shares
Performance share rights
-
-
135,929
278,698
Gary Thursby
Ordinary shares
92,445
15,909
Performance share rights
154,553
76,438
Alastair Welsh2
Ordinary shares
Performance share rights
n/a
n/a
4,223
-
Former Group Executives
Brad Cooper2
Ordinary shares
131,982
16,090
Performance share rights
329,216
94,424
Dave Curran2
Ordinary shares
49,425
Performance share rights
288,436
-
-
George Frazis2
Ordinary shares
81,302
19,308
Performance share rights
300,880
89,928
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(119,476)
(34,263)
-
-
-
-
-
(65,787)
-
(13,823)
-
(29,489)
-
(14,178)
-
(35,662)
-
-
(53,168)
-
-
-
(17,013)
-
-
-
(74,436)
-
(63,519)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
151,478
840,679
-
132,151
77,696
110,717
356,810
118,587
340,558
45,216
193,217
82,671
319,482
59,253
78,548
9,613
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
286,886
2,148
79,277
49,831
(15,000)
29,627
-
-
-
-
-
260,523
135,929
278,698
108,354
213,978
(20,802)
37,256
-
-
-
-
-
14,944
n/a
n/a
n/a
n/a
n/a
n/a
-
(10,000)
(58,231)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1. The highest number of shares held by an individual in the table is 0.0043% of total Westpac ordinary shares outstanding as at
30 September 2019.
2. The information relates to the period the individual was a KMP. Refer to section 1 for further details.
12342019 Westpac Group Annual Report 72
Directors’ report
7.6.
Loans to Non-executive Directors and Executive Key Management Personnel disclosures
Financial instrument transactions that occurred during the financial year between Directors, the CEO or Group
Executives and the Group are in the ordinary course of business on terms and conditions (including interest and
collateral) as they apply to other employees and certain customers. These transactions consisted principally of
normal personal banking and financial investment services.
The table below details loans to Non-executive Directors, the CEO and Group Executives (including their related
parties) of the Group.
Balance at start of
the year
$
Interest paid and
payable for the year
$
Interest not charged
during the year
$
Balance at end of
the year
$
Number in Group at
end of the year
Non-executive Directors
CEO and Group Executives
3,544,610
9,519,382
13,063,992
306,091
366,076
672,167
-
-
-
19,785,162
11,932,845
31,718,007
4
10
14
The table below details KMP (including their related parties) with loans above $100,000 during 2019.
Balance at start of
the year
$
Interest paid and
payable for the year
$
Interest not charged
during the year
$
Balance at end of
the year
$
Highest
indebtedness during
the year
$
Directors
Lindsay Maxsted
Ewen Crouch
Steven Harker1
Peter Nash
CEO and Group Executives
Brian Hartzer
Lyn Cobley
Brad Cooper1
Rebecca Lim
Carolyn McCann
David McLean
Christine Parker
David Stephen
Gary Thursby
Alastair Welsh1
1,572,889
979,947
n/a
991,774
9,847
2,000,000
2,791,360
732,845
145,000
620,841
1,308,486
-
1,911,003
n/a
71,630
39,833
158,722
35,906
15,572
85,800
73,973
13,081
4,788
30,059
46,955
3,112
73,462
19,274
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,666,979
928,781
2,666,979
1,479,947
15,000,000
15,000,000
1,189,402
1,498,923
806,470
2,000,000
n/a
600,000
307,697
625,816
5,001,866
-
1,864,791
726,205
814,285
2,007,287
3,097,569
778,035
440,001
672,004
5,436,523
672,755
2,034,797
726,205
1. The information relates to the period the individual was a KMP. Refer to section 1 for further details.
2019 Westpac Group Annual Report Directors’ report
Directors’ report
11. 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:
73
Auditor’s Independence Declaration
As lead auditor for the audit of Westpac Banking Corporation for the year-ended 30
September 2019, 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.
Lona Mathis
Partner
PricewaterhouseCoopers
Sydney
4 November 2019
PricewaterhouseCoopers, ABN 52 780 433 757
One International Towers Sydney, Watermans Quay, Barangaroo NSW 2000, GPO BOX 2650 Sydney
NSW 2001
T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au,
Liability limited by a scheme approved under Professional Standards Legislation.
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74
Directors’ report
b) Non-audit services
We may decide to engage PwC on assignments additional to their statutory audit duties where their expertise or
experience with Westpac or a controlled entity is important.
Details of the non-audit service amounts paid or payable to PwC for non-audit services provided during the 2018
and 2019 financial years are set out in Note 39 and Note 35 to the respective financial statements.
PwC also provides audit and non-audit services to non-consolidated entities, non-consolidated trusts of which a
Westpac Group entity is trustee, manager or responsible entity and non-consolidated superannuation funds or
pension funds. The fees in respect of these services were approximately $7.5 million in total (2018: $7.5 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 2019 by PwC is compatible with the
general standard of independence for auditors imposed by the Corporations Act. The Directors are satisfied, in
accordance with advice received from the Board Audit Committee, 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 provided by PwC for the year have been reviewed by the Board Audit Committee, which
is of the view that they do not impact the impartiality and objectivity of PwC; and
• based on Board quarterly independence declarations made by PwC to the Board Audit Committee during
the year, 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.
12. 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 2019, 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
Guidance and Transparency Rules 4.1.8R to 4.1.11R of the United Kingdom Financial Conduct Authority, together
with a description of the principal risks and uncertainties faced by the Group.
Signed in accordance with a resolution of the Board.
Lindsay Maxsted
Chairman
4 November 2019
Brian Hartzer
Managing Director & Chief Executive Officer
4 November 2019
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75
02
Five year summary
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Review of Group operations
Divisional performance
Risk and risk management
Westpac’s approach to sustainability
Other Westpac business information
2019 Westpac Group Annual Report12341234
Five year summary1
76
Five year summary1
(in $m unless otherwise indicated)
2019
2018
2017
2016
2015
Income statements for the years ended 30 September2
Net interest income
Net fee income
Net wealth management and insurance income
Trading income
Other income
Net operating income before operating expenses and
impairment charges
Operating expenses
Impairment charges
Profit before income tax
Income tax expense
16,907
16,505
1,655
1,029
929
129
2,424
2,061
945
72
20,649
22,007
(10,106)
(9,566)
(794)
9,749
(710)
11,731
15,516
2,603
1,800
1,202
529
21,650
(9,282)
(853)
11,515
15,148
2,611
1,899
1,124
59
20,841
(9,073)
(1,124)
10,644
14,267
2,808
2,228
964
1,241
21,508
(9,339)
(753)
11,416
(2,959)
(3,632)
(3,518)
(3,184)
(3,348)
Profit attributable to non-controlling interests
(6)
(4)
(7)
(15)
(56)
Net profit attributable to owners of Westpac Banking Corporation
6,784
8,095
7,990
7,445
8,012
Balance sheet as at 30 September2
Loans
Other assets
Total assets
Deposits and other borrowings
Debt issues
Loan capital
Other liabilities
Total liabilities
714,770
709,690
684,919
661,926
623,316
191,856
169,902
166,956
177,276
188,840
906,626
879,592
851,875
839,202
812,156
563,247
559,285
533,591
513,071
475,328
181,457
172,596
168,356
169,902
171,054
21,826
74,589
17,265
17,666
65,873
70,920
15,805
82,243
13,840
98,019
841,119
815,019
790,533
781,021
758,241
Total shareholders’ equity and non-controlling interests
65,507
64,573
61,342
58,181
53,915
Key financial ratios
Shareholder value
Dividends per ordinary share (cents)
Dividend payout ratio (%)3
Return on average ordinary equity (%)
Basic earnings per share (cents)
Net tangible assets per ordinary share ($)4
Share price ($):
High
Low
Close
Business performance
Operating expenses to operating income ratio (%)
Net interest margin (%)
Capital adequacy
Total equity to total assets (%)
Total equity to total average assets (%)
APRA Basel III:
Common equity Tier 1 (%)
Tier 1 ratio (%)
Total capital ratio (%)
Credit quality
Net impaired assets to equity and collectively assessed provisions (%)
Total provisions for expected credit losses/impairment on loans and
credit commitments to total loans (basis points)5
Other information
174
88.83
10.65
196.5
15.36
30.05
23.30
29.64
48.94
2.12
7.2
7.3
10.67
12.84
15.63
1.41
54
188
79.52
13.05
237.5
15.39
33.68
27.24
27.93
43.47
2.13
7.3
7.4
10.63
12.78
14.74
1.14
43
188
79.28
13.65
238.0
14.66
35.39
28.92
31.92
42.87
2.06
7.2
7.2
10.56
12.66
14.82
188
84.19
13.32
224.6
13.90
33.74
27.57
29.51
43.53
2.10
6.9
7.0
9.48
11.17
13.11
187
73.39
16.23
255.0
13.02
40.07
29.10
29.70
43.42
2.09
6.6
6.8
9.50
11.38
13.26
1.29
1.79
1.80
45
54
53
Full time equivalent employees (number at financial year end)6
33,288
35,029
35,096
35,580
35,484
1. Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have
been restated and may differ from results previously reported.
2. The above income statement extracts for 2019, 2018 and 2017 and balance sheet extracts for 2019 and 2018 are derived from the
consolidated financial statements included in this Annual Report. The above income statement extracts for 2016 and 2015 and balance
sheet extracts for 2017, 2016 and 2015 are derived from financial statements previously published.
3. Adjusted for Treasury shares.
4. 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.
5. Provisions for expected credit losses (ECL) for the 30 September 2019 year end have been determined based on AASB 9 Financial
Instruments (December 2014) (AASB 9). Comparatives based on AASB 139 Financial Instruments: Recognition and Measurement (AASB
139) have not been restated. Refer to Note 1 and Note 13 to the financial statements for further details.
6. Full-time equivalent employees include full-time, pro-rata part-time, overtime, temporary and contract staff.
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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 and other actions, inquiries, litigation, fines, penalties, restrictions or other regulator
imposed conditions, including as a result of our actual or alleged failure to comply with laws (such as financial
crime laws), regulations or regulatory policy;
internal and external events which may adversely impact Westpac’s reputation;
information security breaches, including cyberattacks;
reliability and security of Westpac’s technology and risks associated with changes to technology systems;
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;
• an increase in defaults in credit exposures because of a deterioration in economic conditions;
•
the conduct, behaviour or practices of Westpac or its staff;
• changes to Westpac’s credit ratings or the methodology used by credit rating agencies;
•
levels of inflation, interest rates (including low or negative rates), exchange rates and market and monetary
fluctuations;
• market liquidity and investor confidence;
• changes in economic conditions, consumer spending, saving and borrowing habits in Australia, New Zealand
and other countries (including as a result of tariffs and protectionist trade measures) in which Westpac or its
customers or counterparties conduct their operations and Westpac’s ability to maintain or to increase market
share, margins and fees, and control expenses;
•
•
•
•
•
the effects of competition, including from established providers of financial services and from non-financial
services entities, in the geographic and business areas in which Westpac conducts its operations;
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 incidence or severity of Westpac-insured events;
the occurrence of environmental change (including as a result of climate change) or external events in countries
in which Westpac or its customers or counterparties conduct their operations;
• 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
activity, business acquisitions and the 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.
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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 2019
and 30 September 2018 and income statements, statements of comprehensive income, changes in equity and cash
flows for each of the years ended 30 September 2019, 2018 and 2017 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 2019 is referred to as 2019 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$0.6746, the noon buying rate in New York City
for cable transfers in Australian dollars as certified for customs purposes by the Federal Reserve Bank of New
York (the ‘noon buying rate’) as of Monday, 30 September 2019. The Australian dollar equivalent of New Zealand
dollars at 30 September 2019 was A$1.00 = NZ$1.0790, 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 2015 to 30 September 2019.
Any discrepancies between totals and sums of components in tables contained in this Annual Report are due to
rounding.
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79
Selected consolidated financial and operating data
We have derived the following selected financial information as of, and for the financial years ended, 30 September
2019, 2018, 2017, 2016 and 2015 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.
Provisions (other than loan impairment charges)
Provisions are held in respect of a range of obligations such as employee entitlements, litigation and non-lending
losses, impairment charges on credit commitments, surplus lease space, restructuring costs and compliance,
regulation and remediation provisions. Some of the provisions involve significant judgement about the likely
outcome of various events and estimated future cash flows. Refer to Note 27.
Provisions for expected credit losses (ECL)/impairment charges on loans
Provisions for ECL are a probability-weighted estimate of the cash shortfalls expected to result from defaults over
the relevant timeframe. They are 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.
The models use three main components to determine the ECL (as well as the time value of money) including:
• Probability of default (PD): the probability that a counterparty will default;
• Loss given default (LGD): the loss that is expected to arise in the event of a default; and
• Exposure at default (EAD): the estimated outstanding amount of credit exposure at the time of the default.
The provisions for ECL are determined based on three stages as follows:
Stage 1: 12 months ECL - performing
For financial assets where there has been no significant increase in credit risk since origination a provision for
12 months ECL is recognised.
Stage 2: Lifetime ECL - performing
For financial assets where there has been a significant increase in credit risk since origination but where the asset is
still performing a provision for lifetime ECL is recognised.
Stage 3: Lifetime ECL – non-performing
For financial assets that are non-performing a provision for lifetime ECL is recognised. Indicators 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.
Determining when a financial asset has experienced a significant increase in credit risk since origination is a critical
accounting judgement which is primarily based on changes in internal customer risk grades since origination of
the facility. The change in the internal customer risk grade that the Group uses to represent a significant increase
in credit risk is based on a sliding scale. This means that a higher credit quality exposure at origination would
require a more significant downgrade compared to a lower credit quality exposure before it is considered to have
experienced a significant increase in credit risk.
Interest income is calculated based on the gross carrying amount of financial assets in stages 1 and 2 of the Group’s
ECL model and on the carrying amount net of the provision for ECL for financial assets in stage 3.
The measurement of ECL for each stage and the assessment of significant increase in credit risk consider
information about past events and current conditions as well as reasonable and supportable projections of future
events and economic conditions. The estimation of forward looking information is a critical accounting judgement.
The Group considers three future macroeconomic scenarios including a base case scenario along with upside and
downside scenarios.
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The macroeconomic variables used in these scenarios, based on current economic forecasts, include (but are not
limited to) unemployment rates, real gross domestic product growth rates and residential and commercial property
price indices.
The macroeconomic scenarios are weighted based on the Group’s best estimate of the relative likelihood of each
scenario. The weighting applied to each of the three macroeconomic scenarios takes into account historical
frequency, current trends, and forward looking conditions.
As at 30 September 2019, gross loans to customers were $718,378 million (2018: $712,504 million) and the provision
for ECL/impairment charges on loans was $3,608 million (2018: $2,814 million)1.
Fair value of financial instruments
Financial instruments classified as held-for-trading (including derivatives) are measured at fair value through
income statement. Investment securities measured at fair value through other comprehensive income
(AASB 9)/available-for-sale (AASB 139)2 are also recognised in the financial statements at fair value. As much 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 2019, the fair value of trading securities and financial assets measured at fair value
through profit or loss, investment securities measured at fair value through other comprehensive income
(2019) / available-for-sale securities (2018), loans designated at fair value and life insurance assets was
$113,989 million (2018: $94,247 million). The fair value of deposits and other borrowings at fair value, other financial
liabilities at fair value, debt issues at fair value and life insurance liabilities was $56,979 million (2018: $56,427 million).
The fair value of outstanding derivatives was a net asset of $763 million (2018: $306 million net liability). The fair
value of financial assets and financial liabilities determined by valuation models that use unobservable market prices
was $399 million (2018: $964 million) and $29 million (2018: $6 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.
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 2019, the carrying value of goodwill was $8,895 million
(2018: $8,890 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 net superannuation deficit across all our plans as at 30 September 2019 was $335 million (2018: net
superannuation surplus of $64 million). As at 30 September 2019, one superannuation plan was in surplus
of $73 million (2018: two plans in surplus of $89 million) and three superannuation plans were in deficit of
$408 million (2018: two plans in deficit of $25 million).
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.
1. The provision for ECL on loans relates to the 30 September 2019 year end balance determined under AASB 9. The provision for
impairment charges on loans related to the 2018 year end balance determined under AASB 139.
2. On adoption of AASB 9, the majority of available-for-sale securities were reclassified to Investment securities measured at fair value
through other comprehensive income (FVOCI). Refer to Note 1 to the financial statements for more details.
2019 Westpac Group Annual Report Review of Group operations
Income statement review
Consolidated income statement1
For the years ending 30 September
(in $m unless otherwise indicated)
Interest income
Interest expense
Net interest income
Net fee income
Net wealth management and insurance income
Trading income
Other 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
81
2019
US$2
2019
A$
2018
A$
2017
A$
2016
A$
2015
A$
22,412
33,222
32,571
31,232
31,822
32,295
(11,007)
(16,315)
(16,066)
(15,716)
(16,674)
(18,028)
11,405
16,907
16,505
1,116
694
627
88
1,655
1,029
929
129
2,424
2,061
945
72
15,516
2,603
1,800
1,202
529
15,148
14,267
2,611
1,899
1,124
59
2,808
2,228
964
1,241
13,930
20,649
22,007
21,650
20,841
21,508
(6,817)
(10,106)
(9,566)
(9,282)
(9,073)
(9,339)
(536)
6,577
(1,996)
(794)
(710)
9,749
11,731
(2,959)
(3,632)
4,581
6,790
8,099
(853)
11,515
(3,518)
7,997
(7)
7,990
3,355
238.0
229.3
188
79.28
(1,124)
(753)
10,644
11,416
(3,184)
(3,348)
7,460
8,068
(15)
(56)
7,445
3,313
224.6
217.8
188
84.19
8,012
3,140
255.0
248.2
187
73.39
Net profit attributable to non-controlling interests
(5)
(6)
(4)
Net profit attributable to owners of Westpac Banking
Corporation
Weighted average number of ordinary shares (millions)
Basic earnings per ordinary share (cents)
Diluted earnings per share (cents)3
Dividends per ordinary share (cents)
Dividend payout ratio (%)4
4,576
3,450
132.6
127.8
117
6,784
3,450
196.5
189.5
174
88.83
88.83
8,095
3,406
237.5
230.1
188
79.52
Overview of performance – 2019 v 2018
During 2019, Westpac adopted AASB 9 Financial Instruments (AASB 9) and AASB 15 Revenue from Contracts with
Customers (AASB 15). As the Group chose to apply the standards prospectively, comparatives have not been restated.
Adopting the new standards has resulted in measurement and classification differences between 2019 and prior
years. The significant differences are:
•
•
•
the measurement of credit loss provision and impairment charges are now on an expected loss basis;
line fees (mainly in Business) are now recognised in net interest income, previously most was recognised in net
fee income;
interest on performing loans is now measured on the gross loan value. Previously, interest was recognised on
the loan balance net of impairment provision; and
• certain items previously netted are now presented on a gross basis, including payments from credit card
schemes which were previously netted against related expenditure.
The changes have little impact on net profit but a more significant impact on individual line items. As these
changes have only been applied from 1 October 2018, it is difficult to compare some line items across years. These
changes are discussed further in Section 3, Note 1.
Net profit attributable to owners of Westpac Banking Corporation for 2019 was $6,784 million, a decrease of
$1,311 million or 16% compared to 2018. 2019 included significant increases in provisions for estimated customer
refunds, payments, associated costs, and litigation, along with costs associated with restructuring of the wealth
business, which together reduced net profit after tax by $1,130 million. These items are discussed further in Note
27 to the financial statements. A summary of the impact of provisions for estimated customer refunds, payments,
associated costs, and litigation and wealth restructuring costs split across income statement line items is shown in
the ‘Divisional performance’ section.
Net interest income increased $402 million or 2% compared to 2018 driven by an increase of $686 million due to
the reclassification of line fees from net fee income to interest income, partly offset by $239 million increase in
provisions for estimated customer refunds, payments, associated costs, and litigation. Excluding the impact of
these items, net interest income was flat compared to 2018. Average interest earning assets grew 3% primarily from
Australian and New Zealand housing, offset by a lower margin. Reported net interest margin decreased 1 basis
point to 2.12%.
1. Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have
been restated 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$0.6746
(refer to ‘Reading this report’ section).
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. Adjusted for Treasury shares.
2019 Westpac Group Annual Report12341234 82
Review of Group operations
Net fee income decreased $769 million or 32% compared to 2018 primarily due to the reclassification of line fees to
net interest income ($667 million in 2018) and $126 million increase in provisions for estimated customer refunds,
payments, associated costs and litigation.
Net wealth management and insurance income decreased $1,032 million or 50% compared to 2018 primarily
due to additional provisions for estimated customer refunds, payments, associated costs, and litigation of $531
million, higher general insurance claims from severe weather events $69 million, cessation of grandfathered advice
commissions $42 million, lower wealth management income due to changes in platform pricing structure, and exit
of the Hastings business in 2018.
Trading income decreased $16 million or 2% compared to 2018. The decline mainly relates to a change in
methodology in derivative valuation adjustments partially offset by higher non-customer income.
Other income is up $57 million or 79% compared to 2018, primarily due to the non-repeat of a 2018 impairment
charge on an equity holding of $104 million.
Operating expenses increased $540 million or 6% compared to 2018. The increase was mainly due to a $349
million increase in provisions for estimated customer refunds, payments, associated costs, and litigation and wealth
reset, higher technology expenses of $174 million, a rise in regulatory, compliance and investment related spend
of $170 million, partially offset by the exit of the Hastings business in 2018 of $158 million and a net productivity
benefit.
Impairment charges were $84 million or 12% higher compared to 2018. Asset quality remained sound, with stressed
exposures as a percentage of total committed exposures at 1.20%, up 12 basis points over the year.
The effective tax rate of 30.4% in 2019 was lower than the 2018 effective tax rate of 31.0%. The lower effective tax
rate in 2019 reflects a decrease in non-deductible expenses from the non-repeat of the 2018 goodwill write-off
associated with the exit of Hastings.
The Board has determined a final dividend of 80 cents per ordinary share. The full year ordinary dividends of 174
cents is lower than the ordinary dividends declared in 2018 and represents a pay-out ratio of 88.83%. The full year
ordinary dividend is fully franked.
Income statement review – 2019 v 2018
Net interest income – 2019 v 2018
$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
2019
2018
2017
33,222
32,571
31,232
(16,315)
(16,066)
(15,716)
16,907
16,505
15,516
397
5
402
648
341
989
855
(487)
368
Net interest income increased $402 million or 2% compared to 2018. Key features include:
• 3% growth in average interest-earning assets, primarily from Australian and New Zealand housing and higher
third party liquids;
• Group net interest margin decreased 1 basis point to 2.12%. Refer to Interest spread and margin – 2019 v 2018 for
primary drivers of margin movement.
2019 Westpac Group Annual Report
Review of Group operations
83
Loans increased $5.1 billion or 1% compared to 2018. Excluding foreign currency translation impacts, loans
increased $2.9 billion.
Key features of loan growth were:
• Australian housing loans increased $4.5 billion or 1% with $60.6 billion of new lending partially offset by
$56.1 billion of run off. Owner occupied balances grew 3% and comprised 58% of the portfolio, while investor
property lending decreased 1%;
• Australian personal loans decreased $1.8 billion or 8%, across personal lending, credit cards and auto finance.
Demand for unsecured lending continued to decline in 2019 with our experience in line with the market;
• Australian business and institutional loans decreased $2.0 billion or 1%, mostly due to lower institutional
property lending as divisions prioritised returns over growth, partially offset by growth in agricultural lending;
• Australian provision balances increased $0.8 billion or 32% at the start of the year mostly from the
implementation of AASB 9 on 1 October 2018 , which calculates credit loss provisioning on an expected loss
basis; and
• New Zealand lending increased A$4.4 billion or 6%. Housing loans grew 7%, mostly in fixed rate products and
business lending increased 6%, supported by growth in agricultural, and property lending. This was partially
offset by a decline personal lending and credit cards.
Deposits and other borrowings excluding certificates of deposit increased $6.8 billion or 1% compared to 2018.
Excluding foreign currency translation impacts, deposits and other borrowings excluding certificates of deposit
increased $4.7 billion.
Key features of deposits and other borrowings excluding certificates of deposit growth were:
• Australian deposits and other borrowings excluding certificates of deposit increased $2.4 billion or 1%, mostly
from an increase in savings and transactional deposits, partially offset by a reduction in term deposits. Non-
interest bearing deposits were up 4% from increased mortgage offset balances; and
• New Zealand deposits and other borrowings excluding certificates of deposit increased A$3.1 billion or 5%,
as term deposits were up 4% and interest bearing transactional deposits were up 12%. Non-interest bearing
deposits increased 18%, from growth in business and consumer transactional deposits.
Certificates of deposit decreased $2.8 billion or 7%, reflecting reduced short-term wholesale funding issuance in
this form.
Interest spread and margin – 2019 v 2018
$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
2019
2018
2017
16,907
16,505
15,516
798,924
774,944
752,294
734,282
715,509
694,924
64,642
59,435
57,370
1.94%
0.18%
2.12%
1.95%
0.18%
2.13%
1.89%
0.17%
2.06%
Group net interest margin of 2.12% decreased 1 basis point from 2018. Key features include:
• Provisions for estimated customer refunds, payments, associated costs, and litigation contributed to a reduction
in margin of 3 basis points;
•
11 basis points increase from the adoption of AASB 15 and AASB 9 primarily related to the reclassification of line
fees from net fee income to net interest income and the measurement of interest on performing loans based on
the gross loan value; and
• Except for these items, net interest margin decreased 9 basis points driven by:
• Changes in short term wholesale funding rates having little impact with the average cost being similar in 2018
and 2019 despite the sharp reduction in bank bill swap rate (BBSW) in the second half of 2019;
• Loan spreads were little changed, with the impact from changes to pricing of Australian variable mortgages
being offset by competition, retention pricing and changes in the mix of the mortgage portfolio with
customers switching from interest only to principal and interest;
• 2 basis point decrease from lower customer deposit spreads due to broad based competition and the impact
from lower interest rates, particularly in the second half of 2019; and
• 2 basis point decrease from liquidity primarily due to increased balances of third party liquid assets.
• Treasury & Markets contribution decreased 5 basis points due to lower Treasury revenue from interest rate
risk management (3 basis points), and fair value adjustments (2 basis points).
1.
Interest spread is the difference between the average yield on all interest earning assets and the average yield on all interest bearing
liabilities.
2. The benefit of net non-interest bearing assets, liabilities and equity is determined by applying the average yield paid on all interest
bearing liabilities to the average level of net non-interest bearing funds as a percentage of average interest earning assets.
3. Net interest margin is calculated by dividing net interest income by average interest earning assets.
2019 Westpac Group Annual Report12341234
84
Review of Group operations
Non-interest income - 2019 v 2018
$m
Net fee income
Net wealth management and insurance income
Trading income
Other income
Non-interest income
2019
1,655
1,029
929
129
2018
2,424
2,061
945
72
3,742
5,502
2017
2,603
1,800
1,202
529
6,134
Non-interest income decreased $1,760 million or 32% compared to 2018. Key features include:
• $657 million decrease from provisions for estimated customer refunds, payments, associated costs, and
litigation;
• $508 million decrease from the adoption of AASB 15 primarily related to the reclassification of line fees from
net fee income to net interest income ($667 million) and reclassification of certain items previously netted that
are now presented on a gross basis (up $159 million);
• Exit of Hastings business in 2018 ($203 million); and
• Except for these items, non-interest income decreased by $392 million due to reduced net wealth management
and insurance income and lower trading income.
Net fee income decreased $769 million or 32%, including $126 million additional provisions for estimated customer
refunds, payments, associated costs, and litigation mostly related to financial planning, reclassification of line fees
from non-interest income to net interest income as a result of the adoption of AASB 15 to more appropriately
reflect the relationship with drawn lines of credit (down $667 million) and the reclassification of certain items
previously netted that are now presented on a gross basis including card scheme support payments (up $153
million).
Except for these items, net fee income decreased $129 million or 6% mainly from:
• Lower advice income following the exit of financial planning (down $76 million);
• Lower revenue from payments and transaction fees (down $34 million) driven by increased merchant costs and
lower account based fees in New Zealand following the decision to simplify certain consumer fees; and
• A decrease in business lending and mortgage fees largely due to reduced new lending volumes (down
$27 million); partly offset by
• Higher corporate and institutional lending fees largely from syndication fees generated in the first half of 2019
(up $10 million).
Net wealth management and insurance income decreased $1,032 million or 50% compared to 2018, including
additional provisions for estimated customer refunds, payments, associated costs, and litigation (mostly related to
financial planning) of $531 million. Additionally, there was no contribution from Hastings, following the exit of the
business in 2018 (down $203 million).
Except for these items, net wealth management and insurance income decreased $298 million, mainly from:
•
Insurance income decreased $139 million from:
– A reduction in general insurance income (down $69 million) from higher claims, including the New South
Wales hailstorm and Queensland floods;
– A reduction in life insurance income (down $39 million) following the implementation of regulatory reforms
(“Protect Your Super”) and higher claims and movement in policyholder tax recoveries (down $23 million); and
– Lower LMI income (down $8 million) primarily from a reduction in loans written at higher LVR bands.
• Lower Platforms and Superannuation income (down $98 million) primarily driven by margin compression from
full year impact of platform repricing, implementation of regulatory reforms (‘Protect your Super’), product mix
changes and outflows in legacy platforms. This has been partly offset by an 89% increase in BT Panorama funds
to $23 billion due to inflows and higher asset markets; and
• Cessation of grandfathered commission payments (down $42 million).
Trading income decreased $16 million or 2% compared to 2018, primarily driven by the derivative valuation
adjustment (down $78 million) partially offset by higher non-customer income.
Other income increased $57 million or 79% compared to 2018, reflecting the impairment loss on the remaining
Pendal shares in 2018 that did not repeat ($104 million), higher gains from asset sales and revaluation of a Fintech
investment ($98 million), partially offset by loss on financial instruments measured at fair value ($100 million), lower
rental income from operating leases ($35 million) and the impact of hedging future earnings (down $19 million).
2019 Westpac Group Annual Report Review of Group operations
Operating expenses – 2019 v 2018
$m
Staff expenses
Occupancy expenses
Technology expenses
Other expenses
Total operating expenses
85
2019
5,038
1,023
2,319
1,726
2018
4,887
1,033
2,110
1,536
10,106
9,566
2017
4,701
1,073
2,008
1,500
9,282
Total operating expenses to net operating income ratio
48.94%
43.47%
42.87%
Operating expenses increased $540 million or 6% compared to 2018. Key features include:
•
increased costs associated with the Wealth Reset ($241 million higher);
• estimated costs associated with implementing customer refunds and payments and litigation ($108 million
higher);
• an increase due to the reclassification of $238 million predominantly related to merchant and card schemes
from non-interest income to operating expenses; and
•
reduced costs from the exit of the Hastings business ($158 million).
Except for these items, operating expenses increased $111 million, primarily driven by regulatory and compliance
costs ($99 million higher) and investment related spend ($71 million higher) with productivity offsetting underlying
cost growth.
Staff expenses increased $151 million or 3% compared to 2018. This was due to costs associated with the Wealth
Reset and estimated costs associated with implementing customer refunds and payments and litigation ($231
million higher). Except for these items, staff expenses decreased $80 million primarily due to a 5% decrease in
FTE from productivity initiatives related to organisation simplification and channel optimisation along with lower
variable reward. This was partly offset by annual salary increases and the Group’s investment programs having a
higher proportion of spend expensed during the year.
Occupancy expenses decreased $10 million or 1% compared to 2018, driven by the reduction in branch numbers
(down 61), the exit of 4 corporate sites and the removal of 375 ATMs. This was partly offset by annual rental
increases and costs associated with branch and ATM rationalisation.
Technology expenses increased $209 million or 10%. This was due to costs associated with the Wealth Reset
and estimated costs associated with implementing customer refunds and payments and litigation ($35 million
higher). Except for these items, technology expenses increased $174 million largely due to higher amortisation of
software assets ($91 million higher) as key platforms became operational, including the Customer Service Hub, New
Payments Platform and Panorama.
Other expenses increased $190 million or 12%. This was due to costs associated with the Wealth Reset and
estimated costs associated with implementing customer refunds and payments and litigation ($83 million higher).
Except for these items, expenses increased $107 million from increased professional services costs primarily related
to regulatory and compliance activity on Financial Crime, data privacy, product and system simplification and risk
management, and higher marketing expenses, partly offset by lower costs associated with the exit of Hastings
business ($111 million lower) and the Royal Commission
2019 Westpac Group Annual Report12341234 86
Review of Group operations
Impairment charges – 2019 v 2018
$m
Impairment charges
Impairment charges to average gross loans (basis points)
2019
794
11
2018
710
10
2017
853
13
Asset quality remained sound through 2019 with stressed exposures to total committed exposures increasing by
12 basis points to 1.20%. The increase in stressed exposures was due to higher impaired and higher 90+ days but
not impaired facilities. Emerging stress is mostly from an increase in mortgage delinquencies due to the softening
of economic activity and falling house prices.
Given modest change in asset quality, impairment charges have remained low at $794 million in 2019, equal to
11 basis points of gross loans.
Impairment charges for 2019 of $794 million were up $84 million when compared to 2018.
Key movements included:
• The introduction of AASB9 required the removal of the recognition of the time value of money on performing
collective provisions which contributed $115 million increase in impairment charges; and
• Write-offs, included in non-performing provisions, were $95 million higher principally in Australian unsecured
lending portfolios including Auto finance and from increases in customers utilising hardship; partially offset by
• Non performing provisions relating to new individually assessed provisions (IAPs) were $28 million lower due to
lower provisions required in the Business division and New Zealand, partially offset by an increase in WIB; and
• A higher economic overlay release of $96 million 2019 (2018: $22 million). Refer to Note 13.
Income tax expense – 2019 v 2018
$m
Income tax expense
2019
2,959
2018
3,632
2017
3,518
Tax as a percentage of profit before income tax expense (effective tax rate)
30.35%
30.96%
30.55%
The effective tax rate of 30.4% in 2019 was lower than the 2018 effective tax rate of 31.0%. The lower effective
tax rate in 2019 reflects a decrease in non-deductible expenses which included penalties and the non-repeat of
the 2018 write-off of the Hastings goodwill associated with the exit of that business which was non-deductible.
The effective tax rate above the Australian corporate tax rate of 30% reflects several Tier 1 Instruments whose
distributions are not deductible for Australian taxation purposes.
2019 Westpac Group Annual Report 87
Review of Group operations
Balance sheet review
Selected consolidated balance sheet data1
The detailed components of the balance sheet are set out in the notes to the financial statements.
As at 30 September
2019
US$m2
2019
A$m
2018
A$m
2017
A$m
Cash and balances with central banks
13,532
20,059
26,788
18,786
Collateral paid
4,000
5,930
4,787
5,716
Trading securities and financial assets measured at
fair value through income statement and investment
securities/available-for-sale securities
70,956
105,182
84,251
86,693
Derivative financial instruments
20,143
29,859
24,101
24,033
2016
A$m
17,397
8,205
2015
A$m
15,135
8,137
82,841
32,227
83,231
48,173
Loans
Life insurance assets
All other assets
Total assets
Collaterial received
482,184
714,770
709,690
684,919
661,926
623,316
6,319
9,367
9,450
14,476
21,459
20,525
10,643
21,085
14,192
22,414
13,125
21,039
611,610
906,626
879,592
851,875
839,202
812,156
2,217
3,287
2,184
2,477
1,784
4,045
Deposits and other borrowings
379,966
563,247
559,285
533,591
513,071
475,328
Other financial liabilities
19,708
29,215
28,105
30,799
28,704
30,671
Derivative financial instruments
19,628
29,096
24,407
25,375
36,076
48,304
Debt issues
Life insurance liabilities
All other liabilities
122,411
181,457
172,596
168,356
169,902
171,054
4,977
3,788
7,377
5,614
7,597
3,580
9,019
3,250
12,361
3,318
11,559
3,440
Total liabilities excluding loan capital
552,695
819,293
797,754
772,867
765,216
744,401
Loan capital
Total liabilities
Net assets
14,724
21,826
17,265
17,666
15,805
13,840
567,419
841,119
815,019
790,533
781,021
758,241
44,191
65,507
64,573
61,342
58,181
53,915
Total equity attributable to owners of Westpac Banking
Corporation
44,155
65,454
64,521
61,288
58,120
53,098
Non-controlling interests
36
53
52
54
61
817
Total shareholders’ equity and non-controlling interests
44,191
65,507
64,573
61,342
58,181
53,915
Average balances
Total assets
603,581
894,724
873,310
854,058
831,439
791,719
Loans and other receivables3
469,009
695,240
681,201
657,628
631,266
596,378
Total equity attributable to owners of Westpac
Banking Corporation
Non-controlling interests
42,981
63,714
62,017
58,556
55,896
49,361
34
50
31
20
575
854
1. Where accounting classifications have changed or where changes in accounting policy are adopted retrospectively, comparatives have
been restated 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
3.
A$1.00 = US$0.6746 (refer to ‘Reading this report’ section).
Includes interest earning balances. Effective from 1 October 2018, loans and other receivables are net of Stage 3 provisions to reflect the
adoption of AASB 9. For prior years, loans and receivables are net of provisions for impairment charges on loans (refer to Note 9 of the
financial statements). Other receivables include cash and balances with central banks and other interest earning assets.
2019 Westpac Group Annual Report12341234
88
Review of Group operations
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 ratios (%)
Average total equity to average total assets
Common equity Tier 1
Tier 1 ratio
Total capital ratio
Earning ratios
Basic earnings per ordinary share (cents)6
Diluted earnings per ordinary share (cents)7
Dividends per ordinary share (cents)
Dividend payout ratio (%)
Credit quality ratios
Loans written off (net of recoveries)
Loans written off (net of recoveries) to average loans (bps)
Balance sheet review
2019
US$1
2019
A$
2.12
0.76
10.65
10.64
7.13
10.67
12.84
15.63
132.6
127.8
117
2.12
0.76
10.65
10.64
7.13
10.67
12.84
15.63
196.5
189.5
174.0
88.83
88.83
662
14
982
14
2018
A$
2.13
0.93
13.05
13.05
7.10
10.63
12.78
14.74
237.5
230.1
188
79.52
948
14
2017
A$
2.06
0.94
13.65
13.64
6.86
10.56
12.66
14.82
238.0
229.3
188
79.28
1,488
22
2016
A$
2.10
0.90
13.32
13.18
6.79
9.48
11.17
13.11
224.6
217.8
188
84.19
1,052
16
2015
A$
2.09
1.01
16.23
15.96
6.34
9.50
11.38
13.26
255.0
248.2
187
73.39
1,107
18
Assets – 2019 v 2018
Total assets as at 30 September 2019 were $906.6 billion, an increase of $27.0 billion or 3% compared to
30 September 2018. Significant movements during the year included:
• cash and balances with central banks decreased $6.7 billion or 25% reflecting lower liquid assets held in this
form;
• collateral paid increased $1.1 billion or 24% mainly due to an increase in collateralised derivative liabilities;
•
trading securities and financial assets measured at fair value through income statement (FVIS), available-for-
sale securities and investment securities increased $20.9 billion or 25% reflecting higher liquid assets held in this
form;
• derivative assets increased $5.8 billion or 24% mainly driven by movements in cross currency swaps, foreign
currency forward contracts and interest rate swaps; and
•
loans grew $5.1 billion or 1%. Refer to loan quality – 2019 v 2018 below for further information.
Liabilities and equity – 2019 v 2018
Total liabilities as at 30 September 2019 were $841.1 billion, an increase of $26.1 billion or 3% compared to
30 September 2018. Significant movements during the year included:
• collateral received increased $1.1 billion or 51% due to an increase in collateralised derivative assets;
• deposits and other borrowings increased $4.0 billion or 1%;
• other financial liabilities increased $1.1 billion or 4% mainly driven by securities sold under agreements to
repurchase and interbank deposits, partially offset by decreases in accrued interest payable and other financial
liabilities;
• derivative liabilities increased $4.7 billion or 19% driven by movements in cross currency swaps and interest rate
swaps;
• debt issues increased $8.9 billion or 5% ($1.8 billion or 1% decrease excluding foreign currency translation
•
impacts, fair value and hedge accounting adjustments); and
loan capital increased $4.6 billion or 26% mainly due to $3.2 billion net issuance of Tier 2 capital instruments in
response to APRA’s Total Loss Absorbing Capital announcement and $1.3 billion impact of hedging and foreign
currency translation.
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$0.6746
(refer to ‘Reading this report’ section).
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. Based on the weighted average number of fully paid ordinary shares.
7. 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.
2019 Westpac Group Annual Report
Review of Group operations
89
Equity attributable to owners of Westpac Banking Corporation increased $0.9 billion or 1% reflecting retained
profits and shares issued under the 2019 interim dividend reinvestment plan (DRP) and 2018 final DRP, partially
offset by $0.7 billion opening retained earnings adjustment due to the adoption of new accounting standards and
dividends paid during the year.
Loan quality – 2019 v 20181
$m
Total gross loans1
Average gross loans
Australia
New Zealand
Other overseas
Total average gross loans
As at 30 September
2019
2018
2017
718,378
712,504
687,785
622,241
611,398
588,920
78,065
73,000
72,269
16,615
16,228
12,837
716,921
700,626
674,026
Total gross loans represented 79% of the total assets of the Group as at 30 September 2019, 2% lower compared
with 30 September 2018. The decrease was mainly due to greater holdings of liquid assets and movements in cross
currency swaps and interest rate swaps.
Australian average gross loans were $622.2 billion in 2019, an increase of $10.8 billion or 2% from $611.4 billion in
2018. This increase was primarily due to growth in housing loans.
New Zealand average gross loans were A$78.1 billion in 2019, an increase of A$5.1 billion or 7% from A$73.0 billion
in 2018. Excluding foreign currency translation impacts, New Zealand average gross loans grew A$2.7 billion or
4%. The growth was mostly from fixed rate housing loans and business lending, partially offset by lower personal
lending and credit cards.
Other overseas average loans were $16.6 billion in 2019, an increase of $0.4 billion or 2% from $16.2 billion in 2018.
This was primarily due to the depreciation of AUD against USD.
Approximately 14% of the loans at 30 September 2019 mature within one year and 17% mature between one year
and five years. Retail lending comprises the majority of the loan portfolio maturing after five years.
Housing and personal loans that were past due, can be disaggregated based on days overdue at 30 September
2019 as follows:
30-89 days
90+ days
Total
30-89 days
90+ days
Total
2019
2018
3,574
395
3,969
4,063
356
4,419
7,637
751
8,388
3,133
427
3,271
371
3,560
3,642
6,404
798
7,202
Consolidated
$m
Loans
Loans - housing
Loans - personal
Total
Impaired exposures2,3
$m
Impaired exposures
Housing and business loans:
Gross
Provisions
Net
Personal loans greater than 90 days past due:
Gross
Provisions
Net
Restructured:
Gross
Provisions
Net
As at 30 September
2019
2018
2017
2016
2015
1,327
(534)
793
405
(248)
157
31
(10)
21
971
1,019
(458)
561
1,142
(507)
635
371
(189)
182
26
(6)
20
763
373
(195)
178
27
(12)
15
828
1,851
(885)
966
277
(166)
111
31
(16)
15
1,092
1,593
(689)
904
263
(172)
91
39
(16)
23
1,018
412
3,501
3,913
422
2,631
3,053
480
2,639
3,119
869
2,733
3,602
669
2,663
3,332
44.92% 46.12% 46.30% 49.42% 46.28%
0.30%
0.22%
0.53%
0.45%
0.20%
0.43%
0.25%
0.54%
0.32%
0.54%
222.0% 215.6% 202.3% 166.8%
175.8%
Net impaired exposures
Provisions for ECL/impairment on loans and credit commitments
Individually assessed provisions
Collectively assessed provisions
Total provisions for ECL/impairment on loans and credit commitments
Loan quality
Total provisions for ECL/impairment charges on impaired exposures to total impaired
exposures3
Gross impaired exposures to total gross loans
Total provisions for ECL/impairment on loans and credit commitments to gross loans
Total provisions for ECL/impairment on loans and credit commitments to gross impaired
exposures
1. Gross loans are stated before related provision for ECL/impairment charges on loans and credit commitments.
2. The Group has adopted AASB9 and AASB15 from 1 October 2018. Comparatives have not been restated. Refer to Note 1 for further detail.
3.
Impaired provisions relating to impaired loans include IAP plus the proportion of the CAP that relates to impaired loans. The proportion
of the CAP that relates to impaired loans was $380 million as at 30 September 2019 (2018: $231 million, 2017: $234 million, 2016:
$198 million, 2015: $208 million). This sum is compared to the total gross impaired loans to determine this ratio.
2019 Westpac Group Annual Report12341234
90
Review of Group operations
The credit quality remained sound over 2019, with total stressed exposures to TCE increasing by 12 basis points to
1.20%. Total impaired exposures as a percentage of total gross loans were 0.25% at 30 September 2019, an increase
of 0.05% from 0.20% at 30 September 2018.
At 30 September 2019, we had one impaired counterparty with exposure greater than $50 million, accounting for
4% of total impaired loans. This compares to one impaired counterparty with exposure greater than $50 million in
2018 accounting for 4% of total impaired loans. There was one impaired counterparty at 30 September 2019 that
was less than $50 million and greater than $20 million (2018: two impaired counterparties).
At 30 September 2019, 79% of our exposure was to either investment grade or secured consumer mortgage
segment (2018: 79%, 2017: 78%, 2016: 78%, 2015: 77%) and 96% of our exposure as at 30 September 2019 was in
Australia, New Zealand and the Pacific region (2018: 95%, 2017: 96%, 2016: 96%, 2015: 95%).
We believe that Westpac remains appropriately provisioned. Total impairment provisions for impaired exposure to
total impaired exposure coverage at 44.9% at 30 September 2019 compared to 46.1% at 30 September 2018. Total
provisions for ECL on loans and credit commitments to total impaired exposures represented 222.0% of total impaired
loans as at 30 September 2019, up from 215.6%1 at 30 September 2018. Total provisions for ECL on loans and credit
commitments to total loans were 0.54% at 30 September 2019, up from 0.43%1 at 30 September 2018 (2017: 0.45%)1.
Group mortgage loans 90 days past due at 30 September 2019 were 0.82% of outstandings, up from 0.67% of
outstandings at 30 September 2018 (2017: 0.62%).
Group other consumer loan delinquencies (including credit card and personal loan products) were 1.69% of
outstandings as at 30 September 2019, up from 1.64% of outstandings as at 30 September 2018 (2017: 1.57%).
Potential problem loans as at 30 September 2019 amounted to $1,297 million, a decrease of 23% from $1,691 million
at 30 September 2018. The decrease in potential problem loans was mainly due to the downgrade of a Institutional
counterparty to impaired over the year.
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
APRA measures an ADI’s regulatory capital using three measures:
• Common Equity Tier 1 Capital (CET1) comprises the highest quality components of capital that consists of
paid-up share capital, retained profits and certain reserves, less certain intangible assets, capitalised expenses
and software, and investments and retained profits in insurance and funds management subsidiaries that are
not consolidated for capital adequacy purposes;
• Tier 1 Capital being the sum of CET1 and Additional Tier 1 Capital. Additional Tier 1 Capital comprises high
quality components of capital that consist of certain securities not included in CET1, but which include loss
absorbing characteristics; and
• Total Regulatory Capital being the sum of Tier 1 Capital and Tier 2 Capital. Tier 2 Capital includes subordinated
instruments and other components of capital that, to varying degrees, do not meet the criteria for Tier 1 Capital,
but nonetheless contribute to the overall strength of an ADI and its capacity to absorb losses.
Under APRA’s Prudential Standards, Australian ADIs, including Westpac, are required to maintain a minimum CET1
ratio of at least 4.5%, Tier 1 Capital ratio of at least 6.0% and Total Regulatory Capital ratio of at least 8.0%. APRA
may also require ADIs, including Westpac, to meet Prudential Capital Requirements (PCRs) above the minimum
capital ratios. APRA does not allow the PCRs for individual ADIs to be disclosed.
APRA also requires ADIs to hold additional CET1 buffers comprising of:
• a capital conservation buffer (CCB) of 3.5% for ADIs designated by APRA as domestic systemically important
banks (D-SIBs) unless otherwise determined by APRA, which includes a 1.0% surcharge for D-SIBs. APRA has
determined that Westpac is a D-SIB; and
• a countercyclical capital buffer. The countercyclical buffer is set on a jurisdictional basis and APRA is
responsible for setting the requirement in Australia. The countercyclical buffer requirement is currently set to
zero for Australia and New Zealand.
Collectively, the above buffers are referred to as the “Capital Buffer” (CB). Should the CET1 capital ratio fall
within the capital buffer range restrictions on the distributions of earnings will apply. This includes restrictions
on the amount of earnings that can be distributed through dividends, Additional Tier 1 Capital distributions and
discretionary staff bonuses.
1. The provisions for impairment charges on loans and credit commitments were determined under AASB139.
2019 Westpac Group Annual Report Review of Group operations
91
Capital actions
While Westpac’s CET1 capital ratio is above APRA’s ‘unquestionably strong’ benchmark of 10.5%, the Group’s lower
cash earnings, new operational risk capital overlays and changes in the calculation of risk weighted assets has
impacted the Group’s capital generation over the year. Given our priority for balance sheet strength and our goal
to support customer growth, we are seeking to raise approximately $2.5 billion in capital to provide an increased
buffer above APRA’s unquestionably strong benchmark. The raising also creates flexibility for changes in capital
rules and potential litigation or regulatory action. The raising is expected to lift the Group’s CET1 ratios by around
46-581 basis points.
Capital management strategy
Westpac’s approach to capital management seeks to ensure that it is adequately capitalised as an ADI. Westpac
evaluates its approach to capital management through an Internal Capital Adequacy Assessment Process (ICAAP),
the key features of which include:
•
the development of a capital management strategy, including consideration of regulatory minimums, capital
buffers and contingency plans;
• consideration of both economic and regulatory capital requirements;
• a stress testing framework that challenges the capital measures, coverage and requirements including the
impact of adverse economic scenarios; and
• consideration of the perspectives of external stakeholders, including rating agencies and equity and debt investors.
In light of APRA’s ‘unquestionably strong’ capital benchmarks, Westpac will seek to operate with a CET1 capital
ratio above 10.5% in March and September as measured under the existing capital framework. Additional buffers
may also be held to reflect challenging or uncertain environments. This also takes into consideration:
• Current regulatory capital minimums and the capital conservation buffer (CCB), which together are the total
CET1 requirement2;
• Stress testing to calibrate an appropriate buffer against a downturn; and
• Quarterly volatility of capital ratios due to the half yearly cycle of ordinary dividend payments.
Westpac will revise its target capital level once APRA finalises its review of the capital adequacy framework.
Total regulatory capital developments
On 9 July 2019 APRA announced that it will require the major banks (including Westpac) to lift Total Regulatory
Capital by three percentage points of RWA by 1 January 2024 in order to boost loss absorbing capacity and
support orderly resolution. APRA also confirmed that its overall long term target of an additional four to five
percentage points of loss absorbing capacity remains unchanged, and that it will consider the most feasible
alternative method of sourcing the remaining one to two percentage points, taking into account the particular
characteristics of the Australian financial system.
Further details of APRA’s regulatory changes are set out in the Significant Developments section of the 2019
Annual Report.
1. Based on risk weighted assets as at 30 September 2019, a 46 basis point increase reflects the impact of the placement only of $2
billion, while a 58 basis point increase reflects the impact of both the placement and the share purchase plan, assuming the share
purchase plan raises $500 million (the basis point impacts are net of issue costs).
2. Noting that APRA may apply higher CET1 requirements for an individual ADI.
2019 Westpac Group Annual Report12341234 92
Review of Group operations
Basel Capital Accord
APRA’s Prudential Standards are generally consistent with the International Regulatory Framework for Banks,
also known as Basel III, issued by the Basel Committee on Banking Supervision (BCBS), except where APRA has
exercised certain discretions. On balance, the application of these discretions acts to reduce capital ratios reported
under APRA’s Prudential Standards relative to the BCBS approach and to those reported in some other jurisdictions.
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).
Westpac’s Level 2 regulatory capital ratios as at 30 September are summarised in the table below. As the table
summarises Westpac’s Level 2 regulatory capital structure, the capital amounts shown are not the same as the
Westpac Group’s consolidated financial statements. Westpac’s Pillar 3 Report provides further details regarding
Westpac’s capital structure.
Westpac’s Level 2 regulatory capital ratios as at 30 September are summarised in the table below. Westpac’s Pillar
3 Report provides further details regarding Westpac’s capital structure.
$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
2019
2018
64,320
63,576
(18,568)
(18,337)
45,752
45,239
9,299
9,144
55,051
54,383
12,226
(255)
11,971
8,565
(233)
8,332
67,022
62,715
367,864
362,749
9,350
47,680
530
3,370
6,723
39,113
12,989
3,810
428,794
425,384
10.67%
10.63%
2.17%
2.15%
12.84%
12.78%
2.79%
1.96%
15.63%
14.74%
2019 Westpac Group Annual Report Divisional performance
Divisional performance
93
Divisional performance – 2019 v 2018
On 19 March 2019, the Group announced changes to the way it supports customer’s wealth and insurance
needs, realigning its BT Financial Group (BTFG) businesses into expanded Consumer and Business divisions and
exiting the provision of personal financial advice by Westpac Group salaried financial advisers and authorised
representatives. As a result, the insurance business was transferred to Consumer, the funds management business
was transferred to Business , and the Advice business and certain support functions were transferred to Group
Businesses. Changes to the Group’s organisation structure were effective from 1 April 2019 and the results of the
operating segments for 2018 and 2017 have been restated.
Westpac reports under the following four primary customer-facing business divisions:
• Consumer:
–
–
is responsible for sales and service of banking and financial products and services to consumer customers in
Australia;
responsible for the Group’s Australian insurance business, which covers the manufacture and distribution of
life, general and lenders mortgage insurance; and
– operates under the Westpac, St.George, BankSA, Bank of Melbourne, RAMS and BT brands.
• Business:
–
–
–
is responsible for sales and service of banking and financial products and services for SME and commercial
business customers in Australia. SME and Commercial business customers typically have facilities up to
approximately $150 million;
is responsible for Private Wealth, serving the banking needs of high net worth customers across the banking
brands;
is responsible for the manufacture and distribution of investments (including margin lending and equities
broking), superannuation and retirement products as well as wealth administration platforms; and
– operates under the Westpac, St.George, BankSA, Bank of Melbourne and BT brands.
• Westpac Institutional Bank:
–
is responsible for delivering a broad range of financial products and services to commercial, corporate,
institutional and government customers with connections to Australia and New Zealand;
–
services include financing, transactional banking, financial and debt capital markets;
– customers are supported throughout Australia, as well as via branches and subsidiaries located in New
Zealand, US, UK and Asia; and
– also responsible for Westpac Pacific, providing a range of banking services in Fiji and Papua New Guinea.
• Westpac New Zealand:
–
responsible for sales and service of banking, wealth and insurance products to customers in New Zealand;
– customer base includes consumers, business and institutional customers; and
– operates under the Westpac brand for banking products, the Westpac Life brand for life insurance products
and the BT brand for wealth products.
• 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, (excluding Westpac New Zealand) within set risk limits;
– Group Technology, which comprises functions for the Australian businesses, is responsible for technology
strategy and architecture, infrastructure and operations, applications development and business integration;
– Core Support, which comprises functions performed centrally, including Australian banking operations,
property services, strategy, finance, risk, compliance, legal, human resources, and customer and corporate
relations;
– Following the Group’s decision to restructure the Wealth operating segment and to exit of the Advice
business in March 2019, the remaining Advice activities (including associated remediation) and certain
support functions have been transferred to Group Businesses; and
– Group Businesses also includes earnings on capital not allocated to divisions, certain intra-group
transactions that facilitate presentation of performance of the Group’s operating segments, earnings from
non-core asset sales, earnings and costs associated with the Group’s Fintech investments, and certain other
head office items such as centrally held provisions.
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 Group uses a measure of performance referred to as ‘cash
earnings’. 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, including dividends. 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 net
profit attributable to owners of Westpac Banking Corporation. Management believes this allows the Group to more
effectively assess performance for the current period against prior periods and to compare performance across
business divisions and across peer companies.
2019 Westpac Group Annual Report12341234 94
Divisional performance
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 of the Financial Statements.
To determine cash earnings, three categories of adjustments are made to statutory results:
• material items that key decision makers at the Westpac Group believe do not reflect operating performance;
•
items that are not considered when dividends are recommended, such as the amortisation of intangibles,
impact of Treasury shares and economic hedging; 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:
• amortisation of intangible assets: Identifiable intangible assets arising from business acquisitions are
amortised over their useful lives, ranging between four and twenty years. This amortisation (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. The last of these intangible assets were fully amortised in
December 2017;
•
fair value (gain)/loss 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
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;
• adjustment related to Pendal (previously BTIM): Consistent with prior years’ treatment, this item have been
treated as a cash earnings adjustment given their size and that it does not reflect ongoing operations. The
Group has indicated that it may sell the remaining 10% shareholding in Pendal at some future date. From
September 2018, this adjustment relates to the mark to market of the shares and separation costs related to the
original sell down. Any future gain or loss on this shareholding will similarly be excluded from the calculation of
cash earnings;
• 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 cannot be recognised 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; 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.
•
for Westpac, AASB 9 and AASB 15 were adopted on 1 October 2018 and as comparatives were not restated,
line item movements in our reported results are not directly comparable across periods. In order to provide
the operational trends in business, we have revised the 2018 and 2017 cash earnings comparatives as if the
standards applied on 1 October 2017, except for expected credit loss provisioning which is not feasible. These
adjustments do not impact 2018 and 2017 cash earnings but affect individual line items. These adjustments are
comprised of:
–
line fees: The Group has reclassified line fees (mostly Business) from non-interest income to net interest
income to more appropriately reflect the relationship with drawn lines of credit;
– card scheme: Support payments received from Mastercard and Visa have been reclassified to non-interest
income and related expenses have been reclassified to operating expenses;
–
interest carrying adjustment: Interest on performing loans (stage 1 and stage 2 loans) is now measured on
the gross loan value. Previously, interest on performing loans was recognised on the loan balance net of
provisions. This adjustment increases interest income and impairment charges;
– other fees and expenses: The Group has restated the classification of a number of fees and expenses.
This has resulted in the grossing up of net interest income, non-interest income, impairment charges and
operating expenses; and
– merchant terminal costs: Some variable costs related to Westpac’s merchant terminal business have been
reclassified between non-interest income and operating expenses.
2019 Westpac Group Annual Report Divisional performance
95
The guidance provided in Australian Securities and Investments Commission (ASIC) Regulatory Guide 230 has
been followed when presenting this information.
Comparatives have also been restated for:
•
recent customer migration between divisions. This includes restatements to divisional income statements and
balance sheets;
•
refinement in expense allocations; and
• changes to the Group’s organisation structure following the realignment of the BTFG businesses into Consumer,
Business and Group Businesses.
Cash earnings 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 2019, 2018 and 2017. 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.
$m
Consumer
Business
Westpac Institutional Bank
Westpac New Zealand
Group Businesses
Total cash earnings
2019
3,288
2,431
1,014
985
(869)
2018
3,423
2,756
1,093
934
(141)
2017
3,452
2,554
1,163
917
(24)
6,849
8,065
8,062
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.
Additional provisions
Net profit for 2019 was impacted by additional provisions after tax of $1,130 million for:
• Estimated customer refunds and payments, associated costs, and litigation of $958 million; and
• Restructuring costs associated with the restructuring of the Wealth business of $172 million.
The tables below show the impact of the estimated customer refunds, payments, associated costs, litigation, and
restructuring costs on the divisions for 2019 and 2018. Restructuring costs associated with the restructuring of the
wealth business is only reflected in Group Business and were only incurred in 2019.
2019
$m
Net interest income
Non-interest income
Benefits/(expenses)
Core earnings
Tax and non-controlling interests
Cash earnings
2018
$m
Net interest income
Non-interest income
Expenses
Core earnings
Tax and non-controlling interests
Cash earnings
Westpac
Westpac
Institutional
New Zealand
Group
Consumer
Business
Bank
($A)
Businesses
Group
(85)
(2)
25
(62)
29
(33)
(246)
(55)
(87)
(388)
118
(270)
–
–
–
–
–
–
(13)
(4)
(15)
(32)
9
(23)
–
(759)
(384)
(1,143)
339
(804)
(344)
(820)
(461)
(1,625)
495
(1,130)
Westpac
Westpac
Institutional
New Zealand
Group
Consumer
Business
Bank
($A)
Businesses
Group
(99)
(12)
(39)
(150)
36
(114)
–
–
(5)
(5)
–
(5)
–
–
–
–
–
–
(2)
(11)
(3)
(16)
4
(12)
(4)
(140)
(65)
(209)
59
(150)
(105)
(163)
(112)
(380)
99
(281)
2019 Westpac Group Annual Report12341234
96
Divisional performance
Consumer
Consumer is responsible for sales and service to consumer customers in Australia. Consumer is also responsible
for the Group’s insurance business which covers the manufacture and distribution of life, general and lenders
mortgage insurances. The division also uses a third party to manufacture certain general insurance products.
Banking products are provided under the Westpac, St.George, BankSA, Bank of Melbourne, and RAMS brands,
while insurance products are provided under Westpac and BT brands. Consumer works with Business and WIB in
the sales, service, and referral of certain financial services and products including superannuation, platforms, auto
lending and foreign exchange. The revenue from these products is mostly retained by the product originators.
Financial performance
$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
2019
7,942
1,141
9,083
(3,817)
(581)
4,685
(1,397)
3,288
–
3,288
$bn
209.3
388.5
399.2
2018
7,850
1,311
9,161
2017
7,733
1,351
9,084
(3,774)
(3,548)
(486)
4,901
(1,478)
3,423
(15)
(600)
4,936
(1,484)
3,452
(116)
3,408
3,336
$bn
206.2
385.4
395.6
$bn
196.2
370.3
381.8
Total operating expenses to net operating income ratio
42.02%
41.20%
39.06%
2019 v 2018
Cash earnings were 4% lower from a decline in non-interest income mainly reflecting weather related general
insurance claims, and an increased impairment charge. Cash earnings also benefited from a reduction in provisions
for estimated customer refunds, payments, associated costs and litigation.
Net interest income
up $92 million, 1%
• Lending increased 1% with growth in mortgages, partly offset by a decline in other personal
lending and higher provisions associated with the adoption of AASB 9. The decline in
personal lending was due to a 6% reduction in cards and lower personal loans;
• A 4% rise in transaction accounts, and 5% increase in savings accounts supported the 2% rise
in deposits. Term deposits were 6% lower; and
• Net interest margin was down 3 basis points. The decline was due to lower mortgage spreads
from increased competition and changes in mortgage mix with less interest only lending. The
decline was partly offset by mortgage repricing late in 2018.
Non-interest
income down $170
million, 13%
• The decline was mostly due to lower insurance income down ($116 million), from higher
weather related claims ($70 million), and lower life insurance income related to the impact of
the Protecting Your Super legislation and from higher claims; and
• Lower fee income from a contraction in net interchange fees and reduced transaction
volumes across banking products.
Operating
expenses up $43
million, 1%
• Operating expenses benefited from the reversal of provisions raised for estimated associated
costs and litigation in respect to customer refunds and payments, a benefit of $25 million,
compared to a charge of $39 million in 2018. Excluding the benefit of this turnaround,
operating expenses were up 3%;
• The rise was due to higher investment related costs including for the customer service hub,
and costs associated with regulatory change projects; and
• Higher costs from annual salary reviews and inflation based increases were more than offset
by productivity gains of $125 million mostly from organisational redesign, rationalisation of
57 branches and 349 ATMs, and further use of digital channels, all of which contributed to a
reduction in FTE. Lower variable remuneration also contributed.
Impairment
charges up $95
million, 20%
• Credit quality remains sound, although stress was higher with stressed exposures to TCE at
0.81% up 16 basis points consistent with the deterioration in the operating environment;
• Mortgage 90+ day delinquencies were up 16 basis points to 0.90% while other consumer 90+
day delinquencies were up 25 basis points; and
•
Impairment charges were higher driven by the rise in delinquencies.
2019 Westpac Group Annual Report
Divisional performance
97
Business
Business provides business banking and wealth facilities and products for customers across Australia. Business is
responsible for manufacturing and distributing facilities to SME and Commercial business customers (including
Agribusiness) generally for up to $150 million in exposure. SME customers include relationship managed and
non-relationship managed SME customers (generally between $100k-$250k facilities). The division offers a
wide range of banking products and services to support their borrowing, payments and transaction needs. In
addition, specialist services are provided for cash flow finance, trade finance, automotive and equipment finance
and property finance. The division is also responsible for Private Wealth and the manufacture and distribution of
investments (including margin lending and equities broking), superannuation and retirement products as well as
wealth administration platforms. Business operates under the Westpac, St.George, BankSA, Bank of Melbourne, and
BT brands. Business works with Consumer and WIB in the sale, referral and service of select financial services and
risk management products (including corporate superannuation, foreign exchange and interest rate hedging). The
revenue from these products is mostly retained by the product originators.
Financial performance
$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
2019
5,092
1,464
6,556
(2,805)
(272)
3,479
(1,048)
2,431
(45)
2018
5,284
1,640
6,924
(2,651)
(321)
3,952
(1,196)
2,756
(76)
2017
4,950
1,617
6,567
(2,548)
(369)
3,650
(1,096)
2,554
150
Net profit attributable to owners of Westpac Banking Corporation
2,386
2,680
2,704
Deposits and other borrowings
Net loans
Total assets
Total operating expenses to net operating income ratio
$bn
147.8
173.0
187.4
$bn
143.8
173.6
188.2
$bn
137.9
169.4
183.7
42.79%
38.29%
38.80%
2019 v 2018
Cash earnings of $2,431 million were $325 million (or 12%) lower than 2018 with performance impacted by
provisions for estimated customer refunds and payments and associated costs of $270 million after tax. Excluding
these provisions, cash earnings were $60 million or 2% lower from a reduction in non-interest income and increased
regulatory expenditure, partially offset by an increase in net interest margin and a reduction in impairment charges.
Net interest income
down $192 million,
4%
• Lending was largely flat with growth in business lending offset by slower new auto lending;
• Deposits increased 3% mostly in transaction and at call balances. These gains were partly
offset by a 4% decline in term deposits; and
• Net interest margin declined 12 basis points with provisions for customer refunds and
payments ($246 million) contributing 15 basis points to the decline. Excluding this impact, the
net interest margin was up 3 basis points from loan repricing, partly offset by lower deposit
spreads and a shift in the mortgage mix from interest only to principal and interest.
Non-interest
income down $176
million, 11%
• Provisions for estimated customer refunds and payments of $55 million contributed to a
decrease in non-interest income. Excluding these provisions, non-interest income was down
$121 million or 7% mostly due to:
– A reduction in merchant income due to changes in scheme charges; and
–
Lower wealth income ($85 million) from platform margin compression due to new
platform pricing, product mix changes, the cessation of grandfathered commission
payments and implementation of Protecting Your Super reforms.
Operating
expenses up $154
million, 6%
• Provisions for estimated costs of $87 million, to implement the division’s remediation
program, was one of the main drivers increasing expenses. Excluding these costs, expenses
were up 3% due to;
– Higher regulatory and compliance costs as well as increased amortisation of investments
and wealth project costs; and
– Other cost increases, mostly salary rises, were largely offset by lower variable reward and
productivity benefits including operating model simplification and continued digitisation
and product simplification.
Impairment
charges down $49
million, 15%
• The level of stressed exposures increased 24 basis points from increased Commercial stressed
exposures across a broad number of industries; and
•
Impairment charges decreased from lower individual and collective provisions.
2019 Westpac Group Annual Report12341234
98
Divisional performance
Westpac Institutional Bank
Westpac Institutional Bank (WIB) delivers a broad range of financial products and services to commercial,
corporate, institutional and government customers operating in, or with connections to Australia and New Zealand.
WIB operates through dedicated industry relationship and specialist product teams, with expert knowledge in
financing, transactional banking, and financial and debt capital markets. Customers are supported throughout
Australia and via branches and subsidiaries located in New Zealand, the US, UK and Asia. WIB is also responsible
for Westpac Pacific providing a full range of banking services in Fiji and PNG. WIB works with all the Group’s
divisions in the provision of markets related financial needs including foreign exchange and fixed interest solutions.
Financial performance
$m
Net interest income
Non-interest income
Net operating income before operating expenses and impairment charges
Operating expenses
Impairment (charges)/benefits
Profit before income tax
Income tax expense
Profit attributable to non-controlling interests
Cash earnings for the year
Net cash earnings adjustments
Net profit attributable to owners of Westpac Banking Corporation
Deposits and other borrowings
Net loans
Total assets
2019
1,443
1,292
2,735
(1,284)
(46)
1,405
(386)
(5)
2018
1,442
1,565
3,007
(1,449)
16
1,574
(476)
(5)
1,014
1,093
–
1,014
$bn
101.3
75.4
98.0
–
1,093
$bn
104.9
77.4
102.5
2017
1,354
1,716
3,070
(1,358)
(79)
1,633
(463)
(7)
1,163
–
1,163
$bn
92.2
74.8
103.3
Total operating expenses to net operating income ratio
46.95%
48.19%
44.23%
2019 v 2018
Cash earnings of $1,014 million was $79 million (or 7%) lower compared to 2018, primarily from a $78 million
movement in derivative valuation adjustments, no contribution from Hastings and a $62 million increase in
impairment charges. The exit of Hastings in 2018 had a $17 million impact on cash earnings but had a more
significant impact on the movements in individual line items. In 2018 Hastings added $203 million to non-interest
income, $158 million to expenses and $29 million to tax.
Net interest income
up $1 million, flat
• Net loans were 3% lower reflecting a focus on return. This included a decline in property
lending;
• Deposits were 3% lower, mostly from a reduction in government balances; and
• Net interest margin down 1 basis point from lower deposits spreads and a change in funding
mix, partly offset by higher loan spreads consistent with the return focus.
• Excluding Hastings (2018 $203 million; 2019 nil), non-interest income was down $70 million,
or 5%, from:
– A $78 million movement in derivative valuation adjustment (a $14 million benefit in 2018 to
a $64 million charge in 2019); and
– Partly offset by increase in syndication fees from some large transactions in 2019.
• Excluding Hastings (2018 $158 million; 2019 nil), expenses were down $7 million, or 1%, from
– Productivity benefits from organisation redesign (FTE down 8%) and lower variable
reward costs; and
– Partly offset by higher regulatory, risk and compliance costs, particularly related to
updated requirements for the new Banking Code of Practice and responding to regulator
requests.
• Credit quality remains sound with stressed exposures to TCE of 0.68%. This was up 2 basis
point over the year but remains low in historical terms; and
•
Impairment charges were higher due to provisions associated with the migration of two long
standing stressed exposures into impaired.
Non-interest
income down $273
million, 17%
Operating
expenses
down $165 million,
11%
Impairment charge
of $46 million
(compared to
a benefit of $16
million in FY18)
2019 Westpac Group Annual Report
Divisional performance
99
Westpac New Zealand
Westpac New Zealand is responsible for sales and service of banking, wealth and insurance products for consumers,
business and institutional customers in New Zealand. Westpac conducts its New Zealand banking business through
two banks in New Zealand: Westpac New Zealand Limited, which is incorporated in New Zealand and Westpac
Banking Corporation (New Zealand Branch), which is incorporated in Australia. Westpac New Zealand operates via
an extensive network of branches and ATMs across both the North and South Islands. Business and institutional
customers are also served through relationship and specialist product teams. Banking products are provided
under the Westpac brand while insurance and wealth products are provided under Westpac Life and BT brands,
respectively. New Zealand also maintains its own infrastructure, including technology, operations and treasury.
Financial performance
NZ$m
Net interest income
Non-interest income
Net operating income before operating expenses and impairment charges
Operating expenses
Impairment (charges)/benefits
Profit before income tax
Income tax expense
Profit attributable to non-controlling interests
Cash earnings for the year
Net cash earnings adjustments
2019
1,967
448
2,415
(993)
10
1,432
(390)
–
1,042
(1)
2018
1,958
406
2,364
(930)
(25)
1,409
(393)
–
1,016
14
Net profit attributable to owners of Westpac Banking Corporation
1,041
1,030
Deposits and other borrowings1
Net loans
Total assets
Total funds
$bn
64.5
84.2
97.1
11.5
$bn
61.9
80.4
90.0
10.7
2017
1,819
438
2,257
(949)
55
1,363
(392)
–
971
(15)
956
$bn
58.4
77.3
88.3
10.1
Total operating expenses to net operating income ratio
41.12%
39.34%
42.05%
2019 v 2018
Cash earnings increased 3% over 2018. The increase in cash earnings was supported by a NZ$40 million gain on the sale
of Paymark, and a NZ$10 million impairment benefit partly offset by higher risk management and regulatory costs.
Net interest income
up NZ$9 million,
Flat
• Loans increased 5%, or NZ$3.8 billion. Mortgages increased NZ$2.6 billion, with the majority
of mortgage growth in fixed rate products. Business growth (up NZ$1.3 billion) was
distributed across a range of sectors;
• Deposits increased 4% with a NZ$1.7 billion rise in non-interest bearing and at call accounts
and a NZ$0.9 billion rise in term deposits; and
• Net interest margin declined 8 basis points. Most of the decline (5 basis points) was due to
mix from the increase in lower spread products, particularly fixed rate mortgages. A fall in
deposit spreads from lower interest rates also contributed to the decline in margin.
• The gain on sale of Paymark contributed most (NZ$40 million) of the increase in non-interest
income;
• Higher investment income from a 7% increase in fund balances, higher business fees, and a
reduction in provisions for customer refunds and payments, also contributed to the increase;
and
• This was partly offset by lower fee income following the decision to simplify certain consumer
fees.
• Most of the increase was driven by further investment in risk management and regulatory
programs.
• Provisions for estimated costs of NZ$16 million, to implement the division’s remediation
program also contributed to the increase; and
• Excluding investment and the above provisions, costs were broadly unchanged with increases
in salaries and other inflation linked costs offset by productivity savings from increased
digitisation of activities, with FTE down 1% and lower variable remuneration.
• Credit quality remains sound, with stressed exposures to TCE of 1.66%, 9 basis points higher
than September 2018 with most of the increase in stress in exposures that are well secured.
Other consumer 90+ day delinquencies increased 20 basis points to 82 basis points, with
much of the rise due to the decline in the portfolio; and
•
Impairment benefit mostly from write-back of collectively assessed provision.
Non-interest
income up NZ$42
million, 10%
Operating
expenses up
NZ$63 million, 7%
Impairment benefit
of NZ$10 million
(compared to an
impairment charge
of NZ$25 million in
FY18)
1. Refers to total customer deposits in this table.
2019 Westpac Group Annual Report12341234
100
Divisional performance
AUD$m
Net interest income
Non-interest income
Net operating income before operating expenses and impairment charges
Operating expenses
Impairment (charges)/benefits
Profit before income tax
Income tax expense
Profit attributable to non-controlling interests
Cash earnings for the year
Net cash earnings adjustments
Net profit attributable to owners of Westpac Banking Corporation
Deposits and other borrowings
Net loans
Total assets
Total funds
2019
1,860
423
2,283
(939)
10
1,354
(369)
-
985
(1)
984
$bn
59.7
78.0
90.0
10.7
2018
1,799
373
2,172
(855)
(22)
1,295
(361)
-
934
13
947
$bn
56.7
73.6
82.4
9.8
2017
1,706
410
2,116
(890)
51
1,277
(360)
-
917
(14)
903
$bn
53.7
71.1
81.3
9.3
Total operating expenses to net operating income ratio1
41.12%
39.34%
42.05%
1. Ratios calculated using NZ$.
2019 Westpac Group Annual Report 101
Divisional performance
Group Businesses
This segment comprises:
• Treasury, which is responsible for the management of the Group’s balance sheet including wholesale funding,
capital and the 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, (excluding
Westpac New Zealand) within set risk limits;
• Group Technology1, which is responsible for technology strategy and architecture, infrastructure and operations,
applications development and business integration in Australia;
• Core Support2, which comprises functions performed centrally, including Australian banking operations,
property services, strategy, finance, risk, compliance, legal, human resources, and customer and corporate
relations; and
• Following the Group’s decision to restructure its wealth operations and exit its Advice business in March 2019,
the residual Advice operations (including associated remediation) and certain support functions of BTFG
Australia have been transferred to Group Businesses.
Group Technology costs are fully allocated to other divisions in the Group. Core Support costs are partially
allocated to other divisions, while Group Head Office costs are retained in Group Businesses.
Group Businesses also includes earnings on capital not allocated to divisions, certain intra-group transactions that
facilitate the presentation of the performance of the Group’s divisions, gains/losses from most asset sales, earnings
and costs associated with the Group’s Fintech investments, and certain other head office items such as centrally
raised provisions.
Financial performance
$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)/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
2019
616
(618)
(2)
2018
812
89
901
(1,186)
(969)
95
(1,093)
225
(1)
(869)
(19)
(888)
1
(67)
(75)
1
(141)
108
(33)
2017
712
181
893
(834)
43
102
(126)
–
(24)
(92)
(116)
2019 v 2018
Provisions for estimated customer refunds, payments, associated costs, and litigation of $632 million and costs
associated with the Wealth Reset of $172 million incurred during the year was the key driver of the cash earnings
loss of $869 million in 2019. Excluding provisions for estimated customer refunds, payments, associated costs, and
litigation and costs associated with the Wealth Reset, Group Businesses cash earnings was $74 million lower as
the division recorded a loss of $65 million in 2019 compared to cash earnings of $9 million in 2018. The result was
driven by a lower contribution from Treasury partially offset by a higher impairment benefit.
Net operating
income down $903
million, large
Operating
expenses up $217
million, large
Impairment
benefit $95 million,
a $94 million
increase
• Net operating income was lower primarily from:
–
–
an increased charge for estimated customer refunds and payments ($619 million) related
to Advice;
a reduced contribution from Treasury related to interest rate risk management (down
$230 million) and lower Advice income; partly offset by
–
a gain on asset sales and revaluation gains on a fintech investment ($24 million).
• Estimated costs associated with implementing customer refunds and payments, the Wealth
Reset and litigation were $319 million higher; and
• Lower costs associated with the Royal Commission ($62 million) and lower variable reward.
• An impairment benefit of $95 million reflect a reduction in centrally held overlays in 2019,
principally for the mining sector, partially offset by the introduction of an overlay for areas in
Australia impacted by persistent drought conditions, compared to a $1 million benefit in 2018.
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.
2019 Westpac Group Annual Report12341234 Risk and risk management
102
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, reputation, 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 have been and could be adversely affected 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 and the Pacific. We are also supervised by a number of different regulatory and supervisory
authorities which have broad administrative powers over our businesses.
The Group’s business, prospects, reputation, financial performance and financial condition could all be affected by
changes to law and regulation, changes to policies and changes in the supervisory activities and expectations of
our regulators. The Group is currently operating in an environment where there is increased scrutiny of the financial
services sector and specifically, increased scrutiny of financial services providers by regulators. In this environment,
the Group faces increasing supervision and regulation in the jurisdictions in which we operate or obtain funding.
This environment has also served to increase the pace and scope of regulatory change.
Regulatory change could directly and adversely affect the Group’s financial condition and financial position. In
recent years, new laws have required Westpac to maintain increased levels of liquidity and hold higher levels of, and
better quality, capital and funding. Regulatory change may continue in this area. Regulation also affects the way
we operate our business. New regulation could require us to change our existing business models (including by
imposing restrictions on the types of businesses we can conduct) or amend our corporate structure.
Recently, policy makers and regulators have developed and implemented a range of regulations that affect how
we provide products and services to our customers. New laws have been introduced that further regulate our
ability to provide products and services to certain customers and that require us to alter our product and service
offerings. Our ability to set prices for certain products and services may also be impacted by future regulation. The
competitive landscape may also be altered by new laws affecting banks and financial services companies, or our
agents, authorised representatives and external service providers. The phasing in of Open Banking is one example
of new laws that are likely to affect competition amongst banks and other financial services providers in Australia.
Regulatory changes of this type could adversely affect one or more of our businesses, restrict our flexibility, require
us to incur substantial costs, impact the profitability of one or more of our business lines, result in the Group being
unable to increase or maintain market share and/or create pressure on our margins and fees, any of which could
adversely affect our business, prospects, financial performance or financial condition.
There are numerous sources of regulatory change that could affect our business. In some cases, changes to
regulation are driven by international bodies, such as the Basel Committee on Banking Supervision (BCBS).
Regulatory change may also flow from reviews and inquiries commissioned by Governments or regulators. These
reviews and commissions of inquiry may lead to, and in some cases already have led to, substantial regulatory
change or investigations, which could have a material impact on our business, prospects, reputation, financial
performance or financial condition.
It is also possible that governments or regulators in jurisdictions in which we operate or obtain funding might
revise their application of existing regulatory policies that apply to, or impact, our business (including by instituting
macro-prudential limits on lending). Regulators or governments may take this action for a variety of reasons,
including for reasons relating to national interest and/or systemic stability.
Regulatory changes and the timing of their introduction continue to evolve and we manage our businesses in the
context of regulatory uncertainty and complexity. 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 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
(such as obligations to provide certain data and information to regulators) or new interpretations of existing laws
or regulations. The failure of the Group to appropriately manage and implement regulatory change, including
by failing to implement effective processes to comply with new regulations, has, in some instances, resulted in,
and could in the future result in, the Group failing to meet a compliance obligation. Further information about
the consequences of failing to meet a compliance obligation is set out in the section titled ‘Our businesses are
highly regulated and we have been or could be adversely affected by failing to comply with laws, regulations or
regulatory policy’ below.
Another consideration in managing regulatory change arises when regulation is introduced in one jurisdiction in
which we operate that conflicts with the way it is introduced in other jurisdictions in which we operate.
For further information about regulatory changes affecting the Group, refer to ‘Significant developments’ in
Section 1 and the sections ‘Critical accounting assumptions and estimates’ and ‘Future developments’ in Note 1 to
the financial statements.
2019 Westpac Group Annual Report Risk and risk management
103
Our businesses are highly regulated and we have been or could be adversely affected by failing to comply
with laws, regulations or regulatory policy
We are responsible for ensuring that we comply with all applicable legal and regulatory requirements and industry
codes of practice in the jurisdictions in which we operate or obtain funding, as well as meeting our ethical standards.
The Group is subject to compliance risk, which 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. This risk is exacerbated by the increasing
complexity and volume of regulation and can also arise where we interpret our obligations and rights differently to our
regulators or a Court. The potential for this to occur may be heightened in circumstances where regulation is untested
and/or not accompanied by extensive regulatory guidance.
The Group employs a compliance management system which is designed to identify, assess and manage
compliance risk. While this system is currently in place, it may not always have been or continue to be effective.
Breakdowns may occur in this system due, for example, to flaws in the design of controls or processes. This has
resulted in, and may in the future result in, potential breaches of our compliance obligations, as well as poor
customer outcomes.
The Group also depends on its employees, contractors, agents, authorised representatives and external service
providers to ‘do the right thing’ for it to meet its compliance obligations. Inappropriate conduct by these
individuals, such as neglecting to follow a policy or engaging in misconduct, could result in poor customer
outcomes and a failure by the Group to comply with compliance obligations.
The Group’s failure, or suspected failure, to comply with a compliance obligation could lead to a regulator
commencing surveillance or an investigation into the Group. This may, depending on the circumstances, result in
the regulator taking administrative or enforcement action against the Group and/or its representatives. Regulators
could seek to pursue civil or criminal proceedings, seeking substantial fines, civil penalties or other enforcement
outcomes. In addition, the failure or alleged failure of our competitors to comply with their obligations could lead
to increased regulatory scrutiny across the financial services sector.
In many cases, our regulators have broad powers. For example, under the Banking Act 1959 (Cth), APRA can, in
certain circumstances, 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, to take remedial action or not to undertake
transactions) or disqualify an ‘Accountable Person’ under the Banking and Executive Accountability Regime.
APRA also has the power to require us to hold additional capital, which they exercised earlier this year by applying
a $500 million overlay to our operational risk capital requirement following the completion of our self-assessment
into our frameworks and practices in relation to governance, culture and accountability. If the Group incurs
additional capital overlays in the future it may need to raise additional capital which could have an adverse impact
on our business, prospects, financial performance and financial condition.
The current political and regulatory environment that the Group is operating in has also seen (and may in the future
see) our regulators receive new powers. Recently, legislation was passed by the Australian Parliament that provided
ASIC with a product intervention power which enables ASIC to make orders that prevent issuers of financial
products from engaging in certain conduct.
In addition, legislation has been passed that materially increases the penalties that can be imposed for corporate
and financial sector misconduct. In particular, ASIC can commence civil penalty proceedings and seek significant
civil penalties against an Australian Financial Services licensee (such as Westpac) for failing to do all things
necessary to ensure that financial services provided under the licence are provided efficiently, honestly and fairly.
The Group may also face significant penalties for failing to comply with other obligations, such as those provided
for under the recently legislated Consumer Data Right. This trend towards increasingly severe penalties for failing
to meet compliance obligations could continue in the future and be expanded into other areas of regulation that
the Group is subject to.
Changes may also occur in the oversight approach of regulators, which could result in a regulator preferring its
enforcement powers over a more consultative approach. 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.
This dynamic is apparent, with ASIC committing to conducting more enforcement actions against large financial
institutions and adopting a ‘why not litigate?’ enforcement stance. ASIC has also continued to implement its ‘Close
and Continuous Monitoring’ program, which has seen ASIC staff embedded within the institutions they supervise,
including Westpac.
APRA has publicly committed to a revised approach to enforcement as well. APRA has indicated that it will use
enforcement where appropriate to prevent and address serious prudential risks and hold entities and individuals to
account.
The current environment may see a shift in the nature of enforcement proceedings commenced by regulators. As
well as conducting more civil penalty proceedings, our regulators may be more likely to bring criminal proceedings
against institutions and/or their representatives in the future. Alternatively, regulators may elect to make criminal
referrals to the Commonwealth Department of Public Prosecutions or other prosecutorial bodies.
The provision of new powers to regulators, coupled with the increasingly active supervisory and enforcement
approaches adopted by them, increases the prospect of adverse regulatory action being brought against the
Group. Further, the severity and consequences of that action are now greater, given the expansion of penalties for
corporate and financial sector misconduct.
2019 Westpac Group Annual Report12341234 104
Risk and risk management
Regulatory action brought against the Group may expose the Group to an increased risk of litigation brought by
third parties (including through class action proceedings), which may require the Group to pay compensation to
third parties and/or undertake further remediation activities.
Regulatory investigations, inquiries, litigation, fines, penalties, infringement notices, revocation, suspension or
variation of conditions of relevant regulatory licences or other enforcement or administrative action or agreements
(such as enforceable undertakings) could, either individually or in aggregate with other regulatory action, adversely
affect our business, prospects, reputation, financial performance or financial condition. For further details about
regulatory matters that may affect the Group, refer to ‘Significant Developments’ in Section 1.
The failure to comply with financial crime obligations could have an adverse effect on our business and
reputation
The Group is subject to anti-money laundering and counter-terrorism financing (AML/CTF) laws, anti-bribery
and corruption laws, economic and trade sanctions laws and tax transparency laws in the jurisdictions in which
it operates. These laws can be complex and, in some circumstances, impose a diverse range of obligations. For
example, AML/CTF laws require Westpac and other regulated institutions to (amongst other things) undertake
customer identification and verification, conduct ongoing due diligence on customers, maintain and comply with
an AML/CTF program and undertake ongoing risk assessments. AML/CTF laws also require Westpac to report
certain matters and transactions to regulators (including in relation to International Funds Transfer Instructions,
Threshold Transaction Reports and Suspicious Matter Reports) and ensure that certain information is not disclosed
to third parties in a way that would contravene the ‘tipping off’ provisions in AML/CTF legislation.
In recent years there has been increased focus on compliance with financial crime obligations, with regulators
around the globe commencing large-scale investigations and taking enforcement action where they have identified
non-compliance (often seeking significant monetary penalties). Further, due to the large volume of transactions
that the Group processes, the undetected failure or the ineffective implementation, monitoring or remediation of a
system, policy, process or control (including in relation to a regulatory reporting obligation) has in some instances,
and could in the future result in, a significant number of breaches of AML/CTF obligations. This in turn could lead
to significant monetary penalties.
While the Group has systems, policies, processes and controls in place that are designed to manage its financial
crime obligations (including its reporting obligations), these have not always been, and may not in the future
always be effective. The Group is currently undertaking a multi-year program designed to address areas of control
weaknesses in its financial crime management framework and improve the management of this risk class.
If we fail, or where we have failed, to comply with these obligations, we could face regulatory enforcement action
such as litigation, significant fines, penalties and the revocation, suspension or variation of licence conditions.
As reported in the Group’s 2018 Annual Report, the Group self-reported to AUSTRAC a failure to report a large
number of ITFIs (as required under Australia’s AML/CTF Act). AUSTRAC has issued a number of detailed statutory
notices over the last year requiring information relating to the Group’s processes, procedures and oversight. These
notices relate to a range of matters including these IFTI reporting failures and associated potential failings related
to record keeping and obligations to obtain and pass on certain data in funds transfer instructions, as well as
correspondent banking due diligence, risk assessments and transaction monitoring. Further information is set out
in ‘Significant Developments’ in section 1 and in Note 27 to the financial statements.
Non-compliance with financial crime obligations could also lead to litigation commenced by third parties (including
class action proceedings) and cause reputational damage. These actions could, either individually or in aggregate,
adversely affect our business, prospects, reputation, financial performance or financial condition.
Reputational damage could harm our business and prospects
Our ability to attract and retain customers and our prospects could be adversely affected if our reputation is
damaged.
Reputation risk is the risk 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
past, current and planned activities, processes, performance and behaviours.
There are various potential sources of reputational damage. Westpac’s reputation may be damaged where any of
its policies, processes, practices or behaviours result in a negative outcome for a customer or a class of customers.
Other potential sources of reputational damage include the failure to effectively manage risks in accordance with
our risk management frameworks , failure to comply with legal and regulatory requirements, adverse findings from
regulatory reviews (including Westpac-specific and industry-wide reviews), environmental, social and ethical issues,
failure of information security systems, technology failures, security breaches and inadequate record keeping which
may prevent Westpac from demonstrating that a past decision was appropriate at the time it was made.
Westpac may suffer reputational damage where its conduct, practices, behaviours or business activities do not
align with the evolving standards and expectations of the community, our regulators and other stakeholders.
As these expectations may exceed the standard required in order to comply with the law, Westpac may incur
reputational damage even where it has met its legal obligations. Our reputation could also be adversely affected by
the actions of the financial services industry in general or from the actions of our competitors, customers, suppliers,
joint-venture partners, strategic partners and other counterparties.
Furthermore, the risk of reputational damage may be heightened by factors such as the increasing use of social
media or the increasing prevalence of groups which seek to publicly challenge the Group’s strategy or approach to
aspects of its business.
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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 or litigation brought by third parties (including class actions),
require us to remediate and compensate customers and incur 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.
The Royal Commission has led to, and may continue to lead to, regulatory enforcement activity, litigation
and changes in laws, regulations or regulatory policy, and has resulted in, and may continue to result in,
ongoing reputational damage to the Group, all of which has and may continue to have an adverse effect
on our business and prospects
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry investigated
(amongst other things) whether any conduct, practices, behaviours or business activities engaged in by financial
services entities amounted to potential misconduct, or fell below community standards and expectations.
These investigations (including the public hearings, submissions, evidence and findings of the Royal Commission)
had, and may continue to have, an adverse impact on the Group’s reputation and potentially the financial
performance of the Group’s businesses. In addition, the Royal Commission’s findings have led to, and may
continue to lead in the future to, regulators commencing investigations and/or enforcement action against
financial institutions (including the Group). This environment has also resulted in an increase in class actions or
other litigation being commenced by the Group’s customers, including in relation to matters raised at the Royal
Commission. For further information about this risk, refer to the section titled ‘We have and could suffer losses due
to litigation (including class action proceedings)’ below.
In addition, the recommendations made in the Final Report of the Commission (which was publicly released on 4
February 2019) have resulted and will, depending on how its recommendations are implemented, result in further
changes to legislation, and further influence the policies and practices of our regulators. In some instances, this
has already had, and may continue to have in the future, an adverse effect on our business, prospects, financial
performance or financial condition.
The Royal Commission has also led to increased political or regulatory scrutiny of the financial industry in New
Zealand, and may continue to do so.
We have and could suffer losses due to litigation (including class action proceedings)
The Group (and individual entities within the Group) may, from time to time, be involved in legal proceedings,
regulatory actions or arbitration arising from the conduct of their business and the performance of their legal and
regulatory obligations. Proceedings could be commenced against the Group by a range of potential plaintiffs,
such as our customers, shareholders, suppliers and counterparties. These plaintiffs may commence proceedings
individually or they may commence class action proceedings.
In recent years, there has been an increase in the number of class action proceedings brought against financial
services companies (and other organisations more broadly), many of which have resulted in significant monetary
settlements. The risk of class action proceedings being commenced is heightened by findings from regulatory
investigations or inquiries (such as the Royal Commission into Misconduct in the Financial Services Industry),
adverse media, an adverse judgment or the settlement of proceedings brought by a regulator. Furthermore,
there is a risk that class action proceedings commenced against a competitor could lead to similar class action
proceedings being commenced against the Group.
The growth in third party litigation funding in Australia has also contributed to a recent increase in the number
of class actions being commenced in Australia. This trend may continue in light of recent court judgments which
have clarified the courts’ approach to liability and loss on certain types of class action claims. This clarification may
encourage plaintiffs, law firms and funders to bring and maintain class action proceedings, as well as potentially
improve the ability of plaintiffs to establish certain types of class action claims.
From time to time, class action proceedings are commenced against the Group. For further information about class
action proceedings that the Group is currently involved in, refer to Note 27 in the financial statements.
Litigation (including class action proceedings) may, either individually or in aggregate, adversely affect the Group’s
business, operations, prospects, reputation or financial condition. This risk is heightened by the recent increases
in the severity of penalties for certain breaches of the law. Such matters are subject to many uncertainties (for
example, the outcome may not be able to be predicted accurately). Furthermore, the Group’s ability to respond to
and defend litigation may be adversely affected by inadequate record keeping.
Depending on the outcome of any litigation, the Group may be required to comply with broad court orders,
including compliance orders, enforcement orders or otherwise pay money such as damages, fines, penalties or
legal costs.
The Group’s material contingent liabilities are described in Note 27 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,
which could adversely affect our business, prospects, reputation, financial performance or financial condition.
We have suffered and could in the future 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.
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While Westpac has systems in place to protect against, detect and respond to cyberattacks, these systems have
not always been, and may not in the future always be effective. There can be no assurance that we will not suffer
losses from cyberattacks or other information security breaches. The Group may not be able to anticipate and
prevent a cyberattack, or it may not be able to implement effective measures to respond to a cyberattack in
progress. Further, there is a risk that the Group will not be able to rectify or minimise the damage resulting from a
cyberattack.
If the Group incurs a successful cyberattack, technology systems might fail to operate properly or become disabled
and it could result in the unauthorised release, gathering, monitoring, misuse, loss or destruction of confidential,
proprietary and other information of the Group, its employees, customers or third parties or otherwise adversely
impact network access, business operations or availability of services.
In addition, as cyber threats continue to evolve, we may be required to expend significant additional resources to
modify or enhance our systems or to investigate and remediate any vulnerabilities or incidents.
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, other parties that facilitate our business activities and financial platforms and infrastructure
(such as clearing houses, payment systems and exchanges) 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 those in the
government, mining and health sectors), increasing obligations to make data and information available to external
third parties and our plans to continue to improve and expand our internet and mobile banking infrastructure.
We could suffer losses due to technology failures or our inability to appropriately manage and upgrade
our technology
The reliability, integrity and security of our information and technology is crucial in supporting our customers’
banking requirements and meeting our compliance obligations and our regulators’ expectations.
While the Group has a number of processes in place to provide for and monitor the availability and recovery of
our systems, there is a risk that our information and technology systems might fail to operate properly or become
disabled, including as a result of events that are wholly or partially beyond our control.
If we incur a technology failure we may fail to meet a compliance obligation (such as the obligation to retain
records and data for requisite periods of time), or our customers may be adversely affected. This could potentially
result in reputational damage, remediation costs and a regulator commencing an investigation and/or taking
administrative or enforcement action against us. The overuse or overreliance on legacy or outdated systems may
heighten the risk of a technology failure occurring.
Further, in order to continue to deliver new products and services to customers, comply with our regulatory
obligations (such as obligations to report certain data and information to regulators) and meet the ongoing
expectations of our regulators and our customers, we need to regularly renew and enhance our technology. We
are constantly managing technology projects including projects to consolidate technology platforms, simplify
and enhance our technology and operations environment, assist us to comply with legal obligations, improve
productivity and provide for a better customer experience. Failure to implement these projects or manage
associated change effectively could result in cost overruns, unrealised productivity, operational instability, failure to
meet compliance obligations, reputational damage and/or result in the loss of market share to competitors. In turn,
this could place us at a competitive disadvantage and adversely affect our financial performance.
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 other impacts on entities with whom
we do business.
As of 30 September 2019, approximately 30% of our total funding originated from domestic and international
wholesale markets. Of this, around 65% was sourced outside Australia and New Zealand. Customer deposits
provide around 63% 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.
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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 or financial condition. There is no assurance
that we will be able to obtain adequate funding, do so at acceptable prices, or 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. If Westpac is unable to source appropriate funding for an extended period, or
if it can no longer sell liquid securities, there is a risk that Westpac will be unable to pay its debts as and when they
become due and payable.
Westpac enters into collateralised derivative obligations, which may require Westpac to post additional collateral
based on movements in market rates, which has the potential to adversely affect Westpac’s liquidity or ability to
use derivative obligations to hedge its interest rate, currency and other financial instrument risks.
For a more detailed description of liquidity risk, refer to ‘Funding and liquidity risk’ in Note 21 to the financial
statements.
Sovereign risk may destabilise financial markets adversely
Sovereign risk is the risk that 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 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, the quality of our governance, 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.
A downgrade or series of downgrades to our credit ratings could have an adverse effect on 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, geopolitical instability (such
as threats of or actual conflict occurring around the world) and political developments. In particular, there are
significant and ongoing global political developments that have the potential to impact major global economies,
including Brexit and the introduction of tariffs and other protectionist measures by various countries, such as
the US and China. 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 and affect investors’ willingness to invest in the Group. 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.
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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. This 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, asset prices and trade flows in the
countries in which we operate.
We conduct the majority of our business in Australia and New Zealand and, consequently, our performance
is influenced by the level and cyclical nature of lending in these countries. These factors are in turn impacted
by both domestic and international economic conditions, natural disasters and political events. A significant
decrease in Australian and New Zealand housing valuations could adversely impact our home lending activities
because borrowers with loans in excess of their property value show a higher propensity to default. In the event
of defaults our security may be eroded, causing us to incur higher credit losses. The demand for our home lending
products may also decline due to adverse changes in tax legislation (such as changes to tax rates, concessions or
deductions), regulatory requirements or other 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, Japan and the US 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, including as the result of the implementation of tariffs or other
protectionist trade measures, could negatively impact the Australian economy. Changes in commodity prices,
Chinese government policies 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.
Monetary policy can also significantly affect the Group. Interest rate settings (including low or negative rates),
as well as other actions taken by central banks (such as quantitative easing), may adversely affect our cost of
funds, the value of our lending and investments and our margins. Monetary policies also impact the broader
economic conditions of the various jurisdictions that the Group operates or obtains funding in. These policies
could affect demand for our products and services and/or have a negative impact on the Group’s customers and
counterparties, potentially increasing the risk that they will default on their obligations to the Group. All of these
factors could adversely affect 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 and our expectations. If economic
conditions deteriorate outside of our expectations, 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, clearing
houses, 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 21 in 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 a
range of firms, including 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,
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including in relation to digital payment services. The Group faces competition from established providers of
financial services as well as from banking businesses developed by non-financial services companies.
The competitive environment may also change as a result of legislative reforms.
If we are unable to compete effectively in the increasingly competitive environment in which our various businesses
operate, our market share may decline. This may adversely affect us by diverting business to our competitors or
creating pressure to lower margins and fees.
Increased competition for deposits could also increase our cost of funding and lead us to seek access to 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 the section titled Competition in the Directors’
Report 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, our defined benefit
plan 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 low or 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.
Changes in market factors could be driven by a number of developments. As an example, in July 2017, the FCA
which regulates the London Interbank Offered Rate (“LIBOR”), announced that it would not require panel banks to
continue to submit rates for the calculation of the LIBOR benchmark after 2021. Accordingly, the continuation of
LIBOR in its current form will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued
or modified by 2021. Any such developments or future changes in the administration of LIBOR or any other
benchmarks could result in adverse consequences to the return on, value of and market for securities and other
instruments whose returns are linked to any such benchmark, including those securities or other instruments issued
by the Group.
If we were to suffer substantial losses due to any market volatility (including changes in the return on, value of
or market for, securities or other instruments) it may adversely affect our business, prospects, liquidity, capital
resources, financial performance or financial condition. For a discussion of our risk management procedures,
including the management of market risk, refer to the ‘Risk management’ section.
We have and 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, reputational risk, technology risk, model risk and
outsourcing risk, as well as the risk of business disruption due to external events such as natural disasters,
environmental hazard, damage to critical utilities, and targeted activism and protest activity. While we have policies,
processes and controls in place to manage these risks, these may not always have been, or continue to be effective.
Ineffective processes and controls have resulted in, and could in the future result in an adverse outcome for
Westpac’s customers. For example, a process breakdown could result in a customer not receiving a product on
the terms and conditions, or at the pricing, they agreed to. In addition, inadequate record keeping may prevent
Westpac from demonstrating that a past decision was appropriate at the time it was made or that a particular
action or activity was undertaken. If this was to occur, Westpac may incur significant costs in paying refunds and
compensation to customers, as well as remediating any underlying process breakdown. Failed processes could
also result in Westpac incurring losses because it is not able to enforce its contractual rights. This could arise
in circumstances where Westpac did not correctly document its rights or failed to perfect a security interest.
These types of operational failures, may also result in increased regulatory scrutiny and depending on the nature
of the failure and its impact, result in a regulator potentially commencing an investigation and/or taking other
enforcement, administrative or supervisory action.
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 customers, as well as our business,
prospects, reputation, financial performance or financial condition.
Accurate and complete data is critical to ensure that Westpac’s systems (both customer facing and back-office)
and financial reporting processes operate effectively. In some areas of its business and operations, Westpac is
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affected by poor data quality. This has arisen and could in the future arise in a number of ways, including through
inadequacies in systems, processes and policies. This could lead to deficiencies or failings in customer service,
risk management, financial reporting (including in the calculation of risk weighted assets), credit systems and
processes, compliance with legal obligations (including obligations to provide data to regulators) and also result
in poor decision making, including in relation to the provision of credit and the terms on which it is provided. Poor
data quality could affect the ability of Westpac to improve systems and processes. Westpac is also exposed to
model risk, being the risk of loss arising from errors or inadequacies in data or a model, or in the control and use of
a model.
Westpac is required to retain and access data and documentation for specific retention periods in order to satisfy
its compliance obligations. In some cases, Westpac also retains data to enable it to demonstrate that a past
decision was appropriate at the time it was made. Failings in systems, processes and policies could all adversely
affect Westpac’s ability to retain and access data.
In recent times, financial services entities have been increasingly sharing data with third parties, such as suppliers
and regulators (both domestic and offshore), in order to conduct their business activities and meet regulatory
obligations. A breakdown in a process or control related to the transfer, storage or protection of data transferred
to a third party, or the failure of a third party to use and handle this data correctly, could result in the Group failing
to meet a compliance obligation (including any relevant privacy obligations) and/or have an adverse impact on our
customers and the Group.
Westpac also 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. The Group could also be adversely affected by events that cause
disruption within the banking and financial services industry. For example, there is a risk that if central banks adopt
negative interest rates in the future, the technology systems used by the Group, its counterparties and/or financial
infrastructure providers may fail to operate correctly and this may cause loss or damage to the Group and/or its
counterparties.
Operational risks can impact our reputation and result in financial losses (including through decreased demand for
our products and services) which would adversely affect our financial performance or financial condition.
For a discussion of our risk management procedures, including the management of operational risk, refer to the
‘Risk management’ section.
Operational risk, technology risk, conduct risk or compliance risk events have required, and could in the
future require, Westpac to undertake customer remediation activity
Westpac relies on a large number of policies, processes, procedures, systems and people to conduct its business.
Breakdowns or deficiencies in one of these areas (arising from one or more operational risk, technology risk,
conduct risk or compliance risk events) have resulted, and could in the future result in, adverse outcomes for
customers which Westpac is required to remediate.
These events could require the Group to incur significant remediation costs (which may include compensation
payments to customers and costs associated with correcting the underlying issue) and result in reputational
damage.
There are significant challenges and risks involved in customer remediation activities. Westpac’s ability to
investigate an adverse customer outcome that may require remediation could be impeded if the issue is a legacy
matter spanning beyond our record retention period, or if our record keeping is otherwise inadequate. Depending
on the nature of the issue, it may be difficult to quantify and scope the remediation activity.
Determining how to properly and fairly compensate customers can also be a complicated exercise involving
numerous stakeholders, such as the affected customers, regulators and industry bodies. The Group’s proposed
approach to a remediation may be affected by a number of events, such as a group of affected customers
commencing class action proceedings on behalf of the broader population of affected customers, or a regulator
exercising their powers to require that a particular approach to remediation be taken. These factors could impact
the timeframe for completing the remediation activity, potentially resulting in Westpac failing to execute the
remediation in a timely manner. A failure of this type could lead to a regulator commencing enforcement action
against the Group. The ineffective or slow completion of a remediation also exposes the Group to reputational
damage, with the Group potentially being criticised by regulators, affected customers, the media and other
stakeholders, resulting in reputational damage.
The significant challenges and risks involved in scoping and executing remediations in a timely way also create the
potential for remediation costs actually incurred to be higher than those initially estimated by the Group.
If the Group cannot effectively scope, quantify or implement a remediation activity in a timely way, there could be
a negative impact on our business, prospects, reputation, financial performance or financial condition.
We have and 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. Conduct risk could occur through the provision of products and
services to our customers that do not meet their needs or do not support market integrity, as well as the poor
conduct of our employees, contractors, agents, authorised representatives and external service providers, which
could include deliberate attempts by such individuals to circumvent Westpac’s controls, processes and procedures.
This could occur through a failure to meet professional obligations to specific clients (including fiduciary and
suitability requirements), poor product design and implementation, failure to adequately consider customer needs
2019 Westpac Group Annual Report Risk and risk management
111
or selling products and services outside of customer target markets. Conduct risk may also arise where there has
been a failure to adequately provide a product or services that we had agreed to provide a customer.
While we have frameworks, policies, processes and controls that are designed to manage poor conduct outcomes,
these policies and processes may not always have been or continue to be effective. The failure of these policies
and processes could result in financial losses and reputational damage and this could adversely affect our business,
prospects, financial performance or financial condition.
We could suffer losses and our business has been and could be adversely affected by the failure to adopt
and implement effective risk management
We have implemented risk management strategies, policies and internal controls involving processes and
procedures intended to identify, monitor and manage risks facing the Group. However, our risk management
framework has not always been, or may not in the future prove to be, effective.
This could be because the design of the framework may be inadequate, which could result in key information
not being provided to decision-makers in the right form and in a timely manner, or because of weaknesses in
underlying data. There is also the possibility that key risk management policies, controls and processes may be
ineffective, either due to inadequacies in their design, or because of the poor implementation of these policies,
controls and processes.
There are also inherent limitations with any risk management framework as there may exist, or emerge in the
future, risks that we have not anticipated or identified and our controls may not be effective.
Risk management frameworks may also prove ineffective because of weaknesses in risk culture, which may result
in risks and control weaknesses not being identified, escalated and acted upon. Further, while the development of
appropriate remuneration structures can play an important role in supporting a sound risk culture, a deficiency in
the design or operation of our remuneration structures could have a negative effect, potentially resulting in staff
engaging in excessive risk taking behaviours.
Risk management failings of the type outlined above could adversely the Group in numerous ways, with the
Group potentially being exposed to higher levels of risk than expected, which may result in the Group incurring
unexpected losses, breaches of compliance obligations and reputational damage.
As part of the Group’s risk management framework, the Group measures and monitors risks against its risk
appetite. Where the Group identifies a risk as being out-of-appetite, the Group needs to take steps to bring this
risk back into appetite in a timely way. However, the Group may not always be able to achieve this within proposed
timeframes. This may occur because, for example, the Group experiences delays in enhancing its information
technology systems to better manage the out-of-appetite risk, or in recruiting sufficient numbers of appropriately
trained staff to undertake required activities. It is also possible that, because of external factors beyond the Group’s
control, certain risks may be inherently outside of appetite for periods of time. In addition, the Group is required to
periodically review its risk management framework to determine whether it remains appropriate.
If the Group is unable to bring risks back into appetite, or if it is determined that the Group’s risk management
framework is no longer appropriate, the Group may incur unexpected losses and be required to undertake
considerable remedial work. The failure to remedy this situation could result in increased scrutiny from regulators,
who could take supervisory action such as requiring the Group to hold additional capital or directing the Group
to spend money to enhance its’ risk management systems and controls. The Group has been adversely affected
by weaknesses in risk management systems and controls in the recent past, with APRA requiring Westpac to hold
additional capital following the completion of its Compliance, Governance and Accountability self-assessment.
Inadequacies in addressing risks or in the Group’s risk management framework could also result in the Group failing
to meet a compliance obligation and/or financial losses.
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.
The Group’s failure to recruit and retain key executives, employees and Directors may have adverse effects
on our business
Key executives, employees and Directors play an integral role in the operation of Westpac’s business and its pursuit
of its strategic objectives. The unexpected departure of an individual in a key role, or the Group’s failure to recruit
and retain appropriately skilled and qualified persons into these roles, could each have an adverse effect on our
business, prospects, reputation, financial performance or financial condition.
Climate change may have adverse effects on our business
We, our customers and external suppliers, may be adversely affected by the physical risks of climate change,
including increases in temperatures, sea levels, and the frequency and severity of adverse climatic events including
fires, storms, floods and droughts. These effects, whether acute or chronic in nature, may directly impact us and
our customers through reputational damage, environmental factors, insurance risk and business disruption and may
have an adverse impact on financial performance (including through an increase in defaults in credit exposures).
Initiatives to mitigate or respond to adverse impacts of climate change may impact market and asset prices,
economic activity, and customer behaviour, particularly in geographic locations and industry sectors adversely
affected by these changes. Failure to effectively manage these transition risks could adversely affect our business,
prospects, reputation, financial performance or financial condition.
2019 Westpac Group Annual Report12341234 112
Risk and risk management
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) 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, all of 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 or financial condition.
Insurance risk is the risk in our licensed regulated insurance entities of lapses being greater than expected, or
the costs of claims being greater than expected due to a failure in product design, underwriting, reinsurance
arrangements or an increase in the severity and/or frequency of insured events.
In the life insurance business, risk arises primarily through mortality (death) and morbidity (illness and injury) risks,
the costs of claims relating to those risks being greater than was anticipated when pricing those risks and policy
lapses (including through an unexpected or sustained increase in the rate of policy lapses).
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. 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 potential losses from
existing events, such as those arising from natural disaster events, may not be adequate to cover actual claims that
may arise.
In the lenders mortgage insurance business, insurance risk arises primarily from unexpected downturns in
economic conditions leading to higher levels of mortgage defaults from unemployment or other economic factors.
If our reinsurance arrangements are ineffective, this could lead to greater risk, and more losses than anticipated.
There is also a risk that we will not be able to renew an expiring reinsurance arrangement on similar terms,
including in relation to the cost, duration and amount of reinsurance cover provided under that arrangement.
Changes in critical accounting estimates and judgements could expose the Group to losses
The Group is required to make estimates, assumptions and judgements when applying accounting policies and
preparing its financial statements, particularly in connection with the calculation of provisions (including those
related to remediations or credit losses) and the determination of the fair value of financial instruments. A change
in a critical accounting estimate, assumption and/or judgement resulting from new information or from changes in
circumstances or experience could result in the Group incurring losses greater than those anticipated or provided
for. This may have an adverse effect on the Group’s financial performance, financial condition and reputation. The
Group’s financial performance and financial condition may also be impacted by changes to accounting standards
or to generally accepted accounting principles.
We could suffer losses due to impairment of capitalised software, goodwill and other intangible assets
that may adversely affect our business, operations or financial condition
In certain circumstances Westpac may be exposed to a reduction in the value of intangible assets. As at
30 September 2019, 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 and other intangible asset 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
changes in expected future cash flows, could materially impact this assessment, resulting in the potential write-off
of part or all of the intangible assets.
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.
2019 Westpac Group Annual Report Risk and risk management
113
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.
The expansion or integration of a new business, or entry into 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.
Westpac also acquires and invests in businesses owned and operated by external parties. These transactions
involve a number of risks for the Group. For example, Westpac may incur financial losses if a business it invests
in does not perform as anticipated or subsequently proves to be overvalued at the time that the transaction was
entered into.
In addition, we may be unable to successfully divest businesses or assets. These activities may, for a variety of
reasons, not deliver the anticipated positive business results and could have a negative impact on our business,
prospects, reputation, engagement with regulators, financial performance or financial condition.
Electing not to pursue a course of action can have an adverse effect on the Group. If Westpac fails to appropriately
respond to changes in the business environment it operates in (including changes related to economic, geopolitical,
regulatory, technological, social and competitive factors) this could have a range of adverse effects on the Group’s
business, such as being unable to increase or maintain market share as well as creating pressure on margins and
fees, any of which could have a negative impact on the Group’s business, prospects, financial performance or
financial condition.
Risk management
At Westpac, our risk management framework is designed to help achieve our vision to be one of the world’s great
service companies, helping our customers, communities and people to prosper and grow, sustainably and within
risk appetite. Our risk management strategy is to deliver effective risk management outcomes through the robust
execution of our risk management framework.
Effective risk management outcomes mean that we:
• deliver suitable, fair and clear outcomes for our customers that support market integrity;
• protect Westpac Group’s depositors, policyholders and investors by maintaining a balance sheet with sound
credit quality and buffers over regulatory minimums; and
• meet our regulatory and statutory obligations.
The Risk Management Framework (RMF) and Risk Management Strategy (RMS) is approved by the Board
following review and recommended by the Board Risk and Compliance Committee (BRCC) on an annual basis or
more frequently where required by a material business or strategy change or a material change to the Group’s risk
profile.
For further information regarding the role and responsibilities of the BRCC and other Board committees in managing
risk, refer to Westpac’s 2019 Corporate Governance Statement available at www.westpac.com.au/corpgov.
The Westpac Board (the Board) is ultimately responsible for our risk management framework and the oversight
of its operation by management. The Board has delegated the oversight of the RMF and its implementation to the
Chief Risk Officer (CRO) as the Accountable Executive.
The Chief Executive Officer (CEO) is the Accountable Executive for the RMS and oversees its implementation
by business units and functions, including in relation to customers, shareholders and Westpac employees and
contractors.
We adopt a Three Lines of Defence model to ensure we practice end-to-end management of risk, within which all
employees play an active role. This necessitates co-operation between businesses and functions, such that there
are no gaps in risk coverage.
Following the conclusion of the Culture, Governance and Accountability review conducted at the request of APRA,
Westpac is conducting a review of, and upgrades to, its end to end risk management capabilities. This is part of an
ongoing program of work that spans both financial and non-financial risk. Two of the key steps under this complex,
multi-year initiative are a renewed focus on the implementation of our three lines of defence model and the
implementation of a new Risk Management Framework, both of which are underway.
Westpac believes that investing in and enhancing end to end risk management capabilities are essential
imperatives. Recent reviews have identified various policies, systems, data, and risk capabilities which require
improvement. A detailed implementation plan is being designed to facilitate these improvements as soon as
possible, including hiring additional experts in areas such as operational risk, stress testing, modelling, financial
crime, risk systems and data management.
For a discussion of the risks to which Westpac is exposed, and its policies to manage these risks, refer to Westpac’s
Corporate Governance Statement and Note 21 to the financial statements.
2019 Westpac Group Annual Report12341234 114
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 21 to the financial statements for details of our credit risk management policies.
Provisions for expected credit losses/impairment charges on loans
For information on the basis for determining the provision for expected credit losses/impairment charges on loans
refer to ‘Critical accounting assumptions and estimates’ in Note 13 to the financial statements.
Credit risk concentrations
We monitor our credit portfolio to manage risk concentrations. At 30 September 2019, our exposure to consumers
comprised 72% (2018: 72%, 2017: 72%) of our on-balance sheet loans and 59% (2018: 59%, 2017: 59%) of total credit
commitments. At 30 September 2019, 92% (2018: 92%, 2017: 92%) of our exposure to consumers was supported by
residential real estate mortgages. The consumer category includes owner-occupier and 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
2019 Westpac Group Annual Report Risk and risk management
115
Funding and liquidity risk
Funding and liquidity risk is the risk that Westpac cannot meet its payment obligations or that it does not have the
appropriate amount, tenor and composition of funding and liquidity to support its assets. Westpac has a Liquidity
Risk Management Framework which sets out Westpac’s funding and liquidity risk appetite, roles and responsibilities
of key people managing funding and liquidity risk within Westpac, risk reporting and control processes and limits
and targets used to manage Westpac’s balance sheet.
Refer to Note 21 to the financial statements for a more detailed discussion of our liquidity risk management policies.
Westpac debt programs and issuing shelves
Access in a timely and flexible manner to a diverse range of debt markets and investors is provided by the
following programs and issuing shelves as at 30 September 2019:
Program Limit
Issuer(s)
Program/Issuing Shelf Type
Australia
No limit
Euro Market
WBC
Debt Issuance Program
USD 2.5 billion
WBC
Euro Transferable Certificate of Deposit Program
USD 20 billion
WBC/WSNZL1
Euro Commercial Paper and Certificate of Deposit Program
USD 70 billion
WBC
Euro Medium Term Note Program
USD 10 billion
WSNZL1
Euro Medium Term Note Program
USD 40 billion
WBC2
Global Covered Bond Program
EUR 5 billion
WSNZL3
Global Covered Bond Program
Japan
JPY 750 billion
JPY 750 billion
United States
WBC
WBC
Samurai shelf
Uridashi shelf
USD 45 billion
WBC
US Commercial Paper Program
USD 10 billion
WSNZL1
US Commercial Paper Program
USD 35 billion
WBC
US 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 shelves
No limit
WNZL
Medium Term Note and Registered Certificate of Deposit Program
1. Notes issued under this program by Westpac Securities NZ Limited, London branch are guaranteed by Westpac New Zealand Limited,
its parent company.
2. Notes issued under this program are guaranteed by BNY Trust Company of Australia Limited as trustee of the Westpac Covered Bond
Trust.
3. Notes issued under this program by Westpac Securities NZ Limited, London branch are guaranteed by Westpac New Zealand Limited,
its parent company, and Westpac NZ Covered Bond Limited.
2019 Westpac Group Annual Report12341234 116
Risk and risk management
Market risk
Market risk is the risk of an adverse impact on earnings resulting from changes in market factors, such as foreign
exchange rates, interest rates, commodity prices 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 Markets 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 21 to the financial statements for a more detailed discussion of our market risk management policies.
The table below depicts the aggregate Value at Risk (VaR), by risk type, for traded risk for the respective year
ended 30 September:1,2
Consolidated and Parent Entity
$m
Interest rate risk
Foreign exchange risk
Equity risk
Commodity risk1
Other market risks2
Diversification effect
Net market risk
High
14.9
8.6
0.2
42.0
5.5
n/a
45.3
2019
Low Average
6.6
0.8
0.0
1.7
2.0
n/a
7.9
10.9
4.1
0.0
8.2
3.5
(12.3)
14.4
High
15.6
6.9
1.0
24.3
5.8
n/a
28.1
2018
Low Average
5.1
0.7
0.0
1.7
1.4
n/a
6.7
8.6
3.0
0.1
6.5
3.8
(8.6)
13.4
High
16.0
9.4
0.4
14.1
5.1
n/a
22.9
2017
Low Average
4.6
0.6
0.0
3.3
3.5
n/a
9.7
8.5
3.1
0.1
6.6
4.2
(8.6)
13.9
Operational risk
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and
systems or from external events. This definition includes legal and regulatory risk but excludes strategic risk.
Westpac’s operational risk definition is aligned to APS115 Capital Adequacy: Advanced Measurement Approaches
to Operational Risk (AMA). The way operational risk is managed has the potential to positively or negatively impact
our customers, our employees, our financial performance and our reputation.
The Operational Risk Management Framework outlines Westpac’s approach to the:
•
•
identification, measurement and management of operational risks that may impede Westpac’s ability to achieve
its strategic objectives and vision;
identification and escalation of operational risk incidents in order to mitigate potential financial loss, regulatory
impacts and reputational damage that may impact shareholders, the community, and employees; and
• calculation of operational risk capital.
The Operational Risk Management Framework is further supported by a number of key Group-wide operational risk
policies.
For information on our management of operational, refer to Westpac’s Corporate Governance Statement, available
at www.westpac.com.au/corpgov.
Conduct and Compliance risk
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 Conduct Framework sets out our approach to Conduct and Conduct Risk Management.
We establish an umbrella view of Conduct Risk by leveraging existing risk frameworks, in particular Operational,
Compliance, Reputation and Sustainability risk to improve customer outcomes. Conduct also underpins Our
Compass, which brings together our Vision, Values, Code of Conduct and Service Promise to provide our people
with a consistent understanding of what it means to ‘Do the Right Thing’.
Compliance risk
Compliance risk is the risk of legal or regulatory sanction, financial or reputational loss, arising from our failure to
adhere to the compliance obligations required of the Group.
For information on our management of operational and compliance risk, refer to Westpac’s Corporate Governance
Statement, available at www.westpac.com.au/corpgov.
1.
2.
Includes electricity risk.
Includes prepayment risk and credit spend risk (exposure to movements in generic credit rating brands).
2019 Westpac Group Annual Report Risk and risk management
117
Governance risk
The risk that the right information does not get to the right people or governance fora in the right format and
timeframe to empower decision making. It is driven by organisational structures and relationships including
between the Board, management, its shareholders and other stakeholders, which leads to deficient decision
making, poor accountability and ineffective structures and processes.
We have a formal risk governance structure to support our Risk Management Framework which supports having
the right people making the right decisions in the right format and in the right timeframe. This structure consists of
the Board, BRCC and management committees.
Our risk governance structure includes documented approval authorities and delegations to committees
and individuals, formal reporting structures, escalation processes and oversight for the management of risks,
transparent and regular reporting, and evidencing of discussion and decision making by committees and
individuals. We also apply standard protocols to communicate with regulators and critical stakeholders.
Risk Culture
Risk culture is the shared beliefs, attitudes, and norms that determine the way our people consider, identify,
understand, discuss and manage current and emerging risks the Group is exposed to. A strong risk culture is
essential for effective risk management as it promotes individual and organisational risk awareness, shaping
behaviours and judgements around sound risk-taking. At Westpac, all employees are responsible for strengthening
Westpac’s risk culture through fulfilling their risk-related obligations to allow Westpac to operate within risk
appetite.
A strong risk culture continuously improves risk practices, so that key learnings and experiences are integrated
into Group-wide and customer outcomes. Having a strong risk culture also assists emerging risks and risk-related
behaviours being within risk appetite and those risks that are outside of appetite being recognised, assessed,
escalated and addressed to return within appetite in a proactive and responsive way.
Westpac’s Foundations of Strong Risk Culture outline the key structural mechanisms (systems, policies and
processes) and behavioural characteristics (responsiveness, speaking up) that shape and influence our risk culture.
We use these foundations to monitor and assess Westpac’s risk culture through a suite of diagnostic approaches,
including:
• a Risk Culture Dashboard to monitor trends and identify areas for management focus, supported by a database
of risk culture and conduct metrics;
• a Risk Culture Insights Program, which enables a deep dive into a specific business area to identify key risk
culture strengths and opportunities for improvement; and
• a Risk Culture Maturity assessment methodology that enables us to determine our current risk culture maturity
relative to our target state.
Strategic risk
The risks arising from key elements of the strategic objectives and business plans. Strategic risk is the potential
for financial loss or reputational damage arising from choosing the wrong strategy, poorly executing on the right
strategy, or choosing not to pursue certain strategies.
Strategic risk may result from a lack of responsiveness to changes in the business environment within which
Westpac operates – including economic, geopolitical, regulatory, technological, environmental, social and
competitive factors. While these external factors cannot be controlled, their impact can be understood and limited
through an effective strategic risk management framework, including scenario analysis and stress testing.
Group Strategy supports the management of strategic risk through the ongoing business strategy planning cycle,
ensuring alignment across our business, financial, capital and risk planning. Key elements of this are the annual
Board Strategy Review (BSR), annual Financial Target setting, and project investment approval processes which
enable the identification, monitoring and mitigation of strategic risk throughout the Group.
Risk provides oversight of strategic risk by providing independent review of these processes and independently
monitoring and reporting on the level of risk established against our risk appetite metrics. They also consider the
impact on the current and emerging risk landscape, stress testing outcomes of our business plans through different
scenarios and our risk infrastructure.
2019 Westpac Group Annual Report12341234 118
Risk and risk management
Capital Adequacy
The risk that the firm has an insufficient level or composition of capital to support its normal business activities
and to meet its regulatory capital requirements under normal operating environments or stressed conditions
(both actual and as defined for internal planning or regulatory testing purposes). This includes the risk from the
Westpac’s pension plans.
Our approach to capital management seeks to ensure that it is adequately Capitalised as an ADI.
Westpac evaluates its approach to Capital management through an Internal Capital Adequacy Assessment Process
(ICAAP), the key features of which include:
•
the development of a capital management strategy, including consideration of regulatory minimums, capital
buffers and contingency plans;
• consideration of both economic and regulatory capital requirements;
• a stress testing framework that challenges the capital measures, coverage and requirements including the
impact of adverse economic scenarios; and
• consideration of the perspectives of external stakeholders including rating agencies and equity and debt
investors.
Cyber risk
The potential for loss or harm to the business and stakeholders related to the use of technology.
Our cyber risk management approach focuses on having an ‘end to end’ view of the Westpac Group Cyber
ecosystem and whether policies, processes, systems and structures support the management of cyber risk. It is
based on the Operational Risk Management Framework (ORMF) and Risk Management Strategy (RMS) across the
Three Lines of Defence, and benchmarked against cyber risk management approaches considered by Australian
and international regulations, international frameworks, current and emerging approaches within financial services,
consulting firms and insurance.
Reputation risk
Reputation risk is the risk that an action, inaction, transaction, investment or event will reduce trust in Westpac’s
integrity and competence by clients, counterparties, investors, regulators, employees or the public.
Reputation risk arises where there are differences between these stakeholders’ current and emerging perceptions,
beliefs and expectations relative to our current and planned activities, performance and behaviours.
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 2019.
Sustainability risk
The risk of reputation 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 Board-approved Sustainability Risk Management Framework (Framework) that is
supported by a suite of key policies and position statements. These include Our Principles for Doing Business,
Responsible Investment Position Statement, Environmental, Social and Governance (ESG) Credit Risk Policy,
Climate Change Position Statement and 2020 Action Plan, Human Rights Position Statement and 2020 Action
Plan, sensitive sector position statements and Responsible Sourcing Code of Conduct, many of which are publicly
available. The Sustainability Risk Management Framework was reviewed and updated in 2019.
Westpac is also a signatory to several voluntary principles-based frameworks that guide the integration of ESG-
related issues to banking, lending and investment analysis. These include the Equator Principles, the United Nations
Environment Programme Finance Initiative’s Principles for Responsible Banking, the Principles for Responsible
Investment, and the Task Force on Climate-related Financial Disclosures (TCFD).
Climate change risk
Within the Sustainability Risk Management Framework climate change-related risks are managed by the Group
in the same way as other transformational issues facing the economy. The Group examines the policy, regulatory,
technology and market changes related to climate change (‘transition risks’), and the impacts of changes in climate
patterns and extreme weather events (‘physical risks’). The Group seeks to understand the potential for these
changes to impact its business, in particular the possible impact on credit risk, regulatory and reporting obligations,
and its reputation.
Through its Climate Change Position Statement and 2020 Action Plan (CCPS), Westpac has an enhanced approach
to lending to emissions-intensive sectors, supporting customers that are in or reliant on these sectors and who
assess the financial implications of climate change on their business, including how their strategies are likely to
perform under various forward-looking scenarios, and demonstrate a rigorous approach to governance, strategy
setting, risk management and reporting.
2019 Westpac Group Annual Report Risk and risk management
119
Westpac uses scenario analysis to inform its assessment of climate-related risks over short, medium and long-term
horizons. The findings from scenario analysis conducted in 2016 were reflected in Westpac’s current CCPS which
outlined enhanced lending standards for the thermal coal mining and energy sectors. These lending parameters
have been included in the Group’s risk framework and, where appropriate, are applied at the portfolio, customer
and transaction level.
In 2019 the Group undertook scenario analysis to assess the resilience of Westpac’s Australian Business and
Institutional lending1 to transition risks brought about by rapid decarbonisation of the Australian economy under a
1.5-degree scenario.
Westpac also continued to assess:
• The resilience of its Business and Institutional lending to transition risks under a 2-degree scenario (based on
scenarios from work undertaken in 2018); and
• The potential impact of climate-related physical risks on the Australian mortgage portfolio2 arising from global
warming scenarios of both 2 and 4-degrees.
The approach and results are summarised below. Further detail can be found in the Westpac Sustainability
Performance Report.
Scenario analysis - transition risk
Approach3
To assess the possible implications of climate-related transition risks, the Group used scenario analysis to study
how the Australian economy, electricity market and other industry sectors might perform when emissions are
constrained in line with 2-degree and 1.5-degree transition pathways.
• The emission constraints used in the modelling were informed by the International Energy Agency’s Sustainable
Development Scenario, the International Renewable Energy Agency’s Renewable Energy Roadmap and the
Intergovernmental Panel on Climate Change (IPCC) Special Report on Global Warming of 1.5 Degrees;
• Each sector’s performance under the two pathways was analysed and categorised according to risk profile;
• Sectors whose medium (2030) and long-term (2050) performance under a scenario deviated significantly4
from average GDP growth, were classified as ‘higher risk’; and
• These results were applied to the Australian Business and Institutional lending portfolio to assess the extent of
current exposure to these higher risk sectors.
Results
•
1.5-degrees: Westpac’s current exposure to sectors that by 2030 may face growth constraints under a
1.5-degree scenario is approximately 2.5% of its Business and Institutional lending; and
• 2-degrees: Westpac’s current exposure to sectors that by 2030 may face growth constraints under a 2-degree
scenario is approximately 0.9% of its Business and Institutional lending.
Westpac continues to assess the resilience of its Business and Institutional lending portfolio to transition risks.
Lending to higher risk sectors may be subject to enhanced due diligence or restrictions under the parameters laid
out in the CCPS. The Group reviews its CCPS every three years.
Scenario analysis - physical risk
Approach
• To assess the possible implications of climate-related physical risks, the Group studied the potential impact of
natural perils on its Australian mortgage portfolio under a 4-degree scenario:
• The selected perils were inundation, soil contraction, floods, wind and cyclones, and bushfires;
• The core scenario is based on the IPCC’s RCP8.5 scenario and a series of conservative assumptions about the
vulnerability of Australian homes to natural perils;
• Changes under the scenario in average annual costs as a result of climate change were estimated to 2050;
• A set of ‘higher risk’ postcodes were defined where the net present value of changes in these costs was greater
than an interest rate increase above a defined threshold - consistent with our typical stress testing parameters; and
• We applied these results to the Australian mortgage portfolio to assess the extent of the Group’s current
exposure to these postcodes.
1. Excludes retail, sovereign, and bank exposures.
2. Excludes RAMS.
3. Updated transition risk methodology applied from 1H19.
4. Greater than one standard deviation.
2019 Westpac Group Annual Report12341234 120
Risk and risk management
Results
• 4-degrees: Approximately 1.6% of the Australian mortgage portfolio is exposed to postcodes that may
experience higher physical risk at 2050.
Westpac continues to assess the resilience of its Australian mortgage portfolio to physical risks. The Group
understands the importance of both climate mitigation and adaptation efforts, including government planning
measures, and the benefits of climate-resilient building characteristics to reduce property damage and impacts
on customers and communities. Along with the Group’s broader commitment to the Paris Agreement, Westpac
expects to continue to help individual customers respond to climate change, and to continue to advocate for more
research and investment into helping communities adapt and become resilient to climate-related impacts.
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 32 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 2019, the carrying value of assets pledged for the covered bond programs for the Group was
$44.7 billion (2018: $43.1 billion).
Refer to Note 24 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 2019, our assets securitised through a combination of privately or publicly placed issuances to
a combination of domestic and offshore investors were $8.2 billion (2018: $7.6 billion).
Under AAS, all of the structured entities involved in our loan securitisation programs are consolidated by the Group.
Refer to Note 24 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 or Investment securities (2019)/available-for-sale securities (2018). The liabilities
arising from these financing activities are generally included in debt issues or other financial liabilities. 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 34 to the financial statements for details of our superannuation plans and Note 27 for details of our
contingent liabilities, contingent assets and credit commitments.
2019 Westpac Group Annual Report Westpac's approach to
sustainability
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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.
As one of Australia’s largest companies, Westpac Group plays a role in helping to create positive social, economic
and environmental impact, for the benefit of all.
Our approach to sustainability is embedded within the Group’s business activities and aligns with the priorities set
out in the Group’s strategy. We are aligned with the Paris Climate Agreement and contribute to the United Nations
Sustainable Development Goals.
Guiding our approach
Accountability for the Group’s Sustainability Strategy starts with the Board, which 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, meets at least four times a year and 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 as needed.
Our approach is aligned to the widely accepted global standard for corporate responsibility and sustainable
development, the AA1000 AccountAbility Principles Standard (2008), and its three key principles of Inclusivity,
Materiality and Responsiveness.
Westpac’s sustainability performance is regularly benchmarked by a number of third-party ratings and awards,
including the Dow Jones Sustainability Indices (DJSI), where the Group has been recognised as a global leader
as a member of DJSI World for 18 years in a row. In 2019, Westpac ranked number one bank in Australia and ninth
globally.
Frameworks and policies
Westpac responds to enduring and emerging material topics through frameworks and policies that are
complementary to its business strategy and form part of the Group’s approach to governance and risk
management. Collectively, they help to guide decisions, manage risk and drive action. Key frameworks and policies
include:
• Principles for Doing Business, which set out the behaviours the Group expects to be judged against in
pursuit of its 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;
• Sustainability Risk Management Framework, which sets out how the Group manages sustainability risks
in operations, lending and investment decisions, and the supply chain, providing a guide for 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 in day-to-day operations, including
our Code of Conduct, divisional ESG policies, and position statements on sensitive sectors and issues including
climate change and human rights.
2019 Westpac Group Annual Report12341234 122
Westpac's approach to sustainability
Material sustainability topics
Informed by engagement with internal and external stakeholders, including the Group’s Stakeholder Advisory
Council, review of policies, industry trends, peer analysis and regulatory and non-regulatory requirements,
Westpac’s materiality process is aligned with the Global Reporting Initiative Standards (2016) and the AA1000
AccountAbility Principles Standard (2008). Prioritisation of material topics is subject to annual independent
external assurance. Westpac’s top ten material topics are outlined below.
Material sustainability topic
Conduct and culture Instances of poor conduct have
eroded public trust in the financial
services sector, driving an increased
focus on corporate culture and
improved outcomes for customers
Changing regulatory
landscape
Customer
satisfaction and
experience
Customers’ needs are becoming
more complex, and at the same time
their expectations around how they
want to engage with us are evolving
Digital product
and service
transformation
Governance and risk Clear governance practices, active
management of risk, commitment to
compliance, and fair remuneration in
our operations, supplier and partner
relationships are critical to the
longevity and financial wellbeing of
the Group
Maintaining customer confidentiality
and the security of our systems is
paramount to maintaining trust and
confidence
Information security
and data privacy
Customer
vulnerability and
hardship
Executive
remuneration
Financial and
economic
performance
Maintaining a healthy financial
performance and strong balance
sheet is vital to the Group’s long-
term sustainability
Climate change risks
and opportunities
Supervision and regulation in
jurisdictions that the Group operates
in continue to evolve, creating
uncertainty in the operating
environment
Digitisation offers opportunities to
improve efficiency and deliver new
and better customer experiences
when, how and where customers
choose to engage with us
Our ability to support customers
in times of financial hardship and
anticipating times when they can
become vulnerable allows us to help
when it matters most
Appropriate remuneration structures
align executive remuneration and
accountability with stakeholder
interests over the long term, and
play an important role in effective
corporate governance
As a major financial institution,
we have an important role to
play in managing the risks and
opportunities of climate change,
and supporting collaborative efforts
to limit global warming, while also
taking steps to help the economy
and communities become more
resilient to the expected effects
For further detail, please see our Annual Review and Sustainability Report and Sustainability Performance Report
at www.westpac.com.au/sustainability.
2019 Westpac Group Annual Report Westpac's approach to sustainability
123
Sustainability goals
Westpac Group’s 2018-2020 Sustainability Strategy outlines the Group’s commitment to building a sustainable
future. This includes taking action in the areas where the Group can have the greatest impact and create
sustainable, long-term value for customers, communities and the nation by:
• helping people make better financial decisions;
• helping people by being there when it matters most to them; and
• helping people create a prosperous nation.
Underpinning these three priority areas is a commitment to fostering a culture of care and doing the right
thing and continuing to lead on the sustainability fundamentals – policies, action plans, frameworks and metrics
reporting. We continue to progress on our climate change, human rights and reconciliation action plans.
Westpac is committed to regular reporting to enable a comparison of performance over time. The table below
summarises progress against the goals set out in the Group’s Sustainability Strategy with a focus on activity in the
past 12 months.
Performance against sustainability goals
Priority areas
Goals
2019 performance
Help more people
better understand
their financial
position, improving
their financial
confidence
Helping
people
make better
financial
decisions
Help people recover
from financial
hardship
Help people lift
out of a difficult
time and recover
stronger
Helping
people by
being there
when it
matters most
to them
• Continued to offer financial health check programs for superannuation members,
including the digital Wealth Review tool and My Wellbeing online portal;
• Delivered a range of financial literacy programs to individuals, businesses, not-
for-profit organisations and community groups through Westpac’s Davidson
Institute in Australia and the Managing Your Money program in New Zealand; and
• Delivered financial capability communications for different demographic
segments including for young Australians, in partnership with 26 universities
and TAFE NSW (900,000 interactions); women, via Ruby Connection (724,000
interactions); and older Australians, via Starts at 60 (over 3 million interactions).
• Helped customers experiencing financial hardship, issuing over 52,000 financial
assistance packages during the year.
• Extended the $100 million drought relief fund launched last year to support
Australian farmers;
• Committed $50 million to a flood relief fund dedicated to helping farmers in
North Queensland;
• Delivered a portable ‘Bank in a Box’ branch to Townsville to help those affected
by floods;
• Provided over 500 relief packages for customers impacted by natural disasters
across Australia;
• Donated $150,000 to the Salvation Army and a further $100,000 to the
Foundation for Rural & Regional Renewal (FRRR) to support disaster recovery
and programs to build local community resilience;
• Joined the Government-led Drought Finance Taskforce to both share information
with the government on the impact of drought on our customers and advise on
measures to help alleviate the impact; and
• Continued work with the Australian Business Roundtable for Disaster Resilience
and Safer Communities to define approaches to assist government, business and
communities mitigate and respond to natural disasters.
Helping our
most vulnerable
customers
• Published the 2020 Customer Vulnerability Action Plan outlining the Group’s
principles for engaging with customers experiencing vulnerability, including
providing guidance, help and support for customers experiencing domestic and
family violence and financial abuse;
• Assisted more than 900 customers since launching the Priority Assist 1800
telephone line to support customers experiencing domestic and family violence
and financial abuse;
• Established specialist teams to support bankers with complex customer queries;
• Established a dedicated 24/7 Scams Assist team to protect customers who may
be victims of fraud or scams;
• Launched a series of Life Moments tools and resources to assist customers and
their families going through challenging circumstances such as the loss of a
loved one, divorce or separation; and
• Supported over 3,000 Indigenous Australians through a dedicated customer
care team established this year to support remote Indigenous communities.
2019 Westpac Group Annual Report12341234 124
Westpac's approach to sustainability
Priority areas
Goals
2019 performance
Build the workforce
of the future
•
Identified 10 core capabilities to enable our people to prepare for the future of
work and built curricula to support their growth in these areas; and
• Updated our Science, Technology, Engineering and Mathematics (STEM)
Commitment, reflecting a wide range of interventions and initiatives to help build
a STEM-confident nation that is diverse and future ready.
Invest and back the
people and ideas
shaping Australia
• Awarded $4.3 million in educational scholarships, through Westpac Scholars
Trust, to the next 102 Westpac Scholars, bringing the total cohort to 416;
• Helped to create over 700 jobs1 for vulnerable Australians through Westpac
Foundation job creation grants to social enterprises;
• Westpac Foundation awarded 100 Community Grants to the total of $1 million, to
support approximately 12,000 people;
• Supported the establishment of 359 businesses through our Many Rivers
partnership; the partnership has created jobs1 for more than 2,300 people, with
829 identifying as Indigenous;
• Maintained a portfolio of direct investment in nine early stage companies; and
• Maintained our commitment to Reinventure - $150 million across three funds,
supporting Reinventure’s investment in 27 early stage companies.
•
Increased lending to climate change solutions, taking total committed exposure
to $9.3 billion, progressing towards our 2020 target of $10 billion;
• Facilitated $3.6 billion in funding for climate change solutions, exceeding our
2020 target of $3 billion; and
• Analysed climate change risks under 1.5, 2 and 4-degree scenarios.
Helping
people create
a prosperous
nation
Back the growth
of climate change
solutions
Back the growth
of housing
affordability
solutions
• Undertook research with Indigenous consultancy firm Origin Communications
to consider how Westpac can support more Indigenous Australians to own their
own home – with insights informing further exploration, such as intergenerational
home ownership;
• Westpac New Zealand launched a dedicated home loan solution - ‘Westpac
Prebuilt’ - offering a simple and streamlined process to help customers into
prefabricated homes, the first bank in New Zealand to do so; and
• Extended our support to Head Start Homes (HSH) – a charity that helps people
move out of social housing into their own homes.
Bring together
partners and
harness the Group
capacity to tackle
pressing social
issues that matter
most to the nation
• A founding bank and signatory to the Principles for Responsible Banking,
developed as an initiative of the United Nations Environment Programme
Finance Initiative (UNEP FI);
• Joined other Australian banks, insurers, super funds, investors and industry
groups to form the Australian Sustainable Finance Initiative; and
• Joined an Expert Advisory Council, through WEConnect International, focusing
on best-in-class approaches to supply chain, supplier diversity and access to
capital for women-owned businesses.
1. All results for the year ended 30 September except jobs created through the Westpac Foundation job creation grants to social
enterprises and Many Rivers job creation which are for the year ended June. Refer to www.westpac.com.au/sustainability for glossary of
terms and metrics definitions.
2019 Westpac Group Annual Report 125
Westpac's approach to sustainability
Priority areas
Goals
2019 performance
A culture of doing
the right thing
• Continued programs to rebuild trust, strengthen governance and deliver more
consistent customer outcomes, including our Royal Commission response plan
and our Culture, Governance, Accountability Self-Assessment action plan;
• Maintained ongoing Navigate training to reinforce Our Compass – a framework
which brings together our vision, service promise, values and Code of Conduct –
with smaller sessions facilitated by team leaders to continue the conversation
locally; and
• Continued to assess employee performance through the ‘Motivate’ framework –
a behaviours-first approach to people management.
Promote an
inclusive society,
where our
workforce reflects
our customers
• Maintained 50% women in leadership1 roles;
• 36% women on the Westpac Board;
•
•
161 new-to-bank Aboriginal or Torres Strait Islander hires;
Introduced a leadership shadowing program for culturally and linguistically
diverse employees to build exposure to new networks and career pathways; and
A culture
that is caring,
inclusive and
innovative
• Updated leave entitlements to include 20 days paid leave for employees
undergoing a gender transition, three days Sorry Business leave for Aboriginal
and Torres Strait Islander employees, increased paid leave for employees
experiencing domestic and family violence to 20 days, and increased paid
parental leave for support carers to three weeks.
Increase channels
where customers
can provide
feedback
• Established a new complaints strategy centred on customer connection, service
excellence, priority support for vulnerable customers and root cause and
complaints prevention;
• Embedded a Customer Outcome Committee to work through complex cases;
• Reduced non-external dispute resolution average time to close for complaints
from 13 days to seven days;
• Commenced tracking customer satisfaction of the complaint resolution
experience;
• Launched our ‘FAIRGO’ decision principles that set out our approach to
resolving complaints;
• Launched the “Spot it, Log it, Own it” internal campaign, promoting an improved
culture of complaints handling; and
• 97% of Australia-based employees completed the “Why Complaints Matter”
training.
1. Women in Leadership refers to the proportion of women (permanent and maximum term) in leadership roles across the Group. It
includes the CEO, Group Executives, General Managers, senior leaders with significant influence on business outcomes (direct reports to
General Managers and their direct reports) large (3+) team people leaders three levels below General Manager, and Bank and Assistant
Bank Managers.
2019 Westpac Group Annual Report12341234 126
Westpac's approach to sustainability
Priority areas
Goals
2019 performance
Employees
•
Implemented the recommendations of the Sedgwick Review for employees
effective from 1 October 2018, two years ahead of schedule;
Continuing to
lead on the
Sustainability
Fundamentals
• Embedded a Group Consequence Management Framework which sets out the
standards expected of our employees and ensures greater consistency and
transparency in the management of employee conduct matters;
• Achieved total recordable injury frequency rate (TRIFR) of 3.1, a 20% reduction
•
from 2018, and lost time injury frequency rate (LTIFR) of 0.4;
Improved Employee Assistance Program utilisation from 9.0% in 2018 to 10.2%;
and
• Continued commitment to supporting workplace wellbeing, appointing a Chief
Mental Health Officer to drive a range of activities focused on improving the
psychological health and safety of our workforce.
Human rights
•
Identified key categories of products and services that are supplied to the Group
that have a higher likelihood of modern slavery risk;
• Commenced work to meet the requirements of the Australian Modern Slavery
Act (2018) ahead of our 2021 reporting obligations;
• Became the first bank to be accredited as a Living Wage employer in New
Zealand; and
• The only Australian bank to contribute to the Liechtenstein Initiative for a
Financial Sector Commission on Modern Slavery and Human Trafficking - a
public-private partnership that aims to put the financial sector at the heart of
global efforts to end modern slavery and human trafficking - with the outcomes
now published the Finance Against Slavery and Trafficking Blueprint.
Sustainable lending
and investment
• Launched the world’s first Green Tailored Deposit to be certified by
internationally recognised Climate Bonds Initiative (CBI);
• Delivered several sustainability-linked loans designed to incentivise and reward
customers for meeting pre-determined sustainability targets;
• Undertook an extensive review of our Sustainability Risk Management
Framework focusing on improvements to risk identification, governance and
reporting;
• Updated our position statement on Financing Agribusiness and continued our
work to embed the management of key climate change and human rights-
related risks across our business; and
• Updated our BT climate-related financial disclosures (superannuation and
investments), in line with the recommendations of the Task Force on Climate-
related Financial Disclosures (TCFD).
Environment1
• Maintained carbon neutral status;
• Achieved a 5.6% reduction in greenhouse gas emissions (‘emissions’) compared
to 2018 and 17.9% compared to our 2016 baseline;
• Achieved a 15.7% reduction in Group paper consumption compared to 2018 and
45.3% reduction against our 2016 baseline;
• Achieved a 3.9% reduction in water consumption in our Australian workplaces2
compared to 2018 and 23.7% reduction against our 2016 baseline;
• Achieved a 75% diversion of waste from landfill in our main Australian offices3;
and
• Committed to source 100% of global electricity consumption through renewable
energy sources by 2025 and joined RE100.
Responsible Sourcing• Sourced $18.6 million from diverse suppliers, including $3.6 million from
Indigenous suppliers; and
Community and
social impact
• Joined ‘Raising the Bar’ as one of 16 inaugural signatories – a joint initiative of the
Business Council of Australia and Indigenous business advocate Supply Nation,
and committed to spend $21 million with Indigenous businesses by 2024.
• Contributed over $130 million to community investment excluding commercial
•
sponsorships across the Group; and
13% employees participated in our volunteering programs, with more than 500
Westpac employees contributing more than 24,000 hours of skilled volunteering
support to community partners and social enterprises to build their financial
sustainability and social impact.
1. All results for the year ended 30 September except environmental footprint which is for the year ended 30 June. Refer to www.westpac.
com.au/su/sustainability for glossary of terms and metric definitions.
2. Australian workplaces include commercial offices, retail branches, data centres and subsidiaries sites.
3. Our main Australian offices are Sydney based Westpac buildings located at Kent Street, Barangaroo and Kogarah.
2019 Westpac Group Annual Report Westpac's approach to sustainability
127
Climate-related financial disclosures
The Group has long recognised that climate change is one of the most significant issues that will impact the
long-term prosperity of our economy and way of life. Westpac was the first Australian bank to recognise the
importance of limiting global warming to less than two degrees and that to do this, global emissions need to reach
net zero in the second half of this century.
Westpac continues to integrate the consideration of climate-related risks and opportunities into its business
operations. This includes alignment with the recommendations of the Task Force on Climate-related Financial
Disclosures (TCFD), which the Group has publicly committed to support. Westpac Group’s performance against
the recommendations of the TCFD is summarised below.
Governance
The Board has oversight of Westpac Group’s response to climate change. The Group’s third Climate Change
Position Statement and 2020 Action Plan (CCPS) was approved by the Executive Team and the Board in
2017. It covers the management of the Group’s climate change risks and opportunities, including lending to
climate solutions, the Group’s approach to financing emissions-intensive sectors, commitment to reporting and
transparency, direct carbon footprint management, and incorporation of climate change considerations into the
Group’s Sustainability Risk Management Framework1. The Board Risk and Compliance Committee reviews and
approves updates to the Sustainability Risk Management Framework (which includes climate change risks) every
two years.
Management of climate change is delegated to the Executive Team. The Sustainability Council (Council), formed
in 2008 and sponsored by the Group Executive, Customer and Corporate Relations, brings together senior leaders
from across the Group with the explicit responsibility for managing Westpac’s sustainability agenda, including
climate change. The Council meets at least quarterly and has climate change as a fixed agenda item. The Council
reports to the Executive Team and Board through twice-yearly updates.
The Council has oversight of committees established to oversee aspects of the Group’s CCPS. This includes:
• The Climate Change Solutions Committee which meets at least quarterly and oversees initiatives to achieve
Westpac’s targets for lending to and facilitating climate change solutions;
• The Climate Change Risk Committee which oversees initiatives to address credit, regulatory and legal risks of
climate change, including scenario analysis. Reports on climate change-related risks are provided to the Council
on a quarterly basis; and
• The Environment Management Committee which oversees strategies and initiatives to reduce the Group’s direct
environmental footprint, particularly targets around energy and emissions, and reports to the Council on a
quarterly basis.
In addition, the Sustainable Bonds Committee provides risk governance and oversight of Climate Bonds and other
sustainable funding programs to ensure compliance with relevant standards. It reports to the Treasury Risk and
Compliance Committee.
Strategy
The Group’s 2018-2020 Sustainability Strategy and CCPS describe Westpac’s climate change strategy. The strategy
is underpinned by principles which recognise that:
• A transition to a net zero emissions economy is required;
• Economic growth and emissions reductions are complementary goals;
• Addressing climate change creates financial opportunities;
• Climate-related risk is a financial risk; and
• Transparency and disclosure matters.
To address climate change risk and opportunities the CCPS identifies five focus areas where the Group is expected
to direct its attention over the short, medium and long term2:
• Provide finance to back climate change solutions;
• Support businesses that manage their climate-related risks;
• Help individual customers respond to climate change;
•
Improve and disclose our climate change performance; and
• Advocate for policies that stimulate investment in climate change solutions.
Westpac uses scenario analysis to guide its climate change strategy and to analyse the implications of
climate-related factors to its business. Westpac expects to be well positioned to capitalise on opportunities arising
out of growth in sectors benefiting from a transition to a low carbon economy over the short and medium term.
The Group has lending targets to climate change solutions of $10 billion by 2020 and $25 billion by 2030.
1. Westpac’s Climate Change Position Statement and 2020 Action Plan does not apply to investments made where a Westpac Group
entity is acting as a trustee (for example Responsible Super Entity licensee or Responsible Entity) or insurer. The governance and
strategies for ESG risk in these portfolios (including climate change) are the responsibility of the relevant board and management of
these entities. For more information visit the BT website at www.bt.com.au/sustainability.
2. See: Westpac Group’s Climate Change Position Statement and 2020 Action Plan.
2019 Westpac Group Annual Report12341234 128
Westpac's approach to sustainability
Risk management and scenario analysis
Further details about Westpac’s approach to climate related risks and its use of scenario analysis to analyse the
implications of climate-related factors to its business are set out in the ‘Risk and risk management’ section.
Metrics and targets
Metrics
Support for climate solutions
• Total committed exposure (TCE) to climate solutions
• Facilitation of climate solutions
Energy generation
• Emission intensity of electricity generation portfolio
• Energy mix of electricity generation exposure (WIB only)
Coal mining and coal exposure
• Lending to all mining (TCE)
• Lending to coal mining (metallurgical and thermal) (TCE)
• Thermal coal mining portfolio quality thresholds
Direct footprint
• Total Scope 1 and 2 emissions (tCO2e)
• Total Scope 3 emissions (tCO2e)
• Carbon neutral operations
• Commitment to 100% renewable energy
Climate change portfolio resilience
• Transition risk – 1.5-degree scenario
• Transition risk – 2-degree scenario
• Physical risk – 4-degree scenario
2019 performance
• $9.3 billion vs 2020 target - $10 billion
• $3.6 billion climate-related bonds vs 2020 target -
$3 billion
• 0.26 (tCO2e/MWh) vs 2020 target 0.30 (tCO2e/MWh)
• 75% renewable versus 25% non-renewables.
• $10.5 billion mining exposure representing 1% of Group
TCE
• $0.8 billion lending to coal mining representing 0.07% of
Group TCE
• Coal quality
– Existing projects > 5,700 kCal/kg – Compliant
– New projects > 6,300 kCal/Kg - Compliant
•
121,168 tCO2e1 - an annual reduction of 5.6% towards 2020
target of 9% (2016 baseline)
• 62,242 tCO2e2
• Carbon neutrality maintained
• Committed to source 100% global electricity
consumption through renewable energy sources by 2025
• Approximately 2.5% of current business lending exposed
to sectors which by 2030 may experience higher risk in a
transition to a 1.5-degree economy
• Approximately 0.9% of current business lending exposed
to sectors which by 2030 may experience higher risk in a
transition to a 2-degree economy
• Approximately 1.6% of current Australian mortgage
portfolio in postcodes which by 2050 may be exposed to
higher physical risks under a 4-degrees scenario
Further Information
Further details on Westpac’s climate change reporting can be found across the Group’s annual reporting suite:
TCFD recommendation
Governance
Strategy
Risk Management including scenario analysis
Metrics and Targets
Location
• Annual Report Climate-related financial disclosures
• Sustainability Performance Report – Climate Change
• Climate Change Position Statement and 2020 Action
Plan
• Annual Report – Climate-related financial disclosures
• Sustainability Performance Report – Climate Change
• Climate Change Position Statement and 2020 Action
Plan
• Annual Report – Risk and risk management
• Sustainability Performance Report – Climate Change
• Climate Change Position Statement and 2020 Action
Plan
• Annual Report - Climate-related financial disclosures
Sustainability Performance Report – Climate Change;
Performance Metrics
• ESG Dashboard – Westpac website
1. Total Scope 1 and 2 emissions are for the year ended 30 June. Refer to www.westpac.com.au/sustainability for glossary of terms and
metric definitions.
2. Total Scope 3 emissions are for the year ended 30 June. Refer to www.westpac.com.au/sustainability for glossary of terms and metric
definitions.
2019 Westpac Group Annual Report Westpac's approach to sustainability
129
Westpac’s commitment to human rights
Westpac recognises that respecting and advancing human rights helps us to achieve our vision to help our
customers, communities and employees to prosper and grow. Westpac is a signatory of the United Nations Global
Compact and supporter of the UN’s ‘Protect, Respect, Remedy’ framework. The Group’s implementation of the
framework is guided by the UN Guiding Principles on Business and Human Rights (UNGP).
The Group’s Human Rights Position Statement and 2020 Action Plan (Statement) outlines Westpac’s approach
to human rights-related commitments, principles, focus, approach, governance and related policies, statements,
frameworks and action plans; considering its role as an employer, a customer services provider, a purchaser of
goods and services, a financial services provider, a supporter of communities and a responsible business.
Governance and oversight
The Board has oversight of Westpac Group’s approach to human rights. The Statement was approved by the
Group Executive and the Board in 2017. Management of human rights is delegated to Group Executives and the
Sustainability Council brings together senior leaders from across the Group with explicit responsibility for managing
Westpac’s sustainability agenda including human rights. The Council meets at least quarterly and has human rights as
a fixed agenda item. The Council reports to the Board through twice-yearly updates. The Council has oversight of the
Human Rights Working Group which meets quarterly to implement the consideration of human rights into day-to-day
decision-making with a focus on the Group’s salient human rights issues.
Salient human rights issues
The Group has determined the following salient human rights issues – the human rights at risk of the most severe
negative impact through a company’s activities and business relations.
Salient issue
Stakeholders at risk of being impacted
Potential impacts
Managing and protecting the
privacy rights of individuals
Retail and business customers, employees,
contractors, suppliers
Abuse, loss and breach of personal data and
privacy
Customer vulnerability
Customers and wider customer value chain
Economic and social disadvantage of
customers
Individual exclusion and
discrimination in employment
Current and prospective employees and
contractors
Inability to full and equal participation in
employment
Unfair wages and conditions for
workers in the value chain
Contractors, suppliers, third-party service
providers
Impact to an individual’s prosperity, security
and standard of living
Management of human rights issues
A range of policies and strategies outlined in the Human Rights Position Statement and 2020 Action Plan guide
Westpac’s response to human rights issues. Westpac’s approach to engagement with stakeholders is set out in
the Group’s Stakeholder Engagement Framework and aligned to the AA1000 Stakeholder Engagement Standard.
The Group has a range of mechanisms in place to enable effective engagement with stakeholders such as its
Whistleblower hotline, Office of the Customer Advocate, feedback and complaints webpages and phonelines.
Where appropriate these mechanisms are also equipped to remediate human rights issues.
This year the Group engaged with stakeholders in several ways to manage and advance its approach to human
rights issues, including:
• The Group’s Stakeholder Advisory Council on the role of banks and modern slavery;
• Customers and the management of human rights risks arising in different industry sectors;
• Suppliers and the integration of human rights risk assessments in contracts;
• Civil society and evolving expectations on corporate approaches to human rights risk management;
• Specialist advisors and best practice in human rights risk management for companies; and
• Peers, government and industry groups to support collective efforts to address modern slavery.
Australian Modern Slavery Act 2018
With the introduction of the Modern Slavery Act in Australia, Westpac has begun work to embed its requirements
into its procurement practices.
Westpac will publish its first Australian Slavery and Human Trafficking Statement in 2021, reporting on its activities
for the FY20 period. The Group reports further detail on its human rights performance in its Sustainability
Performance Report. It also produces a slavery and human trafficking statement in line with its obligations under
the United Kingdom’s Modern Slavery Act.
2019 Westpac Group Annual Report12341234 130
Westpac's approach to sustainability
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 Sustainability
Performance Report.
Customer
Total customers (millions)2
Digitally active customers (millions)3
Branches4
Branches with 24/7 capability (%)5
ATMs
Smart ATMs (%)6
Change in consumer complaints (%) - Australia7
Change in consumer complaints (%) - NZ
Employees
2019
2018
2017
2016
2015
14.2
5.8
1,143
35
14.2
5.6
1,204
33
13.9
5.3
1,251
29
13.4
4.9
1,310
27
13.2
4.9
1,429
22
2,847
3,222
3,665
3,757
3,850
54
94
2
47
12
(16)
44
(18)
(21)
37
(31)
(7)
31
(28)
(18)
Total employees (full-time equivalent)8
33,288
35,029
35,096
35,580
35,484
Employee voluntary attrition (%)9
New starter retention (%)10
Employee Commitment Index (%)11
Lost Time Injury Frequency Rate (LTIFR)12
Women as percentage of the total workforce (%)
Women in leadership (%)13
Environment
Total Scope 1 and 2 emissions - (tonnes CO2-e)14
Total Scope 3 emissions - (tonnes CO2-e)15
Paper consumption - Aust and NZ (tonnes)16
Sustainable lending and investment
10.3
84.5
71
0.4
58
50
10.0
84.1
73
0.4
57
50
9.6
84.7
76
0.6
58
50
10.6
85.5
-
0.8
58
48
10.6
85.3
-
0.8
59
46
121,168
128,339
134,237
156,701
1175,806
62,242
65,783
68,830
63,347
68,484
1,812
2,161
2,706
3,304
4,857
Climate change solutions attributable financing - Aust and NZ ($m)
9,263
9,113
6,979
6,193
6,054
Proportion of electricity generation financing in renewables including
hydro - Aust and NZ (%)17
75
71
65
59
61
Electricity generation portfolio emissions intensity
(tonnes CO2-e/MWh)18
Finance assessed under the Equator Principles - Group ($m)19
Social impact
Community investment excluding commercial sponsorship ($m)20
Community investment as a percentage of pre-tax profits - Group (%)20
Community investment as a percentage of pre-tax operating profit
(cash earnings basis)20
Financial education (participants)21
Supply chain
0.26
454
130
1.33
0.28
773
128
1.09
0.36
891
164
1.42
0.38
617
148
1.39
0.38
1,065
149
1.30
1.32
1.10
1.41
1.32
1.33
619,995
133,844
112,263
59,596
65,538
Number of suppliers assessed against Responsible Sourcing Code of
Conduct
Spend with Indigenous Australian suppliers - Australia ($m)22
98
3.6
100
3.8
31
2.8
-
1.7
-
1.2
2019 Westpac Group Annual Report
Westpac's approach to sustainability
131
1. All data represents Group performance as at 30 September unless otherwise stated.
2. All customers with an active relationship (exclude 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.
Include six advisory centres and one community banking centre.
4.
5. 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).
6. ATMs with deposit taking functionality. Excludes old style envelope deposit machines.
7. Change in trend reflects updates to our complaints policy and standard which now requires people to log all complaints, even if they
are resolved within 5 days.
8. Full-time equivalent employees include permanent (full-time and pro-rata part-time staff) employees, and temporary (overtime,
temporary and contract staff) employees.
9. Employee voluntary attrition refers to the total voluntary separation of permanent employees over the 12 months average total
permanent headcount for the period (includes full time, part time and maximum term employees).
10. New starter retention over the 12 months rolling new starter headcount for the period (includes full time and part time permanent
employees).
11. New monthly employee survey conducted from 2017. Six month rolling average results reported 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) in leadership roles across the Group. It
includes the CEO, Group Executives, General Managers, senior leaders with significant influence on business outcomes (direct reports to
General Managers and their direct reports) large (3+) team people leaders three levels below General Manager, and Bank and Assistant
Bank Managers.
14. Scope 1 emissions are the release of greenhouse gases into the atmosphere as a direct result of the Westpac Group banking operations.
Scope 2 emissions are indirect greenhouse gas emissions from consumption of purchased electricity from the Westpacing operations.
Australian data is prepared in accordance with the NGER 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. Prior comparison periods
adjusted to reflect Group numbers.
15. Scope 3 emissions are greenhouse gases emitted as a consequence of Westpac Group 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 with
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. Prior comparison periods adjusted to reflect Group numbers.
16. Total office paper and paper products purchased (in tonnes) by Westpac Group as reported by key suppliers. Includes office copy
paper, paper products and printed materials, including direct mail and marketing documents (e.g. office stationery, marketing
brochures, customer statements) and are reported for the period 1 July to 30 June.
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. Indicator name changed from ‘Community investment ($m)’ to ‘Community investment excluding commercial sponsorships ($m)’ in
2018. 2017 figures were restated to be comparable with 2018. 2018 and 2017 figures include monetary contributions, time contributions,
management costs and in-kind contributions comprising gifts and foregone fee revenue. 2016 and prior periods were not restated, and
also include commercial sponsorships.
21. Total number of interactions by employees, customers and general public with financial education materials offered by the Westpac
Group during the year, delivered through face to face and online platforms. Uplift in 2019 number of participants driven by the inclusion
of our Life Moments and Help for your Business Education pages.
22. Annual spend with businesses that are 50% or more owned and operated by an Aboriginal or Torres Strait Islander person and certified
with a relevant member organisation. Include Tiers 1 and 2 spend with Indigenous Australians suppliers. Prior periods restated to reflect
inclusion of Tier 2 spend, first reported in 2018.
2019 Westpac Group Annual Report12341234 Other Westpac business
information
132
Other Westpac business information
Employees
The number of employees in each area of business as at 30 September:
Consumer
Business
Westpac Institutional Bank
Westpac New Zealand
Group Businesses
Total Group1
2019
2018
2017
10,510
5,081
2,434
4,140
11,123
11,015
10,855
5,103
2,646
4,182
12,083
5,258
2,725
4,328
11,930
33,288
35,029
35,096
2019 v 2018
FTE decreased 1,741 or 5% compared to 2018. Delivery of productivity initiatives including organisation
simplification and channel optimisation, the exit of the Advice business more than offset additional resources
required for regulatory, compliance and customer remediation related activities.
Property
We occupy premises primarily in Australia and New Zealand including 1,143 branches (2018: 1,204) as at
30 September 2019. As at 30 September 2019, we owned approximately 0.7% (2018: 1.5%) of the premises we
occupied in Australia and none (2018: none) in New Zealand. The remainder of premises are held under commercial
lease with terms generally averaging three to five years. As at 30 September 2019, the carrying value of our directly
owned premises and sites was $78 million (2018: $89 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 levels
24-32 until 2024. This site is currently undergoing a refurbishment program and will have the capacity for over
6,000 staff in an agile environment upon its completion.
Westpac also occupies levels 1-28 of T2 in International Towers Sydney with a lease running until 2030. This site has
a capacity for over 6,000 personnel in an agile environment.
We continue a corporate presence in Kogarah, in the Sydney metro area, which is a key corporate office of
St.George, with a 2,400 seat capacity. A lease commitment at this site extends to 2034 with options to extend.
In Melbourne, Westpac has occupied the majority of 150 Collins Street since October 2015 with a lease term that
extends to 2026. This was Westpac’s first fully agile workspace environment with over 1,000 staff now occupying
our new Melbourne Head Office.
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 21,903 square metres of office space across two buildings. Lease
commitment at this site extends to 2031, with two six-year options to extend on each lease.
1. Total employees include full-time, pro-rata part time, overtime, temporary and contract staff.
2019 Westpac Group Annual Report Other Westpac business information
133
Significant long term agreements
Westpac has no individual contracts, other than contracts entered into in the ordinary course of business, that
would constitute a material contract.
Related party disclosures
Details of our related party disclosures are set out in Note 36 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 36 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
2019 and 2018 is provided in Note 35 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 2019, 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.
2019 Westpac Group Annual Report12341234 134
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2019 Westpac Group Annual Report 135
03
Intangible assets
Intangible assets, provisions, commitments and contingencies
Note 25
Note 26 Operating lease commitments
Note 27
Provisions, contingent liabilities, contingent assets
and credit commitments
Capital and dividends
Note 28
Note 29
Note 30
Shareholders’ equity
Capital adequacy
Dividends
Group structure
Note 31
Note 32
Investments in subsidiaries and associates
Structured entities
Other
Note 33
Note 34
Note 35
Note 36
Note 37
Note 38
Note 39
Share-based payments
Superannuation commitments
Auditor’s remuneration
Related party disclosures
Notes to the cash flow statements
Subsequent events
Accounting policies relating to prior years
Statutory statements
Directors’ declaration
Management’s report on internal control over financial reporting
Independent auditor’s report to the members of Westpac Banking
Corporation
Report of independent registered public accounting firm
Financial statements
Income statements
Statements of comprehensive income
Balance sheets
Statements of changes in equity
Cash flow statements
Note 1
Financial statements preparation
Financial performance
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Segment reporting
Net interest income
Non-interest income
Operating expenses
Impairment charges
Income tax
Earnings per share
Average balance sheet and interest rates
Financial assets and financial liabilities
Note 10
Note 11
Note 12
Note 13
Trading securities and financial assets measured
at fair value through income statement
Available-for-sale securities / Investment securities
Loans
Provisions for expected credit losses / impairment
charges
Other financial assets
Life insurance assets and life insurance liabilities
Deposits and other borrowings
Other financial liabilities
Debt issues
Loan capital
Derivative financial instruments
Financial risk
Fair values of financial assets and financial liabilities
Note 14
Note 15
Note 16
Note 17
Note 18
Note 19
Note 20
Note 21
Note 22
Note 23 Offsetting financial assets and financial liabilities
Note 24
Securitisation, covered bonds and other transferred
assets
2019 Westpac Group Annual Report1234
Five year summary1
136
Financial statements
Income statements1 for the years ended 30 September
Westpac Banking Corporation
$m
Interest income:
Calculated using the effective interest rate method
Other
Total interest income
Interest expense
Net interest income
Net fee income
Net wealth management and insurance income
Trading income
Other 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
Net profit attributable to non-controlling interests
Net profit attributable to owners of Westpac Banking
Corporation
Earnings per share (cents)
Basic
Diluted
Note
2019
2018
2017
2019
2018
Consolidated
Parent Entity
3
3
3
4
4
4
4
5
6
7
8
8
32,518
31,987
30,614
32,736
32,190
704
584
618
776
640
33,222
32,571
31,232
33,512
32,830
(16,315)
(16,066)
(15,716)
(19,295)
(18,977)
16,907
16,505
1,655
1,029
929
129
2,424
2,061
945
72
15,516
2,603
1,800
1,202
529
14,217
13,853
922
-
956
2,172
-
919
2,684
2,633
20,649
22,007
21,650
18,779
19,577
(10,106)
(9,566)
(9,282)
(8,631)
(8,000)
(794)
(710)
9,749
11,731
(2,959)
(3,632)
6,790
8,099
(6)
(4)
(853)
11,515
(3,518)
7,997
(7)
(750)
(682)
9,398
10,895
(2,277)
7,121
-
(2,751)
8,144
-
6,784
8,095
7,990
7,121
8,144
196.5
189.5
237.5
230.1
238.0
229.3
The above income statements should be read in conjunction with the accompanying notes.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2019 Westpac Group Annual Report
Reading this report
137
Financial statements
Statements of comprehensive income1 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) recognised in equity on:
Available-for-sale securities
Debt securities measured at fair value through other
comprehensive income (FVOCI)
Cash flow hedging instruments
Share of associates’ other comprehensive income
(net of tax)
Transferred to income statements:
Available-for-sale securities
Debt securities measured at FVOCI
Cash flow hedging instruments
Foreign currency translation reserve
Share of associates’ other comprehensive income
(net of tax)
Exchange differences on translation of foreign operations
(net of associated hedges)
Income tax on items taken to or transferred from equity:
Available-for-sale securities reserve
Debt instruments measured at FVOCI
Cash flow hedge reserve
Items that will not be reclassified subsequently to profit
or loss
Gains/(losses) on equity instruments measured at FVOCI
Own credit adjustment on financial liabilities measured
at fair value (net of tax)
Remeasurement of defined benefit obligation
Other comprehensive income for the year (net of tax)
Total comprehensive income for the year
Attributable to:
Consolidated
2019
2018
6,790
8,099
2017
7,997
Parent Entity
2019
7,121
2018
8,144
-
(102)
(46)
(203)
-
-
(29)
197
(10)
-
182
-
20
2
11
(10)
(276)
(162)
6,628
-
(161)
-
66
-
203
(3)
-
181
9
-
(13)
-
43
45
268
8,367
75
-
(91)
3
(3)
-
115
-
9
-
(39)
(121)
-
-
(29)
128
-
-
(116)
162
(18)
-
(6)
-
(164)
190
(6)
-
18
(3)
(2)
(10)
(268)
(164)
7,991
6,957
(32)
-
(125)
-
(33)
-
160
-
-
174
19
-
(10)
-
43
47
243
8,387
Owners of Westpac Banking Corporation
6,620
8,363
7,984
6,957
8,387
Non-controlling interests
8
4
7
-
-
Total comprehensive income for the year
6,628
8,367
7,991
6,957
8,387
The above statements of comprehensive income should be read in conjunction with the accompanying notes.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2019 Westpac Group Annual Report1234
138
Financial statements
Balance Sheets1 as at 30 September
Westpac Banking Corporation
$m
Assets
Cash and balances with central banks
Collateral paid
Trading securities and financial assets measured at fair value
through income statement (FVIS)
Derivative financial instruments
Available-for-sale securities
Investment securities
Loans
Other financial assets
Life insurance assets
Due from subsidiaries
Investment in subsidiaries
Investment in associates
Property and equipment
Deferred tax assets
Intangible assets
Other assets
Total assets
Liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
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:
Consolidated
Parent Entity
Note
2019
2018
2019
2018
20,059
26,788
17,692
24,976
5,930
4,787
5,773
4,722
31,781
29,859
-
73,401
23,132
24,101
61,119
29,565
21,415
29,283
23,562
-
56,513
-
68,398
-
714,770
709,690
631,936
630,168
5,367
9,367
-
-
129
1,155
2,048
11,953
807
5,517
9,450
-
-
115
1,329
1,180
11,763
621
4,615
4,666
-
-
142,961
140,597
6,436
4,508
100
948
1,925
9,687
420
76
1,120
1,102
9,494
311
906,626
879,592
949,739
923,230
3,287
2,184
2,849
1,748
563,247
559,285
501,430
500,468
29,215
28,105
28,516
29,096
24,407
28,867
27,266
24,229
181,457
172,596
156,674
152,288
163
7,377
-
3,169
44
2,238
296
7,597
88
-
184
-
-
148,607
142,400
1,928
2,980
18
-
1,338
1,064
1,766
3
257
10
20
11
11
12
14
15
31
7
25
16
17
20
18
15
27
7
819,293
797,754
871,075
850,609
19
21,826
17,265
21,826
17,265
841,119
815,019
892,901
867,874
65,507
64,573
56,838
55,356
Ordinary share capital
Treasury shares and Restricted Share Plan (RSP) treasury shares
Reserves
Retained profits
Total equity attributable to owners of Westpac Banking Corporation
Non-controlling interests
28
28
28
28
37,508
36,054
37,508
36,054
(553)
1,311
(493)
1,077
(575)
1,338
(508)
1,114
27,188
27,883
18,567
18,696
65,454
64,521
56,838
55,356
53
52
-
-
Total shareholders’ equity and non-controlling interests
65,507
64,573
56,838
55,356
The above balance sheets should be read in conjunction with the accompanying notes.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2019 Westpac Group Annual Report
Financial statements
Statements of changes in equity1 for the years ended 30 September
Westpac Banking Corporation
139
Consolidated
$m
Balance at 1 October 2016
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 shares2
Dividend reinvestment plan
Other equity movements
Share-based payment arrangements
Exercise of employee share options and
rights
Purchase of shares (net of issue costs)
Net (acquisition)/disposal of treasury shares
Other
Total contributions and distributions
Balance at 30 September 2017
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 shares2
Dividend reinvestment plan
Conversion of Convertible Preference Shares
Other equity movements
Share-based payment arrangements
Exercise of employee share options and
rights
Purchase of shares (net of issue costs)
Net (acquisition)/disposal of treasury shares
Other
Total contributions and distributions
Balance at 30 September 2018
Impact on adoption of new accounting standards1
Restated opening balance
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 shares2
Dividend reinvestment plan
Other equity movements
Share-based payment arrangements
Purchase of shares (net of issue costs)
Net (acquisition)/disposal of treasury shares
Other
Total contributions and distributions
Balance at 30 September 2019
Share capital
(Note 28)
Reserves
(Note 28)
Retained
profits
Total equity
attributable
to owners
of Westpac
Banking
Corporation
Non-
controlling
interests
(Note 28)
Total
shareholders’
equity
and non-
controlling
interests
33,014
-
-
-
-
1,452
-
11
(43)
(40)
-
1,380
34,394
-
-
-
-
631
566
-
3
(35)
2
-
1,167
35,561
-
35,561
-
-
-
-
1,489
-
(33)
(62)
-
1,394
36,955
727
-
(32)
(32)
-
-
98
-
-
-
1
99
794
-
180
180
-
-
-
103
-
-
-
-
103
1,077
2
1,079
-
122
122
-
-
108
-
-
2
110
1,311
24,379
7,990
26
8,016
(6,291)
-
-
-
-
-
(4)
(6,295)
26,100
8,095
88
8,183
58,120
7,990
(6)
7,984
(6,291)
1,452
98
11
(43)
(40)
(3)
(4,816)
61,288
8,095
268
8,363
(6,400)
(6,400)
-
-
-
-
-
-
-
(6,400)
27,883
(727)
27,156
6,784
(286)
6,498
631
566
103
3
(35)
2
-
(5,130)
64,521
(725)
63,796
6,784
(164)
6,620
(6,466)
(6,466)
-
-
-
-
-
1,489
108
(33)
(62)
2
(6,466)
(4,962)
27,188
65,454
61
7
-
7
-
-
-
-
-
-
(14)
(14)
54
4
-
4
-
-
-
-
-
-
-
(6)
(6)
52
-
52
6
2
8
-
-
-
-
-
(7)
(7)
53
58,181
7,997
(6)
7,991
(6,291)
1,452
98
11
(43)
(40)
(17)
(4,830)
61,342
8,099
268
8,367
(6,400)
631
566
103
3
(35)
2
(6)
(5,136)
64,573
(725)
63,848
6,790
(162)
6,628
(6,466)
1,489
108
(33)
(62)
(5)
(4,969)
65,507
The above statements of changes in equity should be read in conjunction with the accompanying notes.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2. 2019 comprises 2019 interim dividend 94 cents per share ($3,239 million) and 2018 final dividend 94 cents per share ($3,227 million)
(2018: 2018 interim dividend 94 cents per share ($3,213 million) and 2017 final dividend 94 cents per share ($3,187 million), 2017: 2017
interim dividend 94 cents per share ($3,150 million) and 2016 final dividend 94 cents per share ($3,141 million)), all fully franked at 30%.
2019 Westpac Group Annual Report1234
140
Financial statements
Statements of changes in equity1 for the years ended 30 September (continued)
Westpac Banking Corporation
Parent Entity
$m
Balance at 1 October 2017
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 shares2
Dividend reinvestment plan
Conversion of Convertible Preference Shares
Other equity movements
Share-based payment arrangements
Exercise of employee share options and rights
Purchase of shares (net of issue costs)
Net (acquisition)/disposal of treasury shares
Total contributions and distributions
Balance at 30 September 2018
Impact on adoption of new accounting standards
Restated opening balance
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 shares2
Dividend reinvestment plan
Other equity movements
Share based payment arrangements
Purchase of shares (net of issue costs)
Net (acquisition)/disposal of treasury shares
Total contributions and distributions
Balance at 30 September 2019
Share
capital
(Note 28)
34,452
-
-
-
-
631
566
-
3
(35)
(71)
1,094
35,546
-
35,546
-
-
-
-
1,489
-
(33)
(69)
1,387
36,933
Reserves
(Note 28)
Retained
profits
Total equity
attributable
to owners
of Westpac
Banking
Corporation
52,181
8,144
243
8,387
16,871
8,144
90
8,234
(6,409)
(6,409)
-
-
-
-
-
-
631
566
103
3
(35)
(71)
(6,409)
18,696
(502)
(5,212)
55,356
(500)
18,194
54,856
7,121
(278)
7,121
(164)
6,843
6,957
(6,470)
(6,470)
-
-
-
-
1,489
108
(33)
(69)
(6,470)
18,567
(4,975)
56,838
858
-
153
153
-
-
-
103
-
-
-
103
1,114
2
1,116
-
114
114
-
-
108
-
-
108
1,338
The above statements of changes in equity should be read in conjunction with the accompanying notes.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2. 2019 comprises 2019 interim dividend 94 cents per share ($3,241 million) and 2018 final dividend 94 cents per share ($3,229 million)
(2018: 2018 interim dividend 94 cents per share ($3,218 million) and 2017 final dividend 94 cents per share ($3,191 million)), all fully
franked at 30%.
2019 Westpac Group Annual Report
Financial statements
Cash flow statements1 for the years ended 30 September
Westpac Banking Corporation
141
Note
2019
2018
2017
2019
2018
Consolidated
Parent Entity
$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
37
37
Cash flows from operating activities before changes in
operating assets and liabilities
Net (increase)/decrease in:
Collateral paid
Trading securities and financial assets measured at FVIS
Derivative financial instruments
Loans
Other financial assets
Life insurance assets and liabilities
Other assets
Net increase/(decrease) in:
Collateral received
Deposits and other borrowings
Other financial liabilities
Other liabilities
Net cash provided by/(used in) operating activities
Cash flows from investing activities
Proceeds from available-for-sale securities
Purchase of available-for-sale securities
Proceeds from investment securities
Purchase of investment securities
Net movement in amounts due to/from controlled entities
Proceeds/(payments) from disposal of controlled entities, net of
cash disposed
Net (increase)/decrease in investments in controlled entities
Proceeds from disposal of associates
Purchase of associates
Proceeds from disposal of property and equipment
Purchase of property and equipment
Purchase of intangible assets
Net cash provided by/(used in) investing activities
Cash flows from financing activities
Proceeds from debt issues (net of issue costs)
Redemption of debt issues
Issue of loan capital (net of issue costs)
Redemption of loan capital
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
Net cash provided by/(used in) financing activities
Net increase/(decrease) in cash and balances with central banks
Effect of exchange rate changes on cash and balances with
central banks
Cash and balances with central banks as at the beginning of
the year
Cash and balances with central banks as at the end of the year
33,093
(16,486)
6
3,865
(9,080)
(3,406)
2,189
6
553
(2,250)
(94)
32,639
(15,789)
9
4,995
(7,889)
(3,585)
2,008
17
642
(2,089)
(143)
31,133
(15,415)
27
4,926
(7,828)
(3,388)
2,239
24
433
(1,861)
(164)
33,770
(19,444)
2,218
2,982
(7,491)
(3,081)
32,947
(18,728)
2,016
3,832
(6,543)
(3,349)
-
-
-
-
-
-
-
-
-
-
8,396
10,815
10,126
8,954
10,175
(847)
(7,629)
7,605
(4,188)
336
(134)
(13)
1,007
1,113
1,463
(5)
7,104
-
-
19,768
(29,527)
-
(1)
-
45
(25)
157
(280)
(906)
969
3,492
8,584
(24,740)
859
(230)
10
(295)
23,928
(3,632)
10
19,770
23,878
(24,376)
-
-
-
9
-
-
(30)
91
(310)
(882)
2,320
(4,729)
(5,042)
(26,815)
466
219
67
739
23,062
2,506
(82)
2,837
25,717
(27,028)
-
-
-
-
-
630
(52)
65
(264)
(766)
(755)
(7,358)
6,581
(3,312)
324
-
(41)
1,004
963
1,555
(24)
7,891
-
-
16,483
(25,719)
2,110
-
94
-
(24)
143
(209)
(846)
662
2,815
8,263
(23,661)
502
-
33
(606)
20,783
(3,742)
17
15,241
21,525
(22,230)
-
-
923
-
(577)
-
(30)
62
(251)
(823)
(10,769)
(1,620)
(1,698)
(7,968)
(1,401)
61,484
(63,313)
4,935
(1,662)
-
(6)
(27)
(69)
7
(4,977)
(5)
(3,633)
(7,298)
59,456
(64,698)
2,342
(2,387)
3
(8)
(27)
(71)
73
(5,769)
(6)
(11,092)
7,058
72,368
(69,119)
4,437
(2,188)
11
(17)
(27)
(68)
7
(4,839)
(13)
552
1,691
50,375
(56,347)
4,935
(1,662)
-
(6)
(27)
(69)
-
(4,981)
-
(7,782)
(7,859)
57,440
(58,005)
2,342
(2,387)
3
(8)
(27)
(71)
-
(5,778)
-
(6,491)
7,349
569
944
(302)
575
936
26,788
20,059
18,786
26,788
17,397
18,786
24,976
17,692
16,691
24,976
The above cash flow statements should be read in conjunction with the accompanying notes.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2019 Westpac Group Annual Report1234
Notes to the financial statements
142
Notes to the financial statements
Note 1. Financial statements 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 2019, was authorised for issue by the Board of Directors on
4 November 2019. 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 financial assets and financial liabilities (including derivative instruments) measured at fair value
through income statement (FVIS) or in other comprehensive income (OCI).
(iii) Changes in accounting policies
Balance sheet
The following voluntary presentation changes to the balance sheet (and related notes) have been made to
improve consistency and provide more relevant information to the users of the financial statements by reporting
balances of a similar nature together in the same place in the balance sheet. These changes have no effect on the
measurement of these items and therefore had no impact on retained earnings or net profit. These changes are:
•
•
•
•
•
•
the addition of new balance sheet lines for ‘collateral paid’, ‘other financial assets’, ‘collateral received’ and ‘other
financial liabilities’;
removal of the balance sheet line ‘receivables due from other financial institutions’ and reclassification to
‘collateral paid’ and ‘other financial assets’;
removal of the balance sheet line ‘regulatory deposits with central banks overseas’ and reclassification to ‘cash
and balances with central banks’ and ‘trading securities and financial assets measured at FVIS;
removal of the balance sheet line ‘payables due to other financial institutions’ and reclassification to ‘collateral
received’ and ‘other financial liabilities’;
reclassification of collateral balances with non-financial institutions from ‘other assets’ and ‘other liabilities’ to
‘collateral paid’ and ‘collateral received’ respectively;
reclassification of financial assets or financial liabilities included in other assets or other liabilities respectively to
other financial assets and other financial liabilities respectively; and
•
reclassification of other financial liabilities at FVIS to other financial liabilities.
2019 Westpac Group Annual Report Notes to the financial statements
Note 1. Financial statements preparation (continued)
Collateral paid/collateral received includes cash provided to/received from counterparties as collateral over
financial liabilities/assets arising from derivative contracts, stock borrowing arrangements and funding transactions.
It includes initial and variation margin placed as security for derivative transactions.
Comparatives for 30 September 2018 have been restated for these voluntary presentation changes and are
detailed as follows.
143
$m
Assets
Cash and balances with central banks
Receivables due from other financial institutions
Collateral paid
Trading securities and financial assets
measured at FVIS
Regulatory deposits with central banks overseas
Other financial assets1
Other assets
All other assets
Total assets
Liabilities
Payables due to other financial institutions
Collateral received
Other financial liabilities at FVIS
Other financial liabilities1
Other liabilities
All other liabilities
Total liabilities
Consolidated
Presentation
Parent Entity
Presentation
Reported
changes
Restated
Reported
changes
Restated
26,431
5,790
-
22,134
1,355
-
5,135
818,747
879,592
18,137
-
4,297
-
9,193
783,392
815,019
357
26,788
24,726
(5,790)
4,787
-
4,787
5,711
-
998
(1,355)
5,517
(4,514)
-
-
(18,137)
2,184
(4,297)
28,105
(7,855)
23,132
20,417
-
1,248
5,517
621
-
3,988
818,747
867,140
879,592
923,230
2,184
-
-
4,297
28,105
1,338
-
7,292
-
-
783,392
838,603
815,019
867,874
250
(5,711)
4,722
998
(1,248)
4,666
(3,677)
24,976
-
4,722
21,415
-
4,666
311
-
-
867,140
923,230
1,748
(4,297)
27,266
(7,035)
-
-
-
1,748
-
27,266
257
838,603
867,874
-
17,682
(17,682)
1. Refer to Note 14 and Note 17 for further information.
2019 Westpac Group Annual Report1234 144
Notes to the financial statements
Note 1. Financial statements preparation (continued)
Income statement
The following voluntary presentation changes to the income statement (and related notes) have been made to
provide more relevant information to the users of the financial statements. These changes have no effect on the
measurement of these items and therefore had no impact on retained earnings or net profit.
Net interest income
• The components of interest income and interest expense relating to the balance sheet reclassifications have
been restated accordingly. Note that there was no net impact to total interest income, total interest expense
or to net interest income. Comparatives have been restated for these voluntary presentation changes and are
detailed in the following table.
•
In addition, to comply with disclosure requirements, interest income calculated using the effective interest
rate method has been presented separately from other interest income. For consistency, interest expense is
presented in the same way. The details are provided in Note 3.
$m
Note 3: Net interest income
Interest income
Cash and balances with
central banks
Receivables due from
other financial institutions
Collateral paid
Net ineffectiveness on
qualifying hedges
Trading securities and
financial assets measured
at FVIS
Available-for-sale securities
Investment securities
Loans
Regulatory deposits with
central banks overseas
Due from subsidiaries
Other interest income
Consolidated 2018
Reported
Presentation
changes
Restated
Reported
Consolidated 2017
Presentation
changes
Restated
Reported
Parent Entity 2018
Presentation
changes
Restated
325
1
326
241
1
242
300
1
301
108
-
(108)
129
-
129
110
-
(110)
96
-
96
102
-
(102)
126
-
126
(18)
-
(18)
(22)
-
(22)
(22)
-
(22)
542
1,914
-
29,621
23
-
56
22
564
558
16
574
499
22
521
-
-
-
1,914
1,795
-
-
29,621
28,504
(23)
-
(21)
-
-
35
17
-
29
-
-
-
(17)
-
14
1,795
1,743
-
-
28,504
25,801
-
-
-
1,743
-
25,801
-
-
23
(23)
-
4,328
-
4,328
43
56
(24)
32
Total interest income
32,571
-
32,571
31,232
-
31,232
32,830
-
32,830
Interest expense
Payable due to other financial
institutions
Collateral received
Deposits and other
borrowings
Trading liabilities
Debt issues
Due to subsidiaries
Loan capital
Bank levy
Other interest expense
Total interest expense
Net interest income
(319)
-
(9,021)
(959)
(4,480)
-
(774)
(378)
(135)
(16,066)
16,505
319
(45)
-
(45)
(279)
-
279
(19)
-
(19)
(314)
-
314
(41)
-
(41)
-
-
-
-
-
-
(9,021)
(8,868)
(959)
(2,065)
(4,480)
(3,585)
-
(774)
(378)
-
(693)
(95)
(131)
(274)
(409)
-
-
-
-
-
-
(260)
(8,868)
(7,817)
(2,065)
(754)
(3,585)
(3,958)
-
(4,851)
(693)
(95)
(391)
(774)
(378)
(131)
-
-
(16,066)
(15,716)
16,505
15,516
-
-
(15,716)
(18,977)
15,516
13,853
-
-
-
-
-
-
(7,817)
(754)
(3,958)
(4,851)
(774)
(378)
(273)
(404)
-
-
(18,977)
13,853
2019 Westpac Group Annual Report
Notes to the financial statements
145
Notes to the financial statements
Note 1. Financial statements preparation (continued)
Non-interest income and operating expenses
• Disaggregating the non-interest income line on the income statement into four separate lines for net fee
income, net wealth management and insurance income, trading income and other income.
• Separating net fee income in the non-interest income note into fee income and fee expenses.
• Reclassifying credit card loyalty program expense from operating expenses to the new fee expenses category
in the non-interest income note.
Fee expenses include those expenses that are incremental external costs that vary directly with the provision of
goods or services to customers (excluding expenses which would qualify as transaction costs relating to the issue,
acquisition or disposal of a financial asset or a financial liability which are deferred and included in the effective
interest rate and recognised in net interest income).
An incremental cost is one that would not have been incurred if a specific good or service had not been provided
to a specific customer.
Comparatives have been restated for these voluntary presentation changes and are detailed in the following table.
Consolidated 2018
Reported
Presentation
changes
Restated
Reported
Consolidated 2017
Presentation
changes
Restated
Reported
Parent Entity 2018
Presentation
changes
Restated
$m
Income statement
Net interest income
Non-interest income
Net fee income
Net wealth management and
insurance income
Trading income
Other 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
16,505
5,628
–
–
–
–
22,133
(9,692)
(710)
11,731
(3,632)
8,099
Note 4: Non-interest income (extract)
Net fee income
Facility fees
Transaction fees
Other non-risk fee income
Fee income
Credit card loyalty programs
Transaction fee related
expenses
Fee expenses
Net fee income
Note 5: Operating expenses
(extract)
Credit card loyalty programs
Total other expenses
Total operating expenses
1,347
1,105
98
2,550
–
–
–
2,550
126
1,662
9,692
–
16,505
(5,628)
–
2,424
2,424
2,061
2,061
945
72
945
72
15,516
6,286
–
–
–
–
–
15,516
13,853
–
13,853
(6,286)
–
5,825
(5,825)
–
2,603
2,603
1,800
1,202
529
1,800
1,202
529
–
–
–
–
2,172
2,172
–
919
–
919
2,633
2,633
(126)
22,007
21,802
(152)
21,650
19,678
(101)
19,577
126
(9,566)
(9,434)
152
(9,282)
(8,101)
101
(8,000)
–
–
–
–
18
77
–
95
(710)
(853)
11,731
11,515
(3,632)
(3,518)
8,099
7,997
1,365
1,182
98
1,333
1,193
229
2,645
2,755
–
–
–
–
17
65
–
82
(853)
(682)
11,515
10,895
(3,518)
(2,751)
7,997
8,144
1,350
1,258
229
1,333
886
54
2,837
2,273
(126)
(126)
(95)
(221)
–
–
–
(152)
(152)
(82)
(82)
(234)
(234)
–
–
–
2,424
2,755
(152)
2,603
2,273
–
1,536
9,566
152
1,652
9,434
(152)
(152)
(152)
–
1,500
9,282
101
1,357
8,101
(95)
(221)
(126)
(126)
(126)
(126)
–
–
–
–
18
53
–
71
(682)
10,895
(2,751)
8,144
1,351
939
54
2,344
(101)
(101)
(71)
(172)
(101)
(101)
(101)
(101)
(71)
(172)
2,172
–
1,256
8,000
2019 Westpac Group Annual Report1234 146
Notes to the financial statements
Note 1. Financial statements preparation (continued)
(iv) Standards adopted during the year ended 30 September 2019
AASB 9 Financial Instruments (December 2014) (AASB 9)
The Group adopted AASB 9 on 1 October 2018. The adoption of AASB 9 has been applied by adjusting the
opening balance sheet at 1 October 2018, with no restatement of comparatives as permitted by the standard. The
adoption of AASB 9 reduced retained earnings at 1 October 2018 by $722 million (net of tax) for the Group and
by $495 million (net of tax) for the Parent Entity. This was primarily due to the increase in impairment provisions
under the new standard.
Impairment
AASB 9 introduces a revised impairment model which requires entities to recognise expected credit losses (ECL)
based on unbiased forward looking information, replacing the incurred loss model under AASB 139 Financial
instruments: Recognition and Measurement (AASB 139) which only recognised impairment if there was objective
evidence that a loss had been incurred. The revised impairment model applies to all financial assets at amortised
cost, lease receivables, debt securities measured at FVOCI, and credit commitments.
The accounting policy for the provision for ECL under AASB 9 is detailed in Notes 6 and 13.
Classification and measurement
AASB 9 replaced 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 represent solely payments of principal and interest (SPPI).
The accounting policies for the classification and measurement of financial assets and financial liabilities precede
Note 10 and are also located in the relevant notes to the financial statements for financial assets and financial
liabilities.
In the 2014 financial year, the Group early adopted part of AASB 9 which relates to the recognition of the changes
in fair value of financial liabilities designated at fair value attributable to Westpac’s own credit risk in other
comprehensive income (except where it would create an accounting mismatch, in which case all changes in fair
value are recognised in the income statement). As a result, the accounting for this remains unchanged for the
Group.
Hedging
AASB 9 changes 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 until the IASB completes its accounting for dynamic risk management project. Until
this time, current hedge accounting under AASB 139 can continue to be applied. The Group has applied the option
to continue hedge accounting under AASB 139, however the Group has adopted the amended AASB 7 Financial
Instruments: Disclosures (AASB 7) hedge accounting disclosures as required.
AASB 15 Revenue from Contracts with Customers (AASB 15)
The Group adopted AASB 15 on 1 October 2018. It replaced AASB 118 Revenue and related interpretations and
applies to all contracts with customers, except leases, financial instruments and insurance contracts. The standard
provides a systematic approach to revenue recognition by introducing a five-step model governing revenue
measurement and recognition. This includes:
•
•
identifying the contract with customer;
identifying each of the performance obligations included in the contract;
• determining the amount of consideration in the contract;
• allocating the consideration to each of the identified performance obligations; and
•
recognising revenue as each performance obligation is satisfied.
The Group has applied AASB 15 by reducing the opening balance of retained earnings at the date of initial
application, 1 October 2018, by $5 million (net of tax) for the Group and by $7 million (net of tax) for the Parent
Entity with no comparative restatement.
In addition, the Group identified certain income and expenses which were previously reported on a net basis
primarily within fee income which are now being presented on a gross basis.
Finally, certain facility fees have been reclassified from non-interest income to interest income.
2019 Westpac Group Annual Report 147
Notes to the financial statements
Note 1. Financial statements preparation (continued)
Transition (AASB 9 and AASB 15)
Impact of the adoption of AASB 9 – impairment
The following tables show the impact of the adoption of AASB 9 on impairment balances.
Consolidated
$m
30 September 2018 - carrying amount
ECL on amortised cost financial instruments
ECL on debt securities measured at FVOCI
1 October 2018 - AASB 9 carrying amount
Parent Entity
$m
30 September 2018 - carrying amount
ECL on amortised cost financial instruments
ECL on debt securities measured at FVOCI
1 October 2018 - AASB 9 carrying amount
Provisions
on loans
Provisions for
credit
commitments
Loss allowance
on debt
securities at
FVOCI1
Provisions on debt
securities and
other financial
assets at
amortised cost
2,814
882
–
3,696
239
98
–
337
–
–
2
2
–
9
–
9
Provisions
on loans
Provisions for
credit
commitments
Loss allowance
on debt
securities at
FVOCI1
Provisions on debt
securities and
other financial
assets at
amortised cost
2,407
751
–
3,158
206
95
–
301
–
–
2
2
–
–
–
–
Total
3,053
989
2
4,044
Total
2,613
846
2
3,461
Impact of the adoption of AASB 9 – classification and measurement
Investment securities
Investment securities represent all debt and equity securities not measured at FVIS. Investment securities include
debt securities at amortised cost and both debt and equity securities at FVOCI.
As a result of the adoption of AASB 9, available-for-sale debt securities of $811 million for the Group and $10 million
for the Parent Entity have been reclassified to investment securities - debt securities at amortised cost as the
business model for these instruments is achieved by collecting the contractual cash flows and these cash flows
represent SPPI. The remaining available-for-sale debt securities of $60 billion for the Group and $56 billion for the
Parent Entity have been reclassified to investment securities measured at FVOCI.
In addition, available-for-sale equity securities have been assessed on an instrument-by-instrument basis. For the
Group, $275 million of available-for-sale equity securities have been reclassified to trading securities and financial
assets measured at FVIS. The Group has elected to irrevocably designate the remaining $109 million of available-
for-sale equity securities to continue to be measured at FVOCI. For the Parent Entity, all $67 million of available-
for-sale equity securities were irrevocably designated to continue to be measured at FVOCI.
Loans
As a result of the adoption of AASB 9, for both the Group and the Parent Entity, $56 million of loans which were
measured at amortised cost are measured at FVIS as the cash flows of the loan do not represent SPPI.
1.
Impairment on debt securities at FVOCI is recognised in the income statement with a corresponding amount in other comprehensive
income (refer to Note 28). There is no reduction of the carrying value of the debt security which remains at fair value.
2019 Westpac Group Annual Report1234 148
Notes to the financial statements
Note 1. Financial statements preparation (continued)
30 September 2018
AASB 139 measurement basis
1 October 2018
AASB 9 measurement basis
Amortised
cost
FVIS
FVOCI
Total
Change in
measurement
basis under
AASB 9
Amortised
cost
FVIS
FVOCI
Total
Consolidated
$m
Financial assets
Cash and balances with
central banks
Collateral paid
26,788
4,787
–
–
Trading securities and financial
assets measured at FVIS
Derivative financial instruments
Available-for-sale securities
–
–
–
23,132
24,101
–
61,119
Loans1
Other financial assets
Life insurance assets
709,144
5,517
546
–
–
9,450
–
–
–
709,690
5,517
9,450
–
–
–
–
26,788
4,787
23,132
24,101
61,119
No
No
No
No
Yes
Yes
No
No
26,788
4,787
–
–
811
709,088
5,517
–
–
23,132
24,101
275
602
–
–
9,450
–
–
–
–
60,033
–
–
–
26,788
4,787
23,132
24,101
61,119
709,690
5,517
9,450
Total financial assets
746,236
57,229
61,119
864,584
746,991
57,560 60,033
864,584
Financial liabilities
Collateral received
2,184
–
Deposits and other borrowings
518,107
41,178
Other financial liabilities
23,808
4,297
Derivative financial instruments
–
24,407
Debt issues
Life insurance liabilities
Loan capital
169,241
3,355
–
7,597
17,265
–
Total financial liabilities
730,605
80,834
–
–
–
–
–
–
–
–
2,184
559,285
28,105
24,407
172,596
7,597
17,265
811,439
No
No
No
No
No
No
No
2,184
518,107
23,808
–
41,178
4,297
–
24,407
169,241
–
17,265
3,355
7,597
–
730,605
80,834
–
–
–
–
–
–
–
–
2,184
559,285
28,105
24,407
172,596
7,597
17,265
811,439
30 September 2018
AASB 139 measurement basis
1 October 2018
AASB 9 measurement basis
Amortised
cost
FVIS
FVOCI
Total
Change in
measurement
basis under
AASB 9
Amortised
cost
FVIS
FVOCI
Total
Parent Entity
$m
Financial assets
Cash and balances with
central banks
Collateral paid
Trading securities and financial
assets measured at FVIS
Derivative financial instruments
Available-for-sale securities
–
–
–
21,415
23,562
24,976
4,722
–
–
–
–
–
–
24,976
4,722
21,415
23,562
–
56,513
56,513
Loans1
Other financial assets
Due from subsidiaries2,3
629,622
4,666
133,808
546
–
278
–
–
–
630,168
4,666
134,086
Total financial assets
797,794
45,801
56,513
900,108
Financial liabilities
Collateral received
1,748
–
Deposits and other borrowings
460,406
40,062
Other financial liabilities
22,969
4,297
Derivative financial instruments
–
24,229
Debt issues
Due to subsidiaries4
Loan capital
149,065
3,223
141,877
17,265
523
–
Total financial liabilities
793,330 72,334
–
–
–
–
–
–
–
–
1,748
500,468
27,266
24,229
152,288
142,400
17,265
865,664
No
No
No
No
Yes
Yes
No
No
No
No
No
No
No
No
No
24,976
4,722
–
–
10
629,566
4,666
133,808
–
–
21,415
23,562
–
–
–
–
–
56,503
602
–
278
–
–
–
797,748
45,857 56,503
1,748
–
460,406
40,062
22,969
4,297
–
24,229
149,065
3,223
141,877
17,265
523
–
793,330
72,334
–
–
–
–
–
–
–
–
24,976
4,722
21,415
23,562
56,513
630,168
4,666
134,086
900,108
1,748
500,468
27,266
24,229
152,288
142,400
17,265
865,664
1. As at 30 September 2018, loans at amortised cost were restated from $706,440 million to $709,144 million for the Group, and from
$626,918 million to $629,622 million for the Parent Entity. Loans at FVIS were also restated from $3,250 million to $546 million for both
the Group and the Parent Entity.
2. Due from subsidiaries excludes $6,511 million of long-term debt instruments with equity like characteristics which are part of the total
investment in subsidiaries.
3. Comparatives have been restated to reclassify $278 million from amortised cost to FVIS.
4. Comparatives have been restated to reclassify $523 million from amortised cost to FVIS.
2019 Westpac Group Annual Report Notes to the financial statements
Note 1. Financial statements preparation (continued)
Reconciliation of the opening balance sheet
The following tables reconcile the reported 30 September 2018 balance sheet to the 1 October 2018 opening
balance sheet on adoption of AASB 9 and AASB 15 showing separately the impact of adjustments relating to
reclassification and remeasurement including the related tax impacts.
149
Consolidated
$m
Assets
30 September 2018
1 October 2018
Restated
Carrying
AASB 9 changes
Amount
Reclassifications
Remeasurement1
AASB 15
changes
Cash and balances with central banks
Collateral paid
Trading securities and financial assets measured at FVIS
Derivative financial instruments
Available-for-sale securities
Investment securities
Loans (at amortised cost)
Loans (at fair value)
Other financial assets
Deferred tax assets
All other assets
Total assets
Liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
Derivative financial instruments
Debt issues
Provisions
Loan capital
All other liabilities
Total liabilities
Net assets
Shareholders’ equity
Share capital:
Ordinary shares
Treasury shares and RSP treasury shares
Reserves
Retained profits
Total equity attributable to owners
of Westpac Banking Corporation
Non-controlling interests
26,788
4,787
23,132
24,101
61,119
–
709,144
546
5,517
1,180
23,278
879,592
2,184
559,285
28,105
24,407
172,596
1,928
17,265
9,249
815,019
64,573
36,054
(493)
1,077
27,883
64,521
52
Total shareholder’s equity and Non-controlling interests
64,573
–
–
275
–
(61,119)
60,844
(56)
56
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(9)
(925)
–
–
300
–
(634)
–
–
–
–
–
98
–
(12)
86
(720)
–
–
2
(722)
(720)
–
(720)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(12)
–
–
–
–
17
5
(5)
–
–
–
(5)
(5)
–
(5)
Opening
carrying
amount
26,788
4,787
23,407
24,101
–
60,835
708,163
602
5,517
1,480
23,278
878,958
2,184
559,285
28,093
24,407
172,596
2,026
17,265
9,254
815,110
63,848
36,054
(493)
1,079
27,156
63,796
52
63,848
1. The impact on adoption of expected credit loss provisioning resulted in increases in provisions on loans by $882 million, provisions for
credit commitments by $98 million and loss allowance on debt securities at FVOCI by $2 million and provisions on debt securities at
amortised cost by $9 million.
2019 Westpac Group Annual Report1234 150
Notes to the financial statements
Note 1. Financial statements preparation (continued)
Parent Entity
$m
Assets
30 September 2018
1 October 2018
Restated
Carrying
AASB 9 changes
Amount
Reclassifications
Remeasurement1
AASB 15
changes
Cash and balances with central banks
Collateral paid
Trading securities and financial assets measured at FVIS
Derivative financial instruments
Available-for-sale securities
Investment securities
Loans (at amortised cost)
Loans (at fair value)
Other financial assets
Due from subsidiaries
Investment in subsidiaries
Deferred tax assets
All other assets
Total assets
Liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
Derivative financial instruments
Debt issues
Due to subsidiaries
Provisions
Loan capital
All other liabilities
Total liabilities
Net assets
Shareholders’ equity
Share capital:
Ordinary shares
Treasury shares and RSP treasury shares
Reserves
Retained profits
Total equity attributable to owners
of Westpac Banking Corporation
Non-controlling interests
24,976
4,722
21,415
23,562
56,513
–
629,622
546
4,666
140,597
4,508
1,102
11,001
923,230
1,748
500,468
27,266
24,229
152,288
142,400
1,766
17,265
444
867,874
55,356
36,054
(508)
1,114
18,696
55,356
–
Total shareholder’s equity and non-controlling interests
55,356
–
–
–
–
(56,513)
56,513
(56)
56
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(786)
–
–
–
–
258
–
(528)
–
–
–
–
–
(118)
95
–
(12)
(35)
(493)
–
–
2
(495)
(493)
–
(493)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(9)
–
–
–
–
–
16
7
(7)
–
–
–
(7)
(7)
–
(7)
Opening
carrying
amount
24,976
4,722
21,415
23,562
–
56,513
628,780
602
4,666
140,597
4,508
1,360
11,001
922,702
1,748
500,468
27,257
24,229
152,288
142,282
1,861
17,265
448
867,846
54,856
36,054
(508)
1,116
18,194
54,856
–
54,856
As permitted by AASB 9 and AASB 15, comparatives have not been restated. Comparatives have been restated for
voluntary presentation changes as detailed in the section “Changes in accounting policies” above.
1. The impact on adoption of expected credit loss provisioning resulted in increases in provisions on loans by $751 million, provisions for
credit commitments by $95 million and loss allowance on debt securities measured at FVOCI by $2 million. Included in the increase
in provision on loans was $118 million relating to loans which have been securitised by the Parent Entity to subsidiaries. The due to
subsidiaries balance has been reduced by this amount as the relevant subsidiary records the expected credit loss on these loans and
adjusts its intergroup receivable from the Parent Entity accordingly.
2019 Westpac Group Annual Report 151
Notes to the financial statements
Note 1. Financial statements preparation (continued)
(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.
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. 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
Income tax
• Note 13
Provisions for expected credit losses/impairment charges
• Note 15
Life insurance assets and life insurance liabilities
• Note 22
Fair values of financial assets and financial liabilities
• Note 25
Intangible assets
• Note 27
Provisions, contingent liabilities, contingent assets and credit commitments
• Note 34
Superannuation commitments
2019 Westpac Group Annual Report1234 152
Notes to the financial statements
Note 1. Financial statements preparation (continued)
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 unless otherwise stated, have not been early adopted by the Group:
AASB 16 Leases (AASB 16) was issued on 23 February 2016 and will be effective for the 30 September 2020
financial year. The standard will not result in significant changes for lessor accounting. 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 by
the lessee as a right-of-use (ROU) asset and lease liability. The asset and liability will initially be measured at
the present value of non-cancellable lease payments and payments to be made in optional periods where it is
reasonably certain that the option will be exercised; and
• all leases on balance sheet will give rise to a combination of interest expense on the lease liability and
depreciation of the ROU asset.
The AASB 16 implementation and governance program is led by Finance with representatives from the impacted areas
of the business with oversight from the Chief Financial Officer. The project has identified the portfolios impacted by that
standard which are predominantly property leases. In addition, the project has updated finance systems and processes,
established a governance framework, updated relevant policies and addressed key judgements including the transition
option that will be applied in order to determine the expected impact to the Group.
The Group will adopt the standard using the simplified approach of transition with no restatement of comparative
information. The expected impact on adoption of the standard will be to recognise a ROU asset of approximately
$3.4 billion and an equivalent lease liability with no impact on retained earnings.
The Group has determined that it will use the incremental borrowing rate as the discount rate when determining
present value. This discount rate will be based on the remaining maturity of the lease at the date of transition. The
Group will also apply the practical exemptions for low-value assets and short-term leases.
AASB 17 Insurance Contracts (AASB 17) was issued on 19 July 2017 and will be effective for the 30 September
2022 year end unless early adopted. This will replace AASB 4 Insurance Contracts, AASB 1023 General Insurance
Contracts and AASB 1038 Life Insurance Contracts. The main changes under the standard are:
•
the scope of the standard may result in some contracts that are currently “unbundled”, i.e. accounted for
separately as insurance and investment contracts being required to be “bundled” and accounted for as an
insurance contract;
• portfolios of contracts (with similar risks which are managed together) will be required to be disaggregated
to a more granular level by both the age of a contract and the likelihood of the contract being onerous in
order to determine the recognition of profit over the contract period (i.e. the contractual service margin). The
contractual service margin uses a different basis to recognise profit to the current Margin on Services approach
for life insurance and therefore the pattern of profit recognition is likely to differ;
•
•
risk adjustments, which reflect uncertainties in the amount and timing of future cash flows, are required for both
general and life insurance contracts rather than just general insurance contracts under the current accounting
standards;
the contract boundary, which is the period over which profit is recognised, differs and is determined based
on the ability to compel the policyholder to pay premiums or the substantive obligation to provide coverage/
services. For some general insurance contracts (e.g. some lender mortgage insurance and reinsurance
contracts) this may result in the contract boundary being longer. For life insurance, in particular term renewable
contracts, the contract boundary is expected to be shorter. Both will be impacted by different patterns of profit
recognition compared to the current standards;
• a narrower definition of what acquisition costs may be deferred;
• an election to recognise changes in assumptions regarding discount rate in other comprehensive income rather
than in profit and loss;
• an election to recognise changes in the fair value of assets supporting policy liabilities in other comprehensive
income rather than through profit and loss;
•
reinsurance contracts and the associated liability are to be determined separately to the gross contract liability
and may have different contract boundaries; and
• additional disclosure requirements.
The standard is expected to result in a reduction in the level of deferred acquisition costs, however the quantum of
this and the profit and loss impacts to the Group are not yet practicable to determine.
2019 Westpac Group Annual Report 153
Notes to the financial statements
Note 1. Financial statements preparation (continued)
On 26 June 2019, the IASB issued an exposure draft proposing a number of amendments to the insurance
contracts standard. If approved, these amendments would allow entities to:
• defer acquisition costs for anticipated renewals outside of the initial contract boundary; and
•
recognise a gain in the P&L for reinsurance contracts, to offset losses from onerous contracts on initial
recognition (to the extent the reinsurance contracts held covers the losses of each contract on a proportionate
basis).
In addition, the effective date of the standard would be deferred by one year to be applicable to the Group for the
30 September 2023 financial year.
AASB Interpretation 23 Uncertainty over Income Tax Treatments (Interpretation 23) was issued in July 2017 and will
be effective for the 30 September 2020 financial year. Interpretation 23 clarifies the recognition and measurement
criteria in AASB 112 Income Taxes (AASB 112) where there is uncertainty over income tax treatments, and requires
an assessment of each uncertain tax position as to whether it is probable that a taxation authority will accept the
position.
Where it is not considered probable, the effect of the uncertainty will be reflected in determining the relevant
taxable profit or loss, tax bases, unused tax losses and unused tax credits or tax rates. The amount will be
determined as either the single most likely amount or the sum of the probability weighted amounts in a range of
possible outcomes, whichever better predicts the resolution of the uncertainty. Judgements will be reassessed as
and when new facts and circumstances are presented.
The interpretation is not expected to have a material impact on the Group.
A revised Conceptual Framework (Framework) was issued in May 2019. This will be effective for the Group for
the 30 September 2021 financial year. The revised Framework includes new definitions and recognition criteria
for assets, liabilities, income and expenses and other relevant financial reporting concepts. The changes are not
expected to have a material impact on the Group.
Other amendments to existing standards that are not yet effective are not expected to have a material impact to
the Group.
Interbank-offered rates (IBOR) reform
IBORs are interest rate benchmarks used in financial markets for pricing, valuing and hedging a wide variety of
financial instruments such as derivatives, loans and bonds. Examples of IBOR include ‘LIBOR’ and ‘EURIBOR’.
A review of the global major IBORs is being conducted to reform or replace existing IBORs with more suitable
alternative reference rates (ARRs). This IBOR reform will impact the accounting for financial instruments that
reference IBORs including hedge accounting, fair value methodologies and existing financial instruments that
reference IBORs at transition. This replacement process is at different stages and is progressing at different
speeds in different jurisdictions. Therefore, there is uncertainty as to the basis, method, timing and implications of
transition to the ARRs.
In October 2019, the AASB issued amendments to AASB 9, AASB 139 and AASB 7 which enable hedge accounting
to continue for certain hedges that might otherwise need to be discontinued due to uncertainties arising from
IBOR reform and requires certain disclosures. These amendments are effective for the Group for the 30 September
2021 financial year with early application permitted.
As a result of these developments, the Group has applied judgement in the current reporting period to determine
that hedge relationships that include IBORs as a hedged risk continue to qualify for hedge accounting. The Group
continues to monitor these developments and the expected impact.
2019 Westpac Group Annual Report1234 154
Notes to the financial statements
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, including dividends. 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 the Westpac Group believe do not reflect ongoing operations;
•
items that are not considered when dividends are recommended, such as the amortisation of intangibles,
impact of Treasury shares and economic hedging impacts; and
• accounting reclassifications between individual line items that do not impact statutory results.
Internal charges and transfer pricing adjustments have been reflected in the performance of each operating
segment. Inter-segment pricing is determined on an arm’s length basis.
Reportable operating segments
On 19 March 2019, the Group announced changes to the way it supports customer’s wealth and insurance needs,
realigning its BTFG businesses into expanded Consumer and Business divisions and exiting the provision of
personal financial advice. As a result, the insurance business was transferred to Consumer, the funds management
business was transferred to Business, and the Advice business and certain support functions of BTFG Australia
were transferred to Group Businesses. Changes to the Group’s organisational structure were effective from 1 April
2019 and the results of the operating segments for 2018 and 2017 have been restated.
The operating segments are defined by the customers they service and the services they provide:
• Consumer:
–
–
is responsible for sales and service of banking and financial products and services to consumer customers in
Australia;
is also responsible for the Group’s Australian insurance business, which covers the manufacture and
distribution of life, general and lenders mortgage insurance; and
– operates under the Westpac, St.George, BankSA, Bank of Melbourne, RAMS and BT brands.
• Business:
–
–
–
is responsible for sales and service of banking and financial products and services for SME and commercial
business customers in Australia. SME and Commercial business customers typically have facilities up to
approximately $150 million;
is responsible for Private Wealth, serving the banking needs of high net worth customers across the banking
brands;
is responsible for the manufacture and distribution of investments (including margin lending and equities
broking), superannuation and retirement products as well as wealth administration platforms; and
– operates under the Westpac, St.George, BankSA, Bank of Melbourne and BT brands.
2019 Westpac Group Annual Report 155
Notes to the financial statements
Note 2. Segment reporting (continued)
• Westpac Institutional Bank (WIB):
–
is responsible for delivering a broad range of financial products and services to commercial, corporate,
institutional and government customers with connections to Australia and New Zealand;
–
services include financing, transactional banking, financial and debt capital markets;
– customers are supported throughout Australia, as well as via branches and subsidiaries located in New
Zealand, US, UK and Asia; and
– also responsible for Westpac Pacific, providing a range of banking services in Fiji and Papua New Guinea.
• Westpac New Zealand:
–
is responsible for sales and service of banking, wealth and insurance products to customers in New Zealand;
– customer base includes consumers, business and institutional customers; and
– operates under the Westpac brand for banking products, the Westpac Life brand for life insurance products
and the BT brand for wealth products.
• 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, (excluding Westpac New Zealand) within set risk limits;
– Group Technology1, which comprises functions for the Australian businesses, is responsible for technology
strategy and architecture, infrastructure and operations, applications development and business integration;
– Core Support2, which comprises functions performed centrally, including Australian banking operations,
property services, strategy, finance, risk, compliance, legal, human resources, and customer and corporate
relations;
– Following the Group’s decision to restructure the Wealth operating segment and to exit the Advice business
in March 2019, the remaining Advice business (including associated remediation) and support functions have
been transferred to Group Business; and
– Group Businesses also includes earnings on capital not allocated to divisions, for certain intra-group
transactions that facilitate presentation of performance of the Group’s operating segments, earnings from
non-core asset sales, earnings and costs associated with the Group’s fintech investments, and certain other
head office items such as centrally held provisions.
• For Westpac, AASB 9 and AASB 15 were adopted on 1 October 2018 and as comparatives were not restated,
line item movements in our reported results are not directly comparable across periods. In order to provide the
operational trends in business, we have revised the 2018 cash earnings comparatives as if the standards applied
on 1 October 2017, except for expected credit loss provisioning which is not feasible. These adjustments do not
impact 2018 cash earnings but do affect individual line items. These adjustments are comprised of:
– Line fees: The Group has reclassified line fees (mostly Business) from non-interest income to net interest
income to more appropriately reflect the relationship with drawn lines of credit;
– Card scheme: Support payments received from Mastercard and Visa have been reclassified to non-interest
income and related expenses have been reclassified to operating expenses;
–
Interest carrying adjustment: Interest on performing loans (stage 1 and stage 2 loans) is now measured on
the gross loan value. Previously, interest on performing loans was recognised on the loan balance net of
provisions. This adjustment increases interest income and impairment charges;
– Other fees and expenses: The Group has restated the classification of a number of fees and expenses.
This has resulted in the grossing up of net interest income, non-interest income, impairment charges and
operating expenses; and
– Merchant terminal costs: Some variable costs related to Westpac’s merchant terminal business have been
reclassified between non-interest income and operating expenses.
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.
2019 Westpac Group Annual Report1234 –
6
22
12
(6)
(75)
–
(81)
16
–
1,655
1,029
929
129
20,649
(10,106)
(794)
9,749
(2,959)
(6)
156
Notes to the financial statements
Note 2. Segment reporting (continued)
Comparatives have also been restated for:
•
recent customer migration between divisions and accompanying impacts on divisional income statement and
balance sheet;
•
refinement in expense allocations; and
• changes to Group’s organisation structure following the realignment of the BTFG businesses into Consumer,
Business and Group Businesses.
The following tables present the segment results on a cash earnings basis for the Group:1
2019
$m
Net interest income
Net fee income
Net wealth management and
insurance income
Trading income
Other income
Consumer
Business
Westpac
Institutional
Bank
Westpac
New
Zealand
Group
Businesses
Total
Net cash
earnings
adjustment
Income
Statement
7,942
5,092
1,443
1,860
616
16,953
(46)
16,907
608
464
610
425
93
15
899
106
(5)
–
695
(13)
163
177
37
46
(190)
1,655
(478)
1,023
(24)
74
907
117
Net operating income before operating
expenses and impairment charges
9,083
6,556
2,735
2,283
(2) 20,655
Operating expenses
(3,817)
(2,805)
(1,284)
(939)
(1,186)
(10,031)
Impairment (charges)/benefits
(581)
(272)
(46)
10
95
(794)
Profit before income tax
Income tax expense
4,685
3,479
1,405
1,354
(1,093)
9,830
(1,397)
(1,048)
(386)
(369)
225
(2,975)
Net profit attributable to non-controlling
interests
–
–
(5)
–
(1)
(6)
Cash earnings for the year
3,288
2,431
1,014
985
(869)
6,849
(65)
6,784
Net cash earnings adjustments
–
(45)
–
(1)
(19)
(65)
Net profit attributable to owners
of Westpac Banking Corporation
3,288
2,386
1,014
984
(888)
6,784
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Statutory comparatives have not been restated. However, where
applicable, cash earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. In
addition, the Group has made a number of presentational changes to the Balance Sheet and Income Statement. Both statutory and
cash earnings comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report 157
Notes to the financial statements
Note 2. Segment reporting1 (continued)
2018
$m
Net interest income
Net fee income
Net wealth management and
insurance income
Trading income
Other income
Consumer
Business
Westpac
Institutional
Bank
Westpac
New
Zealand
Group
Businesses
Total
Net cash
earnings
adjustment
7,850
5,284
1,442
1,799
812
17,187
659
549
96
7
511
1,012
100
17
610
212
697
46
164
149
51
9
(34)
1,910
95
(18)
46
2,017
926
125
(682)
514
44
19
(53)
Income
Statement
16,505
2,424
2,061
945
72
Net operating income before operating
expenses and impairment charges
9,161
6,924
3,007
2,172
901
22,165
(158)
22,007
Operating expenses
(3,774)
(2,651)
(1,449)
(855)
(969)
(9,698)
Impairment (charges)/benefits
(486)
(321)
16
(22)
1
(812)
Profit before income tax
Income tax expense
4,901
3,952
1,574
1,295
(67)
11,655
(1,478)
(1,196)
(476)
(361)
(75)
(3,586)
(46)
(3,632)
Net profit attributable to non-controlling
interests
–
–
(5)
Cash earnings for the year
3,423
2,756
1,093
Net cash earnings adjustments
(15)
(76)
–
–
934
13
1
(4)
(141)
8,065
108
30
–
30
(4)
8,095
Net profit attributable to owners
of Westpac Banking Corporation
3,408
2,680
1,093
947
(33)
8,095
132
102
76
(9,566)
(710)
11,731
2017
$m
Net interest income
Net fee income
Net wealth management and
insurance income
Trading income
Other income
Consumer
Business
Westpac
Institutional
Bank
Westpac
New
Zealand
Group
Businesses
7,733
4,950
1,354
1,706
745
518
488
100
18
951
100
48
628
93
967
28
197
148
51
14
712
82
130
–
(31)
Total
16,455
2,170
1,810
1,218
77
Net operating income before operating
expenses and impairment charges
9,084
6,567
3,070
2,116
893
21,730
Operating expenses
(3,548)
(2,548)
(1,358)
(890)
(834)
(9,178)
Impairment (charges)/benefits
(600)
(369)
(79)
51
43
(954)
Profit before income tax
Income tax expense
4,936
3,650
1,633
1,277
102
11,598
(1,484)
(1,096)
(463)
(360)
(126)
(3,529)
Net cash
earnings
adjustment
Income
Statement
(939)
433
(10)
(16)
452
(80)
(104)
101
(83)
11
–
15,516
2,603
1,800
1,202
529
21,650
(9,282)
(853)
11,515
(3,518)
(7)
Net profit attributable to non-controlling
interests
Cash earnings for the year
Net cash earnings adjustments
Net profit attributable to owners of
Westpac Banking Corporation
–
–
3,452
2,554
(116)
150
(7)
1,163
–
–
917
(14)
–
(7)
(24)
8,062
(72)
7,990
(92)
(72)
3,336
2,704
1,163
903
(116)
7,990
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Statutory comparatives have not been restated. However, where
applicable, cash earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. In
addition, the Group has made a number of presentational changes to the Balance Sheet and Income Statement. Both statutory and
cash earnings comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report1234 158
Notes to the financial statements
Note 2. Segment reporting (continued)
Reconciliation of cash earnings to net profit
$m
Cash earnings for the year
Cash earning adjustments:
Amortisation of intangible assets
Fair value gain/(loss) on economic hedges
Ineffective hedges
Adjustments relating to Pendal
Treasury shares
Total cash earnings adjustments
2019
2018
2017
6,849
8,065
8,062
–
(35)
20
(45)
(5)
(65)
(17)
126
(13)
(73)
7
30
(137)
(69)
(16)
171
(21)
(72)
Net profit attributable to owners of Westpac Banking Corporation
6,784
8,095
7,990
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
Australia1
New Zealand1
Other overseas2
Total
Non-current assets3
Australia
New Zealand
Other overseas2
Total
2019
2018
2017
$m
%
$m
%
$m
%
31,113
4,520
1,331
84.2
32,595
85.6
32,210
86.2
12.2
3.6
4,381
1,097
11.5
2.9
4,326
830
11.6
2.2
36,964
100.0 38,073
100.0
37,366
100.0
12,280
93.7
12,271
93.7
12,326
93.8
761
67
5.8
0.5
756
65
5.8
0.5
745
68
5.7
0.5
13,108
100.0
13,092
100.0
13,139
100.0
1. Comparatives have been restated for consistency.
2. Other overseas included Pacific Islands, Asia, the Americas and Europe.
3. Non-current assets represent property and equipment and intangible assets.
2019 Westpac Group Annual Report 159
Notes to the financial statements
Note 3. Net interest income1
Accounting policy
Interest income and interest expense for all interest earning financial assets and interest bearing financial
liabilities at amortised cost or FVOCI, detailed within the table below, are recognised using the effective interest
rate method. Net income from treasury’s interest rate and liquidity management activities and the cost of the
Bank levy are 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.
Interest income is calculated based on the gross carrying amount of financial assets in stages 1 and 2 of the
Group’s ECL model and on the carrying amount net of the provision for ECL for financial assets in stage 3. Refer
to Note 13 for further details of the Group’s ECL model.
$m
Interest income2
Calculated using the effective interest rate method
Cash and balances with central banks
Collateral paid
Available-for-sale securities
Investment securities
Loans
Other financial assets
Due from subsidiaries
Consolidated
Parent Entity
2019
2018
2017
2019
2018
334
201
326
129
242
96
–
1,914
1,795
311
197
–
1,919
–
–
1,750
301
126
1,743
–
30,029
29,583
28,438
26,171
25,763
35
–
35
–
43
–
33
32
4,274
4,225
Total interest income calculated using the effective interest rate method
32,518
31,987
30,614
32,736
32,190
Other
Net ineffectiveness on qualifying hedges
Trading securities and financial assets measured at FVIS
Loans
Due from subsidiaries
Total other
Total interest income
Interest expense
Calculated using the effective interest rate method
Collateral received
Deposits and other borrowings
Debt issues
Due to subsidiaries
Loan capital
Other financial liabilities
28
662
14
–
(18)
564
38
–
704
584
(22)
574
66
–
618
26
633
14
103
776
(22)
521
38
103
640
33,222
32,571
31,232
33,512
32,830
(57)
(45)
(19)
(51)
(41)
(7,967)
(8,141)
(8,026)
(6,745)
(6,949)
(4,706)
(4,325)
(3,448)
(4,218)
(3,820)
–
(776)
(274)
–
–
(4,905)
(4,840)
(774)
(693)
(318)
(307)
(776)
(273)
(774)
(316)
Total interest expense calculated using the effective interest rate method
(13,780) (13,603) (12,493) (16,968) (16,740)
Other
Deposits and other borrowings
(978)
(880)
(842)
(961)
(868)
Trading liabilities
Debt issues
Bank levy
Due to subsidiaries
Other interest expense
Total other
Total interest expense
Net interest income
(959)
(2,065)
(828)
(754)
(915)
(163)
(391)
–
(155)
(378)
–
(137)
(95)
–
(88)
(91)
(84)
(140)
(138)
(391)
(378)
78
(85)
(11)
(88)
(2,535)
(2,463)
(3,223)
(2,327)
(2,237)
(16,315) (16,066) (15,716) (19,295) (18,977)
16,907
16,505
15,516
14,217
13,853
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Statutory comparatives have not been restated. In addition, the
2.
Group has made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated.
Refer to Note 1 for further detail.
Interest income includes items relating to customer refunds recognised as a reduction in interest income of $372 million (2018:
$127 million, 2017: $58 million) for the Group, and $353 million (2018: $125 million) for the Parent Entity. Refer to Note 27 for further
details.
2019 Westpac Group Annual Report1234 Notes to the financial statements
160
Notes to the financial statements
Note 4. Non-interest income
Accounting policy
Non-interest income includes net fee income, net wealth management and insurance income, trading income and
other income.
Net fee income
When another party is involved in providing goods or services to a Group customer, the Group assesses whether
the nature of the arrangement with its customer is as a principal provider or an agent of another party. Where
the Group is acting as an agent for another party, the income earned by the Group is the net consideration
received (i.e. the gross amount received from the customer less amounts paid to a third party provider). As an
agent, the net consideration represents fee income for facilitating the transaction between the customer and the
third party provider with primary responsibility for fulfilling the contract.
Fee income
Fee income is recognised when the performance obligation is satisfied by transferring the promised good or
service to the customer. Fee income includes facility fees, transaction fees and other non-risk fee income.
Facility fees include certain line fees, annual credit card fees and fees for providing customer bank accounts. They
are recognised over the term of the facility/period of service on a straight line basis.
Transaction fees are earned for facilitating banking transactions such as foreign exchange fees, telegraphic
transfers and issuing bank cheques. Fees for these one-off transactions are recognised once the transaction has
been completed. Transaction fees are also recognised for credit card transactions including interchange fees
net of scheme charges. These are recognised once the transaction has been completed, however, a component
of interchange fees received is deferred as unearned income as the Group has a future service obligation to
customers under the Group’s credit card reward programs.
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).
Fee expenses
Fee expenses include incremental external costs that vary directly with the provision of goods or services to
customers. An incremental cost is one that would not have been incurred if a specific good or service had not
been provided to a specific customer. Fee expenses which form an integral part of the effective interest rate of
a financial instrument are recognised using the effective interest method and recorded in net interest income.
Fee expenses include the costs associated with credit card loyalty programs which are recognised as an expense
when the services are provided on the redemption of points as well as merchant transaction costs.
Net wealth management and insurance income
Wealth management income
Wealth management fees earned for the ongoing management of customer funds and investments are
recognised when the performance obligation is satisfied which is over the period of management.
Insurance premium income
Insurance premium income includes premiums earned for life insurance, life investment, loan mortgage insurance
and general insurance products:
•
life insurance premiums with a regular due date are recognised as revenue on an accrual basis;
•
life investment premiums include a management fee component which is recognised as income over the
period the service is provided. The deposit components of life insurance and investment contracts are not
revenue and are treated as movements in life insurance 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.
Insurance 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 22);
• net income related to Treasury’s interest rate and liquidity management activities is included in net interest income.
Other 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.
2019 Westpac Group Annual Report Notes to the financial statements
Note 4. Non-interest income1 (continued)
$m
Net fee income
Facility fees
Transaction fees
Other non-risk fee income2
Fee income
Credit card loyalty programs
Transaction fee related expenses
Fee expenses
Net fee income
Net wealth management and insurance income
Wealth management income2
Life insurance premium income
General insurance and lenders mortgage insurance (LMI) net premium earned
Life insurance investment and other income3
General insurance and LMI investment and other income
Total insurance premium, investment and other income
Life insurance claims and changes in insurance liabilities
General insurance and LMI claims and other expenses
Total insurance claims, changes in liabilities and other expenses
Net wealth management and insurance income
Trading income
Other income
Dividends received from subsidiaries
Transactions with subsidiaries
Dividends received from other entities
Net gain on sale of associates4
Net gain on disposal of assets
Net gain/(loss) on hedging overseas operations
Net gain/(loss) on derivatives held for risk management purposes5
Net gain/(loss) on financial instruments measured at fair value
Net gain/(loss) on disposal of controlled entities
Rental income on operating leases
Share of associates’ net profit/(loss)
Other2,6
Total other income
Total non-interest income
161
Consolidated
Parent Entity
2019
2018
2017
2019
2018
730
1,365
1,350
680
1,225
1,182
1,258
1,046
(76)
98
229
(638)
1,351
939
54
1,879
2,645
2,837
1,088
2,344
(121)
(103)
(126)
(95)
(152)
(82)
(90)
(76)
(101)
(71)
(224)
(221)
(234)
(166)
(172)
1,655
2,424
2,603
922
2,172
276
1,145
997
1,443
1,410
1,204
482
409
52
472
666
50
451
544
77
2,386
2,598
2,276
(1,266)
(1,396)
(1,155)
(367)
(286)
(318)
(1,633)
(1,682)
(1,473)
1,029
2,061
1,800
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
929
945
1,202
956
919
–
–
6
38
61
–
(11)
(39)
3
72
(23)
22
129
–
–
3
–
24
–
8
38
(9)
107
(10)
(89)
72
–
–
2
279
6
–
52
11
–
143
17
19
2,215
2,013
457
472
3
–
60
(71)
(11)
(25)
–
50
–
6
3
–
–
19
8
36
–
77
–
5
529
2,684
2,633
3,742
5,502
6,134
4,562
5,724
Deferred income in relation to the credit card loyalty programs for the Group was $322 million as at 30 September
2019 (2018: $318 million) and $47 million for the Parent Entity (2018: $34 million). This will be recognised as fee
income as the credit card reward points are redeemed.
There were no other material contract assets or contract liabilities for the Group or the Parent Entity.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2. Compliance, regulation and remediation provisions relating to customer refunds were recognised as a reduction of other non-risk fee
income and wealth management income of $860 million (2018: $171 million; 2017: $111 million) for the Group, and $842 million (2018:
$154 million) for the Parent Entity. Refer to Note 27 for further details.
Includes policy holder tax recoveries.
3.
4. On 26 May 2017, the Group sold 60 million (19% of Pendal’s shares on issue) Pendal shares.
5.
Income from derivatives held for risk management purposes reflects the impact of economic hedges of foreign currency capital and
earnings.
6. The Group recognised $104 million of impairment on the remaining shareholdings of Pendal in 2018.
2019 Westpac Group Annual Report1234
162
Notes to the financial statements
Note 5. Operating expenses1,2
$m
Staff expenses
Consolidated
Parent Entity
2019
2018
2017
2019
2018
Employee remuneration, entitlements and on-costs
4,320
4,292
4,133
3,611
3,537
Superannuation expense3
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 assets
Depreciation and impairment of IT equipment
Technology services
Software maintenance and licences
Telecommunications
Data processing
Total technology expenses
Other expenses
378
108
232
386
380
95
114
113
75
313
101
202
315
97
97
5,038
4,887
4,701
4,227
4,046
658
222
143
632
245
156
648
291
134
1,023
1,033
1,073
719
129
810
371
207
83
620
141
721
342
209
77
628
158
639
313
190
80
597
176
122
895
653
117
670
321
182
81
565
196
134
895
567
124
564
289
183
76
2,319
2,110
2,008
2,024
1,803
Professional and processing services
1,060
824
755
860
638
Amortisation and impairment of intangible assets and deferred expenditure
Postage and stationery
Advertising
Non-lending losses
Impairment on investments in subsidiaries
Other
Total other expenses
Total operating expenses
9
179
245
58
–
175
138
182
173
133
–
86
192
217
155
73
–
108
–
143
196
43
136
107
21
152
127
112
44
162
1,726
1,536
1,500
1,485
1,256
10,106
9,566
9,282
8,631
8,000
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2. Operating expenses include costs recognised in relation to compliance, regulation and remediation provisions of $196 million (2018:
$111 million; 2017: $12 million) for the Group, and $180 million (2018: $108 million) for the Parent entity. Refer to Note 27 for further
details.
3. Superannuation expense includes both defined contribution and defined benefit expense. Further details of the Group’s defined benefit
plans are in Note 34.
2019 Westpac Group Annual Report
163
Notes to the financial statements
Note 6. Impairment charges
Accounting policy
As comparatives have not been restated upon the adoption of AASB 9 the accounting policy applied in 2019
differs to that applied in comparative periods. The accounting policy applied in comparative periods is discussed
in Note 39. The accounting policy applied in 2019 is as follows.
Impairment charges are based on an expected loss model which measures the difference between the current
carrying amount and the present value of expected future cash flows taking into account past experience,
current conditions and multiple probability-weighted macroeconomic scenarios for reasonably supportable
future economic conditions. Further details of the calculation of expected credit losses and the critical
accounting assumptions and estimates relating to impairment charges are included in Note 13.
Impairment charges are recognised in the income statement, with a corresponding amount recognised as
follows:
• Loans, debt securities at amortised cost and due from subsidiaries balances: as a reduction of the carrying
value of the financial asset through an offsetting provision account (refer to Note 13);
• Debt securities at FVOCI: in reserves in other comprehensive income with no reduction of the carrying value
of the debt security (refer to Note 28); and
• Credit commitments: as a provision (refer to Note 27).
Uncollectable loans
A 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 amounts are written off
against their related provision for expected credit losses, after all possible repayments have been received.
Where loans are secured, amounts are generally written off after receiving the proceeds from the security, or
in certain circumstances, where the net realisable value of the security has been determined and this indicates
that there is no reasonable expectation of full recovery, write-off may be earlier. Unsecured consumer loans are
generally written off after 180 days past due.
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.
The following table details impairment charges for year ending 30 September 2019 based on the requirements of
AASB 9.
$m
Provisions raised/(released)
Performing
Non-performing
Recoveries
Impairment charges
of which relates to:
Loan and credit commitments
Impairment charges
Consolidated
Parent Entity
2019
2019
(209)
1,175
(172)
794
794
794
(180)
1,073
(143)
750
750
750
As comparatives have not been restated for the adoption of AASB 9, the following table details impairment
charges for comparative year ends based on the requirements of AASB 139. Once AASB 9 has been effective for all
comparative year ends, this table will no longer be presented.
$m
Individually assessed provisions raised
Write-backs
Recoveries
Collectively assessed provisions raised
Impairment charges
Consolidated
Parent Entity
2018
371
(150)
(179)
668
710
2017
610
(288)
(168)
699
853
2018
341
(131)
(138)
610
682
There were no impairment charges for debt securities at FVOCI, debt securities at amortised cost and due from
subsidiaries balances.
2019 Westpac Group Annual Report1234
164
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 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; and
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.
Current and deferred tax 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
determined based on the expected outcomes.
2019 Westpac Group Annual Report 165
Notes to the financial statements
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 items
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
Total income tax expense1
Consolidated
Parent Entity
2019
9,749
2,925
2018
11,731
3,519
2017
2019
2018
11,515
3,455
9,398
2,819
10,895
3,269
72
69
64
72
69
8
(1)
(1)
(14)
12
(32)
(10)
–
24
(1)
(1)
(5)
64
(28)
9
(18)
8
(1)
(3)
(3)
32
(30)
4
(8)
–
–
–
–
(664)
(604)
(2)
9
(5)
3
45
(2)
34
(3)
–
(12)
2,959
3,632
3,518
2,277
2,751
3,370
3,704
3,404
(401)
(10)
2,959
2,526
433
(81)
9
3,632
3,178
454
2,959
3,632
110
4
3,518
3,072
446
3,518
2,711
(437)
3
2,277
2,215
62
2,806
(55)
–
2,751
2,677
74
2,277
2,751
The effective tax rate was 30.35% in 2019 (2018: 30.96%, 2017: 30.55%).
1. As the Bank Levy is not a levy on income, it is not included in income tax. It is included in Note 3.
2019 Westpac Group Annual Report1234
166
Notes to the financial statements
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 loans1
Provisions for expected credit losses on loans1
Provision for long service leave, annual leave and other employee benefits
Financial instruments
Property and equipment
Other provisions2
All other liabilities2
Consolidated
Parent Entity
2019
2018
2019
2018
–
802
309
2
195
590
366
827
–
323
5
196
225
216
–
695
286
2
173
561
358
708
–
301
2
177
207
204
Total amounts recognised in the income statements
2,264
1,792
2,075
1,599
Amounts recognised directly in other comprehensive income
Investment securities
Cash flow hedges
Defined benefit
Total amounts recognised directly in other comprehensive income
Amount recognised in opening retained profits
Provision for expected credit losses on loans
Provision for impairment on credit commitments
Expected credit losses on investment securities
Financial instruments
Impact on adoption of AASB 91
Gross deferred tax assets
Set-off of deferred tax assets and deferred tax liabilities
Net deferred tax assets
Movements
Opening balance
Impact on adoption of new accounting standards1
Restated opening balance
Recognised in the income statements
Recognised in other comprehensive income
Set-off of deferred tax assets and deferred tax liabilities
10
52
105
167
266
30
1
3
300
2,731
(683)
2,048
1,180
300
1,480
472
117
(21)
–
50
–
50
–
–
–
–
–
1,842
(662)
1,180
1,112
–
1,112
84
(16)
–
11
28
101
140
227
30
1
–
258
2,473
(548)
1,925
1,102
258
–
31
–
31
–
–
–
–
–
1,630
(528)
1,102
1,053
–
1,360
1,053
476
109
(20)
100
(13)
(38)
Closing balance
2,048
1,180
1,925
1,102
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Statutory comparatives have not been restated. In addition, the
Group has made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated.
Refer to Note 1 for further detail.
2. Comparatives has been restated for consistency.
2019 Westpac Group Annual Report
Notes to the financial statements
Note 7. Income tax (continued)
Deferred tax liabilities
The balance comprises temporary differences attributable to:
$m
Amounts recognised in the income statements
Finance lease transactions
Property and equipment
Life insurance assets
All other assets
Total amounts recognised in the income statements
Amounts recognised directly in other comprehensive income
Available-for-sale securities
Defined benefit
Total amounts recognised directly in other comprehensive income
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
167
Consolidated
Parent Entity
2019
2018
2019
2018
230
128
57
312
727
–
–
–
727
(683)
44
18
71
(24)
(21)
44
158
135
51
312
656
10
14
24
680
(662)
18
10
3
5
–
18
206
129
–
213
548
–
–
–
548
(548)
–
3
39
(22)
(20)
–
161
135
–
213
509
7
15
22
531
(528)
3
–
45
(4)
(38)
3
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
Consolidated
Parent Entity
2019
2018
2019
2018
291
190
237
151
Gross retained earnings of subsidiaries which the Parent Entity does not intend to
distribute in the foreseeable future
51
58
–
–
2019 Westpac Group Annual Report1234
168
Notes to the financial statements
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 EPS by assuming all dilutive potential ordinary shares are converted. Refer to
Note 19 and Note 33 for further information on the potential dilutive instruments.
Consolidated
$m
2019
2018
2017
Basic
Diluted
Basic
Diluted
Basic
Diluted
Net profit attributable to shareholders
6,784
6,784
8,095
8,095
7,990
7,990
Adjustment for RSP dividends1
Adjustment for potential dilution:
(6)
(6)
(5)
–
(6)
–
Distributions to convertible loan capital holders2
–
290
–
283
–
253
Adjusted net profit attributable to shareholders
6,778
7,068
8,090
8,378
7,984
8,243
Weighted average number of ordinary shares (millions)
Weighted average number of ordinary shares on issue
3,456
3,456
3,414
3,414
3,364
3,364
Treasury shares (including RSP share rights)1
(6)
(6)
(8)
(8)
(9)
(9)
Adjustment for potential dilution:
Share-based payments
Convertible loan capital2
Adjusted weighted average number of ordinary shares
Earnings per ordinary share (cents)
–
–
3,450
196.5
1
278
3,729
189.5
–
–
3,406
237.5
3
232
3,641
230.1
–
–
3,355
238.0
4
236
3,595
229.3
1. RSP share rights are explained in Note 33. Some RSP share rights have not vested and are not ordinary shares but do receive dividends.
These RSP dividends are deducted to show the profit attributable to ordinary shareholders. In 2019, RSP share rights were antidilutive.
2. The Group has issued convertible loan capital which may convert into ordinary shares in the future (refer to Note 19 for further details).
These convertible loan capital instruments are all dilutive, and diluted EPS is therefore calculated as if the instruments had been
converted at the beginning of the year or, if later, the instruments’ issue date.
2019 Westpac Group Annual Report
Notes to the financial
statements
Notes to the financial statements
Note 9. Average balance sheet and interest rates1
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.
169
Consolidated
Assets
Interest earning assets
Collateral paid
Australia
New Zealand
Other overseas
Trading securities and financial
assets measured at FVIS:
Australia
New Zealand
Other overseas
Available-for-sale securities:
Australia
New Zealand
Other overseas
Investment securities
Australia
New Zealand
Other overseas
Loans and other receivables2:
Australia
New Zealand
Other overseas
Total interest earning assets
2019
2018
2017
Average
Interest
Average
Average
Interest
Average
Average
Interest
Average
Balance
Income
$m
$m
Rate
%
Balance
Income
$m
$m
Rate
%
Balance
Income
$m
$m
Rate
%
8,428
364
2,031
20,691
3,862
4,521
-
-
-
152
7
42
468
85
109
-
-
-
56,875
1,691
3,850
3,062
130
98
589,427
25,931
79,255
3,650
26,558
859
1.8
1.9
2.1
2.3
2.2
2.4
-
-
-
3.0
3.4
3.2
4.4
4.6
3.2
5,239
252
2,594
86
4
39
17,420
423
3,538
3,160
80
61
55,458
1,692
3,304
2,778
136
86
-
-
-
-
-
-
578,679
25,700
73,902
3,516
28,620
748
1.6
1.6
1.5
2.4
2.3
1.9
3.1
4.1
3.1
-
-
-
4.4
4.8
2.6
6,926
733
2,042
18,418
4,238
4,101
65
5
26
416
96
62
52,457
1,573
3,479
2,272
147
75
-
-
-
-
-
-
558,361
24,789
73,055
3,463
26,212
515
0.9
0.7
1.3
2.3
2.3
1.5
3.0
4.2
3.3
-
-
-
4.4
4.7
2.0
and interest income
798,924 33,222
4.2
774,944
32,571
4.2
752,294
31,232
4.2
Non-Interest earning assets
Derivative financial instruments3
Life insurance assets
All other assets3
Total non-interest earning assets3
Total assets3
25,959
9,610
60,231
95,800
894,724
26,443
10,664
61,259
98,366
873,310
28,897
12,447
60,420
101,764
854,058
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2. For 2019, loans and other receivables are net of Stage 3 provisions to reflect the adoption of AASB 9 where interest income is
determined based on their carrying value, net of Stage 3 provisions. Stages 1 and 2 provisions were not included in the average interest
earning assets balance as interest income is determined based on the gross value of loans and other receivables. For 2018 and 2017,
loans and other receivables are net of provisions for impairment charges on loans as interest income is determined based on their
carrying value, net of provisions for impairment charges on loans.
3. Derivative assets for the year ended 30 September 2018 were restated from $34,702 million to $26,443 million (30 September 2017:
$37,673 million to $28,897 million) and all other assets were restated from $61,938 million to $61,259 million (30 September 2017:
$60,111 million to $60,420 million). Accordingly, total non-interest earning assets and total assets were restated.
2019 Westpac Group Annual Report1234
170
Notes to the financial statements
Notes to the financial statements
Note 9. Average balance sheet and interest rates1 (continued)
2019
2018
2017
Average
Balance
$m
Interest
Average
Expense
$m
Rate
%
Average
Balance
$m
Interest
Average
Expense
$m
Rate
%
Average
Balance
$m
Interest
Average
Expense
$m
Rate
%
2,039
390
1,188
425,799
54,720
26,270
15,080
1,777
1,324
41
8
8
7,023
1,235
687
632
91
53
188,736
5,937
15,665
1,294
575
25
2.0
2.1
0.7
1.6
2.3
2.6
4.2
5.1
4.0
3.1
3.7
1.9
2,383
342
184
37
6
2
422,006
7,308
51,368
26,599
15,028
1,645
1,324
1,196
517
635
84
55
177,746
5,594
15,011
1,873
591
41
1.6
1.8
1.1
1.7
2.3
1.9
4.2
5.1
4.2
3.1
3.9
2.2
1,641
98
242
15
2
2
409,586
7,344
51,042
24,085
15,841
43
1,324
1,173
351
638
2
53
171,940
5,343
16,366
2,716
754
39
0.9
2.0
0.8
1.8
2.3
1.5
4.0
4.7
4.0
3.1
4.6
1.4
734,282
16,315
2.2
715,509
16,066
2.2
694,924
15,716
2.3
42,455
5,996
819
26,568
7,653
13,187
96,678
830,960
63,714
50
63,764
41,156
5,204
817
26,218
8,874
13,484
95,753
811,262
62,017
31
62,048
873,310
39,355
4,660
867
32,488
10,560
12,628
100,558
795,482
58,556
20
58,576
854,058
Total liabilities and equity3
894,724
Consolidated
Liabilities
Interest bearing liabilities
Collateral received:
Australia
New Zealand
Other overseas
Deposits and other
borrowings:
Australia
New Zealand
Other overseas
Loan capital:
Australia
New Zealand
Other overseas
Other interest bearing
liabilities2:
Australia
New Zealand
Other overseas
Total interest bearing
liabilities and interest
expense
Non-interest bearing
liabilities
Deposits and other
borrowings:
Australia
New Zealand
Other overseas
Derivative financial
instruments3
Life insurance liabilities
All other liabilities3
Total non-interest bearing
liabilities3
Total liabilities3
Shareholders’ equity
Non-controlling interests
Total equity
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
Include net impact of Treasury balance sheet management activities and the Bank Levy.
2.
3. Derivative liabilities for the year ended 30 September 2018 were restated from $37,504 million to $26,218 million (30 September 2017:
$42,780 million to $32,488 million), and all other liabilities were restated from $12,199 million to $13,484 million (30 September 2017:
$11,586 million to $12,628 million). Accordingly, total non-interest bearing liabilities, total liabilities and total liabilities and equity
were restated.
2019 Westpac Group Annual Report
Notes to the financial statements
171
Note 9. Average balance sheet and interest rates1 (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
Collateral paid:
Australia
New Zealand
Other overseas
Trading securities and financial assets measured at FVIS:
Australia
New Zealand
Other overseas
Investment securities2:
Australia
New Zealand
Other overseas
Loans and other receivables:
Australia
New Zealand
Other overseas
Total change in interest income
Interest bearing liabilities
Collateral received:
Australia
New Zealand
Other overseas
Deposits and other borrowings:
Australia
New Zealand
Other overseas
Loan capital:
Australia
New Zealand
Other overseas
Other interest bearing liabilities:
Australia
New Zealand
Other overseas
Total change in interest expense
Change in net interest income:
Australia
New Zealand
Other overseas
Total change in net interest income
2019
Change due to
2018
Change due to
Volume
Rate
Total
Volume
Rate
Total
52
2
(8)
79
7
26
43
22
9
14
1
11
(34)
(2)
22
(44)
(28)
3
477
255
(54)
(246)
(121)
165
66
3
3
45
5
48
(1)
(6)
12
231
134
111
(16)
(3)
7
(23)
(16)
(13)
90
(7)
17
952
39
50
37
2
6
30
-
12
29
(4)
(6)
(41)
14
183
21
(1)
13
7
(16)
(1)
119
(11)
11
911
53
233
910
(259)
651
1,077
262
1,339
(5)
1
11
66
78
(6)
2
7
-
346
26
(13)
9
1
(5)
4
2
6
7
5
-
15
(1)
-
(351)
(285)
223
(259)
(39)
176
39
170
7
37
16
129
(5)
-
(2)
(3)
(42)
(3)
(3)
7
(2)
343
(16)
(16)
(33)
30
75
-
198
(74)
(16)
7
2
53
(89)
18
22
4
-
(36)
23
166
(3)
82
2
251
(163)
2
513
(264)
249
429
(79)
350
242
174
(19)
397
40
(70)
35
5
282
104
16
402
608
-
40
648
216
79
46
341
824
79
86
989
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2. The volume rate calculations for 2019 Investment securities has been completed against the equivalent Available-for-sale securities.
2019 Westpac Group Annual Report1234
172
Notes to the financial statements
FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Accounting policy
Recognition
Purchases and sales by regular way 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.
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.
The terms are deemed to be substantially different if the discounted present value of the cashflows under the
new terms (discounted using the original effective interest rate) is at least 10% different from the discounted
present value of the remaining cash flows of the original financial liability. Qualitative factors such as a change
in the currency the instrument is denominated in, a change in the interest rate from fixed to floating and
conversion features are also considered.
Classification and measurement
As comparatives have not been restated upon the adoption of AASB 9 the accounting policy applied in 2019
differs to that applied in comparative periods. The accounting policy applied in comparative periods is discussed
in Note 39. The accounting policy applied in 2019 is as follows.
Financial assets are grouped into the following classes: cash and balances with central banks; collateral paid,
trading securities and financial assets measured at FVIS, derivative financial instruments, investment securities,
loans, other financial assets and life insurance assets.
Financial assets
Financial assets are classified based on a) the business model within which the assets are managed, and b)
whether the contractual cash flows of the instrument represent solely payment of principal and interest (SPPI).
The Group determines the business model at the level that reflects how groups of financial assets are managed.
When assessing the business model the Group considers factors including how performance and risks are
managed, evaluated and reported and the frequency and volume of, and reason for, sales in previous periods
and expectations of sales in future periods.
When assessing whether contractual cash flows are SPPI, interest is defined as consideration primarily for the
time value of money and the credit risk of the principal outstanding. The time value of money is defined as the
element of interest that provides consideration only for the passage of time and not consideration for other risks
or costs associated with holding the financial asset. Terms that could change the contractual cash flows so that
they may not meet the SPPI criteria include contingent and leverage features, non-recourse arrangements, and
features that could modify the time value of money.
Debt instruments
If the debt instruments have contractual cash flows which represent SPPI on the principal balance outstanding
they are classified at:
• amortised cost if they are held within a business model whose objective is achieved through holding the
financial asset to collect these cash flows; or
• FVOCI if they are held within a business model whose objective is achieved both through collecting these
cash flows or selling the financial asset; or
• FVIS if they are held within a business model whose objective is achieved through selling the financial asset.
Debt instruments are measured at FVIS where the contractual cash flows do not represent SPPI on the principal
balance outstanding or where it is designated at FVIS to eliminate or reduce an accounting mismatch.
Debt instruments at amortised cost are initially recognised at fair value and subsequently measured at amortised
cost using the effective interest rate method. They are presented net of provisions for expected credit losses
determined using the ECL model. Refer to Notes 6 and 13 for further details.
2019 Westpac Group Annual Report 173
Notes to the financial statements
FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
Accounting policy (continued)
Debt instruments at FVOCI are measured at fair value with unrealised gains and losses recognised in other
comprehensive income except for interest income, impairment charges and foreign exchange gains and losses,
which are recognised in the income statement. Impairment on debt instruments at FVOCI is determined using
the ECL model and is recognised in the income statement with a corresponding amount in other comprehensive
income. There is no reduction of the carrying value of the debt security which remains at fair value.
The cumulative gain or loss recognised in other comprehensive income is subsequently recognised in the income
statement when the instrument is derecognised.
Debt instruments at FVIS are measured at fair value with subsequent changes in fair value recognised in the
income statement.
Equity securities
Equity securities are measured at FVOCI where they:
• are not held for trading; and
• an irrevocable election is made by the Group.
Otherwise, they are measured at FVIS.
Equity securities at FVOCI are measured at fair value with unrealised gains and losses recognised in other
comprehensive income, except for dividend income which is recognised in the income statement. The cumulative
gain or loss recognised in other comprehensive income is not subsequently recognised in the income statement
when the instrument is disposed.
Equity securities at FVIS are measured at fair value with subsequent changes in fair value recognised in the income
statement.
Financial liabilities
Financial liabilities are grouped into the following classes: collateral received, deposits and other borrowings, other
financial liabilities, derivative financial instruments, debt issues and loan capital.
Financial liabilities are measured at amortised cost if they are not held for trading or designated at FVIS, otherwise
they are measured at FVIS.
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 or minus directly
attributable transaction costs respectively.
Further details of 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 22.
2019 Westpac Group Annual Report1234 174
Notes to the financial statements
Note 10. Trading securities and financial assets measured at FVIS1
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 collateral paid or as a
borrowing in collateral received respectively.
Reverse repurchase agreements
Securities purchased under these agreements 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 a reverse repurchase
agreement, which forms part of a trading portfolio that is measured at fair value.
Other financial assets measured at FVIS
Other financial assets measured at FVIS include:
• non-trading securities managed on a fair value basis;
• non-trading debt securities that do not have contractual cash flows that represent SPPI on the principal
balance outstanding; or
• non-trading equity securities for which we have not made irrevocable designation to be measured at FVOCI.
Gains and losses on these financial assets are recognised in the income statement. Interest earned from debt
securities is recognised in interest income (Note 3) while dividends on equity securities are recognised in non-
interest income (Note 4).
$m
Trading securities
Reverse repurchase agreements
Other financial assets measured at FVIS
Consolidated
2019
2018
22,210
18,777
6,833
2,738
1,379
2,976
Parent Entity
2017
16,519
6,887
2,577
2019
20,719
6,731
2,115
2018
17,671
1,379
2,365
Total trading securities and financial assets measured at FVIS
31,781
23,132
25,983
29,565
21,415
Trading securities include the following:
$m
Government and semi-government securities
Other debt securities
Equity securities
Other
Total trading securities
Other financial assets measured at FVIS include:
$m
Other debt securities
Equity securities
Total other financial assets measured at FVIS
Consolidated
2019
2018
16,625
5,497
6
82
13,328
5,354
8
87
Parent Entity
2017
11,402
5,049
11
57
2019
15,585
5,046
6
82
2018
12,519
5,057
8
87
22,210
18,777
16,519
20,719
17,671
Consolidated
Parent Entity
2019
2,394
344
2,738
2018
2,715
261
2017
2,259
318
2019
2,057
58
2018
2,302
63
2,976
2,577
2,115
2,365
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2019 Westpac Group Annual Report
175
Notes to the financial statements
Note 11. Available-for-sale securities/Investment securities
Accounting policy
As comparatives have not been restated upon the adoption of AASB 9 the accounting policy applied in 2019
differs to that applied in comparative years. The accounting policy applied in comparative years is discussed in
Note 39. The accounting policy applied in 2019 is as follows.
Investment securities include debt securities (government and other) and equity securities. It includes debt and
equity securities that are measured at FVOCI and debt securities measured at amortised cost. These instruments
are classified based on the criteria disclosed under the heading “Financial assets and financial liabilities” prior to
Note 10.
Debt securities measured at FVOCI
Includes debt instruments that have contractual cash flows which represent SPPI on the principal balance
outstanding and they are held within a business model whose objective is achieved both through collecting
these cash flows or selling the financial asset.
These securities are measured at fair value with gains and losses recognised in OCI except for interest income,
impairment charges and foreign exchange gains and losses which are recognised in the income statement.
Impairment is measured using the same ECL model applied to financial assets measured at amortised cost.
Impairment is recognised in the income statement with a corresponding amount in OCI with no reduction of the
carrying value of the debt security which remains at fair value. Refer to Note 13 for further details.
The cumulative gain or loss recognised in OCI is subsequently recognised in the income statement when the
instrument is disposed.
Debt securities measured at amortised cost
Include debt instruments that have contractual cash flows which represent SPPI on the principal balance
outstanding and are held within a business model whose objective is achieved through holding the financial
asset to collect these cash flows.
These securities are initially recognised at fair value plus directly attributable transaction costs. They are
subsequently measured at amortised cost using the effective interest rate method and are presented net of any
provisions for ECL.
Equity securities
Equity securities are measured at FVOCI where they are not held for trading, the Group does not have control or
significant influence over the investee and where an irrevocable election is made to measure them at FVOCI.
These securities are measured at fair value with unrealised gains and losses recognised in OCI except for
dividend income which is recognised in the income statement. The cumulative gain or loss recognised in OCI is
not subsequently recognised in the income statement when the instrument is disposed.
Transition to AASB 9
The following table shows how the available-for-sale securities under AASB 139 were classified on adoption of
AASB 9 and the balance sheet line items they are reflected in. Refer to Note 1 for further details.
$m
Available-for-sale securities
Consolidated 1 October 2018
Debt securities
Equity securities
Total available-for-sale securities
Parent Entity 1 October 2018
Debt securities
Equity securities
Total available-for-sale securities
Investment Securities
Trading securities
and financial assets
measured at FVIS
Debt securities at
FVOCI
Equity securities at
FVOCI
Debt securities at
amortised cost
Equity securities
at FVIS
Total
59,924
-
59,924
56,436
-
56,436
-
109
109
-
67
67
811
-
811
10
-
10
-
275
275
-
-
-
60,735
384
61,119
56,446
67
56,513
2019 Westpac Group Annual Report1234 176
Notes to the financial statements
Note 11. Available-for-sale securities/Investment securities1 (continued)
Balances recognised under AASB 9
$m
Investment securities
Investment securities measured at FVOCI
Government and semi-government debt securities
Other debt securities
Equity securities
Total investment securities measured at FVOCI
Investment securities measured at amortised cost
Government and semi-government debt securities
Other debt securities
Total investment securities measured at amortised cost
Provisions for ECL on debt securities at amortised cost
Total net investment securities measured at amortised cost
Total investment securities
Consolidated
Parent Entity
2019
2019
53,389
19,058
134
72,581
736
93
829
(9)
820
50,980
17,325
66
68,371
23
4
27
-
27
73,401
68,398
The expected credit losses recognised in relation to investment securities – debt securities are detailed in Note 13.
The following table shows the maturities of the Group’s investment securities as at 30 September 2019 and their
weighted average yield. There are no tax-exempt securities.
Within
1 year
$m
Over 1
Year to 5
years
Over 5
years to
10 years
Over
10 years
No specific
maturity
%
$m
%
$m
%
$m
%
$m
%
Total
$m
Weighted
average
%
5,691
4.2%
24,137
2.9% 23,040
2.8%
1,248
2.2%
4,040
2.8% 15,060
2.7%
51
2.8%
-
-
-
-
-
-
-
-
-
-
9,731
39,197
23,091
1,248
-
-
134
134
-
-
-
54,116
3.1%
19,151
2.7%
134
-
73,401
2019
Carrying
amount
Government
and semi-
government
debt
securities
Other debt
securities
Equity
securities
Total by
maturity
The maturity profile is determined based upon contractual terms for investment securities.
Investment securities include:
• US Government treasury notes of $10,398 million (2018: $5,229 million, 2017: $6,796 million); and
•
total holdings of debt securities, where the aggregate book value exceeds 10% of equity attributable to
Westpac’s owners:
– Queensland Treasury Corporation totalling $13,218 million;
– Australian Commonwealth Government totalling $10,191 million; and
– New South Wales Treasury Corporation totalling $6,630 million.
Balances recognised under AASB 139
$m
Available-for-sale securities
Government and semi-government securities
Other debt securities
Equity securities
Total available-for-sale securities
Consolidated
Parent Entity
2018
2017
2018
42,979
43,382
40,345
17,756
16,863
16,101
384
465
67
61,119
60,710
56,513
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Statutory comparatives have not been restated. In addition, the
Group has made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated.
Refer to Note 1 for further detail.
2019 Westpac Group Annual Report
177
Notes to the financial statements
Note 12. Loans1
Accounting policy
As comparatives have not been restated upon the adoption of AASB 9 the accounting policy applied in 2019
differs to that applied in comparative years. The accounting policy applied in comparative years is discussed in
Note 39. The accounting policy applied in 2019 is as follows.
Loans are financial assets initially recognised at fair value plus directly attributable transaction costs and fees.
Loans are subsequently measured at amortised cost using the effective interest rate method where they have
contractual cash flows which represent SPPI on the principal balance outstanding and they are held within a
business model whose objective is achieved through holding the loans to collect these cash flows. They are
presented net of any provisions for ECL.
Loans are subsequently measured at FVIS where they do not have cash flows which represent SPPI, are held
within a business model whose objective is achieved by selling the financial asset, or are designated at FVIS to
eliminate or reduce an accounting mismatch.
Refer to Note 22 for balances which are measured at fair value and amortised cost.
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.
The loan portfolio is disaggregated by location of booking office and product type, as follows:
$m
Australia
Housing
Personal2
Business
Total Australia
New Zealand
Housing
Personal2
Business
Total New Zealand
Total other overseas
Total loans
Provisions for ECL on loans (refer to Note 13)
Consolidated
Parent Entity
2019
2018
2019
2018
449,201
444,741
449,192
444,730
21,247
22,997
20,848
22,008
152,360
154,347
148,850
150,580
622,808
622,085
618,890
617,318
47,731
44,772
1,709
29,285
1,869
27,701
78,725
74,342
-
-
411
411
-
-
376
376
16,845
16,077
15,738
14,881
718,378
712,504
635,039
632,575
(3,608)
-
(3,103)
-
Provisions for impairment charges on loans (refer to Note 13)
-
(2,814)
-
(2,407)
Total net loans3
714,770
709,690
631,936
630,168
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2. Margin lending and other which were separately presented in prior years are now included in Personal loans. Comparatives have been
revised for consistency.
3. Total net loans include securitised loans of $7,737 million (2018: $7,135 million) for the Group and $91,061 million (2018: $85,965 million)
for the Parent Entity.
2019 Westpac Group Annual Report1234
178
Notes to the financial statements
Note 12. Loans1 (continued)
The following table shows loans presented based on their industry classification:
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 insurance2
Government, administration and defence
Manufacturing
Mining
Property
Property services and business services
Services
Trade2
Transport and storage
Utilities
Retail lending
Other
Total other overseas
Total loans
2019
2018
2017
2016
2015
8,039
9,210
7,186
8,297
8,642
6,751
14,069
14,059
753
9,337
2,869
44,769
14,035
12,099
16,144
8,268
4,077
628
9,298
3,311
45,471
13,477
12,158
16,501
8,853
4,350
8,177
8,182
6,043
12,923
554
9,054
3,025
7,536
7,953
5,797
14,298
675
9,140
3,641
7,490
7,667
5,596
13,175
796
9,342
4,415
43,220
44,785
44,667
12,050
12,950
16,063
8,624
5,237
11,674
12,362
16,044
9,015
4,025
10,703
10,798
15,484
9,940
3,554
466,550
463,609
451,315
429,522
400,441
5,403
6,680
4,229
2,777
1,587
622,808
622,085
601,646
579,244
545,655
355
8,553
493
3,009
85
1,913
278
6,412
1,182
1,973
2,344
1,131
1,429
323
8,138
502
2,903
114
2,199
206
5,997
1,073
1,733
2,509
1,029
1,003
290
7,772
447
2,478
137
2,090
141
5,858
1,113
1,810
2,163
1,080
1,237
256
7,788
396
2,682
163
2,324
280
5,925
1,084
1,396
2,333
1,257
1,600
182
6,860
359
1,725
292
2,110
407
5,301
925
1,173
2,003
1,094
1,021
49,473
46,613
45,190
45,011
40,277
95
-
-
-
-
78,725
74,342
71,806
72,495
63,729
109
150
55
4,628
2
3,784
468
492
1,610
243
2,293
997
1,086
863
65
112
19
71
4,774
25
3,257
322
467
1,684
205
2,312
1,232
736
683
178
97
5
55
4,289
4
2,982
349
491
540
205
2,680
1,389
514
657
76
118
12
147
2,767
4
2,619
535
479
526
99
3,463
1,186
442
1,120
-
111
568
247
4,297
130
3,848
778
409
403
182
2,898
1,099
722
1,191
77
16,845
16,077
14,333
13,517
16,960
718,378
712,504
687,785
665,256
626,344
Provisions for ECL on loans (refer to Note 13)
(3,608)
-
-
-
-
Provisions for impairment charges on loans (refer to Note 13)
-
(2,814)
(2,866)
(3,330)
(3,028)
Total net loans
714,770
709,690
684,919
661,926
623,316
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2. 2018 comparatives have been revised for consistency.
2019 Westpac Group Annual Report
Notes to the financial statements
Note 12. Loans1 (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 insurance2
Government, administration and defence
Manufacturing
Mining
Property
Property services and business services
Services
Trade2
Transport and storage
Utilities
Retail lending
Other
Total other overseas
Total loans
Provisions for ECL on loans
Provisions for impairment charges on loans
Total net loans
179
2019
2018
7,967
9,151
6,810
14,005
746
9,155
2,849
44,707
13,192
11,853
15,961
7,961
4,053
465,535
4,945
618,890
-
5
8
-
-
94
-
-
7
-
297
-
-
-
-
411
67
130
47
4,624
2
3,780
465
226
1,528
216
2,115
886
1,036
587
29
15,738
635,039
(3,103)
-
631,936
8,228
8,584
6,247
14,006
620
9,072
3,279
45,471
12,433
11,891
16,291
8,456
4,324
462,568
5,848
617,318
-
2
5
-
-
98
-
-
8
-
263
-
-
-
-
376
70
4
59
4,769
24
3,253
323
234
1,595
187
2,126
1,127
734
277
99
14,881
632,575
-
(2,407)
630,168
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2. 2018 comparatives have been restated for consistency.
2019 Westpac Group Annual Report1234
180
Notes to the financial statements
Note 12. Loans1 (continued)
The following table shows the consolidated contractual maturity distribution of all loans by industry as at
30 September 2019:
Consolidated 2019
$m
Loans by type of customer in Australia
Accommodation, cafes and restaurants
Agriculture, forestry and fishing
Construction
Finance and insurance
Government, administration and defence
Manufacturing
Mining
Property
Property services and business services
Services
Trade
Transport and storage
Utilities
Retail lending
Other
Total Australia
Total New Zealand
Total other overseas
Total loans
Consolidated
$m
Interest rate segmentation of Group
loans maturing after one year
By offices in Australia
By offices in New Zealand1
By offices in other overseas1
Up to 1 year
1 to 5 years
Over 5 years
Total
2,776
2,676
1,785
6,278
286
3,420
353
18,410
3,011
3,915
7,314
1,603
1,009
21,725
718
75,279
19,124
6,021
4,883
5,967
4,514
5,054
189
5,413
1,734
24,821
8,969
6,395
7,649
5,758
2,839
12,394
3,511
380
567
887
2,737
278
504
782
1,538
2,055
1,789
1,181
907
229
8,039
9,210
7,186
14,069
753
9,337
2,869
44,769
14,035
12,099
16,144
8,268
4,077
432,431
466,550
1,174
5,403
100,090
447,439
622,808
12,790
9,529
46,811
1,295
100,424
122,409
495,545
Loans at
variable
interest
rates
2019
Loans at
fixed
interest
rates
Loans at
variable
interest
rates
Total
2018
Loans at
fixed
interest
rates
78,725
16,845
718,378
Total
418,494
129,035
547,529
423,886
127,077
550,963
9,102
9,881
50,499
943
59,601
10,824
10,634
8,182
45,852
56,486
927
9,109
Total loans maturing after one year
437,477
180,477
617,954
442,702
173,856
616,558
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2019 Westpac Group Annual Report Notes to the financial
statements
181
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges
Accounting policy
As comparatives have not been restated upon the adoption of AASB 9 the accounting policy applied in 2019
differs to that applied in comparative years. The accounting policy applied in comparative years is discussed in
Note 39. The accounting policy applied in 2019 is as follows.
Note 6 provides details of impairment charges.
Impairment under AASB 9 applies to all financial assets at amortised cost, lease receivables, debt securities
measured at FVOCI and credit commitments.
The ECL determined under AASB 9 is recognised as follows:
• Loans (including lease receivables), debt securities at amortised cost and due from subsidiaries: as a
reduction of the carrying value of the financial asset through an offsetting provision account (refer to Notes
11 and 12);
• Debt securities at FVOCI: in reserves in other comprehensive income with no reduction of the carrying value
of the debt security itself (refer to Notes 11 and 28); and
• Credit commitments: as a provision (refer to Note 27).
Measurement
The Group calculates the provisions for ECL based on a three stage approach. ECL are a probability-weighted
estimate of the cash shortfalls expected to result from defaults over the relevant timeframe. They are 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.
The models use three main components to determine the ECL (as well as the time value of money) including:
• Probability of default (PD): the probability that a counterparty will default;
• Loss given default (LGD): the loss that is expected to arise in the event of a default; and
• Exposure at default (EAD): the estimated outstanding amount of credit exposure at the time of the default.
Model stages
The three stages are as follows:
Stage 1: 12 months ECL - performing
For financial assets where there has been no significant increase in credit risk since origination a provision for
12 months ECL is recognised.
Stage 2: Lifetime ECL – performing
For financial assets where there has been a significant increase in credit risk since origination but where the
asset is still performing a provision for lifetime ECL is recognised. The indicators of a significant increase in credit
risk are described on the following page.
Stage 3: Lifetime ECL – non-performing
For financial assets that are non-performing a provision for lifetime ECL is recognised. Indicators 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.
Financial assets in stage 3 are those that are in default. A default occurs when Westpac considers that the
customer is unlikely to repay its credit obligations in full, irrespective of recourse by the Group to actions such
as realising security, or the customer is more than 90 days past due on any material credit obligation. This
definition is aligned to the APRA regulatory definition of default.
Collective and individual assessment
Financial assets that are in stages 1 and 2 are assessed on a collective basis as are financial assets in stage 3
below specified thresholds. Financial assets that are collectively assessed are grouped in pools of similar assets
with similar credit risk characteristics including the type of product and the customer risk grade. Those financial
assets in stage 3 above the specified thresholds are assessed on an individual basis.
Expected life
In considering the lifetime time frame for expected credit losses in stages 2 and 3, the standard generally
requires use of the remaining contractual life adjusted where appropriate for prepayments, extension and
other options. For certain revolving credit facilities which include both a drawn and undrawn component (e.g.
credit cards and revolving lines of credit), the Group’s contractual ability to demand repayment and cancel the
undrawn commitment does not limit our exposure to credit losses to the contractual notice period. For these
facilities, lifetime is based on historical behaviour.
2019 Westpac Group Annual Report1234 182
Notes to the financial statements
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges (continued)
Accounting policy (continued)
Movement between stages
Assets may move in both directions through the stages of the impairment model. Assets previously in stage
2 may move back to stage 1 if it is no longer considered that there has been a significant increase in credit
risk. Similarly, assets in stage 3 may move back to stage 1 or stage 2 if they are no longer assessed to be non-
performing.
Critical accounting assumptions and estimates
Key judgements include when a significant increase in credit risk has occurred and estimation of forward looking
macroeconomic information. Other factors which can impact the provision include the borrower’s financial
situation, 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.
Significant increase in credit risk
Determining when a financial asset has experienced a significant increase in credit risk since origination is
a critical accounting judgement which is primarily based on changes in internal customer risk grades since
origination of the facility. A change in an internal customer risk grade is based on both quantitative and
qualitative factors. The change in the internal customer risk grade that the Group uses to represent a significant
increase in credit risk is based on a sliding scale. This means that a higher credit quality exposure at origination
would require a more significant downgrade compared to a lower credit quality exposure before it is considered
to have experienced a significant increase in credit risk.
The Group does not rebut the presumption that instruments that are 30 days past due have experienced a
significant increase in risk but this is used as a backstop rather than the primary indicator. In addition, retail
accounts in hardship are considered to have experienced a significant increase in credit risk.
The Group does not apply the low credit risk exemption which assumes investment grade facilities do not have
a significant increase in credit risk.
Forward looking macroeconomic information
The measurement of ECL for each stage and the assessment of significant increase in credit risk consider
information about past events and current conditions as well as reasonable and supportable projections of
future events and economic conditions. The estimation of forward looking information is a critical accounting
judgement. The Group considers three future macroeconomic scenarios including a base case scenario along
with upside and downside scenarios.
The macroeconomic variables used in these scenarios, based on current economic forecasts, include (but are
not limited to) unemployment rates, real gross domestic product growth rates and residential and commercial
property price indices.
• Base case scenario
This scenario utilises the internal Westpac economics forecast used for strategic decision making and
forecasting.
• Upside scenario
This scenario represents a modest improvement on the base case scenario.
• Downside scenario
This scenario represents a moderate recession.
The macroeconomic scenarios are weighted based on the Group’s best estimate of the relative likelihood of each
scenario. The weighting applied to each of the three macroeconomic scenarios takes into account historical
frequency, current trends, and forward looking conditions.
The macroeconomic variables and probability weightings of the three macroeconomic scenarios are subject
to the approval of the Group Chief Financial Officer and Chief Risk Officer with oversight from the Board of
Directors (and its Committees).
Where appropriate, adjustments will be made to modelled outcomes to reflect reasonable and supportable
information not already incorporated in the models.
Judgements can change with time as new information becomes available which could result in changes to the
provision for expected credit losses.
2019 Westpac Group Annual Report Notes to the financial statements
183
Note 13. Provisions for expected credit losses/impairment charges (continued)
Loans and credit commitments
The reconciliation of the provision for ECL tables for loans and credit commitments as at 30 September 2019 below
are based on the requirements of AASB 9. They have been determined by an aggregation of monthly movements
over the year. The key line items in the reconciliation represent the following:
• The transfers between stages lines represent transfers between stage 1, stage 2 and stage 3 prior to
remeasurement of the provision for ECL.
• The business activity during the year line represents new accounts originated during the year net of those that
were derecognised due to final repayments during the year.
• The net remeasurement of ECL line represents the impact on the provision for ECL due to changes in credit
quality during the period (including transfers between stages), changes due to forward looking economic
scenarios and partial repayments and additional drawdowns on existing facilities over the year.
• Write-offs represent a reduction in the provision for ECL as a result of derecognition of exposures where there
is no reasonable expectation of full recovery.
2019 Westpac Group Annual Report1234 184
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges (continued)
Consolidated
$m
Performing
Non-performing
Stage 1
Stage 2
Stage 3
Collectively
assessed
provisions
Individually
assessed
provisions
Provision for impairment charges as at 30 September 2018
-
-
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Business activity during the year
Net remeasurement of provision for ECL
Write-offs
Exchange rate and other adjustments
877
1,884
877
1,884
1,458
(1,404)
(242)
(5)
179
(1,385)
-
2
956
(621)
(19)
874
-
4
-
1,272
1,272
(54)
(714)
626
(330)
1,647
(1,154)
62
Total provision for ECL on loans and credit commitments as
at 30 September 2019
884
1,674
1,355
Presented as:
Provision for ECL on credit commitments
(refer to Note 27)
Provision for ECL on loans (refer to Note 12)
121
178
763
1,496
6
1,349
Total provision for ECL on loans and credit commitments as
at 30 September 2019
884
1,674
1,355
Of which:
Individually assessed provisions
Collectively assessed provisions
-
-
884
1,674
412
943
Total provision for ECL on loans and credit commitments as
at 30 September 2019
884
1,674
1,355
2,631
(2,631)
422
(422)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
The provisions for ECL on loans can be further disaggregated into the following classes:
Consolidated
Housing loans
$m
Performing
Non-performing
Stage 1
Stage 2
Stage 3
Collectively
assessed
provisions
Individually
assessed
provisions
Provision for impairment charges as at 30 September 2018
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Business activity during the year
Net remeasurement of provision for ECL
Write-offs
Exchange rate and other adjustments
-
130
130
343
(38)
-
17
(289)
-
-
-
351
351
(317)
396
(145)
(35)
104
-
-
Total provision for ECL on loans and credit commitments as
at 30 September 2019
163
354
Presented as:
Provision for ECL on credit commitments
(refer to Note 27)
Provision for ECL on loans (refer to Note 12)
5
158
2
352
Total provision for ECL on loans and credit commitments as
at 30 September 2019
163
354
-
501
501
(26)
(358)
145
(141)
567
(119)
22
591
-
591
591
385
(385)
97
(97)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
3,053
980
4,033
-
-
-
(170)
1,136
(1,154)
68
3,913
305
3,608
3,913
412
3,501
3,913
Total
482
500
982
-
-
-
(159)
382
(119)
22
1,108
7
1,101
1,108
2019 Westpac Group Annual Report
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges (continued)
Consolidated
Personal loans
$m
Performing
Non-performing
Stage 1
Stage 2
Stage 3
Collectively
assessed
provisions
Individually
assessed
provisions
Provision for impairment charges as at 30 September 2018
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Business activity during the year
Net remeasurement of provision for ECL
Write-offs
Exchange rate and other adjustments
-
263
263
849
-
589
589
(839)
(148)
368
(2)
62
(350)
(18)
(757)
708
-
1
-
1
-
240
240
(10)
(220)
352
(160)
838
(822)
30
Total provision for ECL on loans and credit commitments as
at 30 September 2019
268
459
248
Presented as:
Provision for ECL on cedit commitments
(refer to Note 27)
Provision for ECL on loans (refer to Note 12)
36
232
35
424
Total provision for ECL on loans and credit commitments as
at 30 September 2019
268
459
-
248
248
761
(761)
3
(3)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Consolidated
Business loans
$m
Performing
Non-performing
Stage 1
Stage 2
Stage 3
Collectively
assessed
provisions
Individually
assessed
provisions
Provision for impairment charges as at 30 September 2018
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Business activity during the year
Net remeasurement of provision for ECL
Write-offs
Exchange rate and other adjustments
-
484
484
266
(56)
(3)
100
(339)
-
1
-
944
944
(248)
192
(126)
34
62
-
3
Total provision for ECL on loans and credit commitments as
at 30 September 2019
453
861
Presented as:
Provision for ECL on credit commitments
(refer to Note 27)
Provision for ECL on loans (refer to Note 12)
80
373
141
720
Total provision for ECL on loans and credit commitments as
at 30 September 2019
453
861
-
531
531
(18)
(136)
129
(29)
242
(213)
10
516
6
510
516
1,485
(1,485)
322
(322)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
185
Total
764
328
1,092
-
-
-
(116)
789
(822)
32
975
71
904
975
Total
1,807
152
1,959
-
-
-
105
(35)
(213)
14
1,830
227
1,603
1,830
2019 Westpac Group Annual Report1234
186
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges (continued)
The following table reconciles the 30 September 2019 provision for ECL on loans and commitments for the Parent
Entity based on the requirements of AASB 9.
Parent Entity
$m
Performing
Non-performing
Stage 1
Stage 2
Stage 3
Collectively
assessed
provisions
Individually
assessed
provisions
Provision for impairment charges as at 30 September 2018
-
-
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Business activity during the year
Net remeasurement of provision for ECL
Write-offs
Exchange rate and other adjustments
741
1,605
741
1,605
1,191
(1,153)
(220)
860
(3)
(554)
168
7
(1,130)
654
-
-
-
1
-
1,113
1,113
(38)
(640)
557
(358)
1,552
(1,023)
48
Total provision for ECL on loans and credit commitments as
at 30 September 2019
747
1,420
1,211
Presented as:
Provision for ECL on credit commitments
(refer to Note 27)
Provision for ECL on loans (refer to Note 12)
107
163
640
1,257
5
1,206
Total provision for ECL on loans and credit commitments as
at 30 September 2019
747
1,420
1,211
-
Of which:
Individually assessed provisions
Collectively assessed provisions
-
-
747
1,420
364
847
Total provision for ECL on loans and credit commitments as
at 30 September 2019
747
1,420
1,211
2,238
(2,238)
375
(375)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Parent Entity
Housing loans
$m
Performing
Non-performing
Stage 1
Stage 2
Stage 3
Collectively
assessed
provisions
Individually
assessed
provisions
Provision for impairment charges as at 30 September 2018
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Business activity during the year
Net remeasurement of provision for ECL
Write-offs
Exchange rate and other adjustments
-
105
105
322
(36)
-
15
(265)
-
-
-
334
334
(302)
386
(141)
(33)
91
-
-
Total provision for ECL on loans and credit commitments as
at 30 September 2019
141
335
Presented as:
Provision for ECL on credit commitments
(refer to Note 27)
Provision for ECL on loans (refer to Note 12)
Total provision for ECL on loans and credit commitments as
at 30 September 2019
4
137
1
334
141
335
-
402
402
(20)
(350)
141
(127)
606
(115)
20
557
-
557
557
516
(516)
82
(82)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
2,613
846
3,459
-
-
-
(183)
1,076
(1,023)
49
3,378
275
3,103
3,378
364
3,014
3,378
Total
598
243
841
-
-
-
(145)
432
(115)
20
1,033
5
1,028
1,033
2019 Westpac Group Annual Report
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges (continued)
The provisions for ECL on loans can be further disaggregated into the following classes:
Parent Entity
Personal loans
$m
Performing
Non-performing
Stage 1
Stage 2
Stage 3
Collectively
assessed
provisions
Individually
assessed
provisions
Provision for impairment charges as at 30 September 2018
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Business activity during the year
-
215
215
635
(138)
(1)
62
-
540
540
(633)
319
(311)
(11)
Net remeasurement of provision for ECL
(544)
497
Write-offs
Exchange rate and other adjustments
-
-
-
-
Total provision for ECL on loans and credit commitments as
at 30 September 2019
229
401
Presented as:
Provision for ECL on credit commitments
(refer to Note 27)
Provision for ECL on loans (refer to Note 12)
29
200
32
369
Total provision for ECL on loans and credit commitments as
at 30 September 2019
229
401
-
200
200
(2)
(181)
312
(158)
753
(733)
22
213
-
213
213
524
(524)
3
(3)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Parent Entity
Business loans
$m
Performing
Non-performing
Stage 1
Stage 2
Stage 3
Collectively
assessed
provisions
Individually
assessed
provisions
Provision for impairment charges as at 30 September 2018
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Transfers to Stage 1
Transfers to Stage 2
Transfers to Stage 3
Business activity during the year
Net remeasurement of provision for ECL
Write-offs
Exchange rate and other adjustments
-
421
421
234
(46)
(2)
91
(321)
-
-
-
731
731
(218)
155
(102)
51
66
-
1
Total provision for ECL on loans and credit commitments as
at 30 September 2019
377
684
Presented as:
Provision for ECL on credit commitments (refer to Note 27)
Provision for ECL on loans (refer to Note 12)
74
303
130
554
Total provision for ECL on loans and credit commitments as
at 30 September 2019
377
684
-
511
511
(16)
(109)
104
(73)
193
(175)
6
441
5
436
441
1,198
(1,198)
290
(290)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
187
Total
527
428
955
-
-
-
(107)
706
(733)
22
843
61
782
843
Total
1,488
175
1,663
-
-
-
69
(62)
(175)
7
1,502
209
1,293
1,502
2019 Westpac Group Annual Report1234
188
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges (continued)
Impact of changes in credit exposures on the provision for ECL
• Stage 1 exposures had a net increase of $7.6 billion for the Group and $4.1 billion for the Parent Entity driven by
housing and business portfolio growth, partly offset by net transfers from Stage 1 to Stage 2 and Stage 3 and
repayments. Stage 1 ECL has a marginal increase driven by the exposure growth.
• Stage 2 credit exposures reduced by $2.1 billion for both the Group and the Parent Entity mainly driven by
reduction in Stage 2 balances in personal portfolio. The Stage 2 exposure decrease has been driven by lower
delinquent balances in the Australian personal portfolio. Stage 2 ECL has decreased.
• Stage 3 credit exposures had a net increase of $0.9 billion for both the Group and the Parent Entity driven by
net transfers to Stage 3 from Stage 1 and Stage 2 with the increase driven by housing and business portfolio.
The increase in Stage 3 exposures is in line with increase in 90 days past due for the home loans portfolio.
Stage 3 ECL has increased in line with the increase in Stage 3 exposures.
Sensitivity of the provision for ECL
As noted in the accounting policy, the critical accounting assumptions in determining the provision for ECL are
the determination of a significant increase in credit risk and the use of probability weighted forward looking
macroeconomic scenarios.
Staging sensitivity
If 1% of the stage 1 gross exposure from loans and credit commitments (calculated on a 12 month ECL) was
reflected in stage 2 (calculated on a lifetime ECL) the provision for ECL would increase by $236 million for the
Group and $209 million for the Parent Entity based on applying the average provision coverage ratios by stage to
the movement in the gross exposure by stage.
Weighting of macroeconomic scenarios
The Group uses three macro-economic scenarios which are probability weighted based on the Group’s best
estimate of the relative likelihood of each scenario.
The Group assigned a weighting of 62.5% to the base case scenario, 27.5% to the downside scenario and 10% to
the upside scenario as at 30 September 2019. During September 2019 there was a 2.5% reduction in the weighting
on the base case scenario from 65% and a corresponding 2.5% increase in the weighting on the downside
scenario from 25%. The increase in weighting to the downside scenario was primarily driven by global economic
uncertainties.
The base case scenario utilises Westpac Economics forecasts and assumes the following one-year outlook: a
GDP growth of 2.5%, a reduction in the rate of growth in commercial property prices to 1.1%, a return to positive
growth of 1% in residential property prices, a 50bps reduction in the cash rate to 0.50% and an increase in the
unemployment rate to 5.6%.
The downside scenario represents a moderate recession. In this scenario there is negative GDP growth, declines in
commercial and residential property prices and an increase in the unemployment rate.
The following table shows the reported provision for ECL based on the probability weighted scenarios and what
the provisions for ECL would be assuming a 100% weighting is applied to the base case scenario and to the
downside scenario (with all other assumptions held constant).
$m
Reported probability-weighted ECL
100% base case ECL
100% downside ECL
Consolidated
Parent Entity
3,913
2,748
7,065
3,378
2,387
6,067
2019 Westpac Group Annual Report Notes to the financial statements
189
Note 13. Provisions for expected credit losses/impairment charges (continued)
Investment Securities – debt securities
The following table reconciles the 30 September 2019 provision for ECL on debt securities based on the
requirements of AASB 9.
$m
Consolidated
Provision for impairment charges as at 30 September 2018
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Stage 1 - change in the provision during the year
Total provision for ECL on investment securities - debt securities as at 30 September 2019
Parent Entity
Provision for impairment charges as at 30 September 2018
Restatement for adoption of AASB 9
Restated provision for ECL as at 1 October 2018
Stage 1 - change in the provision during the year
Total provision for ECL on investment securities - debt securities as at 30 September 2019
Debt
securities at
FVOCI1
Debt
securities at
amortised
cost
Total
Investment
securities -
debt
securities
-
2
2
-
2
-
2
2
-
2
-
9
9
-
9
-
-
-
-
-
-
11
11
-
11
-
2
2
-
2
As comparatives have not been restated for the adoption of AASB 9, the following table reconciles the provision
for impairment charges on loans and credit commitments based on the requirements of AASB 139 for prior years.
$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 27)
Total provisions for impairment charges on loans
Consolidated
Parent Entity
2018
2017
2018
480
371
869
610
(150)
(288)
(269)
(688)
(11)
1
(16)
(7)
422
480
2,639
2,733
668
699
(858)
(968)
179
3
188
(13)
2,631
2,639
3,053
3,119
(239)
(253)
2,814
2,866
417
341
(131)
(248)
(11)
7
375
2,180
610
(742)
148
42
2,238
2,613
(206)
2,407
There were no provisions for impairment charges in prior years under AASB 139 for the securities included in
investment securities (which were previously classified as Available-for-sale securities) or for due from subsidiaries
as no impairment had been incurred.
1.
Impairment on debt securities at FVOCI is recognised in the income statement with a corresponding amount in other comprehensive
income (refer to Note 28). There is no reduction of the carrying value of the debt securities which remain at fair value (refer to Note 11).
2019 Westpac Group Annual Report1234
190
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges (continued)
The following table presents provisions for expected credit losses (for 30 September 2019) and provisions for
impairment charges (for prior years) on loans and credit commitments by industry classification for the past
five years:
Consolidated
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 Australia1
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 1
Total other overseas
Total provisions for ECL/
impairment charges on loans and
credit commitments
2019
2018
2017
2016
2015
$m
%
$m
%
$m
%
$m
%
$m
%
75
93
148
55
111
36
216
230
175
242
109
17
1.9
2.4
3.8
1.4
2.8
0.9
5.5
5.9
4.5
6.2
2.8
0.4
62
69
93
67
196
91
204
128
137
199
79
13
2.0
2.3
3.0
2.2
6.4
3.0
6.7
4.2
4.5
6.5
2.6
0.4
67
59
86
53
164
131
240
155
126
183
92
15
2.1
1.9
2.8
1.7
5.3
4.2
7.7
5.0
4.0
5.9
2.9
0.5
95
74
86
131
278
246
287
216
116
213
73
9
2.7
2.1
2.4
3.7
7.7
6.8
8.0
6.0
3.2
5.9
2.0
0.2
86
115
85
124
219
190
314
95
56
209
142
27
1,890
48.3
1,200
39.3
1,229
39.4
1,102
30.6
1,046
109
2.8
106
3.5
92
2.9
138
3.8
119
2.6
3.4
2.5
3.7
6.6
5.7
9.4
2.8
1.7
6.3
4.3
0.8
31.4
3.6
3,506
89.6
2,644
86.6
2,692
86.3
3,064
85.1
2,827
84.8
2
67
9
2
14
-
20
5
9
15
3
1
173
7
327
80
0.1
1.7
0.2
0.1
0.4
-
0.5
0.1
0.2
0.4
0.1
-
4.4
0.2
8.4
2.0
3
77
16
3
26
1
27
8
9
21
5
2
130
1
329
80
0.1
2.5
0.5
0.1
0.9
-
0.9
0.2
0.3
0.7
0.2
0.1
4.3
-
10.8
2.6
2
93
9
3
24
1
38
11
14
17
5
3
130
-
350
77
0.1
3.0
0.3
0.1
0.8
-
1.2
0.3
0.4
0.5
0.2
0.1
4.2
-
11.2
2.5
2
120
9
4
53
15
52
21
13
18
7
4
125
2
445
93
0.1
3.3
0.2
0.1
1.5
0.4
1.4
0.6
0.4
0.5
0.2
0.1
3.5
0.1
12.4
2.5
1
64
9
3
57
14
62
22
12
25
7
2
128
1
407
98
-
1.9
0.3
0.1
1.7
0.4
1.9
0.6
0.4
0.8
0.2
0.1
3.8
-
12.2
3.0
3,913
100.0
3,053
100.0
3,119
100.0
3,602
100.0
3,332
100.0
1. Comparatives have been restated to include industry segmentation for collectively assessed provisions.
2019 Westpac Group Annual Report
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges (continued)
The following table shows details of loan write-offs by industry classifications for the past five years:
191
Consolidated
$m
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
2019
2018
2017
2016
2015
(12)
(4)
(13)
(4)
(12)
(1)
(31)
(24)
(7)
(62)
(14)
(1)
(14)
(12)
(23)
(4)
(12)
(14)
(39)
(44)
(24)
(56)
(17)
(1)
(903)
(10)
(793)
(5)
(38)
(10)
(30)
(6)
(105)
(46)
(76)
(203)
(97)
(59)
(17)
-
(898)
(17)
(17)
(12)
(20)
(13)
(21)
(18)
(44)
(43)
(36)
(30)
(48)
(1)
(803)
(13)
(40)
(36)
(40)
(12)
(20)
(17)
(104)
(70)
(18)
(56)
(24)
(2)
(658)
(13)
(1,098)
(1,058)
(1,602)
(1,119)
(1,110)
-
(2)
-
-
-
-
-
-
-
(2)
-
-
(50)
-
(54)
(2)
-
-
(1)
-
-
-
(13)
-
(1)
(1)
-
-
(53)
-
(69)
-
-
-
(1)
-
-
-
(2)
-
-
(1)
-
-
(49)
-
(53)
(1)
-
(1)
(1)
-
-
-
(10)
(2)
-
(1)
-
-
(51)
(1)
(67)
(3)
-
(3)
-
-
(1)
(28)
(18)
-
(1)
(4)
-
-
(55)
-
(110)
(18)
(1,154)
(1,127)
(1,656)
(1,189)
(1,238)
Write-offs still under enforcement activity
The amount of current year write-offs which remain subject to enforcement activity was $1,093 million for the
Group and $962 million for the Parent Entity.
2019 Westpac Group Annual Report1234
192
Notes to the financial statements
Note 13. Provisions for expected credit losses/impairment charges (continued)
The following table shows details of recoveries of loans by industry classifications for the past five years:
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
Note 14. Other financial assets1
$m
Accrued interest receivable
Securities sold not delivered
Trade debtors
Interbank lending
Clearing and settlement balances
Accrued fees and commissions
Other
Total other financial assets
2019
2018
2017
2016
2015
-
-
1
-
1
-
8
1
-
2
1
-
135
5
154
18
-
172
1
-
1
1
-
1
7
1
1
2
1
-
139
-
155
24
-
179
3
-
2
1
2
1
10
3
-
3
1
-
118
5
149
19
-
168
-
-
1
34
1
-
3
2
2
1
1
-
84
2
131
6
-
137
-
-
4
8
3
-
15
2
1
1
-
-
78
1
113
18
-
131
(1,154)
(982)
(1,127)
(948)
(1,656)
(1,488)
(1,189)
(1,052)
(1,238)
(1,107)
Consolidated
Parent Entity
2019
1,144
1,687
998
514
750
159
115
2018
1,276
1,264
1,056
953
736
129
103
2019
1,005
1,668
517
510
706
95
114
2018
1,103
1,264
514
939
678
60
108
5,367
5,517
4,615
4,666
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2019 Westpac Group Annual Report
Notes to the financial statements
193
Notes to the financial statements
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 separate statutory funds 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 FVIS. 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 22.
The Life Act places restrictions on life insurance assets, including that they can only be used:
•
•
to meet the liabilities and expenses of that statutory fund;
to acquire investments to further the business of the statutory fund; or
• as a distribution, when the statutory 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 FVIS. 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.
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 FVIS.
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.
2019 Westpac Group Annual Report1234 194
Notes to the financial statements
Note 15. Life insurance assets and life insurance liabilities (continued)
Life insurance assets
Consolidated
$m
Investments held directly and in unit trusts
Unit trusts
Equities
Debt securities
Loans and other assets
Total life insurance assets
2019
2018
6,764
989
1,589
25
6,545
1,223
1,622
60
9,367
9,450
There were no life insurance assets in the Parent Entity as at 30 September 2019 (2018: nil).
Life insurance liabilities
Consolidated
Reconciliation of movements in policy liabilities
Life investment
contracts
Life insurance
contracts
Total
$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
2019
8,438
504
898
(1,218)
(73)
2018
9,854
704
738
(1,115)
(104)
(343)
(1,639)
2019
(841)
12
–
–
–
–
2018
(835)
(6)
–
–
–
–
2019
7,597
516
898
(1,218)
(73)
2018
9,019
698
738
(1,115)
(104)
(343)
(1,639)
8,206
8,438
(829)
(841)
7,377
7,597
There were no life insurance liabilities in the Parent Entity as at 30 September 2019 (2018: nil).
2019 Westpac Group Annual Report 195
Notes to the financial statements
Note 16. 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.
Refer to Note 22 for balances measured at fair value and amortised cost.
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
Other overseas
Certificates of deposit
Non-interest bearing, repayable at call
Other interest bearing at call
Other interest bearing term
Total other overseas
Consolidated
Parent Entity
2019
2018
2019
2018
26,259
43,341
28,746
41,783
26,259
43,341
28,746
41,783
247,161
233,052
247,161
233,052
158,564
171,832
158,564
171,832
475,325
475,413
475,325
475,413
1,058
6,368
22,291
31,084
60,801
11,414
824
1,610
13,273
27,121
1,116
5,406
21,368
29,897
57,787
11,672
830
1,638
11,945
–
–
–
–
–
11,414
385
1,233
13,073
–
–
–
3
3
11,672
352
1,249
11,779
26,085
26,105
25,052
Total deposits and other borrowings
563,247
559,285
501,430
500,468
2019 Westpac Group Annual Report1234 196
Notes to the financial statements
Note 16. 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:
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
2019
2018
2017
Average
balance
$m
Average
rate
%
Average
Balance
$m
Average
rate
%
Average
balance
$m
Average
rate
%
42,455
30,367
237,420
158,012
468,254
6,815
11,854
23,616
45,520
87,805
2.0%
1.1%
2.4%
2.6%
1.1%
3.0%
41,156
31,424
228,328
162,254
463,162
6,021
13,008
23,017
41,942
83,988
2.0%
1.2%
2.5%
1.9%
1.2%
2.8%
39,355
33,350
222,122
154,114
448,941
5,527
13,151
24,163
37,813
80,654
2.0%
1.1%
2.7%
1.4%
1.3%
2.7%
Certificates of deposit and term deposits
All certificates of deposit and majority of term deposits 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 2019
$m
Certificates of deposit greater than US$100,000
Term deposits greater than US$100,000
Less Than
3 Months
10,522
82,291
Between
3 and
6 Months
542
28,166
Between
6 Months
and
1 Year
15,159
21,572
Over 1 Year
36
6,276
Total
26,259
138,305
2019 Westpac Group Annual Report
197
Notes to the financial statements
Note 17. Other financial liabilities1
Accounting policy
Other financial liabilities include liabilities measured at amortised cost as well as liabilities which are measured at
FVIS. Financial liabilities measured at FVIS include:
•
•
trading liabilities (i.e. securities sold short); and
liabilities designated at fair value through income statement (i.e. certain repurchase agreements).
Refer to Note 22 for balances measured at fair value and amortised cost.
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 ‘Investment securities’).
The cash consideration received is recognised as a liability (‘Repurchase agreements’). Repurchase agreements
are designated at fair value where they are managed as part of a trading portfolio, otherwise they are measured
on an amortised cost basis.
Where a repurchase agreement is designated at fair value, 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 also recognised through the
income statement.
$m
Repurchase agreements
Interbank placements
Accrued interest payable
Securities purchased not delivered
Trade creditors and other accrued expenses
Settlement and clearing balances
Securities sold short
Other
Total other financial liabilities
Consolidated
Parent Entity
2019
10,604
9,884
2,627
1,398
1,154
1,222
766
1,560
2018
9,522
8,848
2,968
1,343
1,410
1,347
780
1,887
2019
10,604
9,834
2,312
1,395
927
1,197
766
1,481
2018
9,522
8,829
2,633
1,343
1,125
1,333
780
1,701
29,215
28,105
28,516
27,266
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
2019 Westpac Group Annual Report1234 198
Notes to the financial statements
Note 18. Debt issues
Accounting policy
Debt issues are bonds, notes, commercial paper and debentures that have been issued by entities in the Group.
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.
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 non-interest income.
Refer to Note 22 for balances measured at fair value and amortised cost.
Interest expense incurred is recognised within net interest income using the effective interest rate method.
In the table below, the distinction between short-term (12 months or less) and long-term (greater than 12 months)
debt is based on the original maturity of the underlying security.
$m
Short-term debt:
Own issuances
Total short-term debt
Long-term debt:
Covered bonds
Senior
Securitisation
Structured notes
Total long-term debt
Total debt issues
Movement Reconciliation ($m)
Opening balance
Issuances
Consolidated
Parent Entity
2019
2018
2019
2018
25,838
26,266
23,695
26,266
25,838
26,266
23,695
26,266
38,037
109,340
8,190
52
35,434
103,159
7,588
149
33,160
99,819
30,268
95,754
–
–
–
–
155,619
146,330
132,979
126,022
181,457
172,596
156,674
152,288
172,596
168,356
152,288
61,484
59,456
50,375
144,116
57,440
Maturities, repayments, buy backs and reductions
(63,313)
(64,698)
(56,347)
(58,005)
Total cash movements
Foreign exchange translation impact
Fair value adjustments
Fair value hedge accounting adjustments
Other (amortisation of bond issue costs, etc.)
Total non-cash movements
Closing balance
(1,829)
(5,242)
(5,972)
(565)
6,713
317
3,512
148
11,022
(244)
(1,313)
17
6,514
318
3,376
150
10,252
(240)
(1,288)
13
10,690
9,482
10,358
8,737
181,457
172,596
156,674
152,288
2019 Westpac Group Annual Report Notes to the financial statements
Note 18. Debt issues (continued)
Consolidated
$m
Short-term debt
Own issuances:
US commercial paper
Senior debt:
AUD
GBP
Other
Total own issuances
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
199
2019
2018
19,950
18,675
100
5,366
422
25,838
25,838
43,532
3,480
37,464
5,545
2,538
3,197
550
6,604
437
26,266
26,266
37,571
2,953
31,734
5,290
3,226
2,294
54,490
60,336
5,373
2,926
155,619
146,330
2019
2018
2017
26,879
22,502
28,331
23,315
27,456
23,025
2.8%
3.2%
2.0%
2.5%
1.3%
1.2%
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 20.
2019 Westpac Group Annual Report1234 200
Notes to the financial statements
Note 19. 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.
$m
Additional Tier 1 (AT1) loan capital
Westpac capital notes
USD AT1 securities
Total AT1 loan capital
Tier 2 loan capital
Subordinated notes
Subordinated perpetual notes
Total Tier 2 loan capital
Total loan capital
Movement Reconciliation ($m)
Opening balance
Issuances
Maturities, repayments, buy backs and reductions
Total cash movements
Foreign exchange translation impact
Fair value hedge accounting adjustments
Conversion of Convertible preference shares to ordinary shares
Other (amortisation of bond issue costs, etc.)
Total non-cash movements
Closing balance
Consolidated and
Parent Entity
2019
2018
7,411
1,913
9,324
11,981
521
12,502
21,826
7,370
1,585
8,955
7,822
488
8,310
17,265
17,265
4,935
17,666
2,342
(1,662)
(2,387)
3,273
521
748
–
19
1,288
21,826
(45)
449
(257)
(566)
18
(356)
17,265
2019 Westpac Group Annual Report Notes to the financial statements
Note 19. Loan capital (continued)
Additional Tier 1 loan capital
A summary of the key terms and common features of AT1 instruments are provided below1.
Consolidated and Parent Entity
$m
Distribution interest rate
Potential scheduled
conversion date2
Optional
redemption date3
2019
2018
201
Westpac capital notes (WCN)
$1,384 million WCN
$1,311 million WCN2
$1,324 million WCN3
$1,702 million WCN4
$1,690 million WCN5
$1,423 million WCN6
Total Westpac capital notes
USD AT1 securities
US$1,250 million securities
(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)
(90 day bank bill rate + 3.20% p.a.)
x (1 - Australian corporate tax rate)
(90 day bank bill rate + 3.70% p.a.)
x (1 - Australian corporate tax rate)
5.00% p.a. until but excluding
21 September 2027 (first reset date).
If not redeemed, converted or
written-off earlier, from, and
including, each reset date5 to, but
excluding, the next succeeding
reset date, at a fixed rate p.a. equal
to the prevailing 5-year USD mid-
market swap rate plus 2.89% p.a.
8 March 2021
8 March 20194
–
1,382
23 September 2024 23 September 2022
1,308
1,305
22 March 2023
22 March 2021
1,319
1,316
20 December 2023
20 December 2021
1,694
1,691
22 September 2027 22 September 2025
1,677
1,676
31 July 2026
31 July 2024
1,413
–
7,411
7,370
n/a 21 September 20276
1,913
1,585
Total USD AT1 securities
1,913
1,585
Common features of AT1 instruments
Payment conditions
Quarterly distributions on the Westpac capital notes and semi-annual interest payments on the USD AT1 securities
are discretionary and will only be paid if the payment conditions are satisfied, including that the payment will not
result in a breach of Westpac’s capital requirements under APRA’s prudential standards; not result in Westpac
becoming, or being likely to become, insolvent; or if APRA does not object to the payment.
Broadly, if for any reason a distribution or interest payment has not been paid in full on the relevant payment date,
Westpac must not determine or pay any dividends on Westpac ordinary shares or undertake a discretionary buy
back or capital reduction of Westpac ordinary shares, unless the unpaid amount is paid in full within 20 business
days of the relevant payment date or in certain other circumstances.
1. A$ unless otherwise noted.
2. Conversion is subject to the satisfaction of the scheduled conversion conditions. If the conversion conditions are not satisfied on
the relevant scheduled conversion date, conversion will not occur until the next distribution payment date on which the scheduled
conversion conditions are satisfied.
3. Westpac may elect to redeem the relevant AT1 instrument, subject to APRA’s prior written approval.
4. On 18 December 2018, $722 million of WCN were transferred to the WCN nominated party for $100 each pursuant to the Westpac
Capital Note 6 reinvestment offer. Those WCN were subsequently redeemed by Westpac. On 8 March 2019, the remaining $662 million
of WCN were transferred to the WCN nominated party for $100 each. Following the transfer, those remaining WCN were redeemed by
Westpac.
5. 21 September 2027 and every fifth anniversary thereafter is a reset date.
6. Westpac may elect to redeem on 21 September 2027 and every fifth anniversary thereafter.
2019 Westpac Group Annual Report1234 202
Notes to the financial statements
Note 19. Loan capital (continued)
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 relevant AT1 instrument1 will be converted and holders will receive a variable number of Westpac ordinary
shares calculated using the formula described in the terms of the relevant AT1 instrument, subject to a
maximum conversion number. The conversion number of Westpac ordinary shares will be calculated using
the face value of the relevant AT1 instrument and the Westpac ordinary share price determined over the 20
business day period prior to the scheduled conversion date, including 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 event or non-viability trigger event. 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 basis2).
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, write-off or write-down of relevant capital instruments of the Westpac
Group), or public sector injection of capital (or equivalent support), in each case is necessary because without
it, Westpac would become non-viable.
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 relevant AT1 instrument, subject to a maximum
conversion number. The conversion number of Westpac ordinary shares is calculated using the face value or
outstanding principal amount of the relevant AT1 instrument and the Westpac ordinary share price determined
over the 5 business day period prior to the capital trigger event date or non-viability trigger event date 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 event, if conversion of an AT1
instrument does not occur within five business days, holders’ rights in relation to the relevant AT1 instrument will
be immediately and irrevocably terminated.
• Early conversion
Westpac is able to elect to convert3, or may be required to convert3, AT1 instruments early in certain
circumstances. The terms of conversion and the conversion conditions are broadly similar to scheduled
conversion, however the share price floor in the maximum conversion number will depend on the conversion
event.
Early redemption
Westpac is able to elect to redeem the relevant AT1 instrument on the optional redemption date or for certain
taxation or regulatory reasons, subject to APRA’s prior written approval.
1. Scheduled conversion does not apply to USD AT1 securities.
2. 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.
3. Excludes USD AT1 securities.
2019 Westpac Group Annual Report 203
Notes to the financial statements
Note 19. Loan capital (continued)
Tier 2 loan capital
A summary of the key terms and common features of Westpac’s Tier 2 instruments are provided below1:
Consolidated and
Parent Entity
$m
Interest rate2
Maturity date
redemption date3
2019
2018
Optional
Subordinated notes
A$1,000 million
subordinated notes
CNY1,250 million
subordinated notes
A$350 million
subordinated notes
S$325 million
subordinated notes
A$175 million
subordinated notes
US$100 million
subordinated notes
A$700 million
subordinated notes
JPY20,000 million
subordinated notes
JPY10,200 million
subordinated notes
JPY10,000 million
subordinated notes
NZ$400 million
subordinated notes
JPY8,000 million
subordinated notes
US$1,500 million
subordinated notes
JPY12,000 million
subordinated notes
JPY13,500 million
subordinated notes
HKD600 million
subordinated notes
A$350 million
subordinated notes
A$185 million
subordinated notes
A$250 million
subordinated notes
A$130 million
subordinated notes
A$725 million
subordinated notes
US$1,000 million
subordinated notes
US$1,250 million
subordinated notes
A$1,000 million
subordinated notes
90 day bank bill rate + 2.05% p.a.
14 March 2024
14 March 20194
–
999
4.85% p.a. until but excluding 9 February 2020.
Thereafter, if not redeemed, 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 redeemed, 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 redeemed, 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 redeemed, 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.
Fixed 5.00% p.a.
9 February 2025
9 February 2020
260
252
11 March 2027
11 March 2022
362
347
12 August 2027
12 August 2022
356
330
14 June 2028
14 June 2023
182
171
23 February 2046
n/a
161
114
Floating 90 day bank bill rate + 3.10% p.a.
10 March 2026
10 March 2021
697
700
Fixed 1.16% p.a.
Fixed 1.16% p.a.
Fixed 0.76% p.a.
4.6950% p.a. until but excluding 1 September 2021.
Thereafter, if not redeemed, a fixed rate per annum
equal to the New Zealand 5-year swap rate on
1 September 2021 plus 2.60% p.a.
0.9225% p.a until but excluding 7 October 2021.
Thereafter, if not redeemed, a fixed rate per annum equal
to the five-year JPY mid-swap rate plus 1.0005% p.a.
4.322% p.a. until but excluding 23 November 2026.
Thereafter, if not redeemed, a fixed rate per annum equal
to the five-year USD mid-swap rate plus 2.236% p.a.
0.87% p.a. until but excluding 6 July 2022. Thereafter, if
not redeemed, a fixed rate per annum equal to the
five-year JPY mid-swap rate plus 0.78% p.a.
0.868% p.a. until but excluding 6 July 2022. Thereafter,
if not redeemed, a fixed rate per annum equal to the
five-year JPY mid-swap rate plus 0.778% p.a.
3.15% p.a. until but excluding 14 July 2022. Thereafter,
if not redeemed, a fixed rate per annum equal to the
five-year HKD mid-swap rate plus 1.34% p.a.
4.334% p.a. until but excluding 16 August 2024.
Thereafter, if not redeemed, a fixed rate per annum equal
to the five-year AUD semi-quarterly mid-swap reference
rate plus 1.83% p.a., each of which will be annualised.
Fixed 5.00% p.a.
19 May 2026
2 June 2026
9 June 2026
n/a
n/a
n/a
279
242
142
139
123
120
1 September 2026
1 September 2021
373
358
7 October 2026
7 October 2021
110
97
23 November 2031 23 November 2026
2,297
1,922
6 July 2027
6 July 2022
166
146
6 July 2027
6 July 2022
187
165
14 July 2027
14 July 2022
114
102
16 August 2029
16 August 2024
349
347
24 January 2048
n/a
185
185
90 day bank bill rate + 1.40% p.a.
16 February 2028
16 February 2023
250
250
Fixed 5.00% p.a.
2 March 2048
n/a
90 day bank bill rate + 1.80% p.a.
22 June 2028
22 June 2023
130
724
130
722
Fixed 4.421% p.a.
24 July 2039
n/a
1,606
4.110% p.a. until but excluding 24 July 2029. Thereafter, if
not redeemed a fixed rate per annum equal to the
five-year USD treasury rate plus 2% p.a.
Floating 90 day bank bill rate + 1.98% p.a.
24 July 2034
24 July 2029
1,921
27 August 2029
27 August 2024
991
–
-
–
Total subordinated notes
11,981
7,822
Interest payments are made periodically as set out in the terms of the subordinated notes.
1. Excludes subordinated perpetual notes.
2.
3. Westpac may elect to redeem the relevant Tier 2 instrument on the optional redemption date or dates, subject to APRA’s prior written
approval. If not redeemed on the first optional redemption date, Westpac may elect to redeem the relevant Tier 2 instrument on any
interest payment date after the first optional redemption date (except for US$1,500 million subordinated notes and US$1,250 million
subordinated notes), subject to APRA’s prior written approval.
4. The subordinated notes were redeemed in full on the optional redemption date.
2019 Westpac Group Annual Report1234 204
Notes to the financial statements
Note 19. Loan capital (continued)
Common features of subordinated notes
Interest payments are subject to Westpac being solvent at the time of, and immediately following, the interest
payment. These subordinated notes contain non-viability loss absorption requirements.
Non-viability trigger event
Westpac will be required to convert some or all subordinated notes into a variable number of Westpac ordinary
shares upon the occurrence of a non-viability trigger event. A non-viability trigger event will occur on similar terms
as described under AT1 loan capital.
For each subordinated note converted, holders will receive a variable number of Westpac ordinary shares
calculated using the formula described in the terms of the relevant Tier 2 instrument, subject to a maximum
conversion number. The conversion number of Westpac ordinary shares will be calculated in a manner similar to
that described under AT1 loan capital for a non-viability trigger event. For each Tier 2 instrument, the maximum
conversion number is set using a Westpac ordinary share price which is broadly equivalent to 20% of the Westpac
ordinary share price at the time of issue.
Following the occurrence of a non-viability trigger event, if conversion of a Tier 2 instrument does not occur within
five business days, holders’ rights in relation to the relevant Tier 2 instrument will be immediately and irrevocably
terminated.
Subordinated perpetual notes
These notes have no final maturity but Westpac can choose to redeem them at par on any interest payment date
falling on or after September 1991, subject to APRA approval and certain other conditions. Interest is cumulative
and payable on the notes semi-annually at a rate of 6 month US$ 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.
2019 Westpac Group Annual Report 205
Notes to the financial statements
Note 20. Derivative financial instruments
Accounting policy
Derivative financial instruments are instruments whose values are derived from the value of an underlying asset,
reference rate or index and include forwards, futures, swaps and options.
The Group uses derivative financial instruments for meeting customers’ needs, our asset and liability risk
management activities (ALM), and undertaking market making and positioning activities.
Trading derivatives
Derivatives which are used in our ALM activities but are not designated into a hedge accounting relationship
are considered economic hedges, and are adjusted for cash earnings purposes due to the accounting mismatch
between the fair value of the derivatives and the accounting treatment of the underlying exposure (refer to
Note 2 for further details). These derivatives, along with derivatives used for meeting customers’ needs and
undertaking market making and positioning activities, are measured at FVIS and are disclosed as trading
derivatives.
Hedging derivatives
Hedging derivatives are those which are used in our ALM activities and have also been designated into one
of three hedge accounting relationships: fair value hedge; cash flow hedge; or hedge of a net investment in a
foreign operation. These derivatives are measured at fair value. These hedge designations and the associated
accounting treatment are detailed below.
For more details regarding the Group’s asset and liability risk management activities, refer to Note 21.
Fair value hedges
Fair value hedges are used to 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
related to the hedged risk.
If a hedge is discontinued, any fair value adjustments to the carrying value of the asset or liability are amortised
to net interest income over the period to maturity. If the asset or liability is sold, any unamortised adjustment is
immediately recognised in net interest income.
Cash flow hedges
Cash flow hedges are used to 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 cash flows
attributable to the asset or liability that was hedged impact 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 net 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 net interest income.
Net investment hedges
Net investment hedges are used to hedge foreign exchange risks arising from a net investment of a foreign
operation.
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.
2019 Westpac Group Annual Report1234 206
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
Total derivatives
The carrying values of derivative instruments are set out in the tables below:
Consolidated 2019
$m
Interest rate contracts1
Forward rate agreements
Swap agreements
Options
Total interest rate contracts
Foreign exchange contracts
Trading
Hedging
Total derivatives
carrying value
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
35
(36)
–
–
35
(36)
38,383
(37,051)
4,073
(7,568)
42,456
(44,619)
294
(303)
–
–
294
(303)
38,712
(37,390)
4,073
(7,568)
42,785
(44,958)
Spot and forward contracts
6,857
(6,393)
181
(3)
7,038
(6,396)
Cross currency swap agreements (principal
and interest)
Options
8,934
200
(12,478)
(111)
2,172
–
(69)
–
11,106
200
(12,547)
(111)
Total foreign exchange contracts
15,991
(18,982)
2,353
(72)
18,344
(19,054)
Credit default swaps
Credit protection purchased
Credit protection sold
Total credit default swaps
Commodity contracts
Equities
Total of gross derivatives
Impact of netting arrangements
Total of net derivatives
Consolidated 2018
$m
Interest rate contracts1
Forward rate agreements
Swap agreements
Options
Total interest rate contracts
Foreign exchange contracts
–
83
83
251
1
(88)
–
(88)
(187)
(1)
–
–
–
–
–
–
–
–
–
–
–
83
83
251
1
(88)
–
(88)
(187)
(1)
55,038
(56,648)
6,426
(7,640)
61,464
(64,288)
(27,968)
28,703
(3,637)
6,489
(31,605)
35,192
27,070
(27,945)
2,789
(1,151)
29,859
(29,096)
Trading
Hedging
Total derivatives
carrying value
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
11
(12)
15,626
(15,580)
165
(167)
15,802
(15,759)
–
890
–
890
–
11
(12)
(5,301)
16,516
(20,881)
–
165
(167)
(5,301)
16,692
(21,060)
Spot and forward contracts
6,741
(6,418)
–
(32)
6,741
(6,450)
Cross currency swap agreements (principal
and interest)
Options
6,561
120
(9,019)
2,365
(184)
–
(182)
–
8,926
120
(9,201)
(184)
Total foreign exchange contracts
13,422
(15,621)
2,365
(214)
15,787
(15,835)
Credit default swaps
Credit protection purchased
Credit protection sold
Total credit default swaps
Commodity contracts
Equities
Total of gross derivatives
Impact of netting arrangements
Total of net derivatives
3
99
102
246
1
(101)
–
(101)
(300)
–
–
–
–
–
–
–
–
–
–
–
3
99
102
246
1
(101)
–
(101)
(300)
–
29,573
(31,781)
3,255
(5,515)
32,828
(37,296)
(8,222)
8,912
(505)
3,977
(8,727)
12,889
21,351
(22,869)
2,750
(1,538)
24,101
(24,407)
1. The fair value of futures contracts are settled daily with the exchange, and therefore have been excluded from this table.
2019 Westpac Group Annual Report 207
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
Parent Entity 2019
$m
Interest rate contracts1
Forward rate agreements
Swap agreements
Options
Total interest rate contracts
Foreign exchange contracts
Trading
Hedging
Total derivatives
carrying value
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
35
(36)
–
–
35
(36)
38,489
(37,438)
3,955
(7,018)
42,444
(44,456)
294
(303)
–
–
294
(303)
38,818
(37,777)
3,955
(7,018)
42,773
(44,795)
Spot and forward contracts
6,987
(6,389)
46
Cross currency swap agreements (principal
and interest)
Options
Total foreign exchange contracts
Credit default swaps
Credit protection purchased
Credit protection sold
Total credit default swaps
Commodity contracts
Equities
Total of gross derivatives
Impact of netting arrangements
Total of net derivatives
Parent Entity 2018
$m
Interest rate contracts1
Forward rate agreements
Swap agreements
Options
Total interest rate contracts
Foreign exchange contracts
8,934
200
(12,479)
(111)
1,613
–
16,121
(18,979)
1,659
–
83
83
251
1
(88)
–
(88)
(187)
(1)
–
–
–
–
–
(3)
(6)
–
(9)
–
–
–
–
–
7,033
(6,392)
10,547
(12,485)
200
(111)
17,780
(18,988)
–
83
83
251
1
(88)
–
(88)
(187)
(1)
55,274
(57,032)
5,614
(7,027)
60,888
(64,059)
(27,968)
28,703
(3,637)
6,489
(31,605)
35,192
27,306
(28,329)
1,977
(538)
29,283
(28,867)
Trading
Hedging
Total derivatives
carrying value
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
11
(12)
15,659
(15,751)
165
(167)
15,835
(15,930)
–
841
–
841
–
11
(12)
(5,012)
16,500
(20,763)
–
165
(167)
(5,012)
16,676
(20,942)
Spot and forward contracts
6,737
(6,417)
–
(31)
6,737
(6,448)
Cross currency swap agreements (principal
and interest)
Options
6,562
120
(9,019)
1,845
(124)
8,407
(184)
–
–
120
(9,143)
(184)
Total foreign exchange contracts
13,419
(15,620)
1,845
(155)
15,264
(15,775)
Credit default swaps
Credit protection purchased
Credit protection sold
Total credit default swaps
Commodity contracts
Equities
Total of gross derivatives
Impact of netting arrangements
Total of net derivatives
3
99
102
246
1
(101)
–
(101)
(300)
–
–
–
–
–
–
–
–
–
–
–
3
99
102
246
1
(101)
–
(101)
(300)
–
29,603
(31,951)
2,686
(5,167)
32,289
(37,118)
(8,222)
8,912
21,381
(23,039)
(505)
2,181
3,977
(8,727)
12,889
(1,190)
23,562
(24,229)
1. The fair value of futures contracts are settled daily with the exchange, and therefore have been excluded from this table.
2019 Westpac Group Annual Report1234 208
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
Hedge accounting
The Group designates derivatives into hedge accounting relationships in order to manage the volatility in
earnings and capital that would otherwise arise from interest rate risk and foreign exchange risk that may result
from differences in the accounting treatment of derivatives and underlying exposures. These hedge accounting
relationships and the risks they are used to hedge are described below.
The Group enters into one-to-one hedge relationships to manage specific exposures where the terms of the
hedged item significantly match the terms of the hedging instrument. The Group also uses dynamic hedge
accounting where the hedged items are part of a portfolio of assets and/or liabilities that frequently change. In
this hedging strategy, the exposure being hedged and the hedging instruments may change frequently rather than
there being a one-to-one hedge accounting relationship for a specific exposure.
Fair value hedges
Interest rate risk
The Group hedges its interest rate risk to reduce exposure to changes in fair value due to interest rate fluctuations
over the hedging period. Interest rate risk arising from fixed rate debt issuances and fixed rate bonds classified
as investment securities at FVOCI is hedged with single currency fixed to floating interest rate derivatives. The
Group also hedges its benchmark interest rate risk from fixed rate foreign currency denominated debt issuances
using cross currency swaps. In applying fair value hedge accounting the Group primarily uses one-to-one hedge
accounting to manage specific exposures.
The Group also uses a dynamic hedge accounting strategy for fair value portfolio hedge accounting of some
fixed rate mortgages, primarily in New Zealand to reduce exposure to changes in fair value due to interest rate
fluctuations over the hedging period. These fixed rate mortgages are allocated to time buckets based on their
expected repricing dates and the fixed-to-floating interest rate derivatives are designated accordingly to the
capacity in the relevant time buckets.
The Group hedges the benchmark interest rate which generally represents the most significant component of
the changes in fair value. The benchmark interest rate is a component of interest rate risk that is observable in
the relevant financial markets, for example, BBSW for AUD interest rates, LIBOR for USD interest rates and BKBM
for NZD interest rates. Ineffectiveness generally arises from timing differences on repricing between the hedged
item and the derivative. For the portfolio hedge accounting ineffectiveness also arises from prepayment risk (i.e.
the difference between actual and expected prepayment of loans). In order to manage the ineffectiveness from
early repayments and accommodate new originations the portfolio hedges are de-designated and redesignated
periodically.
Cash flow hedges
Interest rate risk
The Group’s exposure to the volatility of interest cash flows from customer deposits and loans is hedged with
interest rate derivatives using a dynamic hedge accounting strategy called macro cash flow hedges. Customer
deposits and loans are allocated to time buckets based on their expected repricing dates. The interest rate
derivatives are designated accordingly to the gross asset or gross liability positions for the relevant time buckets.
The Group hedges the benchmark interest rate which generally represents the most significant component of the
changes in fair value. The benchmark interest rate is a component of interest rate risk that is observable in the
relevant financial markets, for example, BBSW for AUD interest rates, LIBOR for USD interest rates and BKBM for
NZD interest rates. Ineffectiveness arises from timing differences on repricing between the hedged item and the
interest rate derivative. Ineffectiveness also arises if the notional values of the interest rate derivatives exceed the
capacity for the relevant time buckets. The hedge accounting relationship is reviewed on a monthly basis and the
hedging relationships are de-designated and redesignated if necessary.
Foreign exchange risk
The Group’s exposure to foreign currency principal and credit margin cash flows from fixed rate foreign currency
debt issuances is hedged through the use of cross currency derivatives in a one-to-one hedging relationship to
manage the changes between the foreign currency and AUD. In addition, for floating rate foreign currency debt
issuances, the Group hedges from foreign floating to primarily AUD or NZD floating interest rates. These exposures
represent the most significant components of fair value. Ineffectiveness may arise from basis risk or timing
differences on repricing between the hedged item and the cross currency derivative.
2019 Westpac Group Annual Report 209
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
Net investment hedges
Foreign exchange risk
Structural foreign exchange risk results 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 capital is subject to change that could introduce significant variability to the Bank’s reported
financial results and capital ratios.
The Group uses foreign exchange forward contracts when hedging the currency translation risk arising from net
investments in foreign operations. The Group currently applies hedge accounting to its net investment in New
Zealand operations which is the most material offshore operation and therefore the hedged risk is the movement
of the NZD against the AUD. Ineffectiveness only arises if the notional values of the foreign exchange forward
contracts exceed the net investment in New Zealand operations.
Economic hedges
As part of the Group’s ALM activities, economic hedges are entered into to hedge New Zealand future earnings
and long term funding transactions. These hedges do not qualify for hedge accounting and the impact on profit
and loss of these hedges is treated as a cash earnings adjustment. This is due to the accounting mismatch between
the fair value accounting of the derivatives used in the economic hedges when compared to the recognition of the
New Zealand future earnings as they are earned and the amortised cost accounting of the borrowing respectively.
Refer to Note 2 for further details.
Hedging instruments
The following tables show the carrying value of hedging instruments and a maturity analysis of the notional
amounts of the hedging instruments in one-to-one hedge relationships categorised by the types of hedge
relationships and the hedged risk.
Consolidated 2019
$m
Hedging instrument
Hedged risk
One-to-one hedge relationships
Notional amounts
Within
1 year
Over
1 year to
5 years
Over
5 years
Carrying value
Total
Assets
Liabilities
Fair value hedges
Interest rate swap
Interest rate risk
16,322
61,707
48,271
126,300
2,548
(5,672)
Cross currency swap Interest rate risk
Cash flow hedges
Cross currency swap Foreign exchange risk
Net investment hedges
Forward contracts
Foreign exchange risk
Total one-to-one hedge relationships
Macro hedge relationships
Portfolio fair value hedges
Interest rate swap
Interest rate risk
Macro cash flow hedges
Interest rate swap
Interest rate risk
Total macro hedge relationships
Total of gross hedging derivatives
Impact of netting arrangements
Total of net hedging derivatives
Parent 2019
$m
Hedging instrument
Hedged risk
One-to-one hedge relationships
5,632
5,632
8,152
12,870
15,386
1,708
1,708
20,210
22,726
–
–
8,152
584
1,588
181
(69)
–
(3)
35,738
89,963
51,687 177,388
4,901
(5,744)
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
18,813
176,828
195,641
–
(194)
1,525
1,525
(1,702)
(1,896)
(7,640)
n/a 373,029
6,426
n/a
n/a
n/a
n/a
(3,637)
6,489
2,789
(1,151)
Notional amounts
Within
1 year
Over 1
year to
5 years
Over
5 years
Carrying value
Total
Assets
Liabilities
Fair value hedges
Interest rate swap
Interest rate risk
14,323
59,842
47,881
122,046
2,535
(5,475)
Cross currency swap Interest rate risk
Cash flow hedges
Cross currency swap Foreign exchange risk
Net investment hedges
Forward contracts
Foreign exchange risk
Total one-to-one hedge relationships
Macro hedge relationships
Portfolio fair value hedges
Interest rate swap
Interest rate risk
Macro cash flow hedges
Interest rate swap
Interest rate risk
Total macro hedge relationships
Total of gross hedging derivatives
Impact of netting arrangements
Total of net hedging derivatives
4,473
4,473
2,315
7,185
7,185
–
1,384
1,384
13,042
13,042
–
2,315
441
1,172
46
–
(6)
(3)
25,584
74,212 50,649 150,445
4,194
(5,484)
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
–
166,978
n/a
166,978
n/a 317,423
–
1,420
1,420
5,614
–
(1,543)
(1,543)
(7,027)
n/a
n/a
n/a
n/a
(3,637)
6,489
1,977
(538)
2019 Westpac Group Annual Report1234 210
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
The following tables show the weighted average exchange rate related to significant hedging instruments in one-to-
one hedge relationships.
Consolidated 2019
$m
Cash flow hedges
Hedging instrument
Hedged risk
Cross currency swap
Foreign exchange risk
Net investment hedges
Forward contracts
Foreign exchange risk
Parent Entity 2019
$m
Cash flow hedges
Hedging instrument
Hedged risk
Cross currency swap
Foreign exchange risk
Net investment hedges
Forward contracts
Foreign exchange risk
Currency/
Currency pair
Weighted
average rate
EUR:AUD
EUR:NZD
HKD:NZD
NZD:AUD
0.6929
0.6079
4.9670
1.0545
Currency/
Currency pair
Weighted
average rate
EUR:AUD
JPY:AUD
CNH:AUD
NZD:AUD
0.6929
81.4507
4.9328
1.0546
Impact of hedge accounting on the balance sheet and reserves
The following tables show the carrying amount of hedged items in a fair value hedge relationship and the
component of the carrying amount related to accumulated hedge accounting adjustments.
Consolidated 2019
$m
Interest rate risk
Investment securities
Loans
Debt issues and loan capital
Parent Entity 2019
$m
Interest rate risk
Investment securities
Loans
Debt issues and loan capital
Carrying amount of
hedged item
Accumulated fair value
hedge adjustment
included in carrying
amount
53,273
19,235
(100,909)
2,815
133
(2,818)
Carrying amount of
hedged item
Accumulated fair value
hedge adjustment
included in carrying
amount
49,132
421
(93,296)
2,704
5
(2,661)
Total
(176)
(203)
197
(182)
There were no accumulated fair value hedge adjustments included in the above carrying amounts relating to
hedged items that have ceased to be adjusted for hedging gains and losses.
The pre-tax impact of cash flow and net investment hedges on reserves is detailed below:
Consolidated 2019
$m
Cash flow hedge reserve
Balance at beginning of the year
Net gains/(losses) from changes in fair value
Transferred to interest income
Balance at end of year
Parent Entity 2019
$m
Cash flow hedge reserve
Balance at beginning of the year
Net gains/(losses) from changes in fair value
Transferred to interest income
Balance at end of year
Interest rate risk
Foreign exchange risk
(87)
(158)
146
(99)
(89)
(45)
51
(83)
Interest rate risk
Foreign exchange risk
Total
(42)
(130)
102
(70)
(57)
9
26
(22)
(99)
(121)
128
(92)
There were no balances remaining in the cash flow hedge reserve relating to hedge relationships for which hedge
accounting is no longer applied.
As disclosed in Note 28, the net losses from changes in the fair value of net investment hedges were $129 million
for the Group and $52 million for the Parent Entity. Included in the foreign currency translation reserve is a loss
of $210 million for the Group and $214 million for the Parent Entity relating to discontinued hedges of our net
investment in USD operations. This would only be transferred to the income statement on disposal of the related
USD operations.
2019 Westpac Group Annual Report
211
Notes to the financial statements
Note 20. Derivative financial instruments (continued)
Hedge effectiveness
Hedge effectiveness is tested prospectively at inception and during the lifetime of hedge relationships. For-one-
to one hedge relationships this testing uses a qualitative assessment of matched terms where the critical terms
of the derivatives used as the hedging instrument match the terms of the hedged item. In addition, a quantitative
effectiveness test is performed for all hedges which could include regression analysis, dollar offset and/or
sensitivity analysis.
Retrospective testing is also performed to determine whether the hedge relationship remains highly effective
so that hedge accounting can continue to be applied and also to determine any ineffectiveness. These tests are
performed using regression analysis and the dollar offset method.
The following tables provide information regarding the determination of hedge effectiveness:
Consolidated 2019
$m
Hedging instrument
Hedged risk
Fair value hedges
Interest rate swap
Interest rate risk
Cross currency swap
Interest rate risk
Cash flow hedges
Interest rate swap
Interest rate risk
Net investment hedges Forward contracts
Foreign exchange risk
Cross currency swap
Foreign exchange risk
Total
Parent Entity 2019
$m
Hedging instrument
Hedged risk
Change in
fair value
of hedging
instrument
used for
calculating
ineffectiveness
Change in
value of the
hedged item
used for
calculating
ineffectiveness
Hedge
ineffectiveness
recognised in
interest income
Hedge
ineffectiveness
recognised in
non-interest
income
1,532
192
(6)
6
(129)
1,595
(1,512)
(190)
12
(6)
129
(1,567)
20
2
6
–
n/a
28
n/a
n/a
n/a
n/a
–
–
Change in
fair value
of hedging
instrument
used for
calculating
ineffectiveness
Change in
value of the
hedged item
used for
calculating
ineffectiveness
Hedge
ineffectiveness
recognised in
interest income
Hedge
ineffectiveness
recognised in
non-interest
income
Fair value hedges
Interest rate swap
Interest rate risk
1,684
(1,664)
Cash flow hedges
Interest rate swap
Interest rate risk
Cross currency swap
Interest rate risk
Net investment hedges Forward contracts
Foreign exchange risk
Cross currency swap
Foreign exchange risk
56
(21)
35
(52)
(57)
28
(35)
52
Total
1,702
(1,676)
20
(1)
7
–
n/a
26
n/a
n/a
n/a
n/a
–
–
Comparative year information under prior AASB 7 disclosure requirements
Ineffectiveness of hedge relationships
Fair value hedges
$m
Change in fair value hedging instruments
Change in fair value hedge items attributed to hedged risk
Ineffectiveness in interest income
Cash flow hedges
$m
Cash flow hedge ineffectiveness
2018
Consolidated
Parent Entity
(1,203)
1,192
(11)
(1,208)
1,197
(11)
2018
Consolidated
Parent Entity
(7)
(11)
Net investment hedges
For both the Group and Parent Entity, there was no ineffectiveness for net investment hedges recognised in 2018.
Hedging instruments
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:
2018
Cash inflows
Cash outflows
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
0.3%
0.5%
2.1%
1.8%
21.8%
22.4%
23.8%
23.0%
18.9%
19.5%
19.1%
18.0%
4.7%
4.9%
9.3%
9.9%
2019 Westpac Group Annual Report1234
Notes to the financial
statements
212
Notes to the financial statements
Note 21. 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.
Funding and liquidity risk
The risk that Westpac cannot meet its payment obligations
or that it does not have the appropriate amount, tenor and
composition of funding and liquidity to support its assets.
Note name
Risk management frameworks
Credit risk ratings system
Credit risk mitigation, collateral and other credit
enhancements
Credit risk concentrations
Credit quality of financial assets
Non-performing loans and credit commitments
Collateral held
Liquidity modelling
Sources of funding
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 price.
Expected maturity
Value-at-Risk (VaR)
Traded market risk
Non-traded market risk
Note
number
21.1
21.2.1
21.2.2
21.2.3
21.2.4
21.2.5
21.2.6
21.3.1
21.3.2
21.3.3
21.3.4
21.3.5
21.4.1
21.4.2
21.4.3
Risk management frameworks
21.1
The Board is responsible for approving the Westpac Group Risk Management Framework, Westpac Group Risk
Management Strategy and Westpac Group Risk Appetite Statement and for monitoring the effectiveness of risk
management by the Westpac Group. The Board has delegated to the Board Risk and Compliance Committee
(BRCC) responsibility to:
•
•
review and recommend the Westpac Group Risk Management Framework, Westpac Group Risk Management
Strategy and Westpac Group Risk Appetite Statement to the Board for approval;
review and monitor the risk profile and controls of the Group consistent with Westpac Group’s 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.
2019 Westpac Group Annual Report Notes to the financial statements
Note 21. Financial risk (continued)
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
Risk management framework and controls
Credit risk
• The Credit Risk Management Framework describes the principles, methodologies, systems, roles
and responsibilities, reports and key controls for managing credit risk.
213
• 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 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 CREDCO) prior to approval under delegated
authority from the Chief Risk Officer.
•
In determining the provision for expected credit losses, the macroeconomic variables and the
probability weightings of the forward looking scenarios as well as any adjustments made to the
modelled outcomes are subject to the approval of the Group Chief Financial Officer and the
Chief Risk Officer with oversight from the Board of Directors (and its Committees).
• 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.
Funding and
liquidity risk
• Funding and liquidity risk is measured and managed in accordance with the policies and
processes defined in the Board-approved Liquidity Risk Management Framework which is part
of the Westpac Board-approved Risk Management Strategy.
• Responsibility for managing Westpac’s liquidity and funding positions in accordance with
Westpac’s Liquidity Risk Management Framework is delegated to Treasury, under the oversight
of Group ALCO and Group Liquidity Risk.
• Westpac’s Liquidity Risk Management Framework sets out Westpac’s funding and liquidity risk
appetite, roles and responsibilities of key people managing funding and liquidity risk within
Westpac, risk reporting and control processes and limits and targets used to manage Westpac’s
balance sheet.
• Treasury undertakes an annual funding review that outlines Westpac’s balance sheet funding
strategy over a three year period. This review encompasses trends in global markets, peer
analysis, wholesale funding capacity, expected funding requirements and a funding risk analysis.
This strategy is continuously reviewed to take account of changing market conditions, investor
sentiment and estimations of asset and liability growth rates.
• Westpac monitors the composition and stability of its funding so that it remains within
Westpac’s funding risk appetite. This includes compliance with both the Liquidity Coverage
Ratio (LCR) and Net Stable Funding Ratio (NSFR).
• Westpac holds a portfolio of liquid assets for several purposes, including as a buffer against
unforeseen funding requirements. The level of liquid assets held takes into account the liquidity
requirements of Westpac’s balance sheet under normal and stress conditions.
• Treasury also maintains a contingent funding plan that outlines the steps that should be taken
by Westpac in the event of an emerging ‘funding crisis’. The plan is aligned with Westpac’s
broader Liquidity Crisis Management Policy which is approved annually by the Board.
• Daily liquidity risk reports are reviewed by Treasury and the Group’s Liquidity Risk teams.
Liquidity reports are presented to ALCO monthly and to the BRCC quarterly.
2019 Westpac Group Annual Report1234 214
Notes to the financial statements
Note 21. Financial risk (continued)
Risk
Risk management framework and controls
Market risk
• The Market Risk Framework describes the Group’s approach to managing traded and non-
traded market risk.
• Traded market risk includes interest rate, foreign exchange, commodity, equity price, credit
spread and volatility risks. Non-traded market risk includes interest rate and credit spread 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 risk appetite for traded and non-traded risks through the use of VaR,
NaR and specific structural risk limits.
• Westpac Group Market Risk Committee (MARCO) 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 management based upon the Bank’s risk appetite and
business strategies in addition to the consideration of market liquidity and concentration.
• Market risk positions are managed by the trading desks and ALM unit 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 the MARCO, RISKCO and the BRCC.
• Daily stress testing and backtesting of VaR results are 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. MARCO 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 hedging using derivatives. This is overseen by the Market Risk unit and
reviewed by MARCO, RISKCO and BRCC.
21.2
Credit Risk
21.2.1 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
Transaction managed customers are generally customers with business lending exposures. They are individually
assigned a Customer Risk Grade (CRG), 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.
The table below shows Westpac’s high level CRGs for transaction-managed portfolios mapped to the Group’s
credit quality disclosure categories and to their corresponding external rating.
2019 Westpac Group Annual Report Notes to the financial statements
Note 21. Financial risk (continued)
Financial statement disclosure
Westpac CRG
Moody’s Rating
Transaction-managed
Strong
Good/satisfactory
Weak
Weak/default/non-performing
A
B
C
D
E
F
G
H
Aaa – Aa3
A1 – A3
Baa1 – Baa3
Ba1 – B1
Westpac Rating
Watchlist
Special Mention
Substandard/Default
Default
215
S&P Rating
AAA – AA–
A+ – A–
BBB+ – BBB–
BB+ – B+
Program-managed portfolio
The program-managed portfolio generally includes retail products including mortgages, personal lending
(including credit cards) as well as SME lending. These customers are grouped into pools of similar risk. Pools are
created by analysing similar risk 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 credit quality of these pools is based on a combination of behavioural factors, delinquency trends,
PD estimates and loan to valuation ratio (housing loans only).
21.2.2 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 form of guarantees and deposits.
Loans – business1
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. Personal lending also includes margin lending which is secured primarily by
shares or managed funds.
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.
Trading securities,
financial assets
measured at FVIS
and derivatives
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.
2019 Westpac Group Annual Report1234 216
Notes to the financial statements
Note 21. 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. These
processes include margining for non-centrally cleared customer derivatives as regulated by
Australian Prudential Standard CPS226. The collateralisation arrangements are documented
via the Credit Support Annex of the International Swaps and Derivatives Association (ISDA)
dealing agreements and Global Master Repurchase Agreements (GMRA) for repurchase
transactions.
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 sovereign governments and supranationals as approved by an
authorised credit officer;
• protection bought via credit-linked notes (provided the proceeds are invested in cash or
other eligible collateral).
Other credit
enhancements
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 23.
Offsetting
Central clearing
The Group 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.
2019 Westpac Group Annual Report 217
Notes to the financial statements
Note 21. Financial risk (continued)
21.2.3 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 maximum exposure to credit risk (excluding collateral received) is represented by the carrying amount of
on-balance sheet financial assets (which comprises cash and balances with central banks, collateral paid, trading
securities and financial assets measured at FVIS, derivatives, available-for-sale securities/investment securities,
loans; and other financial assets) and undrawn credit commitments.
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 measured at FVIS and available-for-sale securities/
investment securities exclude equity securities as the primary financial risk is not credit risk.
The credit concentrations for each significant class of financial asset are:1
Trading securities
and financial
assets measured
at FVIS (Note 10)
Available-for-
sale securities
/ Investment
securities (Note
11)
• 45% (2018: 41%) were issued by financial institutions for the Group; 44% (2018: 40%) for
the Parent Entity.
• 51% (2018: 55%) were issued by government or semi-government authorities for the
Group; 52% (2018: 56%) for the Parent Entity.
• 71% (2018: 73%) were held in Australia by the Group; 75% (2018: 76%) by the Parent Entity.
• 24% (2018: 27%) were issued by financial institutions for the Group; 25% (2018: 28%) for
the Parent Entity.
• 75% (2018: 73%) were issued by government or semi-government authorities for the
Group; 75% (2018: 72%) for the Parent Entity.
• 90% (2018: 89%) were held in Australia by the Group; 97% (2018: 96%) by the Parent
Entity.
Loans (Note 12)
• Note 12 provides a detailed breakdown of loans by industry and geographic classification.
Derivative
financial
instruments (Note
20)
• 72% (2018: 79%) were issued by financial institutions for both the Group and Parent Entity.
• 78% (2018: 84%) were held in Australia by the Group; 80% (2017: 86%) by the Parent
Entity.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentation changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report1234 Property services and business services
14,191
5,898
20,089
218
Notes to the financial statements
Note 21. 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
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 restated for consistency.
2019
Undrawn
credit
commit-
ments
Total on
balance
sheet
Total
1,070
2,014
9,131
11,264
3,340
10,569
8,316
8,662
6,764
7,316
1,766
5,850
3,802
80,368
68,002
65,348
50,757
16,354
7,127
Total on
balance
sheet
8,061
9,250
7,229
73,052
63,582
10,504
3,325
45,467
10,119
55,586
12,340
16,593
9,529
5,567
6,523
18,863
7,677
24,270
5,114
14,643
4,487
10,054
9,979
3,641
45,871
13,577
12,312
16,866
9,599
5,291
20181
Undrawn
credit
commit-
ments
1,404
2,035
3,324
7,781
728
5,738
3,079
Total
9,720
10,697
10,088
75,783
51,485
15,717
6,720
12,309
58,180
5,596
5,700
7,951
4,958
3,471
19,173
18,012
24,817
14,557
8,762
467,206
84,057
551,263
464,329
86,421
550,750
6,668
2,740
9,408
7,924
1,597
9,521
752,564
151,773
904,337
731,890
152,092
883,982
356
8,631
503
11,685
6,667
2,079
289
6,977
1,300
2,023
2,441
1,209
1,938
36
607
350
1,507
856
1,758
29
1,120
557
577
1,259
755
1,447
392
9,238
853
13,192
7,523
3,837
318
8,097
1,857
2,600
3,700
1,964
3,385
324
8,205
505
8,368
4,867
2,312
213
6,252
1,110
1,762
2,573
1,105
1,418
49,542
12,056
61,598
46,700
151
161
312
14
39
684
429
1,437
691
1,577
101
1,035
512
613
1,023
791
1,564
12,114
245
363
8,889
934
9,805
5,558
3,889
314
7,287
1,622
2,375
3,596
1,896
2,982
58,814
259
95,791
23,075
118,866
85,728
22,855
108,583
109
150
55
17,712
5,646
3,830
500
493
1,766
244
2,318
999
1,088
864
171
11
3
127
120
153
182
112
19
71
12
1
121
3,093
20,805
23,739
3,454
23
5,329
1,872
29
863
637
2,859
652
931
37
26
5,669
9,159
2,372
522
2,629
881
5,177
1,651
2,019
901
197
4,252
3,372
354
468
1,758
207
2,323
1,235
765
684
318
50
4,849
1,793
57
733
448
3,330
222
329
45
6
124
20
192
27,193
4,302
8,221
2,147
525
2,491
655
5,653
1,457
1,094
729
324
35,945
16,492
52,437
39,677
15,450
55,127
884,300
191,340
1,075,640
857,295
190,397
1,047,692
2019 Westpac Group Annual Report
Notes to the financial statements
Note 21. 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 restated for consistency.
219
Total
9,651
10,639
9,584
164,270
51,473
15,492
6,687
58,178
18,128
17,744
24,604
14,159
8,736
2019
Undrawn
credit
commit-
ments
1,070
2,014
3,340
Total
9,059
11,205
10,193
Total on
balance
sheet
8,247
8,604
6,260
7,316
165,734
156,489
1,766
65,365
50,745
5,850
3,802
16,172
7,106
9,754
3,609
20181
Undrawn
credit
commit-
ments
1,404
2,035
3,324
7,781
728
5,738
3,078
Total on
balance
sheet
7,989
9,191
6,853
158,418
63,599
10,322
3,304
45,405
10,119
55,524
45,869
12,309
13,348
12,094
16,408
9,221
5,542
5,898
6,523
19,246
18,617
7,677
24,085
5,114
14,335
4,487
10,029
12,533
12,044
16,655
9,202
5,265
5,595
5,700
7,949
4,957
3,471
466,188
84,057
550,245
463,280
86,421
549,701
5,684
2,740
8,424
6,499
1,574
8,073
833,566
151,773
985,339
815,055
152,064
967,119
-
67
17
10,938
2,196
259
11
117
123
46
392
76
507
-
37
-
7
16
116
8
69
-
3
18
1
170
64
73
13
1
-
74
33
11,054
2,204
328
11
120
141
47
562
140
580
13
38
-
52
7
8,103
1,039
209
7
52
43
25
324
77
374
1
1
-
7
22
50
29
97
1
8
31
44
234
87
146
19
1
-
59
29
8,153
1,068
306
8
60
74
69
558
164
520
20
2
14,786
559
15,345
10,314
776
11,090
67
130
47
10
1
125
77
131
172
70
4
59
12
1
113
82
5
172
60,388
3,067
63,455
63,043
3,442
66,485
4,815
3,822
497
227
1,683
216
2,140
888
1,038
588
133
23
5,269
1,869
13
862
634
2,688
643
905
32
14
4,838
9,091
2,366
240
2,545
850
4,828
1,531
1,943
620
147
3,475
3,367
355
235
1,668
188
2,137
1,129
763
277
238
50
4,741
1,791
31
730
445
3,216
214
329
40
4
3,525
8,108
2,146
266
2,398
633
5,353
1,343
1,092
317
242
76,679
16,155
92,834
77,008
15,159
92,167
925,031
168,487
1,093,518
902,377
167,999
1,070,376
2019 Westpac Group Annual Report1234
220
Notes to the financial statements
Note 21. Financial risk (continued)
21.2.4 Credit quality of financial assets
Credit quality disclosures (AASB 9)
The following tables show the credit quality of gross credit risk exposures measured at amortised cost or at FVOCI
to which the impairment requirements of AASB 9 apply. The credit quality is determined by reference to the credit
risk ratings system (refer Note 21.2.1) and expectations of future economic conditions under multiple scenarios:
$m
Loans - housing
Strong
Good/Satisfactory
Weak
Total loans - housing
Loans - personal
Strong
Good/Satisfactory
Weak
Total loans - personal
Loans - business2
Strong
Good/Satisfactory
Weak
Consolidated 2019
Parent Entity 2019
Stage 1
Stage 2
Stage 3
Total1
Stage 1
Stage 2
Stage 3
Total1
382,119
84,071
4,201
743
11,326
10,715
-
-
382,862
361,727
95,397
58,599
4,367
19,283
3,735
536
10,623
10,244
-
-
362,263
69,222
4,076
18,055
470,391
22,784
4,367 497,542 424,061
21,403
4,076 449,540
5,694
14,538
573
2
955
831
20,805
1,788
–
–
380
380
5,696
15,493
1,784
5,106
13,381
427
22,973
18,914
75,758
109,541
439
232
4,581
5,342
-
-
75,990
64,041
114,122
90,937
1,970
7,751
362
Total loans - business
185,738
10,155
1,970
197,863
155,340
Debt securities
Strong
Good/Satisfactory
Weak
Total debt securities3
All other financial assets
Strong
Good/Satisfactory
Weak
Total all other financial assets
Undrawn credit commitments
Strong
Good/Satisfactory
Weak
72,813
463
-
73,276
30,623
685
48
31,356
-
–
–
-
-
-
-
-
148,525
39,782
142
328
1,294
1,135
–
–
–
-
-
-
-
-
-
-
72,813
68,309
463
-
23
-
73,276
68,332
30,623
162,339
685
48
496
41
31,356
162,876
148,853
132,776
41,076
33,097
134
1,411
123
1
931
680
1,612
123
3,455
3,997
7,575
–
–
–
-
-
-
-
-
317
1,122
937
–
–
334
334
5,107
14,312
1,441
20,860
-
-
64,164
94,392
1,724
6,083
1,724
164,639
–
–
–
-
-
-
-
-
-
-
68,309
23
-
68,332
162,339
496
41
162,876
133,093
34,219
115
1,175
Total undrawn credit commitments
188,449
2,757
134
191,340
165,996
2,376
115
168,487
Total strong
Total good/satisfactory
Total weak
715,532
1,305
249,080
18,156
-
-
716,837
794,298
267,236
196,533
977
16,131
-
-
795,275
212,664
5,403
18,023
6,851
30,277
4,688
15,858
6,249
26,795
Total on and off balance sheet
970,015
37,484
6,851
1,014,350 995,519
32,966
6,249
1,034,734
Details of collateral held in support of these balances are provided in Note 21.2.6.
1. This credit quality disclosure differs to that of credit risk concentration as it relates only to financial assets measured at amortised costs
2.
or at FVOCI and therefore excludes trading securities and financial assets measured at FVIS, and derivative financial instruments.
Included in strong is $131 million of exposure (Parent $131 million) that is covered by a highly rated guarantee, which if it were not
considered, the exposure would be classified as weak.
3. Debt securities include $829 million at amortised cost for the Group and $27 million for the Parent Entity. $366 million of these are
classified as strong for the Group and $4 million for the Parent Entity, and the rest are classified as good/satisfactory.
2019 Westpac Group Annual Report
221
Notes to the financial statements
Note 21. Financial risk1 (continued)
Credit quality disclosures (AASB 139)
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 21.2.1).
as these tables do not reflect the adoption of AASB 9 they are not directly comparable to the credit quality tables
above.
Neither past due nor impaired
Consolidated 2018
$m
Strong2
Good/
Satisfactory
Weak2
Total
Past due
but not
impaired
Impaired
Total
Impairment
provision
Total
carrying
value
Cash and balances with central
banks3
Collateral paid
Trading securities and financial
assets measured at FVIS4
26,555
4,787
22,718
Derivative financial instruments
23,692
Available-for-sale securities4
60,229
233
–
145
406
506
–
–
–
3
–
26,788
4,787
22,863
24,101
60,735
–
–
–
–
–
–
–
–
–
–
26,788
4,787
22,863
24,101
60,735
–
–
–
–
–
26,788
4,787
22,863
24,101
60,735
Loans:
Loans - housing and
personal
379,383
114,627
4,365
498,375
Loans - business5
75,331
112,446
4,481
192,258
Other financial assets
5,025
434
18
5,477
16,162
4,293
37
687
515,224
(1,303)
513,921
729
197,280
(1,511)
195,769
3
5,517
–
5,517
Total6
597,720
228,797
8,867
835,384
20,492
1,419
857,295
(2,814) 854,481
Neither past due nor impaired
Parent Entity 2018
$m
Strong2
Good/
Satisfactory
Weak2
Total
Past due
but not
impaired
Impaired
Total
Impairment
provision
Cash and balances with central
banks3
Collateral paid
Trading securities and financial
assets measured at FVIS4
24,850
4,722
21,199
Derivative financial instruments
23,155
Available-for-sale securities4
56,443
126
–
145
404
3
–
–
–
3
–
24,976
4,722
21,344
23,562
56,446
–
–
–
–
–
–
–
–
–
–
24,976
4,722
21,344
23,562
56,446
–
–
–
–
–
Total
carrying
value
24,976
4,722
21,344
23,562
56,446
Loans:
Loans - housing and
personal
359,843
87,667
4,050
451,560
15,044
572
467,176
(1,125)
466,051
Loans - business5
61,918
95,649
3,412
160,979
3,838
582
165,399
(1,282)
164,117
Due from subsidairies7
Other financial assets
134,086
4,282
–
334
–
15
134,086
4,631
–
33
–
2
134,086
4,666
–
–
134,086
4,666
Total6
690,498
184,328
7,480
882,306
18,915
1,156 902,377
(2,407) 899,970
Details of collateral held in support of these balances are provided in Note 21.2.6.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
2.
made a number of presentational changes to the Balance Sheet and Income Statement. Comparatives have been restated. Refer to
Note 1 for further detail.
Included in strong is $146 million of exposure for both the Group and the Parent Entity that is covered by a highly rated guarantee,
which if it were not considered, the exposure would be classified as weak.
In prior years, cash and balances with central banks were not disclosed. These balances have now been included.
3.
4. Exclude equity securities.
5. Loans - business classified as strong was restated from $90,408 million to $75,331 million for the Group, and from $76,995 million to
$61,918 million for the Parent Entity. In addition, balances classified under good/satisfactory were reclassified from $97,369 million to
$112,446 million for the Group, and from $80,572 million to $95,649 million for the Parent Entity.
6. Total amount disclosed as ‘strong’ was restated from $586,393 million to $597,720 million for the Group, and from $687,386 million to
$690,498 million for the Parent Entity. Total amount disclosed as good/satisfactory was restated from $213,693 million to $228,797
million for the Group, and from $210,856 million to $184,328 million.
7. Due from subsidiaries excludes $6,511 million of long-term debt instruments with equity like characteristics which are part of the total
investment in subsidiaries.
2019 Westpac Group Annual Report1234
222
Notes to the financial statements
Note 21. Financial risk (continued)
21.2.5 Non-performing loans and credit commitments
The loans and credit commitments balance in stage 3 (non-performing) is represented by those loans and credit
commitments which are in default. A default occurs when Westpac considered that the customer is unlikely to
repay its credit obligations in full, irrespective of recourse by the Group to actions such as realising security, or the
customer is more than 90 days past due on any material credit obligation. This definition of default is aligned to
the APRA regulatory definition of default. These can be disaggregated into impaired loans and credit commitments
(which is where the customer is unlikely to pay its credit obligations in full including restructured loans) and items
90 days past due, or otherwise in default but not impaired.
Impaired loans and credit commitments include:
• housing and business loans with insufficient security to cover the principal and interest payments owing
(aligned to an impaired internal credit risk grade);
• personal loans 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).
Items 90 days past due, or otherwise in default but not impaired include:
• currently 90 days or more past due but well secured1;
• 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).
The determination of the provision for expected credit losses is one of the Group’s critical accounting assumptions
and estimates. Details of this and the Group’s accounting policy for the provision for expected credit losses
are discussed in Notes 6 and 13, along with the total provision for expected credit losses on loans and credit
commitments and the total for those loans that are considered non-performing (i.e. stage 3).
1. The estimated net realisable value of security to which the Group has recourse is sufficient to cover all principal and interest
as at 30 September.
2019 Westpac Group Annual Report Notes to the financial statements
Note 21. Financial risk (continued)
The gross amount of non-performing loans and credit commitments, along with the provision for expected credit
losses/provision for impairment charges, by type and geography of impaired loans at 30 September, is summarised
in the following table:
223
Consolidated
$m
Impaired exposures
Australia
Housing and business loans
Gross amount
Provision
Net
Net
Personal loans greater than 90 days past due
Gross amount
Provision
Restructured loans
Gross amount
Provision
Net
New Zealand
Housing and business loans
Gross amount
Provision
Net
Net
Personal loans greater than 90 days past due
Gross amount
Provision
Restructured loans
Gross amount
Provision
Net
Other overseas
Housing and business loans
Gross amount
Provision
Net
Net
Personal loans greater than 90 days past due
Gross amount
Provison
Restructured loans
Gross amount
Provison
Net
Total impaired loans
Gross amount
Provision
Total net impaired assets
Items 90 days past due, or otherwise in default but not impaired
Australia
Gross amount
Provison1
Net
New Zealand
Gross amount
Provison1
Net
Overseas
Gross amount
Provison1
Net
Total Items 90 days past due, or otherwise in default but not impaired
Gross amount
Provison1
Total net items 90 days past due, or otherwise in default but not
impaired
Total non-performing loans and credit commitments
Gross amount
Provison
Total net non-performing loans and credit commitments
2019
2018
2017
2016
2015
1,215
(491)
724
384
(233)
151
16
(6)
10
62
(26)
36
20
(15)
5
12
(3)
9
50
(17)
33
1
–
1
3
(1)
2
1,763
(792)
971
4,684
(521)
4,163
340
(33)
307
64
(9)
55
882
(422)
460
358
(179)
179
9
(1)
8
124
(30)
94
12
(9)
3
14
(4)
10
13
(6)
7
1
(1)
–
3
(1)
2
1,416
(653)
763
3,861
(193)
3,668
127
(10)
117
29
(2)
27
975
(460)
515
362
(187)
175
1,589
(769)
820
267
(159)
108
12
(7)
5
152
(41)
111
11
(8)
3
15
(5)
10
15
(6)
9
–
–
–
–
–
–
1,542
(714)
828
3,322
(165)
3,157
117
(9)
108
19
(2)
17
13
(11)
2
218
(95)
123
10
(7)
3
16
(4)
12
44
(21)
23
–
–
–
2
(1)
1
2,159
(1,067)
1,092
3,075
(137)
2,938
89
(7)
82
17
(1)
16
1,220
(572)
648
252
(164)
88
22
(12)
10
348
(104)
244
10
(7)
3
17
(4)
13
25
(13)
12
1
(1)
–
–
–
–
1,895
(877)
1,018
2,149
(110)
2,039
130
(10)
120
13
(1)
12
5,088
(563)
4,017
(205)
3,458
(176)
3,181
(145)
2,292
(121)
4,525
3,812
3,282
3,036
2,171
6,851
(1,355)
5,496
5,433
(858)
4,575
5,000
(890)
4,110
5,340
(1,212)
4,128
4,187
(998)
3,189
1.
In prior periods only gross amounts were disclosed. Provision information has now been included for all reporting years.
2019 Westpac Group Annual Report1234
224
Notes to the financial statements
Note 21. Financial risk (continued)
The following table summarises the interest received and forgone on impaired loans:
Consolidated 2019
$m
Interest received
Interest forgone
21.2.6 Collateral held
Australia
Overseas
Total
4
32
6
-
10
32
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 and the Parent Entity’s loan portfolio have the following coverage from collateral held based on the
requirements of AASB 9:
Performing loans
Consolidated
%
Fully secured
Partially secured
Unsecured
Total
Parent Entity
%
Fully secured
Partially secured
Unsecured
Total
Non-performing loans
Consolidated
%
Fully secured
Partially secured
Unsecured
Total
Parent Entity
%
Fully secured
Partially secured
Unsecured
Total
Housing
Loans1
100.0
-
-
2019
Personal
Loans
Business
Loans
7.9
29.9
62.2
59.6
19.3
21.1
Total
85.9
6.3
7.8
100.0
100.0
100.0
100.0
Housing
Loans1
100.0
-
-
100.0
2019
Personal
Loans
Business
Loans
8.6
31.1
60.3
100.0
60.1
18.2
21.7
Total
86.7
5.7
7.6
100.0
100.0
2019
Housing
Loans1
Personal
Loans
Business
Loans
90.3
9.7
-
-
38.2
61.8
49.5
29.2
21.3
Total
73.3
17.0
9.7
100.0
100.0
100.0
100.0
2019
Housing
Loans1
Personal
Loans
Business
Loans
90.1
9.9
-
-
34.1
65.9
54.0
27.4
18.6
Total
75.1
16.1
8.8
100.0
100.0
100.0
100.0
Details of the carrying value and associated provisions for ECL are disclosed in Notes 12 and 13 respectively. The
credit quality of loans is disclosed in Note 21.2.4.
1. For the purposes of collateral classification, housing loans are classified as fully secured unless they are non-performing in which case
may be classified as partially secured.
2019 Westpac Group Annual Report Notes to the financial
statements
Notes to the financial statements
Note 21. Financial risk (continued)
As the comparatives have not been restated for the adoption of AASB 9, the Group and the Parent Entity’s loan
portfolio have the following coverage from collateral held based on the requirements of AASB 139 for prior years.
Once AASB 9 has been effective for the comparative year end, these tables will no longer be presented.
Neither past due nor impaired
225
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
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
97.5
0.6
1.9
2018
Loans-
Business
55.8
22.9
21.3
Total
85.9
6.8
7.3
100.0
100.0
100.0
Loans -
Housing
and
personal
98.1
0.3
1.6
2018
Loans-
Business
57.8
20.4
21.8
Total
87.5
5.6
6.9
100.0
100.0
100.0
Loans -
Housing
and
personal
94.6
2.0
3.4
2018
Loans-
Business
52.8
28.2
19.0
Total
85.8
7.5
6.7
100.0
100.0
100.0
Loans -
Housing
and
personal
95.7
1.5
2.8
2018
Loans-
Business
54.7
25.0
20.3
Total
87.3
6.3
6.4
100.0
100.0
100.0
Loans -
Housing
and
personal
72.8
10.0
17.2
2018
Loans-
Business
32.0
11.5
56.5
Total
51.8
10.8
37.4
100.0
100.0
100.0
Loans -
Housing
and
personal
76.4
6.5
17.1
2018
Loans-
Business
28.5
13.1
58.4
Total
52.2
9.8
38.0
100.0
100.0
100.0
2019 Westpac Group Annual Report1234 226
Notes to the financial statements
Note 21. Financial risk (continued)
Collateral held against financial assets other than loans
$m
Cash, primarily for derivatives
Securities under reverse repurchase agreements1
Securities under derivatives and stock borrowing1
Total other collateral held
21.3
Funding and liquidity risk
Consolidated
Parent Entity
2019
3,289
6,836
119
2018
2,187
1,404
28
2019
2,851
6,733
119
2018
1,751
1,404
28
10,244
3,619
9,703
3,183
21.3.1 Liquidity modelling
In managing funding and liquidity for Westpac, Treasury utilises balance sheet forecasts and the maturity profile of
Westpac’s wholesale funding portfolio to project liquidity outcomes. Local liquidity limits are also used by Westpac
in applicable geographies to ensure liquidity is managed efficiently and prudently.
In addition, Westpac conducts regular stress testing 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.
21.3.2 Sources of funding
Sources of funding are regularly reviewed to maintain a wide diversification by currency, geography, product and
term. Sources include, but are not limited to:
• deposits;
• debt issues;
• proceeds from sale of marketable securities;
•
repurchase agreements with central banks;
• principal repayments on loans;
•
•
interest income; and
fee income.
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) increased by $16.2 billion to $169.9 billion over the last 12 months.
A summary of the Group’s liquid asset holdings is as follows2:
$m
Cash
Trading securities and financial assets measured at FVIS
Available-for-sale securities
Investment securities
Loans3
Other financial assets
Total liquid assets
2019
2018
Actual
Average
Actual
Average
18,398
18,867
–
19,189
17,184
25,476
11,235
21,912
10,051
-
60,667
62,892
73,328
66,701
-
-
58,933
52,498
55,500
55,336
345
723
816
745
169,871
156,295
153,694
150,936
1. Securities received as collateral are not recognised on the Group and Parent Entity’s balance sheet.
2. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
3. Loans are self-originated AAA rated mortgage backed securities which are eligible for repurchase with the RBA and Reserve Bank of
New Zealand.
2019 Westpac Group Annual Report 227
Notes to the financial statements
Note 21. Financial risk (continued)
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 compliance with both the LCR and NSFR.
%
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
2019
62.5
16.6
12.1
1.0
7.8
2018
63.1
15.7
12.4
0.9
7.9
100.0
100.0
Movements in the Group’s funding composition in 2019 included:
• Customer deposits decreased by 57 basis points to 62.5% of the Group’s total funding at 30 September 2019.
Customer deposits increased by $6.8 billion over the year, however this was lower than growth in other forms
funding, mainly long-term wholesale funding;
• Long term funding with a residual maturity greater than 12 months increased 98 basis points or $11 billion to
16.6%. The increase mainly reflects changes in interest rates and FX, in particular a lower Australian dollar, which
increases the value of the Group’s offshore funding. Funding from securitisation was little changed at 1.0% of
total funding, reflecting the issuance of a A$2.8 billion RMBS transaction in February 2019;
• Wholesale funding with a residual maturity less than 12 months decreased by 38 basis points to 12.1%. The
Group’s short term funding portfolio (including long term to short term scroll) of $101.2 billion had a weighted
average maturity of 135 days and is more than covered by the $169.9 billion of unencumbered repo-eligible
liquid assets and cash held by the Group; and
• Funding from equity was little changed at 7.8% of total funding.
Maintaining a diverse funding base with the capacity and flexibility to access a wide range of funding markets,
investors, currencies, maturities and products is an important part of managing liquidity risk. Westpac’s funding
infrastructure supports its ability to meet changing and diverse investor demands. In 2019, the Group raised
$33.5 billion of long term wholesale funding. The majority of new issuance came in the form of senior unsecured
and covered bond format, in core currencies of AUD, USD, EUR and NZD. The Group also continued to benefit from
its position as the only major Australian bank with an active Auto ABS capability and the only Australian bank with
access to the US SEC registered market, raising funds in both these markets during the year.
New long term wholesale funding also included $4.2 billion of Tier 2 capital securities, as the Group made good
progress towards the Total Loss Absorbing Capital (TLAC) requirements announced by APRA in July 2019. The
Group also issued $1.4 billion in Basel III compliant Additional Tier 1 securities (refer to Note 19).
Borrowings and outstanding issuances from existing debt programs at 30 September 2019 can be found in
Notes 16 to 19.
Credit ratings
As at 30 September 2019 the Parent Entity’s credit ratings were:
2019
S&P Global Ratings
Moody’s Investors Service
Fitch Ratings
Short-term
Long-term
Outlook
A-1+
P-1
F1+
AA-
Aa3
AA-
Stable
Stable
Negative
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.
2019 Westpac Group Annual Report1234 228
Notes to the financial statements
Note 21. Financial risk (continued)
21.3.3 Assets pledged as collateral
The Group and Parent Entity are required to provide collateral (predominantly 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 24, the carrying value of these financial assets pledged as collateral is:
$m
Cash
Cash deposit on stock borrowed
Securities (including certificates of deposit)
Securities pledged under repurchase agreements
Total amount pledged to secure liabilities
Consolidated
Parent Entity
2019
5,912
18
1,932
2018
4,754
14
1,544
2019
5,755
18
1,932
2018
4,690
14
1,544
13,754
12,492
13,754
12,492
21,616
18,804
21,459
18,740
21.3.4 Contractual maturity of financial liabilities1
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 designated 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” which are measured 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.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report Notes to the financial statements
229
Note 21. Financial risk1 (continued)
Consolidated 2019
$m
Financial liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
Derivative financial instruments:
Held for trading
Held for hedging purposes (net settled)
Held for hedging purposes (gross settled):
Cash outflow
Cash inflow
Debt issues
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
3,291
374,126
19,425
27,945
57
4
-
-
83,365
3,176
-
85
287
(276)
-
97,081
3,874
-
280
902
(875)
-
11,968
157
-
631
517
(466)
-
73
-
-
40
-
-
3,291
566,613
26,632
27,945
1,093
1,710
(1,617)
5,071
12,158
42,917
102,296
30,417
192,859
Total financial liabilities excluding loan capital
429,919
98,795
144,179
115,103
30,530
818,526
Loan capital
1
76
371
6,293
20,557
27,298
Total undiscounted financial liabilities
429,920
98,871
144,550
121,396
51,087
845,824
Total contingent liabilities and commitments
Letters of credit and guarantees
Commitments to extend credit
Other commitments
Total undiscounted contingent liabilities and
commitments
15,150
176,002
188
191,340
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
15,150
176,002
188
191,340
Consolidated 2018
$m
Financial liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
Derivative financial instruments:
Held for trading
Held for hedging purposes (net settled)
Held for hedging purposes (gross settled):
Cash outflow
Cash inflow
Debt issues
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
2,184
352,941
18,894
22,869
68
2,680
(2,658)
1,743
-
-
85,726
108,427
2,445
3,697
-
95
5,140
(5,096)
-
377
406
(337)
-
16,771
160
-
741
-
75
-
-
96
2,184
563,940
25,196
22,869
1,377
2,799
(2,527)
1,258
(1,178)
12,283
(11,796)
7,502
48,848
100,245
31,892
190,230
Total financial liabilities excluding loan capital
398,721
95,812
161,418
Loan capital
8
79
253
118,189
4,866
32,143
16,509
806,283
21,715
Total undiscounted financial liabilities
398,729
95,891
161,671
123,055
48,652
827,998
Total contingent liabilities and commitments
Letters of credit and guarantees
Commitments to extend credit
Other commitments
Total undiscounted contingent liabilities and
commitments
15,585
174,658
154
190,397
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
15,585
174,658
154
190,397
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report1234
230
Notes to the financial statements
Note 21. Financial risk1 (continued)
Parent Entity 2019
$m
Financial liabilities
Collateral received
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
Deposits and other borrowings
339,448
70,761
83,602
Other financial liabilities
19,340
3,121
3,625
2,853
-
-
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
28,329
21
-
-
4,790
15,538
-
9
221
(215)
10,959
1,020
-
10,311
157
-
378
-
-
-
73
-
-
33
-
-
2,853
504,195
26,243
28,329
538
278
(266)
-
97
57
(51)
37,104
4,989
86,064
28,063
166,980
20,117
142,620
184,284
Total financial liabilities excluding loan capital
410,319
85,876
129,423
117,027
170,789
913,434
Loan capital
1
76
371
6,293
20,557
27,298
Total undiscounted financial liabilities
410,320
85,952
129,794
123,320
191,346
940,732
Total contingent liabilities and commitments
Letters of credit and guarantees
Commitments to extend credit
Other commitments
Total undiscounted contingent liabilities and
commitments
14,583
153,716
188
168,487
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14,583
153,716
188
168,487
Parent Entity 2018
$m
Financial liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
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 subsidiaries2
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
1,748
320,365
18,835
23,039
51
2,632
(2,615)
1,588
18,249
-
74,530
2,363
–
55
4,725
(4,687)
7,117
1,156
-
94,855
3,334
–
271
377
(324)
45,527
5,388
-
14,606
160
–
608
2,174
(2,043)
85,106
23,653
-
75
-
–
96
1,748
504,431
24,692
23,039
1,081
726
(644)
10,634
(10,313)
29,329
168,667
139,076
187,522
Total financial liabilities excluding loan capital
383,892
85,259
149,428
124,264
168,658
911,501
Loan capital
8
79
253
4,866
16,509
21,715
Total undiscounted financial liabilities
383,900
85,338
149,681
129,130
185,167
933,216
Total contingent liabilities and commitments
Letters of credit and guarantees
Commitments to extend credit
Other commitments
Total undiscounted contingent liabilities and
commitments
14,957
152,943
99
167,999
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14,957
152,943
99
167,999
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2. Due to subsidiaries was restated from $142,400 million (classified under ‘up to 1 month’) to $187,522 million (classified across different
maturity buckets). The increase reflects the contractual undiscounted interest to be paid on the liability.
2019 Westpac Group Annual Report
231
Notes to the financial statements
Note 21. Financial risk1 (continued)
21.3.5 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 21.3.4) 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/investment 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.
Consolidated 2019
$m
Assets
Cash and balances with central banks
Collateral paid
Trading securities and financial assets measured at FVIS
Derivative financial instruments
Investment securities
Loans (net of provisions)
Other financial assets
Life insurance assets
Investment in associates
All other assets
Total assets
Liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
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
Total
20,059
5,930
18,544
20,695
9,810
99,197
5,367
1,541
-
1,222
-
-
13,237
9,164
63,591
20,059
5,930
31,781
29,859
73,401
615,573
714,770
-
7,826
129
14,741
5,367
9,367
129
15,963
182,365
724,261
906,626
3,287
551,817
29,059
19,203
56,933
1,703
3,907
-
3,287
11,430
563,247
156
9,893
124,524
5,674
1,707
29,215
29,096
181,457
7,377
5,614
665,909
153,384
819,293
-
21,826
665,909
175,210
(483,544)
549,051
21,826
841,119
65,507
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentation and changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report1234
232
Notes to the financial statements
Note 21. Financial risk1 (continued)
Consolidated 2018
$m
Assets
Cash and balances with central banks
Collateral paid
Trading securities and financial assets measured at FVIS
Derivative financial instruments
Available-for-sale securities
Loans (net of provisions)
Other financial assets
Life insurance assets
Investment in associates
All other assets
Total assets
Liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
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 2019
$m
Assets
Cash and balances with central banks
Collateral paid
Trading securities and financial assets measured at FVIS
Derivative financial instruments
Investment securities
Loans (net of provisions)
Other financial assets
Due from subsidiaries
Investment in subsidiaries
Investment in associates
All other assets
Total assets
Liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
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
Total
26,788
4,787
23,132
24,101
61,119
-
-
10,941
6,273
54,160
614,973
709,690
-
7,852
115
5,517
9,450
115
26,788
4,787
12,191
17,828
6,959
94,717
5,517
1,598
-
1,008
13,885
14,893
171,393
708,199
879,592
2,184
-
2,184
543,198
16,087
559,285
27,956
17,346
149
7,061
28,105
24,407
53,930
118,666
172,596
1,547
2,812
6,050
768
7,597
3,580
648,973
148,781
797,754
1,382
15,883
17,265
650,355
164,664
815,019
(478,962)
543,535
64,573
Due within
12 Months
Greater than
12 Months
Total
17,692
5,773
16,736
20,613
7,200
-
-
12,829
8,670
61,198
17,692
5,773
29,565
29,283
68,398
79,956
551,980
631,936
4,615
10,291
-
-
756
-
4,615
132,670
142,961
6,436
100
12,224
6,436
100
12,980
163,632
786,107
949,739
2,849
491,562
28,360
19,167
-
2,849
9,868
501,430
156
9,700
28,516
28,867
50,028
106,646
156,674
17,563
2,545
131,044
148,607
1,587
4,132
612,074
259,001
871,075
-
21,826
21,826
612,074
280,827
892,901
(448,442)
505,280
56,838
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report
Notes to the financial statements
Note 21. Financial risk1 (continued)
Parent Entity 2018
$m
Assets
Cash and balances with central banks
Collateral paid
Trading securities and financial assets measured at FVIS
Derivative financial instruments
Available-for-sale securities
Loans (net of provisions)
Other financial assets
Due from subsidiaries
Investment in subsidiaries
Investment in associates
All other assets
Total assets
Liabilities
Collateral received
Deposits and other borrowings
Other financial liabilities
Derivative financial instruments
Debt issues
Due to subsidiaries
All other liabilities
Total liabilities excluding loan capital
Loan capital
Total liabilities
Net assets/(net liabilities)
21.4 Market risk
233
Due within
12 Months
Greater than
12 Months
24,976
4,722
11,466
17,677
4,846
-
-
9,949
5,885
51,667
Total
24,976
4,722
21,415
23,562
56,513
76,389
553,779
630,168
4,666
12,661
-
-
-
4,666
127,936
140,597
4,508
4,508
76
76
681
11,346
12,027
158,084
765,146
923,230
1,748
-
1,748
486,418
14,050
500,468
27,117
17,317
149
6,912
27,266
24,229
50,499
101,789
152,288
19,932
1,534
122,468
142,400
676
2,210
604,565
246,044
850,609
1,382
15,883
17,265
605,947
261,927
867,874
(447,863)
503,219
55,356
21.4.1 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. 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 concentration limits. These are supplemented
by escalation triggers for material profits or losses and stress testing of risks beyond the 99% confidence interval.
The key parameters of VaR are:
Holding period
Confidence level
Period of historical data used
1 day
99%
1 year
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report1234
234
Notes to the financial statements
Note 21. Financial risk (continued)
21.4.2 Traded market risk
The table below depicts the aggregate VaR, by risk type, for the year ended 30 September:
Consolidated and Parent Entity
2019
2018
2017
$m
Interest rate risk
Foreign exchange risk
Equity risk
Commodity risk1
Other market risks2
Diversification effect
Net market risk
High
14.9
8.6
0.2
42.0
5.5
n/a
45.3
Low Average
High
Low Average
High
Low Average
6.6
0.8
0.0
1.7
2.0
n/a
7.9
10.9
4.1
0.0
8.2
3.5
(12.3)
14.4
15.6
6.9
1.0
24.3
5.8
n/a
28.1
5.1
0.7
0.0
1.7
1.4
n/a
6.7
8.6
3.0
0.1
6.5
3.8
(8.6)
13.4
16.0
9.4
0.4
14.1
5.1
n/a
22.9
4.6
0.6
0.0
3.3
3.5
n/a
9.7
8.5
3.1
0.1
6.6
4.2
(8.6)
13.9
21.4.3 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 (with a floor of zero for falling interest rates) over
the next 12 months as a percentage of reported net interest income:
% (increase)/decrease in net interest
income
Consolidated
Parent Entity
2019
2018
As at
2.88
2.14
Maximum
Exposure
Minimum
Exposure
Average
Exposure
2.88
2.14
(0.46)
(0.42)
0.81
0.43
As at
0.01
(0.22)
Maximum
Exposure
Minimum
Exposure
Average
Exposure
0.78
0.51
(0.09)
(0.28)
0.27
0.04
Value at Risk - IRRBB
The table below depicts VaR for IRRBB:
$m
Consolidated
As at
34.1
2019
High
37.3
Low
19.4
Average
27.8
As at
23.2
2018
High
57.0
Low
23.2
Average
32.5
As at 30 September 2019 the Value at Risk – IRRBB for the Parent Entity was $38.3 million (2018: $20.8 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 20.
The same controls as used to monitor traded market risk allow management to continuously monitor and manage
IRRBB.
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. Note 20 includes details of the Group’s asset and liability risk management activities including details of the
hedge accounting and economic hedges used to manage this risk.
1.
2.
Includes electricity risk.
Includes prepayment risk and credit spread risk (exposure to movements in generic credit rating bands).
2019 Westpac Group Annual Report Notes to the financial statements
235
Notes to the financial statements
Note 22. 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 recognised in the income
statement over the life of the instrument when the inputs become observable.
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
• complexity of the transaction.
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:
• standard industry practice;
• economic models; and
• observed transaction prices.
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.
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.
A key element of the framework is the Revaluation Committee, comprising senior valuation specialists from within
the Group. The 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 incorporate 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 as follows:
2019 Westpac Group Annual Report1234 236
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
Level 1 instruments
The fair value of financial instruments traded in active markets is 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
Balance Sheet Category
Includes:
Valuation
Exchange traded
products
Derivatives
Exchange traded interest
rate futures and options and
commodity, energy and carbon
futures
Foreign exchange
products
Derivatives
FX spot and futures contracts
Equity products
Derivatives
Listed equities and equity indices
Non-asset backed
debt instruments
Trading securities and
financial assets measured
at FVIS
Other financial liabilities
Trading securities and
financial assets measured
at FVIS
Available-for-sale
securities/Investment
securities
Other financial liabilities
Australian Commonwealth and
New Zealand government bonds
All these instruments are
traded in liquid, active
markets where prices are
readily observable. No
modelling or assumptions
are used in the valuation.
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
2019 Westpac Group Annual Report Notes to the financial statements
237
Note 22. Fair values of financial assets and financial liabilities (continued)
Level 2 instruments
The fair value for financial instruments that are not actively traded is 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
Interest rate
products
Balance Sheet
Category
Derivatives
Includes:
Valuation
Interest rate and inflation
swaps, swaptions, caps,
floors, collars and other
non-vanilla interest rate
derivatives
Foreign
exchange
products
Derivatives
Other credit
products
Derivatives
FX swap, FX forward
contracts, FX options
and other non-vanilla FX
derivatives
Single Name and Index
credit default swaps (CDS)
Commodity
products
Derivatives
Commodity, energy and
carbon derivatives
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 and active
broker quoted interest rates in the swap, bond
and future markets. Interest rate volatilities
are sourced from brokers and consensus data
providers. If consensus prices are not available,
these are classified as Level 3 instruments.
Derived from market observable inputs or
consensus pricing providers using industry
standard models.
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 discount 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.
Equity
products
Derivatives
Asset
backed debt
instruments
Trading securities
and financial assets
measured at FVIS
Available-for-sale
securities/Investment
securities
Non-asset
backed debt
instruments
Trading securities
and financial assets
measured at FVIS
Available-for-sale
securities/Investment
securities
Other financial liabilities
Exchange traded equity
options, OTC equity
options and equity
warrants
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.
Australian residential
mortgage backed
securities (RMBS)
denominated in Australian
dollar and other asset
backed securities (ABS)
Valued using an industry approach to value
floating rate debt with prepayment features.
Australian RMBS are valued using prices sourced
from a consensus data provider. If consensus
prices are not available these are classified as
Level 3 instruments.
Valued using observable market prices which
are sourced from independent pricing services,
broker quotes or inter-dealer prices.
State and other
government bonds,
corporate bonds and
commercial paper
Repurchase agreements
and reverse repurchase
agreements over non-asset
backed debt securities
2019 Westpac Group Annual Report1234 238
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
Instrument
Loans at fair
value
Balance Sheet
Category
Loans
Includes:
Valuation
Fixed rate bills and
syndicated loans
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
Discounted cash flow approach, using a discount
rate which reflects the terms of the instrument
and the timing of cash flows, adjusted for
creditworthiness, or expected sale amount.
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 Westpac’s implied credit
worthiness.
Valued using observable market prices or other
widely used and accepted valuation techniques
utilising observable market input.
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
Asset
backed debt
instruments
Balance Sheet
Category
Trading securities
and financial assets
measured at FVIS
Non-asset
backed debt
instruments
Trading securities
and financial assets
measured at FVIS
Equity
investments
Available-for-sale
securities/Investment
securities
Trading securities
and financial assets
measured at FVIS
Available-for-sale
securities/Investment
securities
Includes:
Valuation
Collateralised loan
obligations
As prices for these securities are not available
from a consensus provider these are revalued
based on third party revaluations (lead manager
or inter-dealer). Due to their illiquidity and/or
complexity they are classified as Level 3 assets.
Offshore non-asset backed
debt instruments and debt
securities issued via private
placement
These securities are evaluated by an
independent pricing service or based on third
party revaluations. Due to their illiquidity and/or
complexity these are classified as Level 3 assets.
Strategic equity
investments, investments
in unlisted funds and
investments in boutique
investment management
companies
Valued using valuation techniques appropriate to
the investment, including the use of recent arm’s
length transactions where available, discounted
cash flow approach, reference to the net assets
of the entity or to the most recent fund unit
pricing.
Due to their illiquidity, complexity and/or use of
unobservable inputs into valuation models, they
are classified as Level 3 assets.
2019 Westpac Group Annual Report Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities1 (continued)
The tables below summarise the attribution of financial instruments measured at fair value to the fair value
hierarchy:
2019
Quoted
market
prices
(Level 1)
Valuation
techniques
(Market
observable)
(Level 2)
Valuation
techniques
(Non-market
observable)
(Level 3)
Quoted
market
prices
(Level 1)
Total
2018
Valuation
techniques
(Market
observable)
(Level 2)
Valuation
techniques
(Non-market
observable)
(Level 3)
Consolidated
$m
Financial assets measured at fair
value on a recurring basis
Trading securities and financial
assets measured at FVIS
Derivative financial instruments
Available-for-sale securities
10,440
21,121
7
–
29,828
–
Investment securities
11,163
61,284
Loans2
Life insurance assets
–
1,097
239
8,270
220
24
–
134
21
–
31,781
8,958
29,859
20
–
11,996
72,581
260
–
–
9,367
1,345
13,844
24,066
48,504
–
546
8,105
330
15
619
–
–
–
239
Total
23,132
24,101
61,119
–
546
9,450
Total financial assets measured
at fair value on a recurring basis
Financial liabilities measured at
fair value on a recurring basis
Deposits and other borrowings3
Other financial liabilities4
Derivative financial instruments
Debt issues5
Life insurance liabilities
Total financial liabilities measured
at fair value on a recurring basis
Parent Entity
$m
Financial assets measured at fair
value on a recurring basis
22,707
120,742
399
143,848
22,319
95,065
964
118,348
–
262
8
–
–
38,413
5,108
29,059
5,819
7,377
–
–
38,413
5,370
29
29,096
–
–
5,819
7,377
–
496
76
–
–
41,178
3,801
24,325
3,355
7,597
270
85,776
29
86,075
572
80,256
–
–
6
–
–
6
41,178
4,297
24,407
3,355
7,597
80,834
2019
Quoted
market
prices
(Level 1)
Valuation
techniques
(Market
observable)
(Level 2)
Valuation
techniques
(Non-market
observable)
(Level 3)
Quoted
market
prices
(Level 1)
Total
2018
Valuation
techniques
(Market
observable)
(Level 2)
Valuation
techniques
(Non-market
observable)
(Level 3)
Trading securities and financial
assets measured at FVIS
10,213
Derivative financial instruments
Available-for-sale securities
7
–
19,159
29,253
–
Investment securities
10,191
58,114
Loans2
Due from subsidiaries6
–
–
239
897
193
23
–
66
21
–
29,565
8,952
29,283
20
–
10,657
68,371
260
897
–
–
–
12,257
23,529
45,786
–
546
278
206
13
70
–
–
–
Total financial assets measured
at fair value on a recurring basis
Financial liabilities measured at
fair value on a recurring basis
Deposits and other borrowings3
Other financial liabilities4
Derivative financial instruments
Debt issues5
Due to subsidiaries6
Total financial liabilities measured
at fair value on a recurring basis
20,411
107,662
303
128,376
19,629
82,396
289
102,314
–
262
8
–
–
37,355
5,108
28,831
3,624
1,591
–
–
37,355
5,370
28
28,867
–
–
3,624
1,591
–
496
76
–
–
40,062
3,801
24,147
3,223
523
270
76,509
28
76,807
572
71,756
–
–
6
–
–
6
40,062
4,297
24,229
3,223
523
72,334
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2. As at 30 September 2018, loans measured at fair value were restated from $3,250 million to $546 million for both the Group and the
Parent Entity.
3. The contractual outstanding amount payable at maturity for the Group is $38,468 million (2018: $41,330 million) and for the Parent
Entity is $37,410 million (2018: $40,214 million).
4. The contractual outstanding amount payable at maturity for the Group and the Parent Entity is $5,369 million (2018: $4,298 million).
5. The contractual outstanding amount payable at maturity for the Group is $5,632 million (2018: $3,475 million) and for the Parent Entity
is $3,436 million (2018: $3,344 million). The cumulative change in the fair value of debt issues attributable to changes in Westpac’s own
credit risk is $34 million decrease (2018: $45 million decrease) for the Group and Parent Entity.
6. As at 30 September 2018, the balances disclosed have been restated to include due from subsidiaries and due to subsidiaries measured
at fair value.
Total
21,415
23,562
56,513
–
546
278
2019 Westpac Group Annual Report1234 240
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities (continued)
Reconciliation of non-market observables1
The following tables summarise the changes in financial instruments measured at fair value derived from non-
market observable valuation techniques (Level 3):
Consolidated 2019
$m
Balance as at beginning of year
Impact on adoption of AASB 9
Restated opening balance
Gains/(losses) on assets and (gains)/
losses on liabilities recognised in:
Income statements
Other comprehensive income
Acquisition and issues
Disposal and settlements
Transfer 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 end of year
Trading
securities and
financial assets
measured
at FVIS
330
4
334
36
–
63
(216)
–
3
220
26
Available-
for-sale
securities
619
(619)
–
–
–
–
–
–
–
–
–
Investment
securities
Other2
Total
Level 3
assets
964
(492)
472
48
11
115
15
14
29
12
–
16
Derivatives
Total
Level 3
liabilities
6
–
6
7
–
4
(6)
18
–
29
6
–
6
7
–
4
(6)
18
–
29
(12)
(250)
–
–
–
3
134
45
399
–
109
109
–
11
36
(22)
–
–
–
16
42
(11)
(11)
Consolidated 2018
$m
Trading
securities and
financial assets
measured
at FVIS
Available-
for-sale
securities
Other2
Total
Level 3
assets
Derivatives
Total
Level 3
liabilities
Balance as at beginning of year
767
617
15
1,399
9
9
Gains/(losses) on assets/(gains)/losses on liabilities
recognised in:
Income statements
Available-for-sale securities reserve
Acquisition and issues
Disposal and settlements
Transfer 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 end of
year
2
–
67
–
(7)
1,446
1
–
3
3
(7)
1,516
(433)
(1,456)
(4)
(1,893)
(75)
2
330
–
19
619
(7)
–
–
–
15
4
(75)
21
964
(3)
1
–
1
(5)
–
–
6
(2)
1
–
1
(5)
–
–
6
(2)
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2. Other is comprised of derivative financial assets and, for 2019 only, certain loans.
2019 Westpac Group Annual Report
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities1 (continued)
Parent Entity 2019
$m
Balance as at beginning of year
Impact on adoption of AASB 9
Restated opening balance
Gains/(losses) on assets and (gains)/
losses on liabilities recognised in:
Income statements
Other comprehensive income
Acquisition and issues
Disposal and settlements
Transfer 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 end of year
Trading
securities and
financial assets
measured
at FVIS
206
–
206
6
–
17
(39)
–
3
193
3
Available-
for-sale
securities
70
(70)
–
–
–
–
–
–
–
–
–
Investment
securities
Other2
Total
Level 3
assets
289
11
300
19
–
35
(54)
–
3
13
14
27
13
–
16
(12)
–
–
44
303
–
67
67
–
–
2
(3)
–
–
66
241
Derivatives
Total
Level 3
liabilities
6
–
6
6
–
4
(6)
18
–
28
6
–
6
6
–
4
(6)
18
–
28
–
16
19
(10)
(10)
Parent Entity 2018
$m
Trading
securities and
financial assets
measured
at FVIS
Available-
for-sale
securities
Other2
Total
Level 3
assets
Derivatives
Total
Level 3
liabilities
Balance as at beginning of year
501
64
15
580
9
9
Gains/(losses) on assets/(gains)/losses on liabilities
recognised in:
Income statements
Available-for-sale securities reserve
Acquisition and issues
Disposal and settlements
Transfer 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 end of
year
6
–
21
(268)
(53)
(1)
206
–
2
18
(14)
–
–
70
5
–
1
–
3
(6)
–
–
13
4
7
2
42
(288)
(53)
(1)
289
9
1
–
1
(5)
–
–
6
(2)
1
–
1
(5)
–
–
6
(2)
Transfers into and out of Level 3 have occurred due to changes in observability in the significant inputs into the
valuation models used to determine the fair value of the related financial instruments. Transfers in and transfers out
are reported using the end of year fair values.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2. Other is comprised of derivative financial assets and, for 2019 only, certain loans.
2019 Westpac Group Annual Report1234
242
Notes to the financial statements
Note 22. 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
$3 million (2018: $4 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
Valuation
Loans
Investment
securities
Deposits
and other
borrowings
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.
The carrying value approximates the fair value. The balance principally relates to government
securities from illiquid markets. Fair value is monitored by reference to recent issuances.
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.
2019 Westpac Group Annual Report 243
Total
20,059
5,930
820
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities1 (continued)
The following tables summarise the estimated fair value and fair value hierarchy of financial instruments not
measured at fair value:
Consolidated
$m
Financial assets not measured at fair value
2019 Fair value
Quoted
market
prices
(Level 1)
Valuation
techniques
(Market
observable)
(Level 2)
Valuation
techniques
(Non-market
observable)
(Level 3)
Carrying
amount
Cash and balances with central banks
20,059
20,059
Collateral paid
Investment securities
Loans
Other financial assets
5,930
820
714,510
5,367
5,930
–
–
–
Total financial assets not measured at fair value
746,686
25,989
Financial liabilities not measured at fair value
–
–
366
–
5,367
5,733
–
–
454
716,130
716,130
–
5,367
716,584
748,306
Collateral received
Deposits and other borrowings
Other financial liabilities
Debt issues2
Loan capital
3,287
3,287
–
–
3,287
524,834
23,845
175,638
21,826
–
–
–
–
522,726
23,845
176,838
22,076
2,790
525,516
–
–
–
23,845
176,838
22,076
Total financial liabilities not measured at fair value
749,430
3,287
745,485
2,790
751,562
Consolidated
$m
Financial assets not measured at fair value
Cash and balances with central banks
Collateral paid
Loans3
Other financial assets
2018 Fair value
Quoted
market
prices
(Level 1)
Valuation
techniques
(Market
observable)
(Level 2)
Valuation
techniques
(Non-market
observable)
(Level 3)
Carrying
amount
Total
26,788
26,788
4,787
4,787
709,144
5,517
–
–
–
–
–
–
–
26,788
4,787
709,446
709,446
5,517
–
5,517
Total financial assets not measured at fair value
746,236
31,575
5,517
709,446
746,538
Financial liabilities not measured at fair value
Collateral received
Deposits and other borrowings
Other financial liabilities
Debt issues2
Loan capital
2,184
2,184
–
–
2,184
518,107
23,808
169,241
17,265
–
–
–
–
515,953
23,808
170,060
17,438
2,838
518,791
–
–
–
23,808
170,060
17,438
Total financial liabilities not measured at fair value
730,605
2,184
727,259
2,838
732,281
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2. The estimated fair value of debt issues includes the impact of changes in Westpac’s credit spreads since origination.
3. As at 30 September 2018, loans measured at amortised cost were restated from $706,440 million to $709,144 million. Accordingly, the
fair value estimates were also restated from $706,742 million to $709,446 million.
2019 Westpac Group Annual Report1234
244
Notes to the financial statements
Note 22. Fair values of financial assets and financial liabilities1 (continued)
2019 Fair value
Quoted
market
prices
(Level 1)
Valuation
techniques
(Market
observable)
(Level 2)
Valuation
techniques
(Non-market
observable)
(Level 3)
Parent Entity
$m
Financial assets not measured at fair value
Cash and balances with central banks
Collateral paid
Investment securities
Loans
Due from subsidiaries2
Other financial assets
Carrying
amount
17,692
5,773
27
631,676
133,899
4,615
17,692
5,773
–
–
–
–
Total
17,692
5,773
27
–
–
23
–
–
4
–
633,003
633,003
89,680
45,175
134,855
4,615
–
4,615
Total financial assets not measured at fair value
793,682
23,465
94,299
678,201
795,965
Financial liabilities not measured at fair value
Collateral received
Deposits and other borrowings
Other financial liabilities
Debt issues3
Due to subsidiaries2
Loan capital
2,849
2,849
–
–
2,849
464,075
23,146
153,050
147,016
21,826
–
–
–
–
–
463,440
1,251
464,691
23,146
154,111
6,553
22,076
–
–
23,146
154,111
140,463
147,016
–
22,076
Total financial liabilities not measured at fair value
811,962
2,849
669,326
141,714
813,889
Parent Entity
$m
Financial assets not measured at fair value
Cash and balances with central banks
Collateral paid
Loans4
Due from subsidiaries2
Other financial assets
2018 Fair value
Quoted
market
prices
(Level 1)
Valuation
techniques
(Market
observable)
(Level 2)
Valuation
techniques
(Non-market
observable)
(Level 3)
Carrying
amount
Total
24,976
24,976
4,722
4,722
629,622
133,808
4,666
–
–
–
–
–
–
88,368
4,666
–
–
24,976
4,722
629,774
629,774
46,295
134,663
–
4,666
Total financial assets not measured at fair value
797,794
29,698
93,034
676,069
798,801
Financial liabilities not measured at fair value
Collateral received
Deposits and other borrowings
Other financial liabilities
Debt issues3
Due to subsidiaries2
Loan capital
1,748
1,748
–
–
1,748
460,406
22,969
149,065
141,877
17,265
–
–
–
–
–
459,841
22,969
149,800
6,933
17,438
1,213
461,054
–
–
22,969
149,800
134,944
141,877
–
17,438
Total financial liabilities not measured at fair value
793,330
1,748
656,981
136,157
794,886
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2. Due from subsidiaries excludes $8,165 million (2018: $6,511 million) of long-term debt instruments with equity-like characteristics
which are part of the total investment in subsidiaries. As at 30 September 2018, the due from subsidiaries measured at amortised
cost was restated from $140,597 million to $133,808 million, and due to subsidiaries measured at amortised cost was restated from
$142,400 million to $141,877 million. Accordingly, the fair value estimate of due from subsidiaries was restated from $140,597 million
(all within Level 3) to $134,663 million (split between Level 2 and Level 3), and the fair value estimate of due to subsidiaries was restated
from $142,400 million (all within Level 3) to $141,877 million (split between Level 2 and Level 3).
3. The estimated fair value of debt issues includes the impact of changes in Westpac’s credit spreads since origination.
4. As at 30 September 2018, loans measured at amortised cost were restated from $626,918 million to $629,622 million. Accordingly, the
fair value estimates were also restated from $627,070 million to $629,774 million.
2019 Westpac Group Annual Report
245
Notes to the financial statements
Note 23. Offsetting financial assets and financial liabilities1
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 amounts in the
tables below may not tie back to the balance sheet if there are balances which are not subject to offsetting or
enforceable netting arrangements. The amounts presented in this note do not represent the credit risk exposure
of the Group or Parent Entity. Refer to Note 21.2 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 21.2.2.
Effects of offsetting
on balance sheet
Amounts subject to enforceable
netting arrangements but not offset
Gross
amounts
Amounts
offset
Net amounts
reported on
the balance
sheet
Other
recognised
financial
instruments
Cash
collateral2,3
Financial
instrument
collateral
Net
amount
Consolidated
$m
2019
Assets
Collateral paid4
6,643
(6,559)
84
–
–
Derivative financial instruments
61,464
(31,605)
29,859
(18,609)
(3,280)
Reverse repurchase agreements5
6,833
–
18,202
(18,130)
6,833
72
–
–
(9)
–
(17)
(102)
(6,824)
–
67
7,868
–
72
93,142
(56,294)
36,848
(18,609)
(3,289)
(6,943)
8,007
Loans6
Total assets
Liabilities
Collateral received
3,024
(2,972)
52
–
–
–
52
Derivative financial instruments
64,288
(35,192)
29,096
(18,609)
(5,622)
(1,932)
2,933
Repurchase agreements7
10,604
–
Deposits and other borrowings6
28,880
(18,130)
10,604
10,750
–
–
(3)
–
(10,601)
–
–
10,750
Total liabilities
106,796
(56,294)
50,502
(18,609)
(5,625)
(12,533)
13,735
2018
Assets
Collateral paid4
Derivative financial instruments
Reverse repurchase agreements5
Loans6
Total assets
Liabilities
4,196
32,828
1,379
8,519
(4,162)
(8,727)
–
(8,420)
34
24,101
1,379
99
–
–
(15,962)
(2,184)
–
–
(3)
–
(14)
(14)
(1,376)
–
20
5,941
–
99
46,922
(21,309)
25,613
(15,962)
(2,187)
(1,404)
6,060
Derivative financial instruments
37,296
(12,889)
24,407
(15,962)
(4,487)
Repurchase agreements7
9,522
–
Deposits and other borrowings6
20,486
(8,420)
9,522
12,066
–
–
–
–
(1,544)
(9,522)
2,414
–
–
12,066
Total liabilities
67,304
(21,309)
45,995
(15,962)
(4,487)
(11,066)
14,480
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2. $3,287 million (2018: $2,184 million) of cash collateral, subject to enforceable netting arrangements with derivative financial assets and
reverse repurchase agreements, forms part of collateral received as disclosed on the balance sheet. The remainder is included in term
deposits recognised in deposits and other borrowings within Note 16.
3. $5,625 million (2018: $4,487 million) of cash collateral, subject to enforceable netting arrangements with derivative financial
liabilities and repurchase agreements, forms part of collateral paid as disclosed on the balance sheet. The remainder of collateral
paid, as disclosed on the balance sheet, consists of $18 million (2018: $14 million) in stock borrowing arrangements and $287 million
(2018: $286 million) related to futures margin that does not form part of this column.
4. Gross amounts consist of variation margin held directly with central clearing counterparties and stock borrowing arrangements. Where
variation margin is receivable it is reported as part of collateral paid. Where variation margin is payable it is reported as part of collateral
received. Amounts offset relate to variation margin. 2018 restated to exclude $61 million of initial margin.
5. Reverse repurchase agreements form part of trading securities and financial assets measured at FVIS in Note 10.
6. Gross amounts 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 12 and part of deposits and other borrowings at amortised cost in Note 16.
7. Repurchase agreements form part of other financial liabilities in Note 17.
2019 Westpac Group Annual Report1234
246
Notes to the financial statements
Note 23. Offsetting financial assets and financial liabilities1 (continued)
Effects of offsetting
on balance sheet
Amounts subject to enforceable
netting arrangements but not offset
Gross
amounts
Amounts
offset
Net amounts
reported on
the balance
sheet
Other
recognised
financial
instruments
Cash
collateral2,3
Financial
instrument
collateral
Net
amount
Parent Entity
$m
2019
Assets
Collateral paid4
6,643
(6,559)
84
–
–
Derivative financial instruments
60,888
(31,605)
29,283
(18,526)
(2,842)
Reverse repurchase agreements5
6,731
–
18,202
(18,130)
6,731
72
–
–
(9)
–
(17)
(102)
(6,722)
–
67
7,813
–
72
92,464
(56,294)
36,170
(18,526)
(2,851)
(6,841)
7,952
Loans6
Total assets
Liabilities
Collateral received
3,024
(2,972)
Derivative financial instruments
64,059
(35,192)
Repurchase agreements7
10,604
–
Deposits and other borrowings6
28,880
(18,130)
52
28,867
10,604
10,750
–
–
–
52
(18,526)
(5,466)
(1,932)
2,943
–
–
(3)
–
(10,601)
–
–
10,750
Total liabilities
106,567
(56,294)
50,273
(18,526)
(5,469)
(12,533)
13,745
2018
Assets
Collateral paid4
Derivative financial instruments
Reverse repurchase agreements5
Loans6
Total assets
Liabilities
4,196
32,289
1,379
8,519
(4,162)
(8,727)
–
(8,420)
34
–
–
23,562
(15,862)
(1,748)
1,379
99
–
–
(3)
–
(14)
(14)
(1,376)
–
20
5,938
–
99
46,383
(21,309)
25,074
(15,862)
(1,751)
(1,404)
6,057
Derivative financial instruments
Repurchase agreements7
37,118
9,522
(12,889)
–
Deposits and other borrowings6
20,486
(8,420)
24,229
9,522
12,066
(15,862)
(4,423)
–
–
–
–
(1,544)
(9,522)
2,400
–
–
12,066
Total liabilities
67,126
(21,309)
45,817
(15,862)
(4,423)
(11,066)
14,466
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.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2. $2,849 million (2018: $1,748 million) of cash collateral, subject to enforceable netting arrangements with derivative financial assets and
reverse repurchase agreements, forms part of collateral received as disclosed on the balance sheet. The remainder is included in term
deposits recognised in deposits and other borrowings within Note 16.
3. $5,469 million (2018: $4,423 million) of cash collateral, subject to enforceable netting arrangements with derivative financial
liabilities and repurchase agreements, forms part of collateral paid as disclosed on the balance sheet. The remainder of collateral
paid, as disclosed on the balance sheet, consists of $18 million (2018: $14 million) in stock borrowing arrangements and $286 million
(2018: $285 million) related to futures margin that does not form part of this column.
4. Gross amounts consist of variation margin held directly with central clearing counterparties and stock borrowing arrangements. Where
variation margin is receivable it is reported as part of collateral paid. Where variation margin is payable it is reported as part of collateral
received. Amounts offset relate to variation margin. 2018 restated to exclude $61 million of initial margin.
5. Reverse repurchase agreements form part of trading securities and financial assets measured at FVIS in Note 10.
6. Gross amounts 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 12 and part of deposits and other borrowings at amortised cost in Note 16.
7. Repurchase agreements form part of other financial liabilities in Note 17.
2019 Westpac Group Annual Report
Notes to the financial statements
247
Note 24. 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 the majority of interest bearing debt securities to third party
investors for funding deals and to Westpac for liquidity deals.
Securitisation of its own assets is used by Westpac as a funding and liquidity tool.
For securitisation structured entities which Westpac controls, as defined in Note 31, 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 $537 million were provided by Westpac (2018: $517 million) for the
securitisation of its own assets.
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 consolidates them.
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 Investment securities/Available-for-sale
securities).
The cash consideration received is recognised as a liability (Repurchase agreements). Refer to Note 17 for further
details.
2019 Westpac Group Annual Report1234 248
Notes to the financial statements
Note 24. Securitisation, covered bonds and other transferred assets (continued)
The following table presents Westpac’s assets transferred and their associated liabilities:
Consolidated
$m
2019
Securitisation1
Covered bonds2
Repurchase agreements
Total
2018
Securitisation1
Covered bonds2
Repurchase agreements
Total
Parent Entity
$m
2019
Securitisation1
Covered bonds2
Repurchase agreements
Total
2018
Securitisation1
Covered bonds2
Repurchase agreements
Total
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
8,221
8,190
8,268
44,676
38,037
13,754
10,604
n/a
n/a
66,651
56,831
8,268
8,177
n/a
n/a
8,177
7,631
7,588
7,662
7,565
43,088
35,434
12,492
9,522
n/a
n/a
n/a
n/a
63,211
52,544
7,662
7,565
91
n/a
n/a
91
97
n/a
n/a
97
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
101,689
37,697
101,146
33,160
13,754
10,604
101,871
100,268
1,603
n/a
n/a
n/a
n/a
n/a
n/a
153,140
144,910
101,871
100,268
1,603
97,259
96,728
97,291
96,473
36,190
30,268
12,492
9,522
n/a
n/a
n/a
n/a
145,941
136,518
97,291
96,473
818
n/a
n/a
818
1. The carrying amount of assets securitised exceeds the amount of notes issued primarily because the carrying amount includes both
principal and 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.
2019 Westpac Group Annual Report
249
Notes to the financial statements
INTANGIBLE ASSETS, PROVISIONS, COMMITMENTS AND CONTINGENCIES
Note 25. 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) the consideration paid; over
(ii) 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, BankSA 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
Computer software
3 to 10 years
Depreciation method
Not applicable
Not applicable
Straight-line or the diminishing
balance method (using the Sum of
the Years Digits)
Core deposit intangibles
9 years
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.
2019 Westpac Group Annual Report1234 250
Notes to the financial statements
Note 25. Intangible assets (continued)
$m
Goodwill
Opening balance
Disposals1
Impairment1
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
Amortisation
Closing balance
Cost
Accumulated amortisation and impairment
Carrying amount
Total intangible assets
Consolidated
Parent Entity
2019
2018
2019
2018
8,890
9,012
6,844
6,844
–
–
5
(15)
(105)
(2)
–
–
–
–
–
–
8,895
8,890
6,844
6,844
2,177
1,916
2,014
1,758
906
(25)
882
(2)
846
(25)
823
(2)
(694)
(618)
(628)
(565)
1
(1)
–
–
2,365
2,177
2,207
2,014
6,395
5,727
5,464
4,861
(4,030)
(3,550)
(3,257)
(2,847)
2,365
2,177
2,207
2,014
670
670
670
–
–
–
–
–
–
26
–
(3)
23
144
(121)
23
670
670
670
21
(21)
–
1,494
(1,494)
–
33
–
(7)
26
391
(365)
26
636
636
636
636
636
636
–
–
–
–
–
–
–
–
–
–
–
–
–
21
(21)
–
1,279
(1,279)
–
–
–
–
–
160
(160)
–
11,953
11,763
9,687
9,494
1. The sale of Hastings’ overseas operations and subsequent exit of Hastings’ Australian operations resulted in the entire balance of
goodwill previously allocated to Hastings being derecognised ($15m) or impaired ($105m) in 2018.
2019 Westpac Group Annual Report
Notes to the financial statements
Note 25. Intangible assets (continued)
Goodwill has been allocated to the following CGUs1:
$m
Consumer
Business
Westpac Institutional Bank
BT Financial Group (Australia)
New Zealand
Total goodwill
251
Consolidated
Parent Entity
2019
2018
2019
2018
4,060
3,359
3,144
3,144
3,860
2,513
3,213
2,378
487
487
487
–
2,048
488
483
–
–
487
835
–
8,895
8,890
6,844
6,844
Significant assumptions used in recoverable amount calculations
Assumptions are used to determine the CGUs’ 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% (2018: 11.0%).
• Group’s adjusted pre-tax equity rate for:
– Australia was 15.7% (2018: 15.7%); and
– New Zealand was 15.3% (2018: 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 26. Operating lease commitments
Westpac leases various commercial and retail premises and related property and equipment. The lease
commitments at 30 September 2018 and 30 September 2019 are as follows:
$m
Due within one year
Due after one year but not later than five years
Due after 5 years
Total lease commitments
Consolidated
Parent Entity
2019
608
1,716
1,421
2018
570
1,564
1,819
2019
555
1,583
1,305
2018
498
1,356
1,460
3,745
3,953
3,443
3,314
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 $7 million (2018: $7 million)
for the Group and $7 million (2018: $6 million) for Parent Entity.
1.
In 2019, BT Financial Group (Australia)’s goodwill has been reallocated to Consumer and Business as a result of the restructure of its
operations. Refer to Note 2 for further details of the restructure.
2019 Westpac Group Annual Report1234 252
Notes to the financial statements
Note 27. Provisions, contingent liabilities, contingent assets and credit commitments
Accounting policy
Provisions
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 provision
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 and average salary increases which are then discounted.
Employee benefits – annual leave and other employee benefits provision
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 below. 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
expected credit losses (refer to Note 13).
Compliance, Regulation and Remediation provisions
The compliance, regulation and remediation provisions relate to matters of potential misconduct in providing
services to our customers identified both as a result of regulatory action and internal reviews. An assessment of
the likely cost to the Group of these matters (including applicable customer refunds) is made on a case-by-case
basis and specific provisions are made where appropriate.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future
events, and present obligations where the transfer of economic resources is not probable or cannot be reliably
measured. Contingent liabilities are not recognised on the balance sheet but are disclosed unless the outflow of
economic resources is remote.
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.
Contingent assets
Contingent assets are possible assets whose existence will be confirmed only by uncertain future events.
Contingent assets are not recognised on the balance sheet but are disclosed if an inflow of economic benefits is
probable.
Critical accounting assumptions and estimates
The financial reporting of provisions for litigation and non-lending losses and for compliance, regulation and
remediation matters involves a significant degree of judgement in relation to identifying whether a present
obligation exists and also in estimating the probability, timing, nature and quantum of the outflows that may
arise from past events. These judgements are made based on the specific facts and circumstances relating to
individual events. Specific judgements in respect of material items are included in the discussion below.
Provisions carried for long service leave are supported by an independent actuarial report.
2019 Westpac Group Annual Report 253
Total
1,928
98
2,026
2,777
(1,519)
Notes to the financial statements
Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
Provisions
$m
Consolidated
Annual
leave and
other
employee
benefits
Long
service
leave
Litigation
and non-
lending
losses
Provisions for
impairment
on credit
commitments1
Leasehold
Premises
Restructuring
provisions
Compliance,
regulation and
remediation
provisions
Balance at 30 September 2018
417
Impact on adoption of AASB 9
Restated opening balance
Additions
Utilisation
Reversal of unutilised
provisions
Other
–
417
90
(51)
–
–
Balance at 30 September 2019
456
Parent Entity
Balance at 30 September 2018
386
Impact on adoption of AASB 9
Restated opening balance
Additions
Utilisation
Reversal of unutilised
provisions
–
386
90
(48)
-
Balance at 30 September 2019
428
699
–
699
866
(931)
(20)
–
614
639
–
639
813
53
–
53
66
(81)
–
–
38
37
–
37
53
(876)
(67)
(19)
557
–
23
239
98
337
–
–
(32)
–
305
206
95
301
-
-
(26)
275
24
–
24
7
(7)
–
–
24
24
–
24
7
(7)
–
24
469
–
469
1,489
(324)
27
–
27
259
(125)
(1)
–
(61)
(1)
(114)
(1)
160
1,572
3,169
27
–
27
259
(125)
(1)
160
447
–
447
1,436
(313)
1,766
95
1,861
2,658
(1,436)
(57)
(103)
1,513
2,980
Legislative liabilities
The Group had the following assessed liabilities as at 30 September 2019:
• $22 million (2018: $20 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);
• $7 million (2018: $9 million) based on actuarial assessment as a self-insurer under the Accident Compensation
Act 1985 (Victoria);
• $6 million (2018: $5 million) based on actuarial assessment as a self-insurer under the Workers’ Rehabilitation
and Compensation Act 1986 (South Australia);
• $1 million (2018: $2 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation
and Rehabilitation Act 2003 (Queensland);
• $Nil (2018: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation
Act 1951 (Australian Capital Territory);
• $1 million (2018: $2 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation
and Injury Management Act 1981 (Western Australia); and
• $1 million (2018: $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.
Compliance, regulation and remediation provisions
Provisions in respect of compliance, regulation and remediation at 30 September 2019 include:
• customer refunds associated with certain ongoing advice service fees charged by the Group’s salaried financial
planners;
• customer refunds associated with certain ongoing advice service fees charged by authorised representatives
of the Group’s wholly owned subsidiaries, Securitor Financial Group Limited (Securitor) and Magnitude Group
Pty Ltd (Magnitude);
•
•
refunds for certain consumer and business customers that had interest only loans that did not automatically
switch, when required, to principal and interest loans; and
refunds to certain business customers who were provided with business loans where they should have been
provided with loans covered by the National Consumer Credit Protection Act.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report1234
254
Notes to the financial statements
Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
The provisions for certain ongoing advice service fees charged by the Group’s salaried financial planners and by
authorised representatives of Securitor and Magnitude require significant judgement and are summarised as follows:
Customer refunds associated with certain ongoing advice service fees charged by the Group’s salaried financial
planners
Westpac has raised a provision for customer refunds associated with certain ongoing advice service fees charged
by the Group’s salaried financial planners during the period 2008 to 2018, including instances where records of
financial advice are insufficient.
A number of estimates have been used and judgements have been applied in determining the provision of $276
million as at 30 September 2019. These include:
• Total fees received by the Group in respect of salaried financial planners in the period 2008 to 2018 were
approximately $594 million;
• The proportion of total fees that are estimated to be refunded is 26%. The key assumption in this estimate
relates to the nature and extent of records to evidence that services were provided; and
• The time value of money including the forecast timing over which payments are likely to be made.
The provision also includes estimated costs associated with running the remediation program.
Ongoing advice service fees charged by authorised representatives of Securitor and Magnitude
The Group has estimated customer remediation costs (including interest on refunded fees and additional costs to
implement the remediation program) where customers of authorised representatives of the Group’s wholly owned
subsidiaries Securitor and Magnitude paid ongoing advice service fees to those representatives and where it is not clear
that the services were provided. The ongoing advice service fees were charged during the period from 2008 to 2018.
There are challenges involved in determining the extent of the services provided by authorised representatives who
are no longer operating under the Magnitude and Securitor licences because, amongst other things, many of the
former authorised representatives’ files have been difficult to access particularly where authorised representatives
have ceased operating under the Group’s licences or have left the industry.
As a result, we have conducted sample based reviews in order to develop an estimate of fees that may need to be
refunded. The insights from these reviews have informed a number of the estimates that have been used and the
judgements which have been applied in estimating the provision of $606 million at 30 September 2019. They include:
• Total fees received by authorised representatives from their customers in the period 2008 to 2018 were
approximately $936 million; and
• The proportion of fees that are estimated to be refundable under the current proposed remediation
methodology is 32%. The key assumptions in this estimate include:
– The basis for refunding customers of the authorised representatives; and
– The nature, extent and availability of records to evidence that service was provided; and
• The time value of money including the forecast timing over which payments are likely to be made.
The provision also includes estimated costs associated with running the remediation program.
The provision is necessarily based on a number of assumptions and incomplete information. Westpac is also yet to
finalise its remediation approach which may change following industry and regulator discussions. It is possible that
the final outcome could be below or above the provision, if the actual outcome differs to the assumptions used in
estimating the provision. Remediation processes may change over time as further facts emerge and such changes
could result in a change to the final exposure.
Restructuring provisions
The Group holds restructuring provisions in relation to management changes to the scope or manner of certain
business activities.
During the year, the Group raised a restructuring provision in relation to the reset of its wealth strategy which was
announced on 19 March 2019. This resulted in a number of changes to its wealth business. Key changes that have
been made include:
• The realigning of the major BT businesses into expanded Consumer and Business divisions;
• Exiting of the provision of personal financial advice by Westpac Group salaried financial planners and authorised
representatives;
• Moved to a referral model for financial advice by utilising a panel of advisers or adviser firms; and
• Sold part of the businesses to Viridian Advisory. This enabled many BT Financial Advice ongoing advice
customers to transfer to Viridian Advisory. A number of the Group’s salaried financial advisers and support staff
transitioned to Viridian from the completion date of 1 July 2019. Some authorised representatives also moved to
Viridian prior to 30 September 2019.
2019 Westpac Group Annual Report Notes to the financial statements
255
Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
Other provisions
The Group also holds certain provisions relating to previously claimed research and development tax incentives.
Contingent liabilities
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events
and present obligations where the transfer of economic resources is not probable or cannot be reliably measured.
Contingent liabilities are not recognised on the balance sheet but are disclosed unless the outflow of economic
resource is remote.
Regulatory actions
Regulators and other bodies routinely conduct investigations and reviews involving the financial services sector,
both in Australia and overseas. These investigations and reviews may consider a range of subject matters, and in
Australia, a number of investigations and reviews have recently considered, and continue to consider, potential
misconduct in credit and financial services.
Domestic regulators such as ASIC, APRA, ACCC, AUSTRAC, the OAIC and the ATO, as well as certain international
regulators such as the Reserve Bank of New Zealand, Financial Markets Authority in New Zealand, Hong Kong
Monetary Authority, Monetary Authority of Singapore and National Futures Association in the U.S. are also
currently conducting investigations and reviews and inquiries (some of which are industry-wide) that involve
or may involve the Group in the future. These investigations and reviews are separately considering a range of
matters, including matters such as ongoing advice services fees, responsible lending, residential mortgages,
credit portfolio management, consumer credit insurance, privacy and information governance, the provision of
financial advice, competition law conduct, anti-money laundering and counter-terrorism financing processes and
procedures, and financial markets conduct.
Westpac has also received various notices and requests for information from regulators as part of both industry-
wide and Westpac-specific investigations and reviews and inquiries.
These investigations and reviews and inquiries, which may be conducted by a regulator, and in some cases also
an external third party retained either by the regulator or by the Group (including where a matter has been self-
identified by the Group), may result in litigation (including class action proceedings against the Group), fines,
imposition of additional capital, civil or criminal penalties, revocation, suspension or variation of conditions of
relevant regulatory licences or other enforcement or administrative action being taken by regulators or other
parties. An assessment of the likely cost to the Group of these investigations and reviews and actions has been
made on a case-by-case basis for the purpose of the financial statements but cannot always be reliably estimated.
One regulatory action currently being conducted relates to International Funds Transfer Instructions (IFTIs)
required to be reported under Australia’s AML/CTF Act. Under the Act, the ‘sender’ financial institution of an IFTI
transmitted out of Australia, or the ‘recipient’ financial institution of an IFTI transmitted into Australia, is required
to report the IFTI to AUSTRAC within 10 business days of the instruction being sent or received. As reported in the
Group’s 2018 Annual Report, the Group self-reported to AUSTRAC a failure to report a large number of IFTIs. The
majority of the IFTIs which are the subject of the Group’s engagement with AUSTRAC, concern batch instructions
received by Westpac through one WIB product between 2009 and 2018 from a small number of correspondent
banks for payments made predominantly to beneficiaries living in Australia in Australian dollars, on behalf of
clients of those correspondent banks. The majority of the payments were low value, recurring and made by foreign
government pension funds and corporates.
AUSTRAC has issued a number of detailed statutory notices over the last year requiring information relating to
the Group’s processes, procedures and oversight. These notices relate to a range of matters including these IFTI
reporting failures and associated potential failings related to record keeping and obligations to obtain and pass
on certain data in funds transfer instructions, as well as correspondent banking due diligence, risk assessments
and transaction monitoring. Westpac has not yet received an indication from AUSTRAC about the nature of any
enforcement action it may take. The Group is continuing to work with AUSTRAC in relation to these matters.
Any enforcement action against Westpac may include civil penalty proceedings and result in the payment of a
significant financial penalty, which Westpac is currently unable to reliably estimate. Previous enforcement action by
AUSTRAC against other institutions has resulted in a range of outcomes, depending on the nature and severity of
the relevant conduct and its consequences.
As AUSTRAC is still investigating these issues, any penalty cannot be reliably estimated and accordingly no
provision has been raised for this matter.
Litigation
There are ongoing court proceedings, claims and possible claims for and against the Group. Contingent liabilities
exist in respect of actual and potential claims and proceedings, including those listed below. An assessment of the
Group’s likely loss has been made on a case-by-case basis for the purpose of the financial statements but cannot
always be reliably estimated, including in relation to those listed below.
• On 1 March 2017, ASIC commenced litigation in relation to certain Westpac home loans (including certain
interest only loans) alleging contraventions of the National Consumer Credit Protection Act 2009 (Cth).
The proceedings were heard in May 2019. On 13 August 2019, the Court handed down its judgment in the
proceedings, and dismissed ASIC’s case. On 10 September 2019, ASIC filed an appeal in relation to the decision.
No provision has been recognised in relation to this matter.
2019 Westpac Group Annual Report1234 256
Notes to the financial statements
Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
• On 22 December 2016, ASIC commenced Federal Court proceedings against BT Funds Management Limited
(BTFM) and Westpac Securities Administration Limited (WSAL) in relation to a number of superannuation
account consolidation campaigns conducted between 2013 and 2016. ASIC has alleged that in the course
of some of these campaigns, customers were provided with personal advice in contravention of a number
of Corporations Act 2001 (Cth) provisions, and selected 15 specific customers as the focus of their claim. In
December 2018 the primary Court handed down a judgment in which it held that no personal advice had been
provided and that BTFM and WSAL did not contravene the relevant personal advice provisions although it
did make a finding that BTFM and WSAL had each contravened section 912A(1)(a) of the Corporations Act. In
February 2019, ASIC filed an appeal against this decision. On 28 October 2019, the Full Federal Court handed
down its decision in ASIC’s favour and made findings that BTFM and WSAL each provided personal advice on
the relevant calls. Once formal declarations of contravention are made, the matter will be remitted for penalty.
No provision has been recognised in relation to this matter.
•
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 Australian and international banks alleging misconduct in relation to
the bank bill swap reference rate. On 26 November 2018, the US Court delivered its judgment on the Motion
to Dismiss the US BBSW class action proceedings, with the case against Westpac and certain other foreign
banks being dismissed on the basis that the Court does not have jurisdiction to hear the case. In April 2019, the
Plaintiffs filed an amended claim, which brings Westpac back into the proceedings. Westpac is continuing to
defend the proceedings with a Motion to Dismiss filed in May 2019. No provision has been recognised in relation
to this matter.
• On 12 October 2017, a class action against Westpac and Westpac Life Insurance Services Limited (WLIS) was
filed in the Federal Court of Australia. The class action was filed on behalf of customers who, since February
2011, obtained insurance issued by WLIS on the recommendation of certain financial advisers employed within
the Westpac Group. The plaintiffs have alleged that aspects of the financial advice provided by those advisers
breached fiduciary and statutory duties owed to the advisers’ clients, including the duty to act in the best
interests of the client, and that WLIS was knowingly involved in those alleged breaches. Westpac and WLIS are
defending the proceedings. These proceedings are currently stayed by order of the Court, pending the outcome
of an appeal concerning a procedural issue unrelated to the substantive claims made in the class action. No
provision has been recognised in relation to this matter.
• On 21 February 2019, a class action against Westpac was filed in the Federal Court of Australia. As directed
by the Court, the Plaintiffs filed a Statement of Claim on 22 May 2019 and an amended statement of claim on
18 October 2019. The claims allege that Westpac did not comply with its responsible lending obligations and
entered into certain home loans that it should otherwise have assessed as unsuitable. The allegations include
that during the period from 1 January 2011 to 17 February 2018, Westpac failed to: conduct reasonable inquiries
about the customers’ financial situation, requirements and objectives; verify customer’s financial situation;
conduct assessments of suitability; and act efficiently and fairly. Westpac is defending the proceedings. No
provision has been recognised in relation to this matter.
• On 5 September 2019, a class action against BT Funds Management Limited (BTFM) and WLIS was commenced
in relation to aspects of BTFM’s BT Super for Life cash investment option. The claim follows other industry
class actions as part of Slater and Gordon’s ‘Get your super back’ campaign. It is alleged in the proceedings
that BTFM failed to adhere to a number of obligations under the general law, the relevant trust deed and the
Superannuation Industry (Supervision) Act 1993 (Cth), and that WLIS was knowingly concerned with BTFM’s
alleged contraventions. The damages sought by the claim are unspecified. BTFM and WLIS are defending the
proceedings. No provision has been recognised in relation to this matter.
Internal reviews and remediation
Westpac is currently undertaking a number of reviews to identify and resolve prior issues that have the potential to
impact our customers and reputation. These internal reviews have identified, and may continue to identify, issues in
respect of which we are, or will be, taking steps to put things right (including in relation to areas of industry focus such
as compliance with responsible lending obligations and the way some product terms and conditions are operationalised)
so that our customers are not at a disadvantage from certain past practices. By undertaking these reviews we can also
improve our processes and controls. An assessment of the Group’s likely loss has been made on a case-by-case basis
for the purpose of the financial statements but cannot always be reliably estimated. Contingent liabilities may exist in
respect of actual or potential claims, compensation payments and/or refunds identified as part of these reviews.
Australian Financial Complaints Authority
Contingent liabilities may also exist in relation to customer complaints brought before the Australian Financial
Complaints Authority (AFCA). AFCA has the power to make determinations about complaints and can award
compensation up to certain thresholds. AFCA has a broader jurisdiction than previous dispute resolution bodies which
it has replaced and, up until 30 June 2020, can also consider customer complaints dating back to 1 January 2008.
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.
2019 Westpac Group Annual Report Notes to the financial statements
257
Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued)
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, including payments by APRA to deposit holders in a failed 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. A contingent liability may exist in respect of any levy imposed under the FCS.
Contingent tax risk
Tax and regulatory authorities in Australia and in other jurisdictions are reviewing the taxation treatment of certain
transactions (both historical and present-day transactions) undertaken by the Group in the course of normal
business activities and the claiming of tax incentives and indirect taxes such as GST. The Group also responds to
various notices and requests for information it receives from tax and regulatory authorities.
These reviews, notices and requests may result in additional tax liabilities (including interest and penalties).
The Group has assessed these and other taxation claims arising in Australia and elsewhere, including seeking
independent advice.
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.
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. 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 21 for further details of liquidity risk and credit risk management.
Undrawn credit commitments excluding derivatives are as follows:
$m
Undrawn credit commitments
Letters of credit and guarantees1
Commitments to extend credit2
Other
Total undrawn credit commitments
Consolidated 2019
$m
Letters of credit and guarantees
Commitments to extend credit
Other
Consolidated
Parent Entity
2019
2018
2019
2018
15,150
15,585
14,583
14,957
176,002
174,658
153,716
152,943
188
154
188
99
191,340
190,397
168,487
167,999
Up to
1 Year
7,334
Over 1
to 3 Years
Over 3
to 5 Years
Over
5 Years
Total
4,639
719
2,458
15,150
41,488
58,402
12,917
63,195
176,002
125
-
-
63
188
Total undrawn credit commitments
48,947
63,041
13,636
65,716
191,340
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.
1. Standby letters of credit are undertakings to pay, against presentation documents, an obligation in the event of a default by a customer.
Guarantees are unconditional undertakings given to support the obligations of a customer to third parties. The Group may hold cash as
collateral for certain guarantees issued.
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 2019 the Group had offered $5.0 billion (2018: $5.7 billion) of facilities to customers, which had not
yet been accepted.
2019 Westpac Group Annual Report1234 Notes to the financial statements
258
Notes to the financial statements
CAPITAL AND DIVIDENDS
Note 28. Shareholders’ equity
Accounting policy
Share capital
Ordinary shares are recognised at the amount paid up per ordinary share net of directly attributable issue costs.
Treasury shares are shares in the Parent Entity, purchased by the Parent Entity or other entities within the Group.
These shares are adjusted against share capital as the net of the consideration paid to purchase the shares and,
where applicable, any consideration received from the subsequent sale or reissue of these shares.
Non-controlling interests
Non-controlling interests represent the share in the net assets of subsidiaries attributable to equity interests that
are not owned directly or indirectly by the Parent Entity.
Reserves
Foreign currency translation reserve
Exchange differences arising on translation of the Group’s foreign operations, and any offsetting gains or losses
on hedging the net investment 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.
Debt securities at FVOCI reserve (30 September 2019 – AASB 9)
This reserve was established on adoption of AASB 9 and comprises the changes in fair value of debt securities
measured at fair value through other comprehensive income (except for interest income, impairment charges
and foreign exchange gains and losses which are recognised in the income statement), net of any related hedge
accounting adjustments and tax. These changes are transferred to non-interest income in the income statement
when the asset is disposed.
Equity securities at FVOCI reserve (30 September 2019 – AASB 9)
This reserve was established on adoption of AASB 9 and comprises the changes in fair value of equity securities
measured at fair value through other comprehensive income, net of tax. These changes are not transferred to the
income statement when the asset is disposed.
Available-for-sale securities reserve (30 September 2018 – AASB 139)
This comprises the changes in the fair value of available-for-sale financial securities (including both debt and
equity securities), net of any related hedge accounting adjustments and tax. These changes were transferred to
non-interest income in the income statement when the asset is either disposed of or impaired. This reserve was
closed on the adoption of AASB 9 and the closing balance was allocated to the debt securities at FVOCI reserve
and equity securities at FVOCI reserve noted above for the relevant securities.
Cash flow hedge 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.
2019 Westpac Group Annual Report Notes to the financial statements
Note 28. Shareholders’ equity (continued)
$m
Share capital
Ordinary share capital, fully paid
Treasury shares held for RSP1
Other treasury shares held2
Total treasury shares held
Total share capital
Non-controlling interests
259
Consolidated
Parent Entity
2019
2018
2019
2018
37,508
36,054
37,508
36,054
(572)
19
(553)
(505)
12
(493)
(572)
(3)
(575)
(505)
(3)
(508)
36,955
35,561
36,933
35,546
53
52
–
–
Ordinary shares
Westpac does not have authorised capital and the ordinary shares have no par value. Ordinary shares entitle the
holder to participate in dividends and, in the event of Westpac winding up, to a share of the proceeds in proportion
to the number of and amounts paid on the shares held.
Each ordinary share entitles the holder to one vote, either in person or by proxy, at a shareholder meeting.
Reconciliation of movement in number of ordinary shares.
Consolidated and Parent Entity
(number)
Opening balance
Dividend reinvestment plan3
Conversion of Westpac Convertible Preference Shares4
Closing balance
Ordinary shares purchased and sold on market
Consolidated and Parent Entity
For share-based payment arrangements:
Employee share plan (ESP)
RSP5
Westpac Performance Plan (WPP) - share rights exercised
Westpac Long Term Variable Reward Plan (LTVR) - options exercised6
As treasury shares:
Treasury shares sold
Net number of ordinary shares purchased/(sold) on market
For details of the share-based payment arrangements refer to Note 33.
2019
2018
3,434,796,711
3,394,364,279
55,132,062
21,242,667
–
19,189,765
3,489,928,773
3,434,796,711
2019
2019
Number
Average Price ($)
1,061,442
2,707,931
184,043
37,831
(308,263)
3,682,984
25.27
25.55
26.73
27.68
26.19
1. 2019: 4,784,213 unvested shares held (2018: 3,943,660).
2. 2019: 1,721,532 shares held (2018: 2,029,795).
3. The price per share for the issuance of shares in relation to the dividend reinvestment plan for the 2019 interim dividend was $27.36 and
2018 final dividend was $25.82 (2018: 2018 interim dividend was $28.11 and 2017 final dividend was $31.62).
4. The conversion price per share for the issuance of shares in relation to the conversion of Westpac Convertible Preference Shares was $29.49.
5. Ordinary shares allocated to employees under the RSP are classified as treasury shares until the shares vest.
6. The average exercise price per share received was $23.40 on the exercise of the LTVR options.
2019 Westpac Group Annual Report12341234
260
Notes to the financial statements
Note 28. Shareholders’ equity (continued)
Reconciliation of movement in reserves1
$m
Available-for-sale securities reserve
Opening balance
Impact on adoption of AASB 9
Net gains/(losses) from changes in fair value
Income tax effect
Transferred to income statements
Income tax effect
Exchange differences
Closing balance
Debt securities at FVOCI reserve
Opening balance
Impact on adoption of AASB 9
Net gains/(losses) from changes in fair value
Income tax effect
Transferred to income statements
Income tax effect
Exchange differences
Closing balance
Equity securities at FVOCI reserve
Opening balance
Impact on adoption of AASB 9
Net gains/(losses) from changes in fair value
Closing balance
Share-based payment reserve
Opening balance
Share-based payment expense
Closing balance
Cash flow hedge 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
Gains/(losses) on net investment hedges
Transferred to income statements
Closing balance
Other reserves
Opening balance
Transactions with owners
Closing balance
Total reserves
Consolidated
Parent Entity
2019
2018
2019
2018
37
(37)
–
–
–
–
–
–
–
33
(47)
12
(29)
8
1
(22)
–
6
11
17
64
–
(104)
34
66
(25)
2
37
–
–
–
–
–
–
–
–
–
–
–
–
24
(24)
–
–
–
–
–
–
–
25
(40)
10
(29)
8
1
(25)
–
1
(2)
(1)
70
–
(34)
13
(33)
6
2
24
–
–
–
–
–
–
–
–
–
–
–
–
1,534
1,431
1,425
1,322
108
103
108
103
1,642
1,534
1,533
1,425
(125)
(154)
(203)
60
197
(58)
(161)
47
203
(60)
(129)
(125)
(69)
(121)
36
128
(39)
(65)
(94)
(125)
38
160
(48)
(69)
(351)
(529)
(307)
(481)
311
(129)
(10)
164
17
(3)
214
(52)
–
175
(1)
–
(179)
(351)
(145)
(307)
(18)
–
(18)
(18)
–
(18)
41
–
41
41
–
41
1,311
1,077
1,338
1,114
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report
261
Notes to the financial statements
Note 29. Capital adequacy
APRA measures an ADI’s regulatory capital using three measures:
Level of capital
Definition
Common Equity Tier 1 Capital (CET1)
Tier 1 Capital
Total Regulatory Capital
Comprises the highest quality components of capital that consists of
paid-up share capital, retained profits and certain reserves, less certain
intangible assets, capitalised expenses and software, and investments and
retained profits in insurance and funds management subsidiaries that are
not consolidated for capital adequacy purposes.
The sum of CET1 and AT1 Capital. AT1 Capital comprises high quality
components of capital that consist of certain securities not included in
CET1, but which include loss absorbing characteristics.
The sum of Tier 1 Capital and Tier 2 Capital. Tier 2 Capital includes
subordinated instruments and other components of capital that, to
varying degrees, do not meet the criteria for Tier 1 Capital, but nonetheless
contribute to the overall strength of an ADI and its capacity to absorb
losses.
Under APRA’s Prudential Standards, Australian ADIs, including Westpac, are required to maintain a minimum CET1
ratio of at least 4.5%, Tier 1 Capital ratio of at least 6.0% and Total Regulatory Capital ratio of at least 8.0%. APRA
may also require ADIs, including, Westpac, to meet Prudential Capital Requirements (PCRs) above the minimum
capital ratios. APRA does not allow the PCRs for individual ADIs to be disclosed.
APRA also requires ADIs to hold additional CET1 buffers comprising of:
• a capital conservation buffer (CCB) of 3.5% for ADIs designated by APRA as domestic systemically important
banks (D-SIBs) unless otherwise determined by APRA, which includes a 1.0% surcharge for D-SIBs. APRA has
determined that Westpac is a D-SIB; and
• a countercyclical capital buffer. The countercyclical buffer is set on a jurisdictional basis and APRA is
responsible for setting the requirement in Australia. The countercyclical buffer requirement is currently set to
zero for Australia and New Zealand.
Collectively, the above buffers are referred to as the “Capital Buffer” (CB). Should the CET1 capital ratio fall within
the capital buffer range restrictions on the distributions of earnings will apply. This includes restrictions on the
amount of earnings that can be distributed through dividends, AT1 Capital distributions and discretionary staff
bonuses.
Capital management strategy
Westpac’s approach to capital management seeks to ensure that it is adequately capitalised as an ADI. Westpac
evaluates its approach to capital management through the Internal Capital Adequacy Assessment Process
(ICAAP), the key features of which include:
•
the development of a capital management strategy, including consideration of regulatory minimums, capital
buffers and contingency plans;
• consideration of both economic and regulatory capital requirements;
• a stress testing framework that challenges the capital measures, coverage and requirements including the
impact of adverse economic scenarios; and
• consideration of the perspective of external stakeholders’, including rating agencies and equity and debt
investors.
In light of APRA’s ‘unquestionably strong’ capital benchmarks, Westpac will seek to operate with a CET1 capital
ratio above 10.5% in March and September as measured under the existing capital framework. Additional buffers
may also be held to reflect challenging or uncertain environments. This also takes into consideration:
• current regulatory capital minimums and the CCB, which together are the total CET1 requirement;
• stress testing to calibrate an appropriate buffer against a downturn; and
• quarterly volatility of capital ratios due to the half yearly cycle of ordinary dividend payments.
Westpac will revise its target capital level once APRA finalises its review of the capital adequacy framework.
Total regulatory capital developments
On 9 July 2019 APRA announced that it will require the major banks (including Westpac) to lift Total Regulatory
Capital by three percentage points of RWA by 1 January 2024 in order to boost loss absorbing capacity and
support orderly resolution. APRA also confirmed that its overall long term target of an additional four to five
percentage points of loss absorbing capacity remains unchanged, and that it will consider the most feasible
alternative method of sourcing the remaining one to two percentage points, taking into account the particular
characteristics of the Australian financial system.
Further details of APRA’s regulatory changes are set out in the Significant Developments section of the 2019
Annual Report.
2019 Westpac Group Annual Report12341234 262
Notes to the financial statements
Note 30. Dividends
$m
Dividends not recognised at year end
Consolidated
Parent Entity
2019
2018
2017
2019
2018
Since year end the Directors have proposed the following dividends:
Final dividend 80 cents per share (2018: 94 cents, 2017: 94 cents) all fully franked at 30%
2,791
3,227
3,186
2,792
3,229
Total dividends not recognised at year end
2,791
3,227
3,186
2,792
3,229
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 2019
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 $1,558 million (2018: $1,357
million; 2017: $1,063 million). This is calculated as the year end franking credit balance, adjusted for the Australian
current tax liability and the proposed 2019 final dividend.
New Zealand imputation credits
New Zealand imputation credits of NZ$0.07 (2018: NZ$0.07, 2017: NZ$0.07) per share will be attached to the
proposed 2019 final dividend. New Zealand imputation credits available to the Parent Entity for subsequent years
are NZ$860 million (2018: NZ$530 million, 2017: NZ$375 million). This is calculated on the same basis as the
Australian franking credits but using the New Zealand current tax liability.
2019 Westpac Group Annual Report 263
Notes to the financial statements
GROUP STRUCTURE
Note 31. 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.
The following table includes the principal controlled entities of the Group as at 30 September 2019.
Name
Country of
Incorporation
Name
Advance Asset Management Limited
Australia Westpac Financial Services Limited
Asgard Capital Management Limited
Australia Westpac General Insurance Limited
Asgard Wealth Solutions Limited
Australia Westpac General Insurance Services Limited
BT Financial Group Pty Limited
Australia Westpac Lenders Mortgage Insurance Limited
BT Funds Management Limited
Australia Westpac Life Insurance Services Limited
BT Portfolio Services Limited
Australia Westpac Securitisation Holdings Pty Limited
Capital Finance Australia Limited
Australia BT Funds Management (NZ) Limited
Crusade ABS Series 2017-1 Trust
Australia Westpac Financial Services Group-NZ-Limited
Crusade ABS Series 2017-1P Trust
Australia Westpac Life-NZ-Limited
Crusade Trust No.2P of 2008
Australia Westpac New Zealand Group Limited
Series 2008-1M WST Trust
Australia Westpac New Zealand Limited
Series 2014-2 WST Trust
Series 2015-1 WST Trust
Series 2019-1 WST Trust
Australia Westpac NZ Covered Bond Limited1
Australia Westpac NZ Operations Limited
Australia Westpac NZ Securitisation Limited1
St.George Finance Limited
Australia Westpac Securities NZ Limited
Westpac Covered Bond Trust
Australia Westpac Term Pie Fund2
Country of
Incorporation
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
Westpac Equity Holdings Pty Limited
Australia Westpac Bank-PNG-Limited
Papua New Guinea
Westpac Financial Services Group
Limited
Australia
1. 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 controlled entities within the
Group.
2. The Group has funding agreements in place with this entity and is deemed to have exposure to the associated risks and rewards. The
entity is consolidated as 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.
2019 Westpac Group Annual Report12341234 264
Notes to the financial statements
Note 31. Investments in subsidiaries and associates (continued)
The following controlled entities have been granted relief from compliance with the balance date synchronisation
provisions in the Corporations Act 2001:
• Westpac Cash PIE Fund;
• Westpac Notice Saver PIE Fund; 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
Westpac NZ Covered Bond Limited
Westpac NZ Securitisation Limited
2019
75.0%
89.9%
19.0%
19.0%
2018
75.0%
89.9%
19.0%
19.0%
Non-controlling interests
Details of the balance of non-controlling interests are set out in Note 28. 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 subject to local regulatory
requirements. 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
There are no associates that are material to the Group.
Changes in ownership of subsidiaries
Businesses disposed during the year ending 30 September 2019
Westpac sold its interest in Ascalon Capital Managers (Asia) Limited and Ascalon Capital Managers Limited on
8 February 2019 for a combined profit of $3 million recognised in non-interest income.
Businesses disposed during the year ending 30 September 2018
Westpac sold its interest in a number of Hastings offshore subsidiaries to Northill Capital. Completion of the sale
of the US and UK entities occurred on 28 February 2018 and completion of the Singapore entity occurred on
23 March 2018, with a total loss of $9 million recognised in non-interest income.
Businesses disposed during the year ending 30 September 2017
No businesses were sold in the year ended 30 September 2017.
Details of the assets and liabilities which the Group ceased to control are provided in Note 37.
2019 Westpac Group Annual Report 265
Notes to the financial statements
Note 32. 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 31. 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.
Refer to Note 24 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 an agent then it consolidates the fund.
The principal versus 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
Investment securities/
Available-for-sale
securities
Loans and other credit
commitments
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.
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.
2019 Westpac Group Annual Report12341234 266
Notes to the financial statements
Note 32. Structured entities1 (continued)
The following tables show 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 2019
$m
Assets
Trading securities and financial assets measured at FVIS
Investment securities
Loans
Life insurance assets
Other assets
Total on-balance sheet exposures
Total notional amounts of off-balance sheet exposures
Maximum exposure to loss
Size of structured entities3
Consolidated 2018
$m
Assets
Trading securities and financial assets measured at FVIS
Available-for-sale securities
Loans
Life insurance assets
Other assets
Investment in
third party
mortgage and
other
asset-backed
securities2
Financing to
securitisation
vehicles
Group
managed
funds
Interest
in other
structured
entities
Total
1,827
6,940
–
–
–
–
–
20,979
-
-
-
-
9
282
-
2,109
6,940
22,817
43,805
4,885
1,879
6,764
54
-
54
8,767
20,979
4,948
24,978
59,672
–
8,767
66,015
5,157
26,136
26,136
102
10,086
15,345
5,050
71,538
35,064
75,017
98,983
262,672
Investment in
third party
mortgage and
other
asset-backed
securities2
Financing to
securitisation
vehicles
Group
managed
funds
Interest
in other
structured
entities
Total
2,247
7,352
2,108
7,352
–
–
–
–
–
21,977
–
–
–
–
6
139
–
22,894
44,877
4,702
1,843
6,545
47
–
47
Total on-balance sheet exposures
9,460
21,977
4,755
24,876
61,068
Total notional amounts of off-balance sheet exposures
Maximum exposure to loss
Size of structured entities3
–
9,460
58,976
5,145
27,122
27,122
60
7,988
13,193
4,815
32,864
74,261
66,524
100,427
253,049
Non-contractual financial support
The Group does not provide non-contractual financial support to these unconsolidated structured entities.
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2. The Group’s interests in third party mortgage and other asset-backed securities are senior tranches of notes and are investment grade
rated.
3. Represented either by the total assets or market capitalisation of the entity, or if not available, the Group’s total committed exposure
(for lending arrangements and external debt and equity holdings), funds under management (for Group managed funds) or the total
value of notes on issue (for investments in third-party asset-backed securities).
2019 Westpac Group Annual Report 267
Notes to the financial statements
OTHER
Note 33. 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 issued 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 Variable
Reward Plan (LTVR)
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). Westpac ordinary
How it is used
Share options (no longer issued
since October 2009).
Share options (no longer issued
since October 2009).
Aligns executive remuneration
and accountability with
shareholder interests over the
long term.
Primarily used for mandatory
deferral of a portion of
short-term incentives for New
Zealand employees and key
employees based outside Australia.
Exercise price:
Shares rights
Nil
Nil
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.
Share options
Performance
hurdles
shares (allocated at no
cost).
Primarily used to
reward key employees.
Westpac ordinary
shares (allocated
at no cost) of
up to $1,000 per
employee per year.
To reward eligible
Australian
employees (unless
they have already
been provided
instruments under
another scheme for
the previous year).
n/a
n/a
n/a
n/a
None
None
None
Relative Total Shareholder
return (TSR) over a four year
performance period and
average cash Return on Equity
(cash ROE) over a three year
performance period plus
one year holding lock, each
applying to half of the award
(commencing with the 2016
LTVR award)1.
1. For the 2015 LTVR awards, the relative TSR is subject to a four year performance period and cash EPS compound annual growth rate
(CAGR) over a three year performance period plus one year holding lock. For awards granted for the periods 2011 to 2014 both the
relative TSR and cash EPS CAGR hurdles are subject to a three year performance and vesting period. Relative TSR hurdled awards
granted prior to 2011 were measured 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 relative TSR ranking has improved.
2019 Westpac Group Annual Report12341234 268
Notes to the financial statements
Note 33. Share-based payments (continued)
Scheme name
Westpac Long Term Variable
Reward Plan (LTVR)
Service conditions Continued employment
throughout the vesting period
or as determined by the Board.
Westpac Performance Plan (WPP)
Continued employment throughout
the vesting period or as determined
by the Board.
Restricted Share Plan
(RSP)
Employee Share Plan
(ESP)
Continued employment
throughout the
restriction period or
as determined by the
Board.
Shares must
normally remain
within the ESP for
three years from
granting unless the
employee leaves
Westpac.
Vesting period
(period over
which expenses
are recognised)
Treatment at end
of term
4 years1
Defined period set out at time of
grant.
Defined period set out
at time of grant.
1 year
Lapse if not exercised.
Lapse if not exercised.
Shares are released
at the end of the
restriction period or
when the employee
leaves Westpac.
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
Does the
employee receive
dividends and
voting rights
during the vesting
period?
No
Yes
Yes
Each share-based payment scheme is quantified below:
(i) Westpac Long Term Variable Reward Plan (LTVR)
2019
Share options
Weighted average exercise
price
Weighted average
remaining
contractual life
Outstanding at
1 October 2018
Granted during
the year
Exercised
during the year
Lapsed during
the year
Outstanding at
30 September 2019
–
–
37,831
14,519
$23.40
–
52,350
$23.40
0 years
–
–
–
Outstanding
and exercisable at
30 September 2019
–
–
Share rights
4,712,843
1,169,704
–
1,327,958
4,554,589
3,719
Weighted average
remaining
contractual life
2018
Share options
Weighted average exercise
price
10.9 years
1 Oct 2017
256,840
$26.36
–
–
12.3 years
30 Sept 2018
103,686
100,804
52,350
52,350
Performance share rights
5,231,904
808,290
2,929
1,324,422
4,712,843
$24.23
–
$23.40
$23.40
3,719
The weighted average fair value at grant date of LTVR share rights issued during the year was $15.62 (2018: $17.86).
(ii) Westpac Performance Plan (WPP)
Outstanding at
1 October 2018
Granted during
the year
Exercised
during the year
Lapsed during
the year
Outstanding at
30 September 2019
Outstanding
and exercisable at
30 September 2019
2019
Share rights
One-year vesting period
Two-year vesting period
Three-year vesting period
Four-year vesting period
140,531
253,390
117,739
162,229
145,296
146,139
20,169
74,042
82,287
78,180
23,576
-
5,652
31,440
19,083
32,851
Total share rights
673,889
385,646
184,043
89,026
Weighted average remaining
contractual life
2018
12.4 years
1 Oct 2017
59,413
48,833
22,700
–
130,946
197,888
289,909
95,249
203,420
786,466
12.8 years
30 Sept 2018
Performance share rights
619,779
246,902
156,691
36,101
673,889
124,525
The weighted average fair value at grant date of WPP share rights issued during the year was $23.08
(2018: $27.83).
1. For the 2015 LTVR awards, the relative TSR is subject to a four year performance period and cash EPS compound annual growth rate
(CAGR) over a three year performance period plus one year holding lock. For awards granted for the periods 2011 to 2014 both the
relative TSR and cash EPS CAGR hurdles are subject to a three year performance and vesting period. Relative TSR hurdled awards
granted prior to 2011 were measured 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 relative TSR ranking has improved.
2019 Westpac Group Annual Report
Notes to the financial statements
Note 33. Share-based payments (continued)
(iii) Restricted Share Plan (RSP)
Allocation date1
Outstanding at
1 October 2018
Granted during
the year
Released
Forfeited
during the year
Outstanding at
30 September 2019
269
Granted prior to October 2009
346,732
–
346,732
Granted subsequent to October 2009
3,842,912
2,861,262
1,867,777
Total 2019
Total 2018
4,189,644
2,861,262
2,214,509
4,204,753
2,479,975
2,225,245
269,839
–
63,226
63,226
–
4,773,171
4,773,171
4,189,644
The weighted average fair value at grant date of RSP shares issued during the year was $25.20 (2018: $31.29).
(iv) Employee Share Plan (ESP)
Allocation
date
Number of
participants
Average
number
of shares
allocated per
participant
Total Number
of shares
allocated
Market
price per share2
Total
fair value
2019
2018
23 November 2018
24 November 2017
27,245
27,557
39
31
1,062,555
$25.35
$26,935,769
854,267
$31.80
$27,165,691
The 2018 ESP award was satisfied through the purchase of shares on market.
The liability accrued for the ESP at 30 September 2019 is $26 million (2018: $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, are on the same terms and
conditions as described above for the relevant plan.
(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 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 (i.e. share rights with cash EPS CAGR,
economic profit and cash ROE performance targets) have been determined 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 return of 2.1%, applied to TSR-hurdled grants;
• a dividend yield on Westpac shares of 7.5%, applied to TSR and ROE-hurdled grants;
• volatility in Westpac’s TSR of 20.3%, applied to TSR-hurdled grants; and
• volatilities of, and correlation factors between, TSR of the comparator group and Westpac for TSR-hurdled grants.
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 October 2009, shares are released from the RSP on vesting.
2. The market price per share for the allocation is based on the five day volume-weighted average price up to the grant date.
2019 Westpac Group Annual Report12341234 270
Notes to the financial statements
Note 34. 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.
Westpac had the following defined benefit plans at 30 September 2019:
Name of plan
Type
Form of benefit
Date of last actuarial assessment of
the funding status
Westpac Group Plan (WGP)
Defined benefit and
accumulation
Westpac New Zealand Superannuation
Scheme (WNZS)
Defined benefit and
accumulation
Indexed pension and lump sum
30 June 2018
Indexed pension and lump sum
30 June 2017
Westpac Banking Corporation UK
Defined benefit
Indexed pension and lump sum
5 April 2018
Staff Superannuation Scheme (UKSS)
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;
• behavioural risk – higher proportion of members taking some of their benefits as a pension rather than a lump
sum would increase the cashflows 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. The
funding valuation of the defined benefit plans are based on different assumptions to the calculation of the defined
benefit surplus/deficit for accounting purposes. Based on the most recent valuations, the defined benefit plan
assets are adequate to cover the present value of the accrued benefits of all members with a combined surplus of
$158 million (2018: $324 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 £1.05 million per year.
Contributions
$m
Employer contributions
Member contributions
Consolidated
Parent Entity
2019
2018
2019
2018
28
11
30
12
27
11
30
11
Expected employer contributions for the year ended 30 September 2020 are $26 million.
2019 Westpac Group Annual Report Notes to the financial statements
Note 34. Superannuation commitments (continued)
Expense recognised
$m
Current service cost
Net interest cost on net benefit liability
Total defined benefit expense
Defined benefit balances recognised
$m
Benefit obligation at end of the year
Fair value of plan assets at end of the year
Net surplus/(deficit)
Defined benefit surplus1
Defined benefit deficit2
Net surplus/(deficit)
271
Consolidated
Parent Entity
2019
2018
2017
2019
2018
33
(2)
31
37
1
38
42
8
50
32
(2)
30
37
–
37
Consolidated
Parent Entity
2019
2,799
2,464
(335)
73
(408)
(335)
2018
2,314
2,378
64
89
(25)
64
2019
2,710
2,405
(305)
73
(378)
(305)
2018
2,239
2,319
80
89
(9)
80
The average duration of the defined benefit obligation is 14 years (2018: 11 years).
Significant assumptions
Consolidated and Parent Entity
Discount rate
Salary increases
Inflation rate (pensioners received inflationary increase)
Life expectancy of a 60-year-old male
Life expectancy of a 60-year-old female
2019
2018
Australian
Funds
Overseas
Funds
Australian
Funds
Overseas
Funds
2.6%
1.1%-1.8%
4.1% 2.6%-2.9%
2.4% 3.0%-4.9%
1.4% 2.0%-3.4%
2.9%
1.9%
3%-5%
2%-3.5%
31.1
27.9-28.1
31.0
27.9-28.4
34.0
29.3-29.5
33.9
29.4-29.6
Sensitivity to changes in significant assumptions
The table below shows the impact of changes in assumptions on the defined benefit obligation for the WGP. 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
Asset allocation
Consolidated and Parent Entity
%
Cash
Equity instruments
Debt instruments
Property
Other assets
Total
Increase in obligation
2019
205
14
188
45
2018
120
8
111
38
2019
2018
Australian
Funds
Overseas
Funds
Australian
Funds
Overseas
Funds
3%
45%
28%
10%
14%
100%
3%
7%
5%
1%
84%
100%
5%
45%
28%
10%
12%
2%
7%
80%
1%
10%
100%
100%
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.
1. The defined benefit surplus is recognised in other assets.
2. The defined benefit deficit is recognised in other liabilities.
2019 Westpac Group Annual Report12341234
Notes to the financial
statements
272
Notes to the financial statements
OTHER
Note 35. 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
Total tax fees
Other fees
PwC Australia
Overseas PwC network firms
Total other fees
Total audit and non-audit fees
Consolidated
Parent Entity
2019
2018
2019
2018
28,153
19,999
28,025
19,967
3,216
3,338
321
68
31,369
23,337
28,346
20,035
3,569
128
2,316
117
3,418
2,224
2
–
3,697
2,433
3,420
2,224
35,066
25,770
31,766
22,259
53
53
70
502
572
169
169
1,581
–
1,581
53
53
70
502
572
49
49
1,501
–
1,501
35,691
27,520
32,391
23,809
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 $7.5 million (2018: $7.5 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.
2019 Westpac Group Annual Report
273
Notes to the financial statements
Note 36. 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 Executives and Non-Executive Directors.
Parent Entity
Westpac Banking Corporation is the ultimate parent company of the Group.
Subsidiaries - Note 31
The Parent Entity has the following related party transactions and balances with subsidiaries:
Type of transaction/balance
Balances due to/from subsidiaries
Details disclosed in
Balance Sheet
Dividend income/Transactions with subsidiaries
Interest income and Interest expense
Tax consolidated group transactions and undertakings
Guarantees and undertakings
Note 4
Note 3
Note 7
Note 27
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 31
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 $347 million (2018: $348 million) to defined contribution plans and $28 million to defined
benefit plans (2018: $30 million). Refer to Note 34.
Remuneration of KMP
Total remuneration of the KMP was:
$
Consolidated
2019
2018
Parent Entity
2019
2018
Short-term
Benefits
Post
Employment
Benefits
Other Long-
term
Benefits
Termination
Benefits
Share-based
Payments
Total
23,805,197
712,883
36,572
558,984
20,691,480
45,805,116
23,210,820
618,631
297,495
–
16,086,623
40,213,569
22,515,477
625,173
36,572
558,984
19,783,900
43,520,106
21,807,008
537,187
297,495
–
15,301,417
37,943,107
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:
$
2019
2018
Interest
Payable for
the Year
Closing Loan
Balance
Number of
KMP with
Loans
672,167
31,718,007
650,969
17,498,526
14
13
2019 Westpac Group Annual Report12341234
274
Notes to the financial statements
Note 36. 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 2019 by the CEO and other
key management personnel (including their related parties):
Managing Director & Chief Executive Officer
Brian Hartzer
Group Executives
Craig Bright
Lyn Cobley
Peter King
Rebecca Lim
David Lindberg
Carolyn McCann
David McLean
Christine Parker
David Stephen
Gary Thursby
Alastair Welsh
Former Group Executive
Brad Cooper
Dave Curran
George Frazis
Latest Date of Exercise
Number of
Share Rights
Ranges from 1 October 2030 to 1 October 2033
840,679
Ranges from 1 October 2033 to 1 October 2033
Ranges from 1 October 2030 to 1 October 2033
Ranges from 1 October 2030 to 1 October 2033
Ranges from 1 October 2030 to 1 October 2033
Ranges from 1 October 2030 to 1 April 2034
Ranges from 1 October 2030 to 1 October 2033
Ranges from 1 October 2022 to 1 October 2033
Ranges from 1 October 2030 to 1 October 2033
Ranges from 1 October 2032 to 1 October 2033
Ranges from 1 October 2030 to 1 October 2033
Ranges from 1 October 2030 to 1 October 2030
Ranges from 1 October 2030 to 1 October 2033
Ranges from 1 October 2030 to 1 October 2033
Ranges from 1 October 2030 to 1 October 2033
77,696
356,810
340,558
193,217
319,482
78,548
366,163
260,523
278,698
213,978
14,944
349,204
246,376
332,577
The Group has not issued any options during the year and previously issued options has either been exercised or
lapsed as at 1 October 2018.
2019 Westpac Group Annual Report 275
Notes to the financial statements
Note 37. Notes to the cash flow statements1
Accounting policy
Cash and balances with central banks include 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.
Reconciliation of net cash provided by/(used in) operating activities to net profit for the year is set out below:
Consolidated
Parent Entity
$m
Net profit for the year
Adjustments:
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
2019
6,790
2018
2017
8,099
7,997
1,079
966
(541)
132
(341)
1,143
(832)
1,144
889
(96)
(83)
241
289
332
1,269
1,021
(34)
(75)
148
219
(419)
2019
7,121
1,082
893
(804)
98
(321)
1,214
(329)
Cash flows from operating activities before changes in
operating assets and liabilities
Net (increase)/decrease in derivative financial instruments
8,396
7,605
10,815
8,584
10,126
(5,042)
8,954
6,581
Net (increase)/decrease in life insurance assets and liabilities
(134)
(230)
219
–
(Increase)/decrease in other operating assets:
2018
8,144
952
820
(598)
(74)
217
294
420
10,175
8,263
-
Collateral paid
(847)
969
2,320
(755)
662
Trading securities and other financial assets measured at
fair value
Loans
Other financial assets
Other assets
(Decrease)/increase in other operating liabilities:
Collateral received
Deposits and other borrowings
Other financial liabilities
Other liabilities
(7,629)
3,492
(4,729)
(7,358)
2,815
(4,188)
(24,740)
(26,815)
(3,312)
(23,661)
336
(13)
859
10
466
67
1,007
(295)
739
1,113
23,928
23,062
1,463
(3,632)
2,506
(5)
10
(82)
324
(41)
1,004
963
1,555
(24)
502
33
(606)
20,783
(3,742)
17
Net cash provided by/(used in) operating activities
7,104
19,770
2,837
7,891
15,241
1. The Group has adopted AASB 9 and AASB 15 from 1 October 2018. Comparatives have not been restated. In addition, the Group has
made a number of presentational changes to the Balance Sheet. Comparatives have been restated. Refer to Note 1 for further detail.
2019 Westpac Group Annual Report12341234
276
Notes to the financial statements
Note 37. Notes to the cash flow statements (continued)
Details of the assets and liabilities over which control ceased
Details of the entities over which control ceased are provided in Note 31.
$m
Assets:
Cash and balances with central banks
Trading securities and financial assets measured at fair value
Property and equipment
Deferred tax assets
Intangible assets
Other financial assets
Total assets
Liabilities:
Provisions
Other liabilities
Total liabilities
Total equity attributable to owners of Westpac Banking Corporation
Cash proceeds (net of transaction costs)
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)
Consolidated
Parent Entity
2019
2018
2017
2019
2018
3
3
–
–
–
3
9
–
–
–
9
2
2
10
3
2
(3)
(1)
10
–
2
4
15
5
36
2
3
5
31
19
19
3
(9)
19
(10)
9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Non-cash financing activities
$m
Shares issued under the dividend reinvestment plan
Shares issued from the conversion of Westpac CPS
Consolidated
Parent Entity
2019
1,489
–
2018
631
566
2017
1,452
–
2019
1,489
–
2018
631
566
On 13 March 2018, $623 million of CPS were transferred to the Westpac CPS nominated party for $100 each
pursuant to the Westpac Capital Notes 5 reinvestment offer. Those CPS were subsequently bought back and
cancelled by Westpac. On 3 April 2018, the remaining $566 million of CPS were transferred to the Westpac
CPS nominated party for $100 each. Following the transfer, those remaining CPS were converted into 19,189,765
ordinary shares.
Restricted cash
Certain of our foreign operations are required to maintain reserves or minimum balances with central banks in
their respective countries of operation, totalling $330 million (2018: $357 million) for the Group and $224 million
(2018: $250 million) for the Parent Entity which are included in cash and balances with central banks.
2019 Westpac Group Annual Report
Notes to the financial statements
277
Note 38. Subsequent events
Since the end of the year ended 30 September 2019, the Board has determined to pay a fully franked final dividend
of 80 cents per fully paid ordinary share. The dividend is expected to be $2,791 million. The dividend is not
recognised as a liability as at 30 September 2019. The proposed payment date of the dividend is 20 December 2019.
The Board has determined to issue shares to satisfy the Dividend Re-investment Plan (DRP) for the final 2019
ordinary dividend. The market price used to determine the number of shares issued under the DRP will be set over
the 10 trading days commencing 18 November 2019.
On 4 November 2019, Westpac announced that it will be undertaking an underwritten placement of fully paid
ordinary shares in Westpac to institutional investors to raise $2 billion. As further announced, following the
placement, Westpac will make a share purchase plan available to shareholders and to raise approximately
$500 million, subject to scaleback, and with the ability to raise less or more.
No other matters have arisen since the year ended 30 September 2019 which are not otherwise dealt with in this
report, that have significantly affected or may significantly affect the operations of the Group, the results of its
operations or the state of affairs of the Group in subsequent periods.
Note 39. Accounting polices relating to prior years
Due to the adoption of AASB 9, the accounting policies relating to some financial instruments and related
balances have changed. The policies applicable to the current year are provided in the relevant note to the
financial statements above. As prior comparative years have not been restated, the accounting policies detailed
below reflect the policies applicable to financial years prior to 2019 based on AASB 139. Refer to Note 1 for further
information.
Accounting policy relating to impairment (Note 6 and Note 13)
Impairment charges (Note 6)
At each balance sheet date, the Group assesses whether there is any objective evidence of impairment of its
loan portfolio. An impairment charge is recognised if there is objective evidence that the principal or interest
repayments may not be recoverable and when the financial impact of the non-recoverable loan can be reliably
measured.
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.
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 (refer to Note 13).
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
The policy for uncollectible loans is consistent with that applicable to 2019 based on AASB 9.
Provision for impairment charges (Note 13)
The Group recognises two types of impairment provisions for its loans, being provisions for loans which are:
•
individually assessed for impairment; and
• collectively assessed for impairment.
The Group assesses impairment as follows:
•
individually for loans that exceed specified thresholds. Where there is objective evidence of impairment,
individually assessed provisions will be recognised; and
• collectively for loans below the specified thresholds noted above or if there is no objective evidence of
impairment. These loans are included in a group of loans with similar risk characteristics and collectively
assessed for impairment. If there is objective evidence that the group of loans is collectively impaired,
collectively assessed provisions will be recognised.
2019 Westpac Group Annual Report12341234 278
Notes to the financial statements
Note 39. Accounting polices relating to prior years (continued)
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
Collective provisions 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.
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.
Accounting policy relating to classification and measurement of financial instruments (Policy prior to
Note 10, Note 11 and Note 12)
Classification and measurement of financial assets and financial liabilities (Policy prior to Note 10)
The Group classifies its financial assets in the following categories: cash and balances with central banks,
receivables due from financial institutions, trading securities and financial assets designated at fair value,
derivative financial instruments, available-for-sale securities, loans, life insurance assets and regulatory deposits
with central banks overseas. 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.
Available-for-sale securities (Note 11)
Available-for-sale debt securities (government and other) and equity securities are held at fair value with gains
and losses recognised in other comprehensive income (OCI) except for interest on debt securities, dividends on
equity securities, and impairment charges which are recognised in the income statement.
The cumulative gain or loss recognised in OCI is subsequently recognised in the income statement when the
instrument is disposed.
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 OCI 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.
Loans (Note 12)
Loans are financial assets initially recognised at fair value plus directly attributable transaction costs and fees.
Loans are subsequently measured at amortised cost using the effective interest rate method and are presented
net of any provisions for impairment charges except for a portfolio of loans which are subsequently measured at
fair value to reduce an accounting mismatch.
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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 2019’ 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 2019 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
4 November 2019
Brian Hartzer
Managing Director & Chief Executive
Officer
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Statutory statements
Management’s report on internal control over financial reporting
The following report is required by rules of the US Securities and Exchange Commission.
The management of Westpac is responsible for establishing and maintaining adequate internal control over
financial reporting for Westpac as defined in Rule 13a – 15 (f) under the Securities Exchange Act of 1934, as
amended. Westpac’s internal control system is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with applicable
accounting standards.
Westpac’s internal control over financial reporting includes policies and procedures that: pertain to the
maintenance of records that in reasonable detail accurately reflect the transactions and dispositions of the assets
of Westpac and its consolidated entities; provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with applicable accounting standards, and that receipts
and expenditures of Westpac are being made only in accordance with authorizations of management and directors
of Westpac and its consolidated entities; and provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the assets of Westpac and its consolidated entities that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Westpac management, with the participation of the CEO and CFO, assessed the effectiveness of Westpac’s internal
control over financial reporting as of 30 September 2019 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 2019 was effective.
The effectiveness of Westpac’s internal control over financial reporting as of 30 September 2019 has been audited
by PricewaterhouseCoopers, an independent registered public accounting firm.
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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:
(a) giving a true and fair view of the Parent Entity’s and the Group's financial positions as at 30
September 2019 and of their financial performance for the year then ended
(b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
What we have audited
The Parent Entity and Group financial report comprises:
•
•
•
•
•
•
•
the Consolidated and Parent Entity balance sheets as at 30 September 2019
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 a summary of critical accounting policies
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 Parent Entity and 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.
PricewaterhouseCoopers, ABN 52 780 433 757
One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001
T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
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Statutory statements
Our audit approach for the Group
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.
Materiality for the Group audit
• For the purpose of our audit we used overall Group materiality of $466 million, which
represents approximately 5% of the Group’s profit before tax.
• We applied this threshold, together with qualitative considerations, to determine the scope of
our audit and the nature, timing and extent of our audit procedures and to evaluate the effect
of misstatements on the financial report as a whole.
• We chose Group profit before tax because it is a key financial statement metric and, in our
view, it is the benchmark against which the performance of the Group is commonly measured.
• We utilised a 5% threshold based on our professional judgement, noting it is within the range of
commonly acceptable thresholds.
Audit Scope for the Group audit
• Our audit focused on where the Group made subjective judgements; for example, critical
accounting estimates involving assumptions and inherently uncertain future events.
• We tailored the scope of our audit to ensure that we performed enough work to be able to give
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 and valuation.
• We conducted an audit of the most financially significant operations, being the Consumer,
Business and Westpac Institutional Bank 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 audit procedures over
specified financial statement line items in relation to the Westpac New Zealand division and the
Group Businesses.
• Further audit procedures were performed over the remaining balances and the consolidation
process, including substantive and analytical procedures. The work carried out in these
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.
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Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in
our audit of the financial report for the current period. The key audit matters were addressed in the
context of our audit 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. We communicated the key audit matters to the
Board Audit Committee. The key audit matters identified below relate to both the Parent Entity and
the Group audit.
Key audit matter
How our audit addressed the key audit matter
Our audit procedures included performing tests
of the effectiveness of controls relating to the
ECL estimation process, which included controls
over the data, model and assumptions used in
determining the provision for ECL on loans as
well as IT general controls related to user access
for the relevant IT systems.
These procedures also included, among others:
(i) the involvement of professionals with
specialised skill and knowledge to assist in
testing the process for determining the
provision for ECL on loans by evaluating the
reasonableness of the model and the
assumptions applied for SICR and MES, and
(ii) testing the accuracy and completeness of
selected critical data elements that are inputs
used in the ECL model.
Provision for expected credit losses
As described in Note 13 to the financial statements,
the provision for expected credit losses (ECL) on
loans was $3,913m for the Group and $3,378m for
the Parent at 30 September 2019.
ECL are a probability-weighted estimate of the cash
shortfalls expected to result from defaults over the
relevant timeframe 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. The
model to determine the ECL includes significant
judgement in assumptions used to determine when a
significant increase in credit risk (SICR) has occurred,
and in estimating forward looking macroeconomic
scenarios (MES) and applying a probability weighting
to different scenarios. There is also a significant
volume of data used in the ECL model, which is
sourced from relevant IT systems.
The principal considerations for our determination
that performing procedures relating to the provision
for ECL on loans is a key audit matter were:
(i) there was significant judgement by the Group and
the Parent in determining the ECL, which in turn led
to a high degree of auditor subjectivity in performing
procedures related to the ECL model and
assumptions used to estimate the ECL,
(ii) there was significant judgement and effort in
evaluating audit evidence related to the model and
assumptions used to determine the provision for ECL
on loans,
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Statutory statements
Key audit matter
How our audit addressed the key audit matter
(iii) the audit effort involved the use of professionals
with specialised skill and knowledge,
(iv) the nature and extent of audit testing involved
evaluating audit evidence related to critical data
elements used in the model, and
(v) the nature and extent of audit testing related to
user access for the relevant IT systems used in
determining the provision for ECL on loans.
Valuation of Level 2 financial instruments at fair value
As described in Note 22 to the financial statements,
the value of Level 2 financial instruments held by the
Group at fair value was $120,742m assets and
$85,776m liabilities and Parent $107,662m assets and
$76,509m liabilities.
The fair value for these financial instruments, which
are not actively traded, is determined using valuation
techniques. A significant number of data inputs are
stored in key product IT systems.
The principal considerations for our determination
that performing procedures relating to valuation of
Level 2 financial instruments at fair value is a key
audit matter were:
(i) there was significant judgement by the Group and
the Parent to determine the fair value of Level 2
financial instruments using internally-developed
models, which include inputs and other estimation
assumptions,
(ii) there was significant judgement and audit effort
to evaluate the evidence obtained related to the
valuation models, inputs and assumptions, as well as
the audit effort involving the use of professionals
with specialised skill and knowledge, and
(iii) the nature and extent of audit testing related to
user access for the relevant IT systems used in
determining the valuation of financial instruments.
Our procedures included tests of the
effectiveness of controls relating to the
valuation of financial instruments, including
controls over certain models, significant
assumptions and data inputs, as well as IT
general controls related to user access for the
relevant IT systems.
These procedures also included, among others,
the involvement of professionals with
specialised skills and knowledge that
independently price or obtain independent
inputs for models and compare to the
recognised fair value.
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285
Key audit matter
How our audit addressed the key audit matter
Our procedures included tests of the
effectiveness of controls relating to evaluation
of provisions to determine whether a present
obligation exists and the probability, timing,
nature and quantum of outflows that may arise
from past events, as well as IT general controls
related to user access for the relevant IT
systems. For contingent liabilities, these
procedures also included testing the
effectiveness of controls relating to the
evaluation, including controls over determining
whether or not it is probable that a loss has
occurred and whether the amount of loss can
be reliably measured.
These procedures also included, among others,
evaluating the evidence of the quantification of
provisions and the assumptions applied and
assessing the appropriateness of disclosures.
Compliance, regulation and remediation provisions
and contingent liabilities
As described in Note 27 to the financial statements,
the Group recorded compliance, regulation and
remediation provisions of $1,572m, and the Parent
$1,513m at 30 September 2019.
The compliance, regulation and remediation
provisions relate to matters of potential misconduct
in providing services to customers identified as a
result of regulatory action and internal reviews. An
assessment of the likely cost of these matters
(including applicable customer refunds) is made on a
case-by-case basis and specific provisions or
disclosures are made where the Group and Parent
consider appropriate. There are large volumes of
data from IT systems that is included in this
assessment.
Disclosures are also required on contingent liabilities
for possible obligations whose existence will be
confirmed only by uncertain future events, and
present obligations where the transfer of economic
resources is not probable or cannot be reliably
measured.
The principal considerations for our determination
that performing procedures relating to compliance,
regulation and remediation provisions and
contingent liabilities is a key audit matter were:
(i) there was significant judgement by the Group and
Parent about whether or not it is probable that a loss
has occurred and to quantify the provisions, which
included assumptions related to the timing, nature
and quantum of related cash outflows,
(ii) the subjective nature of assessing the audit
evidence for key assumptions in the provisions and
contingent liabilities, and
(iii) the extent of audit testing related to user access
for the relevant IT systems used in determining the
provisions.
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Statutory statements
Other information
The directors are responsible for the other information. The other information comprises the
information included in the Group’s annual report for the year ended 30 September 2019, but does
not include the financial report and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly 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.
Responsibilities of the directors 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 ability of the Parent
Entity and the Group 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 Parent Entity or 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 the 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.
A further description of our responsibilities for the audit of the financial report is located at the
Auditing and Assurance Standards Board website at:
http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's
report.
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Report on the Remuneration Report
Our 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 2019.
In our opinion, the Remuneration Report of Westpac Banking Corporation for the year ended 30
September 2019 complies with section 300A of the Corporations Act 2001.
Responsibilities
The directors of the Parent Entity 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
Lona Mathis
Partner
Sydney
4 November 2019
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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 and approved by the New South Wales Professional Standards Council pursuant to the
Professional Standards Act (the NSW Accountants Scheme). For matters occurring on or prior to 8 October 2019,
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 2024 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 judgment under
US or other foreign laws rendered against PwC Australia based on or related to its audit report on our financial
statements. Substantially all of PwC Australia’s assets are located in Australia. However, the Professional Standards
Act and the NSW Accountants Scheme have not been subject to extensive judicial consideration and therefore
how the limitation might be applied by the courts and the effect of the limitation remain untested in a number of
respects, including its effect in respect of the enforcement of foreign judgments.
2019 Westpac Group Annual Report 289
04
Shareholding information
Additional information
Information for shareholders
Glossary of abbreviations and defined terms
Contact us
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Shareholding information
290
Shareholding information
Westpac ordinary shares
Top 20 ordinary shareholders as at 3 October 2019
HSBC Custody Nominees (Australia) Limited
J P Morgan Nominees Australia Pty Limited
Citicorp Nominees Pty Limited
National Nominees Limited
BNP Paribas Nominees Pty Limited
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