Westpac Banking
Annual Report 2020

Plain-text annual report

Fix Simplify Perform 2020 ANNUAL REPORT 3943 Westpac AR20 Cov-p33_V40.indd 1 3943 Westpac AR20 Cov-p33_V40.indd 1 31/10/20 4:44 pm 31/10/20 4:44 pm  About this report Westpac’s 2020 Annual Report is our primary statutory and regulatory reporting disclosure. It comprises information about our activities, strategy, and financial and non-financial results over the reporting period. Westpac’s annual reporting suite Our annual reporting suite brings together the Group’s financial, non- financial, risk and sustainability performance for the year. It includes our Annual Report, FY20 Financial Results Announcement, FY20 Investor Discussion Pack, Pillar 3 Report, Sustainability Performance Report, and our Corporate Governance Statement. Access the full suite online at www.westpac.com.au/2020annualreport. Navigating this report Read more or refer to another report for more information Case study Westpac Banking Corporation ABN 33 007 457 141 Rebuilding after bushfires St.George customer, Lyn Grey, and Ulladulla branch manager, Lloyd Pigram, at Lyn’s property on the NSW South Coast. Full story on page 31. 3943 Westpac AR20 Cov-p33_V40.indd 2 3943 Westpac AR20 Cov-p33_V40.indd 2 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW It’s been a challenging year and we should have done better. We’ve taken accountability for our shortcomings and are working to fix our mistakes, simplify the business and restore performance. We’ve made progress, but there’s much to do to restore value, and the trust you’ve placed in us. Here is our plan. CONTENTS 1 STRATEGIC REVIEW Strategic Report About Westpac 2020 Year in review Chairman’s report Chief Executive Officer’s report Performance review External environment Our strategy Our priorities Building a sustainable future Corporate Governance Directors’ Report Board of Directors Executive team Remuneration Report Information on Westpac Significant developments 2 GROUP PERFORMANCE Five year summary Reading this report Review of Group operations Income statement review Balance sheet review 01 01 02 04 06 08 10 12 14 18 34 52 56 57 61 70 101 102 111 112 115 117 120 125 Capital resources Divisional performance Consumer Business Westpac Institutional Bank Westpac New Zealand Specialist Businesses Group Businesses Risk and risk management Risk management Risk factors Other Westpac business information 3 FINANCIAL STATEMENTS Financial statements Notes to the financial statements Statutory statements 4 SHAREHOLDER INFORMATION Shareholding information Additional information Information for shareholders Glossary of abbreviations and defined terms Contact us 339 inside back cover 129 131 135 136 138 139 141 143 144 144 151 164 167 168 174 311 321 322 332 336 Strategic Report 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. All figures in this Annual Report are for the 12 months ended 30 September 2020 unless otherwise indicated. All comparisons are against results for the 12 months ended 30 September 2019 unless otherwise indicated. All dollar amounts are in Australian dollars unless otherwise indicated. 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 1 3943 Westpac AR20 Cov-p33_V40.indd 1 31/10/20 4:44 pm 31/10/20 4:44 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  2 ABOUT WESTPAC Founded in 1817, Westpac is Australia’s first bank and oldest company. DIVISION OVERVIEW FY20 CASH EARNINGS CONSUMER Serves the banking needs of consumers in Australia including the sales and service of banking products, from mortgages, credit cards, personal loans and savings to deposit products. Also works with Business, Westpac Institutional Bank (WIB), and Specialist Businesses in the sales, service and referral of certain financial services and products including general and life insurance, superannuation, platforms, auto lending and foreign exchange. $2,746m BUSINESS Serves the banking needs of small-to-medium businesses and commercial and agribusiness customers across Australia. Also supports the banking needs of high net worth individuals in our Private Wealth business. $734m WESTPAC INSTITUTIONAL BANK Delivers a broad range of financial services to commercial, corporate, institutional and government customers operating in, and with connections to, Australia and New Zealand. $332m NEW ZEALAND Delivers banking, wealth and insurance services to consumer, business, and institutional customers across New Zealand. $612m GROUP BUSINESSES SPECIALIST BUSINESSES Includes Treasury, Technology and Core Support, which comprises Group support functions of Australian banking operations, property services, strategy, finance, risk, compliance, legal, human resources, and customer and corporate relations. ($1,310m) Brings together the Group’s non-core Australian businesses, including superannuation, wealth platforms, investments, auto finance, general insurance, life insurance, lenders mortgage insurance, along with our operations in Fiji and Papua New Guinea. ($506m) REPORTED PROFIT $2,290m TOTAL CASH EARNINGS1 $2,608m 3943 Westpac AR20 Cov-p33_V40.indd 2 3943 Westpac AR20 Cov-p33_V40.indd 2 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT  3 With our portfolio of brands, we provide over 14.1 million2 customers with a full range of banking services. We also provide selected insurance, superannuation and wealth platform services to consumers and businesses. Our market capitalisation is $61 billion with $912 billion of total assets (at 30 September 2020). FY20 CASH EARNINGS BRANDS $2,746m MARKET SHARE AUSTRALIA Household deposits3 21% Business credit4 16% Customers 12.1m NEW ZEALAND Consumer lending6 19% Customers 1.3m Mortgage4 22% Wealth platforms5 18% Deposits6 18% Westpac Pacific 1 Refer to page 10 for a reconciliation of reported profit to cash earnings. 2 Includes Westpac Pacific customers. 3 APRA Banking Statistics, September 2020. 4 RBA Financial Aggregates, September 2020. 5 Strategic Insights, June 2020. All Master Funds Admin. 6 RBNZ, September 2020. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 3 3943 Westpac AR20 Cov-p33_V40.indd 3 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  4 2020 Year in review This year has been challenging, overshadowed by the AUSTRAC proceedings, bushfires and storms, and COVID-19. Through it all, we have remained focused on helping customers, employees, and the Australian and New Zealand economies. The AUSTRAC issues highlighted shortcomings in our management of financial crime risk and have been a catalyst for change across the Group. In the last year, we have refreshed our Board and Executive Team, are refocusing on core banking, and are accelerating our program to address shortcomings in our management of risk. Change is underway, but there is a lot to do. The Group’s financial results were disappointing. Reported profit was $2,290 million, down 66%. Cash earnings were $2,608 million, down 62%. Much of the decline resulted from our operating environment, where we faced lower margins and higher impairment charges – a direct result of COVID-19. However, the poor result was also due to higher costs related to the AUSTRAC proceedings along with asset write-downs from businesses we plan to exit. Nevertheless, our balance sheet remained strong. Our capital ratios are in the top quartile of banks globally and funding and liquidity ratios are comfortably ahead of regulatory minimums. Amplified by COVID-19, our share price declined over the year and dividends were significantly lower. Our three priorities of fix, simplify and perform underpin our plans to fix the issues, simplify our business and improve performance. Progress over the year included: — Five new Group Executives; — Establishing our new Specialist Businesses division bringing together non-core activities; — Launching our new Lines of Business operating model to clarify responsibility and accountability for end-to-end performance; — Implementing structural and operational changes to the management of risk; and — Commencing our CORE program bringing together initiatives to improve non-financial risk management. With a committed team and priorities to fix, simplify, and perform, we are confident that we are on the path to become a simpler, stronger bank. Customers Financial HIGHS Supporting customers during COVID-19 ~175,000 Mortgage deferral packages ~40,000 Deferrals for businesses Strong balance sheet CET1 capital ratio 11.13% Net Stable Funding Ratio 122% 1,9801 Bushfire recovery support packages Long-dated complaints   93% #1 Business Banking NPS ranking2, 3 LOWS #3 Consumer NPS ranking4 Efficiency savings $400m+ $1.2bn Notable Items after tax, excluding AUSTRAC Delays responding to customers given increased queries during COVID-19 No 2020 interim dividend Mortgage 90+ day delinquencies up 68 basis points to 1.50% Final dividend per share 31c Share price5 43% Bushfire recovery packages at 31 March 2020. 1 2 Net Promoter Score measures the net likelihood of recommendation to others of the customer’s main financial institution for retail or business banking. Net Promoter ScoreSMis a trademark of Bain & Co Inc., SatmetrixSystems, Inc., and Mr Frederick Reichheld. Using a 11 point numerical scale where 10 is ‘Extremely likely’ and 0 is ‘Extremely unlikely’, Net Promoter Score is calculated by subtracting the percentage of Detractors (0-6) from the percentage of Promoters (9-10). 3 Source: DBM Consultants Business Atlas, March – August 2020, 6MMA. MFI customers, all businesses. 4 Source: DBM Consultants Consumer Atlas, March – August 2020, 6MMA. MFI Westpac Group customers. 5 Based on 30 September 2020 vs 30 September 2019 closing share prices. 3943 Westpac AR20 Cov-p33_V40.indd 4 3943 Westpac AR20 Cov-p33_V40.indd 4 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT  5 Operations Risk Sustainability Employees Launched New Westpac app Branch and ATM availability during COVID-19 >90% Strengthened infrastructure, major system outages more than halved Bringing 1,000 jobs back to Australia Mortgage balances declining   2% Complexity of IT infrastructure – long timeframe to fix New Board Legal, Regulatory, Compliance & Conduct Committee New Financial Crime function with Group Executive reporting to CEO 400+ new Risk, Compliance and Financial Crime employees Updated position statements: — Climate Change — Human Rights $10.1bn lending to climate change solutions $150m+ in community investment6 Employee commitment index8 73% Supported people working from home at the peak of COVID-19 22,000 Women in leadership9 50% #1 largest financier to greenfield renewable energy projects in Australia for the past three years7 9.4% of employees using Employee Access Program for confidential counseling and coaching Inadequate transaction monitoring to help identify potential child exploitation Remuneration consequences following review of AUSTRAC matters10 $20m Board and Executive departures AUSTRAC’s Statement of Claim and provision for penalty of $1.3bn Additional $500m APRA capital overlay for risk deficiencies Credit impairment charge $3.2bn $2.4bn 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 6 Excludes commercial sponsorships. 7 IJGlobal, September 2020. 8 Six-month rolling average. 9 Proportion of women (permanent and maximum term) in leadership roles across the Group, including 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. 10 Refer to explanation in Remuneration Report in the Directors’ Report. 3943 Westpac AR20 Cov-p33_V40.indd 5 3943 Westpac AR20 Cov-p33_V40.indd 5 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  6 CHAIRMAN’S REPORT Dear fellow shareholders, I am very pleased to have become the Chairman of such an important Australian company as Westpac in what has become a difficult time for us and the industry more broadly. The country, the banking sector and Westpac have been here before, but in different circumstances, and as before, recovery will re-emerge. This is my first Annual Report letter to you as Chairman, and there are three messages I would like to deliver. The first is to express my disappointment at a number of issues we are facing, in particular, the AUSTRAC matters, subdued financial performance, as well as our inability to pay a first half dividend this year. Despite the subdued economic environment, these issues are partly of our own making, and therefore simply not good enough. For this I apologise sincerely on behalf of the Company. The decision on the first half dividend was particularly disappointing for shareholders, especially those relying on dividends. Many shareholders have written to me expressing their disappointment and anger at this, as well as at the loss of the value of their investments. Shareholders legitimately are aggrieved and deserve better outcomes. I am fully aware that in a low growth environment, a solid dividend yield is important to total shareholder return. We have been able to declare a final dividend of 31 cents per share. This dividend represents a payout ratio of 49% of our Full Year 2020 statutory earnings. It is important we work quickly towards a consistent dividend each half by improving the performance of our portfolio of businesses and maintaining our capital strength. With respect to the latter, our capital position remains strong and we have options to ensure we maintain capital strength, without resorting to external sources. It is my role as Chairman, that of my Board colleagues, and our management team to assist the country and our customers to manage through this difficult period. As we undertake this task, we must fix our issues and boost performance and shareholder value. We are committed to seeing this through, and we have made good progress already. We are taking firm and urgent steps to resolve matters. While we can continue to address some issues quickly, many will however take time, and I ask for your patience, which I believe will be rewarded. I look forward to updating you on this progress. The second is while there remain matters to fix, we are primarily focused on the future. I am genuinely pleased at the way the Board and management have responded to these past challenges as well as setting out a new agenda for the Company. While it may not yet be transparent externally, there has been considerable progress over the past six months, which will set a new foundation for the Company. Westpac’s heritage and foundations are strong, and there is much we can build upon, particularly our strong core domestic franchises. There have been few times in history where we have needed to move so rapidly. Circumstances are different now, and our approach must change. Third, we are well advanced to improve the way we manage and respond to the challenges before us. For example, we have moved from committee-based decision making, to faster decision making with clear individual accountabilities. 3943 Westpac AR20 Cov-p33_V40.indd 6 3943 Westpac AR20 Cov-p33_V40.indd 6 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT  7 It is important we work quickly towards a consistent dividend each half by improving performance of our portfolio of businesses and maintaining our capital strength.” This included cancelling all short-term variable reward for the Group Executive Team this year. With the AUSTRAC proceedings settled and remuneration consequences applied, we must now look ahead and implement the necessary change to rebuild Westpac. We have also changed the way the Board works, taking steps to improve processes and oversight, to ensure we are focusing on all elements of success including strategy, management, customer service, economic performance, capital, dividends and importantly given our current regulatory issues, financial and non-financial risk management compliance and culture. With respect to compliance, we have established a new Board Legal, Regulatory and Compliance Committee to give greater focus to this area and have also given separate management focus to these functions. We have made changes to the conduct of Board and committee meetings, to improve decision making and allow us to focus on the most important matters. All of these changes have been necessary as a foundation to ensure we get and put things right, get them done, ensure they have been done and don’t happen again. During the year, Brian Hartzer, our former CEO, stepped down, a number of Directors retired from the Board – Lindsay Maxsted our former Chairman, Ewen Crouch and Anita Fung, Non-executive Directors – and Alison Deans has elected to step down at this year’s Annual General Meeting. I would like to take this opportunity to thank them for their service to the Company. Looking forward, it is unfortunate that COVID-19, and its impact, will likely be with us for a while yet. It will take some time before we fully understand the impact on our customers and the bank. This said, while uncertainty remains, we are working hard to produce better results in 2021, but it is unlikely that we will see a return to a more normal situation until 2022, at the earliest. Rest assured, the Board and management are fully committed to restoring Westpac to its rightful position at the earliest possibility, and I am confident that this will happen. Your sincerely, 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N Immediately on my appointment and that of the CEO, we announced a strategy reset to get back to core banking. We transferred several businesses into a new division and many of these will be exited, adding additional capital strength. This will also help us to become leaner, more agile and more accountable while maintaining our caring and helping orientation. Managing fewer things should also ensure we do them better and resolve issues more quickly. We are also responding to an increasingly digital world and making it easier for customers to do business with us online and with mobile technology. A great example has been the completion of our new generation Westpac Banking app that will be available to all iPhone customers in the year ahead. In designing and delivering our strategy, there is no substitute for having a best-in-class management team and Board. The Board was renewed with the appointments of Chris Lynch and Michael Hawker during the year. Chris has a strong management and finance background, having been the CFO at both Rio Tinto and BHP, as well as the CEO of Transurban. Mike is a highly experienced director and given his extensive financial services experience will complement the Board’s skills. As part of the Board’s renewal we expect to appoint additional Directors in the period ahead, adding to the Board’s skills, experience and diversity. We’ve already made significant changes to the management team, including the appointment of Peter King as CEO. Peter’s experience in banking, and of Westpac, is extensive, and he has a strong execution bias, as have the team overall. Peter has announced and implemented a new business- line management structure which will give the heads of these businesses, end-to-end personal accountability for progress and results, and he has also launched comprehensive business and cultural transformation programmes across the Group. Central to our change has been to improve accountability, and this year significant consequences were applied in relation to the AUSTRAC matters. In addition to the management and Board changes, remuneration consequences of more than $20 million1 were applied to decrease remuneration outcomes across 38 executives, managers and other employees. 1 Refer to explanation in Remuneration Report in the Directors’ Report. John McFarlane Chairman 3943 Westpac AR20 Cov-p33_V40.indd 7 3943 Westpac AR20 Cov-p33_V40.indd 7 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  8 CEO’S REPORT Dear shareholders, This has been a year like no other. COVID-19’s impact has been profound and has created challenges for many individuals and companies. The sharp decline in economic growth, low interest rates and higher impairment charges have materially impacted the sector’s and our earnings. At the same time, our own issues, including responding to our shortcomings in risk management – particularly in financial crime – have contributed to lower earnings. These factors saw dividends and the value of your investment fall. You expected more from Westpac and we apologise for letting you down. I recognise the distress lower dividends caused to many shareholders, especially retirees. I assure you that while it will take some time, we are doing everything we can to fix things and rebuild Westpac. I do not underestimate the importance of leading Australia’s oldest company at such a pivotal moment – it is a great privilege. Having spent the best part of my career at Westpac, I know this Company has strong foundations and deeply committed people, and so I am confident we will fix our issues, simplify our business and perform for our stakeholders. Turning things around On 20 November 2019, AUSTRAC commenced civil proceedings against Westpac in relation to alleged contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). This had a major impact this year, highlighting weaknesses in our management of financial crime. We have taken responsibility for our failings and in September this year, we reached an agreement with AUSTRAC to resolve the proceedings. As part of the settlement, Westpac agreed to pay a civil penalty of $1.3 billion, which the Court has approved. While this is a significant cost for shareholders, the overall settlement is an important step forward, allowing us to direct our energy to getting back on track. We have investigated the underlying issues, and we know we need to do better. We carried out a number of internal reviews including an assessment of management accountability in relation to the issues raised in the AUSTRAC proceedings and the adequacy of Westpac’s financial crime program. We also established an independent Advisory Panel to review Board governance and Board accountability in relation to the issues raised in the AUSTRAC proceedings and reassessed our 2018 Culture, Governance and Accountability self-assessment program. The recommendations and findings of these reviews were published on 4 June and 17 July 2020 respectively. Complexity has been at the heart of our issues – in our systems, processes, and businesses. Accountability was often not clear, and the right skills and capabilities were lacking in some areas. We didn’t have the right culture and we were too reactive and slow to respond when issues emerged. For change to be effective it must start at the top. There has been significant change at the executive level with the team renewed. We have sharpened our focus on Australia and New Zealand and are moving back to core banking, with our Specialist Businesses division bringing our non-core businesses together. We have enhanced our operating structures by implementing a Lines of Business model which aligns our businesses to our major customer offers such as mortgages, everyday banking, or business lending. Individuals are now responsible for each Line of Business, including financial performance, risk management and customer outcomes. This model aims to improve decision making, creates clear end-to-end accountability for our activities, streamlines management and speeds up decision making. 3943 Westpac AR20 Cov-p33_V40.indd 8 3943 Westpac AR20 Cov-p33_V40.indd 8 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT  9 These changes are complemented by our new purpose and values and will help guide our cultural change. We have also made changes in risk management, including the creation of a new role – Group Executive, Financial Crime, Compliance and Conduct, and added significant skills and resources to our risk management areas. Fixing our management of risk is a key priority. We have made good progress in improving our financial crime program and are making Company-wide changes through our Customer Outcomes and Risk Excellence program. This program deals with the source of our issues, seeking to strengthen non-financial risk management and improve our risk culture. I am confident that these changes are steering Westpac in the right direction, towards becoming a simpler and stronger bank. The turnaround will take some years, but we are determined to rebuild value and importantly, your trust. Helping customers when they need it most Against this backdrop, I am very proud of how our people stepped up to support customers through COVID-19, and the bushfires and floods that affected large parts of Australia this year. We worked hard to support customers through this time, changing our operations to remain open, diverting resources to areas of most need and providing a range of tailored support packages. With the bushfires, in addition to the many employees working on the front line, our teams worked tirelessly to ensure customers could access their funds while also providing emergency grants to those most affected. Around 2,000 relief packages were provided. With COVID-19, our focus was doing everything we could to keep our people safe while supporting customers. We kept as many branches as we could open while enabling around 22,000 employees to work from home. We provided customers with special interest rates, certain fee waivers, and temporary loans and supported over 215,000 consumer and business customers with repayment deferrals. While there were a few setbacks through the year, such as increased wait times and delays to loan processing, we have (and will continue to) supported customers through this uncertain time. Performance Our financial performance this year was disappointing. The Group’s reported profit was $2,290 million down 66% (or $2,608 million in cash earnings, down 62%), partly a result of our operating environment including low interest rates, materially higher impairment charges and higher costs from navigating COVID-19. The AUSTRAC settlement, further remediation costs, asset writedowns and high risk and compliance costs also contributed. The larger impacts on results included: — Impairment charges of $3,178 million, reflecting an increase in provisions for expected credit losses due to COVID-19 impacts; — $1,442 million after tax in provisions for AUSTRAC proceedings including a civil penalty of $1,300 million; and — Additional provisions for customer refunds, repayments, associated costs and litigation items of $440 million after tax. I do not underestimate the importance of leading Australia’s oldest company at such a pivotal moment – it is a great privilege.” Despite the strength of our franchise, lending stalled over the year. While demand was lower, we did not keep pace with the market – particularly in our core mortgage portfolio. Net interest margins were also down due principally to low interest rates and a highly competitive market. However, our balance sheet remains strong. Key liquidity and funding ratios are above target, and our CET1 capital ratio was 11.13% – the highest level for at least the last 20 years. This strength made possible the payment of the final dividend, albeit reduced, and allows us to continue supporting customers and the economy through this challenging time. We remain comfortable with our current capital ratios and have buffers to absorb a potential further deterioration in asset quality. Capital will also be generated as we exit activities in our Specialist Businesses division. Looking ahead In the near term, growth is already benefitting from the reopening of the economy. Next year we expect that to continue, albeit at a slower pace. Risks around the containment of the virus, the gradual unwinding of support measures, and prospects for the global economy emphasise the high uncertainty we will continue to experience. Growth in financial services will also be challenged, particularly in a persistent low interest rate environment. Impairment charges are also likely to remain elevated as consumer and business defaults rise following stimulus measures unwind. With our three priorities of fix, simplify and perform we are becoming a simpler and stronger bank focused on our core consumer, business and institutional segments. Through our program of change we are implementing our new Lines of Business operating model, strengthening our risk management capability, finalising customer remediation, enhancing our risk culture and simplifying where we operate. Finally, I want to thank our people. I know how deeply many have been affected by our issues this year. Despite the challenges our people have worked incredibly hard and always maintained their passion to help each other and customers. Importantly, we move ahead with a strong balance sheet and the financial resources and commitment to continue supporting customers and shareholders through this difficult time. Yours sincerely, Peter King CEO 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 9 3943 Westpac AR20 Cov-p33_V40.indd 9 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  10 WESTPAC GROUP 2020 ANNUAL REPORT PERFORMANCE REVIEW FY20 performance overview Westpac Group delivered a net profit attributable to owners of Westpac Banking Corporation for Full Year 2020 of $2,290 million, a decrease of $4,494 million, down 66%. Much of the decline can be traced back to the impact of COVID-19 on customers and on our business. This included a material increase in impairment charges as we put aside provisions for the estimated impact of potential future credit losses. Earnings were also impacted by our own issues, including the costs associated with the AUSTRAC matters. In assessing performance, we use ‘cash earnings’ – a measure of profit determined by adjusting reported earnings by three factors: 1. Material items that do not reflect ongoing performance; 2. Some items that may not be considered when WESTPAC MEASURES OF PROFIT ($m) Reported Net Profit Cash earnings 8,095 8,065 6,784 6,849 2,290 2,608 FY18 FY19 FY20 To further explain performance, we have identified a number of major items that do not reflect underlying performance. These are ‘notable items’ and in FY20 were $2,619 million and included: — Provisions and costs associated with the AUSTRAC proceedings $1,442 million after tax; determining dividends, including the amortisation of intangible items, treasury shares or economic hedging impacts; and — Provisions for customer refunds, repayments, associated costs and litigation items $440 million after tax; 3. Accounting classifications between individual items that do not impact reported results. — The write-down of intangible items $614 million; and — The net impact of major asset sales and revaluations $123 million. The charts on the next page are presented on a cash earnings basis. REPORTED NET PROFIT ATTRIBUTABLE TO OWNERS OF WESTPAC ($m) Net interest income Non interest income Net operating income Operating expenses Net profit before impairment charges and income tax Impairment charges Profit before income tax Income tax expense Net profit for the period Profit attributable to non-controlling interests (NCI) Net profit attributable to owners of WBC Total cash earnings adjustments (post tax) Cash earnings Add back notable items Cash earnings excluding notable items FULL YEAR SEPT 2020 FULL YEAR SEPT 2019 % MOV’T SEPT 20 – SEPT 19 16,696 3,487 20,183 16,907 3,742 20,649 (12,739) (10,106) 7,444 (3,178) 4,266 (1,974) 2,292 (2) 2,290 318 2,608 2,619 5,227 10,543 (794) 9,749 (2,959) 6,790 (6) 6,784 65 6,849 1,047 7,896 (1) (7) (2) 26 (29) large (56) (33) (66) (67) (66) large (62) 150 (34) 3943 Westpac AR20 Cov-p33_V40.indd 10 3943 Westpac AR20 Cov-p33_V40.indd 10 31/10/20 4:44 pm 31/10/20 4:44 pm ASSET QUALITY (%) Stressed exposures to total committed exposures 1.9 1.1 1.2 Sept 18 Sept 19 Sept 20 WESTPAC GROUP 2020 ANNUAL REPORT 11 CASH EARNINGS FY19-FY20 ($m) Average assets higher (mostly liquid assets) net interest margins down Higher risk and compliance spending and costs of responding to COVID-19 impacts including more customer support resources 1,047 7,896 (68) (636) 6,849 (591) (2,384) Lower activity, fee waivers (supporting customers) along with a lower insurance and wealth contribution 1,010 5,227 (2,619) Provisions for higher expected credit losses related to COVID-19 Down 34% Down 62% 2,608 FY19 Add back notable items FY19 ex-notable items Net interest income Non- interest income Expenses Impairment charges Tax & NCI1 FY20 ex-notable items Notable items FY20 GROSS LENDING ($bn) Australian housing Australian businesses Australian personal New Zealand Other overseas NET INTEREST MARGINS (%) Cash earnings basis 16 74 23 154 445 17 78 21 152 449 11 82 17 148 441 2.22 2.12 Low interest rates, strong competition 2.08 Sept 18 Sept 19 Sept 20 Sept 18 Sept 19 Sept 20 ASSET QUALITY (%) Stressed exposures to total committed exposures 1.9 STRONG BALANCE SHEET (%) Common equity tier 1 capital ratio Reported Internationally comparable 16.14 15.85 Top quartile of banks globally 16.50 1.1 1.2 10.63 10.67 11.13 Sept 18 Sept 19 Sept 20 Sept 18 Sept 19 Sept 20 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 11 3943 Westpac AR20 Cov-p33_V40.indd 11 31/10/20 4:44 pm 31/10/20 4:44 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  12 EXTERNAL ENVIRONMENT External environment 2020 has been the most challenging year for the banking system since the early 1990s recession. This has been largely due to the direct and indirect impacts of the COVID-19 pandemic which, at 30 September 2020, contributed to around one million deaths from over 32 million confirmed cases worldwide1. While Australia and New Zealand acted decisively to control the health risks of the pandemic, the lockdowns have had a profound impact on our economies. Both nations are in recession, Australia for the first time in almost 30 years. Further spikes in infection rates may increase restrictions already in place and considerable uncertainty remains around when State and international border restrictions will be lifted. Government bodies and financial institutions have worked together to help mitigate COVID’s impact and maintain financial stability. Governments and central banks have provided unprecedented levels of fiscal and monetary stimulus, while banks have supported customers with substantial hardship packages. Not surprisingly, the environment for most businesses is challenging; including financial services companies. Unemployment has increased significantly, and underemployment is also high, consumer sentiment has only recently recovered from the record lows during the height of the pandemic while business investment is still contracting. Financial services companies have experienced lower returns, driven by very low interest rates, less activity, and higher impairment provisions in anticipation of a rise in customer defaults. At the same time, the sector continues to face intense regulatory and legal scrutiny. Regulators are investigating several sector and company specific matters, including those that emerged in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. These have led to some class actions. In particular, ASIC has indicated it is pursuing a number of potential cases which may lead to additional actions. In response, financial service companies are focusing on raising governance, culture and accountability standards. Competition The Group operates in a highly competitive environment. We serve the banking and risk management needs of consumers, small businesses, corporate and institutional customers and compete with a large number of providers across every product and service. Competitors in Australia and New Zealand include banks (both domestic and global), investment banks, credit unions, building societies, finance companies, mortgage originators, card issuers, buy now pay later firms and other money lenders, fund administration companies, industry funds, insurance companies, online financial services providers, and technology companies. Our competitive position is determined by many factors including: — the quality, range, innovation and pricing of products and services; — digital and technology solutions; — customer service and convenience; — the effectiveness of, and access to, distribution channels; — brand reputation and preference; — the type of customers served; and — the talent and experience of our employees. Digital innovation is also redefining the competitive landscape. This has accelerated through the COVID-19 pandemic, as customers move away from physical outlets to online services. In Australia and New Zealand competition for deposits and lending remains fierce. Apart from the number of providers and the range of product and service options, slowing demand and a rise in liquidity from monetary stimulus has heightened competitive intensity. While the pandemic has reduced the local focus of some international institutions, digital finance providers have added to competitive intensity across a range of products and services. Outlook The outlook for 2021 is uncertain. COVID-19’s path remains unpredictable and the risk of outbreaks is ever present. While government assistance has provided a buffer to the economic impacts, this initial support is scheduled to unwind and is likely to be replaced by other more targeted support. The Federal Budget, which featured personal tax cuts and investment incentives, has been an important addition but further fiscal stimulus may be required. Against this backdrop, we expect GDP in Australia to increase by around 4% in the year to September 2021, a rebound from the significant decline of around 5% expected in the year to September quarter of 2020. The outlook remains challenging. In the near term, growth is already benefitting from the reopening of the economy. Next year we expect that to continue, albeit at a slower pace. Risks around the ongoing containment of the virus, the gradual unwinding of the extensive support measures, and prospects for the global economy emphasise the unusually high uncertainty we will continue to experience. While some government programs will be wound back, both fiscal and monetary policy are likely to remain highly stimulatory until unemployment falls below 6% – a key focus of the Australian Government. Unemployment is expected to increase in the latter months of 2020 to around 8%. While this is better than initial expectations, it is expected to remain between 7% to 8% in 2021. If the economy continues to reopen, 1 WHO Coronavirus Disease (COVID-19) Dashboard (996,000 deaths at 28 September 2020). 3943 Westpac AR20 Cov-p33_V40.indd 12 3943 Westpac AR20 Cov-p33_V40.indd 12 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT  13 jobs growth will lift but the pace of recovery will likely be slow due to the restructuring of businesses, sluggish demand, and the need to rebalance government support. New Zealand’s response to COVID-19 has proven effective, with activity bouncing back from the initial lockdowns and unemployment remaining closer to 4%. Nevertheless, GDP growth in 2021 is expected to remain below levels recorded in 2019 due to a lack of international tourism and offshore students along with limited immigration; all these factors have been good contributors to GDP in recent years. Australian house prices have already fallen by around 3% from the peak in April 2020. Low interest rates and a supportive financial system able to maintain activity will likely support the housing market. While the impact of the rundown of banks’ deferred loans is uncertain, it is likely customers will be provided with significant time to get back on their feet. Once stressed loans reduce, a recovery in house prices is anticipated in 2022 and 2023. Banking and financial services conditions will remain challenging with slower growth, margin pressure from low interest rates and the deterioration in asset quality as companies and individuals continue to experience reduced income. Credit growth for the Australian financial system was 2% for the year to September 2020, down from 2.7% a year earlier. Total credit growth is expected to slow to around 0.5% to September 2021. Housing credit growth is likely to be little changed at 3.2%, while business credit growth is expected to decline with subdued investment. Personal credit, which has been in decline for some years, is expected to fall further in 2021 as consumers remain cautious on debt and use alternative sources of financial credit. Near zero interest rates will continue to weigh on banks and place pressure on net interest margins. The Reserve Bank of Australia (RBA) has indicated that the cash rate will not be increased until progress is made towards full employment and inflation is sustained within the 2% to 3% target band. Very low interest rates are therefore likely to remain for some time and with them, margin pressure. The RBA has offered banks a Term Funding Facility (TFF) to support lending, particularly to businesses. The TFF is capped for each bank and allows them to borrow from the RBA for three years at 0.25%. The facility is expected to be in place until at least June 2021 and will support the Group’s term wholesale funding needs for much of the coming year. At 30 September 2020, we have drawn down $18 billion of the TFF. The Reserve Bank of New Zealand (RBNZ) has been similarly downbeat, committing to maintain its overnight cash rate at 0.25% until at least March 2021. The RBNZ has also flagged that it could take the rate below zero if further stimulus were required. Fee income may reduce as fee waivers linked to the pandemic continue and overall growth remains low. Wealth and insurance income is also likely to fall, due to changes in life insurance markets (less cover and higher reinsurance costs), and strong competition in wealth platforms. In the period ahead, the economic impacts of COVID-19 are expected to lead to higher defaults by consumers and increased business bankruptcies. To date, these impacts have been cushioned by the supportive industry measures to defer repayments and from government stimulus. The banking sector’s approach to the completion of deferrals and the potential for further government action may limit any shock to the economy as other support measures unwind. In 2020, impairment provisions materially increased to account for higher expected losses and are likely to remain elevated into 2021. Westpac has devoted significant time and effort to improving the management of risk over the year, including in non-financial risk and financial crime. This will continue in the year ahead which will likely see costs remain high. While Westpac has resolved some legal cases through the year it is possible that regulators may take further legal action on matters currently under investigation or on new matters. This is discussed further in the risk management and risk factors section. Consistent with our focus on Australian and New Zealand banking, we set up our Specialist Businesses division this year to manage activities not expected to be long-term strategic options for us. We are looking at alternatives for these businesses, including sale. The timing of any sale and settlement will depend on a range of factors but some transactions may occur in the year ahead. We remain well capitalised with a CET1 capital ratio of 11.13%. This ratio may ease from a rise in risk weighted assets as customer stress increases. This will however be partially offset by efforts to improve capital efficiency and may include the sale of businesses. Regardless, we expect to manage our capital position to keep our CET1 capital ratio comfortably above regulatory minimums. We remain committed to supporting customers and the economy through these challenging times. Our immediate priority is to fix our outstanding issues, including improving risk management, enhancing our culture, and completing remediation. We have committed to simplify, focusing on our markets of Australia and New Zealand, exiting non-core businesses, and reducing our product set. We also expect to complete the implementation of our Lines of Business operating model to clarify responsibilities and accountability. Finally, we are focused on performance, restoring growth in our key products including mortgages and business loans, enhancing returns and resetting our cost base. Importantly, our strong balance sheet, committed team and solid customer franchise position us to see these plans through. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 13 3943 Westpac AR20 Cov-p33_V40.indd 13 31/10/20 4:44 pm 31/10/20 4:44 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  14 WESTPAC GROUP 2020 ANNUAL REPORT OUR STRATEGY OUR PRIORITIES WHAT THIS MEANS WHAT IT INVOLVES Our strategy supports our purpose, harnesses our strengths and refocuses where change is required. We have sharpened the markets and products in which we operate, returning to banking, and our home markets of Australia and New Zealand leveraging our portfolio of brands. Our focus is on consumers, businesses and institutional – segments we know well. Our three priorities recognise our need to address our shortcomings, reshape the business to concentrate on our core businesses and markets while lifting service and creating a stronger performance ethic. This will help us to become a simpler, stronger bank. Our purpose Helping Australians and New Zealanders succeed. Our focus Banking for Australian and New Zealand consumers, businesses and institutional customers. Fix Simplify Perform 3943 Westpac AR20 Cov-p33_V40.indd 14 3943 Westpac AR20 Cov-p33_V40.indd 14 31/10/20 4:44 pm 31/10/20 4:44 pm Addressing our shortcomings by materially improving our management of risk and risk culture, reducing customer pain — Risk management — Culture, including risk culture — Customer remediation points, completing historical — IT complexity customer remediation program, and reducing the complexity of our technology. — Reduce customer pain points Returning to our core businesses of banking in — Exit non-core businesses and consolidate Australia and New Zealand, international locations Trusted to do the right thing — Rationalise products LEADING CHANGE including exiting some businesses and international locations. Rationalising products and simplifying processes to make it easier for customers. — Implement Line of Business operating model — Transform using digital and data Improving performance by — Customer service – building customer loyalty and growth through service, sharpening our focus on returns, and resetting our cost base. A strong balance sheet and engaged workforce form the foundations of performance. market leading — Mortgage growth — Enhance returns, optimise capital — Strong balance sheet — Re-set cost base OUR VALUES – WHAT YOU CAN EXPECT HELPFUL Passionate about providing a great customer experience ETHICAL Determined to make it better and be better PERFORMING Accountable to get it done SIMPLE Inspired to keep it simple and easy DELIVERING FOR OUR STAKEHOLDERS1 CUSTOMERS EMPLOYEES SHAREHOLDERS THE ECONOMY Generating appropriate returns Supporting the financial system Delivering financial services to consumers, businesses and institutions in Australia and New Zealand. — Trusted with over $555bn in customer deposits — Supported over $693bn in lending Creating an environment where the best people want to work. — Paid over $5.0bn to 40,225 employees — 50% women in leadership roles2 — Recognised by the Bloomberg Gender Equality Index for the 4th consecutive year over the long-term, including for families who directly own almost half of our total shares on issue. — Our strong balance sheet positions us to manage the downturn and deliver — Earnings per share 63.7 cents, or 72.5 cents (cash earning basis); dividends 31 cents per share long-term shareholder value — Supported customers through COVID-19: Banks play an important role in supporting the economy through lending, deposits, and the efficient flow of funds. Supporting Australia and New Zealand around 175,000 mortgage deferrals and around 40,000 businesses with deferrals — One of the first banks to enable access to data as part of the 'Open Banking' initiative — A major contributor of New Payments Platform transactions One of Australia's largest tax payers — Westpac paid over $4bn6 globally in various taxes during 2020, 99.7% of which were paid in Australia and New Zealand (including the Major Bank Levy). — Our effective tax rate for 2020 was 46% or 56% including the Major Bank Levy. COMMUNITIES SUPPLIERS Support local communities. — Over $150m in community investment3 — 1m+ participants in financial education — Westpac Foundation4 grants to social enterprises helped create 719 jobs5 for vulnerable Australians Choosing suppliers responsibly and paying them on time. — Procured goods and services worth $6.5bn with $5.9m in spend towards Indigenous- owned businesses — Delivering on our 2023 Human Rights Action Plan and working to eliminate risk of modern slavery across our business operations and supply chain THE ENVIRONMENT Supporting the transition to a climate resilient future. — $10.1bn lending to climate 1 All figures for FY20. change solutions — Climate Change Position 2 Proportion of women (permanent and maximum term) in leadership roles across the Group, including 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. Statement and 2023 Action Plan 3 Excludes commercial sponsorships. 4 Westpac Foundation is administered by Westpac Community Limited (ABN 34 086 862 795) as trustee for Westpac Community Trust (ABN 53 265 036 982). The Westpac Community Trust is a Public Ancillary Fund, endorsed by the ATO as a Deductible Gift Recipient. None of Westpac Foundation, Westpac Community Trust Limited nor the Westpac Community Trust are part of Westpac Group. Westpac provides administrative support, skilled volunteering, donations and funding for operational costs of Westpac Foundation. 5 Jobs created through the Westpac Foundation job creation grants to social enterprises are for the year ended 30 June 2020. 6 The majority (76%) of the tax paid comprises corporate income tax. Other taxes paid include the Major Bank Levy, non-recoverable GST, payroll tax and fringe benefits tax.  OUR STRATEGY OUR PRIORITIES WHAT THIS MEANS WHAT IT INVOLVES Addressing our shortcomings by materially improving our management of risk and risk culture, reducing customer pain points, completing historical customer remediation program, and reducing the complexity of our technology. — Risk management — Culture, including risk culture — Customer remediation — IT complexity — Reduce customer pain points WESTPAC GROUP 2020 ANNUAL REPORT 15 OUR VALUES – WHAT YOU CAN EXPECT HELPFUL Passionate about providing a great customer experience ETHICAL Returning to our core businesses of banking in Australia and New Zealand, including exiting some businesses and international locations. Rationalising products and simplifying processes to make it easier for customers. — Exit non-core businesses and consolidate international locations Trusted to do the right thing — Rationalise products LEADING CHANGE — Implement Line of Business operating model — Transform using digital and data Improving performance by building customer loyalty and growth through service, sharpening our focus on returns, and resetting our cost base. A strong balance sheet and engaged workforce form the foundations of performance. — Customer service – market leading — Mortgage growth — Enhance returns, optimise capital — Strong balance sheet — Re-set cost base Determined to make it better and be better PERFORMING Accountable to get it done SIMPLE Inspired to keep it simple and easy Our strategy supports our purpose, harnesses our strengths and refocuses where change is required. We have sharpened the markets and products in which we operate, returning to banking, and our home markets of Australia and New Zealand leveraging our portfolio of brands. Our focus is on consumers, businesses and institutional – segments we know well. Our three priorities recognise our need to address our shortcomings, reshape the business to concentrate on our core businesses and markets while lifting service and creating a stronger performance ethic. This will help us to become a simpler, stronger bank. Our purpose Helping Australians and New Zealanders succeed. Our focus Banking for Australian and New Zealand consumers, businesses and institutional customers. Fix Simplify Perform 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 15 3943 Westpac AR20 Cov-p33_V40.indd 15 31/10/20 4:44 pm 31/10/20 4:44 pm DELIVERING FOR OUR STAKEHOLDERS1 CUSTOMERS EMPLOYEES SHAREHOLDERS THE ECONOMY Generating appropriate returns Supporting the financial system Delivering financial services to consumers, businesses and institutions in Australia and New Zealand. — Trusted with over $555bn in customer deposits — Supported over $693bn in lending Creating an environment where the best people want to work. — Paid over $5.0bn to 40,225 employees — 50% women in leadership roles2 — Recognised by the Bloomberg Gender Equality Index for the 4th consecutive year over the long-term, including for families who directly own almost half of our total shares on issue. — Our strong balance sheet positions us to manage the downturn and deliver — Earnings per share 63.7 cents, or 72.5 cents (cash earning basis); dividends 31 cents per share long-term shareholder value — Supported customers through COVID-19: Banks play an important role in supporting the economy through lending, deposits, and the efficient flow of funds. Supporting Australia and New Zealand around 175,000 mortgage deferrals and around 40,000 businesses with deferrals — One of the first banks to enable access to data as part of the 'Open Banking' initiative — A major contributor of New Payments Platform transactions One of Australia's largest tax payers — Westpac paid over $4bn6 globally in various taxes during 2020, 99.7% of which were paid in Australia and New Zealand (including the Major Bank Levy). — Our effective tax rate for 2020 was 46% or 56% including the Major Bank Levy. COMMUNITIES SUPPLIERS Support local communities. — Over $150m in community investment3 — 1m+ participants in financial education — Westpac Foundation4 grants to social enterprises helped create 719 jobs5 for vulnerable Australians Choosing suppliers responsibly and paying them on time. — Procured goods and services worth $6.5bn with $5.9m in spend towards Indigenous- owned businesses — Delivering on our 2023 Human Rights Action Plan and working to eliminate risk of modern slavery across our business operations and supply chain THE ENVIRONMENT Supporting the transition to a climate resilient future. — $10.1bn lending to climate 1 All figures for FY20. change solutions — Climate Change Position 2 Proportion of women (permanent and maximum term) in leadership roles across the Group, including 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. Statement and 2023 Action Plan 3 Excludes commercial sponsorships. 4 Westpac Foundation is administered by Westpac Community Limited (ABN 34 086 862 795) as trustee for Westpac Community Trust (ABN 53 265 036 982). The Westpac Community Trust is a Public Ancillary Fund, endorsed by the ATO as a Deductible Gift Recipient. None of Westpac Foundation, Westpac Community Trust Limited nor the Westpac Community Trust are part of Westpac Group. Westpac provides administrative support, skilled volunteering, donations and funding for operational costs of Westpac Foundation. 5 Jobs created through the Westpac Foundation job creation grants to social enterprises are for the year ended 30 June 2020. 6 The majority (76%) of the tax paid comprises corporate income tax. Other taxes paid include the Major Bank Levy, non-recoverable GST, payroll tax and fringe benefits tax. 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  16 WESTPAC GROUP 2020 ANNUAL REPORT 3943 Westpac AR20 Cov-p33_V40.indd 16 3943 Westpac AR20 Cov-p33_V40.indd 16 31/10/20 4:45 pm 31/10/20 4:45 pm — Risk management— Culture, including risk culture— Customer remediation— IT complexity— Reduce customer pain points— Exit non-core businesses and consolidate international locations— Rationalise products— Implement Line of Business operating model— Transform using digital and data— Customer service – market leading— Mortgage growth— Enhance returns, optimise capital— Strong balance sheet— Re-set cost base1 All figures for FY20.2 Proportion of women (permanent and maximum term) in leadership roles across the Group, including 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.3 Excludes commercial sponsorships.4 Westpac Foundation is administered by Westpac Community Limited (ABN 34 086 862 795) as trustee for Westpac Community Trust (ABN 53 265 036 982). The Westpac Community Trust is a Public Ancillary Fund, endorsed by the ATO as a Deductible Gift Recipient. None of Westpac Foundation, Westpac Community Trust Limited nor the Westpac Community Trust are part of Westpac Group. Westpac provides administrative support, skilled volunteering, donations and funding for operational costs of Westpac Foundation.5 Jobs created through the Westpac Foundation job creation grants to social enterprises are for the year ended 30 June 2020.6 The majority (76%) of the tax paid comprises corporate income tax. Other taxes paid include the Major Bank Levy, non-recoverable GST, payroll tax and fringe benefits tax.Addressing our shortcomings by materially improving our management of risk and risk culture, reducing customer pain points, completing historical customer remediation program, and reducing the complexity of our technology.Returning to our core businesses of banking in Australia and New Zealand, including exiting some businesses and international locations. Rationalising products and simplifying processes to make it easierfor customers.Improving performance by building customer loyalty and growth through service, sharpening our focus on returns, and resetting our cost base. A strong balance sheet and engaged workforce form the foundations of performance.WHAT THIS MEANSOUR PRIORITIESWHAT IT INVOLVES CUSTOMERS EMPLOYEESSHAREHOLDERSTHE ECONOMYCOMMUNITIESTHE ENVIRONMENTSUPPLIERSOUR VALUES – WHAT YOU CAN EXPECTHELPFULETHICALLEADING CHANGEPERFORMINGSIMPLEPassionate about providing a great customer experienceTrusted to do the right thingDetermined to make it better and be betterAccountable to get it doneInspired to keep it simple and easyChoosing suppliers responsibly and paying them on time.— Procured goods and services worth $6.5bn with $5.9m in spend towards Indigenous-owned businesses— Delivering on our 2023 Human Rights Action Plan and working to eliminate risk of modern slavery across our business operations and supply chain Supporting the transition to a climate resilient future.— $10.1bn lending to climate change solutions— Climate Change Position Statement and 2023 Action PlanSupport local communities. — Over $150m in community investment3 — 1m+ participants in financial education— Westpac Foundation4 grants to social enterprises helped create 719 jobs5 for vulnerable AustraliansCreating an environment where the best people want to work. — Paid over $5.0bn to 40,225 employees— 50% women in leadership roles2— Recognised by the Bloomberg Gender Equality Index for the 4th consecutive year Generating appropriate returns over the long-term, including for families who directly own almost half of our total shares on issue.— Our strong balance sheet positions us to manage the downturn and deliver long-term shareholder value — Earnings per share 63.7 cents, or 72.5 cents (cash earning basis); dividends 31 cents per shareDelivering financial services to consumers, businesses and institutions in Australia and New Zealand.— Trusted with over $555bn in customer deposits— Supported over $693bn in lending Supporting the financial systemBanks play an important role in supporting the economy through lending, deposits, and the efficient flow of funds.Supporting Australia and New Zealand — Supported customers through COVID-19: around 175,000 mortgage deferrals and around 40,000 businesses with deferrals— One of the first banks to enable access to data as part of the 'Open Banking' initiative— A major contributor of New Payments Platform transactionsOne of Australia's largest tax payers— Westpac paid over $4bn6 globally in various taxes during 2020, 99.7% of which were paid in Australia and New Zealand (including the Major Bank Levy).— Our effective tax rate for 2020 was 46% or 56% including the Major Bank Levy.PerformSimplifyFixHelping Australians and New Zealanders succeed.OurpurposeBanking for Australian and New Zealand consumers, businesses and institutional customers.Our focus OUR STRATEGYDELIVERING FOR OUR STAKEHOLDERS1Our strategy supports our purpose, harnesses our strengths and refocuses where change is required. We have sharpened the markets and products in which we operate, returning to banking, and our home markets of Australia and New Zealand leveraging our portfolio of brands.Our focus is on consumers, businesses and institutional – segments we know well. Our three priorities recognise our need to address our shortcomings, reshape the business to concentrate on our core businesses and markets while lifting service and creating a stronger performance ethic. This will help us to become a simpler, stronger bank.WESTPAC GROUP 2020 ANNUAL REPORT 17 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 17 3943 Westpac AR20 Cov-p33_V40.indd 17 31/10/20 4:45 pm 31/10/20 4:45 pm — Risk management— Culture, including risk culture— Customer remediation— IT complexity— Reduce customer pain points— Exit non-core businesses and consolidate international locations— Rationalise products— Implement Line of Business operating model— Transform using digital and data— Customer service – market leading— Mortgage growth— Enhance returns, optimise capital— Strong balance sheet— Re-set cost base1 All figures for FY20.2 Proportion of women (permanent and maximum term) in leadership roles across the Group, including 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.3 Excludes commercial sponsorships.4 Westpac Foundation is administered by Westpac Community Limited (ABN 34 086 862 795) as trustee for Westpac Community Trust (ABN 53 265 036 982). The Westpac Community Trust is a Public Ancillary Fund, endorsed by the ATO as a Deductible Gift Recipient. None of Westpac Foundation, Westpac Community Trust Limited nor the Westpac Community Trust are part of Westpac Group. Westpac provides administrative support, skilled volunteering, donations and funding for operational costs of Westpac Foundation.5 Jobs created through the Westpac Foundation job creation grants to social enterprises are for the year ended 30 June 2020.6 The majority (76%) of the tax paid comprises corporate income tax. Other taxes paid include the Major Bank Levy, non-recoverable GST, payroll tax and fringe benefits tax.Addressing our shortcomings by materially improving our management of risk and risk culture, reducing customer pain points, completing historical customer remediation program, and reducing the complexity of our technology.Returning to our core businesses of banking in Australia and New Zealand, including exiting some businesses and international locations. Rationalising products and simplifying processes to make it easierfor customers.Improving performance by building customer loyalty and growth through service, sharpening our focus on returns, and resetting our cost base. A strong balance sheet and engaged workforce form the foundations of performance.WHAT THIS MEANSOUR PRIORITIESWHAT IT INVOLVES CUSTOMERS EMPLOYEESSHAREHOLDERSTHE ECONOMYCOMMUNITIESTHE ENVIRONMENTSUPPLIERSOUR VALUES – WHAT YOU CAN EXPECTHELPFULETHICALLEADING CHANGEPERFORMINGSIMPLEPassionate about providing a great customer experienceTrusted to do the right thingDetermined to make it better and be betterAccountable to get it doneInspired to keep it simple and easyChoosing suppliers responsibly and paying them on time.— Procured goods and services worth $6.5bn with $5.9m in spend towards Indigenous-owned businesses— Delivering on our 2023 Human Rights Action Plan and working to eliminate risk of modern slavery across our business operations and supply chain Supporting the transition to a climate resilient future.— $10.1bn lending to climate change solutions— Climate Change Position Statement and 2023 Action PlanSupport local communities. — Over $150m in community investment3 — 1m+ participants in financial education— Westpac Foundation4 grants to social enterprises helped create 719 jobs5 for vulnerable AustraliansCreating an environment where the best people want to work. — Paid over $5.0bn to 40,225 employees— 50% women in leadership roles2— Recognised by the Bloomberg Gender Equality Index for the 4th consecutive year Generating appropriate returns over the long-term, including for families who directly own almost half of our total shares on issue.— Our strong balance sheet positions us to manage the downturn and deliver long-term shareholder value — Earnings per share 63.7 cents, or 72.5 cents (cash earning basis); dividends 31 cents per shareDelivering financial services to consumers, businesses and institutions in Australia and New Zealand.— Trusted with over $555bn in customer deposits— Supported over $693bn in lending Supporting the financial systemBanks play an important role in supporting the economy through lending, deposits, and the efficient flow of funds.Supporting Australia and New Zealand — Supported customers through COVID-19: around 175,000 mortgage deferrals and around 40,000 businesses with deferrals— One of the first banks to enable access to data as part of the 'Open Banking' initiative— A major contributor of New Payments Platform transactionsOne of Australia's largest tax payers— Westpac paid over $4bn6 globally in various taxes during 2020, 99.7% of which were paid in Australia and New Zealand (including the Major Bank Levy).— Our effective tax rate for 2020 was 46% or 56% including the Major Bank Levy.PerformSimplifyFixHelping Australians and New Zealanders succeed.OurpurposeBanking for Australian and New Zealand consumers, businesses and institutional customers.Our focus OUR STRATEGYDELIVERING FOR OUR STAKEHOLDERS1Our strategy supports our purpose, harnesses our strengths and refocuses where change is required. We have sharpened the markets and products in which we operate, returning to banking, and our home markets of Australia and New Zealand leveraging our portfolio of brands.Our focus is on consumers, businesses and institutional – segments we know well. Our three priorities recognise our need to address our shortcomings, reshape the business to concentrate on our core businesses and markets while lifting service and creating a stronger performance ethic. This will help us to become a simpler, stronger bank.1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  18 WESTPAC GROUP 2020 ANNUAL REPORT OUR PRIORITIES Fix Addressing our shortcomings by materially improving our management of risk and risk culture, reducing customer pain points, completing our historical customer remediation program and reducing the complexity of our technology systems. James Grant, Westpac Group Financial Controller 3943 Westpac AR20 Cov-p33_V40.indd 18 3943 Westpac AR20 Cov-p33_V40.indd 18 31/10/20 4:45 pm 31/10/20 4:45 pm  19 A new function for Financial Crime, Compliance & Conduct was created Enhanced risk management framework In the past, Westpac’s management of risk has been considered a strength, particularly in our management of capital, funding, liquidity, and credit risk. While we retain a strong balance sheet, several inquiries, including the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the AUSTRAC proceedings and our own assessments have highlighted weaknesses in our management of risk; particularly non-financial risk. Our weaknesses were initially highlighted in our Culture Governance and Accountability self-assessment (CGA self-assessment) completed in 2018. Our CGA self- assessment included 45 recommendations and a program to respond commenced soon after. However, following the AUSTRAC proceedings, APRA asked Westpac to reassess these plans to ensure that they remained ‘fit for purpose’. We released our reassessment (CGA reassessment) on 17 July 2020, reinforcing the initial findings but also identifying that our risk culture was reactive and immature and that the three lines of defence model (model defining risk management responsibilities) was not well understood. It was also clear that we had become too complex and where issues were uncovered we were slow to act. The Group has been exposed to compliance failures, regulatory breaches, customer remediation and legal actions. See pages 22 to 23 for a detailed account of the AUSTRAC matters. We have accepted our shortcomings and are seeking to materially lift our standards and fix the issues identified. The first step has been to refine our operating structure. A new function for Financial Crime, Conduct and Compliance has been created to increase the focus and resources devoted to this important area. The Group Executive for this division reports directly to the CEO. We have also enhanced our risk management framework (for identifying, assessing and managing risk), and increased our risk management resources. We have accepted our shortcomings and have commenced a number of programs that seek to materially lift our standards and fix the issues identified.” Following the CGA reassessment we established the Customer Outcomes and Risk Excellence (CORE) program. The program is designed to improve non- financial risk oversight (including from our initial CGA self-assessment), lift risk culture, and strengthen our risk management framework. The program has 14 streams of work under three categories: 1. Direction and tone set by Board and Group Executive – initiatives that set clear tone and direction from leadership to promote a proactive risk culture. 2. Clear risk boundaries for decision- making – simplifying risk management frameworks and increasing capability and resources in the Risk function. 3. Accountable and empowered people – providing additional training and support for employees to help them understand they all have a role in managing risk and driving clearer accountability and decision-making. Progress over the year includes 400+ new Risk, Compliance and Financial Crime employees CORE program underway 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 19 3943 Westpac AR20 Cov-p33_V40.indd 19 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  20 A strong risk culture includes being clear on accountability and creating an environment where it is safe to speak up.” Updated Code of Conduct rolled out Strengthening risk culture Remediating customers We have continued to review our products, processes and policies where we have not got it right for customers. Where problems have been identified, we have committed to fix them and refund customers. This task is significant as it often involves individual customers over many years. The Group incurred an after-tax cost of $440 million for provisions for estimated customer refunds and payments, and litigation and associated costs in FY2020. Major items included: — Certain business customers who were provided with business loans where they should have been provided loans covered by the National Consumer Credit Protection Act and the National Credit Code; — Compensation to platform customers who were not advised of certain corporate actions, and may have been able to benefit; and — Where certain wealth fees were inadequately disclosed. 2m+ customers received over $280 million in refunds in FY20 The strength of risk management in a company is underpinned by its risk culture. A strong risk culture is an environment where everyone can identify the risks they are responsible for, are alert to changing or new risks and pro-actively address risks when they emerge. It also includes being clear on accountability and feeling safe to speak up. Strengthening risk culture is a focus for the Group and a key element of our CORE program. Our new Lines of Business operating model is establishing end-to- end responsibility for customer outcomes and improving our risk culture by clarifying accountabilities. In addition, our 3LOD model is supporting these structural changes by lifting risk capability and bench-strength across the Group. Other changes to improve risk culture include: — New risk culture framework to better define risk roles and responsibilities; — Launch of an online tool to assess a division’s current risk culture and compare to our target, helping us identify and prioritise areas for improvement; — New Risk Fundamentals training program being rolled out to all employees – to ensure everyone understands the risk culture we are seeking to develop; — Risk culture dashboard to consistently measure our progress; and — Updating our Code of Conduct reinforcing the importance of speaking up. 3943 Westpac AR20 Cov-p33_V40.indd 20 3943 Westpac AR20 Cov-p33_V40.indd 20 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT  21 93% reduction of long dated complaints 74% Australian Banking1 complaints resolved in 5 days compared to 68% in FY19 Reducing customer pain points In 2018, we centralised the management of complaints to improve how they are identified, logged and resolved. This included a shift in culture to see complaints as an opportunity to learn and do better. This heightened focus has contributed to an increase in the number of complaints we capture, while making significant progress on improving how they are managed. In FY20, we received 169,674 complaints, a 145% increase on FY19. In addition, we have: — Reduced average time to resolution for complaints to 6.5 days, from 9 days in FY19; — Reduced the number of long dated complaints (45+ days old) from 288 to 21 at 30 September 2020; and — Solved 63% of complaints on the same day in September 2020 compared to 56% in September 2019. Importantly, insights from better complaint management have led to a number of process improvements – reducing pain points for customers. Redoubling our efforts to remove IT complexity We started a program to reduce complexity some years ago, which prioritised the upgrade of our technology infrastructure while commencing the development of our customer service hub (which will become the consumer bank’s central product on-boarding platform). At the same time, we have sought to ensure our customer interface has kept pace with customer demands. This program has successfully strengthened the stability, speed and security of our systems and helped ensure the bank remained open for business through the COVID-19 pandemic and support customers via digital channels. Having upgraded much of our technology infrastructure, in 2020 we developed a detailed technology roadmap for the next phase of our transformation to build a single, multi-brand operating environment. That roadmap extends for over multiple years, recognising that technology will change and we must be flexible. Significant work is still required but our development plan is clear. CASE STUDY 1 Australian Banking includes Consumer and Business division products. TRANSFORMING OUR COMPLAINTS PROCESS This year we launched ‘Resolve’, a new centralised customer complaints management platform that brings together nine systems into one and makes it easier for our people to log and resolve complaints. In 2018, we changed the way we think about complaints to improve the way we identify, manage and resolve them. However, our multiple legacy systems were holding us back. Resolve has changed that by creating a single platform and an intuitive dashboard for bankers. “This has been a huge opportunity to significantly improve the customer experience”, says Lisa Pogonoski, Westpac’s General Manager of Customer Solutions. “Having our people work on one system provides a common view of complaints and a single source of data.” From 2021, customers will have direct access to the system, enabling them to log and track the progress of their complaint. Over time, we will apply artificial intelligence to help bankers and customers navigate through the complaints process to reach a guided resolution that will be much faster. “Resolve supports the fundamental change to how we think about complaints,” says Lisa. “Its simple and comprehensive functionality allows employees to own complaints and supports them to get the best outcome for customers.” This year we have halved the time it takes to fix long dated complaints and with Resolve we are planning for another step down. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 21 3943 Westpac AR20 Cov-p33_V40.indd 21 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  22 AUSTRAC PROCEEDINGS EXPLAINED AUSTRAC proceedings overview The AUSTRAC proceedings have been discussed in various parts of our Annual Report. With this overview we aim to provide a snapshot of what happened, the issues highlighted and what we’re doing to fix them. The issues highlighted by AUSTRAC in their Statement of Claim in November 2019 deeply disappointed shareholders, customers, and the community, as well as Westpac’s employees. The proceedings have become a catalyst for change at Westpac. We have acknowledged our failings and are deeply sorry for what occurred. We have investigated the issues and are determined to fix our shortcomings. A broader change program is underway to address the root causes. Following the AUSTRAC Statement of Claim and recognising the seriousness of the issues: — The former CEO stepped down and the Board determined to forfeit all of his unvested equity; — The former Chairman brought forward his retirement; and — A former Non-executive Director and Chairman of the Board Risk & Compliance Committee did not seek re-election. On 24 September 2020, we reached an agreement with AUSTRAC to resolve the proceedings, subject to Court approval. The resolution involved the filing of a Statement of Agreed Facts and Admissions (SAFA) with the Court, which on 21 October 2020 approved the payment of a civil penalty of $1.3 billion for the admitted contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). What happened On 20 November 2019, AUSTRAC commenced civil proceedings in the Federal Court of Australia against Westpac in relation to alleged contraventions of the AML/CTF Act. The SAFA filed with the Court is available on our website. In summary, it acknowledged that we had not: — Maintained an AML/CTF Program that fully complied with the requirements of the AML/CTF Rules; — Reported over 19.5 million International Funds Transfer Instructions (IFTIs) on time; — Included all required information about the payer in relation to over 76,000 IFTIs that were reported on time; — Passed on all relevant information in relation to approximately 10,500 IFTIs; — Kept appropriate records relating to over 3.5 million IFTIs; — Appropriately assessed the risks posed by our correspondent banks; and — Appropriately monitored a number of customers’ transactions for child exploitation risk. While we failed in our obligations, the SAFA acknowledged that the contraventions were not the result of any deliberate intention to breach the AML/CTF Act. We carried out a review of these matters to be clear on what had occurred, understand the root cause, and determine accountability. We also commissioned a review by an external Advisory Panel into Board Governance of AML/CTF obligations. The outcomes of these reviews, including the Advisory Panel report, were released in June 2020 and are also available on our website. The main findings of the reviews were that some areas of AML/CTF risk were not sufficiently understood; there were unclear end-to-end accountabilities for managing AML/CTF compliance; and there was a lack of sufficient AML/CTF expertise and resourcing. The Advisory Panel found that the way the Board organised its general governance responsibilities was mainstream and fit for purpose. They noted that, with the benefit of hindsight, and noting the Board’s escalating focus in the area, Directors could have recognised earlier the systemic nature of some of the financial crime issues Westpac was facing. They also found that reporting to the Board on financial crime matters was at times unintentionally incomplete and inaccurate. 3943 Westpac AR20 Cov-p33_V40.indd 22 3943 Westpac AR20 Cov-p33_V40.indd 22 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT  23 Monitoring and assessing transactions One of the most serious allegations made by AUSTRAC related to the way we monitored transactions for potential child exploitation risks. In summary, Westpac is required to monitor transactions and submit suspicious matter reports to AUSTRAC if it identifies that certain patterns of transactions are indicative of child exploitation. While we had monitoring in place, we should have implemented more robust monitoring of transactions for this risk earlier than we did. Since the AUSTRAC proceedings, we have further updated our monitoring, reassessed prior transactions and submitted additional suspicious matter reports to AUSTRAC. Taking accountability A range of remuneration consequences were applied to 38 individuals, totalling over $20 million1. This included cancelling 2020 short-term variable reward (STVR) for the Group Executive team and, in some instances, adjusting prior year awards that had yet to vest. Consequences were not able to be applied to some individuals as they had already left the organisation and had no deferred remuneration outstanding. Fixing our mistakes Within days of AUSTRAC’s allegations, we released a Response Plan which detailed our areas of focus. Immediate fixes: This included closing the two products that were the main source of our failings and reporting a small number of outstanding IFTIs to AUSTRAC. Lifting anti-money laundering and risk management standards: We commenced a program to elevate the importance of financial crime across the Group, with more resources, increased seniority, and greater oversight. We also updated our transaction monitoring rules and enhanced oversight of the processes. Developments include: — Establishing a Board Legal, Regulatory & Compliance Committee; — Elevating the Financial Crime, Compliance and Conduct function, with the Group Executive reporting directly to the CEO; — Increasing risk resources, including adding over 200 additional employees to our financial crime team; and The AUSTRAC proceedings have become a catalyst for change at Westpac.” Established a Board Legal, Regulatory & Compliance Committee $24m committed to two significant partnerships to reduce the human impact of financial crime — Strengthening the management of financial crime risks including our policies, data feeding systems, processes and controls. In addition, our broader plans to improve risk management across the organisation will complement the improved capability we are building in financial crime, including enhancing our risk culture. Safer Children, Safer Communities We have also established a Safer Children, Safer Communities work program to help reduce the human impact of financial crime with a particular focus on child safeguarding, guided by experts in human rights, child safety, online safety and law enforcement. This year, we established multi-year funding partnerships with International Justice Mission and Save the Children (Australia), and launched a new Impact Grants program. For more about this, see page 40. 1 Refer to explanation in Remuneration Report in the Directors’ Report. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 23 3943 Westpac AR20 Cov-p33_V40.indd 23 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  24 24 WESTPAC GROUP 2020 ANNUAL REPORT OUR PRIORITIES Simplify Returning to our core businesses of banking in Australia and New Zealand, including exiting some businesses and international locations. Rationalising products and simplifying processes to make it easier for customers to bank with us. 3943 Westpac AR20 Cov-p33_V40.indd 24 3943 Westpac AR20 Cov-p33_V40.indd 24 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT  25 Specialist Businesses revenue contribution to Group1 8% Becoming a simpler bank Complexity has been the source of many of our issues. We expanded into areas where we did not have a competitive advantage or scale to compete effectively and we lost traction in some of our core businesses. At the same time, our operating model became too diffused. That is, decision making was unclear, and we tended to manage via committee and businesses were not run end-to-end. This inclusive management approach, while collaborative, tended to dilute accountability and slow decision making. Fundamental change is underway, and we are now clear on the locations, markets and businesses in which we will operate. Changes include: — Setting up the Specialist Businesses division to hold the businesses which we do not view ourselves as the long-term owners of; — Consolidating our international operations to focus more on the areas where we can best support customers. As a result, we will exit operations in Beijing, Shanghai, Hong Kong, Mumbai and Jakarta; and — Moving to a Lines of Business operating model. Under this model, each line (a major customer offering) has end-to- end responsibility for that business. For example, in our Mortgages Line of Business a Managing Director is responsible for the entire mortgage process from origination, pricing, credit assessment and service. We are clear on the locations, markets and businesses in which we will operate.” NEW OPERATING MODEL – LINES OF BUSINESS CONSUMER Customer engagement BUSINESS Customer engagement WIB Mortgages Everyday Banking Consumer Finance Business Lending Cash Management Private Wealth Customer engagement Corporate and Institutional Banking Financial Markets Global Transactional Services SPECIALIST BUSINESSES Customer engagement Insurance Superannuation, Platforms and Investments Auto and Vendor Finance Westpac Pacific 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 Cash earnings excluding notable items. 3943 Westpac AR20 Cov-p33_V40.indd 25 3943 Westpac AR20 Cov-p33_V40.indd 25 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  26 To improve customer service, we must simplify the way we operate; this includes streamlining our products and digitising processes.” Inspired to keep it simple and easy WIB — Simplifying our Global Transaction Service product platform and refocusing on core capabilities; and — Reducing the number of correspondent banks we transact with. Westpac New Zealand — Removed eight consumer products including four discontinued home loan products; and — Migrated 12,000 credit card customers from three discontinued products. Wealth and insurance — Continued to migrate customers and funds from BT Wrap to the more modern and flexible BT Panorama platform (transition to be completed in FY21); and — Moved 16 super products into our new BT Super product (to be completed by the end of 2021). Simplifying products for customers To improve customer service, we must simplify the way we operate; this includes streamlining our products and digitising processes. One such initiative is the migration of customers to newer and more flexible products which will ultimately allow us to close a raft of legacy products that are no longer for sale. Other initiatives contributing to simpler and better customer experience in FY20 include: Consumer — Implemented over 50 changes to our mortgage process to streamline applications; and — Removed 40 fees (out of ~200) from over 40 systems – 20 more will go in FY21. Business — Migrated around 14,000 St.George Everyday Banking accounts and closed five products; — Removed 11 fees across Westpac, St.George, Bank of Melbourne and Bank SA products; and — Simplified our Merchant offering, including the closure of 29 legacy products. 3943 Westpac AR20 Cov-p33_V40.indd 26 3943 Westpac AR20 Cov-p33_V40.indd 26 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT  27 Transforming digital We are modernising and simplifying our technology, using digital to streamline and automate processes and lift our data capabilities to support risk management and a better customer experience. The events of this year have emphasised the need to operate using online channels. Our people have responded to a huge increase in demand for online services. Developments this year have included: — Opening new accounts and providing card access to elderly customers to avoid having to enter a branch; — Developing online forms to manage customer demand for payment deferrals; — Expanding the use of the new payments platform for St.George customers; — Introducing a COVID-19 chatbot to better assist Australian customers with queries; — Being one of the first banks to enable access to data as part of the Open Banking initiative; — Launching (with other Australian banks) a new blockchain technology to digitise the bank guarantee process; — Expanding WIB’s digital banking platform – to make it easier for corporates to manage their balance sheets; and — Creating new digital processes in New Zealand including digital credit submissions, complaints capture, and online forms for COVID-19 related assistance. We are using digital to streamline and automate processes CASE STUDY Central to our digital transformation has been the need to improve data quality and data management. We have established a data quality and management assessment dashboard, a series of metrics assessing data quality and our data infrastructure. All the metrics improved over the year due to: — Introducing more central oversight to data quality and management; — Implementing data quality measurement and monitoring across the Group; and — Implementing a new data certification process for new and changed processes. NEW MOBILE APP BRINGS SIMPLICITY Westpac’s new app launched to 240,000 customers at the end of the year. It will be available to all customers who use iPhones in early 2021 and an Android version is expected to be rolled out by the end of that year. The app simplifies what customers do most and makes everything else easier. Developed in collaboration with Apple and Google, customers can initiate payments without opening the app via Apple’s intelligent assistant Siri. Other features include drag and drop transfers, finding things quicker with ‘smart search’, start Apple Pay setup with a single tap, establishing a ‘card hub’ that keeps track of plastic and personalising the app with wallpapers. More features will be rolled out in 2021. “Our Digital and GroupTech teams have listened to customers and reimagined our mobile banking experience. Customers told us they wanted simpler and faster banking. We’ve simplified the navigation and payments are faster to friends and family,” says Martine Jager, Chief Digital & Marketing Officer. “This is a significant leap for Westpac and sets a solid foundation for us to build on in the future with more features and experiences.” 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 27 3943 Westpac AR20 Cov-p33_V40.indd 27 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  28 28 WESTPAC GROUP 2020 ANNUAL REPORT OUR PRIORITIES Perform Improving performance by building customer loyalty and growth through service, sharpening our focus on returns, and resetting our cost base. A strong balance sheet and engaged workforce form the foundation of performance. Holly Rogers, Westpac Personal Banking Advisor 3943 Westpac AR20 Cov-p33_V40.indd 28 3943 Westpac AR20 Cov-p33_V40.indd 28 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT  29 We are focused on simplifying and streamlining our operations so our people can get on and do what they do best, serve customers.” DIGITAL ENHANCEMENTS DURING COVID-19 The impact of COVID-19 was both significant and rapid. Thousands of customers needed urgent help when they had to stop work or close their business. The rise in requests led to increased call wait times which was frustrating for customers. In response, we created a digital solution for customers to apply for an immediate repayment deferral online or via mobile, giving instant cash flow relief. It also allowed customers to exit or extend their support package. This new solution helped many Australians find peace of mind in a time of immense stress. It also freed up the time of our people to support those customers with more complex solutions. “I’m incredibly proud of the way our people rallied to help customers in need – it’s a great example of how digital can simplify and instantly make it easier for customers,” says Dhiren Kulkarni – who leads our Consumer Digital team. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N Helping when it matters – a core commitment Helping Australians and New Zealanders succeed has been behind our success for over 200 years. However, this year’s challenges and uncertainties have tested us. While we retained our number one service ranking in Business Banking1,2 against the other major Australian banks, we remained at number three in Consumer3. In New Zealand we are fourth of the major banks in service but we have been closing the gap this year. Our people have been behind our success in Business banking, responding to the environment and working tirelessly to support customers and businesses through the ups and downs of the year. Australian Consumer NPS has improved over the year but our rank has not increased. In part, this was because we did not adequately keep up with increased demands for assistance in our Contact Centres. In addition, some of our offshore partners were disrupted by lockdowns, which impacted service in mortgages. Supporting customers when it matters most is one of our core commitments and strengths. Our people stepped up to the extraordinary events of the year, by ensuring we remained open for business, by supporting customers in their transition to contactless banking and by helping customers establish loan repayment deferral arrangements. We are focused on simplifying and streamlining our operations so our people can get on and do what they do best. #1 Business Banking NPS ranking2 #3 Consumer NPS ranking3 1 Net Promoter Score measures the net likelihood of recommendation to others of the customer’s main financial institution for retail or business banking. Net Promoter ScoreSMis a trademark of Bain & Co Inc., SatmetrixSystems, Inc., and Mr Frederick Reichheld. Using a 11 point numerical scale where 10 is ‘Extremely likely’ and 0 is ‘Extremely unlikely’, Net Promoter Score is calculated by subtracting the percentage of Detractors (0-6) from the percentage of Promoters (9-10). 2 Source: DBM Consultants Business Atlas, March – August 2020, 6MMA. MFI customers, all businesses. 3 Source: DBM Consultants Consumer Atlas, March – August 2020, 6MMA. MFI Westpac Group customers. 3943 Westpac AR20 Cov-p33_V40.indd 29 3943 Westpac AR20 Cov-p33_V40.indd 29 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  30 Helping customers through COVID-19 and natural disasters COVID-19 has changed many aspects of life, including how we bank. Cities have at times been deserted, the use of cash has dramatically fallen, and demands on our contact centres have escalated. Vulnerable customers, many of whom prefer face-to-face banking, have not been able to visit branches. In short, many customers are doing it tough. We were the first major bank to offer customers a COVID-19 relief package on 11 February 2020 and responded quickly by redirecting resources to where they were needed most; closing some branches, and helping customers adopt to new ways of banking. We worked hard to help those in financial difficulty by providing repayment deferrals and bridging facilities for businesses ahead of government support payments. Many customers still need support and we will continue to work constructively with them to determine the most appropriate options. Workplace COVID-19 hygiene and safety measures in place, including temperature checking stations SUPPORTING CUSTOMERS ~175k mortgage deferral packages ~40k deferrals for businesses ~220k early release superannuation applications paid PROVIDING CRITICAL BANKING SERVICES AND INFRASTRUCTURE >90% of branch network remained open1 1.5k new employees recruited to our customer service teams2 SUPPORTING EMPLOYEES TO WORK EFFECTIVELY ~22k (85%) employees working from home1 1.3m masks provided to employees 1m+ hours of audio and video calls Updated policies and standards to help protect the physical and mental health of our people STANDING BEHIND THE ECONOMY AND COMMUNITIES Supported local community organisations and social enterprises through Westpac Foundation grants and other charitable donations Maintained focus on customers and communities affected by bushfires 1 At the peak of the COVID-19 restrictions across Australia. 2 March to September 2020. 3943 Westpac AR20 Cov-p33_V40.indd 30 3943 Westpac AR20 Cov-p33_V40.indd 30 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT  31 CASE STUDY Many Australians faced the impacts of prolonged drought, devastating bushfires and storms over the year. We helped customers through a range of support packages.” Lloyd Pigram, St.George Ulladulla branch manager, with customer, Lyn Grey, at her Lake Conjola property Recovering from natural disasters HELPING THROUGH BUSHFIRES Over the year, many Australians faced the impacts of prolonged drought as well as devastating bushfires and storms. Large areas of bushland, numerous farms, and townships were severely affected. In some cases, communities were evacuated and homes and businesses destroyed. We helped customers back onto their feet through a range of customer support packages, including: Drought – extended our support to customers under a new drought assistance package; and a $100 million fund to provide carry-on finance loans of up to $1 million to existing eligible Westpac agribusiness customers at a heavily discounted variable interest rate. Bushfires – provided $3.8 million in emergency cash grants to customers; and around 1,980 disaster relief packages. We also received 603 home and contents insurance claims, with total claims from bushfires currently estimated at over $37 million. In addition, we donated over $1.4 million to community groups and charities, including Financial Counselling Australia, State-based volunteer fire services and the Foundation for Rural and Regional Renewal. For more on our bushfire response, see our Sustainability Performance section on page 37. On New Year’s Eve in 2019, bushfires ravaged the NSW South Coast and swept through the seaside village of Lake Conjola. Many properties were taken, including the home of St.George customers, Lyn and her 92-year-old mother, Sharon. “We lost everything. All that was left of our family home of 25 years was a pile of ash and rubble. Our photos, our memories – everything,” says Lyn. Lyn has been a St.George customer since 1980, when she bought her first home. Since then, Lyn and Sharon have kept close ties with their local Ulladulla branch. As part of their weekly trip to town, they stop in to see the team and branch manager, Lloyd Pigram. When Lloyd heard the news, he got straight in touch, and arranged a $2,000 emergency grant to help the family back onto their feet. “Lloyd has been a great support, and the grant really helped us through the early stages,” says Lyn. Lyn and Sharon’s property has been cleared and they are waiting for planning approval before building starts on their new home. “Like a number of other customers, Lyn and Sharon have been through so much,” says Lloyd. “It’s been humbling to witness their resilience. They deserve every second of happiness their new home brings.” $2,000 emergency grant provided by St.George Bank to help get back on their feet 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 31 3943 Westpac AR20 Cov-p33_V40.indd 31 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  32 A clear purpose Helping Australians and New Zealanders succeed In 2020, our people developed a new purpose, which has been supported by a refreshed set of values and behaviours. Our five values – helpful, ethical, leading change, performing, simple (or HELPS) – guide the way and help us achieve our purpose ‘Helping Australians and New Zealanders succeed’. A set of behaviours brings these values to life, making it clear for employees what is expected of them. HELPFUL Passionate about providing a great customer experience ETHICAL Trusted to do the right thing LEADING CHANGE Determined to make it better and be better PERFORMING Accountable to get it done SIMPLE Inspired to keep it simple and easy A motivated workforce with a strong performance ethic Great service is underpinned by a highly motivated workforce who are capable, engaged and driven by a set of clear values. In responding to the challenges of the year, our people have lived our values of being helpful and ethical, caring for customers in difficulty. However, some elements of our culture have held us back, particularly in the area of risk. This was highlighted in our 2018 Culture, Governance and Accountability (CGA) self-assessment. This is now changing. We have commenced a culture program that will build on our strengths of helping when it matters, care and empathy. The program focuses on creating a simpler and stronger business with high-performing teams where everyone knows their role in delivering for customers, and is able to constructively challenge and raise issues early. At the same time, it will help us to turn around the aspects of our culture that are holding us back, such as complexity, slow decision making and diluted accountability. Our new purpose and simplified values and behaviours also support this cultural change. Despite the challenges faced over the year, employee loyalty and support has been little changed. Employee commitment was 73% at September 2020, up from 72% at the end of FY19. 3943 Westpac AR20 Cov-p33_V40.indd 32 3943 Westpac AR20 Cov-p33_V40.indd 32 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT  33 Strong balance sheet and improved capital efficiency Maintaining the strength of our balance sheet while improving capital efficiency is critical in this environment. To maintain capital strength, we had to make some difficult decisions over the year including raising capital in November 2019, and not paying the 2020 interim dividend. We recognise that many shareholders rely on dividends, especially self-funded retirees. However, given the environment and circumstances at the time, this decision was considered to be in the best long-term interests of Westpac and of shareholders. Our capital position is strong and our CET1 capital ratio was 11.13% at 30 September 2020. Funding and liquidity also remain robust, and well above APRA’s minimums. This solid foundation allows us to continue supporting customers and the economy through this challenging time. Improved capital efficiency will also emerge as we exit businesses in our Specialist Businesses division. In addition to not being core to our future, these activities typically have capital returns below the Group average. We are also reconsidering other low-returning products/services where a path to acceptable returns is difficult to achieve. Restoring mortgage growth Since 2019, our mortgage portfolio has grown below system. This is a result of several factors including accelerated repayments, the early implementation of expanded mortgage assessment criteria in 2019, operational issues in processing mortgages including the shut-down of certain offshore partners. Restoring mortgage growth is a priority and our Mortgages Line of Business has helped to identify issues in our processes. We are now implementing the necessary changes which aim to improve growth relative to system in the year ahead. Productivity – a continual focus As growth slows, improving efficiency becomes even more important. Over recent years we have improved efficiency by between $300 million and $500 million annually. In 2020, we saved over $400 million of costs, although this was offset by inflationary cost increases, higher risk and compliance costs and additional resources devoted to our COVID-19 response. While our priority remains supporting customers through this difficult time, we have not lost sight of the need to reset our cost base and fundamentally improve efficiency. In part, efficiency will likely improve as we simplify our business and reduce complexity. Additional opportunities are also expected to emerge from digital, and assessing opportunities to reduce our corporate footprint. We plan to announce a cost reset program in 2021. Restoring mortgage growth is a key priority CASE STUDY SHIFTING FOCUS DURING COVID-19 Manly Spirits founders, Vanessa and David Whittaker (pictured), made some fast decisions this year to keep their business operating. With a tasting bar in Brookvale in Sydney’s northern beaches, the craft spirits distillery has built a strong local following. Its spirits are also sold across Australia through independent and large retailers with international exports growing rapidly. “Our customers love our products and that’s reflected in our rate of growth over the last five years,” says David. “Before COVID-19 hit, we had just taken on more bar staff and extended our business loan to expand the production of dark spirits.” With the pandemic came social distancing and bar closures and the business shifted its focus to retail outlets. It also diverted resources to the manufacture of sanitiser, supplying hospitals and the Rural Fire Service, among others. “Our capabilities in manufacturing and alcohol along with Westpac’s financial support allowed us to pivot quickly,” says David. “This kept our people employed and revenue flowing while meeting an important community need.” 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20 Cov-p33_V40.indd 33 3943 Westpac AR20 Cov-p33_V40.indd 33 31/10/20 4:45 pm 31/10/20 4:45 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  34 WESTPAC GROUP 2020 ANNUAL REPORT 3943 Westpac AR20_34-55_V40.indd 34 3943 Westpac AR20_34-55_V40.indd 34 31/10/20 4:46 pm 31/10/20 4:46 pm BUILDING ASUSTAINABLE FUTUREAs one of Australia’s largest financial institutions, we recognise our role in helping to create positive social, economic and environmental impact. Every year, through our sustainability materiality assessment process, we identify the business opportunities and challenges that matter most to our stakeholders. This helps inform our approach to how we create long-term sustainable value for our customers, employees, suppliers, shareholders and communities.2020 most material sustainability topicsFounding bank and signatory to the Principles for Responsible Banking announced in September 2019.Supporter of the United Nation’s SustainableDevelopment Goals (SDGs) and its agenda for action on improving the wellbeing of present and future generations.Signatory to the Business Coalition Statement on Climate in 2015, which highlights our support for the Paris Climate Agreement to limit global warming to less than two degrees Celsius above pre-industrial levels.Founding signatory to the United Nations Global Compact and a supporter of the UN’s ‘Protect, Respect, Remedy’ framework.Climate change reporting aligned to the recommendations of the Task Force on Climate-related Financial Disclosures. 1 GRI Index available in 2020 Sustainability Appendix.For more information on our sustainability performance and sustainability materiality assessment process, including further commentary on our material topics, see our 2020 Sustainability Performance Report.Our 2018-2020 Sustainability StrategyWe update our sustainability strategy every three years. Our last sustainability strategy was launched in 2017 and centred on three priorities where we believed we could have the greatest impact and create sustainable long-term value by:The following pages assess our progress on this strategy in its final year, ahead of the launch of our 2021-2023 Sustainability Strategy. We have made good progress over the last three years meeting or exceeding over 80% of the measures set in 20172. Helping people make better financial decisionsCultureFundamentalsHelping people by being there when it matters most to themHelping people create a prosperous nation Our approach to identifying our material sustainability topics is aligned to the Global Reporting Initiative (GRI) Standards (2016)1 and the AA1000 AccountAbility Principles Standard (2018). Conduct and culturePoor conduct has eroded public trust in Westpac and the financial services sector. In response, we have plans in place designed to strengthen our culture, and improve our processes to deliver better customer outcomes.Governance and risk management We have enhanced our governance this year and are building a stronger risk management capability. This change is critical to the reputation and financial strength of the Group.Financial performanceDelivering sound financial performance and a strong balance sheet underpins our ability to support customers, the economy and the Group’s long-term success.Changing regulatory landscapeSupervision and regulation in the financial services sector continues to evolve, creating change and complexity in how we operate.Customer satisfaction and experienceCustomers want banking to be easier, simpler and more efficient. At the same time, customer needs are becoming more complex.Customer vulnerability and hardshipOur ability to support customers in times of hardship and anticipate when they are vulnerable allows us to help when it matters most.Customer safety and accessMaintaining an environment where customers can safely and conveniently access our products and services.Digital product and service transformationDigitisation creates opportunities to improve efficiency and deliver new and improved services where, how and when customers choose to engage with us.Information security and data privacyMaintaining confidentiality and the security of our systems and data is paramount in retaining the trust and confidence of our stakeholders.Workforce wellbeing and talent retentionMaintaining a secure, flexible and supportive workplace helps us attract, retain and develop our people.Climate change risks and opportunitiesAs a major financial institution, we have an important role in managing the risks and opportunities of climate change. Supporting communities in need As an integral service provider in the communities in which we operate, we support those in need including in times of emergency and recovery. We also support initiatives that address complex societal and economic issues.Human rights business riskWe seek to positively impact human rights in our value chain through our role as an employer in fostering inclusion and diversity, our lending, understanding our role in supporting Indigenous communities, our investments in funds, and through our supply chain.2 Total number of measures met divided bytotal number of measures.WESTPAC GROUP 2020 ANNUAL REPORT 35 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_34-55_V40.indd 35 3943 Westpac AR20_34-55_V40.indd 35 31/10/20 4:46 pm 31/10/20 4:46 pm BUILDINGASUSTAINABLE FUTUREAs one of Australia’s largest financial institutions, we recognise our role in helping to create positive social, economic and environmental impact. Every year, through our sustainability materiality assessment process, we identify the business opportunities and challenges that matter most to our stakeholders. This helps inform our approach to how we create long-term sustainable value for our customers, employees, suppliers, shareholders and communities.2020 most material sustainability topicsFounding bank and signatory to the Principles for Responsible Banking announced in September 2019.Supporter of the United Nation’s Sustainable Development Goals (SDGs) and its agenda for action on improving the wellbeing of present and future generations.Signatory to the Business Coalition Statement on Climate in 2015, which highlights our support for the Paris Climate Agreement to limit global warming to less than two degrees Celsius above pre-industrial levels.Founding signatory to the United Nations Global Compact and a supporter of the UN’s ‘Protect, Respect, Remedy’ framework.Climate change reporting aligned to the recommendations of the Task Force on Climate-related Financial Disclosures. 1 GRI Index available in 2020 Sustainability Appendix.For more information on our sustainability performance and sustainability materiality assessment process, including further commentary on our material topics, see our 2020 Sustainability Performance Report.Our 2018-2020 Sustainability StrategyWe update our sustainability strategy every three years. Our last sustainability strategy was launched in 2017 and centred on three priorities where we believed we could have the greatest impact and create sustainable long-term value by:The following pages assess our progress on this strategy in its final year, ahead of the launch of our 2021-2023 Sustainability Strategy. We have made good progress over the last three years meeting or exceeding over 80% of the measures set in 20172. Helping people make better financial decisionsCultureFundamentalsHelping people by being there when it matters most to themHelping people create a prosperous nation Our approach to identifying our material sustainability topics is aligned to the Global Reporting Initiative (GRI) Standards (2016)1 and the AA1000 AccountAbility Principles Standard (2018). Conduct and culturePoor conduct has eroded public trust inWestpac and the financial services sector. In response, we have plans in place designedto strengthen our culture, and improve our processes to deliver better customer outcomes.Governance and risk management We have enhanced our governance this year and are building a stronger risk management capability. This change is critical to the reputation and financial strength of the Group.Financial performanceDelivering sound financial performance and a strong balance sheet underpins our ability to support customers, the economy and the Group’s long-term success.Changing regulatory landscapeSupervision and regulation in the financial services sector continues toevolve, creating change and complexity in how we operate.Customer satisfaction and experienceCustomers want banking to be easier, simpler and more efficient. At the same time, customer needs are becoming morecomplex.Customer vulnerability and hardshipOur ability to support customers in times of hardship and anticipate when they are vulnerable allows us to help when it matters most.Customer safety and accessMaintaining an environment where customers can safely and conveniently access our products and services.Digital product and service transformationDigitisation creates opportunities to improve efficiency and deliver new and improved serviceswhere, how and when customers choose toengage with us.Information security and data privacyMaintaining confidentiality and the security ofour systems and data is paramount in retaining the trust and confidence of our stakeholders.Workforce wellbeing and talent retentionMaintaining a secure, flexible and supportiveworkplace helps us attract, retain and develop our people.Climate change risks and opportunitiesAs a major financial institution, we havean important role in managing the risks and opportunities of climate change. Supporting communities in need As an integral service provider in the communities in which we operate, we support those in need including in times of emergency and recovery. We also support initiatives thataddress complex societal and economic issues.Human rights business riskWe seek to positively impact human rights in our value chain through our role as an employer in fostering inclusion and diversity, our lending, understanding our role in supporting Indigenous communities, our investments in funds, and through our supply chain.2 Total number of measures met divided by total number of measures.1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION 36 WESTPAC GROUP 2020 ANNUAL REPORT BUILDING A SUSTAINABLE FUTURE Sustainability performance progress Progress highlights in the final year of our 2018-2020 Sustainability Strategy. New and simpler products and services Customers want simpler, smarter and smoother banking. We continue to review our products and processes to reduce complexity and improve service. To improve the home ownership experience, we now have digital tools to help customers prepare for their first home loan appointment, upload documents, accept a loan offer in one click and track their application via online banking through to settlement, with reminders and alerts. With 80% of digital customers using their phone for banking, we are rolling out a new Westpac personal banking app, designed for a faster and easier experience, with more intuitive navigation and quicker payments. Helping people make better financial decisions During the past year we delivered a range of financial education programs reaching an estimated one million individuals, as well as businesses, not for-profit organisations and community groups through Westpac’s Davidson Institute in Australia and the Managing Your Money program in New Zealand. Together with the launch of a new online platform, we introduced new easy to understand content, including a financial fitness course. Other initiatives include financial capability resources for young Australians via Year 13 and through our new Instagram TV channel; women via Ruby Connection; and older Australians via Starts at 60. Alignment to the sustainable development goals 4 QUALITY EDUCATION 8 DECENT WORK AND ECONOMIC GROWTH 10 REDUCED INEQUALITES 17 PARTNERSHIPS FOR THIS GOALS 3943 Westpac AR20_34-55_V40.indd 36 3943 Westpac AR20_34-55_V40.indd 36 31/10/20 4:46 pm 31/10/20 4:46 pm  37 Helping those in need of extra care We continue to improve support for customers in vulnerable circumstances. This year, we introduced an enterprise- wide standard to help our people support customers in vulnerable circumstances. In addition, we developed our Family or Domestic Violence Position Statement, which outlines the principles we apply when supporting affected customers. We offer a variety of resources to assist customers and their families experiencing challenging circumstances such as the loss of a loved one, divorce or separation, or elder financial abuse. Following the COVID-19 restrictions, we offered support for elderly customers and people experiencing vulnerability to set up contactless banking. Remote banking support Westpac Remote Services supports Aboriginal and Torres Strait Islander customers in remote communities who may face geographic, language and cultural barriers to accessing financial services. First piloted in 2018, this year we expanded Yuri Ingkarninthi, our Indigenous Connection call centre, to customers in all States and Territories, conducting over 18,000 customer conversations to support a variety of remote banking needs. These included access to cards or cash, establishing telephone and internet banking and resolving issues related to scams and fraud. Alignment to the sustainable development goals 8 DECENT WORK AND ECONOMIC GROWTH 10 REDUCED INEQUALITITIES 17 PARTNERSHIPS FOR THE GOALS 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N Helping people by being there when it matters most to them Our teams are working hard to support customers, communities and the economy throughout the COVID-19 pandemic. Our initial response focused on protecting our people and customers while remaining open for business and putting in place a range of customer support packages such as mortgage and business loan deferrals. Our focus has now shifted to working with customers who need more individual support. Before COVID-19, many customers and communities were, and continue to be, impacted by drought and last summer’s devastating bushfires. Support packages included mortgage and business loan deferrals, emergency cash grants and a $100 million fund to provide carry-on finance loans of up to $1 million to existing eligible drought affected agribusiness customers at a discounted variable interest rate. We approved over 75,000 applications for financial assistance from customers experiencing financial hardship in FY20. Supporting more than 24,000 customers experiencing vulnerability through our specialist teams 3943 Westpac AR20_34-55_V40.indd 37 3943 Westpac AR20_34-55_V40.indd 37 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  38 Helping people create a prosperous nation To help our people develop their skills, we provide a range of structured and self- paced learning experiences, including virtual coaching support to help bankers have great customer conversations and deepen relationships. We have also partnered with leading universities to offer employees a range of micro-credentials in disciplines such as risk, lending and service. 719 jobs Westpac Foundation1 grants to social enterprises helped create 719 jobs2 for vulnerable Australians Delivered over $150 million in community investment3 Helping create jobs for vulnerable Australians Westpac Foundation1 paid $2.3 million in grants to help organisations that provide employment, education and training support for some of Australia’s most vulnerable. Given COVID-19’s impact, the Foundation brought forward grant payments and expanded its non-financial support, working with industry partners to offer access to pro bono skills. This year, Westpac Foundation also partnered with the Foundation for Rural and Regional Renewal (FRRR) to award grants to 50 community organisations in rural, regional and remote communities affected by drought, bushfires and COVID-19. CASE STUDY THE BREAD AND BUTTER PROJECT The Bread and Butter Project is Australia’s first social enterprise bakery, investing all its profits into training and employment for refugees and asylum seekers. As a wholesale bakery, the closures of cafes and restaurants due to COVID-19 initially resulted in a 60% loss in revenue. With Westpac Foundation’s support, the Project expanded its distribution to Woolworths Metro stores. This helped the bakery increase sales and keep its bakers and trainees employed. 1 Refer to footnote on page 17. 2 Jobs created through the Westpac Foundation job creation grants to social enterprises are for the year ended 30 June 2020. 3 Excludes commercial sponsorships. 3943 Westpac AR20_34-55_V40.indd 38 3943 Westpac AR20_34-55_V40.indd 38 31/10/20 4:46 pm 31/10/20 4:46 pm WESTPAC GROUP 2020 ANNUAL REPORT  CASE STUDY A QUANTUM ALPHABET Quantum physicist and Westpac Scholar Dr Jacquiline Romero believes the key to online security could lie in a ‘quantum alphabet’ made not from letters, but from different shapes of light. Dr Romero is exploring its potential through her Westpac Research Fellowship at The University of Queensland. “I plan to use my Fellowship as an opportunity to showcase what is possible and inspire young scientists to follow their passion.” “The Fellowship is expanding my network both inside and outside of academia, which encourages a broader conversation beyond physics. Talking to others in the Westpac Scholars network, you get a sense that they sincerely want to help you achieve your vision. That backing helps me be bolder and more ambitious.” 39 I plan to use my Fellowship as an opportunity to showcase what is possible and inspire young scientists to follow their passion.” Dr Jacquiline Romero, Westpac Scholar Tomorrow’s leaders Westpac Scholars Trust4 awards 100 scholarships each year to individuals who have the ideas and drive to help shape the future of Australia. Since beginning in 2014, Westpac Scholars Trust has awarded scholarships valued at $24.6 million in partnership with 22 universities across Australia. Westpac Scholars are talented Australians focused on tackling a range of issues, from finding treatments to rare diseases, to creating innovative businesses that help solve social problems. Today there are almost 500 Westpac Scholars. $3.9m In full year 2020 Westpac Scholars Trust awarded $3.9 million in educational scholarships to the next 64 Westpac Scholars 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 4 Westpac Scholars Trust (ABN 35 600 251 071) is administered by Westpac Scholars Limited (ABN 72 168 847 041) as trustee for the Westpac Scholars Trust. Westpac Scholars Trust is a private charitable trust and neither the Trust nor the Trustee are part of Westpac Group. Westpac provides administrative support, skilled volunteering, and funding for operational costs of Westpac Scholars Trust. 3943 Westpac AR20_34-55_V40.indd 39 3943 Westpac AR20_34-55_V40.indd 39 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  40 Australia’s largest financier of greenfield renewable energy projects for the past three years5 - see Climate change on page 46 for more information Social and affordable housing During the year we were joint lead managers for National Housing Finance and Investment Corporation (NHFIC) on two social bonds, including the largest social bond by an Australian issuer. Funds raised by the bonds will support community housing providers across New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia, financing over 4,700 properties, including over 1,100 new dwellings. Our lending to the social and affordable housing sector increased to $1.7 billion6. This reflects a change in market dynamics, with funding sources to the sector more diversified. We continue to support NHFIC and its clients. Safer Children, Safer Communities One of the commitments in our Response Plan to the AUSTRAC proceedings was to develop a program to help reduce the human impact of financial crime. The program involves a series of actions and investments we intend to deliver in Australia and across the Asia Pacific Region over three years to make a meaningful impact on child safety and protection. To guide our approach, we established the Safer Children, Safer Communities Roundtable of experts in human rights, child safety, online safety and law enforcement. Progress this year included developing strategic partnerships with International Justice Mission to provide $18 million over three years to tackle online sexual exploitation of children in the Philippines, and with Save the Children (Australia) to provide $6 million over six years to support the delivery of its ‘Protect Children – Philippines’ project. We are working with an international non-government organisation to invest $25 million in cross-industry data sharing projects to better detect, monitor, report and prevent harm to children associated with financial crime. Most recently, we launched a new Impact Grants program, allocating $9.2 million to support community organisations and not- for-profits working across a range of child safety and protection initiatives in Australia. Principles for Responsible Banking In 2017, we were a founding bank and signatory to the Principles for Responsible Banking (PRB), an initiative of the United Nations Environment Programme Finance Initiative (UNEP FI). Last year, we became the first bank globally to report in alignment with the draft principles. For this year’s PRB Index, see the 2020 Sustainability Appendix. Alignment to the sustainable development goals 4 QUALITY EDUCATION 8 DECENT WORK AND ECONOMIC GROWTH 9 INDUSTRY,INNOVATION AND INFRASTRUCTURE 10 REDUCED INEQUALITIES 1 SUSTAINABLE CITIES AND COMMUNITIES 12 RESPONSIBLE CONSUMPTION AND PRODUCTION 13 CLIMATE ACTION 17 PARTNERSHIPS FOR THE GOALS 5 Source: IJGlobal, September 2020. 6 Refers to the cumulative Total Approved Exposure to customers in the Social and Affordable Housing sector since 2013. For full definition, see the 2020 Sustainability Appendix. 3943 Westpac AR20_34-55_V40.indd 40 3943 Westpac AR20_34-55_V40.indd 40 31/10/20 4:46 pm 31/10/20 4:46 pm WESTPAC GROUP 2020 ANNUAL REPORT  Average time to resolution for complaints7 is 6.5 days, compared to 9 days in 2019 A culture that is caring, inclusive and innovative We are working to address the culture shortcomings outlined in the Culture, Governance and Accountability (CGA) self-assessment, with a program that builds on our strengths of caring and empathy, while turning around aspects of our culture which have held us back, such as complexity and diluted accountability. Our new purpose and simplified values and behaviours are also supporting this cultural change. Promoting an inclusive society, where our workforce reflects our customers Recognising and embracing the diversity of our people helps us to create an inclusive culture where employees feel they belong, are encouraged to bring new ideas and understand the diversity of the communities we serve. We have introduced a new Cultural Diversity Leadership Shadowing Program, with 210 employees participating in the first year. Westpac was included in the Bloomberg Gender Equality Index for the fourth consecutive year. We welcomed 115 new Aboriginal or Torres Strait Islander employees and increased the regional footprint of our Aboriginal and Torres Strait Islander traineeship program, which provides paid full-time or school- based traineeships to build experience in financial services. We also launched the second intake of our Tailored Talent program for those on the Autism spectrum. This program received Autism Australia’s 2020 Aspect Advancement Award. Improving the way we resolve customer issues Over the past two years, we have made significant changes to the management of customer complaints, both in terms of our processes and by identifying and addressing root cause issues that lead to complaints. Initiatives include complaints skilling sessions for bankers with a focus on first point resolution, an updated Complaints Management Standard and continuing to make information on how to make a complaint easier to find. We have also rolled out a new complaints management system to help improve the customer experience and for better compliance and reporting. We also continue to refund customers where we have not got it right through our customer remediation programs. 41 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 7 Group Internal Dispute Resolution complaints excluding WIB complaints. 3943 Westpac AR20_34-55_V40.indd 41 3943 Westpac AR20_34-55_V40.indd 41 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  42 Continuing to make progress on the sustainability fundamentals Health, safety and wellbeing Our priority through COVID-19 has been to protect our people while remaining open for business. We have implemented a range of measures to support the health and wellbeing of employees, including enhanced cleaning, providing personal protective equipment, temperature checks in larger sites and installation of polycarbonate screens in branches. Where possible, employees are working remotely, with over 20,000 working from home. We also introduced special leave provisions to address illness, self-isolation and changing childcare responsibilities. Over 2,000 leaders have completed training in the early intervention and prevention of mental ill-health, and the importance of supportive leadership. Since COVID-19, we have introduced new health and wellbeing resources, including for parents and carers balancing home and work commitments, and for employees exposed to increased risks of domestic and family violence. SUSTAINABILITY-LINKED LOAN Westpac NZ and Contact Energy entered into a $50 million, four-year sustainability-linked loan facility, one of the first of its kind in New Zealand. The loan’s incentive targets align with continual improvement in Contact Energy’s Environmental Social and Governance (ESG) performance, including assessment of its climate strategy, electricity generation mix, corporate governance and stakeholder engagement. Sustainable lending and investment Many corporate and institutional customers are moving to more sustainable business models. We offer a range of sustainable finance products and services to support them in the transition, including sustainability-linked loans that incentivise borrowers to meet pre-determined sustainability targets. During the year, we updated our Sustainability Risk Management Framework and ESG Credit Risk Policy, developed tools to support bankers when considering ESG risks, and enhanced our position statements including on climate and human rights. Human rights See Human rights on page 44. 3943 Westpac AR20_34-55_V40.indd 42 3943 Westpac AR20_34-55_V40.indd 42 31/10/20 4:46 pm 31/10/20 4:46 pm WESTPAC GROUP 2020 ANNUAL REPORT  43 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N C02 Maintained carbon neutral status 75% Renewable energy represents 75% of our lending to the electricity sector A+ A+ rating for BT’s sustainable investment strategy and governance through the Principles for Responsible Investment (PRI) Environment1 We are committed to reducing the climate change impacts of our operations. We achieved an 11% reduction in Scope 1 and Scope 2 greenhouse gas emissions in 2020 compared to 2019, and a 27% reduction since 20162. The reduction over the last four years has been driven by commercial and retail site consolidation and refurbishments as well as onsite solar installations. Reduced staff numbers at corporate sites due to the COVID-19 pandemic contributed approximately 2% of the reported reduction in Scope 1 and 2 emissions this year. Responsible sourcing We work with over 8,600 supplier partners and during the year procured goods and services worth $6.5 billion across Australia and New Zealand. In response to the Modern Slavery Act 2018 (Cth), we have published a new Responsible Sourcing Code of Conduct, updated our Responsible Sourcing assessment tool to increase our ability to identify risks of modern slavery and expanded the scope of our assessment activities to suppliers in high risk categories, outside of our Top 100 by spend. We have commenced a redesign of the Responsible Sourcing Program to enhance our methods of identifying ESG risks and take steps to mitigate and manage ESG risks across different industries and deeper into our supply chain. Our supplier inclusion and diversity program has continued to grow with $19 million spent with diverse suppliers during the year, including $5.9 million with Indigenous-owned businesses. Community and social impact Through our community programs, we support our employees to make a difference in the issues and causes important to them. More than 3,000 employees participated in our volunteering programs, sharing their skills or time to support community partners and social enterprises. In addition, over $2.7 million was donated to more than 780 charities through our Matching Gifts program, which matches employee donations to eligible Australian charities dollar-for-dollar. FIRST GREEN LOAN IN SUPERANNUATION This year, we launched Australia’s first green loan developed for the superannuation sector. Working with Local Government Super, the $65 million green loan was structured by determining which buildings in its Local Government Property Fund met international standards for green buildings set by the Climate Bonds Initiative. Environmental footprint data as at 30 June 2020, unless otherwise stated. 1 2 FY16 Scope 1 and 2 baseline: 147,620 tCO2 -e. For more detailed information on our sustainability approach, performance and metrics, please visit westpac.com.au/sustainability or see our 2020 Sustainability Performance Report and Sustainability Appendix. 3943 Westpac AR20_34-55_V40.indd 43 3943 Westpac AR20_34-55_V40.indd 43 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  44 WESTPAC GROUP 2020 ANNUAL REPORT BUILDING A SUSTAINABLE FUTURE Human rights Respecting and advancing human rights helps us to achieve our vision to help Australians and New Zealanders succeed. It reflects our belief that all people are entitled to basic rights and freedoms without discrimination. Our Human Rights Position Statement and 2023 Action Plan: Our commitment to human rights Commits to 19 specific actions over the next three years; and Sets out the principles that guide our approach and helps stakeholders identify the specific policies, frameworks and other documents where those principles are applied in practice. As a major financial institution, we understand that through our activities we may impact on human rights, whether in our role as a financial services provider, lender, purchaser of goods and services, employer, or supporter of communities. We recognise we have both a responsibility to respect human rights, and opportunities to positively impact human rights, across our value chain. In particular, Westpac acknowledges and has taken accountability for its inadequate transaction monitoring to help identify potential child exploitation. Every three years, we review and update our Human Rights Position Statement and Action Plan (Human Rights Action Plan) to lay out the principles that guide our approach and help stakeholders identify the specific policies, frameworks and other documents where those principles are applied in practice. In May, we published our third Human Rights Position Statement since 2015, together with our 2023 Action Plan. This sets out nineteen specific actions to be addressed over the next three years for how we will more deeply embed respect for human rights into our business and business relationships, in line with the UN Guiding Principles on Business and Human Rights. Governance and oversight The Westpac Group Board has oversight of our approach to human rights and our management of human rights risks. Our Human Rights Action Plan is reviewed by the Executive Team and approved by the Board every three years. The Board Risk Committee considers and approves Westpac’s Sustainability Risk Management Framework (which includes human rights risks) every two years. The implementation and management of Westpac’s approach to human rights is led by Group Executives. 3943 Westpac AR20_34-55_V40.indd 44 3943 Westpac AR20_34-55_V40.indd 44 31/10/20 4:46 pm 31/10/20 4:46 pm  45 Supported the psychological health and safety of our workforce, particularly in light of the impacts of bushfires and COVID-19 Identifying our salient human rights issues Salient human rights issues are the human rights at risk of the most severe negative impact through a company’s activities and business relations. The following salient human rights have been identified as key focus areas: ROLE SALIENT HUMAN RIGHTS Financial services provider Lender Employer — Customers experiencing vulnerability due to COVID-19, serious illness and natural disasters, including bushfires — Use of our services to adversely impact on human rights — Access to services by Indigenous populations — Information security and data privacy — Labour rights and land-related human rights — Work related mental ill-health — Exclusion and discrimination Purchaser of goods and services — Unfair wages and working conditions — Modern slavery in our operations and supply chain Managing human rights issues This year, we took a number of important steps to uplift our respect for human rights, in line with the Human Rights Action Plan: — delivered extra level of care and sensitivity in the way we serve and support customers experiencing vulnerability; — progressed a significant multi-year program of work to address management of financial crime risks, including those associated with child exploitation; — commenced a series of actions and investments in Australia and across the Asia Pacific region through our Safer Children, Safer Communities work program; — updated our ESG Credit Risk Policy and our position on certain sensitive sectors to include further guidance on human rights risks and to further embed the principle of ‘risk to people’ as well as risk to the business; — supported the psychological health and safety of our workforce, particularly in light of bushfires and COVID-19; and — published our Slavery and Human Trafficking Statement for the 2019 financial year in accordance with the Modern Slavery Act 2015 (UK) and made progress to meet the requirements of the newly commenced Australian Modern Slavery Act 2018 (Cth). TAKING ACTION ON MODERN SLAVERY In response to the Modern Slavery Act 2018 (Cth), this year we have taken steps to embed its requirements across our operations and supply chain. These include: — identifying ways to better address modern slavery risk; — conducting a modern slavery risk assessment; and — identifying areas for industry collaboration. For more detailed information, see our 2020 Sustainability Performance Report, Sustainability Appendix and Sustainability Datasheet. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_34-55_V40.indd 45 3943 Westpac AR20_34-55_V40.indd 45 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  46 WESTPAC GROUP 2020 ANNUAL REPORT BUILDING A SUSTAINABLE FUTURE Climate change Westpac recognises that climate change is one of the most significant issues that will impact the long-term prosperity of the global economy and our way of life. Bomen Solar Farm in Wagga Wagga, NSW Climate-related financial disclosure We are committed to managing our business in alignment with the Paris Agreement and the need to transition to a net zero emissions economy by 2050. There is continued development in the climate change agenda and increasing interest from investors, regulators, customers and the community in our approach to this issue. This year, we further integrated management of climate change impacts into our business. Since 2018, the Group has published disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and our performance against these recommendations is summarised below. 3943 Westpac AR20_34-55_V40.indd 46 3943 Westpac AR20_34-55_V40.indd 46 31/10/20 4:46 pm 31/10/20 4:46 pm  47 Climate change: Strategy Key achievements from our 2020 Climate Action Plan over the year: CLIMATE CHANGE SOLUTIONS Provide finance to back climate change solutions — Increased lending to climate change solutions, taking total committed exposure to $10.1 billion, exceeding our target1 of $10 billion by 2020; and — Facilitated $4.8 billion for climate change solutions, exceeding our 2020 target of $3 billion. SUPPORT BUSINESSES Support businesses that manage their climate-related risks — Reduced the emissions intensity of our lending to the electricity generation sector from 0.36 tCO2 -e/MWh in 2017 to 0.25 tCO2 -e/MWh exceeding our 2020 target of 0.30 tCO2 -e/MWh; — Maintained our commitment to stringent lending standards in the thermal coal mining sector; — Supported customers’ transition strategies through sustainable finance structures, such as sustainability-linked loans – see case study page 42; and — Through BT2, continued our involvement in Climate Action 100+, an investor-led initiative to engage systemically important greenhouse gas emitters and help achieve the goals of the Paris Agreement. HELP CUSTOMERS Help individual customers respond to climate change — Provided over 3,400 natural disaster relief packages to assist customers affected by floods, bushfires and other disasters over the year – see page 31 for further details; and — Westpac New Zealand launched a Warm Up Home Loan, offering up to NZ$10,000 interest-free, for five years, to make homes healthier and more energy efficient. IMPROVE DISCLOSURE Improve and disclose our climate change performance — Reduced Scope 1 and 2 emissions by 27% since 20163 exceeding our reduction target of 9% by 2020; — Commenced renewable electricity supply from Bomen Solar Farm in Q4 2020. We expect to source over 45% of our annual electricity requirement from renewables in 2021, and are on track to meet our commitment of 100% by 2025; — Westpac New Zealand became New Zealand’s first Toitū carbon zero certified bank in 2020; and — Released our updated Climate Change Position Statement and 2023 Action Plan. POLICY ADVOCACY Advocate for policies that stimulate investment in climate change solutions — Actively engaged in industry initiatives on key climate change themes, including through the UN Principles for Responsible Banking, Australian Sustainable Finance Initiative, Australian Business Roundtable for Disaster Resilience and Safer Communities, and Climate Measurement Standards Initiative (CMSI). 1 Progress and targets for lending to climate solutions are reported on an ‘as-at’, non-cumulative basis. 2 BT’s annual climate-related disclosure can be found at bt.com.au/sustainability. 3 FY16 Scope 1 and 2 baseline: 147,620 tCO2 -e. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_34-55_V40.indd 47 3943 Westpac AR20_34-55_V40.indd 47 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  48 Aim to provide $3.5 billion new lending to climate change solutions by 2023 and $15 billion by 2030 Climate change update (continued) Strategy update In May, we released our updated Climate Change Position Statement and 2023 Action Plan (Climate Action Plan)1. Our updated Climate Action Plan describes the principles that underpin our climate change strategy, recognising that: — a transition to a net zero emissions economy is required by 2050; — economic growth and emissions reductions are complementary goals; — addressing climate change creates opportunities; — climate-related risk is a financial risk; and — collective action, transparency and disclosure matter. To address climate change risk and opportunities, our Climate Action Plan identifies three areas where we expect to direct our attention over the short, medium and long-term. We will: — help customers and communities respond to climate change; — improve the climate change performance of our operations; and — support initiatives and policies to achieve the goals of the Paris Agreement. The Climate Action Plan also identifies areas where we will continue to improve our oversight, risk management and disclosure of climate change risks and opportunities. Oversight The Board has oversight of the Group’s approach to and management of climate change and receives twice-yearly updates. Our Climate Action Plan is approved by the Board every three years. The Board Risk Committee considers and approves our Sustainability Risk Management Framework (which includes climate change risks) every two years. The management of our response to climate change is led by Group Executives. The Sustainability Council (Council), sponsored by the Group Executive, Customer and Corporate Relations, comprises senior leaders from across the Group with responsibility for managing Westpac’s sustainability agenda, including climate change. The Council meets at least quarterly and has climate change as a standing agenda item. The Council reports to the Executive Team and Board through twice-yearly updates. Various committees oversee different elements of our climate change strategy: — the Sustainable Finance Committee coordinates initiatives to achieve Westpac’s climate change solutions targets. It reports to the Council; — the Climate Change Risk Committee oversees work to identify and manage the potential impact on credit exposures from climate change-related transition and physical risks across the Group. It reports to the Group Credit Risk Committee; and — the Environment Management Committee oversees strategies and initiatives to reduce our environmental footprint, particularly targets on energy and emissions. It reports to the Council. Divisional risk committees consider the climate change dimensions of our business activities as required. During the year, the Board: — attended a training workshop led by industry experts to discuss climate change risks, investor expectations and directors’ duties; — approved the Group’s fourth Climate Action Plan in April 2020; and — noted a summary of developments in climate change in its six-monthly update. To enhance oversight of climate change we: — aligned the Climate Change Risk Committee, chaired by the Group Chief Credit Officer, to be a sub-committee of the Group Credit Risk Committee to improve oversight of climate-related financial risks; — implemented climate change updates to risk forums for major customer-facing divisions including Westpac Institutional Bank (WIB), Business division, Consumer division and Westpac New Zealand Limited; and — commenced work to enhance climate change reporting to the Board. 1 Westpac’s Climate Change Position Statement and 2023 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. 3943 Westpac AR20_34-55_V40.indd 48 3943 Westpac AR20_34-55_V40.indd 48 31/10/20 4:46 pm 31/10/20 4:46 pm WESTPAC GROUP 2020 ANNUAL REPORT  49 Risks associated with climate change have environmental, social and economic dimensions and are predicted to impact all aspects of society. Bomen Solar Farm in Wagga Wagga, NSW Managing climate-related risks Climate change risks are managed within the Group’s risk management framework. We seek to understand the potential for climate-related transition, physical and litigation risks to impact our business, in particular the possible impact on credit risk, regulatory and reporting obligations, and our reputation. Through our Climate Action Plan, we set out criteria for lending to emissions-intensive and climate-vulnerable 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. We review our Sustainability Risk Management Framework, risk appetite measures and policies ensuring the criteria set out in the Climate Action Plan are integrated. These criteria are applied at the portfolio, customer and transaction level where appropriate. Escalation of climate- related risks to relevant divisional risk committees occurs in accordance with the Sustainability Risk Management Framework. If the identified risks are not within risk appetite then the application of conditions to manage the risks may be considered, or the transaction may be declined. CLIMATE CHANGE RISK COMMITTEE We updated our Climate Change Risk Committee (CCRC) to improve oversight of climate-related financial risks. The CCRC met three times during the year. Now chaired by the Group Chief Credit Officer and reporting to the Group Credit Risk Committee, the CCRC’s objectives are to: — oversee identification, quantification and management of climate-related risks; — integrate climate-related risks into risk management frameworks, lending policies and lending guidelines; — design, execute and integrate climate scenario analysis and portfolio resilience testing; — support climate change disclosures and reporting; and — facilitate continuous improvement in climate-related risk management. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_34-55_V40.indd 49 3943 Westpac AR20_34-55_V40.indd 49 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  50 Westpac has long understood that climate-related risk is a financial risk. This is one of the reasons why we have been taking action on this issue for over a decade. This year we improved climate-related risk management by: — establishing ‘Sustainability’ as a Level 1 Risk in the Group Risk Taxonomy to enhance our focus on material sustainability risks including climate change; — realigning ownership of the Sustainability Risk Management Framework from Group Sustainability to Risk to improve integration with Group-wide risk approaches; — initiating a review of our Sustainability Risk Management Framework, Risk Appetite Statements and ESG Credit Policy to integrate the criteria set out in our new Climate Action Plan; — analysing the credit characteristics of lending in industry sectors and postcodes which may face higher risks by 2050 under climate change scenarios developed in 2018 and 2019; — completing Westpac New Zealand’s first climate risk disclosures in line with TCFD recommendations; and — conducting a physical risk assessment of the impact of sea level rise on coastal flooding and erosion on the Westpac New Zealand residential mortgage book. Scenario analysis Since 2016, Westpac has evolved its scenario analysis to inform its assessment of climate- related risks and opportunities over the short, medium and long-term. The findings from our scenario analysis informed our current Climate Action Plan which outlines a range of commitments to help customers and communities respond to climate change. We continue to assess1: — the resilience of our Australian Business and Institutional2 lending to transition risks using 1.5 and 2-degrees scenarios; and — the potential impact of climate-related physical risks on the Australian mortgage portfolio3 arising from global warming scenarios of both 2 and 4-degrees. As at 30 September 2020: — the share of our current Australian Business and Institutional portfolio exposed to sectors which may face relatively higher growth constraints4 at 2030 and 2050 under climate change transition scenarios (1.5-degrees and 2-degrees) is shown below: 1.5-degrees scenario 2-degrees scenario 2030 1.9% 0.9% 2050 3.4% 2.8% — the share of our current Australian mortgage portfolio in postcodes which by 2050 are likely to be exposed to higher physical risks under a 4-degrees scenario is approximately 1.7%. As part of our Climate Action Plan, further work underway includes: — assessing climate-related physical risks on our Australian agribusiness portfolio and how we can continue to support our customers to respond; — updating our assessment of physical risk in our Australian mortgage book and how we can help customers become more climate- resilient; — integrating climate change considerations into our stress-testing capability; and — analysing lending across the energy sector, including a ‘deep dive’ on the oil and gas sector under Paris-aligned scenarios – see next page. Using scenarios developed in 2018 and 2019 – for further details see pages 118-120 of our 2019 Annual Report. 1 2 Excludes retail, sovereign and bank exposures. 3 Excludes RAMS and Equity Access. 4 Sectors whose medium (2030) and long-term (2050) performance under a scenario deviated by more than one standard deviation below average GDP growth were classified as ‘higher risk’. 3943 Westpac AR20_34-55_V40.indd 50 3943 Westpac AR20_34-55_V40.indd 50 31/10/20 4:46 pm 31/10/20 4:46 pm WESTPAC GROUP 2020 ANNUAL REPORT  51 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N Energy sector focus Our focus on the energy sector recognises its critical role in the transition to a low carbon economy and our role in supporting this change. During the year we undertook further analysis to expand disclosure of our total committed exposure to the energy sector value chain in WIB5. Mining and Extraction Transport Electricity Generation6 LNG Terminal $0.57 billion Oil and Gas Extraction $2.22 billion Exploration $0.56 billion Coal Coal Rail $0.28 billion Port $0.44 billion Metallurgical coal $0.21 billion Metallurgical coal in diversified miners7 $0.03 billion Thermal coal $0.30 billion Uranium $0.03 billion Gas $0.67 billion Black coal $0.27 billion Brown coal $0.03 billion Liquid fuel $0.12 billion Hydro $1.30 billion Other renewables $1.89 billion Oil and Gas Refining $2.02 billion Distribution and Retail Electricity and Gas6 Networks $4.53 billion Retailers $0.77 billion Oil and Gas $1.32 billion In addition to the criteria for financing activities in the energy sector set out in our Climate Action Plan, we have commenced work to further understand the role of oil and gas in the transition to a low carbon economy. More extensive climate change disclosures can be found in our 2020 Sustainability Performance Report. 5 All figures are Total Committed Exposures (TCE) at 30 September 2020 for WIB only. 6 Australia and New Zealand only. Customers with operations across several sectors are attributed across those activities based on business segment contribution. 7 Coal exposures within diversified miners are apportioned by the percentage EBITDA contribution of coal in their latest annual financial statements. Thermal coal exposures within diversified miners are immaterial. 3943 Westpac AR20_34-55_V40.indd 51 3943 Westpac AR20_34-55_V40.indd 51 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  52 CORPORATE GOVERNANCE Our corporate governance approach 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 and are designed to promote transparency, fair dealing and the protection of stakeholder interests. It includes aspiring to the highest standards of corporate governance, which Westpac sees as fundamental to the sustainability of our business and our performance. WESTPAC’S BOARD AND BOARD COMMITTEE STRUCTURE Board Delegation Accountability Independent Assurance Chief Executive Officer External Auditors Group Audit Legal or other professional advice Accountability Group Executives Assurance, Oversight through Reporting Board Committees Delegation Delegation Nominations & Governance Remuneration Audit Provide assurance on the remuneration disclosures in the Remuneration Report Provide assurance on risk components of the annual report and interim/annual financial results announcements Risk Technology Sub-Committee Provide relevant periodic assurances and reports (as appropriate) Legal, Regulatory & Compliance Provide relevant reports (as appropriate) 3943 Westpac AR20_34-55_V40.indd 52 3943 Westpac AR20_34-55_V40.indd 52 31/10/20 4:46 pm 31/10/20 4:46 pm WESTPAC GROUP 2020 ANNUAL REPORT  53 The Board also established a Board Legal, Regulatory & Compliance Committee as a new sub-committee of the Board Risk Committee to assist with overseeing management of financial crime risk, material litigation and regulatory investigations, customer remediation activities, compliance and conduct risk. In addition, the Board is overseeing broader change across the Company, which in FY20 included: — appointing a new CEO and overseeing changes to, and succession planning of, the Executive Team, including the creation of three new Group Executive roles; — overseeing the Group’s response to the COVID-19 pandemic; — overseeing the establishment of the Specialist Businesses division which has undertaken a strategic review of certain businesses to simplify Westpac’s portfolio; — overseeing the implementation of a new Lines of Business operating model to clarify responsibilities and accountability for end-to-end performance; — reviewing the findings of the reassessment of the Culture, Governance and Accountability program and overseeing the CORE program that has been set up to address, among other things, weaknesses in our management of risk and our risk culture; and — approving a Code of Conduct, a new purpose ‘Helping Australians and New Zealanders succeed’, a new set of values ‘Helpful, Ethical, Leading Change, Performing and Simple’ and a set of behaviours to bring those values to life. Board’s areas of focus in FY20 This has been a significant year for Westpac, and has included an investigation by Westpac into its anti-money laundering and counter- terrorism financing (AML/CTF) compliance failures following the filing of AUSTRAC’s Statement of Claim and the reassessment of our Culture, Governance and Accountability program as required by APRA. One of the main conclusions of the reassessment was that aspects of our non-financial risk culture were ‘immature and reactive’. These events have led to a number of changes across the Company. The Group is focused on improving its risk management capability and risk culture, including through its Customer Outcomes and Risk Excellence (CORE) program. The Board is responsible for the governance of the program, with oversight of the CORE program workstreams by the Board Legal, Regulatory & Compliance Committee. Further information on the CORE program can be found on page 19 and 20. Much of the Board’s focus in 2020 (with assistance from its Committees) stemmed from these developments and included seeking to understand the root cause of issues, applying appropriate consequences and overseeing the program of actions to address the matters raised by AUSTRAC in its Statement of Claim including by: — establishing a Board Financial Crime Committee1 to oversee the implementation of Westpac’s enhanced financial crime program; — appointing Promontory Australia to undertake an external assurance review of Westpac’s management accountability review and a separate external review of Westpac’s financial crime program; — appointing an independent Advisory Panel to review the Board’s governance relating to the Group’s AML/CTF obligations; and — determining accountability and applying remuneration consequences for the issues identified in AUSTRAC’s Statement of Claim. 1 The Board Financial Crime Committee was established and dissolved during the reporting period, with its remaining responsibilities assumed by the Board Legal, Regulatory & Compliance Committee. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_34-55_V40.indd 53 3943 Westpac AR20_34-55_V40.indd 53 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  54 Board skills, diversity and tenure Westpac seeks to maintain a Board of Directors with a broad range of financial and other skills, experience and knowledge necessary to guide the business of the Group. The Board uses a skills matrix to illustrate the key skills and experience the Westpac Board is seeking to achieve in its membership collectively, and the number of Directors with each skill and experience. BOARD SKILLS, EXPERIENCE AND ATTRIBUTES (AS AT 30 SEPTEMBER 2020) SKILLS AND EXPERIENCE DESCRIPTION NUMBER OF DIRECTORS Strategic and commercial acumen An ability to define strategic objectives, constructively question business plans and implement strategy using commercial judgement Financial services experience Experience working in, or advising, the banking and financial services industry (including wealth management), with strong knowledge of its economic drivers and global business perspectives Financial acumen Highly proficient in accounting or related financial management and reporting for businesses of significant size Risk Experience in anticipating, recognising and managing risks, including regulatory, financial and non-financial risks, and monitoring risk management frameworks and controls Technology Experience in developing or overseeing the application of technology in large complex businesses, with particular reference to innovation and the Group’s digital transformation strategic priority Governance Commitment to, and knowledge of, governance, environmental and social issues, with particular reference to the legal, compliance, regulatory and voluntary frameworks applicable to listed entities and highly regulated industries People, culture and conduct Experience in people matters including workplace cultures, morale, management development, succession and remuneration, with particular reference to the Group’s talent retention and development initiatives and the ability to consider and respond to matters relating to inclusion and diversity Executive leadership Being appointed as CEO or a similar senior leadership role in a large complex organisation, and having experience in that position in managing the business through periods of significant change Listed company experience Held two or more Non-executive Directorships on Australian or international listed companies International Senior leadership experience involving responsibility for operations across borders, and exposure to a range of political, cultural, regulatory and business environments in that position Customer focus Experience in developing and overseeing the embedding of a strong customer-focused culture in large complex organisations, and a demonstrable commitment to achieving customer outcomes 10/10 7/10 8/10 8/10 8/10 10/10 9/10 9/10 7/10 6/10 8/10 3943 Westpac AR20_34-55_V40.indd 54 3943 Westpac AR20_34-55_V40.indd 54 31/10/20 4:46 pm 31/10/20 4:46 pm WESTPAC GROUP 2020 ANNUAL REPORT  55 BOARD DIVERSITY For FY20, the Board had a target of maintaining at least 30% women on the Westpac Board. The Board gender diversity as at 30 September 2020 is set out below. Number of female Directors of the Board (3 out of 10). 30% FEMALE DIRECTORS In October 2020, the Board Nominations & Governance Committee approved a revised target of at least 40% women on the Westpac Board. Westpac’s performance against the revised target will vary at any given time depending on the timing of Board composition changes. BOARD TENURE The Board tenure as at 30 September 2020 is set out below. The length of service of each Director is set out in Section 1 of the Directors’ Report. 2.8 years AVERAGE BOARD TENURE 0-3 years 60% 3-6 years 20% 6-9 years 20% Corporate Governance Statement Westpac’s 2020 Corporate Governance Statement describes our corporate governance framework, policies and practices as at 1 November 2020 and is available on our website at www.westpac.com.au/corpgov. The website contains copies and summaries of charters, principles and policies referred to in the Corporate Governance Statement. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_34-55_V40.indd 55 3943 Westpac AR20_34-55_V40.indd 55 31/10/20 4:46 pm 31/10/20 4:46 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  56 WESTPAC GROUP 2020 ANNUAL REPORT DIRECTORS’ REPORT Directors’ report Includes Board and Executive Team biographies, report on the business, Directors’ interests, environmental and human rights supply chain disclosures, political engagement, Directors’ meetings and Remuneration Report. Our Directors present their report together with the financial statements of the Group for the financial year ended 30 September 2020. Directors The names of the persons who have been Directors, or appointed as Directors, during the period since 1 October 2019 and up to the date of this report are: John McFarlane (Director from 17 February 2020), Peter King (Director from 2 December 2019), Lindsay Maxsted (appointed as a Director on 1 March 2008 and retired as a Director on 31 March 2020), Brian Hartzer (appointed as a Director on 2 February 2015 and retired as a Director on 2 December 2019), Nerida Caesar, Ewen Crouch AM (appointed as a Director on 1 February 2013 and retired as a Director on 12 December 2019 following the completion of the 2019 Annual General Meeting), Catriona Alison Deans (Alison Deans), Craig Dunn, Yuen Mei Anita Fung (Anita Fung) (appointed as a Director on 1 October 2018 and retired as a Director on 31 March 2020), Steven Harker, Peter Marriott, Peter Nash, Margaret Seale and Christopher Lynch (appointed as a Director on 1 September 2020). 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 2020, and the period for which each directorship has been held, are set out in the following pages. 3943 Westpac AR20_56_onwards V40.indd 56 3943 Westpac AR20_56_onwards V40.indd 56 31/10/20 4:47 pm 31/10/20 4:47 pm  BOARD OF DIRECTORS 57 JOHN MCFARLANE MA, MBA Age: 73 PETER KING BEc, FCA. Age: 50 NERIDA CAESAR BCom, MBA, GAICD Age: 56 CHAIRMAN AND INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed: Director since February 2020 and Chairman since April 2020. Board Committees: Chairman of the Board Nominations & Governance Committee. Experience: John is a senior figure in global banking and financial services and has 45 years of experience in the sector. He was formerly Chairman of Barclays plc, Aviva plc and FirstGroup plc, and Chairman of The City UK. He was also a Non-executive Director of Westfield Group/ Westfield Corporation, The Royal Bank of Scotland Group, Capital Radio plc and was a council member of The London Stock Exchange. John served as Chief Executive Officer of Australia and New Zealand Banking Group Limited from 1997 to 2007, and as Group Executive Director at Standard Chartered. He also held senior positions at Citicorp including as Managing Director of Citicorp Investment Bank Ltd and Head of Citicorp and Citibank in the UK and Ireland. He began his career at Ford Motor Co. Directorships of listed entities over the past three years: Unibail-Rodamco-Westfield SE (since June 2018), Barclays plc (January 2015 to May 2019) and Westfield Corporation Limited (July 2014 to June 2018). Other principal directorships and interests: Director of Old Oak Holdings Ltd. MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER Appointed: Director since December 2019. Board Committees: Member of the Board Technology Committee. Experience: Peter was appointed Westpac Group Chief Executive Officer in April 2020. Peter previously held this role on an acting basis between December 2019 and March 2020. Since joining the Westpac Group in 1994, Peter also held senior finance roles including Chief Financial Officer with responsibility for Westpac’s Finance, Tax, Treasury and Investor Relations functions. Prior to this, he was Deputy Chief Financial Officer for three years. He has also held senior 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. Directorships of listed entities over the past three years: Nil. Other principal directorships and interests: Director of Australian Banking Association Incorporated and Institute of International Finance. INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed: Director since September 2017. Board Committees: Member of the Board Legal, Regulatory and Compliance and Board Technology Committees. Experience: Nerida has over 33 years of broad ranging commercial and business management experience, with particular depth in technology led businesses. Nerida was Group Managing Director and Chief Executive Officer, Australia and New Zealand, of Equifax (formerly the ASX-listed Veda Group Limited) and was also a former director of Genome.One Pty Ltd and Stone and Chalk Limited. Before joining Equifax, Nerida held several senior management roles at Telstra, including Group Managing Director, Enterprise and Government and Group Managing Director, Wholesale. Nerida also held several Executive and senior management positions with IBM within Australia and internationally, including as Vice President of IBM’s Intel Server Division for the Asia Pacific region. Directorships of listed entities over the past three years: Nil. Other principal directorships and interests: Chairman of Workplace Giving Australia Limited and Director of Spark Investment Holdco Pty Ltd. Member of the Advisory Board of IXUP Limited. Advisor to Equifax Australia and New Zealand and Carla Zampatti Pty Ltd. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_56_onwards V40.indd 57 3943 Westpac AR20_56_onwards V40.indd 57 31/10/20 4:47 pm 31/10/20 4:47 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  58 ALISON DEANS BA, MBA, GAICD Age: 52 CRAIG DUNN BCom, FCA Age: 57 STEVEN HARKER BEc (Hons.), LLB Age: 65 PETER MARRIOTT BEc (Hons.), FCA Age: 63 INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed: Director since April 2014. Board Committees: Chairman of the Board Technology Committee. Member of the Board Nominations & Governance, Board Remuneration and Board Risk Committees. Experience: 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. She has served as the CEO of eCorp Limited, CEO of Hoyts Cinemas and CEO of eBay, Australia and New Zealand. Most recently, she was CEO of technology-based investment company netus Pty Ltd, which was acquired by Fairfax Media Limited in 2012. Directorships of listed entities over the past three years: Cochlear Limited (since January 2015), Ramsay Health Care Limited (since November 2018), and Insurance Australia Group Limited (February 2013 to October 2017). Other principal directorships and interests: Director of SCEGGS Darlinghurst Limited, The Observership Program Limited and Deputy Group Pty Ltd. Senior Advisor to McKinsey & Company and Investment Committee member of the CSIRO Innovation Fund (Main Sequence Ventures). INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed: Director since June 2015. Board Committees: Chairman of the Board Remuneration Committee. Member of the Board Nominations & Governance and Board Risk Committees. Experience: Craig has more than 20 years’ experience in financial services, including as CEO of AMP Limited. He was formerly a director of Financial Literacy Australia Limited, and a Board member of the Australian Japanese Business Cooperation Committee, Jobs for New South Wales, and the New South Wales Government’s Financial Services Knowledge Hub. Craig was Chairman of Stone and Chalk Limited and of the Investment and Financial Services Association (now the Financial Services Council). He was also a member of the Financial Services Advisory Committee, the Australian Financial Centre Forum, the Consumer and Financial Literacy Taskforce and a Panel member of the Australian Government’s Financial System Inquiry. Directorships of listed entities over the past three years: Telstra Corporation Limited (since April 2016). Other principal directorships and interests: Chairman of The Australian Ballet, Chairman of the International Standards Technical Committee on Blockchain and Distributed Ledger Technologies (ISO/TC 307), and consultant to King & Wood Mallesons. INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed: Director since March 2019. Board Committees: Member of the Board Audit and Board Legal, Regulatory & Compliance Committees. Experience: Steve has over 35 years’ experience in investment banking. He was formerly Managing Director and Chief Executive Officer of Morgan Stanley Australia, and then Vice Chairman until February 2019. Prior to joining Morgan Stanley, he spent 15 years with Barclays de Zoete Wedd (BZW, now Barclays Investment Bank). Steve was Chairman and Director of Australian Financial Markets Association Limited and a Director of Investa Property Group. He also previously served on the Board of the Centre for International Finance and Regulation and was a Guardian of the Future Fund of Australia. Directorships of listed entities over the past three years: Nil. Other principal directorships and interests: Chairman of the Investment and Executive Committees at Future Now Ventures. Director of The Banking and Finance Oath Limited, The Hunger Project Australia, ASX Refinitiv Charity Foundation, and New South Wales Golf Club Foundation Limited. INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed: Director since June 2013. Board Committees: Chairman of the Board Risk Committee. Member of the Board Legal, Regulatory & Compliance, Board Audit, Board Nominations & Governance and Board Technology Committees. Experience: Peter has over 30 years’ experience in senior management roles in the finance industry, encompassing international banking, finance and auditing. He joined Australia and New Zealand Banking Group Limited (ANZ) in 1993 and was 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. Directorships of listed entities over the past three years: ASX Limited (since July 2009). Other principal directorships and interests: Director of ASX Clearing Corporation Limited, ASX Settlement Corporation Limited and Austraclear Limited. Member of Monash University Council and Chairman of the Monash University Council’s Resources and Finance Committee. 3943 Westpac AR20_56_onwards V40.indd 58 3943 Westpac AR20_56_onwards V40.indd 58 31/10/20 4:47 pm 31/10/20 4:47 pm WESTPAC GROUP 2020 ANNUAL REPORT  59 PETER NASH BCom, FCA, F Fin Age: 58 MARGARET (MARGIE) SEALE BA, FAICD Age: 60 CHRIS LYNCH BCom, MBA, FCPA Age: 67 INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed: Director since March 2018. Board Committees: Chairman of the Board Audit and Board Legal, Regulatory & Compliance Committees. Member of the Board Risk and Board Nominations & Governance Committees. Experience: Peter was formerly a Senior Partner with KPMG, having been admitted to the Australian partnership in 1993. He served as the National Chairman of KPMG Australia and served on KPMG’s Global and Regional Boards. His previous positions with KPMG included Regional Head of Audit for Asia Pacific, National Managing Partner for Audit in Australia and head of KPMG Financial Services. Peter has worked in geographically diverse and complex operating environments providing advice on a range of topics including business strategy, risk management, internal controls, business processes and regulatory change. He has also provided financial and commercial advice to many State and Federal Government businesses. Peter is a former member of the Business Council of Australia and its Economic and Regulatory Committee. Directorships of listed entities over the past three years: Johns Lyng Group Limited (Chairman since October 2017), Mirvac Group (since November 2018) and ASX Limited (since June 2019). Other principal directorships and interests: Director of Reconciliation Australia Limited and Golf Victoria Limited. Board member of the Koorie Heritage Trust. INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed: Director since March 2019. Board Committees: Member of the Board Remuneration and Board Legal, Regulatory & Compliance Committees. Experience: 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 was a Director and then Chair of Penguin Random House Australia Pty Limited, and a Director of Ramsay Health Care Limited, Bank of Queensland Limited and the Australian Publishers’ Association. She also served on the Boards of Chief Executive Women (chairing its Scholarship Committee), the Powerhouse Museum, and the Sydney Writers Festival. Directorships of listed entities over the past three years: Telstra Corporation Limited (since May 2012), Scentre Group Limited (since February 2016), Ramsay Health Care Limited (April 2015 to October 2018) and Bank of Queensland Limited (January 2014 to June 2018). Other principal directorships and interests: Nil. INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed: Director since September 2020. Board Committees: Member of the Board Audit and Board Risk Committees. Experience: Chris has significant experience in mineral resources and infrastructure, having spent over 30 years working in these fields globally. Chris was formerly the Global Chief Financial Officer of Rio Tinto Group, based in London, and an Executive Director. Prior to this, he was a Non-executive Director of Rio Tinto Group. Chris was the Chief Executive Officer of Transurban Group, an international toll road developer and manager with interests in Australia and North America from 2008 to 2012. His executive career also included seven years at BHP Billiton where he was Chief Financial Officer and then Executive Director and Group President – Carbon Steel Materials. Chris spent 20 years with Alcoa Inc. where he held a number of executive positions, including Vice-President and Chief Information Officer based in Pittsburgh, USA and Chief Financial Officer of Alcoa Europe in Switzerland. He was also managing director of KAAL Australia Limited, a joint venture company formed by Alcoa and Kobe Steel. Chris was formerly a Commissioner of the Australian Football League from 2008 until 2014. Directorships of listed entities over the past three years: Rio Tinto Group (September 2011 to September 2018). Other principal directorships and interests: Director of Business for Millennium Development Ltd, Chairman of the National Water Grid Authority Advisory Board. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_56_onwards V40.indd 59 3943 Westpac AR20_56_onwards V40.indd 59 31/10/20 4:47 pm 31/10/20 4:47 pm WESTPAC GROUP 2020 ANNUAL REPORT 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  60 Company Secretary Our Company Secretary as at 30 September 2020 was Tim Hartin. TIM HARTIN LLB (Hons.) Age: 45 COMPANY SECRETARY Tim was appointed 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. Executive Team As at 30 September 2020 our Executive Team was: NAME Peter King POSITION Managing Director & Chief Executive Officer Richard Burton Acting Chief Executive, Consumer Rebecca Lim Group General Counsel & Enterprise Executive Guilherme (Guil) Lima Chief Executive, Business Carolyn McCann Group Executive, Customer & Corporate Relations David McLean Chief Executive Officer, Westpac New Zealand Christine Parker Group Executive, Human Resources Michael Rowland Chief Financial Officer David Stephen Chief Risk Officer Gary Thursby Chief Information Officer (Acting) Les Vance Group Executive, Financial Crime, Compliance & Conduct Alastair Welsh Acting Group Executive, Enterprise Services Jason Yetton Chief Executive, Specialist Businesses, Strategy & Transformation Curt Zuber Acting Chief Executive, Westpac Institutional Bank There are no family relationships between or among any of our Directors or Executive Team members. YEAR JOINED GROUP YEAR APPOINTED TO POSITION 1994 2010 2002 2019 2013 1999 2007 2020 2018 2008 2008 1992 2020 1995 2020 2020 2020 2019 2018 2015 2011 2020 2018 2020 2020 2019 2020 2020 3943 Westpac AR20_56_onwards V40.indd 60 3943 Westpac AR20_56_onwards V40.indd 60 31/10/20 4:47 pm 31/10/20 4:47 pm WESTPAC GROUP 2020 ANNUAL REPORT  EXECUTIVE TEAM AS AT 30 SEPTEMBER 2020 WESTPAC GROUP 2020 ANNUAL REPORT 61 PETER KING BEc, FCA Age: 50 MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER, WESTPAC GROUP Peter was appointed Westpac Group Chief Executive Officer in April 2020, after holding the role on an acting basis between December 2019 and March 2020. In his 25 years at Westpac, Peter has held senior finance roles including Chief Financial Officer with responsibility for Westpac’s Finance, Group Audit, Tax, Treasury and Investor Relations functions. Prior to this he was Deputy Chief Financial Officer for three years and worked in senior 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. RICHARD BURTON BSc Mathematics (Hons) Age: 48 REBECCA LIM B Econ, LLB (Hons) Age: 48 GUILHERME (GUIL) LIMA MBA, BBA Age: 46 ACTING CHIEF EXECUTIVE, CONSUMER DIVISION Richard was appointed Acting Chief Executive, Consumer Division in June 2020. The division provides a wide range of retail banking, lending and consumer finance services across the Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands. In his 10 years at Westpac, Richard has held senior finance roles spanning consumer, business and Group functions including Chief Financial Officer of the Consumer Division, Chief Financial Officer of the Business Division, Acting General Manager, Group Finance and Acting Deputy Chief Financial Officer. During this time, Richard led large teams of finance professionals while driving performance, optimising investment to generate positive customer experiences and managing all aspects of financial reporting. Prior to joining Westpac, Richard held senior roles in financial services in Australia and the UK including Head of Business Performance at Challenger Financial Services Group and Head of Performance Management at National Australia Bank. Richard also led an advisory team for KPMG in the UK. Richard holds a Bachelor of Science in Mathematics with Honours, from the University of Bristol. GROUP GENERAL COUNSEL & ENTERPRISE EXECUTIVE Rebecca is responsible for leading Westpac’s legal function globally, as well as leading the CEO’s office. 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 a member of Chief Executive Women. CHIEF EXECUTIVE, BUSINESS DIVISION Guilherme (Guil) joined Westpac Group as Chief Executive, Business Division in December 2019. The division supports Australia’s small business, commercial, agribusiness and private wealth customers providing a wide range of banking services across the Westpac, St.George, BankSA and Bank of Melbourne brands. Guil has 22 years’ experience in banking and consulting in Hong Kong, Brazil, UK, US, Spain and the Netherlands. Prior to his appointment, Guil was Group Head of Wealth Management at HSBC Hong Kong. He started at HSBC as Group Head of Strategy in London in 2010 after a career totalling 10 years at McKinsey & Co. Guil holds a Bachelor of Business Administration in General Management and Finance from Fundação Getulio Vargas (FGV) in Brazil and a Master of Business Administration in Strategy, Corporate Finance and Investment Management from Harvard Business School. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_56_onwards V40.indd 61 3943 Westpac AR20_56_onwards V40.indd 61 31/10/20 4:47 pm 31/10/20 4:47 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  62 WESTPAC GROUP 2020 ANNUAL REPORT CAROLYN MCCANN BBus (Com), BA, GradDipAppFin, GAICD Age: 48 GROUP EXECUTIVE, CUSTOMER & CORPORATE RELATIONS Carolyn was appointed as Westpac’s Group Executive responsible for customer and corporate relations in May 2018. This division originally brought together management of the Group’s customer resolution of complaints, alongside the functions responsible for reputation, corporate affairs, communications and sustainability. During the year, Carolyn assumed responsibility for the Customer Advocate function as well as the Group’s Customer Outcomes and Risk Excellence Program, a program to improve risk culture, governance and accountability. From 1 November 2020, the division will also include Westpac Group’s customer remediation function. Carolyn joined Westpac in 2013, as General Manager, Corporate Affairs and Sustainability. Prior to joining Westpac, Carolyn spent 13 years at Insurance Australia Group in various positions, including Group General Manager, Corporate Affairs and Investor Relations. She began her career in consulting and has extensive in-house and consulting experience in financial services. DAVID MCLEAN LLB (Hons.) Age: 62 CHIEF EXECUTIVE OFFICER, WESTPAC NEW ZEALAND LIMITED David was appointed Chief Executive Officer, Westpac New Zealand Limited in February 2015. Since joining Westpac in February 1999, he 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 served as in-house counsel for NatWest NZ from 1985. CHRISTINE PARKER BGDipBus (HRM) Age: 60 MICHAEL ROWLAND B.Comm, FCA Age: 59 DAVID STEPHEN BBus Age: 56 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 their health and wellbeing. Christine has responsibility for the office of the Banking Executive Accountability Regime (BEAR) and also supports the CEO and Board on culture and conduct. 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 is currently Chair of the St.George Foundation, a member of the Chief Executive Women and was previously a Director of Women’s Community Shelters and member of the Veterans’ Employment Industry Advisory Committee. CHIEF FINANCIAL OFFICER Michael joined Westpac Group as Chief Financial Officer in September 2020. He is responsible for Westpac’s Finance, Group Audit, Investor Relations, Tax and Treasury functions. Before joining Westpac, Michael was a Partner in Management Consulting at KPMG. Before that he held a number of senior executive positions at ANZ from 1999 to 2013. This included CFO Institutional Banking, CFO Wealth, CFO New Zealand, CFO Personal Financial Services, and business leadership roles as CEO Pacific, Managing Director Mortgages and General Manager, Transformation. Michael commenced his career at KPMG, where he was promoted to become a Tax Partner in 1993. Michael holds a Bachelor of Commerce, University of Melbourne and a Graduate Diploma of Taxation Law, Monash University. He is a Fellow of the Institute of Chartered Accountants in Australia and New Zealand. CHIEF RISK OFFICER David was appointed Chief Risk Officer in October 2018, with responsibility for risk management across the Group. Prior to this, David was the Chief Risk Officer for Royal Bank of Scotland (RBS) from 2013, having joined 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 the International Financial Risk Institute. 3943 Westpac AR20_56_onwards V40.indd 62 3943 Westpac AR20_56_onwards V40.indd 62 31/10/20 4:47 pm 31/10/20 4:47 pm WESTPAC GROUP 2020 ANNUAL REPORT 63 GARY THURSBY BEc, DipAcc, FCA Age: 58 LES VANCE BCom, LLB (Hons) Age: 50 ALASTAIR WELSH MBA, BCA, CA Age: 55 CHIEF INFORMATION OFFICER (ACTING) Gary has held a number of Group Executive roles across the Group. He was appointed Chief Information Officer (Acting) in 2020. Before this, he was Chief Financial Officer (Acting) from December 2019 to August 2020. He has also held the roles of Chief Operating Officer and Group Executive, Strategy & Enterprise Services. Before joining Westpac in 2008, Gary held several senior finance roles at Commonwealth Bank of Australia (CBA) including Deputy CFO and CFO Retail Bank. He 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. GROUP EXECUTIVE, FINANCIAL CRIME, COMPLIANCE AND CONDUCT Les was appointed Group Executive, Financial Crime, Compliance and Conduct in June 2020. In this newly created role, Les is responsible for overseeing and strengthening the governance and management of these risks. Les has over 25 years’ executive experience across transformation and program delivery, risk and governance, operations and line management. Joining Westpac in 2008, Les has held a variety of senior roles including Chief Operating Officer, Consumer Division and Chief Risk Officer, BT Financial Group. Prior to Westpac, Les was Group Executive for External Funds at Investa Property Group and Chief Executive for Gaming at TAB Limited. Les commenced his career as a solicitor at the legal firm Freehills. Les holds a Bachelor of Commerce and a Bachelor of Laws with Honours, both from University of Queensland. ACTING GROUP EXECUTIVE, ENTERPRISE SERVICES Alastair was appointed Acting Group Executive, Enterprise Services in December 2019. His role is designed to accelerate the delivery of the Group’s Service Revolution and provides services to support the Group’s operating businesses. Alastair’s responsibility also includes banking operations, advice and group remediation, procurement, property and enterprise investments. 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 BT Financial Group, Group Customer Transformation and Business Banking. Prior to his current appointment, Alastair was Acting Chief Executive, Business. JASON YETTON B.Comm (Finance & Mktg), GradDipAppFin Age: 49 CHIEF EXECUTIVE, SPECIALIST BUSINESSES, STRATEGY & TRANSFORMATION Jason was appointed Chief Executive, Specialist Businesses in May 2020. He is responsible for Group Strategy, Transformation Office and Corporate & Business Development. He is also accountable for the Strategic Reviews and potential divestments of the Group’s Specialist Businesses. Specialist Businesses support customers with wealth needs including Life and General Insurance, Superannuation and Platforms and Investments as well as Auto Finance and Pacific banking. Most recently, Jason was Chief Executive Officer NewCo, CBA, where he was appointed to lead the demerger of its wealth management and mortgage broking businesses. Prior to that, he was Chief Executive Officer & Managing Director, SocietyOne, an early financial services disrupter and consumer finance marketplace lender. Jason was previously with the Westpac Group for more than 20 years, holding a number of senior positions including Group Executive, Westpac Retail & Business Banking, and a range of senior executive positions in BT Financial Group. CURT ZUBER BA, MBA Age: 55 ACTING CHIEF EXECUTIVE, WESTPAC INSTITUTIONAL BANK Curt was appointed Acting Chief Executive, Westpac Institutional Bank in July 2020. He is responsible 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. He is also responsible for Westpac’s offices and branches in Asia, London and New York. Curt joined Westpac in 1995 and was appointed Group Treasurer in 2004 where he oversaw treasury operations, Group liquidity and Global wholesale funding across all products, including securitisation, covered bonds and other structured products, capital securities and unsecured issuance. He was also responsible for all on-balance-sheet risk management, as well as management of the Group’s balance sheet, including capital planning and execution and meeting the Group’s liquidity and funding regulatory requirements. Prior to this, Curt held several roles including Deputy Group Treasurer and Head of Treasury Risk. Before joining Westpac, Curt spent seven years at Household International in Chicago and Sydney in various treasury-related roles, including risk management, funding and asset and liability management. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3943 Westpac AR20_56_onwards V40.indd 63 3943 Westpac AR20_56_onwards V40.indd 63 31/10/20 4:47 pm 31/10/20 4:47 pm 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION  Directors’ report The effective tax rate of 46.3% was higher than 2019’s effective tax rate of 30.4% predominantly due to both the provision for the AUSTRAC penalty and goodwill impairment being non deductible. A review of the operations of the Group and its divisions and their results for the financial year ended 30 September 2020 is set out in Section 2 of the Annual Report under the sections ‘Review of Group operations’ (see pages 117 to 130), ‘Divisional performance’ (see pages 131 to 143) and ‘Risk and risk management’ (see pages 144 to 163), 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 167 to 320), which form part of this report. c) Dividends Since 30 September 2020, Westpac has announced a final ordinary dividend of 31 cents per Westpac ordinary share, totalling approximately $1,120 million for the year ended 30 September 2020. The dividend will be fully franked and will be paid on 18 December 2020. No interim ordinary dividend was paid for the half year ended 31 March 2020. Further, in respect of the year ended 30 September 2019, a fully franked final dividend of 80 cents per ordinary share totalling $2,791 million was paid on 20 December 2019. The payment comprised direct cash disbursements of $2,518 million with $273 million, being reinvested by participants through the DRP. New shares were issued under the DRP for the 2019 final ordinary dividend. 64 Directors’ report 3. Operating and financial review a) Principal activities The principal activities of the Group during the financial year ended 30 September 2020 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 2020. b) Operations and financial performance The net profit attributable to owners of Westpac Banking Corporation for 2020 was $2,290 million, a decrease of $4,494 million or 66% compared to 2019. Key features of this result were: • Net interest income decreased $211 million or 1% compared to 2019 predominantly due to a decrease in net interest margin of 9 basis points to 2.03%. The movement in net interest income is attributable to the impact of: – lower rates on average interest earning assets exceeding benefits from the decrease in the Group’s funding costs, which includes movements in economic hedges; and – lower charges for estimated customer refunds and payments than in 2019. • In aggregate, non-interest income decreased $255 million compared to 2019 mainly due to: – – – – a decrease in net wealth and insurance income due to lower rates, asset impairment and severe weather events resulting in higher claims; and a decrease in net fee income from lower customer activities and fee waivers; partially offset by a lower charge for estimated customer refunds and payments compared to 2019; and the realisation of a gain upon the derecognition of an associate. • Operating expenses increased $2,633 million or 26% compared to 2019. The rise was mainly due to: – – – costs associated with AUSTRAC proceedings including a provision for penalty; customer service costs associated with responding to COVID-19; and asset impairments, and an increase in amortisation and impairment of capitalised software; partially offset by provisions for Wealth restructuring in 2019. • Impairment charges were $2,384 million higher compared to 2019 reflecting the deterioration in the economy as a result of the COVID-19 pandemic which has led to a significant increase in the expected credit losses. Asset quality deteriorated, with stressed exposures as a percentage of total committed exposures at 1.91%, up 71 basis points compared to 2019. WESTPAC GROUP 2020 ANNUAL REPORT Directors’ report d) Significant changes in state of affairs and events during and since the end of the 2020 financial year Throughout the financial year ended 30 September 2020, the Group has operated in a challenging environment, including as a result of the COVID-19 pandemic which has had a significant and adverse impact on the Australian and global economy and our business, financial performance, customers and people, as well as AUSTRAC’s Statement of Claim and matters relating to those proceedings (refer to ‘AUSTRAC proceedings overview’ section for more details (see page 22)). In this environment, significant changes in the state of affairs of the Group were: • • • • • • • • • implementing a range of initiatives to support certain customers impacted by the COVID-19 pandemic, such as lowering interest rates on certain products, waiving certain fees, providing special loans to support customers to manage their cash flow and granting deferrals of mortgage and business loan repayments; modifying our operations in response to the material restrictions which have been implemented by the Australian, State and Territory governments as a result of the COVID-19 pandemic; the filing of proceedings by AUSTRAC against Westpac in November 2019 in relation to alleged contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), reaching an agreement with AUSTRAC to resolve these proceedings and raising a provision for a penalty of $1.3 billion. ASIC also continues to conduct an extensive investigation into matters related to the AUSTRAC proceedings; reassessing our Culture, Governance and Accountability assessment at the request of APRA and commencing the CORE program; implementing a number of multi-year programs (in addition to the CORE program) that seek to address identified shortcomings and significantly improve Westpac’s management of risks; making changes to the Westpac Board and Executive Team, including the appointment of a new Chairman and Chief Executive Officer; establishing the Specialist Businesses division which has completed a strategic review of certain businesses to simplify Westpac’s portfolio; launching our new Lines of Business operating model to clarify responsibility and accountability for end-to-end performance; and ongoing regulatory changes and developments, which have included changes relating to financial services, access to data, hardship reporting requirements 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 102 to 108). Other than set out above, the Directors are not aware of any other matter or circumstance that has occurred since 30 September 2020 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. 65 e) Business strategies, developments and expected results Our business strategies, prospects and likely major developments in the Group’s operations in future financial years and the expected results of those operations are discussed in the Strategic report (see pages 1 to 55 and in ‘Significant developments’ in Section 1 of the Annual Report (see pages 102 to 108), which forms part of this report. Further information on our business strategies and prospects for the 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 144 to 163). 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  66 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 2020 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, a registered 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 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, a registered scheme made available by us or any of our related bodies corporate. Directors’ interests in Westpac and related bodies corporate as at 1 November 2020 Number of Relevant Interests in Westpac Ordinary Shares Number of Westpac Share Rights Westpac Banking Corporation Current Directors John McFarlane Peter King Nerida Caesar Alison Deans Craig Dunn Steven Harker Chris Lynch Peter Marriott Peter Nash Margaret Seale Former Directors Lindsay Maxsted Brian Hartzer Ewen Crouch Anita Fung 10,000 131,8861 13,583 15,632 15,009 11,605 13,0903 22,110 15,260 22,9604 25,5925 130,5456 79,6907 -8 - 346,7952 - - - - - - - - -5 -6 -7 -8 1. 2. 3. 4. 5. 6. 7. 8. Peter King’s interest in Westpac ordinary shares includes 23,697 restricted shares held under the Restricted Share Plan. Share rights issued under the Long Term Variable Reward Plan. Chris Lynch and his related bodies corporate also hold relevant interests in 1,137 Westpac Capital Notes 5. Margaret Seale and her related bodies corporate also hold relevant interests in 3,220 Westpac Capital Notes 2. Figure displayed is as at Lindsay Maxsted’s retirement date of 31 March 2020. Figure displayed is as at Brian Hartzer’s retirement date of 2 December 2019. Figure displayed is as at Ewen Crouch’s retirement date of 12 December 2019. Ewen Crouch and his related bodies corporate also held relevant interests in 250 Westpac Capital Notes 2 as at 12 December 2019. Figure displayed is at Anita Fung’s retirement date of 31 March 2020. 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). WESTPAC GROUP 2020 ANNUAL REPORT Directors’ report b) Indemnities and insurance Under the Westpac Constitution, unless it is forbidden or would be made void by statute, we indemnify any person who is or has been a Director or Company Secretary of Westpac and of each of our related bodies corporate (except related bodies corporate listed on a recognised stock exchange), any person who is or has been an employee of Westpac or our subsidiaries (except subsidiaries listed on a recognised stock exchange), and any person who is or has been acting as a responsible manager under the terms of 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 the Company Secretary 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 who are or have been 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 (except wholly- owned subsidiaries listed on a recognised stock exchange). 67 For the year ended 30 September 2020, 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 3,154,553 share rights outstanding in relation to Westpac ordinary shares. The latest dates for exercise of the share rights range between 1 October 2021 and 1 July 2035. 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  68 Directors’ report 5. Environmental disclosure As part of our 2020 Sustainability Strategy, we have set targets for our environmental performance to 2020. The Westpac Group’s environmental framework is made up of: • • • • • our Westpac Group Environment Policy; our Sustainability Risk Management Framework; our Climate Change Position Statement and 2023 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, CDP (formerly known as the Climate Disclosure Project), the Equator Principles, the Principles for Responsible Banking, the Principles for Responsible Investment, the United Nations Global Compact, the RE100 and the Australian Government Climate Active Carbon Neutral Standard. The National Greenhouse and Energy Reporting Act 2007 (NGER) came into effect in September 2007. TheGroup 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 are not aware of the Group incurring any material liability (including for rectification costs) under any environmental legislation. Westpac has reported its performance against its 2020 Sustainability Strategy and provides an update in the section titled ‘climate change’ in Section 1 of this Annual Report. This section also includes disclosures aligned to the recommendations of the Task Force on climate-related Financial Disclosures (TCFD) (see pages 34 to 51). 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 https:// www.westpac.com.au/about-westpac/sustainability/. 6. Human rights supply chain disclosure Westpac’s overall approach to human rights is set out in our Human Rights Position Statement. Our Responsible Sourcing Program, including the Responsible Sourcing Code of Conduct and risk assessment methodology is 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 publishes an annual statement for the year 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. Reporting under the Australia’s Modern Slavery Act 2018 (Cth) will satisfy our requirements to report under the UK’s Modern Slavery Act 2015. 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 2020. In Australia, political expenditure for the financial year ended 30 September 2020 was $141,495. 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 2020 was NZD$9,175. WESTPAC GROUP 2020 ANNUAL REPORT 69 Directors’ report 9. Directors’ meetings Each Director attended the following meetings of the Board and Committees of the Board during the financial year ended 30 September 2020. This table shows membership of standing Committees of the Board that operated during the year ended 30 September 2020. From time to time the Board may form other committees or request Directors to undertake specific extra duties. Notes Board (Scheduled) Board (Un- scheduled)1 Audit Committee Risk Committee2 Legal, Regulatory & Compliance Committee2 Nominations & Governance Committee3 Remuneration Committee Technology Committee Financial Crime Committee4 Number of meetings held during the year Director John McFarlane Peter King Nerida Caesar Alison Deans Craig Dunn Steven Harker Christopher Lynch Peter Marriott Peter Nash Margaret Seale Former Director Lindsay Maxsted Brian Hartzer Ewen Crouch Anita Fung 5 6 7 8 9 10 11 12 13 14 15 16 17 18 A 4 6 7 7 7 7 1 7 7 7 A 4 1 2 4 B 4 6 7 7 7 7 1 7 7 7 B 4 1 2 3 A 10 12 20 20 20 20 3 20 20 20 A 11 8 9 11 B 10 12 19 20 19 20 3 20 20 20 B 11 8 9 A n/a n/a n/a n/a n/a 5 B n/a n/a n/a n/a n/a 5 A 2 B 2 n/a n/a 4 5 5 4 4 5 5 4 A n/a n/a 3 n/a n/a 3 B n/a n/a 3 n/a n/a 3 n/a n/a n/a n/a n/a n/a 5 5 5 5 n/a n/a A 2 B 2 5 5 4 A 3 5 5 4 B 3 n/a n/a n/a n/a 1 1 10 n/a n/a 1 3 1 2 3 3 3 A n/a n/a n/a n/a 3 3 3 B n/a n/a n/a n/a A 2 n/a n/a 4 4 B 2 n/a n/a 4 4 n/a n/a n/a n/a 4 3 4 3 n/a n/a A 2 B 2 n/a n/a 1 1 A n/a n/a n/a 6 6 n/a n/a n/a n/a 6 A n/a n/a 1 B n/a n/a n/a 6 6 n/a n/a n/a n/a 6 B n/a n/a 1 n/a n/a n/a n/a A B n/a n/a 3 4 4 n/a n/a n/a 4 n/a n/a A 3 4 4 n/a n/a n/a 4 n/a n/a B n/a n/a 1 n/a n/a 1 n/a n/a A n/a n/a 8 n/a n/a 8 n/a n/a 8 8 A n/a n/a n/a n/a B n/a n/a 8 n/a n/a 8 n/a n/a 8 8 B n/a n/a n/a n/a 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 2019. 1 2 3 4 5 6 7 8 9 Out of cycle Board meetings typically called for a special purpose that do not form part of the Board’s forward agenda. Prior to 1 June 2020, the Board Risk Committee was known as the Board Risk & Compliance Committee. On 1 June 2020, the roles and responsibilities of the Board Risk & Compliance Committee were revised, and the committee was renamed the Board Risk Committee. At the same time, the Board established the Board Legal, Regulatory and Compliance Committee, which is a sub-committee of the Board Risk Committee. On 1 July 2020, the roles and responsibilities of the Board Nominations Committee were revised, and the committee was renamed the Board Nominations & Governance Committee. The Board Financial Crime Committee was established on 27 November 2019 and was dissolved on 1 June 2020 with its responsibilities assumed by the Board Legal, Regulatory & Compliance Committee. John McFarlane was appointed as a Director and member of the Board Risk Committee on 17 February 2020. He was appointed as Board Chairman and Chairman of the Board Nominations & Governance Committee on 1 April 2020. He ceased as a member of the Board Risk Committee on 1 June 2020. Peter King was appointed as a Director and a member of the Board Technology Committee on 2 December 2019. Nerida Caesar was appointed a member of the Board Financial Crime Committee on 27 November 2019. Nerida was also appointed a member of the Board Legal, Regulatory & Compliance Committee on 1 June 2020 and ceased as a member of both the Board Risk Committee and Board Financial Crime Committee on 1 June 2020. Member of the Board Technology Committee. Chairman of the Board Technology Committee. Member of the Board Nominations & Governance Committee, Board Remuneration Committee and the Board Risk Committee. Chairman of the Board Remuneration Committee. Member of the Board Risk Committee and the Board Nominations & Governance Committee. 10 Steven Harker was appointed a member of the Board Financial Crime Committee on 27 November 2019. He was also appointed a 11 12 13 member of the Board Legal, Regulatory & Compliance Committee and ceased as a member of both the Board Risk Committee and Board Financial Crime Committee on 1 June 2020. Member of the Board Audit Committee. Christopher Lynch was appointed as a Director and member of the Board Risk Committee and Board Audit Committee on 1 September 2020. Peter Marriott ceased as Chairman of the Board Audit Committee on 12 December 2019. He was appointed as Chairman of the Board Risk Committee on 12 December 2019. He was also appointed a member of the Board Legal, Regulatory & Compliance Committee on 1 June 2020. Member of Board Technology Committee and Board Nominations & Governance Committee. Peter Nash was appointed as Chairman of the Board Financial Crime Committee on 27 November 2019. Peter Nash was appointed as Chairman of the Board Audit Committee and a member of the Board Nominations & Governance Committee on 12 December 2019. He was also appointed as Chairman of the Board Legal, Regulatory & Compliance Committee and ceased as Chairman of the Board Financial Crime Committee on 1 June 2020 when that Committee was dissolved. 14 Margaret Seale was appointed a member of the Board Financial Crime Committee on 27 November 2019. She was also appointed a member of the Board Legal, Regulatory & Compliance Committee and ceased as a member of both the Board Risk Committee and Board Financial Crime Committee on 1 June 2020. Member of the Remuneration Committee. 15 Lindsay Maxsted retired from the Board and its Committees on 31 March 2020. 16 Brian Hartzer retired from the Board and its Committees on 2 December 2019. 17 18 Anita Fung retired from the Board and its Committees on 31 March 2020. Ewen Crouch retired from the Board and its Committees on 12 December 2019 at the completion of the 2019 Annual General Meeting. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  Directors’ report 70 Directors’ report 10. Remuneration Report Letter from the Chairman of the Board Remuneration Committee 2020 was a challenging year and we are committed to doing better Dear shareholders, On behalf of the Board, I am pleased to present Westpac’s 2020 Remuneration Report. Group performance and strategic priorities 2020 was a challenging year for Westpac, our shareholders, employees, customers and the communities in which we operate. In particular, the sharp contraction in economic activity, low interest rates and higher impairment charges resulting from COVID-19 have impacted earnings. In addition, the AUSTRAC matters and other remediation costs further impacted financial performance. The Board acknowledges the impact on shareholders including the reduction in dividends. We recognise that you felt deeply let down by the AUSTRAC matters. We have taken action in response and we are committed to doing better. While the impacts of COVID-19 continue, the measures we have put in place have allowed us to help our customers and to keep credit flowing. Despite the ongoing uncertainty, our balance sheet remains strong and we have maintained our capital position and liquidity ratios above regulatory requirements. Importantly, the Group’s purpose and strategy have been reset and clear priorities have been established. Our transformation plans are underway with refreshed leadership, changes in strategy and a detailed program to address the Group’s shortcomings in risk management. Remuneration decisions will continue to play a key role in supporting the changes underway. Remuneration consequences for the AUSTRAC matters In June 2020, Westpac released the results of its investigation into the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) compliance issues that related to the AUSTRAC Statement of Claim in November 2019. The consequences for the issues included remuneration impacts and disciplinary actions. While most remuneration consequences were applied after the review of management accountability, there were also remuneration adjustments applied in 2019 prior to the receipt of the AUSTRAC Statement of Claim based on the information known by the Board at the time. As communicated to shareholders last year, we implemented enhanced remuneration adjustment guidelines as part of our response to the first strike. These guidelines were used to support the Board’s decision making during the year. In summary, remuneration consequences were applied to 38 individuals reflecting the level of direct management responsibility or accountability and the level of culpability for the compliance failures. In addition, as the issues took place over many years, a number of relevant individuals had since left Westpac’s employment. For most of these former employees, a remuneration adjustment was not possible as they did not have unvested deferred variable reward on foot. In aggregate, the amount of remuneration consequences applied was $20.1 million1. This included cancelling 2020 short term variable reward (STVR) for the Group Executive team and, in some instances, adjusting prior year awards that had yet to vest. Further detail is set out in Section 3.1 of the Report. 1. Includes the forfeiture of unvested STVR and LTVR for the former CEO as well as a range of downward remuneration adjustments, in part or in full, to current and former executives and employees. Equity-based awards were valued using the five day volume weighted average price (VWAP) of a Westpac share up to and including the date of receipt of the AUSTRAC Statement of Claim on 20 November 2019 ($26.20) and applying a 50% discount for LTVR subject to performance conditions. The cancellation of 2020 STVR for the CEO and Group Executives was valued at 50% of target opportunity as at 2 April 2020. WESTPAC GROUP 2020 ANNUAL REPORT Directors’ report Directors’ report 2020 remuneration outcomes This year’s remuneration decisions, and the discretion applied by the Board, reflect performance and risk outcomes along with the outcomes experienced by our stakeholders and feedback from the second strike against the 2019 Remuneration Report. In summary, key remuneration outcomes for 2020 include: • • • • • • • Reductions in the value of 2020 Long Term Variable Reward (LTVR) opportunity for the CEO and Group Executives reflecting the change in allocation methodology from a fair value to a face value approach when determining the quantum of performance share rights; The new CEO’s total target remuneration is 10.7% lower than that of his predecessor whose total target remuneration was reduced by 23% in October 2019; The cancellation of 2020 STVR for the CEO and Group Executives to demonstrate collective accountability for the financial crime outcomes in Westpac’s businesses that led to the AUSTRAC proceedings; Additional remuneration consequences were applied to four Group Executives, including current and former executives, for the AUSTRAC matters, in addition to a range of other remuneration consequences for other current and former employees; The 2020 variable reward pool for the Group was reduced by $139 million year on year, noting the 2019 pool was also significantly reduced; 2020 STVR for General Managers was cancelled in light of performance and a challenging environment created by COVID-19; and The 2017 LTVR lapsed in full for the fifth consecutive year. Second strike At the 2019 Annual General Meeting, 35.9% of shareholder votes were cast against the 2019 Remuneration Report resulting in a strike for a second year in a row. The second strike was a disappointing outcome for the Board, particularly in light of the changes made in response to the first strike against the 2018 Remuneration Report. These included reducing total target remuneration by 23% for the former CEO and 12.5% for Group Executives for 2020 to reflect changes in the LTVR allocation methodology, as well as applying downward remuneration adjustments in light of material risk and compliance matters. In addition, the CEO’s 2019 STVR outcome was zero as was the case for the former Chief Executive, BT Financial Group and the former Chief Executive, Consumer. Non-executive Director base fees for 2019 were also reduced by 20% as a one-off measure. 71 While most shareholders voted in favour of the report, feedback we received from shareholders in relation to the 2019 Remuneration Report included: • • discontent with the AUSTRAC Statement of Claim; negative sentiment following the reduction in dividends in 2019 and overall poor Group performance, including significant remediation provisions for 2019; and • a lack of support for 2019 STVR outcomes. In 2020, the Chairman and I continued our consultation with shareholders and shareholder advisory groups to better understand shareholder views and to act on their feedback. This feedback has informed the decisions we have made on remuneration outcomes throughout the year. Leadership renewal The leadership of the Group has changed significantly since 2019. Board changes Lindsay Maxsted, Ewen Crouch, and Anita Fung retired as Directors during the year and Alison Deans will retire following the 2020 Annual General Meeting. Chris Lynch and Michael Hawker were appointed to the Board, in September and November 2020 respectively, and we expect to appoint two more Board Directors in the new year. All four appointments will diversify and add to the Board’s skills. The Board made changes to the structure of its Committees. This included establishing a Board Financial Crime Committee to oversee the implementation of Westpac’s enhanced financial crime program. The Board Legal, Regulatory & Compliance Committee then replaced the Board Financial Crime Committee. Executive changes Following Brian Hartzer stepping down from the role of CEO, Peter King was appointed as Acting CEO effective 2 December 2019. Peter King was later appointed as Managing Director & CEO on a permanent basis on 2 April 2020. There have also been changes to executive Key Management Personnel (KMP) including: • • • • Permanent appointments: Guil Lima (Chief Executive, Business), Michael Rowland (Chief Financial Officer), Les Vance (Group Executive, Financial Crime, Compliance & Conduct) and Jason Yetton (Chief Executive, Specialist Businesses, Strategy & Transformation); Acting appointments and other changes: Richard Burton (Acting Chief Executive, Consumer); Gary Thursby (Acting Chief Financial Officer and later the Acting Chief Information Officer); Alastair Welsh (Acting Group Executive, Enterprise Services); Curt Zuber (Acting Chief Executive, Westpac Institutional Bank) and Rebecca Lim (Group General Counsel & Enterprise Executive); Resignations: Craig Bright (Chief Information Officer) and David Lindberg (Chief Executive, Consumer); and Retirement: Lyn Cobley (Chief Executive, Westpac Institutional Bank). 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  72 Directors’ report A summary of remuneration decisions and outcomes for 2020 is set out following this letter, along with a summary of executive appointment and exit arrangements. In addition, we announced executive changes for 2021 including: • • • • Anthony Miller was appointed as Chief Executive, Westpac Institutional Bank and Curt Zuber will retire; Chris de Bruin was appointed as Chief Executive, Consumer; Scott Collary was appointed as Chief Operating Officer and will bring together the Group Operations and Group Technology divisions; and Gary Thursby will act as Chief Information Officer until Scott Collary commences. Review of the executive remuneration structure The Group commenced a review of the executive remuneration structure and intends to implement changes in 2022. In addition to complying with APRA’s proposed Prudential Standard CPS 511 (Remuneration), the key objective supporting the review is to place greater emphasis on rewarding long term, rather than short term, achievement. The need to focus on the longer term outcomes was highlighted during the Royal Commission and aligns with feedback from shareholders and regulators. It is also important that the new structure assists in attracting and retaining executive talent to deliver on Westpac’s strategy in an intensely competitive international market. We look forward to engaging with shareholders in 2021 on the review. Other changes for 2021 The Board reviewed the LTVR performance hurdle for 2021 and determined to reduce the number of companies in the comparator group from 10 to 8 companies to provide a more focused and equally weighted peer group. In line with market practice, a percentile ranking vesting schedule will also replace the composite index. Further detail is set out in Section 4.2 of the Report. On behalf of the Board, I invite you to read our Remuneration Report and welcome your feedback. I hope you find the summaries on the following pages to be a useful reference when reading the broader Report. Craig Dunn, Chairman Board Remuneration Committee In this Report 1. Key Management Personnel 2. Summary of the 2020 executive remuneration framework 3. 2020 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 75 76 78 85 88 90 92 WESTPAC GROUP 2020 ANNUAL REPORT Directors’ report Summary of remuneration decisions and actions 73 • • • • • • • • • • • • • • • • Chief Executive Officer Group Executives Non- executive Directors All employees As part of his permanent appointment, the CEO’s target remuneration package for 2020 included fixed remuneration of $2,400,000, target STVR of $2,400,000 (which may be awarded at between 0% and 150% of target depending on performance) and LTVR of $3,200,000. This represents a 10.7% reduction relative to the former CEO, whose total target remuneration was reduced by 23% in October 2019. The CEO’s 2020 STVR outcome is zero. The 2017 LTVR outcome is zero. The LTVR lapsed in full because the relative TSR and cash ROE performance hurdles were not achieved. In 2020, the CEO received $2.12 million in fixed remuneration and $0.29 million in deferred STVR awarded in prior years that vested during the year, equalling $2.41 million in total realised remuneration (i.e. take home pay). This outcome is 44% of the maximum remuneration he could have received for the year. No Group Executive will receive a STVR award for 2020, reflecting collective accountability for the financial crime outcomes in Westpac’s businesses that led to the AUSTRAC proceedings. This applies to Group Executives who joined the Group during the year and Acting Group Executives. The Board’s assessment of accountability and responsibility for the allegations in the AUSTRAC Statement of Claim also resulted in two current Group Executives having their 2019 STVR outcome reduced. One former Group Executive had all of their STVR from 2019 and prior years reduced to zero, while another former Group Executive had all of their unvested STVR and LTVR reduced to zero. In addition, adjustments were made to a former Group Executive for other material risk and compliance matters via reductions to unvested LTVR from prior years. A total target remuneration increase of 19% was approved for Carolyn McCann in line with the increased scope and accountability associated with her expanded role, including the Customer Outcomes and Risk Excellence program and remediation. Christine Parker's pay mix was also changed to align to a control function pay mix. Temporary increases in total target remuneration were also approved for individuals in Acting Group Executive roles. 2021 LTVR awards for the CEO and Group Executives will be granted at target levels in line with the relevant target remuneration mix. John McFarlane commenced as Chairman during the year and receives an annual fee of $890,000. The Board approved the fee structure for the Board Financial Crime Committee which was later replaced by the Board Legal, Regulatory & Compliance Committee. All other Board fees remain unchanged. The 2020 variable reward pool was reduced by $139 million from 2019 to align with performance and having regard to the challenging economic environment created by COVID-19. The 2019 pool was also significantly reduced. The Board considered cancelling the variable reward pool altogether, however believed it was important to respond to key retention concerns and reward the outstanding contribution of our most critical employees to support the delivery of our strategy. 2020 STVR for General Managers was cancelled in light of performance and the challenging environment created by COVID-19. In addition to the remuneration adjustments for Group Executives, downward remuneration adjustments were approved for a range of current and former employees in response to the AUSTRAC matters, as well as other material risk and compliance matters impacting the Group, ranging from 10% to 100% of STVR. • The Group managed 1,070 employee conduct matters in Australia in 2020, of which 108 employees exited the business and 427 employees were subject to formal disciplinary outcomes. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  74 Directors’ report Summary of appointment and exit arrangements The tables below summarise the appointment and exit arrangements for executives as approved by the Board during the year. Further details are provided in the Report. New Executive Appointment arrangements Guil Lima Chief Executive, Business Michael Rowland Chief Financial Officer Les Vance Group Executive, Financial Crime, Compliance & Conduct Jason Yetton Chief Executive, Specialist Businesses, Strategy & Transformation • • • • • • • • Total target remuneration of $4,392,500 comprised of 26.5% fixed remuneration, 26.5% STVR and 47% LTVR. Pro rata 2020 LTVR grant. Buy out award1 comprising cash and equity components totalling $1,693,151. Relocation benefits. Total target remuneration of $3,800,000 comprised of 32% fixed remuneration, 24% STVR and 44% LTVR. Not eligible for 2020 STVR or 2020 LTVR. Relocation benefits. Total target remuneration of $2,800,000 comprised of 32% fixed remuneration, 24% STVR and 44% LTVR. • Pro rata 2020 LTVR grant. • Total target remuneration of $4,375,000 comprised of 26% fixed remuneration, 26% STVR and 48% LTVR. • Pro rata 2020 LTVR grant. Former Executive Exit arrangements2 Brian Hartzer Former Managing Director & Chief Executive Officer Craig Bright Former Chief Information Officer Lyn Cobley Former Chief Executive, Westpac Institutional Bank David Lindberg Former Chief Executive, Consumer • • • • • • • • • • • • Received contractual requirements after stepping down from the role of Managing Director & Chief Executive Officer. Unvested equity lapsed. Not eligible for 2020 STVR. Served a mutually agreed reduced notice period. Unvested equity lapsed. Not eligible for 2020 STVR. Received contractual requirements in line with retirement. Unvested equity remains on foot. 2020 STVR cancelled. Served a mutually agreed reduced notice period. Unvested equity lapsed. 2020 STVR cancelled. 1. 2. Provided in exceptional circumstances to compensate external hires for remuneration foregone from their previous employer on resignation to join Westpac. Awards reflect the vesting profile at the previous employer and are subject to continued service and adjustment. Refer to Section 5.4 for an overview of employment agreements including termination provisions. WESTPAC GROUP 2020 ANNUAL REPORT 75 Directors’ report Key Management Personnel 1. The remuneration of KMP is disclosed in the Report. In 2020, KMP comprised the CEO, Group Executives and Non-executive Directors as set out in the table below. Disclosures related to former KMP that ceased in 2019 are included in the 2019 Annual Report. 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 Peter King1 Managing Director & Chief Executive Officer Full Year Group Executives Rebecca Lim2 Group General Counsel & Enterprise Executive Ceased in KMP role on 18 May 2020 Guil Lima Chief Executive, Business Commenced in KMP role on 2 December 2019 Carolyn McCann3 Group Executive, Customer & Corporate Relations David McLean Chief Executive Officer, Westpac New Zealand Christine Parker Group Executive, Human Resources Full Year Full Year Full Year Michael Rowland Chief Financial Officer David Stephen Chief Risk Officer Gary Thursby4 Acting Chief Information Officer Commenced in KMP role on 1 September 2020 Full Year Full Year Les Vance Group Executive, Financial Crime, Compliance & Conduct Commenced in KMP role on 15 June 2020 Jason Yetton5 Chief Executive, Specialist Businesses, Strategy & Transformation Commenced in KMP role on 4 May 2020 Acting Group Executives Richard Burton Acting Chief Executive, Consumer Commenced in KMP role on 15 June 2020 Alastair Welsh6 Acting Group Executive, Enterprise Services Full Year Curt Zuber7 Acting Chief Executive, Westpac Institutional Bank Commenced in KMP role on 1 July 2020 Former CEO and Group Executives Brian Hartzer Managing Director & Chief Executive Officer Ceased in KMP role on 2 December 2019 Craig Bright Lyn Cobley Chief Information Officer Ceased in KMP role on 25 September 2020 Chief Executive, Westpac Institutional Bank Ceased in KMP role on 1 July 2020 David Lindberg Chief Executive, Consumer Ceased in KMP role on 15 June 2020 Current Non-executive Directors John McFarlane8 Chairman Nerida Caesar Alison Deans9 Craig Dunn Steven Harker Chris Lynch10 Peter Marriott Peter Nash Margaret Seale Director Director Director Director Director Director Director Director Former Non-executive Directors Lindsay Maxsted Chairman Ewen Crouch Director Anita Fung Director Commenced in KMP role on 17 February 2020 Full Year Full Year Full Year Full Year Commenced in KMP role on 1 September 2020 Full Year Full Year Full Year Retired on 31 March 2020 Retired on 12 December 2019 following the 2019 Annual General Meeting Retired on 31 March 2020 1. 2. 3. 4. 5. 6. Peter King was the Chief Financial Officer until 2 December 2019 when he was appointed as the Managing Director & Acting Chief Executive Officer. Peter King was appointed as the Managing Director & Chief Executive Officer on 2 April 2020. Rebecca Lim was the Group Executive, Legal & Secretariat until 16 December 2019 when she was appointed Enterprise Legal Counsel focusing on AUSTRAC matters. Rebecca Lim resumed her Group General Counsel role when she was appointed the Group General Counsel & Enterprise Executive on 18 May 2020. Carolyn McCann's role and accountability was expanded during the year. This included accountability for the Customer Outcomes and Risk Excellence program and remediation. Gary Thursby was the Chief Operating Officer until 2 December 2019 when he was appointed as the Acting Chief Financial Officer. Gary Thursby was appointed as the Acting Chief Information Officer on 25 September 2020. Jason Yetton commenced as a Group Executive on 4 May and was appointed the Chief Executive, Specialist Businesses on 18 May. Jason Yetton assumed additional responsibility from 1 September 2020 for strategy and transformation across the Group. Alastair Welsh was the Acting Chief Executive, Business until 2 December 2019 when he was appointed as the Acting Group Executive, Enterprise Services. Curt Zuber will retire in 2021. John McFarlane was appointed as a Non-executive Director on 17 February 2020 and was appointed as Chairman on 1 April 2020. Alison Deans will retire from the Board following the 2020 Annual General Meeting. 7. 8. 9. 10. Chris Lynch was appointed as a Non-executive Director on 1 September 2020. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  76 Directors’ report 2. Our purpose and strategy are supported by our remuneration strategy, principles and frameworks. Summary of the 2020 executive remuneration framework Westpac’s purpose and strategy Westpac’s purpose is to help Australians and New Zealanders succeed. Our strategy seeks to deliver on our purpose 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; and be simple, flexible and transparent. Executive remuneration framework Fixed remuneration 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. STVR LTVR Align executive accountability and remuneration with the long-term interests of shareholders by rewarding the delivery of sustained Group performance over the long term. 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. Awarded in performance share rights which vest after four years subject to the achievement of a relative Total Shareholder Return (TSR) performance hurdle, continued service and adjustment. Performance is assessed using a scorecard comprising: • financial and non-financial measures linked to Westpac’s key strategic priorities; and Performance is assessed against relative TSR which is a comparative measure of Westpac’s performance relative to that of peers (measured over four years). • 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. 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 delivered in equity and the relative TSR performance hurdle is aligned to long-term shareholder returns and value creation. 1. The Group Executive outside of Australia receives deferred STVR as unhurdled share rights. WESTPAC GROUP 2020 ANNUAL REPORT 77 Directors’ report 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 influence remuneration outcomes. The key risks that are considered include capital, credit, market, equity, liquidity, insurance, risk culture, financial crime, reputation and sustainability, conduct, operational and compliance risk. In addition, STVR outcomes are influenced by relevant risk-related matters through the Board’s application of the scorecard modifier, which is informed by risk and compliance input independent of the business or functional area. Variable reward pool: The Board determines the size of the variable reward pool each year. 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 pool reflects financial performance. A broad range of financial and non-financial risk measures and customer outcomes may also be taken into account when allocating the 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 from 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. 2020 target remuneration mix1 Chief Executive Officer Group Executives2 40% LTVR 15% STVR (deferred component) 30% fixed remuneration 48% LTVR 15% STVR (cash component) 13% STVR (deferred component) 26% fixed remuneration 13% STVR (cash component) 1. Based on target STVR and LTVR (face value). Variation in the target remuneration mix by individual may apply. 2. Excludes Control Function Group Executives with a target remuneration mix comprised of 32% fixed remuneration, 24% STVR and 44% LTVR. This applies to the Group Executive, Customer & Corporate Relations, the Group Executive, Financial Crime, Compliance & Conduct, the Chief Financial Officer, the Group Executive, Human Resources and the Chief Risk Officer. 2.3. Timeline of potential remuneration 2020 2021 2022 2023 2024 Fixed remuneration Cash STVR award (50%) Deferred STVR award (25%) Deferred STVR award (25%) LTVR award subject to relative TSR performance (100%) – measured over 4 years Date paid Date granted Date eligible for vesting 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  78 Directors’ report 3. 2020 remuneration outcomes and alignment to performance 3.1. Snapshot of 2020 remuneration outcomes Remuneration consequences for the AUSTRAC matters Remuneration consequences in response to information known by the Board, in relation to the AUSTRAC matters at the time, were disclosed in the 2019 Remuneration Report. This included consequences for the self-reported breaches to AUSTRAC which contributed to the zero 2019 STVR outcome for the former CEO, the zero score for non-financial risk in 2019 STVR scorecards for Group Executives, the downward adjustment to a portion of deferred STVR awarded in a prior year for a former Group Executive and the 20% one off fee cut for Non-executive Directors in 2019. Following the receipt of further information contained in the AUSTRAC Statement of Claim in November 2019 (and release of the 2019 Remuneration Report), the Board determined to withhold 2019 STVR for Group Executives (and relevant General Managers and other employees), in part or in full, while a review of management accountability associated with the allegations was completed. While the AUSTRAC matters did not arise from any intentional wrong-doing or misconduct, compliance failures did occur and it was appropriate that consequences be applied under the Westpac Consequence Management Framework. This included further remuneration impacts and disciplinary actions. Remuneration consequences were applied in line with Westpac’s Remuneration Adjustment Guidelines. The guidelines are designed to support consistency and fairness in determining remuneration adjustments based on an assessment of the severity of the matter(s) as well as the level of individual accountability or responsibility. Adjustments are then applied to individual’s at-risk remuneration based on a pre-determined order of awards to ensure consistency and the ability to make further adjustments in the future where required. In summary, remuneration consequences were applied to 38 current and former employees via reductions, either in part or in full, to: • • • 2019 STVR; unvested equity awards granted in prior years; and if neither of the above were available for adjustment then adjustments were made to 2020 STVR. In total, remuneration consequences amounted to $20.1 million¹. This included consequences applied to prior year awards, including withheld 2019 STVR, of approximately $13.2 million and consequences applied to 2020 STVR awards of approximately $6.9 million. Remuneration consequences for some former employees were not possible given there was no deferred variable remuneration available to adjust. 2020 STVR The CEO recommended to the Board that he and the Group Executives receive no STVR for 2020 as a consequence for the AUSTRAC matters as outlined above. The CEO and Board felt it was fundamental that collective accountability for the financial crime outcomes in Westpac’s businesses which had led to the action being taken by AUSTRAC be recognised. The Board fully supported the CEO’s recommendation and determined that 2020 STVR be cancelled for the CEO and Group Executives. In addition, 2020 STVR for General Managers was cancelled in light of performance and the challenging environment created by COVID-19. There is a zero vesting outcome under Westpac’s LTVR plan for the CEO and Group Executives in 2020. The performance hurdles, comprising relative TSR and cash ROE2, were not achieved and the 2017 LTVR award lapsed in full. The table below shows the vesting outcome for the 2017 LTVR award to the CEO and Group Executives that reached the end of its performance period in 2020. 2017 LTVR Performance hurdle Performance start date Performance range Test date Threshold Maximum Outcome % Vested % Lapsed TSR (50% of award) ROE (50% of award) 1 October 2016 1 October 2020 1 October 2016 1 October 20204 Equal to composite TSR index Exceeds composite TSR index by 21.55 (i.e. 5% CAGR3) Westpac: (27.35%) Index: (9.04%) 0% 100% 13.50% 14.50% 12.47% 0% 100% 1. 2. 3. 4. Includes the forfeiture of unvested STVR and LTVR for the former CEO as well as a range of downward remuneration adjustments, in part or in full, to current and former executives and employees. Equity-based awards were valued using the five day VWAP of a Westpac share up to and including the date of receipt of the AUSTRAC Statement of Claim on 20 November 2019 ($26.20) and applying a 50% discount for LTVR subject to performance conditions. The cancellation of 2020 STVR for the CEO and Group Executives was valued at 50% of target opportunity as at 2 April 2020. Cash ROE is return on equity on a cash earnings basis. Cash earnings is not prepared in accordance with accounting standards and has not been subject to audit. Refer to Note 2 to the Financial Statements for a description of cash earnings. Compound annual growth rate. The cash ROE hurdled performance share rights reached the end of their performance period on 30 September 2019 and were subject to an additional one year holding lock through to 30 September 2020. WESTPAC GROUP 2020 ANNUAL REPORT Directors’ report Group performance 3.2. The table below summarises the key performance indicators for the Group and variable reward outcomes over the last five years. 79 CEO STVR award (% of maximum) Average Group Executive STVR (% of maximum) LTVR award (% vested) Cash earnings1 ($m) Statutory earnings ($m) Economic profit/(loss)2 ($m) Cash ROE2 TSR – three years TSR – five years Dividends per Westpac share (cents) Cash earnings per Westpac share1 Share price – high Share price – low Share price – close 2020 0% 0% 0% 2,608 2,290 (3,579) 3.83% (35.43%) Years ended 30 September 2019 2018 0% 37% 0% 6,849 6,784 1,619 10.75% 15.33% 52% 58% 0% 8,065 8,095 3,444 13.00% 8.27% 2017 74% 73% 0% 8,062 7,990 3,774 13.77% 11.79% 2016 65% 63% 0% 7,822 7,445 3,774 13.99% 15.24% (27.87%) 14.58% 25.67% 81.32% 100.72% 31 $0.73 $29.81 $13.47 $16.84 174 $1.98 $30.05 $23.30 $29.64 188 188 188 $2.36 $33.68 $27.24 $27.93 $2.40 $35.39 $28.92 $31.92 $2.35 $33.74 $27.57 $29.51 Cash earnings and CEO STVR award (2016 to 2020) 150% 125% 100% 75% 50% 25% 0% d r a w a R V T S O E C ) m u m x a m i f o % ( 100% 80% 60% 40% 20% 0% ) d e t s e v % ( d r a w a R V T L 2016 2017 2018 2019 2020 Cash earnings ($m) CEO STVR award (% of maximum) Return on equity and LTVR vesting (2016 to 2020) 2016 2017 2018 2019 2020 Return on equity (%) LTVR award (% vested) Total shareholder return (from 1 October 2015 to 30 September 2020) ) m $ ( i 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 y t i u q e n o n r u t e R 16% 14% 12% 10% 8% 6% 4% 2% 0% 40% 30% 20% 10% 0% -10% -20% -30% -40% n r u t e r l r e d o h e r a h s l a t o T Oct 15 Oct 16 Oct 17 Oct 18 Oct 19 Oct 20 Westpac Peer 1 Peer 2 Peer 3 1. 2. Cash earnings is not prepared in accordance with AAS and has not been subject to audit. Refer to Note 2 to the Financial Statements for a description of cash earnings. Economic profit and cash ROE is derived from cash earnings. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  80 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 2020. This includes: • • • • • fixed remuneration, including cash salary and superannuation contributions and excluding contractual provisions on termination, paid during the year; cash STVR awarded in respect of the year; other cash payments made during 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 also reference the maximum value of total remuneration foregone in 2020, including cash STVR not awarded in respect of the year (based on the maximum STVR opportunity being 150% of target) and deferred STVR and LTVR awarded in prior years that was forfeited, adjusted or lapsed during the year. For former executives, this also includes unvested equity on foot that was forfeited or lapsed on termination that was subject to vesting in future years. The value of deferred STVR and LTVR is based on the number of restricted shares or share rights multiplied by the five day VWAP up to and including the date of vesting, forfeiture or lapse (as relevant). The value of equity differs from the disclosure in Section 7. Buy out awards paid or vested during 2020 are set out in Section 3.4. Total realised remuneration ($000) Fixed remuneration Cash STVR Other cash payments Vesting of prior year deferred STVR awards Vesting of prior year LTVR awards 2020 maximum realisable remuneration Managing Director and Chief Executive Officer 0 1,000 2,000 3,000 4,000 5,000 6,000 2020 total remuneration Peter King Managing Director & Chief Executive Officer 0 2 0 2 9 1 0 2 2,121 294 1,288 327 601 0 1,000 2,000 3,000 4,000 Group Executives Rebecca Lim2,3 Group General Counsel & Enterprise Executive Guil Lima2 Chief Executive, Business Carolyn McCann Group Executive, Customer & Corporate Relations David McLean Chief Executive Officer, Westpac New Zealand Christine Parker Group Executive, Human Resources Michael Rowland2 Chief Financial Officer 0 2 0 2 9 1 0 2 0 2 0 2 0 2 0 2 9 1 0 2 0 2 0 2 9 1 0 2 0 2 0 2 9 1 0 2 0 2 0 2 601 216 950 188 409 969 810 153 740 195 260 1,026 355 1,029 427 538 946 259 884 315 501 101 Realised: 2,415 Foregone (max): 3,039 Realised: 817 Foregone (max): 1,362 Realised: 969 Foregone (max): 726 Realised: 963 Foregone (max): 452 Realised: 1,381 Foregone (max): 1,926 Realised: 1,205 Foregone (max): 1,719 Realised: 101 Foregone (max): n/a 1. 2. 3. Equity that vested on 1 October 2020 is included in the 2020 figures. Equity that vested on 1 October 2019 is included in the 2019 figures. The information relates to the period the individual was a KMP. Refer to Section 1 for further details. 2019 cash STVR values have been adjusted to reflect consequences for the AUSTRAC matters. The values differ from Section 7 which are disclosed in line with accounting standards. WESTPAC GROUP 2020 ANNUAL REPORT  Directors’ report 0 1,000 2,000 3,000 4,000 2020 total remuneration 81 David Stephen3 Chief Risk Officer Gary Thursby4 Acting Chief Information Officer Les Vance2 Group Executive, Financial Crime, Compliance & Conduct Jason Yetton2 Chief Executive, Specialist Businesses, Strategy & Transformation Richard Burton2 Acting Chief Executive, Consumer Alastair Welsh Acting Group Executive, Enterprise Services 0 2 0 2 9 1 0 2 0 2 0 2 9 1 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 9 1 0 2 Curt Zuber2 Acting Chief Executive, Westpac Institutional Bank 0 2 0 2 1,807 164 1,800 331 1,179 248 120 900 315 467 Acting Group Executives 263 463 0 0 467 250 315 467 834 135 76 402 296 Brian Hartzer2,5,6 Managing Director & Chief Executive Officer Craig Bright2,6 Chief Information Officer Lyn Cobley2,3,5,7 Chief Executive, Westpac Institutional Bank David Lindberg2,5,6 Chief Executive, Consumer 0 2 0 2 9 1 0 2 0 0 0 2 0 2 9 1 0 2 0 2 0 2 9 1 0 2 0 2 0 2 9 1 0 2 Former Chief Executive Officer and Group Executives 3,000 6,000 9,000 12,000 15,000 18,000 463 2,686 1,329 1,000 2,000 3,000 4,000 5,000 6,000 1,210 1,008 381 847 1,122 582 822 1,124 125 516 Realised: 1,971 Foregone (max): 1,012 Realised: 1,547 Foregone (max): 1,763 Realised: 263 Foregone (max): 147 Realised: 463 Foregone (max): 358 Realised: 250 Foregone (max): 184 Realised: 910 Foregone (max): 625 Realised: 296 Foregone (max): 282 Realised: 463 Foregone (max): 16,063 Realised: 1,210 Foregone (max): 2,952 Realised: 847 Foregone (max): 2,436 Realised: 822 Foregone (max): 6,040 4. 5. 6. 7. 2020 other cash payments include the cash portion of a project bonus approved by the Board on 5 March 2020 and paid to Gary Thursby following the successful divestment of part of the BT Financial Group and the Wealth Reset. This relates to work mostly completed in 2019 in Gary Thursby's previous role as Chief Operating Officer. 2020 fixed remuneration excludes contractual provisions on termination to 30 September 2020 paid after the executive ceased to be a KMP. This includes $2.223 million for Brian Hartzer, $280,500 for Lyn Cobley and $290,000 for David Lindberg. 2020 maximum remuneration foregone includes unvested equity forfeited or lapsed on termination that was subject to vesting in future years. 2020 maximum remuneration foregone excludes adjustments to 2019 deferred STVR before it was granted as a result of the AUSTRAC matters. 2020 maximum remuneration foregone includes adjustments to unvested STVR from prior years as a result of the AUSTRAC matters and unvested LTVR adjusted as a result of other material risk and compliance matters. The values differ from Section 7 which are disclosed in line with accounting standards. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  82 Directors’ report Buy out awards paid or vested during 2020 3.4. Buy out awards are provided in exceptional circumstances to compensate external hires for remuneration foregone from their previous employer on resignation to join Westpac. These awards reflect the vesting profile at the previous employer and are subject to continued service and adjustment. In addition to the total remuneration realised in Section 3.3, the following buy out awards were paid or vested during the year: • • • Craig Bright had 9,152, 13,090, 8,538 and 9,748 restricted shares granted under the Restricted Share Plan which vested in December 2019, February 2020, June 2020 and August 2020 respectively; David Stephen had 67,965 restricted shares granted under the Restricted Share Plan which vested in March 2020; and Guil Lima received a cash buy out award of $533,180. 2020 short term variable reward and Group scorecard 3.5. The Group’s priorities are set out in the Group scorecard, which forms part of the CEO’s scorecard and is cascaded to Group Executive scorecards in combination with other divisional or functional measures. In April 2020, the CEO recommended to the Board that he and the Group Executives receive no STVR for 2020 to demonstrate collective accountability for the financial crime outcomes in Westpac’s businesses that led to the AUSTRAC proceedings. The Board supported the CEO’s recommendation and determined that 2020 STVR be cancelled for the CEO and Group Executives. Subsequently, 2020 STVR was also cancelled for General Managers in light of performance and the challenging environment created by COVID-19. Notwithstanding the zero outcomes for 2020 STVR, the Board completed an assessment of performance against the 2020 Group scorecard. The overall outcome was 35% of target. Performance measures and targets in the Group scorecard were not adjusted to reflect the impacts of COVID-19. The Board’s preference is to make discretionary adjustments within each focus area of the scorecard where the initial score is not considered to appropriately reflect performance. The discretion applied by the Board in determining these adjustments reflect performance and risk outcomes for the year along with the outcomes experienced by our stakeholders. A summary of the Group scorecard performance assessment is provided below. Since the appointment of the new CEO, the Group’s purpose has been reset and clear priorities have been established. Good progress has been made in relation to transformation plans with refreshed leadership, changes in strategy and a detailed program to address the Group’s shortcomings in risk management. Group scorecard - short term variable reward Target Maximum Outcome Group financial performance (40%) Performance measurement is based on cash earnings growth, core earnings growth and cash ROE against plan. • • • Cash ROE was 3.83%, down from 10.75% in 2019 and lower than the 11.11% target. Group Core Earnings growth was down 25% year on year and below the target of 12.6%. Group Cash Earnings growth was down 62% year on year and below the target of 10.4%. Financial performance was impacted by significant increases in impairment charges, costs associated with the AUSTRAC matters, intangible write-downs, lower economic activity and low interest rates. Balance sheet risk management (10%) Performance measurement is based on operating performance relative to the Risk Appetite Statement as measured by capital, funding and liquidity management. • • Our Common Equity Tier 1 (CET1) ratio was 11.13%, the Net Stable Funding Ratio was 122% and the Liquidity Coverage Ratio was 150%. These outcomes were above target. While the CET1 result was above target, it was partly achieved through the raising of capital and reduction in dividends. Given the impact of these decisions on shareholders, the CET1 result was assessed as nil. 0% 100% 150% 0% of target 0% 100% 150% 50% of target WESTPAC GROUP 2020 ANNUAL REPORT 83 0% 100% 150% 35% of target 0% 100% 150% 60% of target Directors’ report Risk management (20%) Performance measurement is based on closing out the recommendations from the Culture, Governance and Accountability (CGA) review, completing remediation programs, improving risk management capability and culture, and strengthening financial crime capability. Progress was made on some key milestones to improve risk management: • • • • • Implemented 37 of 45 recommendations from the CGA review; Mobilised the Customer Outcomes and Risk Excellence program following the reassessment of the CGA review in light of the AUSTRAC Statement of Claim; Programs to improve the risk management of financial crime with early milestones delivered; Improved tools and processes developed to support a stronger and more mature risk culture; and Solid progress on remediation with substantial payments to customers, notwithstanding an increase in provisions. The overall result was adjusted downwards as the management of non-financial risk was below expectations. The AUSTRAC matters resulted in the cancellation of 2020 STVR for the CEO and Group Executives. Customer franchise (10%) Performance measurement is based on employee engagement, business simplification, net promoter score (NPS) and progress on addressing the root causes of customer pain points. • • • • • • Reduced products with a focus on simplification and automation. The Business division maintained the Number 1 ranking on NPS. The Consumer division maintained its Number 3 ranking on NPS with improvements in mortgage processing required. Reduced average time to close complaints with 56% solved on the same day. Reduced the number of long-dated complaints by 93%. Significant support provided to customers impacted by bushfires, floods and COVID-19. Employee engagement reached the target level which was considered a strong performance having regard to environmental factors. Digital transformation (10%) Performance measurement is based on the delivery of digital and data initiatives. 0% 100% 150% • • • • Delivered customer benefits and improved strategic capability, including the Customer Service Hub and the new mobile banking application. Improved system stability with major outages down more than 50% and a lift in network speed. Rapid and effective response to COVID-19 including new working arrangements, and digitising processes (such as mortgage deferral requests). Digitally active customers in the Consumer division up by 91,000 and 25% of all sales in the Business division are through digital channels. 70% of target Operating model (10%) Performance measurement is based on the delivery of the new operating model, culture roadmap and digital partnership initiatives. 0% 100% 150% • • • • • Refreshed the Executive Team structure, roles and accountabilities. Commenced implementing a Lines of Business operating model. Developed a Culture Roadmap and refreshed the Group’s Purpose, Values and Behaviours. Commenced the pilot of a new culture survey tool (Organisational Health Index). Digital and fintech investments delivered significant value. 100% of target 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  84 Directors’ report Variable reward awarded for 2020 (unaudited) 3.6. The table below shows the variable reward awarded to the CEO and Group Executives for 2020, including: • • STVR outcomes for 2020 (including the cash and deferred equity components); and equity granted under the 2020 LTVR plan1. 2020 STVR for the CEO and Group Executives was cancelled to demonstrate collective accountability for the financial crime outcomes in Westpac’s businesses that led to the AUSTRAC proceedings. The final value of equity received 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 remuneration adjustments. 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 accounting standards. Name Managing Director & Chief Executive Officer Peter King Group Executives Rebecca Lim2 Group General Counsel & Enterprise Executive Guil Lima2 Chief Executive, Business Carolyn McCann Group Executive, Customer & Corporate Relations David McLean Chief Executive Officer, Westpac New Zealand Christine Parker Group Executive, Human Resources Michael Rowland2 Chief Financial Officer David Stephen Chief Risk Officer Gary Thursby3 Acting Chief Information Officer Les Vance2 Group Executive, Financial Crime, Compliance & Conduct Jason Yetton2 Chief Executive, Specialist Businesses, Strategy & Transformation Acting Group Executives Richard Burton2 Acting Chief Executive, Consumer Alastair Welsh Acting Group Executive, Enterprise Services Curt Zuber2 Acting Chief Executive, Westpac Institutional Bank Former CEO and Group Executives Brian Hartzer2 Managing Director & Chief Executive Officer Craig Bright2,4 Chief Information Officer Lyn Cobley2 Chief Executive, Westpac Institutional Bank David Lindberg2,4 Chief Executive, Consumer Average STVR award (%) 2020 STVR award 2020 LTVR award Target STVR opportunity (pro rata) Maximum STVR opportunity (pro rata) STVR award (as % of target) STVR award (as % of maximum) STVR outcome Maximum STVR foregone Face value1 (pro rata) 2,081,333 3,122,000 0% 0% 0 3,122,000 2,657,167 468,750 703,125 966,667 1,450,000 0% 0% 0% 0% 0 703,125 1,318,750 0 1,450,000 1,727,083 602,917 904,375 0% 0% 0 904,375 1,126,276 1,025,736 1,538,604 850,000 1,275,000 - - 1,350,000 2,025,000 1,004,167 1,506,250 0% 0% - 0% 0% 0% 0% - 0% 0% 195,417 293,125 0% 0% 477,083 715,625 0% 0% 0 0 - 1,538,604 1,855,376 1,275,000 1,562,000 - - 0 2,025,000 2,559,375 0 1,506,250 1,809,896 0 0 293,126 358,750 715,625 879,167 245,000 367,500 833,333 1,250,000 0% 0% 0% 0% 0 367,500 45,208 0 1,250,000 416,667 375,000 562,500 0% 0% 0 562,500 181,000 447,667 671,500 561,000 841,500 841,500 1,262,250 821,667 1,232,500 - - 0% 0% 0% - - 0% 0% 0% - - 671,500 - 841,500 2,214,000 0 1,262,250 2,029,500 0 1,232,500 2,072,500 2. 3. 1. Calculated by multiplying the number of rights by the five day VWAP up to and including the grant date. The five day VWAP was $29.87 for awards made in December 2019 and $16.14 for awards made in July 2020. For Peter King, this excludes the additional 2020 LTVR award of $200,000 following his appointment as CEO which is subject to shareholder approval at the 2020 Annual General Meeting. The information relates to the period the individual was a KMP. Refer to Section 1 for further details. Excludes Gary Thursby’s project bonus of $240,000 (50% cash and 50% deferred equity) approved by the Board on 5 March 2020 relating to the successful divestment of part of the BT Financial Group and the Wealth Reset. This work was mostly completed in 2019 in Gary Thursby's previous role as Chief Operating Officer. Excludes adjustments to unvested 2020 LTVR, and other equity based awards, that were forfeited or lapsed on termination. 4. WESTPAC GROUP 2020 ANNUAL REPORT 85 Directors’ report 4. Further detail on the executive variable reward structure This section provides further details of the 2020 STVR and LTVR plans. 4.1. The table below sets out the key design features of 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 restricted share provides the holder with one ordinary share at no cost subject to trading restrictions until the time of vesting. One unhurdled share right entitles the holder to one ordinary share at the time of vesting with no exercise cost. 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. Target STVR (100% of fixed remuneration for the CEO and between 74% and 100% of fixed remuneration for Group Executives) 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. For 2020, STVR was cancelled for the CEO and Group Executives. 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 scorecard which is designed to align with shareholder interests by setting stretching 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 measures that are imperative to supporting the effective execution of Westpac’s strategy; and Modifier: The Board and Board Remuneration Committee recognise that performance measures 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 the 2020 Group scorecard is provided in Section 3.5. 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 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 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 applies, 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. Changes for 2021 There are no changes to the 2021 STVR plan. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  86 Directors’ report Long term variable reward 4.2. The table below sets out the key design features of the 2020 LTVR Plan awarded in December 2019 and changes for the 2021 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 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 2020 is 133% of fixed remuneration, and the face value of LTVR opportunities for the Group Executives (excluding Acting Group Executives) range between 137% and 183% of fixed remuneration. Allocation methodology 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 2020 for the 2020 LTVR grant). Performance hurdles LTVR is subject to a relative TSR performance hurdle that aims to achieve long-term growth in shareholders’ value and support alignment between executive reward and shareholder interests. Performance share rights only vest where Westpac’s TSR exceeds a composite index. Relative TSR is a measure of the total return delivered to shareholders over the performance period assuming dividends are reinvested, relative to that of 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 outlined below. Vesting occurs on a straight line basis between 50% and 100%. Westpac’s TSR performance Indicative vesting percentage Composite TSR index exceeded by 21.55 or more (i.e. 5% compound annual growth in TSR over the four year period) Equal to composite TSR index Below composite TSR index 100% 50% 0% Assessment of performance outcomes The comparator group of companies in the 2020 composite TSR index and their relative weightings are: AMP (7.14%), ANZ Banking Group (16.67%), Bank of Queensland (7.14%), Bendigo and Adelaide Bank (7.14%), Challenger (7.14%), Commonwealth Bank of Australia (16.67%), National Australia Bank (16.67%), Macquarie Group (7.14%), Perpetual (7.14%) and Suncorp Group (7.14%). The relative TSR result is calculated independently to ensure external objectivity 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 2024. No re-testing There is no re-testing. Awards that have not vested after the measurement period lapse immediately. Early vesting Delayed vesting 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 has discretion (subject to law) to delay vesting of equity-based awards if the individual is under investigation for misconduct, or the subject of or implicated in legal or regulatory proceedings, if the Board is considering an adjustment or if otherwise required by law. WESTPAC GROUP 2020 ANNUAL REPORT Directors’ report 87 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. 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. Long term variable reward plan Remuneration adjustments for prior period matters 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 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. The Board may also determine to apply clawback to LTVR which has previously vested. Clawback applies, to the extent legally permissible and practicable, to deferred 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. Changes for 2021 In line with market practice, a percentile ranking vesting schedule will replace the composite index to assess relative TSR performance as follows: Westpac’s TSR performance At the 75th percentile or higher Indicative vesting percentage 100% Between the median and the 75th percentile Pro-rata vesting between 50% and 100% At the median Below the median 50% 0% In addition, the number of companies in the comparator group will be reduced from 10 to 8 to provide a more focused and equally weighted comparator group including AMP, ANZ Banking Group, Bank of Queensland, Bendigo and Adelaide Bank, Commonwealth Bank of Australia, National Australia Bank, Macquarie Group and Suncorp Group. The table below details other LTVR awards currently on foot. Vesting date Performance hurdles Further detail 2018 LTVR award 30 September 2021 2019 LTVR award 30 September 2022 • • • Relative TSR performance against a weighted composite index of comparator companies (50%) Refer to the 2018 Annual Report Average cash ROE performance (50%) Relative TSR performance against a weighted composite index of comparator companies (50%) Refer to the 2019 Annual Report • Average cash ROE performance (50%) 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  88 Directors’ report 5. Remuneration governance Group Remuneration Policy and governance 5.1. The Group 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. Board The Board provides strategic guidance for the Group and has oversight of management’s implementation of Westpac’s strategic initiatives. The Board has accountability for reviewing and approving remuneration for select groups of employees. Without limiting its role, the Board approves (following recommendation from the Board Remuneration Committee where applicable) corporate goals and objectives relevant to the remuneration of the CEO, the size of the variable reward pool, adjustments to variable reward (including forfeiture and clawback) in accordance with the Group Remuneration Policy, remuneration (including variable reward targets and performance outcomes) for the CEO, Group Executives, other executives who report directly to the CEO, any other accountable persons under the Banking Executive Accountability Regime, 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 discharge its responsibility by overseeing remuneration policies and practices of Westpac and its related bodies corporate in the context that these policies and practices fairly and responsibly reward individuals having regard to performance, and reflect Westpac’s risk management framework, the law and the highest standard of governance. The Board Remuneration Committee reviews and makes recommendations to the Board in relation to the Group Remuneration Policy, remuneration arrangements for the individuals and groups outlined above, the remuneration structures for each category of persons covered by the Group Remuneration Policy, STVR and LTVR plans and outcomes and adjustments (including forfeiture and clawback) for the Group Executives, any other accountable persons under the Banking Executive Accountability Regime and any other person the Board determines, as well as corporate goals and objectives relevant to the remuneration of the CEO and approving any equity-based plans and overseeing general remuneration practices across Westpac. 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 Members of the Board Remuneration Committee are members of either the Board Risk Committee or the Board Legal, Regulatory & Compliance Committee. The cross membership of those Committees supports alignment between risk and reward. The Board Remuneration Committee seeks feedback from and considers matters raised by the Board Risk Committee, the Board Legal, Regulatory & Compliance Committee and the 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 and functional remuneration oversight committees consider areas of risk 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 minor changes were made to enhance the Terms of Reference for the Group Remuneration Oversight Committee. Remuneration consultants In 2020, the Board retained an independent adviser 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 the independent adviser included the provision of information relating to the benchmarking of Non-executive Director, CEO and Group Executive remuneration as well as modelling and analysis of alternative remuneration structures for the CEO and Group Executives. In 2020, no remuneration recommendations, as prescribed under the Corporations Act 2001 (Cth) (Corporations Act), were made by Board advisers. WESTPAC GROUP 2020 ANNUAL REPORT 89 Directors’ report 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 2020, the CEO and 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 $10.96 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, this has included: • • • 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 a self-managed superannuation fund since 2012. Hedging policy 5.3. Participants in Westpac’s equity plans are prohibited 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. Who Conditions Term Duration of agreement Notice (by the executive or the Group) to terminate employment Termination payments on termination without cause2 CEO and Group Executives CEO and Group Executives CEO and Group Executives Termination for cause CEO and Group Executives • • • • • Ongoing until notice given by either party Twelve months1 Deferred STVR and LTVR awards vest according to the applicable equity plan rules Immediately for misconduct Three months' notice for poor performance Post-employment restraints CEO and Group Executives • Twelve month non-solicitation restraint 1. 2. 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 2020 was $14.9 million (2019: $16.0 million). 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  90 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. 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 fees Committee fees Relate 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 & Governance 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 2020 6.2. John McFarlane was appointed as a Non-executive Director on 17 February 2020 and Chairman on 1 April 2020. The Chairman base fee was increased to $890,000 from $810,000. The Board established the Board Financial Crime Committee as a special purpose committee to oversee the implementation of Westpac's enhanced financial crime program. The Chairman of the Board Financial Crime Committee received a fee of $4,000 and each member received $2,000 on a per diem basis. The Board Financial Crime Committee later became the Board Legal, Regulatory & Compliance Committee to enhance oversight of non-financial risk. The Chairman of the Board Legal, Regulatory & Compliance Committee receives a fee of $67,500 and each member receives $30,000. The table below sets out the annual Board and standing Committee fees and the changes for 2020. Non-executive Director base fees have not increased since 1 October 2014 and the Non-executive Director fee pool of $4.5 million per annum was approved by shareholders at the 2008 Annual General Meeting. Non-executive Director base fees for 2019 were reduced by 20% as a one-off measure to recognise collective accountability for customer outcomes highlighted by the Royal Commission, shareholder sentiment leading to the first strike against the 2018 Remuneration Report and significant non-financial risk matters. For 2020, $3.66 million (81%) 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 Committee Board Remuneration Committee Board Technology Committee Board Legal, Regulatory & Compliance Committee Committee membership fees Board Audit Committee Board Risk Committee Board Remuneration Committee Board Technology Committee Board Legal, Regulatory & Compliance Committee Annual fee $ 890,000 225,000 70,400 90,000 63,800 35,200 67,500 32,000 32,000 29,000 20,000 30,000 Changes for 2020 Fee increase to $890,000 (from $810,000) effective 1 April 2020 No change No change No change No change No change New Committee for 2020 No change No change No change No change New Committee for 2020 Subsidiary Board and Advisory Board fees During the reporting period, additional fees of $42,610 were paid to Anita Fung (former Non-executive Director) as a member of the Westpac Asia Advisory Board. WESTPAC GROUP 2020 ANNUAL REPORT  91 Directors’ report 6.3. On 27 November 2019, the Board Financial Crime Committee was established. Changes to Board and Committee composition On 1 June 2020, the roles and responsibilities of the Board Risk & Compliance Committee were revised and the Committee was renamed the Board Risk Committee. At the same time, the Board Legal, Regulatory & Compliance Committee was established as a sub-committee of the Board Risk Committee. The Board Financial Crime Committee was also dissolved, with its responsibilities assumed by the Board Legal, Regulatory & Compliance Committee. On 1 July 2020, the roles and responsibilities of the Board Nominations Committee were revised and the Committee was renamed the Board Nominations & Governance Committee. The table below outlines the changes that were made to the Board and Committee composition during the year ended 30 September 20201. Name of Non- executive Director John McFarlane Lindsay Maxsted Nerida Caesar Ewen Crouch Anita Fung Steven Harker Chris Lynch Peter Marriott Peter Nash Margaret Seale Change in position Appointed Non-executive Director Appointed Member of the Board Risk & Compliance Committee Appointed Chairman Appointed Chairman of the Board Nominations Committee (now the Board Nominations & Governance Committee) Ceased as Member of the Board Risk Committee (formerly the Board Risk & Compliance Committee) Retired from the Board and its Committees Appointed Member of the Board Financial Crime Committee Ceased as Member of the Board Financial Crime Committee Ceased as Member of the Board Risk Committee (formerly the Board Risk & Compliance Committee) Effective date 17 February 2020 17 February 2020 1 April 2020 1 April 2020 1 June 2020 31 March 2020 27 November 2019 1 June 2020 1 June 2020 Appointed Member of the Board Legal, Regulatory & Compliance Committee 1 June 2020 Retired from the Board and its Committees Retired from the Board and its Committees Appointed Member of the Board Audit Committee Appointed Member of the Board Financial Crime Committee Ceased as Member of the Board Financial Crime Committee Ceased as Member of the Board Risk Committee (formerly the Board Risk & Compliance Committee) 12 December 20192 31 March 2020 1 October 2019 27 November 2019 1 June 2020 1 June 2020 Appointed Member of the Board Legal, Regulatory & Compliance Committee 1 June 2020 Appointed Non-executive Director Appointed Member of the Board Audit Committee Appointed Member of the Board Risk Committee Ceased as Chairman of the Board Audit Committee Appointed Chairman of the Board Risk & Compliance Committee (now the Board Risk Committee) 1 September 2020 1 September 2020 1 September 2020 12 December 20192 12 December 20192 Appointed Member of the Board Legal, Regulatory & Compliance Committee 1 June 2020 Appointed Chairman of the Board Financial Crime Committee Appointed Chairman of the Board Audit Committee Appointed Member of the Board Nominations Committee (now the Board Nominations & Governance Committee) 27 November 2019 12 December 20192 12 December 20192 Ceased as Chairman of the Board Financial Crime Committee 1 June 2020 Appointed Chairman of the Board Legal, Regulatory & Compliance Committee 1 June 2020 Appointed Member of the Board Remuneration Committee Appointed Member of the Board Financial Crime Committee Ceased as Member of the Board Financial Crime Committee Ceased as Member of the Board Risk Committee (formerly the Board Risk & Compliance Committee) 1 October 2019 27 November 2019 1 June 2020 1 June 2020 • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Appointed Member of the Board Legal, Regulatory & Compliance Committee 1 June 2020 Non-executive Director minimum shareholding requirement 6.4. 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 2020, all Non-executive Directors comply with the requirement. 1. 2. In addition, Peter King was appointed to the Board Technology Committee on 2 December 2019. Following the 2019 Annual General Meeting. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  92 Directors’ report 7. Statutory remuneration details 7.1. The table below details Non-executive Director remuneration. Details of Non-executive Director remuneration Name Current Non-executive Directors John McFarlane, Chairman2 2020 2019 Nerida Caesar 2020 2019 Alison Deans 2020 2019 Craig Dunn 2020 2019 Steven Harker 2020 2019 Chris Lynch2 2020 2019 Peter Marriott 2020 2019 Peter Nash 2020 2019 Margaret Seale 2020 2019 Former Non-executive Directors Lindsay Maxsted2 2020 2019 Ewen Crouch2 2020 2019 Anita Fung2 2020 2019 Total fees 2020 2019 Short-term benefits Post-employment benefits Westpac Banking Corporation Board fees1 $ Subsidiary and Advisory Board fees $ Non- monetary benefits3 $ Superannuation $ Total $ 480,054 - 8,335 14,698 503,087 ---------------------------------- Not a KMP in 2019---------------------------------- 294,454 232,000 323,671 276,200 323,268 275,800 306,349 123,667 24,454 - - - - - - - - - - - - - - - - - - 21,012 20,658 10,578 20,658 21,079 20,658 21,029 11,972 315,466 252,658 334,249 296,858 344,347 296,458 327,378 135,639 2,323 26,777 ---------------------------------- Not a KMP in 2019---------------------------------- 376,057 302,400 377,085 244,000 303,523 123,667 408,115 648,000 76,646 323,000 129,489 212,000 3,423,165 2,825,109 - - - - - - - - - - 42,610 83,146 42,610 90,387 - - - - - - 7,468 - - - - 6,300 15,803 6,300 21,190 20,658 21,187 20,658 21,025 11,972 11,148 20,658 4,564 20,658 10,621 20,658 397,247 323,058 398,272 264,658 324,548 135,639 426,731 668,658 81,210 343,658 182,720 322,104 180,454 193,456 3,662,032 3,115,252 1. 2. 3. Includes fees paid to the Chairman and members of Board Committees, including the Board Financial Crime Committee which was a special purpose committee during 2020. The information relates to the period the individual was a KMP. Refer to Section 1 for further details. Non-monetary benefits are determined on the basis of the cost to the Group including associated fringe benefits tax (FBT) where applicable and includes annual health checks. WESTPAC GROUP 2020 ANNUAL REPORT 93 Directors’ report 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 Peter King, Managing Director & Chief Executive Officer 2020 2019 Group Executives 2,286,027 - 20,822 1,222,006 326,500 4,238 Rebecca Lim, Group General Counsel & Enterprise Executive10,11 2020 2019 575,537 (75,000) 2,207 950,128 262,500 4,981 Guil Lima, Chief Executive, Business - - - - 41,310 36,803 463,100 19,492 427,604 549,189 323,888 3,562,751 483,692 2,641,920 22,314 31,718 13,628 14,390 207,672 422,793 64,807 811,165 260,108 1,946,618 2020 2019 990,070 - 384,076 533,180 3,748 14,548 575,580 51,884 2,553,086 ------------------------------------------------------- Not a KMP in 2019 ------------------------------------------------------- Carolyn McCann, Group Executive, Customer & Corporate Relations 2020 2019 884,663 - 731,367 194,500 3,497 4,828 David McLean, Chief Executive Officer, Westpac New Zealand 2020 2019 989,209 - 3,497 861,551 426,975 1,194 Christine Parker, Group Executive, Human Resources 2020 2019 950,258 - 3,497 875,430 315,000 3,123 Michael Rowland, Chief Financial Officer10 94,695 - 75,325 2020 2019 - - - - - - - 23,424 21,579 94,548 87,710 28,181 27,420 29,421 11,198 369,668 445,723 143,645 1,454,318 186,563 1,595,758 - - - - 712,683 1,799,937 907,580 2,285,010 17,869 394,231 228,766 1,622,802 (33,023) 456,373 384,005 2,028,328 7,019 122 - - 177,161 ------------------------------------------------------- Not a KMP in 2019 ------------------------------------------------------- David Stephen, Chief Risk Officer11 2020 1,828,781 (135,000) 125,922 2019 1,816,090 466,000 263,844 - - 38,991 25,900 27,273 1,461,973 303,459 3,651,399 27,265 2,023,326 732,611 5,355,036 Gary Thursby, Acting Chief Information Officer13 2020 1,206,783 - 3,497 120,000 2019 881,655 315,000 3,123 - Les Vance, Group Executive, Financial Crime, Compliance & Conduct10 - 2020 278,702 774 - 29,394 29,605 76,758 23,294 460,647 423,765 254,721 2,151,800 306,672 1,983,114 9,062 38,817 179,551 5,075 511,981 2019 ------------------------------------------------------- Not a KMP in 2019 ------------------------------------------------------- Jason Yetton, Chief Executive, Specialist Businesses, Strategy & Transformation10 2020 505,257 717 - - 12,445 48 - 17,564 536,031 2019 ------------------------------------------------------- Not a KMP in 2019 ------------------------------------------------------- Acting Group Executives Richard Burton, Acting Chief Executive, Consumer10 2020 255,558 - 1,661 - 9,162 21,802 141,680 - 429,863 2019 ------------------------------------------------------- Not a KMP in 2019 ------------------------------------------------------- Alastair Welsh, Acting Group Executive, Enterprise Services 2020 2019 832,473 - 369,151 135,000 2,894 438 Curt Zuber, Acting Chief Executive, Westpac Institutional Bank10 299,950 - 440 2020 2019 - - - 28,036 11,861 20,756 6,557 703,974 207,066 73 1,588,206 13,321 743,394 68,876 15,170 231,520 - 615,956 ------------------------------------------------------- Not a KMP in 2019 ------------------------------------------------------- Former CEO and Group Executives Brian Hartzer, Managing Director & Chief Executive Officer10,14,16 2020 3,038,627 2,136 - 2019 2,608,424 - 21,966 - - 241,558 44,320 27,443 40,660 (261,657) (2,822,754) 225,353 1,169,581 1,168,040 5,052,991 Craig Bright, Chief Information Officer10,16 2020 1,154,119 - 192,350 116,636 2019 1,022,829 381,000 309,495 1,050,000 Lyn Cobley, Chief Executive, Westpac Institutional Bank10,11,12,14,15 2020 1,127,348 (338,500) 3,773 824,437 2019 1,108,830 338,500 4,948 - David Lindberg, Chief Executive, Consumer10,14,16 2020 1,024,228 - 23,769 235,414 2019 1,129,075 125,000 6,592 - 31,601 23,818 50,206 30,611 47,569 30,434 (15,079) 61,643 (170,797) 1,370,473 15,137 2,075,911 170,797 5,048,987 17,005 16,995 (117,041) 985,685 2,552,913 516,242 508,437 2,524,563 (111,306) (110,803) (1,076,835) 32,036 23,822 470,092 475,368 2,260,383 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  94 Directors’ report 1. 2. 3. 4. 5. 6. 7. 8. 9. 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. The cash STVR award is typically paid in December following the end of the financial year. Excludes interest payments made on the release of withheld 2019 STVR to Peter King ($627), David Stephen ($635), Rebecca Lim ($360) and Gary Thursby ($605). 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. Includes payments on cessation of employment or other contracted amounts. 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. The value of restricted shares is amortised over the applicable vesting period and the amount shown is the amortisation relating to 2020 (and 2019 for comparison). The restricted shares held by Guil Lima and a portion of restricted shares held by Craig Bright and David Stephen represent an allocation made to compensate them for remuneration foregone from their previous employer on resignation to join Westpac. The restricted shares replicate the vesting periods of the equity foregone. Craig Bright received additional restricted shares for equity forgone with his previous employer in December 2019. Equity-settled remuneration is based on the amortisation over the vesting period (normally one, two or four years) of the fair value at the grant date of hurdled and unhurdled share rights that were granted during the four years ended 30 September 2020. Details of prior year grants are disclosed in previous Annual Reports. The 2020 value for David McLean includes 63% attributed to deferred STVR awards. The expensed value of the 2018 LTVR cash ROE hurdled performance share rights has been reduced to zero. The expensed value of the 2019 LTVR cash ROE hurdled performance share rights has been reduced by 50%. This reflects the current assessment of the probability of vesting. The percentage of total remuneration which is performance-related (i.e. cash STVR award plus share-based payments) was: Peter King 21%, Rebecca Lim 24%, Guil Lima 25%, Carolyn McCann 35%, David McLean 40%, Christine Parker 38%, Michael Rowland n/a, David Stephen 45%, Gary Thursby 33%, Les Vance 36%, Jason Yetton 3%, Richard Burton 33%, Alastair Welsh 44%, Curt Zuber 38%, Brian Hartzer n/a, Craig Bright n/a, Lyn Cobley 25% and David Lindberg n/a. The percentage of total remuneration delivered in the form of options (including share rights) was: Peter King 9%, Rebecca Lim 8%, Guil Lima 2%, Carolyn McCann 10%, David McLean 40%, Christine Parker 14%, Michael Rowland n/a, David Stephen 8%, Gary Thursby 12%, Les Vance 1%, Jason Yetton 3%, Richard Burton n/a, Alastair Welsh n/a, Curt Zuber n/a, Brian Hartzer n/a, Craig Bright n/a, Lyn Cobley 42% and David Lindberg n/a. 10. The information relates to the period the individual was a KMP with the exception of footnote 14 below. Refer to Section 1 for further details. Adjustments to 2019 cash STVR as a result of the AUSTRAC matters are shown as a reduction in remuneration in the current year. 11. 12. The 2020 share based payment value for restricted shares excludes adjustments to 2019 deferred STVR before it was granted and includes adjustments to unvested STVR from prior years as a result of the AUSTRAC matters. The 2020 share based payment value for share rights includes adjustments to unvested LTVR as a result of other material risk and compliance matters. 13. On 5 March 2020, the Board approved a project bonus for Gary Thursby following the successful divestment of part of the BT Financial Group and the Wealth Reset. This related to work mostly completed in 2019 in his previous role as Chief Operating Officer. The cash portion of the project bonus is included under other short term benefits. 14. Fixed remuneration for Brian Hartzer, Lyn Cobley and David Lindberg includes payments made or to be made during their notice period where, in line with contractual requirements, they continue to receive cash salary and superannuation. 15. The share based payment values for Lyn Cobley reflect the accruals for unvested equity up to the end of each performance period. While the full value is being accrued for all unvested equity, the awards may or may not vest subject to the relevant performance hurdles. 16. The share based payment values for Brian Hartzer, Craig Bright and David Lindberg include the reversal of the accrued expense of unvested equity that was forfeited on termination. WESTPAC GROUP 2020 ANNUAL REPORT Directors’ report 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 2020. 95 Number granted1 Number vested2 Number exercised3 Value granted4 $ Value exercised5 $ Name Type of equity-based instrument Managing Director and Chief Executive Officer Peter King Performance share rights Shares under Restricted Share Plan Group Executives 88,957 13,299 - 20,172 Rebecca Lim6 Performance share rights 44,149 - Shares under Restricted Share Plan - 13,725 Guil Lima Performance share rights Shares under Restricted Share Plan Carolyn McCann Performance share rights Shares under Restricted Share Plan David McLean Performance share rights Christine Parker Performance share rights Unhurdled share rights Shares under Restricted Share Plan Michael Rowland6 Performance share rights Shares under Restricted Share Plan David Stephen Performance share rights Shares under Restricted Share Plan Gary Thursby Performance share rights Shares under Restricted Share Plan Les Vance6 Performance share rights Shares under Restricted Share Plan Jason Yetton6 Performance share rights Shares under Restricted Share Plan Acting Group Executives Richard Burton6 Performance share rights Shares under Restricted Share Plan Alastair Welsh Performance share rights 57,819 46,085 39,815 7,922 62,385 18,838 52,293 12,830 - - 85,683 18,981 60,592 20,219 22,227 - 54,213 - - 1,841 - - - - 11,972 - 18,053 - 16,822 - - - 67,965 - 15,663 - - - - - - - Shares under Restricted Share Plan 35,944 8,543 Curt Zuber6 Performance share rights Shares under Restricted Share Plan Former CEO and Group Executives Brian Hartzer6 CEO Performance share rights Shares under the CEO Restricted Share Plan - 7,372 - - - - - 44,626 Craig Bright6 Performance share rights 74,121 - Shares under Restricted Share Plan 20,244 40,528 Lyn Cobley6 Performance share rights 67,944 - Shares under Restricted Share Plan - 19,533 David Lindberg6 Performance share rights 69,383 - Shares under Restricted Share Plan - 17,323 Value forfeited or lapsed5 $ 2,346,573 - 481,201 - - - 458,308 - 1,838,167 - 1,718,655 - - - - - 687,462 - - - - - - - 423,926 - - - 21,518,209 517,201 2,531,169 1,201,087 2,859,503 174,043 1,943,241 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 392,300 238,164 194,697 - 254,982 1,155,010 169,965 141,871 275,118 426,036 230,612 229,765 - - 377,862 339,920 267,211 350,594 70,811 - 172,712 - - 32,969 - 847,130 - 128,092 - - 326,874 394,109 299,633 - 305,979 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1. 2. 3. 4. 5. 6. No performance options were granted in 2020. Any deferred STVR awards in the form of restricted shares (or unhurdled share rights for David McLean based in New Zealand) are awarded in December each year. David McLean’s unhurdled share rights were granted on 27 July 2020 at a fair value of $23.35 (unhurdled share rights which vested on 1 October 2020) and $21.92 (unhurdled share rights vesting on 1 October 2021). No hurdled share rights granted in 2015 vested in October 2019 when assessed against the relative TSR and cash EPS performance hurdles. Vested share rights granted after July 2015 may be exercised up to a maximum of 15 years from their commencement date. For each vested share right exercised during the year, the relevant executive received one fully paid Westpac ordinary share. The exercise price for share rights is zero. The impact of the cancellation of 2020 STVR for the CEO and Group Executives is not reflected as any awards would have been granted in December 2020. 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 LTVR 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 2020, 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. The value of each share right exercised, forfeited or lapsed is calculated based on the five day VWAP of a Westpac ordinary share 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 a Westpac ordinary share, the value has been calculated as zero. The overall values reflect forfeitures or lapses as a result of a failure to meet performance conditions, resignation or adjustments for material risk and compliance matters (such as AUSTRAC). The information relates to the period the individual was a KMP. Refer to Section 1 for further details. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  96 Directors’ report Fair value of LTVR awards made during the year In accordance with AASB 2 Share-based Payment, the table below provides a summary of the fair value of LTVR awards granted to the CEO and Group Executives in December 20191. LTVR awards will only vest if performance hurdles are achieved and service conditions are met in future years. Plan name Granted to Performance hurdle Grant date Commencement date Test date Expiry Fair value per instrument2 Westpac LTVR Plan CEO and Group Executives Relative TSR 19 December 2019 1 October 2019 1 October 2023 1 October 2034 $4.41 7.4. Details of Westpac equity holdings of Non-executive Directors 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 20203. Current Non-executive Directors John McFarlane4 Nerida Caesar Alison Deans Craig Dunn Steven Harker Chris Lynch4,5 Peter Marriott6 Peter Nash Margaret Seale7 Former Non-executive Directors Lindsay Maxsted4 Ewen Crouch4,8 Anita Fung4 Number held at start of the year Changes during the year Number held at end of the year n/a 13,583 14,392 8,869 11,930 n/a 39,071 8,020 37,439 23,680 82,264 - 10,000 - 1,240 6,140 1,240 - 1,240 7,240 1,241 1,990 1,447 - 10,000 13,583 15,632 15,009 13,170 13,090 40,311 15,260 38,680 n/a n/a n/a 1. 2. 3. 4. 5. 6. 7. 8. In addition, LTVR awards were also granted to Carolyn McCann, Jason Yetton and Les Vance on 27 July 2020 with a fair value per instrument of $3.19. For these awards, the commencement date is 2 April 2020, the test date is 1 April 2024 and the expiry date is 2 April 2035. 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 hurdles based on TSR performance relative to a group of comparator companies takes into account the average TSR outcome determined using a Monte Carlo simulation pricing model. Other than as disclosed below, no share interests include non-beneficially held shares. The information relates to the period the individual was a KMP. Refer to Section 1 for further details. In addition to holding ordinary shares, Chris Lynch and his related parties held interests in 1,137 Westpac Capital Notes 5 at year end. In addition to holding ordinary shares, Peter Marriott and his related parties held interests in 563 Westpac Capital Notes 2 at year end. In addition to holding ordinary shares, Margaret Seale and her related parties held interests in 3,220 Westpac Capital Notes 2 at year end. Ewen Crouch held 42,000 ordinary shares following the grant of probate in a deceased estate for which he is one of the executors. In addition, Ewen Crouch and his related parties held interests in 250 Westpac Capital Notes 2. WESTPAC GROUP 2020 ANNUAL REPORT Directors’ report 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 20201. Name Type of equity-based instrument 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 year2 Other changes during the year Number held at end of the year Number vested and exercisable at end of the year 97 Managing Director and Chief Executive Officer Peter King Ordinary shares 118,587 Performance share rights 340,558 Group Executives Rebecca Lim3 Ordinary shares Performance share rights Guil Lima3 Ordinary shares Performance share rights Carolyn McCann Ordinary shares Performance share rights David McLean Ordinary shares 45,216 193,217 n/a n/a 59,253 78,548 9,613 Performance share rights 286,886 Unhurdled share rights Christine Parker Ordinary shares 79,277 29,627 Performance share rights 260,523 Michael Rowland3,4 Ordinary shares Performance share rights n/a n/a David Stephen Ordinary shares 135,929 Performance share rights 278,698 Gary Thursby Ordinary shares Performance share rights 108,354 213,978 Les Vance3 Ordinary shares Performance share rights Jason Yetton3 Ordinary shares Performance share rights Acting Group Executives Richard Burton3 Ordinary shares Performance share rights Alastair Welsh Ordinary shares Performance share rights Curt Zuber3 Ordinary shares Performance share rights Former CEO and Group Executives Brian Hartzer3 Ordinary shares CEO Performance share rights Craig Bright3 Ordinary shares Performance share rights Lyn Cobley3,5 Ordinary shares n/a n/a n/a n/a n/a n/a 37,256 14,944 n/a n/a 151,478 840,679 132,151 77,696 110,717 13,299 88,957 - 44,149 46,085 57,819 7,922 39,815 - 62,385 18,838 12,830 52,293 - - 18,981 85,683 20,219 60,592 - 22,227 - 54,213 1,841 - 35,944 - 7,372 - - - 20,244 74,121 - Performance share rights 356,810 67,944 David Lindberg3 Ordinary shares 82,671 - Performance share rights 319,482 69,383 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (82,720) - (16,963) - - - (16,156) - (64,798) - - - - - - - - - - - - - (10,000) (60,585) - - - - - - (24,234) - - - - - - - (14,944) - - (20,933) (840,679) - - - - - - - - - - - - - - - - - - (72,040) (80,355) (151,817) (9,362) (105,123) - (68,502) - - - - - 131,886 346,795 n/a n/a 46,085 57,819 67,175 102,207 9,613 284,473 98,115 32,457 252,231 - - 154,910 364,381 128,573 250,336 78,767 22,227 - 54,213 71,749 - 73,200 - 202,934 - n/a n/a n/a n/a n/a n/a n/a n/a - - n/a n/a - - - - - 2,148 67,884 - - - - - - - - - - - - - - - - - - n/a n/a n/a n/a n/a n/a n/a n/a 1. 2. 3. 4. 5. The highest number of shares held by an individual in the table is 0.0056% of total Westpac ordinary shares outstanding as at 30 September 2020. Forfeitures or lapses during the year are as a result of a failure to meet performance conditions and resignation, with the exception of a former Group Executive who also has adjustments for material risk and compliance matters (such as AUSTRAC). The information relates to the period the individual was a KMP. Refer to Section 1 for further details. Michael Rowland held interests in 500 Westpac Capital Notes 3 and 500 Westpac Capital Notes 5. In addition to holding ordinary shares, Lyn Cobley and her related parties held interests in 4,000 Westpac Capital Notes 5 and 3,500 Westpac Capital Notes 6. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REPORT2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  98 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 Non-executive 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 are provided at arms-length and at normal commercial rates and consist 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 Total 19,785,162 11,919,499 31,704,661 165,382 383,875 549,257 - - - 1,171,921 14,607,236 15,779,157 1 7 8 The table below details KMP (including their related parties) with loans above $100,000 during 2020. 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 $ Non-executive Directors Steven Harker1 Peter Nash Former Non-executive Directors Lindsay Maxsted2 Ewen Crouch2 CEO and Group Executives Rebecca Lim2 Carolyn McCann David McLean Christine Parker Gary Thursby Les Vance2 Alastair Welsh Curt Zuber2 Former CEO and Group Executives Brian Hartzer2 Lyn Cobley2 15,000,000 1,189,402 2,666,979 928,781 600,000 307,697 625,816 4,988,520 1,864,791 n/a 726,205 n/a 806,470 2,000,000 67,053 37,596 57,313 3,420 5,495 9,030 25,634 145,275 69,695 21,415 24,104 13,192 5,626 64,409 - - - - - - - - - - - - - - - 15,000,000 1,171,921 1,291,099 n/a n/a 600,000 261,373 681,206 4,981,435 - 2,531,885 651,337 3,103,318 928,781 600,000 347,697 690,169 5,026,841 1,947,763 2,653,970 1,520,788 4,900,000 4,900,000 n/a n/a 819,538 2,007,287 1 2. Steven Harker’s loan was in place prior to his commencement as a Non-executive Director at Westpac. Steven disclosed the loan as part of the onboarding process. The loan was provided at arms-length in the ordinary course of business and at normal commercial rates. The information relates to the period the individual was a KMP. Refer to Section 1 for further details. WESTPAC GROUP 2020 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: 99 Auditor’s Independence Declaration As lead auditor for the audit of Westpac Banking Corporation for the year ended 30 September 2020, 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 1 November 2020 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.corn.au Liability limited by a scheme approved under Professional Standards Legislation. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW  100 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 2019 and 2020 financial years are set out in 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 $6.1 million in total (2019: $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 2020 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 2020, 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. John McFarlane Chairman 1 November 2020 Peter King Managing Director & Chief Executive Officer 1 November 2020 WESTPAC GROUP 2020 ANNUAL REPORT  Information on Westpac 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). 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 of banking products, including mortgages, credit cards, personal loans, and savings and deposit products to consumer customers in Australia. Banking products are provided under the Westpac, St.George, BankSA, Bank of Melbourne, and RAMS brands. Consumer works with Business, WIB, and Specialist Businesses in the sales, service, and referral of certain financial services and products including general and life insurance, superannuation, platforms, auto lending and foreign exchange. Business provides business banking products and services for Australian SME and Commercial customers (including Agribusiness) generally up to $200 million in exposure. The division also serves Private Wealth. SME includes relationship managed and non-relationship managed SME customers. 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, equipment finance and property finance. Business operates under the Westpac, St.George, BankSA, and Bank of Melbourne brands. Business works with Consumer, WIB, and Specialist Businesses in the sale, referral and service of select financial services and risk management products (including corporate superannuation, foreign exchange and interest rate hedging). 1. 2. 3. A consumer is defined as a person who uses our products and services. It does not include business entities. Refer to Note 31 to the financial statements for a list of our material controlled entities as at 30 September 2020. Contact details for our head office, major businesses and offshore locations can be found on the inside back cover. 101 Westpac Institutional Bank (WIB) delivers a broad range of financial products and services to 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 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 provides banking, wealth and insurance products and services 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 through a network of branches and ATMs in both the North and South Islands. Business and institutional customers are also served through relationship and specialist product teams. Banking products and services are provided under the Westpac brand while insurance and wealth products are provided under Westpac Life and BT brands, respectively. New Zealand maintains its own infrastructure, including technology, operations and treasury in accordance with regulatory requirements. Specialist Businesses provides automobile finance, Australian life, general and lenders mortgage insurance, investment product and services (including margin lending and equities broking), superannuation and retirement products as well as wealth administration platforms. It also manages Westpac Pacific which provides a full range of banking services in Fiji and Papua New Guinea. The division operates under the Westpac, St.George, BankSA, Bank of Melbourne, and BT brands. Specialist Businesses works with Consumer, Business and WIB in the provision of select financial services and products. 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; and Core Support, which comprises Group support functions, including Australian banking operations, property services, strategy, finance, risk, compliance, legal, human resources, and customer and corporate relations. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW  102 Information on Westpac 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, costs associated with customer remediation for the Advice business3, and certain other head office items such as centrally raised provisions. Significant developments COVID-19 impacts on Westpac COVID-19 has had, and continues to have, a significant and adverse impact on the Australian economy, the banking sector, our customers, counterparties and third party suppliers, as well as our operations. In response to the COVID-19 pandemic, the Australian government has taken a number of actions to help reduce and mitigate the economic impact of the pandemic, including in relation to JobKeeper and JobSeeker payments. The Australian, State and Territory governments have also implemented a range of material restrictions on businesses, venues, travel, movement and gatherings of people. There have also been similar restrictions put in place in other jurisdictions in which the Group operates. Many of these new measures have adversely impacted Westpac. Westpac’s business activities and operations have been, and will likely in the future be, disrupted by the COVID-19 pandemic. For example, the COVID-19 pandemic has resulted in Westpac closing workplaces and suspending the provision of services through certain channels. The COVID-19 pandemic has also disrupted, and will continue to disrupt, numerous industries and global supply chains. Banks continue to play an important role in supporting customers, continuing to lend to keep credit flowing and supporting the circulation of funds in the economy. Westpac has provided support to certain customers impacted by the COVID-19 pandemic by implementing a range of initiatives, such as lowering interest rates on certain products, waiving certain fees, providing special loans to support customers to manage their cash flow and granting deferrals of mortgage and business loan repayments. These initiatives, and any support that governments or regulators may in the future require banks to provide to customers impacted by the COVID-19 pandemic, may have a negative impact on the Group’s financial performance and may see the Group assume greater risk than it would have under ordinary circumstances. Both APRA and ASIC have supported the provision of credit to customers in these circumstances and remain closely engaged to understand the impact of these measures on our customers, capital, credit risk profile and liquidity. On 1 September 2020, Westpac submitted a comprehensive plan to APRA and ASIC detailing the existing and planned processes in place to ensure appropriate ongoing borrower review, customer engagement, capabilities, resourcing and oversight across the borrower assessment process for COVID-19 impacted customers. Westpac is expected to identify, address and report to ASIC and APRA any material issues that arise in the implementation of these plans. The COVID-19 pandemic has also led to increased regulatory focus in certain areas, including operational resilience, technology, cyber security, capital management and stress testing. Westpac continues to manage these risks. In March 2020, the RBA established a Term Funding Facility (TFF) to lower funding costs for the entire banking system so that the cost of credit to households and businesses is low, and to provide an incentive for lenders to support credit to businesses. The TFF provides Westpac access to at least $29.8 billion of funds through three year repurchase transactions at a fixed interest rate of 25 basis points. For further information on the TFF see Note 21 to the financial statements. Further information on the actual and potential impacts of COVID-19 and the Group’s response are set out in the ‘Strategic Report’ and ‘Risk Factors’ sections. Westpac significant developments Leadership changes, reset of strategy and launch of Lines of Business operating model Since November 2019, there have been significant changes to the Westpac Board and Group Executives. Further information is set out in Section 10 of the Directors’ Report. In addition, Westpac has adopted a new purpose, helping Australians and New Zealanders succeed, and reset its strategy which is focused on concentrating on banking in our core markets of Australia and New Zealand to support consumer, business, commercial and institutional customers. Further information is set out in the Strategic Report section. Westpac has also launched its Lines of Business operating model to clarify responsibility and accountability for end-to-end performance. Further information is set out in the Strategic Report section. AUSTRAC civil proceedings On 20 November 2019, AUSTRAC commenced civil proceedings in the Federal Court of Australia against Westpac in relation to alleged contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). These proceedings related to non-reporting of a large number of International Funds Transfer Instructions (IFTIs) and a failure to include in a number of IFTIs required information about the payer, failings in relation to record keeping and the passing on of certain data required in IFTIs, failure to comply with correspondent banking obligations, AML/CTF Program failures and contraventions of ongoing customer due diligence obligations. AUSTRAC alleged over 23 million contraventions of the AML/CTF Act. On 24 September 2020, Westpac announced that it had reached an agreement with AUSTRAC to resolve the proceedings, subject to Court approval. Under the agreement, the parties agreed to file with the Court a Statement of Agreed Facts and Admissions (SAFA), and to recommend to the Court that Westpac pay a civil penalty of $1.3 billion in relation to in excess of 23 million admitted contraventions of the AML/CTF Act. Westpac also agreed to pay AUSTRAC’s legal costs of $3.75 million. In light of the above developments, Westpac has increased the provision in respect of the penalty from $900 million to $1.3 billion. The settlement was approved by the Court on 21 October 2020. Further information on the provision is set out in Note 27 to the financial statements. WESTPAC GROUP 2020 ANNUAL REPORT Information on Westpac As part of the SAFA, Westpac admitted to additional contraventions of the AML/CTF Act to those in its Defence of May 2020, and to the new allegations in the Amended Statement of Claim that AUSTRAC filed with the Court on 24 September 2020. Those additional admitted contraventions relate to the reporting of 76,144 IFTIs that did not contain the required information about the payer, two additional failures to comply with correspondent banking due diligence obligations, a failure to conduct appropriate ongoing customer due diligence in relation to a number of additional customers, and aspects of Part A of Westpac’s AML/CTF Program not fully complying with the requirements under the AML/CTF Act and the AML/ CTF Rules. AUSTRAC response plan and external reviews Since the commencement of the AUSTRAC proceedings, Westpac has made significant progress in its AUSTRAC response plan. Further information on the AUSTRAC response plan is set out in the Strategic Report section. Westpac commissioned a number of external reviews in order to identify the causes of the compliance failings related to the AUSTRAC proceedings, determine appropriate consequences, and to identify key lessons learned. These reviews include a review by an Advisory Panel into Westpac’s Board governance of AML/CTF obligations, an assurance review by Promontory of Westpac’s management accountability investigation, and a review, also by Promontory, of Westpac’s financial crime program. On 4 June 2020 Westpac released a copy of the Advisory Panel Report and a summary of the reviews’ findings and recommendations. Financial Crime Following the AUSTRAC proceedings, Westpac has been progressing actions to improve its financial crime program. This includes a significant multi-year program of work to improve its management of financial crime risks (including AML/CTF, sanctions, Anti-Bribery and Corruption, Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS)). Through this work, Westpac has identified further weaknesses and areas for improvement, which it is addressing. Specific focus areas include uplifting its AML/CTF policies, reviewing the completeness of data feeding into its AML/CTF systems and considering the adequacy and appropriateness of its AML/ CTF processes and controls. The work also involves addressing matters identified in AUSTRAC’s Statement of Claim and outlined in the SAFA. Westpac is also undertaking remediation work in multiple areas, including applicable customer identification procedures, ongoing and enhanced customer due diligence, customer and payment screening, risk assessments, transaction monitoring and regulatory reporting including in relation to IFTIs, Threshold Transaction Reports (TTRs) and Suspicious Matter Reports (including “tipping off” controls). With increased focus on financial crime, further issues requiring attention have been identified and may continue to be identified. As part of these efforts, Westpac identified deficiencies in certain systems and controls relevant to its obligation to file TTRs. This has resulted in instances where the Group has failed to report TTRs, as well as instances where the Group 103 filed TTRs with incomplete or inaccurate information. The Group self-reported these TTR deficiencies to AUSTRAC, providing a series of updates since 2019, and is keeping AUSTRAC apprised of the status of its remediation. As part of the remediation work the Group is also working to remediate gaps and enhance controls to support compliance with its FATCA and CRS obligations. Details about the consequences of failing to comply with financial crime obligations are set out in the Risk Factors section. Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) investigations On 17 December 2019, APRA commenced an investigation examining potential contraventions by Westpac, its directors and/or senior managers of the Banking Act 1959 (Cth) (including the Banking Executive Accountability Regime) (Banking Act) and/ or APRA’s Prudential Standards by engaging in, and the way it responded to, the conduct which is the subject of the AUSTRAC proceedings. On 17 June 2020, APRA delegated certain of its enforcement powers under the Banking Act to ASIC. Following that delegation, ASIC will examine potential contraventions under the Banking Act by Westpac, its directors and/or senior managers. APRA has retained its power to administratively disqualify certain individuals under the Banking Act. ASIC has commenced an extensive investigation into matters related to the AUSTRAC allegations in the AUSTRAC proceedings. Westpac remains committed to cooperating and working constructively with ASIC during its investigation which is ongoing. Westpac has not received an indication from ASIC about the nature of any enforcement action it may take. Details about the consequences of failing to comply with legal obligations are set out in the Risk Factors section. Australian and US class actions Westpac is defending a class action proceeding which was commenced in December 2019 in the Federal Court of Australia by law firm Phi Finney McDonald, on behalf of certain investors in Westpac securities between 16 December 2013 and 19 November 2019. The proceeding involves allegations relating to market disclosure issues connected to Westpac’s monitoring of financial crime over the relevant period and matters which are the subject of the AUSTRAC proceedings. The claims do not identify the amount of any damages sought. However, given the time period in question and the nature of the claims it is likely that the damages which will be alleged will be significant. No provision has been taken in relation to the potential exposure. A second class action in relation to similar issues was commenced by law firm Johnson Winter & Slattery in March 2020. The Phi Finney McDonald claim was subsequently amended to include the group members from the Johnson Winter & Slattery proceeding. The Johnson Winter & Slattery proceeding was discontinued in May 2020 by agreement between Westpac, the applicant in that proceeding and the applicant in the Phi Finney McDonald proceeding. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW  104 Information on Westpac In January 2020, a US class action was commenced by the Rosen Law Firm, naming Westpac, our current CEO and our former CEO as defendants. It was brought on behalf of certain investors in Westpac securities between 11 November 2015 and 19 November 2019. That claim related to market disclosure issues connected to Westpac’s monitoring of financial crime over the relevant period and matters which are the subject of the AUSTRAC proceedings. The parties have agreed to settle this proceeding on a wholly without admissions basis and on the basis that in return for full releases from the class members in the proceeding, Westpac will pay an amount of US$3.1million. The settlement remains subject to approval by the District Court of Oregon and a process to give class members an option to opt out. In light of the above developments, Westpac has taken a provision in respect of the settlement. APRA review into risk governance On 17 December 2019, following the commencement of the AUSTRAC proceedings and other significant prudential reviews, APRA announced that in addition to investigating possible breaches of the Banking Act by Westpac, it would conduct an extensive supervision program focused on Westpac’s risk governance, accountability and risk culture. This program will assess Westpac’s remediation actions, the effectiveness of Westpac’s execution and the steps Westpac has been taking to strengthen risk governance, including through its self-assessment, which is referred to below. APRA’s review will consider several governance focus areas in non-financial and financial risk management and case studies. This review is expected to take approximately 18 months and result in a report of APRA’s observations and findings. Operational risk capital overlays The following additional capital overlays are currently applied by APRA to Westpac’s operational risk capital requirement: • • $500 million in response to Westpac’s Culture, Governance and Accountability (CGA) self-assessment. The overlay applied from 30 September 2019 and will remain in place until APRA is satisfied that Westpac has completed its action plan. $500 million in response to the magnitude and nature of issues alleged by AUSTRAC in its Statement of Claim. The additional overlay applied from 31 December 2019. Both of the overlays have been applied through an increase in risk weighted assets (RWA). The impact on Westpac’s Level 2 common equity tier 1 (CET1) capital ratio at 30 September 2020 was 31 basis points. Outcome of Specialist Businesses strategic review On 4 May 2020, Westpac announced the creation of a new Specialist Businesses division consisting of the following businesses: • • • • Superannuation, Investments and Platforms; Insurance; Auto and vendor finance; and Westpac Pacific. These businesses have since undergone a strategic review process which has now been completed. The outcome is that Westpac does not view itself as the long-term owner of these businesses and will seek to exit them over time as market conditions permit. On 21 August 2020, Westpac announced that it had entered into an agreement for the sale of its Vendor Finance business to Angle Finance, a portfolio company of Cerberus Capital Management, L.P. Vendor Finance supports third parties to fund small ticket equipment finance loans to around 42,000 Australian businesses. Given the relatively modest size of the portfolio, the sale is expected to have an immaterial impact on Westpac’s balance sheet and capital ratios. Completion is expected to occur at the end of April 2021. Consolidation of Westpac’s international operations Following a comprehensive review of its Asia, Europe and US businesses, Westpac has decided to consolidate its international operations into three branches; Singapore, London and New York. This decision means the Group will exit operations in Beijing, Shanghai, Hong Kong, Mumbai and Jakarta. The changes are not expected to have a significant impact on cash earnings and, over time, are planned to improve the Group’s capital efficiency, including by reducing RWA. Sale of shares in Pendal Group Limited On 17 June 2020, Westpac announced the sale of approximately 31 million Pendal Group Limited (ASX:PDL) (Pendal) shares at a price of $5.98 per share, pursuant to a fully underwritten institutional offer. This sale completed the divestment of Westpac’s proprietary shareholding in Pendal, following earlier share sales in 2007, 2015 and 2017. Sale of shares in Zip Co Limited On 21 October 2020, Westpac announced the sale of its 10.7% stake in Zip Co Limited (ASX:Z1P) by way of a fully underwritten institutional offer. The decision reflects Westpac’s approach to simplifying its business and ensuring the efficient use of capital. The sale added approximately 8 basis points to Westpac’s common equity tier 1 capital ratio in the first half of FY21. Settlement of the transaction occurred on 26 October 2020. Westpac reviews Culture, Governance and Accountability reassessment Following a reassessment of its existing CGA Remediation Plan (as defined below), which was undertaken in response to a request from APRA, Westpac has launched a Group-wide program to strengthen its management of non-financial risks. Westpac first conducted a self-assessment into culture, governance and accountability in November 2018 and developed a remediation plan in response (CGA Remediation Plan). Following AUSTRAC’s Statement of Claim in November 2019, Westpac reassessed its remediation plan at the request of APRA. A central conclusion from the reassessment was that Westpac’s non-financial risk culture remains immature and reactive. WESTPAC GROUP 2020 ANNUAL REPORT Information on Westpac As a result, Westpac is embarking on a Group-wide program, CORE – Customer Outcomes and Risk Excellence – with a focus on Board and Executive oversight of non-financial risk, and strengthening risk culture, risk frameworks and risk management capability. Promontory will provide ongoing assurance over the CORE program. Further information about CORE is set out in the ‘Strategic Report’ and ‘Group Performance’ sections. Risk management Westpac is upgrading its end to end risk management. Recent reviews have identified a wide range of shortcomings and areas for improvement in Westpac’s policies, systems and data, as well as its risk capabilities and risk management framework. The Group has a number of risks which sit outside of our risk appetite or do not meet the expectations of regulators. The CORE program is addressing some of these improvements. Key components of the CORE program include embedding a more proactive risk culture, refining a three lines of defence model to define clearer risk management accountabilities and improving risk awareness, capability and capacity through organisational-wide training and additional risk resources in the business. Other areas of improvement are being addressed through significant investment in risk management expertise in areas such as operational risk, compliance, financial crime, stress testing, modelling and data management. Further information about risk management is set out in the Risk and Risk Management section. Regulatory and Government focus Royal Commission into the banking, superannuation and financial services industry Implementation of the 76 express recommendations in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry continues to have a significant impact on Australia’s banking and financial services entities and their regulators. Depending on how and when the government legislates or regulates for the recommendations there may also be adverse impacts on our business. To allow the industry to focus on its response to COVID-19 and support for customers on 8 May 2020 the government announced a six month deferral in its Implementation Roadmap. A number of the legislative drafts are proposed to come into effect in early 2021 but the final form of these drafts have not yet been released by the government posing a challenge to implementation. Presently, 50 recommendations apply to Westpac. The Group has commenced programs of work in relation to all of the applicable recommendations that have been the subject of legislative activity and/or regulatory activity and, to date, has implemented 14 recommendations. In anticipation of the removal of grandfathering of conflicted remuneration payable to financial advisers effective from 1 January 2021, we are also currently reviewing third party remuneration arrangements. Other impacts arising from the Royal Commission include a number of claims being brought against financial institutions in relation to certain matters 105 considered during the Royal Commission, and the referral of several cases of misconduct to the financial regulators by Commissioner Hayne. The Royal Commission has also led to increased political and regulatory scrutiny of the financial industry in New Zealand and may continue to do so. Changes to responsible lending laws On 25 September 2020, the government announced a proposed simplification of Australia’s consumer credit regulatory regime. The government’s intended commencement date (subject to the passage of law) is 1 March 2021. We are closely monitoring this and will make any changes to our systems and processes as appropriate. In addition to the responsible lending obligations, consumer credit is subject to regulatory oversight through a range of mechanisms, including APRA standards and guidance in relation to credit assessments by authorised deposit-taking institutions (ADIs), the ABA’s Banking Code of Practice and the general conduct obligations under section 47 of the National Consumer Credit Protection Act 2009 (Cth), including the obligation to do all things to ensure that credit activities are engaged in efficiently, honestly and fairly. Accordingly, without analogous changes to these regulatory requirements, removal of the responsible lending obligations may not necessarily have a significant impact on our overall consumer credit processes. Focus on superannuation On 6 October 2020, the government released a paper entitled ‘Your Future, Your Super’, setting out ‘reforms to make your super work harder for you’. The first key reform involves linking a person to their superannuation fund throughout their working life (although a person can choose to change their super fund at any time). Rather than contributing to the employer’s default fund for its employees who do not choose their own superannuation fund, employers will be required to contribute to their employees’ existing superannuation funds. This reform is intended to reduce the number of people with multiple superannuation accounts. This means employees do not have to select a superannuation fund each time they change jobs, and should therefore reduce individuals having unintended multiple superannuation accounts. The second key reform relates to annual performance tests. An online ATO ‘YourSuper’ comparison tool that compares funds by fees and performance will be introduced to assist people in selecting a superannuation fund. The tool will also expressly list under performing funds, based on the annual performance tests. These annual performance tests will apply by July 2021 for MySuper (default) products. If a MySuper product fails the performance ‘test’, the trustee will be required to notify members of the under performance by October 2021 and provide information about the YourSuper comparison tool. If a fund fails two consecutive performance ‘tests’, it will not be permitted to accept new members. Annual performance tests will also apply to certain types of superannuation choice options by July 2022. Westpac is supportive of the changes given they are expected to drive increased competitiveness across the industry. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW  106 Information on Westpac In addition, APRA is increasing its supervisory focus on superannuation providers, including Westpac, with an emphasis on member outcomes and governance. Westpac’s superannuation entities are underway with an ongoing program of work to strengthen their management of risk under the risk management framework and address feedback from APRA. Regulatory reviews and inquiries Provision of credit - reviews by APRA Following APRA reviews assessing the adequacy of our credit risk management framework including our controls, end-to-end processes, policies and operating systems, long-standing weaknesses have been identified that require significant uplift. The Group is making changes to systems and controls to improve its end-to- end approach for mortgage, business and institutional lending portfolios, as well as other key processes. This includes enhancing portfolio management practices, data governance, 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 will also address issues identified by Westpac’s internal assurance and audit teams. General regulatory changes affecting our business Open banking regime The Competition and Consumer Act 2010 (Cth), as amended by the Treasury Laws Amendment (Consumer Data Right) Act 2019 (Cth), contains a regime for a consumer data right that gives customers in Australia a right to direct that their data (starting with banking data) be shared with accredited third parties. Data sharing facilitates competition through easier product comparison and switching. This is expected to have significant implications for consumers and banks, including Westpac. The Competition and Consumer (Consumer Data Right) Rules 2020 (the CDR Rules) commenced on 6 February 2020. The CDR Rules set out how the CDR regime will operate. Open Banking commenced on 1 July 2020 with the four major banks required to share consumer data for credit and debit card, deposit account and transaction account data with accredited service providers. Future phases will introduce additional products, joint accounts and business and corporate consumers. Other brands in the Westpac Group will be required to commence data sharing on 1 July 2021. Comprehensive Credit Reporting (CCR) The National Consumer Credit Protection Amendment (Mandatory Credit Reporting and Other Measures) Bill 2019 (Cth) is currently before the Senate. The Bill requires the four major Australian banks to supply CCR data to credit reporting bodies and outlines how financial hardship cases should be reported. The Bill has not yet passed and there have been disruptions to the parliamentary schedule as a result of COVID-19. Nevertheless, Westpac is already participating in CCR on a voluntary basis. Other litigation ASIC’s 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) (Corporations Act) provisions, and selected 15 specific customers as the focus of their claim. Following an appeal by ASIC in the proceedings, 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 relevant calls made to 14 of the 15 customers and made declarations of consequential contraventions of the Corporations Act (including section 912A(1) (a)). BTFM and WSAL were granted special leave to appeal by the High Court of Australia, which heard the appeal to the Full Federal Court’s decision on 7 and 8 October 2020. The High Court’s judgment in the matter is reserved. If this appeal is unsuccessful, the matter will be remitted to the Federal Court for a hearing on penalties and any other orders sought by ASIC. ASIC’s proceedings against BT Funds Management and Asgard Capital Management On 20 August 2020, ASIC commenced proceedings in the Federal Court against BT Funds Management Limited and Asgard Capital Management Limited, in relation to an issue that was a case study in the Royal Commission. The allegations concern the inadvertent charging of financial adviser fees to 404 customers totalling $130,006 after a request had been made to remove the financial adviser from the customers’ accounts. The issue was self-reported to ASIC in 2017 and customers have been contacted and remediated. BTFM and ACML accept the allegations made by ASIC and do not intend to defend the proceedings. Westpac is now working through the relevant Court procedural steps to try and bring the matter to a resolution. 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. The matter has been set down for an initial trial in May 2021. WESTPAC GROUP 2020 ANNUAL REPORT Information on Westpac Class action in the US relating to bank bill swap rate (BBSW) 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 number of other Australian and international banks and brokers alleging misconduct in relation to the bank bill swap reference rate. Westpac has reached agreement with the Plaintiffs to settle this class action. The terms of the settlement are currently confidential and subject to negotiation and execution of settlement papers and Court approval. Westpac holds a provision in relation to this matter. Class action relating to cash in super On 5 September 2019, a class action against BTFM and WLIS was commenced in the Federal Court of Australia in relation to aspects of BTFM’s BT Super for Life cash investment option. The claim follows other industry class actions. It is alleged 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. Class action relating to consumer credit insurance On 28 February 2020, a class action was commenced against Westpac Banking Corporation, Westpac General Insurance Limited and Westpac Life Insurance Services Limited in the Federal Court of Australia in relation to Westpac’s sale of consumer credit insurance (CCI). The claim follows other industry class actions. It is alleged that the three entities failed to adhere to a number of obligations in selling CCI in conjunction with credit cards, personal loans and flexi loans. The damages sought by the claim are unspecified. The three entities are defending the proceedings. Westpac no longer sells CCI products. Class action relating to payment of flex commissions to auto dealers On 16 July 2020, a class action was commenced against Westpac Banking Corporation and St George Finance Limited (SGF) in the Supreme Court of Victoria in relation to flex commissions paid to auto dealers from 1 March 2013 to 31 October 2018. This proceeding is one of two class actions brought by Maurice Blackburn against a number of lenders in the auto finance industry. It is alleged that Westpac and SGF are liable for the unfair conduct of dealers acting as credit representatives and engaged in misleading or deceptive conduct. The damages sought are unspecified. Westpac and SGF are defending the proceedings. Another law firm publicly announced in July 2020 that it is preparing to commence a class action against Westpac entities in relation to flex commissions paid to auto dealers. Westpac has not been served with a claim from that law firm on flex commissions. Westpac has not paid flex commissions since 1 November 2018 following an industry-wide ban issued by ASIC. 107 Potential class actions Westpac is aware from media reports and other publicly available material that other class actions against Westpac entities are being investigated. In July 2020, one law firm publicly stated that it intends to commence a class action against BTFM alleging that since 2014, BTFM did not act in the best interests of members of certain superannuation funds when obtaining group insurance policies. In August 2020, another law firm announced that it is investigating claims on behalf of persons who in the past 6 years acquired, renewed or continued to hold a financial product (including life insurance) on the advice or recommendation of a financial adviser from Magnitude Group, Securitor Financial Group or Westpac Banking Corporation. Westpac has not been served with a claim in relation to either of these matters and has no information about the proposed claims beyond the public statements issued by the law firms involved. APRA regulatory changes and other changes affecting capital APRA announcements on capital As part of its response to the current economic environment following the COVID-19 pandemic, APRA has made the following announcements on capital: • • • • • Updated guidance on capital management and dividends: For 2020, APRA expects ADIs to retain at least half of their earnings, actively use the dividend reinvestment plan (DRP) and/or other capital management initiatives to at least partially offset the reduction in capital from distributions. Westpac took this guidance into consideration when determining the final dividend, which is discussed further in Section 3 of the Directors’ Report; Adjustment to expectations for bank capital: As announced in March 2020, APRA does not expect ADIs to meet the ‘unquestionably strong’ capital benchmarks in the period ahead (so long as they remain above the current regulatory requirement). Westpac’s capital management strategy is set out further in the Review of Group Operations section; Temporary amendments to the calculation of RWA for COVID-19 support packages: Where a support package provides an option to defer repayments for a period of time, for RWA calculation purposes, a bank need not treat the period of the repayment holiday as a period of arrears (provided the borrower had previously been meeting their repayment obligations). In addition, the government’s ‘Coronavirus SME Guarantee Scheme’ is to be regarded as an eligible guarantee by the government for RWA calculation purposes. The temporary capital treatment is available until the earlier of either a maximum period of ten months from when the initial repayment deferral was granted, or 31 March 2021; Deferral of APRA’s implementation of the Basel III capital reforms by a year to January 2023; and Deferral of changes to APS 222 Associations with Related Entities standard by a year to 1 January 2022. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW  108 Information on Westpac APRA’s proposed revisions to subsidiary capital investment treatment APRA has proposed changes to APS 111 Capital Adequacy Measurement of Capital including changes to the existing approach for equity exposures in banking and insurance subsidiaries (Level 1). There is no impact to Westpac’s reported capital ratios on a Level 2 basis. APRA has indicated that they intend to recommence consultation and a revised standard will come into effect from 1 January 2022 following the COVID-19 pandemic. Additional loss absorbing 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 RWA as measured under the current capital adequacy framework. This increase in total capital will take full effect from 1 January 2024. 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 is continuing to make progress towards the new requirements. As at 30 September 2020, the Tier 2 ratio was 3.15%. APRA is still targeting an additional four to five percentage points of loss-absorbing capacity. Over the next four years, APRA has stated that it will consider feasible alternative methods for raising the remaining 1-2 percentage points. 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. In August 2020, APRA released its 2020-2024 Corporate Plan noting the revised APRA Prudential Standard CPS 511 is expected to be released from January to July 2021. New Zealand COVID-19 impacts In response to COVID-19, a number of laws have been enacted by the New Zealand government to help reduce the economic impact and it has implemented a range of material restrictions on businesses, venues, travel and movement. Many of these new measures have impacted WNZL’s operations. Also in response to COVID-19, there have been a number of new guidance updates published and regulatory delays announced by New Zealand regulators, including the Reserve Bank of New Zealand (RBNZ), the Financial Markets Authority and the Commerce Commission. On 2 April 2020, a decision was made by the RBNZ to freeze the distribution of dividends on ordinary shares by all banks in New Zealand during the period of economic uncertainty caused by COVID-19. Non- payment of dividends from WNZL only affects Westpac’s Level 1 CET1 capital ratio. Westpac is well capitalised and at 30 September 2020 had a Level 1 CET1 capital ratio of 11.40%. RBNZ Capital Review On 5 December 2019, the RBNZ announced changes to the capital adequacy framework in New Zealand. The new framework includes the following key components: • • • • • Setting a Tier 1 capital requirement of 16% of RWA for systemically important banks (including WNZL) and 14% for all other banks; Additional Tier 1 capital (‘AT1’) can comprise no more than 2.5% of the 16% Tier 1 capital requirement; Eligible Tier 1 capital will comprise common equity and redeemable perpetual preference shares. Existing AT1 instruments will be phased out over a seven year period; Maintaining the existing Tier 2 capital requirement of 2% of RWA; and Recalibrating RWA for internal rating based banks, such as WNZL, such that aggregate RWA will increase to 90% of standardised RWA. Westpac believes WNZL is already strongly capitalised with a Tier 1 capital ratio of 15% at 30 September 2020 based on the current RBNZ rules. On a pro forma basis (including the new RWA and capital requirements) at 30 September 2020 and assuming a Tier 1 capital ratio of 16-17%, WNZL would require a further NZ$1.6-$2.2 billion of Tier 1 capital to meet the new requirements that are fully effective in 2028. In response to the impacts of COVID-19, and to support credit availability, the RBNZ has delayed the start date of the new capital regime by 12 months to 1 July 2021 and the RBNZ will consider further delays in 2021 if it considers that market conditions warrant it. Banks will be given up to seven years to comply. 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. With effect from 31 December 2019, the RBNZ removed the requirement imposed on WNZL since 31 December 2017 to maintain minimum regulatory capital ratios that were two percentage points higher than the ratios applying to other locally incorporated banks. WESTPAC GROUP 2020 ANNUAL REPORT 109 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. 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. Information on Westpac Supervision and regulation Australia Within Australia, we are subject to supervision and regulation by seven 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); the Australian Transaction Reports and Analysis Centre (AUSTRAC) and the Office of the Australian Information Commissioner (OAIC). APRA is the prudential regulator of the Australian financial services industry. As an ADI, we report prudential information to APRA, including information in relation to capital adequacy, large exposures, credit quality and liquidity. 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. 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 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. 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. The OAIC is responsible for the regulation of privacy and information rights, including under the Privacy Act 1988 (Cth) (Privacy Act). Its functions include handling complaints about the handling of personal information and conducting investigations into potential breaches of the Privacy Act. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW  110 Information on Westpac United States Our New York branch is a US federally licensed branch and therefore is subject to supervision, examination and regulation by the US Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System (the US Federal Reserve) under the US International Banking Act of 1978 (IBA) and related regulations. A US federal branch must maintain, with a US Federal Reserve member bank, a capital equivalency deposit as prescribed by the US Comptroller of the Currency, which is at least equal to 5% of its total liabilities (including acceptances, but excluding accrued expenses, and amounts due and other liabilities to other branches, agencies and subsidiaries of the foreign bank). In addition, a US federal branch is subject to periodic on-site 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, US Financial Industry Regulatory Authority, 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. Websites Investor communications and information, including this 2020 Westpac Group Annual Report, the 2020 Westpac Group Annual Review and Sustainability Report, the 2020 Westpac Group Sustainability Performance Report and investor discussion packs and presentations can be accessed at www.westpac.com.au/investorcentre. WESTPAC GROUP 2020 ANNUAL REPORT Group performance 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 Specialist Businesses Group Businesses Risk and risk management Risk management Risk factors Other Westpac business information 111 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  112 Five year summary Five year financial summary1 (in $m unless otherwise indicated) 2020 2019 2018 2017 2016 Income statements for the years ended 30 September2 Net interest income Net fee income Net wealth management and insurance income Trading income Other income Net operating income before operating expenses and impairment charges Operating expenses Impairment charges Profit before income tax Income tax expense Profit attributable to non-controlling interests (NCI) Net profit attributable to owners of Westpac Banking Corporation (WBC) Balance sheet as at 30 September2 Loans Other assets Total assets Deposits and other borrowings Debt issues Loan capital Other liabilities Total liabilities 16,696 16,907 16,505 1,592 751 895 249 1,655 1,029 929 129 2,424 2,061 945 72 15,516 2,603 1,800 1,202 529 15,148 2,611 1,899 1,124 59 20,183 20,649 22,007 21,650 20,841 (12,739) (10,106) (9,566) (9,282) (9,073) (3,178) 4,266 (1,974) (2) (794) 9,749 (2,959) (6) (710) (853) (1,124) 11,731 (3,632) (4) 11,515 10,644 (3,518) (3,184) (7) (15) 2,290 6,784 8,095 7,990 7,445 693,059 714,770 709,690 684,919 661,926 218,887 191,856 169,902 166,956 177,276 911,946 906,626 879,592 851,875 839,202 591,131 563,247 559,285 533,591 513,071 150,325 181,457 172,596 168,356 169,902 23,949 21,826 17,265 17,666 15,805 78,467 74,589 65,873 70,920 82,243 843,872 841,119 815,019 790,533 781,021 Total shareholders’ equity and NCI 68,074 65,507 64,573 61,342 58,181 Key financial ratios Shareholder value Dividends per ordinary share (cents) Dividend payout ratio (%)3 Return on average ordinary equity (%) Basic earnings per share (cents) Net tangible assets per ordinary share ($)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 31 174 188 188 188 48.87 88.83 79.52 13.05 237.5 79.28 13.65 238.0 84.19 13.32 224.6 15.39 14.66 13.90 3.37 63.7 15.67 29.81 13.47 16.84 63.12 2.03 7.5 7.4 11.13 13.23 16.38 10.65 196.5 15.36 30.05 23.30 29.64 33.68 27.24 27.93 48.94 43.47 2.12 2.13 7.2 7.3 10.67 12.84 15.63 7.3 7.4 10.63 12.78 14.74 35.39 28.92 31.92 42.87 2.06 7.2 7.2 10.56 12.66 14.82 33.74 27.57 29.51 43.53 2.10 6.9 7.0 9.48 11.17 13.11 Net impaired assets to equity and collectively assessed provisions (%) 2.21 1.41 1.14 1.29 1.79 Total provisions for expected credit losses/impairment on loans and credit commitments to total loans (basis points)5 88 54 43 45 54 1. 2. 3. 4. 5. 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. The above income statement extracts for 2020, 2019 and 2018 and balance sheet extracts for 2020 and 2019 are derived from the consolidated financial statements included in this Annual Report. The above income statement extracts for 2017 and 2016 and balance sheet extracts for 2018, 2017 and 2016 are derived from financial statements previously published. Adjusted for Treasury shares. 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. Provisions for expected credit losses (ECL) on loans and credit commitments as at 2020 and 2019 were determined based on AASB 9 Financial Instruments (December 2014) (AASB 9). Provisions for impairment charges on loans and credit commitments as at 2018, 2017 and 2016 were based on AASB 139 Financial Instruments: Recognition and Measurement (AASB 139) and were not restated. WESTPAC GROUP 2020 ANNUAL REPORT 113 Five year summary 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. (in $m unless otherwise indicated) Customer Total customers (millions)2 Digitally active customers (millions)3 Branches4 Branches with 24/7 capability (%)5 ATMs Smart ATMs (%)6 Change in consumer complaints (%) - Australia7 Change in consumer complaints (%) - NZ Number of approved applications for financial assistance from customers experiencing financial hardship8 Employees 2020 2019 2018 2017 2016 14.0 5.9 1,103 36 14.2 5.8 14.2 5.6 1,143 1,204 35 33 13.9 5.3 1,251 29 13.4 4.9 1,310 27 2,036 2,847 3,222 3,665 3,757 69 145 6 54 94 2 47 12 (16) 44 (18) (21) 37 (31) (7) 75,367 52,025 37,678 28,322 30,759 Total employees (full-time equivalent)9 36,849 33,288 35,029 35,096 35,580 Employee voluntary attrition (%)10 New starter retention (%)11 Employee Commitment Index (%)12 Lost Time Injury Frequency Rate (LTIFR)13 Whistleblower reporting - number of new concerns14 Women as percentage of the total workforce (%) Women in leadership (%)15 Environment Total Scope 1 and 2 emissions - (tonnes CO2 -e)16 Total Scope 3 emissions - (tonnes CO2 -e)17 Paper consumption - Aust and NZ (tonnes)18 Carbon neutrality Sustainable lending 7.4 85.8 73 0.4 184 57 50 10.3 84.5 72 0.4 278 58 50 10.0 84.1 73 0.4 289 57 50 9.6 84.7 76 0.6 344 58 50 10.6 85.5 - 0.8 209 58 48 107,634 121,168 128,339 134,237 156,701 91,616 87,262 90,454 94,279 80,125 1,539 1,812 2,161 2,706 3,304 Maintained Maintained Maintained Maintained Maintained Climate change solutions attributable financing - Aust and NZ ($m) 10,059 9,263 9,113 6,979 6,193 Proportion of electricity generation financing in renewables including hydro - Aust and NZ (%)19 Electricity generation portfolio emissions intensity (tonnes CO2 -e/ MWh)20 Finance assessed under the Equator Principles - Group ($m)21 Social impact Community investment excluding commercial sponsorships ($m)22 Community investment as a percentage of pre-tax profits - Group (%)22 Community investment as a percentage of pre-tax operating profit (cash earnings basis)22 75 75 71 65 59 0.25 126 153 3.58 3.21 0.26 454 130 1.33 0.28 773 128 1.09 0.36 891 164 1.42 0.38 617 148 1.39 1.32 1.10 1.41 1.32 Financial education (participants)23 1,009,232 619,995 133,844 112,263 59,596 Supply chain Top suppliers assessed under the Westpac Responsible Sourcing Program (%)24 Spend with Indigenous Australian suppliers - Australia ($m)25 100 5.9 98 4.2 100 4.5 21 2.8 - 1.7 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  114 Five year summary 1. 2. 3. 4. 5. 6. 7. 8. 9. All data represents Group performance as at 30 September unless otherwise stated. All customers with an active relationship (exclude channel only and potential relationships). Westpac Group customers who, as at 30 September, have successfully authenticated at least once into the Bank’s digital banking platforms (including Quick zone) within the last 90 days. Includes six advisory centres and one community banking centre. 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). ATMs with deposit taking functionality. Excludes envelope deposit machines. Total Australia complaints excluding WIB. Full Year 2019 change 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. Complaints number is inclusive of 12,367 complaints related to COVID-19. Number of approved applications for financial assistance from Westpac Group customers experiencing financial hardship. Financial hardship occurs when a person is unable to meet their repayment obligations for a period of time due to an unexpected event or unforeseen change in circumstances, such as illness or injury or a change in employment. Each request is assessed on a case-by-case basis. Some hardship options that may be available to customers include reduced or deferred repayments and reduction in interest charges. Full-time equivalent employees include permanent (full-time and pro-rata part-time staff) employees, and temporary (overtime, temporary and contract staff) employees. 10. Employee voluntary attrition refers to the total voluntary separation of permanent employees over the 12 months average total 11. permanent headcount for the period (includes full time, part time and maximum term employees). New starter retention over the 12 months rolling new starter headcount for the period (includes full time and part time permanent employees). 12. New monthly employee survey conducted from 2017. Six month rolling average results reported and prior data not included due to change in survey methodology. The 2019 result has been reviewed and updated. 13. 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. 14. Number of disclosures entered into the whistleblower case management database that has come via: a direct entry by the whistleblower, the whistleblower external hotline, the Group’s Whistleblower Protection Officer, or other Eligible Recipients. 15. 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. 16. Scope 1 emissions are the release of greenhouse gases (GHG) into the atmosphere as a result of Westpac Group’s direct operations for the period 1 July to 30 June. Australian data is prepared in accordance with the National Greenhouse and Energy Reporting Act 2007 (NGER Act). New Zealand data is prepared in accordance with the New Zealand Ministry for the Environment guidance for GHG reporting and Toitū carbonzero programme rules. Scope 2 emissions are indirect greenhouse gas emissions from consumption of purchased electricity from the Westpac’s operations for the period 1 July to 30 June. Australian data is prepared in accordance with the NGER Act 2007. New Zealand data is prepared in accordance with the New Zealand Ministry for the Environment guidance for GHG reporting and Toitū carbonzero programme rules. 17. Scope 3 emissions are indirect greenhouse gases (GHG) emitted as a consequence of Westpac Group operations but occur at sources owned or controlled by another organisation for the period 1 July to 30 June. Australian data is prepared in accordance with the Climate Active Carbon Neutral Standard for Organisations. New Zealand data is prepared in accordance with the New Zealand Ministry for the Environment guidance on GHG reporting and Toitū carbonzero programme rules. 2016 to 2019 figures restated to reflect methodology update in 2020. 18. 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. 19. Measured as the percentage of indirect and direct financing (total committed exposure) to electricity generation assets in the Australian and New Zealand electricity markets. 20. Data is based on the reported exposures to electricity 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. 21. The Equator Principles is a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing. 22. 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. 23. 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 from 2019 number of participants driven by the inclusion of our Life Moments and Help for your Business Education pages. 24. Top 100 Westpac Australia and New Zealand suppliers by spend assessed for inherent ESG risk for the 12 months ended 30 September. 25. 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 and 2018 adjusted to reflect newly identified spend with Indigenous Australian suppliers. WESTPAC GROUP 2020 ANNUAL REPORT Reading this report 115 Reading this report Disclosure regarding forward-looking statements This Annual Report contains statements that constitute ‘forward-looking statements’ within the meaning of Section 21E of the US Securities Exchange Act of 1934. Forward-looking statements are statements about matters that are not historical facts. Forward-looking statements appear in a number of places in this Annual Report and include statements regarding Westpac’s intent, belief or current expectations with respect to its business and operations, market conditions, results of operations and financial condition, including, without limitation, future loan loss provisions and financial support to certain borrowers. Words such as ‘will’, ‘may’, ‘expect’, ‘intend’, ‘seek’, ‘would’, ‘should’, ‘could’, ‘continue’, ‘plan’, ‘estimate’, ‘anticipate’, ‘believe’, ‘probability’, ‘risk’, ‘aim’, ‘outlook’ 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 the global COVID-19 pandemic, which has had, and is expected to continue to have, a negative impact on our business and global economic conditions, adversely affected a wide-range of Westpac’s key suppliers, third-party contractors and customers, created increased volatility in financial markets and may result in increased impairments, defaults and write-offs; 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, reviews 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; the failure to comply with financial crime obligations, which has had, and could further have, adverse effects on our business and reputation; internal and external events which may adversely impact Westpac’s reputation; litigation and other legal proceedings and regulator investigations and enforcement actions; 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; an increase in defaults in credit exposures because of a deterioration in economic conditions; adverse asset, credit or capital market conditions; the incidence of inadequate capital levels under stressed conditions; the risk that governments will default on their debt obligations or will be unable to refinance their debts as they fall due; changes to Westpac’s credit ratings or the methodology used by credit rating agencies; levels of inflation, interest rates (including low or negative interest rates), exchange rates and market and monetary fluctuations and volatility; an increase in defaults, write-offs and provisions for credit impairments; changes in economic conditions, consumer spending, saving and borrowing habits in Australia, New Zealand and other countries (including as a result of tariffs and other 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; poor data quality or poor data retention; the effectiveness of Westpac’s risk management policies, including internal processes, systems and employees, and operational risks resulting from ineffective processes and controls, as well as breakdowns in processes and procedures requiring remediation activity; 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 Westpac’s critical accounting estimates and judgements and changes to the value of Westpac’s intangible assets; 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  Reading this report 116 Reading this report • • • changes in political, social or economic conditions in any of the major markets in which Westpac or its customers or counterparties operate; the inability to syndicate or sell down underwritten securities, particularly during times of heightened market volatility; 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. Currency of presentation, exchange rates and certain definitions In this Annual Report, ‘financial statements’ means our audited consolidated balance sheets as at 30 September 2020 and 30 September 2019 and income statements, statements of comprehensive income, changes in equity and cash flows for each of the years ended 30 September 2020, 2019 and 2018 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 2020 is referred to as 2020 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$0.7160, the noon buying rate in New York City for cable transfers in Australian dollars as certified for customs purposes by the Federal Reserve Bank of New York (the ‘noon buying rate’) as of Wednesday, 30 September 2020. The Australian dollar equivalent of New Zealand dollars at 30 September 2020 was A$1.00 = NZ$1.0802, 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 2016 to 30 September 2020. Any discrepancies between totals and sums of components in tables contained in this Annual Report are due to rounding. WESTPAC GROUP 2020 ANNUAL REPORT Review of Group operations 117 Review of Group operations Selected consolidated financial and operating data We have derived the following selected financial information as of, and for the financial years ended, 30 September 2020, 2019, 2018, 2017 and 2016 from our 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 Provisions for expected credit losses (ECL) on loans and credit commitments) Provisions are held in respect of a range of obligations such as employee entitlements, litigation and non-lending losses, lease restoration obligations, 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 ECL on loans and credit commitments Provisions for ECL are a probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant time frame. 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  118 Review of Group operations 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. 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. 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 ECL. As at 30 September 2020, gross loans to customers were $698,661 million (2019: $718,378 million) and the provision for ECL was $5,602 million (2019: $3,608 million). Refer to Note 13. 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 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 2020, 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, loans designated at fair value and life insurance assets was $135,376 million (2019: $113,989 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 $47,142 million (2019: $56,979 million). The fair value of outstanding derivatives was a net asset of $313 million (2019: $763 million net asset). The fair value of financial assets and financial liabilities determined by valuation models that use unobservable market prices was $399 million (2019: $399 million) and $13 million (2019: $29 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. Refer to Note 22. 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, or when there is an indication of impairment, 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 2020, the carrying value of goodwill was $8,397 million (2019: $8,895 million). A $498 million write-down for impairment of goodwill was recognised in 2020 (2019: nil). Refer to Note 25. 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 2020 was $530 million (2019: net superannuation deficit of $335 million). As at 30 September 2020, one superannuation plan was in surplus of $71 million (2019: one plan in surplus of $73 million) and three superannuation plans were in deficit of $601 million (2019: three plans in deficit of $408 million). Refer to Note 34. WESTPAC GROUP 2020 ANNUAL REPORT 119 Review of Group operations 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. Refer to Note 7. 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. Refer to Note 15. Impact of COVID-19 The COVID-19 pandemic and the measures put in place domestically and globally to control the spread of the virus have had a significant impact on global economies and financial markets. As a result, this has increased the uncertainty and judgement required in relation to our critical accounting assumptions and estimates, primarily relating to: • • As there is a higher than usual degree of uncertainty associated with these assumptions and estimates, the actual economic conditions are likely to be different from those forecast which may significantly impact accounting estimates included in these financial statements. The impact of COVID-19 is discussed further in each of the related notes. Refer to Note 13 and Note 25. expected credit losses; and recoverable amount assessments of intangible assets. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REVIEW2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT  Review of Group operations 120 Review of Group operations Income statement review Consolidated income statement1 For the years ended 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 Profit attributable to NCI Net profit attributable to owners of WBC 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 2020 US$2 2020 A$ 2019 A$ 2018 A$ 2017 A$ 2016 A$ 19,366 27,047 33,222 32,571 31,232 31,822 (7,412) (10,351) (16,315) (16,066) (15,716) (16,674) 11,954 16,696 16,907 16,505 1,140 1,592 538 641 178 751 895 249 1,655 1,029 929 129 2,424 2,061 945 72 15,516 2,603 1,800 1,202 529 15,148 2,611 1,899 1,124 59 14,451 20,183 20,649 22,007 21,650 20,841 (9,122) (12,739) (10,106) (9,566) (9,282) (9,073) (2,275) (3,178) 3,054 4,266 (1,974) (794) 9,749 (2,959) 11,731 (3,632) (710) (853) (1,124) (1,413) 1,641 (1) 1,640 3,590 45.6 45.6 22 2,292 6,790 8,099 (2) (6) (4) 2,290 3,590 63.7 63.7 31 6,784 3,450 196.5 189.5 174 8,095 3,406 237.5 230.1 188 11,515 10,644 (3,518) 7,997 (7) 7,990 3,355 238.0 229.3 188 (3,184) 7,460 (15) 7,445 3,313 224.6 217.8 188 48.87 48.87 88.83 79.52 79.28 84.19 Overview of performance – 2020 v 2019 Net profit attributable to owners of WBC for 2020 was $2,290 million, a decrease of $4,494 million or 66% compared to 2019. 2020 net profit included a significant increase in impairment charges due to the economic impact of the COVID-19 pandemic, costs associated with the AUSTRAC proceedings, asset impairments and revaluations, and estimated customer refunds, payments, associated costs and litigation. Net interest income decreased $211 million compared to 2019 predominantly due to a decrease in net interest margin of 9 basis points to 2.03%. The movement in net interest income is attributable to the impact of: • lower rates on average interest earning assets exceeding benefits from the decrease in the Group’s funding costs, which includes movements in economic hedges; and • lower charges for estimated customer refunds and payments than in 2019. In aggregate, non-interest income decreased $255 million compared to 2019 mainly due to: • • • • a decrease in net wealth and insurance income due to lower rates, asset impairment, and severe weather events resulting in higher claims; and a decrease in net fee income from lower customer activities and fee waivers, partially offset by a lower charge for estimated customer refunds and payments compared to 2019; and the realisation of a gain upon the derecognition of an associate. Operating expenses increased $2,633 million or 26% compared to Full Year 2019. The rise was mainly due to: • • • costs associated with AUSTRAC proceedings including a provision for penalty; customer service costs associated with responding to COVID-19; and asset impairments, and an increase in amortisation and impairment of capitalised software; partially offset by provisions for Wealth restructuring in 2019. Impairment charges were $2,384 million higher compared to 2019 mostly reflecting the deterioration in the economy as a result of the COVID-19 pandemic which has led to a significant increase in the expected credit losses. Asset quality deteriorated, with stressed exposures5 as a percentage of total committed exposures at 1.91%, up 71 basis points compared to 2019 1. 2. 3. 4. 5. 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. Australian dollar amounts have been translated into US dollars solely for the convenience of the reader at the rate of A$1.00 = US$0.7160 (refer to ‘Reading this report’ section). 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. Adjusted for Treasury shares. Stressed exposures do not include exposures which are on an active COVID 19 deferral package as of September 2020. WESTPAC GROUP 2020 ANNUAL REPORT Review of Group operations The effective tax rate of 46.3% was higher than the 2019 effective tax rate of 30.4% predominantly due to both the provision for the AUSTRAC penalty and goodwill impairment being non-deductible. The Board has determined a final dividend of 31 cents per ordinary share. The full year ordinary dividends of 31 cents is lower than the ordinary dividends declared in 2019 and represents a payout ratio of 48.87%. The full year ordinary dividend is fully franked. 121 Income statement review – 2020 v 2019 Net interest income – 2020 v 2019 $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 2020 2019 2018 27,047 33,222 32,571 (10,351) (16,315) (16,066) 16,696 16,907 16,505 496 (707) (211) 397 5 402 648 341 989 Net interest income decreased $211 million or 1% compared to 2019. Key features include: • • • 3% growth in average interest earning assets from increased holdings of third party liquid assets, from a higher liquidity position driven by strong deposit inflow partly offset by Australian based lending; Other interest earning assets increased due the deployment of excess liquidity to assets under reverse repurchase agreements, and higher collateral balances; and Group net interest margin decreased 9 basis points to 2.03%. Refer to Interest spread and margin – 2020 v 2019 for primary drivers of margin movement. Total loans decreased $21.7 billion or 3% compared to 2019. Excluding foreign currency translation impacts, total loans decreased $20.8 billion or 3%. Key features of loan movements were: • • • • • • Australian housing loans declined mostly from accelerated payments. The decline was in investor property lending down $10.6 billion or 6% with owner occupied lending up $5.3 billion or 2%; Australian personal lending decreased across credit cards, personal loans and auto lending. This was consistent with the overall market trends in unsecured lending and auto finance with customers reducing debt and adopting other forms of finance; Australian business lending contracted from lower demand for investment and working capital requirements along with higher institutional repayments; Most of the increase in New Zealand lending was in housing, with the property market continuing to grow with business lending also a little higher. This was partly offset by lower personal loans due to customer deleveraging and increased competition; Overseas lending decreased due to lower trade finance in Asia; and Provision balances increased from changes in the economic scenarios and weightings used in AASB 9 provision models. Deposits and other borrowings excluding certificates of deposit increased $30.9 billion or 6% compared to 2019. Excluding foreign currency translation impacts, deposits and other borrowings excluding certificates of deposit increased $32.0 billion or 6%. Key features of deposits and other borrowings excluding certificates of deposit growth were: • • • Australian deposits and other borrowings excluding certificates of deposit grew and the mix shifted from term deposits to at call products. Non-interest bearing deposits grew mainly due to $4.9 billion of higher mortgage offset balances; New Zealand deposits and other borrowings excluding certificates of deposit increased across both households and businesses. The trends in deposit growth were similar to Australia with term deposits declining and at call increasing; and Overseas deposits and other borrowings excluding certificates of deposit decreased with all of the decline in the second half of the year as we continued to reduce our exposure to international regions. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCEWESTPAC GROUP 2020 ANNUAL REPORT  Review of Group operations 122 Review of Group operations Interest spread and margin – 2020 v 2019 $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 2020 2019 2018 16,696 16,907 16,505 821,718 798,924 774,944 745,641 734,282 715,509 76,077 64,642 59,435 1.90% 0.13% 2.03% 1.94% 0.18% 2.12% 1.95% 0.18% 2.13% Group net interest margin of 2.03% decreased 9 basis points from 2019. Key features include: • • Estimated customer refunds and payments contributed to an increase in margin of 2 basis points; and Except for these items, net interest margin decreased 11 basis points driven by: • • • • • • 11 basis point decrease from lower deposit spreads and hedges due to the low interest rate environment. This was partially offset by changes in the mix of the portfolio with customers moving to at call accounts from term deposits; 7 basis point decrease from higher holdings of third party liquid assets due to our deployment of excess liquidity generated by strong deposit inflows and lower lending; and 4 basis point decrease from capital and other primarily due to lower income earned on hedged balances, this was partially offset by: 6 basis point increase from lower short term funding costs; 5 basis point increase from loan spreads with pricing changes to Australian mortgages and business loans partially offset by increased competition driving lower rates on new lending and retention pricing, and the impact of customers switching to lower spread fixed rate loans; and Treasury and Markets contribution was flat on 2019 with interest rate risk management offset by fair value adjustments. Non-interest income - 2020 v 2019 $m Net fee income Net wealth management and insurance income Trading income Other income Non-interest income 2020 1,592 751 895 249 2019 1,655 1,029 929 129 2018 2,424 2,061 945 72 3,487 3,742 5,502 Non-interest income of $3,487 million decreased $255 million or 7% compared to 2019. Net fee income decreased $63 million or 4% primarily resulting from: • • The impacts of COVID-19 including fee waivers for customer support packages, lower interchange fees, and a decline in international card volumes; A decline in institutional customer activity impacting syndication, arrangement and structured finance fee income (down $79 million), partially offset by: • Estimated customer refunds and payments which were $133 million in 2020 compared to $283 million in 2019. Net wealth management and insurance income decreased $278 million or 27% primarily due to: • • • • Lower life insurance income (down $355 million) due to asset impairment and deferred acquisition cost write- offs; Lower general insurance income (down $105 million) due to elevated claims for bushfires and severe weather events; Lower platform income (down $93 million) as customers migrated to lower margin products, a decline of funds under administration in line with lower markets and the impact of lower interest rates on managed cash balances; Lower superannuation income (down $78 million) from pricing changes, customer migration to lower margin products, the impact of Protecting Your Super legislation, and the early release of superannuation. 1. 2. 3. Interest spread is the difference between the average yield on all interest earning assets and the average yield on all interest bearing liabilities. 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. Net interest margin is calculated by dividing net interest income by average interest earning assets. WESTPAC GROUP 2020 ANNUAL REPORT 123 Review of Group operations Trading income decreased $34 million or 4% primarily due to: • • • Offshore earnings hedges; Lower client demand impacting sales performance; partially offset by Higher non-customer income across fixed income and foreign exchange products benefiting from volatile markets. Other income increased $120 million primarily due to a higher gain relating to the revaluation of an investment in Zip Co Limited ($303 million) partially offset by the realisation of a foreign currency loss related to the closure of the Mumbai branch in 2020 and the non-repeat of prior year asset sales and revaluations related to Paymark, Coinbase and 316 George Street. Operating expenses – 2020 v 2019 $m Staff expenses Occupancy expenses Technology expenses Other expenses Total operating expenses Total operating expenses to net operating income ratio (%) 2020 5,015 1,016 2,643 4,065 2019 2018 5,038 4,887 1,023 2,319 1,726 1,033 2,110 1,536 12,739 10,106 9,566 63.12% 48.94% 43.47% Operating expenses increased $2,633 million or 26% compared to 2019. Key features include: • • • • • Provisions and costs for the AUSTRAC proceedings ($1,478 million higher); Write-down of intangible items ($668 million higher); Asset sales and revaluations ($119 million higher); and Costs associated with estimated customer refunds, payments, costs and litigation ($54 million higher); Partly offset by non-repeat of costs associated with the exit of personal advice businesses ($241 million lower). Except for these items, operating expenses increased $555 million or 6%. The following discussion excludes the impact of these key items. Staff expenses increased $119 million or 2% from: • • • Additional FTE (up 3,561) over the year as we responded to the operational requirements of higher volumes associated with COVID-19 activities, and additional resources for risk and compliance (including financial crime); Salary costs were higher as staff took less leave over the year; and Lower short-term incentives and productivity benefits partly offset these increases. Occupancy expenses decreased $7 million or 1% from: Savings from onshore retail branch closures; and • Lower depreciation on operating leases; • Partly offset by exit costs associated with reducing our branch footprint. • Technology expenses increased $190 million or 8% mainly due to: • • Higher amortisation, including the full-year impact of the Customer Service Hub; and Higher telecommunication and software licensing costs mainly due to increased capacity and capability to support our staff working from home. Other expenses increased $253 million or 16% due to: Increased spending on risk and compliance; and • Costs associated with supporting COVID-19 activities, including the onshoring of certain activities. • 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Review of Group operations 124 Review of Group operations Impairment charges – 2020 v 2019 $m Total impairment charges Impairment charges to average gross loans (basis points) 2020 3,178 45 2019 794 11 2018 710 10 Impairment charges significantly increased to $3,178 million in 2020 (equivalent to 45 basis points of gross loans), up $2,384 million compared to 2019. Total new collectively assessed provisions (CAP) charges were $2,090 million higher due to a $2,167 million increase in CAPs partially offset by a $77 million decrease in write-offs. The increase in other changes in CAP was driven by the following: • • Changes in forward-looking economic inputs, increased weighting of a downside economic scenario and increased overlay provisions from estimated impacts of the COVID-19 pandemic, predominately within the First Half 2020; and A rise in 90+ day delinquencies in the mortgage portfolio; and the downgrade of certain customers in the Business division. Total new individually assessed provisions (IAPs), write-backs and recoveries were $294 million higher than 2019. This was predominately due to higher new IAPs for five large exposures (three WIB Asia, one Business and one New Zealand). The higher IAPs were partially offset by higher recoveries in the unsecured portfolio. Income tax expense – 2020 v 2019 $m Income tax expense 2020 1,974 2019 2018 2,959 3,632 Tax as a percentage of profit before income tax expense (effective income tax rate) 46.27% 30.35% 30.96% The effective tax rate of 46.3% in 2020 was significantly higher than the 2019 effective tax rate of 30.4%. The effective tax rate is above the Australian corporate tax rate of 30% with the key drivers being the non-deductible provision and associated costs for the penalty relating to AUSTRAC civil proceedings, and non-deductible goodwill impairments. WESTPAC GROUP 2020 ANNUAL REPORT Review of Group operations Review of Group operations Balance sheet review Selected consolidated balance sheet data1 The detailed components of the balance sheet are set out in the notes to the financial statements. As at 30 September 2020 US$m2 2020 A$m 2019 A$m 2018 A$m 2017 A$m Cash and balances with central banks 21,572 30,129 20,059 26,788 18,786 Collateral paid 3,421 4,778 5,930 4,787 5,716 125 2016 A$m 17,397 8,205 Trading securities and financial assets measured at fair value through income statement and available-for-sale securities and investment securities 94,659 132,206 105,182 84,251 86,693 82,841 Derivative financial instruments 16,731 23,367 29,859 24,101 24,033 32,227 Loans Life insurance assets All other assets Total assets Collateral received 496,230 693,059 714,770 709,690 684,919 661,926 2,573 3,593 9,367 9,450 10,643 14,192 17,767 24,814 21,459 20,525 21,085 22,414 652,953 911,946 906,626 879,592 851,875 839,202 1,611 2,250 3,287 2,184 2,477 1,784 Deposits and other borrowings 423,250 591,131 563,247 559,285 533,591 513,071 Other financial liabilities 29,302 40,925 29,215 28,105 30,799 28,704 Derivative financial instruments 16,507 23,054 29,096 24,407 25,375 36,076 Debt issues Life insurance liabilities All other liabilities 107,633 150,325 181,457 172,596 168,356 169,902 1,000 1,396 7,762 10,842 7,377 5,614 7,597 3,580 9,019 3,250 12,361 3,318 Total liabilities excluding loan capital 587,065 819,923 819,293 797,754 772,867 765,216 Total loan capital Total liabilities Net assets 17,147 23,949 21,826 17,265 17,666 15,805 604,212 843,872 841,119 815,019 790,533 781,021 48,741 68,074 65,507 64,573 61,342 58,181 Total equity attributable to owners of WBC 48,704 68,023 65,454 64,521 61,288 58,120 NCI 37 51 53 52 54 61 Total shareholders’ equity and NCI 48,741 68,074 65,507 64,573 61,342 58,181 Average balances Total assets 658,777 920,080 894,724 873,310 854,058 831,439 Loans and other receivables3 499,894 698,176 695,240 681,201 657,628 631,266 Total equity attributable to owners of WBC 48,698 68,014 63,714 62,017 58,556 55,896 NCI 37 52 50 31 20 575 1. 2. 3. 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. Australian dollar amounts have been translated into US dollars solely for the convenience of the reader at the rate of A$1.00 = US$0.7160 (refer to ‘Reading this report’ section). Includes interest earning balances. For 2020 and 2019, loans and other receivables are net of Stage 3 provision for ECL on loans to reflect the Group’s adoption of AASB 9 in 2019. Prior to 2019, loans and other receivables are net of provision for impairment charges on loans. Other receivables include cash and balances with central banks and other interest earning assets. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  126 Review of Group operations Summary of consolidated ratios As at 30 September (in $m unless otherwise indicated) Profitability ratios (%) Net interest margin2 Return on average assets3 Return on average ordinary equity4 Return on average total equity5 Capital ratios (%) Average total equity to average total assets Common equity Tier 1 Tier 1 ratio Total capital ratio Earnings ratios Basic earnings per ordinary share (cents)6 Diluted earnings per ordinary share (cents)7 Dividends per ordinary share (cents) Dividend payout ratio (%) Credit quality ratios Loans written off (net of recoveries) Loans written off (net of recoveries) to average loans (bps) 2019 A$m 2018 A$m 2017 A$m 2016 A$m 2.10 0.90 13.32 13.18 6.79 9.48 11.17 13.11 2.13 0.93 13.05 13.05 7.10 10.63 12.78 14.74 2.06 0.94 13.65 13.64 6.86 10.56 12.66 14.82 2020 US$m1 2.03 0.25 3.37 3.36 7.40 11.13 13.23 16.38 45.6 45.6 22 2020 A$m 2.03 0.25 3.37 3.36 7.40 11.13 13.23 16.38 63.7 63.7 31 2.12 0.76 10.65 10.64 7.13 10.67 12.84 15.63 196.5 189.5 174 48.87 48.87 88.83 237.5 238.0 224.6 230.1 188 79.52 229.3 188 79.28 217.8 188 84.19 700 14 977 14 982 14 948 14 1,488 1,052 22 16 Balance sheet review During 2020, our balance sheet composition shifted, with higher levels of liquid assets from higher inflows of deposits and utilisation of the Term Funding Facility (TFF) in place of debt issuance. Our lending portfolio also experienced net outflows during the period. This shift impacted our margins and profitability. Assets – 2020 v 2019 Total assets as at 30 September 2020 were $911.9 billion, an increase of $5.3 billion or 1% compared to 30 September 2019. Significant movements during the year included: • • • • • • cash and balances with central banks increased $10.1. billion or 50% reflecting higher liquid assets held in this form; trading securities and financial assets measured at fair value through income statement (FVIS) and investment securities increased $27.0 billion or 26% reflecting higher balances held in this form; derivative assets decreased $6.5 billion or 22% mainly driven by movements in cross currency swaps and foreign currency forward contracts; loans decreased $21.7 billion or 3%. Refer to loan quality – 2020 v 2019 below for further information; Life insurance assets decreased $5.8 billion or 62% mainly due to transfer of assets to non-consolidated funds, partly offset by consolidation of new funds; and Other assets increased $3.3 billion or 16% mainly due to the adoption of AASB 16, higher deferred tax assets from the impact of provision for ECL, partly offset by impairment of intangible assets. 1. 2. 3. 4. 5. 6. 7. Australian dollar amounts have been translated into US dollars solely for the convenience of the reader at the rate of A$1.00 = US$0.7160 (refer to ‘Reading this report’ section). Calculated by dividing net interest income by average interest earning assets. Calculated by dividing net profit attributable to owners of Westpac Banking Corporation by average total assets. Calculated by dividing net profit attributable to owners of Westpac Banking Corporation by average ordinary equity. Calculated by dividing net profit attributable to owners of Westpac Banking Corporation by average ordinary equity and non-controlling interests. Based on the weighted average number of fully paid ordinary shares. 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. WESTPAC GROUP 2020 ANNUAL REPORT 127 Review of Group operations Liabilities and equity – 2020 v 2019 Total liabilities as at 30 September 2020 were $843.9 billion, an increase of $2.8 billion, flat, compared to 30 September 2019. Significant movements during the year included: • • • • • • deposits and other borrowings increased $27.9 billion or 5%; other financial liabilities increased $11.7 billion or 40% mainly driven by higher securities sold under agreements to repurchase as the Group accessed the TFF and securities purchased not delivered, partly offset by lower accrued interest payable and interbank deposits; derivative liabilities decreased $6.0 billion or 21% driven by movements in cross currency swaps and foreign currency forward contracts; debt issues decreased $31.1 billion or 17% ($29.2 billion or 16% decrease excluding foreign currency impacts); life insurance liabilities decreased $6.0 billion or 81% mainly due to transfer of liabilities to non-consolidated funds, partly offset by consolidation of new funds loan capital increased $2.1 billion or 10% mainly due to the issuance of US$1.5 billion Tier 2 capital instruments; and • Other liabilities increased $5.2 billion or 93% mainly due to the adoption of AASB 16 and higher provisions. Equity attributable to owners of Westpac Banking Corporation increased $2.6 billion or 4% reflecting $2.8 billion of new shares issuances, 2019 final dividend reinvestment plan and retained profits, partly offset by 2019 final dividends paid in First Half 2020. Loan quality – 2020 v 20191 $m Total gross loans1 Average gross loans Australia New Zealand Other overseas Total average gross loans 2020 2019 2018 698,661 718,378 712,504 615,541 622,241 611,398 82,170 78,065 73,000 15,089 16,615 16,228 712,800 716,921 700,626 Total gross loans represented 77% of the total assets of the Group as at 30 September 2020, 2% lower compared with 30 September 2019. The decrease was mainly due to greater holdings of liquid assets and lower mortgages. Australian average gross loans were $615.5 billion in 2020, a decrease of $6.7 billion or 1% from $622.2 billion in 2019. This decrease was due to lower lending across mortgages, business lending and personal lending. New Zealand average gross loans were $82.2 billion in 2020, an increase of $4.1 billion or 5% from $78.1 billion in 2019. Excluding foreign currency translation impacts, New Zealand average gross loans grew $4.3 billion or 6%. The growth was mostly from housing loans and business lending, partially offset by lower personal lending. Other overseas average loans were $15.1 billion in 2020, a decrease of $1.5 billion or 9% from $16.6 billion in 2019. This was due to lower trade finance in the Asia region. The reduction was partly offset by foreign currency translation impacts as the AUD depreciated against the USD. Approximately 12% of the loans at 30 September 2020 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 as follows: Consolidated $m Loans Loans - housing Loans - personal Total 30-89 days 2020 90+ days Total 30-89 days 2019 90+ days Total 2,682 7,399 10,081 3,574 4,063 7,637 260 347 607 395 356 751 2,942 7,746 10,688 3,969 4,419 8,388 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. Gross loans are stated before related provision for ECL/impairment charges on loans and credit commitments. WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Review of Group operations 128 Review of Group operations Impaired exposures1,2 $m Impaired Loans Housing and business loans: Gross Provisions Net Personal loans greater than 90 days past due: Gross Provisions Net Restructured: Gross Provisions Net 2020 2019 2018 2017 2016 2,357 (916) 1,441 406 (232) 174 16 (4) 12 1,327 (534) 793 405 (248) 157 31 (10) 21 1,019 (458) 561 371 (189) 182 26 (6) 20 1,142 (507) 635 373 (195) 178 27 (12) 15 1,851 (885) 966 277 (166) 111 31 (16) 15 Net impaired exposures 1,627 971 763 828 1,092 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 611 5,521 412 3,501 422 2,631 480 2,639 869 2,733 6,132 3,913 3,053 3,119 3,602 Total provisions for ECL/impaired charges on impaired exposures to total impaired exposures 41.45% 44.92% 46.12% 46.30% 49.42% Gross impaired exposures to total gross loans 0.40% 0.25% 0.20% 0.22% 0.32% 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 0.88% 0.54% 0.43% 0.45% 0.54% 220.7% 222.0% 215.6% 202.3% 166.8% Credit quality deteriorated over 2020, with total stressed exposures to TCE increasing by 71 basis points to 1.91% driven mainly by the impacts of the COVID-19 pandemic. Total impaired exposures as a percentage of total gross loans were 0.40% at 30 September 2020, an increase of 0.15% from 0.25% at 30 September 2019. At 30 September 2020, we had four impaired counterparties with exposure greater than $50 million, accounting for 15% of total impaired loans. This compares to one impaired counterparty with exposure greater than $50 million in 2019 accounting for 4% of total impaired loans. There were five impaired counterparties at 30 September 2020 that were less than $50 million and greater than $20 million (2019: one impaired counterparty). At 30 September 2020, 80% of our exposure was to either investment grade or secured consumer mortgage segment (2019: 79%, 2018: 79%) and 96% of our exposure as at 30 September 2020 was in Australia, New Zealand and the Pacific region (2019: 96%, 2018: 95%). We believe that Westpac remains appropriately provisioned. Total impairment provisions for impaired exposure to total impaired exposure coverage at 41.5% at 30 September 2020 compared to 44.9% at 30 September 2019. Total provisions for ECL on loans and credit commitments to total impaired exposures represented 221% of total impaired loans as at 30 September 2020, down from 222.0% at 30 September 2019. Total provisions for ECL on loans and credit commitments to total loans were 0.88% at 30 September 2020, up from 0.54% at 30 September 2019 (2018: 0.43%). Group mortgage loans 90 days past due at 30 September 2020 were 1.50% of outstandings, up from 0.82% of outstandings at 30 September 2019 (2018: 0.67%). Group other consumer loan delinquencies (including credit card and personal loan products) were 2.09% of outstandings as at 30 September 2020, up from 1.69% of outstandings as at 30 September 2019 (2018: 1.64%). Potential problem loans as at 30 September 2020 amounted to $1,455 million, an increase of 12.2% from $1,297 million at 30 September 2019. 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. 1. 2. 2020 and 2019 provisions were determined under AASB 9. 2018, 2017 and 2016 provisions were determined under AASB 139. 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 $541 million as at 30 September 2020 (2019: $380 million, 2018: $231 million, 2017: $234 million, 2016: $198 million). This sum is compared to the total gross impaired loans to determine this ratio. WESTPAC GROUP 2020 ANNUAL REPORT Review of Group operations 129 Review of Group operations 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. APRA announcements on capital On 29 July 2020, APRA released further capital management guidance for ADIs1. This guidance included APRA’s expectation that for 2020, ADIs will retain at least half of their earnings, actively use dividend reinvestment plans (DRPs) and/or other capital management initiatives to at least partially offset the diminution in capital from distributions and conduct regular stress testing to inform decision-making and demonstrate ongoing lending capacity. APRA also committed to ensuring that any rebuild of capital buffers, if required, will be conducted in a gradual manner. APRA noted that the implementation of the Basel III capital reforms, which will embed the ‘unquestionably strong’ level of capital in the framework, has been postponed to 1 January 2023. Further details of APRA’s regulatory changes are set out in the Significant Developments section of the 2020 Annual Report. 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 regulatory and economic 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 as well as equity and debt investors. • • • During the period of disruption caused by COVID-19, Westpac is operating with the following principles in relation to capital: • • prioritise maintaining capital strength; retain capital to absorb further downside on credit quality and acknowledge a high degree of uncertainty regarding the length and depth of this stress; allow for capital flexibility to support lending to customers; and in line with APRA guidance, Westpac will seek to maintain a buffer above the regulatory minimum (currently at least 8% for D-SIBs including Westpac) and may utilise some of the “unquestionably strong” buffer2. At 30 September 2020, the CET1 buffer above the regulatory minimum of 8% is $13.7 billion. • • 1. 2. Letter to Authorised Deposit Taking Institutions – Capital Management, 29 July 2020 APRA has set an “unquestionably strong” benchmark of a CET1 capital ratio of 10.5%. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  130 Review of Group operations These principles take into consideration: • current regulatory capital minimums and the capital conservation buffer (CCB), which together are the Total CET1 Requirement. In line with the above, the Total CET1 requirement for Westpac is at least 8.0%, based upon an industry minimum CET1 requirement of 4.5% plus a capital buffer of at least 3.5% applicable to D-SIBs1,2; 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 levels once the medium to longer term impacts of COVID-19 are clearer and APRA’s review of the capital adequacy framework is finalised. APRA have proposed a number of changes to the regulatory capital framework, which are set out in the Significant Developments section of the 2020 Annual Report. 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. $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 2020 2019 67,039 64,320 (18,306) (18,568) 48,733 45,752 9,206 9,299 57,939 55,051 14,052 12,226 (261) (255) 13,791 11,971 71,730 67,022 359,389 367,864 8,761 9,350 54,090 47,680 9,124 6,541 530 3,370 437,905 428,794 11.13% 2.10% 10.67% 2.17% 13.23% 12.84% 3.15% 2.79% 16.38% 15.63% 1. 2. Noting that APRA may apply higher CET1 requirements for an individual ADI. If an ADI’s CET1 ratio falls below the Total CET1 Requirement (at least 8%), they face restrictions on the distribution of earnings, such as dividends, distribution payments on AT1 capital instruments and discretionary staff bonuses. WESTPAC GROUP 2020 ANNUAL REPORT Divisional performance 131 Divisional performance Divisional performance – 2020 v 2019 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 typically 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. In 2020, Westpac implemented a change to the presentation of its divisional financial information. The change related to: • • the creation of the Specialist Businesses division, which includes the following businesses: Auto and Vendor Finance, Australian insurance businesses, Superannuation, Platforms and Investments, and Westpac Pacific; and the movement of certain small to medium size enterprise customers, and products between the Consumer and Business division to better reflect our new line of business operating structure. This change has no impact on the Group’s overall results or balance sheet but impacts divisional results and balance sheets. Comparative divisional financial information has been restated for this change. 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; some items that are not typically 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 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; and 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. Westpac has ceased this activity, and as a result, at this stage, no further adjustments will be recognised in future periods; 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: Consistent with prior years’ treatment, this item has been treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations. The adjustment relates to the mark to market of the shares and separation costs related to the original sell down. Westpac disposed of its holdings in 2020. As a result, no further adjustments will be recognised in future years. 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. As at 30 September 2020 there are no Treasury shares; and • • • • accounting reclassifications between individual line items that do not impact reported results comprise: – – 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; and 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; 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  132 Divisional performance • 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. The guidance provided in Australian Securities and Investments Commission (ASIC) Regulatory Guide 230 has been followed when presenting this information. 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 2020, 2019 and 2018. 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 Specialist Businesses Group Businesses Total cash earnings 2020 2,746 734 332 612 (506) (1,310) 2019 3,116 1,946 925 985 712 (835) 2018 3,192 2,104 985 934 974 (124) 2,608 6,849 8,065 In presenting divisional results on a management reporting basis, internal charges and transfer pricing adjustments are included in the performance of each division reflecting the management structure rather than the legal entity (these results cannot be compared to results for individual legal entities). Where management reporting structures or accounting classifications have changed, financial results for comparative periods have been revised and may differ from results previously reported. Our internal transfer pricing frameworks facilitate risk transfer, profitability measurement, capital allocation and business unit alignment, tailored to the jurisdictions in which we operate. Transfer pricing allows us to measure the relative contribution of our products and divisions to the Group’s interest margin and other dimensions of performance. Key components of our transfer pricing frameworks are funds transfer pricing for interest rate and liquidity risk and allocation of basis and contingent liquidity costs, including capital allocation. WESTPAC GROUP 2020 ANNUAL REPORT Divisional performance In 2020 a number of large items have impacted results that do not reflect underlying performance. These can be divided into four categories: Category Cash earnings impact FY20 $m Detail 133 1. AUSTRAC proceedings $1,442 2. Refunds, payments, costs and litigation $440 3. Write-down of intangibles $614 4. Asset sales and revaluations $123 2020 $m Net interest income Non-interest income Operating expenses Profit before impairment charges and income tax expense Tax and NCI Cash earnings 2019 $m Net interest income Non-interest income Operating expenses Profit before impairment charges and income tax expense Tax and NCI Cash earnings • • • • • • • • • • • • Provision for $1.3 billion penalty. Legal costs, including AUSTRAC’s costs. Costs linked to Westpac’s response plan. Additional provisions for estimated refunds in FY20 including for : – – – business customers provided with a business loan instead of a consumer loan regulated by the National Consumer Credit Protection Act and the National Credit Code; refunds to superannuation and investment customers not advised of certain corporate actions; refunds to some BT customers where certain wealth fees were inadequately disclosed; and – net increase in provisions for the refund of Advice fees. Costs associated with implementing the remediation programs. Cost of settling legal actions, including settlement of two US class actions. Following a review, the valuation of our Life insurance business did not support its goodwill so it has been written down. Lower returns in the Auto business has resulted in a write-down in its goodwill. Write-down and impairment of capitalised software. Gain on revaluation of shareholding in Zip Co Limited. Write-down of Life insurance deferred acquisition costs, along with a loss on the liabilities associated with our disability insurance. Accounting loss on the sale of our Vendor Finance business, sold at a discount to book value (recorded loss), with potential earn-out payments on performance over next 3 years (to be recognised in future years). AUSTRAC proceedings Refunds, payments, costs, and litigation Write-downs of intangibles Asset sales and revaluations - - (1,478) (1,478) 36 (1,442) (143) (209) (274) (626) 186 (440) - - (668) (668) 54 (614) AUSTRAC proceedings - - - - - - Refunds, payments, costs, and litigation (344) (820) (220) (1,384) 426 (958) Write- downs of intangibles Asset sales and revaluations - - - - - - - 83 - 83 - 83 - (54) (119) (173) 50 (123) Wealth Reset - - (241) (241) 69 (172) Total (143) (263) (2,539) (2,945) 326 (2,619) Total (344) (737) (461) (1,542) 495 (1,047) 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  134 Divisional performance 2018 $m Net interest income Non-interest income Operating expenses Profit before impairment charges and income tax expense Total (105) (163) (112) (380) 99 (281) Group (143) (263) AUSTRAC proceedings Refunds, payments, costs, and litigation Write-downs of intangibles Asset sales and revaluations - - - - - - (105) (163) (112) (380) 99 (281) - - - - - - - - - - - - Consumer Business Westpac Institutional Bank Westpac New Zealand ($A) Specialist Businesses Group Businesses 5 4 (64) (55) 16 (39) (141) 2 (130) (269) 81 (188) - - - - - - (7) (7) 1 (13) 4 (9) - (409) (694) - 147 (1,652) (2,539) (1,103) (1,505) (2,945) 181 (922) 44 326 (1,461) (2,619) Consumer Business Westpac Institutional Bank Westpac New Zealand ($A) Specialist Businesses Group Businesses (85) (2) 25 (62) 29 (33) (246) (12) (57) (315) 95 (220) - - - - - - (13) 34 (15) 6 9 15 - (40) (30) (70) 23 (47) - (717) (384) Group (344) (737) (461) (1,101) (1,542) 339 (762) 495 (1,047) Consumer Business Westpac Institutional Bank Westpac New Zealand ($A) Specialist Businesses Group Businesses (99) (6) (39) (144) 34 (110) - - (5) (5) - (5) - - - - - - (2) (11) (3) (16) 4 (12) - (6) - (6) 2 (4) (4) (140) (65) (209) 59 (150) Group (105) (163) (112) (380) 99 (281) Tax and NCI Cash earnings 2020 $m Net interest income Non-interest income Operating expenses Profit before impairment changes and income tax expense Tax and NCI Cash earnings 2019 $m Net interest income Non-interest income Operating expenses Profit before impairment changes and income tax expense Tax and NCI Cash earnings 2018 $m Net interest income Non-interest income Operating expenses Profit before impairment changes and income tax expense Tax and NCI Cash earnings WESTPAC GROUP 2020 ANNUAL REPORT Divisional performance Consumer Consumer is responsible for sales and service of banking products, including mortgages, credit cards, personal loans, and savings and deposit products to consumer customers in Australia. Banking products are provided under the Westpac, St.George, BankSA, Bank of Melbourne, and RAMS brands. Consumer works with Business, WIB, and Specialist Businesses in the sales, service, and referral of certain financial services and products including general and life insurance, superannuation, platforms, auto lending and foreign exchange. 135 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 WBC Deposits and other borrowings Net loans Total assets Total operating expenses to net operating income ratio 2020 v 2019 2020 8,547 573 9,120 (4,176) (1,015) 2019 8,130 695 8,825 (3,794) (582) 2018 8,092 766 8,858 (3,779) (490) 3,929 4,449 4,589 (1,183) 2,746 - (1,333) 3,116 - (1,397) 3,192 (15) 2,746 3,116 3,177 $bn 219.3 389.8 398.3 $bn $bn 207.6 399.3 407.0 203.9 396.3 403.4 45.79% 42.99% 42.66% Cash earnings of $2,746 million were $370 million or 12% lower than 2019 from higher impairment charges, higher expenses and lower non-interest income. This was partly offset by a 15 basis point increase in net interest margin. Net interest income up $417 million, 5% Non-interest income down $122 million, 18% Operating expenses up $382 million, 10% Impairment charges up $433 million, 74% • • • • • • • • Net loans were 2% lower (or $9.5 billion) over the year. Mortgages decreased $6.2 billion (or 2%) with the decline mostly from accelerated pay down. Other personal lending was $2.8 billion (or 23%) lower as customers paid down debt and reduced spending; Deposits increased 6% (or $11.7 billion), with most of the growth in the second half of the year from higher mortgage offset balances and increased at call deposits partly offset by a reduction in term deposits; and Net interest margin was 15 basis points higher from mortgage repricing and lower funding costs (this benefit was partly offset by elevated retention pricing and lower spreads on new mortgages). Deposit spreads declined due to low interest rates. Non-interest income was lower mostly from COVID-19 restrictions leading to reduced activity, lower credit and debit card revenue, while lower international travel contributed to reduced foreign currency conversion and foreign ATM fees. Costs associated with the write-down of certain intangibles, and the benefit from a write-back of a provision for litigation expenses in 2019, increased expenses by $89 million. Excluding the impact of these items, expenses were $293 million higher, up 8% from: – – – – Costs associated with our COVID-19 and bushfire response; Increased restructuring costs; Higher spend on risk and compliance programs; and Increased costs associated with mortgage processing and bringing jobs onshore; Increases from annual salary reviews, inflation, and the roll-out of the customer service hub, were offset by productivity benefits from organisational redesign, rationalisation of a further 24 branches in 2020 (on top of 57 branches closed in 2019), and further use of digital channels. Mortgage 90+ day delinquencies of 1.60% were up 70 basis points since September 2019 (0.90%) predominately due to an increase in hardship, particularly for those customers who were not eligible for the COVID-19 deferral package. Other consumer 90+ day delinquencies of 1.69% were down 6 bps over the year; and Impairment charges were higher, with collectively assessed provisions increasing significantly reflecting the rise in delinquencies and changes to the economic forecasts. Increased overlay provisions also contributed to the rise. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  136 Divisional performance Business Business provides business banking products and services for Australian SME and Commercial customers (including Agribusiness) generally up to $200 million in exposure. The division also serves Private Wealth. SME includes relationship managed and non-relationship managed SME customers. 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, equipment finance and property finance. Business operates under the Westpac, St.George, BankSA, and Bank of Melbourne brands. Business works with Consumer, WIB, and Specialist Businesses in the sale, referral and service of select financial services and risk management products (including corporate superannuation, foreign exchange and interest rate hedging). 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 WBC Deposits and other borrowings Net loans Total assets Total operating expenses to net operating income ratio 2019 2018 4,456 4,619 2020 4,163 560 4,723 (2,298) (1,371) 594 5,050 (2,094) (172) 1,054 2,784 (320) 734 - (838) 1,946 - 612 5,231 (1,983) (236) 3,012 (908) 2,104 - 734 1,946 2,104 $bn 151.9 140.7 145.8 $bn 142.6 146.9 151.6 $bn 141.0 146.1 150.5 48.66% 41.47% 37.91% WESTPAC GROUP 2020 ANNUAL REPORT 137 Divisional performance 2020 v 2019 Cash earnings of $734 million were $1,212 million (or 62%) lower than 2019. Excluding estimated customer refunds, payments, costs and litigation, cash earnings were $1,244 million (or 57%) lower mostly from an increase in impairment charges and a decline in net interest margin. Net interest income down $293 million, 7% Non-interest income down $34 million, 6% Operating expenses up $204 million, 10% Impairment charges up $1,199 million, large • • • • • • • Net loans were 4% (or $6.2 billion) lower over the year, driven by a 4% (or $2.3 billion) reduction in mortgages and a 3% (or $2.7 billion) reduction in business lending, with growth in agriculture more than offset by declines across other industries; Deposits were 7% (or $9.3 billion) higher over the year with a 33% rise in transaction balances and 20% increase in savings and online balances supported by government stimulus packages. This was partially offset by an 18% decline in term deposits given a customer preference to retain funds in at call accounts; and Net interest margin was 17 basis points lower than 2019 (down 25 basis points excluding estimated customer refunds and payments). The lower margin was mostly from reduced deposit spreads from low interest rates and interest rate reductions on business lending products as part of COVID-19 support measures. These reductions were partly offset by repricing and changes in deposit mix. Estimated customer refunds and payments in 2020 were $14 million lower than 2019. Excluding this, non-interest income was down $48 million (or 8%) mostly due to lower markets income, lower business lending fees, and the impact of COVID-19 fee waivers. These impacts were partly offset by higher merchant fee income. Costs associated with customer refunds, payments and litigation and write-down of intangible assets were $73 million higher than 2019. Excluding these items, expenses were up $131 million (or 6%), due to higher spend relating to COVID-19 activities, increased spending on risk and compliance programs, and investment in bankers. The level of stressed exposures increased 182 basis points to 4.70% mostly from an increase in watchlist and substandard within the Commercial portfolio; Impairment charges were higher mostly from an increase in collectively assessed provisions due to COVID-19 impacts reflecting: – – – Changes to the base case economics forecasts and increasing the weight applied to the downside economic scenario; an increased overlay provision; and an increase in stressed exposures; • Individually assessed provisions also increased $58 million, from a small number of large exposures. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  138 Divisional performance Westpac Institutional Bank Westpac Institutional Bank (WIB) delivers a broad range of financial products and services to 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 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 Cash earnings for the year Net cash earnings adjustments Net profit attributable to owners of WBC Deposits and other borrowings Net loans Total assets 2020 1,111 1,182 2,293 (1,316) (404) 573 (241) 332 - 332 $bn 102.9 66.2 75.5 2019 1,337 1,195 2,532 (1,220) (31) 1,281 (356) 925 - 925 $bn 99.0 73.6 95.0 2018 1,320 1,473 2,793 (1,399) 20 1,414 (429) 985 - 985 $bn 102.7 75.6 99.6 Total operating expenses to net operating income ratio 57.39% 48.18% 50.09% 2020 v 2019 Cash earnings of $332 million were $593 million or 64% lower than 2019, primarily driven by higher impairment charges (up $373 million) and a 26% decline in net operating income before impairment charges. Income was 9% lower mostly from the 24 basis points decrease in net interest margin. Expenses were higher from a rise in risk and compliance costs. Net interest income down $226 million, 17% Non-interest income down $13 million, 1% Operating expenses up $96 million, 8% Impairment charges up $373 million, large • • • • • • • • • • • • Net loans decreased 10% (or $7.4 billion) primarily from a reduction in offshore lending, including lower trade finance in Asia; Deposits increased 4% (or $3.9 billion) reflecting higher at call balances as customers increased liquidity in response to COVID-19 and from higher government balances. This was partly offset by lower term deposits and offshore deposits; and Net interest margin was down 24 basis points, with lower interest rates reducing deposit spreads and earnings on capital. This was partly offset by more disciplined loan pricing and benefits from the change in deposit mix. Higher charge on derivative valuation adjustments ($77 million charge in 2020 compared to $64 million charge in 2019); Reduced syndication fees with 2019 including several large transactions; A reduction in customer Markets income from lower fixed income and FX sales; partly offset by Higher non-customer Markets income across fixed income and FX. Higher risk and compliance related costs, including financial crime; Increase in restructuring costs; and Productivity savings of $36 million and lower variable remuneration more than offset increases from annual salary reviews and higher technology costs. Stressed exposures to TCE of 1.03%, up 44 basis points compared to 30 September 2019 due to the downgrade of a number of facilities to stressed or impaired; and Impairment charges were higher, reflecting COVID-19 impacts. These resulted from changes to the base case economics forecasts and increasing the weight applied to the downside economic scenario. Individually assessed provisions were also higher following the downgrade of a small number of facilities to impaired. WESTPAC GROUP 2020 ANNUAL REPORT 139 Divisional performance Westpac New Zealand Westpac New Zealand provides banking, wealth and insurance products and services for consumer, business and institutional customers in New Zealand. Westpac conducts its New Zealand banking business through two banks: Westpac New Zealand Limited, which is incorporated in New Zealand, and Westpac Banking Corporation (New Zealand Branch), which is incorporated in Australia. Westpac New Zealand operates through a network of branches and ATMs in both the North and South Islands. Business and institutional customers are also served through relationship and specialist product teams. Banking products and services are provided under the Westpac brand while insurance and wealth products are provided under Westpac Life and BT brands, respectively. New Zealand maintains its own infrastructure, including technology, operations and treasury in accordance with regulatory requirements. All figures are in NZ$ unless noted otherwise. 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 Cash earnings for the year Net cash earnings adjustments Net profit attributable to owners of WBC Deposits and other borrowings1 Net loans Total assets Total funds 2020 1,943 339 2,282 (1,059) (320) 903 (254) 649 7 656 $bn 71.0 88.0 104.2 12.2 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 1,041 1,030 $bn 64.5 84.2 97.1 11.5 $bn 61.9 80.4 90.0 10.7 Total operating expenses to net operating income ratio 46.41% 41.12% 39.34% 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. Refers to total customer deposits in this table. WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  140 Divisional performance 2020 v 2019 Cash earnings of NZ$649 million were NZ$393 million or 38% lower than 2019, primarily driven by higher impairment charges (up NZ$330 million). Net operating income before impairment charges were 14% lower from a 24% decline in non-interest income and a 7% increase in expenses. Net interest income up down NZ$24 million, 1% Non-interest income down NZ$109 million, 24% Operating expenses up NZ$66 million, 7% Impairment charge of NZ$320 million compared to an impairment benefit of NZ$10 million • • • Net loans increased 5%, or NZ$3.8 billion, primarily from mortgages which increased NZ$3.7 billion, mostly in fixed rate loans. Business lending increased NZ$0.8 billion (up 3%). These gains were partly offset by a NZ$0.4 billion decline in other personal lending, and higher impairment provision balance (up NZ$0.3 billion); Deposits were up NZ$6.5 billion with growth across both consumer and business deposits. Term deposits were lower from customer preference to retain funds in at call accounts; and Net interest margin was down 19 basis points, with the low interest rate environment reducing deposit spreads. This was partly offset by improved lending spreads from repricing and some mix impacts. • Non-interest income declined from: – – – Gain on sale of PayMark in 2019: Full period impact of fee simplification initiatives implemented in 2019, and lower income from card products; COVID-19 restrictions which contributed to lower activity based fees, and fee waivers from customer support measures; and – Lower insurance income also contributed to the decline. • Excluding costs associated with customer refunds, payments and litigation (NZ$17 million lower in 2020), expenses increased NZ$83 million (or 8%) mostly from: – – increased spending on risk and compliance programs (including BS11 outsourcing) and increased restructuring expenses; and Costs to support COVID-19 activities, salary increases and other inflationary rises were offset by productivity benefits. • • • Stressed exposures to TCE decreased 7 basis points to 1.59% compared to September 2019; During 2019, the methodology for reporting hardship was aligned to APRA’s definition which has impacted delinquencies. These changes increased other consumer 90+ day delinquencies by 127 basis points and mortgage 90+ day delinquencies by 39 basis points. Excluding the impact of these changes, other consumer 90+ day delinquencies increased 42 basis points and mortgage 90+ day delinquencies increased 2 basis points; and Impairment charges were higher, reflecting expected COVID-19 impacts. These included changes to the base case economics forecasts and increasing the weight applied to the downside economic scenario used in provision models. New individually assessed provisions for two large exposures also contributed to the increase. AUD$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 Cash earnings for the year Net cash earnings adjustments Net profit attributable to owners of WBC Deposits and other borrowings Net loans Total assets Total funds 2020 1,832 319 2,151 (998) (302) 851 (239) 612 7 619 $bn 65.7 81.4 96.4 11.3 2019 1,860 423 2,283 (939) 10 2018 1,799 373 2,172 (855) (22) 1,354 1,295 (369) 985 (1) 984 $bn 59.7 78.0 90.0 10.7 (361) 934 13 947 $bn 56.7 73.6 82.4 9.8 Total operating expenses to net operating income ratio1 46.40% 41.13% 39.36% 1. Ratios calculated using NZ$. WESTPAC GROUP 2020 ANNUAL REPORT Divisional performance Specialist Businesses Specialist Businesses provides automobile finance, Australian life, general and lenders mortgage insurance, investment products and services (including margin lending and equities broking), superannuation and retirement products as well as wealth administration platforms. It also manages Westpac Pacific which provides a full range of banking services in Fiji and Papua New Guinea. The division operates under the Westpac, St.George, BankSA, Bank of Melbourne, and BT brands. Specialist Businesses works with Consumer, Business and WIB in the provision of select financial services and products. 141 $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 NCI Cash earnings for the year Net cash earnings adjustments Net profit attributable to owners of WBC Deposits and other borrowings Net loans Total assets Total funds Total operating expenses to net operating income ratio 2020 534 762 2019 555 2018 565 1,412 1,664 1,296 1,967 2,229 (1,548) (847) (746) (255) (111) (84) (507) 1,009 1,399 3 (2) (506) (31) (292) (420) (5) 712 (45) (5) 974 (76) (537) 667 898 $bn 9.3 14.9 22.8 $bn 9.3 17.2 31.1 $bn 7.2 18.3 32.8 193.0 207.2 198.9 119.44% 43.06% 33.47% 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  142 Divisional performance 2020 vs 2019 Cash earnings were a loss of $506 million compared to a profit of $712 million in 2019. During 2020 the business incurred $922 million (after tax) of costs associated with write-down of intangible assets, revaluation of assets, and provisions for estimated customer refunds, payments and associated costs, compared to $47 million (after tax) in 2019. Excluding these items, cash earnings for 2020 was $416 million, $343 million lower than 2019. Net interest income down $21 million, 4% Non-interest income down $650 million, 46% Operating expenses up $701 million, 83% Impairment charges up $144 million, 130% • • • • • Net loans decreased 13% (or $2.3 billion) over the year, mostly in Auto Loans, reflecting subdued activity and lower new car sales; Deposits were unchanged with the decline in term deposits offset by an increase in at call accounts; and Net interest margin was up 11 basis points with the benefit of lower funding costs partly offset by reduced deposit spreads and lower earnings on capital from low interest rates, and interest rate reductions from customer support measures. Increase in estimated customer refunds and payments and a write-down of intangible assets reduced non-interest income $369 million during the year. Excluding these, non-interest income decreased $281 million (or 19%); Superannuation, Platforms and Investments (SPI) contribution was down $143 million from: – – Margin compression from platform and superannuation pricing changes, product migrations to lower margin super products and impacts of regulation (including Protecting Your Super); and Lower platform revenue from lower interest rates on cash duration managed balances. • Insurance contribution was down $140 million mostly from: – – General insurance claims increased $108 million primarily due to bushfires and major weather events (including NSW/QLD storms and floods), partly offset by an increase in premiums; Life insurance income was $10 million lower mostly from COVID-19 customer policy support measures. Lower premiums were largely offset by lower claims; and – LMI income was also lower, mostly from higher claims. • • • Write-down of intangible assets, asset revaluations, and costs associated with customer refunds, payments and litigation in 2020 were $664 million higher than 2019. Excluding these items, expenses were $37 million higher. Most of the increase related to supporting COVID-19 activities, continued spend on risk and compliance, and CPI increases. The level of stressed exposures to TCE increased 508 bps to 8.56%, mostly from an increase in watchlist exposures in Westpac Pacific; Impairment charges were higher, mostly reflecting COVID-19 impacts. These were from changes to the base case economics forecasts and increasing the weight applied to the downside economic scenario. Higher stress and delinquencies also led to increased overlay provisions. Lower recoveries in Full Year 2020 also contributed to the increase. WESTPAC GROUP 2020 ANNUAL REPORT 143 Divisional performance Group Businesses 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 Technology1, which is responsible for technology strategy and architecture, infrastructure and operations, applications development and business integration in Australia; and Core Support2, which comprises Group support functions, including Australian banking operations, property services, strategy, finance, risk, financial crime, compliance and conduct, compliance, legal, human resources, and customer and corporate relations. 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, costs associated with customer remediation for the Advice business3, 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 (charges)/benefits Profit before income tax Income tax (expense)/benefit Profit attributable to NCI Cash earnings for the year Net cash earnings adjustments Net profit attributable to owners of WBC 2020 899 144 1,043 (2,364) 169 2019 615 (617) (2) (1,137) 92 (1,152) (1,047) (158) - (1,310) (294) (1,604) 213 (1) (835) (19) (854) 2018 792 90 882 (936) - (54) (71) 1 (124) 108 (16) 2020 v 2019 Group Businesses 2020 cash earnings loss of $1,310 million was $475 million worse than 2019. Net operating income up $1,045 million, large • • • Provisions for estimated customer refunds and payments which were $156 million in 2020, compared to $759 million in 2019; Revaluation gains from our investment in Zip Co Limited ($303 million); and Higher Treasury revenue due to management of interest rate risk ($384 million). Operating Expenses up $1,227 million, 108% Impairments charges down $77 million, 84% • Higher costs due to a provision for a penalty from AUSTRAC and the associated costs ($1,478 million), partly offset by; • Lower costs from the exit of the Advice business ($241 million). • The movement of $77 million was mainly due to centrally held overlays relating to drought and bushfires no longer required. 1. 2. 3. 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. In March 2019, Westpac announced that it was exiting the provision of personal financial advice. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Risk and risk management 144 Risk and risk management Risk management As a bank, the management of risk is an inherent part of our business. We manage a number of risks across Westpac, these are detailed below. An example is credit risk, when we offer a loan, we accept credit risk through our assessment of the capacity of the customer to meet their repayment obligation. A customer’s circumstances may change impacting their ability to meet repayments and creating a potential loss for Westpac. We strive to manage our business in a manner that will achieve our desire of Helping Australians and New Zealanders Succeed, while protecting the safety and soundness of Westpac. The issues raised through the Royal Commission, the AUSTRAC Statement of Claim and our own analysis of Culture, Governance and Accountability have highlighted that we must significantly improve the management of our risk, particularly non-financial risk. As a result, we have commenced a significant program to address shortcomings in the management of risk, increase the resources devoted to risk and mature our risk culture. For a more detailed discussion of these issues, please refer to the Strategic Review in Section 1 and also the Risk Factors later in this section. The program has included changes to our risk governance structure, the introduction of a new risk management framework and clearer risk definitions. We are working to mature our risk culture and improve the clarity for our people of their risk responsibilities. A key principle at Westpac is that risk is everyone’s business and we all have a role to play. How we manage risk Central to the management of risk is our Risk Management Framework which outlines the steps to manage our risks, as set out in the diagram below. This Framework provides structure and discipline for our risk management activities. Effective risk management requires all the elements of the framework to operate both independently and as part of a holistic approach. At the centre of the framework is the need for a strong risk culture, that binds the elements, and for all parts of the Group to be clear on their responsibilities for identifying and managing risks through the three lines of defence model. We are working on further embedding the Risk Management Framework to improve the overall management of risk and the maturity of our risk culture. RISK MANAGEMENT FRAMEWORK Ensuring appropriate data, analysis and recommendations flow to the right people and forums on a timely basis to support decision making Westpac’s business plans are shaped considering the risks associated with its strategic objectives Appropriate action plans are implemented to improve our risk profile Board governance & control Business strategy Identifying new and emerging risks in our business from internal and external environments Risks are assessed through ongoing monitoring, management, reporting and assurance Action & response Monitoring & reporting r ee li n e s of d e f h T Risk Culture Risk identification e n c e Risk appetite Control definition & effectiveness People & infrastructure Stress and scenarios analysis Embedding appropriate Frameworks, policies, standards and controls to manage the risks we take Having the right capability, people, data and systems to support effective risk management and decision making Performing stress tests to assess the potential impact of changes that existing and new risks may have on the Group, including on capital Setting risk appetite to provide clarity on the level of risk we are prepared to take The Risk Management Framework has nine components starting with our ‘Business Strategy’, which defines the markets and businesses the Group is operating in. We are an Australian and New Zealand bank, with a predominant focus on retail, business and targeted institutional segments. We also operate wealth, insurance and ancillary banking operations; these are managed in our Specialist Businesses division. WESTPAC GROUP 2020 ANNUAL REPORT  145 Risk and risk management Risk management is a daily discipline in our business. Throughout the year, we execute the elements of the Risk Management Framework to identify, analyse, oversee and manage our risks. Some components are executed more regularly. For example, monitoring and stress testing of risks are performed throughout the year, and the reporting of risks to the Board committees is performed at least quarterly. Some of our risks are stress tested and subject to scenario analysis to assess how major events and changing operating conditions could impact on our operations, financial performance, balance sheet or reputation. Stress tests are particularly relevant in the loan portfolios where we assess the impact of changing economic scenarios on customers and our financial position. The current environment demonstrates the importance of stress testing given the potential impacts from COVID-19 pandemic. We need to have the right people and systems to manage risk, and underpin this with our frameworks, policies, procedures and standards used to define the appropriate controls. For example, our Risk Culture Framework sets out how we define, measure, monitor and manage risk culture. Risk frameworks, policies, procedures and standards exist at various levels across Westpac. These may be at the Group level, across major risk categories as well as for individual regulated entities or divisions. We also have processes in place to monitor and report risks, incidents, issues and actions. These include specific reporting of any breaches of limits. The Group has also increased its focus on resolving long-standing issues, taking action to bring risks back within appetite, and assessing the effectiveness of controls to manage risks. We have a formal risk governance structure to support our risk management framework by providing appropriate data, analysis and recommendations to the right people and forums on a timely basis to support decision making. Risk activities are overseen by established committees (including at Board level, Executive Management, major risk type Committees, Divisional and Specialist Committees). A fuller explanation of our corporate governance is included in section one. In response to developments over the last year, changes have been made to the committee structure with a focus on lifting our management and oversight of non-financial risk. This has included establishing a new Board Legal, Regulatory & Compliance Committee to enhance oversight of non-financial risk. Risk Culture A strong risk culture is essential for the Group’s Risk Management Framework to operate effectively. Following the release of AUSTRAC’s Statement of Claim, APRA required Westpac to reassess whether our CGA Program remained fit for purpose. One of the main conclusions from the CGA reassessment (completed during 2020) was that aspects of our risk culture were ‘immature and reactive’. Westpac aspires to a mature risk culture that pro-actively identifies, manages and mitigates risks, learns from risk events and continuously anticipates new risks and opportunities. To track progress towards our aspiration, we have developed and implemented several risk culture tools and processes designed to assist management better measure, monitor and manage our risk culture: • • • • Risk Culture Framework – establishing a new framework, clearly articulating the roles and responsibilities for moving our risk culture maturity towards Westpac’s aspiration, through the use of the tools and processes; Risk Culture Maturity Self-Assessment – deploying an online tool allowing Divisions to annually assess their current risk culture maturity relative to Westpac’s aspiration, helping to identify and prioritise areas for improvement; Risk Culture Insights Program – undertaking an independent second line deep-dive program of each Division’s risk culture, identifying the factors that positively and negatively influence the Division’s approach to risk management; and Risk Culture Dashboard – launching a comprehensive database of risk culture and conduct risk metrics, to support an online automated Risk Culture Dashboard rolled out to Divisions, enabling risk culture to be measured, monitored and reported in a consistent way across the Group. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW2 GROUP PERFORMANCE  146 Risk and risk management Three Lines of Defence The three lines of defence model outlines the active roles that all employees must play in the end-to-end management of risk. The first line is responsible for identifying and owning the risks arising from all aspects of their activity. The second line provides expertise, advice and oversight in how risks are managed. The third line is Internal Audit who provide independent testing and assurance. FIRST LINE RISK OWNER Identify, control and manage risk • • • • • • Own the current and emerging risks of the business/division by identifying, managing, and monitoring Ensure that business activities are within approved risk appetite and policies Design, implement and maintain controls Comply with laws and regulation Identify and escalate risk issues Responsible for promoting a strong risk culture SECOND LINE RISK OVERSIGHT Set the risk standards, provide challenge and advise the first line THIRD LINE Independent audit • • • • • Establish and communicate risk frameworks, appetite, and strategies Provide oversight and independent challenge to first line Identify, assess, and communicate regulatory change Measure, monitor and report risks against appetite Includes roles in Risk and Financial Crime, Compliance & Conduct divisions, INTERNAL AUDIT • • Verify that Risk Management Framework is designed and operating effectively Validate the adequacy and effectiveness of first and second line functions Risk Identification: Major Risk Categories The Group has identified a number of risk types and classified these under 11 major risk categories. It is important to note that the major risk categories do not represent every risk the Group may face but rather the most material risks to the Group. MAJOR RISK CATEGORIES 1 2 3 4 5 6 7 Strategic Risk Risk Culture Operational Risk Conduct & Compliance Financial Crime Cyber Risk Reputational & Sustainability Risk 8 Capital Adequacy 9 Funding & Liquidity Risk 10 Credit Risk 11 Market Risk Non-financial risks Financial risks We place boundaries or limits on these risks by establishing a risk appetite. Risk appetite is articulated in the Group’s Risk Appetite Statement which lists the Group’s major risks and the measures used to monitor these risks. Most of these measures are monitored by “amber” and “red” limits which indicate when risks are close to or over our risk appetite. The Group has a number of risks which sit outside of our risk appetite or do not meet the expectations of regulators. Westpac is underway with a comprehensive action plan to address risk management and other culture, governance and accountability issues including through its CORE program and other activities, as outlined in ‘Significant Developments’ in Section 1. WESTPAC GROUP 2020 ANNUAL REPORT 147 Risk and risk management Here is an explanation of each of our major risk categories, how we consider risk appetite and some examples of areas of focus in 2020 to illustrate how our Risk Management Framework operates. 1. STRATEGIC RISK 2. RISK CULTURE The risk that the Group makes incomplete strategic choices, does not implement its strategies successfully, or does not respond effectively to changes in the operating environment. Risk Appetite and Mitigation We grow our business through well-considered strategic initiatives that are aligned with the Group’s overall strategic priorities. We manage strategic risk through: • • • Annual Board Strategy Review and Financial Target setting Scenario analysis for major strategic events Project investment approval processes The risk that our culture does not promote and reinforce behavioural expectations and structures to identify, understand, discuss and act on risks. Risk Appetite and Mitigation We promote a risk culture which supports our purpose, vision and values and our ability to manage risk effectively. We assess our risk culture and our risk management outcomes regularly, and this is supported by risk culture metrics that reinforce strong risk management behaviour. Some areas of focus include: • the impact of COVID-19 Some areas of focus include: • the new Board approved Risk Culture Framework • creation of the Specialist Businesses division. • • launched Risk Fundamentals training completed Risk Culture Maturity self-assessments across the Group Example of a Risk Appetite measure • Return on Equity versus target ROE Example of a Risk Appetite measure • Internal survey results - % of respondents who feel safe calling out issues, risks and/ or concerns 3. OPERATIONAL RISK 4. CONDUCT AND COMPLIANCE The risk of loss from inadequate or failed internal processes, people and systems or from external events. Risk Appetite and Mitigation We seek to be resilient to operational risk through robust processes and controls. Material issues and incidents from breakdowns in processes and controls must be quickly and effectively remediated. The risk of failing to abide by compliance obligations required of us or otherwise failing to have behaviours and practices that deliver suitable, fair and clear outcomes for our customers and that support market integrity. Risk Appetite and Mitigation We must comply with relevant laws and regulations, and we seek to conduct our business in a way that delivers suitable, fair and clear outcomes for our customers and supports the integrity of the markets in which we operate. In seeking to achieve this we aim to establish robust controls and systems to manage conduct and compliance risk, and in doing so have no appetite for: • • Deliberate or reckless breaches of regulatory requirements Systems or processes that lead to systemic or material breaches of regulatory requirements Recognising that non-compliance will occur from time to time, we have no appetite for the failure to promptly own, investigate and remediate incidents of non-compliance. Some areas of focus include: • managing the disruption in some suppliers and contractors due to COVID-19 Some areas of focus include: • many of our employees and staff of third-party contractors working remotely due to COVID-19 • • working to bring back 1,000 jobs to Australia in our operations team implemented new control self-assessment standard and strengthening controls • mid-way through a significant multi-year program designed to uplift the Group’s compliance management system and professional capability of the Compliance function Example of a Risk Appetite measure • Timely recording and ownership of incidents identified Example of a Risk Appetite measure • Number of Compliance and Conduct matters reported to regulators 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW2 GROUP PERFORMANCE  148 Risk and risk management 5. FINANCIAL CRIME 6. CYBER RISK The risk that the Group fails to prevent financial crime and comply with applicable financial crime obligations. The risk that the Group’s or its third parties’ data or technology are inappropriately accessed, manipulated or damaged from cybersecurity threats or vulnerabilities. Risk Appetite and Mitigation We seek to help prevent financial crime by pro- actively identifying, assessing, mitigating and reporting financial crime risks. We also seek to comply with all applicable financial crime obligations. Risk Appetite and Mitigation We manage our cyber risks within the appropriate regulatory frameworks, we have an end-to-end view of the Westpac Group Cyber ecosystem to ensure these risks do not undermine our strategic, financial, reputational or regulatory standing, and we remain resilient to cybersecurity threats and vulnerabilities. This means managing our financial crime risks through robust controls and systems, and promptly owning, investigating and remediating financial crime incidents where they occur. Some areas of focus include: • continuing a significant multi-year program to strengthen areas of control weaknesses in financial crime • • establishing a Board Legal, Regulatory & Compliance Committee increasing resources and training for our financial crime team Example of a Risk Appetite measure • Number of high rated issues not remediated within agreed timeframes. We implement cyber controls commensurate to the cyber threats we respond to. Some areas of focus include: • continued delivery of a program to lift cybersecurity capability including new data protection controls Example of a Risk Appetite measure • Number of material security incidents 7. REPUTATIONAL AND SUSTAINABILITY RISK Reputational risk is defined as an action, inaction, transaction, investment or event that will reduce trust in the Group’s integrity and competence by clients, counterparties, investors, regulators, employees or the public. Sustainability risk is the risk of loss or negative impact from the failure to recognise or address environmental, social or governance (ESG) issues. Risk Appetite and Mitigation We seek to maintain the confidence of all stakeholders, to cultivate trust in our integrity and competence. We have little appetite for actions, inactions, transactions, investments and events which may affect the Group’s integrity or competence. We only have appetite for this risk where it is outweighed by another equally or more important Group interest which is aligned with our purpose and core values and there is no way to circumvent the risk. The principles that govern our approach include • • • • Acting with integrity Doing the right thing by our customers Balancing commerciality of decisions with stakeholder expectations Balancing commerciality of decisions with potential impact on people or the environment Some areas of focus include: • the causes and impact of AUSTRAC civil penalty proceedings against Westpac • released updates to our Climate Change and Human Rights Position Statements and 2023 Action Plans, including commitments to improve risk identification, management, oversight and reporting Example of a Risk Appetite measure • Dow Jones Sustainability Index (DJSI) ranking WESTPAC GROUP 2020 ANNUAL REPORT 149 Risk and risk management 8. CAPITAL ADEQUACY 9. FUNDING AND LIQUIDITY The risk of an inadequate level or composition of capital to support our business and meet regulatory requirements under both normal or stressed conditions. Risk Appetite and Mitigation We seek to maintain a strong balance sheet, including in stress scenarios. We evaluate our approach to Capital management through an Internal Capital Adequacy Assessment Process, the key features of which include: • • • • A capital management strategy Considering economic and regulatory requirements Stress testing considerations Considering the perspective of external stakeholders The risk we cannot meet our payment obligations or have an appropriate amount, tenor and composition of funding and liquidity to support our assets. Risk Appetite and Mitigation We ensure that we hold sufficient cash and other liquid resources to meet financial obligations as and when they fall due, and that we comply with all relevant internal policies and regulatory obligations. We manage our balance sheet such that we have: • • • A diversified, stable and cost-effective funding base Enough funding as and when needed sufficient securable assets to meet our funding and repo requirements • Sufficient stable funding sources to fund new loan growth Some areas of focus include: • $2.5 billion capital raising in November 2019 • • APRA imposed a $500 million capital overlay following AUSTRAC’s statement of claim use of RWA overlays to account for higher probability of default for corporate, business lending and specialised lending Some areas of focus include: • the RBA announced the establishment of the TFF on 19 March 2020. As at 30 September 2020, Westpac’s total TFF allowance was $19.7 billion. A supplementary allowance of $11.9 billion will be available to Westpac from 1 October 2020 • further information on liquidity risk management is contained in Note 21 to the financial statements Example of a Risk Appetite measure • Common equity tier 1 (CET1) ratio – a measure which shows a bank’s capacity to absorb losses on a going concern basis. Example of a Risk Appetite measure Net Stable Funding Ratio (NSFR) • • Liquidity coverage ratio (LCR) 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATIONWESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW2 GROUP PERFORMANCE  150 Risk and risk management 10. CREDIT RISK 11. MARKET RISK The risk of financial loss where a customer or counterparty fails to meet their financial obligations to Westpac. The risk of an adverse impact on earnings from changes in various market prices such as exchange rates, interest rates and credit spreads. Risk Appetite and Mitigation We have appetite for credit risk where: • • We have sufficient expertise to make appropriate credit decisions We understand and are comfortable with possible downsides • No excessive exposure concentrations We manage credit risk using Program- managed (high-volume homogeneous credit risk) and Transaction-managed (individual customer and transactions) approaches. Management of credit risk is also supported by a range of policies, processes, systems, risk delegated authorities and Board-approved credit risk limits. Risk Appetite and Mitigation We have appetite for market risk in approved products within our limit framework. We seek to protect our positions from changes in financial market factors which may affect our activities. We manage market risk using the Traded market risk (risk arising from dealings in a variety of approved financial markets products) and Non-traded market risk (risk arising from lending, deposit-taking, balance sheet funding, liquidity and capital management activities) approaches. Some areas of focus include: • heightened credit risk from COVID-19 and reduced economic activity Some areas of focus include: • exited Energy Trading in the final quarter of the financial year • • higher provisions for expected credit losses • further information on credit risk management and provisioning is contained in Notes 13 and 21 to the financial statements, and in Westpac’s Pillar 3 reports further information on market risk management is contained in Note 21 to the financial statements Example of a Risk Appetite measure • Impairment charge as percentage of core earnings Example of a Risk Appetite measure • Value at Risk (VaR, $m) measures across products and portfolios • Net interest income at risk For further information regarding the role and responsibilities of the BRiskC and other Board committees in managing risk, refer to Westpac’s 2020 Corporate Governance Statement available at www.westpac.com.au/corpgov. WESTPAC GROUP 2020 ANNUAL REPORT Risk and risk management 151 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 COVID-19 has had, and COVID-19 and a pandemic like COVID-19 could in the future have, an adverse effect on the Group The Group is vulnerable to the impacts of a communicable disease outbreak or a pandemic. The COVID-19 pandemic has had, and we expect will continue to have, a negative impact on our customers, shareholders, employees and financial performance, among other adverse effects. The pandemic has disrupted, and will continue to disrupt, numerous industries and global supply chains, while important measures to mitigate its impact (such as restrictions on businesses, movement and public gatherings) have had, and we expect will continue to have, a negative effect on economic activity. This decrease in economic activity has affected, and will continue to affect, demand for Westpac’s products and services for an unknown time and by an unknown amount. The associated financial stress on Westpac’s customers has increased impairments, defaults and write-offs. Westpac has increased its provisions for expected credit losses, however, further increases may be required. For more information refer to Note 13 and Note 21 to the financial statements. Westpac has supported customers impacted by the pandemic by lowering interest rates on certain products, waiving certain fees and granting deferrals of certain loan repayments. These initiatives have had and may continue to have a negative impact on the Group’s financial performance and may see the Group assume greater risk than it would have under ordinary circumstances. There is also a possibility that governments or regulators will require banks (including Westpac) to provide further support to customers impacted by the COVID-19 pandemic. Actions taken by regulators in response to the COVID-19 pandemic have impacted and could in the future impact the Group. As an example, regulators in some overseas jurisdictions have exercised their powers to prevent banks from declaring dividends or undertaking share buybacks. In New Zealand, the RBNZ made the decision to freeze the distribution of dividends on ordinary shares by all banks in New Zealand during the period of economic uncertainty caused by COVID-19. This prevents Westpac’s subsidiary Westpac New Zealand Limited from paying dividends and has a negative impact on Westpac’s Level 1 CET1 capital ratio. It is possible that APRA will take a similar approach in the future and prevent Westpac from declaring dividends to its investors. While APRA has not yet taken such action, it has written to Australian banks (including Westpac) and outlined its expectation that they limit any dividends and discretionary capital distributions in the coming months. Further information about impacts on the Group as a result of actions taken by regulators in response to the COVID-19 pandemic is outlined in ‘Significant Developments’. Westpac’s business activities and operations have been, and will likely in the future be, disrupted by disease outbreaks or pandemics. For example, the COVID-19 pandemic has resulted in Westpac closing workplaces and suspending the provision of services through certain channels. When such outbreaks or pandemics occur, Westpac may need to adjust its risk appetite, policies or controls so it can respond to the outbreak or pandemic and protect the well-being of staff and customers who visit our premises. These changes could have unforeseen consequences and expose the Group to increased regulatory oversight and/or regulatory action. Further, to respond to the COVID-19 pandemic, Westpac has implemented (and may implement in the future) new measures in very short periods of time. Taking this type of action may increase the risk that an operational or compliance breakdown occurs, potentially leading to financial losses, impacts on customer service or regulatory and/or legal action. The COVID-19 pandemic has also impacted the Group’s ability to pay dividends, with the Group electing not to pay an interim dividend this financial year given the desire to retain a strong balance sheet and the ongoing uncertainty in the operating environment. It is possible that the pandemic will negatively impact the Group’s ability to pay future dividends or make capital distributions. There continues to be significant uncertainty associated with the COVID-19 pandemic, including the severity of the disease, its duration and actions that may be taken by governments and businesses to attempt to contain the virus or mitigate its impact. In turn, this has the potential for longer term impacts on Westpac’s customers, business and operations. The COVID-19 pandemic may also heighten other risks described below. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  152 Risk and risk management We could be adversely affected by legal or regulatory change The Group’s business, prospects, reputation, financial performance and financial condition have been, and could in the future be, adversely affected by changes to law, regulation, policies, supervisory activities and the expectations of our regulators. The Group operates in an environment where there is increased regulation on and scrutiny of financial services providers. Regulatory change has directly and adversely affected the Group’s financial condition and financial position, and could do so in the future. In recent years, laws and regulations have been introduced requiring Westpac to hold more liquidity and higher capital, and a Bank Levy (based on liabilities) has been imposed on Australia’s largest banks. Laws and regulations that have a similar effect could be passed in the future, including as a result of APRA’s proposed capital policy reforms. Regulatory changes may also affect how we operate. For example, recent regulation has altered the way we provide our products and services, in some cases requiring us to change or discontinue our offerings. Regulation could also limit our flexibility, require us to incur substantial costs, impact the profitability of our businesses, result in the Group being unable to increase or maintain market share and/or create pressure on margins and fees. There are many sources of regulatory change that could affect our business. Such change could stem from international bodies, such as the Basel Committee on Banking Supervision (BCBS) or from reviews and inquiries commissioned by governments (including the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry) or regulators. Reviews and commissions of inquiry may lead to, and in some cases already have led to, substantial regulatory change, which could have a material impact on the Group. Regulation impacting our business may not always be released in a timely manner before its date of implementation. Similarly, early announcements of regulatory change may not be specific and significantly differ from the final regulation. In those cases, the Group may not be able to effectively manage its compliance design in the timeframes available. Relevant governments or regulators could also revise their application of regulatory policies, thereby impacting our business (such as macro-prudential limits on lending). It is critical the Group manages regulatory change effectively. The failure to do so has, and could in the future, result in the Group not meeting its compliance obligations, the potential consequences of which are set out below in ‘We have been or could be adversely affected by failing to comply with laws, regulations or regulatory policy’. We expect that we will continue to invest significantly in compliance and the management and implementation of regulatory change, and significant management attention and resources may be required to update existing, or implement new, processes to comply with such new regulations. The Group’s ability to manage regulatory change has been, and will in the future be, impacted by the COVID-19 pandemic or similar pandemics. The COVID-19 pandemic has caused significant disruptions and delays to regulatory change projects, increasing the risk that the Group may not comply with new regulations when they come into effect. The governmental response to COVID-19 has also seen new legislation and regulation, which may increase compliance risks. The Group may also incur significant costs responding to this new legislation and regulation. For further information about regulatory changes affecting the Group, refer to ‘Significant Developments’ and the sections ‘Critical accounting assumptions and estimates’ and ‘Future developments’ in Note 1 to the financial statements. We have been and 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 conduct and compliance risk. These risks are exacerbated by the increasing complexity and volume of regulation, including where we interpret our obligations and rights differently to regulators or a Court, tribunal or other body. The potential for this is heightened when regulation is new, untested or is not accompanied by extensive regulatory guidance. The Group’s compliance management system is designed to identify, assess and manage compliance risk. However, this system has not always been, and may not always be, effective. Breakdowns have, and may in the future, occur due to flaws in the design of controls or processes. This has resulted in, and may in the future result in, potential breaches of compliance obligations as well as poor customer outcomes. Conduct risk could occur through the provision of products and services to customers that do not meet their needs or do not meet the expectations of the market, as well as the poor conduct of our employees, contractors, agents, authorised representatives and external services providers. This could occur through a failure to meet professional obligations to specific clients (including fiduciary and suitability requirements), weakness in risk culture, poor product design and implementation, failure to adequately consider customer needs or selling products and services outside of customer target markets. This could include deliberate attempts by such individuals to circumvent Westpac’s controls, processes and procedures or negligent actions that could result in the circumvention of Westpac’s controls, processes and procedures. The Group depends on its people to ‘do the right thing’ to meet its compliance obligations. Inappropriate or poor conduct by these individuals such as not following a policy or engaging in misconduct has and could result in poor customer outcomes and a failure by the Group to meet its compliance obligations. The large number of employees and the staff of our third-party contractors WESTPAC GROUP 2020 ANNUAL REPORT 153 Risk and risk management working remotely due to the COVID-19 pandemic may negatively affect the Group’s compliance controls and monitoring processes and there may be an increased risk that staff fail to follow internal policies or that customers may be adversely affected through privacy breaches. While we have frameworks, policies, processes and controls that are designed to manage poor conduct outcomes, these policies and processes have been, and may be, ineffective. The failure of these policies and processes could result in financial losses (including incurring substantial remediation costs and as a result of litigation by regulators and customers) and reputational damage, which could adversely affect our business, prospects, financial performance or financial condition. The Group’s failure, or suspected failure, to comply with a compliance obligation could lead to a regulator commencing surveillance or an investigation. The Group is currently subject to investigations and reviews by regulators (refer to ‘Significant Developments’ and Note 27 to the financial statements for more detail), with the intensity of these increasing. The Group has devoted (and will need to continue to devote) significant resources and has incurred (and will continue to incur) costs for these reviews and investigations, which may adversely affect Westpac’s business, operations, reputation, financial performance and ability to pay dividends. Depending on the circumstances, regulatory reviews and investigations have in the past and may in the future result in a regulator taking administrative or enforcement action against the Group and/or its representatives. Regulators could pursue civil or criminal proceedings, seeking substantial fines, civil penalties or other enforcement outcomes. In addition, regulatory investigations may lead to adverse findings against directors and management, including potential disqualification. In many cases, our regulators have broad powers. For example, APRA can, in certain circumstances, issue directions to us (such as a direction to comply with a prudential requirement, conduct an audit or take remedial action) or disqualify an ‘Accountable Person’ under the Banking and Executive Accountability Regime. APRA can also require the Group to hold additional capital either through a capital overlay or higher risk weighted assets. APRA imposed 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 and a further $500 million overlay following the commencement of civil penalty proceedings by AUSTRAC (both overlays were applied through an increase in risk weighted assets). If the Group incurs additional capital overlays it may need to raise additional capital which could have an adverse impact on our financial performance and financial condition. The political and regulatory environment that the Group operates in has seen (and may in the future see) our regulators (including any new regulator) receive new powers along with materially increased penalties for corporate and financial sector misconduct. In particular, ASIC can commence civil penalty proceedings and seek civil penalties (currently up to $525 million per offence) 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, and a failure by the Group may result in multiple contraventions leading to large penalties. Our regulators have adjusted and may in the future continue to adjust the way they approach oversight, potentially preferring their enforcement powers over a more consultative approach. For example ASIC has committed to continue to use a ‘Why not litigate?’ approach and indicated that it will (among other things) prioritise case studies and referrals arising from the Royal Commission and significant market misconduct. APRA has also committed to a revised enforcement approach (including a new Supervision Risk and Intensity Model), indicating it will use enforcement where appropriate to prevent and address serious prudential risks and hold entities and individuals to account. There may also be a shift in the type and focus of enforcement proceedings commenced by regulators in the future. Regulators may increasingly seek to bring criminal proceedings against institutions and/or their employees or representatives by referring potential criminal matters to the Commonwealth Department of Public Prosecutions or other prosecutorial bodies. The way regulators supervise and monitor institutions has also changed and may continue to change in the future. An example is ASIC’s ‘Close and Continuous Monitoring’ (CCM) program involving onsite reviews of financial services entities, including Westpac. While ASIC, APRA and other regulators have indicated their immediate focus is on responding to the COVID-19 pandemic and they may delay certain enforcement, supervisory activities or monitoring activities, the long term trend to enhanced supervision and monitoring and greater enforcement activity remains. Disruptions to Westpac’s business, operations, third party contractors and suppliers resulting from the COVID-19 pandemic have also increased and may continue to increase the risk that Westpac will not be able to satisfy commitments made to regulators about improving processes and/or resolving outstanding issues, potentially increasing the prospect of a regulator taking action against the Group. Regulatory action commenced against the Group has exposed and may in the future 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 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’. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  154 Risk and risk management The failure to comply with financial crime obligations has had and could have further adverse effects 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. As a result, regulatory, operational and compliance risks are heightened. For example, AML/CTF laws require Westpac and other regulated institutions to (amongst other things) undertake the applicable customer identification procedures, conduct ongoing and enhanced 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 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. The failure to comply with these laws has had, and in the future may have, adverse impacts for the Group. In recent years there has been, and there continues to be, increased focus on compliance with financial crime obligations, with regulators globally commencing large-scale investigations and taking enforcement action for identified non-compliance (often seeking significant penalties). Further, due to the Group’s large number of customers and transaction volumes, the undetected failure or the ineffective implementation, monitoring or remediation of a system, policy, process or control (including a regulatory reporting obligation) has, and could in the future result in, a significant number of breaches of AML/CTF obligations. This in turn could lead to significant penalties and other adverse impacts for the Group, such as reputational damage. While the Group has systems, policies, processes and controls in place designed to manage its financial crime obligations (including reporting obligations), these have not always been, and may not in the future always be effective. This could be for a range of reasons, including, for example, a deficiency in the design of a control or a technology failure. Our analysis and reviews, in addition to regulator feedback, have highlighted that our systems, policies, processes and controls are not operating satisfactorily in a number of respects and require improvement. The Group is currently undertaking a significant multi-year program of work to strengthen areas of control weakness in its financial crime risk management framework (including important aspects of its money laundering and terrorism financing risk assessments and governance) and rectify the management of this risk. The Group has increased dedicated financial crime risk expertise and resources to deliver the financial crime program of work. With increased focus on financial crime, further issues requiring attention have been identified and may continue to be identified. For further information, refer to ‘Significant Developments’. Although the Group provides updates to AUSTRAC and other regulators on its remediation and other program activities, there is no assurance that AUSTRAC or other regulators will agree that its remediation and program update activities will be adequate or effectively enhance the Group’s compliance programs. If we fail, or where we have failed, to comply with these financial crime obligations, we have and could face regulatory enforcement action such as litigation, significant fines, penalties and the revocation, suspension or variation of licence conditions, such as the civil penalty proceedings brought by AUSTRAC against Westpac on 20 November 2019 for alleged contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). Further information on the AUSTRAC proceedings and other financial crime matters is in ‘Significant Developments’. For information on the provision made for a penalty for these proceedings, refer to Note 27 to the financial statements. Non-compliance or alleged non-compliance with our financial crime related obligations and public disclosure have also resulted in, and could lead to regulatory investigations, reviews, inquiries, proceedings or other litigation commenced by third parties (including Australian, US or other class actions), and regulatory action in non- Australian jurisdictions where we operate. Any such litigation or proceeding could cause significant financial and reputational damage to us. Reputational damage could result in the loss of customers or restrict the Group’s ability to efficiently access capital markets, which could have a material adverse effect on the Group’s business, reputation, prospects, financial performance and financial condition. Furthermore, any such effect could harm the Group’s credit ratings. Previous enforcement action by AUSTRAC has resulted in a range of outcomes, depending on the nature and severity of the relevant conduct and its consequences, including substantial financial penalties, restrictions and other regulator imposed conditions. Reputational damage has harmed and could in the future harm our business and prospects Reputational risk 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. For example, where our actions cause, or are perceived to cause, a negative outcome for customers, shareholders, stakeholders or the community. Reputational damage could also arise from the failure to effectively manage risks, failure to comply with legal and regulatory requirements, enforcement or supervisory action by regulators (such as the civil penalty proceedings brought by AUSTRAC), adverse findings from regulatory reviews, failure or perceived failure to adequately respond to community, environmental, social and ethical issues, failure of information security systems, technology failures and security breaches and inadequate record keeping which may prevent Westpac from demonstrating that or determining if a past decision was appropriate at the time it was made. WESTPAC GROUP 2020 ANNUAL REPORT 155 Risk and risk management Our reputation could also be adversely affected by the actions of customers, suppliers, joint-venture partners, strategic partners, other counterparties and accredited data recipients that the Group provides customer data to under Australia’s ‘Open Banking’ regime. Failure, or perceived failure, to address issues that could or do give rise to reputational risk has created, and could in the future create, 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 market. This could adversely affect our business, prospects, financial performance or financial condition. We have and could suffer losses due to litigation Westpac and its subsidiaries may, from time to time, be involved in legal proceedings (including class actions), regulatory actions or arbitration. Such litigation could be commenced by a range of plaintiffs, such as customers, shareholders, suppliers, counterparties and regulators. In recent years there has been an increase in class action proceedings, many of which have resulted in significant monetary settlements. The risk of class actions has been heightened by a number of factors, including regulatory enforcement actions (such as the civil penalty proceedings brought by AUSTRAC), an increase in the number of regulatory investigations and inquiries (such as the Royal Commission), a greater willingness on the part of regulators to commence court proceedings, more intense media scrutiny and the growth of third party litigation funding. Class actions commenced against a competitor could also lead to similar proceedings against Westpac. Litigation (including class actions) may, either individually or in aggregate, adversely affect the Group’s business, operations, prospects, reputation or financial condition. This risk is heightened by increases in the severity of penalties for certain breaches of the law. Such matters are subject to many uncertainties and the outcome may not 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 significant damages, fines, penalties or legal costs. In addition, the case studies considered by the Royal Commission, and the Royal Commission’s findings, have led, and may in the future lead to, regulators commencing investigations and/or enforcement action against the Group. The Group’s material provisions and contingent liabilities are described in Note 27 to the financial statements. There is a risk that the actual penalty paid following a settlement or determination by a Court for any legal proceedings may be materially higher or lower than the provision or that any contingent liability may be larger than anticipated. This may occur in a range of situations, for example where the scope of litigation against the Group is expanded by further claims or causes of action. There is also a risk that additional litigation or contingent liabilities arise, all of 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 Group (and its external service providers) is subject to information security risks. These risks are heightened by: • • • • • new technologies; increased use of the internet and telecommunications to conduct financial transactions; the growing sophistication of attackers; increased regulatory focus on cyber security and oversight of cyber activities; and the COVID-19 pandemic, which has resulted in many Westpac employees (and staff of service providers) working remotely or from other sites, potentially providing increased opportunities for cyber threat actors to exploit. While Westpac has systems in place to protect against, detect and respond to cyberattacks, these systems have not always been, and may not always be, effective. There is no assurance that we will not suffer losses from cyberattacks or information security breaches. The Group may not be able to anticipate and prevent a cyberattack, effectively respond to a cyberattack and/or rectify or minimise damage resulting from a cyberattack. Our external service providers, and other parties that facilitate our activities and financial platforms and infrastructure (such as payment systems and exchanges) are also subject to the risk of cyberattacks. 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 confidentiality and integrity 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. A range of potential consequences could arise from a successful cyberattack, such as: • • • • • systems not operating properly disrupting operations; damage to technology infrastructure; adverse impacts to network access, operations or availability of services; loss of customers; loss of data/information; 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  156 Risk and risk management • • • • reputational damage; claims for compensation; adverse regulatory action including fines or penalties; and significant additional resources required to modify our systems or to investigate and remediate any vulnerabilities or incidents. All these potential consequences could negatively affect our business, prospects, financial performance or financial condition. As cyber threats evolve, we may need to spend significant resources to modify or enhance our systems or investigate and remediate any vulnerabilities or incidents. We could suffer losses due to technology failures Maintaining the reliability, integrity and security of our information and technology is crucial to our business. While the Group has a number of processes in place to preserve 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 from events wholly or partially beyond our control. For example, the COVID-19 pandemic has seen more employees and staff of our third-party contractors work remotely or from alternative sites, which may put additional stress on Westpac’s technology infrastructure and systems. Similarly, the COVID-19 pandemic and the measures implemented by governments to mitigate its spread are likely to result in increased demand being placed on critical national technology and communications infrastructure which the Group relies on. This could adversely impact the reliability of such infrastructure and increase the risk that our technology systems will not be able to operate properly or will become disabled for a period of time. If we incur a technology failure we may fail to meet a compliance obligation (such as retaining records and data for a certain period of time), or our customers may be adversely affected, including through privacy breaches or loss of personal data. This could result in reputational damage, remediation costs and a regulator commencing an investigation and/or taking action against us. The over reliance on legacy systems may heighten the risk of a technology failure. We need to regularly renew and enhance our technology to deliver new products and services, comply with regulatory obligations and meet our customers’ and regulators’ obligations. Consequently, we are constantly managing new technology projects. Failure to effectively implement these projects could result in cost overruns, reduced productivity, operational instability, compliance failures, reputational damage and/or the loss of market share. This could place us at a competitive disadvantage and adversely affect our business, prospects, financial performance or financial condition. We are exposed to adverse credit and capital market conditions We rely on deposits, and credit and capital markets to fund our business and source 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. Such disruption can be for extended periods and be unpredictable as experienced during the Global Financial Crisis. The main risks we face are damage to market confidence, changes to the access and cost of funding, a slowing in global economic activity or other impacts on customers or counterparties. As of 30 September 2020, approximately 27% of our total funding originated from domestic and international wholesale markets. Of this, around 58% was sourced outside Australia and New Zealand. Customer deposits provide around 65% of total funding. Customer deposits held by Westpac comprise both term deposits, which can be withdrawn after a certain period of time and at call deposits, which can be withdrawn at any time. A shift in investment preferences could result in deposit withdrawals which could increase our need for funding from other, potentially less stable, or more expensive sources. If market conditions deteriorate due to economic, financial, political or other reasons (including the COVID-19 pandemic), there may also be a loss of confidence in bank deposits leading to unexpected withdrawals. This could increase funding costs and our liquidity, funding and lending activities may be constrained and our financial solvency threatened. If our current sources of funding prove to be insufficient, we may need to seek alternatives which will depend on factors such as market conditions, our credit ratings and 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. If Westpac is unable to source appropriate funding, we may be forced to reduce lending or liquidity. This 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 realise liquidity, Westpac may not be able to pay its debts as and when they fall due. Westpac enters into collateralised derivative obligations, which may require Westpac to post additional collateral based on market movements, 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. WESTPAC GROUP 2020 ANNUAL REPORT 157 Risk and risk management We could be adversely affected by the risk of inadequate capital levels under stressed conditions The economic impact of the COVID-19 pandemic has brought to the fore the risk of an inadequate level or composition of capital to support normal business activities and to meet regulatory capital requirements under normal operating environments or stressed conditions. Regulatory change will require banks to hold higher capital, specifically for the implementation of future capital and risk-weighted assets regulations coming into effect from 2023. APRA requires banks to operate above the 10.5% unquestionably strong benchmark to prepare for this change although the impact on each bank will be different due to different balance sheet and portfolio mix. Capital distribution constraints apply when an ADI’s Common Equity Tier 1 Capital ratio is within the capital buffer (CB) range (consisting of the capital conservation buffer plus any countercyclical capital buffer). Capital constraints could have an impact on Westpac’s ability to pay future dividends or make capital distributions. Adverse conditions and/or adverse regulatory change could impact Westpac’s capital adequacy and/or trigger capital distribution constraints. Sovereign risk may destabilise financial markets adversely Sovereign risk is the risk that governments will default on their debt obligations or will be unable to refinance their debts as they fall due. Potential sovereign debt defaults and the risk that governments will nationalise parts of their economy including assets of financial institutions such as Westpac could negatively impact the value of our holdings of 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. We could be adversely affected by the failure to maintain our credit ratings Credit ratings are independent opinions on our creditworthiness. Our credit ratings can affect the cost and availability of our funding and may be important to certain customers or counterparties when evaluating our products and services. 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 economy and Australia’s Sovereign credit rating. A rating downgrade could be driven by a downgrade of Australia’s Sovereign credit rating, or one or more of the risks identified in this section or by other events including changes to the methodologies rating agencies use to determine ratings. The economic impacts of the COVID-19 pandemic have affected Westpac’s credit ratings and may do so in the future. In April 2020, Fitch Ratings downgraded its short-term and long-term ratings for the major Australian banks (including Westpac) by one notch, to A+ (from AA-) and F1 (from F1+) respectively, citing the significant economic consequences for Westpac’s core markets of Australia and New Zealand caused by the actions taken by governments to slow the spread of COVID-19. Fitch Ratings has maintained the rating outlook for the major Australian banks as “negative”, reflecting the major downside risk to Fitch’s economic outlook in light of the evolving global situation. In April 2020, S&P Global Ratings revised its outlook for Westpac’s long-term issuer credit rating to ‘negative’, mirroring a similar change to its outlook for the Australian Sovereign. As the economic impacts from the COVID-19 pandemic continue, there is a risk that there will be further negative movement in our credit ratings. A downgrade to our credit ratings could have an adverse effect on our cost of funds, 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 rating change, differences across agencies (split ratings) and whether competitors or the sector are also impacted. We could be adversely affected by a shock to the Australian, New Zealand or other financial systems There is a risk that a major systemic shock could occur that adversely impacts the Australian, New Zealand or other financial systems. In the past decade the financial services industry and capital markets have been, and may continue to be, adversely affected by volatility, global economic conditions, external events, geopolitical instability (such as global conflicts), and political developments. For example, the impacts from the COVID-19 pandemic have been, and could continue to be, significant for the global economy including Australia and New Zealand. 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 our products and services could decline, thereby reducing our earnings. These conditions may also affect the ability of our borrowers or counterparties to repay their loans or meet their obligations, causing us higher credit losses and affecting investors’ willingness to invest in the Group. These events could also undermine confidence in the financial system, reduce liquidity, impair access to funding and affect our customers and counterparties. If this occurred, our business, prospects, financial performance or financial condition could be adversely affected. The nature and consequences of any such event are difficult to predict and there is a risk that our response may be ineffective. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  158 Risk and risk management Declines in asset markets could adversely affect our operations or profitability Recent and future declines in Australian, New Zealand or other asset markets, including equity, residential and commercial property markets have adversely affected, and could in the future adversely affect, our operations and profitability. Declining asset prices could also impact customers and counterparties and the value of security (including residential and commercial property) we hold. This may impact our ability to recover amounts owing to us if customers or counterparties default. It may also affect our impairment charges and provisions, in turn impacting our financial performance and financial condition. Declining asset prices also impact our wealth management business as its earnings partly depend on fees based on the value of securities and/or assets held or managed. 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. The majority of our business is conducted in Australia and New Zealand so our performance is influenced by the level and cyclical nature of activity in these countries. These factors are in turn impacted by domestic and international economic conditions (including, at present, the COVID-19 pandemic). A significant decrease in Australian and New Zealand housing valuations and commercial property valuations could adversely impact our lending activities because borrowers with loans in excess of their property value show a higher propensity to default. If defaults occur, our security may be eroded, causing higher credit losses. The demand for our home lending products may also decline due to changes in tax legislation (such as changes to tax rates, concessions or deductions), regulatory requirements or buyer concerns about decreases in values. Adverse changes to economic and business conditions in Australia, New Zealand and other countries could also adversely affect our customers. In particular, due to the economic relationship between Australia and China, particularly in the mining, resources and agricultural sectors, a slowdown in China’s economic growth (or the adoption of protectionist trade measures) could negatively impact the Australian economy. Changes in commodity prices, Chinese Government policies and economic conditions could reduce demand for our products and services and affect the ability of our borrowers to repay their loans. If this occurred, 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) and 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 economic conditions of the jurisdictions we operate or obtain 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. All these factors could adversely affect our business, prospects, financial performance or financial condition. An increase in defaults has adversely affected and could further adversely affect our financial performance or financial condition We establish provisions for credit impairment based on current information and our expectations. If economic conditions deteriorate beyond our expectations, some customers and/or counterparties could experience higher financial stress leading to an increase in defaults and write-offs, and higher provisioning. Such events could adversely affect our liquidity, capital resources, financial performance or financial condition. These risks are heightened by the COVID-19 pandemic which has negatively impacted economic activity and caused a range of customers to experience financial stress. The pandemic has seen many customers cease or substantially reduce their operations for an unknown period. In addition, individuals may have been laid off, been unable to work, or have fewer work hours. Westpac has received requests for assistance from affected businesses and consumers and has implemented, and will continue to implement, various initiatives to support them, including repayment deferrals and interest capitalisation. These initiatives, and any support that governments or regulators may in the future require banks to provide to customers impacted by the COVID-19 pandemic, may have a negative impact on the Group’s financial performance and may see the Group assume greater risk than it would have under ordinary circumstances. The long-term impact of the COVID-19 pandemic on customers and the magnitude of defaults or impairments is uncertain. For example, consumers may permanently decrease discretionary spending, which may increase the time it takes certain industries to recover. Credit risk also arises from certain derivative, clearing and settlement contracts we enter into, and from our dealings in, and holdings of, debt securities issued by other institutions, 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, including the management of credit risk, refer to the ‘Risk management’ section and Note 21 to the financial statements. WESTPAC GROUP 2020 ANNUAL REPORT 159 Risk and risk management We face intense competition in all aspects of our business The financial services industry is highly competitive. We compete with a range of firms, including retail and commercial banks, investment banks, other financial service companies, fintech companies and businesses in other industries with financial services aspirations. This includes those not subject to the same capital and regulatory requirements which may allow those competitors to operate more flexibly. Emerging competitors are increasingly altering the competitive environment by adopting new business models or seeking to use new technologies to disrupt existing business models. The competitive environment may also change as a result of increased scrutiny by regulators in the sector, and legislative reforms such as ‘Open Banking’, which will stimulate competition, improve customer choice and likely give rise to increased competition from new and existing firms. A failure to compete effectively in the various markets in which we operate has and may continue to lead to a decline in our margins or market share. Deposits fund a significant portion of our balance sheet and have been a relatively stable source of funding. If we are not able to successfully compete for deposits this could increase our cost of funding, lead us to seek access to other types of funding or result in us reducing our lending. Our ability to compete depends on our ability to offer products and services that meet evolving customer preferences. A failure to effectively respond to changes in customer preferences could see us lose customers. This could adversely affect our business, prospects, financial performance or financial condition. For more detail on how we address competitive pressures refer to ‘Competition’ in Section 1. We could suffer losses due to market volatility We are exposed to market risk due to our financial markets businesses, our defined benefit plan and through asset and liability management. Market risk 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 low or negative interest rates and any resulting pressure placed on the Group’s interest margins). This includes interest rate risk in the banking book due to a mismatch between the duration of assets and liabilities arising from the normal course of business activities. Changes in markets could be driven by numerous developments. For example, the COVID-19 pandemic has resulted in significant market disruption and price volatility. The July 2017 announcement by the FCA (which regulates the London Interbank Offered Rate (“LIBOR”)) that it would not require panel banks to continue to submit rates for the calculation of the LIBOR benchmark after 2021 may also impact market volatility. Accordingly, the continuation of LIBOR in its current form will not be guaranteed after 2021, and it appears that LIBOR will be discontinued or modified by 2021. Any such developments or future changes in the administration of LIBOR or other market benchmarks could have adverse consequences to the return on, value of and market for securities and other instruments linked to any such benchmark, including securities or other instruments issued by the Group. If we were to suffer substantial losses due to 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 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, or outbreaks of communicable diseases (such as the COVID-19 pandemic), 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 have not always been, or may not now be, effective. Ineffective processes and controls have resulted in, and could 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, conditions, or pricing they agreed to, potentially leading to greater amounts of financial stress. Failed processes could also result in Westpac incurring losses because we cannot enforce our contractual rights. This could occur because Westpac did not correctly document its rights or failed to perfect a security interest. These types of operational failures may also result in customer remediation and/or increased regulatory scrutiny and, depending on the nature of the failure, result in class action proceedings or a regulator commencing an investigation and/or taking other action. We could incur losses from fraudulent applications for loans or from incorrect or fraudulent payments and settlements. Fraudulent conduct can also arise from external parties seeking to access the bank’s systems or customer accounts. If systems, procedures and protocols for managing fraud fail, or are ineffective, they could lead to losses which could adversely affect our customers, business, prospects, reputation, financial performance or financial condition. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  160 Risk and risk management 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. Financial services entities have been increasingly sharing data with third parties, such as suppliers and regulators, to conduct their business and meet regulatory obligations. A breakdown in a process or control related to the transfer, storage or protection of data sent 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 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. The COVID-19 pandemic is disrupting some suppliers and third party contractors, and these disruptions are likely to continue. Failures by these third-party contractors and suppliers to deliver services as required could disrupt Westpac’s ability to provide its products and services and adversely impact our operations, financial performance or reputation. Another possible source of disruption to the Group is central banks adopting negative interest rates. If this occurred, the technology systems used by the Group, its counterparties and/or financial infrastructure providers may not operate correctly and this may cause loss or damage to the Group and/or its counterparties. For a discussion of our risk management procedures, including the management of operational risk, refer to the ‘Risk management’ section. Poor data quality could adversely affect our business and operations Accurate, complete and reliable data, along with appropriate data control, retention and access frameworks and processes, is critical to Westpac’s business. Data plays a key role in how we provide products and services to customers, our systems, our risk management framework and our decision-making and strategic planning. In some areas of our business, we are affected by poor data quality. This has occurred and could arise in the future in a number of ways, including through inadequacies in systems, processes and policies, or the ineffective implementation of data management frameworks. Poor data quality could lead to poor customer service, negative risk management outcomes, and deficiencies in credit systems and processes. Any deficiency in credit systems and processes could, in turn, have a negative impact on Westpac’s decision making in the provision of credit and the terms on which it is provided. Poor data or poor data retention can also affect Westpac’s ability to meet its compliance obligations which could lead to a regulator taking action against us. Westpac also needs accurate data for financial and other reporting. Due to the importance of data, the Group has and will likely continue to incur substantial costs and devote significant effort to improving the quality of data and data frameworks and processes and remediating deficiencies where necessary. Some of our efforts to remediate data issues have been disrupted by the COVID-19 pandemic and if these are not fixed in a timely way could result in increased regulatory scrutiny, and lead regulators to require the Group to remediate these issues within specific timeframes. The consequences and effects arising from poor data quality or poor data retention could have an adverse impact on the Group’s business, operations, prospects, financial performance and/or financial condition. Breakdowns in processes and procedures have required, and could in the future require, us to undertake remediation activity Breakdowns in Westpac’s processes and procedures (such as those identified in the civil penalty proceedings brought by AUSTRAC) have led to, and could in the future lead to, adverse outcomes for customers, employees or other third parties which Westpac is required to remediate. The Group has, on a number of occasions, incurred significant remediation costs (including compensation payments and costs of correcting the issue) and there is a risk that similar issues will arise in the future that will require remediation. There are significant challenges and risks involved in customer remediation activities. Westpac’s ability to investigate the underlying issue could be impeded if the issue is old and occurred beyond our record retention period, or our records are inadequate. It may also be difficult and take significant time to properly quantify and scope a remediation activity. Determining how to compensate customers properly and fairly can also be complicated, involving numerous stakeholders. The Group’s proposed approach to a remediation may be affected by a number of events, such as affected customers commencing a class action, or a regulator requiring a remediation to be done in a specific way. These factors could delay Westpac in completing the remediation and may lead to a regulator commencing enforcement action against the Group. It could result in increased reputational risk, and we could be challenged by regulators, affected customers, the media and other stakeholders. The significant challenges involved in scoping and executing remediations also create a risk that the remediation costs incurred will be higher than initially estimated. Further, delays in completing a remediation could result in Westpac incurring additional administration costs and making higher remediation payments to customers to reflect the time value of money. If the Group cannot effectively scope, quantify or implement a remediation activity in a timely way, there could be an adverse impact on our business, prospects, reputation, financial performance or financial condition. WESTPAC GROUP 2020 ANNUAL REPORT 161 Risk and risk management We have suffered, and in the future could suffer, losses and be adversely affected by the failure to implement effective risk management 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 is inadequate or that key risk management policies, controls and processes may be ineffective, due to inadequacies in their design, technology failures or because of poor implementation. The potential for these types of failings is heightened if the Group does not have enough appropriately skilled, trained and qualified employees in key positions. There are also inherent limitations with any risk management framework as risks may exist, or emerge in the future, that we have not anticipated or identified and our controls may not be effective. The risk management framework 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. Recent analysis and reviews, in addition to regulatory feedback, have highlighted that the framework is not operating satisfactorily in a number of respects and needs to be improved. The Group has a number of risks which sit outside our risk appetite or do not meet the expectations of regulators. Further, 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. As part of the Group’s risk management framework, the Group measures and monitors risks against its risk appetite. If a risk is 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 or in recruiting sufficient numbers of appropriately trained staff for required activities. It is also possible that due to external factors beyond our control, certain risks may be inherently outside of appetite for periods of time. The Group is required to periodically review its risk management framework to determine if 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, including incurring substantial costs. The failure to remedy this situation could result in increased scrutiny from regulators, who could require (amongst other things) that the Group hold additional capital or direct the Group to spend money to enhance its risk management systems and controls. Weaknesses in risk management systems and controls have recently led to adverse outcomes for the Group, with APRA requiring Westpac to hold additional capital following the completion of its Culture, Governance and Accountability self- assessment, as well as following the commencement of civil penalty proceedings by AUSTRAC. 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, as has occurred, any of our governance or risk management processes and procedures prove ineffective or inadequate or are otherwise not appropriately implemented, we could be exposed to higher levels of risk than expected which may result in unexpected losses, breaches of compliance obligations 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. Our 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, external suppliers and communities in which we operate, 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 disruptions to business and economic activity or impacts on income and asset values. Initiatives to mitigate or respond to climate change (transition risks) may impact market and asset prices, economic activity, and customer behaviour, particularly in emissions intensive industry sectors and geographies affected by these changes. Further, the failure or perceived failure to manage climate change appropriately may increase the risk that third parties commence litigation against the Group, with this type of climate-related litigation becoming more common. Failure to effectively manage and disclose these risks could adversely affect our business, prospects, reputation, financial performance or financial condition. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  162 Risk and risk management We could suffer losses due to environmental factors or external events 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, outbreaks or pandemics of communicable diseases such as the COVID-19 pandemic, civil unrest or terrorism) in any of these locations has the potential to disrupt business activities, damage property and affect asset values 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 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. The COVID-19 pandemic and its economic impacts may lead to increased insurance claims, as well as potentially impact new business, lapses, and capital coverage for the Group’s insurance entities. In life insurance, risk arises primarily through mortality and morbidity (illness and injury) risks, the costs of claims relating to those risks being greater than was anticipated and policy lapses. In general insurance, insurance risk arises mainly through environmental events (including storms, floods and bushfires) and other calamities, such as earthquakes and tsunamis. The frequency and severity of these external events is difficult to predict and it is possible that pricing and reserving may not be adequate to cover the cost of claims that may arise. In lenders mortgage insurance, insurance risk arises primarily from higher levels of mortgage defaults than expected, mostly from unemployment or other economic factors. If our reinsurance arrangements are ineffective, this could lead to more retained losses than anticipated. The Group has been unable to, and may in the future be unable to, renew reinsurance arrangements on similar terms, including in relation to the cost, duration and amount of reinsurance cover provided. There is also a risk that we will not be able to obtain and have not obtained appropriate reinsurance or insurance coverage for the risks that the Group may be exposed to. 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 remediation and expected 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. If the Group’s actual and expected credit losses exceed those currently provided for, or if any of its other accounting judgements change in the future, there could be 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 incur a reduction in the value of intangible assets. At our balance date Westpac’s intangible assets principally relate to goodwill recognised on acquisition, capitalised software and other capitalised expenses. Westpac is required to assess the recoverability of goodwill and other intangible asset balances at least annually or wherever an indicator of impairment exists. For this purpose, Westpac uses a discounted cash flow calculation. Changes in the methodology or assumptions in calculations together with changes in expected cash flows, could materially impact this assessment. Estimates and assumptions used in assessing the useful life of an asset can also be affected by a range of factors including changes in strategy, changes in technology and regulatory requirements. 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 performance. 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. We could suffer losses if we fail to syndicate or sell down this risk to others. This risk is more pronounced in times of heightened market volatility, such as during the COVID-19 pandemic. WESTPAC GROUP 2020 ANNUAL REPORT 163 Risk and risk management Certain strategic decisions may have adverse effects on our business The Group routinely evaluates and implements 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. Westpac also acquires and invests in businesses. These transactions involve a number of risks. For example, a business Westpac invests in may not perform as anticipated or ultimately prove to be overvalued when the transaction was entered into. In addition, we may be unable to successfully divest businesses or assets, or to do so in a timely manner. As a result we may not receive the anticipated positive business results, and the Group could otherwise be adversely affected. There are also risks involved in failing to appropriately respond to changes in the business environment (including changes related to economic, geopolitical, regulatory, technological, environmental, social and competitive factors). This could have a range of adverse effects on us, such as being unable to increase or maintain market share and placing pressure on margins and fees. Any of these risks could have a negative impact on the Group’s business, prospects, reputation, engagement with regulators, financial performance or financial condition. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Other Westpac business information 164 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 Specialist Businesses Group Businesses Total Group2 2020 9,925 3,827 1,629 4,354 4,037 13,077 20191 9,447 3,537 1,481 4,140 3,576 11,107 20181 9,938 3,692 1,610 4,182 3,550 12,057 36,849 33,288 35,029 2020 v 2019 FTE increased 3,561 or 11% compared to 2019. FTE increased as we responded to the operational requirements of higher volumes due to COVID-19. We further increased resourcing to address risk and financial crime matters. This was partly offset by productivity gains. Property We occupy premises primarily in Australia and New Zealand including 1,072 branches (2019: 1,143) as at 30 September 2020. As at 30 September 2020, we owned approximately 1% (2019: 1%) of the retail premises we occupied in Australia and none (2019: 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 2020, the carrying value of our directly owned Corporate and Retail premises and sites was $72 million (2019: $78 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 . Subsequently Westpac also leased levels 24-32 until 2024. This site has capacity for over 6,000 staff in an agile environment. Westpac has a lease for levels 1-28 of T2 in International Towers Sydney 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 leased 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 capacity for 1,000 staff. 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. 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. 1. 2. 2019 and 2018 comparatives have been restated as a result of the creation of Specialist Businesses. There is no impact on the total number of employees. Total employees include full-time, pro-rata part time, overtime, temporary and contract staff. WESTPAC GROUP 2020 ANNUAL REPORT 165 Other Westpac business information Auditor’s remuneration Auditor’s remuneration, including goods and services tax, to the external auditor for the years ended 30 September 2020 and 2019 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) under Westpac’s Pre-Approval of Engagement of PricewaterhouseCoopers for Audit or Non-Audit Services Policy (‘Pre-Approval Policy’). Westpac Group Secretariat promptly brings to the attention of the Board Audit Committee 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 Policy is communicated to Westpac’s divisions through publication on the Westpac intranet. During the year ended 30 September 2020, there were no fees paid by Westpac to PwC that required approval by the Board Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. 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 2020: 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. 2. 3. Notes issued under this program by Westpac Securities NZ Limited, London branch are guaranteed by Westpac New Zealand Limited, its parent company. Notes issued under this program are guaranteed by BNY Trust Company of Australia Limited as trustee of the Westpac Covered Bond Trust. 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  166 This page has been intentionally left blank. WESTPAC GROUP 2020 ANNUAL REPORT Financial statements SECTION 3 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 Note 14 Note 15 Note 16 Note 17 Note 18 Note 19 Note 20 Note 21 Note 22 Note 23 Note 24 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 Offsetting financial assets and financial liabilities Securitisation, covered bonds and other transferred assets Intangible assets, provisions, commitments and contingencies Note 25 Note 26 Note 27 Intangible assets Lessee disclosures 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 years prior to 2019 Statutory statements Directors’ declaration Independent auditor’s report to the members of Westpac Banking Corporation Limitation on Independent Registered Public Accounting Firm’s Liability 167 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 2 GROUP PERFORMANCE3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION1 STRATEGIC REVIEWWESTPAC GROUP 2020 ANNUAL REPORT  168 Financial statements Income statements 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 (NCI) Net profit attributable to owners of Westpac Banking Corporation (WBC) Earnings per share (cents) Basic Diluted Note 2020 Consolidated 2019 2018 Parent Entity 2020 2019 3 3 3 4 4 4 4 5 6 7 8 8 26,596 32,518 31,987 26,025 32,736 451 704 584 598 776 27,047 33,222 32,571 26,623 33,512 (10,351) (16,315) (16,066) (12,539) (19,295) 16,696 16,907 16,505 14,084 14,217 1,592 751 895 249 1,655 1,029 929 129 2,424 2,061 945 72 1,359 - 876 1,597 922 - 956 2,684 20,183 20,649 22,007 17,916 18,779 (12,739) (10,106) (9,566) (10,772) (8,631) (710) (2,691) (3,178) 4,266 (1,974) (794) 9,749 (2,959) 11,731 (3,632) 2,292 6,790 8,099 (2) (6) (4) 4,453 (1,795) 2,658 - (750) 9,398 (2,277) 7,121 - 2,290 6,784 8,095 2,658 7,121 63.7 63.7 196.5 189.5 237.5 230.1 The above income statements should be read in conjunction with the accompanying notes. WESTPAC GROUP 2020 ANNUAL REPORT Financial statements Statements of comprehensive income for the years ended 30 September Westpac Banking Corporation 169 $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 Transferred to income statements: Available-for-sale securities Debt securities measured at FVOCI Cash flow hedging instruments Foreign currency translation reserve Loss allowance on debt instruments measured at FVOCI 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 hedging instruments Items that will not be reclassified subsequently to profit or loss Gains/(losses) on equity instruments measured at FVOCI (net of tax) Own credit adjustment on financial liabilities measured at fair value (net of tax) Remeasurement of defined benefit obligation recognised in equity (net of tax) Other comprehensive income for the year (net of tax) Consolidated 2019 2020 2018 Parent Entity 2020 2,292 6,790 8,099 2,658 2019 7,121 - - (102) - 357 (95) - (79) 218 55 2 (46) (203) - (29) 197 (10) - (161) 66 - 203 (3) 289 (28) - (79) 150 55 - - 2 - (39) (121) - (29) 128 - - (168) 182 181 (131) 162 - (81) (36) (21) (39) (115) (2) - 20 2 11 (10) (276) (162) 9 - (13) - 43 45 268 - (62) (37) 1 (39) (110) 11 - 18 (3) (2) (10) (268) (164) Total comprehensive income for the year 2,290 6,628 8,367 2,669 6,957 Attributable to: Owners of WBC NCI 2,291 6,620 8,363 2,669 6,957 (1) 8 4 - - Total comprehensive income for the year 2,290 6,628 8,367 2,669 6,957 The above statements of comprehensive income should be read in conjunction with the accompanying notes. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  170 Financial statements Balance sheets 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 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: Ordinary share capital Treasury shares and Restricted Share Plan (RSP) treasury shares Reserves Retained profits Total equity attributable to owners of WBC NCI Total shareholders’ equity and NCI Note Consolidated 2020 2019 Parent Entity 2020 2019 30,129 20,059 25,436 17,692 4,778 5,930 4,641 5,773 40,667 31,781 38,030 29,565 23,367 29,859 22,794 29,283 91,539 73,401 85,826 68,398 693,059 714,770 607,824 631,936 5,474 3,593 5,367 9,367 4,745 4,615 - - - - 61 3,910 3,064 11,497 808 - - 180,979 142,961 6,475 6,436 129 1,155 2,048 11,953 807 57 3,447 2,497 9,630 421 100 948 1,925 9,687 420 911,946 906,626 992,802 949,739 2,250 3,287 1,862 2,849 591,131 563,247 521,613 501,430 40,925 29,215 40,156 28,516 23,054 29,096 22,779 28,867 150,325 181,457 127,666 156,674 70 1,396 - 163 7,377 13 - 88 - - 186,263 148,607 5,287 3,169 4,983 2,980 126 44 - - 5,359 2,238 3,770 1,064 10 20 11 12 14 15 7 25 16 17 20 18 15 27 7 819,923 819,293 909,105 871,075 19 23,949 21,826 23,949 21,826 843,872 841,119 933,054 892,901 68,074 65,507 59,748 56,838 28 28 28 28 40,509 37,508 40,509 37,508 (563) 1,544 (553) 1,311 (621) 1,576 (575) 1,338 26,533 27,188 18,284 18,567 68,023 65,454 59,748 56,838 51 53 - - 68,074 65,507 59,748 56,838 The above balance sheets should be read in conjunction with the accompanying notes. WESTPAC GROUP 2020 ANNUAL REPORT Financial statements Statements of changes in equity for the years ended 30 September Westpac Banking Corporation 171 Share capital (Note 28) Reserves (Note 28) Retained profits Total equity attributable to owners of WBC Total shareholders’ equity and NCI NCI (Note 28) 26,100 61,288 54 61,342 Consolidated $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 shares1 Dividend reinvestment plan Conversion of Convertible Preferences 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 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 shares1 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 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Share issuances Dividends on ordinary shares1 Dividend reinvestment plan Other equity movements Share-based payment arrangements Purchase of shares (net of issue costs) Net (acquisition)/disposal of treasury shares Other 34,394 - - - - 631 566 - 3 (35) 2 - 1,167 35,561 - 35,561 - - - - 1,489 - (33) (62) - 1,394 36,955 - - - 2,751 - 273 - (29) (10) 6 794 - 180 180 - - - 103 - - - - 103 1,077 2 1,079 - 122 122 - - 108 - - 2 110 1,311 - 155 155 - - - 78 - - - 8,095 88 8,183 8,095 268 8,363 (6,400) (6,400) - - - - - - - (6,400) 27,883 (727) 27,156 6,784 (286) 6,498 (6,466) - - - - - (6,466) 27,188 2,290 (154) 2,136 - (2,791) - - - - - 631 566 103 3 (35) 2 - (5,130) 64,521 (725) 63,796 6,784 (164) 6,620 (6,466) 1,489 108 (33) (62) 2 (4,962) 65,454 2,290 1 2,291 2,751 (2,791) 273 78 (29) (10) 6 4 - 4 - - - - - - - (6) (6) 52 - 52 6 2 8 - - - - - (7) (7) 53 2 (3) (1) - - - - - - (1) (1) 51 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 2,292 (2) 2,290 2,751 (2,791) 273 78 (29) (10) 5 277 68,074 Total contributions and distributions Balance at 30 September 2020 2,991 39,946 78 1,544 (2,791) 26,533 278 68,023 The above statements of changes in equity should be read in conjunction with the accompanying notes. 1. 2020 relates to 2019 final dividend of 80 cents per share ($2,791 million) (2019: 2019 interim dividend of 94 cents per share ($3,239 million) and 2018 final dividend of 94 cents per share ($3,227 million), 2018: 2018 interim dividend of 94 cents per share ($3,213 million) and 2017 final dividend of 94 cents per share ($3,187 million)), all fully franked at 30%. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  172 Financial statements Statements of changes in equity for the years ended 30 September (continued) Westpac Banking Corporation Parent Entity $m 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 shares1 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 Net profit for the year Net other comprehensive income for the year Total comprehensive income for the year Transactions in capacity as equity holders Share issuances Dividends on ordinary shares1 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 2020 Share capital (Note 28) Reserves (Note 28) Retained profits Total equity attributable to owners of WBC 35,546 1,114 18,696 55,356 - 35,546 - - - - 1,489 - (33) (69) 1,387 36,933 - - - 2,751 - 273 - (29) (46) 6 2 1,116 - 114 114 - - 108 - - 108 1,338 - 160 160 - - - 78 - - - (502) (500) 18,194 54,856 7,121 (278) 7,121 (164) 6,843 6,957 (6,470) - - - - (6,470) 18,567 2,658 (149) (6,470) 1,489 108 (33) (69) (4,975) 56,838 2,658 11 2,509 2,669 - 2,751 (2,792) (2,792) - - - - - 273 78 (29) (46) 6 241 59,748 2,955 39,888 78 1,576 (2,792) 18,284 The above statements of changes in equity should be read in conjunction with the accompanying notes. 1. 2020 relates to 2019 final dividend of 80 cents per share ($2,792 million) (2019: 2019 interim dividend of 94 cents per share ($3,241 million) and 2018 final dividend of 94 cents per share ($3,229 million)), all fully franked at 30%. WESTPAC GROUP 2020 ANNUAL REPORT Financial statements Cash flow statements for the years ended 30 September Westpac Banking Corporation 173 $m Cash flows from operating activities Interest received Interest paid Dividends received excluding life business Other non-interest income received Operating expenses paid Income tax paid excluding life business Life business: Receipts from policyholders and customers Interest and other items of similar nature Dividends received Payments to policyholders and suppliers Income tax paid Cash flows from operating activities before changes in operating assets and liabilities Net (increase)/decrease in: 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 37 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 Payments for the principal portion of lease liabilities Issue of loan capital (net of issue costs) Redemption of loan capital Proceeds from share issuances 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 Dividends paid to NCI 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 beginning of year Cash and balances with central banks as at end of year Note 2020 Consolidated 2019 27,215 (11,466) 16 2,894 (8,598) (3,080) 2,235 21 306 (2,302) (6) 33,093 (16,486) 6 3,865 (9,080) (3,406) 2,189 6 553 (2,250) (94) 2018 32,639 (15,789) 9 4,995 (7,889) (3,585) 2,008 17 642 (2,089) (143) Parent Entity 2020 2019 26,830 (13,543) 763 2,330 (6,967) (2,732) 33,770 (19,444) 2,218 2,982 (7,491) (3,081) - - - - - - - - - - 37 7,235 8,396 10,815 6,681 8,954 348 (847) 969 329 (755) (8,756) 1,851 18,272 273 (277) 70 (1,096) 28,910 11,817 4 58,651 - - 33,080 (51,332) - - - - (8) 58 (240) (1,035) (19,477) 34,766 (65,160) (543) 2,225 (262) 2,751 - (4) (25) (46) 14 (2,518) (1) (28,803) 10,371 (301) 20,059 30,129 (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) (10,769) 61,484 (63,313) - 4,935 (1,662) - - (6) (27) (69) 7 (4,977) (5) (3,633) (7,298) 569 26,788 20,059 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) (1,620) 59,456 (64,698) - 2,342 (2,387) - 3 (8) (27) (71) 73 (5,769) (6) (11,092) 7,058 944 18,786 26,788 (8,266) 2,103 21,273 283 - 50 (1,072) 20,859 11,866 (7) 54,099 - - 29,807 (47,311) (665) - (315) - (6) 32 (165) (955) (19,578) 27,487 (55,761) (499) 2,225 (262) 2,751 - (4) (25) (46) - (2,519) - (26,653) 7,868 (124) 17,692 25,436 (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) (7,968) 50,375 (56,347) - 4,935 (1,662) - - (6) (27) (69) - (4,981) - (7,782) (7,859) 575 24,976 17,692 The above cash flow statements should be read in conjunction with the accompanying notes. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Notes to the financial statements 174 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 2020, was authorised for issue by the Board of Directors on  1 November 2020. 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 (ADI) 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) Standards adopted during the year ended 30 September 2020 AASB 16 Leases (AASB 16) AASB 16 was adopted by the Group on 1 October 2019. AASB 16 requires all operating leases of greater than 12 months duration be presented on balance sheet by the lessee as a right-of-use (ROU) asset and lease liability. There are no significant changes to lessor accounting. The Group adopted the standard using the simplified approach of transition with no restatement of comparative information and no effect on retained earnings. The lease liabilities are measured at the present value of the remaining lease payments, discounted at the lessee’s incremental borrowing rate at 1 October 2019. On transition to the new standard, the lease liability recognised in other liabilities was $3.3 billion for the Group and $3.0 billion for the Parent Entity. The associated ROU assets of $3.2 billion for the Group and $2.9 billion for the Parent Entity were measured at an amount equal to the lease liability, less previously recognised accrued lease payments of $0.1 billion for the Group and the Parent Entity. The ROU assets are recognised in property and equipment. All leases on balance sheet give rise to a combination of interest expense on the lease liability and depreciation of the ROU asset. Interest expense is recognised in net interest income on an effective yield basis. Depreciation expense is recognised in operating expenses on a straight-line basis over the lease term. Extension options are included in a number of lease contracts. The extension options are only included in the lease term if the lease is reasonably certain to be extended, which is assessed by the Group at the lease commencement date. The assessment is reviewed if a significant event or significant change in circumstances occurs which affects this assessment and is within the control of the Group. The Group considered the impact of COVID-19 on our assessment of extension options and concluded that they were unchanged. The Group also considered the impact of COVID-19 on the carrying value of the ROU asset and determined there was no impairment. The Group used the incremental borrowing rate based on the remaining maturity of leases at the date of transition as the discount rate when determining present value. The weighted average incremental borrowing rate applied was 2.1%. Operating lease commitments disclosed under AASB 117 Leases (AASB 117) as at 30 September 2019 were $3.7 billion for the Group and $3.4 billion for the Parent Entity compared to the lease liabilities of $3.3 billion for the Group and $3.0 billion for the Parent Entity recognised under AASB 16 as at 1 October 2019. The difference is principally due to the discounting of the contractual lease payments under AASB 16. WESTPAC GROUP 2020 ANNUAL REPORT 175 Notes to the financial statements Note 1. Financial statements preparation (continued) AASB Interpretation 23 Uncertainty over Income Tax Treatments (Interpretation 23) Interpretation 23 was adopted by the Group on 1 October 2019 and 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. Interpretation 23 did not have a material impact on the Group. AASB 2019-3 Amendments to Australian Accounting Standards – Interest rate benchmark reform (AASB 2019-3) AASB 2019-3 was early adopted, as permitted by the standard, by the Group on 1 October 2019. AASB 2019-3 makes amendments to AASB 9 Financial Instruments (December 2014) (AASB 9), AASB 139 Financial Instruments: Recognition and Measurement (AASB 139), and AASB 7 Financial Instruments: Disclosures (AASB 7) which allows the Group to apply certain exceptions to the standard hedging requirements in respect of hedge relationships that are impacted by a market-wide interest rate benchmark reform. Specifically the exceptions allow the Group to: • • • • Assume that the interest rate benchmark on which the hedged cash flows are based is not altered as a result of the reform when determining whether a forecast transaction is highly probable; Assume that interest rate benchmark of the hedged item / instrument is not altered for the life of the hedge when assessing whether a hedge is expected to continue to be highly effective; A hedge relationship impacted by uncertainty arising from benchmark interest rate reform is not required to pass the 80%-125% effectiveness test, however any actual ineffectiveness must be recorded in the income statement; and The determination of a designated component of an exposure in portfolio hedges is only required to be made the first time that component is designated, and not when the portfolio is de-designated and re-designated. The exceptions allowed by the amendments are being applied to the Group’s LIBOR linked hedge relationships that mature after the LIBOR discontinuance date of 31 December 2021. Last year the Group established an enterprise-wide Interbank Offered Rates (IBORs) Transition Program to manage the impacts of Interest Rate Benchmark Reform (IBOR reform). The scope of the program is to address the impact of transition from IBORs to alternative reference rates (ARRs) including business, compliance, customer and technology impacts. The Governance structure of the program is well established to include a Steering Committee with its key responsibility being the governance of the program. The Committee includes senior executives from Finance, Legal, Technology, Compliance, Risk and all impacted business units. The program is executing against transition timelines with regulatory guidance in relation to COVID-19 indicating LIBOR is still expected to cease by end of December 2021. Significant activities underway include development of ARR product variations, changes required for adopting the International Swaps and Derivatives Association (ISDA) Protocol, customer outreach including management of conduct risk in customer transition and technology. Changes required for both euro short-term rate (ESTR) and secured overnight funding rate (SOFR) LCH discounting have been implemented. A key assumption made when performing hedge accounting at the reporting date is that both the hedged item and instrument will be amended from existing LIBOR linked floating rates to new ARRs on the same date. Where actual differences between those dates arise hedge ineffectiveness will be recorded in the income statement. Note 20 provides further information regarding the hedging relationships affected by the IBOR reform. Refer to Note 1 (c) – Future developments in accounting standards for details of the accounting standard issues but not yet effective dealing with phase two of the IBOR reform. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  176 Notes to the financial statements Note 1. Financial statements preparation (continued) (iv) 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. (v) 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 (FX) 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 OCI 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 OCI. 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 OCI. 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. (vi) Comparative revisions Comparative information has been revised where appropriate to conform to changes in presentation in the current year and to enhance comparability. b. Critical accounting assumptions and estimates Applying the Group’s accounting policies requires the use of judgement, assumptions and estimates which impact the financial information. The significant assumptions and estimates used are discussed in the relevant notes below: • • • • • • • Note 7 Note 13 Note 15 Note 22 Note 25 Note 27 Income tax Provisions for expected credit losses/impairment charges Life insurance assets and life insurance liabilities Fair values of financial assets and financial liabilities Intangible assets Provisions, contingent liabilities, contingent assets and credit commitments Note 34 Superannuation commitments Impact of COVID-19 The COVID-19 pandemic and the measures put in place domestically and globally to control the spread of the virus have had a significant impact on global economies and financial markets. As a result, this has increased the uncertainty and judgement required in relation to our critical accounting assumptions and estimates, primarily relating to: • • expected credit losses; and recoverable amount assessments of intangible assets. As there is a higher than usual degree of uncertainty associated with these assumptions and estimates, the actual economic conditions are likely to be different from those forecast which may significantly impact accounting estimates included in these financial statements. The impact of COVID-19 is discussed further in each of the related notes. WESTPAC GROUP 2020 ANNUAL REPORT 177 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 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 4), 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 OCI rather than in income statement; an election to recognise changes in the fair value of assets supporting policy liabilities in OCI rather than through the income statement; 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 income statement impacts to the Group are not yet practicable to determine. AASB 2020-5 Amendments to Australian Accounting Standards – Insurance Contracts was issued on 30 July 2020. This standard includes a number of amendments to AASB 17. These amendments include: • • • • • • deferral of acquisition costs for anticipated renewals outside of the initial contract boundary; further clarity on the contractual service margin; additional scope exclusion for credit card contracts and similar contracts that provide insurance coverage as well as optional scope exclusion for loan contracts that transfer significant insurance risk; ability to recognise a gain in the income statement for reinsurance contracts, to offset losses from onerous contracts on initial recognition; simplified presentation requirements; and additional transitional relief. In addition, the effective date of AASB 17 will be deferred by two years to be applicable to the Group for the 30 September 2024 financial year. On 22 September 2020, the AASB issued AASB 2020-8 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform – Phase 2 which makes further amendments to AASB 9, AASB 139, and AASB 7 resulting from IBOR reform. Amendments are also made to AASB 4 and AASB 16. The standard is effective for the 30 September 2022 year end unless early adopted. The amendments: • • allow the Group to account for a change in contractual cash flows of a financial instrument or lease liability that result specifically from IBOR reform by updating the effective interest rate rather than recognising a modification gain or loss; allow the Group to continue hedge accounting and not trigger a de-designation when the following occurs specific to IBOR reform: – – – changes to hedge documentation to update the hedged risk, item and instrument; changes to the method of assessing hedge ineffectiveness; once the hedge relationship has been converted from LIBOR to ARR the cumulative change in fair value for ineffectiveness testing could be reset to zero if this would improve the retrospective effectiveness test; 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  178 Notes to the financial statements Note 1. Financial statements preparation (continued) – this amendment can apply to macro cash flow and fair value hedges where subgroups can be formed within the portfolio of hedges where some are under the existing LIBOR rate and others have already changed to the ARR; • require additional disclosures including: – – – quantitative information regarding all financial instruments linked to LIBOR which have not been yet converted to ARR; changes to the entity’s risk management strategy arising from IBOR reform; and the management of the Group’s transition to ARR. These amendments will impact the Group’s financial instruments and lease liabilities that reference a LIBOR rate as they transition to an ARR. The Group is currently assessing the impact of the standard and considering whether to early adopt the amendments as permitted by the standard. 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 to the Group. Other amendments to existing standards that are not yet effective are not expected to have a material impact to the Group. WESTPAC GROUP 2020 ANNUAL REPORT 179 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 reflect 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 typically 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 typically 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 The operating segments are defined by the customers they serve and the services they provide: • Consumer: – is responsible for sales and service of banking and financial products and services to consumer customers in Australia; and – operates under the Westpac, St.George, BankSA, Bank of Melbourne, and RAMS brands. • Business: – – is responsible for sales and service of banking products and services for SME and commercial customers in Australia. SME and Commercial customers typically have facilities up to approximately $200 million; is responsible for Private Wealth, serving the banking needs of high net worth customers across the banking brands; and – operates under the Westpac, St.George, BankSA, and Bank of Melbourne brands. • 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; and customers are supported throughout Australia, as well as via branches and subsidiaries located in New Zealand, US, UK and Asia. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  180 Notes to the financial statements Note 2. Segment reporting (continued) • Westpac New Zealand: – – – is responsible for banking, wealth and insurance products and services 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. • Specialist Businesses: – – is responsible for sales and service of Auto and Vendor Finance, Australian insurance products, Superannuation, Platforms and Investments; it is also responsible for Westpac Pacific which provides a full range of banking services in Fiji and Papua New Guinea; and – operates under the Westpac, St.George, BankSA, Bank of Melbourne and BT brands. • 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 Group support functions, including Australian banking operations, property services, strategy, finance, risk, financial crime, compliance and conduct, compliance, legal, human resources, and customer and corporate relations; 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, costs associated with customer remediation for the Advice business3, and certain other head office items such as centrally held provisions. Revisions to segment results In 2020, Westpac implemented a change to the presentation of its divisional financial information. The change related to: • • the creation of the Specialist Businesses division, which includes the following businesses: Auto and Vendor Finance, Australian insurance businesses, Superannuation, Platforms and Investments, and Westpac Pacific; and the movement of certain small to medium size enterprise customers, and products between the Consumer and Business division to better reflect our new line of Business operating structure. This change has no impact on the Group’s overall results or balance sheet but impacts divisional results and balance sheets. Comparative divisional financial information has been restated for this change. 1. 2. 3. Costs are fully allocated to other divisions in the Group. Costs are partially allocated to other divisions in the Group, with costs attributed to enterprise activity retained in Group Businesses. In March 2019, Westpac announced that it was exiting the provision of personal financial advice. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 2. Segment reporting (continued) The following tables present the segment results on a cash earnings basis for the Group: 2020 $m Consumer Business Westpac Institutional Bank Westpac New Zealand Specialist Businesses Group Businesses Total Net cash earnings adjustment Income statement 181 Net interest income 8,547 4,163 Net fee income 471 438 1,111 544 - 637 1 1,832 123 158 27 11 534 89 624 57 (8) 899 17,086 (390) 16,696 (73) 1,592 - 1,592 (45) 20 242 759 928 261 (8) (33) (12) 751 895 249 - 90 12 22 97 3 Net wealth management and insurance income Trading income Other income Net operating income before operating expenses and impairment charges 9,120 4,723 2,293 2,151 1,296 1,043 20,626 (443) 20,183 Operating expenses1 (4,176) (2,298) Impairment charges (1,015) (1,371) Profit before income tax 3,929 1,054 Income tax expense (1,183) (320) Profit attributable to NCI - - (1,316) (404) 573 (241) - (998) (302) 851 (239) - (1,548) (2,364) (12,700) (39) (12,739) (255) (507) 3 (2) 169 (3,178) - (3,178) (1,152) 4,748 (482) 4,266 (158) (2,138) 164 (1,974) - (2) - (2) Cash earnings for the year Net cash earnings adjustments Net profit attributable to equity holders of WBC Balance sheet Loans Deposits and other borrowings 2,746 734 332 612 (506) (1,310) 2,608 (318) 2,290 - - - 7 (31) (294) (318) 2,746 734 332 619 (537) (1,604) 2,290 389,793 140,698 66,192 81,434 14,942 - 693,059 219,259 151,939 102,851 68,473 9,260 39,349 591,131 1. Included in the Specialist Businesses division in operating expenses is $571 million relating to impairment of goodwill and other intangible assets for 2020. For other divisions, there was no impairment of goodwill and impairment of other intangibles assets was not material. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  182 Notes to the financial statements Note 2. Segment reporting (continued) 2019 $m Consumer Business Westpac Institutional Bank Westpac New Zealand Specialist Businesses Group Businesses Total Net cash earnings adjustment Income statement Net interest income 8,130 4,456 1,337 1,860 Net fee income 594 463 570 163 555 44 615 16,953 (46) 16,907 (179) 1,655 - 1,655 Net wealth management and insurance income Trading income Other income Net operating income before operating expenses and impairment charges - 94 7 16 109 6 - 636 (11) 177 37 46 1,319 (489) 1,023 54 (5) (23) 74 907 117 6 22 12 1,029 929 129 8,825 5,050 2,532 2,283 1,967 (2) 20,655 (6) 20,649 Operating expenses (3,794) (2,094) (1,220) (939) Impairment charges (582) (172) (31) 10 (847) (111) 92 (794) (1,137) (10,031) (75) (10,106) - (81) 16 - (794) 9,749 (2,959) (6) Profit before income tax 4,449 2,784 1,281 1,354 1,009 (1,047) 9,830 Income tax expense (1,333) (838) (356) (369) Profit attributable to NCI - - - - (292) (5) 213 (2,975) (1) (6) Cash earnings for the year Net cash earnings adjustments Net profit attributable to equity holders of WBC Balance sheet Loans Deposits and other borrowings 3,116 1,946 925 985 712 (835) 6,849 (65) 6,784 - - - (1) (45) (19) (65) 3,116 1,946 925 984 667 (854) 6,784 399,279 146,867 73,572 78,005 17,216 (169) 714,770 207,578 142,558 99,005 60,801 9,277 44,028 563,247 2018 $m Consumer Business Westpac Institutional Bank Westpac New Zealand Net interest income 8,092 4,619 1,320 1,799 Net fee income 645 469 572 164 Specialist Businesses Group Businesses 565 80 792 (20) Net cash earnings adjustment Income statement (682) 16,505 514 2,424 Total 17,187 1,910 Net wealth management and insurance income Trading income Other income Net operating income before operating expenses and impairment charges - 100 21 14 114 15 212 641 48 149 1,533 109 2,017 51 9 42 9 (22) 23 926 125 44 19 (53) 2,061 945 72 8,858 5,231 2,793 2,172 2,229 882 22,165 (158) 22,007 Operating expenses (3,779) (1,983) (1,399) Impairment charges (490) (236) 20 (855) (22) Profit before income tax 4,589 3,012 1,414 1,295 Income tax expense (1,397) (908) (429) (361) Profit attributable to NCI - - - - (746) (84) 1,399 (420) (5) (936) (9,698) - (812) (54) 11,655 (71) (3,586) 1 (4) 132 102 76 (46) - (9,566) (710) 11,731 (3,632) (4) Cash earnings for the year Net cash earnings adjustments Net profit attributable to equity holders of WBC Balance sheet Loans Deposits and other borrowings 3,192 2,104 985 934 974 (124) 8,065 30 8,095 (15) - - 13 (76) 108 30 3,177 2,104 985 947 898 (16) 8,095 396,265 146,099 75,627 73,604 18,329 (234) 709,690 203,872 141,031 102,703 57,784 7,180 46,715 559,285 WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 2. Segment reporting (continued) Reconciliation of cash earnings to net profit attributable to owners of WBC $m Cash earnings for the year Cash earnings adjustments Amortisation of intangible assets Fair value gain/(loss) on economic hedges Ineffective hedges Adjustments related to Pendal Treasury shares Total cash earnings adjustments Net profit attributable to owners of WBC 183 2020 2019 2018 2,608 6,849 8,065 - (362) 61 (31) 14 (318) - (35) 20 (45) (5) (65) (17) 126 (13) (73) 7 30 2,290 6,784 8,095 Revenue from products and services Details of revenue from external customers by product or service are disclosed in Notes 3 and 4. No single customer amounted to greater than 10% of the Group’s revenue. Geographic segments Geographic segments are based on the location of the office where the following items were recognised: Revenue Australia New Zealand Other overseas1 Total Non-current assets2 Australia New Zealand Other overseas1 Total 2020 2019 2018 $m % $m % $m % 26,135 85.6 31,113 84.2 32,595 85.6 3,439 11.3 4,520 12.2 4,381 960 3.1 1,331 3.6 1,097 11.5 2.9 30,534 100.0 36,964 100.0 38,073 100.0 14,270 92.6 12,280 93.7 12,271 93.7 1,015 122 6.6 0.8 761 67 5.8 0.5 756 65 5.8 0.5 15,407 100.0 13,108 100.0 13,092 100.0 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. 2. Other overseas included Pacific Islands, Asia, the Americas and Europe. Non-current assets represent property and equipment and intangible assets. WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  184 Notes to the financial statements Note 3. Net interest income 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 expected credit losses (ECL) model and on the carrying amount net of the provision for ECL for financial assets in stage 3. For 2018 comparative year, interest income under AASB 139 is recognised net of provision for impairment on loans. Refer to Note 13 for further details of the Group’s ECL model. $m Interest income1 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 2020 2019 2018 Parent Entity 2020 2019 135 75 - 334 201 326 129 - 1,914 122 74 - 311 197 - 1,521 1,919 - 1,385 1,750 24,848 30,029 29,583 21,488 26,171 17 - 35 - 35 16 33 - 2,940 4,274 Total interest income calculated using the effective interest rate method 26,596 32,518 31,987 26,025 32,736 Other Net ineffectiveness on qualifying hedges 87 28 (18) 77 26 Trading securities and financial assets measured at FVIS 359 662 564 338 633 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 5 - 14 - 38 - 451 704 584 5 178 598 14 103 776 27,047 33,222 32,571 26,623 33,512 (26) (57) (45) (23) (51) (4,652) (7,967) (8,141) (3,782) (6,745) (2,907) (4,706) (4,325) (2,549) (4,218) - (800) (98) - (776) (274) - (3,601) (4,905) (774) (800) (318) (98) (776) (273) Total interest expense calculated using the effective interest rate method (8,483) (13,780) (13,603) (10,853) (16,968) Other Deposits and other borrowings (402) (978) (880) (385) (961) Trading liabilities2 Debt issues Bank levy Due to subsidiaries Other interest expense3 Total other Total interest expense Total net interest income (959) (640) (828) (787) (107) (408) - (915) (163) (391) - (155) (74) (378) (408) - (29) (140) (391) 78 (85) (164) (88) (91) (150) (1,868) (2,535) (2,463) (1,686) (2,327) (10,351) (16,315) (16,066) (12,539) (19,295) 16,696 16,907 16,505 14,084 14,217 1. 2. 3. Interest income includes items relating to estimated customer refunds, payments, associated costs and litigation recognised as a reduction in interest income of $170 million (2019: $372 million, 2018: $127 million) for the Group, and $164 million (2019: $353 million) for the Parent Entity. Refer to Note 27 for further details. Includes net impact of Treasury balance sheet management activities. Included in other interest expense for 2020 is $64 million for the Group and $56 million for the Parent Entity relating to interest expense on lease liabilities due to the adoption of AASB 16 from 1 October 2019. Comparatives have not been restated. Refer to Notes 1 and 26 for further details. WESTPAC GROUP 2020 ANNUAL REPORT 185 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 FX 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  186 Notes to the financial statements Note 4. Non-interest income1 (continued) $m 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 Net wealth management and insurance income Wealth management income Life insurance premium income Consolidated 2020 2019 2018 Parent Entity 2020 2019 731 730 1,365 672 680 1,021 1,225 1,182 891 1,046 48 (76) 98 (52) (638) 1,800 1,879 2,645 1,511 1,088 (102) (106) (121) (103) (208) (224) (126) (95) (221) (71) (81) (152) 1,592 1,655 2,424 1,359 (90) (76) (166) 922 631 276 1,145 1,297 1,443 1,410 - - - - - - - - - - - - - - - - - - - - General insurance and lenders mortgage insurance (LMI) net premium earned 499 482 472 Life insurance investment and other income2 General insurance and LMI investment and other income Total insurance premium, investment and other income Life insurance claims and changes in life insurance liabilities3 General insurance and LMI claims and other expenses 64 42 409 666 52 50 1,902 2,386 2,598 (1,284) (1,266) (1,396) (498) (367) (286) Total insurance claims, changes in life insurance liabilities and other expenses (1,782) (1,633) (1,682) Net wealth management and insurance income 751 1,029 2,061 Trading income Other income Dividends received from subsidiaries Transactions with subsidiaries Dividends received from other entities Net gain/(loss) on derecognition/sale of associates Net gain/(loss) on disposal of assets Net gain/(loss) on hedging of overseas operations Net gain/(loss) on derivatives held for risk management purposes4 Net gain/(loss) on financial assets measured at fair value Net gain/(loss) on disposal of controlled entities Rental income on operating leases Share of associates’ net profit/(loss) Other Total other income Total non-interest income 895 929 945 876 956 - - 1 316 11 - 4 (78) - 54 (23) (36) - - 6 38 61 - (11) (39) 3 72 (23) 22 - - 3 - 24 - 8 38 (9) 107 (10) (89) 762 2,215 579 457 1 305 9 (8) 4 (35) - 33 - (53) 3 - 60 (71) (11) (25) - 50 - 6 249 129 72 1,597 2,684 3,487 3,742 5,502 3,832 4,562 Deferred income in relation to the credit card loyalty programs for the Group was $361 million as at 30 September 2020 (2019: $322 million; 2018: $318 million) and $30 million for the Parent Entity (2019: $47 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. 2. 3. 4. Non-interest income includes items relating to estimated customer refunds, payments, associated costs and litigation recognised as a reduction in non-risk fee income, wealth management income and other income of $225 million (2019: $860 million, 2018: $171 million) for the Group, and $190 million (2019: $842 million) for the Parent Entity. Refer to Note 27 for further details. Includes policyholder tax recoveries. Life insurance claims and changes in life insurance liabilities include a $260 million loss for the Group (2019: nil, 2018: nil) recognised as a result of the liability adequacy test on life insurance contracts (refer to Note 15). It also includes a $97 million write-off of deferred acquisition costs for the Group (2019: nil, 2018: nil) as a result of Westpac Life Insurance Limited (WLIS) ceasing to provide group life insurance products to BT Super. Income from derivatives held for risk management purposes reflects the impact of economic hedges of earnings. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 5. Operating expenses1 $m Staff expenses 187 Consolidated 2020 2019 2018 Parent Entity 2020 2019 Employee remuneration, entitlements and on-costs 4,428 4,320 4,292 3,744 3,611 Superannuation expense2 Share-based payments Restructuring costs Total staff expenses Occupancy expenses Operating lease rentals Depreciation and impairment of property and equipment3,4 Other Total occupancy expenses Technology expenses Amortisation and impairment of software assets4 Depreciation and impairment of IT equipment3,4 Technology services Software maintenance and licences Telecommunications Data processing Total technology expenses Other expenses 413 80 94 378 108 232 386 95 114 351 76 76 313 101 202 5,015 5,038 4,887 4,247 4,227 148 658 632 708 160 222 143 245 156 123 614 145 597 176 122 1,016 1,023 1,033 882 895 970 272 698 398 216 89 719 620 896 653 129 810 371 207 83 141 721 342 209 77 244 569 343 190 88 117 670 321 182 81 2,643 2,319 2,110 2,330 2,024 Professional and processing services 1,374 1,060 824 1,184 860 Amortisation and impairment of intangible assets and deferred expenditure4 Postage and stationery Advertising Non-lending losses Impairment on investments in subsidiaries Other Total other expenses Total operating expenses 523 164 217 1,443 - 9 179 245 58 - 138 182 173 133 116 130 172 1,428 - 272 344 175 86 11 - 143 196 43 136 107 4,065 1,726 1,536 3,313 1,485 12,739 10,106 9,566 10,772 8,631 1. 2. 3. 4. Operating expenses include estimated costs associated with AUSTRAC proceedings of $1,478 million which includes a provision for penalty of $1,300 million (2019: nil, 2018: nil) for the Group and the Parent Entity. They also include estimated customer refunds, payments, associated costs and litigation of $317 million (2019: $196 million, 2018: $111 million) for the Group and $488 million (2019: $180 million) for the Parent Entity. Refer to Note 27 for further details. Superannuation expense includes both defined contribution and defined benefit expense. Further details of the Group’s defined benefit plans are in Note 34. These balances include depreciation of ROU assets of $630 million for the Group and $567 million for the Parent Entity due to the adoption of AASB 16 from 1 October 2019. Comparatives have not been restated. Refer to Notes 1 and 26 for further details. Impairment expenses include: • $5 million (2019: nil, 2018: nil) for property and equipment for the Group, and $4 million (2019: nil) for the Parent Entity; • $171 million (2019: $25 million, 2018: $2 million) for computer software for the Group, and $165 million (2019: $25 million) for the Parent Entity; • $23 million (2019: nil, 2018: $1 million) for IT equipment for the Group, and $23 million (2019: nil) for the Parent Entity; and • $518 million (2019: nil, 2018: $105 million) for goodwill and other intangible assets for the Group, and $116 million (2019: nil) for the Parent Entity. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  188 Notes to the financial statements Note 6. Impairment charges Accounting policy As 2018 comparatives were not restated for the Group’s adoption of AASB 9 in 2019, the accounting policy applied in 2020 and 2019 differs to that applied prior to 2019. The accounting policy applied prior to 2019 is discussed in Note 39. The accounting policy applied in 2020 and 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 ECL 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 OCI 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 ECL, 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 based on the requirements of AASB 9. $m Provisions raised/(released) Performing Non-performing Recoveries Impairment charges of which relates to: Loans and credit commitments Debt securities at amortised cost Debt securities at FVOCI Impairment charges Consolidated 2020 2019 Parent Entity 2020 2019 1,437 1,934 (193) 3,178 (209) 1,175 (172) 794 1,147 1,717 (173) 2,691 (180) 1,073 (143) 750 3,158 794 2,689 750 18 2 - - - 2 - - 3,178 794 2,691 750 As 2018 comparatives were not restated for the Group’s adoption of AASB 9 in 2019, the following table details impairment charges 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 2018 371 (150) (179) 668 710 WESTPAC GROUP 2020 ANNUAL REPORT 189 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 OCI, 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  190 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 2020 4,266 1,280 Consolidated 2019 9,749 2,925 2018 11,731 3,519 Parent Entity 2020 2019 4,453 1,336 9,398 2,819 56 72 69 56 72 (17) 1 - (3) 585 16 1 55 8 (1) (1) (14) 12 (32) (10) - 24 (1) (1) (5) 64 (28) 9 (18) - - (228) (3) 468 32 1 133 - - (664) (2) 9 (5) 3 45 1,974 2,959 3,632 1,795 2,277 2,954 3,370 3,704 (981) 1 1,974 1,697 277 (401) (10) 2,959 2,526 433 (81) 9 3,632 3,178 454 2,417 (623) 1 1,795 1,753 42 2,711 (437) 3 2,277 2,215 62 1,974 2,959 3,632 1,795 2,277 The effective tax rate was 46.27% in 2020 (2019: 30.35%, 2018: 30.96%). 1. As the Bank Levy is not a levy on income, it is not included in income tax. It is included in Note 3. WESTPAC GROUP 2020 ANNUAL REPORT 191 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 and opening retained profits due to adoption of new accounting standards Provisions for ECL on loans and credit commitments1,2 Provision for long service leave, annual leave and other employee benefits Financial instruments1 Property and equipment Other provisions2 Lease liabilities3 All other liabilities3 Consolidated 2020 2019 Parent Entity 2020 2019 1,788 335 - 223 606 899 419 1,158 309 5 195 531 - 366 1,507 308 - 198 570 825 304 1,003 286 2 173 511 - 358 Total amounts recognised in the income statements and opening retained profits due to adoption of new accounting standards 4,270 2,564 3,712 2,333 Amounts recognised directly in OCI Investment securities Cash flow hedges Defined benefit Total amounts recognised directly in OCI Gross deferred tax assets Set-off of deferred tax assets and deferred tax liabilities Net deferred tax assets Movements Balance as at beginning of year Impact on adoption of new accounting standards1,3 Restated opening balance Recognised in the income statements Recognised in OCI Set-off of deferred tax assets and deferred tax liabilities Balance as at end of year - 25 155 180 4,450 (1,386) 10 52 105 167 2,731 (683) - - 149 149 3,861 (1,364) 3,064 2,048 2,497 2,048 948 1,180 300 1,925 872 11 28 101 140 2,473 (548) 1,925 1,102 258 2,996 1,480 2,797 1,360 758 13 (703) 472 117 (21) 507 9 (816) 476 109 (20) 3,064 2,048 2,497 1,925 1. 2. 3. Included in 2019, is the impact on adoption of AASB 9, which increased deferred tax assets by $300 million for the Group and $258 million for the Parent Entity, recognised as an opening adjustment in retained profits. The details are as follows: • Provision for ECL - $297 million for the Group and $258 million for the Parent Entity; and • Financial instruments - $3 million for the Group and nil for the Parent Entity. 2019 Other provisions were restated from $590 million to $531 million for the Group, and from $561 million to $511 million for the Parent Entity, to reclassify provision for ECL on credit commitments to provisions for ECL on loans and credit commitments. The adoption of AASB 16 on 1 October 2019 resulted in an increase in deferred tax assets of $948 million for the Group and $872 million for the Parent Entity. A corresponding increase was also recognised in deferred tax liabilities (refer to the following table), which resulted in a net nil impact on retained profits. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  192 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 and opening retained profits due to adoption of new accounting standards Finance lease transactions Property and equipment1 Life insurance assets All other assets Consolidated 2020 2019 Parent Entity 2020 2019 253 933 43 223 230 128 57 312 232 864 - 208 206 129 - 213 Total amounts recognised in the income statements and opening retained profits due to adoption of new accounting standards 1,452 727 1,304 548 Amounts recognised directly in OCI Investment securities Cash flow hedges Total amounts recognised directly in OCI Gross deferred tax liabilities Set-off of deferred tax assets and deferred tax liabilities Net deferred tax liabilities Movements Balance as at beginning of year Impact on adoption of new accounting standards1 Restated opening balance Recognised in the income statements Recognised in OCI Set-off of deferred tax assets and deferred tax liabilities Balance as at end of year 51 9 60 1,512 (1,386) 126 44 948 992 (223) 60 (703) 126 - - - 727 (683) 44 18 - 18 71 (24) (21) 44 51 9 60 1,364 (1,364) - - 872 872 (116) 60 (816) - - - - 548 (548) - 3 - 3 39 (22) (20) - 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 2020 2019 Parent Entity 2020 2019 335 291 264 237 Gross retained earnings of subsidiaries which the Parent Entity does not intend to distribute in the foreseeable future 55 51 - - 1. The adoption of AASB 16 on 1 October 2019 resulted in an increase in deferred tax liabilities of $948 million for the Group and $872 million for the Parent Entity, which was recognised as an opening adjustment in retained profits. A corresponding increase was also recognised in deferred tax assets (refer to the previous table), which resulted in a net nil impact on retained profits. WESTPAC GROUP 2020 ANNUAL REPORT 193 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 Notes 19 and 33 for further information on the potential dilutive instruments. $m 2020 2019 2018 Basic Diluted Basic Diluted Basic Diluted Net profit attributable to shareholders 2,290 2,290 6,784 6,784 8,095 8,095 Adjustment for RSP dividends1 Adjustment for potential dilution: Distributions to convertible loan capital holders2 (2) - (2) - (6) (6) (5) - - 290 - 283 Adjusted net profit attributable to shareholders 2,288 2,288 6,778 7,068 8,090 8,378 Weighted average number of ordinary shares (millions) Weighted average number of ordinary shares on issue 3,595 3,595 3,456 3,456 3,414 3,414 Treasury shares (including RSP share rights)1 (5) (5) (6) Adjustment for potential dilution: Share-based payments Convertible loan capital2 Adjusted weighted average number of ordinary shares Earnings per ordinary share (cents) - - 1 - - - 3,590 63.7 3,591 63.7 3,450 196.5 (6) 1 278 3,729 189.5 (8) - - 3,406 237.5 (8) 3 232 3,641 230.1 1. 2. RSP is explained in Note 33. Some shares under the RSP have not vested and are not outstanding ordinary shares but do receive dividends. These RSP dividends are deducted to show the profit attributable to ordinary shareholders. Shares under the RSP were antidilutive in 2020 and 2019, but were dilutive in 2018. 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 potentially dilutive instruments, 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. In 2020, all convertible loan capital instruments were antidilutive, but were dilutive in 2019 and 2018. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  194 Notes to the financial statements Note 9. Average balance sheet and interest rates The daily average balances of the Group’s interest earning assets and interest bearing liabilities are shown below along with their interest income or expense. 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 receivables1: Australia New Zealand Other overseas Total interest earning assets and interest income Non-Interest earning assets Derivative financial instruments Life insurance assets All other assets2 Total non-interest earning assets Total assets Average balance $m 2020 Interest income $m Average rate % Average balance $m 2019 Interest income $m Average rate % Average balance $m 2018 Interest income $m Average rate % 13,555 373 1,804 20,300 4,728 4,601 - - - 56 3 16 217 47 95 - - - 71,402 1,347 3,921 2,858 96 78 585,643 21,315 85,184 3,237 27,349 540 0.4 0.8 0.9 1.1 1.0 2.1 - - - 1.9 2.4 2.7 3.6 3.8 2.0 8,428 364 2,031 152 7 42 20,691 468 3,862 4,521 85 109 1.8 1.9 2.1 2.3 2.2 2.4 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 56,875 1,691 3,850 3,062 130 98 589,427 25,931 79,255 3,650 26,558 859 3.0 3.4 3.2 4.4 4.6 3.2 - - - - - - 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 2.6 821,718 27,047 3.3 798,924 33,222 4.2 774,944 32,571 4.2 31,334 4,614 62,414 98,362 920,080 25,959 9,610 60,231 95,800 894,724 26,443 10,664 61,259 98,366 873,310 1. 2. For 2020 and 2019, loans and other receivables are net of Stage 3 provision for ECL, where interest income is determined based on their carrying value. Stages 1 and 2 provisions for ECL are 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, loans and other receivables are net of provision for impairment charges on loans, as under AASB 139 interest income is determined based on their carrying value, net of provision for impairment charges on loans. Includes property and equipment, intangible assets, deferred tax assets, non-interest earning loans relating to mortgage offset accounts and all other non-interest earning assets. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 9. Average balance sheet and interest rates (continued) 195 2020 2019 2018 Average balance $m Interest expense $m Average rate % Average balance $m Interest expense $m Average rate % Average balance $m Interest expense $m Average rate % Consolidated Liabilities Interest bearing liabilities Collateral received: Australia New Zealand Other overseas Deposits and other borrowings: 2,586 596 4,399 11 3 12 0.4 0.5 0.3 2,039 390 1,188 41 8 8 2.0 2.1 0.7 2,383 342 184 37 6 2 Australia 435,877 3,745 0.9 425,799 New Zealand Other overseas Loan capital: Australia New Zealand Other overseas Other interest bearing liabilities1: 57,096 25,660 19,554 1,833 1,324 882 427 663 94 43 Australia New Zealand Other overseas 176,950 3,849 18,510 1,256 558 64 1.5 1.7 3.4 5.1 3.2 2.2 3.0 5.1 54,720 26,270 15,080 1,777 1,324 7,023 1,235 687 632 91 53 188,736 5,937 15,665 1,294 575 25 1.6 422,006 7,308 2.3 2.6 4.2 5.1 4.0 3.1 3.7 1.9 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 2.2 745,641 10,351 1.4 734,282 16,315 2.2 715,509 16,066 2.2 Total interest bearing liabilities and interest expense Non-interest bearing liabilities Deposits and other borrowings: Australia New Zealand Other overseas Derivative financial instruments Life insurance liabilities All other liabilities2 Total non-interest bearing liabilities Total liabilities Shareholders’ equity NCI Total equity 45,231 8,760 901 33,249 2,999 15,233 106,373 852,014 68,014 52 68,066 Total liabilities and equity 920,080 42,455 5,996 819 26,568 7,653 13,187 96,678 830,960 63,714 50 63,764 894,724 41,156 5,204 817 26,218 8,874 13,484 95,753 811,262 62,017 31 62,048 873,310 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. 2. Includes net impact of Treasury balance sheet management activities and the Bank Levy. Includes other financial liabilities, provisions, current and deferred tax liabilities and all other non-interest bearing liabilities. WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  196 Notes to the financial statements Note 9. Average balance sheet and interest rates (continued) Net interest income may vary from year to year due to changes in the volume of, and interest rates associated with, interest earning assets and interest bearing liabilities. The table below allocates the change in net interest income between changes in volume and interest rate for those assets and liabilities. Calculation of variances • volume changes are determined based on the movements in average asset and liability balances; and • interest rate changes are determined based on the change in interest rate associated with those assets and liabilities. Variances that arise due to a combination of volume and interest rate changes are allocated to interest rate changes. 2020 Change due to Rate Volume 2019 Change due to Total Volume Rate Total 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 securities: 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 66 3 3 45 5 48 (1) (6) 12 231 134 111 651 4 2 6 93 (189) (96) (4) (26) (4) (21) (242) (251) (57) (16) (38) (14) - (5) (9) 19 2 433 (777) (344) 2 (7) (36) (13) (34) (20) 52 2 (8) 79 7 26 43 22 9 14 1 11 (34) (2) 22 (44) (28) 3 (167) (4,449) (4,616) 274 26 (687) (345) (413) (319) 477 255 (54) (246) (121) 165 661 (6,836) (6,175) 910 (259) 11 4 22 (41) (9) (18) (30) (5) 4 167 (3,445) (3,278) 54 (16) (407) (353) (244) (260) 188 (157) 3 - - (10) 31 3 (10) (5) 1 11 66 78 (6) 2 7 - 9 1 (5) (351) (285) (39) 176 39 170 (5) - (2) (3) 7 (2) (372) (1,716) (2,088) 346 (3) 343 105 (1) (122) 40 (17) 39 26 (13) (42) (3) (16) (16) 165 (6,129) (5,964) 513 (264) 249 356 129 11 (298) (246) (163) 496 (707) 58 (117) (152) (211) 242 174 (19) 397 40 (70) 35 282 104 16 5 402 WESTPAC GROUP 2020 ANNUAL REPORT 197 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, where the Group retains control of the transferred asset, it will continue to be recognised in 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 cash flows 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 prior to 2019 were not restated for the Group’s adoption of AASB 9 in 2019, the accounting policy applied in 2020 and 2019 differs to that applied prior to 2019. The accounting policy applied prior to 2019 is discussed in Note 39. The accounting policy applied in 2020 and 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 provision for ECL determined using the ECL model. Refer to Notes 6 and 13 for further details. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  198 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 OCI except for interest income, impairment charges and FX 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 OCI. There is no reduction of the carrying value of the debt security which remains at fair value. The cumulative gain or loss recognised in OCI 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 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. 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 FVIS 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. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements 199 Notes to the financial statements Note 10. Trading securities and financial assets measured at FVIS 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 risks 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 in 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 2020 2018 Parent Entity 2020 2019 17,776 22,210 18,777 15,519 20,719 20,401 2,490 6,833 2,738 1,379 20,401 2,976 2,110 6,731 2,115 Total trading securities and financial assets measured at FVIS 40,667 31,781 23,132 38,030 29,565 Trading securities include the following: $m Consolidated 2019 2020 2018 Parent Entity 2020 2019 Government and semi-government securities 14,667 16,625 13,328 12,542 15,585 Other debt securities Equity securities Other Total trading securities Other financial assets measured at FVIS include: $m Other debt securities Equity securities 3,044 5,497 5,354 2,913 5,046 4 61 6 82 8 87 3 61 6 82 17,776 22,210 18,777 15,519 20,719 Consolidated 2019 2020 2,045 2,394 445 344 2018 2,715 261 Parent Entity 2020 2019 1,703 407 2,110 2,057 58 2,115 Total other financial assets measured at FVIS 2,490 2,738 2,976 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  200 Notes to the financial statements Note 11. Available-for-sale securities/Investment securities Accounting policy As 2018 comparatives were not restated for the Group’s adoption of AASB 9 in 2019, the accounting policy applied in 2020 and 2019 differs to that applied prior to 2019. The accounting policy applied prior to 2019 is discussed in Note 39. The accounting policy applied in 2020 and 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 Include 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 FX 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 provision 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. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 11. Available-for-sale securities/Investment securities (continued) Balances recognised under AASB 9 $m Investment securities Investments securities measured at FVOCI 201 Consolidated 2020 2019 Parent Entity 2020 2019 Government and semi-government debt securities 73,486 53,389 69,929 50,980 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 Provision for ECL on debt securities at amortised cost Total net investment securities measured at amortised cost 16,916 19,058 15,826 17,325 153 134 68 66 90,555 72,581 85,823 68,371 881 130 1,011 (27) 984 736 93 829 (9) 820 - 3 3 - 3 23 4 27 - 27 Total investment securities 91,539 73,401 85,826 68,398 The ECL 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 2020. It also shows the weighted average yield of the Group’s investment securities. There are no tax-exempt securities. Up to 1 year $m Over 1 year to 5 years $m % Over 5 years to 10 years $m % Over 10 years $m % No specific maturity $m % Total $m % Weighted average % 2,670 2.7 32,848 2.1 38,565 1.8 257 1.4 4,057 1.7 12,989 1.6 - - - - - - - - - - - - - - - 17,046 153 - 153 1.6 - - 74,340 2.0 6,727 45,837 38,565 257 153 91,539 2020 Carrying Amount Government and semi- government 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 $7,271 million (2019: $10,398 million, 2018: $5,229 million); and total holdings of debt securities, where the aggregate book value exceeds 10% of equity attributable to Westpac’s owners: – – – – Australian Commonwealth Government totalling $15,714 million; Queensland Treasury Corporation totalling $14,033 million; New South Wales Treasury Corporation totalling $13,385 million; and Treasury Corporation of Victoria totalling $10,593. 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 2018 42,979 17,756 384 61,119 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  202 Notes to the financial statements Note 12. Loans Accounting policy As 2018, 2017 and 2016 comparatives were not restated for the Group’s adoption of AASB 9 in 2019, the accounting policy applied in 2020 and 2019 differs to that applied prior to 2019. The accounting policy applied prior to 2019 is discussed in Note 39. The accounting policy applied in 2020 and 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 provision 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 in 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 Personal Business Total Australia New Zealand Housing Personal Business Total New Zealand Total other overseas Total loans Provision for ECL on loans (refer to Note 13) Total net loans1 Consolidated 2020 2019 Parent Entity 2020 2019 440,933 449,201 440,926 449,192 17,081 21,247 16,938 20,848 147,584 152,360 144,354 148,850 605,598 622,808 602,218 618,890 51,126 1,360 47,731 1,709 29,864 29,285 82,350 78,725 - - 354 354 - - 411 411 10,713 16,845 9,945 15,738 698,661 718,378 612,517 635,039 (5,602) (3,608) (4,693) (3,103) 693,059 714,770 607,824 631,936 1. Total net loans include securitised loans of $7,367 million (2019: $7,737 million) for the Group and $132,506 million (2019: $91,061 million) for the Parent Entity. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 12. Loans (continued) The following tables show loans presented based on their industry classification: Consolidated $m 2020 2019 203 2018 2017 2016 Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property 7,933 10,116 6,711 8,039 9,210 7,186 8,297 8,642 6,751 8,177 8,182 6,043 7,536 7,953 5,797 13,348 14,069 14,059 12,923 14,298 730 8,493 2,975 753 9,337 2,869 628 9,298 3,311 554 9,054 3,025 675 9,140 3,641 44,468 44,769 45,471 43,220 44,785 Property services and business services 12,562 14,035 13,477 12,050 11,674 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 11,675 12,099 12,158 12,950 12,362 13,268 8,218 4,962 16,144 8,268 4,077 16,501 8,853 4,350 16,063 16,044 8,624 5,237 9,015 4,025 454,433 466,550 463,609 451,315 429,522 5,706 5,403 6,680 4,229 2,777 605,598 622,808 622,085 601,646 579,244 388 9,101 509 355 8,553 493 323 8,138 502 290 7,772 447 3,427 3,009 2,903 2,478 94 1,689 203 6,667 951 2,119 1,949 1,176 1,303 85 1,913 278 6,412 1,182 1,973 114 2,199 206 137 2,090 141 5,997 5,858 1,073 1,733 1,113 1,810 2,163 1,080 1,237 2,344 2,509 1,131 1,429 1,029 1,003 256 7,788 396 2,682 163 2,324 280 5,925 1,084 1,396 2,333 1,257 1,600 52,584 49,473 46,613 45,190 45,011 190 95 - - - 82,350 78,725 74,342 71,806 72,495 118 124 51 109 150 55 112 19 71 97 5 55 118 12 147 2,298 4,628 4,774 4,289 2,767 Government, administration and defence 20 2 25 4 4 Manufacturing Mining Property Property services and business services Services Trade Transport and storage Utilities Retail lending Other Total other overseas Total loans Provision for ECL on loans (refer Note 13) Provision for impairment charges on loans Total net loans 1,877 3,784 3,257 2,982 2,619 336 416 1,545 218 1,553 732 950 457 18 468 492 1,610 243 2,293 997 1,086 863 65 322 467 1,684 205 2,312 1,232 736 683 178 349 491 540 205 2,680 1,389 514 657 76 535 479 526 99 3,463 1,186 442 1,120 - 10,713 16,845 16,077 14,333 13,517 698,661 718,378 712,504 687,785 665,256 (5,602) (3,608) - - - - - (2,814) (2,866) (3,330) 693,059 714,770 709,690 684,919 661,926 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  204 Notes to the financial statements Note 12. Loans (continued) Parent Entity $m Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property Property services and business services Services Trade Transport and storage Utilities Retail lending Other Total Australia New Zealand Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property Property services and business services Services Trade Transport and storage Utilities Retail lending Other Total New Zealand Other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property Property services and business services Services Trade Transport and storage Utilities Retail lending Other Total other overseas Total loans Provision for ECL on loans Total net loans 2020 2019 7,857 10,058 6,199 7,967 9,151 6,810 13,290 14,005 709 8,282 2,955 746 9,155 2,849 44,468 44,707 11,843 11,334 13,058 7,870 4,938 13,192 11,853 15,961 7,961 4,053 454,259 465,535 5,098 4,945 602,218 618,890 - 4 4 - - - 5 8 - - 70 94 - 1 7 - 263 5 - - - - - 7 - 297 - - - - 354 411 81 114 46 67 130 47 2,295 4,624 20 2 1,875 3,780 314 209 1,478 196 1,415 642 894 359 7 465 226 1,528 216 2,115 886 1,036 587 29 9,945 15,738 612,517 635,039 (4,693) (3,103) 607,824 631,936 WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 12. Loans (continued) The following table shows the Group’s contractual maturity distribution of all loans by industry as at 30 September 2020: 205 Consolidated 2020 $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 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 Zealand By offices in other overseas Up to 1 year Over 1 year to 5 years Over 5 years Total 3,253 3,115 1,604 6,066 300 3,465 458 4,303 6,417 4,241 4,761 154 4,589 1,903 18,027 25,088 2,991 3,793 5,892 1,593 860 16,491 748 68,656 20,555 3,151 92,362 8,055 6,252 6,236 5,977 3,847 10,468 3,886 96,177 11,481 6,900 114,558 377 584 866 2,521 276 439 614 1,353 1,516 1,630 1,140 648 255 7,933 10,116 6,711 13,348 730 8,493 2,975 44,468 12,562 11,675 13,268 8,218 4,962 427,474 454,433 1,072 5,706 440,765 605,598 50,314 662 491,741 82,350 10,713 698,661 Loans at variable interest rates 2020 Loans at fixed interest rates Loans at variable interest rates 2019 Loans at fixed interest rates Total Total 396,055 140,887 536,942 418,494 129,035 547,529 8,771 7,216 53,024 346 61,795 7,562 9,102 9,881 50,499 943 59,601 10,824 Total loans maturing after one year 412,042 194,257 606,299 437,477 180,477 617,954 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Notes to the financial statements 206 Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges Accounting policy As 2018, 2017 and 2016 comparatives were not restated upon the Group’s adoption of AASB 9 in 2019, the accounting policy applied in 2020 and 2019 differs to that applied prior to 2019. The accounting policy applied prior to 2019 is discussed in Note 39. The accounting policy applied in 2020 and 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, due from subsidiaries and credit commitments. The Expected Credit Loss (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 OCI 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 provision 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 an individual basis. Financial assets in Stage 3 are those that are in default. A default occurs when Westpac considers that the customer is unable 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 Australian Prudential Regulation Authority (APRA) regulatory definition of default. Collective and individual assessment Financial assets that are in Stages 1 and 2 are assessed on a collective basis. This means that they are grouped in pools of similar assets with similar credit risk characteristics including the type of product and the customer risk grade. Financial assets in Stage 3 are assessed on an individual basis and calculated collectively for those below a specified threshold. Expected life In considering the lifetime timeframe for ECL 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 the exposure to credit losses to the contractual notice period. For these facilities, lifetime is based on historical behaviour. WESTPAC GROUP 2020 ANNUAL REPORT 207 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. The deferral of payments by customers in hardship arrangements is generally treated as an indication of a significant increase in credit risk (SICR) but the deferral of payments under the current COVID-19 support packages for mortgages and business loans has not, in isolation, been treated as an indication of SICR. The Group has classified these deferral packages into different categories of risk which have been assessed for an increased likelihood of a risk of default to determine whether a SICR has occurred. 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) employment to population 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 The downside scenario is a more severe scenario with ECL higher than those under the current base case scenario. The more severe loss outcome for the downside is generated under a recession scenario in which the combination of negative GDP growth, declines in commercial and residential property prices and an increase in the unemployment rate simultaneously impact ECL across all portfolios from the reporting date. 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 ECL. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  208 Notes to the financial statements 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 has 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 provision for ECL” line represents the impact on the provision for ECL due to changes in credit quality during the year (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. Total provision for ECL on loans (Note 12) 902 2,537 2,163 5,602 1,496 1,349 3,608 Consolidated $m Provision for ECL on loans Housing Personal Business Provisions for ECL on credit commitments Housing Personal Business Total provision for ECL on credit commitments (Note 27) Total provisions for ECL on loans and credit commitments Of which: Performing Stage 1 Stage 2 2020 Non- performing Stage 3 Performing Total Stage 1 Stage 2 2019 Non- performing Stage 3 185 180 537 742 362 1,433 977 232 954 1,904 774 2,924 352 424 720 591 248 510 Total 1,101 904 1,603 7 36 139 5 46 287 - - 12 82 10 436 2 35 141 182 338 10 530 121 178 - - 6 6 7 71 227 305 1,084 2,875 2,173 6,132 884 1,674 1,355 3,913 158 232 373 763 5 36 80 Individually assessed provisions - - 611 611 - - Collectively assessed provisions 1,084 2,875 1,562 5,521 884 1,674 412 943 412 3,501 Total provisions for ECL on loans and credit commitments Gross loans and credit commitments 1,084 812,450 2,875 71,841 2,173 6,132 884 1,674 1,355 3,913 11,311 895,602 865,383 37,484 6,851 909,718 Coverage ratio (%) 0.13 4.00 19.21 0.68 0.10 4.47 19.78 0.43 Parent Entity $m Provision for ECL on loans Housing Personal Business Total provision for ECL on loans (Note 12) Provision for ECL on credit commitments Housing Personal Business Total provision for ECL on credit commitments (Note 27) Total provisions for ECL on loans and credit commitments Of which: Performing Stage 1 Stage 2 2020 Non- performing Stage 3 Performing Total Stage 1 Stage 2 2019 Non- performing Stage 3 145 162 445 752 4 28 129 630 297 1,154 904 193 763 1,679 652 2,362 2,081 1,860 4,693 5 35 269 9 63 407 - - 9 9 137 200 303 640 4 29 74 334 369 554 557 213 436 1,257 1,206 1 32 130 - - 5 5 161 309 479 107 163 Total 1,028 782 1,293 3,103 5 61 209 275 913 2,390 1,869 5,172 747 1,420 1,211 3,378 Individually assessed provisions - - 520 520 - - Collectively assessed provisions 913 2,390 1,349 4,652 747 1,420 364 847 364 3,014 Total provisions for ECL on loans and credit commitments 913 2,390 1,869 5,172 747 1,420 1,211 3,378 Gross loans and credit commitments 712,381 61,822 10,293 784,496 764,311 32,966 6,249 803,526 Coverage ratio (%) 0.13 3.87 18.16 0.66 0.10 4.31 19.38 0.42 WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) The following table reconciles the provisions for ECL on loans and credit commitments for the Group. Consolidated $m Performing Stage 1 Stage 2 Non-performing Stage 3 Provision for impairment charges as at 30 September 2018 - - Restatement for adoption of AASB 9 877 1,884 Restated provisions for ECL on loans and credit commitments 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 1,458 (1,404) (242) 956 (5) (621) 179 (19) (1,385) 874 - 2 - 4 - 1,272 1,272 (54) (714) 626 (330) 1,647 (1,154) 62 Total provisions for ECL on loans and credit commitments as at 30 September 2019 884 1,674 1,355 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 1,578 (1,528) (345) 1,161 (7) (955) 212 60 (1,233) 2,474 - (5) - (11) (50) (816) 962 (77) 1,915 (1,170) 54 Total provisions for ECL on loans and credit commitments as at 30 September 2020 1,084 2,875 2,173 Collectively assessed provisions Individually assessed provisions 2,631 (2,631) 422 (422) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 209 Total 3,053 980 4,033 - - - (170) 1,136 (1,154) 68 3,913 - - - 195 3,156 (1,170) 38 6,132 The provisions for ECL on loans and credit commitments can be further disaggregated into the following classes: Consolidated Housing $m Performing Stage 1 Stage 2 Non-performing Stage 3 Provision for impairment charges as at 30 September 2018 - - Restatement for adoption of AASB 9 Restated provisions for ECL on loans and credit commitments 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 Total provisions for ECL on loans and credit commitments as at 30 September 2019 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 130 351 130 343 351 (317) (38) 396 - 17 (289) - - (145) (35) 104 - - 163 566 354 (542) (68) 472 - (276) 25 (53) (492) 798 - (2) - (6) - 501 501 (26) (358) 145 (141) 567 (119) 22 591 (24) (404) 276 (142) 772 (120) 28 Total provisions for ECL on loans and credit commitments as at 30 September 2020 192 747 977 Collectively assessed provisions Individually assessed provisions 385 (385) 97 (97) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total 482 500 982 - - - (159) 382 (119) 22 1,108 - - - (170) 1,078 (120) 20 1,916 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  210 Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) Consolidated Personal $m Performing Stage 1 Stage 2 Non-performing Stage 3 Provision for impairment charges as at 30 September 2018 - - Restatement for adoption of AASB 9 263 589 Restated provisions for ECL on loans and credit commitments 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 Total provisions for ECL on loans and credit commitments as at 30 September 2019 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 Total provisions for ECL on loans and credit commitments as at 30 September 2020 263 849 589 (839) (148) 368 (2) (350) 62 (18) (757) 708 - 1 - 1 268 744 459 (732) (154) 368 (1) (342) 35 (37) (676) 694 - - - (2) 216 408 - 240 240 (10) (220) 352 (160) 838 (822) 30 248 (12) (214) 343 (50) 617 (728) 28 232 Collectively assessed provisions Individually assessed provisions 761 (761) 3 (3) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Consolidated Business $m Performing Stage 1 Stage 2 Non-performing Stage 3 Provision for impairment charges as at 30 September 2018 - - Restatement for adoption of AASB 9 484 944 Restated provisions for ECL on loans and credit commitments 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 Total provisions for ECL on loans and credit commitments as at 30 September 2019 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 484 266 (56) (3) 100 (339) - 1 944 (248) 192 (126) 34 62 - 3 453 268 861 (254) (123) 321 (6) (337) 152 (65) - (3) 150 982 - (3) - 531 531 (18) (136) 129 (29) 242 (213) 10 516 (14) (198) 343 115 526 (322) (2) Total provisions for ECL on loans and credit commitments as at 30 September 2020 676 1,720 964 Collectively assessed provisions Individually assessed provisions 1,485 (1,485) 322 (322) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total 764 328 1,092 - - - (116) 789 (822) 32 975 - - - (52) 635 (728) 26 856 Total 1,807 152 1,959 - - - 105 (35) (213) 14 1,830 - - - 417 1,443 (322) (8) 3,360 WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) The following table reconciles the provision for ECL on loans and credit commitments for the Parent Entity. Parent Entity $m Performing Stage 1 Stage 2 Non-performing Stage 3 Provision for impairment charges as at 30 September 2018 - - Restatement for adoption of AASB 9 741 1,605 Restated provisions for ECL on loans and credit commitments 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 Total provisions for ECL on loans and credit commitments as at 30 September 2019 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 1,191 (1,153) (220) 860 (3) (554) 168 7 (1,130) 654 - - - 1 747 1,420 1,150 (1,125) (266) 930 (6) (773) 188 64 (897) 1,880 - (3) - (6) - 1,113 1,113 (38) (640) 557 (358) 1,552 (1,023) 48 1,211 (25) (664) 779 (45) 1,672 (1,105) 46 Total provisions for ECL on loans and credit commitments as at 30 September 2020 913 2,390 1,869 Collectively assessed provisions Individually assessed provisions 2,238 (2,238) 375 (375) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 211 Total 2,613 846 3,459 - - - (183) 1,076 (1,023) 49 3,378 - - - 207 2,655 (1,105) 37 5,172 The provisions for ECL on loans and credit commitments can be further disaggregated into the following classes: Parent Entity Housing $m Performing Stage 1 Stage 2 Non-performing Stage 3 Provision for impairment charges as at 30 September 2018 - - Restatement for adoption of AASB 9 Restated provisions for ECL on loans and credit commitments 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 Total provisions for ECL on loans and credit commitments as at 30 September 2019 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 105 334 105 322 334 (302) (36) 386 - 15 (265) - - (141) (33) 91 - - 141 376 335 (365) (44) 391 - 19 (233) (45) (343) 552 - - - - - 402 402 (20) (350) 141 (127) 606 (115) 20 557 (11) (347) 233 (128) 686 (111) 25 Total provisions for ECL on loans and credit commitments as at 30 September 2020 149 635 904 Collectively assessed provisions Individually assessed provisions 516 (516) 82 (82) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total 598 243 841 - - - (145) 432 (115) 20 1,033 - - - (154) 895 (111) 25 1,688 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  212 Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) Parent Entity Personal $m Performing Stage 1 Stage 2 Non-performing Stage 3 Provision for impairment charges as at 30 September 2018 - - Restatement for adoption of AASB 9 215 540 Restated provisions for ECL on loans and credit commitments as at 1 October 2018 Transfers to Stage 1 Transfers to Stage 2 Transfers to Stage 3 Business activity during the year 215 635 (138) (1) 62 540 (633) 319 (311) (11) Net remeasurement of provision for ECL (544) 497 Write-offs Exchange rate and other adjustments Total provisions for ECL on loans and credit commitments as at 30 September 2019 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 Total provisions for ECL on loans and credit commitments as at 30 September 2020 - - - - 229 549 (131) 401 (547) 313 (1) (307) 36 (31) (492) 503 - - - - 190 332 - 200 200 (2) (181) 312 (158) 753 (733) 22 213 (2) (182) 308 (43) 573 (699) 25 193 Parent Entity Business $m Performing Stage 1 Stage 2 Non-performing Stage 3 Provision for impairment charges as at 30 September 2018 - - Restatement for adoption of AASB 9 421 731 Restated provisions for ECL on loans and credit commitments 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 Total provisions for ECL on loans and credit commitments as at 30 September 2019 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 421 234 (46) (2) 91 (321) - - 377 225 (91) (5) 133 (62) - (3) 731 (218) 155 (102) 51 66 - 1 684 (213) 226 (233) 140 825 - (6) Total provisions for ECL on loans and credit commitments as at 30 September 2020 574 1,423 - 511 511 (16) (109) 104 (73) 193 (175) 6 441 (12) (135) 238 126 413 (295) (4) 772 Collectively assessed provisions Individually assessed provisions 524 (524) 3 (3) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Collectively assessed provisions Individually assessed provisions 1,198 (1,198) 290 (290) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total 527 428 955 - - - (107) 706 (733) 22 843 - - - (38) 584 (699) 25 715 Total 1,488 175 1,663 - - - 69 (62) (175) 7 1,502 - - - 399 1,176 (295) (13) 2,769 WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) 213 Reconciliation of impairment charges $m Loans and credit commitments: Business activity during the year Net remeasurement of provision for ECL Impairment charges for debt securities at amortised cost Impairment charges for debt securities at FVOCI Recoveries Impairment charges (Note 6) Impact of Overlays on the provision for ECL Consolidated 2020 2019 Parent Entity 2020 2019 195 3,156 18 2 (193) 3,178 (170) 1,136 - - (172) 794 207 2,655 - 2 (173) 2,691 (183) 1,076 - - (143) 750 The following table attributes the breakup between modelled ECL and other economic overlays. Where there is increased uncertainty regarding the required forward-looking economic conditions under AASB 9, or limitations of the historical data used to calibrate the models to current stressed environments, overlays are typically used to address areas of potential risk not captured in the underlying modelled ECL. $m Modelled provision for ECL Overlays1 Total provision for ECL Consolidated 2020 Parent Entity 2019 2020 2019 5,480 3,801 4,659 3,266 652 6,132 112 513 112 3,913 5,172 3,378 Details of these changes, which are based on reasonable and supportable information up to the date of this report are provided below. Modelled provision for ECL The modelled provision for ECL is a probability weighted estimate based on three scenarios which together are representative of the Group’s view of the forward-looking distribution of potential loss outcomes. The increase in provisions as a result of changes in modelled ECL are reflected through the “net remeasurement of provision for ECL” line in the “movement in provision for ECL on loans and credit commitments” table. The base case scenario uses current Westpac Economics forecasts and reflects the latest available macroeconomic view which shows a deterioration in the short term, with a subsequent recovery. The latest view considers both the economic and societal impacts of COVID-19, the Australian Government stimulus measures implemented to cushion the impacts, including the JobKeeper package and the New Zealand Government stimulus package. The Westpac Australian economics forecast assumes the following: Key macroeconomic assumptions for base case scenario 30 September 2020 30 September 2019 Annual GDP Commercial property index Residential property prices Cash rate Unemployment rate: Australia New Zealand Forecast growth of 2.5% for calendar year 2021 Growth of 2.5% over the next 12 months Forecast price contraction of 19.3% for calendar year 2021 Reduction in the rate of growth of 1.1% over the next 12 months Forecast price contraction of 0.4% for calendar year 2021 Return to positive growth of 1% over the next 12 months Forecast to remain at 10bps over calendar year 2021 Reduction of 50 bps in the next 12 months Forecast to peak at 7.9% (February 2021) and fall to 7.5% at December 2021 Increase to 5.6% over the next 12 months Forecast to peak at 7% (December 2020) and then fall to 6.4% at December 2021 Reduction of 50 bps in the next 12 months The downside scenario is a more severe scenario with ECL higher than the base case scenario. The more severe loss outcome for the downside is generated under a recession scenario in which the combination of negative GDP growth, declines in commercial and residential property prices and an increase in the unemployment rate simultaneously impact ECL across all portfolios from the reporting date. The assumptions in this scenario and relativities to the base case scenario will be monitored having regard to the emerging economic conditions and updated where necessary. The upside scenario represents a modest improvement to the base case. The following sensitivity table shows the reported provision for ECL based on the probability weighted scenarios and what the provision for ECL would be assuming a 100% weighting is applied to the base case scenario and to the downside scenario (with all other assumptions, including customer risk grades, held constant). 1. Included in 2020 is $577 million related to COVID-19. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  214 Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) $m Reported probability-weighted ECL 100% base case ECL 100% downside ECL Consolidated 2020 2019 Parent Entity 2020 2019 6,132 4,750 8,315 3,913 2,748 7,065 5,172 4,051 6,956 3,378 2,387 6,067 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 $296 million (2019: $236 million) for the Group and $266 million (2019: $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. The following table indicates the weightings applied by the Group and Parent Entity: Macroeconomic scenario weightings (%) Upside Base Downside 2020 5.0 55.0 40.0 2019 10.0 62.5 27.5 The increase in weighting to the downside scenario since 30 September 2019 reflects the continuing uncertainty around the economic assumptions used in the base case and the asymmetric impact of downside tail risk on ECL. In particular, the current base case economic forecast indicates a relatively short and sharp economic impact followed by a subsequent recovery. There is a risk that the economic impacts of COVID-19 could be deeper or more prolonged which would result in higher credit losses than those modelled under the base case. The COVID-19 pandemic is leading to material structural shifts in the behaviour of the economy and customers, and unprecedented actions by banks, governments and regulators in response. ECL models are expected to be subject to a higher than usual level of uncertainty during this period. In this environment there is a heightened need for the application of judgement in order to reflect these evolving relationships and risks. This judgement has been applied in the form of the revision to scenario weightings and a COVID-19 overlay. COVID-19 overlay Where there is increased uncertainty regarding the required forward-looking economic conditions under AASB 9, or limitations of the historical data used to calibrate the models to current stressed environments, overlays are typically used to address areas of potential risk not captured in the underlying modelled ECL. The COVID-19 pandemic has had, and continues to have, an impact on businesses around the world and the economic environments in which they operate. There also exists significant uncertainty regarding the duration and severity of COVID-19 impacts and the associated disruption to the economy and our customers. While the impacts on the broader economy are included in the assumptions used in the economic scenarios and the weightings applied to these scenarios, these general economy wide impacts may not fully reflect the specific impact on individual customers, and therefore the potential risk is not captured in the underlying modelled ECL. As overlays require the application of expert judgment, they are documented and subject to comprehensive internal governance and oversight. The Group’s COVID-19 overlay as of September 2020 is $577 million, of which, $404 million relates to COVID-19 deferral packages. The deferral of payments by customers in hardship arrangements is generally treated as an indication of a significant increase in credit risk (SICR) but the deferral of payments under the current COVID-19 support packages for mortgages, personal and business loans has not, in isolation, been treated as an indication of SICR. As highlighted by the IASB in its guidance document ‘IFRS 9 and COVID-19’ issued on 27 March 2020, in these changed circumstances it is not appropriate to apply previously established approaches to assessing significant increase in credit risk (‘SICR’) for payment holidays in a mechanistic manner. These relief packages are available to customers who require assistance because of COVID-19 and who otherwise had up to date payment status prior to the onset of COVID-19. The relief packages allow for a deferral of payments for up to 6 months. During this period, the deferred interest will be capitalised and the deferred principal along with the capitalised interest, will be repaid over the remaining term of the loan. These packages have been designed to provide short-term cash flow support while the most significant COVID-19 restrictions are in place. A further extension allowing for up to an additional 4 month deferral up to 31 March 2021 has been announced. The extension will not be automatic and will require up-to-date financial information on each borrower to confirm that there is a reasonable prospect to repay the loan. As the situation has evolved since March 2020, the Group has classified the deferral packages into different categories of risk. Each of these categories are assigned a corresponding AASB 9 staging level based on whether SICR is deemed to have occurred because of the increased likelihood of a risk of default. The group has identified a proportion of deferral packages as higher credit risk and has identified a SICR event to have occurred on these customers. An overlay estimation has been done on this base of customers. We continue to monitor our lending portfolios closely and reassess our provisioning levels as the situation around COVID-19 evolves. At the cessation of the COVID-19 support packages, it is likely that some customers will move into general hardship arrangements (Stage 2). Exposures allocated to Stage 3 relies only on observable evidence of default. WESTPAC GROUP 2020 ANNUAL REPORT 215 Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) Business lending (including institutional) The business lending overlay relates to the increased credit risk relating to a portion of small business and transaction managed (<$10 million TCE) customers currently on COVID-19 relief packages or still to be reviewed. Based on this judgement we have identified $2.4 billion for the Group and $1.3 billion for the Parent Entity of business portfolio exposures on which a lifetime ECL overlay has been determined. This has resulted in a $223 million overlay for the Group and $140 million overlay for the Parent Entity for business lending exposures which is included in Stage 2 provision. Retail lending The retail lending overlay relates to the increased credit risk relating to a portion of housing and personal customers currently on COVID-19 relief packages. Customers with packages have been segmented into different categories of risk based on how these customers are expected to perform following the expiry of the package. Customers assessed to be high risk have been considered for an overlay estimation and a lifetime ECL overlay has been determined for these customers. We have identified $7.5 billion for the Group and $5.7 billion for the Parent Entity of retail exposures on which a lifetime ECL overlay has been determined. This has resulted in a $354 million overlay for the Group and $298 million for the Parent entity which is included in Stage 2 provision. The judgements and assumptions used in estimating the above overlays will be reviewed and refined as both the COVID-19 pandemic and portfolio evolves. Impact of changes in credit exposures on the provision for ECL • Stage 1 exposures had a net decrease of $52.9 billion (2019: net increase of $7.6 billion) for the Group and $51.9 billion (2019: net increase of $4.1 billion) for the Parent Entity primarily driven by decreases in housing and business segments. The decrease is impacted by underlying balance reduction as well as an additional $31.3 billion transferred to Stage 2 to account for staging methodology changes and TCE associated with overlays. Stage 1 ECL has increased mainly from impacts from revised macro-economic forecasts and weightings. • • Stage 2 credit exposures increased by $34.3 billion (2019: decreased by $2.1 billion) for both the Group and the Parent Entity mainly driven by increases from the business segment and the impact of the additional $31.3 billion transferred to Stage 2 to account for staging methodology changes and TCE associated with overlays. The Stage 2 underlying exposure increase has been driven by the business segment resulting from credit reviews in the portfolio. Stage 2 ECL has increased driven by the COVID-19 overlay, impacts from revised macro-economic forecasts/weightings and underlying increase in Stage 2 exposures. Stage 3 credit exposures had a net increase of $4.5 billion (2019: $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 the housing portfolio. The increase in Stage 3 exposures is in line with increase in 90 days past due for the home loan portfolio. Stage 3 ECL has increased in line with the increase in Stage 3 exposures. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  216 Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) COVID-19 deferral packages The customers with deferral of payments under COVID-19 support packages for mortgages and business loans at 30 September 2020 is $35.6 billion. These loans and the related provision for ECL can be disaggregated as follows: $m Housing loans Stage 1 Stage 2 Stage 3 Total housing loans Personal loans Stage 1 Stage 2 Stage 3 Total personal loans Business loans Stage 1 Stage 2 Stage 3 Total business loans Total loans Stage 1 Stage 2 Stage 3 Total loans Consolidated TCE Provision for ECL Parent Entity TCE Provision for ECL 18,053 11,811 93 29,957 275 145 6 426 3,147 1,993 101 5,241 21,475 13,949 200 35,624 (17) (371) (12) 14,970 10,779 46 (400) 25,795 (8) (60) (5) (73) (17) (181) (19) (217) (42) (612) (36) 243 120 3 366 2,846 1,839 78 4,763 18,059 12,738 127 (690) 30,924 (11) (339) (4) (354) (7) (51) (2) (60) (17) (179) (12) (208) (35) (569) (18) (622) If the balance of COVID support packages in Stage 1 moved to Stage 2 the Group estimates that the provision for ECL would increase by $0.9 billion for the Group and $0.8 billion for the parent entity. The COVID-19 support packages provided to customers who were in Stage 2/3 at the time of the modification was $4 billion, of which $0.7 billion have moved to Stage 1. WESTPAC GROUP 2020 ANNUAL REPORT 217 Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) Investment Securities – debt securities The following table reconciles the provision for ECL on debt securities. $m Consolidated Provision for impairment charges as at 30 September 2018 Restatement for adoption of AASB 9 Restated provision for ECL on investment securities - debt securities 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 Stage 1 - change in the provision during the year Stage 2 - change in the provision during the year Total provision for ECL on investment securities - debt securities as at 30 September 2020 Parent Entity Provision for impairment charges as at 30 September 2018 Restatement for adoption of AASB 9 Restated provision for ECL on investment securities - debt securities 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 Stage 1 - change in the provision during the year Stage 2 - change in the provision during the year Total provision for ECL on investment securities - debt securities as at 30 September 2020 Debt securities at amortised Total investment securities - debt cost securities Debt securities at FVOCI1 - 2 2 - 2 2 - 4 - 2 2 - 2 2 - 4 - 9 9 - 9 (9) 27 27 - - - - - - - - - 11 11 - 11 (7) 27 31 - 2 2 - 2 2 - 4 As 2018 comparatives were not restated for the Group’s adoption of AASB 9 in 2019, the following table reconciles the provisions for impairment charges on loans and credit commitments based on the requirements of AASB 139. $m Individually assessed provisions Balance as at beginning of year Provisions raised Write-backs Write-offs Interest adjustment Other adjustments Balance as at end of year Collectively assessed provisions Balance as at beginning of year Provisions raised Write-offs Interest adjustment Other adjustments Balance as at end of year Total provisions for impairment charges on loans and credit commitments Less provision for credit commitments (refer to Note 27) Total provision for impairment charges on loans Consolidated 2018 480 371 (150) (269) (11) 1 422 2,639 668 (858) 179 3 2,631 3,053 (239) 2,814 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. Impairment on debt securities at FVOCI is recognised in the income statement with a corresponding amount in OCI (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). WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  218 Notes to the financial statements Note 13. Provisions for expected credit losses/impairment charges (continued) The following table presents provisions for ECL (as at 30 September 2020 and 2019) and provision for impairment charges (as at 30 September 2018, 2017 and 2016) on loans and credit commitments by industry classification: 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 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 provisions for ECL/ Impairment charges on loans and credit commitments 2020 2019 2018 2017 2016 $m % $m % $m % $m % $m % 222 153 268 104 193 67 378 394 289 394 188 34 3.6 2.5 4.4 1.7 3.1 1.1 75 93 148 55 111 36 6.2 216 6.4 4.7 6.4 3.1 0.6 230 175 242 109 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 2,396 39.1 1,890 48.3 1,200 39.3 1,229 39.4 1,102 30.6 191 3.1 109 2.8 106 3.5 92 2.9 138 5,271 86.0 3,506 89.6 2,644 86.6 2,692 86.3 3,064 4 110 12 2 45 - 34 7 13 16 4 2 352 8 609 252 0.1 1.8 0.2 - 0.7 - 0.6 0.1 0.2 0.3 0.1 - 5.7 0.1 9.9 4.1 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 0.1 2.5 0.5 0.1 0.9 - 0.9 0.2 0.3 0.7 0.2 0.1 4.3 - 2 93 9 3 24 1 38 11 14 17 5 3 130 - 329 10.8 350 80 2.6 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 12.4 93 2.5 6,132 100.0 3,913 100.0 3,053 100.0 3,119 100.0 3,602 100.0 3.8 85.1 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 WESTPAC GROUP 2020 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: 219 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 2020 2019 2018 2017 2016 (6) (13) (16) (2) (14) (4) (49) (16) (6) (11) (18) (4) (12) (4) (13) (4) (12) (1) (31) (24) (7) (62) (14) (1) (14) (12) (23) (4) (12) (14) (39) (44) (24) (56) (17) (1) (873) (4) (903) (10) (793) (5) (38) (10) (30) (6) (105) (46) (76) (203) (97) (59) (17) - (898) (17) (1,036) (1,098) (1,058) (1,602) - - - - - - (4) - - (1) - - (31) - (36) (98) - (2) - - - - - - - (2) - - (50) - (54) (2) - - (1) - - - (13) - (1) (1) - - (53) - (69) - - - (1) - - - (2) - - (1) - - (49) - (53) (1) (17) (12) (20) (13) (21) (18) (44) (43) (36) (30) (48) (1) (803) (13) (1,119) - (1) (1) - - - (10) (2) - (1) - - (51) (1) (67) (3) (1,170) (1,154) (1,127) (1,656) (1,189) Write-offs still under enforcement activity The amount of current year write-offs which remain subject to enforcement activity was $1,127 million (2019: $1,093 million) for the Group and $1,062 million (2019: $962 million) for the Parent Entity. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  220 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 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 assets $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 2020 2019 2018 2017 2016 1 1 4 2 1 - 3 2 1 5 1 - 157 - 178 15 - 193 - - 1 - 1 - 8 1 - 2 1 - 135 5 154 18 - 172 (1,170) (977) (1,154) (982) Consolidated 2020 905 2,358 992 299 630 170 120 1 - 1 1 - 1 7 1 1 2 1 - 139 - 155 24 - 179 (1,127) (948) 2019 1,144 1,687 998 514 750 159 115 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 (1,656) (1,488) (1,189) (1,052) Parent Entity 2020 2019 797 2,352 502 295 558 117 124 1,005 1,668 517 510 706 95 114 5,474 5,367 4,745 4,615 WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements 221 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 of 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. Life insurance contract liability adequacy test Life insurance contract policy liabilities are tested for liability adequacy by comparing them to the best estimate of future cash flows. Liabilities are grouped into related product groups and each group is tested against the best estimate of future cash flows. If the liability of a related product group is less than best estimate the liability is increased with the expense being recognised in non-interest income. 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  222 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 2020 2019 333 6,764 - 2,818 442 989 1,589 25 3,593 9,367 There were no life insurance assets in the Parent Entity as at 30 September 2020 (2019: nil). Life insurance liabilities Consolidated Reconciliation of movements in policy liabilities $m Balance as at beginning of year 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 Balance as at end of year Life investment contracts 2020 2019 8,206 8,438 221 368 (8,322) (44) 1,458 1,887 504 898 (1,218) (73) (343) 8,206 Life insurance contracts 2020 (829) 2019 (841) 338 12 - - - - - - - - (491) (829) Total 2020 2019 7,377 7,597 559 368 (8,322) (44) 1,458 1,396 516 898 (1,218) (73) (343) 7,377 There were no life insurance liabilities in the Parent Entity as at 30 September 2020 (2019: nil). WESTPAC GROUP 2020 ANNUAL REPORT 223 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 OCI 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 Total deposits and other borrowings Consolidated 2020 2019 Parent Entity 2020 2019 25,647 26,259 25,647 26,259 48,303 43,341 48,303 43,341 304,761 247,161 304,761 247,161 125,820 158,564 125,820 158,564 504,531 475,325 504,531 475,325 2,773 10,711 1,058 6,368 26,300 22,291 28,689 31,084 68,473 60,801 - - - 1 1 - - - - - 7,258 868 1,864 8,137 18,127 11,414 824 1,610 13,273 27,121 7,258 333 1,559 7,931 11,414 385 1,233 13,073 17,081 26,105 591,131 563,247 521,613 501,430 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  224 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, repayable at call Certificates of deposit Other interest bearing at call Other interest bearing term Total Australia Overseas Non-interest bearing, repayable at call Certificates of deposit Other interest bearing at call Other interest bearing term Total overseas 2020 2019 2018 Average balance $m Average rate % Average balance $m Average rate % Average balance $m Average rate % 45,231 25,041 275,475 135,361 481,108 9,661 14,376 25,999 42,381 92,417 0.8 0.5 1.5 1.4 0.5 2.3 42,455 30,367 237,420 158,012 468,254 6,815 11,854 23,616 45,520 87,805 41,156 2.0 31,424 1.1 228,328 2.4 162,254 463,162 2.6 1.1 3.0 6,021 13,008 23,017 41,942 83,988 2.0 1.2 2.5 1.9 1.2 2.8 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 2020 $m Certificates of deposit greater than US$100,000 Term deposits greater than US$100,000 Up to 3 months 13,363 61,663 Over 3 months to 6 months 11,440 18,001 Over 6 months to 1 year 817 24,315 Over 1 year 27 4,540 Total 25,647 108,519 WESTPAC GROUP 2020 ANNUAL REPORT 225 Notes to the financial statements Note 17. Other financial liabilities 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 FVIS (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 in 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 OCI 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 2020 2019 Parent Entity 2020 2019 27,763 10,604 27,763 10,604 4,981 1,367 2,291 1,250 1,005 846 1,422 9,884 2,627 1,398 1,154 1,222 766 1,560 4,710 1,169 2,291 1,045 989 846 1,343 9,834 2,312 1,395 927 1,197 766 1,481 40,925 29,215 40,156 28,516 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  226 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 OCI 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) Balance at beginning of year Issuances Maturities, repayments, buy backs and reductions Total cash movements FX translation impact Fair value adjustments Fair value hedge accounting adjustments Other (amortisation of bond issue costs, etc) Total non-cash movements Balance as at end of year Consolidated 2020 2019 Parent Entity 2020 2019 16,477 25,838 14,160 23,695 16,477 25,838 14,160 23,695 36,051 38,037 31,926 33,160 89,766 109,340 81,580 99,819 8,000 8,190 31 52 - - - - 133,848 155,619 113,506 132,979 150,325 181,457 127,666 156,674 181,457 172,596 156,674 152,288 34,766 61,484 27,487 50,375 (65,160) (63,313) (55,761) (56,347) (30,394) (1,829) (28,274) (5,972) (1,977) 6,713 (2,005) 6,514 81 1,038 120 317 3,512 148 81 318 1,076 3,376 114 150 (738) 10,690 (734) 10,358 150,325 181,457 127,666 156,674 WESTPAC GROUP 2020 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 year end 227 2020 2019 13,864 19,950 - 100 2,437 5,366 176 422 16,477 25,838 16,477 25,838 36,062 43,532 3,177 3,480 34,498 37,464 3,440 2,439 3,519 5,545 2,538 3,197 45,917 54,490 4,796 5,373 133,848 155,619 2020 2019 2018 21,639 26,879 28,331 18,462 22,502 23,315 1.4 0.4 2.8 3.2 2.0 2.5 The Group manages FX exposure from debt issuances as part of its hedging activities. Further details of the Group’s hedge accounting are in Note 20. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  228 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 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) Balance as at beginning of year Issuances Maturities, repayments, buy backs and reductions Total cash movements FX translation impact Fair value hedge accounting adjustments Other (amortisation of bond issue costs, etc) Total non-cash movements Balance as at end of year Consolidated and Parent Entity 2020 2019 7,423 1,941 7,411 1,913 9,364 9,324 14,090 11,981 495 521 14,585 12,502 23,949 21,826 21,826 17,265 2,225 (262) 1,963 (564) 703 21 160 4,935 (1,662) 3,273 521 748 19 1,288 23,949 21,826 WESTPAC GROUP 2020 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 Potential scheduled Optional $m Distribution Interest rate conversion date2 redemption date3 2020 2019 229 Westpac capital notes (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$1,250 million securities (90 day bank bill rate + 3.05% p.a.) x (1 - Australian corporate tax rate) (90 day bank bill rate + 4.00% p.a.) x (1 - Australian corporate tax rate) (90 day bank bill rate + 4.90% p.a.) x (1 - Australian corporate tax rate) (90 day bank bill rate + 3.20% p.a.) x (1 - Australian corporate tax rate) (90 day bank bill rate + 3.70% p.a.) x (1 - Australian corporate tax rate) 23 September 2024 23 September 2022 1,307 1,308 22 March 2023 22 March 2021 1,323 1,319 20 December 2023 20 December 2021 1,698 1,694 22 September 2027 22 September 2025 1,680 1,677 31 July 2026 31 July 2024 1,415 1,413 7,423 7,411 n/a 21 September 20275 1,941 1,913 5.00% p.a. until but excluding 21 September 2027 (first reset date). If not redeemed, converted or written- off earlier, from, and including, each reset date4 to, but excluding, the next succeeding reset date at a fixed rate p.a. equal to the prevailing 5-year USD midmarket swap rate plus 2.89% p.a. Total USD AT1 securities 1,941 1,913 Common features of AT1 instruments Payment conditions Quarterly distributions on the Westpac capital notes and semi-annual interest payments on the USD AT1 securities are discretionary and will only be paid if the payment conditions are satisfied, including that the payment will not result in a breach of Westpac’s capital requirements under APRA’s prudential standards; not result in Westpac becoming, or being likely to become, insolvent; or if APRA does not object to the payment. Broadly, if for any reason a distribution or interest payment has not been paid in full on the relevant payment date, Westpac must not determine or pay any dividends on Westpac ordinary shares or undertake a discretionary buy back or capital reduction of Westpac ordinary shares, unless the unpaid amount is paid in full within 20 business days of the relevant payment date or in certain other circumstances. 1. 2. 3. 4. 5. A$ unless otherwise noted. 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. Westpac may elect to redeem the relevant AT1 instrument, subject to APRA’s prior written approval. Every fifth anniversary thereafter is a reset date. Westpac may elect to redeem on 21 September 2027 and every fifth anniversary after the first reset date is a reset date.. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  230 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. 2. 3. Scheduled conversion does not apply to USD AT1 securities. Level 1 comprises Westpac Banking Corporation and its subsidiary entities that have been approved by APRA as being part of a single ‘Extended Licenced Entity’ for the purpose of measuring capital adequacy. Level 2 is the consolidation of Westpac Banking Corporation and all its subsidiary entities except those entities specifically excluded by APRA regulations. The head of the Level 2 group is Westpac Banking Corporation. Excludes USD AT1 securities. WESTPAC GROUP 2020 ANNUAL REPORT 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: 231 Consolidated and Parent Entity $m Interest rate2 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 US$1,500 million subordinated notes 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. Maturity date redemption date3 2020 2019 Optional 9 February 2025 9 February 20204 - 260 11 March 2027 11 March 2022 361 362 12 August 2027 12 August 2022 347 356 14 June 2028 14 June 2023 185 182 23 February 2046 n/a 175 161 Floating 90 day bank bill rate + 3.10% p.a. 10 March 2026 10 March 2021 700 697 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 270 279 137 142 134 139 1 September 2026 1 September 2021 376 373 7 October 2026 7 October 2021 107 110 23 November 2031 23 November 2026 2,320 2,297 6 July 2027 6 July 2022 161 166 6 July 2027 6 July 2022 181 187 14 July 2027 14 July 2022 111 114 16 August 2029 16 August 2024 349 349 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 130 130 90 day bank bill rate + 1.80% p.a. 22 June 2028 22 June 2023 714 724 Fixed 4.421% p.a. 24 July 2039 n/a 1,707 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. 2.894% p.a. until but excluding 4 February 2025. Thereafter, if not redeemed, a fixed rate per annum equal to the five-year USD treasury rate plus 1.35% p.a. 24 July 2034 24 July 2029 1,970 1,921 27 August 2029 27 August 2024 1,000 991 4 February 2030 4 February 2025 2,220 - Total subordinated notes 14,090 11,981 1. 2. 3. 4. Excludes subordinated perpetual notes. Interest payments are made periodically as set out in the terms of the subordinated notes. 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 with an optional redemption date in November 2026, US$1,250 million subordinated notes with an optional redemption date in July 2029 and US$1,500 million subordinated notes with an optional redemption date in February 2025), subject to APRA’s prior written approval. The subordinated notes were redeemed in full on the optional redemption date. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  232 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. WESTPAC GROUP 2020 ANNUAL REPORT 233 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 (ALM) activities, 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 ALM 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 OCI 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 OCI. 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 OCI is immediately recognised in net interest income. Net investment hedges Net investment hedges are used to hedge FX 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 OCI. 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 OCI is immediately recognised in non-interest income. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  234 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 2020 $m Interest rate contracts1 Forward rate agreements Swap agreements Options Total interest rate contracts FX contracts Trading Hedging Total derivatives carrying value Assets Liabilities Assets Liabilities Assets Liabilities 14 (14) - - 14 (14) 44,366 (42,724) 5,916 (10,331) 50,282 (53,055) 161 (165) - - 161 (165) 44,541 (42,903) 5,916 (10,331) 50,457 (53,234) Spot and forward contracts 5,595 (4,797) 61 (46) 5,656 (4,843) Cross currency swap agreements (principal and interest) Options Total FX contracts Credit default swaps Credit protection bought Credit protection sold Total credit default swaps Commodity contracts Equities Total of gross derivatives Impact of netting arrangements Total of net derivatives Consolidated 2019 $m Interest rate contracts1 Forward rate agreements Swap agreements Options Total interest rate contracts FX contracts 4,977 (8,872) 1,450 (141) 6,427 383 (200) - - 383 (9,013) (200) 10,955 (13,869) 1,511 (187) 12,466 (14,056) - 57 57 352 3 (59) - (59) (204) - - - - - - - - - - - - 57 57 352 3 (59) - (59) (204) - 55,908 (57,035) 7,427 (10,518) 63,335 (67,553) (34,402) 34,819 (5,566) 9,680 (39,968) 44,499 21,506 (22,216) 1,861 (838) 23,367 (23,054) 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 Total FX contracts Credit default swaps Credit protection bought Credit protection sold Total credit default swaps Commodity contracts Equities Total of gross derivatives Impact of netting arrangements Total of net derivatives 8,934 (12,478) 2,172 200 (111) - (69) - 11,106 (12,547) 200 (111) 15,991 (18,982) 2,353 (72) 18,344 (19,054) - 83 83 251 1 (88) - (88) (187) (1) - - - - - - - - - - - 83 83 251 1 (88) - (88) (187) (1) 55,038 (56,648) (27,968) 28,703 6,426 (3,637) (7,640) 61,464 (64,288) 6,489 (31,605) 35,192 27,070 (27,945) 2,789 (1,151) 29,859 (29,096) 1. The fair value of futures contracts is settled daily with the exchange, and therefore have been excluded from this table. WESTPAC GROUP 2020 ANNUAL REPORT 235 Notes to the financial statements Note 20. Derivative financial instruments (continued) Parent Entity 2020 $m Interest rate contracts1 Forward rate agreements Swap agreements Options Total interest rate contracts FX contracts Trading Hedging Total derivatives carrying value Assets Liabilities Assets Liabilities Assets Liabilities 14 (14) - - 14 (14) 44,511 (43,108) 5,749 (9,807) 50,260 (52,915) 161 (165) - - 161 (165) 44,686 (43,287) 5,749 (9,807) 50,435 (53,094) Spot and forward contracts 5,641 (4,821) 14 (19) 5,655 (4,840) Cross currency swap agreements (principal and interest) Options Total FX contracts Credit default swaps Credit protection bought Credit protection sold Total credit default swaps Commodity contracts Equities Total of gross derivatives Impact of netting arrangements Total of net derivatives Parent Entity 2019 $m Interest rate contracts1 Forward rate agreements Swap agreements Options Total interest rate contracts FX contracts 4,977 (8,872) 383 (200) 11,001 (13,893) 900 - 914 (9) - 5,877 383 (8,881) (200) (28) 11,915 (13,921) - 57 57 352 3 (59) - (59) (204) - - - - - - - - - - - - 57 57 352 3 (59) - (59) (204) - 56,099 (57,443) (34,521) 35,175 21,578 (22,268) 6,663 (5,447) 1,216 (9,835) 62,762 (67,278) 9,324 (39,968) 44,499 (511) 22,794 (22,779) 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 FX contracts Credit default swaps Credit protection bought Credit protection sold Total credit default swaps Commodity contracts Equities Total of gross derivatives Impact of netting arrangements Total of net derivatives 8,934 (12,479) 1,613 200 (111) - 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) (27,968) 28,703 27,306 (28,329) 5,614 (3,637) 1,977 (7,027) 60,888 (64,059) 6,489 (31,605) 35,192 (538) 29,283 (28,867) 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. The fair value of futures contracts is settled daily with the exchange, and therefore have been excluded from this table. WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  236 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 and FX risks 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 may arise from timing or discounting 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 may arise from timing or discounting 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. FX 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 timing or discounting differences on repricing between the hedged item and the cross currency derivative. WESTPAC GROUP 2020 ANNUAL REPORT 237 Notes to the financial statements Note 20. Derivative financial instruments (continued) Net investment hedges FX risk Structural FX 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 FX 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 FX forward contracts exceed the net investment in New Zealand operations. Economic hedges As part of the Group’s ALM activities, economic hedges may be 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 the income statement 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. Interest Rate Benchmark Reform The Group’s hedging relationships include hedged items and hedging instruments that are impacted by IBOR reform. As described in Note 1, the Group has early adopted AASB 2019-3 which allows certain exceptions to the standard hedging requirements in respect of hedge relationships that are impacted by this benchmark reform. The table below summarises the exposures Westpac currently has in hedging relationships maturing after 31 December 2021 which will be impacted by the IBOR reform and the quantum of those risks expressed in AUD equivalent values. The extent of the risk exposure also reflects the notional amounts of related hedging instruments. Benchmark A$bn US LIBOR GBP LIBOR CHF LIBOR JPY LIBOR Notional hedged exposure Consolidated Parent Entity 40 2 2 1 40 2 2 1 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  238 Notes to the financial statements Note 20. Derivative financial instruments (continued) 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 2020 $m One-to-one hedge relationships Hedging instrument Hedged risk Notional amounts Over 1 year to 5 years Within 1 year Over 5 years Carrying value Total Assets Liabilities Fair value hedges Interest rate swap Interest rate risk 16,748 60,258 56,979 133,985 4,395 (8,810) Cash flow hedges Cross currency swap FX risk 5,877 9,590 Cross currency swap Interest rate risk 4,668 8,381 1,615 1,615 14,664 355 17,082 1,095 Net investment hedges Forward contracts FX risk 6,320 - - 6,320 61 - (141) (46) 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 Consolidated 2019 $m One-to-one hedge relationships Hedging instrument Hedged risk 33,613 78,229 60,209 172,051 5,906 (8,997) 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 n/a n/a n/a 19,907 - (187) 174,611 1,521 (1,334) 194,518 366,569 1,521 7,427 (1,521) (10,518) n/a n/a (5,566) 9,680 1,861 (838) Notional amounts Over 1 year to 5 years Within 1 year 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) Cash flow hedges Cross currency swap FX risk 5,632 15,386 1,708 22,726 1,588 Net investment hedges Forward contracts FX risk 8,152 - - 8,152 181 Cross currency swap Interest rate risk 5,632 12,870 1,708 20,210 584 (69) - (3) 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 Entity 2020 $m One-to-one hedge relationships Hedging instrument Hedged risk 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 n/a n/a n/a 18,813 - (194) 176,828 1,525 (1,702) 195,641 1,525 373,029 6,426 (3,637) n/a (1,896) (7,640) 6,489 n/a 2,789 (1,151) Notional amounts Over 1 year to 5 years Within 1 year Over 5 years Carrying value Total Assets Liabilities Fair value hedges Interest rate swap Interest rate risk 16,125 58,628 56,979 131,732 4,390 (8,644) Cross currency swap Interest rate risk 2,981 4,284 1,286 8,551 Cash flow hedges Cross currency swap FX risk 2,981 4,284 1,286 8,551 Net investment hedges Forward contracts FX risk 1,240 - - 1,240 252 648 14 - (9) (19) 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 23,327 67,196 59,551 150,074 5,304 (8,672) 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 162,033 1,359 (1,163) n/a 162,033 1,359 (1,163) n/a 312,107 6,663 (9,835) n/a n/a n/a n/a (5,447) 9,324 1,216 (511) WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 20. Derivative financial instruments (continued) Parent Entity 2019 $m One-to-one hedge relationships Hedging instrument Hedged risk 239 Notional amounts Over 1 year to 5 years Within 1 year 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 4,473 7,185 1,384 13,042 441 Cash flow hedges Cross currency swap FX risk 4,473 7,185 1,384 13,042 1,172 Net investment hedges Forward contracts FX risk 2,315 - - 2,315 46 - (6) (3) 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 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 1,420 (1,543) n/a 166,978 1,420 (1,543) n/a 317,423 5,614 (7,027) n/a n/a n/a n/a (3,637) 6,489 1,977 (538) The following tables show the weighted average FX rate related to significant hedging instruments in one-to-one hedge relationships. Consolidated Weighted average rate Hedging instrument Hedged risk Currency pair Cash flow hedges Cross currency swap FX risk Net investment hedges Forward contracts FX risk EUR:AUD JPY:AUD EUR:NZD HKD:NZD NZD:AUD 2020 0.6687 81.4507 0.6160 4.9670 1.0838 Parent Entity Weighted average rate Hedging instrument Hedged risk Currency pair Cash flow hedges Cross currency swap FX risk Net investment hedges Forward contracts FX risk EUR:AUD JPY:AUD CNH:AUD NZD:AUD 2020 0.6687 81.4507 4.9492 1.0904 2019 0.6929 81.4507 0.6079 4.9670 1.0545 2019 0.6929 81.4507 4.9328 1.0546 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  240 Notes to the financial statements Note 20. Derivative financial instruments (continued) Impact of hedge accounting in the balance sheets 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 fair value hedge accounting adjustments (FVHA). Consolidated $m Interest rate risk Investment securities Loans Debt issues and loan capital Parent Entity $m Interest rate risk Investment securities Loans Debt issues and loan capital 2020 2019 Carrying amount of hedged item FVHA included in carrying amount Carrying amount of hedged item FVHA included in carrying amount 68,862 20,290 (96,605) 3,285 140 (4,559) 53,273 19,235 (100,909) 2,815 133 (2,818) 2020 2019 Carrying amount of hedged item FVHA included in carrying amount Carrying amount of hedged item FVHA included in carrying amount 66,529 251 (90,287) 3,175 8 49,132 421 (4,440) (93,296) 2,704 5 (2,661) There were no (2019: nil) FVHA 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 $m Cash flow hedge reserve Balance as at beginning of year Net gains/(losses) from changes in fair value Transferred to interest income Balance as at end of year Parent Entity $m Cash flow hedge reserve Balance as at beginning of year Net gains/(losses) from changes in fair value Transferred to interest income Balance as at end of year Interest rate risk 2020 FX risk (99) (1) 173 73 (83) (94) 45 (132) 2020 Interest rate risk Foreign exchange risk (70) 16 137 83 (22) (44) 13 (53) Interest rate risk (87) (158) 146 (99) 2019 FX risk (89) (45) 51 (83) Interest rate risk 2019 FX risk (42) (130) 102 (70) (57) 9 26 (22) Total (182) (95) 218 (59) Total (92) (28) 150 30 Total (176) (203) 197 (182) Total (99) (121) 128 (92) There were $43 million (2019: nil) 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 gains from changes in the fair value of net investment hedges were $9 million (2019: net losses $129 million) for the Group and $17 million (2019: net losses $52 million) for the Parent Entity. Included in the foreign currency translation reserve is a loss of $210 million (2019: $210 million) for the Group and $214 million (2019: $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. WESTPAC GROUP 2020 ANNUAL REPORT 241 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 2020 $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 Fair value hedges Interest rate swap Interest rate risk 1,403 (1,372) Cross currency swap Interest rate risk Cash flow hedges Interest rate swap Interest rate risk Net investment hedges Forward contracts FX risk Cross currency swap FX risk Total 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 FX risk Cross currency swap FX risk Total Parent Entity 2020 $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 FX risk Cross currency swap FX risk Total Parent Entity 2019 $m Hedging instrument Hedged risk (110) 230 (49) 9 108 (172) 49 (9) 1,483 (1,396) Change in fair value of hedging instrument used for calculating ineffectiveness Change in value of the hedged item used for calculating ineffectiveness 1,532 192 (6) 6 (129) 1,595 (1,512) (190) 12 (6) 129 (1,567) Change in fair value of hedging instrument used for calculating ineffectiveness Change in value of the hedged item used for calculating ineffectiveness 1,408 (73) 200 (31) 17 (1,377) 72 (153) 31 (17) 1,521 (1,444) Change in fair value of hedging instrument used for calculating ineffectiveness Change in value of the hedged item used for calculating ineffectiveness Fair value hedges Interest rate swap Interest rate risk 1,684 (1,664) Cross currency swap Interest rate risk Cash flow hedges Interest rate swap Interest rate risk Net investment hedges Forward contracts FX risk Cross currency swap FX risk Total 56 (21) 35 (52) (57) 28 (35) 52 1,702 (1,676) 31 (2) 58 - n/a 87 n/a n/a n/a n/a - - Hedge ineffectiveness recognised in interest income Hedge ineffectiveness recognised in non-interest income 20 2 6 - n/a 28 n/a n/a n/a n/a - - Hedge ineffectiveness recognised in interest income Hedge ineffectiveness recognised in non-interest income 31 (1) 47 - n/a 77 n/a n/a n/a n/a - - Hedge ineffectiveness recognised in interest income Hedge ineffectiveness recognised in non-interest income 20 (1) 7 - n/a 26 n/a n/a n/a n/a - - 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Notes to the financial statements 242 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. 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 or equity price. 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 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 Committee (BRiskC) 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. WESTPAC GROUP 2020 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 243 Credit risk • • • • • • • • • • • • • • The Credit Risk Management Framework describes the principles, methodologies, systems, roles and responsibilities, reports and key controls for managing credit risk. The BRiskC, 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 BRiskC and CREDCO. Specific credit risk estimates (including PD, LGD and 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 ECL, 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. Climate change related credit risks are considered in line with our Climate Change Position Statement (CCPS). The CCPS outlines 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. The Climate Change Risk Committee oversees work to identify and manage the potential impact on credit exposures from climate change-related transition and physical risks across the Group and reports to CREDCO. The Group’s Environmental, Social and Governance (ESG) Credit Risk Policy details the Group’s overall approach to managing ESG risks in the credit risk process for applicable transactions 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  244 Notes to the financial statements Note 21. Financial risk (continued) Risk Risk management framework and controls 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 the Liquidity Risk Management Framework is delegated to Treasury, under the oversight of Group ALCO and Treasury 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 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 the Group’s Treasury and Treasury Risk teams. Liquidity reports are presented to Group ALCO monthly and to the Board quarterly. WESTPAC GROUP 2020 ANNUAL REPORT 245 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, FX, 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 BRiskC approves the risk appetite for traded and non-traded risks through the use of VaR, NaR and specific structural risk limits. This includes separate VaR sub-limits for the trading activities of Financial Markets and Treasury and for non-traded 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 and Treasury Risk units, which monitor 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 Westpac Group Market Risk Committee (MARCO), RISKCO and the BRiskC. Daily stress testing and backtesting of VaR results are performed to support model integrity and to analyse extreme or unexpected movements. A review of 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 BRiskC 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 Treasury Risk unit and reviewed by Banking Book Risk Committee (BBRC), MARCO, RISKCO and BRiskC. 21.2 Credit Risk Credit risk ratings system 21.2.1 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. 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 S&P Rating AAA – AA– A+ – A– Baa1 – Baa3 BBB+ – BBB– Ba1 – B1 BB+ – B+ Westpac Rating Watchlist Special Mention Substandard/Default Default 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  246 Notes to the financial statements Note 21. Financial risk (continued) 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 Loans – business1 Trading securities, financial assets measured at FVIS and derivatives Housing loans are secured by a mortgage over property and additional security may take the form of guarantees and deposits. Personal lending (including credit cards and overdrafts) is predominantly unsecured. Where security is taken, 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. 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. WESTPAC GROUP 2020 ANNUAL REPORT 247 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 Other credit enhancements Offsetting Central clearing 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 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; or protection bought via credit-linked notes (provided the proceeds are invested in cash or other eligible collateral). 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–. 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): • • • • 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. 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  248 Notes to the financial statements Note 21. Financial risk (continued) Credit risk concentrations 21.2.3 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 comprise cash and balances with central banks, collateral paid, trading securities and financial assets measured at FVIS, derivative financial instruments, 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 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: Trading securities and financial assets measured at FVIS (Note 10) Investment securities (Note 11) Loans (Note 12) Derivative financial instruments (Note 20) • • • • • • • • • 64% (2019: 45%) were issued by financial institutions for the Group; 67% (2019: 44%) for the Parent Entity. 33% (2019: 51%) were issued by government or semi-government authorities for the Group; 31% (2019: 52%) for the Parent Entity. 79% (2019: 71%) were held in Australia by the Group; 84% (2019: 75%) by the Parent Entity. 18% (2019: 24%) were issued by financial institutions for the Group; 18% (2019: 25%) for the Parent Entity. 82% (2019: 75%) were issued by government or semi-government authorities for the Group; 82% (2019: 75%) for the Parent Entity. 92% (2019: 90%) were held in Australia by the Group; 98% (2019: 97%) by the Parent Entity. Note 12 provides a detailed breakdown of loans by industry and geographic classification. 68% (2019: 72%) were issued by financial institutions for both the Group and Parent Entity. 76% (2019: 78%) were held in Australia by the Group; 78% (2019: 80%) by the Parent Entity. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 21. Financial risk (continued) 249 Consolidated $m Australia Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property Property services and business services Services Trade Transport and storage Utilities Retail lending Other Total Australia New Zealand Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property Property services and business services Services Trade Transport and storage Utilities Retail lending Other Total New Zealand Other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance Government, administration and defence Manufacturing Mining Property Property services and business services Services Trade Transport and storage Utilities Retail lending Other Total other overseas Total gross credit risk 2020 Undrawn credit commit- ments Total 1,225 2,219 9,181 12,378 3,643 10,369 2019 Undrawn credit commit- ments Total 1,070 2,014 9,131 11,264 3,340 10,569 Total on balance sheet 8,061 9,250 7,229 8,954 90,456 73,052 7,316 80,368 1,588 81,770 63,582 1,766 65,348 6,477 3,735 15,725 10,504 7,137 3,325 5,850 3,802 16,354 7,127 Total on balance sheet 7,956 10,159 6,726 81,502 80,182 9,248 3,402 45,139 10,869 56,008 45,467 10,119 55,586 12,712 11,922 7,019 7,595 19,731 19,517 14,191 5,898 20,089 12,340 6,523 18,863 13,633 10,171 23,804 16,593 7,677 24,270 9,392 6,368 5,136 4,918 14,528 11,286 9,529 5,567 5,114 14,643 4,487 10,054 454,986 84,454 539,440 467,206 84,057 551,263 6,867 2,491 9,358 6,668 2,740 9,408 760,194 160,494 920,688 752,564 151,773 904,337 389 9,158 517 12,701 7,833 1,804 208 7,433 1,033 2,168 2,025 1,249 1,809 51 632 429 440 9,790 946 1,782 14,483 865 1,782 97 977 712 853 1,510 871 1,681 8,698 3,586 305 8,410 1,745 3,021 3,535 2,120 3,490 356 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 52,645 12,596 65,241 49,542 12,056 61,598 204 182 386 151 161 312 101,176 25,020 126,196 95,791 23,075 118,866 118 124 51 19,194 4,787 1,908 352 416 1,652 218 1,555 755 952 459 129 10 5 118 128 129 169 2,243 21,437 18 4,805 3,443 1,194 27 790 698 5,351 1,546 443 2,442 916 1,931 3,486 276 615 32 27 1,031 1,567 491 156 109 150 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 3,093 20,805 23 5,669 5,329 1,872 29 863 637 2,859 652 931 37 26 9,159 2,372 522 2,629 881 5,177 1,651 2,019 901 197 32,670 11,427 44,097 35,945 16,492 52,437 894,040 196,941 1,090,981 884,300 191,340 1,075,640 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  250 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 insurance1 Government, administration and defence 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 insurance1 Government, administration and defence Manufacturing Mining Property Property services and business services Services Trade Transport and storage Utilities Retail lending Other Total New Zealand1 Other overseas Accommodation, cafes and restaurants Agriculture, forestry and fishing Construction Finance and insurance1 Government, administration and defence Manufacturing Mining Property Property services and business services Services Trade Transport and storage Utilities Retail lending Other Total other overseas1 Total gross credit risk 2020 Undrawn credit commit- ments 1,225 2,219 3,643 Total on balance sheet 7,880 10,101 6,213 Total on balance sheet 7,989 9,191 6,853 Total 9,105 12,320 9,856 2019 Undrawn credit commit- ments 1,070 2,014 3,340 Total 9,059 11,205 10,193 244,758 8,954 253,712 200,863 7,316 208,179 80,166 9,037 3,381 1,588 6,477 3,735 81,754 63,599 1,766 65,365 15,514 10,322 7,116 3,304 5,850 3,802 16,172 7,106 45,139 10,868 56,007 45,405 10,119 55,524 11,992 11,581 13,425 9,044 6,342 7,019 7,595 10,171 5,136 4,918 19,011 19,176 13,348 12,094 5,898 6,523 19,246 18,617 23,596 16,408 7,677 24,085 14,180 11,260 9,221 5,542 5,114 14,335 4,487 10,029 454,808 84,437 539,245 466,188 84,057 550,245 5,731 2,489 8,220 5,684 2,740 8,424 919,598 160,474 1,080,072 876,011 151,773 1,027,784 - 48 11 8,173 1,743 184 5 102 88 46 337 76 492 - 2 1 4 35 135 8 51 - - 16 - 157 67 83 1 - 1 52 46 8,308 1,751 235 5 102 104 46 494 143 575 1 2 - 67 17 9,501 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 9,617 2,204 328 11 120 141 47 562 140 580 13 38 11,307 558 11,865 13,349 559 13,908 81 114 46 10 1 114 91 115 160 67 130 47 10 1 125 77 131 172 20,585 2,217 22,802 19,380 3,067 22,447 3,902 1,905 330 209 1,585 196 1,417 665 896 359 118 18 3,384 1,134 10 786 695 1,754 268 511 31 14 3,920 5,289 1,464 219 2,371 891 3,171 933 1,407 390 132 4,815 3,822 497 227 1,683 216 2,140 888 1,038 588 133 23 5,269 1,869 13 862 634 4,838 9,091 2,366 240 2,545 850 2,688 4,828 643 905 32 14 1,531 1,943 620 147 32,408 10,947 43,355 35,671 16,155 51,826 963,313 171,979 1,135,292 925,031 168,487 1,093,518 1. The Parent Entity’s 2019 ‘Total on balance sheet’ and ‘Total’ amounts for Finance and Insurance have been restated for Australia, New Zealand and Other overseas locations to appropriately reflect intracompany eliminations. These restatements did not have any impact on total gross credit risk exposures. WESTPAC GROUP 2020 ANNUAL REPORT 251 Notes to the financial statements Note 21. Financial risk (continued) 21.2.4 Credit quality of financial assets Credit quality disclosures 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: Consolidated $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 2020 2019 Stage 1 Stage 2 Stage 3 Total1 Stage 1 Stage 2 Stage 3 Total1 382,892 6,629 62,324 20,603 - - 389,521 382,119 743 82,927 84,071 11,326 - - 382,862 95,397 4,122 8,258 7,643 20,023 4,201 10,715 4,367 19,283 449,338 35,490 7,643 492,471 470,391 22,784 4,367 497,542 4,768 10,607 404 146 1,515 631 15,779 2,292 65,091 2,063 94,046 16,091 - - 381 381 - - 4,914 5,694 12,122 14,538 1,416 573 2 955 831 - - 5,696 15,493 380 1,784 18,452 20,805 1,788 380 22,973 67,154 75,758 232 110,137 109,541 4,581 - - 75,990 114,122 180 7,200 3,067 10,447 439 5,342 1,970 7,751 Total loans - business 159,317 25,354 3,067 187,738 185,738 10,155 1,970 197,863 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 90,461 365 - - 90,461 39,871 470 40 40,381 - 587 952 - - - - 149,778 2,384 38,121 4,713 - - - - - - - - - - 90,826 72,813 - 463 587 - 91,413 73,276 39,871 30,623 470 40 685 48 40,381 31,356 - - - - - - - - 152,162 148,525 328 42,834 39,782 1,294 - - - - - - - - - - 72,813 463 - 73,276 30,623 685 48 31,356 148,853 41,076 117 1,608 220 1,945 142 1,135 134 1,411 Total undrawn credit commitments 188,016 8,705 220 196,941 188,449 2,757 134 191,340 Total strong Total good/satisfactory Total weak 732,861 11,587 205,568 42,922 - - 744,448 715,532 1,305 248,490 249,080 18,156 - - 716,837 267,236 4,863 18,284 11,311 34,458 5,403 18,023 6,851 30,277 Total on and off-balance sheet 943,292 72,793 11,311 1,027,396 970,015 37,484 6,851 1,014,350 Details of collateral held in support of these balances are provided in Note 21.2.6. 1. 2. This credit quality disclosure differs to that of credit risk concentration as it relates only to financial assets measured at amortised cost or at FVOCI and therefore excludes trading securities and financial assets measured at FVIS, and derivative financial instruments. Included in strong in 2019 was a $131 million exposure 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 $1,011 million (2019: $829 million) at amortised cost. $424 million (2019: $366 million) of these are classified as strong, and the rest are classified as weak. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  252 Notes to the financial statements Note 21. Financial risk (continued) Parent Entity $m Loans - housing Strong Good/satisfactory Weak Total loans - housing Loans - personal Strong Good/satisfactory Weak 2020 2019 Stage 1 Stage 2 Stage 3 Total1 Stage 1 Stage 2 Stage 3 Total1 345,662 5,805 54,065 19,001 - - 351,467 361,727 536 73,066 58,599 10,623 - - 362,263 69,222 3,066 6,467 7,195 16,728 3,735 10,244 4,076 18,055 402,793 31,273 7,195 441,261 424,061 21,403 4,076 449,540 4,292 135 10,071 1,376 - - 4,427 5,106 11,447 13,381 294 449 329 1,072 427 1 931 680 - - 5,107 14,312 334 1,441 Total loans - personal 14,657 1,960 329 16,946 18,914 1,612 334 20,860 Loans - business2 Strong Good/satisfactory Weak 53,321 1,761 77,330 13,275 - - 55,082 64,041 123 90,605 90,937 3,455 - - 64,164 94,392 135 5,899 2,589 8,623 362 3,997 1,724 6,083 Total loans - business 130,786 20,935 2,589 154,310 155,340 7,575 1,724 164,639 Debt securities Strong Good/satisfactory Weak Total debt securities3 All other financial assets Strong Good/satisfactory Weak Strong Good/satisfactory Weak Total all other financial assets 204,624 Undrawn credit commitments 85,434 324 - - - - 85,434 324 204,239 354 31 - - - - 130,494 33,552 2,111 4,117 - - - - - - - - - - 85,758 68,309 - - 23 - 85,758 68,332 204,239 162,339 354 31 496 41 204,624 162,876 132,605 132,776 37,669 33,097 - - - - - - - - 317 1,122 937 - - - - - - - - - - 68,309 23 - 68,332 162,339 496 41 162,876 133,093 34,219 115 1,175 99 1,426 180 1,705 123 Total undrawn credit commitments 164,145 7,654 180 171,979 165,996 2,376 115 168,487 Total strong Total good/satisfactory Total weak 823,442 10,136 175,372 37,769 - - 833,578 794,298 977 213,141 196,533 16,131 - - 795,275 212,664 3,625 14,241 10,293 28,159 4,688 15,858 6,249 26,795 Total on and off-balance sheet 1,002,439 62,146 10,293 1,074,878 995,519 32,966 6,249 1,034,734 Details of collateral held in support of these balances are provided in Note 21.2.6. 1. 2. This credit quality disclosure differs to that of credit risk concentration as it relates only to financial assets measured at amortised cost or at FVOCI and therefore excludes trading securities and financial assets measured at FVIS, and derivative financial instruments. Included in strong in 2019 was a $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 $3 million (2019: $27 million) at amortised cost. In 2020, all of these are classified as strong (2019: $4 million), and the remainder of the 2019 balances are classified as good/satisfactory. WESTPAC GROUP 2020 ANNUAL REPORT 253 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 provisions for ECL is one of the Group’s critical accounting assumptions and estimates. Details of this and the Group’s accounting policy for the provision for ECL are discussed in Notes 6 and 13, along with the total provisions for ECL on loans and credit commitments and the total for those loans that are considered non-performing (i.e. stage 3). 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. The estimated net realisable value of security to which the Group has recourse is sufficient to cover all principal and interest. WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  254 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 ECL/provision for impairment charges1, by type and geography of impaired loans, is summarised in the following table: Consolidated $m Impaired exposures Australia Housing and business loans Gross amount Provision Net Personal loans greater than 90 days past due Gross amount Provision Net Restructured loans Gross amount Provision Net New Zealand Housing and business loans Gross amount Provision Net Personal loans greater than 90 days past due Gross amount Provision Net Restructured loans Gross amount Provision Net Other overseas Housing and business loans Gross amount Provision Net Personal loans greater than 90 days past due Gross amount Provision Net Restructured loans Gross amount Provision Net Total impaired exposures Gross amount Provision Total net impaired exposures Items 90 days past due, or otherwise in default but not impaired Australia Gross amount Provision Net New Zealand Gross amount Provision Net Overseas Gross amount Provision Net Total items 90 days past due, or otherwise in default but not impaired Gross amount Provision Total net items 90 days past due, or otherwise in default but not impaired Total non-performing loans and credit commitments Gross amount Provision Total net non-performing loans and credit commitments 2020 2019 2018 2017 2016 1,845 (690) 1,155 370 (206) 164 16 (4) 12 157 (70) 87 36 (26) 10 - - - 355 (156) 199 - - - - - - 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) 2 882 (422) 460 358 (179) 179 9 (1) 8 124 (30) 94 12 (9) 3 14 (4) 10 13 (6) 7 1 (1) - 3 (1) 2 975 (460) 515 362 (187) 175 12 (7) 5 152 (41) 111 11 (8) 3 15 (5) 10 15 (6) 9 - - - - - - 1,589 (769) 820 267 (159) 108 13 (11) 2 218 (95) 123 10 (7) 3 16 (4) 12 44 (21) 23 - - - 2 (1) 1 2,779 (1,152) 1,627 1,763 (792) 971 1,416 (653) 763 1,542 (714) 828 2,159 (1,067) 1,092 7,976 (941) 7,035 4,684 (521) 4,163 3,861 (193) 3,668 3,322 (165) 3,157 3,075 (137) 2,938 503 (72) 431 53 (8) 45 340 (33) 307 64 (9) 55 127 (10) 117 29 (2) 27 117 (9) 108 19 (2) 17 89 (7) 82 17 (1) 16 8,532 (1,021) 5,088 (563) 4,017 (205) 3,458 (176) 3,181 (145) 7,511 4,525 3,812 3,282 3,036 11,311 (2,173) 9,138 6,851 (1,355) 5,496 5,433 (858) 4,575 5,000 (890) 4,110 5,340 (1,212) 4,128 1. 2020 and 2019 provisions for ECL were determined under AASB 9. 2018, 2017 and 2016 provisions for impairment charges were determined under AASB 139. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 21. Financial risk (continued) The following table summarises the interest received and forgone on impaired loans: Consolidated 2020 $m Interest received Interest foregone 21.2.6 Collateral held 255 Australia Overseas 3 30 8 - Total 11 30 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: 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 Personal Business Housing Personal Business 2020 2019 loans1 100.0 - - loans 8.0 32.5 59.5 loans 62.8 18.9 18.3 Total 87.6 5.9 6.5 loans1 100.0 - - loans 7.9 29.9 62.2 loans 59.6 19.3 21.1 Total 85.9 6.3 7.8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Housing Personal Business Housing Personal Business 2020 2019 loans1 100.0 - - loans 8.7 34.6 56.7 loans 63.7 17.7 18.6 Total 88.3 5.4 6.3 loans1 100.0 - - loans 8.6 31.1 60.3 loans 60.1 18.2 21.7 Total 86.7 5.7 7.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Housing Personal Business Housing Personal Business 2020 2019 loans1 95.2 4.8 - loans - 49.4 50.6 loans 39.2 30.7 30.1 Total 76.4 13.5 10.1 loans1 90.3 9.7 - loans - 38.2 61.8 loans 49.5 29.2 21.3 Total 73.3 17.0 9.7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Housing Personal Business Housing Personal Business 2020 2019 loans1 95.2 4.8 - loans - 50.7 49.3 loans 44.1 26.4 29.5 Total 79.0 11.8 9.2 loans1 90.1 9.9 - loans - 34.1 65.9 loans 54.0 27.4 18.6 Total 75.1 16.1 8.8 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Details of the carrying value and associated provision 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  256 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 2020 2019 Parent Entity 2020 2,252 3,289 1,864 2019 2,851 20,501 6,836 20,501 6,733 32 119 32 119 22,785 10,244 22,397 9,703 Liquidity modelling 21.3.1 In managing 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 jurisdictions to ensure liquidity is managed efficiently and prudently. In addition, Westpac conducts regular stress testing to assess its ability to meet cash flow obligations under a range of market conditions and scenarios. These scenarios inform liquidity limits and strategic planning. Sources of funding 21.3.2 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 held in cash, or are otherwise eligible for repurchase agreements with the Reserve Bank of Australia or another central bank and include 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. A summary of the Group’s liquid asset holdings is as follows: $m Cash Trading securities and financial assets measured at FVIS Investment securities Loans2 Other financial assets Total liquid assets Consolidated 2020 2019 Actual Average Actual Average 29,099 28,157 18,398 29,364 14,789 18,867 19,189 17,184 91,097 82,678 73,328 66,701 71,616 66,512 58,933 52,498 - 468 345 723 221,176 192,604 169,871 156,295 1. 2. Securities received as collateral are not recognised in the Group and Parent Entity’s balance sheet. Loans are self-originated AAA rated mortgage backed securities which are eligible for repurchase with the RBA and Reserve Bank of New Zealand. WESTPAC GROUP 2020 ANNUAL REPORT 257 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 2020 65.0 15.7 10.4 0.9 8.0 2019 62.5 16.6 12.1 1.0 7.8 100.0 100.0 Movements in the Group’s funding composition in 2020 included: • • • Customer deposits increased by 254 basis points to 65.0% of the Group’s total funding at 30 September 2020. Customer deposits increased by $30.9 billion over the year, reflecting Government stimulus payments, a reduction in consumer spending and a higher household savings ratio, the early release of superannuation and an increase in Government and corporate cash balances; Long term funding with a residual maturity greater than 12 months decreased 94 basis points or $5.6 billion to 15.7%. The reduction in long term funding reflects strong growth in customers deposits and a contraction in lending which have reduced the bank’s wholesale funding needs. Funding from securitisation was largely unchanged at 0.9% of total funding, reflecting the issuance of a $2.5 billion RMBS transaction in February 2020 which offset amortisation of existing RMBS transactions; Wholesale funding with a residual maturity less than 12 months decreased by 169 basis points to 10.4%. High levels of liquidity from customer deposits and access to the TFF enabled the bank to reduce its outstanding short term funding. The Group’s short term funding portfolio (including long term to short term scroll) of $88.5 billion had a weighted average maturity of 127 days and is more than covered by the $221.2 billion of unencumbered repo-eligible liquid assets and cash held by the Group; and • Funding from equity increased by 14 basis points to 8.0% 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 the first half of 2020, the Group raised $12.9 billion of long term wholesale funding, including $2.2 billion of Tier 2 capital securities, as the Group continued to make progress towards the Total Loss Absorbing Capital (TLAC) requirements. The Group did not access term wholesale funding markets in the Second Half following the introduction of the TFF. Borrowings and outstanding issuances from existing debt programs at 30 September 2020 can be found in Notes 16 to 19. Term Funding Facility (TFF) On 19 March 2020, the Reserve Bank announced extensive measures aimed at providing liquidity to financial markets and to support the banks in providing credit to businesses. As well as lowering the cash rate, these measures included injecting extra liquidity into the financial system through daily market operations, the purchasing of Australian Government bonds in the secondary market, increasing the interest rate on Exchange Settlement Account Balances, and the introduction of the TFF. The RBA extended the TFF on 1 September 2020. The TFF makes funding available to ADIs at a fixed interest rate of 25 basis points, for a maximum of three years. To access the TFF, ADIs must pledge eligible collateral, which includes self-securitised residential mortgage-backed securities. In aggregate, ADIs have access to at least $200 billion under the TFF, comprised of an Initial Allowance for each ADI, an Additional Allowance and a Supplementary Allowance. Westpac’s total TFF allowance as at 30 September 2020 was $19.7 billion and Westpac had drawn down $17.9 billion from its total TFF allowance. Westpac’s Supplementary Allowance of $11.9 billion will be available to from 1 October 2020. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  258 Notes to the financial statements Note 21. Financial risk (continued) Credit ratings As at 30 September 2020 the Parent Entity’s credit ratings were: 2020 S&P Global Ratings Moody’s Investors Service Fitch Ratings Short-term Long-term Outlook A-1+ P-1 F1 AA- Aa3 Negative Stable A+ Negative On 7 April 2020, following an assessment of the economic impact of the COVID-19 pandemic on the Australian and New Zealand economies, Fitch Ratings (Fitch) downgraded their long-term ratings for the major Australian banks (including Westpac Banking Corporation) by one notch, to A+ (from AA-). Fitch has maintained the rating outlook for the major Australian banks as “negative”, reflecting the major downside risk to Fitch’s economic outlook in light of the evolving global situation. On 8 April 2020, S&P Global Ratings affirmed Australia’s AAA/A-1+ ratings but revised the outlook on these ratings to “negative”. As a result of the change in Australia’s sovereign rating outlook, S&P Global Ratings affirmed Westpac Banking Corporation’s current issuer credit rating of AA- long term and A-1+ short term but the outlook was revised to “negative”. 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 2020 2019 Parent Entity 2020 2019 4,762 5,912 4,625 5,755 16 18 16 18 1,693 1,932 1,693 1,932 36,727 13,754 36,727 13,754 43,198 21,616 43,061 21,459 21.3.4 Contractual maturity of financial liabilities The following tables 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 FVIS 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 following tables. WESTPAC GROUP 2020 ANNUAL REPORT 259 Total 2,251 596,841 39,563 22,216 652 9,338 (9,155) - 63 - - 22 - - Notes to the financial statements Note 21. Financial risk (continued) Consolidated 2020 $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 Deposits and other borrowings 432,005 67,944 86,421 Other financial liabilities 20,275 1,129 94 2,251 - - - 10,408 18,065 Derivative financial instruments: Held for trading Held for hedging purposes (net settled) Held for hedging purposes (gross settled): Cash outflow Cash inflow Debt issues 22,216 29 204 (200) 6,920 - 43 - 179 - 379 5,645 (5,595) 11,264 1,785 (1,709) 1,704 (1,651) 32,715 79,797 25,623 156,319 Total financial liabilities excluding loan capital 483,700 80,430 119,485 108,702 25,708 818,025 Loan capital 1 68 387 6,665 21,410 28,531 Total undiscounted financial liabilities 483,701 80,498 119,872 115,367 47,118 846,556 Total contingent liabilities and commitments Letters of credit and guarantees Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments 12,610 184,064 267 196,941 - - - - - - - - - - - - - - - - 12,610 184,064 267 196,941 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 3,291 - 374,126 83,365 19,425 3,176 - 97,081 3,874 27,945 57 4 - - 85 287 (276) - 280 902 (875) - 11,968 157 - 631 517 (466) - 73 - - 40 - - Total 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 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  260 Notes to the financial statements Note 21. Financial risk (continued) Parent Entity 2020 $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 389,498 57,543 71,368 Other financial liabilities 19,704 1,129 94 1,863 - - Derivative financial instruments: Held for trading Held for hedging purposes (net settled) Held for hedging purposes (gross settled): 22,268 21 - 28 Cash outflow Cash inflow Debt issues Due to subsidiaries 7 (7) 6,596 18,610 2,110 (2,088) 10,915 - 8,466 18,065 - 277 455 (437) - 63 - - 22 - - 1,863 526,938 38,992 22,268 485 2,581 (2,553) - 137 9 (21) 24,980 66,305 24,370 133,166 934 4,390 18,529 171,240 213,703 Total financial liabilities excluding loan capital 458,560 70,571 100,957 111,660 195,695 937,443 Loan capital 1 68 387 6,665 21,410 28,531 Total undiscounted financial liabilities 458,561 70,639 101,344 118,325 217,105 965,974 Total contingent liabilities and commitments Letters of credit and guarantees Commitments to extend credit Other commitments Total undiscounted contingent liabilities and commitments 12,069 159,644 266 171,979 - - - - - - - - - - - - - - - - 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 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 - - - 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 12,069 159,644 266 171,979 Total 2,853 504,195 26,243 28,329 538 278 (266) WESTPAC GROUP 2020 ANNUAL REPORT 261 Notes to the financial statements Note 21. Financial risk (continued) 21.3.5 Expected maturity The following tables 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 following tables are equity securities classified as trading 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 $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 Due within 12 months 2020 Greater than 12 months Total Due within 12 months 2019 Greater than 12 months 30,129 4,778 32,591 13,583 6,824 - - 30,129 20,059 4,778 5,930 8,076 9,784 84,715 40,667 23,367 91,539 18,544 20,695 9,810 - - 13,237 9,164 63,591 Total 20,059 5,930 31,781 29,859 73,401 90,856 602,203 693,059 99,197 615,573 714,770 5,474 3,450 - - 143 61 5,474 3,593 61 5,367 1,541 - 1,400 17,879 19,279 1,222 - 7,826 129 14,741 5,367 9,367 129 15,963 189,085 722,861 911,946 182,365 724,261 906,626 2,250 584,037 22,861 13,157 - 7,094 18,064 9,897 2,250 591,131 40,925 23,054 3,287 551,817 29,059 19,203 - 3,287 11,430 563,247 156 29,215 9,893 29,096 49,070 101,255 150,325 56,933 124,524 181,457 1,809 5,395 (413) 1,396 5,447 10,842 1,703 3,907 5,674 1,707 7,377 5,614 Total liabilities excluding loan capital 678,579 141,344 819,923 665,909 153,384 819,293 Loan capital Total liabilities 1,323 22,626 23,949 - 21,826 21,826 679,902 163,970 843,872 665,909 175,210 Net assets/(net liabilities) (490,817) 558,891 68,074 (483,544) 549,051 841,119 65,507 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  262 Notes to the financial statements Note 21. Financial risk (continued) Parent Entity $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 Due within 12 months 2020 Greater than 12 months Total Due within 12 months 2019 Greater than 12 months 25,436 4,641 30,550 13,349 - - 7,480 9,445 5,120 80,706 25,436 4,641 38,030 22,794 85,826 17,692 5,773 16,736 20,613 7,200 - - 12,829 8,670 61,198 Total 17,692 5,773 29,565 29,283 68,398 70,453 537,371 607,824 79,956 551,980 631,936 4,745 - 4,745 4,615 - 4,615 10,420 170,559 180,979 10,291 132,670 142,961 - - 6,475 6,475 57 57 - - 6,436 100 6,436 100 796 15,199 15,995 756 12,224 12,980 165,510 827,292 992,802 163,632 786,107 949,739 1,862 516,391 22,092 12,805 - 1,862 2,849 - 2,849 5,222 521,613 491,562 9,868 501,430 18,064 9,974 40,156 22,779 28,360 156 19,167 9,700 28,516 28,867 40,886 86,780 127,666 50,028 106,646 156,674 20,551 3,770 165,712 186,263 4,996 8,766 17,563 2,545 131,044 148,607 1,587 4,132 Total liabilities excluding loan capital 618,357 290,748 909,105 612,074 259,001 871,075 Loan capital Total liabilities 1,323 22,626 23,949 - 21,826 21,826 619,680 313,374 933,054 612,074 280,827 892,901 Net assets/(net liabilities) (454,170) 513,918 59,748 (448,442) 505,280 56,838 21.4 Market risk 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, FX 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 and Treasury Risk units which monitor 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 WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 21. Financial risk (continued) 21.4.2 Traded market risk The following table depicts the aggregate VaR, by risk type: Consolidated and Parent Entity $m Interest rate risk FX risk Equity risk Commodity risk1 Other market risks2 Diversification effect Net market risk High 25.5 11.7 0.7 3.4 32.9 n/a 42.0 2020 Low Average 14.6 4.0 0.2 1.9 14.6 (14.9) High 14.9 8.6 0.2 42.0 5.5 n/a 20.4 45.3 7.0 0.5 0.0 0.6 2.4 n/a 7.1 263 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 21.4.3 Non-traded market risk Non-traded market risk includes Interest Rate Risk in the Banking Book (IRRBB) – the risk to net interest income or the economic value on banking book items as interest rates change. 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 following table 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 NII: % (increase)/decrease in NII Consolidated Parent Entity 2020 Maximum exposure Minimum exposure Average exposure 3.09 2.35 (1.22) (0.89) (0.25) (0.10) As at (0.27) (0.38) 2019 Maximum exposure Minimum exposure Average exposure 2.88 2.14 (0.46) (0.42) 0.81 0.43 As at 2.88 2.14 Value at Risk - IRRBB The table below depicts VaR for IRRBB: $m Consolidated As at 202.4 2020 High 219.7 Low Average 31.0 126.7 As at 34.1 2019 High 37.3 Low Average 19.4 27.8 As at 30 September 2020 the Value at Risk – IRRBB for the Parent Entity was $208.2 million (2019: $38.3 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 used to monitor traded market risk allow management to continuously monitor and manage IRRBB. Structural FX risk Structural FX 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 ALM activities including details of the hedge accounting and economic hedges used to manage this risk. 1. Includes electricity risk. The lower VaR measures in 2020 were due to reduced risk, revised modelling and closure of electricity trading commenced in June 2020. Includes prepayment risk and credit spread risk (exposure to movements in generic credit rating bands). 2. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Notes to the financial statements 264 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 (CVA) and funding valuation adjustments (FVA). 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 CVA and 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: WESTPAC GROUP 2020 ANNUAL REPORT 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. 265 Instrument Balance sheet category Includes Valuation Exchange traded products Derivatives Exchange traded interest rate futures and options and commodity, energy and carbon futures FX 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 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 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  266 Notes to the financial statements 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 Balance sheet category Includes Valuation Interest rate products Derivatives Interest rate and inflation swaps, swaptions, caps, floors, collars and other non-vanilla interest rate derivatives FX 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 provider. 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 Investment securities Non-asset backed debt instruments Trading securities and financial assets measured at FVIS 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 WESTPAC GROUP 2020 ANNUAL REPORT 267 Notes to the financial statements Note 22. Fair values of financial assets and financial liabilities (continued) Level 2 instruments (continued) Instrument Balance sheet category Includes Valuation Loans at fair value Loans 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, OTC 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 Balance sheet category Includes Valuation Debt instruments Equity instruments Trading securities and financial assets measured at FVIS Investment securities Trading securities and financial assets measured at FVIS Investment securities Certain ABS, offshore non-ABS 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 Valued using valuation techniques appropriate to the instrument, including the use of recent arm’s length transactions where available, discounted cash flow approach or reference to the net assets of the entity. Due to their illiquidity, complexity and/or use of unobservable inputs into valuation models, they are classified as Level 3 assets. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  268 Notes to the financial statements Note 22. Fair values of financial assets and financial liabilities (continued) The following tables summarise the attribution of financial instruments measured at fair value to the fair value hierarchy: 2020 Quoted market prices (Level 1) Valuation techniques (Market observable) (Level 2) Valuation techniques (Non-market observable) (Level 3) Quoted market prices (Level 1) Total 2019 Valuation techniques (Market observable) (Level 2) Valuation techniques (Non-market observable) (Level 3) Total Consolidated $m Financial assets measured at fair value on a recurring basis Trading securities and financial assets measured at FVIS 8,059 32,387 221 40,667 10,440 Derivative financial instruments 10 23,353 4 23,367 7 Investment securities 18,032 72,370 153 90,555 11,163 Loans Life insurance assets - 617 540 2,976 21 - 561 - 3,593 1,097 21,121 29,828 61,284 239 8,270 220 31,781 24 29,859 134 72,581 21 260 - 9,367 Total financial assets measured at fair value on a recurring basis Financial liabilities measured at fair value on a recurring basis 26,718 131,626 399 158,743 22,707 120,742 399 143,848 Deposits and other borrowings1 - 35,764 Other financial liabilities2 420 4,229 - - 35,764 - 38,413 4,649 262 Derivative financial instruments 10 23,031 13 23,054 Debt issues3 Life insurance liabilities - - 5,333 1,396 - - 5,333 1,396 8 - - 5,108 29,059 5,819 7,377 - - 38,413 5,370 29 29,096 - - 5,819 7,377 Total financial liabilities measured at fair value on a recurring basis 430 69,753 13 70,196 270 85,776 29 86,075 Parent Entity $m Financial assets measured at fair value on a recurring basis Trading securities and financial assets measured at FVIS 2020 Quoted market prices (Level 1) Valuation techniques (Market observable) (Level 2) Valuation techniques (Non-market observable) (Level 3) Quoted market prices (Level 1) Total 2019 Valuation techniques (Market observable) (Level 2) Valuation techniques (Non-market observable) (Level 3) Total 7,074 30,763 193 38,030 10,213 19,159 193 29,565 Derivative financial instruments 10 22,781 Investment securities 15,714 70,040 Loans Due from subsidiaries - - 540 663 3 69 21 - 22,794 7 29,253 23 29,283 85,823 10,191 58,114 66 68,371 561 663 - - 239 897 21 - 260 897 Total financial assets measured at fair value on a recurring basis Financial liabilities measured at fair value on a recurring basis 22,798 124,787 286 147,871 20,411 107,662 303 128,376 Deposits and other borrowings1 - 32,991 Other financial liabilities2 420 4,229 - - 32,991 - 37,355 4,649 262 Derivative financial instruments 10 22,756 13 22,779 Debt issues3 Due to subsidiaries - - 2,986 239 - - 2,986 239 8 - - 5,108 28,831 3,624 1,591 - - 37,355 5,370 28 28,867 - - 3,624 1,591 Total financial liabilities measured at fair value on a recurring basis 430 63,201 13 63,644 270 76,509 28 76,807 1. 2. 3. The contractual outstanding amount payable at maturity for the Group is $35,764 million (2019: $38,468 million) and $32,990 million for the Parent Entity (2019: $37,410 million). The contractual outstanding amount payable at maturity for the Group and the Parent Entity is $4,649 million (2019: $5,369 million). The contractual outstanding amount payable at maturity for the Group is $5,062 million (2019: $5,632 million) and $2,714 million for the Parent Entity (2019: $3,436 million). The cumulative change in the fair value of debt issues attributable to changes in Westpac’s own credit risk is $5 million decrease (2019: $34 million decrease) for the Group and Parent Entity. WESTPAC GROUP 2020 ANNUAL REPORT 269 Notes to the financial statements Note 22. Fair values of financial assets and financial liabilities (continued) Reconciliation of non-market observables The following tables summarise the changes in financial instruments measured at fair value derived from  non-market observable valuation techniques (Level 3): Consolidated 2020 $m Trading securities and financial assets measured Investment Total Level 3 Total Level 3 as FVIS securities Other1 assets Derivatives liabilities Balance as at beginning of year 220 134 45 399 29 29 Gains/(losses) on assets/(gains)/losses on liabilities recognised in: Income statements OCI Acquisitions and issues Disposals 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) - 26 (23) - - - (15) 40 (6) - - (2) - 12 (30) - - (4) (15) 78 (59) - - 221 153 25 399 (4) - 7 (19) - - 13 (4) - 7 (19) - - 13 (4) - 3 (1) (3) (3) Consolidated 2019 $m Balance as at beginning of year Impact on adoption of AASB 9 Restated opening balance Gains/(losses) on assets/(gains)/losses on liabilities recognised in: Income statements OCI Acquisitions and issues Disposals 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 Available- for-sale Investment Total Level 3 Total Level 3 as FVIS securities securities Other1 assets Derivatives liabilities 330 4 334 36 - 63 (216) - 3 220 26 619 (619) - - - - - - - - - - 109 109 - 11 36 (22) - - 15 14 29 12 - 16 (12) - - 964 (492) 472 48 11 115 (250) - 3 134 45 399 6 - 6 7 - 4 (6) 18 - 29 6 - 6 7 - 4 (6) 18 - 29 - 16 42 (11) (11) 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. Other is comprised of derivative financial assets and certain loans. WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  270 Notes to the financial statements Note 22. Fair values of financial assets and financial liabilities (continued) Parent Entity 2020 $m Trading securities and financial assets measured Investment Total Level 3 Total Level 3 as FVIS securities Other1 assets Derivatives liabilities Balance as at beginning of year 193 66 44 303 28 28 Gains/(losses) on assets/(gains)/losses on liabilities recognised in: Income statements OCI Acquisitions and issues Disposals 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) - 26 (24) - - - - 3 - - - (2) - 12 (30) - - (4) - 41 (54) - - 193 69 24 286 (4) - 7 (18) - - 13 (4) - 7 (18) - - 13 (4) - 3 (1) (3) (3) Parent Entity 2019 $m Balance as at beginning of year Impact on adoption of AASB 9 Restated opening balance Gains/(losses) on assets/(gains)/losses on liabilities recognised in: Income statements OCI Acquisitions and issues Disposals 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 Available- for-sale Investment Total Level 3 Total Level 3 as FVIS securities securities Other1 assets Derivatives liabilities 206 - 206 6 - 17 (39) - 3 193 3 70 (70) - - - - - - - - - - 67 67 - - 2 (3) - - 13 14 27 13 - 16 (12) - - 289 11 300 19 - 35 (54) - 3 66 44 303 6 - 6 6 - 4 (6) 18 - 28 6 - 6 6 - 4 (6) 18 - 28 - 16 19 (10) (10) 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. Other is comprised of derivative financial assets and certain loans. WESTPAC GROUP 2020 ANNUAL REPORT 271 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 $4 million (2019: $3 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  272 Notes to the financial statements Note 22. Fair values of financial assets and financial liabilities (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 Cash and balances with central banks Collateral paid Investment securities Loans Other financial assets Quoted market prices (Level 1) Carrying amount 2020 Estimated fair value Valuation techniques (Market observable) (Level 2) Valuation techniques (Non-market observable) (Level 3) Total 30,129 30,129 4,778 4,778 - - - - 30,129 4,778 984 692,498 5,474 - - - 424 560 984 - 694,264 694,264 5,474 - 5,474 Total financial assets not measured at fair value 733,863 34,907 5,898 694,824 735,629 Financial liabilities not measured at fair value Collateral received Deposits and other borrowings Other financial liabilities Debt issues1 Loan capital 2,250 2,250 - - 2,250 555,367 36,276 144,992 23,949 - - - - 552,192 36,276 144,660 23,934 3,429 555,621 - 36,276 1,742 146,402 - 23,934 Total financial liabilities not measured at fair value 762,834 2,250 757,062 5,171 764,483 Consolidated $m Financial assets not measured at fair value Cash and balances with central banks Collateral paid Investment securities Loans Other financial assets Quoted market prices (Level 1) Carrying amount 2019 Estimated fair value Valuation techniques (Market observable) (Level 2) Valuation techniques (Non-market observable) (Level 3) 20,059 20,059 5,930 5,930 - - - - Total 20,059 5,930 820 820 714,510 5,367 - - - 366 454 - 716,130 716,130 5,367 5,733 - 5,367 716,584 748,306 Total financial assets not measured at fair value 746,686 25,989 Financial liabilities not measured at fair value Collateral received Deposits and other borrowings Other financial liabilities Debt issues1 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 1. The estimated fair value of debt issues includes the impact of changes in Westpac’s credit spreads since origination. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 22. Fair values of financial assets and financial liabilities (continued) 273 Parent Entity $m Financial assets not measured at fair value Cash and balances with central banks Collateral paid Investment securities Loans Due from subsidiaries1 Other financial assets Quoted market prices (Level 1) Carrying amount 25,436 25,436 4,641 4,641 3 607,263 169,139 4,745 - - - - 2020 Estimated fair value Valuation techniques (Market observable) (Level 2) Valuation techniques (Non-market observable) (Level 3) Total - - 3 - - - - 25,436 4,641 3 608,602 608,602 126,623 43,669 170,292 4,745 - 4,745 Total financial assets not measured at fair value 811,227 30,077 131,371 652,271 813,719 Financial liabilities not measured at fair value Collateral received Deposits and other borrowings Other financial liabilities Debt issues2 Due to subsidiaries Loan capital 1,862 1,862 - - 1,862 488,622 35,507 124,680 186,024 23,949 - - - - - 487,452 35,507 125,896 1,292 488,744 - - 35,507 125,896 6,805 179,219 186,024 23,934 - 23,934 Total financial liabilities not measured at fair value 860,644 1,862 679,594 180,511 861,967 Parent Entity $m Financial assets not measured at fair value Cash and balances with central banks Collateral paid Investment securities Loans Due from subsidiaries1 Other financial assets Quoted market prices (Level 1) Carrying amount 17,692 17,692 5,773 5,773 27 631,676 133,899 4,615 - - - - 2019 Estimated fair value Valuation techniques (Market observable) (Level 2) Valuation techniques (Non-market observable) (Level 3) 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 issues2 Due to subsidiaries 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 1. 2. Due from subsidiaries excludes $11,177 million (2019: $8,165 million) of long-term debt instruments with equity-like characteristics which are part of the total investment in subsidiaries. The estimated fair value of debt issues includes the impact of changes in Westpac’s credit spreads since origination. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  274 Notes to the financial statements Note 23. Offsetting financial assets and financial liabilities Accounting policy Financial assets and liabilities are presented net in the balance sheet when the Group has a legally enforceable right to offset them in all circumstances and there is an intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously. The gross assets and liabilities behind the net amounts reported in the balance sheet are disclosed in the following tables. 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. Amounts subject to enforceable netting arrangements Effects of offsetting Amounts subject to enforceable on balance sheet netting arrangements but not offset Gross Amounts Net amounts reported on the balance Other recognised financial Cash Financial instrument Net amounts offset sheet instruments collateral1,2 collateral amount Consolidated $m 2020 Assets Collateral paid3 10,068 (10,032) 36 - - Derivative financial instruments4 61,171 (39,968) 21,203 (14,719) (2,247) (16) (16) Reverse repurchase agreements5 20,401 - 20,401 23,301 (23,266) 35 - - (5) (20,396) - - 114,941 (73,266) 41,675 (14,719) (2,252) (20,428) 4,276 Loans6 Total assets Liabilities Collateral received 5,516 (5,501) 15 - - - Derivative financial instruments4 66,144 (44,499) 21,645 (14,719) (4,426) (1,693) Repurchase agreements7 27,763 - 27,763 Deposits and other borrowings6 43,999 (23,266) Total liabilities 143,422 (73,266) 20,733 70,156 2019 Assets - - (98) (27,665) - - 20,733 (14,719) (4,524) (29,358) 21,555 Collateral paid3 6,643 (6,559) 84 - - (17) 67 Derivative financial instruments4 58,125 (31,605) 26,520 (18,609) (3,280) (102) 4,529 Reverse repurchase agreements5 6,833 - 6,833 18,202 (18,130) 72 - - (9) - (6,824) - - 72 89,803 (56,294) 33,509 (18,609) (3,289) (6,943) 4,668 Loans6 Total assets Liabilities Collateral received 3,024 (2,972) 52 - - - Derivative financial instruments4 62,046 (35,192) 26,854 (18,609) (5,622) (1,932) Repurchase agreements7 10,604 - 10,604 Deposits and other borrowings6 28,880 (18,130) 10,750 - - (3) - (10,601) - 10,750 Total liabilities 104,554 (56,294) 48,260 (18,609) (5,625) (12,533) 11,493 1. 2. 3. 4. 5. 6. 7. $2,250 million (2019: $3,287 million) of cash collateral on derivative financial assets and reverse repurchase agreements forms part of collateral received as disclosed in the balance sheet. The remainder is included in term deposits recognised in deposits and other borrowings within Note 16. $4,524 million (2019: $5,625 million) of cash collateral, subject to enforceable netting arrangements with derivative financial liabilities and repurchase agreements, forms part of collateral paid as disclosed in the balance sheet. The remainder of collateral paid, as disclosed in the balance sheet, consists of $16 million (2019: $18 million) in stock borrowing arrangements and $238 million (2019: $287 million) in futures margin that does not form part of this column. 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. $2,164 million (2019: $3,339 million) of derivative financial assets and $1,409 million (2019: $2,242 million) of derivative financial liabilities are not subject to enforceable netting arrangements. 2019 gross amounts, net amounts reported on the balance sheet and net amount were restated to exclude amounts not subject to enforceable netting arrangements. Reverse repurchase agreements form part of trading securities and financial assets measured at FVIS in Note 10. 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. Repurchase agreements form part of other financial liabilities in Note 17. 20 4,221 - 35 15 807 - 52 691 - WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 23. Offsetting financial assets and financial liabilities (continued) 275 Amounts subject to enforceable netting arrangements Effects of offsetting Amounts subject to enforceable on balance sheet netting arrangements but not offset Gross Amounts Net amounts reported on the balance Other recognised financial Cash Financial instrument Net amounts offset sheet instruments collateral1,2 collateral amount Parent Entity $m 2020 Assets Collateral paid3 10,068 (10,032) 36 - - Derivative financial instruments4 60,616 (39,968) 20,648 (14,586) (1,859) (16) (16) Reverse repurchase agreements5 20,401 - 20,401 23,301 (23,266) 35 - - (5) (20,396) - - 114,386 (73,266) 41,120 (14,586) (1,864) (20,428) 4,242 Loans6 Total assets Liabilities Collateral received 5,516 (5,501) 15 - - - Derivative financial instruments4 65,874 (44,499) 21,375 (14,586) (4,289) (1,693) Repurchase agreements7 27,763 - 27,763 Deposits and other borrowings6 43,999 (23,266) 20,733 - - (98) (27,665) - - 20,733 Total liabilities 143,152 (73,266) 69,886 (14,586) (4,387) (29,358) 21,555 2019 Assets Collateral paid3 6,643 (6,559) 84 - - (17) 67 Derivative financial instruments4 57,550 (31,605) 25,945 (18,526) (2,842) (102) 4,475 Reverse repurchase agreements5 6,731 - 18,202 (18,130) 6,731 72 - - (9) - (6,722) - - 72 89,126 (56,294) 32,832 (18,526) (2,851) (6,841) 4,614 Loans6 Total assets Liabilities Collateral received 3,024 (2,972) 52 - - - Derivative financial instruments4 61,807 (35,192) 26,615 (18,526) (5,466) (1,932) Repurchase agreements7 10,604 - 10,604 Deposits and other borrowings6 28,880 (18,130) Total liabilities 104,315 (56,294) 10,750 48,021 - - (3) - (10,601) - 10,750 (18,526) (5,469) (12,533) 11,493 20 4,187 - 35 15 807 - 52 691 - 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. 2. 3. 4. 5. 6. 7. $1,862 million (2019: $2,849 million) of cash collateral on derivative financial assets and reverse repurchase agreements forms part of collateral received as disclosed in the balance sheet. The remainder is included in term deposits recognised in deposits and other borrowings within Note 16. $4,387 million (2019: $5,469 million) of cash collateral, subject to enforceable netting arrangements with derivative financial liabilities and repurchase agreements, forms part of collateral paid as disclosed in the balance sheet. The remainder of collateral paid, as disclosed in the balance sheet, consists of $16 million (2019: $18 million) in stock borrowing arrangements and $238 million (2019: $286 million) on futures margin that does not form part of this column. 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. $2,146 million (2019: $3,338 million) of derivative financial assets and $1,404 million (2019: $2,252 million) of derivative financial liabilities are not subject to enforceable netting arrangements. 2019 gross amounts, net amounts reported on the balance sheet and net amount were restated to exclude amounts not subject to enforceable netting arrangements. Reverse repurchase agreements form part of trading securities and financial assets measured at FVIS in Note 10. 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. Repurchase agreements form part of other financial liabilities in Note 17. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  276 Notes to the financial statements 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 $492 million (2019: $537 million) were provided by Westpac 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 in 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). Refer to Note 17 for further details. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 24. Securitisation, covered bonds and other transferred assets (continued) The following tables present Westpac’s assets transferred and their associated liabilities: 277 Consolidated $m 2020 Securitisation1 Covered bonds2 Repurchase agreements Total 2019 Securitisation1 Covered bonds2 Repurchase agreements Total Parent Entity $m 2020 Securitisation1 Covered bonds2 Repurchase agreements Total 2019 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 8,029 8,000 8,072 7,994 43,654 36,051 36,727 27,763 n/a n/a n/a n/a 88,410 71,814 8,072 7,994 8,221 8,190 8,268 8,177 44,676 38,037 13,754 10,604 n/a n/a n/a n/a 66,651 56,831 8,268 8,177 78 n/a n/a 78 91 n/a n/a 91 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 141,660 141,000 141,991 138,870 3,121 36,689 31,926 36,727 27,763 n/a n/a n/a n/a n/a n/a 215,076 200,689 141,991 138,870 3,121 101,689 101,146 101,871 100,268 1,603 37,697 33,160 13,754 10,604 n/a n/a n/a n/a n/a n/a 153,140 144,910 101,871 100,268 1,603 1. 2. 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. 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  278 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. The Group’s CGUs represent the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or group of assets. They reflect the level at which the Group monitors and manages its operations. 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) 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. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 25. Intangible assets (continued) $m Goodwill Balance as at beginning of year Disposals Impairment Other adjustments Balance as at end of year Computer software Balance as at beginning of year Additions Impairment Amortisation Other adjustments Balance as at end of year Cost Accumulated amortisation and impairment Carrying amount Brand names Balance as at beginning of year Balance as at end of year Carrying amount Other intangible assets Balance as at beginning of year Impairment Amortisation Balance as at end of year Cost Accumulated amortisation and impairment Carrying amount Total intangible assets Goodwill has been allocated to the following CGUs1: $m Consumer Business Westpac Institutional Bank New Zealand Specialist Businesses Total goodwill 279 Consolidated 2020 2019 Parent Entity 2020 2019 8,895 8,890 6,844 6,844 - (498) - - - 5 - (116) - - - - 8,397 8,895 6,728 6,844 2,365 2,177 2,207 2,014 1,035 906 955 846 (171) (25) (799) (694) - 1 (165) (731) - (25) (628) - 2,430 2,365 2,266 2,207 7,370 6,395 6,372 5,464 (4,940) (4,030) (4,106) (3,257) 2,430 2,365 2,266 2,207 670 670 670 670 670 670 636 636 636 636 636 636 23 (20) (3) - 141 (141) - 26 - (3) 23 144 (121) 23 - - - - - - - - - - - - - - 11,497 11,953 9,630 9,687 Consolidated 2020 2019 Parent Entity 2020 2019 3,359 4,060 3,144 3,144 3,205 3,860 3,022 3,213 487 488 858 487 488 - 487 487 - 75 - - 8,397 8,895 6,728 6,844 In addition, brand names of $670 million for the Group have been allocated as $382 million to Consumer, $286 million to Business and $2 million to Specialist Businesses as at 30 September 2020 (2019: $382 million to Consumer and $288 million to Business). Brand names of $636 million for the Parent Entity have been allocated as $350 million to Consumer and $286 million to Business as at 30 September 2020 and 30 September 2019. 1. On 4 May 2020, the Group announced the creation of a new operating segment, Specialist Businesses, which includes businesses that were previously part of Consumer and Business operating segments (refer to Note 2). As a result, the Group’s CGUs have been reassessed and goodwill reallocated accordingly. This Specialist Businesses segment includes a number of individual CGUs (Superannuation, Platforms, Investments, General Insurance, Life Insurance, Lenders Mortgage Insurance, and Auto and Vendor Finance) to which goodwill has been allocated. The carrying amount of goodwill allocated to these individual CGUs is not significant compared to total goodwill. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  280 Notes to the financial statements Note 25. Intangible assets (continued) Impairment testing and results Impairment testing is performed at least once a year, or whenever there is an indication of impairment, by comparing the recoverable amount of each CGU with the carrying amount. The primary test for the recoverable amount is determined based on value-in-use which refers to the present value of expected cash flows under its current use. Fair value less costs to sell was also considered for those CGUs where value-in-use was lower than carrying value. In these cases, there was no change to the result of the impairment test. In the current year the Group recognised goodwill impairment of $498 million for the Group and $116 million for the Parent Entity from Specialist Businesses CGUs. The goodwill impairment recognised for the Life Insurance CGU was $374 million for the Group (Parent Entity: nil) and for the Auto and Vendor Finance CGU was $124 million for the Group (Parent Entity: $116 million). No goodwill remains for these CGUs. The impairment of goodwill resulted from our macroeconomic outlook and lower forecast profitability as well as goodwill being allocated at a lower level to individual business levels within the specialised business division. This allocation reflects the discrete nature of these businesses and the level at which goodwill has been monitored by management. Significant assumptions used in recoverable amount calculations The assumptions made for goodwill impairment testing for each relevant significant CGU are provided in the following table and are based on past experience and management’s expectations for the future. In the current year and given the present economic environment, the Group has reassessed these assumptions and revised them where necessary in order to provide a reasonable estimate of the value-in-use of the CGUs and Group. Discount rate Group’s equity rate/ Group’s adjusted pre-tax equity rate Westpac Institutional Bank New Zealand 2020 11.0% / 14.4% 11.0% / 14.5% All other significant CGUs 11.0% / 15-15.2% 2019 11.0% / 15.7% 11.0% / 15.3% 11.0% / 15.7% Cash flows Forecast period/ terminal growth rate 2020 2019 5 years / 2% 3 years / 2% 3 years / 2% 2 years / 0% 2 years / 0% 2 years / 0% The Group discounts the projected cash flows by its adjusted pre-tax equity rate. The cash flows used are based on management approved forecasts. These forecasts utilise information about current and future economic conditions, observable historical information and management expectations of future business performance. The terminal value growth rate represents the growth rate applied to extrapolate cash flows beyond the forecast period and reflects the lower end of the RBA’s target long-term inflation rate band. For all CGUs other than Westpac Institutional Bank, the recoverability of goodwill is not reliant on any one particular assumption. Refer to the sensitivity analysis below for details regarding Westpac Institutional Bank. Sensitivity analysis The table below shows a sensitivity analysis for Westpac Institutional Bank which has no impairment of goodwill but for which a reasonable possible change in assumptions would result in impairment. This sensitivity analysis assumes the specific assumption moves in isolation while all other assumptions are held constant and presents the change in key assumptions required to reduce any headroom to nil. Whilst remaining a good business with a strong franchise, Westpac Institutional Bank’s forecasts are responsive to a decrease in cash flows resulting from increased impairment from credit losses, higher than forecast expenses, higher capital retention requirements, or from lower than assumed interest margins. To address the uncertainty resulting from these assumptions, a range of probability weighted scenarios were used to calculate the recoverable amount. Consolidated and Parent Entity Headroom Westpac Institutional Bank $m 578 Change required to assumption to reduce headroom to nil Increase in discount rate (bps) Decrease in cash flows (%) Decrease in terminal growth rate (bps) 56 6.2 76 WESTPAC GROUP 2020 ANNUAL REPORT 281 Notes to the financial statements Note 26. Lessee disclosures Accounting policy Accounting policy for 30 September 2020 under AASB 16 At the lease commencement date (or the inception date for certain leases), a right-of-use (ROU) asset and a lease liability are recognised in the balance sheet for all leases with the exception of short term leases (12 months or less) and low value leases (underlying asset is less than A$10,000). ROU asset The ROU asset is initially measured at cost being the amount of the initial measurement of the lease liability, plus any payments made at or before the commencement date, initial direct costs and estimated make-good costs, less any lease incentives received. It is subsequently measured at cost less accumulated depreciation and impairment losses. The asset is also adjusted for any subsequent remeasurement of the lease liability (refer below). Depreciation expense is recognised in operating expenses on a straight-line basis over the lease term. Lease liability The lease liability is initially measured at the present value of the future lease payments using a discount rate based on Westpac’s incremental borrowing rate. It is subsequently increased by interest, reduced by principal payments and remeasured for any reassessment or lease modification. The lease liability may be remeasured in certain circumstances. For Westpac’s leases, it is expected that the lease liability will only be required to be remeasured to reflect a change in the Group’s assessment of the exercise of an extension option (refer below) or for a change in future lease payments for a change in rate or index. Interest expense is recognised in net interest income on an effective yield basis. Lease term Extension options are included in a number of lease contracts. The extension options are only included in the lease term if the lease is reasonably certain to be extended, which is assessed by the Group at the lease commencement date. The assessment is reviewed if a significant event or significant change in circumstances occurs which affects this assessment and is within the control of the Group. A reassessment of the lease term (to determine whether it has become ‘reasonably certain’ that an extension option will be exercised) must be undertaken for each of the Group’s property and technology leases at a specific point prior to the lease expiry date. The reassessment point, which is generally based on the option exercise window, will vary in each jurisdiction. Scope exemptions For certain short-term and low value leases, lease payments are recognised in operating expenses on a straight- line basis over the lease term. Accounting policy for 30 September 2019 under AASB 117 An operating lease under AASB 117 is a lease where substantially all of the risks and rewards of the leased assets remain with the lessor. Where the Group is the lessee, lease rentals payable are recognised as an expense in the income statement on a straight-line basis over the lease term unless another systematic basis is more appropriate. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  282 Notes to the financial statements Note 26. Lessee disclosures (continued) Westpac leases various commercial and retail premises and related property and equipment. The ROU asset recognised as a result of these lease arrangements is included in property and equipment in the balance sheet and detailed in the following table: ROU assets $m Consolidated Balance at 30 September 2019 Impact on adoption of AASB 16 Restated opening balance Additions Depreciation Other Balance at 30 September 2020 Parent Entity Balance at 30 September 2019 Impact on adoption of AASB 16 Restated opening balance Additions Depreciation Other Balance at 30 September 2020 Lease liabilities Lease liabilities included in other liabilities in the balance sheet were: $m Lease liabilities - property Lease liabilities - other Total lease liabilities as at 30 September 2020 Property Other Total - 2,686 2,686 354 (506) - 2,534 - 2,432 2,432 319 (455) (5) 2,291 - 492 492 16 (124) - 384 - 456 456 16 (112) 1 361 - 3,178 3,178 370 (630) - 2,918 - 2,888 2,888 335 (567) (4) 2,652 Consolidated Parent Entity 2,538 387 2,925 2,309 363 2,672 The following table presents the future contractual undiscounted cash flows relating to lease liabilities by remaining contractual maturity based on the requirements AASB 16 applicable for the current period: $m Up to one year Over 1 year to 5 years Over 5 years Total undiscounted lease liabilities as at 30 September 2020 Consolidated Parent Entity 568 1,537 1,101 515 1,415 997 3,206 2,927 As comparatives have not been restated on the adoption of AASB 16, the table below presents the operating lease commitments by remaining contractual maturity based on the requirements of AASB 117 applicable for the prior year: $m Up to one year Over 1 year to 5 years Over 5 years Total undiscounted lease liabilities as at 30 September 2019 Consolidated Parent Entity 608 1,716 1,421 3,745 555 1,583 1,305 3,443 The total cash outflow for the year ended 30 September 2020 for leases was $607 million for Group and $555 million for Parent Entity. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements 283 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 is granted to certain 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 ECL (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 in 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 in 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  284 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 Provision for impairment on credit commitments Lease restoration obligations Restructuring provisions Compliance, regulation and remediation provisions Total Balance at 30 September 2019 456 Additions Utilisation Reversal of unutilised provisions Other 95 (40) - - 614 795 (794) (19) - 38 1,391 (46) (9) (3) 305 225 - - - 24 197 (12) (1) - 160 126 (110) - - 1,572 3,169 1,107 3,936 (567) (1,569) (217) (246) - (3) Balance at 30 September 2020 511 596 1,371 530 208 176 1,895 5,287 Parent Entity Balance at 30 September 2019 428 Additions Utilisation Reversal of unutilised provisions Other 92 (38) - - 557 749 (747) (19) - 23 1,358 (34) (3) (1) 275 204 - - - 24 166 (10) (1) - 160 92 (110) - - 1,513 2,980 1,052 3,713 (537) (1,476) (210) (233) - (1) Balance at 30 September 2020 482 540 1,343 479 179 142 1,818 4,983 Legislative liabilities The Group had the following assessed liabilities as at 30 September 2020: • • • • • • • $22 million (2019: $22 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 (2019: $7 million) based on actuarial assessment as a self-insurer under the Accident Compensation Act 1985 (Victoria); $6 million (2019: $6 million) based on actuarial assessment as a self-insurer under the Workers’ Rehabilitation and Compensation Act 1986 (South Australia); $1 million (2019: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Rehabilitation Act 2003 (Queensland); $Nil (2019: $nil) based on an actuarial assessment as a self-insurer under the Workers’ Compensation Act 1951 (Australian Capital Territory); $1 million (2019: $1 million) based on an actuarial assessment as a self-insurer under the Workers’ Compensation and Injury Management Act 1981 (Western Australia); and $1 million (2019: $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. Provisions Litigation and non-lending loss provisions A provision for a penalty in relation to the AUSTRAC civil proceedings. On 24 September 2020, Westpac announced that it had reached an agreement with AUSTRAC to resolve the civil penalty proceedings commenced by AUSTRAC on 20 November 2019, subject to Court approval. Under the agreement, the parties agreed to file with the Court a Statement of Agreed Facts and Admissions, and to recommend to the Court that Westpac pay a civil penalty of $1.3 billion in relation to the admitted contraventions of the AML/CTF Act. Westpac also agreed to pay AUSTRAC’s legal costs of $3.75 million. The settlement was approved by the Court on 21 October 2020 and the penalty and AUSTRAC’s legal costs are to be paid within 28 calendar days of this date. In light of the above developments, Westpac has increased the provision in respect of the penalty from $900 million provided for in the First Half 2020 results to $1.3 billion and has also provided for AUSTRAC’s legal costs. WESTPAC GROUP 2020 ANNUAL REPORT 285 Notes to the financial statements Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued) Westpac is defending a class action proceedings filed by Phi Finney McDonald in Australia relating to market disclosure issues connected to Westpac’s monitoring of financial crime over the relevant period and matters which are the subject of the recent AUSTRAC proceedings. The claims are brought on behalf of certain shareholders who acquired an interest in Westpac securities between 16 December 2013 and 19 November 2019. It does not identify the amount of any damages sought, however given the time period in question and the nature of the claims it is likely that the damages which will be alleged will be significant. No provision has been recognised in relation to this potential exposure. Compliance, regulation and remediation provisions Provisions for the Full Year 2020 in respect of compliance, regulation and remediation include: • • • • estimated customer refunds associated with certain ongoing advice service fees charged by the Group’s salaried financial planners; estimated 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 customers who were provided with business loans where they should have been provided with loans covered by the National Consumer Credit Protection Act 2009 (Cth). Certain compliance, regulation and remediation provisions are described further as follows: Estimated customer refunds associated with certain ongoing advice service fees charged by the Group’s salaried financial planners At balance date, Westpac has a provision of $112 million for customer refunds associated with certain ongoing advice service fees charged by the Group’s salaried financial planners during the period 2008 to 2018. A number of estimates and judgements continue to be applied in measuring the provision at FY20. The provision includes estimated interest and estimated program costs. Ongoing advice service fees charged by authorised representatives of Securitor and Magnitude. At balance date, Westpac has a provision of $646 million relating to estimated customer remediation costs (including interest on refunded fees and additional costs to run 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. At balance date, A number of estimates and judgements continue to be applied in measuring the provision at 30 September 2020. It is possible that the final outcome could be below or above the provision, if the actual outcome differs from 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 carries restructuring provisions in relation to changes in business restructures primarily for separation and redundancy costs. Lease restoration obligations The addition to the lease restoration provision reflects a reassessment of the cost of making good leasehold premises at the end of the Group’s property leases. The increase in the expected make-good cost has been treated as an addition to the right-of-use asset and is being depreciated over the remaining life of those assets. 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 investigations, reviews and inquiries Regulators, statutory authorities and other bodies routinely conduct investigations, reviews and inquiries involving the financial services sector, both in Australia and overseas. These regulatory actions may consider a range of subject matter, and in Australia, a number of regulatory investigations and reviews are currently considering potential misconduct in credit and financial services. Domestic regulators such as ASIC, APRA, ACCC, AUSTRAC, the OAIC, the ATO and the Fair Work Ombudsman, 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 are also currently conducting investigations (some of which are industry-wide) involving the Group. Two specific areas of investigation undertaken by ASIC are: 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  286 Notes to the financial statements Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued) • Ongoing advice services – A current set of regulatory actions involve investigations by ASIC into alleged ‘fee for no service’ activity. The first relates to ongoing advice services provided by the Group’s former salaried financial planners and by authorised representatives of the Group’s wholly owned subsidiaries Securitor and Magnitude and whether the corresponding ongoing advice was provided in all circumstances. The second relates to advice service fees charged or deducted from some customer accounts (including platform and superannuation accounts) following the death of the relevant account holder. ASIC’s investigations relate to the periods between 2010 and 2019. ASIC commenced both of these investigations in 2019 and is examining a range of matters, including whether Westpac had appropriate systems and processes in place to ensure that customers received the advice services that they had paid for, and the processes for ensuring ongoing fees were terminated quickly enough following the death of some members. The Group is continuing to cooperate fully with ASIC’s investigations and remediate affected accounts where appropriate. To date, ASIC has commenced a number of civil penalty proceedings against other financial entities in relation to fee for no service activity. • Consumer credit insurance - ASIC is also investigating Westpac’s past sales practices in relation to Consumer Credit Insurance (CCI). This investigation follows ASIC’s industry-wide review of CCI sales practices between the period 2011 and 2018. Westpac ceased selling CCI products in branch and contact centre channels in November 2018, and ceased online sales in June 2019. ASIC’s investigation is a separate matter to the Federal Court class action proceedings commenced against Westpac, Westpac General Insurance Limited and Westpac Life Insurance Services Limited. Further information about this class action is set out in the ‘Litigation’ section below. In addition, there are investigations covering a range of other matters (some of which are industry-wide) that involve or may involve the Group in the future, including: • • • the provision of financial advice, including whether personal advice obligations have been complied with and the conduct of financial planners; financial markets conduct, including market activity prior to entering into interest rate swaps with certain customers; Westpac’s practices relating to selling unsecured debt; and the adequacy of fee disclosure charged for our products and services; and other areas such as responsible lending, residential mortgages, credit portfolio management, general insurance, the provision of superannuation (including insurance in superannuation), privacy and information governance, competition law conduct and anti-money laundering and counter-terrorism financing processes and procedures. The Group has not received any indication of what (if any) action regulators will take following the conclusion of the investigations set out above. No provisions have yet been made in relation to any financial penalty that might arise in the event that regulators were to pursue enforcement proceedings, as any potential future liability of that kind cannot be reliably estimated at this time. These investigations may result in litigation (including class action proceedings), fines and penalties, infringement notices, enforceable undertakings, imposition of capital requirements, licence revocation or variation, or other action being taken by regulators or other parties. Given the size of Westpac, these investigations have in some instances resulted, and could in the future result, in findings of a significant number of breaches of obligations. This in turn could lead to significant financial and other penalties. 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. Except as otherwise stated, no provision has been recognised in relation to the matters below because liability is not certain and cannot be reliably estimated. Regulatory litigation • • 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. The litigation has recently gone through an appeal process, with the most recent appeal being brought by Westpac in the High Court of Australia. The judgment will relate to whether BTFM and WSAL each provided personal advice on relevant telephone calls made to 14 of the 15 specific customers (who were the focus of the claim) and consequentially contravened the Corporations Act 2001 (Cth) (including section 912A(1)(a)). On 20 August 2020, ASIC commenced proceedings in the Federal Court against BTFM and Asgard Capital Management Limited (ACML), in relation to an issue that was a case study in the Financial Services Royal Commission. The allegations concern the inadvertent charging of financial adviser fees to 404 customers totalling $130,006 after a request had been made to remove the financial adviser from the customers’ accounts. The issue was self-reported to ASIC in 2017 and customers have been remediated. BTFM and ACML accept the allegations made by ASIC and do not intend to defend the proceedings. Westpac is now working through the relevant Court procedural steps to try to bring the matter to a resolution. WESTPAC GROUP 2020 ANNUAL REPORT 287 Notes to the financial statements Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued) Class actions The Group is currently defending the following five class actions: • • • • • 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 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. The matter has been set down for an initial trial in May 2021. The damages sought are unspecified. On 5 September 2019, a class action against BTFM and WLIS was commenced in the Federal Court of Australia in relation to aspects of BTFM’s BT Super for Life cash investment option. The claim follows other industry class actions. It is alleged 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 are unspecified. A class action proceeding was commenced in December 2019 in the Federal Court of Australia, on behalf of certain investors who acquired an interest in Westpac securities between 16 December 2013 and 19 November 2019. The proceeding involves allegations relating to market disclosure issues connected to Westpac’s monitoring of financial crime over the relevant period and matters which are the subject of the recent AUSTRAC proceedings. The damages sought are unspecified. However, given the time period in question and the nature of the claims it is likely that the damages which will be alleged will be significant. On 28 February 2020, a class action was commenced against Westpac, Westpac General Insurance Limited and WLIS in the Federal Court of Australia in relation to Westpac’s sale of CCI. The claim follows other industry class actions. It is alleged that the three entities failed to adhere to a number of obligations in selling CCI in conjunction with credit cards, personal loans and flexi loans. The damages sought are unspecified. Westpac no longer sells CCI products. On 16 July 2020, a class action was commenced against Westpac and St George Finance Limited (SGF) in the Supreme Court of Victoria in relation to flex commissions paid to auto dealers from 1 March 2013 to 31 October 2018. This proceeding is one of two class actions commenced against a number of lenders in the auto finance industry. It is alleged that Westpac and SGF are liable for the unfair conduct of dealers acting as credit representatives and engaged in misleading or deceptive conduct. The damages sought are unspecified. Another law firm publicly announced in July 2020 that it is preparing to commence a class action against Westpac entities for similar conduct. Westpac has not paid flex commissions since 1 November 2018 following an industry-wide ban issued by ASIC. Westpac is aware from media reports and other publicly available material that other class actions against Westpac entities are being investigated. In July 2020, one law firm publicly stated that it intends to commence a class action against BTFM alleging that since 2014, BTFM did not act in the best interests of members of certain superannuation funds when obtaining group insurance policies. In August 2020, another law firm announced that it is investigating claims on behalf of persons who in the past 6 years acquired, renewed or continued to hold a financial product (including life insurance) on the advice or recommendation of a financial adviser from Magnitude, Securitor or Westpac. Westpac does not have any further information about the proposed claims beyond the public statements issued by the law firms involved. Internal reviews and remediation As in prior periods, Westpac is continuing to undertake a number of reviews to identify and resolve prior issues that have the potential to impact our customers and reputation. These internal reviews continue to identify a number of issues in respect of which we are taking steps or will take steps to put things right so that our customers are not at a disadvantage from certain past practices, including making compensation/remediation payments to customers and providing refunds where identified. These issues include compliance with lending obligations (including responsible lending) which is an area of industry focus, the provision of credit in accordance with the National Consumer Credit Protection Act 2009 (Cth), the charging of certain Wealth fees, the processing of corporate actions, reviewing third party remuneration arrangements and the way some product terms and conditions are operationalised. 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 (which could be brought by customers or regulators), compensation/remediation payments and/or refunds identified as part of these reviews. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  288 Notes to the financial statements Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued) 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, could 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. 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 FX). 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. WESTPAC GROUP 2020 ANNUAL REPORT 289 Notes to the financial statements Note 27. Provisions, contingent liabilities, contingent assets and credit commitments (continued) 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 liquidity and credit risk exposure varies in line with amounts drawn and may be 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 2020 $m Letters of credit and guarantees Commitments to extend credit Other Consolidated 2020 2019 Parent Entity 2020 2019 12,610 15,150 12,069 14,583 184,064 176,002 159,644 153,716 267 188 266 188 196,941 191,340 171,979 168,487 Up to 1 year Over 1 year to 3 years Over 3 years to 5 years Over 5 years Total 5,909 3,709 492 2,500 12,610 71,350 33,832 13,428 65,454 184,064 - - 67 200 267 Total undrawn credit commitments 77,259 37,541 13,987 68,154 196,941 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. 2. 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. 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 2020, the Group had offered $4.9 billion (2019: $5.0 billion) of facilities to customers, which had not yet been accepted. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Notes to the financial statements 290 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 onwards – AASB 9) This reserve was established on adoption of AASB 9 and comprises the changes in fair value of debt securities measured at FVOCI (except for interest income, impairment charges and FX 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 onwards – AASB 9) This reserve was established on adoption of AASB 9 and comprises the changes in fair value of equity securities measured at FVOCI, 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 NCI are adjusted and the fair value of any consideration paid or received. WESTPAC GROUP 2020 ANNUAL REPORT Notes to the financial statements Note 28. Shareholders’ equity (continued) $m Share capital Ordinary share capital, fully paid Treasury shares held for RSP1 Other treasury shares held2 Total treasury shares held Total share capital NCI 291 Consolidated 2020 2019 Parent Entity 2020 2019 40,509 37,508 40,509 37,508 (618) 55 (563) (572) 19 (553) (618) (3) (621) (572) (3) (575) 39,946 36,955 39,888 36,933 51 53 - - Ordinary shares Westpac does not have authorised capital and the ordinary shares have no par value. Ordinary shares entitle the holder to participate in dividends and, in the event of Westpac winding up, to a share of the proceeds in proportion to the number of and amounts paid on the shares held. Each ordinary share entitles the holder to one vote, either in person or by proxy, at a shareholder meeting. Reconciliation of movement in number of ordinary shares Consolidated and Parent Entity (number) Opening balance Share issuances3 Dividend reinvestment plan4 Closing balance Ordinary shares purchased and sold on market Consolidated and Parent Entity For share-based payment arrangements: Employee share plan (ESP) RSP5 Westpac Performance Plan (WPP) - share rights exercised As treasury shares: Treasury shares purchased Treasury shares sold Net number of ordinary shares purchased/(sold) on market For details of the share-based payment arrangements refer to Note 33. 2020 2019 3,489,928,773 3,434,796,711 110,919,861 - 10,836,236 55,132,062 3,611,684,870 3,489,928,773 2020 Number Average Price ($) 931,524 1,931,521 175,957 114,376 (1,835,908) 1,317,470 26.46 24.06 26.00 24.52 20.23 1. 2. 3. 4. 5. 2020: 4,588,277 unvested shares held (2019: 4,784,213). 2020: Nil shares held (2019: 1,721,532). The average price per share for the share issuance was $24.81. The price per share for the issuance of shares in relation to the dividend reinvestment plan for the 2019 final dividend was $25.17 (2019: 2019 interim dividend was $27.36 and 2018 final dividend was $25.82). Ordinary shares allocated to employees under the RSP are classified as treasury shares until the shares vest. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  292 Notes to the financial statements Note 28. Shareholders’ equity (continued) Reconciliation of movement in reserves $m Available-for-sale securities reserve Balance as at beginning of year Impact on adoption of AASB 9 Balance as at end of year Debt securities at FVOCI reserve Balance as at beginning of year Impact on adoption of AASB 9 Net gains/(losses) from changes in fair value Income tax effect Transferred to income statements Income tax effect Loss allowance on debt securities measured at FVOCI Exchange differences Balance as at end of year Equity securities at FVOCI reserve Balance as at beginning of year Impact on adoption of AASB 9 Net gains/(losses) from changes in fair value Balance as at end of year Share-based payment reserve Balance as at beginning of year Share-based payment expense Balance as at end of year Cash flow hedge reserve Balance as at beginning of year Net gains/(losses) from changes in fair value Income tax effect Transferred to income statements Income tax effect Balance as at end of year Foreign currency translation reserve Balance as at beginning of year Exchange differences on translation of foreign operations Gains/(losses) on net investment hedges Transferred to income statements Balance as at end of year Other reserves Balance as at beginning of year Transactions with owners Balance as at end of year Total reserves Consolidated 2020 2019 Parent Entity 2020 2019 - - - (22) - 360 (96) (79) 15 2 (3) 37 (37) - - 33 (47) 12 (29) 8 - 1 - - - (25) - 292 (77) (79) 15 2 (3) 24 (24) - - 25 (40) 10 (29) 8 - 1 177 (22) 125 (25) 17 - (21) (4) - 6 11 17 (1) - 1 - - 1 (2) (1) 1,642 1,534 1,533 1,425 78 108 78 108 1,720 1,642 1,611 1,533 (129) (95) 28 218 (64) (42) (125) (203) 60 197 (58) (129) (65) (28) 9 150 (46) 20 (69) (121) 36 128 (39) (65) (179) (351) (145) (307) (177) 9 55 311 (129) (10) (148) 17 55 214 (52) - (292) (179) (221) (145) (18) 3 (15) (18) - (18) 41 - 41 41 - 41 1,544 1,311 1,576 1,338 WESTPAC GROUP 2020 ANNUAL REPORT 293 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. APRA announcements on capital On 29 July 2020, APRA released further capital management guidance for ADIs1. This guidance included APRA’s expectation that for 2020, ADIs will retain at least half of their earnings, actively use dividend reinvestment plans (DRPs) and/or other capital management initiatives to at least partially offset the diminution in capital from distributions and conduct regular stress testing to inform decision-making and demonstrate ongoing lending capacity. APRA also committed to ensuring that any rebuild of capital buffers, if required, will be conducted in a gradual manner. APRA noted that the implementation of the Basel III capital reforms, which will embed the ‘unquestionably strong’ level of capital in the framework, has been postponed to 1 January 2023. Further details of APRA’s regulatory changes are set out in the Significant Developments section of the 2020 Annual Report. 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 regulatory and economic 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 as well as equity and debt investors. During the period of disruption caused by COVID-19, Westpac is operating with the following principles in relation to capital: • • • • prioritise maintaining capital strength; retain capital to absorb further downside on credit quality and acknowledge a high degree of uncertainty regarding the length and depth of this stress; allow for capital flexibility to support lending to customers; and in line with APRA guidance, Westpac will seek to maintain a buffer above the regulatory minimum (currently at least 8% for D-SIBs including Westpac) and may utilise some of the “unquestionably strong” buffer. At 30 September 2020, the CET1 buffer above the regulatory minimum of 8% is $13.7 billion. 1. Letter to Authorised Deposit Taking Institutions – Capital Management, 29 July 2020. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  294 Notes to the financial statements Note 29. Capital adequacy (continued) These principles take into consideration: • current regulatory capital minimums and the capital conservation buffer (CCB), which together are the Total CET1 Requirement. In line with the above, the Total CET1 Requirement for Westpac is at least 8.0%, based upon an industry minimum CET1 requirement of 4.5% plus a capital buffer of at least 3.5% applicable to D-SIBs1,2; • 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 levels once the medium to longer term impacts of COVID-19 are clearer and APRA’s review of the capital adequacy framework is finalised. Note 30. Dividends $m Dividends not recognised at year end Consolidated 2020 2019 2018 Parent Entity 2020 2019 Since year end the Directors have proposed the following dividends: Final dividend 31 cents per share (2019: 80 cents, 2018: 94 cents) all fully franked at 30% 1,120 2,791 3,227 1,120 2,792 Total dividends not recognised at year end 1,120 2,791 3,227 1,120 2,792 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 2020 final dividend and to apply a 1.5% discount to the market price used to determine the number of shares issued under the DRP. The market price used to determine the number of shares issued under the DRP will be set over the 15 trading days commencing 17 November 2020. Westpac has also entered into an agreement to underwrite the DRP to the full amount of the 2020 final dividend. 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 $3,448 million (2019: $1,558 million, 2018: $1,357 million). This is calculated as the year end franking credit balance, adjusted for the Australian current tax liability and the proposed 2020 final dividend. New Zealand imputation credits New Zealand imputation credits of NZ$0.07 (2019: NZ$0.07, 2018: NZ$0.07) per share will be attached to the proposed 2020 final dividend. New Zealand imputation credits available to the Parent Entity for subsequent years are NZ$980 million (2019: NZ$860 million, 2018: NZ$530 million). This is calculated on the same basis as the Australian franking credits but using the New Zealand current tax liability. 1. 2. Noting that APRA may apply higher CET1 requirements for an individual ADI. If an ADI’s CET1 ratio falls below the Total CET1 Requirement (at least 8%), they faces restrictions on the distribution of earnings, such as dividends, distribution payments on AT1 capital instruments and discretionary staff bonuses. WESTPAC GROUP 2020 ANNUAL REPORT 295 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 2020. Name Country of incorporation Name Advance Asset Management Limited Australia Westpac Financial Services Group Limited Asgard Capital Management Limited Australia Westpac General Insurance Services Limited Asgard Wealth Solutions Limited Australia Westpac Securitisation Holdings Pty Limited BT Financial Group Pty Limited Australia Westpac Life-NZ-Limited BT Funds Management Limited Australia Westpac New Zealand Group Limited BT Portfolio Services Limited Australia Westpac New Zealand Limited Capital Finance Australia Limited Australia Westpac NZ Covered Bond Limited1 Crusade Trust No.2P of 2008 Series 2008-IM WST Trust Westpac Covered Bond Trust Australia Westpac NZ Securitisation Limited1 Australia Westpac Securities NZ Limited Australia Westpac Term Pie Fund2 Country of incorporation Australia Australia Australia 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 1. 2. The Group indirectly owns 19% of Westpac NZ Covered Bond Limited (WNZCBL) and Westpac NZ Securitisation Limited (WNZSL), however, due to contractual and structural arrangements both WNZCBL and WNZSL are considered to be controlled entities within the Group. 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  296 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 Westpac Bank-PNG-Limited Westpac NZ Covered Bond Limited Westpac NZ Securitisation Limited 2020 89.9% 19.0% 19.0% 2019 89.9% 19.0% 19.0% Non-controlling interests Details of the balance of NCIs are set out in Note 28. There are no NCIs 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 NCIs. Associates There are no associates that are material to the Group. During the year ended 30 September 2020, Westpac ceased to exert significant influence over Zip Co Limited and this investment is now recognised at FVIS. As a result the Group recognised a gain on derecognition of associate in non-interest income of $316 million (Refer to Note 4). Changes in ownership of subsidiaries Businesses disposed during the year ending 30 September 2020 No businesses were sold in the year ended 30 September 2020 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. Details of the assets and liabilities which the Group ceased to control are provided in Note 37. WESTPAC GROUP 2020 ANNUAL REPORT 297 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 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  298 Notes to the financial statements Note 32. Structured entities (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 2020 $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 entities2 Consolidated 2019 $m Assets Trading securities and financial assets measured at FVIS Investment securities Loans Life insurance assets Other assets Investment in third party mortgage and other asset-backed securities1 Financing to securitisation Group managed Interest in other structured vehicles funds entities Total 1,526 6,105 - - - - - 20,094 - - 7,631 20,094 - 6,122 - - - 204 52 256 44 34 - 1,560 6,105 16,955 37,049 129 - 333 52 17,118 45,099 7,768 13,934 7,631 26,216 300 24,886 59,033 59,324 26,216 67,423 40,209 193,172 Investment in third party mortgage and other asset-backed securities1 Financing to securitisation Group managed Interest in other structured vehicles funds 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 Total on-balance sheet exposures 8,767 20,979 4,948 24,978 59,672 Total notional amounts of off-balance sheet exposures - 5,157 102 10,086 15,345 Maximum exposure to loss Size of structured entities2 8,767 26,136 5,050 35,064 75,017 66,015 26,136 71,538 98,983 262,672 Non-contractual financial support The Group does not provide non-contractual financial support to these unconsolidated structured entities. 1. 2. The Group’s interests in third party mortgage and other asset-backed securities are senior tranches of notes and are investment grade rated. 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). WESTPAC GROUP 2020 ANNUAL REPORT 299 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 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. Share rights 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 rights are 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 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 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) Type of share- based payment Share rights (allocated at no cost). Westpac Performance Plan (WPP) Share rights (allocated at no cost). How it is used 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. Restricted Share Plan (RSP) Employee Share Plan (ESP) Westpac ordinary 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). Shares rights Nil Nil n/a n/a 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  300 Notes to the financial statements Note 33. Share-based payments (continued) Westpac Performance Plan (WPP) Restricted Share Plan (RSP) Employee Share Plan (ESP) None None None Scheme name Performance hurdles Westpac Long Term Variable Reward Plan (LTVR) 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. Service conditions Continued employment throughout the vesting period or as determined by the Board. Continued employment throughout the vesting period or as determined by the Board. 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) 4 years1 Defined period set out at time of grant. Defined period set out at time of grant. 1 year Treatment at end of term Automatically exercised at the end of the term. Automatically exercised at the end of the term. Vested shares are released from the RSP at the end of the vesting period. Shares are released at the end of the restriction period or when the employee leaves Westpac. 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) 2020 Share rights Outstanding at 1 October 2019 Granted during the year Exercised during the year Lapsed during the year Outstanding at 30 September 2020 Outstanding and exercisable at 30 September 2020 4,554,589 779,581 - 2,267,844 3,066,326 3,719 Weighted average remaining contractual life 2019 Share options Weighted average exercise price 12.3 years 1 October 2018 52,350 $23.40 12.4 years 30 September 2019 - - 37,831 14,519 $23.40 - - - - - Share rights 4,712,843 1,169,704 - 1,327,958 4,554,589 3,719 The weighted average fair value at grant date of LTVR share rights issued during the year was $28.44 (2019: $15.62). 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 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 (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 and cash EPS CAGR hurdles are subject to a three year performance and vesting period. WESTPAC GROUP 2020 ANNUAL REPORT 301 Notes to the financial statements Note 33. Share-based payments (continued) (ii) Westpac Performance Plan (WPP) 2020 Share rights Outstanding at 1 October 2019 Granted during the year Exercised during the year Lapsed during the year Outstanding at 30 September 2020 Outstanding and exercisable at 30 September 2020 One-year vesting period Two-year vesting period Three-year vesting period 197,888 289,909 95,249 120,562 113,649 18,357 Four-year vesting period 203,420 186,290 75,417 79,568 20,972 - Total share rights 786,466 438,858 175,957 36,792 31,049 15,786 8,605 92,232 206,241 292,941 76,848 381,105 957,135 90,451 55,846 17,922 - 164,219 Weighted average remaining contractual life 2019 Share rights 12.8 years 1 October 2018 12.8 years 30 September 2019 673,889 385,646 184,043 89,026 786,466 130,946 The weighted average fair value at grant date of WPP share rights issued during the year was $24.68 (2019: $23.08). (iii) Restricted Share Plan (RSP) Allocation date Total 2020 Total 2019 Outstanding at 1 October 2019 Granted during the year Released Forfeited during the year Outstanding at 30 September 2020 4,773,171 2,100,030 2,081,545 402,495 4,189,644 2,861,262 2,214,509 63,226 4,389,161 4,773,171 The weighted average fair value at grant date of RSP shares issued during the year was $23.88 (2019: $25.20). (iv) Employee Share Plan (ESP) Allocation Number of Average number of shares allocated per Total number of shares Market date participants participant allocated price per share1 Total fair value 2020 2019 21 November 2019 23 November 2018 25,725 27,245 38 39 977,550 1,062,555 $26.20 $25,611,810 $25.35 $26,935,769 The 2019 ESP award was satisfied through the purchase of shares on market. The liability accrued for the ESP at 30 September 2020 is $28 million (2019: $26 million) and is provided for as other employee benefits. (v) 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. (vi) Fair value assumptions The fair values of 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 0.8%, applied to TSR-hurdled grants; a dividend yield on Westpac shares of 6.5%, applied to TSR and ROE-hurdled grants; volatility in Westpac’s TSR of 21%, applied to TSR-hurdled grants; and volatilities of, and correlation factors between, TSR of the comparator group and Westpac for TSR-hurdled grants. 1. The market price per share for the allocation is based on the five day volume-weighted average price up to the grant date. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  302 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 OCI. 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 resulting remeasurement recognised in OCI and the superannuation cost recognised in the income statement. Westpac had the following defined benefit plans at 30 September 2020: 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)1 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 cash flows payable by the Group; and • legislative risk – legislative changes could be made which increase the cost of providing defined benefits. Investment risk is managed by setting benchmarks for the allocation of plan assets between asset classes. The long-term investment strategy will often adopt relatively high levels of equity investment in order to: • • secure attractive long term investment returns; and provide an opportunity for capital appreciation and dividend growth, which gives some protection against inflation. Funding recommendations for the WGP, WNZS and the UKSS are made based on triennial actuarial valuations. 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 $154 million (2019: $158 million). Current contribution rates are as follows: • • • WGP – contributions are made to the WGP at the rate of 12.1% of members’ salaries; WNZS – contributions are made to the WNZS at the rate of 17% of members’ salaries; and UKSS – not required to make contributions under the 2018 actuarial assessment. Contributions $m Employer contributions Member contributions Consolidated 2020 26 10 2019 28 11 Parent Entity 2020 26 10 2019 27 11 Expected employer contributions for the year ended 30 September 2021 are $25 million. 1. The 30 June 2020 actuarial assessment of the funding status of the WNZS will be available by January 2021. Where applicable, the 30 June 2020 interim valuation data has been used. WESTPAC GROUP 2020 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) 303 Consolidated 2019 2020 44 8 52 33 (2) 31 2018 37 1 38 Parent Entity 2020 2019 43 8 51 32 (2) 30 Consolidated 2020 2019 Parent Entity 2020 2019 2,880 2,350 (530) 71 (601) (530) 2,799 2,464 (335) 73 (408) (335) 2,790 2,295 (495) 71 (566) (495) 2,710 2,405 (305) 73 (378) (305) The average duration of the defined benefit obligation is 14 years (2019: 14 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 2020 2019 Australian funds Overseas funds Australian funds Overseas funds 2.6% 0.7%-1.5% 2.6% 1.1%-1.8% 2.7% 3.0%-4.6% 2.4% 3.0%-4.9% 1.7% 2.0% - 3.1% 1.4% 2.0%-3.4% 31.3 28.1-28.2 31.1 27.9-28.1 34.2 29.5-29.6 34.0 29.3-29.5 Sensitivity to changes in significant assumptions The following table 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. $m 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 $m Cash Equity instruments Debt instruments Property Other assets Total Increase in obligation 2020 230 19 201 68 2019 205 14 188 45 2020 2019 Australian funds Overseas funds Australian funds Overseas funds 6% 45% 25% 8% 16% 100% 1% 9% 4% 1% 85% 100% 3% 45% 28% 10% 14% 100% 3% 7% 5% 1% 84% 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 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. 2. The defined benefit surplus is recognised in other assets. The defined benefit deficit is recognised in other liabilities. WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  304 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 2020 2019 Parent Entity 2020 2019 27,667 28,153 27,667 28,025 5,295 3,216 705 321 32,962 31,369 28,372 28,346 4,404 3,569 4,404 3,418 107 128 - 2 4,511 3,697 4,404 3,420 37,473 35,066 32,776 31,766 57 57 - - - 53 53 70 502 572 57 57 - - - 53 53 70 502 572 37,530 35,691 32,833 32,391 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 Board Audit Committee in accordance with Westpac’s Pre-Approval of Engagement of PricewaterhouseCoopers for Audit or Non-Audit Services Policy. PwC also received fees of $6.1 million (2019: $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. WESTPAC GROUP 2020 ANNUAL REPORT 305 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 $361 million (2019: $347 million) to defined contribution plans and $26 million (2019: $28 million) to defined benefit plans. Refer to Note 34. Remuneration of KMP Total remuneration of the KMP was: $ Consolidated 2020 2019 Parent Entity 2020 2019 Short-term benefits Post employment benefits Other long- term benefits Termination benefits Share-based payments Total 22,759,397 967,898 657,375 1,176,487 3,748,106 29,309,263 23,805,197 712,883 36,572 558,984 20,691,480 45,805,116 21,766,691 873,350 657,375 1,176,487 3,035,423 27,509,326 22,515,477 625,173 36,572 558,984 19,783,900 43,520,106 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: $ 2020 2019 Interest payable for the year Closing loan balance Number of KMP with loans 549,257 15,779,157 672,167 31,718,007 8 14 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  306 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 2020 by the CEO and other key management personnel (including their related parties): Managing Director & Chief Executive Officer Peter King Group Executives Rebecca Lim1 Guilherme Lima Carolyn McCann David McLean Christine Parker Michael Rowland David Stephen Gary Thursby Les Vance Jason Yetton Acting Group Executives Richard Burton Alastair Welsh Curt Zuber Former Group Executive Brian Hartzer Craig Bright Lyn Cobley David Lindberg Latest Date of Exercise Number of Share Rights Ranges from 1 October 2031 to 1 October 2034 346,795 Ranges from 1 October 2031 to 1 October 2034 1 October 2034 Ranges from 1 October 2032 to 2 April 2035 Ranges from 1 October 2022 to 1 October 2034 Ranges from 1 October 2031 to 1 October 2034 n/a Ranges from 1 October 2032 to 1 October 2034 Ranges from 1 October 2031 to 1 October 2034 2 April 2035 2 April 2035 n/a n/a n/a n/a n/a Ranges from 1 October 2031 to 1 October 2034 n/a 220,403 57,819 102,207 382,588 252,231 - 364,381 250,336 22,227 54,213 - - - - - 319,631 - The Group has not issued any options during the year and there are no outstanding options as at 30 September 2020. 1. Rebecca Lim was the Group Executive, Legal & Secretariat until 16 December 2019 when she was appointed Enterprise Legal Counsel focusing on AUSTRAC matters. Rebecca Lim resumed her Group General Counsel role when she was appointed the Group General Counsel & Enterprise Executive on 18 May 2020. WESTPAC GROUP 2020 ANNUAL REPORT 307 Notes to the financial statements Note 37. Notes to the cash flow statements 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: $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 Cash flows from operating activities before changes in operating assets and liabilities Net (increase)/decrease in derivative financial instruments Net (increase)/decrease in life insurance assets and liabilities (Increase)/decrease in other operating assets: Consolidated 2019 2020 2018 Parent Entity 2020 2,292 6,790 8,099 2,658 2,473 3,371 (1,112) 239 (1,260) 1,925 (693) 7,235 1,851 (277) 1,079 966 (541) 132 (341) 1,143 (832) 1,144 889 (96) (83) 241 289 332 8,396 7,605 10,815 8,584 (134) (230) 2,142 2,864 (937) 208 (1,143) 2,003 (1,114) 6,681 2,103 - Collateral paid 348 (847) 969 329 Trading securities and other financial assets measured at FVIS (8,756) (7,629) 3,492 (8,266) Loans Other financial assets Other assets (Decrease)/increase in other operating liabilities: Collateral received Deposits and other borrowings Other financial liabilities Other liabilities 18,272 (4,188) (24,740) 21,273 273 70 336 (13) 859 10 283 50 (1,096) 1,007 (295) (1,072) 1,004 28,910 1,113 23,928 20,859 11,817 1,463 (3,632) 11,866 4 (5) 10 (7) 963 1,555 (24) Net cash provided by/(used in) operating activities 58,651 7,104 19,770 54,099 7,891 2019 7,121 1,082 893 (804) 98 (321) 1,214 (329) 8,954 6,581 - (755) (7,358) (3,312) 324 (41) 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  308 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 other financial assets measured at FVIS 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 WBC Cash proceeds received (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) Non-cash financing activities $m Shares issued under the dividend reinvestment plan Shares issued from the conversation of Westpac CPS Increase in lease liabilities Consolidated 2019 2020 2018 Parent Entity 2020 2019 - - - - - - - - - - - - - - - - - - 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 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Consolidated 2019 1,489 - - 2020 273 - 177 2018 631 566 - Parent Entity 2020 273 - 173 2019 1,489 - - 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 $457 million (2019: $330 million) for the Group and $380 million (2019: $224 million) for the Parent Entity which are included in cash and balances with central banks. WESTPAC GROUP 2020 ANNUAL REPORT 309 Notes to the financial statements Note 38. Subsequent events Since 30 September 2020, the Board has determined to pay a fully franked final dividend of 31 cents per fully paid ordinary share. The dividend is expected to be $1,120 million. The dividend is not recognised as a liability at 30 September 2020. The proposed payment date of the dividend is 18 December 2020. The Board has determined to issue shares to satisfy the Dividend Reinvestment Plan (DRP) for the 2020 final ordinary dividend. The DRP will include a 1.5% discount to the market price used to determine the number of shares issued under the DRP. The market price used to determine the number of shares issued under the DRP will be set over the 15 trading days commencing 17 November 2020. Subsequent to the end of the financial year the Group’s General Insurance business met the criteria to be classified as held for sale. The General Insurance business currently forms part of the Specialist Businesses segment. Completion of the expected sale would have no material impact on the Group. No other matters have arisen since the year ended 30 September 2020 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 years prior to 2019 Due to the Group’s adoption of AASB 9 in 2019, the accounting policies relating to some financial instruments and related balances have changed. The policies applicable to 2020 and 2019 are provided in the relevant note to the financial statements above. As comparative years prior to 2019 were not restated, the accounting policies detailed below reflect the policies applicable to financial years prior to 2019 based on AASB 139. 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 uncollectable loans is consistent with that applicable to 2020 and 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  310 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 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 provision for impairment charges except for a portfolio of loans which are subsequently measured at fair value to reduce an accounting mismatch. WESTPAC GROUP 2020 ANNUAL REPORT Statutory statements 311 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 2020 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 2020 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. John McFarlane Chairman Sydney 1 November 2020 Peter King Managing Director & Chief Executive Officer 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  312 Statutory statements Independent auditor’s report To the members of Westpac Banking Corporation Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Westpac Banking Corporation (the Parent Entity) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Parent Entity’s and the Group's financial positions as at 30 September 2020 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 2020 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 thenended 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 (including Independence Standards) (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. WESTPAC GROUP 2020 ANNUAL REPORT 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. ● ● ● ● ● ● ●  Statutory statements 313 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 materiality of $350 million, which represents approximately 5% of the Parent Entity's weighted average 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 profit before tax because, in our view, it is the benchmark against which performance is most commonly measured. Due to fluctuations in profit and loss from year to year, we chose a weighted three year average. We utilised approximately 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 determine 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 determined 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 components, 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, the Specialist Businesses 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE 2 ● ● ● ● ● ● ● ● ­  314 Statutory statements 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 testing the effectiveness of controls relating to the Group's ECL estimation process, which included controls over the data, model and assumptions used in determining the provision for ECL 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 Group's process for determining the provision for ECL by evaluating the appropriateness of the models and the reasonableness of the assumptions, (ii) testing the accuracy and completeness of selected critical data elements that are inputs used in the ECL model, (iii) testing the reasonableness of overlay adjustments to the ECL. and (iv) testing of the user access to relevant IT systems used in determining the provision for ECL. Provision for expected credit losses on loans and credit commitments As described in Note 13 to the financial statements, the provision for expected credit losses on loans and credit commitments (ECL) was $6,132 million for the Group and $5,172 million for the Parent Entity at 30 September 2020. 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 Group's model to determine the ECL includes significant judgement in assumptions used to determine when a significant increase in credit risk (SICR) has occurred, estimating forward looking macroeconomic scenarios (MES), applying a probability weighting to different scenarios and identifying and calculating adjustments to model output (overlays). The economic uncertainty has increased the impact of certain judgements made by the Group, specifically relating to forward-looking assumptions applied to the probability of default of individual customers and the associated macroeconomic scenarios that are applied across the Group's portfolio. Where customers have been granted payment deferrals, their loans have not been deemed to be delinquent, and as a result, the Group have applied additional judgements related to the likelihood borrowers with certain characteristics have resulted in SICR. 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 is a key audit matter are: (i) there was significant judgement and effort in evaluating audit evidence related to the model and WESTPAC GROUP 2020 ANNUAL REPORT 3  Statutory statements 315 Key audit matter How our audit addressed the key audit matter assumptions used to determine the provision for ECL on loans, (ii) there was significant judgement and effort in evaluating audit evidence related to the identification and calculation of overlay adjustments to the ECL due to the impacts of current conditions and forecasts of future economic conditions, (iii) the nature and extent of audit testing related to critical data elements used in the model, (iv) the audit effort involved the use of professionals with specialised skill and knowledge, 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. Provisions and contingent liabilities As described in Note 27 to the financial statements, the compliance, regulation and remediation provisions were $1,895 million for the Group and $1,818 million for the Parent Entity at 30 September 2020. Litigation and non-lending loss provisions were $1,371 million for the Group and $1,343 million for the Parent Entity at 30 September 2020. We collectively referred to these as the "provisions". 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 to the Group 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 considers appropriate. Litigation and non-lending loss provisions primarily relate to a civil penalty of $1.3 billion in relation to the admitted contraventions of the AML/CTF Act from the AUSTRAC proceeding which was agreed by the Federal Court of Australia. Disclosures are also made in Note 27 for contingent (abilities 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 estimated. Our procedures included testing the effectiveness of controls relating to the Group's evaluation of provisions to determine whether a present obligation with a probable outflow exists and can be reliably estimated. For contingent liabilities, these procedures also included testing the effectiveness of controls relating to the Group's evaluation, including controls over determining whether or not it is possible that a loss has occurred or whether there is a probable outflow from a present obligation. These procedures also included, among others evaluating the evidence of the quantification of provisions and the assumptions applied and assessing the appropriateness of disclosures. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE 4  316 Statutory statements Key audit matter How our audit addressed the key audit matter The principal considerations for our determination that performing procedures relating to the provisions and contingent liabilities is a key audit matter were that there was significant judgement by the Group to quantify the provisions which included assumptions related to the probability of loss and the timing, nature and quantum of related cash outflows. This in turn led to a high degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence related to the provisions and key assumptions and in evaluating the appropriateness of the related disclosure. Impairment of goodwill As described in Note 25 to the financial statements, the goodwill balance was $8,397 million for the Group and $6,728 million for the Parent Entity at 30 September 2020. The Group conducts an annual impairment assessment, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. Potential impairment is identified by comparing the value-in-use of a cash generating unit C'CGU”) to its carrying value, including goodwill. The value-in-use for each of the CGUs is estimated by the Group using a discounted cash flow model. The Group's value-in-use models for the CGUs include significant judgements and assumptions relating to cash flow projections, terminal growth rates, and the discount rate. This impairment test resulted in impairment charges of $498 million for the Group and $116 million for the Parent Entity. The principal considerations for our determination that performing procedures relating to the impairment of goodwill is a key audit matter are: (i) there was significant judgement by the Group when developing key assumptions used in the determination of the value-in-use, which in turn led to a high degree of auditor subjectivity and effort in performing procedures and evaluating audit evidence related to Group's cash flow projections, terminal growth rate and discount rate assumptions, and (ii) the audit effort involved the use of professionals with specialised skill and knowledge. Our procedures included testing of the effectiveness of the controls related to the Group's goodwill impairment assessment which includes the review over the reasonableness of the Group's key assumptions. These procedures also included, among others: (I) testing the Group's process for developing the value-in-use estimate of the CGUs including evaluating the appropriateness of the value-in-use methodology, (ii) evaluating the significant assumptions used by the Group related to cash flow projections, terminal growth rate and the discount rate, and (iii) developing an independent estimate for a CGU Evaluating the Group’s assumptions related to the terminal growth rates of the CGUs involved evaluating whether the assumptions used by the Group were reasonable considering: (i) the current and past performance of the CGUs (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialised skill and knowledge were used to assist in the evaluation of the reasonableness of the discount rate and terminal rate assumptions in relation to the value-in-use estimates and develop an independent estimate to compare to the Group's value-in-use estimate for a CGU. WESTPAC GROUP 2020 ANNUAL REPORT 5  Statutory statements 317 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 2020, 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/admin/file/contentl02/c3/arl_2020.pdf. This description forms part of our auditor's report. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE 6  318 Statutory statements 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 2020. In our opinion, the Remuneration Report of Westpac Banking Corporation for the year ended 30 September 2020 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 1 November 2020 WESTPAC GROUP 2020 ANNUAL REPORT 7  319 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. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  320 Statutory statements This page has been intentionally left blank. WESTPAC GROUP 2020 ANNUAL REPORT Shareholder information SECTION 4 Shareholding information Additional information Information for shareholders Glossary of abbreviations and defined terms Contact us 321 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Shareholding information 322 Shareholding information Westpac ordinary shares Top 20 ordinary shareholders as at 2 October 2020 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Nominees Pty Limited BNP Paribas NOMS Pty Ltd HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited Australian Foundation Investment Company Limited Pacific Custodians Pty Limited Argo Investments Limited Milton Corporation Limited Netwealth Investments Limited BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd AMP Life Limited Navigator Australia Ltd Australian Executor Trustees Limited Nulis Nominees (Australia) Limited Floralcrest Proprietary Limited HSBC Custody Nominees (Australia) Limited - A/C 2 Total of Top 20 registered shareholders1 Number of Fully Paid Ordinary Shares 804,970,476 528,649,872 226,608,549 120,260,184 61,608,360 37,299,817 28,734,255 24,073,078 15,545,000 13,576,005 11,908,448 9,985,458 8,490,625 6,096,187 5,699,451 4,586,686 4,322,683 4,273,616 3,600,000 3,048,930 1,923,337,680 % Held 22.29 14.64 6.27 3.33 1.71 1.03 0.80 0.67 0.43 0.38 0.33 0.28 0.24 0.17 0.16 0.13 0.12 0.12 0.10 0.08 53.28 As at 2 October 2020 there were 671,057 holders of our ordinary shares compared to 610,334 in 2019 and to 619,578 in 2018. Ordinary shareholders with a registered address in Australia held approximately 98% of our fully paid share capital at 2 October 2020 (approximately 96% in 2019 and 98% in 2018). Substantial shareholders as at 2 October 2020 As at 2 October 2020 BlackRock Group (comprised of BlackRock Inc. and its subsidiaries) and The Vanguard Group, Inc. (including its subsidiary Vanguard Investments Australia Ltd.) had a ‘substantial holding’ of our shares within the meaning of the Corporations Act. A person has a substantial holding of our shares if the total votes attached to our voting shares in which they or their associates have relevant interests is 5% or more of the total number of votes attached to all our voting shares. The above table of the Top 20 ordinary shareholders includes shareholders that may hold shares for the benefit of third parties. BlackRock Group has been a substantial shareholder since 4 April 2017 (221,964,794 equity securities as at 24 March 2020) and The Vanguard Group, Inc. has been a substantial shareholder since 17 July 2018 (171,757,716 equity securities as at 17 July 2018). Control of registrant We are not directly or indirectly owned or controlled by any other corporation(s) or by any foreign government. Refer to the section ‘Exchange controls and other limitations affecting security holders’, which provides information on the Foreign Acquisitions and Takeovers Act 1975, Corporations Act 2001 and Financial Sector (Shareholdings) Act 1998, which impose limits on equity holdings. At 30 September 2020, our Directors and Executive Officers owned beneficially, directly or indirectly, an aggregate of 1,172,084 (0.032%) of the fully paid ordinary shares outstanding. 1. As recorded on the share register by holder reference number. WESTPAC GROUP 2020 ANNUAL REPORT  323 Shareholding information Analysis by range of holdings of ordinary shares as at 2 October 2020 Number of Shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Totals Number of Holders of Fully Paid Ordinary Shares 377,760 223,409 41,777 27,438 673 671,057 Number of Fully Paid Ordinary Shares % 56.29 33.29 6.23 4.09 0.10 139,067,463 521,149,341 291,863,461 575,236,702 2,084,367,903 Number of Holders of Share Options and Rights 23,977 275 37 85 13 % 3.85 14.43 8.08 15.93 57.71 100.00 3,611,684,870 100.00 24,387 There were 24,593 shareholders holding less than a marketable parcel ($500) based on a market price of $16.57 at the close of trading on 2 October 2020. Voting rights of ordinary shares Holders of our fully paid ordinary shares have, at general meetings (including special general meetings), one vote on a show of hands and, upon a poll, one vote for each fully paid ordinary share held by them. Westpac Capital Notes 2 Top 20 holders of Westpac Capital Notes 2 as at 2 October 2020 HSBC Custody Nominees (Australia) Limited BT Portfolio Services Limited Netwealth Investments Limited Netwealth Investments Limited BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd J P Morgan Nominees Australia Pty Limited BNP Paribas NOMS Pty Ltd HSBC Custody Nominees (Australia) Limited - A/C 2 Navigator Australia Ltd Nulis Nominees (Australia) Limited Citicorp Nominees Pty Limited Australian Executor Trustees Limited Rakio Pty Ltd National Nominees Limited Mutual Trust Pty Ltd BNP Paribas Nominees Pty Ltd Dimbulu Pty Ltd Domer Mining Co P/L Royal Freemasons Benevolent Institution Marrosan Investments Pty Ltd Total of Top 20 registered holders1 Number of Westpac Capital Notes 2 1,160,501 250,000 224,205 208,270 180,529 143,045 139,837 137,857 132,318 122,018 81,590 73,880 63,000 53,875 52,483 51,913 51,000 50,000 50,000 50,000 % Held 8.85 1.91 1.71 1.59 1.38 1.09 1.07 1.05 1.01 0.93 0.62 0.56 0.48 0.41 0.40 0.40 0.39 0.38 0.38 0.38 3,276,321 24.99 Analysis by range of holdings of Westpac Capital Notes 2 as at 2 October 2020 Number of Securities 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Totals Number of Holders of Westpac Capital Notes 2 13,639 1,494 136 72 10 % 88.85 9.73 0.89 0.47 0.06 15,351 100.00 Number of Westpac Capital Notes 2 4,651,865 3,061,160 966,929 1,727,171 2,698,580 13,105,705 % 35.49 23.36 7.38 13.18 20.59 100.00 There were 6 security holders holding less than a marketable parcel ($500) of Westpac Capital Notes 2 based on a market price of $100.40 at the close of trading on 2 October 2020. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N 1. As recorded on the holder register by holder reference number. WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  324 Shareholding information Westpac Capital Notes 3 Top 20 holders of Westpac Capital Notes 3 as at 2 October 2020 Number of Westpac Capital Notes 3 % Held HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited National Nominees Limited Berne No 132 Nominees Pty Ltd Navigator Australia Ltd BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd Nulis Nominees (Australia) Limited Netwealth Investments Limited Balanced Property Pty Ltd BNP Paribas NOMS Pty Ltd HSBC Custody Nominees (Australia) Limited - A/C 2 Mutual Trust Pty Ltd BNP Paribas Nominees Pty Ltd V S Access Pty Ltd Invia Custodian Pty Limited Dimbulu Pty Ltd Marrosan Investments Pty Ltd Wayrich Pty Ltd Citicorp Nominees Pty Limited Marshstoke Pty Ltd 1,457,585 409,077 197,721 179,188 160,253 135,782 131,015 113,091 100,000 78,292 68,590 67,194 61,374 60,000 52,245 50,000 50,000 50,000 48,865 47,000 11.01 3.09 1.49 1.35 1.21 1.03 0.99 0.85 0.76 0.59 0.52 0.51 0.46 0.45 0.39 0.38 0.38 0.38 0.37 0.35 Total of Top 20 registered holders1 3,517,272 26.56 1. As recorded on the holder register by holder reference number. Analysis by range of holdings of Westpac Capital Notes 3 as at 2 October 2020 Number of Securities 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Totals Number of Holders of Westpac Capital Notes 3 12,914 1,412 114 77 8 % 88.91 9.72 0.78 0.53 0.06 Number of Westpac Capital Notes 3 4,441,503 3,044,695 916,953 2,057,417 2,783,712 % 33.54 22.99 6.92 15.53 21.02 14,525 100.00 13,244,280 100.00 There were 5 security holders holding less than a marketable parcel ($500) of Westpac Capital Notes 3 based on a market price of $100.61 at the close of trading on 2 October 2020. WESTPAC GROUP 2020 ANNUAL REPORT  Shareholding information Westpac Capital Notes 4 Top 20 holders of Westpac Capital Notes 4 as at 2 October 2020 Number of Westpac Capital Notes 4 % Held 325 BNP Paribas Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited National Nominees Limited Citicorp Nominees Pty Limited Mutual Trust Pty Ltd Netwealth Investments Limited BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd DRP BNP Paribas NOMS Pty Ltd Zashvin Pty Ltd Dimbulu Pty Ltd HSBC Custody Nominees (Australia) Limited - A/C 2 Australian Executor Trustees Limited Nulis Nominees (Australia) Limited Navigator Australia Ltd Willimbury Pty Ltd V S Access Pty Ltd New Regency Pty Ltd Navigator Australia Ltd Fulton Holdings Pty Ltd Total of Top 20 registered holders1 1. As recorded on the holder register by holder reference number. 3,041,748 1,614,890 450,622 264,789 238,791 180,885 125,459 106,322 104,432 104,000 100,000 97,967 80,552 77,366 67,220 60,000 51,570 50,000 41,132 40,000 17.87 9.49 2.65 1.56 1.40 1.06 0.74 0.62 0.61 0.61 0.59 0.58 0.47 0.45 0.39 0.35 0.30 0.29 0.24 0.24 6,897,745 40.51 Analysis by range of holdings of Westpac Capital Notes 4 as at 2 October 2020 Number of Securities 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Totals Number of Holders of Westpac Capital Notes 4 15,092 1,601 125 64 10 % 89.34 9.48 0.74 0.38 0.06 Number of Westpac Capital Notes 4 4,921,058 3,312,570 934,423 1,620,545 6,231,938 % 28.91 19.46 5.49 9.52 36.62 16,892 100.00 17,020,534 100.00 There were 4 security holders holding less than a marketable parcel ($500) of Westpac Capital Notes 4 based on a market price of $102.50 at the close of trading on 2 October 2020. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  326 Shareholding information Westpac Capital Notes 5 Top 20 holders of Westpac Capital Notes 5 as at 2 October 2020 Number of Westpac Capital Notes 5 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Diocese Development Fund - Catholic Diocese Of Paramatta BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd Australian Executor Trustees Limited HSBC Custody Nominees (Australia) Limited - A/C 2 Netwealth Investments Limited Citicorp Nominees Pty Limited Navigator Australia Ltd National Nominees Limited Nulis Nominees (Australia) Limited Dimbulu Pty Ltd Zashvin Pty Ltd Marrosan Investments Pty Ltd BNP Paribas Nominees Pty Ltd BNP Paribas Nominees Pty Ltd Mutual Trust Pty Ltd Netwealth Investments Limited BNP Paribas NOMS Pty Ltd Royal Freemasons’ Benevolent Institution Total of Top 20 registered holders1 1. As recorded on the holder register by holder reference number. 1,637,969 367,535 280,112 227,185 220,994 218,377 214,292 181,307 166,588 112,844 110,617 100,000 92,220 92,000 90,630 83,762 70,470 63,855 62,996 60,000 % Held 9.69 2.17 1.66 1.34 1.31 1.29 1.27 1.07 0.99 0.67 0.65 0.59 0.55 0.54 0.54 0.50 0.42 0.38 0.37 0.35 4,453,753 26.35 Analysis by range of holdings of Westpac Capital Notes 5 as at 2 October 2020 Number of Securities 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Totals Number of Holders of Westpac Capital Notes 5 15,216 1,924 160 99 11 17,410 % 87.40 11.05 0.92 0.57 0.06 Number of Westpac Capital Notes 5 5,420,678 4,008,359 1,153,127 2,583,399 3,737,820 % 32.07 23.72 6.82 15.28 22.11 100.00 16,903,383 100.00 There was 1 security holder holding less than a marketable parcel ($500) of Westpac Capital Notes 5 based on a market price of $100.21 at the close of trading on 2 October 2020. WESTPAC GROUP 2020 ANNUAL REPORT  Shareholding information Westpac Capital Notes 6 Top 20 holders of Westpac Capital Notes 6 as at 2 October 2020 Number of Westpac Capital Notes 6 % Held 327 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited BNP Paribas NOMS Pty Ltd BT Portfolio Services Limited Citicorp Nominees Pty Limited Netwealth Investments Limited HSBC Custody Nominees (Australia) Limited - A/C 2 BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd National Nominees Limited Australian Executor Trustees Limited Dimbulu Pty Ltd G Harvey Investments Pty Limited Navigator Australia Ltd Mutual Trust Pty Ltd V S Access Pty Ltd BNP Paribas Nominees Pty Ltd Nulis Nominees (Australia) Limited 179 Hyde Investment Pty Ltd Eastcote Pty Ltd Willimbury Pty Ltd Total of Top 20 registered holders1 1,604,140 460,215 315,300 200,000 185,050 161,135 145,727 125,980 120,808 103,226 100,000 100,000 91,013 90,883 90,000 71,621 61,600 60,000 50,000 50,000 11.27 3.23 2.22 1.41 1.30 1.13 1.02 0.89 0.85 0.73 0.70 0.70 0.64 0.64 0.63 0.50 0.43 0.42 0.35 0.35 4,186,698 29.41 1. As recorded on the holder register by holder reference number. Analysis by range of holdings of Westpac Capital Notes 6 as at 2 October 2020 Number of Securities 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Totals Number of Holders of Westpac Capital Notes 6 12,116 1,529 148 71 10 % 87.33 11.02 1.07 0.51 0.07 Number of Westpac Capital Notes 6 4,349,432 3,265,424 1,148,371 2,045,772 3,421,581 % 30.56 22.95 8.07 14.38 24.04 13,874 100.00 14,230,580 100.00 There were 2 security holders holding less than a marketable parcel ($500) of Westpac Capital Notes 6 based on a market price of $102.10 at the close of trading on 2 October 2020. Voting rights of Westpac Capital Notes 2, Westpac Capital Notes 3, Westpac Capital Notes 4, Westpac Capital Notes 5 and Westpac Capital Notes 6 In accordance with the terms of issue, holders of Westpac Capital Notes 2, Westpac Capital Notes 3, Westpac Capital Notes 4, Westpac Capital Notes 5 and Westpac Capital Notes 6 have no right to vote at any general meeting of Westpac before conversion into Westpac ordinary shares. If conversion occurs (in accordance with the applicable terms of issue), holders of Westpac Capital Notes 2, Westpac Capital Notes 3, Westpac Capital Notes 4, Westpac Capital Notes 5 or Westpac Capital Notes 6 (as applicable) will become holders of Westpac ordinary shares and have the voting rights that attach to Westpac ordinary shares. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Shareholding information 328 Shareholding information Exchange controls and other limitations affecting security holders – Australian exchange controls Australian laws control and regulate or permit the control and regulation of a broad range of payments and transactions involving non-residents of Australia. Pursuant to a number of exemptions, authorities and approvals, there are no general restrictions from transferring funds from Australia or placing funds to the credit of non-residents of Australia. However, Australian foreign exchange controls are implemented from time to time against prescribed countries, entities and persons. At the present time, these include: (a) withholding taxes in relation to remittances or dividends (to the extent they are unfranked) and interest payments; (b) the financial sanctions administered by the Department of Foreign Affairs and Trade (DFAT) in accordance with the Autonomous Sanctions Act 2011 and the Autonomous Sanctions Regulations 2011, specifically, in relation to transactions involving the transfer of funds or payments to, by the order of, or on behalf of individuals or entities including: – – – – – – – persons associated with the former Milosevic regime, and persons indicted or suspected of committing war crimes during the Balkan wars in the early 1990s; persons or entities engaged in activities that seriously undermine democracy, respect for human rights and the rule of law in Zimbabwe; certain persons or entities associated with the Democratic People’s Republic of Korea’s weapons of mass destruction program or missiles program; certain persons or entities that have contributed to or are contributing to Iran’s nuclear or missile program; certain individuals and entities associated with the former Qadhafi regime in Libya; certain individuals and entities supporting the Syrian regime or that are responsible for human rights abuses in Syria; and persons who have been instrumental or complicit in the threat to the sovereignty and territorial integrity of Ukraine, without the prior approval of the Minister for Foreign Affairs; (c) the United Nations Security Council (UNSC) financial sanctions administered by DFAT, including: – Terrorist Asset Freezing Regime In accordance with the Charter of the United Nations Act 1945 and the Charter of the United Nations (Dealings with Assets) Regulations 2008, a person is prohibited from using or dealing with funds, financial assets or economic resources of persons or entities listed as terrorists by the Minister for Foreign Affairs in the Commonwealth of Australia Gazette. It is also a criminal offence to make assets available to such persons or entities; and Country-based sanctions Under the Charter of the United Nations Act 1945 and associated regulations, UNSC financial sanctions have been implemented. It is an offence to use or deal with funds, financial assets or economic resources of certain persons or entities associated with countries designated by the UNSC. It is also a criminal offence to make assets available to such persons or entities. Limitations affecting security holders The following Australian laws impose limitations on the right of non-residents or non-citizens of Australia to hold, own or vote Westpac shares. All these limitations apply to the holders of the American Depositary Receipts (ADRs) evidencing ADS, issued by our Depositary in the United States. Foreign Acquisitions and Takeovers Act 1975 Acquisitions of interests in shares in Australian companies by foreign persons that meet certain thresholds are required to be notified to the Treasurer of Australia (through the Foreign Investment Review Board) and to obtain a no objections notification under the Foreign Acquisitions and Takeovers Act 1975 (Cth). That legislation applies to any acquisition by a foreign person, including a corporation or group of associated foreign persons, which results in ownership of 20% or more of the issued shares of an Australian company or the ability to control 20% or more of the total voting power. In addition, the legislation applies to any acquisition by a foreign government investor of 10% or more of the total voting power or ownership of an Australian company (or any interest if the foreign government investor acquires a control element – for example the right to appoint a director). The legislation requires any persons proposing to make any such acquisition to first notify the Treasurer of their intention to do so. Where such an acquisition has already occurred in the absence of a no objections notification, the Treasurer has the power to order divestment if he considers the acquisition to be contrary to Australia’s national interest. Financial Sector (Shareholdings) Act 1998 The Financial Sector (Shareholdings) Act 1998 (Cth) imposes restrictions on shareholdings in Australian financial sector companies (which includes Westpac). Under that legislation a person (including a corporation) may not hold more than a 20% ‘stake’ in a financial sector company without prior approval from the Treasurer of Australia. A person’s stake in a financial sector company is equal to the aggregate of the person’s voting power in the company and the voting power of the person’s associates. The concept of voting power is broadly defined. The Treasurer may approve a higher percentage stake if the Treasurer is satisfied that it is in the national interest to do so. In addition, even if a person’s stake in a financial sector company does not exceed the 20% limit, the Treasurer has the power to declare that a person has ‘practical control’ of a financial sector company and require the person to relinquish that control or reduce their stake in that company. WESTPAC GROUP 2020 ANNUAL REPORT Shareholding information Corporations Act 2001 The Corporations Act 2001 (Cth) prohibits any person (including a corporation) from acquiring a relevant interest in our voting shares if, after the acquisition, that person or any other person would be entitled to exercise more than 20% of the voting power in our shares. The prohibition is subject to certain limited exceptions. In addition, under the Corporations Act, a person is required to give a notice to us and to the ASX providing certain prescribed information, including their name, address and details of their relevant interests in our voting shares if they begin to have, or cease to have, a substantial holding in us, or if they already have a substantial holding and there is a movement of at least 1% in their holding. Such notice must, generally, be provided within two business days after the person becomes aware of that information. A person will have a substantial holding if the total votes attached to our voting shares in which they or their associates have relevant interests is 5% or more of the total number of votes attached to all our voting shares. The concepts of ‘associate’ and ‘relevant interest’ are broadly defined in the Corporations Act and investors are advised to seek their own advice on their scope. In general terms, a person will have a relevant interest in a share if they: (a) are the holder of that share; (b) have power to exercise, or control the exercise of, a right to vote attached to that share; or (c) have power to dispose of, or control the exercise of a power to dispose of, that share. It does not matter how remote the relevant interest is or how it arises. If two or more persons can jointly exercise any one of these powers, each of them is taken to have that power. Nor does it matter that the power or control is express or implied, formal or informal, exercisable either alone or jointly with someone else. The American Depositary Shares (ADS) agreement There is a Deposit Agreement between The Bank of New York Mellon as Depositary, and Westpac, and the record holders from time to time of all ADS. Holders of our ADS are subject to the foregoing limitations on the rights of non-residents or non-citizens of Australia to own or vote Westpac shares. Record holders of ADS are required by the Deposit Agreement to comply with our requests for information as to the capacity in which such holders own ADS and related ordinary shares as well as to the identity of any other person interested in such ADS and related ordinary shares and the nature of such interest. Enforceability of foreign judgments in Australia We are an Australian public corporation with limited liability. All of our Directors and Executive Officers reside outside the US. Substantially all or a substantial portion of the assets of all or many of such persons are located outside the US. As a result, it may not be possible for investors to effect service of process within the US upon such persons or to enforce against them judgments obtained in US courts predicated upon the civil liability provisions of the federal securities laws of the US. There may be doubt as to the enforceability in Australia, in original actions or in actions for enforcement of judgments of US courts, of civil liabilities predicated upon the federal securities laws of the US. 329 Taxation Australian taxation The following discussion is a summary of certain Australian taxation implications of the ownership and disposition of ordinary shares (including ADS) for shareholders holding their shares on capital account. This discussion is based on the laws in force at the date of the Annual Report and the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and The Prevention of Fiscal Evasion with Respect to Taxes on Income (the Tax Treaty), and is subject to any changes in Australian law and any change in the Tax Treaty occurring after that date. This discussion is intended only as a descriptive summary and does not purport to be a complete analysis of all the potential Australian tax implications of owning and disposing of ordinary shares. The specific tax position of each investor will determine the applicable Australian income tax implications for that investor and we recommend that investors consult their own tax advisers concerning the implications of owning and disposing of ordinary shares. Taxation of dividends Under the Australian dividend imputation system, Australian tax paid at the company level is imputed (or allocated) to shareholders by means of imputation credits (also called franking credits) which attach to dividends paid by the company to the shareholder. Such dividends are termed ‘franked dividends’. When an Australian resident individual shareholder receives a franked dividend, the shareholder receives a tax offset to the extent of the franking credits, which can be offset against the Australian income tax payable by the shareholder. An Australian resident shareholder may, in certain circumstances, be entitled to a refund of excess franking. The extent to which a dividend is franked typically depends upon a company’s available franking credits at the time of payment of the dividend. Accordingly, a dividend paid to a shareholder may be wholly or partly franked or wholly unfranked. Fully franked dividends paid to non-resident shareholders are exempt from Australian dividend withholding tax. Dividends paid to a non-resident shareholder which are not fully franked are subject to dividend withholding tax at the rate of 30% (unless reduced by a double tax treaty) to the extent they are unfranked. In the case of residents of the US who are entitled to the benefits of the Tax Treaty and are beneficially entitled to the dividends, the rate is reduced to 15% under the Tax Treaty, provided the shares are not effectively connected with a permanent establishment or a fixed base of the non-resident in Australia through which the non-resident carries on business in Australia or provides independent personal services. In the case of residents of the US that have a permanent establishment or fixed base in Australia where the shares in respect of which the dividends are paid are attributable to that permanent establishment or fixed base, there is no dividend withholding tax. Rather, such dividends will be taxed on a net assessment basis and, where the dividends are franked, entitlement to a tax offset may arise. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  330 Shareholding information Fully franked dividends paid to non-resident shareholders and dividends that have been subject to dividend withholding tax should not be subject to any further Australian income tax. There are circumstances where a shareholder may not be entitled to the benefit of franking credits. The application of these rules depends upon the shareholder’s own circumstances, including the period during which the shares are held and the extent to which the shareholder is ‘at risk’ in relation to their shareholding. Gain or loss on disposition of shares Generally, any profit made by a resident shareholder on disposal of shares will be subject to capital gains tax. However, if the shareholder is regarded as a trader or speculator, or carries on a business of investing for profit, any profits may be taxed as ordinary income. A discount may be available on capital gains on shares held for 12 months or more by Australian resident individuals, trusts or complying superannuation entities. The discount is one half for individuals and trusts, and one third for complying superannuation entities. Companies are not eligible for the capital gains tax discount. For shares acquired prior to 21 September 1999, an alternative basis of calculation of the capital gain may be available which allows the use of an indexation formula. Normal rates of income tax would apply to capital gains so calculated. Any capital loss can only be offset against capital gains. Excess capital losses may be able to be carried forward for offset against future capital gains. Generally, subject to two exceptions, a non-resident disposing of shares in an Australian public company who holds those shares on capital account will be free from income tax in Australia. The main exceptions are: • • shares held as part of a trade or business conducted through a permanent establishment in Australia. In such a case, any profit on disposal would be assessable to tax. Losses may give rise to capital losses or be otherwise deductible; and shares held in companies where the shareholder and its associates have held at the time of disposal (or at least 12 months in the 24 months prior to disposal) a holding of 10% or more in the company and more than 50% of the company’s assets are represented by interests in Australian real property (which is unlikely to be the case for Westpac). In such a case, capital gains tax would apply. United States taxation The following discussion is a summary of certain US federal income tax implications of the ownership and disposition of ordinary shares (including ADS) by US holders (as defined below) that hold the ordinary shares as capital assets. This discussion is based on the US Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, and the Tax Treaty, all as currently in effect and all of which are subject to change, possibly on a retroactive basis. This discussion is intended only as a descriptive summary. It does not purport to be a complete analysis of all the potential US federal income tax consequences of owning and disposing of ordinary shares and does not address US federal income tax considerations that may be relevant to US holders subject to special treatment under US federal income tax law (such as banks, insurance companies, real estate investment trusts, regulated investment companies, dealers in securities, brokers, tax-exempt entities, retirement plans, certain former citizens or residents of the US, persons holding ordinary shares as part of a straddle, hedge, conversion or other integrated transaction, persons that have a ‘functional currency’ other than the US dollar, persons that own 10% or more (by vote or value) of our stock, persons that generally mark their securities to market for US federal income tax purposes or persons that receive ordinary shares as compensation). As this is a complex area, we recommend investors consult their own tax advisers concerning the US federal, state and/or local implications of owning and disposing of ordinary shares. For the purposes of this discussion you are a US holder if you are a beneficial owner of ordinary shares and you are for US federal income tax purposes: • • • • an individual who is a citizen or resident of the US; a corporation created or organised in or under the laws of the US or any state thereof or the District of Columbia; an estate, the income of which is subject to US federal income taxation regardless of its source; or a trust, if a US court can exercise primary supervision over the trust’s administration and one or more US persons are authorised to control all substantial decisions of the trust, or certain electing trusts that were in existence on 19 August 1996 and were treated as domestic trusts on that date. If an entity treated as a partnership for US federal income tax purposes owns the ordinary shares, the US federal income tax implications of the ownership and disposition of ordinary shares will generally depend upon the status and activities of such partnership and its partners. Such an entity should consult its own tax adviser concerning the US federal income tax implications to it and its partners of owning and disposing of ordinary shares. Taxation of dividends If you are a US holder, you must include in your income as a dividend, the gross amount of any distributions paid by us out of our current or accumulated earnings and profits (as determined for US federal income tax purposes) without reduction for any Australian tax withheld from such distribution. We have not maintained and do not plan to maintain calculations of earnings and profits for US federal income tax purposes, and as a result, you may need to include the entire amount of any distribution in income as a dividend. If you are a non-corporate US holder, dividends paid to you that constitute qualified dividend income may be taxable to you at a preferential tax rate so long as certain holding period and other requirements are met. Dividends we pay with respect to the ordinary shares generally will be qualified dividend income so long as we are not a PFIC during the taxable year in which the dividend is paid or the preceding taxable year. Each non-corporate US holder should consult their own tax advisor regarding the possible applicability of the reduced tax rate and the related restrictions and special rules. WESTPAC GROUP 2020 ANNUAL REPORT 331 Medicare tax In addition to regular US federal income tax, certain US holders that are individuals, estates or trusts are subject to a 3.8% tax on all or a portion of their ‘net investment income’, which may include all or a portion of their dividend income and net gain from the sale, exchange or other disposition of their ordinary shares. Passive foreign investment company considerations We believe that we will not be treated as a passive foreign investment company (PFIC) for US federal income tax purposes, and this discussion assumes we are not a PFIC. However, the determination as to whether we are a PFIC is made annually at the end of each taxable year and therefore could change. If we were to be treated as a PFIC, a US holder of ordinary shares could be subject to certain adverse tax consequences. Disclosure requirements for specified foreign financial assets Individual US holders (and certain US entities specified in US Internal Revenue Service (IRS) guidance) who, during any taxable year, hold any interest in any specified foreign financial asset, generally will be required to file with their US federal income tax returns certain information on IRS Form 8938 if the aggregate value of all such assets exceeds certain specified amounts. ‘Specified foreign financial asset’ generally includes any financial account maintained with a non-US financial institution and may also include the ordinary shares if they are not held in an account maintained with a financial institution. Substantial penalties may be imposed, and the period of limitations on assessment and collection of US federal income taxes may be extended, in the event of a failure to comply. US holders should consult their own tax advisers as to the possible application to them of this filing requirement. Information reporting and backup withholding Under certain circumstances, information reporting and/or backup withholding may apply to US holders with respect to payments on or the proceeds from the sale, exchange or other disposition of the ordinary shares, unless an applicable exemption is satisfied. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or credit against a US holder’s US federal income tax liability if the required information is furnished by the US holder on a timely basis to the IRS. Shareholding information Dividends paid by us constitute ordinary income that must generally be included in income when actually or constructively received. Such dividends will not be eligible for the dividends-received deduction generally allowed to corporate shareholders with respect to dividends received from US corporations. The amount of the dividend that you must include in your income as a US holder will be the US dollar value of the Australian dollar payments made, determined at the spot Australian dollar/US dollar rate on the date the dividend distribution is included in your income, regardless of whether the payment is in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. This gain or loss generally will be income from sources within the US for foreign tax credit limitation purposes. Distributions on an ordinary share in excess of current and accumulated earnings and profits, as determined for US federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in such ordinary share and thereafter as capital gain. Subject to certain limitations, Australian tax withheld in accordance with the Tax Treaty and paid over to Australia may be claimed as a foreign tax credit against your US federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to a preferential tax rate. A US holder that does not elect to claim a US foreign tax credit for Australian income tax withheld may instead claim a deduction for such withheld tax, but only for a taxable year in which the US holder elects to do so with respect to all non-US income taxes paid or accrued in such taxable year. Dividends paid by us generally will be income from sources outside the US for foreign tax credit limitation purposes. Under the foreign tax credit rules, dividends will, depending on your circumstances, be ‘passive category’ or ‘general category’ income for purposes of computing the foreign tax credit. The rules relating to US foreign tax credits are very complex, and each US holder should consult its own tax adviser regarding the application of such rules. Taxation of capital gains If you sell, exchange or otherwise dispose of your ordinary shares, you will generally recognise a capital gain or loss for US federal income tax purposes equal to the difference between the US dollar value of the amount that you realise and your tax basis, determined in US dollars, in your ordinary shares. A capital gain of a non-corporate US holder is generally taxed at a reduced rate if the holder has a holding period greater than one year. The deductibility of capital losses is subject to limitations. Such capital gain or loss generally will be income from sources within the US, for foreign tax credit limitation purposes. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Additional information 332 Additional information Our constitution Overview We were incorporated in 1850 under the Bank of New South Wales Act, a special piece of legislation passed by the New South Wales Parliament at a time when there was no general companies’ legislation in Australia. On 23 August 2002, Westpac became registered under the Corporations Act 2001 (Cth) as a public company limited by shares. As part of the process of becoming a company regulated under the Corporations Act, shareholders adopted a new constitution at the AGM on 15 December 2000, which came into operation on 23 August 2002. Our constitution has been subsequently amended by shareholders on 15 December 2005, 13 December 2007 and 13 December 2012. Our objects and purposes Our constitution does not contain a statement of our objects and purposes. As a company regulated by the Corporations Act, we have the legal capacity and powers of an individual both within and outside Australia, and all the powers of a body corporate, including the power to issue and cancel shares, to issue debentures, to distribute our property among our equity holders (either in kind or otherwise), to give security by charging our uncalled capital, to grant a floating charge over our property and to do any other act permitted by any law. Directors’ voting powers Under clause 9.11(a) of our constitution, subject to complying with the Corporations Act regarding disclosure of and voting on matters involving material personal interests, our Directors may: (a) hold any office or place of profit in our company, except that of auditor; (b) hold any office or place of profit in any other company, body corporate, trust or entity promoted by our company or in which it has an interest of any kind; (c) enter into any contract or arrangement with our company; (d) participate in any association, institution, fund, trust or scheme for past or present employees or directors of our company or persons dependent on or connected with them; (e) act in a professional capacity (or be a member of a firm that acts in a professional capacity) for our company, except as auditor; and (f) participate in, vote on and be counted in a quorum for any meeting, resolution or decision of the Directors and be present at any meeting where any matter is being considered by the Directors. Under clause 9.11(b) of our constitution, a Director may do any of the above despite the fiduciary relationship of the Director’s office: (a) without any liability to account to our company for any direct or indirect benefit accruing to the Director; and (b) without affecting the validity of any contract or arrangement. Under the Corporations Act, however, a Director who has a material personal interest in any matter to be considered at any Board meeting must not be present while the matter is being considered or vote on the matter, unless the other Directors resolve to allow that Director to be present and vote or a declaration is made by ASIC permitting that Director to participate and vote. These restrictions do not apply to a limited range of matters set out in section 191(2) of the Corporations Act, where the Director’s interest: (a) arises because the Director is a shareholder of the company and is held in common with other shareholders; (b) arises in relation to the Director’s remuneration as a Director of the company; (c) relates to a contract the company is proposing to enter into that is subject to shareholder approval and will not impose obligations on the company if not approved by shareholders; (d) arises merely because the Director is a guarantor or has given an indemnity or security for all or part of a loan (or proposed loan) to the company; (e) arises merely because the Director has a right of subrogation in relation to a guarantee or indemnity referred to in (d); (f) relates to a contract that insures, or would insure, the Director against liabilities the Director incurs as an officer of the company (but only if the contract does not make the company or related body corporate the insurer); (g) relates to any payment by the company or a related body corporate in respect of certain indemnities permitted by the Corporations Act or any contract relating to such an indemnity; or (h) is in a contract or proposed contract with, or for the benefit of, or on behalf of, a related body corporate and arises merely because the Director is a Director of that related body corporate. If there are not enough Directors to form a quorum for the Board meeting because of Directors’ interests in a particular matter, a general meeting for shareholders may be called to consider the matter and interested Directors are entitled to vote on any proposal to requisition such a meeting. Under clause 9.7 of our constitution, the maximum aggregate amount of annual remuneration to be paid to our Non-executive Directors must be approved by our shareholders. This aggregate amount is paid to the Non-executive Directors in such manner as the Board from time to time determines. Directors’ remuneration is one of the exceptions under section 191 of the Corporations Act to the prohibitions against being present and voting on any matter in which a Director has a material personal interest. WESTPAC GROUP 2020 ANNUAL REPORT Additional information Directors’ borrowing powers Clause 10.2 of our constitution empowers our Directors, as a Board, to exercise all the powers of Westpac to borrow or raise money, to charge any property or business of Westpac or all or any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of Westpac or of any other person. Such powers may only be changed by amending the constitution, which requires a special resolution (that is, a resolution passed by at least 75% of the votes cast by members entitled to vote on the resolution and for which notice has been given in accordance with the Corporations Act). Minimum number of Directors Our constitution requires that the minimum number of Directors is determined in accordance with the Corporations Act or other regulations. Currently the Corporations Act prescribes three as a minimum number of Directors and APRA governance standards specify five as the minimum number of Directors for APRA regulated entities. Westpac’s current number of Directors is above these prescribed minimums. Share rights The rights attaching to our ordinary shares are set out in the Corporations Act and in our constitution, and may be summarised as follows: a) Profits and dividends Holders of ordinary shares are entitled to receive such dividends on those shares as may be determined by our Directors from time to time. Dividends that are paid but not claimed may be invested by our Directors for the benefit of Westpac until claimed or required to be dealt with in accordance with any law relating to unclaimed monies. Our constitution requires that dividends be paid out of our profits. In addition, under the Corporations Act, Westpac must not pay a dividend unless our assets exceed our liabilities immediately before the dividend is declared and the excess is sufficient for payment of the dividend. In addition, the payment must be fair and reasonable to the company’s shareholders and must not materially prejudice our ability to pay our creditors. Subject to the Corporations Act, the constitution, the rights of persons (if any) entitled to shares with special rights to dividend and any contrary terms of issue of or applying to any shares, our Directors may determine that a dividend is payable, fix the amount and the time for payment and authorise the payment or crediting by Westpac to, or at the direction of, each shareholder entitled to that dividend. If any dividends are returned unclaimed, we are generally obliged, under the Banking Act 1959 (Cth), to hold those amounts as unclaimed monies for a period of seven years. If at the end of that period the monies remain unclaimed by the shareholder concerned, we must submit an annual unclaimed money return to the Australian Securities and Investment Commission by 31 March each year containing the unclaimed money as at 31 December of the previous year. Upon such payment being made, we are discharged from further liability in respect of that amount. Our Directors may, before paying any dividend, set aside out of our profits such sums as they think proper as reserves, to be applied, at the discretion of our Directors, for any purpose for which the profits may be 333 properly applied. Our Directors may carry forward so much of the profits remaining as they consider ought not to be distributed as dividends without transferring those profits to a reserve. The following restrictions apply to our ability to declare and/or pay dividends: (i) if the payment of the dividend would breach or cause a breach by us of applicable capital adequacy or other supervisory requirements of APRA, including the capital conservation buffer. Currently, one such requirement is that a dividend should not be paid without APRA’s prior consent if payment of that dividend, after taking into account all other dividends (if any) paid on our shares and payments on more senior capital instruments, in the preceding 12 consecutive months to which they relate, would cause the aggregate of such dividend payments to exceed our after tax earnings for the preceding 12 consecutive months, as reflected in our relevant audited consolidated financial statements; and (ii) if, under the Banking Act 1959 (Cth), we are directed by APRA not to pay a dividend; (iii) if the declaration or payment of the dividend would result in us becoming insolvent; or (iv)if any interest payment, dividend, redemption payment or other distribution on certain Additional Tier 1 securities issued by the Group is not paid in accordance with the terms of those securities, we may be restricted from declaring and/or paying dividends on ordinary shares. This restriction is subject to a number of exceptions. b) Voting rights Holders of our fully paid ordinary shares have, at general meetings, one vote on a show of hands and, upon a poll, one vote for each fully paid share held by them. c) Voting and re-election of Directors Under our constitution, at each AGM one-third of eligible Directors (or if their number is not a multiple of three, the number nearest to one-third) and any other Director who has held office for three years or more since the Director’s last election, must retire from office. In determining the number of Directors to retire, no account is to be taken of a Director who holds office in order to fill a casual vacancy or the Managing Director. A retiring Director holds office until the conclusion of the meeting at which that Director retires but is eligible for re-election at the meeting. Under the ASX Listing Rules, no Director of a listed entity, apart from the Managing Director, may continue to hold office, without offering himself or herself for re-election, past the third AGM following their appointment or three years, whichever is the longer. Under the Corporations Act, the election or re-election of each Director by shareholders at a general meeting of a public company must proceed as a separate item, unless the shareholders first resolve that the elections or re-elections may be voted on collectively. A resolution to allow collective voting in relation to elections or re-elections is effective only if no votes are cast against that resolution. Any resolution electing or re-electing two or more Directors in contravention of this requirement is void. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  334 Additional information d) Winding up Subject to any preferential entitlement of holders of preference shares on issue at the relevant time, holders of our ordinary shares are entitled to share equally in any surplus assets if we are wound up. e) Sinking fund provisions We do not have any class of shares on issue that is subject to any sinking fund provisions. Variation of rights attaching to our shares Under the Corporations Act, unless otherwise provided by the terms of issue of a class of shares, the terms of issue of a class of shares in Westpac can only be varied or cancelled in any way by a special resolution of Westpac and with either the written consent of our shareholders holding at least three quarters of the votes in that class of shares or with the sanction of a special resolution passed at a separate meeting of the holders of that class of shares. Convening general meetings Under our constitution, our Directors may convene and arrange to hold a general meeting of Westpac whenever they think fit and must do so if required to do so under the Corporations Act and ASX Listing Rules. Under the Corporations Act, our Directors must call and arrange to hold a general meeting of Westpac if requested to do so by our shareholders who hold at least 5% of the votes that may be cast at the general meeting. Shareholders who hold at least 5% of the votes that may be cast at a general meeting may also call and arrange to hold a general meeting of Westpac at their own expense. At least 28 days notice must be given of a meeting of our shareholders. Written notice must be given to all shareholders entitled to attend and vote at the meeting. All ordinary shareholders are entitled to attend and, subject to the constitution and the Corporations Act, to vote at general meetings of Westpac. Limitations on securities ownership A number of limitations apply in relation to the ownership of our shares, and these are more fully described in the section ‘Limitations affecting security holders’. Change in control restrictions Restrictions apply under the Corporations Act, the Financial Sector (Shareholdings) Act 1998 (Cth) and the Foreign Acquisitions and Takeovers Act 1975 (Cth). For more detailed descriptions of these restrictions, refer to the sections ‘Limitations affecting security holders’, Foreign Acquisitions and Takeovers Act 1975, Financial Sector (Shareholdings) Act 1998, and Corporations Act 2001. Substantial shareholder disclosure There is no provision in our constitution that requires a shareholder to disclose the extent of their ownership of our shares. Under the Corporations Act, however, any person who begins or ceases to have a substantial holding of our shares must notify us within two business days after they become aware of that information. A further notice must be given to us if there is an increase or decrease of 1% in a person’s substantial holding. Copies of these notices must also be given to the ASX. A person has a substantial holding of our shares if the total votes attached to our voting shares in which they or their associates have relevant interests is 5% or more of the total number of votes attached to all our voting shares. For more details, refer to the section ‘Corporations Act 2001’. We also have a statutory right under the Corporations Act to trace the beneficial ownership of our shares by giving a direction to a shareholder, or certain other persons, requiring disclosure to us of, among other things, their own relevant interest in our shares and the name and address of each other person who has a relevant interest in those shares, the nature and extent of that interest and the circumstances that gave rise to that other person’s interest. Such disclosure must, except in certain limited circumstances, be provided within two business days after the direction is received. Australian Company and Business Numbers All Australian companies have a unique nine-digit identifier, referred to as an Australian Company Number (ACN), which must be included on public documents, eligible negotiable instruments and the company’s common seal. In addition, entities can apply for registration on the Australian Business Register and be allocated a unique eleven-digit identifier known as an Australian Business Number (ABN). For Australian companies, the last nine digits of their ABN are identical to their ACN. The ABN may be quoted on documents in lieu of the ACN. Our ACN is 007 457 141 and our ABN is 33 007 457 141. Documents on display We are subject to the disclosure requirements of the US Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file Annual Reports with, and furnish other information to, the US Securities & Exchange Commission (SEC). The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Since April 2002, we have filed our reports on Form 20-F and have furnished other information to the SEC in electronic format which may be accessed through this website. WESTPAC GROUP 2020 ANNUAL REPORT 335 Additional information Exchange rates For each of the years indicated, the high, low, average and year-end noon buying rates1 for Australian dollars were: (US$ per A$1.00) High Low Average3 Close (on 30 September)4 Year Ended 30 September 20212 0.7237 0.7140 n/a n/a 2020 0.7388 0.5755 2019 0.7360 0.6730 2018 0.8105 0.7107 2017 0.8071 0.7174 2016 0.7817 0.6855 0.6815 0.7023 0.7583 0.7624 0.7385 0.7160 0.6746 0.7238 0.7840 0.7667 For each of the months indicated, the high and low noon buying rates for Australian dollars were: (US$ per A$1.00) High Low October 20202 0.7237 0.7140 September 2020 0.7375 0.7012 Month August 2020 0.7388 0.7107 July 2020 0.7168 0.6917 June 2020 May 2020 0.7004 0.6664 0.6785 0.6410 1. 2. 3. 4. 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. Through to 9 October 2020. On 9 October 2020, the noon buying rate was A$1.00 = 0.7237. The average is calculated by using the average of the exchange rates on the last day of each month during the period. The noon buying rate at such date may differ from the rate used in the preparation of our consolidated financial statements at such date. Refer to Note 1(a) to the financial statements. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  Information for shareholders 336 Information for shareholders Financial calendar Westpac shares are listed on the securities exchanges in Australia (ASX) and New Zealand (NZX) and as American Depository Receipts in New York (NYSE). Westpac Capital Notes 2, Westpac Capital Notes 3, Westpac Capital Notes 4, Westpac Capital Notes 5 and Westpac Capital Notes 6 are listed on the ASX. Westpac NZD Subordinated Notes are listed on the NZX. Important dates to note are set out below, subject to change. Payment of any distribution, dividend or interest payment is subject to the relevant payment conditions and the key dates for each payment will be confirmed to the ASX for securities listed on the ASX. Westpac Ordinary Shares (ASX code: WBC, NYSE code: WBK) Westpac Capital Notes 3 (ASX code: WBCPF) 9 November 2020 Ex-date for quarterly distribution 11 December 2020 New York ex-dividend date for final dividend New York record date for final dividend 10 November 2020 Ex-dividend date for final dividend 11 November 2020 Record date for final dividend Annual General Meeting Final dividend payable Financial Half Year end Interim results and dividend announcement New York ex-dividend date for interim dividend New York record date for interim dividend Ex-dividend date for interim dividend Record date for interim dividend Interim dividend payable Financial Year end 12 November 2020 11 December 2020 18 December 2020 31 March 2021 3 May 2021 12 May 2021 13 May 2021 13 May 2021 14 May 2021 25 June 2021 Record date for quarterly distribution 14 December 2020 Payment date for quarterly distribution 22 December 2020 Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution 11 March 2021 12 March 2021¹ 22 March 2021 10 June 2021 11 June 20211 22 June 2021 Ex-date for quarterly distribution 13 September 2021 Record date for quarterly distribution 14 September 2021 Payment date for quarterly distribution 22 September 2021 Ex-date for quarterly distribution 13 December 2021 Record date for quarterly distribution 14 December 2021 30 September 2021 Payment date for quarterly distribution 22 December 2021 Final results and dividend announcement 1 November 2021 New York ex-dividend date for final dividend 9 November 2021 1. Adjusted to immediately preceding business day as record date falls on a non-ASX business day or a date on which banks are not open for general business in Sydney. New York record date for final dividend 10 November 2021 Westpac Capital Notes 4 (ASX code: WBCPG) Ex-dividend date for final dividend Record date for final dividend 11 November 2021 12 November 2021 Ex-date for quarterly distribution 21 December 2020 Record date for quarterly distribution 22 December 2020 Annual General Meeting Final dividend payable 15 December 20211 Payment date for quarterly distribution 30 December 2020 21 December 2021 Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution 19 March 2021 22 March 2021 30 March 2021 21 June 2021 22 June 2021 30 June 2021 Ex-date for quarterly distribution 21 September 2021 Record date for quarterly distribution 22 September 2021 Payment date for quarterly distribution 30 September 2021 Ex-date for quarterly distribution 21 December 2021 Record date for quarterly distribution 22 December 2021 Payment date for quarterly distribution 30 December 2021 1. Details regarding the location of the meeting and the business to be dealt with will be contained in a Notice of Meeting sent to shareholders in the November before the meeting. Westpac Capital Notes 2 (ASX code: WBCPE) Ex-date for quarterly distribution 14 December 2020 Record date for quarterly distribution 15 December 2020 Payment date for quarterly distribution 23 December 2020 Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution 12 March 2021 15 March 2021 23 March 2021 11 June 2021 15 June 2021 23 June 2021 Ex-date for quarterly distribution 14 September 2021 Record date for quarterly distribution 15 September 2021 Payment date for quarterly distribution 23 September 2021 Ex-date for quarterly distribution 14 December 2021 Record date for quarterly distribution 15 December 2021 Payment date for quarterly distribution 23 December 2021 WESTPAC GROUP 2020 ANNUAL REPORT 337 Information for shareholders Westpac Capital Notes 5 (ASX code: WBCPH) Westpac NZD Subordinated Notes (NZX code: WBC010) Ex-date for quarterly distribution 11 December 2020 Ex-date for quarterly interest payment 19 November 2020 Record date for quarterly distribution 14 December 2020 Record date for quarterly interest payment 20 November 2020¹ Payment date for quarterly distribution 22 December 2020 Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution 11 March 2021 12 March 20211 22 March 2021 10 June 2021 11 June 20211 22 June 2021 Ex-date for quarterly distribution 13 September 2021 Record date for quarterly distribution 14 September 2021 Payment date for quarterly interest payment 1 December 2020 Ex-date for quarterly interest payment 18 February 2021 Record date for quarterly interest payment 19 February 2021 Payment date for quarterly interest payment Ex-date for quarterly interest payment Record date for quarterly interest payment Payment date for quarterly interest payment 1 March 2021 20 May 2021 21 May 2021¹ 1 June 2021 Payment date for quarterly distribution 22 September 2021 Ex-date for quarterly interest payment 19 August 2021 Ex-date for quarterly distribution 13 December 2021 Record date for quarterly interest payment Record date for quarterly distribution 14 December 2021 Payment date for quarterly distribution 22 December 2021 Payment date for quarterly interest payment 20 August 2021¹ 1 September 2021 Ex-date for quarterly interest payment 18 November 2021 Record date for quarterly interest payment Payment date for quarterly interest payment 19 November 2021¹ 1 December 2021 1 Adjusted to immediately preceding business day as record date falls on a date on which banks are not open for general business in Wellington and Auckland, New Zealand and Sydney, Australia. 1. Adjusted to immediately preceding business day as record date falls on a non-ASX business day or a date on which banks are not open for general business in Sydney. Westpac Capital Notes 6 (ASX code: WBCPI) Ex-date for quarterly distribution 9 December 2020 Record date for quarterly distribution 10 December 2020 Payment date for quarterly distribution 18 December 2020 Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution Ex-date for quarterly distribution Record date for quarterly distribution Payment date for quarterly distribution 9 March 2021 10 March 2021 18 March 2021 9 June 2021 10 June 2021 18 June 2021 Ex-date for quarterly distribution 9 September 2021 Record date for quarterly distribution 10 September 2021 Payment date for quarterly distribution 20 September 20211 Ex-date for quarterly distribution 9 December 2021 Record date for quarterly distribution 10 December 2021 Payment date for quarterly distribution 20 December 20211 1. Adjusted to next business day as payment date falls on a non- ASX business day or a date on which banks are not open for general business in Sydney. Annual General Meeting The Westpac Annual General Meeting (AGM) will be held on Friday, 11 December 2020 at 10:00am (Sydney time). Westpac will hold its AGM online as a virtual meeting and shareholder registration will open at 9:00am (Sydney time). The AGM will be webcast live on Westpac’s website at westpac.com.au/AGM and an archived version of the webcast will be available on the website after the event. 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  338 Information for shareholders Useful information Key sources of information for shareholders We report our full year performance to shareholders, in late October or early November, in the following forms: an Annual Report; a Sustainability Performance Report; an Investor Discussion Pack and earnings releases. Electronic communications Shareholders can elect to receive the following communications electronically: • • • • Annual Report; Dividend statements when paid by direct credit or via Westpac’s Dividend Reinvestment Plan (DRP); Notices of Meetings and proxy forms; and Major company announcements. Opt for electronic communications by logging into Westpac’s Share Registrar’s Investor Centre at www. linkmarketservices.com.au. Online information Australia Westpac’s website www.westpac.com.au provides information for shareholders and customers, including: Share registrars Shareholders can check and update their information in Westpac’s Share Registrars’ online Investor Centres, see details below. In Australia, broker sponsored holders must contact their broker to amend their address. Australia – Ordinary shares on the main register, Westpac Capital Notes 2, Westpac Capital Notes 3, Westpac Capital Notes 4, Westpac Capital Notes 5 and Westpac Capital Notes 6 Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Postal address: Locked Bag A6015, Sydney South NSW 1235, Australia www.linkmarketservices.com.au Shareholder enquiries: Telephone: 1800 804 255 (toll free within Australia) International: +61 1800 804 255 Facsimile: +61 2 9287 0303 Email: westpac@linkmarketservices.com.au New Zealand – Ordinary shares on the New Zealand Branch register and Westpac NZD Subordinated Notes access to internet banking and online investing services; Link Market Services Limited Level 11, Deloitte Centre details on Westpac’s products and services; 80 Queen Street company history, results, market releases and news; and corporate responsibility and Westpac in the community activities. Investors can access the Investor Centre at www.westpac. com.au/investorcentre. The Investor Centre includes the current Westpac share price and links to the latest ASX announcements and Westpac’s Share Registrars’ websites. New Zealand Westpac’s New Zealand website www.westpac.co.nz provides: Auckland 1010, New Zealand Postal address: P.O. Box 91976, Auckland 1142, New Zealand www.linkmarketservices.co.nz Shareholder enquiries: Telephone: 0800 002 727 (toll free within New Zealand) International: +64 9 375 5998 Facsimile: +64 9 375 5990 Email: enquiries@linkmarketservices.co.nz access to internet banking services; details on products and services; Depositary in USA for American Depositary Shares1 Listed on New York Stock Exchange (CUSIP 961214301) • • • • • • • BNY Mellon Shareowner Services PO Box 505000 Louisville, KY 40233-5000, USA https://www-us.computershare.com/investor American Depositary Shares holder enquiries: Telephone: 1-888-269-2377 (toll free in USA) International: +1 201 680 6825 Email: shrrelations@cpushareownerservices.com economic updates, news and information, key financial results; and • sponsorships and other community activities. Westpac Investor Relations Information other than that relating to your shareholding can be obtained from: • Westpac Investor Relations 275 Kent Street Sydney NSW 2000 Australia Telephone: +61 2 8253 3143 Facsimile: +61 2 8253 1207 Email: investorrelations@westpac.com.au Stock exchange listings Westpac ordinary shares are listed on: • • Australian Securities Exchange (code WBC); New York Stock Exchange (NYSE), as American Depositary Shares (code WBK); and • New Zealand Exchange Limited (code WBC). 1. Each ADS represents one fully paid ordinary share. WESTPAC GROUP 2020 ANNUAL REPORT Glossary of abbreviations and defined terms Glossary of abbreviations and defined terms 339 CGU CHF CLF Cash Generating Unit Swiss franc Committed Liquidity Facility Corporations Act Corporations Act 2001 (Cth) Advanced Measurement Approach D-SIB COSO CPM CRG CRO CRS CVA DFAT EAD ECL EPS ESG ESP FBT FCA FCS FMA FTE FVA FVIS FX GHG AAS AASB ABS ACCC ADI ADRs ADS Australian Accounting Standards Australian Accounting Standards Board Asset-backed securities Australian Competition and Consumer Commission Authorised Deposit-taking Institution American Depositary Receipts American Depositary Shares Advanced IRB Advanced Internal Ratings Based AGM ALCO ALM AMA ANZSIC APRA ASIC ASX Annual General Meeting Westpac Asset and Liability Committee Asset and Liability Management Australian and New Zealand Standard Industrial Classification Australian Prudential Regulation Authority Australian Securities and Investments Commission Australian Securities Exchange ASXCGC ASX Corporate Governance Council AT1 ATMs ATO Additional Tier 1 Automatic teller machines Australian Taxation Office AUSTRAC Australian Transaction Reports and Analysis Centre BAC Board Audit Committee BankSA Bank of South Australia BBSW BCBS bps BRCC CAGR CAPs Bank Bill Swap Reference Rate Basel Committee on Banking Supervision Basis points Board Risk & Compliance Committee Compound annual growth rate Collectively assessed provisions Cash EPS Cash earnings per share CCB CDS CEO CET1 CFO Capital Conservation Buffer Credit default swap Chief Executive Officer Common Equity Tier 1 Chief Financial Officer Committee of Sponsoring Organizations of the Treadway Commission Credit Portfolio Management Customer Risk Grade Chief Risk Officer Common Reporting Standard Credit valuation adjustment Department of Foreign Affairs and Trade Domestic Systemically Important Banks Exposure at default Expected credit loss Earnings per share Environmental, social and governance Employee Share Plan Fringe benefits tax Financial Conduct Authority Financial Claims Scheme Financial Markets Authority Full time equivalent employees Funding Valuation Adjustment Fair value through income statement Foreign Exchange Greenhouse gas Hastings Hastings Funds Management Limited IAPs IASB ICAAP IFRS IFTI IRRBB Individually Assessed Provisions International Accounting Standards Board Internal Capital Adequacy Assessment Process International Financial Reporting Standards International Funds Transfer Instructions Interest Rate Risk in the Banking Book 1 I S T R A T E G C R E V I E W 2 G R O U P P E R F O R M A N C E 3 I F I N A N C A L S T A T E M E N T S 4 S H A R E H O L D E R I N F O R M A T I O N WESTPAC GROUP 2020 ANNUAL REPORT1 STRATEGIC REVIEW3 FINANCIAL STATEMENTS4 SHAREHOLDER INFORMATION2 GROUP PERFORMANCE  340 Glossary of abbreviations and defined terms SME SOx STVR TCE TLAC TSR UK UKSS UNSC US VaR VWAP Small to medium enterprises Sarbanes-Oxley Act of 2002 Short Term Variable Reward Total committed exposures Total Loss Absorbing Capacity Total Shareholder Return United Kingdom Westpac Banking Corporation UK Staff Superannuation Scheme United Nations Security Council United States Value at Risk Volume weighted average price Westpac CPS Westpac Convertible Preference Shares WGP WHS WIB WNZL WNZS WPP WSNZL Westpac Group Plan Workplace Health and Safety Westpac Institutional Bank Westpac New Zealand Limited Westpac New Zealand Superannuation Scheme Westpac Performance Plan Westpac Securities NZ Limited IRS ISDA KMP LCR Internal Revenue Service International Swaps and Derivatives Association Key Management Personnel Liquidity Coverage Ratio LGBTIQ+ Lesbian, gay, bisexual, transgender, intersex and queer LGD LIBOR LMI LTIFR LTVR LVR Loss given default London InterBank Offer Rate Lenders mortgage insurance Lost Time Injury Frequency Rate Long Term Variable Reward Loan to value ratio Moody’s Moody’s Investors Service NaR NCI NII NYSE NSFR NZX OCC OCI OFAC OTC PD PFIC PNG RAMS RBA RBNZ RISKCO RMBS Net interest income-at-risk Non-controlling interests Net interest income New York Stock Exchange Net Stable Funding Ratio New Zealand Exchange Limited Office of the Comptroller of the Currency Other comprehensive income Office of Foreign Assets Control Over the counter Probability of default Passive foreign investment company Papua New Guinea RAMS Home Loans Reserve Bank of Australia Reserve Bank of New Zealand Westpac Group Executive Risk Committee Residential Mortgage Backed Securities ROE Return on equity Cash ROE Return on equity on a cash earnings basis RSP RWA S&P SEC Restricted Share Plan Risk-weighted assets Standard & Poor’s US Securities and Exchange Commission WESTPAC GROUP 2020 ANNUAL REPORT CONTACT US Westpac Group Head Office 275 Kent Street Sydney NSW 2000 Australia Tel: +61 2 9155 7713 Facsimile: +61 2 8253 4128 International payments Tel: +61 2 9155 7700 Website: www.westpac.com.au/westpacgroup Westpac Telephone – Consumer 132 032 Telephone – Business 132 142 From outside Australia: +61 2 9155 7700 Website: www.westpac.com.au St.George Bank St.George House 4-16 Montgomery Street Kogarah NSW 2217 Australia Mail: Locked Bag 1 Kogarah NSW 1485 Australia Tel: 13 33 30 Website: www.stgeorge.com.au Bank of Melbourne Level 2, 525 Collins Street Melbourne VIC 3000 Australia Tel: 13 22 66 From outside Australia: +61 3 8536 7870 Website: www.bankofmelbourne.com.au BankSA Level 8, 97 King William Street, Adelaide SA 5000 Australia Mail: GPO Box 399, Adelaide SA 5001 Australia Tel: 131 376 From outside Australia: +61 2 9155 7850 Website: www.banksa.com.au RAMS RAMS Financial Group Pty Ltd Level 12, 321 Kent Street Sydney NSW 2000 Australia Mail: GPO Box 4008, Sydney NSW 2001 Australia Tel: +61 2 8218 7000 Email: communications@rams.com.au Website: www.rams.com.au BT Level 18, 275 Kent Street, Sydney NSW 2000 Australia Tel: 132 135 From outside Australia: +61 2 9155 4070 Email: customer.relations@btfinancialgroup.com Website: www.bt.com.au Westpac Institutional Bank Tel: 132 032 Website: www.westpac.com.au Institutional Bank Locations Hong Kong India – Mumbai People’s Republic of China – Beijing – Shanghai Republic of Indonesia – Jakarta Republic of Singapore – Singapore United States of America – New York United Kingdom – London 1 1 S S T T R R A A T T E E G G C C R R E E V V I I E E W W I I 2 2 G G R R O O U U P P P P E E R R F F O O R R M M A A N N C C E E I I 3 3 F F I I N N A A N N C C A A L L S S T T A A T T E E M M E E N N T T S S 4 4 S S H H A A R R E E H H O O L L D D E E R R I I N N F F O O R R M M A A T T I I O O N N Westpac Pacific www.westpac.com.au/pacific Westpac PNG Level 1, Burns Philp Haus Corner of Champion Parade and Musgrave Street Port Moresby, NCD, Papua New Guinea Tel: +675 322 0511 Email: westpacpngcommunication@westpac.com.au Westpac Fiji Level 1, Westpac House 1 Thomson Street Suva, Fiji Tel: +67 9 321 7309 Email: westpacfiji@westpac.com.au Westpac New Zealand 16 Takutai Square, Auckland 1010 New Zealand Tel: +64 9 912 8000 Email: customersolutions@westpac.co.nz Website: www.westpac.co.nz Global locations Specific contact details for the many locations globally can be located on our website at www.westpac.com.au. Select ‘About Westpac’ from the top menu bar, then ‘Global Locations’ from the ‘Explore’ menu. Share Registrar Link Market Services Limited 680 George Street Sydney NSW 2000 Australia Mail: Locked Bag A6015, Sydney South NSW 1235 Tel: 1800 804 255 Facsimile: +61 2 9287 0303 Email: westpac@linkmarketservices.com.au Website: www.linkmarketservices.com.au Westpac Group Sustainability Email: sustainability@westpac.com.au For further information on Westpac Group’s sustainability approach, policies and performance, please visit www.westpac.com.au/sustainability. To contact the Group Sustainability team, or if you have a human rights related concern, please email sustainability@westpac.com.au or write to 275 Kent Street, Sydney NSW 2000 Australia. PEFC Certified This product is form sustainably managed forest and controlled sources Recognised in Autralia by Responsible Wood. www.pefc.org.au The 2020 Westpac Group Annual Report is printed on PEFC certified paper. Compliance with the certification criteria set out by the Programme for the Endorsement of Forest Certification (PEFC) means that the paper fibre is sourced from sustainable forests. 3943 Westpac AR20_56_onwards V40.indd 65 3943 Westpac AR20_56_onwards V40.indd 65 31/10/20 4:47 pm 31/10/20 4:47 pm  westpac.com.au 3943 Westpac AR20_56_onwards V40.indd 66 3943 Westpac AR20_56_onwards V40.indd 66 31/10/20 4:47 pm 31/10/20 4:47 pm 

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