2018 BASEL III PILLAR 3DISCLOSURE

AS AT 30 SEPTEMBER 2018
APS 330:
PUBLIC DISCLOSURE

ANZ Basel III Pillar 3 Disclosure

September 2018

Important noticeThis document has been prepared by Australia and New Zealand Banking Group Limited (ANZ) to meet its
disclosure obligations under the Australian P r u d e n t i a l Regulation Authority (APRA) ADI Prudential
Standard (APS) 330: Public Disclosure.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Table of Contents1
Chapter 1 – Highlights .................................................................................................................................. 3
Chapter 2 – Introduction ............................................................................................................................... 5
Purpose of this document .................................................................................................................. 5
Chapter 3 - Risk appetite and governance ...................................................................................................... 6
Risk types ...................................................................................................................................... 6
Risk appetite framework ................................................................................................................... 7
Risk management governance ........................................................................................................... 7
Chapter 4 – Capital reporting and measurement .............................................................................................. 9
Chapter 5 – Capital and capital adequacy .......................................................................................................10
Table 1

Capital disclosure template ...............................................................................................11

Table 2Main features of capital instruments ..................................................................................22

Table 6

Capital adequacy .............................................................................................................22

Chapter 6 – Credit risk .................................................................................................................................26
Table 7
Table 8Credit risk – General disclosures .......................................................................................26
Credit risk – Disclosures for portfolios subject to the Standardised approach andsupervisory risk weights in the IRB approach ......................................................................42

Table 9Credit risk – Disclosures for portfolios subject to Advanced IRB approaches ............................43

Table 10Credit risk mitigation disclosures .......................................................................................53

Table 11

General disclosures for derivative and counterparty credit risk .............................................58

Chapter 7 – Securitisation ...........................................................................................................................62
Table 12Banking Book - Securitisation disclosures ...........................................................................65
Trading Book - Securitisation disclosures ............................................................................73

Chapter 8 – Market risk ................................................................................................................................76
Table 13

Market risk – Standard approach .......................................................................................76

Table 14

Market risk – Internal models approach..............................................................................77

Chapter 9 - Operational risk ..........................................................................................................................81
Table 15

Operational risk ..............................................................................................................81

Chapter 10 – Equities ..................................................................................................................................85
Table 16

Equities – Disclosures for banking book positions ................................................................85

Chapter 11 – Interest Rate Risk in the Banking Book .......................................................................................87
Table 17

Interest Rate Risk in the Banking Book ..............................................................................87

Chapter 12 – Leverage and Liquidity Coverage Ratio ........................................................................................90
Table 18

Leverage Ratio ................................................................................................................90

Table 19

Summary comparison of accounting assets vs. leverage ratio exposure measure ....................91

Table 20

Liquidity Coverage Ratio disclosure template ......................................................................92

Table 21

NSFR disclosure template .................................................................................................93

Glossary .....................................................................................................................................................95

1

Each table reference adopted in this document aligns to those required by APS 330 to be disclosed at half year.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 1 – Highlights

Strong capital position at September
2018• CET1 ratios have increased in the half toSeptember 2018 mainly due to cash profit
generation in 2H18 and net reduction inunderlying RWA growth (excluding foreignexchange impacts, regulatory changes andother one-offs). This was partially offset by
the payment of the March 2018 interim
dividend.

* Internationally Comparable methodology aligns with APRA’s information
paper titled International Capital Comparison Study (13 July 2015).

• The APRA CET1 ratio is currently inexcess of APRA’s ‘unquestionably strong’benchmark and well ahead of the 2020
implementation date.

EAD up $14bn to $944bn for 2H18
• Underlying movement primarily driven
by growth in Corporate, Sovereign andBank asset classes, partially offset by
reduction in Other Retail, Qualifying
Revolving
RetailandStandardised
portfolio.

*Exposure at Default is post Credit Risk Mitigation (CRM) and does
not include Securitisation, Equities or Other Assets.

Impaired Assets down $58m, 3% HoH• Decreased in Impaired Asset HOH isdriven by repayments and upgrades in theInstitutional division offset by an increasein the Australia Division driven by a single
name restructured loan.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Provision Ratios (Provisions / Credit RWA)
1.13%
1.05%

1.02%

Provision coverage remains sound• The total provision ratio decreasedby 3bps HOH to 1.02%. Collective
Provision ratio remains flat andcontinues
toprovideadequatecoverage.

0.79%

0.75%

Sep 17

Mar 180.75%

Sep 18

Total Provision Balance / CRWA
Collective Provision Balance / CRWA

Movements in Credit Risk Weighted Assets
($bn)
342.8

1.0

337.6

（2.3）

Mar 18(3.9)

GrowthFX Impact

CreditRisk
Weighted(CRWA) decreased by
HoH.

• Driven by reductions in volume tonon-mortgage Retail portfolios as wellas Standardised Corporate exposures
combined with improved credit profile
within the AIRB Corporate asset class.
Offset by increased exposure to
Sovereign, Banks and Residential
Mortgages. Reduction in “Other”
category reflects improved credit
migration.

Other

Sep 18Average Risk Weights (CRWA / EAD*)
Sep 17
Mar 1889%

84%

Sep 18
61%
50%

26%

25%

12%

Corporate

Bank & Sovereign

Residential
Mortgage

Assets$5.2bnQRR & Other
RetailSpecialised
Lending

Other

Standardised*Exposure at Default is post Credit Risk Mitigation (CRM) and does not include Securitisation, Equities or Other Assets.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 2 - Introduction
Purpose of this document
This document has been prepared in accordance with the Australian Prudential Regulation Authority (APRA) ADI
Prudential Standard (APS) 330: Public Disclosure.
APS 330 mandates the release to the investment community and general public of information relating to capital
adequacy and risk management practices. APS 330 was established to implement Pillar 3 of the Basel Committee on
Banking Supervision’s framework for bank capital adequacy2. In simple terms, the Basel framework consists of threemutually reinforcing ‘Pillars’:
Pillar 1

Pillar 2

Pillar 3

Minimum capital requirement

Supervisory review process

Market discipline

Minimum capital requirements for
Credit Risk, Operational Risk, Market
Risk and Interest Rate Risk in the
Banking Book

Firm-wide risk oversight, Internal
Capital Adequacy Assessment Process(ICAAP), consideration of additionalrisks, capital buffers and targets andrisk concentrations, etc.

Regular disclosure to the market of
qualitative and quantitative aspectsofrisk
management,
capitaladequacy and underlying risk metrics

APS 330 requires the publication of various levels of information on a quarterly, semi-annual and annual basis. This
document is the annual disclosure.
Basel in ANZIn December 2007, ANZ received accreditation for the most advanced approaches permitted under Basel for credit risk
and operational risk, complementing its accreditation for market risk. Effective January 2013, ANZ adopted APRA
requirements for Basel III with respect to the measurement and monitoring of regulatory capital.
Verification of disclosures
These Pillar 3 disclosures have been verified in accordance with Board approved policy, including ensuring consistency
with information contained in ANZ’s Financial Report and in Pillar 1 returns provided to APRA. In addition ANZ’s
external auditor has performed an agreed upon procedure review with respect to these disclosures.
Comparison to ANZ’s Financial Reporting
These disclosures have been produced in accordance with regulatory capital adequacy concepts and rules, rather thanwith accounting policies adopted in ANZ’s financial reports. As such, there are different areas of focus and measures insome common areas of disclosures. These differences are most pronounced in the credit risk disclosures, for instance:The principal method for measuring the amount at risk is Exposure at Default (EAD), which is the estimatedamount of exposure likely to be owed on a credit obligation at the time of default. Under the Advanced Internal
Ratings Based (AIRB) approach in APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk,banks are accredited to provide their own estimates of EAD for all exposures (drawn, commitments or contingents)
reflecting the current balance as well as the likelihood of additional drawings prior to default.



Loss Given Default (LGD) is an estimate of the amount of losses expected in the event of default. LGD isessentially calculated as the amount at risk (EAD) less expected net recoveries from realisation of collateral as wellas any post default repayments of principal and interest.



Most credit risk disclosures split ANZ’s portfolio into regulatory asset classes, which span different areas of ANZ’sinternal divisional and business unit organisational structure.

Unless otherwise stated, all amounts are rounded to AUD millions.

2
Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards: A Revised
Framework, 2004.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 3 – Risk appetite and governanceRisk types: ANZ is exposed to a broad range of inter-related business risks.
Capital Adequacy risk is the risk of loss arising from the Group failing to maintain the level of capital requiredby prudential regulators and other key stakeholders (shareholders, debt investors, depositors, rating agencies,etc.) to support ANZ’s consolidated operations and risk appetite.

Compliance risk is the risk of failure to act in accordance with laws, regulations, industry standards and codes,
internal policies and procedures and principles of good governance as applicable to ANZ’s businesses.

Credit risk is the risk of financial loss resulting from a counterparty failing to fulfil its obligations or a decrease incredit quality of a counterparty resulting in a financial loss. Credit Risk incorporates the risks associated with us
lending to customers who could be impacted by climate change or by changes to laws, regulations, or otherpolicies adopted by governments or regulatory authorities, including carbon pricing and climate change adaptation
or mitigation policies.



Equity risk is the risk of financial loss arising from the unexpected reduction in value of equity investments notheld in the trading book including those of the Group’s associates.

Insurance risk is risk of unexpected losses resulting from worse than expected claims experience, including anyof the following that expose an insurer to financial loss: inadequate or inappropriate underwriting, claims
management, reserving, insurance concentrations, reinsurance management, product design and pricing.

Market risk is the risk to the Group’s earnings arising from changes in any interest rates, foreign exchange rates,
credit spreads, volatility, and correlations or from fluctuations in bond, commodity or equity prices.



Liquidity and Funding risk is the risk that the Group is unable to meet its payment obligations as they fall due,
including repaying depositors or maturing wholesale debt or the Group having insufficient capacity to fundincreases in assets.



Operational risk is risk of loss and/or non-compliance with laws resulting from inadequate or failed internal
processes, people and/or systems, or from external events. This definition includes legal risk, and the risk ofreputation loss, or damage arising from inadequate or failed internal processes, people and systems, but excludes
strategic risk.



Reinsurance risk - Reinsurance is an agreement in which one insurer (‘the reinsurer’) indemnifies anotherinsurer for all or part of the risk of a policy originally issued and assumed by that other insurer. Reinsurance is arisk transfer tool between the insurer and reinsurer. The main risk that arises with reinsurance is counterparty
credit risk. This is the risk that a reinsurer fails to meet its contractual obligations, that is, to pay us reinsurance
claims when due, which in turn creates a counterparty credit risk.



Reputation risk3 is defined as the risk of loss that directly or indirectly impacts earnings, capital adequacy orvalue, that is caused by adverse perceptions of the Group held by any of customers, the community,
shareholders, investors, regulators, or rating agencies, conduct risk associated with the Group’s employees orcontractors (or both) or the social or environmental (or both) impacts of our lending decisions.



Securitisation risk is the risk of credit related losses greater than expected due to a securitisation failing tooperate as anticipated, or of the values and risks accepted or transferred, not emerging as expected.

Strategic risk is the risk that the Group’s business strategy and strategic objectives may lead to an increase inother key Material Risks — for example: Credit Risk, Market Risk and Operational Risk.

Technology risk is the risk of loss and/or non-compliance with laws resulting from inadequate or failed internal
processes, people and systems or from external events impacting on IT assets, including the compromise of an IT
asset’s confidentiality, integrity or availability.

3
Regulatory Capital is calculated in accordance with the definition of Operational Risk outlined in APS 115 Capital Adequacy: Advanced
Measurement Approaches to Operational Risk, and therefore excludes reputation risk considerations.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Risk Appetite Framework
ANZ's Board is ultimately responsible for ANZ’s risk management framework, which includes the Group Risk Appetite
Statement (RAS). The Group RAS is the document which clearly and concisely sets out the Board’s expectations
regarding the degree of risk that ANZ is prepared to accept in pursuit of its strategic objectives and business plan.
The articulation of risk appetite and risk tolerances is central to the risk appetite statement. ANZ’s Group RAS conveys
the following:






The degree of risk (risk appetite) that ANZ is prepared to accept in pursuit of its strategy, objectives and businessplans with consideration of its shareholders’ and customers’ best interests.
For each material risk, ANZ has set the maximum level of risk (risk tolerance) that it is willing to operate within,
expressed as a risk limit and based on its risk appetite, risk profile and capital strength. Risk tolerances translaterisk appetite into operational limits for the day-to-day management of material risks, where possible.
The process for ensuring that risk tolerances are set at an appropriate level, based on an estimate of the impact inthe event that a risk tolerance is breached, and the likelihood that each material risk is realised.
The process for monitoring compliance with each risk tolerance and for taking appropriate action in the event that
it is breached; andThe timing and process for review of the risk appetite and risk tolerances.

Risk management governance
The Board is principally responsible for overseeing the establishment by Management of a sound risk management
culture with an operational structure and the necessary resources to facilitate effective risk management throughout
ANZ, and which in turn supports the ability of ANZ to operate consistently within its risk appetite and approves the risk
appetite within which management is expected to operate and including ANZ’s risk appetite statement and risk
management strategy. The Committees and their purpose are:Risk Committee
The purpose of the Risk Committee is to assist the Board of Directors in the effective discharge of its responsibilities
for business, market, credit, equity and other investment, financial, operational, liquidity and reputational risk
management and for the management of the Group’s compliance obligations. The Risk Committee also assists theBoard by providing an objective non-executive oversight of the implementation by management of ANZ’s risk
management framework and its related operation and by enabling an institution-wide view of ANZ’s current and futurerisk position relative to its risk appetite and capital strength. The Committee meets at least four times annually.
Audit Committee
Assists the Board of Directors in reviewing: financial reporting principles and policies, controls and procedures; theeffectiveness of ANZ's internal control and risk management framework; the work of Internal Audit which reports
directly to the Board Audit Committee; the integrity of ANZ’s financial statements and the independent audit thereof
and compliance with related legal and regulatory requirements; due diligence procedures; prudential supervision
procedures and other regulatory requirements to the extent relating to financial reporting and for reviewing reports
from major subsidiary audit committees. It’s also responsible for the appointment and evaluation of the external
auditor. The committee meets at least four times annually.
Digital Business and Technology Committee
The purpose of the Digital Business and Technology Committee is to assist the Board of Directors in the effective
discharge of its responsibilities in connection with the oversight of ANZ’s information technology, digitalisation andtechnology-related innovation strategies. The Committee meets at least three times annually.
Human Resource Committee
The Committee is responsible for, among other matters, reviewing and making recommendations to the Board withregard to the remuneration of ANZ Board Appointees and ANZ Material Risk Takers, the design of executive
remuneration structures and significant incentive plans and the Group’s Remuneration Policy. It also approves theappointment and termination of ANZ Board Appointees (excluding the CEO, CRO and GGM-IA4), reviews senior
executive succession plans and monitors the effectiveness of ANZ’s culture, employee engagement and diversity andinclusion programs. The Committee meets at least four times annually.
Ethics, Environment, Social and Governance Committee
Amongst other matters, the Committee reviews the development of and approves all other corporate governancepolicies and principles applicable to ANZ and seeks to ensure an appropriate Board and Committee structure is inplace. It seeks to ensure there is a robust and effective process for evaluating the performance of the Board, Board
Committee and Non-Executive Directors. It also reviews, monitors and approves ANZ’s corporate sustainability
objectives and provides advice to management on sustainability issues within ANZ. The Committee meets at least
twice annually.
The above Committees are exclusively comprised of Non-Executive directors. Members, including the Chair are
appointed by the Board and serve at the discretion of the Board and for such term or terms as the Board determines.
Processes and procedures relating to the operation of each of the board committees are documented in the committee
charters and in the Board Committees’ Standing Rules.

4

CRO: Chief Risk Officer; GGM-IA: Group General Manager-Internal Audit

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ANZ Basel III Pillar 3 Disclosure

September 2018

Executive Management Committees are responsible for co-ordination of risk matters for each of the areas of risk
management. The Executive Management Committees most relevant to the risks described above and overall capitalmanagement at ANZ are as follows:
Group Asset and Liability Committee (GALCO)GALCO is responsible for the oversight and strategic management of the ANZ’s balance sheet activities includingbalance sheet structure, liquidity, funding, capital management, non-traded interest rate risk, and non-traded FXrisks and exposures. The Committee meets at least 4 times a year, or more frequently as required.
Credit and Market Risk Committee (CMRC)
CMRC is responsible for the oversight and control of credit, market, insurance and material financial risks across the
ANZ Group. The Committee meets monthly, with additional meetings as required.
Operational Risk Executive Committee (OREC)OREC is responsible for oversight of and monitoring Operational and Compliance Risk and the related Control
Environment, setting policies and frameworks for the implementation across ANZ. The committee meets at least fourtimes per year, or on an ‘as required’ basis.
Responsible Business Committee (RBC)
The Responsible Business Committee (RBC) is a leadership and decision making body that exists to advance ANZ’s
Purpose. The Committee meets at least 4 times a year, or more frequently as required.
Capital Management Policy Committee (CMPC)CMPC is responsible for the oversight and control of the Group’s capital and portfolio measurement framework,
addressing economic and regulatory capital requirements and is also responsible for making capital management andportfolio measurement related recommendations to the Risk Committee and ANZ Board. The Committee normallymeets six times per year or on an as required basis. CMPC is a sub-committee of GALCO.
Credit Ratings System Oversight Committee (CRSOC)
CRSOC is a sub-committee of CMRC responsible for the oversight and control of the Internal Ratings System for
credit risk including credit model approvals and performance monitoring. The Committee meets at least 4 times a
year, or more frequently as required.
Stress Testing Oversight Committee (STOC)
STOC is responsible for the oversight and control of the Group’s stress testing framework, modelling and processes.
The Committee meets meet a minimum of three times per year, with additional meetings at the discretion of the
Chair. STOC is a sub-committee of CMPC.
Processes and procedures relating to the operation of each of the Executive Management Committees are documented
in the committee charters.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 4 – Capital reporting and measurement
Capital reporting and measurement
To ensure that an Authorised Deposit-taking Institution (ADI) is adequately capitalised on both a standalone and groupbasis, APRA adopts a tiered approach to the measurement of an ADI’s capital adequacy by assessing the ADI’s
financial strength at three levels:

Level 1 - being the ADI i.e. Australia and New Zealand Banking Group Limited, consolidated with APRA approved
subsidiaries, to form the ADI’s Extended Licensed Entity (ELE).



Level 2 - being the consolidated group for financial reporting purposes adjusted to exclude associates activities andcertain subsidiaries referenced under APS 001: Definitions that undertake the following business activities:







Insurance businesses (including friendly societies and health funds).
Acting as manager, responsible entity, approved trustee, trustee or similar role in relation to funds
management.
Non-financial (commercial) operations.
Securitisation special purpose vehicles to which assets have been transferred in accordance with APRA's
requirements as set out in APS 120: Securitisation.

Level 3 – the consolidated group for financial reporting purposes.

ANZ measures capital adequacy monthly and reports for prudential purposes on a Level 1 and Level 2 basis.
APRA is extending its prudential supervision framework to Conglomerate Groups via the Level 3 framework which will
regulate a bancassurance group such as ANZ as a single economic entity with minimum capital requirements andadditional monitoring of risk exposure levels.
In August 2016, APRA confirmed the deferral of capital requirements for Conglomerate Groups until 2019 at theearliest. The non-capital components of the Level 3 framework relating to group governance, intragroup transactions
and other risk management and compliance requirements were effective from 1 July 2017 and have no material impact
on the Group’s capital position.
Based upon the current versions of the Level 3 standards covering capital adequacy, ANZ is not expecting any material
impact on its operations.
This Pillar 3 report is based on the Level 2 prudential structure.

Refer to Note 25 Controlled Entities of ANZ’s 2018 Annual Report for a list of all material subsidiaries and a brief
description of their key activities.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 5 – Capital and Capital Adequacy
Table 1

Capital Disclosure template

The head of the Level 2 Group to which this prudential standard applies is Australia and New Zealand Banking Group
Limited.
Table 1 of this chapter consists of a Capital Disclosure template that assists users in understanding the differences
between the application of the Basel III reforms in Australia and those rules as detailed in the document Basel III: A
global regulatory framework for more resilient banks and banking systems, issued by the Bank for International
Settlements.
The information in the lines of the template has been mapped to ANZ’s Level 2 balance sheet, which adjusts for nonconsolidated subsidiaries as required under APS 001: Definitions. Where this information cannot be mapped on a one
to one basis, it is provided in an explanatory table. ANZ’s material non-consolidated subsidiaries are also listed in thischapter.
Restrictions on Transfers of Capital within ANZANZ operates branches and locally incorporated subsidiaries in many countries. These operations are capitalised at an
appropriate level to cover the risks in the business and to meet local prudential requirements. This level ofcapitalisation may be enhanced to meet local taxation and operational requirements. Any repatriation of capital fromsubsidiaries or branches is subject to meeting the requirements of the local prudential regulator and/or the local
central bank. Apart from ANZ’s operations in New Zealand, local country capital requirements do not impose any
material call on ANZ’s capital base.
ANZ undertakes banking activities in New Zealand principally through its wholly owned subsidiary, ANZ Bank New
Zealand Limited, which is subject to minimum capital requirements as set by the Reserve Bank of New Zealand(RBNZ). The RBNZ adopted the Basel II framework, effective from 1 January 2008 and Basel III reforms from 1
January 2013 and ANZ Bank New Zealand Limited has been accredited to use the advanced approach for the
calculation of credit risk and operational risk. ANZ Bank New Zealand Limited maintains a buffer above the minimum
capital base required by the RBNZ. This capital buffer has been calculated via the ICAAP undertaken for ANZ Bank New
Zealand Limited, to ensure ANZ Bank New Zealand Limited is appropriately capitalised under stressed economic
scenarios.

10ANZ Basel III Pillar 3 Disclosure
Table 1

September 2018

Capital disclosure templateSep-18Reconciliation
Table

$M

Reference

Common Equity Tier 1 Capital: instruments and reserves
1

Directly issued qualifying ordinary shares (and equivalent for mutually-owned entities) capital

27,321

Table A

2

Retained earnings

31,203

Table B

3

349

Table C

5

Accumulated other comprehensive income (and other reserves)
Directly issued capital subject to phase out from CET1 (only applicable to mutually-owned
companies)
Ordinary share capital issued by subsidiaries and held by third parties (amount allowed ingroup CET1)

6

Common Equity Tier 1 capital before regulatory adjustments

4

n/a
56

Table D58,929Common Equity Tier 1 capital : regulatory adjustments
7

Prudential valuation adjustments

8

Goodwill (net of related tax liability)

3,776

Table E

9

3,050

Table F

10

Other intangibles other than mortgage servicing rights (net of related tax liability)
Deferred tax assets that rely on future profitability excluding those arising from temporary
differences (net of related tax liability)

10

Table J

11

Cash-flow hedge reserve

127

12

Shortfall of provisions to expected losses

609

13

Securitisation gain on sale

14

Gains and losses due to changes in own credit risk on fair valued liabilities

(3)

15

Defined benefit superannuation fund net assets
Investments in own shares (if not already netted off paid-in capital on reported balance
sheet)

124

16
17

-

n/a

21

Mortgage service rights (amount above 10% threshold)Deferred tax assets arising from temporary differences (amount above 10% threshold, net of
related tax liability)

22

Amount exceeding the 15% threshold

19
20

of which: significant investments in the ordinary shares of financial entities

24

of which: mortgage servicing rights

26
26a

-

Table I-

23
25

Table H-

Reciprocal cross-holdings in common equity
Investments in the capital of banking, financial and insurance entities that are outside thescope of regulatory consolidation, net of eligible short positions, where the ADI does not own
more than 10% of the issued share capital (amount above 10% threshold)
Significant investments in the ordinary shares of banking, financial and insurance entities thatare outside the scope of regulatory consolidation, net of eligible short positions (amountabove 10% threshold)18

Table G-n/aof which: deferred tax assets arising from temporary differences
National specific regulatory adjustments (sum of rows 26a - 26j)

6,545

26b

of which: treasury sharesof which: offset to dividends declared under a dividend reinvestment plan (DRP), to theextent that the dividends are used to purchase new ordinary shares issued by the ADI

26c

of which: deferred fee income

(132)

26d

of which: equity investments in financial institutions not reported in rows 18, 19 and 23

4,427

Table I26eof which: deferred tax assets not reported in rows 10, 21 and 25

1,108

Table J

26f

1,077

Table K

36

Table L26g

of which: capitalised expenses
of which: investments in commercial (non-financial) entities that are deducted under
APRA prudential requirements

26h

of which: covered bonds in excess of asset cover in pools

26iof which: undercapitalisation of a non-consolidated subsidiary

26j

-

-

27

of which: other national specific regulatory adjustments not reported in rows 26a to 26i
Regulatory adjustments applied to CET1 due to insufficient Additional Tier 1 and Tier 2 tocover deductions

28

Total regulatory adjustments to CET1

14,23829

Common Equity Tier 1 Capital (CET1)

44,691

11

29-

ANZ Basel III Pillar 3 Disclosure
Table 1

September 2018

Capital disclosure templateSep-18$M

Reconciliation
Table
Reference

7,639

Table M

Additional Tier 1 Capital: instruments
30
31
32

Directly issued qualifying Additional Tier 1 instrumentsof which: classified as equity under applicable accounting standardsof which: classified as liabilities under applicable accounting standards

7,639

33

Directly issued capital instruments subject to phase out from Additional Tier 1

34
35

Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued bysubsidiaries and held by third parties (amount allowed in group AT1)of which: instruments issued by subsidiaries subject to phase out

36

Additional Tier 1 Capital before regulatory adjustments

7,939

Additional Tier 1 Capital: regulatory adjustments-

300

Investments in own Additional Tier 1 instruments-

38

Reciprocal cross-holdings in Additional Tier 1 instruments-

39

Investments in the capital of banking, financial and insurance entities that are outside thescope of regulatory consolidation, net of eligible short positions, where the ADI does not own
more than 10% of the issued share capital (amount above 10% threshold)
Significant investments in the capital of banking, financial and insurance entities that areoutside the scope of regulatory consolidation (net of eligible short positions)
National specific regulatory adjustments (sum of rows 41a - 41c)

-

41
41a

405

43
44

Additional Tier 1 capital (AT1)

7,527

45

Tier 1 Capital (T1=CET1+AT1)

52,21841c
42Table M

Table M7of which: holdings of capital instruments in group members by other group members onbehalf of third partiesof which: investments in the capital of financial institutions that are outside the scope of
regulatory consolidations not reported in rows 39 and 40
of which: other national specific regulatory adjustments not reported in rows 41a and41b
Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to coverdeductions
Total regulatory adjustments to Additional Tier 1 capital

41b

Table M

n/a

37

40

Table M-

6

Table M

1

Table M

412
Table M

Tier 2 Capital: instruments and provisions
46

Directly issued qualifying Tier 2 instruments

6,559

Table N

47

Directly issued capital instruments subject to phase out from Tier 2

658

Table N

48

62

49

Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued bysubsidiaries and held by third parties (amount allowed in group T2)of which: instruments issued by subsidiaries subject to phase out

50

Provisions

119

51

Tier 2 Capital before regulatory adjustments

Table G

7,398

Tier 2 Capital: regulatory adjustments
52

Investments in own Tier 2 instruments

53

Reciprocal cross-holdings in Tier 2 instruments-

54

Investments in the Tier 2 capital of banking, financial and insurance entities that are outside
the scope of regulatory consolidation, net of eligible short positions, where the ADI does not
own more than 10% of the issued share capital (amount above 10% threshold)
Significant investments in the Tier 2 capital of banking, financial and insurance entities thatare outside the scope of regulatory consolidation, net of eligible short positions
National specific regulatory adjustments (sums of rows 56a - 56c)

-

55
56
56a

10

57

of which: holdings of capital instruments in group members by other group members onbehalf of third partiesof which: investments in the capital of financial institutions that are outside the scope of
regulatory consolidation not reported in rows 54 and 55
of which: other national specific regulatory adjustments not reported in rows 56a and56b
Total regulatory adjustments to Tier 2 capital

58

Tier 2 capital (T2)59

Total capital (TC=T1+T2)

60

Total risk-weighted assets based on APRA standards

56b
56c

85

Table N

12
12

Table N

107
7,291
59,509390,820

12

Table N

Table NANZ Basel III Pillar 3 Disclosure
Table 1

September 2018

Capital disclosure template5
Reconciliation
Table
Reference

Capital ratios and buffers
61

Common Equity Tier 1 (as a percentage of risk-weighted assets)

11.4%

62

Tier 1 (as a percentage of risk-weighted assets)

13.4%

63

Total capital (as a percentage of risk-weighted assets)

15.2%

64

Institution specific buffer requirement (minimum CET1 requirement plus capital conservationbuffer plus countercyclical buffer requirements plus G-SIBs buffer requirement, expressed asa percentage of risk-weighted assets)of which: capital conservation buffer requirement

8.037%

65
66

of which: ADI-specific countercyclical buffer requirements

67

of which: G-SIB buffer requirement (not applicable)

68

3.5%4
0.037%
n/aCommon Equity Tier 1 available to meet buffers (as a percentage of risk-weighted assets)

6.9%

National minima (if different from Basel III)-69

National Common Equity Tier 1 minimum ratio (if different from Basel III minimum)

n/a

70

National Tier 1 minimum ratio (if different from Basel III minimum)

n/a

71

National total capital minimum ratio (if different from Basel III minimum)

n/aAmount below thresholds for deductions (not risk-weighted)
72

Non-significant investments in the capital of other financial entities

73

Significant investments in the ordinary shares of financial entities

74

Mortgage servicing rights (net of related tax liability)

75

50
4,396

Deferred tax assets arising from temporary differences (net of related tax liability)

1,108

Applicable caps on the inclusion of provisions in Tier 2
76
77
78

Table In/a
Table J-

Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised
approach (prior to application of cap)
Cap on inclusion of provisions in Tier 2 under standardised approach

119
289

79

Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratingsbased approach (prior to application of cap)
Cap for inclusion of provisions in Tier 2 under internal ratings-based approach

-

Blank

80

Capital instruments subject to phase-out arrangements (only application between 1
January 2018 to 1 January 2022)
Current cap on CET1 instruments subject to phase out arrangements

81

Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities)

n/a

82

Current cap on AT1 instruments subject to phase out arrangements

n/a

83
84

Amount excluded from AT1 instruments due to cap (excess over cap after redemptions andmaturities)
Current cap on T2 instruments subject to phase out arrangements

n/a

85

Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)

-

1,887

n/a

-

Counter Cyclical Capital Buffer
Hong
Kong

SwedenNorwayUnitedKingdom

Other

$M

$M

$M

$M

$M

$M

3,479

316

510

6,175

297,631

308,111

Jurisdictional buffer set by national authorities

1.875%

2.000%

2.000%

0.500%--Countercyclical buffer requirement

0.022%

0.002%

0.003%

0.010%-

0.037%

Geographic breakdown of Private Sector Credit Exposures
RWA for all private sector credit exposures

5

Includes 1.0% buffer applied by APRA to ADI’s deemed as domestic systemically important.

13

Total

ANZ Basel III Pillar 3 Disclosure

September 2018

The following table shows ANZ's consolidated balance sheet and the adjustments required to derive the Level 2
Balance Sheet. The adjustments remove the external assets and liabilities of the entities deconsolidated for prudential
purposes and reinstate any intragroup assets and liabilities, treating them as external to the Level 2 Group.
Balance
Sheet as inpublishedfinancialstatements
AssetsCash and Cash Equivalents

Adjustments

Balancesheet underscope ofregulatory
consolidation

$M

$M

$M

84,636(52)

84,584

Settlement Balances owed to ANZ

2,319

-

2,319

Collateral Paid

11,043-

11,043

Trading securities

37,722-

37,722Derivative financial instruments

68,423-68,423Available-for-sale assetsof which: significant investment in financial institutions equity
instrumentsof which: non-significant investment in financial institutions
equity instruments

74,284(675)

73,609of which: Financial Institutions capital instruments

10

1,025

of which: Other entities equity investments
Net loans and advances

603,938(1,212)

Template andReconciliation
Table
Reference

Table N

Table I

31

Table I30

Table L602,726of which: deferred fee income(132)

of which: collective provision(2,523)

Table Gof which: individual provisions(920)

Table Gof which: capitalised brokerage

997

Table Kof which: CET1 margin lending adjustment

29

Row 26j

1

Table Mof which: AT1 margin lending adjustment
Regulatory deposits

882

-

882

Assets held for sale

45,248(43,635)

1,613

of which: Goodwill

71

of which: Deferred Tax assets

8

Due from controlled entitiesof which: Significant investments in the Tier 2 capital of banking,financial and insurance entities that are outside the scope of
regulatory consolidation-

Investment in associates

1,469

3,272

3,272

Blank

Shares in controlled entitiesof which: Investment in deconsolidated financial subsidiaries
of which: AT1 significant investment in banking, financial andinsurance entities that are outside the scope of regulatory
consolidation

1,469

-

85

Row 26c

Table E

Table N

2,867

Table I

Blank

405

Table M

2,553

2,553

of which: Financial Institutionsof which: Other Entities
Current tax assets

268

Deferred tax assets

900

-

2,548

Table I

5

Table L

268
900

of which: Deferred tax assets that rely on future profitability

Table J

10

Goodwill and other intangible assets

4,930

(1)

4,929

of which: Goodwill

3,508

Table Eof which: Software

1,421

Table F

Investments backing policy liabilities

-

-

-

Premises and equipment

1,833

-

1,833

Other assets

3,645

5

3,650

942,624(40,829)

901,795

of which: Defined benefit superannuation fund net assets

155

Total Assets

14

ANZ Basel III Pillar 3 Disclosure

September 2018

Liabilities
Settlement Balances owed by ANZ
Collateral Received

Balance
Sheet as inpublishedfinancialstatements

Balancesheet underscope ofregulatory
consolidation

Adjustments

$M

$M

$M

11,810(1)

11,809

Template andReconciliation
Table
Reference

6,542

-

6,542

Deposits and other borrowings

618,150

4,703

622,853

Derivative financial instruments

69,676-

69,676

-

1,575

1,575

Current tax liabilities

300

64

364

Deferred tax liabilities

59

(202)

(143)

Table J

5

Table K

31

Table HDue to controlled entitiesof which: related to capitalised expenses
of which: related to defined benefit super assets
Liabilities held for sale47,159(45,423)

1,736

Policy liabilities

-

-

-

External unit holder liabilities (life insurance funds)

-

-

1,504

Provisions

1,578

(74)

Payables and other liabilities

6,788

(193)

6,595

121,179(1,215)

119,964

Debt Issuancesof which: Directly issued qualifying Additional Tier 1
instrumentsof which: Additional Tier 1 Instrumentsof which: Directly issued capital instruments subject to phaseout from Tier 2of which: Directly issued qualifying Tier 2 instruments
Total Liabilities
Net Assets

7,460

Table M

456

Table M

1,432

Table N

6,559

Table N883,241(40,766)

842,475

59,383(63)

59,320Adjustments

Balancesheet underscope ofregulatory
consolidation

Balance
Sheet as inpublishedfinancialstatements

Template andReconciliation
Table
Reference

Shareholders’ equity

$M

$M

$M

Ordinary Share Capital

27,205328

27,533

Table A

212

Tables A & C

228

Table C127

Row 11
Table Bof which: Share reserve
Reserves

323

(95)

of which: Cash flow hedging reserves
Retained earnings
Share capital and reserves attributable to shareholders of
the Company
Non-controlling interest
Total shareholders’ equity

15

31,715(294)

31,421

59,243(61)

59,182

140

(2)

138

59,383(63)

59,320

Table DANZ Basel III Pillar 3 Disclosure

September 2018

The following reconciliation tables provide additional information on the difference between Table 1 Capital Disclosure
Template and the Level 2 Balance Sheet.
Table A
Issued capital
less

Table 1

$M

Reference

27,533

Reclassification to reserves
Regulatory Directly Issued qualifying ordinary shares

Table Bless

Sep-18(212)

Table C

27,321

Row 1

Sep-18

Table 1

$M

Reference

Retained earnings
Regulatory reclassification from significant investments in the ordinary shares of banking,financial and insurance entities outside the scope of regulatory consolidation

31,421(218)

Table I

Retained earnings

31,203

Row 2

Table C
Reserves

Sep-18

Table 1

$M

Reference

228

add

Reclassification from Issued Capital

212

less

Non qualifying reserves(91)

Reserves for Regulatory capital purposes (amount allowed in group CET1)

349

Table D
less

Table 1

$M

ReferenceNon-controlling interests

138
(82)

Table E
Goodwill

Row 3

Sep-18

Surplus capital attributable to minority shareholders
Ordinary share capital issued by subsidiaries and held by third parties

Table A56

Row 5

Sep-18

Table 1

$M

Reference

3,508

add

Goodwill classified as Held for Sale

71

add

Goodwill component of investments in financial associates

197

Table I

3,776

Row 8

Goodwill (net of related tax liability)

Table Fadd

Sep-18

Table 1

$M

Reference

SoftwareRegulatory reclassification from significant investments in the ordinary shares of banking,financial and insurance entities outside the scope of regulatory consolidation

1,421
1,629

Table I

Other intangibles other than mortgage servicing rights (net of related tax liability)

3,050

Row 9

16

ANZ Basel III Pillar 3 Disclosure

September 2018

Table G

Sep-18

Table 1

$M

Reference

Qualifying collective provisionCollective provision(2,523)less

Non-qualifying collective provision

307

less

Standardised collective provision

119

less

Non-defaulted expected loss

Row 502,664

Non-Defaulted: Expected Loss - Eligible Provision Shortfall

567

Qualifying individual provision
Individual provision

(920)

add

Additional individual provisions for partial write offs

(325)

less

Standardised individual provisionaddCollective provision on advanced defaulted

(281)

less

Defaulted expected loss

1,489

79

Defaulted: Expected Loss - Eligible Provision Shortfall

42

Gross deduction

609

Table Hless

Sep-18

Table 1

$M

Reference

Defined benefit superannuation fund net assets

155

Associated deferred tax liabilities(31)

Defined benefit superannuation fund net of deferred tax liabilities

124

Table I
Investment in deconsolidated financial subsidiaries

Row 12

Row 15

Sep-18

Table 1

$M

Reference

2,867

less

Regulatory reclassification to Retained Earnings and Other Intangible Assets(1,847)

add

Investment in financial associates

2,548

add

Investment in financial institutions Available for Sale

1,025

less

Goodwill component of investments in financial associates

less

Amount below 10% threshold
Significant investments in the ordinary shares of banking, financial and insurance
entities that are outside the scope of regulatory consolidation, net of eligible shortpositions (amount above 10% threshold)-Row 19add

Deduction amount below the 10% threshold of CET 1
Investments in the capital of banking, financial and insurance entities that are outside the scopeof regulatory consolidation, net of eligible short positions, where the ADI does not own more than
10% of the issued share capital - Available for Sale exposures

4,396

Row 73Equity investment in financial institutions not reported in rows 18, 19 and 23

4,427

Deduction for equity holdings in financial institutions - APRA regulations

4,427

add

17

(197)

Tables B &F

Table E

(4,396)31
Row 26dANZ Basel III Pillar 3 Disclosure

September 2018

Table J
add
add

Table 1

$M

Reference

Deferred tax assets

900

Deferred tax liabilities

143

DTL reclassed to Held for Sale

8

Deferred tax asset less deferred tax liabilities

1,051

less

Deferred tax assets that rely on future profitability

addDeferred tax liabilities on intangible assets, capitalised expenses and defined benefit
superannuation assets
Impact of calculating the deduction on a jurisdictional basis

add

Sep-18(10)

Deferred tax assets not reported in rows 10, 21 and 25 of the Common Disclosure
Template

Table K
Capitalised brokerage costs

31
1,108

Table 1

$M

Reference

997

Capitalised debt raising expenses

85

less

Associated deferred tax liabilities(5)

Capitalised expenses

1,077

Table L
Investments in non-financial Available for Sale equities

Table 1

$M

Reference

30

Investments in associates moved to Held for Sale

1

add

Investments in non financial associates

5

Equity exposures to non financial entities

36

Table M
Directly issued qualifying Additional Tier 1 Capital Instruments classified as liabilities

Table 1

$M

Reference

7,460

Issue costs

44

add

Fair value adjustment

135

Additional Tier 1 instruments issued by subsidiaries held by third parties
Issue costs
Surplus capital attributable to third party holders

add
less
less
less

Row 26g

Sep-18add

Directly issued qualifying Additional Tier 1 Capital Instruments classified as liabilities

Row 26f

Sep-18add

less

Row 26eSep-18add

add

Row 1036

7,639

Row 30

456
2
(158)
300

Row 34

Additional Tier 1 capital before regulatory adjustments

AT1 Instruments issued by subsidiaries and held by third parties (amounts allowed in Group AT1)

7,939

Row 36Significant investments in the capital of banking, financial and insurance entities that are outside
the scope of regulatory consolidation
Investments in the capital of financial institutions that are outside the scope of regulatory
consolidations not reported in rows 39 and 40
Other national specific regulatory adjustments not reported(405)

Row 40(6)

Row 41b(1)

Row 41c

Additional Tier 1 capital

7,527

Row 4418

ANZ Basel III Pillar 3 Disclosure

September 2018

Table N
Directly issued capital instruments subject to phase out from Tier 2
add

Issue costs

lessAmortisation of Tier 2 Capital Instruments subject to Phase out

add

Sep-18

Table 1

$M

Reference

1,432
16
(967)

Fair value adjustment

177

Directly issued capital instruments subject to phase out from Tier 2

658

add

Surplus capital attributable to third party holders

62

add

Directly issued qualifying Tier 2 instruments

add

Provisions

less

Investments in own Tier 2 instruments (trading limit)(10)

Row 52

less

Significant investments in the Tier 2 capital of banking, financial and insurance entities that areoutside the scope of regulatory consolidation, net of eligible short positions
Investments in the capital of financial institutions that are outside the scope of regulatory
consolidation not reported in rows 54 and 55
Tier 2 capital(85)

Row 55(12)

Row 56b

7,291

Row 58Tier 2 capital before regulatory adjustments

less

Row 47

6,559

Row 46

119

Table G

7,398

19

ANZ Basel III Pillar 3 Disclosure

September 2018

The following table provides details of entities included within the accounting scope of consolidation but excluded from
regulatory consolidation.
Total Assets

Total Liabilities$M$M

EntityActivity

ACN 008 647 185 Pty Ltd

Holding Company--

ANZ ILP Pty Ltd

Incorporated Legal Practice20

ANZ Investment Services (New Zealand) Limited

Funds Management

26

10

ANZ Lenders Mortgage Insurance Pty Limited

Mortgage insurance

1,154

689

ANZ Pensions (UK) Limited

Trustee/Nominee453-

ANZ Life Assurance Company Pty Ltd

Insurance

ANZ New Zealand Investments Limited

Funds Management

ANZ New Zealand Investments Nominees Limited
ANZ Self Managed Super Ltd

-

-

116

32

Nominee--Investment--

ANZ Wealth Alternative Investments Management Pty Ltd

Investment

1,035

1,031

ANZ Wealth Australia Limited

Holding Company / Corporate

1,570

-

ANZ Wealth New Zealand Limited

Holding Company

471-

ANZcover Insurance Private Ltd

Captive-Insurance

116

89
-

AUT Administration Pty Ltd

Dormant-

Capricorn Financial Advisers Pty Ltd

Advice--Elders Financial Planning Pty Ltd

Advice4

1Financial Investment Network Group Pty Ltd

Advice34-

Financial Lifestyle Solutions Pty Limited

Advice4

1Financial Planning Hotline Pty Ltd

Advice--Financial Services Partners Holdings Pty Limited

Holding Company / Advice

2-

Financial Services Partners Incentive Co Pty Limited

Advice--Financial Services Partners Management Pty Limited

Advice--Financial Services Partners Pty Ltd

Advice1-

FSP Funds Management Limited

Advice--FSP Group Pty Limited

Holding Company / Advice

1-

FSP Portfolio Administration Limited

Advice--FSP Super Pty Limited

Advice--Integrated Networks Pty Limited

Holding Company / Advice

Kingfisher Trust 2016-1

Securitisation Trust

12

-

1,239

1,239

Looking Together Pty Ltd
Mercantile Mutual Financial Services Pty Ltd

Property Price Information--

Investment-

Millennium 3 Financial Services Group Pty Ltd-

Advice16-

Millennium 3 Financial Services Pty Ltd

Advice71Millennium 3 Mortgage Platform Services Pty Limited

Advice--Millennium 3 Professional Services Pty Ltd

Advice--OASIS Asset Management Limited

Investment

10

1

OASIS Fund Management Limited

Superannuation

8

3

OneAnswer Nominees Limited

Nominee--

OnePath Administration Pty Ltd

Service Company

17

13

OnePath Custodians Pty Ltd

Superannuation

59

1

OnePath Financial Planning Pty Ltd

AdviceOnePath Funds Management Limited--

Investment

44

13

OnePath General Insurance Pty Ltd

Insurance

105

65

OnePath Investment Holdings Pty Ltd

Investment

7-

OnePath Life (NZ) Limited

Insurance

861

309

OnePath Life Australia Holdings Pty Ltd

Holding Company

1,501

-

OnePath Life Limited

Insurance

41,65740,15520

ANZ Basel III Pillar 3 Disclosure

September 2018

Total Assets

Total Liabilities

EntityActivity$M$M

Polaris Financial Solutions Pty Limited

Advice-1

RI Advice Group Pty Ltd

Advice12-

RI Central Coast Pty Ltd

Advice--RI Dandenong Pty Ltd

Advice--

RI Gold Coast Pty Ltd

Advice--RI Maroochydore Pty Ltd

Advice--RI Newcastle Pty Ltd

Advice--RI Parramatta Pty Ltd

Advice--RI Rockhampton & Gladstone Pty Ltd

Advice--RI Townsville Pty Ltd

Advice--Rieas Pty Ltd

Advice--

Shout for Good Pty Ltd

Corporate-

1

Tandem Financial Advice Pty Limited

Advice--Union Investment Company Pty Limited

Advice--21

ANZ Basel III Pillar 3 Disclosure
Table 2September 2018

Main features of capital instruments

As the main features of ANZ’s capital instruments are updated on an ongoing basis, ANZ has provided this information
separately in the Regulatory Disclosures section of its website.

Table 3

Capital adequacy, Table 4 Credit risk, Table 5 Securitisation

The above tables are produced at the quarters ending 30 June and 31 December.

Table 6

Capital adequacy

Capital management
ANZ pursues an active approach to capital management, which is designed to protect the interests of depositors,
creditors and shareholders. This involves the on-going review and Board approval of the level and composition of
ANZ’s capital base, assessed against the following key policy objectives:
Regulatory compliance such that capital levels exceed APRA’s, ANZ’s primary prudential supervisor, minimum
Prudential Capital Ratios (PCRs) both at Level 1 (the Company and specified subsidiaries) and Level 2 (ANZ
consolidated under Australian prudential standards), along with US Federal Reserve’s minimum Level 2
requirements under ANZ’s Foreign Holding Company Licence in the United States of America;Capital levels are aligned with the risks in the business and to meet strategic and business development plans
through ensuring that available capital exceeds the level of Economic Capital required to support the Ratings
Agency ‘default frequency’ confidence level for a ‘AA’ credit rating category bank. Economic Capital is an internal
estimate of capital levels required to support risk and unexpected losses above a desired target solvency level; andAn appropriate balance between maximising shareholder returns and prudent capital management principles.

ANZ’s capital management strategy aims to protect the interests of depositors, creditors and shareholders. We achieve
this through an Internal Capital Adequacy Assessment Process (ICAAP) whereby ANZ conducts detailed strategic andcapital planning over a 3 year time horizon. The process involves


Review capital ratios, targets, and levels of different classes of capital against ANZ’s risk profile and risk appetite
outlined in the Strategic Plan. ANZ’s capital targets reflect the key policy objectives above, and the desire to ensurethat under specific stressed economic scenarios that capital levels are sufficient to remain above both Economic
Capital and PCR requirements;

Stress tests are performed under different economic conditions to ensure a comprehensive review of ANZ’s capital
position both before and after mitigating actions. The stress tests determine the level of additional capital (i.e. the‘stress capital buffer’) needed to absorb losses that may be experienced during an economic downturn; andStress testing is integral to strengthening the predictive approach to risk management and is a key component inmanaging risks, asset writing strategies and business strategies. It creates greater understanding of the impacts
on financial performance through modelling relationships and sensitivities between geographic, industry andDivisional exposures under a range of macro-economic scenarios. ANZ has a dedicated stress testing team within
Risk Management that models and reports to management and the Board’s Risk Committee on a range of scenariosand stress tests.

Results are subsequently used to: Recalibrate ANZ’s management targets for minimum and operating ranges for its respective classes of capital suchthat ANZ will have sufficient capital to remain above both Economic Capital and regulatory requirements; and

Identify the level of organic capital generation and hence determine current and future capital issuance requirementsfor Level 1 and Level 2.

From these processes, a Capital Plan is developed and approved by the Board which identifies the capital issuancerequirements, capital securities maturity profile, and options around capital products, timing and markets to execute
the Capital Plan under differing market and economic conditions.
The Capital Plan is maintained and updated through a monthly review of forecast financial performance, economic
conditions and development of business initiatives and strategies. The Board and senior management are provided
with monthly updates of ANZ’s capital position. Any actions required to ensure ongoing prudent capital management
are submitted to the Board for approval.

22

ANZ Basel III Pillar 3 Disclosure

September 2018

Regulatory environment
ANZ’s regulatory capital calculation is governed by APRA’s Prudential Standards which adopt a risk-based capitalassessment framework based on the Basel III capital measurement standards. This risk-based approach requires
eligible capital to be divided by total risk weighted assets (RWA), with the resultant ratio being used as a measure ofan Authorised Deposit-taking Institution’s (ADIs) capital adequacy. APRA determines PCRs for Common Equity Tier 1(CET1), Tier 1 and Total Capital, with capital as the numerator and RWAs as the denominator.
Regulatory capital is divided into Tier 1, carrying the highest capital elements, and Tier 2, which has lower capitalelements, but still adds to the overall strength of the ADI.
Tier 1 capital is comprised of Common Equity Tier 1 capital less deductions and Additional Tier 1 capital instruments.
Common Equity Tier 1 capital comprises shareholders’ equity adjusted for items which APRA does not allow as
regulatory capital or classifies as lower forms of regulatory capital. Common Equity Tier 1 capital includes the following
significant adjustments:
Additional Tier 1 capital instruments included within shareholders’ equity are excluded;

Reserves exclude the hedging reserve and reserves of insurance and funds management subsidiaries;

Retained and current year earnings excluding those of insurance and funds management subsidiaries, but includes
capitalised deferred fees forming part of loan yields that meet the criteria set out in the prudential standard;

Inclusion of qualifying treasury shares.

Additional Tier 1 capital instruments are high quality components of capital that provide a permanent and unrestrictedcommitment of funds, are available to absorb losses, are subordinated to the claims of depositors and senior creditors
in the event of the winding up of the issuer and provide for fully discretionary capital distributions.
Deductions from the capital base comprise mainly deductions to the Common Equity Tier 1 component. These
deductions are largely intangible assets, investments in insurance and funds management entities and associates,
capitalised expenses (including loan and origination fees), and the amount of regulatory expected losses (EL) in excess
of eligible provisions.
Tier 2 capital mainly comprises perpetual subordinated debt instruments and dated subordinated debt instruments
which have a minimum term of five years at issue date.
Total Capital is the sum of Tier 1 capital and Tier 2 capital.
In addition to the prudential capital oversight that APRA conducts over the Company and the Group, the Company’s
branch operations and major banking subsidiary operations are overseen by local regulators such as the Reserve Bankof New Zealand, the US Federal Reserve, the UK Prudential Regulation Authority, the Monetary Authority of Singapore,
the Hong Kong Monetary Authority and the China Banking and Insurance Regulatory Commission who may impose
minimum capitalisation rates on those operations.
Throughout the financial year, the Company and the Group maintained compliance with the minimum Common Equity
Tier 1, Tier 1 and Total Capital ratios set by APRA and the US Federal Reserve (as applicable) as well as applicable
capitalisation rates set by regulators in countries where the Company operates branches and subsidiaries.
Regulatory development
There are a number of matters currently outstanding that may have an impact on ANZ’s regulatory capital in the
future. Details of these matters are available in ANZ’s 2018 Full Year Results Announcement Group Results section,
pages 46 and 47, available on ANZ’s website: [shareholder.anz.com/pages/results-announcement-archive.]23

ANZ Basel III Pillar 3 Disclosure
Table 6

September 2018

Capital adequacy - Capital Ratio and Risk Weighted Assets 6 7

The following table provides the composition of capital used for regulatory purposes and capital adequacy ratios.
Sep 18Mar 18

Sep 17$M$M$M

Corporate

121,891

123,253

121,915

Sovereign

6,955

6,896

7,555

Bank

15,90815,12913,080Residential Mortgage

97,76499,56096,267

Qualifying Revolving Retail

6,314

6,845

7,059

Other Retail

29,37330,76931,077278,205

282,452

276,953

33,11032,06531,845

13,365

Risk weighted assets
Subject to Advanced Internal Rating Based (IRB) approach

Credit risk weighted assets subject to Advanced IRB approach
Credit risk Specialised Lending exposures subject to slotting approach6
Subject to Standardised approach
Corporate

13,76015,105Residential Mortgage

327

321

950

Other Retail

88

102

2,000

14,175

15,52816,315Credit Valuation Adjustment and Qualifying Central Counterparties

7,344

7,864

7,269

Credit risk weighted assets relating to securitisation exposures

1,600

1,728

1,083

Other assets

3,146

3,185

3,369

337,580

342,822336,834

Credit risk weighted assets subject to Standardised approach

Total credit risk weighted assets
Market risk weighted assets

6,808

6,558

5,363

Operational risk weighted assets

37,61837,37837,305Interest rate risk in the banking book (IRRBB) risk weighted assets
Total risk weighted assets

8,814

9,019

11,611

390,820395,777

391,113

Capital ratios (%)7
Level 2 Common Equity Tier 1 capital ratio

11.4%

11.0%

10.6%

Level 2 Tier 1 capital ratio

13.4%

12.9%

12.6%

Level 2 Total capital ratio

15.2%

14.9%

14.8%

Level 1: Extended licensed Common Equity Tier 1 capital ratio

11.6%

10.9%

10.5%

Level 1: Extended licensed entity Tier 1 capital ratio

13.6%

12.9%

12.7%

Level 1: Extended licensed entity Total capital ratio

15.6%

15.1%

14.8%

Other significant Authorised Deposit-taking Institution (ADI) or overseas bank subsidiary:

BLANK

ANZ Bank New Zealand Limited – Common Equity Tier 1 capital ratio

11.1%

11.0%

10.7%

ANZ Bank New Zealand Limited - Tier 1 capital ratio

14.4%

14.4%

14.1%

ANZ Bank New Zealand Limited - Total capital ratio

14.4%

14.4%

14.4%

6

Specialised Lending exposures subject to slotting approach are those where the main servicing and repayment is from the asset being
financed, and includes specified commercial property development/investment lending, project finance and object finance.

7
ANZ Bank New Zealand Limited’s capital ratios have been calculated in accordance with Reserve Bank of New Zealand prudential
standards.

24

ANZ Basel III Pillar 3 Disclosure

September 2018

Credit Risk Weighted Assets (CRWA)
Total CRWA increased $0.8 billion from $336.8 billion in September 2017 to $337.6 billion in September 2018. Thiswas driven by increases in Banks and Residential Mortgages, partially offset by reductions in Australia Other Retail andthe sale of the Asia Retail and Wealth Businesses.
Market Risk, Operational Risk and IRRBB RWA
Traded Market Risk RWA increased $1.4 billion year on year due to a temporary regulatory requirement to holdadditional market risk capital while upgrades to the market risk systems and methodologies are implemented.
IRRBB RWA decreased $2.8 billion year on year due to a reduction in Repricing and Yield Curve risk.

25

ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 6 – Credit risk
Table 7

Credit risk – General disclosures

Definition of credit risk
Credit Risk is the risk of financial loss resulting from a counterparty failing to fulfil its obligations, or from a decrease incredit quality of a counterparty resulting in a loss in value.
Regulatory approval to use the Advanced Internal Ratings-based approach
ANZ has been given approval by APRA to use the Advanced Internal Ratings (AIRB) based approach to credit risk,
under APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk. As an AIRB bank, ANZ’s internal
models generate the inputs into regulatory capital adequacy to determine the risk weighted exposure calculations forboth on and off-balance sheet exposures, including undrawn portions of credit facilities, committed and contingent
exposures and expected loss (EL) calculations.
ANZ’s internal models are used to generate three key risk components that serve as inputs to the IRB approach tocredit risk:Probability of Default (PD) is an estimate of the level of the risk of borrower default
Exposure at Default (EAD) is defined as the expected facility exposure at the date of default
Loss Given Default (LGD) is an estimate of the potential economic loss on a credit exposure, incurred as aconsequence of obligor default.

There are however several small portfolios (mainly retail and local corporates in Asia Pacific) where ANZ applies theStandardised approach to credit risk, under APS 112 Capital Adequacy: Standardised Approach to Credit Risk.
Credit risk management framework and policies
ANZ has a comprehensive framework to manage Wholesale Credit Risk. The framework is top down, being defined bycredit principles and policies. Credit policies, requirements and procedures cover all aspects of the credit life cycle suchas transaction structuring, risk grading, initial approval, ongoing management and problem debt management, as well
as specialist policy topics.
The effectiveness of the credit risk management framework is assessed through various compliance and monitoringprocesses. These, together with portfolio selection, define and guide the credit process, organisation and staff.
Organisation
The Credit and Market Risk Committee (CMRC) is a senior executive level committee responsible for the oversight andcontrol of credit, market, insurance and material financial risks across the ANZ Group. The Credit Rating System
Oversight Committee (CRSOC) supports the CMRC, by providing oversight and control of the internal ratings systemfor credit risk in the wholesale and retail sectors, including credit model approvals and performance monitoring.
The primary responsibility for prudent and profitable management of credit risk assets and customer relationships
rests with the business units. An independent credit risk management function is staffed by risk specialists.
Independence is achieved by having all credit risk staff ultimately report to the Chief Risk Officer (CRO), even where
they are embedded in business units. Risk provides independent credit assessment and approval on lending decisions,and also performs key roles in portfolio management such as development and validation of credit risk measurement
systems, loan asset quality reporting, and development of credit policies and requirements.
The authority to make credit decisions is delegated by the Board to the CEO who in turn delegates authority to theCRO. The CRO in turn delegates some of their credit discretion to individuals as part of a ‘cascade’ of authority fromsenior to the most junior credit officers. Within ANZ, credit approval for material judgemental lending is made on a‘dual approval’ basis, jointly by the business writer in the business unit and the respective independent credit risk
officer. Individuals must be suitably skilled and accredited in order to be granted and retain a credit discretion. Credit
discretions are reviewed on an annual basis, and may be varied based on the holder’s performance.
Programmed credit assessment typically covers retail and some small business lending, and refers to the automatedassessment of credit applications using a combination of scoring (application and behavioural), policy rules andexternal credit reporting information. Where an application does not meet the automated assessment criteria it will bereferred out for manual assessment, with assessors considering the decision tool recommendation.

26

ANZ Basel III Pillar 3 Disclosure

September 2018

Portfolio direction and performance
The credit risk management framework contains several portfolio direction and performance tools which enable Risk toplay a fundamental role in monitoring the direction and performance of the portfolio. These include:Group and divisional level risk appetite strategies, business writing strategies and segment transaction guidelines
are prepared by the businesses and set out appetite, planned portfolio growth, capital usage and risk/return
profile, and also identify areas that may require attention to mitigate and improve risk management;Regular portfolio reviews; andExposure concentration limits, covering single customers, industries and cross border risk, to ensure a diversified
portfolio.

ANZ uses portfolio monitoring and analysis tools, technologies and techniques to assist with portfolio risk assessmentand management. These assist in:Monitoring, analysing and reporting ANZ’s credit risk profile and progress in meeting portfolio objectives;
Calculating and reporting ANZ’s collective provision, economic capital, expected loss, regulatory risk weighted
assets (RWA) and regulatory expected loss;Assessing impact of emerging issues, and conducting ad-hoc investigations and analysis.

Validating rating/scoring tools and credit estimates; and

Ongoing review and refinement of ANZ's credit risk measurement and policy framework.

Credit Risk Reporting
Credit risk management information systems, reporting and analysis are managed centrally and at the divisional andbusiness unit level.
Periodic reporting provides confirmation of the effectiveness of processes highlights emerging issues requiring attention
and allows monitoring of portfolio trends by all levels of management and the Board.
Examples of reports include EAD, portfolio mix, risk grade profiles and migrations, RWAs, large exposure reporting,credit watch and control lists, impaired assets and provisions.
Exposure at default
EAD is defined as the expected facility exposure at the date of default. Unless otherwise stated, throughout thisdisclosure EAD represents credit exposure net of offsets for credit risk mitigation such as guarantees, credit
derivatives, netting and financial collateral.
Past due facilities
Facilities where a contractual payment has not been met or the customer is outside of contractual arrangements for amaterial length of time are deemed past due. Past due facilities include those operating in excess of approved
arrangements or where scheduled repayments are outstanding, but do not include impaired assets.
Impaired assets
A facility for which there is doubt about timely payment of principal, interest and fees being achieved and / or amaterial credit obligation is 90 days or more past due and is not well secured. It includes all problem assets, offbalance sheet exposures and assets brought to ANZ’s balance sheet through the enforcement of security.
Restructured items
A facility in which the original contractual terms have been modified to provide concessions of interest, principal, orother payments due, or for an extension in maturity for a non-commercial period for reasons related to the financial
difficulties of the borrower.

27

ANZ Basel III Pillar 3 Disclosure

September 2018

Collective Provisions
As well as holding individual provisions for credit loss, ANZ also holds a collective provision to cover credit losses whichhave been incurred but have not yet been specifically identified.
Calculation of the collective provision involves placing exposures in pools of similar assets with similar risk
characteristics. The required collective provision is estimated on the basis of historical loss experience for assets withcredit risk characteristics similar to those in the collective pool and includes an allowance for inherent risk associatedwith the design and use of models. The initial calculation from historical loss experience may be adjusted based on
current observable data such as changed economic conditions, and to take account of the impact of inherent risk oflarge concentrated losses within the portfolio.
The current methodology underpinning calculation of collective provision from historical experience is predominantly
based around the product of an exposure’s PD, LGD and EAD. ANZ uses slightly different PD, LGD and EAD factors in
the calculation of regulatory capital and regulatory EL, due to the different requirements of APRA and accounting
standards. The key differences are:

ANZ must use more conservative LGD assumptions for regulatory capital purposes, such as the 20% LGD floor for
retail mortgages and downturn LGD factors.

ANZ must use cycle-adjusted PDs for regulatory capital purposes, but uses point-in-time estimates to calculate
provisions.

Essentially these differences reflect the effects of the credit cycle on credit losses. Point-in-time refers to losses at any
given point in the credit cycle, cycle-adjusted refers to adjusting estimates to reflect a full credit cycle and downturn
refers to losses at the worst of the cycle and is the most conservative estimate to use. Regardless of the adjustments,
the starting point for all estimates is the output of the rating/scoring models and tools to satisfy the in use test8.
ANZ’s collective provisioning methodology will change 1st October 2018 with the implementation of Australian
Accounting Standard AASB 9 Financial Instruments.
Individual Provisions
Individual provisions are assessed on a case-by-case basis for all individually managed impaired assets taking into
consideration factors such as the realisable value of security (or other credit mitigants), the likely return available uponliquidation or bankruptcy, legal uncertainties, estimated costs involved in recovery, the market price of the exposure insecondary markets and the amount and timing of expected receipts and recoveries.
Write-offs
Facilities are written off against the related provision for impairment when they are assessed as partially or fully
uncollectable, and after proceeds from the realisation of any collateral have been received. Where individual provisions
recognised in previous periods have subsequently decreased or are no longer required, such impairment losses arereversed in the current period income statement.
Definition of default
ANZ uses the following definition of default:

ANZ considers that the customer is unlikely to pay its credit obligations in full, without recourse to actions such as
realising security, orthe customer is at least 90 days past due on a credit obligation, orthe customer’s overdraft or other revolving facility(ies) have been continuously outside approved limits for 90 or
more consecutive days.

Specific Provision and General Reserve for Credit Losses
Due to definitional differences, there is a difference in the split between ANZ’s individual provision and collective
provision for accounting purposes and the specific provision and general reserve for credit losses (GRCL) for regulatory
purposes. This does not impact total provisions, and essentially relates to the classification of collectively assessed
provisions on defaulted accounts. The disclosures in this document are based on individual provision and collective
provision, for ease of comparison with other published results.

8

One of the key criteria for regulatory acceptance of a rating model is that the outputs must be used in a wide range of ongoing
management activities, to demonstrate that the model is used in day-to-day management of exposures and not just for regulatory
capital calculation.

28

ANZ Basel III Pillar 3 Disclosure

September 2018

Exposure at Default in Table 7 represents credit exposure net of offsets for credit risk mitigation such as guarantees,credit derivatives, netting and financial collateral. It includes Advanced IRB, Specialised Lending and Standardised
exposures, and excludes Securitisation, Equities or Other Assets exposures.
Table 7(b) part (i): Period end and average Exposure at Default 9

Risk
Weighted
Assets$M

Exposureat Default$M

Sep 18Average
Exposureat Default
for half year
$M

Corporate

121,891

245,625

Sovereign

6,955

145,569

Bank

15,908Residential Mortgage
Qualifying Revolving Retail

Advanced IRB approach

Other Retail
Total Advanced IRB approach
Specialised Lending

Individual
provision
charge forhalf year$M

Write-offs
for half year$M

241,7081

90

143,426(3)-

51,36350,016--

97,764

376,573376,328

56

41

6,314

18,447

18,88993

140

29,37339,81940,700211

277

278,205

877,396

871,067358

548

33,11039,462

38,661

2

4Standardised approach
Corporate

13,76015,064

15,646(19)

15

Residential Mortgage

327

704

693

1

3

Other Retail

88

87

94

1

3

14,17515,855

16,433

(17)

21

7,344

11,402

10,997--

332,834

944,115

937,158

343

573

Total Standardised approach
Credit Valuation Adjustment andQualifying Central Counterparties
Total

9
Average Exposure at Default for half year is calculated as the simple average of the balances at the start and the end of each six
month period.

29

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(b) part (i): Period end and average Exposure at Default (continued)

Risk
Weighted
Assets$M

Exposureat Default$M

Mar 18Average
Exposureat Default
for half year
$M

Corporate

123,253

237,791

234,083

68

Sovereign

6,896

141,282

136,378

-

-

Bank

15,12948,66846,604--

Residential Mortgage

99,560376,082

371,376

42

24

Qualifying Revolving Retail

6,845

19,331

20,69392

139

Advanced IRB approach

Other Retail
Total Advanced IRB approach
Specialised Lending

Individual
provision
charge forhalf year$M

Write-offs
for half year$M
142

30,76941,58041,766

197

287

282,452

864,734

850,900

399

592

32,06537,86037,533(4)

4

16Standardised approach
Corporate

15,105

16,22815,342-

Residential Mortgage

321

681

1,565

2

1

Other Retail

102

101

1,045

33

38

15,52817,01017,952

35

55

7,864

10,591

10,255--337,909930,195

916,640

430

651

Risk
Weighted
Assets$M

Exposureat Default$M

Sep 17
Average
Exposureat Default
for half year
$M

Individual
provision
charge forhalf year$M

Write-offs
for half year
$M

Corporate

121,915230,375

229,52275

178

Sovereign

7,555

131,473

131,139

-

-

Bank

13,08044,54045,1285

8

Residential Mortgage

96,267

366,669

360,67942

20

Qualifying Revolving Retail

7,059

22,05522,164

118

137

Total Standardised approach
Credit Valuation Adjustment andQualifying Central Counterparties
Total

Advanced IRB approach

Other Retail
Total Advanced IRB approach
Specialised Lending

31,077

41,95142,039245

275

276,953

837,063

830,671485

618

31,84537,20537,951(4)

2

13,365

14,455

15,661

(1)

80

950

2,448

4,462

2

1

2,000

1,988

2,638

72

90

16,31518,891

22,761

73

171

7,269

9,919

9,838

-

-

332,382

903,078

901,221554

791

Standardised approach
Corporate
Residential Mortgage
Other Retail
Total Standardised approach
Credit Valuation Adjustment andQualifying Central Counterparties
Total

30

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(b) part (ii): Exposure at Default by portfolio type10 11

Sep 18Mar 18

$M

$M

$M

$M

Cash

57,60456,49947,58757,052

Contingents liabilities, commitments, and other off-balance sheet exposures

153,021

152,263

153,775

152,642

Derivatives

42,75243,35738,922

43,055

16

19

68

18

Investment Securities

73,296

69,14966,802

71,223

Net Loans, Advances & Acceptances

587,674

Portfolio Type

Settlement Balances

Sep 17

Average forhalf year
Sep 18592,967

582,380

568,089

Other assets

4,387

2,873

2,558

3,630

Trading Securities

20,072

23,65525,277

21,864

Total exposures

944,115930,195

903,078

937,158

10

Average for half year is calculated as the simple average of the balances at the start and the end of each six month period.

11

Prior period comparatives have been restated due to the reclassification of certain assets from Settlement Balances to Cash.

31

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(c): Geographic distribution of Exposure at Default
Sep 18Australia

New Zealand

Asia Pacific,
Europe andAmericas

$M

$M

$M

$M

134,11344,60881,968260,689

Sovereign48,311

12,402

84,856

145,569

Bank

22,215

4,041

25,10751,363

Residential Mortgage

298,367

78,206704

377,277

Portfolio Type
Corporate

Total

Qualifying Revolving Retail

18,447--18,447

Other Retail27,956

11,86387

39,906

Qualifying Central Counterparties

7,763

1,293

2,346

11,402

Specialised Lending

27,993

11,321

148

39,462

Total exposures

585,165

163,734

195,216

944,115

Total

Mar 18Australia

New Zealand

Asia Pacific,
Europe andAmericas

$M

$M

$M

$M

130,966

46,02577,028254,019

Sovereign

49,482

12,28879,512

141,282

Bank

22,776

4,702

21,19048,668Residential Mortgage

297,892

78,190681

376,763

Portfolio Type
Corporate

Qualifying Revolving Retail

19,331--

19,331Other Retail

29,24912,331

101

41,681

Qualifying Central Counterparties

7,561

1,321

1,709

10,591

Specialised Lending

26,633

11,15473

37,860Total exposures

583,890

166,011

180,294930,195

Total

Sep 17Australia

New Zealand

Asia Pacific,
Europe andAmericas

$M

$M

$M

$M

126,446

45,60572,779244,830

Sovereign

47,632

11,306

72,535

131,473

Bank

19,697

4,620

20,22344,540Residential Mortgage

291,868

74,801

2,448

369,117

Portfolio Type
Corporate

Qualifying Revolving Retail

22,055--22,055

Other Retail30,14011,811

1,988

43,939Qualifying Central Counterparties

6,790

1,346

1,783

9,919

Specialised Lending

26,331

10,749125

37,205

Total exposures

570,959

160,238

171,881903,07832

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(d): Industry distribution of Exposure at Default12 13
Sep 18Agriculture,
Forestry,
Fishing &Mining$M

Business
Services$M

Corporate

43,262

Sovereign

1,095

Portfolio TypeBank
Residential Mortgage
Qualifying Revolving
RetailConstruction$M

Electricity,
Gas &
Water
Supply$MEntertainment,
Leisure &Tourism
$M

9,676

5,621

9,390

13,119

1

16

604

-

14

9

35

57

27

-

-

-

-

-

Financial,
Investment&
Insurance$M

Government
and Official
Institutions$M

Personal$M

Property
Services$M

Wholesale
Trade$M

RetailTrade$M

Transport&
Storage$M

Manufacturing
$M

Other
$M

Total
$M

41,966

2,989

77,79062,55539,260710

21,19925,351

13,98815,171

18,987

260,689

1,018

-

1,600

11

-

445

434

50,956

145,569

-

17

-

83

31

30

78

26

-

51,363--377,277

-

-

-

-

-

377,277

-

-

-

-

-

-

-

-

18,447

-

-

-

-

-

18,447

Other Retail
Qualifying Central
Counterparties

3,046

2,887

4,000

104

2,239

663

16

1,634

13,567

1,212

1,213

4,013

1,353

3,959

39,906

-

-

-

-

-

11,402

-

-

-

-

-

-

-

-

11,402

Specialised Lending

1,283

5

367

1,212

77

1

-

3

-

34,868

14

16

1,054

562

39,462

Total exposures

48,70012,57810,03911,367

15,462

182,778

65,56041,932410,001

58,962

26,62018,047

18,101

23,968944,115

5.2%

1.3%

1.1%

1.2%

1.6%

19.5%

6.9%

4.4%

43.5%

6.2%

2.8%

1.9%

1.9%

2.5%

100.0%% of Total

12

Property Services includes Commercial property operators, Residential property operators, Retirement village operators/developers, Real estate agents, Non-financial asset investors and Machinery and equipment
hiring and leasing.

13

Other industry includes Health & Community Services, Education, Communication Services and Personal & Other Services.

33

ANZ Basel III Pillar 3 disclosure

September 2018

Table 7(d): Industry distribution of Exposure at Default (continued)
Mar 18Agriculture,
Forestry,
Fishing &Mining$M

Business
Services$M

Corporate

43,623

Sovereign

1,095

Bank
Residential Mortgage
Qualifying Revolving
RetailPortfolio TypeConstruction$M

Electricity,
Gas &
Water
Supply$MEntertainment,
Leisure &Tourism
$M

9,941

5,678

9,461

13,456

-

28

773

-

2

4

1

27

-

-

-

-

-

-

Financial,
Investment&
Insurance$M

Government
and Official
Institutions$M

Personal$M

Property
Services$M

Wholesale
Trade$M

RetailTrade$M

Transport&
Storage$M

Manufacturing
$M

Other
$M

Total
$M

37,2302,849

73,58462,706

37,790730

19,685

24,776

13,405

16,10919,286254,019

1,048

-

1,420

13

-

344

271

48,465

141,282

-

13

-

-

27

2

127

-

-

48,668--376,763

-

-

-

-

-

376,763

-

-

-

-

-

-

-

-

19,331

-

-

-

-

-

19,331Other Retail
Qualifying Central
Counterparties

3,174

2,956

4,100

105

2,318

691

16

1,661

14,453

1,244

1,257

4,177

1,401

4,128

41,681

-

-

-

-

-

10,591

-

-

-

-

-

-

-

-

10,591

Specialised Lending

815

6

375

1,599

67

1

-

1

-

33,561

17

16

955

447

37,86048,70912,907

10,182

11,965

15,841

170,562

65,571

40,513

411,277

55,91026,09017,60018,93624,132

930,195

5.2%

1.4%

1.1%

1.3%

1.7%

18.4%

7.0%

4.4%

44.2%

6.0%

2.8%

1.9%

2.0%

2.6%

100.0%

Entertainment,
Leisure &Tourism$M

Financial,
Investment&
Insurance$M

Wholesale
Trade$M

RetailTrade$M

Transport&
Storage
$M

Other
$M

Total
$M

Total exposures% of Total

Sep 17
Agriculture,
Forestry,
Fishing &Mining$M

Business
Services$M

Construction$M

Electricity,
Gas &
Water
Supply$M

Corporate

41,333

9,746

5,468

9,461

13,109Sovereign

1,075

-

29

524

1

132

49

34

25

4

-

-

-

-

-

Portfolio TypeBank
Residential Mortgage
Qualifying Revolving
RetailGovernment
and Official
Institutions$M

Manufacturing$M

Personal$M

Property
Services$M

33,6003,027

36,912870

18,91924,28913,52615,177

19,393244,830

65,694

61,576

856

-

1,026

16

-

370

306

131,473

44,119

-

65

-

-

39

-

43

30

44,540---369,117

-

-

-

-

-

369,117

-

-

-

-

-

-

-

-

22,055

-

-

-

-

-

22,055

Other Retail
Qualifying Central
Counterparties

3,257

2,951

4,135

110

2,376

713

15

1,650

16,511

1,278

1,259

4,288

1,442

3,954

43,939

-

-

-

-

-

9,919

-

-

-

-

-

-

-

-

9,919

Specialised Lending

807

7

181

1,696

232

1

-

1

-

32,824

14

16

708

718

37,20546,604

12,753

9,847

11,816

15,722

154,046

64,61839,484

408,553

54,047

25,617

17,83017,74024,401

903,078

5.2%

1.4%

1.1%

1.3%

1.7%

17.1%

7.2%

4.4%

45.1%

6.0%

2.8%

2.0%

2.0%

2.7%

100.0%

Total exposures% of Total

34

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(e): Residual contractual maturity of Exposure at Default14
Sep 18< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

113,477

132,355

14,711

146

260,689

Sovereign

82,871

44,102

18,596-

145,569

Bank

35,53915,424400-

51,363329

993

346,915

29,040377,277

Portfolio Type

Residential Mortgage
Qualifying Revolving Retail

-

-

-

18,44718,447

Other Retail

13,933

7,142

18,831-

39,906

Qualifying Central Counterparties

3,881

4,427

2,736

358

11,402

Specialised Lending

16,62721,023

1,766

46

39,462

Total exposures

266,657

225,466

403,955

48,037944,115

Mar 18< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

112,769

125,869

15,231150

254,019

Sovereign

79,422

36,02325,837-141,282

Bank

33,167

15,078423-

48,668311

1,100

345,272

30,080376,763

Portfolio Type

Residential Mortgage
Qualifying Revolving Retail

-

-

-

19,331

19,331Other Retail

14,537

7,645

19,499-41,681

Qualifying Central Counterparties

3,372

4,053

2,824

342

10,591

Specialised Lending

16,825

19,6951,290

50

37,860Total exposures

260,403

209,463410,376

49,953930,195

Sep 17< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

109,154

120,769

14,746

161

244,830

Sovereign

66,591

40,31924,563-

131,473Bank

30,06814,159313-

44,540345

2,533

335,664

30,575369,117

Portfolio Type

Residential Mortgage
Qualifying Revolving Retail

-

-

-

22,05522,055

Other Retail

15,462

8,289

19,758430

43,939Qualifying Central Counterparties

3,103

3,771

2,704

341

9,919

Specialised Lending

16,16019,9851,010

50

37,205

Total exposures

240,883

209,825

398,758

53,612903,078

14

No Maturity Specified predominately includes credit cards and residential mortgage equity manager accounts.

35

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(f) part (i): Impaired assets15 16, Past due loans17, Provisions and Write-offs by Industry sector
Sep 18Industry Sector
Agriculture, Forestry, Fishing &MiningImpairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance$M

Individual
provision
charge forhalf year$M

Write-offs
for half
year
$M
31

-

567

90

136

(12)

Business Services

-

72

39

32

3

14

Construction

-

118

62

53

6

26

Electricity, gas and water supply

-

2

1

1

-

-

Entertainment Leisure & Tourism

-

102

54

42

17

25

Financial, Investment & Insurance

-

86

19

48

2

22

Government & Official Institutions

-

-

-

-

-

-

Manufacturing

-

140

23

102

(13)

23

Personal

-

637

2,359

311

271

351

Property Services

-

75

36

21

(3)

7

Retail Trade

-

136

73

74

36

31

Transport & Storage

-

72

20

22

12

10

Wholesale Trade

-

65

20

33

2

16

Other

-

77

66

45

22

17

Total

-

2,149

2,862

920

343

573

15

Impaired derivatives are net of credit value adjustment (CVA) of $27 million, being a market value based assessment of the credit
risk of the relevant counterparties (March 2018: $36 million; September 2017: $42 million).

16
Impaired loans / facilities include restructured items of $269 million for customer facilities in which the original contractual terms
have been modified for reasons related to the financial difficulties of the customer. Restructuring may consist of reduction of interest,principal or other payments legally due, or an extension in maturity materially beyond those typically offered to new facilities withsimilar risk (March 2018: $76 million; September 2017: $167 million).
17

For regulatory reporting, not well secured portfolio managed retail exposures have been reclassified from past due loans > 90 days to
impaired loans / facilities.

36

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(f) part (i): Impaired assets, Past due loans, Provisions and Write-offs by Industry sector(continued)
Mar 18Industry Sector
Agriculture, Forestry, Fishing &MiningImpairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance$M

Individual
provision
charge forhalf year$M

Write-offs
for half
year
$M
39

-

459

92

169

(5)

Business Services

-

81

40

32

17

18

Construction

-

157

64

73

16

69

Electricity, gas and water supply

-

1

1

1

-

1

Entertainment Leisure & Tourism

-

127

55

45

17

29

Financial, Investment & Insurance

-

103

14

68

58

5

Government & Official Institutions

-

-

-

-

-

-

Manufacturing

-

193

23

130

18

22

Personal

-

641

2,351

298

263

353

Property Services

-

60

38

28

3

5

Retail Trade

-

145

72

67

35

30

Transport & Storage

-

73

20

22

(13)

10

Wholesale Trade

-

86

20

46

4

19

Other

-

81

75

37

17

51

Total

-

2,207

2,865

1,016

430

651

Sep 17

Industry Sector
Agriculture, Forestry, Fishing &MiningImpairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance$M

Individual
provision
charge forhalf year$M

Write-offs
for half
year
$M
62

-

545

110

203

(14)

Business Services

-

109

31

31

(7)

15

Construction

-

225

71

125

48

16

Electricity, gas and water supply

-

2

2

1

1

1

Entertainment Leisure & Tourism

-

144

45

59

16

33

Financial, Investment & Insurance

-

29

30

14

6

10

Government & Official Institutions

-

-

-

-

-

-

Manufacturing

-

219

26

137

36

93

Personal

-

745

2,177

307

369

421

Property Services

-

50

39

28

(14)

14

Retail Trade

-

129

90

62

25

19

Transport & Storage

-

144

25

33

8

10

Wholesale Trade

-

121

28

65

48

55

Other

-

119

82

71

32

42

Total

-

2,581

2,756

1,136

554

791

37

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(f) part (ii): Impaired asset, Past due loans, Provisions and Write-offs
Sep 18
Individual
provision
charge forhalf year$M

Writeoffs
for half
year
$M

394

1

90

-

(3)

-

-

-

-

-

2,291

160

56

41
140

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥
90 days$M

Individual
provisionbalance$M

Corporate

-

1,051

161

Sovereign

-

-

-

Bank

-

-

Residential Mortgage-

304

Portfolios subject to Advanced IRB approach

Qualifying Revolving Retail

-

76

-

-

93

Other Retail

-

490

353

247

211

277

Total Advanced IRB approach

-

1,921

2,805

801

358

548

Specialised Lending

-

43

22

7

2

4

Corporate

-

150

17

101

(19)

15

Residential Mortgage

-

20

12

9

1

3

Other Retail

-

15

6

2

1

3

Total Standardised approach

-

185

35

112

(17)

21

Qualifying Central Counterparties

-

-

-

-

-

-

Total

-

2,149

2,862

920

343

573

Portfolios subject to Standardised approach

38

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(f) part (ii): Impaired asset, Past due loans, Provisions and Write-offs (continued)
Mar 18

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥
90 days$M

Individual
provisionbalance$M

Individual
provision
charge forhalf year$M

Writeoffs
for half
year$M

Corporate

-

997

140

456

68

142

Sovereign

-

-

-

3

-

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

272

2,333

144

42

24

Qualifying Revolving Retail

-

88

-

5

92

139

Other Retail

-

545

336

260

197

287

Total Advanced IRB approach

-

1,902

2,809

868

399

592

Specialised Lending

-

28

17

9

(4)

4

Corporate

-

237

23

127

-

16

Residential Mortgage

-

25

12

10

2

1

Other Retail

-

15

4

2

33

38

Total Standardised approach

-

277

39

139

35

55

Qualifying Central Counterparties

-

-

-

-

-

-

Total

-

2,207

2,865

1,016

430

651

Portfolios subject to Advanced IRB approach

Portfolios subject to Standardised approach

Sep 17

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥
90 days$M

Individual
provisionbalance$M

Individual
provision
charge forhalf year$M

Writeoffs
for half
year$M

Corporate

-

1,193

175

520

75

178

Sovereign

-

-

-

3

-

-

Bank

-

-

10

-

5

8

Residential Mortgage

-

259

2,166

126

42

20

Qualifying Revolving Retail

-

99

-

18

118

137

Portfolios subject to Advanced IRB approach

Other Retail

-

586

325

299

245

275

Total Advanced IRB approach

-

2,137

2,676

966

485

618

Specialised Lending

-

25

21

17

(4)

2

Corporate

-

273

34

140

(1)

80

Residential Mortgage

-

25

19

10

2

1

Other Retail

-

121

6

3

72

90

Total Standardised approach

-

419

59

153

73

171

Qualifying Central Counterparties

-

-

-

-

-

-

Total

-

2,581

2,756

1,136

554

791

Portfolios subject to Standardised approach

39

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(g): Impaired assets18 19, Past due loans20 and Provisions21 by Geography

Impairedderivatives$M

Impairedloans/
facilities$M

Sep 18
Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Australia

-

1,590

2,644

650

1,796

New Zealand

-

328

183

121

352

Asia Pacific, Europe and America

-

231

35

149

375

Total

-

2,149

2,862

920

2,523

Impairedderivatives$M

Impairedloans/
facilities$M

Mar 18
Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Australia

-

1,510

2,647

668

1,822

New Zealand

-

361

178

165

393

Asia Pacific, Europe and America

-

336

40

183

364

Total

-

2,207

2,865

1,016

2,579

Impairedderivatives$M

Impairedloans/
facilities$M

Sep 17
Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Australia

-

1,723

2,519

791

1,810

New Zealand

-

359

168

141

398

Asia Pacific, Europe and America

-

499

69

204

454

Total

-

2,581

2,756

1,136

2,662

Geographic region

Geographic region

Geographic region

18

Impaired derivatives are net of credit value adjustment (CVA) of $27 million, being a market value based assessment of the credit
risk of the relevant counterparties (March 2018: $36 million; September 2017: $42 million).

19
Impaired loans / facilities include restructured items of $269 million for customer facilities in which the original contractual terms
have been modified for reasons related to the financial difficulties of the customer. Restructuring may consist of reduction of interest,principal or other payments legally due, or an extension in maturity materially beyond those typically offered to new facilities withsimilar risk (March 2018: $76 million; September 2017: $167 million).
20

For regulatory reporting, not well secured portfolio managed retail exposures have been reclassified from past due loans > 90 days to
impaired loans / facilities.

21

Due to definitional differences, there is a variation in the split between ANZ’s Individual Provision and Collective Provision foraccounting purposes and the Specific Provision and General Reserve for Credit Losses (GRCL) for regulatory purposes. This does not
impact total provisions, and essentially relates to the classification of collectively assessed provisions on defaulted accounts. The
disclosures in this document are based on Individual Provision and Collective Provision, for ease of comparison with other publishedresults.

40

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 7(h): Provision for Credit Impairment
Half year
Sep 18
Collective Provision
Balance at start of period
Charge/(Release) to Income Statement

Half year
Mar 18Half year
Sep 17

$M

$M

$M

2,579

2,662

2,785
(75)

(63)

(22)

Adjustment for exchange rate fluctuations and transfers

7

18

(9)

Retail Asia divestment

-

(79)

(39)

2,523

2,579

2,662

1,016

1,136

1,269

716

728

948

(234)

(191)

(280)

Total Collective Provision
Individual Provision
Balance at start of period
New and increased provisions
Write-backs
Adjustment for exchange rate fluctuations and transfers

5

5

(2)

Discount unwind

(10)

(7)

(8)

Bad debts written off

(573)

(651)

(791)

-

(4)

-

920

1,016

1,136

3,443

3,595

3,798

Sep 18Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

307

2,216

2,523

Individual Provision

920

-

920

1,227

2,216

3,443

Mar 18Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

312

2,267

2,579

Individual Provision

1,016

-

1,016

Total Provision for Credit Impairment

1,328

2,267

3,595

Sep 17
Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

352

2,310

2,662

Individual Provision

1,136

-

1,136

Total Provision for Credit Impairment

1,488

2,310

3,798

Asia Retail and Wealth divestment
Total Individual Provision
Total Provisions for Credit Impairment

Table 7(j): Specific Provision Balance and General Reserve for Credit Losses22
S

Total Provision for Credit Impairment

22

Due to definitional differences, there is a variation in the split between ANZ’s Individual Provision and Collective Provision foraccounting purposes and the Specific Provision and General Reserve for Credit Losses (GRCL) for regulatory purposes. This does not
impact total provisions, and essentially relates to the classification of collectively assessed provisions on defaulted accounts. The
disclosures in this document are based on Individual Provision and Collective Provision, for ease of comparison with other publishedresults.

41

ANZ Basel III Pillar 3 Disclosure
Table 8September 2018

Credit risk – Disclosures for portfolios subject to the Standardised
approach and supervisory risk weights in the IRB approach

Table 8(b): Exposure at Default by risk bucket23
Sep 18Mar 18

Sep 17

$M

$M

$M

0%

-

-

-

20%

487

255

308

Standardised approach exposures

35%

359

344

2,030

50%

2,351

2,462

2,336

75%

-

-

5

100%

12,467

13,64314,000

150%

188

303

215

>150%

3

3

4

Capital deductions

-

-

-

15,85517,01018,898

Total
Other Asset exposures
0%

-

-

-

20%

865

907

947

35%

-

-

-

50%

-

-

-

75%

-

-

-

100%

2,974

3,004

3,179

150%

-

-

-

>150%

-

-

-

Capital deductions

-

-

-

3,839

3,911

4,126

Total
Specialised Lending exposures
0%

193

99

120

70%

18,225

15,983

13,93590%

18,402

19,164

19,659

115%

2,084

2,153

3,207

250%

558

461

284

Total

39,46237,86037,20523

Table 8(b) shows exposure at default after credit risk mitigation in each risk category.

42

ANZ Basel III Pillar 3 Disclosure
Table 9September 2018

Credit risk – Disclosures for portfolios subject to Advanced IRB
approaches

Portfolios subject to the Advanced IRB (AIRB) approach
The following table summarises the types of borrowers and the rating approach adopted within each of ANZ’s AIRB
portfolios:
IRB Asset Class

Borrower Type

Rating Approach

Corporate

Corporations, partnerships or proprietorships that do not fit
into any other asset class

AIRB

Sovereign

Central governments
Central banks
Certain multilateral development banks

AIRB

Bank

Banks24
In Australia only, other authorised deposit taking institutions(ADI) incorporated in Australia

AIRB

Residential Mortgages

Exposures secured by residential property

AIRB

Qualifying Revolving
RetailConsumer credit cards <$100,000 limit

AIRB

Other Retail

Small business lending
Other lending to consumers

AIRB

Specialised Lending

Income Producing Real Estate25
Project financeObject finance

AIRB – Supervisory
Slotting26

Other Assets

All other assets not falling into the above classes e.g. margin
lending, fixed assets

AIRB – fixed risk
weights

In addition, ANZ has applied the Standardised approach to some portfolio segments (mainly retail and local corporates
in Asia Pacific) where currently available data does not enable development of advanced internal models for PD, LGD
and EAD estimates. Under the Standardised approach, exposures are mapped to several regulatory risk weights,
mainly based on the type of counterparty and its external rating. For these counterparties, external ratings byStandard & Poor’s and Moody’s Investors Service are used as inputs into the RWA calculation. As described in thesection on the ANZ rating system, ANZ has mapped its master scale to the grading of these two External Credit
Assessment Institutions (ECAIs).
ANZ applies its full normal risk measurement and management framework to these segments for internal management
purposes, such as for economic capital. Standardised segments will be migrated to AIRB if they reach a volume thatgenerates sufficient data for development of advanced internal models.
ANZ has not applied the Foundation IRB approach to any portfolios.
The ANZ rating system
As an AIRB bank, ANZ’s internal models generate the inputs into regulatory capital adequacy to determine the risk
weighted exposure calculations for both on and off-balance sheet exposures, including undrawn portions of credit
facilities, committed and contingent exposures and EL calculations. ANZ’s internal models are used to generate thethree key risk components that serve as inputs to the IRB approach to credit risk:PD is an estimate of the level of the risk of borrower default. Borrower ratings are derived by way of rating models
used both at loan origination and for ongoing monitoring.



EAD is defined as the expected facility exposure at the date of default.



LGD is an estimate of the potential economic loss on a credit exposure, incurred as a consequence of obligor
default and expressed as a percentage of the facility’s EAD. ANZ’s LGD also includes recognition of the different
legal and insolvency regimes in different countries, where this has been shown to influence recovery outcomes.

24

The IRB asset classification of investment banks is Corporate, rather than Bank.

25

Since 2009, APRA has agreed that some large, well-diversified commercial property exposures may be treated as corporate
exposures, in line with the original Basel Committee’s definition of Specialised Lending.

26

ANZ uses an internal assessment which is mapped to the appropriate Supervisory Slot.

43

ANZ Basel III Pillar 3 Disclosure

September 2018

Effective maturity is also calculated as an input to the risk weighted exposure calculation for bank, sovereign andcorporate IRB asset classes.
ANZ’s rating system has two separate and distinct dimensions that:

Measure the PD, which is expressed by the Customer Credit Rating (CCR), reflecting the ability to service andrepay debt.

Measure the LGD as expressed by the Security Indicator (SI) ranging from A to G. The SI is calculated by reference
to the percentage of a loan covered by security which can be realised in the event of default. This calculation uses
standard ratios to adjust the current market value of collateral items to allow for historical realisation outcomes.
The security-related SIs are supplemented with a range of other SIs which cover such factors as cash cover,mezzanine finance, intra-group guarantees and sovereign backing as ANZ’s LGD research indicates that thesetransaction characteristics have different recovery outcomes. ANZ’s LGD also includes recognition of the different
legal and insolvency regimes in different countries, where this has been shown to influence recovery outcomes.

ANZ’s corporate PD master scale is APRA approved, and is made up of 27 rating grades. Each level/grade is separately
defined and has a range of default probabilities attached to it. The PD master scale enables ANZ’s rating system to bemapped to the grading’s of external rating agencies, using the PD as a common element after ensuring that default
definitions and other key attributes are aligned.
The following table demonstrates this alignment (for one year PDs):
ANZ CCR

Moody’sStandard & Poor’s

PD Range

0+ to 1-

Aaa to Aa3

AAA to AA-

0.0000 - 0.0346%

2+ to 3+

A1 to Baa1

A+ to BBB+

0.0347 - 0.1636%

3= to 4+

Baa2 to > Baa3

BBB to > BB+

0.1637 - 0.4004%

4= to 6=

Ba1 to B1

BB+ to B+

0.4005 – 2.7550%

6- to 7=

B2 to B3

B to B-

2.7551 – 9.7980%

7- to 8+Caa

CCC

9.7981 – 27.1109%

8=

Ca, C

CC, C

27.1110 – 99.9999%

8-, 9 and 10

Default

Default

100%

In the retail asset classes, most facilities utilise credit rating scores. The scores are calibrated to PDs, and used toallocate exposures to homogenous pools, along with LGD and EAD.
Use of internal estimates other than for regulatory capital purposes
ANZ’s rating system is a fundamental part of credit management and plays a key role in:Lending discretions,

Minimum origination standards,

Concentration limits,Portfolio reporting,Customer profitability measurement,Collective provision measurement,Management of
scrutiny), and

Pricing decisions.

deteriorating customers (wherecertain

44

CCR/SI

combinations trigger

increasing

ANZ Basel III Pillar 3 Disclosure

September 2018

PD, LGD and EAD are used in the calculation of economic capital and in the collective provisioning process. Regulatory
and economic capital are calculated from the same data sources and starting from the same basis, however there aresome differences between the factors used because several aspects of ANZ’s rating system are adjusted in accordancewith APRA requirements for regulatory capital purposes. The most significant of these adjustments are the use forregulatory capital purposes of downturn LGDs; the imposition of a 20% LGD floor for exposures secured by Australianresidential real estate and the mandatory use of the supervisory slotting approach for project finance and mostcommercial real estate exposures.
Controls surrounding the ratings system
ANZ’s rating system and credit risk estimates are governed by the Board Risk Committee and several executive
management committees, and are underpinned by a comprehensive framework of controls that operate throughout
ANZ. All policies, methodologies, model designs, model reviews, validations, responsibilities, systems and processes
supporting the ratings systems are documented, and subject to review by Global Internal Audit.
The design, build and implementation of credit rating models resides with a specialist Group-level team. Credit rating
models are owned by central Risk teams. The use (including overrides) and performance of credit rating models ismonitored by the relevant business and their counterparts in Risk, and validated regularly by a separate specialist
Group-level function. This cycle of design, build, implementation, monitoring and validation is overseen by the
CRSOC, and informs the need for new models or recalibration of existing models.
Within ANZ’s wholesale businesses, Group Credit Assurance provides independent credit related assurance activities,
including providing an independent assessment of both the asset quality in the portfolio and the quality of credit
decision making. It also assesses management controls from a “top down” portfolio oversight perspective as well as
credit risk processes from a “bottom up” perspective based on individual customer file reviews.
Risk grades are an integral part of reporting to the Board and executives.
In addition, the use of the rating system’s outputs in key business unit performance measures in processes such asprovisioning and the allocation of economic capital ensures that the rating system receives robust input from thebusiness units, not just the specialist modelling teams.
Rating process by asset class
Building reliable and accurate rating tools requires balancing of many factors including data availability (external data
may be used in some circumstances, where it is relevant), the size of the segment (the more customers within thesegment, the more likely that statistically reliable models can be built), and the need to be able to validate the model.
Rating tool approaches include:

Statistical models producing a PD or a LGD, which are developed from internal or external data on defaults.



Statistical models producing an internal rating, which involve calibrating ANZ’s models to external rating data
where data on defaults is insufficient for statistical purposes (such as banks).

Hybrid statistical and expert models producing an internal rating, which use a mixture of default data and expert
input.

Expert models/processes that produce an internal rating, including external rating agency replication models.
Ongoing data collection and testing processes ensure enhanced or new models are introduced as required to maintainand improve the accuracy and reliability of rating processes.

45

ANZ Basel III Pillar 3 Disclosure

September 2018

Regardless of what credit risk rating tool is used, lending staff rating a customer are required to review the modelgenerated PD (or CCR) and take into account any out-of-model factors or policy overlays to decide whether or not tooverride the model rating. Overrides of a rating model to a better rating require approval from the independent credit
risk function. The significance of the model for risk grading varies with the customer segment: models will dominate
risk grading of homogenous, simple and data-rich segments such as in Retail, however for complex, specialised
business segments expert knowledge and the highly customised nature of transactions will influence the rating
outcome.
The following table summarises the types of internal rating approaches used in ANZ:IRB Asset Class

Borrower type

Rating Approach

Corporate

Corporations, partnerships or
proprietorships that do not fit into any otherasset class

Mainly statistical models
Some use of expert models and policy
processes

Sovereign

Central governments
Central banks
Certain multilateral development banks
Australian state governments

External rating and expert
judgement

Bank

Banks
In Australia only, other ADIs
incorporated in Australia

Statistically-based models
Review of all relevant and material
information including externalratings

Residential
Mortgages

Exposures secured by residential property

Statistical models

Qualifying Revolving
RetailConsumer credit cards <$100,000 limit

Statistical models

Other Retail

Small business lending
Other lending to consumers

Statistical models

Specialised Lending

Income Producing Real Estate
Project financeObject financeExpert models/Supervisory
Slotting27

For the Retail Basel asset class (Residential Mortgages, Qualifying Revolving Retail and Other Retail Exposures) the
large number of relatively homogenous exposures enable the development of statistically robust application scoringmodels for use at origination and behavioural scoring for ongoing management. As noted above, the scores arecalibrated to PD, and used to allocate exposures to homogenous pools, along with LGD and EAD.
Estimation of LGD and EAD
ANZ’s LGD modelling takes into account data on secured recovery, unsecured recovery rates and debt seniority,
geography and internal management costs from several major data sources. Internal data is used as the basis for LGD
estimation in the retail asset class, and is supplemented by external data for the corporate asset class. Given the
scarcity of internal data for Bank and Sovereign Basel asset classes, LGD modelling for these classes is primarily basedon external data.
EAD represents the expected facility exposure at the date of default, including an estimate of additional drawings prior
to default, as well as post-default drawings that were legally committed to prior to default.

27

Specialised Lending exposures are rated with internal rating tools to produce a PD and LGD. These are used in internal processes, but
not for regulatory capital purposes where the exposures are mapped to Supervisory Slots.

46

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 9(d): Non Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB) approach28 29
30

AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

Sep 18
B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Corporate

24,26968,25379,83354,934

14,790

1,636

1,910

245,625

Sovereign

120,919

19,532

1,822

903

2,375

17

1

145,569

Bank

17,177

27,971

4,183

1,917

109

6

-

51,363

Total

162,365

115,756

85,83857,754

17,274

1,659

1,911

442,557

36.7%

26.2%

19.4%

13.1%

3.9%

0.4%

0.4%

100.0%

Exposure at Default% of Total

Undrawn commitments (included in above)
Corporate

8,015

24,703

22,462

7,943

1,631

245

33

65,032

Sovereign

952

68

-

11

2

-

-

1,033

Bank

6

450

28

131

3

-

-

618

Total

8,973

25,221

22,490

8,085

1,636

245

33

66,683

Average Exposure at Default
Corporate

11.109

8.117

1.603

0.651

0.130

0.172

0.714

0.911

Sovereign161.225542.567

31.9729.219

30.444

5.712

0.653

142.296

Bank

12.0137.359

11.951

6.223

0.998

0.209

-

8.514
47.0%

Exposure-weighted average Loss Given Default (%)
Corporate

55.7%

55.8%

46.5%

37.0%

33.8%

38.7%

43.6%

Sovereign

5.3%

11.5%

39.9%

46.7%

53.9%

60.0%

5.0%

7.6%

Bank

63.5%

62.5%

65.0%

65.0%

34.8%

42.7%

-

63.0%
49.2%

Exposure-weighted average risk weight (%)
Corporate

18.5%

32.3%

52.2%

63.2%

88.0%

180.6%

109.6%

Sovereign

1.0%

3.0%

43.0%

94.7%

146.5%

267.3%

-

4.8%

Bank

20.3%

26.4%

65.1%

113.1%

114.2%

251.7%

-

31.0%

28

In accordance with APS 330, EAD in Table 9(d) includes Advanced IRB exposures and excludes Specialised Lending, Standardised,
Securitisation, Equities or Other Assets exposures. Specialised Lending is excluded from Table 9(d) as it follows the Supervisory Slotting
treatment, and a breakdown of risk weightings is provided in Table 8(b).

29

Average EAD is calculated as total EAD post risk mitigants divided by the total number of credit risk generating exposures.

30

Exposure-weighted average risk weight (%) is calculated as CRWA divided by EAD.

47

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 9(d): Non Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB) approach(continued)

AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

Mar 18
B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Corporate

19,41962,74478,496

58,64914,245

2,409

1,829

237,791

Sovereign

120,077

16,108

1,760

1,001

2,323

13

-

141,282

Bank

17,34225,651

3,928

1,668

71

8

-

48,668

Total

156,838

104,503

84,18461,318

16,639

2,430

1,829

427,741

36.7%

24.4%

19.7%

14.3%

3.9%

0.6%

0.4%

100.0%

Exposure at Default% of Total

Undrawn commitments (included in above)
Corporate

5,731

24,602

23,306

9,165

1,506

275

44

64,629Sovereign

862

70

8

51

3

-

-

994

Bank

139

506

1

-

2

-

-

648

Total

6,732

25,17823,315

9,216

1,511

275

44

66,271

Average Exposure at Default
Corporate

6.812

7.567

1.628

0.666

0.124

0.237

0.671

0.865

Sovereign158.412413.028

34.4938.558

27.3346.747-

134.298

7.791

5.489

8.908

6.391

1.019

0.185

-

6.311
46.7%

Bank

Exposure-weighted average Loss Given Default (%)
Corporate

54.7%

55.8%

46.6%

37.6%

34.3%

41.0%

47.5%

Sovereign

5.4%

12.6%

38.9%

49.3%

51.1%

60.0%

-

7.7%

Bank

63.4%

62.4%

66.3%

67.6%

72.3%

55.6%

-

63.3%
51.2%

Exposure-weighted average risk weight (%)
Corporate

18.2%

32.2%

52.0%

64.2%

88.2%

196.9%

118.1%

Sovereign

1.1%

3.4%

44.4%

105.2%

138.3%

267.3%

-

4.9%

Bank

20.7%

26.5%

68.5%

113.4%

197.3%

309.6%

-

31.1%

AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

Sep 17
B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Corporate

20,27359,504

72,91659,268

14,525

1,856

2,033

230,375

Sovereign107,161

18,177

2,138

1,403

2,573

21

-

131,473

Bank

16,77323,248

3,055

1,371

80

2

11

44,540Total

144,207

100,929

78,10962,042

17,178

1,879

2,044

406,388

35.5%

24.8%

19.2%

15.3%

4.2%

0.5%

0.5%

100.0%

Exposure at Default% of Total

Undrawn commitments (included in above)
Corporate

6,621

23,37222,802

10,088

1,448

144

52

64,527

Sovereign

553

85

6

56

-

-

-

700

Bank

15

144

23

-

1

-

-

183

Total

7,189

23,601

22,831

10,144

1,449

144

52

65,410

Average Exposure at Default
Corporate

8.590

8.114

1.578

0.649

0.126

0.185

0.660

0.836

Sovereign

143.456

757.354

37.5138.451

29.9243.468-

121.062Bank

15.416

5.846

6.990

9.523

1.102

0.073

5.195

7.747
46.9%

Exposure-weighted average Loss Given Default (%)
Corporate

55.8%

56.6%

45.7%

39.1%

34.2%

38.0%

46.5%

Sovereign

5.6%

12.2%

38.9%

50.1%

50.8%

56.3%

-

8.4%

Bank

63.2%

63.1%

68.8%

68.8%

73.1%

69.5%

29.6%

63.7%
51.4%

Exposure-weighted average risk weight (%)
Corporate

18.1%

32.7%

50.9%

67.5%

85.7%

181.4%

118.1%

Sovereign

1.2%

3.2%

43.3%

107.3%

124.5%

301.2%

-

5.8%

Bank

20.1%

26.1%

64.8%

109.3%

190.4%

390.2%

136.2%

29.4%

48

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 9(d): Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB) approach by risk
grade
Sep 183.49%<10.09%$M

10.09%<100.00%$M

Default
$M

Total
$M

127,212

7,944

3,830

2,654

376,573

4,695

1,767

703

74

18,447

2,384

22,156

5,780

2,125

965

39,819110,175

65,356

154,063

15,491

6,658

3,693

434,839

25.3%

15.0%

35.4%

3.6%

1.5%

0.8%

100.0%

0.00%<0.11%$M

0.11%<0.30%$M

0.30%<0.51%$M

0.51%<3.49%$M

Residential Mortgage

72,571

100,91161,451

Qualifying Revolving Retail

5,776

3,911

1,521

Other Retail

1,056

5,353

Total

79,403% of Total

18.3%

Exposure at Default

Undrawn commitments (included in above)
Residential Mortgage

15,368

7,284

2,689

7,431

37

27

1

32,837

Qualifying Revolving Retail

4,225

2,957

982

1,948

507

79

1

10,699

811

3,418

1,544

2,945

546

81

8

9,353

20,404

13,6595,215

12,324

1,090

187

10

52,889Other Retail
Total
Average Exposure at Default
Residential Mortgage

0.251

0.231

0.252

0.248

0.332

0.324

0.272

0.246

Qualifying Revolving Retail

0.009

0.008

0.009

0.011

0.010

0.006

0.009

0.009

Other Retail

0.008

0.015

0.012

0.025

0.010

0.011

0.027

0.017

Exposure-weighted average Loss Given Default (%)
Residential Mortgage

19.7%

18.5%

19.2%

20.7%

20.3%

20.0%

19.9%

19.9%

Qualifying Revolving Retail

75.5%

80.2%

77.5%

81.3%

84.7%

82.8%

83.5%

79.3%

Other Retail

56.6%

54.5%

73.6%

45.2%

65.1%

57.7%

46.8%

52.0%

Exposure-weighted average risk weight (%)
Residential Mortgage

5.9%

11.6%

19.3%

40.0%

94.1%

127.7%

190.5%

25.6%

Qualifying Revolving Retail

3.5%

8.1%

16.3%

44.8%

105.1%

201.4%

232.6%

34.2%

Other Retail

30.5%

36.9%

55.8%

59.1%

112.7%

172.4%

255.0%

73.8%

49

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 9(d): Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB) approach by risk
grade
Mar 183.49%<10.09%$M

10.09%<100.00%$M

Default
$M

Total
$M

129,372

8,360

4,213

2,658

376,082

5,184

1,902

768

83

19,331

2,440

23,055

6,253

2,149

973

41,580109,505

65,575

157,611

16,515

7,130

3,714

436,993

25.1%

15.0%

36.1%

3.8%

1.6%

0.8%

100.0%

0.00%<0.11%$M

0.11%<0.30%$M

0.30%<0.51%$M

0.51%<3.49%$M

Residential Mortgage

70,03799,89761,545

Qualifying Revolving Retail

5,799

4,005

1,590

Other Retail

1,107

5,603

Total

76,943% of Total

17.6%

Exposure at Default

Undrawn commitments (included in above)
Residential Mortgage

15,252

7,274

2,678

8,363

37

22

-

33,626

Qualifying Revolving Retail

4,250

3,026

1,019

2,304

576

88

1

11,264

829

3,569

1,587

3,209

563

81

6

9,844

20,331

13,8695,284

13,876

1,176

191

7

54,734

Other Retail
Total
Average Exposure at Default
Residential Mortgage

0.246

0.231

0.251

0.247

0.326

0.325

0.272

0.245

Qualifying Revolving Retail

0.009

0.008

0.009

0.011

0.010

0.006

0.009

0.009

Other Retail

0.008

0.016

0.013

0.025

0.011

0.011

0.025

0.017

Exposure-weighted average Loss Given Default (%)
Residential Mortgage

19.7%

18.5%

19.1%

20.8%

20.3%

20.0%

20.0%

19.7%

Qualifying Revolving Retail

75.5%

80.3%

77.4%

81.1%

84.5%

82.8%

83.5%

79.3%

Other Retail

55.6%

54.4%

73.7%

45.5%

64.9%

57.7%

48.2%

52.2%

Exposure-weighted average risk weight (%)
Residential Mortgage

5.9%

11.7%

19.3%

40.1%

94.3%

128.1%

193.7%

26.1%

Qualifying Revolving Retail

3.5%

8.1%

16.3%

44.9%

104.8%

201.2%

232.3%

35.4%

Other Retail

29.8%

36.7%

55.8%

59.8%

113.1%

174.4%

257.2%

74.0%

0.00%
<0.11%$M

0.11%<0.30%$M

0.30%<0.51%$M

0.51%<3.49%$M

Sep 173.49%<10.09%$M

10.09%<100.00%$M

Default
$M

Total
$M

68,361

96,84859,982

126,225

8,394

4,381

2,478

366,669-

11,785

2,833

4,825

1,723

724

165

22,055

1,066

5,443

2,339

23,182

6,773

2,155

993

41,951

Total

69,427

114,076

65,154

154,232

16,890

7,260

3,636

430,675% of Total

16.1%

26.5%

15.1%

35.9%

3.9%

1.7%

0.8%

100.0%

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail

Undrawn commitments (included in above)
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total

15,073

7,153

2,655

9,102

37

23

1

34,044

-

9,239

2,097

2,194

671

82

36

14,319

814

3,466

1,543

3,134

566

86

6

9,615

15,887

19,8586,295

14,430

1,274

191

43

57,978Average Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail

0.243

0.227

0.245

0.242

0.319

0.315

0.268

0.241

-

0.011

0.009

0.010

0.009

0.008

0.009

0.010

0.008

0.015

0.011

0.025

0.011

0.010

0.026

0.017

Exposure-weighted average Loss Given Default (%)
Residential Mortgage

19.8%

18.6%

19.2%

20.9%

20.4%

20.0%

20.1%

19.8%

Qualifying Revolving Retail

0.0%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

Other Retail

57.2%

54.7%

74.4%

45.2%

64.0%

58.1%

50.1%

52.2%

Exposure-weighted average risk weight (%)
Residential Mortgage

5.9%

11.8%

19.5%

40.2%

94.5%

128.3%

195.5%

26.3%

Qualifying Revolving Retail

0.0%

5.2%

14.5%

39.8%

116.1%

210.4%

355.4%

32.0%

Other Retail

31.3%

36.8%

55.9%

59.5%

111.9%

175.4%

239.5%

74.1%

50

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 9(e): Actual Losses by portfolio type
Half year Sep 18
Individual provision charge$M

Write-offs$M

Corporate

1

90

Sovereign

(3)

-

-

-

Basel Asset ClassBank
Residential Mortgage

56

41

Qualifying Revolving Retail

93

140

Other Retail

211

277

Total Advanced IRB

358

548

Specialised Lending

2

4Standardised approach

(17)

21

Total

343

573

Half year Mar 18
Individual provision charge$M

Write-offs$M

Corporate

68

142

Sovereign

-

-

Bank

-

-

42

24

Qualifying Revolving Retail

92

139

Other Retail

197

287

Total Advanced IRB

399

592

Specialised Lending(4)4Standardised approach

35

55

430

651

Half year Sep 17
Individual provision charge$M

Write-offs$M

Corporate

75

178

Sovereign

-

-

Bank

5

8

Basel Asset Class

Residential Mortgage

Total

Basel Asset Class

Residential Mortgage

42

20

Qualifying Revolving Retail

118

137

Other Retail

245

275

Total Advanced IRB

485

618

Specialised Lending(4)

2Standardised approach

73

171

554

791

Total

Factors impacting the loss experience
The individual credit impairment charge decreased $87 million over the half driven primarily by AIRB Corporate andStandardised asset class due to lower new individual provisions combined with higher write-backs and recoveries.
Write-offs decreased $78 million over the half driven by AIRB Corporate and Standardised asset class reflecting thedecrease in the number of large single names exposures being written-off.

51

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 9(f): Average estimated vs. actual PD, EAD and LGD – Advanced IRB31

Average
Estimated PD%

Average
Actual PD%

Sep 18Averageestimated toactual EAD
ratio

Corporate

1.83

1.78

1.15

42.04

Sovereign

0.37

nil

n/a

n/a

n/a

Bank

0.67

0.08

1.31

46.00

58.30

Specialised Lending

n/a

2.12

1.06

n/a

24.63

Residential Mortgage

0.71

0.77

1.01

20.78

2.21

Qualifying Revolving Retail

2.45

1.85

1.07

74.48

71.68

Other Retail

4.02

3.35

1.05

52.87

42.29

Portfolio Type

Average
Estimated
LGD%

Average
Actual LGD%
35.00

APS 330 Table 9(f) compares internal credit risk estimates used in calculating regulatory capital with realised
outcomes by portfolio types. It covers the PD, EAD and LGD estimates for the IRB portfolios.
Estimated PD and LGD for Specialised Lending exposures have not been provided, since APRA requires the use of
supervisory slotting for Regulatory EL calculations. Actual PD, EAD ratio, Estimated LGD and Actual LGD for Sovereign
exposures have not been provided, since there were no Sovereign defaults observed in ANZ Sovereign exposures forthe observation period.
Wholesale Portfolios
The estimated PD is based on the average of the internally estimated long-run PD’s for obligors that are not in default
at the beginning of each financial year over the period of observation being 2009 to 2017. The actual PD is based on
the number of defaulted obligors up to August 2018 compared to the total number of obligors measured.
The EAD ratio compares internally estimated EAD prior to default to realised EAD for defaulted obligors over the 8
years of observation being 2009 to August 2018. A ratio greater than 1.0 signifies that on average, the actual
defaulted exposures are lower than the estimated exposures at the time of default.
The estimated LGD is the downturn LGD for accounts that defaulted at the beginning of each year during theobservation period being 2009 to September 2016. The actual LGD is based on the average realised losses over theperiod for the accounts observed at the beginning and defaulted during the observation period. For non-retail
portfolios, the estimated and actual LGDs are based on accounts that defaulted up to September 2016. Defaults
occurring after September 2016 have been excluded from the analysis to allow sufficient time for workout period.
Actual LGD for defaults where workouts were not finalised have been estimated to approximate the final actual loss.
Retail Portfolios
The estimated PD is based on the average of the internally estimated long-run PD’s for obligors that are not in default
at the beginning of each financial year over the period of observation being 2013 to 2017. The actual PD is based on
the number of defaulted obligors up to September 2018 compared to the total number of obligors measured.
The EAD ratio compares internally estimated EAD prior to default to realised EAD for defaulted obligors over the periodof observation being 2013 to 2017. A ratio greater than 1.0 signifies that on average, the actual defaulted exposures
are lower than the estimated exposures at the time of default.
The estimated LGD is the downturn LGD for accounts that defaulted at the beginning of each year during theobservation period being 2012 to 2016. The actual LGD is based on the average realised losses over the period for theaccounts observed at the beginning and defaulted during the observation period. Defaults occurring after September
2016 have been excluded from the analysis to allow sufficient time for workout period.

31

A revised capital model was introduced in June 2017, which will impact Average Estimated PD rates for the Australian Residential
Mortgages portfolio. The current Average Estimated PD rates are based on previous capital models, with the impacts of the revised
model to gradually roll through in future periods.

52

ANZ Basel III Pillar 3 Disclosure

Table 10

September 2018

Credit risk mitigation disclosures

Main types of collateral taken by ANZ
Collateral is used to mitigate credit risk, as the secondary source of repayment in case the counterparty cannot meetits contractual repayment obligations.32 Types of collateral typically taken by ANZ include:Charges over residential, commercial, industrial or rural property,Charges over business assets,

Charges over specific plant and equipment,Charges over listed shares, bonds or securities,

Charges over cash deposits, and

Guarantees and pledges.

In some cases, such as where the customer risk profile is considered very sound or by the nature of the product, atransaction may not be supported by collateral.
Our credit policy, requirements and processes set out the acceptable types of collateral, as well as a process by which
additional instruments and/or asset types can be considered for approval. ANZ’s credit risk modelling teams use
historical internal loss data and other relevant external data to assist in determining the discount that each type
would be expected to incur in a forced sale. The discounted value is used in the determination of the SI.
Policies and processes for collateral valuation and management
ANZ has well established policies, requirements and processes around collateral valuation and management, that are
reviewed regularly. The concepts of legal enforceability, certainty and current valuation are central to collateralmanagement.
In order to achieve legal enforceability and certainty, ANZ uses standard collateral instruments or has specificdocumentation drawn up by external legal advisers, and where applicable, security interests are registered. The useof collateral management systems also provides certainty that the collateral has been properly taken, registered andstored.
In order to rely on the valuation of collateral assets, ANZ has developed comprehensive rules around acceptabletypes of valuations (including who may value an asset), the frequency of revaluations and standard extension ratios
for typical asset types. Upon receipt of a new valuation, the information is used to recalculate the SI (or to reassess
the adequacy of the provision, in the case of an impaired asset), thereby ensuring that the exposure has an updated
LGD attached to it for risk quantification purposes.
Guarantee support
Guarantee support for lending proposals is an integral component in transaction structuring for ANZ. The guaranteeof a financially stronger party can help improve the PD of a transaction through its explicit support of the weakerrated borrower.
Guarantees that are recognised for risk rating purposes may be provided by parties that include associated entities,banks, sovereigns or individuals. Credit requirements provide threshold parameters to determine acceptablecounterparties in achieving risk grade enhancement of the transaction.
The suitability of the guarantor is determined by risk rating that guarantor. Not all guarantees or guarantors arerecognised for risk grade enhancement purposes.
Use of credit derivatives for risk mitigation
ANZ uses purchased credit derivatives to mitigate credit risk by lowering exposures to reference entities thatgenerate high concentration risk exposures or to improve risk return performance. Only certain credit derivatives
such as credit default swaps (CDS) are recognised for risk mitigation purposes in the determination of regulatory
capital. Standard, legally enforceable documentation applies.
For regulatory capital purposes, ANZ only recognises protection using credit derivatives where they meet several
policy and regulatory requirements around the strength of the protection offered such as being irrevocable.

32

For some products, the collateral provided is fundamental to its structuring so is not strictly the secondary source of repayment. For
example, lending secured by trade receivables is typically repaid by the collection of those receivables.

53

ANZ Basel III Pillar 3 Disclosure

September 2018

A CDS may only be transacted with banks and non-bank financial institutions that have been credit assessed andapproved by a designated specialist credit officer. All parties must meet minimum credit standards and be allocated a
related credit limit. In the event that the creditworthiness of a credit protection provider falls below the minimum
required to provide effective protection, the protection is no longer recognised as an effective risk mitigant for
regulatory purposes.
The use of netting
Netting is a form of credit risk mitigation in that it reduces EAD, by offsetting a customer’s positive and negativebalances with ANZ.
In order to apply on-balance sheet netting, the arrangement must be specifically documented with the customer andmeet a number of legally enforceable requirements.
Netting is also used where the credit exposure arises from off-balance sheet market related transactions. For closeout netting to be utilised with counterparties, a legally enforceable eligible netting agreement in an acceptablejurisdiction must be in place. This means that each transaction is aggregated into a single net amount andtransactions are netted to arrive at a single overall sum.
Transaction structuring to mitigate credit risk
Besides collateral, guarantee support and derivatives described above, credit risk mitigation can also be furthered by
prudent transaction structuring. For example, the risk in project finance lending can be mitigated by lending
covenants, loan syndication and political risk insurance.
Concentrations of credit risk mitigation
Taking collateral raises the possibility that ANZ may inadvertently increase its risk by becoming exposed to collateralconcentrations. For example, in the same way that an over-exposure to a particular industry may mean that a bank ismore sensitive to the fortunes of that industry, an over- exposure to a particular collateral asset type may make ANZ
more sensitive to the performance of that asset type.
ANZ does not believe that it has any material concentrations of collateral types, given the well diversified nature of its
portfolio and conservative asset extension ratios.

54

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 10(b): Credit risk mitigation on Standardised approach portfolios – collateral 33

Exposure$M

Sep 18Eligible Financial
Collateral$M

Other Eligible
Collateral$M% Coverage
53.6%

Standardised approach
Corporate

15,064

5,486

2,585

Residential Mortgage

704

-

-

0.0%

Other Retail

87

-

-

0.0%

15,855

5,486

2,585

50.9%

Exposure$M

Mar 18Eligible Financial
Collateral$M

Other Eligible
Collateral$M% Coverage
50.8%

Total

Standardised approach
Corporate

16,228

5,159

3,078

Residential Mortgage

681

-

-

0.0%

Other Retail

101

-

-

0.0%

17,010

5,159

3,078

48.4%

Exposure$M

Sep 17
Eligible Financial
Collateral$M

Other Eligible
Collateral$M% Coverage

Corporate

14,455

5,023

2,499

52.0%

Residential Mortgage

2,448

-

-

0.0%

Other Retail

1,988

131

-

6.6%

18,891

5,154

2,499

40.5%

Total

Standardised approach

Total

33

Eligible Collateral could include cash collateral (cash, certificates deposits and bank bills issued by the lending ADI), gold bullion andhighly rated debt securities.

55

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 10(c): Credit risk mitigation – guarantees and credit derivatives

Exposure$M

Sep 18
Exposurescovered by
Guarantees$M

Exposurescovered by
Credit Derivatives$M% Coverage

Corporate (incl. Specialised Lending)

285,087

7,460

856

2.9%

Sovereign

145,569

5,386

-

3.7%

Bank

51,363

11

-

0.0%

Residential Mortgage

376,573

-

-

0.0%

Qualifying Revolving Retail

18,447--0.0%

Advanced IRB

Other RetailTotal

39,819--0.0%

916,858

12,857

856

1.5%

0.4%

Standardised approach
Corporate

15,06458-

Residential Mortgage

704

-

-

0.0%

Other Retail

87

-

-

0.0%

Total

15,855

58

-

0.4%

Qualifying Central Counterparties

11,402--0.0%

Exposure$M

Mar 18
Exposurescovered by
Guarantees$M

Exposurescovered by
Credit Derivatives$M% Coverage

Corporate (incl. Specialised Lending)

275,651

6,790

824

2.8%

Sovereign

141,282

5,212

-

3.7%

Bank

48,668

10

-

0.0%

Residential Mortgage

376,082

-

-

0.0%

Qualifying Revolving Retail

19,331--0.0%

Advanced IRB

Other RetailTotal

41,580--0.0%

902,594

12,012

824

1.4%

1.1%

Standardised approach
Corporate

16,228

182-

Residential Mortgage

681

-

-

0.0%

Other Retail

101

-

-

0.0%

Total

17,010

182

-

1.1%

Qualifying Central Counterparties

10,591

-

-

0.0%

56

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 10(c): Credit risk mitigation – guarantees and credit derivatives (continued)

Exposure$M

Sep 17
Exposurescovered by
Guarantees$M

Exposurescovered by
Credit Derivatives$M% Coverage

Corporate (incl. Specialised Lending)

267,580

6,824

887

2.9%

Sovereign131,473

4,479

-

3.4%

Bank

44,540

15

-

0.0%

Residential Mortgage

366,669

-

-

0.0%

Qualifying Revolving Retail

22,055--0.0%

Advanced IRB

Other Retail

41,951--

0.0%

874,268

11,318887

1.4%

Corporate

14,455

168

-

1.2%

Residential Mortgage

2,448

-

-

0.0%

Other Retail

1,988

-

-

0.0%

18,891

168

-

0.9%

9,919

-

-

0.0%

Total
Standardised approach

Total
Qualifying Central Counterparties

57

ANZ Basel III Pillar 3 Disclosure
Table 11

September 2018

General disclosures for derivatives and counterparty credit risk

Definition of Counterparty Credit Risk
Counterparty credit risk in derivative transactions arises from the risk of counterparty default before settlement date ofderivative contracts and the counterparty is unable to fulfil present and future contractual payment obligations. The
amount at risk may change over time as a function of the underlying market parameters up to the positive value of thecontract in favour of ANZ.
Counterparty credit risk is present in market instruments (derivatives and forward contracts), and comprises:Settlement risk, which arises where one party makes payment or delivers value in the expectation but withoutcertainty that the counterparty will perform the corresponding obligation in a bilateral contract at settlement date.



Market replacement risk (pre-settlement risk), which is the risk that a counterparty will default during the life of a
derivative contract and that a loss will be incurred in covering the position.

ANZ transacts market instruments with the following counterparties:

End users – would typically use Over the Counter (OTC) derivative instruments provided by ANZ to manage pricemovement risk associated with their core business activity.

Professional counterparties – ANZ may hedge price movement risks by entering into transactions with professionalcounterparties that conduct two way (buy and sell) business.

Counterparty credit risk requires a different method to calculate exposure at default because actual and potential
market movements impact ANZ’s exposure or replacement cost over the life of derivative contracts. The markets
covered by this treatment include the derivative activities associated with interest rate, foreign exchange, CDS, equity,commodity and repurchase agreement (repo) products.
Counterparty credit risk governance
ANZ’s counterparty credit risk management is governed by its credit principles, policies and procedures. The Markets
Risk function is responsible for determining the counterparty credit risk exposure methodology applied to market
instruments, in the framework for counterparty credit limit management, measurement and reporting.
The counterparty credit risk associated with derivative transactions is governed by credit limit setting consistent withall credit exposures to the ANZ Group. Counterparty credit limits are approved by the appropriate credit delegation
holders.
Counterparty credit risk measurement and reporting
The approach to measure counterparty credit risk exposure is based on internal models. These measures are referred
to as potential credit risk exposure (PCRE) and potential future exposure (PFE) and measure the maximum credit
exposure of derivative transactions at future time points to ANZ. PFE is measured at the 97.5th percentile at future
pre-described time points, and PCRE is a 97.5th percentile averaged over time points.
PCRE factors recognise that prices may change over the remaining period to maturity, and that risk decreases as thecontract’s remaining term to maturity decreases. In general terms PCRE is calculated by applying a risk weighting or
volatility factor to the face value of the notional principal of individual trades.
PFE simulates relevant risk factors in a portfolio by taking into account the relevant volatilities and correlations
calibrated to historical market data.

58

ANZ Basel III Pillar 3 Disclosure

September 2018

Credit valuation adjustment (CVA)
Over the life of a derivative instrument, ANZ uses a CVA model to adjust fair value to take into account the impact ofcounterparty credit quality. The methodology calculates the present value of expected losses over the life of thefinancial instrument as a function of PD, LGD, and expected credit risk exposure.
APRA requires banks, including ANZ, to hold additional risk based capital to cover the risk of mark to market losses
associated with deterioration in counterparty credit worthiness when entering into derivatives transactions.
Wrong way risk
ANZ’s management of counterparty credit risk also considers the possibility of wrong way risk, which emerges when
PD is adversely correlated with counterparty credit risk exposures.
Counterparty credit risk mitigation and credit enhancements
ANZ’s primary tools to mitigate counterparty credit risk include:

A bilateral netting master agreement (e.g. by International Swaps and Derivatives Association – (ISDA)) allowing
close-out netting of exposures in a portfolio with offsetting contracts, with a single net payment with the same legal
counterparty.

Use of collateral agreements in some transactions based on standard market documentation (i.e. ISDA masteragreement with credit support annex or CSA) that governs the amount of collateral required to be posted or
received by ANZ throughout the life of the contract. Reasons for requiring collateral include:Initial Margin – covers the future potential exposure that could arise from future changes in market value;Variation Margin – reflects the current mark-to-market exposure.



Since March 2017, APRA’s CPS 226 “Margining and risk mitigation for non-centrally cleared derivatives” hasmandated CSA arrangements between financial institutions, subject to trading volume thresholds. The operationof collateral agreements falls under a policy which establishes the control framework designed to ensure a robust
and globally consistent approach to the management of collateralised exposures, as well as compliance with CPS
226 obligations.



Use of right to break clauses in master agreement or in trade confirmation to reduce term of long dated derivativetrades.



Independent limit setting, credit exposure control, monitoring and reporting of excesses against approved credit
limits.



Additional termination triggers (close out of exposure) such as credit rating downgrade clauses and change inownership clauses included in documentation.

Linking covenants and events of default in existing loan facility agreements to master agreements.

Use of credit derivatives to hedge counterparty credit risk exposure.

Settlement through Continuous Linked Settlement (CLS) to eliminate settlement risk for foreign exchangetransactions with CLS members.



Clearing certain derivative transactions through central clearing counterparties clearing houses. Ensuring that when
dealing in derivative risk mitigation tools, such as portfolio compression and reconciliation occur are used whereapplicable, and that there is a framework to resolve any derivative valuation disputes.



Exchange of variation and initial margin for derivative transactions not cleared through CCP’s mandated byregulators subject to certain criteria.

In the event of a downgrading of ANZ’s rating by one notch from AA- to A+, as at 30 September 2018, ANZ would not
be required to lodge additional collateral with its counterparties.

59

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 11(b): Counterparty credit risk – net derivative credit exposure

Gross positive fair value of contracts
Netting benefits

Sep 18Mar 18$M$M

Sep 17$M

68,42670,91562,518(49,227)(54,251)(55,268)

Netted current credit exposure

14,175

15,647

13,291

Collateral held

(5,507)(7,530)(5,093)Net derivatives credit exposure

8,668

8,117

8,198

Sep 18Mar 18

Sep 17$M$M$M

14,286

15,106

13,573

Counterparty credit risk exposure - by portfolio type
Portfolio Type
Corporate
Sovereign

1,478

1,383

1,359

Bank

15,19915,817

13,569Qualifying Central Counterparties

11,402

10,591

9,916

387

461

505

42,75243,35838,922

Sep 18Mar 18

Sep 17

Specialised Lending
Total exposures
Notional Value of Credit Derivative Hedges
Product Type

$M

$M

$M

Credit Default Swaps

342

343

731

Interest Rate Swaps

-

-

-

Currency Swaps

-

-

-

Other

-

-

-

342

343

731

Total exposures

60

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 11(c): Counterparty credit risk exposure – credit derivative transactions

Protection
Bought$M

Sep 18
Protection
Sold
$M

Total
$M

Credit derivative products used for own credit portfolio
Credit default swaps

2,347

1,794

4,141

Total notional value

2,347

1,794

4,141

342

342

684

-

-

-

342

342

684

2,689

2,136

4,825

Protection
Bought$M

Mar 18
Protection
Sold
$M

Total
$M

Credit derivative products used for intermediation
Credit default swaps
Total return swaps
Total notional value
Total credit derivative notional value

Credit derivative products used for own credit portfolio
Credit default swaps

2,896

2,502

5,398

Total notional value

2,896

2,502

5,398

343

343

686

-

-

-

343

343

686

3,239

2,845

6,084

Protection
Bought$M

Sep 17
Protection
Sold
$M

Total
$M

Credit derivative products used for intermediation
Credit default swaps
Total return swaps
Total notional value
Total credit derivative notional value

Credit derivative products used for own credit portfolio
Credit default swaps

6,138

5,672

11,810Total notional value

6,138

5,672

11,810

731

731

1,462

-

-

-

731

731

1,462

6,869

6,403

13,272Credit derivative products used for intermediation
Credit default swaps
Total return swaps
Total notional value
Total credit derivative notional value

61

ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 7 – Securitisation
Table 12Securitisation disclosures

Definition of securitisation
A securitisation is a financial structure where the cash flow from a pool of assets is used to service obligations to atleast two different tranches or classes of creditors, typically holders of debt securities, with each class or tranche
reflecting a different degree of credit risk. This stratification of credit risk means that one class of creditors is entitled toreceive payments from the pool before another class.
Securitisation of ANZ originated assets
Securitisations may be categorised as:Traditional securitisations, where legal ownership of the underlying asset pool is transferred to investors, withprincipal and interest paid from realisation of or regular cash flows from the assets. The Special Purpose Vehicle(SPV) assets are insulated from bankruptcy of the seller or servicer.

Synthetic securitisations, where credit risk is transferred to a third party but legal ownership of the underlying
assets remain with the originator e.g. by using credit derivatives or guarantees.

Covered bond transactions, whereby bonds issued by ANZ are secured by assets held in a special purpose vehicle, arenot securitisation exposures.
Third Party Securitisation Activities
ANZ’s involvement with securitisation of third-party originated assets, including residential mortgages, auto andequipment loans and trade receivables, comprises of:

Provision of facilities – this may include providing facilities to securitisation vehicles in the form of funding facility
provider and interest rate swap provider. Funding may be provided via an ANZ-sponsored securitisation vehicle
which is consolidated onto the Bank’s financial statements, to certain clients wishing to access securitisation.

Services to securitisation programs may include structuring and arranging services and acting as bond manager.



Investment in securities – ANZ may purchase notes issued by securitisation programs.

For any assets ANZ has securitised or for SPVs that ANZ sponsors, any role provided by ANZ or its subsidiaries issubject to market based terms and conditions, and ANZ’s normal approval and review processes. Further, any
securitisation exposures retained by ANZ or its affiliated entities are subject to ANZ’s normal approval and review
processes as well as satisfying the requirements under APS 120: Securitisation.
Governance of securitisation activities
Governance of securitisation activities is managed in accordance with the credit risk and market risk frameworks
described in Chapters 6 and 8.

62

ANZ Basel III Pillar 3 Disclosure

September 2018

Risk Management
Similar to other exposures, securitisation exposures are subject to credit, market, operational liquidity and legal risks.
Roles and responsibilities are clearly outlined in ANZ’s established risk management framework of policies andprocedures, including:Appropriate risk management systems to identify, measure, monitor and manage the risks arising from its
involvement in securitisation exposures;Impact of ANZ’s involvement in securitisation exposures on its risk profile; and

How ANZ ensures that it does not provide any implicit support to its securitisation exposures.

Funding for third party originated exposures and investment in securities are via balance sheet funded arrangements
where such arrangements satisfy ANZ’s credit, due diligence and other business requirements.
Many functions within ANZ are involved in securitisation activities given the range of activities undertaken and risks
that need to be managed. For origination and structuring of securitisation transactions, ANZ has a specialist
securitisation team with independent Risk personnel overseeing operations. Credit decisions require joint Risk andbusiness approval. The securitisation team must be involved in all non-trading securitisation transactions across ANZ,
which ensures consistent expert treatment. Where ANZ invests in instruments issued by securitisation programs, therelevant business area manages these exposures until the securitisation exposures are repaid in full or traded.
All facilities provided to our investments in securitisation programs (across both the banking and trading books)
undergo initial and ongoing due diligence requirements as outlined by APRA. This due diligence is completed with input
from the Risk function and includes analysing the structure of the transaction and monitoring performance of theunderlying assets of the transaction. In addition, such securitisation exposures are formally reviewed at least annually,
including the risk grade.
Risk reporting of securitisation exposures
In addition to the formal credit review process for ANZ’s securitisation exposures, the type and frequency of internalreporting to the appropriate Risk and management functions is as follows:

Facilities provided to securitisation programs are reported using standard credit reporting systems, distinguished byappropriate product codes. The regular reporting frequency for most of these systems is monthly.



Investments in securitisations are reported through the banking book or the trading book on a monthly basis.

The use and treatment of Credit Risk Mitigation (CRM) techniques with respect to securitisation exposures is assessedon a case-by-case basis in a manner consistent with the bank-wide CRM methodology34.
Regulatory capital approaches
For securitisation exposures held in ANZ’s banking book35, ANZ applies a Standardised approach (as outlined in APS
120: Securitisation) to determine the regulatory capital charge.
Chapter 8 outlines regulatory capital treatment for securitisation exposures held in ANZ’s trading book. The operational
requirements for the recognition of external credit assessments outlined in APS 120 apply to these exposures.
In accordance with APS 120: Securitisation, ANZ has a hierarchy of approaches available to quantify the credit risk ofbanking book securitisation exposures. As at 1 January 2018, APRA revised APS 120 and included changing thepermitted rating approaches.
The primary rating approach is the External Ratings Based Approach (ERBA) (specifically utilising the external ratings ofExternal Credit Assessment Institutions (ECAIs)). Where the use of ECAIs is relevant, ANZ applies the ratings or the
rating methodologies provided by Standard & Poor’s, Moody’s Investor Services and/or Fitch Ratings as appropriate.

34

For example, various types of analysis including quantitative analysis of credit enhancements are performed for non-externally rated
transactions. Factors such as geography, facility/transaction type and ANZ’s role will determine the applicable CRM techniques to apply.

35

Exposures are classified into either the trading book or the banking book. In general terms, the trading book consists of positions infinancial instruments and commodities held with trading intent or in order to hedge other elements of the trading book, and the banking
book contains all other exposures. Banking book exposures are typically held to maturity, in contrast to the shorter term, trading
nature of the trading book.

63

ANZ Basel III Pillar 3 Disclosure

September 2018

Other factors such as the tenor of the securitisation exposure are factored into the credit risk regulatory capital
calculation.
In absence of ERBA being applicable, securitisation exposures must adopt the Supervisory Formula Approach (SFA).
Previous rating approaches including Internal Assessment Approach (IAA) and Eligible Facility Approach are no longer
applicable under the revised APS 120.
Accounting policies
The principal accounting policies governing ANZ’s securitisation activities are outlined in ANZ’s 2018 Annual Report,
Notes to the Financial Statements. These include the valuation, derecognition, consolidation and income recognition
principles outlined in the accounting policies and key judgements and estimates disclosures in each relevant note. ANZ
applies these group accounting policies to its securitisation activities, as appropriate and these policies have notchanged since the prior year. Note 27 – Structured Entities and Note 28 – Transfers of Financial Assets also provides
details about the nature of ANZ’s securitisation activities and certain accounting policies and key judgements andestimates as they specifically apply to these activities.
Financial instruments held or issued by structured entities are recognised and valued using the principles of AASB 139
Financial Instruments: Recognition and Measurement. For synthetic securitisations, any transferred credit exposure isrecognised through the fair value measurement of the segregated embedded or stand-alone credit derivative
established within the structure.
To the extent that ANZ has exposures intended to be securitised, they could reside in either the banking or tradingbook.
To the extent that ANZ has entered into contractual arrangements that could require it to provide financial support for
securitised assets e.g. liquidity facilities, these are recognised in accordance with the accounting policies set out in
ANZ’s 2018 Annual Report.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Banking Book
Table 12(g): Banking Book: Traditional and synthetic securitisation exposures
Sep 18
Traditional securitisations
Underlying asset

ANZ Originated$M

ANZ Self Securitised$M

Residential mortgage

ANZ Sponsored
$M

1,211

70,615-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

1,211

70,615-ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M-

Synthetic securitisations
Underlying asset
Residential mortgage--

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Aggregate of traditional and synthetic securitisations
Underlying asset
Residential mortgage

1,211

70,615-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

1,211

70,615-65

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 12(g): Banking Book: Traditional and synthetic securitisation exposures (continued)
Mar 18
Traditional securitisations
Underlying asset

ANZ Originated$M

ANZ Self Securitised$M

Residential mortgage

ANZ Sponsored
$M

1,349

70,709-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

1,349

70,709-ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M-

Synthetic securitisations
Underlying asset
Residential mortgage--

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Aggregate of traditional and synthetic securitisations
Underlying asset
Residential mortgage

1,349

70,709-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

1,349

70,709-Sep 17
Traditional securitisations
Underlying asset

ANZ Originated$M

ANZ Self Securitised$M

Residential mortgage

ANZ Sponsored
$M

1,528

71,011-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

1,528

71,011-ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M-

Synthetic securitisations
Underlying asset
Residential mortgage--

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Aggregate of traditional and synthetic securitisations
Underlying asset
Residential mortgage

1,528

71,011-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

1,528

71,011-

66

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 12(h): Banking Book: Impaired and Past due loans relating to ANZ originated securitisations
Sep 18Underlying asset
Residential mortgage

ANZ
originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

Lossesrecognised
for the six
month ended
$M

1,211

70,615-52-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

1,211

70,615-52-

Impaired$M

Past due$M

Lossesrecognised
for the six
month ended$M

Mar 18Underlying asset
Residential mortgage

ANZ
originated$M

ANZ Self
Securitised
$M

1,349

70,709-57-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

1,349

70,709-57-

Impaired$M

Past due$M

Lossesrecognised
for the six
month ended$M

Sep 17

Underlying asset
Residential mortgage

ANZ
originated$M

ANZ Self
Securitised
$M

1,528

71,011-

67-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

1,528

71,011-

67-

Table 12(i): Banking Book: Total amount of outstanding exposures intended to be securitised
No assets from ANZ's Banking Book were intended to be securitised as at the reporting date.

67

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 12(j): Banking Book: Securitisation - Summary of current period’s activity by underlying asset typeand facility 36
Sep 18
Original value securitised
Securitisation activity by underlying asset
type
Residential mortgage

ANZ Originated$M

ANZ Self
Securitised$M

ANZ Sponsored$M

Recognised
gain
or loss on sale
$M

(138)

(94)

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

(138)

(94)

-

Notional
amount$M

Securitisation activity by facility provided
Liquidity facilities(3)

Funding facilities

600

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

(444)

Other

5

Total

158
Mar 18
Original value securitised

Securitisation activity by underlying asset
type
Residential mortgage

ANZ Originated$M

ANZ Self
Securitised$M

ANZ Sponsored$M

Recognised
gain
or loss on sale
$M

(179)

(302)

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

(179)

(302)

-

Notional
amount$M

Securitisation activity by facility provided
Liquidity facilities(51)

Funding facilities(162)

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

(404)

Other

6

Total

(611)

36

Activity represents net movement in outstandings.

68

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 12(j): Banking Book: Securitisation - Summary of current period’s activity by underlying asset typeand facility (continued)
Sep 17
Original value securitised
Securitisation activity by underlying asset
type
Residential mortgage

ANZ Originated$M

ANZ Self
Securitised$M

ANZ Sponsored$M

Recognised
gain
or loss on sale
$M

(222)

(10,213)--Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

(222)

(10,213)-

Notional
amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities

815

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

(635)

Other

4

Total

184

69

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 12(k): Banking Book: Securitisation - Regulatory credit exposures by exposure typeSep 18Mar 18

Sep 17$M$M$M

Liquidity facilities

-

-

21

Funding facilities

6,924

7,126

7,004

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

1,721

2,165

2,569

-

-

-

Other

104

128

151

Total

8,749

9,418

9,745

Securitisation exposure type - On balance sheet

Holdings of securities (excluding trading book)Protection provided

Sep 18Mar 18

Sep 17

Securitisation exposure type - Off Balance Sheet

$M

$M

$M

Liquidity facilities

13

17

51

Funding facilities

1,362

1,411

-

-

-

-

Underwriting facilities
Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities (excluding trading book)

-

-

-

Protection provided

-

-

-

Other

-

-

-

Total

1,375

1,428

51

Sep 18Mar 18

Sep 17

Total Securitisation exposure type

$M

$M

$M

Liquidity facilities

13

17

72

Funding facilities

8,286

8,537

7,004

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

1,721

2,165

2,569

-

-

-

Other

104

128

151

Total

10,124

10,846

9,796

Holdings of securities (excluding trading book)Protection provided

70

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 12(l) part (i): Banking Book: Securitisation - Regulatory credit exposures by risk weight band

Securitisation risk
weights≤ 25%

Regulatory
creditexposure$M

Sep 18Riskweighted
assets$M

Regulatory
creditexposure$M

Mar 18Riskweighted
assets$M

Regulatory
creditexposure$M

Sep 17Risk
weighted
assets$M

10,124

1,600

10,846

1,728

9,709

1,012

>25 ≤ 35%

-

-

-

-

-

-

>35 ≤ 50%

-

-

-

-

-

-

>50 ≤ 75%

-

-

-

-

36

20

>75 ≤ 100%

-

-

-

-

51

51

>100 ≤ 650%

-

-

-

-

-

-

1250% (Deduction)

-

-

-

-

-

-

10,124

1,600

10,846

1,728

9,796

1,083

Regulatory
creditexposure$M

Sep 18Riskweighted
assets$M

Regulatory
creditexposure$M

Mar 18Riskweighted
assets$M

Regulatory
creditexposure$M

Sep 17Risk
weighted
assets
$M

≤ 25%

-

-

-

-

-

-

>25 ≤ 35%

-

-

-

-

-

-

>35 ≤ 50%

-

-

-

-

-

-

>50 ≤ 75%

-

-

-

-

-

-

>75 ≤ 100%

-

-

-

-

-

-

>100 ≤ 650%

-

-

-

-

-

-

1250% (Deduction)

-

-

-

-

-

-

Total

-

-

-

-

-

-

Regulatory
creditexposure$M

Sep 18Riskweighted
assets$M

Regulatory
creditexposure$M

Mar 18Riskweighted
assets$M

Regulatory
creditexposure$M

Sep 17Risk
weighted
assets$M

Total

Resecuritisation risk
weights

Total Securitisation risk
weights≤ 25%

10,124

1,600

10,846

1,728

9,709

1,012

>25 ≤ 35%

-

-

-

-

-

-

>35 ≤ 50%

-

-

-

-

-

-

>50 ≤ 75%

-

-

-

-

36

20

>75 ≤ 100%

-

-

-

-

51

51

>100 ≤ 650%

-

-

-

-

-

-

1250% (Deduction)

-

-

-

-

-

-

10,124

1,600

10,846

1,728

9,796

1,083

Total

71

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 12(l) part (ii): Banking Book: Securitisation - Aggregate securitisation exposures deducted from
CapitalNo longer required under Basel III; defaulted exposures are given a risk weight of 1250% and no longer deductedfrom Capital.

Table 12(m): Banking Book: Securitisations subject to early amortisation treatment
ANZ does not have any Securitisations subject to early amortisation treatment or using Standardised approach.

Table 12(n): Banking Book: Resecuritisation - Aggregate amount of resecuritisation exposures retained orpurchased
ANZ does not have any retained or purchased Resecuritisation exposures.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Trading Book
Table 12(o): Trading Book: Traditional and synthetic securitisation exposures
No assets from ANZ's Trading Book were securitised during the reporting period.

Table 12(p): Trading Book: Total amount of outstanding exposures intended to be securitised
No assets from ANZ's Trading Book were intended to be securitised as at the reporting date.

Table 12(q): Trading Book: Securitisation - Summary of current year's activity by underlying asset typeand facility
No assets from ANZ's Trading Book were securitised during the reporting period.

Table 12(r): Trading Book: Traditional and synthetic securitisation exposures
No assets from ANZ's Trading Book were securitised during the reporting period.

73

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 12(s): Trading Book: Securitisation – Regulatory credit exposures by exposure typeSep 18Mar 18

Sep 17$M$M$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Securitisation exposure type - On balance sheet

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

-

-

23

Protection provided

-

-

-

Other

-

-

-

Total

-

-

23

Sep 18Mar 18

Sep 17$M$M$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Securitisation exposure type - Off Balance Sheet

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

-

-

-

Protection provided

-

-

-

Other

-

-

-

Total

-

-

-

Sep 18Mar 18

Sep 17$M$M$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Total Securitisation exposure typeLending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

-

-

23

Protection provided

-

-

-

Other

-

-

-

Total

-

-

23

74

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 12(t)(i) & Table 12(u)(i): Trading Book: Aggregate securitisation exposures subject to Internal
Models Approach (IMA) and the associated Capital requirements
ANZ does not have any Securitisation exposures subject to Internal Models Approach.

Table 12(t)(ii) & Table 12(u)(ii): Trading Book: Aggregate securitisation exposures subject to APS 120
and the associated Capital requirements
ANZ does not have any aggregate Securitisation exposures subject to APS120 and the associated Capitalrequirements.

Table 12(u)(iii): Trading Book: Securitisation - Aggregate securitisation exposures deducted from Capital
ANZ does not have any Securitisation exposures deducted from Capital.

Table 12(v): Trading Book: Securitisations subject to early amortisation treatment
ANZ does not have any Securitisation exposures subject to early amortisation or using Standardised approach.

Table 12(w): Trading Book: Resecuritisation - Aggregate amount of resecuritisation exposures retained orpurchased
ANZ does not have any retained or purchased Resecuritisation exposures.

75

ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 8 – Market risk
Table 13

Market risk – Standard approach

ANZ uses the standard model approach to measure market risk capital for specific risk37 (APRA does not currently
permit Australian banks to use an internal model approach for this).
Table 13(b): Market risk – Standard approach 38
Sep 18Mar 18

Sep 17$M$M$M

Interest rate risk

76

100

90

Equity position risk

-

-

-

Foreign exchange risk

-

-

-

Commodity risk

-

-

-

76

100

90

950

1,250

1,125

Total
Risk Weighted Assets equivalent

37

Specific risk is the risk that the value of a security will change due to issuer-specific factors. It applies to interest rate and equity
positions related to a specific issuer.

38

RWA equivalent is the capital requirement multiplied by 12.5 in accordance with APS 110.

76

ANZ Basel III Pillar 3 Disclosure
Table 14

September 2018

Market risk – Internal models approach

Definition and scope of market risk
Market Risk stems from ANZ’s trading and balance sheet activities and is the risk to ANZ’s earnings arising fromchanges in interest rates, foreign exchange rates, credit spreads, volatility, correlations or from fluctuations in bond,commodity or equity prices.
Market risk management of IRRBB is described in Chapter 11 and is excluded from this Chapter.
Regulatory approval to use the Internal Models Approach
ANZ has been approved by APRA to use the Internal Models Approach (IMA) under APS 116 Capital Adequacy: Market
Risk for general market risk and under APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (Advanced
ADIs) for interest rate risk in the banking book (IRRBB).
Governance of market risk
The Board Risk Committee supervision of market risk is supported by the Credit and Market Risk Committee (CMRC).
CMRC is responsible for the oversight and control of credit, market, insurance and material financial risks across the
ANZ Group and meets at least monthly.
The Market Risk function is a specialist risk management unit independent of the business that is responsible for:

Designing and implementing policies and procedures to ensure market risk exposures are managed within theappetite and limit framework set by the Board.

Measuring and monitoring market risk exposures, and approving counterparty and associated risks.

The ongoing effectiveness and appropriateness of the risk management framework.

Traded Market Risk
Traded Market Risk is the risk of loss from changes in the value of financial instruments due to movements in pricefactors for both physical and derivative trading positions. Trading positions arise from transactions where ANZ acts as
principal with customers, financial exchanges or inter-bank counterparties.
The Traded, Foreign Exchange and Commodity Market Risk Policy and accompanying procedures (together the “TFC
Framework”) governs the management of traded market risk and its key components include:

A clear definition of the trading book.

A comprehensive set of requirements that promote the proactive identification and communication of risk.



A robust Value at Risk (VaR) quantification approach supplemented by comprehensive stress testing.



A comprehensive limit framework that controls all material market risks.

An independent Market Risk function with specific responsibilities.



Regular and effective reporting of market risk to executive management and the Board.

Non-Traded Market Risk
Non Traded Market Risk is the market risk associated with the management of non-traded interest rate risk, liquidity
risk and foreign exchange exposures from the Group’s foreign currency capital and earnings.
Included in Non-Traded Market risk is Interest Rate Risk in the Banking Book (IRRBB). This is the risk of loss arisingfrom adverse changes in the overall and relative level of interest rates for different tenors, differences in the actual
versus expected net interest margin, and the potential valuation risk associated with embedded options in financial
instruments and bank products.
In quantifying risk, all material market risk factors need to be identified and reflected within the risk measurement
approach. Non-traded market risk (or balance sheet risk) comprises the management of non-traded interest rate risk,
liquidity risk, and foreign exchange exposures from the Group’s foreign currency capital and earnings.

77

ANZ Basel III Pillar 3 Disclosure

September 2018

ANZ has a detailed market risk management and control framework, to support its trading and balance sheet activities,
which incorporates an independent risk measurement approach to quantify the magnitude of market risk within the
trading and balance sheet portfolios. This approach, along with related analysis, identifies the range of possible
outcomes that can be expected over a given period of time, and establishes the likelihood of those outcomes andallocates an appropriate amount of capital to support these activities.
Measurement of Traded Market Risk
ANZ’s traded market risk management framework incorporates a risk measurement approach to quantify themagnitude of market risk within trading books. This approach and related analysis identifies the range of possible
outcomes that can be expected over a given period of time and establishes the relative likelihood of those outcomes.
ANZ’s key tools to measure and manage traded market risk on a daily basis are VaR, sensitivity measures and stresstests. VaR is calculated using a historical simulation with a 500 day observation period for standard VaR, and a oneyear stressed period for stressed VaR. Traded VaR is calculated at a 99% confidence level for both standard VaR andStressed VaR. Standard VaR is calculated over both a one-day and a ten-day holding period, while Stressed VaR iscalculated over a ten-day holding period. All material market risk factors and all trading portfolios are captured within
the VaR model, with the exception of specific risk where capital is calculated using the Standardised approach.
ANZ also undertakes a wide range of stress tests on the Group trading portfolio and to individual trading portfolios.
Standard stress tests are applied daily measuring the potential loss that could arise from the largest market
movements observed since 2008 over specific holding periods. Holding periods used to calculate stress parameters
differ and reflect the relative liquidity of each product type. Results from stress testing on plausible severe scenarios
are also calculated daily.
VaR and stress tests are supplemented by loss limits and detailed control limits. Loss limits ensure that in the event ofcontinued losses from a trading activity, the trading activity is stopped and senior management reviews before trading
resumed. Where necessary, detailed control limits such as sensitivity or position limits are also in place to ensure
appropriate control is exercised over a specific risk or product.
Comparison of VaR estimates to gains/losses
Back testing involves comparing VaR calculations with corresponding profit and loss to identify how often trading
losses exceed the calculated VaR. For APRA back testing purposes, VaR is calculated at the 99% confidence intervalwith a one-day holding period.
Back testing is conducted daily, and outliers are analysed to determine whether they are the result of trading
decisions, systemic changes in market conditions or issues related to the VaR model (historical data or model
calibration).
ANZ uses actual and hypothetical profit and loss data. Hypothetical data is designed to remove the impacts of intraday
trading and sales margins. It is calculated as the difference between the value of the prior day portfolio at prior day
closing rates and the value at current day closing rates. Markets Finance calculates actual profit and loss while Market
Risk calculates hypothetical profit and loss.

78

ANZ Basel III Pillar 3 Disclosure

September 2018

Table 14(f): Value at Risk (VaR) and stressed VaR over the reporting period 39

Mean
$M

99% 1 Day Value at Risk (VaR)

Six months ended Sep 18
Maximum
Minimum$M$M

Period end$MForeign Exchange

3.3

6.4

1.7

3.7

Interest Rate

13.6

18.7

6.0

8.3

Credit

2.9

3.5

2.3

2.5

Commodity

3.8

4.5

3.3

3.7

-

-

-

-

Six months ended Mar 18
Maximum
Period end$M$M

Period end$M

EquityMean$M

99% 1 Day Value at Risk (VaR)
Foreign Exchange

5.0

10.3

2.1

3.3

Interest Rate

10.8

15.5

6.8

12.7

Credit

5.1

6.5

3.4

3.6

Commodity

2.4

3.5

1.4

3.5

-

-

-

-

Six months ended Sep 17
Maximum
Minimum$M$M

Period end$M

EquityMean$M

99% 1 Day Value at Risk (VaR)
Foreign Exchange

5.3

10.5

2.5

4.2

Interest Rate

11.7

17.0

8.4

12.8

Credit

3.8

5.4

2.6

4.4

Commodity

1.9

3.0

1.4

2.2

Equity

0.1

0.2

-

-

Six months ended Sep 18
Maximum
Minimum$M$M

Period end
$M

Mean
$M

99% 10 Day Stressed VaR
Foreign Exchange

42.1

80.7

15.4

Interest Rate

81.3

198.5

49.3

49.3

Credit

30.9

36.1

21.8

32.1

Commodity

17.0

26.0

7.5

10.4

-

0.1

-

-

Six months ended Mar 18
Maximum
Minimum$M$M

Period end$M

EquityMean$M

99% 10 Day Stressed VaR

71.0

Foreign Exchange

40.8

74.0

20.0

Interest Rate

68.6

166.5

35.3

64.5

Credit

37.3

49.3

29.0

29.0

Commodity

13.3

24.0

4.3

21.3

Equity

0.1

0.3

-

-

Six months ended Sep 17
Maximum
Minimum$M$M

Period end
$M

Mean
$M

99% 10 Day Stressed VaR

46.3

Foreign Exchange

40.9

81.1

18.4

Interest Rate

82.1

184.0

41.2

63.1

Credit

31.8

38.0

26.2

34.8

Commodity

7.0

14.9

4.2

8.5

Equity

1.8

2.1

-

0.3

39

The Foreign exchange VaR excludes foreign exchange translation exposures outside of the trading book.

79

37.2

ANZ Basel III Pillar 3 Disclosure

September 2018

Comparison of VaR estimates with actual gains/losses experienced

Reporting of Traded Market Risk
Market Risk reports daily VaR and stress testing results to senior management in Market Risk and the Markets
business. Market Risk expediently escalates details of any limit breach to the appropriate discretion holder withinMarket Risk and to Group Risk, and reports to the CMRC each month.
Market Risk monitors and analyses back testing results daily and reports results to the CMRC quarterly.
Total traded market risks back testing exceptions were within the APS 116 green zone for the period.
Mitigation of market risk
The Market Risk team’s responsibilities, including the reporting and escalation processes described above, arefundamental to how market risk is managed. Market Risk has a presence in all the major dealing operations centres inAustralia, New Zealand, Asia, Europe and America.
Commodities risk
Commodity price risk arises as a result of movement in prices or the implied volatilities of various commodities. All
direct commodity price exposures are managed in the trading book by the Markets business and monitored by Market
Risk in accordance with the TFC framework.
Foreign exchange risk
Foreign exchange risk arises as a result of movements in values or the implied volatilities of exchange rates.
Exposures from ANZ’s normal operating business and trading activities are recorded in core multi-currency systems
and managed within the trading book in accordance with the TFC framework.
Structural exposures from foreign investments and capital management activities are managed in accordance with
policies approved by the Board Risk Committee, with the main objective of ensuring that ANZ’s capital ratio is largely
protected from changes in foreign exchange. As at 30 September 2018, ANZ’s investment in ANZ Bank New Zealand
Limited is the main source of the structural foreign exchange exposure.

80

ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 9 – Operational risk
Table 15 Operational risk
Definition of operational risk
Operational Risk is defined as the risk of loss and/or non-compliance with laws resulting from inadequate or failed
internal processes, people and systems, and/or from external events. This definition includes legal risk, and the riskof reputation loss, or damage arising from inadequate or failed internal processes, people and systems, but excludes
strategic risk.
ANZ’s Operational Risk Measurement and Management Framework (ORMMF), taking into consideration the internaland external environment in which ANZ operates at any point in time, allows for more targeted focus on particularareas of operational risk. Currently, ANZ has identified the following types of operational risk as separate Key Material
Risks:
Compliance Risk: ANZ uses the same policies, governance, management and systems for Operational Risk
and Compliance Risk. These are described below.



Reputation Risk: ANZ uses some additional policies, governance, management and systems for managing
Reputation Risk. These are described below.

Technology Risk: (effective from 1 October 2018): ANZ uses some additional policies, governance,
management and systems for managing Technology Risk.

ANZ has been authorised by APRA to use the advanced measurement approach (AMA) for calculation of operationalrisk capital requirements under APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk.
This methodology applies across all of ANZ.
Operational risk governance and structure
The primary responsibilities for operational risk are vested by the Operational Risk Approach in the Board Risk
Committee and Operational Risk Executive Committee.
The Board Risk Committee:
approve the Operational Risk Approach

identify, act on and monitor Operational Risk, at a group level

promote a culture that supports the organisation to identify, act on and monitor Operational Risk

Operational Risk Executive Committee:
endorse the Operational Risk Approachmonitor the implementation of the Operational Risk Approach, at a group level

assist the Board Risk Committee to identify, act on and monitor Operational Risk, at a group level

promote a culture that supports the organisation to identify, act on and monitor Operational Risk

Risk management framework
ANZ operates three lines of defence model for the management of Operational Risk. Each line of defence has definedroles, responsibilities and escalation paths to support effective two way communication and management ofoperational risk at ANZ. There are also on-going review mechanisms in place to ensure the Operational Risk
Measurement and Management Framework (ORMMF) and Compliance Framework continue to meet organisational
needs and regulatory requirements.
First line
The Business has first line of defence responsibility for managing operational risk including obligations to:take primary accountability for the identification, measurement and management of key risks and the related
control environment;

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ANZ Basel III Pillar 3 Disclosure

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Second line
Operational Risk functions (Division and Enterprise) form the second line of defence.
Division Risk is accountable for:


undertaking review and challenge of business activities and ensuring that the strategy is maintained across thedivision.

Group Operational Risk is accountable for:

developing and maintaining relevant policies and procedures to ensure continuing appropriateness of the
Operational Risk Measurement and Management Framework (ORMMF) and to support its consistent execution, andsetting and monitoring compliance with the Group Operational Risk, Risk Appetite Statements (RAS).

Third line
Internal Audit forms the third line of defence and is accountable for:


providing independent and objective assurance to management and the ANZ Board regarding compliance with
policy and regulatory requirements;

performing objective assessments across all geographies, divisions, lines of business and processes, and

undertaking independent review of the adequacy of the ORMMF.

Collectively Internal Audit, Operational Risk functions, Divisions and Business Units are responsible for monitoring andreporting to Executive Management, the Board, Regulators and others on all matters related to the measurement andmanagement of operational risk.
Operational Risk Framework
ANZ’s operational risk framework is delivered through:

Level 1 ANZ Board Operational Risk Approach (the policy) – approved by the Board Risk Committee, outlines thecore standards, roles and responsibilities and minimum requirements of the way in which operational risks andobligations are identified, acted on and monitored across ANZ sets the operational risk principles for governing theoverall measurement and management of operational risk across ANZ.

Level 2A Operational Risk Procedures (the requirements) – owned by Group Operational Risk, provide theprocedures to support the consistent application of Level 1 Policy across ANZ. The procedures are further
augmented by tools, templates, systems and on-going training.

Operational risk management
The objective of ANZ’s approach to operational risk is to ensure that risks are identified, assessed, measured,
evaluated, treated, monitored and reported in a structured environment with appropriate governance oversight.
ANZ’s foundational operational risk policy is the Operational Risk Approach. The Operational Risk Approach and its
supporting requirements (together comprising the ORMMF) includes management and measurement of operationalrisks and compliance with laws, regulations, industry standards, codes and principles of good governance, and internal
policies and procedures. It is founded on ANZ’s values and culture, which focus on doing what’s right and being ethical,
accountable, trustworthy and transparent in our decisions.
ANZ takes a risk based approach to the management of operational risks and obligations. This enables ANZ to beconsistent in proactively identifying, assessing, managing, reporting and escalating operational risk-related risk
exposures, while respecting the specific obligations of each jurisdiction in which we operate.
Day-to-day management of operational risk is the responsibility of business unit line management and staff. Risk
management, supported by a strong Risk Culture, ensures all staff are thinking about and managing risk on a daily
basis – “Risk is Everyone’s Responsibility”. However, Senior Management needs visibility of Key Risks. These are therisks that if they materialised, would adversely affect the achievement of business objectives, ANZ’s reputation, legal
and regulatory compliance or impact key processes.

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Operational risk mitigation
In line with industry practice, ANZ obtains insurance to cover those operational risks where cost-effective premiums
can be obtained. In conducting their business, Business Units are advised to act as if uninsured and not to use
insurance as a guaranteed mitigants for operational risk.
ANZ has business continuity, recovery and crisis management plans. The intention of the business continuity andrecovery plans is to ensure critical business functions can be maintained, or restored in a timely fashion, in the event ofmaterial disruptions arising from internal or external events.
Crisis management planning at Group and country levels supplement business continuity plans in the event of abroader group or country crisis. Crisis management plans include crisis team structures, roles, responsibilities andcontact lists, and are subject to testing.
Operational risk reporting
ANZ’s operational risk management framework includes a global, web-based Risk, Compliance and IT Governance toolthat provides ANZ the source of truth and provides greater transparency and integrity of Risk, Controls, Obligations andEvents information across ANZ.
OREC’s role is to monitor and oversight at an enterprise level the state of operational risk and compliance management
and to instigate any necessary corrective actions.
ANZ has been authorised by APRA to use the advanced measurement approach (AMA) for calculation of operational risk
capital requirements under APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk. Thismethodology applies across all of ANZ.
ANZ’s advanced measurement approach
Group Operational Risk is responsible for maintaining ANZ’s AMA for the measurement and allocation of operational risk
capital.
Operational risk capital is held to protect depositors and shareholders of the bank from rare and severe unexpected
losses. In order to quantify the overall operational risk profile, ANZ maintains and calculates operational risk capital(including regulatory and economic capital), on at least a six monthly basis. The capital model uses the following data
as inputs:historical internal losses captured and reported in the bank wide Compliance and Operational Risk platform;

relevant external losses, sourced from the Operational Risk Data Exchange (ORX), an industry data base comprising
the anonymised loss data from over 60 member banks;scenario analysis - unexpected potential loss estimates for severe but plausible risk events which are calculatedusing exposure models developed using business data and inputs from subject matter experts.

Once calculated, the capital is allocated to divisions based on the historic loss experience and exposure to scenarios.
Understanding the divisional exposure to scenarios (and their underlying risk drivers) allows lines of business toconsider capital impacts when making decisions. Accordingly, capital allocations are structured to encourage businesses
to effectively manage their operational risk exposures e.g. improve controls, reduce losses etc.
Operational risk regulatory capital to meet the regulatory capital soundness standard is based on a 99.9% confidence
interval in accordance with APS 115. Economic Capital is based on 99.97% confidence interval.

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ANZ Basel III Pillar 3 Disclosure

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Definition of compliance risk
Compliance Risk is a subset of Operational Risk. It covers the risk of failure to act in accordance with laws, regulations,industry standards and codes, internal policies and procedures and principles of good governance as applicable to
ANZ’s businesses.
Compliance
The consequences of Compliance failure may include significant legal or regulatory sanctions, material financial loss
(fines, civil penalties, damages) diminished reputation or restrictions on the ability of ANZ to do business.
In order for the Business to be able to identify and manage Compliance Risk, they must identify their Regulatory
Obligations and their impacted business activities, and maintain and monitor key controls.
Compliance specific approaches include:Centralised management of key obligations via a Global Obligations Library, enabling ANZ's change management
capability in relation to new and revised obligations.



An emphasis on the identification of changing regulations and the business environment, to enable proactive
assessment of emerging compliance risks.



Recognition of incident management as a separate element to enhance ANZ's ability to identify, manage andreport on incidents/breaches in a timely manner.

Management of the Whistle-blower Protection Policy
ANZ will ensure there is an effective and fit for purpose channel, allowing employees and contractors to makeconfidential, anonymous submissions regarding concerns relating to accounting, internal control, compliance, audit andother matters.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 10 – Equities
Table 16

Equities – Disclosures for banking book positions

Definition and categorisation of equity investments held in the banking book
Equity risk is the risk of financial loss arising from the unexpected reduction in value of equity investments not held in
the trading book including those of the Group’s associates. ANZ’s equity exposures in the banking book are primarily
categorised as follows: Equity investments that are taken for strategic reasons - These transactions represent strategic business initiatives
and include ANZ’s investments in partnership arrangements with financial institutions in Asia. These investments
are undertaken after extensive analysis and due diligence by Group Strategy, internal specialists and external
advisors, where appropriate. Board approval is required prior to committing to any investments over delegatedauthorities, and all regulatory notification requirements are met. Performance of these investments is monitored byboth the owning business unit and Group Strategy to ensure that it is within expectations and the values of theinvestments are tested at least six monthly for impairment.
 Equity investments made as the result of a work out of a problem exposure - From time to time, ANZ will take anequity stake in a customer as part of a work out arrangement for problem exposures. These investments are madeonly where there is no other viable option available and form an immaterial part of ANZ’s equity exposures.
Valuation of and accounting for equity investments in the banking bookIn line with Group Accounting Policy the accounting treatment of equity investments depends on whether ANZ has
significant influence over the investee.
Investments in associates
Where significant influence exists, the investment is classified as an Investment in Associate in the financial
statements. ANZ adopts the equity method of accounting for associates. ANZ’s share of the results of associates is
included in the consolidated income statement. The associate investments are recognised at cost plus ANZ’s share of
post-acquisition net assets. Interests in associates are reviewed bi-annually for impairment, using either market
value, or a discounted cash flow methodology to assess value in-use. As at 30 September 2018 the carrying value ofthese investments were supported by value in use calculations.
Available-for-Sale Investments
Where ANZ does not have significant influence over the investee, the investment is classified as Available-for-Sale(AFS). The investment is initially recognised at fair value plus transaction costs. Changes in the fair value of theinvestments are recognised in an equity reserve with any impairment recognised in the income statement. When theasset is sold the cumulative gain or loss relating to the asset held in the AFS revaluation reserve is transferred to theincome statement.

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ANZ Basel III Pillar 3 Disclosure

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Table 16(b) and 16(c): Equities – Types and nature of Banking Book investments
Sep 18Equity investments$M
Balance sheet value

Fair value

Value of listed (publicly traded) equities

3,554

2,869

Value of unlisted (privately held) equities

86

86

3,640

2,955

Total

Mar 18Equity investments$M
Balance sheet value

Fair value

Value of listed (publicly traded) equities

3,444

2,831

Value of unlisted (privately held) equities

151

151

3,595

2,982

Total

Sep 17
Equity investments$M
Balance sheet value

Fair value

Value of listed (publicly traded) equities

2,900

2,633

Value of unlisted (privately held) equities

1,953

1,953

Total

4,853

4,586

Half Year

Half Year

Half Year

Sep 18Mar 18

Sep 17

$M

$M

$M

124

353

(2)

-

-

-

124

353

(2)

Half Year

Half Year

Half Year

Sep 18Mar 18

Sep 17

Unrealised gains (losses) on equity investments

$M

$M

$M

Total unrealised gains (losses)
Reversal of prior period unrealised gains (losses) from disposals
and liquidations in the reporting period

36

170

21

Table 16(d) and 16(e): Equities – gains (losses)

Realised gains (losses) on equity investments
Cumulative realised gains (losses) from disposals
and liquidations in the reporting period
Cumulative realised losses from impairment and writedowns in
the reporting period-

Total unrealised gains (losses) included in Common
Equity Tier 1, Tier 1 and/or Tier 2 capital

36

-

170

Table 16(f): Equities Risk Weighted Assets
From 1 January 2013 all banking book equity exposures are deducted from Common Equity Tier 1 capital.

86

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ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 11 – Interest Rate Risk in the Banking Book
Table 17

Interest Rate Risk in the Banking Book

Definition of Interest Rate Risk in the Banking Book (IRRBB)Interest rate risk in the banking book (IRRBB) relates to the potential adverse impact of changes in market interest
rates on ANZ’s future net interest income. The risk generally arises from:

Repricing and yield curve risk - the risk to earnings or market value as a result of changes in the overall level ofinterest rates and/or the relativity of these rates across the yield curve.

Basis risk - the risk to earnings or market value arising from volatility in the interest margin applicable to banking
book items.



Optionality risk – the risk to earnings or market value arising from the existence of stand-alone or embedded
options in banking book items.

Regulatory capital approach
ANZ has received approval from APRA to use the IMA for the calculation of regulatory capital for IRRBB, under APS 117
Capital Adequacy: Interest Rate Risk in the Banking Book (Advanced ADIs).
Governance
The Board Risk Committee has established a risk appetite for IRRBB and delegated authority to theGroup Asset and Liability Committee (GALCO) to manage the strategic position (capital investment term) and oversee
the interest rate risk arising from the repricing of asset and liabilities (mismatch risk) in the banking book. GALCO hasdelegated the management of this mismatch risk to the Markets business.
Market Risk is the independent function responsible for:

Designing and implementing policies and procedures to ensure that IRRBB exposure is managed within the limit
framework set by the Board Risk Committee.



Monitoring and measuring IRRBB market risk exposure, compliance with limits and policies.

Ensuring ongoing effectiveness and appropriateness of the risk management framework.

Risk Management framework
IRRBB is managed under a comprehensive measurement and reporting framework, supported by an independent
Market Risk function. Key components of the framework include:

A comprehensive set of policies that promote proactive risk identification and communication.

Funds Transfer Pricing framework to transfer interest rate risk from business units so it can be managed by theMarkets business and monitored by Market Risk.



Quantifying the magnitude of risks and controlling the potential impact that changes in market interest rates canhave on the net interest income and balance sheet fair value of ANZ.

Regular and effective reporting of IRRBB to executive management and the Board.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Measurement of interest rate risk in the banking book
ANZ uses the following principal techniques to quantify and monitor IRRBB:Interest Rate Sensitivity - this is an estimate of the change in economic value of the banking book due to a 1 basis
point move in a specific part of the yield curve.

Earnings at risk (EaR) - this is an estimate of the amount of income that is at risk from interest rate movements
over a given holding period, expressed to a 97.5% or 99% level of statistical confidence.

Value at risk (VaR) - this is an estimate of the impact of interest rate changes on the banking book’s market value,
expressed to a 99% level of statistical confidence for a given holding period.

Market Value loss limits - this mitigates the potential for embedded losses within the banking book.

Stress testing - standard and extraordinary tests are used to highlight potential risk which may not be captured by
VaR, and how the portfolio might behave under extraordinary circumstances.

The calculations used to quantify IRRBB require assumptions to be made about the repricing term of exposures that do
not have a contractually defined repricing date, such as deposits with no set maturity dates, and prepayments.
Changes to these assumptions require GALCO approval.
Where relevant, IRRBB techniques recognise foreign currency effects as all measures are expressed in Australian
dollars.
Basis and optionality risks are measured using Monte Carlo simulation techniques, to generate a theoretical worst
outcome at a specified confidence level (typically no less than at a 99% level of statistical confidence) less the averageoutcome.
Reporting of interest rate risk in the banking bookMarket Risk analyses the output of ANZ’s VaR, EaR and Stress Testing calculations daily. Compliance with the risk
appetite and limit framework is reported to CMRC, GALCO and the Board Risk Committee.
ANZ’s interest rate risk in the banking book capital requirement
The IRRBB regulatory capital requirements includes a value for repricing and yield curve risk, basis and optionality risks
based on a 99% confidence interval, one year holding period and a six year historical data set.
Embedded losses also contribute to make up the capital requirement and are calculated as the difference between thebook value of banking book items and the current economic value.
Results of standard shock scenario
The Basel II framework sets out a standard shock scenario of a 200 basis point parallel shift change in interest rates, inorder to establish a comparable test across banks.
Table 17(b) that follows shows the results of this test by currency of the exposures outside the trading book.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Table 17(b): Interest Rate Risk in the Banking Book
Change in Economic Value
Standard Shock Scenario Stress Testing:Sep 18Mar 18

Sep 17$M$M$M

200 basis point parallel increase

(485)

(339)

(427)

200 basis point parallel decrease

497

344

415

200 basis point parallel increase

(133)

(112)

(82)

200 basis point parallel decrease

129

106

75

200 basis point parallel increase

(76)

(46)

(32)

200 basis point parallel decrease

76

52

34

Interest rate shock applied
AUD

NZD

USD

GBP
200 basis point parallel increase

21

12

9

200 basis point parallel decrease

(21)

(12)

(9)

200 basis point parallel increase

(48)

(96)

(98)

200 basis point parallel decrease

52

103

103

Other

IRRBB regulatory capital

705

722

929

IRRBB regulatory RWA

8,814

9,019

11,611IRRBB stress testing methodology
Stress tests within ANZ include standard and extraordinary tests. These tests are used to highlight potential risk which
may not be captured by VaR, and how the portfolio might behave under extraordinary circumstances. Standard stresstests include statistically derived scenarios based on historical yield curve movements. These combine parallel shocks
with twists and bends in the curve to produce a wide range of hypothetical scenarios at high statistical confidence
levels, with the single worst scenario identified and reported. Extraordinary stress tests include interest rate moves
from historical periods of stress as well as stresses to assumptions made about the repricing term of exposures. The
rate move scenarios include daily changes over the stressed periods and the worst theoretical losses over the selectedperiods are each reported. Stresses of the repricing term assumptions investigate scenarios where actual repricing
terms are significantly different to the base modelling assumptions.

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ANZ Basel III Pillar 3 Disclosure

September 2018

Chapter 12 – Leverage and Liquidity Coverage Ratio
Leverage Ratio
The Leverage Ratio requirements are part of the Basel Committee on Banking Supervision (BCBS) Basel III capitalframework. It is a simple, non-risk based supplement or backstop to the current risk based capital requirements and isintended to restrict the build-up of excessive leverage in the banking system.
Consistent with the BCBS definition, APRA’s Leverage Ratio compares Tier 1 Capital to the Exposure Measure(expressed as a percentage) as defined by APS 110. APRA has not finalised a minimum Leverage Ratio requirement forAustralian ADIs, although the current BCBS requirement is for a minimum of 3%.
At 30 September 2018, the Group’s Leverage Ratio of 5.5% was above the 3% minimum currently required by the
BCBS. Table 18 below shows the Group’s Leverage Ratio calculation as at 30 September 2018 and Table 19
summarises the reconciliation of accounting assets and leverage ratio exposure measure at 30 September 2018.
Table 18

Leverage Ratio
Sep 18Mar 18

Sep 17$M$M$M

On-balance sheet exposures1

On-balance sheet items (excluding derivatives and SFTs, but including collateral)

799,199

795,034

768,930

2(Asset amounts deducted in determining Basel III Tier 1 capital)(13,794)(14,762)(16,583)3

Total on-balance sheet exposures (excluding derivatives and SFTs)

785,405780,272

752,347

8,702

8,267

8,354

29,471

31,10728,193---(8,106)(7,199)(6,102)Derivative exposures4
5
6

Replacement cost associated with all derivatives transactions (ie net of eligible cash
variation margin)
Add-on amounts for PFE associated with all derivatives transactions

8

Gross-up for derivatives collateral provided where deducted from the balance sheet
assets pursuant to the operative accounting framework(Deductions of receivables assets for cash variation margin provided in derivatives
transactions)(Exempted CCP leg of client-cleared trade exposures)

9

Adjusted effective notional amount of written credit derivatives

10(Adjusted effective notional offsets and add-on deductions for written credit
derivatives)
Total derivative exposures

7

-

-

-

2,137

2,851

6,429

(1,528)(2,279)(5,405)30,67632,747

31,46934,17329,54328,03413

Gross SFT assets (with no recognition of netting), after adjusting for sale accounting
transactions(Netted amounts of cash payables and cash receivables of gross SFT assets)(253)(1,240)(490)

14

CCR exposure for SFT assets

2,146

1,048

1,054

11

Securities financing transaction exposures
12

15

Agent transaction exposures

16

Total securities financing transaction exposures

-

-

-

36,06629,351

28,598Other off-balance sheet exposures
17

Off-balance sheet exposure at gross notional amount

245,108

233,527

232,16218(Adjustments for conversion to credit equivalent amounts)(142,298)(133,606)(135,397)

Off-balance sheet items

102,81099,921

96,76519

Capital and Total Exposures
20

Tier 1 capital

21

Total exposures

22

Basel III leverage ratio

52,21851,12549,324

954,957

942,291

909,179

5.5%

5.4%

5.4%

Leverage ratio

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ANZ Basel III Pillar 3 Disclosure
Table 191

September 2018

Summary comparison of accounting assets vs. leverage ratio exposure measureSep 18Mar 18$M$M

Sep 17$M

942,624

935,116

897,326(40,829)(39,623)(37,846)

3

Total consolidated assets as per published financial statements
Adjustment for investments in banking, financial, insurance or commercial entities
that are consolidated for accounting purposes but outside the scope of regulatory
consolidation.
Adjustment for assets held on the balance sheet in a fiduciary capacity pursuant to
the Australian Accounting Standards but excluded from the leverage ratio exposure
measure

-

-

-

4

Adjustments for derivative financial instruments.

(37,747)(38,168)(31,047)

5

1,893

(193)

564

6

Adjustment for SFTs (i.e. repos and similar secured lending)
Adjustment for off-balance sheet exposures (i.e. conversion to credit equivalentamounts of off-balance sheet exposures)

102,81099,921

96,765

7

Other adjustments(13,794)(14,762)(16,583)

Leverage ratio exposure

954,957

942,291

909,1792

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ANZ Basel III Pillar 3 Disclosure
Table 20

September 2018

Liquidity Coverage Ratio disclosure templateSep 18Jun 18Mar 18

Total
Unweighted
Value
$M

Total
Weighted
Value
$M

Total
Unweighted
Value
$M

Total
Weighted
Value
$M

Total
Unweighted
Value
$M

Total
Weighted
Value$M

Liquid assets, of which:1High-quality liquid assets (HQLA)-

143,308-

140,961-

142,0322-

40,897-40,896-40,8983

Alternative liquid assets (ALA)
Reserve Bank of New Zealand (RBNZ)
securities-

10,672-

11,554-

12,306

4

Cash outflows
Retail deposits and deposits from small
business customers

21,800200,900

21,704202,281

21,797

201,6135of which: stable deposits

76,2783,814

76,751

3,838

76,0743,804

6

of which: less stable deposits

124,622

17,890125,530

17,959125,539

17,996

7

Unsecured wholesale fundingof which: operational deposits (allcounterparties) and deposits in
networks for cooperative banksof which: non-operational
deposits (all counterparties)

191,856

106,859

191,333

108,219

199,523

112,597

57,716

13,76057,657

13,78759,713

14,303

121,176

80,135

121,593

82,349128,114

86,598

12,964

12,96412,08312,083

11,696

11,6968910of which: unsecured debt

11

Secured wholesale funding

12

15

Additional requirementsof which: outflows related toderivatives exposures and othercollateral requirementsof which: outflows related to lossof funding on debt productsof which: credit and liquidity
facilities

16

Other contractual funding obligations

17

Other contingent funding obligations

18

Total cash outflows

13
14

1,679

272

604

142,461

42,596

143,057

43,349142,331

44,342

29,301

29,30130,72630,72631,87831,878

-

-

-

-

-

-

113,160

13,295112,331

12,623

110,453

12,464

10,200-

10,244-

10,189-66,375

3,872

73,9184,571

81,064

4,733

176,710

178,208

184,076

Cash inflows
19

Secured lending (e.g. reverse repos)

27,371

1,271

24,262

1,025

21,956

1,122

20

Inflows from fully performing exposures

29,633

19,43330,89020,64629,39019,201

21

Other cash inflows

19,211

19,211

20,78920,78921,712

21,71222

Total cash inflows

76,21539,91575,941

42,46073,05842,03523

Total liquid assets

194,877

193,411

195,236

24

Total net cash outflows

136,795

135,748

142,04125

Liquidity Coverage Ratio (%)
Number of data points used (simple
average)142.5%

142.5%

137.5%

65

65

64

Blank

Liquidity Coverage Ratio (LCR)
ANZ’s average LCR for the 6 months to 30 September 2018 was 142.5% with total liquid assets exceeding net
outflows by an average of $57.9b.
The main contributors to net cash outflows were modelled outflows associated with the bank’s corporate and retaildeposit portfolios, offset by inflows from maturing loans. While cash outflows associated with derivatives are material,
these are effectively offset by derivative cash inflows.
The composition of the liquid asset portfolio has remained relatively stable through the half, with HQLA securities andcash making up on average 73% of total liquid assets.
Through the period the Liquidity Coverage Ratio has remained within a range of 134% to 153%. ANZ has a welldiversified deposit and funding base avoiding undue concentrations by investor type, maturity, market source andcurrency.
ANZ monitors and manages its liquidity risk on a daily basis including LCR by geography and currency, ensuringongoing compliance across the network.

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ANZ Basel III Pillar 3 Disclosure
Table 21

September 2018

NSFR disclosure templateSep 18Unweighted value by residual maturity
6monthsNo<6
to <maturity
months1yr≥ 1yr

Available Stable Funding (ASF) Item
1

Capital2of which: regulatory capital3of which: other capital instruments

4

Retail deposits and deposits from small business customers

BLANK

Weighted
value

$M

$M

$M

$M

$M

59,061--

14,251

73,31259,061--

14,251

73,312

-

-

-

-

-

168,41770,308

9,673

3,594

231,659

5of which: stable deposits

71,183

18,970--85,6456of which: less stable deposits

97,234

51,338

9,673

3,594

146,014
194,4777

113,775

250,123

30,40590,6868Wholesale fundingof which: operational deposits

58,455---29,2289of which: other wholesale funding

55,320250,123

30,40590,686

165,249

10

Liabilities with matching interdependent assets

11
12

Other liabilitiesof which: NSFR derivative liabilitiesof which: All other liabilities and equity not included in theabove categories

13

-

-

-

-

-

13,462

6,982
6,982

-

294
-

294

13,462

-

-

294

294

14

Total ASF
Required Stable Funding (RSF) Item15(a)Total NSFR (HQLA)

5,194

15(b)

ALA

4,690

15(c)

RBNZ securities
Deposits held at other financial institutions for operational
purposes

16
17
18

19

20
21
22
23
24

499,742

570
-

-

-

-

-

Performing loans and securitiesof which: Performing loans to financial institutions secured by
Level 1 HQLA
of which: Performing loans to financial institutions secured by
non-Level 1 HQLA and unsecured performing loans tofinancial institutionsof which: Performing loans to non- financial corporate clients,
loans to retail and small business customers, and loans tosovereigns, central banks and public sector entities (PSEs)
of which: With a risk weight of less than or equal to 35%
under APS 112

11,969111,572

38,409432,568

388,308-

31,951

3

-

3,197

488

23,607

8,277

10,525

18,693

9,823

50,06725,756

123,867

151,307

21

967

479

4,951

3,955

of which: Performing residential mortgages,of which: With a risk weight equal to 35% under APS
112
of which: Securities that are not in default and do not qualify
as HQLA, including exchange-traded equities

-

4,412

4,214

296,285

211,247

-

3,927

3,755

255,403

176,026
3,864

1,658

1,535

159

1,891

25

Assets with matching interdependent liabilities

-

-

-

-

-

26

Other assets:-

19,115597

3,577

30,53627

28
29

of which: Physical traded commodities, including goldof which: Assets posted as initial margin for derivative
contracts and contributions to default funds of central
counterparties (CCPs)

30

of which: NSFR derivative assetsof which: NSFR derivative liabilities before deduction ofvariation margin posted

31

of which: All other assets not included in the above categories

1,249

1,062

BLANK

1,416

-

-

1,204

BLANK

1,719

-

-

1,719

BLANK

15,115

-

-

3,023

77,976

865

597

3,577

23,528--

171,70232

Off-balance sheet items

33

Total RSF

436,053

6,755

34

Net Stable Funding Ratio (%)

114.61%

ANZ's NSFR as at 30 September 2018 was 114.6%, unchanged since June 2018.
The main sources of Available Stable Funding (ASF) at September 2018 were deposits from Retail and SME customers,
at 46%, with other wholesale funding at 33% and capital at 15% of the total ASF.
The majority of ANZ's Required Stable Funding (RSF) at September 2018 was driven by mortgages at 48% and otherlending to non-FI customers at 35% of the total RSF.

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ANZ Basel III Pillar 3 Disclosure
Table 21

September 2018

NSFR disclosure template (continued)
Jun 18Unweighted value by residual maturity
6monthsNo<6
to <maturity
months1yr≥ 1yr

Available Stable Funding (ASF) Item
1

Capital2of which: regulatory capital3of which: other capital instruments

4

Retail deposits and deposits from small business customers

BLANK

Weighted
value

$M

$M

$M

$M

$M

57,957--

14,67972,636

57,957--

14,67972,636

-

-

-

-

-

165,61673,702

8,351

3,735

231,071

5of which: stable deposits

70,714

17,964--84,244

6of which: less stable deposits

94,902

55,738

8,351

3,735

146,827
191,3987

114,259

250,616

29,201

94,6408Wholesale fundingof which: operational deposits

57,453---28,7279of which: other wholesale funding

56,806250,616

29,201

94,640162,671

10

Liabilities with matching interdependent assets

11
12

Other liabilitiesof which: NSFR derivative liabilitiesof which: All other liabilities and equity not included in theabove categories

13

-

-

-

-

-

13,199

6,930
6,930

-

985
-

985

13,199

-

-

985

985

14

Total ASF
Required Stable Funding (RSF) Item15(a)Total NSFR (HQLA)

5,302

15(b)

ALA

4,690

15(c)

RBNZ securities
Deposits held at other financial institutions for operational
purposes

16
17
18

19

20
21
22
23
24

496,090

601
-

-

-

-

-

Performing loans and securitiesof which: Performing loans to financial institutions secured by
Level 1 HQLA
of which: Performing loans to financial institutions secured by
non-Level 1 HQLA and unsecured performing loans tofinancial institutionsof which: Performing loans to non- financial corporate clients,
loans to retail and small business customers, and loans tosovereigns, central banks and public sector entities (PSEs)
of which: With a risk weight of less than or equal to 35%
under APS 112

10,808114,131

34,810429,507383,227-

31,974

37

-

3,216

622

27,235

4,524

8,391

15,361

8,470

49,90825,242

123,140

149,202

-

958

394

4,935

3,883

of which: Performing residential mortgages,of which: With a risk weight equal to 35% under APS
112
of which: Securities that are not in default and do not qualify
as HQLA, including exchange-traded equities

-

4,278

4,255

295,822

211,415

-

3,807

3,793

255,279

176,487
4,033

1,716

736

752

2,154

25

Assets with matching interdependent liabilities

-

-

-

-

-

26

Other assets:-

18,888892

3,697

32,18127

28

of which: Physical traded commodities, including goldof which: Assets posted as initial margin for derivative
contracts and contributions to default funds of central
counterparties (CCPs)

704

599

BLANK

1,342

-

-

1,141

BLANK

2,397

-

-

2,397

30

of which: NSFR derivative assetsof which: NSFR derivative liabilities before deduction ofvariation margin posted

BLANK

14,747

-

-

2,949

31

of which: All other assets not included in the above categories

85,398

402

892

3,697

25,095--

166,069

29

32

Off-balance sheet items

33

Total RSF

432,626

34

Net Stable Funding Ratio (%)

114.67%94

6,625

ANZ Basel III Pillar 3 Disclosure

September 2018

Glossary
ADI

Authorised Deposit-taking Institution.

Basel III Credit Valuation
adjustment (CVA) capital charge

CVA charge is an additional capital requirement under Basel III for bilateralderivative exposures. Derivatives not cleared through a central
exchange/counterparty are subject to this additional capital charge andalso receive normal CRWA treatment under Basel II principles.

Collective provision (CP)Collective provision is the provision for credit losses that are inherent in theportfolio but not able to be individually identified. A collective provision
may only be recognised when a loss event has already occurred. Losses
expected as a result of future events, no matter how likely, are notrecognised.

Credit exposure

The aggregate of all claims, commitments and contingent liabilities arisingfrom on- and off-balance sheet transactions (in the banking book andtrading book) with the counterparty or group of related counterparties.

Credit risk

The risk of financial loss resulting from a counterparty failing to fulfil its
obligations, or from a decrease in credit quality of a counterparty resulting
in a loss in value.

Credit Valuation Adjustment(CVA)

Over the life of a derivative instrument, ANZ uses a CVA model to adjust
fair value to take into account the impact of counterparty credit quality.
The methodology calculates the present value of expected losses over thelife of the financial instrument as a function of probability of default, loss
given default, expected credit risk exposure and an asset correlation factor.
Impaired derivatives are also subject to a CVA.

Days past due

The number of days a credit obligation is overdue, commencing on the datethat the arrears or excess occurs and accruing for each completed calendar
day thereafter.

Exposure at Default (EAD)

Exposure At Default is defined as the expected facility exposure at the dateof default.

Impaired assets (IA)Facilities are classified as impaired when there is doubt as to whether thecontractual amounts due, including interest and other payments, will be
met in a timely manner. Impaired assets include impaired facilities, andimpaired derivatives. Impaired derivatives have a credit valuation
adjustment (CVA), which is a market assessment of the credit risk of therelevant counterparties.

Impaired loans (IL)Impaired loans comprise of drawn facilities where the customer’s status isdefined as impaired.

Individual provision charge(IPC)

Individual provision charge is the amount of expected credit losses on
financial instruments assessed for impairment on an individual basis (asopposed to on a collective basis). It takes into account expected cash flows
over the lives of those financial instruments.

Individual provisions (IP)Individual provisions are assessed on a case-by-case basis for all
individually managed impaired assets taking into consideration factors suchas the realisable value of security (or other credit mitigants), the likely
return available upon liquidation or bankruptcy, legal uncertainties,
estimated costs involved in recovery, the market price of the exposure insecondary markets and the amount and timing of expected receipts andrecoveries.

Internationally Comparable
Basel III Capital Ratio

The Internationally Comparable Basel III CET1 ratios are ANZ’sinterpretation of the regulations documented in the Basel Committee
publications; “Basel 3: A global regulatory framework for more resilientbanks and banking systems” (June 2011) and “International Convergenceof Capital Measurement and Capital Standards” (June 2006). They also
include differences identified in APRA’s information paper entitledInternational Capital Comparison Study (13 July 2015).

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ANZ Basel III Pillar 3 Disclosure
Market risk

September 2018

The risk to ANZ’s earnings arising from changes in interest rates, foreignexchange rates, credit spreads, volatility, correlations or from fluctuations
in bond, commodity or equity prices. ANZ has grouped market risk into two
broad categories to facilitate the measurement, reporting and control ofmarket risk:
Traded market risk - the risk of loss from changes in the value of financial
instruments due to movements in price factors for both physical andderivative trading positions. Trading positions arise from transactions
where ANZ acts as principal with customers, financial exchanges or interbank counterparties.
Non-traded market risk (or balance sheet risk) - comprises interest raterisk in the banking book and the risk to the AUD denominated value of
ANZ’s capital and earnings due to foreign exchange rate movements.

Operational risk

The risk of loss resulting from inadequate or failed internal processes,
people and systems, or from external events including legal risk but
excluding reputation risk.

Past due facilities

Facilities where a contractual payment has not been met or the customer is
outside of contractual arrangements are deemed past due. Past due
facilities include those operating in excess of approved arrangements or
where scheduled repayments are outstanding but do not include impaired
assets.

Qualifying Central
Counterparties (QCCP)QCCP is a central counterparty which is an entity that interposes itself
between counterparties to derivative contracts. Trades with QCCP attract amore favorable risk weight calculation.

Recoveries

Payments received and taken to profit for the current period for theamounts written off in prior financial periods.

Restructured items

Restructured items comprise facilities in which the original contractual
terms have been modified for reasons related to the financial difficulties of
the customer. Restructuring may consist of reduction of interest, principal
or other payments legally due, or an extension in maturity materiallybeyond those typically offered to new facilities with similar risk.

Risk Weighted Assets (RWA)

Assets (both on and off-balance sheet) are risk weighted according to each
asset’s inherent potential for default and what the likely losses would be in
the case of default. In the case of non-asset backed risks (i.e. market andoperational risk), RWA is determined by multiplying the capitalrequirements for those risks by 12.5.

Securitisation risk

The risk of credit related losses greater than expected due to asecuritisation failing to operate as anticipated, or of the values and risks
accepted or transferred, not emerging as expected.

Write-Offs

Facilities are written off against the related provision for impairment when
they are assessed as partially or fully uncollectable, and after proceedsfrom the realisation of any collateral have been received. Where individual
provisions recognised in previous periods have subsequently decreased or
are no longer required, such impairment losses are reversed in the current
period income statement.

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September 2018

ANZ Basel III Pillar 3 Disclosure

June 2017