2016

BASEL IIIPILL AR 3
DISCLOSURE

AS AT 30 SEPTEMBER 2016
APS 330: PUBLIC DISCLOSURE

ANZ Basel III Pillar 3 disclosure

September 2016

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) A D I Prudential Standard (APS) 330: Public Disclosure.

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ANZ Basel III Pillar 3 disclosure

September 2016

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

Common disclosure template....................................................................... 10

Table 2Main features of capital instruments ............................................................. 21

Table 6

Capital adequacy ....................................................................................... 21

Chapter 6 – Credit risk ..................................................................................................... 26
Table 7

Credit risk – General disclosures .................................................................. 26

Table 8Credit 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 ...................................................... 74

Chapter 8 – Market risk .................................................................................................... 78
Table 13

Market risk – Standard approach ................................................................. 78

Table 14

Market risk – Internal models approach ........................................................ 79

Chapter 9 - Operational risk .............................................................................................. 83
Table 15

Operational risk ........................................................................................ 83

Chapter 10 – Equities ...................................................................................................... 88
Table 16

Equities – Disclosures for banking book positions ........................................... 88

Chapter 11 – Interest Rate Risk in the Banking Book............................................................ 90
Table 17

Interest Rate Risk in the Banking Book ......................................................... 90

Chapter 12 – Leverage and Liquidity Coverage Ratio ............................................................ 93
Glossary.......... ............................................................................................................... 96

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 2016

Chapter 1 – Highlights
StrongcapitalSeptember 2016

positionat• Capital ratios have declined in the half
to September 2016 due to the impact ofhigher capital requirements for Australianresidential mortgages. This was partly
offset by a reduction in credit risk
weighted assets in Institutional due tothe strategic repositioning of thatbusiness and capital benefits from
earnings generation (net of 2016 Interim
dividend payment).

* Internationally Comparable methodology aligns with APRA’s
information paper entitled International Capital Comparison Study (13July 2015). Basel III Internationally Comparable ratios do not include
anestimate
of
the
Basel
I
capitalfloor
requirement.

• ANZ’s capital ratios are in excess of
APRA’s Capital Conservation Buffer (CCB)
requirements. The CCB incorporates anadditional 1% Domestically Systemic
ImportantBank(D-SIB)
CET1
requirement.

EAD up $5.1bn to $894bn for 2H16
• Underlying movement mainly driven by
reduction in Corporate asset class frombook contraction within Institutional aspart of the strategic repositioning of thatbusiness, offset by growth in Residential
Mortgage asset class from Australia and
New Zealand region.

*Exposure at Default is post Credit Risk Mitigation (CRM) and doesnotincludeSecuritisation,
Equitiesor
Other
Assets.

Impaired Assets up 10% HoH• Increase in Impaired Assets HoH driven
by Australian Corporate & Commercial
business, Institutional, and New Zealand
Agriculture business.

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ANZ Basel III Pillar 3 disclosure

September 2016

Provision coverage remains sound• The total Provision ratio decreasedby 4bps HoH to 1.19% driven byhigher Credit Risk Weighted Assets(following changes in mortage risk
weightings) in conjunction with anincrease
inindividual
provisionbalance. Collective Provision ratio
decreased by 4bps HoH to 0.82%(0.88% prior to revised Risk Weight
treatment for Australia Mortgages)
and continues to provide adequate
coverage.

CreditRisk
Weighted
Assets(CRWA) increased by $17.7bn
HoH.
•
Increase
relatedto‘other’predominantly
drivenby$26bn
regulator
imposedincreasetoAustralian Mortgages Risk Weight.
• FX movements increased CRWA by$3.7bn, mainly driven by depreciationof AUD against US and NZ currencies.
• Portfolio contraction decreased
CRWAby$11.8bn,drivenbyreduction in Institutional Corporate
assets and partially offset by anincrease in Australia and New Zealand
Residential Mortgages.

*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 2016

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 three mutually 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 additional risks,
capital buffers and targets andrisk concentrations, etc.

Regular disclosure to themarket of qualitative andquantitative aspects of risk
management, capital adequacy
and underlying risk metrics

APS 330 requires the publication of various levels of information on a quarterly, semi-annual andannual 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 andmonitoring 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 andrules, rather than in accordance with accounting policies adopted in ANZ’s financial reports. As such,there are different areas of focus and measures in some 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 theestimated amount 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 is essentially calculated as the amount at risk (EAD) less expected net recoveries fromrealisation of collateral as well as any post default repayments of principal and interest.



Most credit risk disclosures split ANZ’s portfolio into regulatory asset classes, which span areas of
ANZ’s internal 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 CapitalStandards: A Revised Framework, 2004.

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ANZ Basel III Pillar 3 disclosure

September 2016

Chapter 3 – Risk appetite and governanceRisk types: ANZ is exposed to a broad range of inter-related business risks.
Credit risk is the risk of financial loss resulting from a counterparty falling to fulfill its
obligations, or from a decrease in credit quality of a counterparty resulting in a loss in value.

Market risk stems from ANZ’s trading and balance sheet activities and is the risk to ANZ’searnings arising from changes in interest rates, foreign exchange rates, credit spreads, volatility,
correlations or from fluctuations in bond, commodity or equity prices.



Securitisation risk is 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.

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people
and systems, or from external events. The definition includes legal risk, and the risk ofreputation loss, or damage arising from inadequate or failed internal processes, people andsystems, but excludes strategic risk.

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 joint ventures andassociates.

Capital adequacy risk is the risk of loss arising from ANZ failing to maintain the level of capitalrequired by prudential regulators and other key stakeholders (shareholders, debt investors,
depositors, rating agencies etc.) to support ANZ's consolidated operations and risk
appetite. Losses include those arising from diminished reputation, a reduction in
investor/counter-party confidence, regulatory non-compliance (e.g. fines and banking licence
restrictions) and an inability for ANZ to continue to do businessCompliance risk is defined as the probability and impact of an event that results in a failure toact in accordance with laws, regulations, industry standards and codes, internal policies andprocedures and principles of good governance as applicable to ANZ’s businesses.

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 that the Group has
insufficient capacity to fund increases in assets.



Reputation risk3 is defined as the risk of loss caused by adverse perceptions of ANZ held by the
public, the media, depositors, shareholders, investors, regulators, or rating agencies that directly
or indirectly impact earnings, capital adequacy or value. Reputation Risk can arise as a result ofpoor control processes or a result of unexpected risks crystallising (e.g. credit, market or
operational risks).

Insurance risk is defined as the risk of unexpected losses resulting from worse than expectedclaims experience (variation in timing and amount of insurance claims due to incidence or nonincidence of death, sickness, disability or general insurance claims) and includes inadequate or
inappropriate underwriting, claims management, reserving, insurance concentrations,reinsurance management, product design and pricing which will expose an insurer to financial
loss and the consequent inability to meet its liabilities.



Reinsurance risk - Reinsurance is an agreement in which one insurer (‘the reinsurer’)
indemnifies another insurer for all or part of the risk of a policy originally issued and assumed bythat other insurer. Reinsurance is a risk 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 their contractual obligations, i.e. to pay reinsurance claims when due. This risk ismeasured by assigning a counterparty credit rating or probability of default. Reinsurance
counterparty credit risk is mitigated by restricting counterparty exposures on the basis offinancial strength and concentration.

Strategic risks are risks that affect or are created by an organisation’s business strategy andstrategic objectives. Where the strategy leads to an increase in other Key Material Risks (e.g.
Credit Risk, Market Risk, Operational Risk) the risk management strategies associated with theserisks form the primary controls.

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 2016

Risk Appetite Framework
ANZ's Board is ultimately responsible for ANZ’s risk management framework, which includes theGroup 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 a risk appetite statement. ANZ’sGroup RAS conveys the following: The degree of risk (risk appetite) that ANZ is prepared to accept in pursuit of its s trategy,
objectives and business plans with consideration of its shareholders’ and customers’ bestinterests.
 For each material risk, ANZ has set the maximum level of risk (risk tolerance) that it is willingto operate within, expressed as a risk limit and based on its risk appetite, risk profile and capitalstrength. Risk tolerances translate risk 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 estimateof the impact in the 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; and The timing and process for review of the risk appetite and risk tolerances.
Risk management governance
ANZ’s Board has ultimate responsibility for establishing processes, and monitoring the effectivenessof the processes for risk management. There are three key committees focused on risks that impact
regulatory capital.

Risk
Committee

The Board is principally responsible for overseeing the establishment bymanagement 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 operateconsistently within its risk appetite and approves the risk appetite within
which management is expected to operate and including ANZ’s risk appetitestatement and risk management strategy; 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 the Board by providing an objective non-executive oversight of theimplementation by management of ANZ’s risk management framework and its
related operation and by enabling an institution-wide view of ANZ’s current
and future risk 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 andpolicies, controls and procedures; the effectiveness of ANZ's internal control
and risk management framework; the integrity of ANZ’s financial statements
and the independent audit thereof and compliance with related legal andregulatory requirements; due diligence procedures; prudential supervision
procedures; and other regulatory requirements to the extent relating tofinancial reporting and for reviewing reports from major subsidiary audit
committees. It is also responsible for the appointment and evaluation of theexternal auditor. The committee meets at least four times annually.

GovernanceCommittee

Amongst other matters, the Committee reviews the development of andapproves all other corporate governance policies and principles applicable to
ANZ and ensures an appropriate Board and Committee structure is in place. It
ensures there is a robust and effective process for evaluating the performanceof the Board, Board Committee and Non-Executive Directors. It also approves
corporate sustainability objectives and reviews their progress in achieving
them. The Committee meets at least twice annually.

The above Committees are exclusively comprised of non-executive directors. Members, including
the chairperson are appointed by the Board and serve at the discretion of the Board and for suchterm or terms as the Board determines. Internal Audit provides independent and objective assurance
around ANZ’s risk management and control effectiveness.

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ANZ Basel III Pillar 3 disclosure

September 2016

Executive Management Committees are responsible for co-ordination of risk matters for each of theareas of risk management. The Executive Committees most relevant to the risks described above andoverall capital management 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,liquidity and funding positions and capital management activities. The committee meets at least
four times annually.
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 formaking capital management and portfolio measurement related recommendations to the Risk
Committee and ANZ Board. The committee meets six times per year or on an ‘as required’ basis.
CMPC is a sub-committee of GALCO.
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.
Credit Ratings System Oversight Committee (CRSOC)
CRSOC oversees and controls the internal ratings system for credit risk in the wholesale and retailsectors, including credit model approvals and performance monitoring. CRSOC is assisted in its
rating systems governance role by the Wholesale Ratings Working Group and the Retail Ratings
Working Group. The committee meets at least four times per year or more frequently if required.
Operational Risk Executive Committee (OREC)OREC is responsible for oversight of Operational Risk and Compliance Risk expected andunexpected risk profile and the related Control Environment. The committee meets at least fourtimes annually.
Reputation Risk Committee (RRC)
RRC is responsible for assisting ANZ businesses, Risk, Corporate Affairs, and Legal in partnership toeffectively manage reputation risk in relation to environmental, social, business, and regulatory
issues across ANZ. The committee meets at least four times annually.
Stress Testing Oversight Committee (STOC)
STOC is responsible for the oversight and control of the Group’s stress testing framework, modelingand processes. The Committee meets at least 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 Management Committees are
documented in the committee charters.

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ANZ Bassel III Pillaar 3 disclo
osure

Septemmber 2016
6

Chapter 4 – Capital reporti ng and measuremement
g and measu
urement
Capiital reportingn Authorised Deposit-taking
Dg Institution (ADI) is adequuately capitaliised on both
To ensure that an
andalone and group basis, APRA adopts a tiered apprroach to the measurementmt of an ADI’s
a sta
capittal adequacy byb assessing thet
ADI’s fina ncial strength
h at three leve
els:


L
Level 1 - being the ADI i.e. Australia an
nd New Zealand Banking GroupG
Limited,, consolidated
d withA
APRA approved subsidiariess, to form the ADI’s Extende
ed Licensed Entity (ELE).

L
Level 2 - beiing the consolidated grou
up for financial reporting purposes ad
djusted toeexclude associiates activitiess and certain ssubsidiaries excluded under APS 001: De
efinitions thattuundertake the following bus
siness activitie
es:





Insurance businesses (including frieendly societiess and health funds).

s manager, responsible entiity, approved trustee, trusttee or similar role in relation to
Acting as
funds maanagement.



Non-finan
ncial (commercial) operatio
ons.



Securitisa
ation special purposepvehiccles to which assetsahave beeen transferre
ed in accordanncewith APR
RA's requireme
ents as set ou t in APS 120: Securitisationn.

L
Level 3 - the consolidatedcgroup for finan
ncial reporting purposes.

Refer to Note 33
3 of ANZ’s 20
016 Annual R
Report for a list of all ma
aterial subsid
diaries and a brief
desccription of theiir key activitiees.
ANZ measures capital adequacyd reports for prudential purposes on a LLevel 1 and Le
y monthly andevel 2basis
s. This Pillar 3 report is bas
sed on the Lev
vel 2 prudential structure.
APRA
A is extendin
ng its prudential supervisio
merate Groupps via the Level 3
on framework to Conglom
fram
mework which will regulate a bancassura
ance group su
uch as ANZ as a single eco
onomic entity
y withminimum capital requirementsrand additiona
al monitoring of risk exposu
ure levels.
In August 2016, APRAA
confirm
med the deferrral of capital requirements for Conglom
merate Groups until
9 at the earliest, to allow final form off the capital requirements arising fromm Financial Sy
ystem
2019
Inqu
uiry (FSI) reccommendation
ns and inter national initia
atives that areaalready i n progress tot bedetermined.
The non-capital components
cofo the Level 3 framework covering grou
up governancce, risk expos
sures,
intra
agroup transa
actions and other risk m
management and compliannce requirem
ments will becomens based upon theeffecctive on 1 Julyy 2017. ANZ is not expectting any mateerial impact onn its operation
curre
ent version off these standards.

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ANZ Basel III Pillar 3 disclosure

September 2016

Chapter 5 – Capital and Capital Adequacy
Table 1

Common 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 Common 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 common disclosure template in thischapter is the post January 2018 version as ANZ is fully applying the Basel III regulatory adjustments,
as implemented by APRA. The capital conservation and countercyclical buffers referred to in rows 64
to 67 commenced on 1 January 2016 and the phase out period for capital instruments began on 1
January 2013.
The information in the lines of the template have been mapped to ANZ’s Level 2 balance sheet, which
adjusts for non-consolidated subsidiaries as required under APS 001: Definitions. Where thisinformation cannot be mapped on a one to one basis, it is provided in an explanatory table. ANZ’smaterial non-consolidated subsidiaries are also listed in this chapter.
Restrictions on Transfers of Capital within ANZANZ operates branches and locally incorporated subsidiaries in many countries. These operations arecapitalised at an appropriate level to cover the risks in the business and to meet local prudential
requirements. This level of capitalisation may be enhanced to meet local taxation and operational
requirements. Any repatriation of capital from subsidiaries or branches is subject to meeting therequirements of the local prudential regulator and/or the local central bank. Apart from ANZ’soperations 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 andoperational risk. ANZ Bank New Zealand Limited maintains a buffer above the minimum capital baserequired by the RBNZ. This capital buffer has been calculated via the ICAAP undertaken for ANZ BankNew Zealand Limited, to ensure ANZ Bank New Zealand Limited is appropriately capitalised understressed economic scenarios.

10ANZ Basel III Pillar 3 disclosure

September 2016

Table 1 Common disclosure template$M

Reconciliation
Table
Reference

Common Equity Tier 1 Capital: instruments and reserves
1
Directly issued qualifying ordinary shares (and equivalent for mutually-owned entities) capital

28,965

Table A

2

Retained earnings

27,119

Table B

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 in group
CET1)

1,074

Table CSep 163
4
5
6

Common Equity Tier 1 capital before regulatory adjustments

Common Equity Tier 1 capital : regulatory adjustments
7
Prudential valuation adjustments

n/a50

Table D57,208-

8Goodwill (net of related tax liability)

3,912

Table E

9

4,244

Table F

16

Table J

11

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)
Cash-flow hedge reserve

12

Shortfall of provisions to expected losses

13

Securitisation gain on sale

14

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

4

15

Defined benefit superannuation fund net assets

88

16

Investments in own shares (if not already netted off paid-in capital on reported balance sheet)-

17

Reciprocal cross-holdings in common equity-

18

Investments in the 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)-

19

Significant investments in the ordinary shares of banking, financial and insurance entities that areoutside the scope of regulatory consolidation, net of eligible short positions (amount above 10%threshold)

1,951

10

20
21
22

700

Mortgage service rights (amount above 10% threshold)Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related
tax liability)
Amount exceeding the 15% thresholdof which: significant investments in the ordinary shares of financial entities

24

of which: mortgage servicing rights

2626aTable G

-

23
25

329

Table H

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

6,697

26c

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

(238)

26d

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

4,833

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

883

Table J

26f

1,148

Table K

30

Table L26h

of which: capitalised expenses
of which: investments in commercial (non-financial) entities that are deducted under APRA
prudential requirementsof which: covered bonds in excess of asset cover in pools

26iof which: undercapitalisation of a non-consolidated subsidiary

26b

26g

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 to coverdeductions

-

41
-

28

Total regulatory adjustments to CET1

17,941

29

Common Equity Tier 1 Capital (CET1)

39,267

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ANZ Basel III Pillar 3 disclosure

September 2016

Additional Tier 1 Capital: instruments
30 Directly issued qualifying Additional Tier 1 instruments
31
32

of which: classified as equity under applicable accounting standards

Reconciliation
Table
Reference

6,635

Table M

6,635

Table M

2,408

Table M

381

Table M

35

Directly issued capital instruments subject to phase out from Additional Tier 1
Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries
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

9,424

33
34

of which: classified as liabilities under applicable accounting standards

Sep 16$Mn/aAdditional Tier 1 Capital: regulatory adjustments
37 Investments in own Additional Tier 1 instruments

-

38

-

39
40

Reciprocal cross-holdings in Additional Tier 1 instruments
Investments in the 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 capital of banking, financial and insurance entities that are outside thescope of regulatory consolidation (net of eligible short positions)

41

405

National specific regulatory adjustments (sum of rows 41a - 41c)of which: holdings of capital instruments in group members by other group members on behalf of
41athird partiesof which: investments in the capital of financial institutions that are outside the scope of
41b
regulatory consolidations not reported in rows 39 and 40
41cof which: other national specific regulatory adjustments not reported in rows 41a and 41b

1

42Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions-

43

Total regulatory adjustments to Additional Tier 1 capital

44

Additional Tier 1 capital (AT1)

9,018

45

Tier 1 Capital (T1=CET1+AT1)

48,285

Table M

1

Table M

406

Tier 2 Capital: instruments and provisions
46 Directly issued qualifying Tier 2 instruments

6,162

47

3,326

49

Directly issued capital instruments subject to phase out from Tier 2Tier 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

51

Tier 2 Capital before regulatory adjustments

48

Table M

Table N

732
732

Table N

267

Table G

10,487

Tier 2 Capital: regulatory adjustments
52 Investments in own Tier 2 instruments

1053

Reciprocal cross-holdings in Tier 2 instruments
Investments in the Tier 2 capital of banking, financial and insurance entities that are outside the54 scope of regulatory consolidation, net of eligible short positions, where the ADI does not own morethan 10% of the issued share capital (amount above 10% threshold)
Significant investments in the Tier 2 capital of banking, financial and insurance entities that are
55
outside the scope of regulatory consolidation, net of eligible short positions
56 National specific regulatory adjustments (sums of rows 56a - 56c)of which: holdings of capital instruments in group members by other group members on behalf of
56athird partiesof which: investments in the capital of financial institutions that are outside the scope of
56b
regulatory consolidation not reported in rows 54 and 55
56c
of which: other national specific regulatory adjustments not reported in rows 56a and 56b

85

Table N

64
64
-

57

Total regulatory adjustments to Tier 2 capital

159

58

Tier 2 capital (T2)59

Total capital (TC=T1+T2)

58,61360

Total risk-weighted assets based on APRA standards

408,582

10,328

12

Table N-

Table NANZ Basel III Pillar 3 disclosure

September 2016

Sep 16$M
Capital ratios and buffers
61 Common Equity Tier 1 (as a percentage of risk-weighted assets)

9.6%

62

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

11.8%

63

Total capital (as a percentage of risk-weighted assets)
Buffer requirement (minimum CET1 requirement of 4.5% plus capital conservation buffer of 2.5%
plus any countercyclical buffer requirements expressed as a percentage of risk-weighted assets)of which: capital conservation buffer requirement

8.014%

64
65
66

of which: ADI-specific countercyclical buffer requirements

67

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

68

14.3%

3.5%4
0.014%
n/aCommon Equity Tier 1 available to meet buffers (as a percentage of risk-weighted assets)

5.1%

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

104

73

Significant investments in the ordinary shares of financial entities

74

Mortgage servicing rights (net of related tax liability)

n/a

75

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

883

4,792

Applicable caps on the inclusion of provisions in Tier 2
Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach76(prior to application of cap)
77 Cap on inclusion of provisions in Tier 2 under standardised approach
Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based78
approach (prior to application of cap)
79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach

1,899

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

n/aTable I
Table J

267
445
-

81

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

82

3,589

84

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

85

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

1,474

83

Reconciliation
Table
Reference

n/a

4,122

Counter Cyclical Capital Buffer
Geographic breakdown of Private Sector Credit
ExposuresHong Kong$M

RWA for all private sector credit exposures

Sweden$M

Norway
$M

Other
$M

Total
$M
323,864

5,747

423

276

317,418

Jurisdictional buffer set by national authorities

0.625%

1.500%

1.500%

0.000%

n/aCountercyclical buffer requirement

0.011%

0.002%

0.001%

0.000%

0.014%

From 1 January 2016, ADIs are required to hold capital buffers determined by the national authority ofjurisdictions where they have private sector credit exposures based on credit conditions in thosemarkets. The countercyclical capital buffer is designed to ensure that ADIs build up capital buffers
when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk.
This additional buffer can then be released during periods of stress, to reduce the risk of the supply ofcredit being impacted by regulatory capital requirements. The countercyclical capital buffer is to be
applied by extending the range of the capital conservation buffer, which also came into effect from 1
January 2016.
The ADI specific buffer is the weighted average of the jurisdictional buffers advised by the relevant
national authorities.

4

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

13

ANZ Basel III Pillar 3 disclosure

September 2016

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, treatingthem as external to the Level 2 group.
Balance
Sheet as inpublishedfinancialstatements($m)

Adjustments($m)

Balancesheet underscope ofregulatory
consolidation
($m)

Cash

48,675(5)

48,670

Settlement balances owed to ANZ

21,951-

21,951

Collateral Paid

12,723-

12,723

Trading securities

47,188-47,188Assetsof which: Financial Institutions capital instrumentsof which: Financial Institutions equity investmentsof which: Investments in the capital of financial institutions

Template andReconciliation
Table
Reference

10-

Table N

64

Table N

Derivative financial instruments

87,496(3)

87,493Available-for-sale assets

63,113(1,363)61,750of which: Financial institutions equity instruments

828

Table Iof which: Other entities equity investments

21

Table LNet loans and advances

575,852(129)

575,723of which: deferred fee income(238)

Row 26cof which: collective provision(2,876)

Table Gof which: individual provisions(1,307)

Table Gof which: capitalised brokerage

1,063

Table Kof which: Financial Institutions equity exposures-

Table Iof which: Other equity exposures-

Table Lof which: CET1 margin lending adjustment

41

Row 26jof which: AT1 margin lending adjustment

1

Table M

Regulatory deposits
Due from controlled entitiesof which: Significant investments in the Tier 2 capital ofbanking, financial and insurance entities that are outside
the scope of regulatory consolidation
Shares in controlled entitiesof which: Investment in deconsolidated financial
subsidiaries
of which: AT1 significant investment in banking, financial
and insurance entities that are outside the scope of
regulatory consolidation
Investments in associates

2,296

-

2,296

-

91

91
85

-

4,272

4,775

(3)

of which: Financial Institutionsof which: Other Entities

Table N

4,775
4,370

Table I

405

Table M

4,269
4,260

Table I

9126

Table L
Table J

Current tax assets

126-

Deferred tax assetsof which: Deferred tax assets that rely on future
profitability
Goodwill and other intangible assets

623

147

770
16

7,672

(1,917)

5,755

Table Jof which: Goodwill

3,551

of which: Software

2,202

Table F

2

Table Fof which: other intangible assets
Investments backing policy liabilities

35,656(35,656)-

Premises and equipment

2,205

(2)

2,203

Other assets

5,021(1,367)

3,654

914,869(35,432)

879,437of which: Defined benefit superannuation fund net assets

110

Total Assets

14

Table EANZ Basel III Pillar 3 disclosure

September 2016

Balance
Sheet as inpublishedfinancialstatements($m)

Adjustments($m)

Balancesheet underscope ofregulatory
consolidation($m)

10,625(1)

10,624

6,386

-

6,386

Deposits and other borrowings

588,195

5,361

593,556

Derivative financial instruments

88,725(5)88,720

-

796

796

Current tax liabilities

188

(195)

(7)

Deferred tax liabilities

227

(262)

(35)

Table J

63

Table F

Liabilities
Settlement balances owed by ANZ
Collateral Received

Due to controlled entitiesof which: related to intangible assetsof which: related to capitalised expenses

422

of which: related to defined benefit super assets
Policy liabilities

36,145(36,145)-

External unit holder liabilities (life insurance funds)

3,333(3,333)-

Provisions

1,209

(47)

1,162

Payables and other liabilities

8,865(1,252)

7,613

Debt Issuances

91,08010

91,090Subordinated Debt

21,96417

21,981

Template andReconciliation
Table
Reference

Table K
Table Hof which: Directly issued qualifying Additional Tier 1
instruments

6,612

Table Mof which: Directly issued capital instruments subject tophase out from Additional Tier 1

2,408

Table Mof which: Additional Tier 1 Instruments issued bysubsidiaries held by third partiesof which: Directly issued capital instruments subject tophase out from Tier 2

473

Table M

5,530

Table Nof which: Directly issued qualifying Tier 2 instruments

6,162

Table Nof which: instruments issued by subsidiaries subject tophase out

796

Table N

Total Liabilities
Net Assets

Shareholders’ equity
Ordinary Share Capital

856,942(35,056)

821,886

57,927(376)

57,551

Balance
Sheet as inpublishedfinancialstatements($m)

Adjustments

Balancesheet underscope ofregulatory
consolidation($m)

28,765395($m)

of which: Share reserve
Reserves

29,160195

Template andReconciliation
Table
Reference

Table A
Table A & C

1,078

(129)

949
329

Table C

Retained earnings

27,975(638)

27,337

Table B

Share capital and reserves attributable to shareholdersof the Company

57,818(372)

57,446of which: Cash flow hedging reserves

Non-controlling interest
Total shareholders’ equity

15

109

(4)

105

57,927(376)

57,551

Row 11

Table DANZ Basel III Pillar 3 disclosure

September 2016

The following reconciliation tables provide additional information on the difference between Table 1
Common Disclosure template and the Level 2 balance sheet.

Sep 16$M

Table A
Issued capitalless

29,160Reclassification to reserves
Regulatory Directly Issued qualifying ordinary shares

Table B
less

(195)

Table C

28,965

Row 1

Sep 16$M

Table 1
Reference

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

27,337(218)

Table I

Retained earnings

27,119Row 2

Sep 16$M

Table 1
Reference

Table C
Reserves

949

add

Reclassification from Issued Capital

195

less

Non qualifying reserves(70)

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

Table D
less

Row 3

Sep 16$M

Table 1
Reference

105

Surplus capital attributable to minority shareholders(55)

Table E
Goodwill

Table A

1,074

Non-controlling interests
Ordinary share capital issued by subsidiaries and held by third parties

add

Table 1
Reference

50

Row 5

Sep 16$M

Table 1
Reference

3,551

Goodwill component of investments in financial associates
Goodwill (net of related tax liability)

Table F
Software361

Table I

3,912

Row 8

Sep 16$M

Table 1
Reference

2,202

Other intangible assets

2

less

Associated deferred tax liabilities

(63)

add

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

2,103

Table I

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

4,244

Row 9

16

ANZ Basel III Pillar 3 disclosure

September 2016

Sep 16$M

Table G

Table 1
Reference

Qualifying collective provisionCollective provisionless

Non-qualifying collective provision

lessStandardised collective provisionless

Non-defaulted expected loss

(2,876)350
267

Row 502,959

Non-Defaulted: Expected Loss - Eligible Provision Shortfall

700

Qualifying individual provision
Individual provision(1,307)add

Additional individual provisions for partial write offs

lessStandardised individual provisionaddCollective provision on advanced defaulted

(304)

less

Defaulted expected loss

1,909

195

Defaulted: Expected Loss - Eligible Provision Shortfall
Gross deduction

Table H
less

add

Investment in financial associates

add

Investment in financial institutions Available for Sale

less

Goodwill component of investments in financial associates

less

Amount below 10% threshold of CET 1
Significant investments in the ordinary shares of banking, financial and insurance entities
that are outside the scope of regulatory consolidation, net of eligible short positions(amount above 10% threshold)Amount below the 10% threshold of CET 1
Investments in the 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 – trading security exposures
Investments in the 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 - Available for Sale exposures

Sep 16$M

Table 1
Reference(2,321)

Tables B & F

795
(361)

Table E

(4,792)

Row 73

1,951

Row 19

4,792

Row 73

-

33

-

8

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

4,833

Deduction for equity holdings in financial institutions - APRA regulations

6,784

Sep 16$M

Table J
Deferred tax assets

add

Row 154,260

Investments in the 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 - Loan exposures
Investments in the 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 - Undrawn

add

88

4,370

Regulatory reclassification to Retained Earnings and Other Intangible Assets

lessTable 1
Reference

110

Investment in deconsolidated financial subsidiaries

add

Sep 16
$M
(22)

less

add

Row 12

Associated deferred tax liabilities

Table I

add

700

Defined benefit superannuation fund net assets
Defined benefit superannuation fund net assets

add

(509)

Row 26dTable 1
Reference

770

Deferred tax liabilities

35

Deferred tax asset less deferred tax liabilities

805

Deferred tax assets that rely on future profitability
Deferred tax liabilities on intangible assets, capitalised expenses and defined benefit superannuation
assets
Impact of calculating the deduction on a jurisdictional basis(16)

Deferred tax assets not reported in rows 10, 21 and 25 of the Common Disclosure
Template17

Row 1089
5883

Row 26eANZ Basel III Pillar 3 disclosure

September 2016

Sep 16$M

Table K
Capitalised brokerage costs
less

1,063

Capitalised debt and capital issuance expenses

89

Associated deferred tax liabilities(4)

Capitalised expenses

Table L

Table 1
Reference

9-

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

lessFair value adjustment30

Row 26g

Sep 16$M

Table 1
Reference

6,612
51
(28)

Directly issued qualifying Additional Tier 1 Capital Instruments classified as liabilities

6,635

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

2,408

add

Issue costs

lessTransitional adjustment-

Additional Tier 1 instruments issued by subsidiaries held by third parties
Issue costs

2,408

Row 33473
5Surplus capital attributable to third party holders(97)

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

381

Row34

Additional Tier 1 capital before regulatory adjustments

9,424

Row 36Significant investments in the capital of banking, financial and insurance entities that are outside thescope of regulatory consolidation(405)

Row 40

Other national specific regulatory adjustments not reported
Additional Tier 1 capital

Table N
Directly issued capital instruments subject to phase out from Tier 2(1)

Row 41

9,018

Row 44

Sep 16$M

Table 1
Reference

5,530

add

Issue costs

lessAmortisation of Tier 2 Capital Instruments subject to Phase out

lessFair value adjustment

(329)

less

Transition adjustment(1,474)less

Row 30-

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

less

Sep 16$M
21

Equity exposures to non financial entities

add

Row 26f

Investments in non financial associates
Non financial equity exposures (loans)

add

1,148

Investments in non-financial Available for Sale equities

add

Table 1
Reference

41
(442)

Directly issued capital instruments subject to phase out from Tier 2

3,326

Instruments issued by subsidiaries subject to phase out from Tier 2796

Surplus capital attributable to third party holders(64)

Instruments issued by subsidiaries subject to phase out from Tier 2
add

Directly issued qualifying Tier 2 instruments

add

Provisions
Tier 2 capital before regulatory adjustments

732

Row 47

Row 496,162

Row 46

267

Table G

10,487

Row 51

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(85)

Row 55less

Investments in the capital of financial institutions that are outside the scope of regulatory
consolidation not reported in rows 54 and 55(64)

Row 56b

10,328

Row 58Tier 2 capital

18

ANZ Basel III Pillar 3 disclosure

September 2016

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

ACN 003 042 082 Limited

Investment

ACN 008 647 185 Pty Ltd

Corporate

Total Assets($M)

Total Liabilities
($M)

134

-

-

-

ANZ ILP Pty Ltd

Incorporated Legal Practice1

ANZ Insurance Broker Co Ltd

Insurance Broker

17-

ANZ Investment Services (New Zealand) Limited

Funds Manager

41

15

2,398

1,937

ANZ Lenders Mortgage Insurance Pty Limited

Mortgage insurance

ANZ Life Assurance Company Pty Ltd

Insurance

ANZ New Zealand Investments Limited

Funds Manager

ANZ New Zealand Investments Nominees Limited
ANZ Private Equity Management Limited

-

-

110

25

Trustee/Nominee--

Investment--

ANZ Self Managed Super Ltd

Investment--

ANZ Specialist Asset Management Limited

Trustee/Nominee

14

7

ANZ Wealth Alternative Investments Management Pty Ltd

Investment

1,475

1,474

ANZ Wealth Australia Limited

Holding Company / Corporate

2,763

-

ANZ Wealth New Zealand Limited

Holding Company

490-

ANZcover Insurance Private Ltd

Captive-Insurance

163

109

AUT Administration Pty Ltd

Corporate

1-

Capricorn Financial Advisers Pty Ltd

Advice-2

Elders Financial Planning Pty Ltd

Advice91Financial Investment Network Group Pty Ltd

Advice1051

Financial Lifestyle Solutions Pty Limited

Advice42Financial 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-3

Financial Services Partners Pty Ltd

Advice3

FSP Funds Management Limited

Advice1-

FSP Group Pty Limited

Holding Company / Advice

17

1

FSP Portfolio Administration Limited

Advice1-

FSP Super Pty Limited

Advice6-Integrated Networks Pty Limited

Holding Company / Advice

44-

Mercantile Mutual Financial Services Pty Ltd

Investment

Millennium 3 Financial Services Group Pty Ltd--

Advice42

17Millennium 3 Financial Services Pty Ltd

Advice168Millennium 3 Mortgage Platform Services Pty Limited

Advice--Millennium 3 Professional Services Pty Ltd

Advice1-

Nova Pacific Holdings Pty Limited

Investment--

OASIS Asset Management Limited

Investment

11

4

OASIS Fund Management Limited

Superannuation

6

4

OneAnswer Nominees Limited

Trustee/Nominee--

OnePath Administration Pty Ltd

Corporate

76

34

OnePath Custodians Pty Ltd

Superannuation

49

4

OnePath Financial Planning Pty Ltd

Advice1-

OnePath Funds Management Limited (RE)Investment

66

20

OnePath General Insurance Pty Ltd

Insurance

166

103

OnePath Investment Holdings Pty Ltd

Investment

7-

OnePath Life (NZ) Limited

Insurance

883

315

OnePath Life Australia Holdings Pty Ltd

Holding Company / Corporate

3,000

-

OnePath Life Limited

Insurance

39,95437,363

Polaris Financial Solutions Pty Limited

Advice--19

ANZ Basel III Pillar 3 disclosure

September 2016
Activity

EntityTotal Assets($M)

Total Liabilities($M)

RI Advice Group Pty Ltd

Advice13

2

RI Central Coast Pty Ltd

Advice1-

RI Gold Coast Pty Ltd

Advice1-

RI Maroochydore Pty Ltd

Advice--RI Newcastle Pty Ltd

Advice2-

RI Parramatta Pty Ltd

Advice1-

RI Rockhampton & Gladstone Pty Ltd

Advice2-

RI Townsville Pty Ltd

Advice--Rieas Pty Ltd

Advice--

Shout for Good Pty Ltd

Corporate--

SIL Nominees Pty Limited

Investment--

Tandem Financial Advice Pty Limited

Advice--Union Investment Company Pty Limited

Advice--20

ANZ Basel III Pillar 3 disclosure
Table 2September 2016

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 ofdepositors, creditors and shareholders. This involves the on-going review and Board approval of thelevel 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 Licencein the United States of America;
Capital levels are aligned with the risks in the business and to meet strategic and businessdevelopment plans through ensuring that available capital exceeds the level of Economic Capital.
Economic Capital is an internal estimate of capital levels required to support risk and unexpected
losses above a desired target solvency level; andAn appropriate balance between maximising shareholder returns and prudent capitalmanagement principles.

ANZ achieves these objectives through an Internal Capital Adequacy Assessment Process (ICAAP)
whereby ANZ conducts detailed strategic and capital planning over a medium term time horizon.
Annually, ANZ conducts a detailed strategic planning process over a three year time horizon, theoutcomes of which are embodied in the Strategic Plan. This process involves forecasting key economic
variables which Divisions use to determine key financial data for their existing business. New strategic
initiatives to be undertaken over the planning period and their financial impact are then determined.
These processes are used for the following:

Reviewing capital ratios, targets, and levels of different classes of capital against ANZ’s risk profileand risk appetite outlined in the Strategic Plan. ANZ’s capital targets reflect the key policy
objectives above, and the desire to ensure that under specific stressed economic scenarios capitallevels have sufficient capital 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 thelevel of additional capital (i.e. the ‘stress capital buffer’) needed to absorb losses that may be
experienced during an economic downturn; andStress testing is integral to strengthening the predictive approach to risk management and is a key
component in managing risks, asset writing strategies and business strategies. It creates greater
understanding of the impacts on financial performance through modeling relationships andsensitivities between geographic, industry and Divisional exposures under a range of macroeconomic 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 scenarios and stresstests.

Results are subsequently used to:
Recalibrate ANZ’s management targets for minimum and operating ranges for its respectiveclasses of capital such that ANZ will have sufficient capital to remain above both Economic Capitaland regulatory requirements; and
Identify the level of organic capital generation and hence determine current and future capitalissuance requirements for Level 1 and Level 2.
From these processes, a capital plan is developed and approved by the Board which identifies thecapital issuance requirements, 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 Boardand 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.

21

ANZ Basel III Pillar 3 disclosure

September 2016

Regulatory environment
ANZ’s regulatory capital calculation is governed by APRA’s Prudential Standards which adopt a riskbased capital assessment framework based on the Basel III capital measurement standards. This riskbased approach requires eligible capital to be divided by total risk weighted assets (RWAs), with theresultant ratio being used as a measure of an Authorised Deposit-taking Institution’s (ADIs) capital
adequacy. APRA determines PCRs for Common Equity Tier 1 (CET1), Tier 1 and Total Capital, withcapital 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 capital elements, 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:






Reserves excluding the hedging reserve and reserves of insurance and funds management
subsidiaries excluded for Level 2 purposes;
Retained earnings excluding retained earnings of insurance and funds management subsidiaries
excluded for Level 2 purposes, 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; andCurrent year net of tax earnings less profits of insurance and funds management subsidiaries
excluded for Level 2 purposes.

Additional Tier 1 capital instruments are high quality components of capital that provide a permanentand unrestricted commitment of funds, are available to absorb losses, are subordinated to the claimsof 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), andthe 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 Bank of 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 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 (asapplicable) 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 2016 Full Year Results
Announcement Group Results section, page 51 and 52, available on ANZ’s website:shareholder.anz.com/pages/results-announcement.

22

ANZ Basel III Pillar 3 disclosure

Table 6

September 2016

Capital adequacy - Capital Ratio and Risk Weighted Assets

The following table provides the composition of capital used for regulatory purposes and capital
adequacy ratios.
Sep 16$M

Mar 16$M

Sep 15$M

Corporate

130,799

139,643

150,165

Sovereign

6,634

6,185

6,664

Bank

14,884

15,061

17,445Residential Mortgage

84,27557,21854,996

Qualifying Revolving Retail

7,334

7,744

7,546

Other Retail31,36030,681

32,990275,286

256,532

269,806

36,10035,06632,240

Corporate

20,45922,14925,341

Residential Mortgage

2,493

2,616

2,882

Other Retail

3,277

3,550

3,625

26,22928,31531,848Credit Valuation Adjustment and Qualifying Central Counterparties

9,371

9,147

11,046

Credit risk weighted assets relating to securitisation exposures

1,203

1,194

1,156

Other assets

3,844

4,054

3,655

352,033

334,308

349,751

Risk weighted assets (RWA)
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 approach5
Subject to Standardised approach

Credit risk weighted assets subject to Standardised approach

Total credit risk weighted assets
Market risk weighted assets

6,188

6,059

6,868

Operational risk weighted assets

38,661

37,68837,885Interest rate risk in the banking book (IRRBB) risk weighted assets
Total risk weighted assets

11,70010,2807,433

408,582

388,335

401,937

Capital ratios (%)6
8.5%9.6% 8.2%9.8%n/a 9.6%

Level 2 Common Equity Tier 1 capital ratio
Level 2 Tier 1 capital ratio

11.8%

11.6%

11.3%

Level 2 Total capital ratio

14.3%

13.7%

13.3%

9.7%

10.2%

9.6%

Level 1: Extended licensed entity Tier 1 capital ratio

12.1%

12.2%

11.6%

Level 1: Extended licensed entity Total capital ratio

14.7%

14.4%

13.7%

Level 1: Extended licensed Common Equity Tier 1 capital ratio

Other significant Authorised Deposit-taking Institution (ADI) or overseas bank subsidiary:
ANZ Bank New Zealand Limited –Common Equity Tier 1 capital ratio

10.0%

10.0%

10.5%

ANZ Bank New Zealand Limited - Tier 1 capital ratio

13.2%

12.2%

12.7%

ANZ Bank New Zealand Limited - Total capital ratio

13.7%

12.8%

13.6%

5
Specialised Lending exposures subject to slotting approach are those where the main servicing and repayment isfrom the asset being financed, and includes specified commercial property development/investment lending, project
finance and object finance.
6
ANZ Bank New Zealand Limited’s capital ratios have been calculated in accordance with Reserve Bank of New
Zealand prudential standards

23

ANZ Basel III Pillar 3 disclosure

September 2016

Credit Risk Weighted Assets (CRWA)
Total CRWA increased $2.3billion (1%) from September 2015 to $352 billion at September 2016,
including a $4.3 billion decrease due to foreign currency movements. The increase in IRB Residential
Mortgage asset class includes an upward impact for the APRA determined correlation adjustment.
Underlying portfolio growth in Australia and New Zealand contributed further to the increase in IRB
Residential Mortgage and Specialised Lending asset classes. These increases were partially offset by
portfolio contraction in our Institutional business which contributed to the decrease mainly seen in
AIRB Corporate, Standardised Corporate and Bank asset classes.
Market Risk, Operational Risk and IRRBB RWA
Traded Market Risk RWA decreased AUD 0.7 billion (9.9%) over the year due to improved portfolio
diversification and reduced specific risk exposure.
Increase in IRRBB RWA due to an increase in repricing and yield curve risk combined with a decreasein embedded gains.
The Operational Risk RWA increased by 2% since September 2015 with growth in Australia, New
Zealand, and Asia Retail offset by a reduction in Institutional in line with portfolio contraction.
International capital ratio comparisonsInternationally comparable details
One of the main purposes of the Pillar 3 disclosures is to facilitate comparisons of banks, both within
and across jurisdictions. International investors should be aware that there are a number of featuresof APRA’s implementation of Basel III that have the effect of making key capital adequacy ratios
appear lower than would be the case if they were calculated under the rules in other jurisdictions.
The following table details the material differences between APRA’s Basel III prudential requirements
and those of the Basel Committee on Banking Supervision (BCBS) as at 20 September 2015 on an
Internationally Comparable basis. The Internationally Comparable capital ratios methodology isaligned with APRA’s information paper entitled International Capital Comparison Study (13 July 2015).
The Basel III Internationally Comparable ratios do not include an estimate of the Basel I capital floor.
ANZ’s CET1, Tier 1 and Total Capital ratios as at 30 September 2016 on an Internationally
Comparable basis were 14.5%, 17.4% and 20.7% respectively.
CET1

Tier 1 Capital

Total
Capital

9.6%

11.8%

14.3%

Investments in FI's and deconsolidated entities

0.9%

0.9%

0.9%

Deferred Tax Assets

0.1%

0.1%

0.1%

Net Capitalised Expenses

0.2%

0.2%

0.2%

Mortgages – 20% LGD floor & 15% correlation

1.1%

1.3%

1.6%

IRRBB RWA (APRA Pillar 1 approach)

0.3%

0.4%

0.4%

Specialised Lending (Advanced treatment)

0.6%

0.7%

0.8%

Unsecured Corporate Lending LGD

1.1%

1.3%

1.6%

Undrawn Corporate EAD

0.4%

0.5%

0.5%

Other RWA items

0.2%

0.2%

0.3%

Total Adjustments

4.9%

5.6%

6.4%

14.5%

17.4%

20.7%

Regulatory Capital Frameworks Comparison
Basel III - APRA
Differences relating to capital

Differences related to risk weighted assets

Basel III - Internationally Comparable

24

ANZ Basel III Pillar 3 disclosure

September 2016

The table below provides an explanation of the material differences between APRA’s Basel III capitalrules and the International Comparable basis with the impact of converting APRA Basel III capitalratios to Internationally Comparable Basel III capital ratios.
Movement inratio, APRA to
Internationally
Comparable

Item

Description

Significant investments in
Financial Institutions(FI’s) and otherdeconsolidated
subsidiaries

APRA requires full deduction against CET1 forinvestment in insurance and banking associates.
On an Internationally Comparable basis, theseinvestments are subject to concessional threshold
before a deduction is required.

Increase ratio

Deferred Tax Assets

APRA requires all deferred tax assets, including
those relating to temporary differences, to be
deducted 100% from CET1. On an Internationally
Comparable basis, deferred tax assets relating totemporary differences are first subject toconcessional threshold before any deduction isrequired.

Increase ratio

Interest rate risk in thebanking book (IRRBB)APRA requires the inclusion of IRRBB within RWA
Pillar 1 requirement. This is not required underthe Basel III framework.

Increase ratio

Mortgages – 20% Loss
Given Default (LGD) floor
and 15% Correlation
factorAPRA imposes a floor of 20% on the downturn
Loss Given Default (LGD) used in advanced credit
models for determining credit RWA’s forresidential mortgages versus Basel framework of
10%. Additionally, from July 16, APRA also
requires a higher correlation factor above theBasel framework 15% to raise average risk
weighting of Australian residential mortgages toat least 25%.

Increase ratio

Specialised Lending

APRA requires the supervisory slotting approach
be used in determining credit RWA for specialised
lending
exposures.
The
Internationally
Comparable basis allows for the advanced internalratings based approach to be used instead whencalculating RWA for these exposures.

Increase ratio

Unsecured Corporate
Lending LGD

Adjustment to align ANZ’s unsecured corporate
lending LGD to 45% to be consistent with banks
in other jurisdictions. The 45% LGD rate is also
used in the Foundation Internal Ratings-based
approach (FIRB).

Increase ratio

Undrawn Corporate
Lending Exposure at
Default (EAD)

To adjust ANZ’s credit conversion factors (CCF)
for undrawn corporate loan commitments to 75%(also used in FIRB approach) to align with banks
in other jurisdictions.

Increase ratio

25

ANZ Basel III Pillar 3 disclosure

September 2016

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, orfrom a decrease in credit 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-based approach tocredit risk, under APS 113. 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 offbalance 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 to credit risk:PD is an estimate of the level of the risk of borrower default

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 aconsequence of obligor default.

There are, however, several small portfolios (mainly retail and local corporates in Asia Pacific)
where ANZ applies the Standardised 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 credit risk and support sound growth forappropriate returns. The framework is top down, being defined by credit principles and policies.
Credit policies, requirements and procedures cover all aspects of the credit life cycle such astransaction 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 monitoring processes. These, together withportfolio selection, define and guide the credit process, organisation and staff.
Organisation
As described in Chapter 3, The Credit and Market Risk Committee (CMRC) is a senior executive levelcommittee responsible for the oversight and control of credit, market, insurance and material financial
risks across the ANZ Group. The Credit Rating System Oversight Committee (CRSOC) supports theCMRC, by providing oversight and control of the internal ratings system for 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 andcustomer 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 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 turndelegates authority to the CRO. The CRO in turn delegates some of his credit discretion toindividuals as part of a ‘cascade’ of authority from senior to the most junior credit officers. Within
ANZ, credit approval for material judgmental 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 automated assessment of credit applications using a combination of scoring (application andbehavioural), policy rules and external credit reporting information. Where an application does notmeet the automated assessment criteria it will be referred out for manual assessment, with assessors
considering the decision tool recommendation.

26

ANZ Basel III Pillar 3 disclosure

September 2016

Portfolio direction and performance
The credit risk management framework contains several important portfolio direction and performancetools which enable Risk to play a fundamental role in monitoring the direction and performance of theportfolio. These include:Group and divisional level risk appetite strategies, business writing strategies & 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.

Exposure concentration limits, covering single customers, industries and cross border risk, toensure a diversified portfolio.

ANZ uses portfolio monitoring and analysis tools, technologies and techniques to assist with portfolio
risk assessment and 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
RWA and regulatory expected loss.

Assessing the impact of emerging issues, and conducting ad hoc investigations and analysis.

Validating rating/scoring tools and credit estimates.



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

Reporting – overview and definitions
Credit risk management information systems, reporting and analysis are managed centrally and at thedivisional and business 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 theBoard.
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. Within the retailsegments, monthly reporting packs are prepared that focus on such aspects as scoring anddelinquency/slippage monitoring.
Exposure at Default
Exposure at Default is defined as the expected facility exposure at the date of default. Unlessotherwise stated, throughout this disclosure 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 a material 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 a material credit obligation which is not well secured is 90 days or more past due. It includes
all problem assets, off-balance sheet exposures and assets brought to ANZ’s balance sheet through theenforcement of security.
Restructured Items
A facility in which the original contractual terms have been modified to provide concessions of interest,principal, or other payments due, or for an extension in maturity for a non-commercial period forreasons related to the financial difficulties of the entity.

27

ANZ Basel III Pillar 3 disclosure

September 2016

Collective Provisions
As well as holding individual provisions for credit loss, ANZ also holds a collective provision to covercredit losses which have been incurred but have not yet been specifically identified.
Calculation of the collective provision involves placing exposures in pools of similar assets with similarrisk characteristics. The required collective provision is estimated on the basis of historical loss
experience for assets with credit risk characteristics similar to those in the collective pool and includes
an allowance for inherent risk associated with 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 of large concentrated losses
within the portfolio.
The methodology underpinning calculation of collective provision from historical experience ispredominantly based around the product of an exposure’s probability of default (PD), loss given default(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 afull 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 therating/scoring models and tools to satisfy the “in use” test7.
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), thelikely return available upon liquidation or bankruptcy, legal uncertainties, estimated costs involved inrecovery, the market price of the exposure in secondary 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 are reversed 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 toactions 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 andcollective 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 tothe classification of collectively assessed provisions on defaulted accounts. The disclosures in thisdocument are based on individual provisions and collective provisions, for ease of comparison withother published results.

7

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

28

ANZ Basel III Pillar 3 disclosure

September 2016

In order to provide better alignment to the prudential reporting of other IRB accredited ADIs, ANZ haschanged the reporting of exposure at default (EAD) from a pre credit risk mitigation basis to post
credit risk mitigation basis.
Exposure at Default in Table 7 represents credit exposure net of offsets for credit risk mitigation suchas guarantees, credit derivatives, netting and financial collateral. It includes Advanced IRB,
Specialised Lending and Standardised exposures, however does not include Securitisations, Equities or
Other Assets exposures.
The March 2016 and September 2015 EAD values have been restated to provide comparative post
credit risk mitigation basis EAD figures.
Table 7(b) part (i): Period end and average Exposure at Default 8

Sep 16

Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Defau
for half year
$M

Corporate

130,799229,317

235,169

466

468

Sovereign

6,634

120,933

119,576

2

2

Bank

14,884

48,87549,001--

Residential Mortgage

84,275348,394

342,854

33

17

Qualifying Revolving Retail

7,334

22,39522,406

104

141

Other Retail31,36042,291

41,617251275

275,286

812,205

810,623856

903

36,10040,45839,933(1)

8

Corporate

20,45921,254

21,875

107

61

Residential Mortgage

2,493

6,851

7,017

2

3

Other Retail

3,277

3,279

3,416

83

91

26,22931,38432,308

192

155

9,371

10,448

9,071

-

-

346,986

894,495

891,935

1,047

1,066

Advanced IRB approach

Total Advanced IRB approach
Specialised Lending

Individual
provision
charge forhalf year$M

Write-offs forhalf year$M

Standardised approach

Total Standardised approach
Credit Valuation Adjustment andQualifying Central Counterparties
Total

8

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

29

ANZ Basel III Pillar 3 disclosure

September 2016

Mar 16

Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Defau
for half year
$M

Corporate

139,643

241,020

248,323

325

139

Sovereign

6,185

118,219

118,710

2

-

Bank

15,061

49,12751,702--

Residential Mortgage

57,218337,314330,24410

16

Qualifying Revolving Retail

7,744

22,41722,253

96

130

Other Retail

30,68140,94343,647258

250

256,532

809,040

814,879691

535

35,06639,40738,5596

6

Corporate

22,14922,491

24,313

115

7

Residential Mortgage

2,616

7,182

7,497

(2)

4

Other Retail

3,550

3,556

3,596

82

104

28,31533,22935,406

195

115

9,147

7,693

7,353

-

-

329,060

889,369

896,197892

656

Individual
provision
charge forhalf year$M

Write-offs forhalf year$M

Advanced IRB approach

Total Advanced IRB approach
Specialised Lending

Individual
provision
charge forhalf year$M

Write-offs forhalf year$M

Standardised approach

Total Standardised approach
Credit Valuation Adjustment andQualifying Central Counterparties
Total

Sep 15

Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Defau
for half year
$M

Corporate

150,165

255,628

252,666

157

183

Sovereign

6,664

119,201

112,614

(2)

-

Bank

17,44554,276

58,127--

Residential Mortgage

54,996323,174

316,986917

Qualifying Revolving Retail

7,546

22,08822,011

102

145

Other Retail32,99046,351

46,236279

272

269,806

820,718

808,640

545

617

32,24037,71037,592(15)

61

Corporate

25,341

26,134

26,33457

48

Residential Mortgage

2,882

7,811

7,540

-

4

Other Retail

3,625

3,635

3,459

68

85

Total Standardised approach

31,84837,58037,333125

137

Credit Valuation Adjustment andQualifying Central Counterparties

11,046

7,013

6,198

-

-

344,940

903,021889,763655

815

Advanced IRB approach

Total Advanced IRB approach
Specialised LendingStandardised approach

Total

30

ANZ Bassel III Pillaar 3 disclo
osure

Septemmber 20166

Tablle 7(b) part (ii): Exposur
re at Defaultt by portfolioo type9

Portffolio TypeSep 16$M

Mar 16$M

Sep 15$M

A
Average for halfyear Sep 16
$M

Cash

27,05431,75917,40529,4407

Contiingents liabilities, commitmentss, andotherr off-balance sheet exposures1
154,142

160,920

162,535

157,5
531

Deriv
vatives

41,641

39,26345,16040,4451

Settleement Balancess

16,662

20,026

39,216

18,3
344

Inves
stment Securitie
es58,426

43,57937,811

51,0
003

Net L
Loans, Advancess & Acceptancess5
563,545557,810560,743560,6
678

Otherr assets

3,134

5,405

3,888

4,2
270

Trading Securities

29,89130,60736,26330,2249

Total exposures

8 94,495

889,369

903,021891,933

9

Aveerage for half ye
ear is calculated
d as the simple aaverage of the balances at the start and the eend of each six monthmperiod.

31

ANZ Basel III Pillar 3 disclosure

September 2016

Table 7(c): Geographic distribution of Exposure at Default
Sep 16

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

122,934

48,55379,084

250,571

Sovereign

45,457

11,46964,007

120,933

Bank

23,684

5,562

19,62948,875Residential Mortgage

274,291

74,1046,850

355,245

Qualifying Revolving Retail22,395--22,395

Other Retail30,232

12,083

3,255

45,570Qualifying Central Counterparties

6,905

1,651

1,892

10,448Specialised Lending

29,392

10,601

465

40,458

Total exposures

555,290

164,023

175,182

894,495

Total
$M

Total
$M

Mar 16

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

128,785

45,65389,073

263,511

Sovereign34,905

11,681

71,633

118,219Bank

26,4872,340

20,30049,127

Residential Mortgage

270,025

67,2897,182

344,496

Qualifying Revolving Retail

22,417--22,417

Other Retail

29,187

11,784

3,528

44,499Qualifying Central Counterparties

3,643

1,530

2,520

7,693

Specialised Lending

29,276

9,709

422

39,407

Total exposures

544,725

149,986

194,658

889,369

Total$M

Sep 15

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

128,966

45,922

106,874

281,762

Sovereign

33,52010,85974,822

119,201

Bank

28,733

2,433

23,11054,276

Residential Mortgage

257,901

65,273

7,811

330,985

Qualifying Revolving Retail

22,088--22,088Other Retail34,561

11,822

3,603

49,986

Qualifying Central Counterparties

3,859

1,589

1,565

7,013

Specialised Lending

28,0339,240

437

37,710Total exposures

537,661

147,138

218,222

903,02132

ANZ Basel III Pillar 3 disclosure

September 2016

Table 7(d): Industry distribution of Exposure at Default10 11

Sep 16

Portfolio Type
Corporate
SovereignBank
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Qualifying Central
Counterparties
Specialised Lending
Total exposures% of Total

Agriculture,
Forestry, Fishing& Mining$M

Business
Services$M

Construction$M

Electricity,
Gas & Water
Supply$MEntertainment,
Financial,
Leisure & Investment &Tourism
Insurance$M$M

Government
and Official
Institutions$M

Manufacturing$M

Personal$M

Property
Services$M

Wholesale
Trade$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

42,860
1,514
182
‐
‐
3,423

9,875
‐
10
‐
‐
2,717

6,161
44
2
‐
‐
3,953

9,007
590
27
‐
‐
105

12,900
9
8
‐
‐
2,301

28,24864,277
48,476
‐
‐
650

3,455
52,213‐‐‐
10

41,971
1,177
48
‐
‐
1,588

2,124
‐
‐
355,245
22,395
18,437

19,328
384
‐
‐
‐
1,250

25,299
27
45
‐
‐
1,216

14,292
‐
10
‐
‐
4,288

16,193
455
2
‐
‐
1,473

18,858
243
65
‐
‐
4,159

250,571
120,933
48,875355,245
22,39545,570

‐

‐

‐

‐

‐

10,448

‐

‐

‐

‐

‐

‐

‐

‐

10,4481,155
49,1345.5%

6
12,6081.4%

170
10,3301.2%

1,718
11,4471.3%

423
15,641
1.7%

2152,101
17.0%‐
55,6786.2%

544,7895.0%‐
398,201
44.5%

35,13756,0996.3%

1126,5983.0%

618,5962.1%

1,127
19,2502.2%

698
24,0232.7%

40,458894,495
100.0%

10

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.

11

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

33

ANZ Basel III Pillar 3 disclosure

September 2016

Mar 16

Portfolio Type
Corporate
SovereignBank
Residential Mortgage
Qualifying Revolving
RetailOther Retail
Qualifying Central
Counterparties
Specialised Lending
Total exposures% of Total

Agriculture,
Forestry, Fishing& Mining$M

Electricity, Gas& Water
Construction
Supply$M$MEntertainment,
Financial,
Leisure & Investment &Tourism
Insurance$M$M

Government
and Official
Institutions$M

Business
Services$M

Manufacturing$M

Personal$M

Property
Services$M

Wholesale
Trade$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

43,3261,192
1‐

10,726
8
9
‐

6,596
58
1
‐

9,497
671
25
‐

12,6758
3‐28,25472,45548,701‐

3,139
41,579‐‐45,881
1,207
139
‐

2,277
‐
‐
344,496

20,433514‐‐

28,38933
83‐

16,166‐
9‐

17,385219
65‐

18,767275
91‐

263,511
118,219
49,127344,496

‐

‐

‐

‐

‐

‐

‐

‐

22,417

‐

‐

‐

‐

‐

22,417

3,365

2,553

3,725

102

‐

‐

‐

‐

2,194

641

9

1,497

18,306

1,220

1,156

4,178

1,430

4,123

44,499

‐

7,693

‐

‐

‐

‐

‐

‐

‐

‐

7,693

1,046

7

160

1,633

191

7

‐

4

‐

34,518

7

3

1,139

692

39,40748,93013,303

10,54011,92815,071

157,751

44,727

48,728387,496

56,68529,66820,356

20,23823,948889,369

5.5%

1.5%

1.2%

1.3%

1.7%

17.7%

5.0%

5.5%

43.6%

6.4%

3.3%

2.3%

2.3%

2.7%

100.0%

Entertainment,
Financial,
Leisure & Investment &Tourism
Insurance$M$M

Government
and Official
Institutions$M

Manufacturing$M

Personal$M

Property
Services$M

Wholesale
Trade$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

Sep 15

Portfolio Type
Corporate
SovereignBank
Residential Mortgage
Qualifying Revolving
RetailOther Retail
Qualifying Central
Counterparties
Specialised Lending
Total exposures% of Total

Agriculture,
Forestry, Fishing& Mining$M

Business
Services$M

Construction$M

Electricity,
Gas & Water
Supply$M

46,094
1,268
6‐

11,259
9
8
‐

7,412
59
1
‐

10,447677
20‐

12,3604
3‐31,946
77,21553,672‐

3,260
37,668‐‐52,562
1,427
176
‐

2,081
‐
‐
330,985

20,699260
2‐32,18544
123‐

16,081‐
72‐

16,692247
70‐

18,684323
123‐

281,762
119,201
54,276
330,985

‐

‐

‐

‐

‐

‐

‐

‐

22,088

‐

‐

‐

‐

‐

22,088

3,506

2,831

4,040

117

2,156

658

11

1,537

23,095

1,172

1,169

4,221

1,468

4,005

49,986

‐

‐

‐

‐

‐

7,013

‐

‐

‐

‐

‐

‐

‐

‐

7,013

1,040

8

166

1,495

239

3

39

6

‐

32,455

9

7

1,234

1,009

37,71051,914

14,115

11,67812,756

14,762

170,507

40,97855,708378,249

54,58833,53020,381

19,711

24,144

903,021

5.7%

1.6%

1.3%

1.4%

1.6%

18.9%

4.5%

6.2%

41.9%

6.0%

3.7%

2.3%

2.2%

2.7%

100.0%

34

ANZ Basel III Pillar 3 disclosure

September 2016

Table 7(e): Residual contractual maturity of Exposure at Default12

Sep 16< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

100,671

133,592

16,138170

250,571

Sovereign

57,69730,65932,577-

120,933

Bank

29,86418,500511-

48,875434

6,603

316,003

32,205355,245

Portfolio Type

Residential Mortgage
Qualifying Revolving Retail

-

-

-

22,39522,395

Other Retail

16,6408,293

20,000637

45,570Qualifying Central Counterparties

4,045

3,375

2,700

328

10,448Specialised Lending

14,161

24,5101,732

55

40,458

Total exposures

223,512225,532

389,661

55,790894,495

Mar 16< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

104,567

141,552

17,228164

263,511

Sovereign

67,14725,012

26,060-118,219Bank

29,813

18,833481-

49,127405

7,044

305,260

31,787344,496

Portfolio Type

Residential Mortgage
Qualifying Revolving Retail

-

-

-

22,41722,417

Other Retail

16,673

7,543

19,605678

44,499Qualifying Central Counterparties

2,892

2,643

2,158

-

7,693

Specialised Lending

13,271

24,154

1,934

48

39,407

Total exposures

234,768

226,781372,726

55,094

889,369

Sep 15< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

117,408

146,178

18,006

170

281,762

Sovereign

71,481

25,16522,555-

119,201

Bank

33,953

19,761

562-

54,276411

7,734

291,437

31,403

330,985

Portfolio Type

Residential Mortgage
Qualifying Revolving Retail

-

-

-

22,08822,088Other Retail

16,672

13,82918,797688

49,986

Qualifying Central Counterparties

3,039

2,264

1,710

-

7,013

Specialised Lending

11,57424,0332,054

49

37,710Total exposures

254,538

238,964

355,12154,398903,02112No Maturity Specified predominately includes credit cards and residential mortgage equity manager accounts.

35

ANZ Basel III Pillar 3 disclosure

Table 7(f) part (i):Industry sector

September 2016

Impaired assets13 14, Past due loans15, Provisions and Write-offs by

Sep 16

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥
90 days$M

Individual
provisionbalance$M

Individual
provision
charge forhalf year$M

Write-offs
for half
year
$M

-

1,016

93

283

108

102

-

84

30

46

10

35

Construction

-

178

58

95

59

32

Electricity, gas and water supply

-

2

1

1

2

4

Entertainment Leisure & Tourism

-

134

44

59

51

28

Financial, Investment & Insurance

1

33

23

11

(3)

14

Government & Official Institutions

-

-

-

4

2

-

Manufacturing

6

466

36

266

322

251

Personal

-

834

1,989

284

374

422

Property Services

-

120

63

46

13

26

Retail Trade

3

221

68

76

55

38

Transport & Storage

-

88

23

25

14

36

Wholesale Trade

4

115

13

67

18

62

Other

-

72

58

44

22

16

Total

14

3,363

2,499

1,307

1,047

1,066

13
Impaired derivatives are net of credit value adjustment (CVA) of $63 million, being a market value based
assessment of the credit risk of the relevant counterparties (March 2016: $63 million; September 2015: $69 million).
14

Impaired loans / facilities include restructured items of $403 million for customer facilities in which the originalcontractual 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 (March 2016: $226 million; September 2015: $184
million).

15

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

36

ANZ Basel III Pillar 3 disclosure

September 2016

Mar 16
Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥90days
$M

Individual
provisionbalance
$M

5

892

131

284

133

59

-

121

39

65

27

16

Construction

-

150

82

67

46

21

Electricity, gas and water supply

-

3

1

3

1

1

Entertainment Leisure & Tourism
Financial, Investment &Insurance
Government & Official Institutions

-

123

52

54

31

15

1

40

10

23

2

5

-

-

2

2

2

-

Manufacturing

7

319

43

198

113

46

Personal

-

853

1,710

233

342

415

Property Services

-

96

71

57

17

11

Retail Trade

-

121

112

66

42

23

Transport & Storage

1

137

23

49

36

8

Wholesale Trade

5

175

31

117

72

14

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Other

-

33

68

20

28

22

Total

19

3,063

2,375

1,238

892

656

Sep 15

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥90days
$M

Individual
provisionbalance
$M

5

799

136

221

112

76

-

88

31

55

12

17

Construction

-

95

183

42

20

31

Electricity, gas and water supply

-

3

-

3

(1)

1

Entertainment Leisure & Tourism
Financial, Investment &Insurance
Government & Official Institutions

-

131

38

43

33

18

-

52

20

26

19

14

-

-

-

-

-

-

Manufacturing

4

258

42

145

33

50

Personal

-

869

1,434

290

337

441

Property Services

-

110

100

50

(3)

53

Retail Trade

-

139

88

60

42

28

28

164

26

29

(13)

35

Wholesale Trade

-

126

27

76

39

24

Other

-

28

74

21

25

27

Total

37

2,862

2,199

1,061

655

815

Transport & Storage

37

ANZ Basel III Pillar 3 disclosure

September 2016

Table 7(f) part (ii): Impaired asset, Past due loans, Provisions and Write-offs
Sep 16

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥
90 days$M

Individual
provisionbalance$M

Individual
provision
charge forhalf year$M

Write-offs
for half
year$M

Portfolios subject to Advanced IRB approach
Corporate

1

1,795

178

653

466

468

Sovereign

-

-

-

6

2

2

Bank

-

-

11

-

-

-

Residential Mortgage

-

220

1,981

94

33

17

Qualifying Revolving Retail

-

89

-

-

104

141

Other Retail

-

515

255

281

251

275

Total Advanced IRB approach

1

2,619

2,425

1,034

856

903

Specialised Lending

-

42

38

23

(1)

8

61

Portfolios subject to Standardised approach
Corporate

13

440

18

237

107

Residential Mortgage

-

29

11

8

2

3

Other Retail

-

233

7

5

83

91

Total Standardised approach

-

702

36

250

192

155

Qualifying Central Counterparties

-

-

-

-

-

-

14

3,363

2,499

1,307

1,047

1,066

Total

38

ANZ Basel III Pillar 3 disclosure

September 2016

Mar 1616

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥90 days$M

Individual
provision
charge forhalf year$M

Individual
provisionbalance$M

Write-offs
for half
year$M

Portfolios subject to Advanced IRB approach
Corporate

4

1,527

219

646

325

139

Sovereign

-

2

2

6

2

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

212

1,815

77

10

16

Qualifying Revolving Retail

-

95

-

-

96

130

Other Retail

-

490

270

265

258

250

Total Advanced IRB approach

4

2,326

2,306

994

691

535

Specialised Lending

-

73

24

38

6

6

7

Portfolios subject to Standardised approach
Corporate

15

419

32

201

115

Residential Mortgage

-

32

5

11

(2)

4

Other Retail

-

213

8

(6)

82

104

15

664

45

206

195

115

-

-

-

-

-

-

19

3,063

2,375

1,238

892

656

Individual
provision
charge forhalf year$M

Write-offs
for halfyear$M

Total Standardised approach
Qualifying Central Counterparties
Total

Sep 1516

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥90 days$M

Individual
provisionbalance$M

Portfolios subject to Advanced IRB approach
Corporate

-

1,266

197

523

157

183

Sovereign

-

2

-

4

(2)

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

240

1,570

86

9

17

Qualifying Revolving Retail

-

88

-

-

102

145

Other Retail

-

599

306

317

279

272

Total Advanced IRB approach

-

2,195

2,073

930

545

617

28

159

62

40

(15)

61

Corporate

9

294

45

75

57

48

Residential Mortgage

-

37

12

14

-

4

Other Retail

-

177

7

2

68

85

Total Standardised approach

9

508

64

91

125

137

Qualifying Central Counterparties

-

-

-

-

-

-

37

2,862

2,199

1,061

655

815

Specialised Lending
Portfolios subject to Standardised approach

Total

16

The corporate asset class split between advanced and standardised has been revised for March 2016 and
September 2015 comparatives to better reflect the Basel treatment of the underlying assets.

39

ANZ Basel III Pillar 3 disclosure

September 2016

Table 7(g): Impaired assets17 18, Past due loans19 and Provisions20 by Geography
Sep 16
Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Australia

1

1,804

2,319

757

1,803

New Zealand

3

483

127

147

456

Asia Pacific, Europe and America

10

1,076

53

403

617

Total

14

3,363

2,499

1,307

2,876

4fii
RA

0

0

0

0

0

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Australia

7

1,771

2,145

762

1,844

New Zealand

-

330

178

123

421

Asia Pacific, Europe and America

12

962

52

353

597

Total

19

3,063

2,375

1,238

2,862

4fii
RA

0

0

0

0

0

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Geographic region

Mar 16

Geographic region

Sep 15

Geographic region
Australia

33

1,621

1,949

698

1,895

New Zealand

-

400

182

147

425

Asia Pacific, Europe and America

4

841

68

216

636

37

2,862

2,199

1,061

2,956

Total

17
Impaired derivatives are net of credit value adjustment (CVA) of $63 million, being a market value based
assessment of the credit risk of the relevant counterparties (March 2016: $63 million; September 2015: $69 million).
18

Impaired loans / facilities include restructured items of $403 million for customer facilities in which the originalcontractual 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 (March 2016: $226 million; September 2015: $184
million).

19

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

20

Due to definitional differences, there is a variation 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 andCollective Provision, for ease of comparison with other published results.

40

ANZ Basel III Pillar 3 disclosure

September 2016

Table 7(h): Provision for Credit Impairment

Collective Provision
Balance at start of period

Half year
Sep 16$M

Half year
Mar 16$M

Half year
Sep 15
$M

2,862

2,956

2,914

Charge to income statement

(9)

26

40

Adjustments for exchange rate fluctuations

28

(47)

2

Esanda Dealer Finance divestment

(5)

(73)

-

2,876

2,862

2,956

Balance at start of period

1,238

1,061

1,114

New and increased provisions

1,308

1,137

951

Write-backs

(151)

(160)

(174)

Total Collective Provision

Individual Provision

Adjustment for exchange rate fluctuations

17

(26)

7

(39)

(26)

(22)

(1,066)

(656)

(815)

-

(92)

-

Total Individual Provision

1,307

1,238

1,061

Total Provisions for Credit Impairment

4,183

4,100

4,017

Discount unwind
Bad debts written off
Esanda Dealer Finance divestment

Table 7(j): Specific Provision Balance and General Reserve for Credit Losses21
S
Sep 16
Specific Provision
Balance$M

General Reserve
for Credit Losses
$M

Total
$M

Collective Provision

350

2,526

2,876

Individual Provision

1,307

-

1,307

Total Provision for Credit Impairment

1,657

2,526

4,183

Specific Provision
Balance$M

General Reserve
for Credit Losses
$M

Total
$M

Collective Provision

313

2,549

2,862

Individual Provision

1,238

-

1,238

Total Provision for Credit Impairment

1,551

2,549

4,100

Specific Provision
Balance$M

General Reserve
for Credit Losses
$M

Total
$M

Collective Provision

334

2,622

2,956

Individual Provision

1,061

-

1,061

Total Provision for Credit Impairment

1,395

2,622

4,017

Mar 16

Sep 1521

Due to definitional differences, there is a variation 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 andCollective Provision, for ease of comparison with other published results.

41

ANZ Basel III Pillar 3 disclosure

September 2016

Table 8Credit risk – Disclosures for portfolios subject to theStandardised approach and supervisory risk weights in the IRB approach
Table 8(b): Exposure at Default by risk bucket
Risk weightSep 16$M

Standardised approach exposures

Mar 16$M

Sep 15
$M

0%

-

-

-

20%

459

255

855

35%

6,417

6,820

7,386

50%

2,067

1,417

1,406

75%

4

2

4

100%

21,83424,05627,098

150%

680

740

852

>150%

-

-

1

Capital deductions

-

-

-

31,46133,29037,602

Total
Other Asset exposures
0%

-

-

-

20%

1,202

1,172

1,191

35%

-

-

-

50%

-

-

-

75%

-

-

-

100%

3,604

3,820

3,417

150%

-

-

-

>150%

-

-

-

Capital deductions

-

-

-

4,806

4,992

4,608

Total
Specialised Lending exposures
0%

182

318

473

70%

13,052

12,156

14,00590%

22,193

21,40019,539

115%

4,139

4,841

3,245

250%

892

692

448

Total

40,45839,40737,71042

ANZ Basel III Pillar 3 disclosure

September 2016

Table 9Credit 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

Banks22
In Australia only, other authorised deposit taking
institutions (ADI) incorporated in Australia

AIRB

Residential
mortgages

Exposures secured by residential property

AIRB

Consumer credit cards <$100,000 limit

AIRB

Other retail

Small business lending
Other lending to consumers

AIRB

Specialised Lending

Income Producing Real Estate23
Project financeObject finance

AIRB – Supervisory
Slotting24

Other assets

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

AIRB –
weights

Qualifying
retailrevolving

fixed

risk

In addition, ANZ has applied the Standardised approach to some portfolio segments (mainly retail andlocal corporates in Asia Pacific) where currently available data does not enable development ofadvanced 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.
ANZ applies its full normal risk measurement and management framework to these segments forinternal management purposes, such as for economic capital. Standardised segments will be migrated
to AIRB if they reach a volume that generates 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 todetermine 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 the three 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 wayof 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 aconsequence of obligor default and expressed as a percentage of the facility’s EAD. Whenmeasuring economic loss, all relevant factors are taken into account, including material effects ofthe timing of cash flows and material direct and indirect costs associated with collecting on the
exposure, including realisation of collateral.

22

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

23

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

24

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

43

ANZ Basel III Pillar 3 disclosure

September 2016

Effective maturity is also calculated as an input to the risk weighted exposure calculation for bank,sovereign and corporate 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 toservice and repay debt.

Measure the LGD as expressed by the Security Indicator (SI) ranging from A to G. The SI iscalculated by reference to the percentage of loan covered by security which can be realised in theevent of default. This calculation uses standard ratios to adjust the current market value ofcollateral items to allow for historical realisation outcomes. The security-related SIs aresupplemented 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 recognitionof 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 is APRA approved, and is made up of 27 rating grades. Eachlevel/grade is separately defined and has a range of default probabilities attached to it. The PD masterscale enables ANZ’s rating system to be mapped to the gradings 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 12+ to 3+
3= to 4+
4= to 6=
6- to 7=
7- to 8+8=
8-, 9 and 10

Aaa to Aa3
A1 to Baa1
Baa2 to > Baa3
Ba1 to B1B2 to B3
Caa to Caa3
Ca, C
Default

AAA to AAA+ to BBB+BBB to > BBBBB+ to B+
B to BCCC+ to CCCCC, C
Default

0.0000 - 0.0346%
0.0347 - 0.1636%
0.1637 - 0.4004%
0.4005 -2.7550% %2.7551-9.7980%
9.7981-27.1109%
27.1110 – 99.9999%
100%

In the retail asset classes, most facilities utilise credit rating scores. The scores are calibrated to PDs
and used to allocate exposures to homogenous pools, along with LGD and EAD.
ANZ also uses specialised PD master scale/mappings for the sovereign asset class, based
predominantly on the corporate master scale.

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 deteriorating customers (where certain CCR/SI combinations trigger
increasing scrutiny).

Pricing decisions.

44

ANZ Basel III Pillar 3 disclosure

September 2016

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 fromthe same basis, however there are some differences between the factors used because several
aspects of ANZ’s rating system are adjusted in accordance with APRA requirements for regulatory
capital purposes. The most significant of these adjustments are the use for regulatory capital purposesof downturn LGDs; the imposition of a 20% LGD floor for exposures secured by Australian residential
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 controlsthat 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 Internal Audit.
The design, build and implementation of credit rating models resides with a specialist Group-levelteam. Credit rating models are owned by central Risk teams. The use (including overrides) andperformance of credit rating models is monitored 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 newmodels or recalibration of existing models.
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 inprocesses such as provisioning and the allocation of economic capital ensures that the rating system
receives robust input from the business 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 (themore customers within the segment, 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 externalrating 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 maintain and improve the accuracy and reliability of rating processes.
Regardless of what credit risk rating tool is used, lending staff rating a customer are required toreview the model-generated PD (or CCR) and take into account any out-of-model factors or policy
overlays to decide whether or not to override the model rating. Overrides of a rating model to abetter 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.

45

ANZ Basel III Pillar 3 disclosure

September 2016

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 andpolicy 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 inAustralia

Statistically-based models
Review of all relevant andmaterial information including
external ratings

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
Slotting25

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 ofstatistically robust application scoring models for use at origination and behavioural scoring forongoing management. As noted above, the scores are calibrated 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 isused as the basis for LGD estimation in the retail asset class, and is supplemented by external data forthe corporate asset class. Given the scarcity of internal data for Bank and Sovereign Basel asset
classes, LGD modelling for these classes is primarily based on external data.
EAD represents the expected facility exposure at the date of default, including an estimate ofadditional drawings prior to default, as well as post-default drawings that were legally committed toprior to default.

25

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

46

ANZ Basel III Pillar 3 disclosure

September 2016

Table 9(d): Non Retail Exposure at Default subject to Advanced Internal Ratings Based(IRB) approach26 27 28

Sep 16
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Exposure at Default
Corporate
SovereignBank

17,682
101,889
20,83555,341
13,71522,61776,4792,054
3,543

59,0681,885
1,806

15,883
1,376
49

2,409
14
25

2,455 229,317- 120,933
48,875

Total

140,406

91,67382,07662,75917,3082,448

2,455 399,125

35.2%

23.0%

20.6%

15.7%

4.3%

0.6%

0.6%

100.0%

Undrawn commitments (included in above)
Corporate
5,665
23,176
Sovereign
963
364
Bank
15
47

23,15012
40

10,299
80
8

1,569
43
1

208
-

50
-

64,117
1,462
111

Total

50

65,690% of Total

Default
$M

Total
$M

6,643

23,587

23,202

10,387

1,613

208

Average Exposure at Default
Corporate
6.131
Sovereign139.767
Bank
21.7263.423
489.832
4.858

1.441
38.0307.158

0.610
11.63311.0780.182
28.073
0.595

0.352
1.804
0.878

0.758
0.862
- 117.837
7.657

Exposure-weighted average Loss Given Default (%)
Corporate
55.0%
56.9%
47.9%
Sovereign
6.1%
10.4%
39.6%
Bank
63.5%
61.8%
62.6%

39.8%
55.0%
67.5%

35.2%
48.2%
70.3%

45.2%
58.3%
52.3%

40.7%
-

47.6%
8.3%
62.8%

Exposure-weighted average risk weight (%)
Corporate
19.3%
35.6%
Sovereign
1.4%
2.9%
Bank
21.3%
26.4%

70.6%
122.0%
111.6%

89.2%
122.5%
187.5%

212.6%
323.9%
290.4%

141.8%
-

56.6%
5.4%
30.5%

55.2%
42.3%
64.6%

26

In accordance with APS 330, EAD in Table 9(d) includes Advanced IRB exposures; however does not include
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 isprovided in Table 8(b).

27

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

28

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

47

ANZ Basel III Pillar 3 disclosure

September 2016

Mar 16
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

18,036
94,58017,657

58,82918,70526,23982,853
1,837
3,376

60,082
1,674
1,765

16,516
1,408
89

2,481
15
1

2,223 241,020- 118,219
49,127130,273

103,773

88,06663,52118,0132,497

2,223 408,366

31.9%

25.4%

21.6%

15.6%

4.4%

0.6%

0.5%

100.0%

Undrawn commitments (included in above)
Corporate
5,960
24,942
Sovereign
655
325
Bank
3
389

25,5379
197

10,719
48
9

1,844
23
-

274
-

56
-

69,332
1,060
598

Total

Exposure at Default
Corporate
Sovereign
Bank
Total
% of Total

Default
$M

Total
$M

6,618

25,65625,743

10,776

1,867

274

56

70,990

Average Exposure at Default
Corporate
6.089
Sovereign125.502
Bank
13.5403.565
103.340
3.351

1.466
27.8312.779

0.624
12.1343.453

0.180
31.986
0.828

0.259
1.698
0.052

0.902
-

0.873
99.151
4.353

Exposure-weighted average Loss Given Default (%)
Corporate
55.4%
57.4%
49.5%
Sovereign
6.0%
9.8%
42.3%
Bank
62.4%
62.2%
61.4%

40.6%
54.8%
68.4%

36.1%
46.0%
72.8%

46.9%
59.0%
70.0%

43.9%
-

48.7%
8.4%
62.5%

Exposure-weighted average risk weight (%)
Corporate
18.6%
36.2%
Sovereign
1.2%
3.0%
Bank
22.2%
25.8%

57.6%
46.9%
64.5%

72.3%
118.8%
115.7%

92.3%
113.8%
202.3%

218.4%
323.1%
369.8%

144.3%
-

58.0%
5.2%
30.7%

Default
$M

Total
$M

Sep 15
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

20,88399,425
17,74164,86014,18829,15689,1762,438
4,876

59,431
2,600
2,317

17,072
529
177

2,199
21
9

2,007 255,628- 119,201
54,276

138,049

108,204

96,49064,348

17,7782,229

2,007 429,105

32.2%

25.2%

22.5%

15.0%

4.1%

0.5%

0.5%

100.0%

Undrawn commitments (included in above)
Corporate
6,229
25,739Sovereign
564
497
Bank
10
81

26,4605
162

10,116
62
12

1,889
3
1

223
-

80
-

70,736
1,131
266

Total

80

72,133

Exposure at Default
Corporate
Sovereign
Bank
Total
% of Total

6,803

26,317

26,627

10,190

1,893

223

Average Exposure at Default
Corporate
7.658
Sovereign160.363
Bank
18.615

4.136
94.5884.396

1.540
38.6924.107

0.610
23.2145.531

0.191
21.178
1.624

0.270
1.949
0.282

0.846
0.935
- 121.510
5.815

Exposure-weighted average Loss Given Default (%)
Corporate
57.0%
58.7%
51.0%
Sovereign
5.8%
16.3%
43.3%
Bank
62.3%
62.9%
63.9%

42.1%
50.5%
68.4%

36.7%
57.3%
73.5%

46.0%
59.2%
74.4%

38.8%
-

50.3%
9.0%
63.1%

Exposure-weighted average risk weight (%)
Corporate
19.4%
36.7%
Sovereign
1.1%
5.1%
Bank
21.3%
24.9%

75.7%
109.6%
118.1%

98.2%
150.7%
187.1%

228.7%
316.7%
358.6%

141.3%
-

58.8%
5.6%
32.1%

59.1%
47.8%
67.8%

48

ANZ Basel III Pillar 3 disclosure

September 2016

Table 9(d): Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB)
approach by risk grade
Sep 160.00%<0.11%$M

0.11%<0.30%$M

0.30%<0.51%
$M

0.51%
3.49%
10.09%<3.49% <10.09% <100.0%
$M
$M
$M

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail

71,052
1,173

153,769
11,715
5,438

31,0862,805
2,299

74,795
5,149
23,243

9,619
1,755
7,089

5,816
799
2,197

2,257 348,394
172
22,395852
42,291

Total

72,225

170,922

36,190 103,187

18,4638,812

3,281 413,080% of Total

17.5%

41.4%

8.8%

25.0%

4.5%

2.1%

0.8%

100.0%

Undrawn commitments (included in above)
Residential Mortgage
6,744
17,844
Qualifying Revolving Retail
9,144
Other Retail
626
2,201

1,023
2,069
1,306

7,549
2,418
3,106

159
605
561

179
93
85

31
6

33,49814,360
7,891

Total

7,370

29,1894,398

13,073

1,325

357

37

55,749Average Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail

0.242
0.006

0.224
0.011
0.012

0.209
0.009
0.010

0.253
0.010
0.025

0.270
0.009
0.011

0.278
0.008
0.011

0.249
0.009
0.020

0.234
0.010
0.016

Exposure-weighted average Loss Given Default (%)
Residential Mortgage
19.8%
19.2%
18.8%
Qualifying Revolving Retail
73.2%
73.2%
Other Retail
59.1%
54.4%
74.2%

21.9%
73.2%
46.7%

20.4%
73.2%
64.1%

20.0%
73.2%
60.0%

20.3%
73.2%
53.1%

19.9%
73.2%
53.1%

Exposure-weighted average risk weight (%)
Residential Mortgage
9.8%
11.9%
Qualifying Revolving Retail
5.2%
Other Retail
31.5%
37.3%

38.5%
39.8%
60.0%

112.9%
112.6%
111.1%

148.0%
209.5%
178.5%

223.8%
366.6%
228.6%

24.2%
32.8%
74.2%

18.2%
14.3%
55.3%

49

Default
$M

Total
$M

ANZ Basel III Pillar 3 disclosure

September 2016

Mar 160.00%<0.11%$M

0.11%<0.30%$M

0.30%<0.51%
$M

0.51%
3.49%
10.09%<3.49% <10.09% <100.0%
$M
$M
$M

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail70,457
11,546
1,131

146,431516
5,254

28,9592,072
2,192

73,2155,020
22,733

10,541
2,188
6,650

5,620
905
2,144

2,091 337,314
170
22,417839
40,943

Total

83,134

152,201

33,223 100,968

19,3798,669

3,100 400,674% of Total

20.7%

38.0%

8.3%

25.2%

4.8%

2.2%

0.8%

100.0%

Undrawn commitments (included in above)
Residential Mortgage
6,466
17,366
Qualifying Revolving Retail
9,035
515
Other Retail
600
2,130

960
1,372
1,270

7,416
2,330
3,317

188
889
548

180
115
79

1
30
6

32,577
14,286
7,950

Total

Default
$M

Total
$M

16,101

20,011

3,602

13,063

1,625

374

37

54,813

0.239
0.011
0.008

0.216
0.006
0.016

0.197
0.010
0.011

0.241
0.010
0.023

0.278
0.009
0.010

0.274
0.008
0.011

0.233
0.009
0.019

0.226
0.010
0.016

Exposure-weighted average Loss Given Default (%)
Residential Mortgage
19.8%
19.2%
19.1%
Qualifying Revolving Retail
73.2%
73.2%
73.2%
Other Retail
53.6%
46.8%
73.9%

22.1%
73.2%
46.5%

20.4%
73.2%
64.0%

20.0%
73.2%
60.0%

20.4%
73.2%
53.1%

20.0%
73.2%
51.9%

Exposure-weighted average risk weight (%)
Residential Mortgage
5.2%
6.6%
Qualifying Revolving Retail
4.9%
11.5%
Other Retail
31.0%
36.7%

29.2%
38.8%
61.2%

75.2%
111.5%
112.3%

107.9%
206.5%
177.9%

223.4%
337.8%
236.8%

17.0%
34.5%
74.9%

Default
$M

Total
$M

Average Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail

13.6%
14.2%
55.1%

Sep 150.00%<0.11%$M

0.11%<0.30%$M

0.30%<0.51%
$M

0.51%
3.49%
10.09%<3.49% <10.09% <100.0%
$M
$M
$M

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail

69,637
11,4091,393

139,008
435
5,433

27,253
2,007
2,157

70,065
5,110
25,773

10,126
2,103
8,843

5,085
863
1,809

2,000 323,174
161
22,088943
46,351

Total

82,439144,876

31,417 100,948

21,072

7,757

3,104 391,613% of Total

21.1%

37.0%

8.0%

25.8%

5.4%

2.0%

0.8%

100.0%

Undrawn commitments (included in above)
Residential Mortgage
6,249
16,935
Qualifying Revolving Retail
8,915
434
Other Retail
681
2,014

968
1,328
1,252

7,577
2,305
3,340

182
781
464

176
113
68

2
28
6

32,08913,904
7,825

Total

15,845

19,383

3,548

13,222

1,427

357

36

53,818

0.234
0.011
0.010

0.210
0.006
0.017

0.192
0.010
0.011

0.237
0.009
0.022

0.276
0.009
0.011

0.268
0.008
0.010

0.218
0.009
0.019

0.221
0.010
0.016

Exposure-weighted average Loss Given Default (%)
Residential Mortgage
19.8%
19.2%
19.1%
Qualifying Revolving Retail
73.2%
73.2%
73.2%
Other Retail
44.9%
44.3%
73.1%

22.3%
73.2%
45.5%

20.5%
73.2%
59.3%

20.0%
73.2%
60.1%

20.8%
73.2%
49.9%

20.1%
73.2%
50.0%

Exposure-weighted average risk weight (%)
Residential Mortgage
5.3%
6.7%
Qualifying Revolving Retail
4.9%
11.6%
Other Retail
26.4%
34.8%

29.5%
39.2%
60.0%

75.1%
110.5%
100.8%

108.4%
207.5%
182.2%

224.7%
327.8%
201.2%

17.0%
34.4%
71.2%

Average Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail

13.7%
13.8%
54.2%

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ANZ Basel III Pillar 3 disclosure

September 2016

Table 9(e): Actual Losses by portfolio type
Half year Sep 16
Individual provision charge$M

Write-offs$M

Corporate

466

468

Sovereign

2

2

Bank

-

-

Residential Mortgage

33

17

Qualifying Revolving Retail

104

141

Other Retail

251

275

Total Advanced IRB

856

903

Basel Asset Class

Specialised Lending(1)

8Standardised approach

192

155

1,047

1,066

Total

Half year Mar 1629
Individual provision charge$M

Write-offs$M

Corporate

325

139

Sovereign

2

-

Bank

-

-

10

16

Qualifying Revolving Retail

96

130

Other Retail

258

250

Total Advanced IRB

691

535

Basel Asset Class

Residential Mortgage

Specialised Lending

6

6Standardised approach

195

115

Total

892

656

Half year Sep 1529
Individual provision charge$M

Write-offs$M

Corporate

157

183

Sovereign(2)-

Basel Asset Class

Bank

-

-

Residential Mortgage

917

Qualifying Revolving Retail

102

145

Other Retail

279

272

Total Advanced IRB

545

617

Specialised Lending

(15)

61

Standardised approach

125

137

Total

655

815

29
The corporate asset class split between advanced and standardised has been revised for March 2016 and
September 2015 comparatives to better reflect the Basel treatment of the underlying assets.

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ANZ Basel III Pillar 3 disclosure

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

Average
Estimated PD%

Average
Actual PD%

Sep 16
Averageestimated toactual EAD
ratio

Corporate

1.57

1.08

1.13

40.99

Sovereign

0.38

nil

n/a

n/a

n/a

Bank

0.61

0.05

0.93

46.00

58.30

Specialised Lending

n/a

1.95

1.09

n/a

24.80

Residential Mortgage

0.73

0.79

1.00

20.09

3.10

Qualifying Revolving Retail

2.62

1.95

1.05

73.20

72.50

Other Retail

3.74

3.59

1.05

50.30

41.80

Portfolio Type

Average
Estimated
LGD%

Average
Actual LGD%
31.65

APS 330 Table 9f compares internal credit risk estimates used in calculating regulatory capital withrealised 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 for the observation
period.
The estimated PD is based on the average of the internally estimated long-run PD’s for obligors thatare not in default at the beginning of each financial year over the period of observation being 2009 to
2016. The actual PD is based on the number of defaulted obligors up to FAugust 2016 compared tothe total number of obligors measured.
The EAD ratio compares internally estimated EAD prior to default to realised EAD for defaulted
obligors over the 7 years of observation being 2009 to August 2016. A ratio greater than 1.0 signifies
that on average, the actual defaulted exposures are lower than the estimated exposures at the time ofdefault.
The estimated LGD is the downturn LGD for accounts that defaulted at the beginning of each year
during the observation period being 2009 to September 2014. The actual LGD is based on the averagerealised losses over the period for the accounts observed at the beginning and defaulted during theobservation period. For non-retail portfolios, the estimated and actual LGDs are based on accounts
that defaulted up to September 2014. Defaults occurring after September2014 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.
For retail portfolios, the estimated and actual LGDs are based on accounts that defaulted in 2011 to2015 financial years. For the retail portfolios, defaults with non-finalised workout have been excluded
from the analysis.
In assessing the accuracy of the credit risk estimates, it should be noted that the period of analysis
does not cover a full economic cycle.

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ANZ Basel III Pillar 3 disclosure

Table 10

September 2016

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 thecounterparty cannot meet its contractual repayment obligations.30 Types of collateral typically taken
by ANZ include:Security over residential, commercial, industrial or rural property.

Charges over business assets.



Security over specific plant and equipment.

Charges over listed shares, bonds or securities.



Charges over cash deposits.

Guarantees and pledges.

In some cases, such as where the customer risk profile is considered very sound or by the nature of
the product (for instance, small limit products such as credit cards), a transaction may not be
supported by collateral.
Credit policy, requirements and processes set out the acceptable types of collateral, as well as aprocess by which additional instruments and/or asset types can be considered for approval. ANZ’scredit 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 a SI for LGD purposes.
Policies and processes for collateral valuation and management
ANZ has well established policies, requirements and processes around collateral valuation andmanagement, that are reviewed regularly. The concepts of legal enforceability, certainty and current
valuation are central to collateral management.
In order to achieve legal enforceability and certainty, ANZ uses standard collateral instruments or
has specific documentation drawn up by external legal advisers, and where applicable, security
interests are registered. The use of collateral management systems also provides certainty that thecollateral has been properly taken, registered and stored.
In order to rely on the valuation of collateral assets, ANZ has developed comprehensive rules aroundacceptable types of valuations (including who may value an asset), the frequency of revaluations andstandard extension ratios for typical asset types. Upon receipt of a new valuation, the information isused 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 are an integral component in transaction structuring for
ANZ. The guarantee of a financially strong party can help improve the PD of a transaction through its
explicit support of the weaker rated 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 thresholdparameters to determine acceptable counterparties in achieving risk grade enhancement of thetransaction.
The suitability of the guarantor is determined by risk rating that guarantor. Not all guarantees orguarantors are recognised 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 that generate high concentration risk exposures or to improve risk return performance.

30

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

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ANZ Basel III Pillar 3 disclosure

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Only certain credit derivatives such as credit default swaps (CDS) are recognised for risk mitigation
purposes in the determination of regulatory capital. A CDS entails the payment by one party inexchange for credit default protection payment if a credit default event on a reference asset occurs.
Standard, legally enforceable documentation applies.
For regulatory capital purposes, ANZ only recognises protection using credit derivatives where theymeet several policy and regulatory requirements around the strength of the protection offered suchas being irrevocable.
A CDS may only be transacted with banks and non-bank financial institutions that have been credit
assessed and approved 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 acredit protection provider falls below the minimum required to provide effective protection, theprotection 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 negative balances with ANZ.
In order to apply on-balance sheet netting, the arrangement must be specifically documented withthe customer and meet a number of legally enforceable requirements.
Netting is also used where the credit exposure arises from off-balance sheet market relatedtransactions. For close-out netting to be utilised with counterparties, a legally enforceable eligible
netting agreement in an acceptable jurisdiction must be in place. This means that each transaction isaggregated into a single net amount and transactions 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 canbe 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 collateral concentrations. For example, in the same way that an over-exposure to aparticular industry may mean that a bank is more sensitive to the fortunes of that industry, an overexposure to a particular collateral asset type may make ANZ more sensitive to the performance ofthat asset type.
ANZ does not believe that it has any material concentrations of collateral types, given the welldiversified nature of its portfolio and conservative asset extension ratios.

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ANZ Basel III Pillar 3 disclosure

September 2016

Table 10(b): Credit risk mitigation on Standardised approach portfolios – collateral 31
Exposure at
Default$M

Sep 16
Eligible Financial Other Eligible
CollateralCollateral$M$M% Coverage

Standardised approach
Corporate
Residential Mortgage
Other RetailTotal

21,254

4,382

2,544

32.6%

6,851
3,279

1

-

0.0%

63

-

1.9%

31,384

4,446

2,544

22.3%

Mar 16
Eligible Financial Other Eligible
CollateralCollateral$M$M% Coverage

Exposure at
Default$M
Standardised approach
Corporate

22,491

2,937

1,497

19.7%

Residential Mortgage

7,182

1

-

0.0%

Other Retail

3,556

14

-

0.4%

33,229

2,952

1,497

13.4%

Sep 15
Eligible Financial Other Eligible
CollateralCollateral$M$M% Coverage

Total

Exposure at
Default$M
Standardised approach
Corporate

26,134

2,742

1,414

15.9%

Residential Mortgage

7,811

18

-

0.2%

Other Retail

3,635

-

-

0.0%

37,580

2,760

1,414

11.1%

Total

31

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

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ANZ Basel III Pillar 3 disclosure

September 2016

Table 10(c): Credit risk mitigation – guarantees and credit derivatives
Sep 16
Exposure at
Default$M

Exposurescovered by
Guarantees$M

Exposurescovered by
CreditDerivatives$M% Coverage

Corporate (incl. Specialised Lending)

269,775

4,974

589

2.1%

Sovereign

120,933

4,579

-

3.8%

Bank

48,875

10

-

0.0%

Residential Mortgage

348,394

-

-

0.0%

Qualifying Revolving Retail22,395--0.0%

Other Retail42,291--0.0%

852,663

9,563

589

1.2%

Corporate

21,254

349

26

1.8%

Residential Mortgage

6,851

-

-

0.0%

Other Retail

3,279

-

-

0.0%

Total

31,384

349

26

1.2%

Qualifying Central Counterparties

10,448--0.0%

Exposure at
Default$M

Exposurescovered by
Guarantees$M

Exposurescovered by
CreditDerivatives$M% Coverage

Corporate (incl. Specialised Lending)

280,427

3,939

454

1.6%

Sovereign

118,219

4,353

-

3.7%

Bank

49,127

57

-

0.1%

Residential Mortgage

337,314

-

-

0.0%

Qualifying Revolving Retail

22,417--0.0%

Other Retail

40,943--0.0%

848,447

8,349

454

1.0%

Corporate

22,491

405

26

1.9%

Residential Mortgage

7,182

-

-

0.0%

Other Retail

3,556

-

-

0.0%

33,229

405

26

1.3%

7,693

-

-

0.0%

Advanced IRB

Total
Standardised approach

Mar 16

Advanced IRB

Total
Standardised approach

Total
Qualifying Central Counterparties

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ANZ Basel III Pillar 3 disclosure

September 2016

Sep 15

Exposure at
Default$M

Exposurescovered by
Guarantees$M

Exposurescovered by
CreditDerivatives$M% Coverage

Corporate (incl. Specialised Lending)

293,338

6,860

345

2.5%

Sovereign

119,201

4,437

-

3.7%

Bank

54,276

111

-

0.2%

Residential Mortgage

323,174

-

-

0.0%

Qualifying Revolving Retail

22,088--0.0%

Other Retail46,351--

0.0%

858,428

11,408345

1.4%

Corporate

26,134

544

-

2.1%

Residential Mortgage

7,811

-

-

0.0%

Other Retail

3,635

-

-

0.0%

37,580

544

-

1.4%

7,013

-

-

0.0%

Advanced IRB

Total
Standardised approach

Total
Qualifying Central Counterparties

57

ANZ Basel III Pillar 3 disclosure

Table 11risk

September 2016

General disclosures for derivatives and counterparty credit

Definition of counterparty credit risk
Counterparty credit risk in derivative transactions arises from the risk of counterparty default before
settlement date of derivative contracts and the counterparty is unable to fulfill present and futurecontractual payment obligations. The amount at risk may change over time as a function of theunderlying market parameters up to the positive value of the contract in favour of ANZ.
Counterparty credit risk is present in market instruments (derivatives and forward contracts), andcomprises:•

Settlement risk, which arises where one party makes payment or delivers value in the expectation
but without certainty that the counterparty will perform the corresponding obligation in a bilateralcontract 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 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 professional counterparties that conduct two way (buy and sell) business.

Counterparty credit risk requires a different method to calculate exposure at default because actualand potential market movements impact ANZ’s exposure or replacement cost. The markets covered bythis 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 andprocedures. The Market 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 with all credit exposures to the ANZ Group. Counterparty credit limits are approved by theappropriate 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 worst case credit exposure of derivative transactions at future time points. PFE ismeasured 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 the contract’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 andcorrelations calibrated to historical market data.
PFE and PCRE models are also used by credit officers to establish credit limits on an uncommitted andunadvised basis, to ensure the potential volatility of the transaction value is recognised. Counterparty
credit risk exposure is calculated six times per 24 hour day and excesses above approved limits arereported to account controllers and Credit officers for action.

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ANZ Basel III Pillar 3 disclosure

September 2016

Credit valuation adjustment (CVA)
In determining the fair value of a derivative the Group makes a derivative credit valuation adjustment(CVA) to reflect the possibility that the counterparty may default at some point over the life of thetransaction. It is calculated by applying a probability of default (PD) on the potential estimated future
positive exposure of the counterparty after taking into account the impact of collateral arrangements.
At 30 September 2016, the Group revised its methodology for estimating CVA to align with industry
best practice. The revised methodology makes greater use of market information for determining the
PD and enhanced exposure modelling, to align with leading market practice.
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. an 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 master agreement with credit support annex) that governs the amount of collateral required
to be posted or received by ANZ throughout the life of the contract. Some agreements are linked
to external credit ratings which means in the event of a party’s (ANZ or a counterparty) externalrating being downgraded, it would likely be required to lodge collateral. The operation of collateralagreements falls under policy which establishes the control framework to ensure a robust andglobally consistent approach to the management of collaterised exposures.

Use of right to break clauses in the master agreement or in trade confirmation to reduce term oflong dated derivative trades.

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 in ownership clauses included in documentation.

Linking covenants and events of default in an existing loan facility agreement to the masteragreement.



Use of credit derivatives to hedge counterparty credit risk exposure.

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



Clearing certain derivative transactions through central counterparty clearing houses.

In the event of a downgrading of ANZ’s rating by one notch from AA- to A+, as at 30 September
2016, ANZ would be required to lodge USD 132 million additional collateral with its counterparties.
This represents a small percentage of ANZ's overall liquidity portfolio.

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ANZ Basel III Pillar 3 disclosure

September 2016

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

Net derivative credit exposure
Sep 16$M
Gross positive fair value of contracts
Netting benefits

Mar 16$M

Sep 15$M

87,49688,74785,625(71,394)(70,991)(62,782)

Netted current credit exposure

16,102

17,756

22,843collateral held

(5,259)(5,473)(7,165)Net derivatives credit exposure

10,843

12,283

15,678

Sep 16$M
15,214

Mar 16$M
15,786

Sep 15$M
19,084

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

1,801

2,529

3,872

Bank

13,537

13,687

14,908

Qualifying Central Counterparties

10,120

6,450

6,491

969

810

805

41,641

39,26345,160

Product Type
Credit Default Swaps

Sep 16$M
737

Mar 16$M724

Sep 15$M
728

Interest Rate Swaps

-

-

-

Currency Swaps

-

-

-

Other

-

-

-

737

724

728

Specialised Lending
Total exposures

Notional Value of Credit Derivative Hedges

Total exposures

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ANZ Basel III Pillar 3 disclosure

September 2016

Table 11(c): Counterparty credit risk exposure – credit derivative transactions
Sep 16
Protection
Bought$M

Protection
Sold
$M

Total
$M

Credit derivative products used for own credit portfolio
Credit default swaps

8,397

7,796

16,193

Total notional value

8,397

7,796

16,193

737

737

1,474

-

-

-

737

737

1,474

9,134

8,533

17,667

Protection
Bought$M

Protection
Sold$M

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

Mar 16
Total$M

Credit derivative products used for own credit portfolio
Credit default swaps

19,921

19,36539,286

Total notional value

19,921

19,36539,286

724

724

1,448

-

-

-

724

724

1,448

20,64520,08940,734Credit derivative products used for intermediation
Credit default swaps
Total return swaps
Total notional value
Total credit derivative notional value

Sep 15
Protection
Bought$M

Protection
Sold
$M

Total
$M

Credit derivative products used for own credit portfolio
Credit default swaps

22,284

21,47443,758

Total notional value

22,284

21,47443,758

728

728

1,456

-

-

-

728

728

1,456

23,012

22,20245,214Credit 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 2016

Chapter 7 – Securitisation
Table 12Securitisation disclosures

Definition of securitisation and resecuritisation
A securitisation is a financial structure where the cash flow from a pool of assets is used to service
obligations to at least 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 to receive payments from the pool before
another class32. A resecuritisation exposure is a securitisation exposure in which the risk associatedwith an underlying pool of exposures is tranched and at least one of the underlying exposures is asecuritisation exposure.
Securitisations may be categorised as:Traditional securitisations, where legal ownership of the underlying asset pool is transferred toinvestors, with principal and interest paid from realisation of or regular cash flows from theassets. The Special Purpose Vehicle (SPV) assets are insulated from bankruptcy of the seller orservicer.

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 as p e c i a l purpose vehicle, are not securitisation exposures.
Securitisation Activities
ANZ’s key securitisation activities are:

Securitisation of third-party originated assets, including residential mortgages, credit cards, autoand equipment loans and trade receivables.

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



Securitisation of ANZ originated assets (including self securitisation) as a funding and liquidity
management tool, which may or may not involve the transfer of credit risk i.e. may or may notprovide regulatory capital relief.

Provision of facilities and services to securitisations or resecuritisations (where the underlying
assets may be ANZ or third-party originated) e.g. structuring and arranging services, providing
funding and/or swaps to securitisation vehicles and (via ANZ Capel Court Limited) trust
management services. Funding may be provided via an ANZ-sponsored securitisation vehicle whichis consolidated onto the Bank’s financial statements, to certain clients wishing to accesssecuritisation.

ANZ has no affiliated entities that ANZ manages or advises and that invest in securitisation exposuresthat ANZ has securitised or in SPVs that ANZ sponsors.
Governance of securitisation activities
Governance of securitisation activities is overseen by the Board and executive committees described in
Chapter 3, and managed in accordance with the credit risk and market risk frameworks described in
Chapters 6 and 8.
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 and procedures, including:Appropriate risk management systems to identify, measure, monitor and manage the risks arisingfrom its involvement in securitisation exposures;

32

APRA’s definition of securitisation includes certain cases where only one tranche or class of creditors is serviced by
the cash flow from the pool of assets.

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ANZ Basel III Pillar 3 disclosure

September 2016

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 fundedarrangements 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 securitisationtransactions, ANZ has a specialist securitisation team with independent Risk personnel overseeing
operations. Credit decisions require joint Risk and business 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, the relevant businessarea manages these exposures until the securitisation exposures are repaid in full or traded.
All facilities provided to or investments in securitisation programs (across both the banking and tradingbooks) undergo initial and ongoing due diligence requirements as outlined by APRA. This due diligenceis completed with input from the credit risk function and includes analysing the structure of thetransaction and monitoring performance of the underlying assets of the transaction. In addition, suchsecuritisation 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 andfrequency of internal reporting to the appropriate credit risk and Markets functions is as follows:

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



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

The use and treatment of Credit Risk Mitigation (CRM) techniques with respect to securitisation
exposures are assessed on a case-by-case basis in a manner consistent with the bank-wide CRM
methodology33.
Regulatory capital approaches
For securitisation exposures held in ANZ’s banking book34, ANZ applies an IRB 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 Attachment
B to APS 120 apply to these exposures.
In accordance with APS 120, ANZ has a hierarchy of approaches available to quantify the credit risk ofbanking book securitisation exposures. The most common approaches used are the Ratings BasedApproach (specifically utilising the external ratings of External Credit Assessment Iinstructions and theInternal Assessment Approach (IAA). Other approaches that may be used are Supervisory Formula
Approach (SFA) and Eligible Facility Approach.
Where the use of ECAI’s is relevant, ANZ applies the ratings or the rating methodologies provided byStandard & Poor’s, Moody’s Investor Services and/or Fitch Ratings as appropriate.

33

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.

34

Exposures are classified into either the trading book or the banking book. In general terms, the trading bookconsists of positions in financial instruments and commodities held with trading intent or in order to hedge otherelements 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 2016

IAA is applied to securitisation exposures that are not externally rated where the underlying assets areresidential mortgages, equipment finance, auto loans or trade receivables. When utilising the IAA,
ANZ uses a rating agency-type methodology which specifies certain stress factors, takes into accounthistorical performance of assets and other (asset-specific) considerations such as underwriting
standards.
IAA methodology is applied and maintained in accordance with APRA’s requirements and it forms partof ANZ’s overall securitisation risk-grading framework. In addition to adopting IAA for regulatory andeconomic capital requirements, IAA may be used for internal management purposes.
Accounting policies
The principal accounting policies governing ANZ’s securitisation activities are outlined in ANZ’s 2016
Annual Report Notes to the Financial Statements. These include the valuation, derecognition,
consolidation and income recognition principles outlined in Note 1 – Significant Accounting Policies andthe critical judgments applied to these policies outlined in Note 2 – Critical Estimates and Judgments
Used in Applying Accounting Policies. ANZ applies these group accounting policies to its securitisation
activities, as appropriate and these policies have not changed since the prior year. Note 35 –Structured Entities and Note 36 – Transfers of Financial Assets also provides details about the natureof ANZ’s securitisation activities and certain accounting policies as they specifically apply to these
activities.
Financial instruments held or issued by structured entities are recognised and valued using theprinciples of AASB 139 Financial Instruments: Recognition and Measurement. For synthetic
securitisations, any transferred credit exposure is recognised 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 thebanking or trading book.
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 withthe accounting policies set out in ANZ’s 2016 Annual Report.

64

ANZ Basel III Pillar 3 disclosure

September 2016

Banking Book
Table 12(g): Banking Book: Traditional and synthetic securitisation exposures
Sep 16
Traditional securitisations
ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage-

80,478-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

80,478-ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

Aggregate of traditional and synthetic securitisations
ANZ Originated$M
Underlying asset

ANZ Self Securitised$M

ANZ Sponsored$M

Underlying asset

Synthetic securitisations
Underlying asset

Residential mortgage-

80,478-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

80,478-65

ANZ Basel III Pillar 3 disclosure

September 2016

Mar 16
Traditional securitisations
ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage-

79,806-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

79,806-ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

Aggregate of traditional and synthetic securitisations
ANZ Originated$M
Underlying asset

ANZ Self Securitised$M

ANZ Sponsored$M

Underlying asset

Synthetic securitisations
Underlying asset

Residential mortgage-

79,806-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

79,806-

Sep 15
Traditional securitisations
ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage-

79,355-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

79,355-ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

Underlying asset

Synthetic securitisations
Underlying asset

Underlying asset

Aggregate of traditional and synthetic securitisations
ANZ Originated ANZ Self Securitised
ANZ Sponsored
$M
$M
$M

Residential mortgage-

79,355-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

79,355-66

ANZ Basel III Pillar 3 disclosure

September 2016

Table 12(h): Banking Book: Impaired and Past due loans relating to ANZ originatedsecuritisations
Sep 16ANZ Originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

Losses recognised
for the six month
ended
$M

Residential mortgage-

80,478-44-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

-

80,478-44-

Underlying asset

Mar 16ANZ Originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

Losses recognised
for the six month
ended
$M

Residential mortgage-

79,806-

51-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

-

79,806-

51-

Underlying asset

Sep 15ANZ Originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

Losses recognised
for the six month
ended
$M

Residential mortgage-

79,355-36

1Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

-

79,355-36

1

Underlying asset

67

ANZ Basel III Pillar 3 disclosure

September 2016

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.
Table 12(j): Banking Book: Securitisation - Summary of current period’s activity byunderlying asset type and facility35
Sep 16
Original value securitised

Securitisation activity by underlying asset type

ANZ
Originated$M

ANZ Self
Securitised$M

ANZ Sponsored$M

Recognised gainor loss
on sale$M

Residential mortgage

-

672

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

672

-

-

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities

317

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

(934)

Other

11

Total

(606)

35

Activity represents net movement in outstandings.

68

ANZ Basel III Pillar 3 disclosure

September 2016

Mar 16
Original value securitised
Recognised gainor loss
on sale$M

ANZ
Originated$M

ANZ Self
Securitised$M

ANZ Sponsored$M

Residential mortgage

-

451

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

451

-

-

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities-

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

(186)

Other

49

Total

(137)

Sep 15
Original value securitised
ANZ
Originated$M

ANZ Self
Securitised$M

ANZ Sponsored$M

Recognised gainor loss
on sale$M

Residential mortgage

-

5,295

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

5,295

-

-

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities

329

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

240

Other

4

Total

573

69

ANZ Basel III Pillar 3 disclosure

September 2016

Table 12(k): Banking Book: Securitisation - Regulatory credit exposures by exposure typeSep 16$M

Securitisation exposure type - On balance sheet

Mar 16$M

Sep 15$M

Liquidity facilities

5

5

5

Funding facilities

6,791

6,100

5,593

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

3,975

4,890

5,076

Holdings of securities (excluding trading book)Protection provided

-

-

-

Other

152

170

168

Total

10,923

11,165

10,842

Securitisation exposure type - Off balance sheet

Sep 16$M

Mar 16$M

Sep 15$M

Liquidity facilities

61

62

66

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities (excluding trading book)

-

-

-

Protection provided

-

-

-

Other

-

-

-

Total

61

62

66

Sep 16$M

Mar 16$M

Sep 15$M

Total Securitisation exposure type
Liquidity facilities

66

67

71

Funding facilities

6,791

6,100

5,593

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

3,975

4,890

5,076

Holdings of securities (excluding trading book)Protection provided

-

-

-

Other

152

170

168

Total

10,984

11,227

10,90870

ANZ Basel III Pillar 3 disclosure

September 2016

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

Securitisation
risk weights≤ 25%

Sep 15
Sep 16
Mar 16
Regulatory credit
Risk weighted Regulatory credit
Risk weighted Regulatory credit
Risk weighted
exposure
assetsexposure
assetsexposure
assets
$M
$M
$M
$M
$M
$M
10,873

1,113

11,1201,106

10,7991,065>25 ≤ 35%

-

-

-

-

-

-

>35 ≤ 50%

-

-

-

-

-

-

>50 ≤ 75%

50

29

45

26

43

24

>75 ≤ 100%

61

61

62

62

66

66

>100 ≤ 650%

0

0

-

-

-

1

1250% (Deduction)

-

-

-

-

-

-

10,984

1,203

11,227

1,194

10,908

1,156

Total

Resecuritisation
risk weights≤ 25%

Sep 15
Sep 16
Mar 16
Regulatory credit
Risk weighted Regulatory credit
Risk weighted Regulatory credit
Risk weighted
exposure
assetsexposure
assetsexposure
assets
$M
$M
$M
$M
$M
$M
-

>25 ≤ 35%

-

-

-

-

-

-

>35 ≤ 50%

-

-

-

-

-

-

>50 ≤ 75%

-

-

-

-

-

-

>75 ≤ 100%

-

-

-

-

-

-

>100 ≤ 650%

-

-

-

-

-

-

1250% (Deduction)

-

-

-

-

-

-

Total

-

-

-

-

-

-

Total Securitisation
risk weights≤ 25%

Sep 15
Sep 16
Mar 16
Regulatory credit
Risk weighted Regulatory credit
Risk weighted Regulatory credit
Risk weighted
exposure
assetsexposure
assetsexposure
assets
$M
$M
$M
$M
$M
$M
10,873

1,113

11,1201,106

10,7991,065>25 ≤ 35%

-

-

-

-

-

-

>35 ≤ 50%

-

-

-

-

-

-

>50 ≤ 75%

50

29

45

26

43

24

>75 ≤ 100%

61

61

62

62

66

66

>100 ≤ 650%

0

0

-

-

-

1

1250% (Deduction)

-

-

-

-

-

-

10,984

1,203

11,227

1,194

10,908

1,156

Total

71

ANZ Basel III Pillar 3 disclosure

September 2016

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

72

ANZ Basel III Pillar 3 disclosure

September 2016

Table 12(n): Banking Book: Resecuritisation - Aggregate amount of resecuritisation
exposures retained or purchased

Exposuressubject to CRM$M

Resecuritisation exposures retained or purchased

Sep 16
Exposures not
subject to CRM
$M

Total
$M

Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other

-

-

-

Total

-

-

-

Total
$M
-

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Exposures to
Guarantors$M-

Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other

-

Mar 16
Exposures not
subject to CRM
$M
-

Total

-

-

Exposuressubject to CRM$M

Resecuritisation exposures retained or purchased

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Exposures to
Guarantors$M-

Resecuritisation exposures retained or purchased
Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other
Total

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Exposuressubject to CRM$M-

Sep 15
Exposures not
subject to CRM
$M
-

Total
$M
-

-

-

-

Exposures to
Guarantors
$M
-

73

ANZ Basel III Pillar 3 disclosure

September 2016

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 byunderlying asset type and 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.

74

ANZ Basel III Pillar 3 disclosure

September 2016

Table 12(s): Trading Book: Securitisation – Regulatory credit exposures by exposure typeSep 16$M

Mar 16$M

Sep 15$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

-

-

-

Protection provided

-

-

-

Other

-

-

-

Total

-

-

-

Sep 16$M

Mar 16$M

Sep 15$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

19

-

-

Protection provided

-

-

-

Other

-

-

-

Total

19

-

-

Sep 16$M

Mar 16$M

Sep 15$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

19

-

-

Protection provided

-

-

-

Other

-

-

-

Total

19

-

-

Securitisation exposure type - On balance sheet

Securitisation exposure type - Off balance sheet

Total Securitisation exposure type75

ANZ Basel III Pillar 3 disclosure

September 2016

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 APS120 and the associated Capital requirements
ANZ does not have any aggregate Securitisation exposures subject to APS120 and the associatedCapital requirements.
Table 12(u)(iii): Trading
deducted from Capital

Book:

Securitisation-

Aggregate

securitisation

exposures

ANZ has approximately AUD3,860 of securitisation exposures deducted from capital as a result of ongoing due diligence being discontinued in respect of these very small holdings, i.e. AUD40,000 original
notional / AUD3,860 paid down notional
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.

76

ANZ Basel III Pillar 3 disclosure

September 2016

Table 12(w):Trading Book: Resecuritisation - Aggregate amount of resecuritisation
exposures retained or purchased

Exposuressubject to CRM$M

Sep 16
Exposures not
subject to CRM
$M

Total
$M

Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other

-

-

-

Total

-

-

-

Exposuressubject to CRM$M

Mar 16
Exposures not
subject to CRM
$M

Total
$M

-

-

-

Resecuritisation exposures retained or purchased

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Exposures to
Guarantors$M-

Resecuritisation exposures retained or purchased
Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other
Total

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Resecuritisation exposures retained or purchased
Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other
Total

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

77

Exposures to
Guarantors$M-

Exposuressubject to CRM$M

Sep 15
Exposures not
subject to CRM
$M

Total
$M

-

-

-

Exposures to
Guarantors$M-

ANZ Basel III Pillar 3 disclosure

September 2016

Chapter 8 – Market risk
Table 13

Market risk – Standard approach

ANZ uses the standard model approach to measure market risk capital for interest rate risk – specificrisk36, equity specific risk and electricity trading risk factors. For internal purposes only ANZ also uses
an internal model for electricity.
For interest rate risk – specific risk, ANZ’s internal VaR model captures general interest rate and credit
spread risk for all products, but not the credit spread risk associated with individual issuers of interest
rate products.

Table 13(b): Market risk – Standard approach 37

Sep 16$M

Mar 16$M

Sep 15$M

Interest rate risk

79

93

118

Equity position risk

1

1

1

Foreign exchange risk

-

-

-

Commodity risk

1

1

2

81

95

121

1,013

1,188

1,513

Total
Risk Weighted Assets equivalent

36

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.

37

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

78

ANZ Basel III Pillar 3 disclosure

Table 14

September 2016

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 from changes in interest rates, foreign exchange rates, credit spreads, volatility, correlations orfrom 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 all trading portfolios except for specific interest rate risk, equity specificrisk and electricity trading. ANZ uses the Standardised approach to market risk capital for thesesegments.
Governance of market risk
The Board Risk Committee supervision of market risk is supported by the Credit Market Risk
Committee (CMRC). CMRC is responsible for the oversight and control of credit, market, insurance andmaterial financial risks across the ANZ Group and meets at least monthly..
The Markets 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 aremanaged within the appetite and limit framework set by the Board.

Measuring and monitoring market risk exposures, and approving counterparty and associatedrisks.

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 tomovements in price factors for both physical and derivative trading positions. Trading positions arise
from transactions where ANZ acts as principal with customers, financial exchanges or inter-bankcounterparties.
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 communicationof risk.



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



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 raterisk, liquidity risk and foreign exchange exposures from the Group’s foreign currency capital andearnings.
Included in Non-Traded Market risk is Interest Rate Risk in the Banking Book (IRRBB). This is the riskof loss arising from 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.

79

ANZ Basel III Pillar 3 disclosure

September 2016

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.
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 themagnitude of market risk within the trading and balance sheet portfolios. This approach, along withrelated analysis, identifies the range of possible outcomes that can be expected over a given period oftime, and establishes the likelihood of those outcomes and allocates an appropriate amount of capitalto support these activities.
Measurement of market risk
ANZ’s traded market risk management framework incorporates a risk measurement approach toquantify the magnitude of market risk within trading books. This approach and related analysis
identifies the range of outcomes that can be expected over a given period of time and establishes therelative likelihood of those outcomes.
ANZ’s key tools to measure and manage traded market risk on a daily basis are VaR, sensitivities
measures and stress tests. VaR is calculated using a historical simulation with a 500 day observation
period for standard VaR, and a one-year stressed period for stressed VaR. Traded VaR is calculated at
a 99% confidence level for one and ten-day holding periods for standard VaR, and a ten-day holding
period for stressed VaR. All material market risk factors and all trading portfolios are captured within
the VaR model, with the exception of specific interest rate risk, equity specific risk and electricity
trading, for which capital is calculated using the Standardised approach described in Table 13(b).
Risk measurement methods and models are reviewed and validated by an independent function tocomply with the prudential requirements for prudent valuation practices for positions held in the
trading book contained in Attachment A of APS 111 Capital Adequacy: Measurement of Capital.
ANZ also applies a wide range of stress tests on the Group trading portfolio and to individual trading
portfolios. Standard stress tests are executed daily measuring the potential loss that could arise fromthe largest market movements during 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 l o s s limits and detailed control limits. Loss limits
ensure that in the event of continued losses from a trading activity, the trading activity is stopped andsenior 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 interval with 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 theimpacts of intraday trading and sales margins. It is calculated as the difference between the value ofthe 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.

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Table 14(e): Value at Risk (VaR) and stressed VaR over the reporting period38

Six months ended 30 Sep 16
Mean$M

99% 1 Day Value at Risk (VaR)

Maximum$M

Minimum$M

Period end$MForeign Exchange

4.8

8.6

2.2

4.0

Interest Rate

7.0

15.2

4.1

4.7

Credit

3.4

4.4

2.2

3.3

Commodity

1.8

2.8

1.4

2.5

Equity

0.1

0.6

0.1

0.5

Six months ended 31 Mar 16
Mean$M

Maximum$M

Minimum$M

Period end$MForeign Exchange

5.6

11.4

2.6

5.9

Interest Rate

11.3

20.1

6.9

9.0

Credit

3.0

4.6

2.4

2.7

Commodity

1.7

2.5

1.0

1.2

Equity

0.2

2.0

0.1

0.1

99% 1 Day Value at Risk (VaR)

Six months ended 30 Sep 15
Mean$M

Maximum$M

Minimum$M

Foreign Exchange

6.7

14.2

2.8

5.0

Interest Rate

8.3

12.9

5.5

10.1

Credit

3.8

5.4

2.9

3.5

Commodity

2.4

3.6

1.5

1.6

Equity

0.9

4.5

0.1

2.5

Six months ended 30 Sep 16
Maximum
Minimum$M$M

Period end$M

99% 1 Day Value at Risk (VaR)

Mean
$M

99% 10 Day Stressed VaR
Foreign Exchange

Period end
$M

31.7

53.0

13.0

27.1

Interest Rate

42.8

95.2

17.7

39.4

Credit

19.6

30.2

12.5

16.7

Commodity

8.4

16.4

5.5

8.6

Equity

1.8

3.9

0.9

3.5

Six months ended 31 Mar 16
Maximum
Minimum$M$M

Period end
$M

Mean
$M

99% 10 Day Stressed VaR
Foreign Exchange

29.5

59.5

11.0

33.3

Interest Rate

55.1

79.1

26.1

36.3

Credit

21.4

34.5

14.0

20.3

Commodity

11.4

20.6

5.8

6.7

Equity

1.5

3.1

0.6

1.6

Six months ended 30 Sep 15
Maximum
Minimum$M$M

Period end
$M

Mean
$M

99% 10 Day Stressed VaR
Foreign Exchange

36.1

71.6

13.3

25.5

Interest Rate

67.3

161.7

38.5

45.2

Credit

26.5

40.4

19.2

23.6

Commodity

10.7

19.6

5.3

11.6

Equity

1.3

5.0

0.5

2.9

38

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

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Reporting of market risk
Market Risk reports daily VaR and stress testing results to senior management in Market Risk and theMarkets business. Market Risk expediently escalates details of any limit breach to the appropriate
discretion holder within Market 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 risk 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 describedabove, are fundamental to how market risk is managed. Market Risk has a presence in all the major
dealing operations centres in Australia, 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 exposures are transferred to the trading book and centrally managed by the Global
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 multicurrency systems and managed within the trading book in accordance with the TFC framework.
Structural exposures from foreign investments and capital management activities are managed inaccordance with policies approved by the Board Risk Committee, with the main objective of ensuringthat ANZ’s capital ratio is largely protected from changes in foreign exchange. As at 30 September
2016, ANZ’s investment in ANZ Bank New Zealand Limited is the main source of the structural foreignexchange exposure.

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Chapter 9 – Operational risk
Table 15 Operational risk
Definition of operational risk
Operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and systems, or from external events. This definition includes legal risk,
and the risk of reputation loss, or damage arising from inadequate or failed internal processes,
people and systems, but excludes strategic risk.
The objective of operational risk management is to ensure that risks are identified, assessed,
measured, evaluated, treated, monitored and reported in a structured environment with appropriate
governance and oversight. ANZ does not expect to eliminate all risks. Rather it seeks to ensure thatits residual risk exposure is managed as low as reasonably practical based on a soundrisk/reward analysis in the context of an international financial institution.
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. This methodology applies across all of ANZ.
Operational risk governance and structure
The ANZ Board has delegated its powers to the Risk Committee to approve the ANZ Operational
Risk Measurement and Management Framework which is in accordance with Australian Prudential
Standard APS 115. The Operational Risk Executive Committee (OREC) is the primary senior
executive management forum responsible for oversight of ANZ’s Risk Profile. The purpose of OREC isto assist the Board Risk Committee in the effective discharge of its responsibilities for operational risk
management and the management of the compliance obligations of ANZBGL and its controlled
entities.
Divisional Risk Committees and Business Unit Risk Forums manage and maintain oversight ofoperational risks supported by thresholds for escalation and monitoring. Day to day management ofoperational risk is the accountability of every employee. Business Units undertake operationalrisk activities as part of this accountability. This includes implementation of the operational risk
framework and involvement in decision making processes concerning all material operational risk
matters.
Three lines of defence
ANZ operates three lines of defence model for the management of Operational Risk. Each lineof Defence has defined roles, responsibilities and escalation paths to support effective two way
communication and management of operational risk at ANZ. There are also on-going review
mechanisms in place to ensure the Operational Risk Measurement and Management Framework(ORMMF) and Compliance frameworks continue to meet organisational needs and regulatory
requirements.
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;undertake day-to-day management of risks;

promote a strong risk culture; manage risk exposure and make sustainable business decisions;

ensure operational risk information is up to date and reflective of the bank’s true operationalrisk position.

Operational Risk functions (Divisional 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 ismaintained across the division.

undertaking independent oversight of the application of the ORMMF;



coordinating, oversighting and reporting on material operational risks and change initiatives;

contributing to the identification of systemic issues and risk collation across the Division;

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Enterprise Operational Risk is accountable for:

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

undertaking independent review and challenge of business activities and ensuring that thestrategy is maintained across the enterprise;leading the scenario analysis and operational risk capital calculation process;

being a central point of contact for regulators in regards to operational risk;



ensuring a strong risk management culture across the enterprise.

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 andprocesses;undertaking independent review of the adequacy of the ORMMF.

Collectively Internal Audit, Operational Risk functions, Divisions and Business Units are responsible
for monitoring and reporting to Executive Management, the Board, Regulators and others on all
matters related to the measurement and management of operational risk.

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Operational risk principles
ANZ has developed a comprehensive framework to manage operational risk and compliance which
includes the following operational risk management principles:
Principle 1:
Risk Governance

ANZ recognises operational risk as a primary risk category and has aneffective and embedded operational risk governance structure. This includes a
dedicated and independent operational risk management function and an
executive committee for oversight of operational risk across ANZ, supported
by organisation wide policies, procedures and systems.

Principle 2:
Risk Culture

ANZ believes risk management is everyone’s responsibility and encourages aculture of prompt escalation of risk to staff sufficiently senior to drive
resolution. This culture is supported by clearly articulated roles andresponsibilities to ensure effective measurement and management ofoperational risk.

Principle 3:
Risk Appetite andObjective Setting

ANZ’s Board is responsible for the overall operational risk profile andaccordingly has an approved operational risk appetite, including thresholds forrisk assessment and reporting that determines the risk boundaries within
which the business must operate to set its strategy.

Principle 4:
Risk and Control
Assessment

ANZ periodically identifies and assesses its exposure to key operational risk
within all existing and new products, processes, projects and systems, andassesses the key controls in place to manage these risks.

Principle 5:
Loss and IncidentManagement

ANZ incorporates analysis of loss, incident and control failure into improving
the underlying control environment by defining clearly articulated risk
response strategies.
This includes effective contingency and business
continuity plans that enable it to operate on an ongoing basis and limit losses
in the event of severe business disruption.

Principle 6:
Capital Calculation

ANZ holds capital commensurate with its operational risk, and maintains
comprehensive and well documented operational risk capital processes forcalculating its operational risk capital, including monitoring for materialchanges to capital exposure.

Principle 7:
Risk Monitoring andReporting

ANZ maintains a comprehensive and sustainable approach for monitoring andreporting relevant operational risk data, and monitors material changes tooperational risk exposure, including Key Risk Indicators (KRIs), to support theproactive management of operational risk across the Group.

Principle 8:
Assurance andContinuous
Improvement

ANZ has appropriate review processes to continuously evaluate theeffectiveness and relevance of its operational risk measurement andmanagement processes to meet organisational needs and regulatory
requirements.

Principle 9:
Risk Based Decision
Making

ANZ ensures effective integration of day to day operational risk managementwith outputs from the operational risk measurement processes, to support
risk based decision making.

ANZ’s operational risk framework is delivered through:

Level 1 ANZ Board Operational Risk Policy (the Principles) – approved by the Board Risk
Committee, which sets out the operational risk principles for governing the overall measurement
and management of operational risk across ANZ.

Level 2 Global Operational Risk Measurement and Management Policy (the Policy) – approved by
the Board Risk Committee, which outlines the core standards, roles and responsibilities andminimum requirements for the way in which operational risk is measured and managed, in linewith Level 1 ANZ Board Operational Risk Policy and APS 115.

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 Level 2A Global Operational Risk Procedures – owned by Enterprise Operational Risk, which detailthe processes that support the consistent application of Level 1 and Level 2 Global Operational Risk
Policies across ANZ. The procedures are further augmented by tools, templates, systems and on-goingtraining.
Operational risk management
Risk and controls are managed as part of business as usual right across the organisation. 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 visibilityof key risks. These are the risks that if they materialised, would adversely affect the achievement ofbusiness objectives, ANZ’s reputation, legal and regulatory compliance or impact key processes.
Day-to-day management of operational risk is the responsibility of business unit line management andstaff. This includes:
primary accountability for the understanding of key risks and the related control environment;

analysis of identified risks, including assessment of inherent and residual risks This requires
analysis of the potential consequences of failing to deal with the risks, the likelihood of therisks being realised and the effectiveness of the key controls in place to prevent or mitigate the
risk;



evaluation of the risk to determine whether it is within Board approved risk appetite tolerances

identification and implementation of risk treatment options to improve the environment of key
risks that are outside appetite;ensuring operational risk information is up to date and reflective of the true operational risk
position;

monitoring and reviewing of treatment plans, operational risks and controls, including testing of
key controls and reporting on the current operational risk profile;

promoting a strong risk culture of managing risk exposure and making sustainable risk
decisions;Operational risk mitigation
In line with industry practice, ANZ obtains insurance to cover those operational risks where costeffective premiums can be obtained. In conducting their business, Business Units are advised to act as
if uninsured and to not use insurance as a guaranteed mitigant for operational risk.
ANZ has business continuity, recovery and crisis management plans. The intention of the business
continuity and recovery plans is to ensure critical business functions can be maintained, or restored ina timely fashion, in the event of material disruptions arising from internal or external events.
Crisis management planning at Group and country levels supplements business continuity plans in theevent of a broader group or country crisis. Crisis management plans include crisis team structures,roles, responsibilities and contact lists, and are subject to testing.
Operational risk reporting
ANZ’s operational risk management framework includes “COR” a global, web-based Risk, Complianceand IT Governance tool that provides ANZ an enterprise solution for risk management. It is the sourceof truth and provides greater transparency and integrity of Risk, Controls, Obligations and Events
information across ANZ.
The Corporate Centre and Business Unit risk functions prepare reporting. OREC’s role is to monitor thestate of operational risk measurement and management and compliance management on an enterprisebasis and instigate any necessary corrective actions.
ANZ has been authorised by APRA to use the advanced measurement approach (AMA) for calculationof operational risk capital requirements under APS 115. This methodology applies across all of ANZ.
ANZ’s advanced measurement approach
Enterprise Operational Risk is responsible for maintaining ANZ’s AMA for the measurement andallocation of operational risk capital.
Operational risk capital is held to protect depositors and shareholders of the bank from rare andsevere unexpected losses. In order to quantify the overall operational risk profile, ANZ maintains andcalculates operational risk capital (including regulatory and economic capital), on at least a six
monthly basis. The capital model uses the following as data inputs:

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

historical internal losses captured and reported in the Bank-wide 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 calculated using exposure models developed using business data and inputs fromsubject matter experts;

Operational risk modelling is performed by a specialist central function. The data inputs are combinedusing loss distribution approach and calculated using Monte Carlo simulations.
Once calculated, the capital is allocated to divisions based on the historic loss experience andexposure to scenarios. Understanding the divisional exposure to scenarios (and their underlying risk
drivers) allows lines of business to consider 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 a 99.97%
confidence interval.
Compliance
ANZ’s Compliance Function is responsible for the development and maintenance of ANZ’s Compliance
Framework. Each division and business is responsible for embedding the Framework into its business
operations, identifying all relevant regulatory compliance obligations and escalating and managing
incidents when they occur.
Definition of compliance
At ANZ, Compliance Risk is defined as the probability and impact of an event that results in a failure toact in accordance with laws, regulations, industry standards and codes, internal policies andprocedures and principles of good governance as applicable to ANZ’s businesses.
Compliance Governance and structure
The roles of the Board Risk Committee and OREC are described in Section 2.
ANZ’s Compliance Function is accountable for designing a program that enables ANZ to meet its
regulatory obligations and satisfy itself that appropriate standards of good governance are met. It has
also been tasked to provide assurance to the Board that material compliance risks are identified,assessed and appropriately managed by the business.
ANZ’s compliance principles
The following Principles, approved by ANZ’s Board set out ANZ’s commitment to compliance:

Doing the right thing the right way - ANZ will operate to high ethical standards by promoting aculture where our people understand the importance of doing the right thing the right way andwill reinforce this through its values, Code of Conduct and training programs.

Enterprise-wide approach for compliance - ANZ will adopt an enterprise-wide approach for
managing compliance and ensure consistent standards are embedded in how we do business, how
we conduct ourselves and the design and operation of our processes, systems and products.



Clearly defined authority and accountability - ANZ will clearly define authority and accountability
for compliance management and associated decision-making across its business operations andwill commit adequate resources to enable its businesses to operate in a compliant manner.

Independent compliance function – ANZ will have an independent compliance function
responsible for governance, management, oversight and reporting of compliance with ANZ’s key
compliance obligations.



No tolerance for deliberate non-compliance – Managing ANZ’s business to our global compliancestandards and the laws of the countries in which we operate is non-negotiable. ANZ will not
tolerate deliberate or negligent non-compliance. Consequences could result in severe disciplinary
action such as dismissal.

Adequate risk and control environment and prompt response to deficiencies – ANZ will ensure
implementation of a generally acceptable risk and control environment for managing compliancewhich is within our risk appetite settings. When compliance incidents are identified, ANZ will act
promptly to implement meaningful corrective action.

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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 diligenceby Group Strategy, internal specialists and external advisors, where appropriate. Board approvalis required prior to committing to any investments over delegated authorities, and all regulatory
notification requirements are met. Performance of these investments is monitored by both theowning business unit and Group Strategy to ensure that it is within expectations and the values of
the investments are tested at least six monthly for impairment.

•

Equity investments on which capital gains are expected - These transactions are originated andmanaged by dedicated equity finance teams. These transactions represent funding solutions for
known customers of ANZ and are governed by specific policies. ANZ ensures that the investmentin these entities does not constitute a controlling interest in the relevant business.

•

Equity investments made as the result of a work out of a problem exposure - From time to time,
ANZ will take an equity stake in a customer as part of a work out arrangement for problem
exposures. These investments are made only where there is no other viable option available andform 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 onwhether ANZ has significant influence over the investee.
Investments in associates
Where significant influence exists, the investment is classified as an Investment in Associate in thefinancial statements. ANZ adopts the equity method of accounting for associates. ANZ’s share of theresults of associates is included in the consolidated income statement. The associate investments arerecognised at cost plus ANZ’s share of post acquisition net assets. Interests in associates are reviewed
annually for impairment, using either market value, or a discounted cash flow methodology to assessvalue in-use.
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 the investments are recognised in an equity reserve with any
impairment recognised in the income statement. When the asset is sold the cumulative gain or loss
relating to the asset held in the AFS revaluation reserve is transferred to the income statement.

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Table 16(b) and 16(c): Equities – Types and nature of Banking Book investments
Sep 16$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

2,990

2,503

Value of unlisted (privately held) equities

2,131

2,131

Total

5,121

4,634
Mar 16$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

3,081

2,646

Value of unlisted (privately held) equities

2,080

2,080

Total

5,161

4,726

Sep 15$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

2,328

1,853

Value of unlisted (privately held) equities

3,157

3,157

Total

5,485

5,010

Half Year
Sep 16$M

Half Year
Mar 16$M

Half Year
Sep 15$M---

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 andwritedowns in the reporting period

-

(260)

-

Total

-

(260)

-

Half Year
Sep 16

Half Year
Mar 16

Half Year
Sep 15

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

(84)

6

-

-

-

-

(84)

6

-

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

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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 bookInterest rate risk in the banking book (IRRBB) relates to the potential adverse impact of changes inmarket 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 of interest 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 investmentterm) and oversee the interest rate risk arising from the repricing of asset and liabilities (mismatchrisk) in the banking book. GALCO has delegated the management of this mismatch risk to theMarkets 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.

Management framework
IRRBB is managed under a comprehensive measurement and reporting framework, supported by anindependent 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 the Global Markets business and monitored by Markets business.

•

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

•

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

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 bookdue 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 statisticalconfidence.

•

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.

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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 inAustralian dollars.
Basis and optionality risks are measured using Monte Carlo simulation techniques, to generate atheoretical worst outcome at a specified confidence level (typically 99%) less the average outcome.
Reporting of interest rate risk in the banking bookMarket Risk analyses the output of ANZ’s VaR, EaR and Stress Testing calculations daily. Compliancewith the risk appetite and limit framework is reported to CMRC, GALCO and the Board Risk Committee.
IRRBB regulatory capital is calculated monthly.
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 make up the capital requirement and are calculated as the difference between
the book 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 ininterest rates, in order 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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Table 17(b): Interest Rate Risk in the Banking Book
Change in Economic Value
Sep 16

Mar 16

Sep 15$M$M$M

200 basis point parallel increase

(85)

(200)

(17)

200 basis point parallel decrease

84

215

34

200 basis point parallel increase

(58)

(82)

17

200 basis point parallel decrease

51

76

(23)

200 basis point parallel increase

31

(81)

(112)

200 basis point parallel decrease

(29)

92

123

Standard Shock Scenario Stress Testing:Interest rate shock applied
AUD

NZD

USD

GBP
200 basis point parallel increase

18

16

-

200 basis point parallel decrease

(18)

(16)

-

200 basis point parallel increase

(53)

(80)

(74)

200 basis point parallel decrease

59

87

80

Other

IRRBB regulatory capital
IRRBB regulatory RWA

936

822

595

11,70010,2807,433

IRRBB stress testing methodology
Stress tests within ANZ include standard and extraordinary tests. These tests are used to highlightpotential risk which may not be captured by VaR, and how the portfolio might behave under
extraordinary circumstances. Standard stress tests 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 selected periods are each reported. Stresses of the repricing term
assumptions investigate scenarios where actual repricing terms are vastly different to those modelled.

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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 capital framework. It is a simple, non-risk based supplement or backstop to the current risk
based capital requirements and is intended to restrict the build-up of excessive leverage in thebanking 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 for Australian ADIs, although the current BCBS proposal is for a minimumof 3%. Currently the Leverage Ratio is only a disclosure requirement. APRA intends to consult on theappropriate application of the Leverage Ratio as a minimum requirement for Australian ADIs once
BCBS finalises its calibration for implementation as a Pillar 1 requirement by January 2018
At 30 September 2016, the Group’s Leverage Ratio of 5.3% was above the 3% minimum currently
proposed by the BCBS. Table 18 below shows the Group’s Leverage Ratio calculation as at 30
September 2016 and Table 19 summarises the reconciliation of accounting assets and leverage ratio
exposure measure at 30 September 2016.

Table 18

Leverage Ratio
Sep 16$M

Mar 16$M

Sep 15$M

On-balance sheet exposures1

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

762,007751,367

751,843

2(Asset amounts deducted in determining Basel III Tier 1 capital)(17,648)(17,432)(18,087)3

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

744,359

733,935

733,756

Derivative exposures
4

Replacement cost associated with all derivatives transactions (i.e. net of eligible
cash variation margin)

11,295

12,19916,0785Add-on amounts for PFE associated with all derivatives transactions

27,304

26,57827,960---(9,151)(9,821)(8,121)

6
7

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)

8(Exempted CCP leg of client-cleared trade exposures)

9

Adjusted effective notional amount of written credit derivatives

-

-

-

8,535

20,01922,11510(Adjusted effective notional offsets and add-on deductions for written credit
derivatives)(7,383)(18,433)(19,917)

11

Total derivative exposures

30,60030,542

38,11529,937

20,92817,319Securities financing transaction exposures
12

Gross SFT assets (with no recognition of netting), after adjusting for saleaccounting transactions

13(Netted amounts of cash payables and cash receivables of gross SFT assets)

(391)

(387)

(763)

14

CCR exposure for SFT assets

1,871

879

741

15

Agent transaction exposures

16

Total securities financing transaction exposures

-

-

-

31,417

21,42017,297

Other off-balance sheet exposures
17

Off-balance sheet exposure at gross notional amount

18(Adjustments for conversion to credit equivalent amounts)

19

Off-balance sheet items

245,189

257,836

271,129(146,729)(154,883)(163,312)

98,460102,953

107,817

Capital and Total Exposures
20

Tier 1 capital

21

Total exposures

48,28545,06245,484

904,836

888,850

896,985

5.3%

5.1%

5.1%

Leverage ratio
22

Basel III leverage ratio

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Table 19
Summary comparison of accounting assets vs. leverage ratio
exposure measureSep 16$M

Mar 16$M

Sep 15$M

914,869

895,278

889,900(35,432)(34,236)(35,113)---(56,893)(58,205)(47,510)

1,480

492

(22)

1

Total consolidated assets as per published financial statements

2

Adjustment for investments in banking, financial, insurance or commercial
entities that are consolidated for accounting purposes but outside the scope of
regulatory consolidation.

3

Adjustment for assets held on the balance sheet in a fiduciary capacity
pursuant to the Australian Accounting Standards but excluded from theleverage ratio exposure measure

4

Adjustments for derivative financial instruments.

5

Adjustment for SFTs (i.e. repos and similar secured lending)

6

Adjustment for off-balance sheet exposures (i.e. conversion to credit
equivalent amounts of off-balance sheet exposures)

98,460102,953

107,817

7

Other adjustments(17,648)(17,432)(18,087)

8

Leverage ratio exposure

904,836

888,850

896,985

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Table 20

September 2016

Liquidity Coverage Ratio disclosure templateSep 16
Total
Total
Unweighted
Weighted
Value
Value
$M
$M

Jun 16
Total
Unweighted
Value
$M

Total
WeightedValue$M

Mar 16
Total
Total
Unweighted
Weighted
Value
Value
$M
$M

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

124,723-

122,959-

125,727

Alternative liquid assets (ALA)
Reserve Bank of New Zealand (RBNZ)
3
securities
Cash outflows-

45,294-45,299-45,300

-

9,480

-

8,239

-

9,987

205,315

24,246

206,474

24,050207,897

23,715

2

4
5
6
7
8
9
10

Retail deposits and deposits from small
business customersof which: stable depositsof which: less stable deposits
Unsecured wholesale fundingof which: operational deposits (allcounterparties) and deposits in
networks for cooperative banksof which: non-operational deposits(all counterparties)of which: unsecured debt

71,261

3,563

72,042

3,602

74,4133,721

134,054

20,683

134,432

20,448133,484

19,994

190,864

115,163

188,235

113,230

190,478

113,890

53,531

13,30749,626

12,336

48,97912,156

122,120

86,643

122,82185,106125,679

85,914

15,213

15,213

15,78815,78815,82015,820

246

154

1,213

11

Secured wholesale funding

12

139,640

38,131

144,004

40,546

149,890

41,45626,30926,30928,29028,29027,664

27,664

-

-

-

-

-

-

113,331

11,822

115,714

12,256122,226

13,79216

Additional requirementsof which: outflows related toderivatives exposures and othercollateral requirementsof which: outflows related to loss offunding on debt productsof which: credit and liquidity
facilities
Other contractual funding obligations

10,647-

11,524-

11,606-

17

Other contingent funding obligations

103,040

4,622

111,696

5,292

111,944

4,867

18

Total cash outflows

13
14
15

182,408

183,272

185,141

Cash inflows
19

17,5601,839

16,8282,008

15,166

1,379

34,19523,54834,251

22,72736,79725,191

21

Secured lending (e.g. reverse repos)
Inflows from fully performing
exposures
Other cash inflows

13,292

13,292

16,794

16,794

15,865

15,86522

Total cash inflows

65,047

38,67967,873

41,52967,82842,43523

Total liquid assets-

179,497

176,497-

181,014

24

Total net cash outflows-

143,729

141,743-

142,70625

Liquidity Coverage Ratio (%)

124.9%

124.5%

126.8%

66

65

64

20

Number of data points used (simple
average)

Liquidity Coverage Ratio (LCR)
ANZ’s average LCR for the 6 months to 30 September 2016 was 125% with total liquid assets
exceeding net outflows by an average of $35.3b.
The main contributors to net outflows were modelled outflows associated with the bank’s corporate
and retail deposit portfolios, offset by inflows from maturing loans. While cash outflows associatedwith 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 and cash making up on average 70% of total liquid assets.
Through the period the Liquidity Coverage Ratio has remained within a range of 117% to 131%.
ANZ has a well diversified deposit and funding base avoiding undue concentrations by investor type,maturity, market source and currency.
ANZ monitors and manages its liquidity risk on a daily basis including LCR by geography andcurrency, ensuring ongoing compliance across the network.

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Glossary
ADI

Authorised Deposit-taking Institution.

Basel III Credit Valuation
adjustment (CVA) capitalcharge

CVA charge is an additional capital requirement under Basel III for
bilateral derivative exposures. Derivatives not cleared through acentral exchange/counterparty are subject to this additional capitalcharge and also receive normal CRWA treatment under Basel II
principles.

Collective provision (CP)Collective provision is the provision for credit losses that are
inherent in the portfolio 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, nomatter how likely, are not recognised.

Credit exposure

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

Credit risk

The risk of financial loss resulting from the failure of ANZ’scustomers and counterparties to honour or perform fully the termsof a loan or contract.

Credit Valuation Adjustment(CVA)

Over the life of a derivative instrument, ANZ uses a CVA model toadjust fair value to take into account the impact of counterparty
credit quality. The methodology calculates the present value of
expected losses over the life of the financial instrument as afunction 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 date that the arrears or excess occurs and accruing for eachcompleted calendar day thereafter.

Exposure at Default (EAD)

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

Impaired assets (IA)Facilities are classified as impaired when there is doubt as towhether the contractual amounts due, including interest and otherpayments, will be met in a timely manner. Impaired assets include
impaired facilities, and impaired derivatives. Impaired derivatives
have a credit valuation adjustment (CVA), which is a market
assessment of the credit risk of the relevant counterparties.

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

Individual provision charge(IPC)

Impaired provision charge is the amount of expected credit losses
on financial instruments assessed for impairment on an individual
basis (as opposed to on a collective basis). It takes into accountexpected 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 such as the realisable value of security (or other credit
mitigants), the likely return available upon liquidation or
bankruptcy, legal uncertainties, estimated costs involved inrecovery, the market price of the exposure in secondary markets
and the amount and timing of expected receipts and recoveries.

Internationally Comparable
Basel III Capital

The Internationally Comparable Basel 3 CET1 ratio incorporates
differences between APRA and both the Basel Committee Basel III
framework (including differences identified in the March 2014 BaselCommittee Regulatory Consistency Assessment Programme (RCAP)
on Basel III implementation in Australia) and its application in
major offshore jurisdictions.

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Market risk

The risk to ANZ’s earnings arising from changes in interest rates,
currency exchange rates and credit spreads, or from fluctuations inbond, commodity or equity prices. ANZ has grouped market risk
into two broad categories to facilitate the measurement, reportingand control of market risk:
Traded market risk - the risk of loss from changes in the value offinancial instruments due to movements in price factors for physicaland derivative trading positions. Trading positions arise fromtransactions where ANZ acts as principal with clients or with themarket.
Non-traded market risk (or balance sheet risk) - comprises interest
rate risk in the banking book and the risk to the AUD denominatedvalue of ANZ’s capital and earnings due to foreign exchange rate
movements.

Operational risk

The risk of loss resulting from inadequate or failed internal controls
or from external events, including legal risk but excluding
reputation risk.

Past due facilities

Facilities where a contractual payment has not been met or thecustomer is outside of contractual arrangements are deemed pastdue. Past due facilities include those operating in excess ofapproved arrangements or where scheduled repayments areoutstanding 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 a more 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 originalcontractual terms have been modified for reasons related to thefinancial 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 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 and operational risk), RWA is determinedby multiplying the capital requirements 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 andrisks 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
proceeds from the realisation of any collateral have been received.
Where individual provisions recognised in previous periods havesubsequently decreased or are no longer required, such impairment
losses are reversed in the current period income statement.

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ANZ Basel III Pillar 3 disclosure

Average Risk Weights (Credit RWA / EAD*)

September 2016