2013
BASEL IIIPILLAR 3 DISCLOSURE

YEAR ENDED 30 SEPTEMBER 2013

APS 330: PUBLIC DISCLOSURE

ANZ Basel III Pillar 3 disclosure

September 2013

Important noticeThis document has been prepared by Australia and New Zealand Banking Group Limited (ANZ) tomeet its disclosure obligations under the Australian Prudential Regulation Authority (APRA) ADI
Prudential Standard (APS) 330: Public Disclosure.
This disclosure was prepared as at 30 September 2013. ANZ has a continuous disclosure policy, underwhich ANZ will immediately notify the market of any material price sensitive information concerningtheGroup,
inaccordancewithlegislative
andregulatory
disclosure
requirements.

1

ANZ Basel III Pillar 3 disclosure

September 2013

TABLE OF CONTENTS 1
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 .................................................................10
Chapter 5 – Capital and capital adequacy ............................................................................11
Table 1

Common disclosure template .......................................................................12

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 disclosure for exposures related to counterparty credit risk .................58

Chapter 7 – Securitisation ................................................................................................60
Table 12Banking Book - Securitisation disclosures ......................................................63
Trading Book - Securitisation disclosures.......................................................72

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

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

Table 14

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

Chapter 9 - Operational Risk .............................................................................................80
Table 15

Operational risk ........................................................................................80

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

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

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

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

Chapter 12 – Liquidity risk ................................................................................................90
Appendix 1 – ANZ Bank (Europe) Limited ............................................................................92
Glossary.......... ...............................................................................................................93

1

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

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ANZ Basel III Pillar 3 disclosure

September 2013

Chapter 1 – Highlights
Capital ratios
Strengthening capital position•
2.5% Capital
Conservation
Buffer

The Group is well placed in regards
tocapitallevelswithcapitalgeneration and initiatives in FY13
lifting capital levels by 47bps (APRA
CET1) AND 76bps (InternationallyHarmonised CET1)

4.5% CET1
Minimum

Sep 12

Sep 13
Mar 13
Internationally Harmonised Basel III
APRA Basel III

Exposure at Default* ($bn)

Growth in EAD of$812.2bn in 2H13
•

5%

HoH

to

Growth driven predominately byincreases in the Corporate +$16bn
and Residential Mortgages +$15bnasset classes.

* Exposure at Default represents exposure gross of credit risk mitigationsuch as guarantees, credit derivatives, netting and financial collateral.

Impaired Assets ($m)
Impaired
Assetsdownward trend

3

continue

the•Impaired Loans/Facilities decreased
by 6% HoH; 14% YoY.

•

Gross Impaired assets declining at
an average of $0.8bn YoY since
September 2010.

ANZ Basel III Pillar 3 disclosure

September 2013

Provision Ratios (Provisions/Credit RWA)
2.00%

1.78%

1.65%

Provision coverage remains
appropriate
1.57%

1.51%

1.50%

The total provision coverage ratio at
1.51% and collective provision ratio
at 1.00% on a Basel III basis
providesconservative
coveragegiven the ongoing improvement incredit quality.

•

1.00%
1.08%

1.06%

1.00%

1.01%

0.50%

0.00%
Sep 12*

Mar 13*

Total Provision Balance/CRWA

Sep 13 Basel III

Mar 13 Basel III

Collective Provision Balance/CRWA* Under Basel II

Movement in Credit Risk Weighted Assets ($bn)
300
280

12.2
275.0

4.9

(0.2)

287.7

(4.2)

260

CreditRisk
Weighted
Assets(CRWA) up by $12.7bn HoH

240
220

•

Growth in CRWA has been driven
by increases in the Corporate,
Other Retail, as well as Residential
Mortgages Basel Asset Classes.

•

FX
impactdrivenbythedepreciation of the AUD against
most of the major currencies, inparticular USD & NZD.

•

Total
averagerisk
weightremaining flat HoH at 37.7%

200
Mar 13GrowthData
Review

FX
ImpactSep 13

Risk

Average Risk Weights (Credit RWA/EAD*)

87%#* EAD represents exposure net of credit risk mitigation such as guarantees,credit derivatives, netting and financial collateral as used as input to advanced
Credit RWA calculations.
# includes Equity, Securitisation and Other Asset classes.
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ANZ Basel III Pillar 3 disclosure

September 2013

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, which has the most comprehensive
requirements.
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. Prior period comparatives for 30 September 2012 in this disclosure
are under Basel II approach.
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 Annual Report and in Pillar 1 returns
provided to APRA. This Pillar 3 disclosure is not audited by ANZ’s external auditor.
Comparison to ANZ’s Annual Report
These disclosures have been produced in accordance with regulatory capital adequacy concepts andrules, rather than in accordance with accounting policies adopted in ANZ’s Annual Report. 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 2013

Chapter 3 – Risk appetite and governanceRisk types
ANZ is exposed to a broad range of interrelated business risks. The main risks that directly impact
determination of regulatory capital are as follows:•

Credit risk - is the risk of financial loss resulting from the failure of ANZ’s customers andcounterparties to honour or perform fully the terms of a loan or contract. ANZ has a comprehensive
framework to manage credit risk and support sound growth for appropriate returns. The framework
is top down, being defined by credit principles and policies. The effectiveness of the credit risk
management framework is assessed through various compliance and monitoring processes. These,
together with portfolio selection, define and guide the credit process, organisation and staff.

•

Market risk – is defined as the risk to earnings arising from changes in market risk factors, which
ANZ may have an exposure to in the Banking Book and/or Trading Book. The key market risk factors
can be summarised as follows:••••

Interest rate risk - exposure to changes in the level and volatility of interest rates, slope ofthe yield curve and changes in credit spreads.
Currency rate risk - exposure to changes in foreign exchange spot and forward prices andthe volatility of foreign exchange rates.
Commodity price risk - exposure to changes in commodity prices and the volatility ofcommodity prices.
Equity price risk - exposure to changes in equity prices and the volatility of equity prices.

The Markets Risk function is a specialist risk management unit independent of the business that is
responsible for measuring and monitoring market risk. Markets Risk have implemented policies andprocedures to ensure that ANZ’s market risk exposures are managed within the appetite and limit
framework set by the Board.
•

Equity risk - is the potential loss that may be incurred on equity investments in the banking book.

•

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

•

Operational risk – within ANZ, operational risk is defined as 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 of reputation loss, or damage arising from inadequate or failed internal
processes, people and systems, but excludes strategic risk3. The Group Operational Risk function is
responsible for exercising governance over operational risk by ensuring the business management
usage of the operational risk measurement and management framework. They are also responsible
for ensuring that key operational risks and their management are reported to executive risk
committees. Key operational risk themes include business disruption, rogue trader and mis-selling.
Business units are responsible for the day to day management of operational risks through theimplementation of the Operational Risk Measurement and Management framework. This includes theidentification, analysis, assessment, monitoring, treatment and escalation of operational risks.

Other key risks faced by ANZ, but which do not directly impact determination of regulatory capital,
include:•Insurance Risk – within ANZ, insurance risk is defined as the risk of loss due to unexpected changes
in current and future insurance claim rates. In life insurance business, insurance risk arises primarily
through mortality (death) and morbidity (illness and injury) and longevity risks. For generalinsurance business, insurance risk arises mainly through weather-related incidents and similarcalamities, as well as adverse variability in home, contents, motor, travel and other insurance claim
amounts. Insurance risk is managed primarily by: product design to price all applicable risks into
contracts; reinsurance to reduce liability for large individual risks; underwriting to price/reserve forthe level of risk associated with an individual contract; claims management to admit and pay only
genuine claims; insurance experience reviews to update assumptions and portfolio management tomaintain a diversity of individual risks.

•

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 by that otherinsurer. Reinsurance is a risk transfer tool between the insurer and reinsurer. The main risk thatarises with reinsurance is counterparty credit risk. This is the risk that a reinsurer fails to meet theircontractual obligations, i.e. to pay reinsurance claims when due. This risk is measured by assigning a

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 2013

counterparty credit rating or probability of default. Reinsurance counterparty credit risk is mitigatedby restricting counterparty exposures on the basis of financial strength and concentration.
•

Strategic risk - is defined to be the potential for loss arising from a failure in ANZ’s strategies. These
include strategies designed to address or anticipate changes in the competitive, client, political or
regulatory environments.

•

Business risk - the risk of financial loss due to unexpected movements in volume, profit margin, andoperating expenses (excluding risks elsewhere defined) arising from unexpected changes in thebusiness environment, customer preferences and/or competitor actions.

•

Liquidity risk – within ANZ, liquidity risk is defined as the risk that the Group is unable to meet its
payment obligations as they fall due, including repaying depositors or maturing wholesale debt, orthat the Group has insufficient capacity to fund increases in assets. The timing mismatch of cash
flows and the related liquidity risk is inherent in all banking operations and is closely monitored by
the Group. The Group maintains a portfolio of liquid assets to manage potential stresses in funding
sources. The minimum level of liquidity portfolio assets to hold is based on a range of ANZ specificand general market liquidity stress scenarios such that potential cash flow obligations can be met
over the short to medium term.

•

Compliance risk – within ANZ, compliance risk is defined as the probability and impact of an eventthat results in a failure to act in accordance with laws, regulations, industry standards and codes,
internal policies and procedures and principles of good governance as applicable to ANZ’sbusinesses. Group Compliance is accountable for designing a compliance program that allows ANZ tomeet its regulatory obligations. It also provides assurance to the Board that material risks are
identified, assessed and managed by the business.

•

Reputation risk – within ANZ, reputation risk is defined as the risk of loss caused by adverse
perceptions of ANZ held by the public, shareholders, investors, regulators, or rating agencies that
directly or indirectly impact earnings, capital adequacy or value. We have established decisionmaking frameworks and policies to ensure our business decisions are guided by sound social andenvironmental standards and take into account reputation risk.

Risk Appetite Framework
ANZ's risk appetite is set by the Board and integrated within ANZ’s strategic objectives. The risk appetite
framework underpins fundamental principles of strong capitalisation, robust balance sheet and soundearnings, which protects ANZ’s franchise and supports the development of an enterprise-wide risk
culture. The framework provides an enforceable risk statement on the amount of risk ANZ is willing toaccept. It supports strategic and core business activities and customer relationships ensuring that:•

Only permitted activities are engaged in.

•

The scale of permitted activities, and subsequent risk profile, does not lead to potential losses or
earnings volatility that exceeds ANZ approved risk appetite.

•

Risk is expressed quantitatively via limits and tolerances.

•

Management focus is brought to bear on key and emerging risk issues and mitigating actions.

•

Risk is linked to the business by informing, guiding and empowering the business in executing
strategy.

Risk management governance
ANZ’s Board has ultimate responsibility for risk management, and has three key committees focused onrisks that impact regulatory capital.

Risk
Committee

Audit
Committee

GovernanceCommittee

Assists the Board in the effective discharge of the Board’s responsibilities forbusiness, market, credit, equity and other investment, financial, operational,
liquidity, compliance and reputation risk management.
In addition to its role reviewing financial reporting principles and policies,
controls and procedures, the Audit Committee also reviews prudential
supervision procedures required by regulatory bodies to the extent relating tofinancial reporting and oversees the work of Global Internal Audit.
Ensures an appropriate Board and Committee structure is in place. Reviews
the development of and approves corporate governance policies and principles
applicable to ANZ.

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ANZ Basel III Pillar 3 disclosure

September 2013

The Chair and members of these committees are non - executive directors, and are appointed by the
Board. Global Internal Audit provides independent and objective assurance around ANZ’s risk
management and control effectiveness, and its primary reporting line is to the Audit Committee.
ANZ’s Chief Executive Officer (CEO) creates and delegates powers to various executive management
committees, several of which perform functions that support the Risk Committee. The executive
committees most relevant to the risks described above and overall capital management at ANZ are as
follows:
Group Asset and Liability Committee (GALCO)GALCO is responsible for the oversight and strategic management of ANZ’s balance sheet, liquidityand funding positions and capital management activities. This ensures they are aligned to adding
shareholder value by managing and positioning the balance sheet consistent with ANZ’s appetite forrisk, maintaining ANZ’s preferred AA rating category, and striving for best-practice corporate
governance. Specifically, GALCO co-ordinates, approves and, where necessary, directs:•

Liquidity and funding activities, to ensure that these are managed in a way consistent with
ANZ’s strategy and within ANZ’s appetite for liquidity risk.

•

The management of ANZ’s capital management framework to ensure that ANZ is adequately
capitalised to cover its material risks and exposures in an efficient and effective manner.

•

Balance sheet management activities including management of non-traded related risks andexposures.

In all cases this is in accordance with ANZ’s risk appetite and limits defined by the Board,
regulatory requirements, and international best practice.
GALCO is chaired by ANZ’s Chief Financial Officer (CFO). GALCO is supported by specialist
committees that cover capital management and non-traded market risk, as well as regional asset
and liability management committees.

Capital Management Policy Committee (CMPC)CMPC is a sub-committee of GALCO, with responsibility for the oversight and control of ANZ’scapital and portfolio measurement framework, addressing economic and regulatory capitalrequirements. CMPC is also responsible for making capital management and portfolio measurement
related recommendations to the Risk Committee and ANZ Board.
The Committee’s main objective is to ensure ANZ’s regulatory and economic capital management
activities are aligned with ANZ and GALCO’s objectives.
CMPC is chaired by ANZ’s CFO (or in absence, ANZ’s Chief Risk Officer (CRO)) and meets six times
a year.
Credit and Market Risk Committee (CMRC)
CMRC is the senior executive management forum responsible for the oversight and control of credit
and market risk. Its responsibilities and duties include:•

Approve Level 2 credit and market risk management policy, propose Level 1 policy changes to
the Risk Committee.

•

Approve take up of equity interest within its discretion.

•

Ensure comprehensive credit and market risk control.

•

Oversee credit portfolio composition including large exposures, risk grade migration, risk
concentrations and changes to delinquency patterns.

•

Set Value at Risk, Earnings at Risk and other limits within discretions.

•

Oversee market risk limits.

CMRC is chaired by ANZ’s CRO and meets as required, and is supported by a specialist committeethat covers credit ratings systems.

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ANZ Basel III Pillar 3 disclosure

September 2013

Credit Ratings System Oversight Committee (CRSOC)
CRSOC is the senior executive management forum responsible for the oversight and control of theInternal Ratings System for credit risk across ANZ including credit model approvals andperformance monitoring. This delegation is intended to encompass all aspects of model governanceincluding:•Approving the content and design of the rating system, including models and methodology for
Probability of Default (PD), LGD and EAD.

•

Prioritising, monitoring and approval of model changes, enhancements and re-builds.

•

Performance monitoring of internal rating system models.

•Monitor annual independent validation of use and performance of all models.

CRSOC is chaired by the Chief Wholesale Credit Officer and meets six times a year. It supports
CMPC and CMRC, and in turn is supported by working groups.
Operational Risk Executive Committee (OREC)OREC is the primary senior executive management forum responsible for oversight of operationalrisk and compliance risk expected and unexpected risk profile and the related Control Environment.
Its main responsibilities and duties include:•

Endorse ANZ’s Operational Risk Measurement and Management Framework (ORMMF) for
approval by the Board Risk Committee.

•

Approve ANZ’s Group Compliance Framework.

•

Approve Operational Risk policies and Compliance policies.

•

Approve extreme operational risks treatment plans.

OREC is chaired by ANZ’s CRO and meets a minimum of four times per year.
Reputation Risk Committee (RRC)
The purpose of the RRC is to assist ANZ businesses, Risk, Corporate Affairs, and Legal inpartnership to effectively manage reputation risk in relation to environmental, social, business andregulatory issues in the regions in which ANZ operates.
RRC is chaired by ANZ’s CRO and meets a minimum of four times a year.

9ANZ Basel III Pillar 3 disclosure

September 2013

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

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

•

Level 2 - being the consolidated group for financial reporting purposes adjusted to exclude
associates activities and certain subsidiaries excluded under APS 001: Definitions that undertake thefollowing business activities:••

Insurance businesses (including friendly societies and health funds).

•

Acting as manager, responsible entity, approved trustee, trustee or similar role in relation to
funds management.

•

Non-financial (commercial) operations.

•

Securitisation special purpose vehicles to which assets have been transferred in accordance with
APRA's requirements as set out in APS 120 Securitisation.

Level 3 - the consolidated group for financial reporting purposes.

ANZ measures capital adequacy monthly and reports for prudential purposes on a Level 1 and Level 2
basis. APRA has announced that it will proceed with implementing Level 3 Conglomerates framework on
1 January 2015, with final Level 3 Prudential Standards on capital adequacy to be released by January
2014. The standards will regulate a bancassurance group such as ANZ as a single economic entity withminimum capital requirements and additional reporting on risk exposure levels. Based upon APRA’s draft
prudential standards covering group governance and risk exposures in December 2012 and draft Level 3
capital adequacy standards released in May 2013, ANZ is not expecting any material impact on its
operations.
This Pillar 3 report is based on the Level 2 prudential structure

Level 1

Australia & New
Zealand Banking GroupLtd

Level 2

Level 3

ANZ Bank New Zealand
Ltd
Insurance Business
OnePathOther

Other International
ADI’s

Extended Licence
Entity Subsidiaries

Other Level 2
Subsidiaries
EsandaE-Trade
Other

Other Deconsolidated
Subsidiaries
Trustee / Funds
Management Companies
Other

Refer to Note 38 of ANZ’s 2013 Annual Report for a list of all material subsidiaries and a brief descriptionof their key activities.

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ANZ Basel III Pillar 3 disclosure

September 2013

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 thedifferences 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 this chapter is the post
January 2018 version as ANZ is fully applying the Basel III regulatory adjustments, as implemented by
APRA. Note that the capital conservation and countercyclical buffers referred to in rows 64 to 67 do not
apply until 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 this information
cannot be mapped on a one to one basis, it is provided in an explanatory table. ANZ’s material nonconsolidated 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’s operations
in New Zealand, local country capital requirements do not impose any material call on ANZ’s capital base.
ANZ undertakes banking activities in New Zealand principally through its wholly owned subsidiary, ANZBank New Zealand Limited, which is subject to minimum capital requirements as set by the Reserve Bankof New Zealand (RBNZ). The RBNZ adopted the Basel II framework, effective from 1 January 2008 andBasel III reforms from 1 January 2013 and ANZ Bank New Zealand Limited has been accredited to use
the advanced approach for the calculation of credit risk and operational risk. ANZ Bank New Zealand
Limited maintains a buffer above the minimum capital base required by the RBNZ. This capital buffer has
been calculated via the ICAAP undertaken for ANZ Bank New Zealand Limited, to ensure ANZ Bank New
Zealand Limited is appropriately capitalised under stressed economic scenarios.

11ANZ Basel III Pillar 3 disclosure

Table 1

September 2013

Common disclosure templateSep 13$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

23,749

Table A

2

Retained earnings

21,365

Table B

3

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)

(847)

Table C

4
5
6

Common Equity Tier 1 capital before regulatory adjustments

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

n/a36

Table D

44,303-8

Goodwill (net of related tax liability)

3,943

Table E

94,226

Table F

33

Table I

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-

15

Defined benefit superannuation fund net assets-

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)

1,393

10

20
21
22

75
376

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% threshold23

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

24

of which: mortgage servicing rights

Table G

Table H

n/a
n/a

25

of which: deferred tax assets arising from temporary differences
National specific regulatory adjustments (sum of rows 26a, 26b, 26c, 26d, 26e, 26f, 26g, 26h, 26i
26
and 26j)
26aof which: treasury sharesof which: offset to dividends declared under a dividend reinvestment plan (DRP), to the extent
26bthat the dividends are used to purchase new ordinary shares issued by the ADI
26c
of which: deferred fee income

5,466
(380)

26d

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

3,617

26e

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

1,069

Table I

26f

979

Table J

140

Table K26h

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

26g

26j
27

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

41
-

28

Total regulatory adjustments to Common Equity Tier 1

15,512

29

Common Equity Tier 1 Capital (CET1)

28,791

12

Table HANZ Basel III Pillar 3 disclosure

September 2013

Sep 13$M
Additional Tier 1 Capital: instruments
30 Directly issued qualifying Additional Tier 1 instruments
31
32

Reconciliation
Table
Reference

1,120-

Table Lof which: classified as equity under applicable accounting standardsof which: classified as liabilities under applicable accounting standards

1,120

Table L

5,384

Table L35

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

6,504

33
34

n/a
n/a

Additional 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

National specific regulatory adjustments (sum of rows 41a, 41b and 41c)of which: holdings of capital instruments in group members by other group members on behalf
41aof third 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

85

18

Table L-

Regulatory 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)

6,401

45

Tier 1 Capital (T1=CET1+AT1)

35,192103

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

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 L

18

42

47

Table L

5,440

Table M

624
624

Table M

245

Table G

6,309

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 (sum of rows 56a, 56b and 56c)of which: holdings of capital instruments in group members by other group members on behalf
56aof third 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 M

24
24
-

57

Total regulatory adjustments to Tier 2 capital

119

58

Tier 2 capital (T2)

6,190

59

Total capital (TC=T1+T2)

41,38260

Total risk-weighted assets based on APRA standards

339,265

13

Table M-

Table M

ANZ Basel III Pillar 3 disclosure

September 2013

Sep 13$M
Capital ratios and buffers
61 Common Equity Tier 1 (as a percentage of risk-weighted assets)

8.5%

62

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

10.4%

63

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

12.2%

64
65
66

of which: ADI-specific countercyclical buffer requirements

67

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

68

7.0%
2.5%
n/a

Common Equity Tier 1 available to meet buffers (as a percentage of risk-weighted assets)

4.0%

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

n/a

70

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

n/a

71

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

n/aAmount below thresholds for deductions (not risk-weighted)
72 Non-significant investments in the capital of other financial entities
73

Significant investments in the ordinary shares of financial entities

74

Mortgage servicing rights (net of related tax liability)

75

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

94
3,565
n/a
1,069

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

1,531

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/a

81

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

82

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)

83

Reconciliation
Table
Reference

14

245
405
-

n/a
5,384
683
6,183
229

Table HANZ Basel III Pillar 3 disclosure

September 2013

The following table shows ANZ's consolidated balance sheet and the adjustments required to derive theLevel 2 balance sheet. The adjustments remove the external assets and liabilities of the entities
deconsolidated for prudential purposes and reinstate any intragroup assets and liabilities, treating themas external to the Level 2 group.
Balance
Sheet as inpublishedfinancialstatements($m)
39,737

AssetsLiquid Assets

Adjustments

($m)
(160)

Balancesheet underscope ofregulatory
consolidation($m)
39,577

Due from other financial institutions

22,177-

22,177

Trading securities

41,288(2)

41,28645,878(1)

45,877of which: Financial Institutions capital instruments

24

Derivative financial instruments

Template andReconciliation
Table
Reference

Table Mof which: Financial Institutions equity investments

28

Table Hof which: Other entities equity investments

3

Table K

Available-for-sale assets

28,135(681)

27,454of which: Financial institutions equity instruments

14

Table Hof which: Other entities equity investments

86

Table K

18

Table Lof which: Financial Institutions Additional Tier 1
instruments
Net loans and advances

469,295-

469,295

of which: deferred fee income(380)

Row 26cof which: collective provision(2,887)

Table Gof which: individual provisions(1,467)

Table Gof which: capitalised brokerage

942

Table Jof which: Financial Institutions equity exposures

10

Table Hof which: Other equity exposures

35

Table Kof which: margin lending adjustment

41

Row 26j

Regulatory deposits
Due from controlled entities

2,106

-

2,106

-

725

725

of which: Significant investments in the Tier 2 capital ofbanking, financial and insurance entities that are outside
the scope of regulatory consolidation

85

Shares in controlled entities

-

3,915

of 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
Shares in associates

4,123

(9)

of which: Financial Institutionsof which: Other Entities

Table M

3,915
3,830

Table H85

Table L

4,114
4,098

Table H

16

Table K

Current tax assets

20

(2)

18

Deferred tax assets

721

(45)

676

Table I

33

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

7,690(2,265)5,425

of which: Goodwill

3,290

Table Eof which: Software

2,102

Table F

33

Table Fof which: other intangible assets
Investments backing policy liabilities

32,083(32,083)-

Other assets

7,574(1,252)

6,322

Premises and equipment

2,164

(8)

2,156

702,991(31,868)

671,123

Total Assets

15

ANZ Basel III Pillar 3 disclosure

September 2013

Balance
Sheet as inpublishedfinancialstatements($m)
36,306

Adjustments($m)-

Balancesheet underscope ofregulatory
consolidation($m)
36,306

Deposits and other borrowings

439,674

4,927

444,601

Derivative financial instruments

47,5094

47,513

-

1,062

1,062

Current tax liabilities

972

(145)

827

Deferred tax liabilities

14

(362)

(348)

Table I

4

Table F

8

Table J

Liabilities
Due to other financial institutions

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

32,388(32,388)

External unit holder liabilities

3,511(3,511)-

Payables and other liabilities

12,594(335)

12,259Provisions

1,228

(189)

1,039

Bonds and notes

70,376(749)

69,627

Loan Capital

12,804

8

12,812of which: capitalised debt raising expenses

Template andReconciliation
Table
Reference-(45)

Table Jof which: Directly issued qualifying Additional Tier 1
instruments

1,106

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

5,185

Table Lof which: Directly issued capital instruments subject tophase out from Tier 2

5,778

Table Mof which: instruments issued by subsidiaries subject tophase out

743

Table M

Total Liabilities
Net Assets

Shareholders equity
Issued Capital

657,376(31,678)625,698

45,615(190)

45,425

Balance
Sheet as inpublishedfinancialstatements($m)
23,641

Adjustments

Balancesheet underscope ofregulatory
consolidation($m)
23,913

Template andReconciliation
Table
Reference

164

Table A & C

($m)
272

of which: Share reserve
Preference share capital871-

of which: Directly issued capital instruments subject tophase out from Additional Tier 1
Reserves

(907)

(91)

of which: Cash flow hedging reserves

871
871

Table L

(998)

Table C75

Row 11
Table B

Retained earnings

21,948(365)

21,583

Share capital and reserves attributable to shareholdersof the company

45,553(184)

45,369Non-controlling interest
Total Shareholders Equity

16

Table A

62

(6)

56

45,615(190)

45,425

Table DANZ Basel III Pillar 3 disclosure

September 2013

The following reconciliation tables provide additional information on the difference between Table 1
Common Disclosure template and the Level 2 balance sheet.
Sep 13$M

Table A
Issued capital
less

23,913

Reclassification to reserves
Regulatory Directly Issued qualifying ordinary shares

Table B

less

(164)

Table C

23,749Row 1

Sep 13$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

21,583(218)

Table H

Retained earnings

21,365

Row 2

Sep 13$M

Table 1
Reference

Table C
Reserves

(998)

add

Reclassification from Issued Capital

164

less

Non qualifying reserves(13)

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

Table D
Non-controlling interests
less

Table A

(847)

Row 3

Sep 13$M

Table 1
Reference

56

Surplus capital attributable to minority shareholders(20)

Ordinary share capital issued by subsidiaries and held by third parties

Table E
Goodwill
add

Table 1
Reference

36

Row 5

Sep 13$M

Table 1
Reference

3,290

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

Table F
Software653

Table H

3,943

Row 8

Sep 13$M

Table 1
Reference

2,102

Other intangible assets

33

less

Associated deferred tax liabilities

(4)

add

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

2,095

Table H

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

4,226

Row 9

Sep 13$M

Table 1
Reference

Table G
Collective Provision

2,887

Individual Provision

1,467

less

Standardised component of collective provision allowed as Tier 2 capital

(245)

less

Standardised component of individual provision

(219)

less

Excluded component of collective provision(24)

Eligible Provisions for regulatory purposes

3,866

less

Regulatory expected loss

(4,242)

Expected loss in excess of eligible provisions

(376)

17

Row 50

Row 12

ANZ Basel III Pillar 3 disclosure

September 2013
Sep 13$M

Table H
Investment in deconsolidated financial subsidiaries

3,830

less

Regulatory reclassification to Retained Earnings and Other Intangible Assets

add

Investment in financial associates

less

Goodwill component of investments in financial associates

less

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

add
add

add

(2,317)

Table B & F

4,098

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(653)

Table E

(3,565)

Row 73

1,393

Row 193,565

Row 7328

14

10Equity investment in financial institutions not reported in rows 18, 19 and 23

3,617

Deduction for equity holdings in financial institutions - APRA regulations

5,010

Sep 13$M

Table I
Deferred tax assets

676

Deferred tax liabilities(348)

Deferred tax asset less deferred tax liabilities

1,024

less

Deferred tax assets that rely on future profitability

addDeferred tax liabilities on intangible assets and capitalised expenses

12

add

Impact of calculating the deduction on a jurisdictional basis

(33)
66

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

Table J
Capitalised brokerage costs
lessTable 1
ReferenceRow 26dTable 1
ReferenceRow 10

1,069

Row 26e

Sep 13$M

Table 1
Reference

942

Capitalised debt raising expenses

45

Associated deferred tax liabilities(8)

Capitalised expenses979

Row 26f

Sep 13$M

Table 1
Reference

Table K
Investments in non-financial Available for Sale equities

86

Investments in non financial associates

16

Non financial equity exposures (loans)

35

Derivative non financial equity exposures

3

Equity exposures to non financial entities

140

18

Row 26g

ANZ Basel III Pillar 3 disclosure

September 2013
Sep 13$M

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

Issue costs

Table 1
Reference

1,106
14

Directly issued qualifying Additional Tier 1 Capital Instruments classified as liabilities

1,120

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

5,185

Directly issued capital instruments subject to phase out from Additional Tier 1 - preference sharesRow 30871

add

Issue costs

16

less

Fair value adjustment

(5)

less

Transitional adjustment(683)

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

5,384

Additional Tier 1 capital before regulatory adjustments

6,504

Row 36(85)

Row 40(18)

Row 41b6,401

Row 44

Sep 13$M

Table 1
Reference

less
less

Significant investments in the capital of banking, financial and insurance entities that are outside thescope of regulatory consolidation, (net of eligible short positions)
Investments in the capital of financial institutions that are outside the scope of regulatory
consolidation which are not reported in rows 39 and 40
Additional Tier 1 capital

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

5,778

add

Issue costs

lessFair value adjustment

less

Transition adjustment(229)

Directly issued capital instruments subject to phase out from Tier 2

5,440

Instruments issued by subsidiaries subject to phase out from Tier 2

743

less

15
(124)

Surplus capital attributable to third party holders(119)

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

Row 47

Provisions
Tier 2 capital before regulatory adjustments

624

Row 49245

Table G

6,309

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(24)

Row 56b

6,190

Row 58Tier 2 capital

19

ANZ Basel III Pillar 3 disclosure

September 2013

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

ACN 008 647 185 Pty Ltd

Corporate

Advice for Life Pty Ltd

AdviceANZ Insurance Broker Co Ltd

Insurance Broker

ANZ Investment Services (New Zealand) Limited

Funds Manager

53

33

ANZ Lenders Mortgage Insurance Pty Limited

Mortgage insurance

864

482

ANZ Life Assurance Company Pty Ltd

Insurance

ANZ New Zealand Investments Limited

Funds Manager

ANZ New Zealand Investments Nominees Limited

Trustee/Nominee--

ANZ New Zealand Securities Limited

Broker

35

26

ANZ Private Equity Management Limited

Investment

1-

ANZ Securities (NZ) Limited

Trustee/Nominee

1-

ANZ Self Managed Super Ltd

Investment--

ANZ Specialist Asset Management Limited

Trustee/Nominee

6-

ANZ Trustees Limited

Trustee/Nominee

64

37

ANZ Underwriting Limited

Trustee/Nominee

9-

ANZ Wealth Alternative Investments Management Pty Ltd

Investment

1,281

1,281

ANZ Wealth Australia Limited

Corporate

2,802

798

ANZ Wealth New Zealand Limited

Holding Company

490-

ANZcover Insurance Pte Ltd

Captive-Insurance

46

6

ANZcover Insurance Pty Ltd

Captive-Insurance

268

123

ANZMAC Securities (NZ) Nominees Limited

Trustee/Nominee--

AUT (NZ) Administration Pty Ltd

Corporate

1-

AUT Investments Limited

Investment Company

6-

Capricorn Financial Advisers Pty Ltd

Advice12

Direct Nominees Limited

Trustee/Nominee--

Elders Financial Planning Pty Ltd

Advice14

3

Financial Investment Network Group Pty Ltd

Advice78

3

Financial Lifestyle Solutions Pty Limited

Advice44Financial Planning Hotline Pty Ltd

Investment--

FSP Group Pty Limited

Advice7

5

Mercantile Mutual Financial Services Pty Ltd

Investment

1-

Millennium 3 Financial Services Group Pty Ltd

Advice66

9Millennium 3 Professional Services Pty Ltd

Advice1-Millennium3 Financial Services Pty Ltd

Advice15

7Millennium3 Mortgage Platform Services Pty Limited

Advice--OASIS Asset Management Limited

Investment

31

5

OASIS Fund Management Limited

Investment

2

2

OneAnswer Nominees Limited

Trustee/Nominee--

OnePath Administration Pty Ltd

Corporate

105

54

OnePath Custodians Pty Ltd

Investment

30

5

OnePath Financial Planning Pty Ltd

Advice1-

OnePath Funds Management Ltd

Investment

119

39

OnePath General Insurance Pty Ltd

Insurance

262

181

OnePath Insurance Holdings (NZ) Limited

Holding Company

325-

OnePath Insurance Services (NZ) Limited

Insurance

153

46

OnePath Investment Holdings Pty Ltd

Investment

71-

OnePath Life (NZ) Limited

Insurance

578

142

OnePath Life Australia Holdings Pty Ltd

Corporate

2,529

-

OnePath Life Limited

Insurance

35,53833,362

Polaris Financial Solutions Pty Limited

Advice1

1

Private Nominees Limited

Trustee/Nominee--

RI Advice Group Pty Ltd

Advice20

7

RI Central Coast Pty Ltd

Advice2-

RI Gold Coast Pty Ltd

Advice2-

RI Maroochydore Pty Ltd

Advice1-

RI Newcastle Pty Ltd

Advice2-

RI Parramatta Pty Ltd

Advice7

1

RI Rockhampton & Gladstone Pty Ltd

Advice3-

RI Townsville Pty Ltd

Advice1-Super Concepts Pty Ltd

Investment

7

1

20

Total Assets$M-

Total Liabilities
$M
-

-

-

22

1

3

-

108

19

ANZ Basel III Pillar 3 disclosure

Table 2September 2013

Main features of capital instruments

As the main feature of ANZ’s capital instruments are updated on an ongoing basis, ANZ has provided thisinformation 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 the level
and composition of ANZ’s capital base, assessed against the following key policy objectives:
•

•

•
•

Regulatory compliance such that capital levels exceed APRA’s, ANZ’s primary prudential supervisor,
minimum Prudential Capital Ratios (PCRs) both at Level 1 (the Company and specified subsidiaries)
and Level 2 (ANZ consolidated under Australian prudential standards), along with US Federal
Reserve’s minimum Level 2 requirements under ANZ’s Foreign Holding Company Licence in the
United States of America;
Capital levels are aligned with the risks in the business and to meet strategic and businessdevelopment plans through ensuring that available capital exceeds the level of Economic Capitalrequired to support the Ratings Agency ‘default frequency’ confidence level for a ‘AA’ credit rating
category bank. Economic Capital is an internal estimate of capital levels required to support risk andunexpected losses above a desired target solvency level;
Capital levels are commensurate with ANZ maintaining its preferred ‘AA’ credit rating category forsenior long-term unsecured debt given its risk appetite outlined in its strategic plan; andAn appropriate balance between maximising shareholder returns and prudent capital management
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:•••

Review capital ratios, targets, and levels of different classes of capital against ANZ’s risk profile andrisk 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 that capital levels
have sufficient capital to remain above both Economic Capital and Prudential Capital Ratio (PCR)
requirements;
Stress tests are performed under different economic conditions to ensure a comprehensive review of
ANZ’s capital position both before and after mitigating actions. The stress tests determine the levelof 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 macro economic
scenarios. ANZ has a dedicated stress testing team within Risk Management that models and reports
to management and the Board’s Risk Committee on a range of scenarios and stress tests.

Results are subsequently used to:••recalibrate ANZ’s management targets for minimum and operating ranges for its respective classes ofcapital such that ANZ will have sufficient capital to remain above both Economic Capital andregulatory requirements; andidentify 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 the capitalissuance 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 Board and senior
management are provided with monthly updates of ANZ’s capital position. Any actions required to ensureongoing prudent capital management are submitted to the Board for approval.
21

ANZ Basel III Pillar 3 disclosure

September 2013

Regulatory environment
ANZ’s regulatory capital calculation is governed by APRA’s Prudential Standards which adopt a risk-based
capital assessment framework based on the Basel III capital measurement standards. This risk-based
approach requires eligible capital to be divided by total risk weighted assets (RWAs), with the resultant
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, with capital as thenumerator 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:
•
•
•

•
•

Additional Tier 1 capital instruments included within shareholders’ equity are excluded;
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 thatmeet 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 permanent andunrestricted commitment of funds, are available to absorb losses, are subordinated to the claims ofdepositors and senior creditors in the event of the winding up of the issuer and provide for fully
discretionary capital distributions.
Deductions from the capital base comprise mainly deductions to the Common Equity Tier 1 component.
These deductions are largely intangible assets, investments in insurance and funds management entities
and associates, capitalised expenses (including loan and origination fees), and the amount of regulatory
expected losses (EL) in excess of eligible provisions.
Tier 2 capital mainly comprises perpetual subordinated debt instruments and dated subordinated debt
instruments which have a minimum term of five years at issue date.
Total Capital is the sum of Tier 1 capital and Tier 2 capital.
In addition to the prudential capital oversight that APRA conducts over the Company and the Group, theCompany’s branch operations and major banking subsidiary operations are overseen by local regulatorssuch 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 change
The Basel Committee on Banking Supervision has released a series of consultation papers (Basel III)
containing a number of proposals to strengthen the global capital and liquidity framework to improve thebanking sector’s ability to absorb shocks arising from financial and economic stress.
Following the above, APRA’s released its new prudential capital standards in September 2012 detailingthe implementation of the majority of Basel III capital reforms in Australia. ANZ has implemented APRA’s
Basel III capital reforms from 1 January 2013, and is also well placed to meet the future
implementation of the capital conservation measures included in the reforms, including the capitalconservation buffer from 1 January 2016
APRA is still to finalise capital standards on the Basel III reforms dealing with the improvements incapital disclosures, leverage ratio, counterparty credit risk, contingent capital and measures to address
systematic and inter-connected risks.
Level 3 Conglomerates
Refer to discussion of page 10 of this document.

22

ANZ Basel III Pillar 3 disclosure

September 2013

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

Table 6

Capital Ratio and Risk Weighted Assets
Basel III

Basel II

Sep 13$M

Mar 13$M

Sep 12$M

Corporate

121,586

114,700

111,796

Sovereign

4,360

4,382

4,088

Bank

16,27015,838

10,964

Residential Mortgage

47,55944,59742,959Qualifying Revolving Retail

7,219

7,234

7,092

Other Retail24,32823,20021,277221,322

209,951

198,176

27,64027,842

27,628

Corporate

19,285

17,15718,281

Residential Mortgage

1,922

1,827

1,812

Qualifying Revolving Retail

1,728

2,068

2,028

985

1,248

1,165

23,92022,30023,286

Credit Valuation Adjustment5 and Qualifying Central Counterparties6

8,501

8,949

n/a

Credit risk weighted assets relating to securitisation exposures

2,724

2,549

1,170

n/a

n/a

1,030

3,544

3,387

3,585

287,651

274,978

254,875

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 approach 4

Subject to Standardised approach

Other Retail
Credit risk weighted assets subject to Standardised approach

Credit risk weighted assets relating to equity exposures
Other assets
Total credit risk weighted assets
Market risk weighted assets

4,303

6,850

4,664

Operational risk weighted assets

29,024

28,12528,125Interest rate risk in the banking book (IRRBB) risk weighted assets
Total risk weighted assets

18,287

12,62912,455339,265

322,582

300,119

Capital ratios (%)7
8.5%

8.2%

n/a

Level 2 Tier 1 capital ratio

10.4%

9.8%

10.8%

Level 2 Total capital ratio

12.2%

11.7%

12.2%

8.5%

8.4%

n/a

Level 2 Common Equity Tier 1 capital ratio

Level 1: Extended licensed Common Equity Tier 1 capital ratio
Level 1: Extended licensed entity Tier 1 capital ratio

10.6%

10.3%

11.4%

Level 1: Extended licensed entity Total capital ratio

12.5%

12.2%

12.7%

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

10.4%

10.2%

n/a

ANZ Bank New Zealand Limited - Tier 1 capital ratio

10.8%

10.2%

10.8%

ANZ Bank New Zealand Limited - Total capital ratio

12.4%

11.8%

12.5%

4

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

5
Basel III capital reforms have introduced a Credit Value Adjustment (CVA) capital charge on over the counter
derivative (OTC) assets.
6

Basel III capital reforms, exposures to Qualifying Central Counterparties (QCCP’s) arising from over the counter (OTC)
derivatives, exchange-traded derivatives and securities financing transactions are subject to refined capitalrequirements.

7

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

23

ANZ Basel III Pillar 3 disclosure

September 2013

Credit Risk Weighted Assets (CRWA)
Total CRWA increased $32.8 billion (12.9%) from September 2012 to $287.7 billion at September 2013,
including a $14.1 billion increase due to the introduction of Basel III. Significant Basel Asset Class
movements include an increase of $9.8 billion (8.8%) in AIRB Corporate driven by growth in theInstitutional business, FX impacts and Basel III, a $5.3 billion (48.4%) in AIRB Bank driven mainly by
growth in the Institutional business and Basel III, and an increase of $4.6 billion (10.7%) in IRB Retail
Mortgages driven mainly by growth in the Australian portfolio.
IRRBB RWA increased by $5.8 billion (46.8%) to $18.3 billion over the year, which was due to greater
repricing and yield curve risk.
International capital ratio comparisonsInternational harmonisation details
One of the main purposes of the Pillar 3 disclosures is to facilitate comparisons of banks, both within andacross jurisdictions. International investors should be aware that there are a number of features of
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 andthose of the Basel Committee on Banking Supervision (BCBS) as at 30 September 2013 (InternationallyHarmonised). ANZ’s CET1, Tier 1 and Total Capital ratios as at 30 September 2013 on an InternationallyHarmonised Basel III basis were 10.8%, 12.8% and 14.7% respectively.
CET1
%

%

Total
Capital
%

8.5%

10.4%

12.2%

Significant Investments in FI's and deconsolidated entities

0.8%

0.8%

0.7%

Deferred Tax Assets

0.3%

0.2%

0.2%

Net Capitalised Expenses & Other Capital Items

0.2%

0.2%

0.2%

IRRBB

0.5%

0.6%

0.7%

RWA treatment - residential mortgages & other

0.5%

0.6%

0.7%

Total Adjustments

2.3%

2.4%

2.5%

10.8%

12.8%

14.7%

Regulatory Capital Frameworks Comparison
Basel III - APRA

Tier 1 Capital

Differences relating to capital

Differences related to risk weighted assets

Basel III - Internationally Harmonised

The table below provides an explanation of the material differences between APRA’s Basel III capitalrules and the BCBS Basel III minimum requirements and the impact of converting APRA Basel III capitalratios to fully implemented Internationally Harmonised Basel III capital ratios.

Item

Description

Movement inratios, APRA to
InternationallyHarmonised

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

A 100% adjustment is required from CET1 forsignificant
equityinvestments
infinancial
institutions and entities that are deconsolidated forregulatory purposes (e.g. insurance and funds
management businesses). APRA requires theseequity investments to be 100% deducted from
CET1. BCBS allows a concessional threshold before
the deduction is required.

Increase ratio

24

ANZ Basel III Pillar 3 disclosure

September 2013

Item

Description

Movement inratios, APRA to
InternationallyHarmonised

Deferred Tax Assets

A 100% adjustment is required from CET1 fordeferred tax
assets relatingtotemporarydifferences. APRA requires all deferred tax assets,
including those relating to temporary differences, tobe deducted 100% from CET1. BCBS allows aconcessional threshold before the deduction isrequired.

Increase ratio

Capitalised expenses net
of deferred fee income

A 100% adjustment is required for the net of
capitalised expenses and deferred fee income. BCBS
does not provide for any adjustments to CET1 forcapitalised expenses net of deferred fee income.

Increase ratio

Interest rate risk in thebanking book (IRRBB)APRA requires the inclusion of IRRBB within RWA.
BCBS requirements make no reference to IRRBB
RWA.

Increase ratio

RWA treatment –residential mortgages

APRA imposes a floor of 20% on the downturn Loss
Given Default (LGD) used in advanced credit models
for determining credit RWA’s for residential
mortgages. BCBS imposes a downturn LGD floor of
10% for these exposures.

Increase ratio

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ANZ Basel III Pillar 3 disclosure

September 2013

Chapter 6 – Credit risk
Table 7 Credit risk – General disclosures
Definition of credit risk
Credit risk is defined as the risk of financial loss resulting from the failure of ANZ’s customers andcounterparties to honour or perform fully the terms of a loan or contract.
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 to credit
risk, under APS 113. 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 for appropriate
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 as transaction structuring, risk
grading, initial approval, ongoing management and problem debt management, as well as specialist
policy topics. The effectiveness of the credit risk management framework is assessed through various
compliance and monitoring processes. These, together with portfolio selection, define and guide thecredit process, organisation and staff.
Organisation
As described in Chapter 3, the CMRC is a senior executive level credit risk committee. The CRSOC
supports the CMRC, by providing group-wide oversight of ANZ’s credit rating system.
The primary responsibility for prudent and profitable management of credit risk assets and customer
relationships rests with the business units. An independent credit risk management function is staffed byrisk 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 andapproval 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 ofcredit policies and requirements.
The authority to make credit decisions is delegated by the Board to the CEO who in turn delegatesauthority to the CRO. The CRO in turn delegates some of his credit discretion to individuals as part of a‘cascade’ of authority from senior to the most junior credit officers. Within ANZ, credit approval formaterial judgemental lending is made on a ‘dual approval’ basis, jointly by the business writer in thebusiness unit and the respective independent credit risk officer. Individuals must be suitably skilled andaccredited in order to be granted and retain a credit discretion. Credit discretions are reviewed on anannual 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 theautomated assessment of credit applications using a combination of scoring (application andbehavioural), policy rules and external credit reporting information. Where an application does not meet
the automated assessment criteria it will be referred out for manual assessment, with assessors
considering the decision tool recommendation.

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:•

Business writing strategies that 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, to ensure
a diversified portfolio.

26

ANZ Basel III Pillar 3 disclosure

September 2013

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, EL, regulatory RWA andregulatory expected loss.

•

Assessing impact of emerging issues, and conducting adhoc 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 the Board.
Examples of reports include EAD, portfolio mix, risk grade profiles and migrations, RWAs, large exposure
reporting, credit watch and control lists, impaired assets and provisions. Within the retail segments,
monthly reporting packs are prepared that focus on such aspects as scoring and delinquency/slippage
monitoring.
Past due facilities
Facilities where a contractual payment has not been met or the customer is outside of contractual
arrangements are deemed past due. Past due facilities include those operating in excess of approved
arrangements or where scheduled repayments are outstanding but do not include impaired assets.
Impaired assets
Facilities are classified as impaired when there is doubt as to whether the contractual amounts due,
including interest and other payments, will be met in a timely manner. Impaired assets include impaired
facilities, and impaired derivatives. Impaired derivatives have a credit value adjustment (CVA), which is amarket assessment of the credit risk of the relevant counterparties.
Restructured items
Restructured items comprise facilities in which the original contractual terms have been modified forreasons related to the financial difficulties of the customer. Restructuring may consist of reduction ofinterest, principal or other payments legally due, or an extension in maturity beyond those typicallyoffered to new facilities with similar risk.
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 anallowance 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 theportfolio.

The methodology underpinning calculation of collective provision from historical experience ispredominantly based around the product of an exposure’s PD, LGD and EAD. ANZ uses slightly different
PD, LGD and EAD factors in the calculation of regulatory capital and regulatory EL, due to the different
requirements of APRA and accounting standards. The key differences are:•

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

•

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

27

ANZ Basel III Pillar 3 disclosure

September 2013

Essentially these differences reflect the effects of the credit cycle on credit losses. Point-in-time refers tolosses at any given point in the credit cycle, cycle-adjusted refers to adjusting estimates to reflect a fullcredit 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 test8.
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 partiallyor 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.
Basel III definition of default
ANZ uses the standard APRA definition of default, so that a default is considered to have occurred withregard to a particular obligor when either or both of the two following events have taken place:•

ANZ considers that the obligor is unlikely to pay9 its credit obligations to ANZ in full, without recourse
by ANZ to actions such as realising available security.

•

The obligor is at least 90 days past due on a credit obligation to ANZ.

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 provision and collective provision, for ease of comparison with otherpublished results.

8

One of the key criteria for regulatory acceptance of a rating model is that the outputs must be used in a wide range ofongoing management activities, to demonstrate that the model is used in day-to-day management of exposures and notjust for regulatory capital calculation.

9

Elements to be taken as indications of unlikeliness to pay include the factors relating to impairment (irrespective ofwhether the credit obligations are well secured) or ANZ selling the credit obligation at a material credit-related economic
loss.

28

ANZ Basel III Pillar 3 disclosure

September 2013

Table 7(b) part (i): Period end and average Exposure at Default 10 11

Sep 13

Exposureat Default$M

Average
Exposureat Default
for half year
$M

Individual
provision
charge forhalf year$M

Write-offs forhalf year$M

121,586

224,087

215,887

225

240

4,360

73,84675,922--

Bank

16,270102,636

102,504--

Residential Mortgage

47,559274,755

267,154

23

51

Qualifying Revolving Retail

7,219

21,17421,063

115

152

Other Retail24,32837,034

36,111

166

188

221,322733,532

718,641

529

631

27,64032,07232,197

6

51

Corporate

19,28519,756

18,373

20

71

Residential Mortgage

1,922

5,191

4,699

4

5

Qualifying Revolving Retail

1,728

1,721

1,892

(7)

3

985

980

1,111

20

32

23,92027,64826,075

37

111

8,501

5,069

3,293

-

-

281,383

798,321780,206

572

793

Basel III
Risk Weighted
Assets$M

Corporate
Sovereign

Advanced IRB approach

Total Advanced IRB approach

Specialised LendingStandardised approach

Other Retail
Total Standardised approach
Credit Valuation Adjustment andQualifying Central Counterparties
Total

10

Exposure at Default in Table 7 includes Advanced IRB, Specialised Lending and Standardised exposures, however
does not include Securitisation, Equities or Other Assets exposures. Exposure at Default in Table 7 is gross of credit risk
mitigation such as guarantees, credit derivatives, netting and financial collateral.

11
Average Exposure at Default for half year is calculated as the simple average of the balances at the start and the endof each six month period.

29

ANZ Basel III Pillar 3 disclosure

September 2013

Mar 13

Exposureat Default$M

Average
Exposureat Default
for half year
$M

Individual
provision
charge forhalf year$M

Write-offs forhalf year$M

114,700

207,687

205,084

243

303

4,382

77,99872,294--

Bank

15,838102,372

100,640--

Residential Mortgage

44,597

259,553

255,19635

31

Qualifying Revolving Retail

7,234

20,951

20,932

112

146

Other Retail

23,20035,18733,570138

150

209,951

703,748687,716528

630

27,84232,321

31,96939

170

Corporate

17,157

16,98917,47822

36

Residential Mortgage

1,827

4,206

3,991

1

1

Qualifying Revolving Retail

2,068

2,062

2,041

(9)

8

Other Retail

1,248

1,242

1,194

14

19

22,30024,49924,704

28

64

8,949

1,516

1,516

-

-

269,042762,084

745,905

595

864

Individual
provision
charge forhalf year$M

Write-offs forhalf year$M

Basel III
Risk Weighted
Assets$M

Corporate
Sovereign

Advanced IRB approach

Total Advanced IRB approach

Specialised LendingStandardised approach

Total Standardised approach
Credit Valuation Adjustment andQualifying Central Counterparties
Total

Sep 12
Basel II
Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Default
for half year
$M

Corporate

111,796

202,481

193,822450

387

Sovereign

4,088

66,59062,747--

Bank

10,964

98,90895,085--Residential Mortgage

42,959250,839

247,516

34

36

Qualifying Revolving Retail

7,092

20,912

21,150

134

161

Other Retail

21,277

31,954

31,219131

125

198,176

671,684

651,539

749

709

27,62831,616

31,538137

79

Corporate

18,281

17,967

21,382

27

38

Residential Mortgage

1,812

3,775

3,463

3

1

Qualifying Revolving Retail

2,028

2,021

1,973

(9)

4

Other Retail

1,165

1,146

1,125

8

10

23,286

24,90927,94329

53

249,090728,209711,020915

841

Advanced IRB approach

Total Advanced IRB approach

Specialised LendingStandardised approach

Total Standardised approach

Total

30

ANZ Basel III Pillar 3 disclosure

September 2013

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

Portfolio TypeSep 13$M

Mar 13$M

Sep 12$M

Average for halfyear Sep 13$M

Cash and liquid assets

38,76747,43334,592

43,100Contingents liabilities, commitments, andother off-balance sheet exposures

133,668

127,206

121,752

130,438

Derivatives

90,36880,64886,79785,508Due from other financial institutions

11,991

14,518

8,836

13,255Investment securities

24,20720,01818,116

22,113Loans, advances and acceptances

468,000

441,299

427,537

454,651

Other assets

2,956

2,788

1,506

2,872

Trading securities

28,36428,17429,07328,269Total exposures

798,321762,084

728,209780,206

31

ANZ Basel III Pillar 3 disclosure

September 2013

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

Sep 13

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

126,645

42,06175,137

Sovereign

21,742

9,155

42,94973,846

Bank

59,667

10,994

31,975

102,636

Residential Mortgage

218,861

55,894

5,191

279,946

Qualifying Revolving Retail

21,174-

1,721

22,895

Other Retail

28,476

8,602

936

38,014

Qualifying Central Counterparties

3,522

819

728

5,069

Specialised Lending

24,111

7,047

914

32,072

Total exposures

504,198

134,572

159,551

798,321

Total$M
224,676

Total$M
243,843

Mar 13

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

122,352

38,38963,935

Sovereign

19,9238,547

49,52877,998Bank

62,994

9,913

29,465102,372

Residential Mortgage

210,841

48,712

4,206

263,759

Qualifying Revolving Retail

20,951-

2,062

23,013

Other Retail

27,671

7,564

1,194

36,429Qualifying Central Counterparties

1,292

68

156

1,516

Specialised Lending

23,814

6,585

1,922

32,321

Total exposures

489,838

119,778

152,468

762,084

Total$M

Sep 12

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

125,607

37,77957,062

220,448

Sovereign

19,098

9,763

37,72966,590Bank

61,967

11,19925,742

98,908Residential Mortgage

203,665

47,177

3,772

254,614

Qualifying Revolving Retail

20,912-

2,021

22,933

Other Retail24,469

7,538

1,093

33,100Specialised Lending

24,5006,491

625

31,616

Total exposures

480,218

119,947

128,044728,20932

% of Total

Total exposures

1.5%

11,817
1.2%

9,736
1.6%

12,833

2,029

-

88

-

-

-

633

10,083

Electricity,
Gas & Water
Supply$M

1.5%

11,707

130

-

1,193

-

-

-

8

10,37622.9%

182,817

3

2,966

392

-

-

102,441

43,45633,559Entertainment,
Financial,
Leisure & Investment &Tourism
Insurance
$M
$M

3.7%

29,344

173

-

9

-

-

-

26,6082,554

Government
and Official
Institutions
$M

5.4%

43,165

15

-

1,121

-

-

75

731

41,223

Manufacturing$M

Sep 1340.6%

323,853--

18,56522,895279,946

-

1

2,446

Personal$M

5.9%

47,31926,945

-

1,029

-

-

-

622

18,723

Property
Services$M

3.4%

27,497

-

-

815

-

-

25

49

26,608Wholesale
Trade
$M

2.2%

17,791

34

-

2,631

-

-

-

-

15,126

Retail Trade
$M

2.0%

15,658

1,602

-

1,179

-

-

95

527

12,255

Transport &Storage$M

13

33

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

2.7%

21,506

562

2,103

2,777

-

-

-

99

15,965

Other$M

September 201312
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.

5.4%

43,278

142

-

26

-

411

-

-

-

67

6,526

Construction
$M

3,001

-

-

-

-

9,726

Business
Services
$M

2,065

-

Qualifying Revolving Retail

3,149

-

Residential Mortgage

Other Retail
Qualifying Central
Counterparties
Specialised Lending

-

1,045

SovereignBank38,673

Corporate

Portfolio Type

Agriculture,
Forestry, Fishing& Mining$M

Table 7(d): Industry distribution of Exposure at Default 12 13

ANZ Basel III Pillar 3 disclosure

100.0%

798,32132,072

5,069

38,01422,895279,946

102,636

73,846

243,843

Total
$M

26

-

Qualifying Revolving Retail% of Total

Total exposures

Specialised Lending

5.3%

38,834

462

2,821

-

Residential Mortgage

Other retail

-

527

Bank

35,024

1.4%

10,428

-

1,828

-

-

-

3

8,597

Business
Services$M

Agriculture,
Forestry, Fishing& Mining$M

Sovereign

1.4%

5.3%

10,525730

40,452

Corporate

Portfolio Type% of Total

Total exposures

-

-

-

-

2,024

-

Qualifying Revolving Retail

-

-

8,475

Business
Services
$M

3,129

-

Residential Mortgage

Other Retail
Qualifying Central
Counterparties
Specialised Lending

-

1,154

SovereignBank35,439Corporate

Portfolio Type

Agriculture,
Forestry, Fishing& Mining
$M

1.3%

9,112

-

2,626

-

-

-

98

6,388

Construction
$M

1.2%

9,117

9

-

2,934

-

-

-

91

6,083

Construction$M

ANZ Basel III Pillar 3 disclosure

1.7%

12,098

2,070

84

-

-

-

688

9,256

Electricity,
Gas & Water
Supply$M

1.6%

12,228

2,318

-

85

-

-

-

790

9,035

Electricity,
Gas & Water
Supply$M

23.7%

180,748

-

660

373

-

-

102,372

49,052

28,291

1.6%

11,658

137

903

-

-

-

2

10,61622.4%

163,142

-

330

-

-

98,90837,98325,921Entertainment,
Financial,
Leisure & Investment &Tourism
Insurance
$M
$M

1.5%

11,328

168

-

1,098

-

-

-

8

10,054Entertainment,
Financial,
Leisure & Investment &Tourism
Insurance
$M
$M

34

3.8%

27,936

173

8

-

-

-

25,464

2,291

Government
and Official
Institutions
$M

3.6%

27,570

173

-

7

-

-

-

25,045

2,345

Government
and Official
Institutions
$M

5.3%

38,882

241

923

-

-

-

368

37,350

Manufacturing$M

Sep 12

5.4%

41,407

124

-

1,131

-

-

-

585

39,567

Manufacturing$M

Mar 1340.6%

295,805-

16,782

22,933

254,614

-

2

1,474

Personal$M

40.2%

306,481--

17,76423,013

263,759

-

2

1,943

Personal$M

6.3%

45,901

26,460

857

-

-

-

668

17,916

Property
Services$M

6.0%

45,60926,373

-

1,031

-

-

-

598

17,607

Property
Services$M

3.5%

25,197

-

638

-

-

-

57

24,502Wholesale
Trade
$M

3.5%

26,540

-

-

806

-

-

-

122

25,612Wholesale
Trade
$M

2.2%

16,031

11

2,046

-

-

-

-

13,974Retail Trade
$M

2.2%

16,980

22

-

2,508

-

-

-

-

14,450Retail Trade
$M

2.0%

14,841

1,634

1,039

-

-

-

452

11,716

Transport &Storage$M

1.9%

14,465

1,827

-

1,131

-

-

-

370

11,137

Transport &Storage$M

2.5%

18,344

428

2,215

-

-

-

278

15,423

Other
$M

2.4%

18,634

551

856

2,408

-

-

-

181

14,638

Other
$M

Total
$M

100.0%

728,209

31,616

33,10022,933

254,61498,90866,590220,448

Total$M

100.0%

762,084

32,321

1,516

36,42923,013

263,759

102,372

77,998

224,676

September 2013

ANZ Basel III Pillar 3 disclosure

September 2013

Table 7(e): Residual contractual maturity of Exposure at Default 14

Sep 13< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

108,760

114,807

20,106

170

243,843

Sovereign

44,171

17,771

11,904-73,846

Bank

47,57353,2691,794-

102,636

689

4,969

244,357

29,931

279,946---

22,89522,895

Other Retail12,41914,133

11,462-38,014

Qualified Central Counterparties

1,303

2,464

1,302

-

5,069

Specialised Lending

11,41018,9251,676

61

32,072

Total exposures

226,325

226,338

292,601

53,057

798,321

Portfolio Type

Residential Mortgage
Qualifying Revolving RetailMar 13< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

100,881

104,989

18,677

129

224,676

Sovereign

49,351

19,598

9,049-

77,998Bank

49,49550,5402,337-

102,372

Residential Mortgage

1,646

4,403

228,585

29,125

263,759---

23,01323,013

12,312

15,932

8,185-

36,429

847

370

299

-

1,516

Specialised Lending

12,254

17,2512,754

62

32,321

Total exposures

226,786

213,083

269,886

52,329762,084

Portfolio Type

Qualifying Revolving Retail
Other Retail
Qualified Central Counterparties

Sep 12< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

93,957104,262

22,121

108

220,448

Sovereign

40,99015,386

10,214-

66,590Bank44,356

51,2103,342-

98,908653

3,549

221,393

29,019254,614

Portfolio Type

Residential Mortgage
Qualifying Revolving Retail

-

-

-

22,93322,933

Other Retail

10,76014,335

8,005-

33,100Specialised Lending

11,183

17,8722,509

52

31,616

Total exposures

201,899

206,614

267,584

52,112

728,20914

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

35

ANZ Basel III Pillar 3 disclosure

September 2013

Table 7(f) part (i): Impaired assets 15 16, Past due loans 17, Provisions and Write-offs by
Industry sector
Sep 13
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

-

1,143

161

337

78

65

-

96

44

63

11

23

Construction

-

105

94

47

14

22

Electricity, gas and water supply

-

285

5

2

(5)

(1)

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

-

122

56

35

6

8

-

160

21

21

-

12

-

-

-

-

-

-

Manufacturing

-

319

31

141

27

60

Personal

-

955

955

395

309

400

Property Services

6

479

145

134

-

55

Retail Trade

-

119

91

77

53

25

61

238

23

70

7

19

Wholesale Trade

-

186

25

109

43

68

Other

-

141

47

36

29

37

Total

67

4,348

1,698

1,467

572

793

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Transport & Storage

15

Impaired derivatives are net of credit value adjustment (CVA) of $93 million, being a market value based
assessment of the credit risk of the relevant counterparties (March 2013: $111 million; September 2012: $105
million).

16

Impaired loans / facilities include restructured items of $341 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 2013: $524 million; September 2012: $525
million).
17
Not well secured portfolio managed retail exposures have been reclassified from past due loans > 90 days to
impaired loans / facilities from June 2013.

36

ANZ Basel III Pillar 3 disclosure

September 2013

Mar 13
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

-

1,158

178

327

49

33

-

131

61

64

27

35

Construction

2

113

58

50

11

25

Electricity, gas and water supply

2

271

3

6

-

1

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

1

110

59

34

12

13

-

171

22

31

(2)

5

-

-

-

-

-

-

Manufacturing

6

373

30

132

30

147

Personal

-

810

1,009

403

269

334

Property Services

7

727

122

191

65

68

Retail Trade

-

90

68

55

30

37

65

253

22

74

73

144

Wholesale Trade

-

240

19

133

13

8

Other

-

155

45

43

18

14

Total

83

4,602

1,696

1,543

595

864

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Transport & Storage

Sep 12

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥90days
$M

Individual
provisionbalance
$M

-

1,142

229

312

Individual
provision
charge for
Write-offs
half year for half year
$M
$M
69

54

-

158

41

70

24

47

Construction

-

149

49

66

142

124

Electricity, gas and water supply

2

273

27

5

7

2

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

-

156

45

41

12

11

-

210

26

28

(15)

6

-

-

-

-

-

-

Manufacturing

9

489

26

234

178

105

Personal
Property Services
Retail Trade
Transport & Storage
Wholesale Trade

-

798

970

412

258

359

11

796

133

211

44

73

-

112

85

64

20

16

94

383

19

158

127

7

-

241

29

130

29

21

Other

-

173

34

42

20

16

Total

116

5,080

1,713

1,773

915

841

37

ANZ Basel III Pillar 3 disclosure

September 2013

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

Sep 13

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

2

2,286

308

790

225

240

Sovereign

-

-

-

-

-

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

398

1,026

134

23

51

Qualifying Revolving Retail

-

78

-

-

115

152

Other Retail

-

390

233

213

166

188

Total Advanced IRB approach

2

3,152

1,567

1,137

529

631

65

857

97

145

6

51

Corporate

-

172

21

100

20

71

Residential Mortgage

-

44

9

14

4

5

Qualifying Revolving Retail

-

65

-

45

(7)

3

Other Retail

-

58

4

26

20

32

Total Standardised approach

-

339

34

185

37

111

Qualifying Central Counterparties

-

-

-

-

-

-

67

4,348

1,698

1,467

572

793

Specialised Lending
Portfolios subject to Standardised approach

Total

38

ANZ Basel III Pillar 3 disclosure

September 2013

Mar 13

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

10

2,418

282

759

243

303

Sovereign

-

-

-

-

-

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

463

907

159

35

31

Qualifying Revolving Retail

-

-

94

-

112

146

Other Retail

-

323

284

202

138

150

Total Advanced IRB approach

10

3,204

1,567

1,120

528

630

Specialised Lending

71

1,055

72

183

39

170

Corporate

2

237

39

150

22

36

Residential Mortgage

-

18

3

14

1

1

Qualifying Revolving Retail

-

63

1

46

(9)

8

Other Retail

-

25

14

30

14

19

Total Standardised approach

2

343

57

240

28

64

Qualifying Central Counterparties

-

-

-

-

-

-

83

4,602

1,696

1,543

595

864

Portfolios subject to Standardised approach

Total

Sep 12

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

15

2,631

358

854

450

387

Sovereign

-

-

-

-

-

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

468

898

163

34

36

Qualifying Revolving Retail

-

-

83

1

134

161

Other Retail

-

286

198

182

131

125

Total Advanced IRB approach

15

3,385

1,537

1,200

749

709

Specialised Lending

99

1,343

117

326

137

79

Corporate

2

209

30

142

27

38

Residential Mortgage

-

23

4

17

3

1

Qualifying Revolving Retail

-

65

13

53

(9)

4

Other Retail

-

55

12

35

8

10

Total Standardised approach

2

352

59

247

29

53

116

5,080

1,713

1,773

915

841

Portfolios subject to Standardised approach

Total

39

ANZ Basel III Pillar 3 disclosure

September 2013

Table 7(g): Impaired assets 18 19, Past due loans 20 and Provisions by Geography

Sep 13

Geographic region
Australia

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥90 days$M

Individual
provisionbalance$M

Collective
provisionbalance
$M

67

2,806

1,486

944

1,862

New Zealand

-

873

178

261

495

Asia Pacific, Europe and America

-

669

34

262

530

67

4,348

1,698

1,467

2,887

Impairedderivatives$M

Past dueloans≥90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Total

Mar 13

79

Impairedloans/
facilities
$M
2,973

1,455

955

1,808

New Zealand

-

1,021

184

313

470

Asia Pacific, Europe and America

4

608

57

275

491

83

4,602

1,696

1,543

2,769

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Geographic region
Australia

Total

Sep 12

Geographic region
Australia

111

3,335

1,473

1,128

1,788

New Zealand

-

1,157

181

368

496

Asia Pacific, Europe and America

5

588

59

277

481

116

5,080

1,713

1,773

2,765

Total

18

Impaired derivatives are net of credit value adjustment (CVA) of $93 million, being a market value based
assessment of the credit risk of the relevant counterparties (March 2013: $111 million; September 2012: $105
million).

19

Impaired loans / facilities include restructured items of $341 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 2013: $524 million; September 2012: $525
million).
20
Not well secured portfolio managed retail exposures have been reclassified from past due loans > 90 days to
impaired loans / facilities from June 2013.

40

ANZ Basel III Pillar 3 disclosure

September 2013

Table 7(h): Provision for Credit Impairment
Half year
Sep 13$M

Half year
Mar 13$M

Half year
Sep 12
$M

2,769

2,765

2,994

26

4

(227)

-

-

(4)

92

-

2

Total Collective Provision

2,887

2,769

2,765

Individual Provision
Balance at start of period

1,543

1,773

1,714

957

932

1,270

(247)

(240)

(286)

54

(3)

(5)

(47)

(55)

(79)

Collective Provision
Balance at start of period
Charge to income statement
Disposal
Adjustments for exchange rate fluctuations

New and increased provisions
Write-backs
Adjustment for exchange rate fluctuations
Discount unwind
Bad debts written off

(793)

(864)

(841)

Total Individual Provision

1,467

1,543

1,773

Total Provisions for Credit Impairment

4,354

4,312

4,538

Specific Provision Balance and General Reserve for Credit Losses 21
S

Sep 13Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

346

2,541

2,887

Individual Provision

1,467

-

Total Provision for Credit Impairment

1,467
4,354

Mar 13Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

341

2,428

2,769

Individual Provision

1,543

-

Total Provision for Credit Impairment

1,543
4,312

Sep 12
Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

334

2,431

2,765

Individual Provision

1,773

-

Total Provision for Credit Impairment

1,773
4,538

21

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

Table 8September 2013

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

Use of external rating agencies (External Credit Assessment Institutions)
ANZ portfolios under the Standardised approach are mainly Retail portfolios and hence are not rated
by external rating agencies. However, there are a small number of local corporate counterparties thatare externally rated. For these counterparties, external ratings by Standard & Poor’s and Moody’s
Investors Service are used as inputs into the RWA calculation. As described in the section on the ANZ
rating system, ANZ has mapped its master scale to the gradings of these two External Credit
Assessment Institutions (ECAIs).
Table 8(b): Exposure at Default by risk bucket 22
Risk weightSep 13$M

Mar 13$M

Sep 12
$M

0%

-

-

-

20%

364

-

-

35%

4,771

3,156

2,434

50%

821

387

375

75%

-

711

971

100%

21,47819,66020,248

150%

184

539

847

>150%

2

-

-

Capital deductions

-

-

-

27,62024,45324,875

Standardised approach exposures

Total
Other Asset exposures
0%

-

-

-

20%

1,023

1,081

1,092

35%

-

-

-

50%

-

-

-

75%

-

-

-

100%

3,339

3,171

3,367

150%

-

-

-

>150%

-

-

-

Capital deductions

-

-

-

4,362

4,252

4,459

1,478

Total
Specialised Lending exposures
0%

1,020

1,231

70%

11,938

11,3399,954

90%

14,972

15,51915,102

115%

3,308

3,231

3,970

250%

802

889

1,001

Total

32,04032,20931,505

300%

n/a

n/a

58

400%

n/a

n/a

214

Total

n/a

n/a

272

Equity exposures 23

22

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

23

Under Basel III, equity exposures are no longer risk weighted, but are taken as capital deductions.

42

ANZ Basel III Pillar 3 disclosure

Table 9September 2013

Credit risk – Disclosures for portfolios subject to Advanced
IRB approaches

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

Borrower Type

Rating Approach

Corporate

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

AIRB

Sovereign

Central governments
Central banks
Certain multilateral development banks

AIRB

Bank

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

AIRB

Residential
mortgages

Exposures secured by residential property

AIRB

Consumer credit cards <$100,000 limit

AIRB

Other retail

Small business lending
Other lending to consumers

AIRB

Specialised Lending

Income Producing Real Estate25
Project financeObject finance

AIRB – Supervisory
Slotting26

Qualifying
retailrevolving

EquityOther assets

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

AIRB –
weights

fixed

risk

AIRB –
weights

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.

24

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

25

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

26

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

43

ANZ Basel III Pillar 3 disclosure•

September 2013

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.

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 thatthese transaction characteristics have different recovery outcomes. ANZ’s LGD also includes
recognition of the different legal and insolvency regimes in different countries, where this has
been shown to influence recovery outcomes.

ANZ’s corporate PD master scale is made up of 27 rating grades. Each level/grade is separately
defined and has a range of default probabilities attached to it. The PD master scale enables ANZ’s
rating system to 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 tabledemonstrates this alignment (for one year PDs):
ANZ CCR

Moody’sStandard & Poor’s

PD Range

0+ to 1-

Aaa to < A1

AAA to < A+

0.0000 - 0.0346%

2+ to 3+

A1 to < Baa2

A+ to < BBB

0.0347 - 0.1636%

3= to 4=

Baa2 to < Ba1

BBB to < BB+

0.1637 - 0.5108%

4- to 6-

Ba1 to < B1

BB+ to < B+

0.5109 - 3.4872%

7+ to 8+

B1 to < Caa

B+ to < CCC

3.4873 - 10.0928%

8=

Caa

CCC

10.0929 - 99.9999%

8-, 9 and 10

Default

Default

100%

In the retail asset classes, most facilities utilise credit rating scores. The scores are calibrated to PD,
so the PD master scale gives ANZ a common language to understand and manage credit risk. For
retail asset class exposures, the LGD dimension is recognised through the process of pooling retail
exposures into homogenous groups.
ANZ also uses specialised PD master scale/mappings for the sovereign and bank asset classes, 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.

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 purposes

44

ANZ Basel III Pillar 3 disclosure

September 2013of 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 Global 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 2013

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

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
Slotting27

For the Retail Basel asset class (Residential Mortgages, Qualifying Revolving Retail and Other Retail
Exposures) the large number of relatively homogenous exposures enable the development ofstatistically robust application scoring models for use at origination and behavioural scoring forongoing management. The scores are calibrated to PD, so the PD master scale gives ANZ a common
language to understand and discuss credit risk. LGD is recognised through the process of pooling retail
exposures into homogenous groups.
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.

27

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 2013

Table 9(d): Non Retail Exposure at Default subject to Internal Ratings Based (IRB)
approach 28 29 30

Sep 13
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Exposure at Default
Corporate

12,33856,75877,63868,754

3,792

1,706

3,101 224,087

SovereignBank

67,73085,766

1,933
8,769

1,239
6,914

2,873
1,180

50
1

21
6

73,846- 102,636

165,834

67,46085,79172,807

3,843

1,733

3,101 400,569

41.4%

16.8%

21.4%

18.2%

1.0%

0.4%

0.8%

100.0%

Undrawn commitments (included in above)
Corporate
4,238
18,957

Total% of Total

Sovereign
Bank
Total

Default
$M

Total
$M

21,365

10,822

509

207

117

56,215

711
282

411
107

19
220

9
13

-

-

-

1,150
622

5,231

19,475

21,604

10,844

509

207

117

57,987

Average Exposure at Default
Corporate

3.861

3.057

1.258

0.388

0.635

0.319

0.748

0.783

SovereignBank

71.9147.613

38.1342.755

20.3923.517

16.607
1.198

5.571
0.083

1.775
0.198

-

58.910
5.313

Exposure-weighted average Loss Given Default (%)
Corporate
Sovereign

58.2%
2.4%

60.0%
4.2%

48.3%
49.8%

39.7%
49.8%

40.4%
70.7%

43.0%
34.6%

39.4%
-

48.4%
5.2%

Bank

63.7%

64.6%

70.9%

72.0%

54.5%

65.7%

-

64.3%

Exposure-weighted average risk weight (%)
Corporate
20.8%
37.0%

54.0%

74.1%

125.2%

187.9%

136.5%

58.7%

Sovereign
Bank

52.9%
81.6%

110.9%
134.2%

222.9%
167.1%

212.3%
329.7%

-

6.1%
31.1%

0.5%
20.0%

1.8%
29.8%

28
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).
29

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

30

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

47

ANZ Basel III Pillar 3 disclosure

September 2013

Mar 13
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Exposure at Default
Corporate

10,66350,80574,38762,974

1,812

3,765

3,281 207,687

SovereignBank

72,19981,682

1,576
13,350

1,018
5,960

3,115
1,375

22
4

68
1

77,998- 102,372

164,544

65,731

81,36567,464

1,838

3,834

3,281 388,057

42.4%

16.9%

21.0%

17.4%

1.3%

1.0%

0.8%

100.0%

Undrawn commitments (included in above)
Corporate
3,865
17,933Total% of Total

Default
$M

Total
$M

20,947

10,396

508

136

118

53,903

789
102

411
99

41
62

4
16

-

-

-

1,245
279

4,756

18,44321,05010,416

508

136

118

55,427

Corporate
Sovereign

0.199
67.5952.730
24.1781.161
19.3460.356
15.185

0.589
4.557

0.197
1.463

0.798
-

0.611
54.644

Bank

4.437

2.486

3.420

1.679

0.070

0.256

-

3.820

Exposure-weighted average Loss Given Default (%)
Corporate
57.0%
60.2%
48.1%

39.1%

40.3%

41.4%

40.0%

48.2%

Sovereign
Bank

52.6%
73.3%

59.1%
75.0%

40.6%
68.5%

-

5.1%
65.8%

59.0%

Sovereign
Bank
Total
Average Exposure at Default

2.4%
64.8%

4.4%
66.4%

44.0%
73.0%

Exposure-weighted average risk weight (%)
Corporate

20.0%

37.0%

53.0%

74.0%

126.0%

192.0%

132.0%

Sovereign

0.4%

2.0%

46.8%

109.7%

195.1%

222.5%

-

5.8%

Bank

19.8%

31.4%

90.1%

135.9%

245.3%

334.0%

-

32.2%

AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Exposure at Default
Corporate

9,294

50,101

67,98966,079

3,652

1,886

SovereignBank61,151
81,721

1,728
10,621

459
5,033

3,188
1,530

62
1

2
2

152,166

62,45073,48170,797

3,715

1,890

3,480 367,979

41.4%

17.0%

20.0%

19.2%

1.0%

0.5%

0.9%

100.0%

Undrawn commitments (included in above)
Corporate
3,835
17,252

Sep 12

Total% of Total

3,480 202,481-

66,59098,90818,027

11,484

399

138

100

51,235

639
66

327
76

42
17

61
13

-

-

-

1,069
172

4,540

17,65518,086

11,558

399

138

100

52,476

Corporate
Sovereign

0.171
54.5442.671
27.858

1.079
8.592

0.375
13.344

0.560
4.776

0.276
0.245

1.003
-

0.600
44.416

Bank

7.125

2.754

3.011

1.454

0.291

0.076

-

5.034

Sovereign
Bank
Total
Average Exposure at Default

Exposure-weighted average Loss Given Default (%)
Corporate

56.5%

59.7%

46.8%

38.5%

37.5%

40.4%

37.2%

46.8%

Sovereign
Bank

2.5%
64.5%

4.8%
65.7%

29.4%
72.8%

54.1%
73.5%

58.9%
62.7%

55.5%
65.8%

-

5.4%
65.8%

Exposure-weighted average risk weight (%)
Corporate
Sovereign

18.5%
0.5%

36.1%
1.8%

52.2%
30.2%

72.8%
110.7%

117.1%
207.7%

179.1%
469.8%

140.9%
-

58.3%
6.4%

Bank

14.7%

22.9%

72.9%

118.7%

232.1%

329.9%

-

25.2%

48

ANZ Basel III Pillar 3 disclosure

September 2013

Table 9(d): Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB)
approach by risk grade
Sep 130.00%<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

2,749
11,246

178,322219

21,116
1,904

58,390
4,797

950

3,866

3,039

20,226

6,991

1,279

14,945 182,407

26,05983,413

17,4086,221

2,510 332,963

7.8%

25.0%

5.2%

1.9%

0.8%

100.0%

1,077
1,223

3,468
2,085

222
586

66
106

2
22

25,39912,998

Default
$M

Total
$M

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total% of Total

4.5%

54.8%

8,455
1,962

4,053
889

1,670 274,755
157
21,174683

37,034

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

1,077
8,758

19,487
218

446

1,633

1,495

2,305

273

44

7

6,203

10,281

21,338

3,795

7,858

1,081

216

31

44,600Residential Mortgage

0.026

0.224

0.160

0.195

0.233

0.255

0.192

0.197

Qualifying Revolving Retail
Other Retail

0.011
0.013

0.006
0.012

0.010
0.013

0.009
0.017

0.009
0.010

0.008
0.008

0.009
0.014

0.010
0.014

Total
Average Exposure at Default

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

16.3%
73.2%

19.5%
73.2%

19.0%
73.2%

23.4%
73.2%

20.9%
73.2%

20.0%
73.2%

22.5%
73.2%

20.3%
73.2%

Other Retail

51.3%

51.5%

59.5%

46.1%

53.3%

62.0%

52.3%

49.8%

Exposure-weighted average risk weight (%)
Residential Mortgage
4.1%
6.3%

13.7%

32.1%

76.1%

108.6%

221.7%

17.3%

Qualifying Revolving Retail
Other Retail

14.2%
43.0%

39.2%
59.9%

108.4%
83.8%

207.3%
145.2%

364.6%
206.7%

34.1%
40.6%

4.9%
13.2%

11.5%
22.5%

49

ANZ Basel III Pillar 3 disclosure

September 2013

Mar 130.00%<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

2,541
11,148171,246167

18,914
1,859

53,456
4,697

870

3,462

2,812

19,288

6,780

1,304

14,559 174,875

23,58577,441

16,7056,090

2,436 315,691

7.5%

24.5%

5.3%

1.9%

0.8%

100.0%

991
1,189

3,199
2,058

179
577

69
113

3
20

23,90812,825

Default
$M

Total
$M

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total% of Total

4.6%

55.4%

7,985
1,940

3,812
974

1,599 259,553
166
20,951671

35,187

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

943
8,702

Other Retail

18,524
166

409

1,482

1,416

2,097

250

45

7

5,706

10,054

20,172

3,596

7,354

1,006

227

30

42,439Average Exposure at Default
Residential Mortgage

0.025

0.219

0.145

0.180

0.226

0.250

0.177

0.189

Qualifying Revolving Retail

0.011

0.006

0.010

0.009

0.009

0.008

0.008

0.010

Other Retail

0.009

0.008

0.011

0.017

0.010

0.007

0.012

0.013

Total

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

16.6%
73.2%

19.6%
73.2%

18.7%
73.2%

23.1%
73.2%

20.9%
73.2%

20.0%
73.2%

23.4%
73.2%

20.3%
73.2%

Other Retail

50.3%

51.1%

60.0%

45.1%

52.9%

63.0%

53.7%

49.2%

Exposure-weighted average risk weight (%)
Residential Mortgage

4.2%

6.4%

13.5%

32.1%

76.3%

108.8%

225.9%

16.2%

Qualifying Revolving Retail
Other Retail

4.8%
12.9%

11.3%
22.4%

14.0%
43.5%

38.5%
58.7%

107.1%
83.0%

206.8%
146.8%

339.7%
228.5%

32.8%
61.9%

0.00%
<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

Default
$M

Total
$M

Exposure at Default
Residential Mortgage

2,392

165,193

18,28352,735

7,404

3,318

Qualifying Revolving Retail
Other Retail

11,068
747

121
3,190

1,891
1,849

4,932
18,362

1,778
5,988

962
904

Total

14,207 168,504

22,02376,02915,1705,184

2,588 303,705

7.3%

25.0%

5.0%

1.7%

0.9%

100.0%

Sep 12% of Total

4.7%

55.4%

Undrawn commitments (included in above)
Residential Mortgage
882
17,887

1,514 250,839
160
914

20,912
31,954

992

2,909

179

65

2

22,916

8,705
659

121
2,208

1,227
1,162

2,182
2,457

510
195

114
46

19
5

12,878
6,732

10,246

20,216

3,381

7,548

884

225

26

42,526

Average Exposure at Default
Residential Mortgage

0.025

0.214

0.141

0.176

0.223

0.242

0.182

0.186

Qualifying Revolving Retail
Other Retail

0.011
0.007

0.006
0.007

0.010
0.008

0.009
0.015

0.009
0.010

0.008
0.006

0.009
0.022

0.010
0.012

Qualifying Revolving Retail
Other Retail
Total

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

16.6%
73.2%

19.6%
73.2%

18.6%
73.2%

22.8%
73.2%

21.1%
73.2%

20.0%
73.2%

24.1%
73.2%

20.2%
73.2%

Other Retail

57.0%

51.8%

59.1%

43.8%

50.6%

63.9%

58.3%

47.8%

Exposure-weighted average risk weight (%)
Residential Mortgage
4.3%
6.5%

13.5%

31.8%

77.8%

109.4%

225.3%

17.1%

Qualifying Revolving Retail
Other Retail

14.1%
40.0%

38.9%
57.3%

105.8%
79.5%

206.8%
155.2%

329.4%
254.6%

33.9%
66.2%

4.9%
14.9%

11.4%
22.7%

50

ANZ Basel III Pillar 3 disclosure

September 2013

Table 9(e): Actual Losses by portfolio type
Half year Sep 13
Individual provision charge$M

Write-offs$M

Corporate

225

240

Sovereign

-

-

Bank

-

-

Residential Mortgage

23

51

Qualifying Revolving Retail

115

152

Other Retail

166

188

Total Advanced IRB

529

631

Basel Asset Class

Specialised Lending

6

51Standardised approach

37

111

572

793

Total

Half year Mar 13
Individual provision charge$M

Write-offs$M

Corporate

243

303

Sovereign

-

-

Bank

-

-

Residential Mortgage

35

31

Qualifying Revolving Retail

112

146

Other Retail

138

150

Total Advanced IRB

528

630

Specialised Lending

39

170

Basel Asset Class

Standardised approach
Total

28

64

595

864

Half year Sep 12
Individual provision charge$M

Write-offs$M

Corporate

450

387

Sovereign

-

-

Bank

-

-

Residential Mortgage

34

36

Qualifying Revolving Retail

134

161

Other Retail

131

125

Total Advanced IRB

749

709

Specialised Lending

137

79

Standardised approach

29

53

915

841

Basel Asset Class

Total

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ANZ Basel III Pillar 3 disclosure

September 2013

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

Average
Estimated PD%

Average
Actual PD%

Sep 13
Averageestimated toactual EAD
ratio

Corporate

1.49

1.09

1.12

0.40

nil

n/a

41.5
n/a

30.0

Sovereign
Bank

0.49

0.08

-

46.0

58.3

Specialised Lending

n/a

2.54

1.14

n/a

25.8

Residential Mortgage

0.85

0.83

1.00

20.7

3.9

Qualifying Revolving Retail

2.73

2.11

1.04

73.2

Other Retail

3.29

3.55

1.05

48.1

71.7
44.6

Portfolio Type

Average
Estimated
LGD%

Average
Actual LGD%

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 was 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
March 2013. The actual PD is based on the number of defaulted obligors compared to the total
number of obligors measured at the beginning of each financial year over the period of observation
being 2009 to March 2013.
The EAD ratio compares internally estimated EAD prior to default to realised EAD for defaulted
obligors over the four years of observation being 2009 to 2013 financial years. A ratio greater than
1.0 signifies that on average, the actual defaulted exposures are lower than the estimated exposuresat the time of default.
The estimated LGD is the internal estimates of downturn LGD for accounts that defaulted at the
beginning of each year during the observation period being 2009 to 2012 financial years. The actual
LGD is based on the average realised losses over the period for the accounts observed at beginningand defaulted during the observation period. For non-retail portfolios, the estimated and actual LGDs
are based on accounts that defaulted in 2009 to 2011 financial years. For retail portfolios, theestimated and actual LGDs are based on accounts that defaulted in 2009 to 2012 financial years. For
non-retail portfolios, defaults occurring in the 2012 and 2013 have been excluded from the analysis,
to allow sufficient time for workout period. For retail portfolios, defaults occurring in 2013 have been
excluded. For non-retail portfolios, actual LGD for defaults where workouts were not finalised havebeen estimated to approximate the final actual loss. For the retail portfolios, defaults with nonfinalised 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.

52

nil

ANZ Basel III Pillar 3 disclosure

Table 10

September 2013

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.31 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. The concepts of legal enforceability, certainty and current valuation are central tocollateral 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 the collateral
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.
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 in

31

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

September 2013exchange 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 such as
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 a credit
protection provider falls below the minimum required to provide effective protection, the protection is
no longer recognised as an effective risk mitigant for regulatory purposes.
The use of netting
Netting is a form of credit risk mitigation in that it reduces EAD, by offsetting a customer’s positive
and negative balances with ANZ.
In order to apply on-balance sheet netting, the arrangement must be specifically documented with thecustomer 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.

54

ANZ Basel III Pillar 3 disclosure

September 2013

Table 10(b): Credit risk mitigation on Standardised approach portfolios – collateral 32
Sep 13
Eligible Financial Other Eligible
Exposure
CollateralCollateral
$M
$M
$M

% Coverage

Standardised approach
Corporate

19,756

267

-

1.4%

Residential Mortgage

5,191

3

-

0.1%

Qualifying Revolving Retail

1,721

-

-

0.0%

980

-

-

0.0%

27,648

270

-

1.0%

Mar 13
Eligible Financial Other Eligible
Exposure
CollateralCollateral
$M
$M
$M

% Coverage

Other Retail
Total

Standardised approach
Corporate

16,989

370

-

2.2%

Residential Mortgage

4,206

1

-

0.0%

Qualifying Revolving Retail

2,062

-

-

0.0%

Other Retail

1,242

-

-

0.0%

24,499

371

-

1.5%

Sep 12
Eligible Financial Other Eligible
Exposure
CollateralCollateral
$M
$M
$M

% Coverage

TotalStandardised approach
Corporate

17,967

338

-

1.9%

Residential Mortgage

3,775

1

-

0.0%

Qualifying Revolving Retail

2,021

-

-

0.0%

Other Retail

1,146

-

-

0.0%

24,909

339

-

1.4%

Total

32

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 2013

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

Sep 13

Exposure$M

Exposurescovered by
Guarantees$M

Exposurescovered by
CreditDerivatives$M% Coverage

Corporate (incl. Specialised Lending)

256,159

18,093250

7.2%

Sovereign

73,846

247

-

0.3%

Bank

102,636

8,131

-

7.9%

Residential Mortgage

274,755

-

-

0.0%

Qualifying Revolving Retail

21,174--

0.0%

Other Retail37,034--

0.0%

765,604

26,471250

3.5%

Corporate

19,756--

0.0%

Residential Mortgage

5,191

-

-

0.0%

Qualifying Revolving Retail

1,721

-

-

0.0%

980

-

-

0.0%

27,648--0.0%

Exposure$M

Exposurescovered by
Guarantees$M

Exposurescovered by
CreditDerivatives$M% Coverage

Corporate (incl. Specialised Lending)

240,008

16,406142

6.9%

Sovereign

77,998

241

-

0.3%

Bank

102,372

6,717

-

6.6%

Residential Mortgage

259,553

-

-

0.0%

Qualifying Revolving Retail

20,951--

0.0%

Other Retail35,187--0.0%

736,069

23,364142

3.2%

Corporate

16,989--0.0%

Residential Mortgage

4,206

-

-

0.0%

Qualifying Revolving Retail

2,062

-

-

0.0%

Other Retail

1,242

-

-

0.0%

24,499--0.0%

Advanced IRB

Total
Standardised approach

Other RetailTotal

Mar 13

Advanced IRB

Total
Standardised approach

Total

56

ANZ Basel III Pillar 3 disclosure

September 2013

Sep 12

Exposure$M

Exposurescovered by
Guarantees$M

Exposurescovered by
CreditDerivatives$M% Coverage

Corporate (incl. Specialised Lending)

234,097

16,259150

7.0%

Sovereign

66,590

227

-

0.3%

Bank

98,908

6,417

-

6.5%

Residential Mortgage

250,839

-

-

0.0%

Qualifying Revolving Retail

20,912--

0.0%

Other Retail

31,954--0.0%

703,300

22,903150

3.3%

Corporate

17,967--0.0%

Residential Mortgage

3,775

-

-

0.0%

Qualifying Revolving Retail

2,021

-

-

0.0%

Other Retail

1,146

-

-

0.0%

24,909--0.0%

Advanced IRB

Total
Standardised approach

Total

57

ANZ Basel III Pillar 3 disclosure

Table 11

September 2013

General disclosures for derivatives and counterparty credit
riskDefinition of counterparty credit risk
Counterparty credit risk in derivative transactions arises from the risk of counterparty default before
settlement date of the derivative contracts and the counterparty will not be able to fulfill present andfuture contractual 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 over the counter derivative instruments provided by ANZ tomanage price movement 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 coveredby this treatment include the derivative activities associated with interest rate, foreign exchange,
CDS, equity, commodity and repurchase agreement (repo) products.
Counterparty credit risk governance
ANZ’s counterparty credit risk management is governed by its credit principles, policies andprocedures. The Counterparty Credit 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 exposure of derivative transactions at future time points.
ANZ is moving from PCRE based on add-on methodology to a more sophisticated PFE Monte Carlobased approach to assess possible exposure movements for certain derivative products.
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 daily and excesses above approved limits are reported to accountcontrollers and risk officers for action.

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ANZ Basel III Pillar 3 disclosure

September 2013

Credit value adjustment (CVA)
Over the life of a derivative instrument, ANZ uses a CVA model to adjust fair value to take into
account the impact of counterparty credit quality. The methodology calculates the present value of
expected losses over the life of the financial instrument as a function of PD, LGD, expected credit risk
exposure and an asset correlation factor.
Impaired derivatives are also subject to a CVA.
In January 2013 APRA introduced the new Basel III credit value adjustment risk capital charge which
requires banks to hold additional risk based capital to cover the risk of mark to market losses
associated with deterioration in counterparty credit worthiness when entering into derivatives
transactions. The effect is that banks are required to increase the amount of capital provisioned for
deterioration in the counterparty credit worthiness when entering into a derivatives trade.
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. ANZ’s credit
policies and independent transaction evaluation by Credit Risk are central to managing wrong way
risk.
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.

•

Use of right to break clauses in master agreement or in trade confirmation to reduce term of longdated 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 being included in documentation.

•

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

•

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
2013, ANZ would be required to lodge USD460 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 2013

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,33 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 class. A resecuritisation exposure is a securitisation exposure in which the risk associated withan 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.

Regulatory capital approaches used in ANZ’s securitisation activities
For securitisation exposures held in ANZ’s banking book34, ANZ applies an IRB approach (as outlinedin APS 120) to determine the regulatory capital charge.
Chapter 8 outlines regulatory capital treatment for securitisation exposures held in ANZ’s tradingbook.
Securitisation activities
ANZ’s key securitisation activities are:
•
•
•

•

Securitisation of third-party originated assets, including residential mortgages, auto andequipment 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 securitization vehicles and (via ANZ Capel Court Limited) trust
management services.

Similar to other exposures, securitisation exposures are subject to credit, market, operational andlegal 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;
Impact of ANZ’s involvement in securitisation exposures on its risk profile; andHow ANZ ensures that it does not provide any implicit support to its securitisation exposures.

Historically, ANZ utilised a conduit structure to facilitate the securitising of third party originatedassets via the issuance of asset backed commercial paper (ABCP). The conduit is no longer issuing
ABCP due to changes in regulatory and market conditions. Funding is instead provided on third party
originated exposures via balance sheet funded arrangements where such arrangements satisfy ANZ’scredit, due diligence and other business requirements.
ANZ has no affiliated entities that ANZ manages or advises and that invests in securitisation
exposures that ANZ has securitised or in SPV’s that ANZ sponsors.
33

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.

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.

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ANZ Basel III Pillar 3 disclosure

September 2013

Governance of securitisation activities
Governance of securitisation activities is overseen by the Board and executive committees describedin Chapter 3, and managed in accordance with the credit risk and market risk frameworks described in
Chapters 6 and 8.
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, ANZ has a specialist
securitisation team with independent risk personnel overseeing operations. Credit decisions requirejoint risk and business approval. The securitisation team must be involved in all non-trading
securitisation transactions across ANZ, which ensures consistent expert treatment. When ANZ invests
in instruments issued by securitisation programs, the relevant business area manages these
exposures until the securitisation or resecuritisation exposures are repaid in full or traded.
Risk measurement and reporting of securitisation 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 ECAI’s) and the Internal Assessment Approach(IAA).
When utilising the IAA, ANZ uses a rating agency-type methodology which specifies certain stressfactors, takes into account historical performance of assets and other (asset-specific) considerations
such as underwriting standards. IAA methodology is applied in accordance with APRA’s requirements
and it forms part of ANZ’s overall securitisation risk-grading framework.
All facilities provided to or investments in securitisation programs (across both the banking andtrading books) undergo initial and ongoing due diligence. This due diligence is completed with input
from the Risk function and includes analysing the structure of the transaction and monitoring of theperformance of the underlying assets of the transaction. In addition, such exposures are formallyreviewed at least annually, including the risk grade.
The type and frequency of internal reporting on ANZ’s securitisation exposures 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 ofthese systems 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 is assessed on a case-by-case basis in a manner consistent with the bank-wide CRM
methodology.35
Accounting policies
The principal accounting policies governing ANZ’s securitisation activities are outlined in ANZ’s 2013
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. The policies as they apply to ANZ’s securitisation activities have not changed
since the prior period. Note 40 – Securitisations and Covered Bonds also provides details about thenature of ANZ’s securitisation activities and certain accounting policies as they specifically apply tothese activities.
Any SPV used in ANZ’s securitisation activities are assessed for control under the requirements of
AASB Interpretation 112 Consolidation – Special Purpose Entities. Where control is determined toexist, the SPV is consolidated into ANZ’s financial statements. Financial instruments held or issued
either by SPVs consolidated by ANZ or those held or issued to a non-consolidated SPV are recognised
and valued using the principles 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.

35

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.

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ANZ Basel III Pillar 3 disclosure

September 2013

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 2013 Annual Report.
Use of external rating agencies
Where the use of external rating agencies is relevant, ANZ applies the ratings or the rating
methodologies provided by Standard & Poor’s, Moody's Investor Services and/or Fitch Ratings asappropriate.
Significant changes in quantitative information
Since the last reporting period, securitisation exposures have increased by $850 million, largely due toan increase in funding facilities provided to securitisation programs.

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ANZ Basel III Pillar 3 disclosure

September 2013

Banking Book
Table 12(g): Banking Book: Traditional and synthetic securitisation exposures

Sep 13
Traditional securitisations
ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage-

46,597-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

46,597-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-

46,597-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

46,597-63

ANZ Basel III Pillar 3 disclosure

September 2013

Mar 13
Traditional securitisations
ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage-

46,141-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

46,141-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-

46,141-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

46,141-

Sep 12
Traditional securitisations
ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage-

45,499-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

45,499-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-

45,499-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

45,499-64

ANZ Basel III Pillar 3 disclosure

September 2013

Table 12(h): Banking Book: Impaired and Past due loans relating to ANZ originatedsecuritisations

Sep 13

ANZ Originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

Losses recognised
for the six month
ended
$M

Residential mortgage-

46,5971

103

0Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

-

46,5971103

0Underlying asset

Mar 13

ANZ Originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

Losses recognised
for the six month
ended
$M

Residential mortgage-

46,141-66-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

-

46,141-

66-

Underlying asset

Sep 12ANZ Originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

Losses recognised
for the six month
ended
$M

Residential mortgage-

45,499-50-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

-

45,499-50-

Underlying asset

65

ANZ Basel III Pillar 3 disclosure

September 2013

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 facility 36
Sep 13
Original value securitised
Recognised gainor loss
on sale$M

ANZ
Originated$M

ANZ Self
Securitised$M

ANZ
Sponsored$M

Residential mortgage

-

456

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

456

-

-

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities

661

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

150

Other

589

Total

1,400

Mar 13
Original value securitised

ANZ
Originated$M

ANZ Self
Securitised$M

ANZ
Sponsored$M

Recognised gainor loss
on sale$M

Residential mortgage

-

642

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

642

-

-

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities

-

-

-

-

Funding facilities

-

-

-

190

Underwriting facilities

-

-

-

-

Lending facilities

-

-

-

-

Credit enhancements

-

-

-

-

Holdings of securities (excluding trading book)

-

-

-

444

Other

-

-

-

-

Total

-

-

-

634

36

Activity represents net movement in outstandings.

66

ANZ Basel III Pillar 3 disclosure

September 2013

Sep 12
Original value securitised
ANZ
Originated$M

ANZ Self
Securitised$M

ANZ
Sponsored$M

Recognised gainor loss
on sale$M

Residential mortgage-

11,640--Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

11,640--

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities

-

-

-

-

Funding facilities

-

-

-

396

Underwriting facilities

-

-

-

-

Lending facilities

-

-

-

-

Credit enhancements

-

-

-

-

Holdings of securities (excluding trading book)

-

-

-

609

Other

-

-

-

-

Total

-

-

-

1,005

67

ANZ Basel III Pillar 3 disclosure

September 2013

Table 12(k): Banking Book: Securitisation - Regulatory credit exposures by exposure type

Securitisation exposure type - On balance sheet
Liquidity facilities

Sep 13$M

Mar 13$M

Sep 12
$M

-

-

128

5,806

5,232

5,007

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

3,040

2,889

2,925

-

-

-

Other

589

-

-

Total

9,435

8,121

8,060

Securitisation exposure type - Off balance sheet

Sep 13$M

Mar 13$M

Sep 12$M

Liquidity facilities

113

121

233

Funding facilities

-

-

60

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities (excluding trading book)

-

-

-

Protection provided

-

Other

-

-

-

Total

113

121

293

Sep 13$M

Mar 13$M

Sep 12$M

Funding facilities

Holdings of securities (excluding trading book)Protection provided

Total Securitisation exposure type-

Liquidity facilities

113

121

361

Funding facilities

5,806

5,232

5,067

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

3,040

2,889

2,925
-

Holdings of securities (excluding trading book)Protection provided

-

-

Other

589

-

-

Total

9,548

8,242

8,353

68

ANZ Basel III Pillar 3 disclosure

September 2013

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

Securitisation
risk weights≤ 25%

Sep 12
Sep 13
Mar 13
Regulatory credit
Risk weighted Regulatory credit
Risk weighted Regulatory credit
Risk weighted
exposure
assetsexposure
assetsexposure
assets
$M
$M
$M
$M
$M
$M
7,610
820
8,919
938
7,676
841

>25 ≤ 35%

-

-

-

-

-

-

>35 ≤ 50%

-

-

-

-

>50 ≤ 75%

155

81

148

77

154

80

>75 ≤ 100%

88

88

80

80

108

108

>100 ≤ 650%

33

50

33

50

38

57

1250% (Deduction)

119

1,488

114

1,426

160

-

9,314

2,645

8,051

2,474

8,070

1,065

Total

Resecuritisation
risk weights≤ 25%>25 ≤ 35%
>35 ≤ 50%>50 ≤ 75%

Sep 12
Sep 13
Mar 13
Regulatory credit
Risk weighted Regulatory credit
Risk weighted Regulatory credit
Risk weighted
exposure
assetsexposure
assetsexposure
assets
$M
$M
$M
$M
$M
$M
151
30
195
39
146
29
-

-

-

-

86

30

-

-

-

-

-

45

>75 ≤ 100%

40

40

45

45

45

>100 ≤ 650%

-

-

-

-

-

105

1250% (Deduction)
Total

Total Securitisation
risk weights≤ 25%>25 ≤ 35%

-

-

-

-

-

235

79

191

74

282

Sep 12
Sep 13
Mar 13
Regulatory credit
Risk weighted Regulatory credit
Risk weighted Regulatory credit
Risk weighted
exposure
assetsexposure
assetsexposure
assets
$M
$M
$M
$M
$M
$M
7,761
850
9,114
977
7,822
870
-

-

-

-

86

30

>35 ≤ 50%

-

-

-

-

>50 ≤ 75%

155

81

148

77

154

80

>75 ≤ 100%

128

128

125

125

153

153

50

38

57
1,170

>100 ≤ 650%
1250% (Deduction)
Total

33

50

33

119

1,488

114

1,426

160

9,549

2,724

8,242

2,548

8,352

69

ANZ Basel III Pillar 3 disclosure

September 2013

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

Sep 13
Deductions
from Tier I Capital$M

Deductions
from Tier II Capital$M

Deductions from Total
Capital$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

Deductions
from Tier I Capital$M

Deductions
from Tier II Capital$M

Deductions from Total
Capital$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

Deductions
from Tier I Capital$M
80

Deductions
from Tier II Capital$M
80

Deductions from Total
Capital$M
160

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

80

80

160

Securitisation exposures deducted from Capital

Mar 13

Securitisation exposures deducted from CapitalSep 12

Securitisation exposures deducted from Capital
Residential mortgage

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.

70

ANZ Basel III Pillar 3 disclosure

September 2013

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

Exposuressubject to CRM$M

Sep 13
Exposures not
subject to CRM
$M

Total
$M

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

-

163
40
32

163
40
32

Total

-

235

235

Mar 13
Exposures not
subject to CRM
$M

Total
$M

146
45
-

146
45
-

191

191

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-

Exposuressubject to CRM$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

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 12
Exposures not
subject to CRM
$M
92
145
45
-

Total
$M
92
145
45
-

-

282

282

Exposures to
Guarantors
$M
-

71

ANZ Basel III Pillar 3 disclosure

September 2013

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.

72

ANZ Basel III Pillar 3 disclosure

September 2013

Table 12(s): Trading Book: Securitisation – Regulatory credit exposures by exposure typeSep 13$M

Mar 13$M

Sep 12$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

21

17

10

Protection provided

-

-

-

Other

-

-

-

Total

21

17

10

Sep 13$M

Mar 13$M

Sep 12$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

-

-

-

Protection provided

-

-

-

Other

-

-

-

Total

-

-

-

Sep 13$M

Mar 13$M

Sep 12$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

21

17

10

Protection provided

-

-

-

Other

-

-

-

Total

21

17

10

Securitisation exposure type - On balance sheet

Securitisation exposure type - Off balance sheet

Total Securitisation exposure type73

ANZ Basel III Pillar 3 disclosure

September 2013

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 Book:
deducted from Capital

Securitisation - Aggregate securitisation exposures

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

74

ANZ Basel III Pillar 3 disclosure

September 2013

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

Exposuressubject to CRM$M

Sep 13
Exposures not
subject to CRM
$M

Total
$M

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

21
-

-

21
-

Total

21

-

21

Exposuressubject to CRM$M-

Mar 13
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

Exposures to
Guarantors
$M
21
21

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

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 12
Exposures not
subject to CRM
$M
15
-

Total
$M
15
-

-

15

15

Exposures to
Guarantors
$M
15
15

75

ANZ Basel III Pillar 3 disclosure

September 2013

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 – specificrisk37, 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 38

Sep 13$M

Mar 13$M

Sep 12$M

Interest rate risk

127

134

110

Equity position risk

7

7

4

Foreign exchange risk

-

-

-

Commodity risk

5

3

3

139

144

117

1,738

1,800

1,463

Total

Risk Weighted Assets equivalent

37

Specific risk is the risk that the value of a security will change due to issuer-specific factors. It applies to interest
rate and equity positions related to a specific issuer.
38

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

76

ANZ Basel III Pillar 3 disclosure

Table 14

September 2013Market risk – Internal models approach

Definition and scope of market risk
Market risk may stem 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 and credit spreads, or from fluctuations
in bond, commodity or equity prices.
Market risk management of IRRBB is described in Chapter 11 and therefore 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 for all
trading portfolios except for specific interest rate risk, equity specific risk and electricity trading. ANZ
uses the Standardised approach to market risk capital for these subsets.
Governance of market risk
The Board Risk Committee oversight of market risk is supported by the CMRC as described in Chapter
3.
The Market Risk function is a specialist risk management unit independent of the business that is
responsible for:•

Designing and implementing policies and procedures to ensure market risk exposures 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
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
communication of risk.

•

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

•

A comprehensive limit framework that controls all material market risks.

ofrequirements

thatpromotetheproactive

identification•

An independent Markets Risk function with specific responsibilities.

•

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

andMeasurement 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 possible outcomes that can be expected over a given period of time andestablishes the relative likelihood of those outcomes.
ANZ’s key tools to measure and manage traded market risk on a daily basis are VaR estimates,
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 iscalculated at a 99% confidence level for one and ten-day holding periods for standard VaR, and a tenday holding period for stressed VaR. All material market risk factors and all trading portfolios arecaptured within the VaR model, with the exception of interest rate risk, equity specific risk andelectricity trading, for which capital is calculated using the Standardised approach described in Table
13(b).
ANZ also undertakes a wide range of stress tests to the Group trading portfolio and to individual
trading portfolios. Standard stress tests are applied daily and measure the potential loss impact
arising from applying the largest market movements during the previous seven years over specificholding periods. Holding periods used to calculate stress parameters differ and reflect the relativeliquidity of each product type.

77

ANZ Basel III Pillar 3 disclosure

September 2013

Results from stress testing on plausible severe scenarios are calculated monthly and potential losses
are reported to the CMRC.
VaR and stress tests are also supplemented by cumulative loss limits and detailed control limits.
Cumulative loss limits ensure that in the event of continued losses from a trading activity, the trading
activity is stopped and senior management reviews before trading is 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 the comparison of calculated VaR exposures with profit and loss data to identify
the frequency of instances when 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 understand if the issues 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.
Total traded market risk back testing exceptions were within the APS 116 green zone for the period.
The following table discloses the high, mean and low VaR values over the reporting period and at
period end.
Table 14(e): Value at Risk (VaR) and stressed VaR over the reporting period 39

Six months ended 30 Sep 13
Mean$M

99% 1 Day Value at Risk (VaR)

Maximum$M

Minimum$M

Period end$MForeign Exchange

4.9

8.0

2.3

3.0

Interest Rate

6.4

11.2

3.3

3.9

Credit

4.6

8.6

3.2

4.2

Commodity

1.7

2.2

1.2

1.4

Equity

1.4

3.4

0.6

1.4

Six months ended 31 Mar 13
Mean$M

Maximum$M

Minimum$M

Period end$MForeign Exchange

5.4

12.6

3.3

6.3

Interest Rate

5.2

11.6

2.8

8.3

Credit

3.8

5.6

2.8

3.8

Commodity

2.5

4.1

1.3

2.3

Equity

1.8

2.9

1.0

1.3

99% 1 Day Value at Risk (VaR)

Six months ended 30 Sep 12
Mean$M

Maximum$M

Minimum$M

Period end$MForeign Exchange

5.5

10.0

3.5

3.5

Interest Rate

4.6

8.1

2.8

4.5

Credit

4.7

7.5

2.6

4.0

Commodity

2.9

4.2

1.4

1.7

Equity

1.3

2.7

0.7

1.2

99% 1 Day Value at Risk (VaR)

39

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

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ANZ Basel III Pillar 3 disclosure

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Mean
$M

99% 10 Day Stressed VaR
Foreign Exchange

Six months ended 30 Sep 13
Maximum
Minimum$M$M

Period end
$M

52.7

89.1

27.7

46.7

Interest Rate

44.2

81.6

25.7

37.3

Credit

17.8

26.8

11.7

20.8

Commodity

7.6

14.3

5.2

7.7

Equity

10.7

60.1

0.1

1.0

Reporting of market risk
Market Risk reports results of daily VaR and stress testing to senior management in Market Risk and
the Global Markets business. Market Risk will escalate details of any limit breach to the appropriate
discretion holder within Market Risk and to Group Risk expediently, and report to the CMRC monthly.
Market Risk monitors and analyses back testing results daily and reports results to the CMRC
quarterly.
Mitigation of market risk
The Market Risk team’s responsibilities, including the reporting and escalation processes describedabove, is fundamental to how market risk is managed. Market Risk has 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 of various commodities. All exposures
are transferred to the trading book and centrally managed by the Global Markets business andmonitored by Market Risk in accordance with the TFC framework.
Foreign exchange risk
Foreign exchange risk arises as a result of movements in relative values of various currencies.
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
2013, 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
Within ANZ, 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 riskof 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 governanceoversight. ANZ does not expect to eliminate all risks, but to ensure that the residual risk exposure ismanaged as low as reasonably practical based on a sound risk/reward analysis in the context of aninternational financial institution.
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.
Operational risk governance and structure
The ANZ Board has delegated its powers to the Risk Committee to approve the ANZ Operational Risk
Framework which is in accordance with Australian Prudential Standard APS 115 Capital Adequacy:
Advanced Measurement Approaches to Operational Risk. Operational Risk Executive Committee(OREC) is the primary senior executive management forum responsible for the oversight ofoperational risk and the compliance risk control environment. OREC supports the Risk Committee in
relation to the carrying out of its role in connection with operational risk and compliance. OREC
reviews ANZ’s operational risk profile and approved treatment plans for extreme risks.
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 operational risk
activities as part of this accountability. This includes implementation of the operational risk frameworkand involvement in decision making processes concerning all material operational risk matters.
Divisional risk personnel provide oversight of operational risk undertaken in the Business Units.
Group Operational Risk is responsible for exercising governance over operational risk through the
management of the operational risk frameworks, policy development, framework assurance,
operational risk measurement and capital allocations and reporting of operational risk issues to
executive committees.
Three lines of defence
The three lines of defence are Business first line, Divisional and Group risk functions second line andInternal Audit the third line. The First and Second Lines of Defence have 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 meetorganisational needs and regulatory requirements.
The Business has first line of defence responsibility for managing operational risk including obligations
to:•take primary accountability for the understanding of key risks and related control
environment.
•

undertake day-to-day management of risks, related decision-making and reporting.

•promote a strong risk culture of adhering to thresholds, managing risk exposure and making
sustainable business decisions.

•ensure operational risk information is up to date and reflective of the true operational risk
position.

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Operational Risk functions (Divisional and Group) form the second line of defence accountable for:
Division•providing independent oversight and guidance to enable consistent application of the ORMMF.
•

coordinating, oversight and reporting on material operational risks and change initiatives.

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

Group
•

acting as the independent function responsible for overarching risk oversight across the bank.

•setting Group operational risk appetite statements.

•

developing and maintaining relevant policies and procedures to support consistent execution
and continuing appropriateness of ORMMF.

•

monitoring and reporting compliance with ORMMF, consider and approve any exception
requests.

•sourcing external loss data.

•

leading scenario analysis and operational risk capital calculation process.

•acting as the central point of contact with regulators.

•

providing global insight and commentary on consolidated bank wide view; and identifying
group wide exposures and trends.

With Global Internal Audit being the third line of defence accountable for:•providing independent and objective assurance to management and ANZ Board regarding
compliance with policy and regulatory requirements.
•

performing objective assessments across all geographies, Divisions, Lines of Business andprocesses.

•

ensuring independent review of the adequacy of the ORMMF is undertaken.

Collectively Global Internal Audit, Operational Risk functions, Divisions and Business Units are
responsible for monitoring and reporting to Executive Management, the Board, Regulators and others.

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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 andsystems.

Principle 2:
Risk Culture

ANZ believes risk management is everyone’s responsibility andencourages a culture of prompt escalation of risk to staff sufficiently senior
to drive resolution. This culture is supported by clearly articulated roles
and responsibilities 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 for risk assessment and reporting that determines the riskboundaries 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 operationalrisk within all existing and new products, processes, projects and systems,
and assesses 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 ongoingbasis 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
and reporting relevant operational risk data, and monitors materialchanges to operational risk exposure, including Key Risk Indicators (KRIs),
to support the proactive management of operational risk across theGroup.

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
management with 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, sets the operational risk principles for governing the overall measurement andmanagement of operational risk across ANZ.

•

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

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Level 2A Global Operational Risk Procedures (the Procedures) – owned by Group Operational Risk,
provide the procedures to 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-going training.

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
visibility of the key risks. These are the risks that if they materialised, would adversely affect theachievement of business objectives, ANZ’s reputation, regulatory compliance or impact key processes(i.e. the risks that really matter, not all risks) and are typically inherent high and extreme risks.
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 related control environment.

•

Analysis of identified risks, including assessing the inherent and residual risk after considerationof controls currently in place. This requires analysis of the potential consequences of failing todeal with the risks, the likelihood of the risks 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.

•

Identification and implementation of risk treatment options to improve the key controls over therisk for those risks that are outside the risk appetite. When the preferred risk treatment option is
selected the risk treatment plan is documented.

•

Ensure operational risk information is up to date and reflective of the true operational risk
position.

•

Monitoring and review of treatment plans, operational risks and controls, including testing the key
controls and reporting on the current operational risk profile.

•

Promote a strong risk culture of adhering to thresholds, managing risk exposure and making
sustainable risk decisions.

•

Dedicated Divisional and Group Corporate Centre Risk Governance teams play a support,monitoring, oversight and challenge role with Global Internal Audit providing independent
assurance and review.

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 not to use insurance as a guaranteed mitigant for operational risk. ANZ’s Advanced
Measurement Approach (AMA) operational risk regulatory capital calculation does not utilise insurance
as a risk mitigation.
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 supplement 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 includes a system for capturing internal losses, case management
and reporting. Operational risk and compliance events (including actual losses, near misses andbreaches) are recorded and managed to ensure timely, complete and accurate reporting.
The Corporate Centre and Business Unit risk functions prepare reporting. OREC’s role is to review
and, if appropriate, approve the risk mitigation and monitor associated action plans.
ANZ’s advanced measurement approach
Group Operational Risk is responsible for maintaining ANZ’s AMA for operational risk measurement
and capital allocation.
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

83ANZ Basel III Pillar 3 disclosure

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monthly basis. The capital is calculated using scaled external loss data, internal loss data andscenarios as a direct input and risk registers as an indirect input.
ANZ typically models capital at a divisional or geographic layer. Once calculated, the capital isallocated to lines of business according to risk exposure (key allocation drivers). Understanding the
make up of the key allocation 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.
In the event of an ‘off cycle’ scenario review, a recalculation is performed within the relevant cell of
the model, to judge the sensitivity of the change on capital. The outcomes of the off cycle calculation
are shared with executive management and decisions are made as to whether to adjust capital orincorporate a scenario change in to the next capital update. This ensures that capital levels are
responsive to material changes in risk levels across ANZ.
Capital modelling uses the following expected and unexpected losses as data inputs:•

Minimum of five years of historical internal losses captured and reported in the Bank-wide
Operational Loss Database (BOLD).

•

Relevant external losses, sourced from IBM First Op Data (includes losses >USD1 million) a
recognised industry database. This data is suitably scaled using internally developed rules toensure relevance to ANZ’s size and operations.

•

Scenario analysis, unexpected potential loss estimates for severe but plausible risk events.

ANZ does not use expected loss offsets for the purposes of regulatory capital modelling and does notrecognise the risk-mitigating effect of insurance in determining operational risk capital.
Operational risk modelling is performed at the divisional or geographic level for applicable Basel risk
event types. Operational risk capital is derived using probability distributions and calculated using
Monte Carlo simulations using a mathematical method called a loss distribution approach.
Operational risk modelling is performed by a specialist central function. Operational risk capital isderived using probability distributions and calculated using Monte Carlo simulations at the division andevent type level referred to as a modelling cell. The data inputs are combined for each cell using a loss
distribution approach and include the following:•

Historical internal losses captured and reported in an internal loss database.

•

Relevant external losses sourced from a reputable industry supplier. This data is suitably scaled
using internally developed rules to ensure relevance to ANZ’s size and operations.

•

Scenario analysis data for severe but plausible risk events, elicited in workshops with risk andbusiness professionals.

Capital outcomes include:•

Operational risk regulatory capital to meet the regulatory capital soundness standard based on a
99.9% confidence interval in accordance with APS 115.

•

Economic Capital 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 regulatory compliance obligations and escalating and managing incident
when they occur.

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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 potential loss that may be incurred on equity investments in the banking book.
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 only after extensive analysis and due
diligence by Group Strategy, internal specialists and external advisors, where appropriate. Board
approval is required prior to committing to any investments over delegated authorities, and all
regulatory notification requirements are met. Performance of these investments is monitored byboth the owning business unit and Group Strategy to ensure that it is within expectations and thevalues of the investments are tested at least annually 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 is assessed, the investment is classified as an Investment in Associate in
the financial statements. ANZ adopts the equity method of accounting for associates. ANZ’s share of
the results of associates is included in the consolidated income statement. The associate investments
are recognised at cost plus ANZ’s share of post acquisition net assets. Interests in associates arereviewed annually for impairment, using either market value, or a discounted cash flow methodology
to assess value 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 13$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

2,089

2,392

Value of unlisted (privately held) equities

2,146

2,180

Total

4,235

4,572

Mar 13$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

1,998

2,305

Value of unlisted (privately held) equities

1,834

1,864

Total

3,832

4,169

Sep 12$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

1,943

2,169

Value of unlisted (privately held) equities

1,694

1,731

Total

3,637

3,900

Half Year
Sep 13$M

Half Year
Mar 13$M

Half Year
Sep 12$M

Cumulative realised gains (losses) from disposals
and liquidations in the reporting period

4

4

233

Cumulative realised losses from impairment andwritedowns in the reporting period

(29)

(1)

(4)

-

10

(25)

3

239

Half Year
Sep 13

Half Year
Mar 13

Half Year
Sep 12

$M

$M

$M

4

4

9

-

(1)

(196)

4

3

-

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

Realised gains (losses) on equity investments

Gain on dilution of shareholding
Total

Unrealised gains (losses) on equity investments
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

Table 16(f): Equities Risk Weighted Assets 40
Basel IIISep 13$Mn/aRisk Weighted Assets
Equity investments subject to a 300% risk weightMar 13$M
n/aBasel II
Sep 12$M
174

Equity investments subject to a 400% risk weight

n/a

n/a

856

Total RWA - Equity

n/a

n/a

1,030

40

Under Basel III, equity exposures in the banking book are no longer risk weighted, but are taken as capital
deductions.

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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 theoverall 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 orembedded 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.
Governance
The Board Risk Committee has established a risk appetite for IRRBB and delegated authority to the
GALCO to manage the strategic position (capital investment term) and oversee the interest rate risk
arising from the repricing of asset and liabilities (mismatch risk) in the banking book. GALCO hasdelegated the management of this mismatch risk to the Global Markets business.
Market Risk is the independent function responsible for:•

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

•

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

•

Ensuring ongoing effectiveness and appropriateness of the risk management framework.

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 Market Risk.

•

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.

•

An independent Market Risk function with specific responsibilities.

•

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.

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.

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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 13

Mar 13

Sep 12$M$M$M

200 basis point parallel increase

(709)

(479)

(18)

200 basis point parallel decrease

773

524

20

200 basis point parallel increase

(16)

(5)

(3)

200 basis point parallel decrease

10

1

(4)

200 basis point parallel increase

(34)

(37)

(1)

200 basis point parallel decrease

16

16

8

200 basis point parallel increase

(3)

(2)

(6)

200 basis point parallel decrease

1

1

2

Standard Shock Scenario Stress Testing:Interest rate shock applied
AUD

NZD

USD

GBP

Other
200 basis point parallel increase

47

41

17

200 basis point parallel decrease

5

(8)

1

IRRBB regulatory capital

1,463

1,010

996

IRRBB regulatory RWA

18,287

12,62912,455IRRBB 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 – Liquidity risk
Liquidity risk is the risk that ANZ has insufficient capacity to fund increases in assets or is unable tomeet its payment obligations as they fall due, including repaying depositors or maturing wholesale
debt. The timing mismatch of cash flows and the related liquidity risk is inherent in all banking
operations and is closely monitored by ANZ.
Governance
The management of ANZ’s liquidity and funding risk is overseen by the Board Risk Committee and
GALCO, in accordance with ANZ’s liquidity policy framework.
Scenario modelling
The Global financial crisis highlighted the importance of differentiating between stressed and normal
market conditions in a name-specific crisis and the different behaviour that offshore and domestic
wholesale funding markets can exhibit during market stress events. ANZ’s short term liquidity
scenario modelling stresses cash flow projections against multiple ‘survival horizons’ over which theGroup is required to remain cash flow positive. In addition, longer term scenarios are in place thatmeasures the structural liquidity position of the balance sheet. Scenarios modelled are either
prudential requirements or Board mandated scenarios. Under these scenarios, customer andwholesale balance sheet asset/liability flows are stressed.
Wholesale Funding
ANZ targets a diversified funding base, avoiding undue concentrations by investor type, maturity,
market source and currency.
$23.7 billion of term wholesale debt (with a remaining term greater than one year as at 30 September2013) was issued during FY13. In addition, $1.1 billion of ANZ Capital Notes and $0.4 billion of ANZ
Wealth bonds were issued.
•

Access to all major global wholesale funding markets remained available to ANZ during 2013.

•

All wholesale funding needs were comfortably met.

•

The weighted average tenor of new term debt was 4.3 years (4.6 years in 2012).

•

The weighted average cost of new term debt issuance decreased in FY13 as a result of
improved market conditions. Although average portfolio costs remain substantially above
pre-crisis levels, they have started to decrease from these elevated levels during 2013.

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Liquidity portfolio
The Group holds a diversified portfolio of cash and high credit quality securities that may be sold or
pledged to provide same-day liquidity. This portfolio helps protect the Group’s liquidity position by
providing cash in a severely stressed environment. All assets held in the prime portfolio are securities
eligible for repurchase under agreements with the applicable central bank (i.e. ‘repo eligible’).
The liquidity portfolio is well diversified by counterparty, currency and tenor. Under the liquidity policy
framework, securities purchased for ANZ’s liquidity portfolio must be of a similar or better credit
quality to ANZ’s external long-term or short-term credit ratings and continue to be repo eligible.
Supplementing the prime liquid asset portfolio, the Group holds additional liquidity;•

central bank deposits with the US Federal Reserve, Bank of England, Bank of Japan andEuropean Central Bank of $21.2 billion,•

Australian Commonwealth and State Government securities of $6.9 billion and gold andprecious metals of $2.9 billion, and,•cash and other securities to satisfy local country regulatory liquidity requirements which are
not included in the liquid assets below.

Sep 13Liquidity portfolio(Market Values41)$bn

Australia

27.8

New Zealand11.1

United States

2.1

United Kingdom

5.1

Singapore

3.1

Hong Kong

0.6

Japan

1.4

Total excluding internal Residential Mortgage Backed Securities
Internal Residential Mortgage Backed Securities (Australia)
Internal Residential Mortgage Backed Securities (New Zealand)

51.2
35.7
3.7

Total prime portfolio

90.6

Other eligible securities including gold and cash on deposit with central banks
Total

41

31.0
121.6

Market value is post the repo discount applied by the applicable central bank.

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Appendix 1 – ANZ Bank (Europe) Limited
ANZ Bank (Europe) Limited (ANZBEL) is a 100% owned and controlled subsidiary of ANZ. ANZBEL isregulated by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA),
formerly the Financial Services Authority (FSA). ANZBEL is subject to similar Pillar 3 requirements as
ANZ, under the FCA's Prudential Source Book for Banks, Building Societies and Investment Firms(BIPRU). The FCA has granted ANZBEL a Pillar 3 Disclosure waiver direction, which can be found on
the FCA website: fca.org.uk/static/fca/documents/waivers/bipru-waivers.pdf
In line with the FCA waiver direction, ANZBEL will rely on disclosures in this document to satisfy mostof its Pillar 3 disclosure obligations. The following FCA requirements are not mirrored in APS 330 orincluded in this disclosure document, and as such are required by the FCA to be reported on an
individual basis in the annual ANZBEL Statutory Accounts:••

BIPRU 11.5.4R (4) - Disclosure of the firm’s minimum capital requirements covering position,
foreign exchange, commodity, counterparty and concentration risks.
BIPRU 11.5.12R – Disclosure: Market Risk.

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Glossary
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 aloss event has already occurred. Losses expected as a result of
future events, no matter how likely, are not recognised.

Credit Default Swaps (CDS)

A sequence of payments by one party (often called the “Buyer”)
in exchange for an obligation of the other party (often called
the “Seller”) to make a payment to the buyer if a credit default
event occurs in relation to a specified reference entity (andpossibly a specified obligation of that reference entity).

Credit exposure

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

Credit risk

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

Credit Valuation Adjustment (CVA)

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

Days past due

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

Equity risk

Is the potential loss that may
investments in the banking book.

Expected loss (EL)

Expected loss is determined based on the expected averageannual loss of principal over the economic cycle for the current
risk profile of the lending portfolio.

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 andother payments, 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
customer’s status is defined as impaired.

Individual provision charge (IPC)

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

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Loss Given Default (LGD)

Loss Given Default is an estimate of the potential economic loss
on a credit exposure, incurred as a consequence of obligor
default and expressed as a percentage of the facility’s EAD.

Market risk

The risk to ANZ’s earnings arising from changes in interest
rates, currency exchange rates and credit spreads, or fromfluctuations in bond, commodity or equity prices. ANZ has
grouped market risk into two broad categories to facilitate themeasurement, reporting and control of market risk:
Traded market risk - the risk of loss from changes in the valueof financial instruments due to movements in price factors forphysical and derivative trading positions. Trading positions arise
from transactions where ANZ acts as principal with clients orwith the market.
Non-traded market risk (or balance sheet risk) - comprises
interest rate risk in the banking book and the risk to the AUD
denominated value of ANZ’s capital and earnings due to foreignexchange rate movements.

Operational risk

The risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events. Thisdefinition 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.

Past due facilities

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

Probability of Default (PD)Probability of Default is an estimate of the level of the risk ofborrower default.

Recoveries

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

Regulatory Expected Loss

Regulatory Expected Loss is a measure of expected credit
losses at the start of the year.

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 consistof reduction of interest, principal or other payments legally due,or an extension in maturity materially beyond those typicallyoffered to new facilities with similar risk.

Risk Weighted Assets (RWA)

Assets which are weighted for credit risk according to a set
formula (APS 112/113).

Securitisation risk

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

Slotting

Exposures where repayment is dependent on funds generated
by the asset financed and with little/no recourse to any
alternative source.

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.

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