2014 ANNUAL REPORTAustralia and New Zealand Banking Group Limited ABN 11 005 357 522
This Annual Report (Report) has been prepared for Australia and New Zealand Banking Group Limited (“the Company”)
together with its subsidiaries which are variously described as: ”ANZ”, “Group”, “ANZ Group”, “the Bank”, “us”, “we” or “our”.

ANZ ANNUAL REPORT 2014

ANZ IS EXECUTING A FOCUSED STRATEGYTO BUILD THE BEST CONNECTED, MOST RESPECTEDBANK ACROSS THE ASIA PACIFIC REGION

WHO WE ARE AND HOW WE OPERATE
ANZ’s history of expansion and growth stretches over 175 years. We have a strong franchisein Retail, Commercial and Institutional banking in our home markets of Australia and
New Zealand and we have been operating in Asia Pacific for more than 30 years.
Today, ANZ operates in 33 countries globally. We are the third largest bank in Australia, thelargest banking group in New Zealand and the Pacific, and among the top 20 banks in the world.

ANZ is building the best connected, most respected bankacross the Asia Pacific region. The strategy has three key
elements – strong domestic markets, profitable Asian
growth and an enterprise wide approach to operations
and technology.
Our strategy is based on the belief that the future of ourhome markets of Australia and New Zealand are increasingly
linked to the fast growing region of Asia through trade,
capital and wealth flows. We also believe that people
want a bank that understands their specific needs, andincreasingly can meet these needs in more than one market
through a variety of means.
ANZ is particularly focused on the significant organic growth
opportunities which exist within the Asia Pacific region and our
distinctive Asia Pacific footprint sees us uniquely positioned tomeet the needs of customers who are dependent on regional
capital, trade and wealth flows.
By building a ‘super-regional’ bank, ANZ can better serve ourcustomers and achieve superior financial returns over the
longer term.
ANZ’s aspiration is to have 25 to 30% of ANZ Group profit aftertax (including network revenues) sourced from Asia Pacific,
Europe and America, by 2017. ANZ has made good progress
towards this goal.

Achievements and progress during 2014
We are building stronger positions in our home markets
of Australia and New Zealand, led by productivity
and market share gains in Retail and Commercial andimproved penetration of Wealth products into our existingcustomer base.

In International and Institutional Banking (IIB), profit from Asia
increased 25% and revenue 10%. Revenue has consistently
grown at double digit rates with a cumulative annual growthrate over the last 5 years of 23%. The Division’s revenue mix
has diversified substantially over the past five years with moresignificant contributions emerging from more capital efficient
products like Foreign Exchange, Trade and Cash Management
and Debt Capital Markets.
Our Operations and Technology functions are helping ANZ build
economies of scale, increase our speed to market and strengthen
the operating risk control environment for the business.
The Group’s regional delivery centres provide full service regional
coverage across our operating time zones helping to drive lower
unit costs, improve quality and lower risk.
Our business risk profile improved, with a continuing shift toinvestment-grade clients and shorter tenor Trade Finance,and greater earnings diversification across products andgeographies. Combined with a benign risk environment, these
improvements saw a further fall in provision charges and theloan loss rate across the bank.
Finally, we focused on strengthening management depth andthe alignment between business, operations, technology andenablement.
We are committed to delivering above-peer earnings growthwith strong capital and expense disciplines, targeting further
productivity improvements over the next three years while
increasing return on equity from current levels.
This will be achieved by strengthening our position in Australia
and New Zealand, growing in Asia and sharing common
technology, processes, products and services that are designedwith our customers in mind.

ANZ ANNUAL REPORT 2014

1

2

ANZ ANNUAL REPORT 2014

CONTENTS
Section 1

Section 3

Financial Highlights

5

Five Year Summary

196

Chairman’s Report

6

Principal Risks and Uncertainties

197

Chief Executive Officer’s Report

7

Supplementary Information

206

Directors’ Report8

Shareholder Information

208– Operating and Financial Review

12

Glossary of Financial Terms

214– Remuneration Report

28

Alphabetical Index

216

Corporate Governance

57

Section 2
Financial Statements

77

Notes to the Financial Statements

84

Directors’ Declaration andResponsibility Statement

193

Independent Auditor’s Report

194

CONTENTS

3SECTION 1
Financial Highlights

5

Chairman’s Report

6

Chief Executive Officer’s Report

7

Directors’ Report8– Operating and Financial Review

12– Remuneration Report

28

Corporate Governance

57

4

ANZ ANNUAL REPORT 2014

FINANCIAL HIGHLIGHTS
2014

2013

Profit attributable to shareholders of the Company ($m)
Cash profit1 ($m)

7,271
7,117

6,310
6,492

Return on:
Average ordinary shareholders’ equity2
Average ordinary shareholders’ equity (cash basis)1,2
Average assets
Net interest margin
Cash profit per average FTE ($)1

15.8%
15.4%
0.97%
2.13%
142,064

15.0%
15.3%
0.93%
2.22%
132,347

43.7%
1.17%
44.7%
1.17%

44.6%
1.22%
44.9%
1.22%

Individual credit impairment charge ($m)
Collective credit impairment charge/(release) ($m)

1,141
(155)

1,158
30

Total credit impairment charge ($m)
Individual credit impairment charge as a % of average net loans and advances
Total credit impairment charge as a % of average net loans and advances

986
0.22%
0.19%

1,188
0.25%
0.26%

83
95

73
91

178
67.4%
68.9%

164
71.4%
69.4%

6

6

Profitability

Efficiency ratios
Operating expenses to operating income
Operating expenses to average assets
Operating expenses to operating income (cash basis)1
Operating expenses to average assets (cash basis)1
Credit impairment provisioning

Ordinary share dividends
Interim – 100% franked (cents)
Final – 100% franked (cents)
Total dividend (cents)
Ordinary share dividend payout ratio3
Cash ordinary share dividend payout ratio1,3
Preference share dividend ($m)
Dividend paid4

1 Statutory profit has been adjusted to exclude non-core items to arrive at cash profit, and has been provided to assist readers to understand the results for the ongoing business activities of theGroup. The adjustments made in arriving at cash profit are included in statutory profit which is subject to audit within the context of the Group statutory audit opinion. Cash profit is not auditedby the external auditor, however the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent basis across each period presented. Referto page 15 and pages 206 to 207 for analysis of the adjustments between statutory profit and cash profit.
2 Average ordinary shareholders’ equity excludes non-controlling interests and preference shares.
3 The 2014 dividend payout ratio is calculated using the March 2014 interim and the proposed September 2014 final dividend. The 2013 dividend payout ratio is calculated using the March 2013
interim and September 2013 final dividend.
4 Represents dividends paid on Euro Trust Securities issued on 13 December 2004.

FINANCIAL HIGHLIGHTS

5

CHAIRMAN’S REPORTA MESSAGE FROM DAVID GONSKI
I AM PLEASED TO REPORT THAT ANZ’S STATUTORY PROFIT AFTER TAX FOR THE 2014
FINANCIAL YEAR WAS $7.3 BILLION UP 15%. EXCLUDING NON-CORE ITEMS, CASH PROFITWAS $7.1 BILLION UP 10%.

The final dividend of 95 cents was up 14% on the Interim Dividend
bringing the total dividend for the year to 178 cents per share
fully franked, an increase of 9%. This will see us pay out a record$4.9 billion to shareholders for this year.
ANZ remains strongly capitalised and the quality of our balance
sheet continues to improve. Our common equity tier one capital ratio
ended the year at 8.8%, well positioned ahead of the new capitallevels currently required of Domestic Systemically Important Banks.

Regulation
The Financial System Inquiry in Australia has created a vigorous
discussion about regulation and in particular about capital and loss
absorbency. Significant steps have already been taken to strengthenbanking since the global financial crisis and this has built on what
was already a very sound, well regulated and well supervised financial
system in Australia.
While outcomes from the inquiry are not yet clear, we believe
recommendations that combine strong regulatory and supervisory
frameworks and market-based disciplines will deliver the bestbalance between financial stability and economic efficiency.
Everyone benefits from a well-capitalised, well-managed banking
system – consumers, shareholders and taxpayers. There is however areal cost to the economy of regulation and policy settings that are tooconservative and it is not in Australia’s best interests for the financial
system to become globally uncompetitive.

Board Changes
Two long standing directors David Meiklejohn and Greg Clark
retired at the Annual General Meeting in December 2013 as part of a
succession plan that previously saw Paula Dwyer and Graeme Liebelt
join the board. Both David and Greg gave significant service to ANZ
over many years and I thank them for their contribution.

Corporate Sustainability
ANZ has an important role to play within the communities inwhich we operate. Our longstanding investment in building
the money management skills and savings capabilities ofpeople across our region is an integral part of ANZ’s Corporate
Sustainability Framework.
More than 294,000 people have participated in our flagship financial
literacy program MoneyMinded since 2003 and this year we extended
the reach of this program by launching MoneyMinded online.
We have also made banking more accessible in rural and remoteareas of the Pacific, with our mobile banking application goMoney.
At a time when governments around the world are examining
the most effective ways to mitigate climate change, some of our
stakeholders view our financing of fossil fuel industries as a key risk.
While ANZ is not a major emitter of greenhouse gases, many of ourlarge corporate customers are and we are therefore committed tosupporting our customers to transition to a lower-carbon economy.
I would encourage shareholders to read our forthcoming Corporate
Sustainability Review in which we outline our position on climatechange and our response to these issues in more detail.

Outlook
We expect 2015 to present similar opportunities for ANZ to thosein 2014 with a continuation of a stable credit environment.
In Australia and New Zealand the consumer sector remains relatively
buoyant and we expect a gradual transition to business-led growth.
Asia’s economies are set to maintain their position as the world’s best
performing region.
We believe the environment, ANZ’s strategy and the strength of its
customer franchise mean the bank is well positioned to maintain its
momentum and to deliver growth and value to shareholders over the
medium term.

I was pleased to re-join the ANZ board this year, and to succeed
John Morshel as your Chairman in May. John made an enormous
contribution to ANZ as a director and as Chairman and, on behalf ofshareholders and all at ANZ, I thank him for his outstanding service.
We also made two other appointments to the board as part of our
succession and renewal process. John (JT) Macfarlane, a former
corporate banker, joined the board following Peter Hay’s retirement.
Ilana Atlas, an experienced company director and banking executive,
also joined the board following Alison Watkins’ decision to step down
after accepting a new executive role.
Both Peter and Alison made significant contributions to our board
and to ANZ, and I also thank them for their service.

6

David M Gonski, AC
ChairmanANZ ANNUAL REPORT 2014

CHIEF EXECUTIVE OFFICER’S REPORTA MESSAGE FROM MICHAEL SMITH
ANZ’S PERFORMANCE IN 2014 DEMONSTRATES CONSISTENT EXECUTION OF OUR SUPER REGIONALSTRATEGY WITH STRONG GROWTH IN AUSTRALIA, NEW ZEALAND AND ASIA PACIFIC.

This is continuing to create a better bank for customers – whether
big, small, retail or corporate – and a better bank for shareholders.
In the six years since the Global Financial Crisis, we have transformed
ANZ into a bank that’s more customer focused, more regionallydiversified, more efficient and more sustainable.

Stronger in Australia and New Zealand
We have strengthened our position in our major domestic markets inAustralia and New Zealand through consistent market share gains.
A key measure of our success continues to be our growth in customer
numbers. During 2014 we have added 106,000 net new customers
across Retail and Commercial in Australia. We have also achieved thenumber two position in retail customer satisfaction in Australia1 andin New Zealand our brand consideration is at an historic high.
We are also investing heavily in growth in Australia and New Zealand.
This includes digital and mobile transformation, the broader Banking
on Australia program and our New Zealand transformation program.

High Quality Growth in Asia
We have invested strongly in our business in Asia Pacific throughprofitable expansion of an integrated network that connects
customers with Asia’s faster growing regional capital, trade andwealth flows.
This has established a unique competitive position in Asia, and thatbusiness is now at a stage of maturity where it can deliver both highquality growth and improved returns.
Our regional connectivity is delivering significant outcomes for ourcustomers. We are gaining a greater share of our clients’ financial
institutions wallet and growing the number of multi-country clients.
Once again we were ranked in the top four corporate banks in Asia
by Greenwich Associates.2

Corporate Sustainability
Each year we set public sustainability targets which reflect thecommitments made in our Corporate Sustainability Frameworkand support the delivery of our business strategy. We have threesustainability priority areas: sustainable development, diversity andinclusion and financial inclusion and capability.
We have made good progress against the majority of our 2014sustainability targets. Some targets however, such as representationof women in management, remain a challenge. In the coming year
we are focusing on a range of initiatives to support our commitment
to achieve greater gender balance, including increasing opportunities
for flexible working.
Sustainability will continue to be a key focus as we drive performance
improvements across the business to ensure we are effectively
managing our most material social and environmental opportunities
and risks.

Reaching a tipping point
We continue to operate in a tough, highly competitive environment
where banking faces a number of challenges. There are also big
shifts redefining the global economy and customer expectations arechanging as they embrace the convenience of digital and mobile
financial solutions. We have to be ahead of the curve by ensuring
ANZ is future-ready in every part of our business.
I believe however we are now at a tipping point where our strategy,
the transformation of our business since the financial crisis and theenergy of our people can create an even more successful future
for ANZ.

Productivity
We now have a well-established enterprise approach to delivering
more control and greater efficiency through standardised processes
and systems, consolidating like teams, more straight-throughprocessing and more convenient online self-service.

Michael Smith, OBE
Chief Executive Officer

This has seen us deliver double digit productivity growth in operations
and a more consistent, higher quality customer experience. This saw
the ANZ’s cost to income ratio fall to 44.7% during 2014.

1 Roy Morgan Research. Base: ANZ Main Financial Institution Customers, aged 14+ based on
6 months to September for each year.
2 Top 4 Corporate bank in Asia (as recognised by Greenwich Associates 2013 Asia Large
Corporate Banking Study).

CHAIRMAN’S REPORT AND CHIEF EXECUTIVE OFFICER’S REPORT

7

DIRECTORS’ REPORTTHE DIRECTORS PRESENT THEIR REPORT TOGETHER WITH THE FINANCIAL STATEMENTS OF THE
CONSOLIDATED ENTITY (THE GROUP), BEING AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED(THE COMPANY) AND ITS CONTROLLED ENTITIES, FOR THE YEAR ENDED 30 SEPTEMBER 2014 AND THE
INDEPENDENT AUDITOR’S REPORT THEREON. THE INFORMATION IS PROVIDED IN CONFORMITY WITH
THE CORPORATIONS ACT 2001.

Principal Activities

Dividends

The Group provides a broad range of banking and financial
products and services to retail, small business, corporate andinstitutional clients.

The Directors propose that a fully franked final dividend of 95 cents
per fully paid ANZ ordinary share will be paid on 16 December 2014.
The proposed payment amounts to approximately $2,619 million.1

Geographically, operations span Australia, New Zealand, a numberof countries in the Asia Pacific region, the United Kingdom andthe United States (US). At 30 September 2014, the Group had
1,220 branches and other points of representation excluding
Automatic Teller Machines (ATMs).

During the financial year, the following fully franked dividends were
paid on fully paid ANZ ordinary shares:

The Group operates on a divisional structure with Australia,
International and Institutional Banking (IIB), New Zealand and Global
Wealth being the major operating divisions.

Results
Consolidated profit after income tax attributable to shareholders of theCompany was $7,271 million, an increase of 15% over the prior year.
Operating income growth of $1,532 million (8%) was primarily driven
by higher net interest income following a 12% increase in averageinterest earning assets, partially offset by a 9 basis point decline in net
interest margin. Operating expenses increased $503 million (6%).
The credit impairment charge decreased by $202 million (17%), withcredit quality improvements notably across the New Zealand and
IIB divisions.
Balance sheet growth was strong with total assets increasing by$69.1 billion (10%) and total liabilities increasing by $65.4 billion(10%). Movements within the major components include:}} Net loans and advances increased by $38.5 billion (8%) primarily
driven by sustained above system housing lending growthof $16.3 billion (6%) in the Australia division and growth of$18.4 billion (15%) in IIB, mainly in Global Loans.
}} Growth in customer deposits of $34.9 billion (9%) comprised
growth in Australia of $8.7 billion (6%), growth in IIB of $19.6 billion(12%) driven by strong momentum in Asia Pacific, Europe
and America (APEA) and strong customer deposit growth in
New Zealand of $4.9 billion (10%), mainly in Retail and Small
Business Banking.
Further details are contained in the Operating and Financial
Review section of this Directors’ Report on pages 12 to 27 in thisAnnual Report.

State of Affairs
In the Directors’ opinion there have been no significant changes
in the state of affairs of the Group during the financial year.
Further review of matters affecting the Group’s state of affairs is
also contained in the Operating and Financial Review section of thisDirectors’ Report on pages 12 to 27 in this Annual Report.

8

Cents
per share

Dividend amount$m1

Final 2013

91

2,497

16 December 2013

Interim 2014

83

2,278

1 July 2014Type

Date of payment

The 2014 interim dividend of 83 cents together with the proposed
2014 final dividend of 95 cents brings total dividends in relation
to the year ended 30 September 2014 to 178 cents per fully paid
ANZ ordinary share fully franked. New Zealand imputation credits
of NZ 10 cents per fully paid ANZ ordinary share were attached
in respect of both the 2013 final dividend and 2014 interim
dividend and it is proposed that New Zealand imputation credits
of NZ 12 cents per fully paid ANZ ordinary share will be attached
in respect of the proposed 2014 final dividend.
Further details on dividends provided for or paid during the year
ended 30 September 2014 on ANZ’s ordinary and preference shares
are set out in notes 7, 26, 27 and 28 to the financial statements.

Operating and Financial Review
A review of the Group during the financial year and the results of
those operations, including an assessment of the financial position
and business strategies of the Group, is contained in the Chairman’s
Report, the Chief Executive Officer’s Report and the Operating
and Financial Review section of this Directors’ Report in thisAnnual Report.

Events since the end of the Financial Year
There were no significant events from 30 September 2014 to thedate of this report.

1 Amounts are before bonus option plan adjustments.

ANZ ANNUAL REPORT 2014

Future Developments
Details of likely developments in the operations of the Group and its
prospects in future financial years are contained in the Chairman’s
Report, the Chief Executive Officer’s Report and the Operating and
Financial Review section of this Directors’ Report in this Annual Report.

Environmental Regulation
ANZ recognises the expectations of its stakeholders – customers,
shareholders, staff and the community – to operate in a way thatmitigates its environmental impact. It sets and reports against public
targets regarding its environmental performance.
In Australia, ANZ meets the requirements of the National Greenhouseand Energy Reporting Act 2007 (Cth), which imposes reporting
obligations where energy production, use or greenhouse gas
emissions trigger specified thresholds. Prior to its repeal with effectfrom 29 June 2014, ANZ also complied with the Energy Efficiency
Opportunities Act 2006 (Cth), which imposed an obligation to identify
energy efficiency opportunities and report on progress towards
achieving them.
ANZ holds a licence under the Water Act 1989 (Vic), allowing it
to extract water from the Yarra River for thermal regulation of its
Melbourne Head-Office building. The licence specifies daily andannual limits for the extraction of water from the Yarra River withwhich ANZ fully complies. The extraction of river water reduces
reliance on the high‑quality potable water supply and is one ofseveral environmental initiatives that ANZ has introduced at its
Melbourne Head-Office building.
The Group does not believe that its operations are subject to any
particular and significant environmental regulation under a lawof the Commonwealth of Australia or of an Australian State or
Territory. It may become subject to environmental regulation
as a result of its lending activities in the ordinary course ofbusiness and has developed policies to identify and manage
such environmental matters.
Having made due enquiry, and to the best of ANZ’s knowledge,
no entity of the Group has incurred any material environmental
liability during the year.
Further details of ANZ’s environmental performance, including
progress against its targets and details of its emissions profile, areavailable on anz.com > About us > Corporate Responsibility.

Directors’ Qualifications, Experience andSpecial Responsibilities
At the date of this report, the Board comprises seven Non-Executive
Directors who have a diversity of business and community experienceand one Executive Director, the Chief Executive Officer, who has
extensive banking experience. The names of Directors and details of
their skills, qualifications, experience and when they were appointed
to the Board are contained on pages 58 to 60 of this Annual Report.
Details of the number of Board and Board Committee meetings held
during the year, Directors’ attendance at those meetings and details
of Directors’ special responsibilities, and details of Directors who
retired during the 2013/14 financial year are shown on pages 67 to 70of this Annual Report.
Details of directorships of other listed companies held by eachcurrent Director in the three years prior to the end of the 2014
financial year are listed on pages 58 to 60.

Company Secretaries’ Qualifications
and Experience
Currently there are two people appointed as Company Secretariesof the Company. Details of their roles are contained on page 65.
Their qualifications and experience are as follows:}} Bob Santamaria, BCom, LLB (Hons) Group General Counsel.
Mr Santamaria joined ANZ in 2007. He had previously beena Partner at the law firm Allens Arthur Robinson since 1987.
He was Executive Partner Corporate, responsible for client liaison
with some of Allens Arthur Robinson’s largest corporate clients.
Mr Santamaria brings to ANZ a strong background in leadershipof a major law firm, together with significant experience insecurities, mergers and acquisitions. He holds a Bachelor ofCommerce and Bachelor of Laws (Honours) from the Universityof Melbourne. He is also an Affiliate of the Governance Instituteof Australia.
}} John Priestley, BEc, LLB, FGIA Company Secretary.
Mr Priestley, a qualified lawyer, joined ANZ in 2004. Prior tojoining ANZ, he had a long career with Mayne Group and held
positions which included responsibility for the legal, company
secretarial, compliance and insurance functions. He is a Fellowof the Governance Institute of Australia and also a memberof the Governance Institute of Australia’s National Legislation
Review Committee.

DIRECTORS’ REPORT

9

DIRECTORS’ REPORT (continued)

Non-audit Services
The Group’s Stakeholder Engagement Model for Relationshipwith the External Auditor (which incorporates requirements of the
Corporations Act 2001 and international best practice) states thatthe external auditor may not provide services that are perceived
to be in conflict with the role of the external auditor. These include
consulting advice and sub-contracting of operational activities
normally undertaken by management, and engagements where theexternal auditor may ultimately be required to express an opinion
on its own work.
Specifically the Stakeholder Engagement Model:}} limits the non-audit services that may be provided;}} requires that audit, audit-related and permitted non-audit services
must be pre-approved by the Audit Committee, or pre-approvedby the Chairman of the Audit Committee (or up to a specified
amount by a limited number of authorised senior members ofmanagement) and notified to the Audit Committee; and}} requires that the external auditor does not commence anengagement for the Group until the Group has confirmedthat the engagement has been pre-approved.
Further details about the Stakeholder Engagement Model can befound in the Corporate Governance Statement on pages 70 to 71.
The Audit Committee has reviewed the non-audit services provided
by the external auditor (KPMG) for 2014, and has confirmed thatthe provision of non-audit services for 2014 is consistent with the
Stakeholder Engagement Model and compatible with the generalstandard of independence for external auditors imposed by the
Corporations Act 2001. This has been formally advised by the Audit
Committee to the Board of Directors.
The external auditor has confirmed to the Audit Committee thatit has:}} implemented procedures to ensure it complies with independence
rules both in Australia and the United States (US); and}} complied with domestic policies and regulations, together withthe regulatory requirements of the US Securities and Exchange
Commission, and ANZ’s policy regarding the provision of non-audit
services by the external auditor.

The non-audit services supplied to the Group by the Group’s external
auditor, KPMG, or by another person or firm on KPMG’s behalf, andthe amount paid or payable by the Group by type of non-audit
service during the year ended 30 September 2014 are as follows:
Amount paid/payable$’000’s
Non-audit services

2014

2013

Branch optimisation analysis

383–

Industry benchmarking for Group Technology

109–

Review data migration approach86–

Development of market risk training material

22–

Review of accounts for divestment purposes

16

53

Industry benchmarking for Global Wealth14

26

Perform data analytical procedures on commissions

4–

Review of internal regulatory framework policies
submitted to the UK, US and Indian regulators–

324

Review operational risk management scenario
analysis process–

77

Accounting advice for Wealth Australia–

22

Review analysis tool developed by Wealth Australia–

20

Assistance with review of IT controls of ANZ’svendors in Vietnam–

13

Regulatory services related to the UK regulator–

13

Review terminal stocktake as part of the sale of
EFTPOS New Zealand Limited–

8

Assistance with regulatory registration processes
in Taiwan

–

7

634

563

Total

Further details on the compensation paid to KPMG is provided
in note 5 to the financial statements including details ofaudit‑related services provided during the year of $4.361 million(2013: $3.879 million).
For the reasons set out above, the Directors are satisfied that theprovision of non-audit services by the external auditor during
the year ended 30 September 2014 is compatible with the generalstandard of independence for external auditors imposed by the
Corporations Act 2001.

Chief Executive Officer/Chief Financial
Officer Declaration
The Chief Executive Officer and the Chief Financial Officer havegiven the declarations to the Board concerning the Group’s financial
statements and other matters as required under section 295A(2)of the Corporations Act 2001 and Recommendation 7.3 of the
ASX Corporate Governance Principles and Recommendations.

10

ANZ ANNUAL REPORT 2014

Directors’ and Officers’ Indemnity

Rounding of Amounts

The Company’s Constitution (Rule 11.1) permits the Company toindemnify any officer or employee of the Company against liabilities(so far as may be permitted under applicable law) incurred as suchan officer or employee. It is the Company’s policy that its employees
should be protected from any liability they incur as a result of acting
in the course of their employment, subject to appropriate conditions.

The Company is a company of the kind referred to in Australian
Securities and Investments Commission class order 98/100 (asamended) pursuant to section 341(1) of the Corporations Act 2001.

Under the policy, the Company will indemnify employees and former
employees against any liability they incur to any third party as a resultof acting in the course of their employment with the Company or asubsidiary of the Company and extends to liability incurred as a resultof their appointment/nomination by or at the request of the Group as
an officer or employee of another corporation or body or as trustee.
The indemnity is subject to applicable law and in addition will not
apply to liability arising from:}} serious misconduct, gross negligence or lack of good faith;}} illegal, dishonest or fraudulent conduct; or}} material non-compliance with the Company’s policies, processes
or discretions.
The Company has entered into Indemnity Deeds with each of
its Directors, with certain secretaries and former Directors of theCompany, and with certain employees and other individuals who
act as directors or officers of related bodies corporate or of anothercompany. To the extent permitted by law, the Company indemnifies
the individual for all liabilities, including costs, damages and expenses
incurred in their capacity as an officer of the company to which they
have been appointed.
The Company has indemnified the trustees and former trustees ofcertain of the Company’s superannuation funds and directors, former
directors, officers and former officers of trustees of various Company
sponsored superannuation schemes in Australia. Under the relevant
Deeds of Indemnity, the Company must indemnify each indemnified
person if the assets of the relevant fund are insufficient to cover any
loss, damage, liability or cost incurred by the indemnified person
in connection with the fund, being loss, damage, liability or costs
for which the indemnified person would have been entitled to beindemnified out of the assets of the fund in accordance with thetrust deed and the Superannuation Industry (Supervision) Act 1993.
This indemnity survives the termination of the fund. Some of theindemnified persons are or were Directors or executive officers of
the Company.
The Company has also indemnified certain employees of theCompany, being trustees and administrators of a trust, from andagainst any loss, damage, liability, tax, penalty, expense or claim ofany kind or nature arising out of or in connection with the creation,
operation or dissolution of the trust or any act or omission performed
or omitted by them in good faith and in a manner that theyreasonably believed to be within the scope of the authority conferredby the trust.
Except for the above, neither the Company nor any related body
corporate of the Company has indemnified or made an agreement
to indemnify any person who is or has been an officer or auditor of
the Company against liabilities incurred as an officer or auditor of
the Company.
During the financial year, the Company has paid premiums for
insurance for the benefit of the directors and employees of
the Company and related bodies corporate of the Company.
In accordance with common commercial practice, the insurance
prohibits disclosure of the nature of the liability insured against
and the amount of the premium.

As a result, amounts in this Directors’ Report and the accompanying
financial statements have been rounded to the nearest million dollars
except where otherwise indicated.

Key Management Personnel and Employee
Share and Option Plans
Details of equity holdings of Non-Executive Directors, the Chief
Executive Officer and Disclosed Executives during the 2014
financial year and as at the date of this report are detailed in the
Remuneration Report.
Details of options/rights issued over shares granted to the Chief
Executive Officer and Disclosed Executives during the 2014 financial year
and as at the date of this report are detailed in the Remuneration Report.
Details of options/rights issued over shares granted to employees
during the 2014 financial year and on issue as at the date of thisreport are detailed in note 45 of the 2014 financial statements.
Details of shares issued as a result of the exercise during the 2014
financial year of options/rights granted to employees are detailed innote 45 of the 2014 financial statements.
Other details about the share options/rights issued, including any
rights to participate in any share issues of the Company, are set out
in note 45 of the 2014 financial statements. No person entitled toexercise any option/right has or had, by virtue of an option/right, aright to participate in any share issue of any other body corporate.
The names of all persons who currently hold options/rights are enteredin the register kept by the Company pursuant to section 170 of the
Corporations Act 2001. This register may be inspected free of charge.

Lead Auditor’s Independence Declaration
The lead auditor’s independence declaration given under section
307C of the Corporations Act is set out below and forms part of thisDirectors’ Report for the year ended 30 September 2014.
THE AUDITOR’S INDEPENDENCE DECLARATION
Lead Auditor’s Independence Declaration under Section 307C of the
Corporations Act 2001
To: the Directors of Australia and New Zealand Banking Group Limited
I declare that, to the best of my knowledge and belief, in relation to theaudit for the financial year ended 30 September 2014, there have been:(i) no contraventions of the auditor independence requirements as
set out in the Corporations Act 2001 in relation to the audit; and(ii) no contraventions of any applicable code of professional conduct
in relation to the audit.

KPMG

Andrew Yates
Partner
Melbourne
5 November 2014
DIRECTORS’ REPORT

11

DIRECTORS’ REPORT (continued)
OPERATING AND FINANCIAL REVIEWThis Operating and Financial Review has been prepared inaccordance with section 299A of the Corporations Act 2001 andAustralian Securities and Investments Commission (ASIC) Regulatory
Guide 247: Effective disclosure in an operating and financial review.
It sets out information that allows shareholders to assess the Group’s
operations, financial position, business strategies and prospects for
future financial years. This information complements and provides
context to the financial report.

Operations of the GroupOVERVIEWANZ provides a broad range of banking and financial products andservices to retail, high net worth, small business, corporate andcommercial and institutional customers. It conducts its operations
primarily in Australia, New Zealand and the Asia Pacific region.
ANZ also operates in a number of other countries including theUnited Kingdom and the United States.
BUSINESS MODEL
ANZ’s business model primarily consists of raising funds throughcustomer deposits and the wholesale debt markets and lending
those funds to customers. In addition, the Group earns revenue
from the Global Wealth business through the provision of insurance,
superannuation and funds management services, and our Global
Markets business from sales, trading and risk management activities.
Our primary lending activities are personal lending coveringresidential home loans, credit cards and overdrafts, and lending
to corporate and institutional customers.
Our income is derived from a number of sources, primarily:}} Net interest income – represents the difference between theinterest income the Group earns on its lending activities, lessinterest paid on customer deposits and our wholesale funding;}} Net fee and commission income – represents fee income earnedon lending and non-lending related financial products and services,
including income from sales, trading and risk management
activities in our Global Markets business; and}} Net funds management and insurance income – represents
income earned from the provision of investment, insurance andsuperannuation solutions.

12

PRINCIPAL ACTIVITIES OF SEGMENTS
The Group operates on a divisional structure with Australia,
International and Institutional Banking (IIB), New Zealand, and Global
Wealth being the operating divisions. The IIB and Global Wealthdivisions are co-ordinated globally. Global Technology, Services& Operations (GTSO) and Group Centre provide global enablement
capability to these operating divisions.
During the year, operations, technology, property and certain
enablement functions supporting the operating divisions (including
human resources, risk, finance and legal) were transferred from theoperating divisions to GTSO. This change aligns with our strategy
of building on common infrastructure with an enterprise focus.
Australia
The Australia division comprises the Retail and Corporate andCommercial Banking (C&CB) business units. Retail includes Home
Loans, Cards and Payments, and Deposits. C&CB includes Corporate
Banking, Regional Business Banking, Business Banking, Small BusinessBanking and Esanda.
International and Institutional Banking (IIB)
The IIB division comprises Global Products servicing Global Banking
and International Banking customers across three major product sets
(Global Transaction Banking, Global Loans and Global Markets), Retail
Asia Pacific focusing on affluent and emerging affluent customers
across 21 countries and Asia Partnerships.
New Zealand
The New Zealand division comprises Retail and Commercial
business units. Retail includes Home Loans and Cards and Payments
to personal customers in New Zealand. Commercial comprises Small
Business Banking and Commercial and Agri.
Global Wealth
The Global Wealth division comprises Funds Management, Insurance
and Private Wealth business units that provide investment,
superannuation, pension, insurance and private banking solutions
to customers across Australia, New Zealand and Asia.
Global Technology, Services & Operations and Group Centre
GTSO and Group Centre provide support to the operating divisions,
including technology, operations, shared services, property, risk
management, financial management, strategy, marketing, humanresources and corporate affairs. The Group Centre also includes
Group Treasury and Shareholder Functions.

ANZ ANNUAL REPORT 2014

THE GROUP’S STRATEGIC PRIORITIES AND OUTLOOKSUPER REGIONAL STRATEGY

To become the best connected and most respected bank across the Asia Pacific region

Strengthen our position inAustralia and New ZealandGrow in Asia, focused on
corporate and financial
institutions, supported by ourAsia retail branch network

Share common technology,
processes, products and services
that are designed with ourcustomers in mind, and to reduce
costs, complexity and risk

Manage risk, balance sheet and capital to drive superior return for shareholders.
Develop the best connected and most respected people in banking.

ANZ is executing a focused strategy to build the best connected,
most respected bank across the Asia Pacific region, and in doing
so provide shareholders with above-peer earnings growth.
The strategy has three key elements – strong domestic markets,
profitable Asian growth and an enterprise wide approach tooperations and technology. ANZ is particularly focused on thesignificant organic growth opportunities which exist within the
Asia Pacific region and our distinctive Asia Pacific footprint sees
us uniquely positioned to meet the needs of customers who aredependent on regional capital, trade and wealth flows.
This year, our differentiated strategy delivered a 10% increase in cash
profit1 to $7.1 billion, with a Return on Equity (ROE) of 15.4%, earnings
per share of 260.3 cents and a fully-franked dividend of 178 cents per
share. Our Common Equity Tier 1 (CET 1) ratio strengthened to 8.8%
at the end of September. After adjusting for foreign exchange2 (FX)
the result was driven by 5% revenue growth, 3% expense growth, andan 18% reduction in provisions. Total shareholder returns for the year
were 5.9% and revenue sourced from the Asia, Pacific, Europe andAmericas (APEA) region was 24% of total Group revenue.
While ANZ is continuing to pursue growth aspirations in the region,
we have a clear strategy in place to leverage the scale in our businessto also improve returns, and so ANZ last year set itself the goal toreduce the cost to income ratio below 43% and to lift Group ROE to
16% by the end of the 2016 financial year, in part driven by improving
returns in Asia Pacific.

STRATEGIC PROGRESS IN 2014
While global economic conditions remained volatile, conditions
across the Asia Pacific region were more robust by comparison.
However, relatively low credit growth and variations in the level ofmarket volatility meant conditions for banking remained challenging,particularly for institutional banking.
Two years ago, ANZ took the view that ongoing challenging market
conditions required a greater focus by the banking sector on bothproductivity and capital management, and put in place a number of
initiatives to drive improvements in both measures. These initiatives
have delivered steady improvement in both our cost and capital
position, including a continued improvement in the cost to income
and common equity capital ratios.
}} We’ve built stronger positions in our core markets of Australia
and New Zealand, with further gains in productivity and market
share, and further penetration of Wealth products into our existingcustomer base in these markets.
}} In IIB, profit from Asia increased 25% and revenue 10%.3
Revenue has consistently grown at double digit rates with thecompound annual growth rate over the last five years, standingat 23%. The division’s revenue mix has diversified substantially overthe past five years, with more significant contributions emerging
from more capital efficient products like Foreign Exchange, Tradeand Cash Management and Debt Capital Markets.

1 Statutory profit has been adjusted to exclude non-core items to arrive at cash profit, and has been provided to assist readers to understand the results for the ongoing business activities of theGroup. The adjustments made in arriving at cash profit are included in statutory profit which is subject to audit within the context of the Group statutory audit opinion. Cash profit is not auditedby the external auditor, however the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent basis across each period presented. Referto page 15 and pages 206 to 207 for analysis of the adjustments between statutory profit and cash profit. The Operating and Financial Review is reported on a cash basis unless otherwise noted.
2 ANZ’s overseas operations are subject to the impact of foreign currency translation. To assist with period on period comparability, comparative data is adjusted to remove the impact of foreignexchange movements.
3 IIB Asia profit and revenue figures are in USD.

DIRECTORS’ REPORT

13

DIRECTORS’ REPORT (continued)}} Our Operations and Technology functions continue to deliver
economies of scale, speed to market and a stronger control
environment to the business, particularly from our regional
operations centres and our use of common platforms andprocesses which have delivered lower unit costs, higher quality
and more consistent customer experience and lower risk.
While average operations volumes increased by 8% over the past
year, operations expenses reduced 4% (FX adjusted). ANZ recorded
a 22% increase in transaction volumes processed and the numberof Australian retail and commercial customer complaints has
reduced 9%.
}} Strong organic capital generation of $5.6 billion coupled with theGroup’s ongoing focus on capital efficiency saw ANZ’s CET1 capitalratio increase to 8.8% on an Australian Prudential Regulation
Authority (APRA) Basel 3 basis and 12.7% on an internationallycomparable Basel 3 CET1 basis. For further details on regulatory
capital measures refer to page 126. Customer funding remained
stable at 63% of total funding.
}} The total loss rate for the lending portfolio declined significantly
across the year from 26 bps to 19 bps reflecting ongoing asset
quality improvement. Gross impaired assets continued theirdownward trajectory, reducing by a further 32% and have now
reduced at an average of $918 million each year since 2010.

MEDIUM TO LONG TERM STRATEGIC GOALS AND OUTLOOKANZ is committed to delivering strong total shareholder returns
and above-peer earnings growth over the business cycle, targeting
a Group cost to income ratio below 43% and ROE to 16% by 2016.
The target dividend payout ratio remains at 65-70% of cash profit,
which we believe to be a sustainable level in a Basel 3 environment.
To do this we will continue to:}} Strengthen our position in our core markets of Australia and
New Zealand by growing our Retail and Commercial operations,driving productivity benefits, leveraging our super regional
strategy and using technology to drive better functionality.
– In Australia, we are transforming the way we serve ourcustomers by investing in physical, mobile and digital channels
to support our retail customers, by increasing sales capacity tosupport our business banking customers, and by investing incustomer analytics.
– In New Zealand, we are now working under one brand andon one technology platform and have a far more efficient
market coverage.
}} Focus our Asian expansion primarily on Institutional Banking,supporting our Australian and New Zealand customers, targeting
profitable markets and segments in which we have expertise andwhich are connected through trade and capital flows.
}} Achieve greater efficiency and control through the use of scalable
common infrastructure and platforms.
}} Maintain strong liquidity and actively manage capital toenhance ROE.
}} Build on our Super Regional capabilities – utilising ourmanagement bench-strength and continuing to deepen ourinternational talent pool.
}} Apply strict criteria when reviewing existing investment andnew inorganic opportunities.
The ability of the Group to achieve its goals set out above isdependent on the success of the Group’s ability to manage its
material risks which are outlined on pages 26 to 27.
Further information on business strategies which may affect theoperations of the Group in subsequent years is contained in the
Chairman’s Report and the CEO Report.

14

ANZ ANNUAL REPORT 2014

Results of the operations of the GroupANZ REPORTED A STATUTORY PROFIT AFTER TAX OF $7,271 MILLION FOR THE YEAR ENDED 30 SEPTEMBER 2014.
Income Statement

2014
$m

20131
$m

Net interest income

13,81012,758

8%

Other operating income

6,244

5,764

8%

Operating income

20,054

18,5228%

Movt

Operating expenses(8,760)(8,257)

6%

Profit before credit impairment and income tax

11,294

10,265

10%

Credit impairment charge(986)(1,188)-17%

Profit before income tax

10,308

9,077

14%

Income tax expense and non-controlling interests(3,037)(2,767)

10%

Profit attributable to shareholders of the Company

7,271

6,310

15%

Non-IFRS information
The Group provides an additional measure of performance which is prepared on a basis other than in accordance with the accounting standards– cash profit. The guidance provided in ASIC Regulatory Guide 230 has been followed when presenting this information.
Cash Profit
Statutory profit has been adjusted to exclude non-core items to arrive at cash profit, and has been provided to assist readers to understandthe results for the ongoing business activities of the Group. The adjustments made in arriving at cash profit are included in statutory profit
which is subject to audit within the context of the Group statutory audit opinion. Cash profit is not subject to audit by the external auditor,
however the external auditor has informed the Audit Committee that the adjustments have been determined on a consistent basis across eachperiod presented.
2014
$m

20131
$m

Statutory profit attributable to shareholders of the Company

7,271

6,310

15%

Adjustments between statutory profit and cash profit

(154)

182

large

Cash profit

7,117

6,492

10%

2014

2013

Movt

Adjustments between statutory profit and cash profit ($m)

Movt

Treasury shares adjustment

24

84

-71%

Revaluation of policy liabilities

(26)

46

large

Economic hedging

(72)

(57)

26%

Revenue and net investment hedges

(101)

159

large

Structured credit intermediation trades
Total adjustments between statutory profit and cash profit

21

(50)

large

(154)

182

large

Refer pages 206 to 207 for analysis of the adjustments between statutory profit and cash profit.

1 Certain amounts reported as comparative information have changed as a result of the adoption of new accounting standards or being classified to conform with current period financial
statement presentation.

DIRECTORS’ REPORT

15

DIRECTORS’ REPORT (continued)

Analysis of the business performance by major income and expense lines and by division is on a cash basis.

Income Statement

2014
$m

2013
$m

Net interest income

13,797

12,772

8%

Other operating income

5,781

5,619

3%

Operating income

19,57818,391

6%

Operating expenses(8,760)(8,257)

6%

Profit before credit impairment and income tax

10,818

10,1347%(989)(1,197)-17%

Credit impairment charge

Movt

Profit before income tax

9,829

8,937

10%

Income tax expense and non-controlling interests(2,712)(2,445)

11%

Cash profit

7,117

6,492

10%

2014

2013

Movt

Return on average ordinary shareholders equity1

15.4%

15.3%

10 bps2

Return on average assets

0.95%

0.96%

-1 bpsNon-financial key performance metrics3

2014

2013

Employee engagement

73%

72%

82.6%

80.2%

85%

84%

1

2

Financial performance metrics

1 Average ordinary shareholders’ equity excludes non-controlling interests and preference shares.
2 Basis points (bps).

Customer satisfaction– Australia (retail customer satisfaction)4– New Zealand (retail customer satisfaction)5– IIB (Institutional Relationship strength index ranking)6– Australia– New Zealand

1

1

39.2%

38.7%

2014

2013

Movt

13,797

12,772

8%

Women in management7
Net Interest Income
Net interest income ($m)

2.13%

2.22%

-9 bpsAverage interest earnings assets ($m)

Net Interest margin (%)

646,997575,339

12%

Average deposits and other borrowings

507,856

450,065

13%

3 The Group uses a number of non-financial measures to assess performance. These metrics form part of the balanced scorecard used to measure performance in relation to the Group’s
main incentive programs. Discussion of the non-financial performance metrics is included within the Remuneration report on pages 38 to 39 of this Directors’ report.
4 Source: Roy Morgan Research. Base: ANZ Main Financial Institution Customers, aged 14+, based on six months to September for each year.
5 Camorra Research Retail Market Monitor (2014). The Nielson Company Consumer Finance Monitor (2012) excludes National Bank brand. Base: ANZ main bank customers aged 15+,
rolling 6 months moving average to September. Based on responses of excellent, very good and good.
6 Source: Peter Lee Associates Large Corporate and Institutional Relationship Banking surveys, Australia and New Zealand 2014.
7 Includes all employees regardless of leave status and includes casuals but not contractors (which are included in FTE).

Net interest income increased $1,025 million (8%), with strong growth in average interest earning assets, up 12%, partially offset by a decline
in net interest margin.
The Group net interest margin of 2.13% was 9 bps lower than 2013, reflecting continued pressure on lending margins, including significant
competition and switching from variable to fixed in the home loan market (primarily in New Zealand), increased competition in Global Loans andthe impact of improving the credit quality of the lending portfolio, adverse asset mix impact from faster growth in lower margin Trade business andslower growth in the higher margin Cards and Payments business, and the adverse impact of lower earnings on capital from lower interest rates.
These impacts were partially offset by active margin management across deposit products, particularly term deposits, and favourable wholesalefunding costs.

16

ANZ ANNUAL REPORT 2014

Average interest earning assets increased $71.7 billion (12%) over the year with increases driven by:}} Australia increased by $16.6 billion with market share growth in variable home loan products and small business lending facilities.
}} IIB increased by $39.2 billion with a $23 billion increase in Global Markets mainly from growth in the liquidity portfolio, higher settlementbalances and loans and advances, as well as the impact of a weaker Australian dollar (AUD). Global Loans increased $8.6 billion andTransaction banking increased $4.8 billion, with strong growth in Asia.
}} New Zealand increased by $12.6 billion driven by market share growth and stronger economic conditions across both Retail and Commercial
lending, as well as the impact of a stronger New Zealand dollar (NZD).
}} Global Wealth and Group Centre increased by $3.3 billion driven by growth in Treasury relating to Reserve Bank of Australia (RBA)
requirements to facilitate overnight settlements.
Average deposits and other borrowings increased $57.8 billion (13%) over the year, driven by:}} Australia increased $10.3 billion due to growth in customer deposits within Retail and Commercial, the majority of which were at call products.
}} IIB increased $32.1 billion driven from increases in customer deposits, both term deposits and transaction accounts, across Australia and APEA,
as well as the impact of a weaker AUD.
}} New Zealand increased $9.2 billion with increased market share in Commercial customer deposits and issuance of commercial paper funding.
}} Global Wealth and Group Centre increased $6.2 billion from Treasury repo borrowings and an increase in Private Bank deposits in
Global Wealth.
Other Operating Income

Fee income1
Foreign exchange earnings1
Net income from funds management and insurance
Share of associates’ profit1
Global Markets other operating income
Other1,2
Cash other operating income

2014
$m

2013
$m

2,374

2,316

3%

95

209

-55%

1,283

1,216

6%

510

478

7%

1,286

1,310

-2%

233

90

large%

5,781

5,619

3%

Movt

1 Excluding Global Markets.
2 Other income includes a $125 million gain on sale of ANZ Trustees in July 2014 and a $21 million loss arising on sale of Saigon Securities Inc (SSI) in September 2014.

The Group’s other operating income increased $162 million (3%) during the period. The increase primarily relates to increases in Fee income,Net income from wealth management and insurance and Other due to a gain recorded on the sale of the ANZ Trustees business of $125 million,
partially offset by lower FX earnings and Global Markets other operating income.
Fee income was up by $58 million due to increases in Transaction Banking fee income arising from lending growth in APEA and New Zealand,
as well as growth in payments and cash management in Asia. Corporate and Commercial Banking fees increased by $12 million largely driven
by growth in Small Business Banking and New Zealand increased due largely to movements in exchange rates which were partially offset by adecrease in income following the sale of EFTPOS New Zealand Limited (EFTPOS) in 2013. These increases were partially offset by a decrease in
Cards and Payments fee income, reflecting improved customer payment behaviour on consumer credit cards.
FX income decreased by $114 million largely as a result of realised losses on foreign currency revenue hedges (offsetting translation gains
elsewhere in the Group), which were partially offset by increases in Global Transaction Banking due to a combination of volume and margin
growth in Australia.
Net income from funds management and insurance increased $67 million with a $36 million increase in Global Wealth driven by stronger
growth across the Funds Management and Insurance businesses, along with a $13 million increase in Retail Asia Pacific arising from higher salesof investment and insurance products.
Share of associates’ profit increased by $32 million as a result of increased profits generated by our Asian associates. AMMB Holdings Berhad
increased $22 million, mainly due to a gain from the partial divestment of its insurance businesses, and Metrobank Card Corporation increased$6 million primarily due to lending growth in their cards business.
Global Markets other operating income is affected by mix impacts between the categories within other operating income and net interest
income. The $24 million decrease was driven by a $75 million decrease from derivative positions which is offset in net interest income.
Partly offsetting this was a 20% increase in APEA driven by growth across Commodities and Fixed Income businesses.

DIRECTORS’ REPORT

17

DIRECTORS’ REPORT (continued)

Other income increased by $143 million due to the following:}} Global Wealth increased $148 million due to a $125 million gain on sale of ANZ Trustees and a non-recurring insurance settlement gain
relating to a legacy NZ Funds Management matter.
}} Asia Partnerships increased $18 million due to the Bank of Tianjin (BoT) dilution gain of $12 million (from non-participation in a rights issue)
in 2014 and the $26 million impairment on SSI in 2013, partially offset by the $21 million loss arising from the sale of SSI in 2014.
}} Specialised Finance increased $11 million, mainly driven by the revaluation of lease assets in Australia. Partially offsetting this was a decrease
in New Zealand of $19 million, primarily due to the gain on sale of EFTPOS recorded in 2013.
Operating Expenses

Personnel expenses

2014
$m

2013
$m

Movt

5,088

4,905

4%

Premises expenses

888

843

5%

Technology expenses

1,266

1,122

13%

113

85

33%

Other expenses

Restructure expenses

1,405

1,302

8%

Total cash operating expenses

8,760

8,257

6%

44.7%
50,32844.9%
49,866-20 bps
1%

Key performance metrics
Operating expenses to operating income
Full time equivalent staff (FTE)1

The Group’s total cash operating expenses increased by $503 million (6%) driven primarily by FX and increased Technology expenses.
Despite this increase, the Group’s operating expenses to operating income ratio decreased by 20 bps.
Personnel expenses increased $183 million due to the adverse impact of FX movements and annual salary increases, partially offset by lower
temporary staff costs and the benefit of increased utilisation of our hub resources.
Premises expenses increased $45 million due to rent increases and the full year impact of a transition to new buildings in Sydney and
New Zealand in 2013, and the adverse impact of FX movements.
Technology expenses increased $144 million with increased depreciation and amortisation, higher data storage and software licence costs
and increased use of outsourced providers.
Restructuring expenses increased $28 million due to productivity and business restructuring initiatives within the Australia and IIB divisions,partly offset by the completion of “NZ Simplification” in 2013.
Other expenses increased $103 million primarily due to higher advertising spend, write down of intangible assets in Global Wealth, and goods
and services tax credits in 2013.
Credit impairment charge
2014
$m

2013
$m

Movt

Individual credit impairment charge

1,144

1,167

-2%

Collective credit impairment charge/(release)

(155)

30

large

Total credit impairment charge to income statement

989

1,197

-17%

The total individual credit impairment charge decreased $23 million, primarily due to improvements in credit quality in New Zealand, partially
offset by lower recoveries in Australia and IIB.
The collective credit impairment charge decreased $185 million primarily due to releases following the crystallisation of individual provisions
on a few large IIB exposures, and as a result of upgrades to a number of customer exposures in IIB and New Zealand. In addition, there was a net
decrease in the economic cycle overlays as a result of improved credit conditions.

1 In September 2014, the Group migrated onto a single global HR platform. In doing so, the Group revised and standardised the measure of FTE and this resulted in an increase of FTE.
Comparative information has been restated.

18

ANZ ANNUAL REPORT 2014

FINANCIAL POSITION OF THE GROUP
Summary Balance Sheet

AssetsCash/Settlement balances owed to ANZ/Collateral paid

2014
$b

2013
$b

Movt

58.3

51.0

14%

Trading and available-for-sale assets

80.6

69.6

16%

Derivative financial instruments

56.4

45.9

23%

Net loans and advances

521.8

483.3

8%

Investments backing policy liabilities

33.6

32.1

5%

Other

21.4

21.1

1%

Total Assets

772.1

703.0

10%

Liabilities
Settlement balances owed by ANZ/Collateral received

15.7

12.6

25%

Deposits and other borrowings

510.1

466.9

9%

Derivative financial instruments

52.9

47.5

11%

Debt issuances

80.1

70.4

14%

Policy liabilities/external unit holder liabilities

37.7

35.9

5%

Other

26.3

24.1

9%

Total Liabilities

722.8

657.4

10%

Total Equity

49.3

45.6

8%

The Group’s balance sheet continued to strengthen during 2014 with stronger capital ratios, an increased liquidity portfolio, an increased
proportion of funding from customer deposits and a significant reduction in impaired assets.
Asset growth of $69.1 billion (10%):}} Net loans and advances increased by $39 billion, with an increase of $16 billion in the Australia division from market share growth in variable
home loans and small business loans, an $18 billion increase in IIB due to strong refinancing levels in Global Loans and strong growth inTrade Finance, as well as a $5 billion increase in the New Zealand division due to market share growth and stronger economic conditions.
}} Trading and available-for-sale assets increased $11 billion due to larger holdings in the liquidity portfolio.
Liabilities growth of $65.4 billion:}} Deposits and other borrowings increased $43 billion, driven by a $9 billion increase in at call deposit products in the Australia division, a$26 billion increase in IIB relating to Transaction Banking and Global Markets deposits, and a $6 billion increase in the New Zealand division
due to market share growth in customer deposits.

DIRECTORS’ REPORT

19

DIRECTORS’ REPORT (continued)

Credit Provisioning
2014

2013

Movt

Gross impaired assets ($m)

2,889

4,264

-32%

Credit risk weighted assets ($b)

308.9

287.7

7%

Total provision for credit impairment ($m)

3,933

4,354

-10%

Individual provision as % of gross impaired assets

40.7%

34.4%

630 bps

Collective provision as % of credit risk weighted assets

0.89%

1.00%

-11 bps

Gross impaired assets decreased by 32% due to improved portfolio credit quality resulting in lower levels of new impairment, combinedwith higher write-offs in IIB and Australia division. The Group has an individual provision coverage ratio on impaired assets of 40.7% at
30 September 2014, up from 34.4% at 30 September 2013.
The collective provision ratio of 0.89% as at 30 September 2014 (down from 1% at 30 September 2013) continues to provide conservative credit
provision coverage given the ongoing improvement in credit quality, particularly in the Institutional bank where credit exposure to investment
grade clients now represents 78% of the loan book compared to 60% in 2008.
Liquidity and Funding
2014

2013

Movt

Total liquidity portfolio ($b)

140.4

121.6

15%

Total customer liabilities funding (% of total funding)

62%

62%

–

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 specific and general market liquidity stress scenarios such that potential cash flow obligations can be met
over the short to medium term.
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 tobe repo eligible.
During the year customer funding increased by $36 billion and wholesale funding increased $12 billion. Customer funding continues torepresent 62% of total funding. $23.9 billion of term wholesale debt (with a remaining term greater than one year as at 30 September 2014)
was issued during 2014 and $1.6 billion of ANZ Capital Notes were issued. All wholesale funding needs were comfortably met.
Capital Management
2014

2013

Movt

31 bpsCommon Equity Tier 1– APRA Basel 3

8.8%

8.5%

– Internationally Comparable Basel 31

12.7%

12.7%2–

Risk weighted assets ($b) (APRA Basel 3)

361.5

339.3

7%

1 Previously disclosed International Harmonised capital ratios have been replaced with Internationally Comparable capital ratios as per the methodology in the “Australian Bankers’ Association:
International comparability of capital ratios of Australia’s major banks” (August 2014) report prepared by PwC Australia.
2 Restated for change in methodology to Internationally Comparable capital ratios.

APRA, under the authority of the Banking Act 1959, sets minimum regulatory capital requirements for banks including what is acceptableas capital and provide methods of measuring the risks incurred by the Bank.
The Group’s Common Equity Tier 1 ratio increased 31 basis points to 8.8% based upon the APRA Basel 3 standards, exceeding APRA’s minimum
requirements, with cash earnings and capital initiatives (including divestments) outweighing dividends, incremental risk weighted assets
and deductions.

20

ANZ ANNUAL REPORT 2014

RESULTS OF MAJOR SEGMENTS OF THE GROUP
Australia
Across ANZ’s Retail and Commercial businesses in Australia we serve more than 6 million customers. We focus on understanding our customers’
goals and making banking easier to put them firmly in control of their finances.
Banking on Australia Transformation Program
Through our “Banking on Australia” program, we are transforming the business and strengthening our position in our core markets.
We are transforming our distribution networks, leveraging digital innovation, making it easier for our customers to bank with us and allowing ourfrontline bankers to have high quality interactions focused on customer needs. ANZ goMoney™ has processed over $100 billion in transactions
since its launch in September 2010 and 772 Smart ATMs have been rolled out across the network. This increases banker productivity and leverages
the 143 branches and business centres which have been transformed to a new format focused around needs-based sales conversations.
We have delivered leading digital and mobile solutions, further enhancing the customer experience, providing connectivity and allowing
customers more control over their banking needs. We have implemented integrated, customer friendly online applications for Retail transaction
and credit card products, resulting in 21% of sales for these products through digital channels. We launched ANZ Shield in July 2014, a leading
soft token multi factor authentication security application, further enhancing ANZ goMoney™.
We have simplified our products and processes to further improve the customer experience and generate productivity, with operations
costs declining 6% while absorbing volume increases of 8%. The productivity achieved as a result of the distribution transformation, digital
investment and simplification has been reinvested into building the capability of our people and systems, further improving frontline banker
effectiveness and sales productivity.
Retail has had two consecutive strong years. Volumes continue to grow above system and margins have been well managed. We haveconsistently grown Home Loans at above system for 19 consecutive quarters1, and 52% of Home Loans were sold through our proprietarychannels. We also grew retail deposits at system.
Corporate and Commercial Banking continues to perform well in a subdued credit environment. Lending grew 3% with momentum in thesecond half driving lending and revenue growth. The Small Business Banking segment is performing strongly with lending up 16%, aided by
ANZ’s $2 billion lending pledge and investments made in the frontline. Other business foundations remain strong with deposits growing 8% andcustomer numbers2 increasing by 27,000. We have maintained our cost discipline and underlying asset quality remains sound.
Income statement
Net interest income
Other operating income

2014
$m

2013
$m

Movt

7,045
1,183

6,670
1,190

6%
-1%

Operating income

8,228

7,860

5%

Operating expenses(3,057)(2,967)

3%

Profit before credit impairment and income tax

5,171

4,893

6%

Credit impairment charge

(819)

(820)

0%

Profit before income tax

4,352

4,073

7%

Income tax expense and non-controlling interests(1,304)(1,215)

7%

Cash profit

3,048

2,858

7%

10,263

10,0252%

Key performance metrics
Number of employees (FTE)
Net interest margin

2.51%

2.52%

-1 bpsOperating expenses to operating income

37.2%

37.7%

-50 bps

Net loans and advances ($b)

287.9

271.6

6%

Customer deposits ($b)

161.1

152.4

6%

1 Source: APRA Monthly Banking Statistics 12 months to September 2014.
2 Customer numbers (excludes Esanda) for the 12 months to August 2014.

Cash profit increased 7%, with 5% income growth, a 3% increase in expenses and flat credit impairment charges. Key factors affecting the result were:}} Net interest income increased 6% primarily due to a 6% increase in average net loans and advances from Home Loans and Small BusinessBanking. Growth in deposits has been offset by subdued Corporate and Commercial Banking lending conditions in the middle market sector.
Net interest margin contracted 1 bp, reflecting increased lending competition and portfolio mix, partially offset by disciplined deposit pricing.
}} Operating expenses increased 3%. This was in part driven by $39 million invested in initiatives to increase sales capacity and capability andaccelerate revenue generating projects. Excluding this, costs grew by 2% with inflationary impacts partially offset by productivity gains.
}} Credit impairment charges were flat year on year, with Retail down 6% from improved Home Loan recoveries and lower delinquencies in
Cards. In Corporate and Commercial Banking, credit impairment charges were up 6% driven by increased individual provisions in Corporate
Banking and Esanda, offset by improvements across all other Corporate and Commercial Banking segments.
DIRECTORS’ REPORT

21

DIRECTORS’ REPORT (continued)

International and Institutional Banking
ANZ’s goal to build a Super Regional bank by growing our business across the APEA region, while maintaining our market leading positionin our home markets of Australia and New Zealand, is spearheaded by the IIB division. IIB is represented in all of ANZ’s 33 markets and provides
borderless solutions for our business and retail customers across the region. ANZ aims to be the best bank for customers that have trade orcapital flows in Asia Pacific, Australia, New Zealand and beyond.
Our goal is to help deliver on ANZ’s aspiration to have APEA sourced revenue drive 25 to 30% of group profit by 2017, and to continue to grow
our Institutional business in Australia and New Zealand. Following an aggressive growth agenda for the past five years, IIB now services morethan two million retail and institutional customers with 138 branches, 580 ATMs and 8,000 staff.
IIB’s four key strategic priorities are: Connecting with more customers by providing seamless value; Delivering leading products throughInsights; Intensifying balance sheet discipline; and Scaling and optimising infrastructure.
The customer franchise is going from strength to strength. ANZ’s unique regional capability helped the business to regain the number one leadbank position in Institutional Banking in Australia and retain the number one lead bank position in New Zealand in the Peter Lee survey. ANZ has
also had the fastest ever rise in the Greenwich relationship strength survey covering the Asia region, narrowing the gap on the number 3 player.
Revenue from Global Banking customers grew in line with the overall IIB average for the year, where we continued to see strong momentum
within Financial Institutions. Revenue from International Banking customers was modest as declining margins had a larger impact. Retail was
our highest growth customer segment, benefiting from strong volume momentum across Asia in both lending and deposits. We continued
to balance growth against risk which is reflected in net interest income and improved credit outcomes.
2014
$m

2013
$m

Movt

Net interest income
Other operating income

3,986
3,029

3,669
2,911

9%
4%

Operating income

7,015

6,580

7%

Operating expenses(3,215)(2,985)

8%

Profit before credit impairment and income tax

3,800

3,595

6%

Income statement

Credit impairment charge

(215)

(317)

-32%

Profit before income tax

3,585

3,278

9%

Income tax expense and non-controlling interests

(894)

(846)

6%

Cash profit

2,691

2,432

11%

Key performance metrics
Number of employees (FTE)

7,862

8,258

-5%

Net interest margin

1.49%

1.61%

-12 bpsOperating expenses to operating income

45.8%

45.4%

40 bpsNet loans and advances ($b)

141.8

123.5

15%

Customer deposits ($b)

182.7

163.2

12%

Cash profit increased 11%, driven primarily by an increase in operating income in our fixed income business and Global Transaction Banking
and a decrease in credit impairment charge, partially offset by an increase in operating expenses. The key factors affecting the result were:}} Net interest income increased 9%, primarily due to higher returns from the Bank’s liquidity positions, asset and liability repricing mismatches
and volume driven growth in Global Transaction Banking. Average deposits increased 17% and average net loans and advances increased
20%, with growth across all regions. Net interest margin declined by 12 bps driven by Global Loans price competition and growth focusedon higher credit quality customers.
}} Other operating income increased 4% with good performances across most lines of business. Global Transaction Banking and Retail Asia
Pacific increased mainly due to volume growth, while Global Loans increased primarily due to higher fee income in Specialised Finance.
The increase in Asia Partnerships was due to growth in underlying revenue, and a gain arising from the dilution of our BoT stake, which waspartially offset by a loss arising from the sale of Saigon Securities Inc., a Vietnamese brokerage firm.
}} Operating expenses increased 8%. Business as usual expenses, excluding FX impacts and $40 million spend associated with the IIB organisational
structure, increased 3% reflecting well managed cost control and investment in targeted growth areas and supporting infrastructure.
}} Credit impairment charges decreased 32%, primarily due to collective provision releases relating to the crystallisation of individual provisions
and improved customer credit ratings.

22

ANZ ANNUAL REPORT 2014

New Zealand
ANZ New Zealand is the largest bank in New Zealand with a financial relationship with around one in two New Zealanders. Customers are served
through our market-leading network of around 250 full-service branches, our multichannel contact centres and more ATMs than any other bank,along with New Zealand’s largest internet and mobile banking services.
Following the successful merger of ANZ and The National Bank of New Zealand in 2012, we have continued to reduce costs and build a simpler,
more productive business. By leveraging our strong financial position and scale, we have grown market share in home loans, credit cards,
KiwiSaver and commercial lending, and are advancing strongly towards our ultimate goal of creating New Zealand’s best bank.
The continued execution of our simplification strategy has underpinned a strong financial performance across the businesses during 2014.
We have continued to realise gains from effectively leveraging our market-leading resources and connections. We have simplified and improved
processes and products in order to deliver a higher level of service to our customers. The brand is strong, with consideration at record highs.
The financial outcomes of our strategy are reflected in improved returns and a strong downward trend in the cost to income ratio. We are
growing both lending and deposits in excess of system and at the same time we are improving the quality of our portfolio. We have createda stronger bank, and established a platform for consistent, sustainable earnings growth.
RetailDuring 2014, we achieved good progress in optimising our market-leading branch network and enhanced our digital channels. We are
improving the customer experience, and are strongly positioned to attract and retain more customers. We are meeting more needs per
customer, and earning more revenue per FTE and per branch.
Commercial
We have increased our network of banking specialists serving the commercial, agri and small business banking sectors. We aim to maintainleadership not only in our extensive coverage but in the connections and insights that we provide our customers. Our simplification strategy
has been a key factor in our small business banking and commercial businesses delivering above-system lending growth for the 2014 year.
At the same time, resources invested in improving credit quality, particularly in the agri book, have resulted in a significantly improved
provisioning result. The agri business, after a period of re-balancing, is now positioned for renewed growth.
Income statement
Net interest income
Other operating income

2014
$m

2013
$m

Movt

2,162
349

1,863
347

16%
1%

Operating income

2,511

2,210

14%

Operating expenses(1,033)(960)

8%Profit before credit impairment and income tax

1,478

1,250

18%

8

(37)

large

Credit impairment charge
Profit before income tax

1,486

1,213

23%

Income tax expense and non-controlling interests

(416)

(336)

24%

Cash profit

1,070

877

22%

5,080

5,323

-5%

Key performance metrics
Number of employees (FTE)
Net interest margin

2.48%

2.49%

-1 bpsOperating expenses to operating income

41.1%

43.5%

-240 bps

Net loans and advances ($b)

86.1

81.5

6%

Customer deposits ($b)

51.4

46.5

10%

Cash profit increased 22% (10% FX adjusted), due to lending growth, cost productivity and credit quality improvement. Key factors affecting
the results were:}} Net interest income increased 16% (5% FX adjusted), due to above-system lending growth and FX. Margins were well managed in a competitiveenvironment that was further constrained by a shift to fixed rate lending. Net interest margin contraction for the year was held to 1 basis point.
}} Other operating income increased 1% (decreased 9% FX adjusted). The 2013 result included a gain from the sale of the EFTPOS business, as well
as revenue earned by that business prior to its divestment. Excluding the EFTPOS impact, other operating income in 2014 matched that of the2013 year, with strong growth achieved in card and merchant income, but this was offset by lower income from retail transaction fees and FX.
}} Operating expenses increased 8% (decreased 3% FX adjusted). The 2013 result included restructuring costs related to the systems integration
project and operating costs in the EFTPOS business prior to its sale. Excluding these items and the impact of FX, costs were held flat with costproductivity offsetting inflationary impacts and investment spend.
}} The credit impairment charge increased by $45 million during the year. The individual credit impairment charge decreased 34%, with the levelof new provisions having slowed and write-backs remaining high. The release from the collective provision increased despite a lower releaseof economic overlay provision, reflecting improvements in credit quality which have more than offset the impact of lending growth.
DIRECTORS’ REPORT

23

DIRECTORS’ REPORT (continued)

Global Wealth
Global Wealth provides a range of innovative solutions for customers across the region to make it easier for them to connect, protect andgrow their wealth. Global Wealth serves over 2.3 million customers and manages $61 billion in investment and retirement savings. Customers
can access ANZ’s wealth solutions through teams of highly qualified financial planners and advisers, innovative digital platforms, ANZ Private
Bankers, ANZ branches and direct channels.
ANZ’s customers are increasingly looking for simple, affordable and more convenient ways to manage their wealth. In response to this,Global Wealth developed Grow – a series of innovations across the physical, digital and advice space to help our customers better connect,
protect and grow their wealth. These innovations include ANZ Smart Choice Super, a simple direct retirement savings solution, the ANZ Grow
Centre, a destination that blends digital tools with the physical wealth specialists, where customers can get help with everything from theirdigital device to financial advice, and Grow by ANZ, our award winning digital app that brings banking, share investments, superannuation(pension) and insurance, together in the one place.
Funds Management
The Funds Management business helps customers grow their wealth through investment, superannuation and pension solutions. Global Wealthhas embraced the changing regulatory environment to reshape the business, simplifying operational processes and delivering innovative
solutions like ANZ Smart Choice Super and Grow by ANZ.
Insurance
The Insurance business provides protection for all life stages through a comprehensive range of life and general insurance products distributed
through intermediated and direct channels. Global Wealth’s focus on retail risk resulted in 10% growth in individual in-force premiums, while
continued investment in claims management and retention initiatives in Australia improved claims ratios as well as reduced retail lapse rates
by 130 basis points.
Private WealthOperating in six geographies across the region we continue to strengthen our Private Wealth offerings by building core investment advice
capabilities and developing a suite of global investment solutions. This includes leveraging the expertise of strategic partners such as
Swiss Private Bank Vontobel.
2014
$m

2013
$m

Movt

Net funds management and insurance income
Other operating income including net interest income

1,249
495

1,213
313

3%
58%

Operating expenses including credit provision(1,024)(959)

7%

Income statement

Profit before income tax

720

567

27%

Income tax expense and non-controlling interests

(195)

(96)

large

Cash profit

525

471

11%

115

128

-10%

– Insurance

224

222

1%

– Private Wealth

172

50

large

– Corporate and Other²

14

71

-80%

Total Global Wealth

525

471

11%

Consisting of:– Funds Management1

Key performance metrics
Number of employees (FTE)

2,296

2,482

-7%

Operating expenses to operating income

58.8%

62.6%

-380 bps

Funds under management ($m)

61,41158,5785%In-force premiums ($m)

2,038

1,986

3%

– Australia

12.4%

13.7%

-130 bps– New Zealand

16.1%

15.9%

20 bpsRetail insurance lapse rates

1 Funds Management includes Pensions & Investments business and E*TRADE.
2 Corporate and Other includes income from invested capital and cash profits from the advice and distribution business.

24

ANZ ANNUAL REPORT 2014

Cash profit increased by 11%, with a 3% increase in net funds management and insurance income, 58% increase in other operating income
and 7% increase in expenses. Key factors affecting the result were:}} Funds Management operating income increased by 3%. This was driven by 12% growth in average FUM as a result of strong performancein investment markets and improvement in net flows by $2.4 billion due to solid growth in ANZ Smart Choice Super and KiwiSaver product.
}} Insurance operating income increased by 4% despite the exit of a Group Life Insurance plan resulting in a $47 million experienceloss. Excluding this, income grew 12% due to strong underlying business performance and improved claims and lapse experience.
This performance delivered a 16% uplift in the Embedded Value (gross of transfers).
}} Other operating income (including net interest income) includes a gain of $125 million arising from the sale of ANZ Trustees that wasrecorded in the Private Wealth segment. Excluding this gain, operating income increased by 18% driven by improved margins and solid
growth in customer deposits and investment funds under management, both up by 20% and 21% respectively.
}} The divisional operating income also benefitted from a non-recurring insurance settlement of $26 million.
}} Operating expense increased 7% including $41 million spend on revenue generating initiatives and the write-down of intangible assets.
Excluding this, expenses increased by 3%, including additional regulatory and compliance costs of $13 million.
Global Technology, Services and Operations and Group Centre
Global Technology, Services & Operations is the delivery division for the bank, responsible for the delivery of technology, shared services,and operations across our global footprint. The division is also responsible for major transformation projects and ANZ’s commercial and branchproperty portfolio.
We are delivering the next generation of enterprise platforms that will underpin future growth and improve banking for our customers globally.
Our regional delivery network, with key locations in Melbourne, Wellington, Bangalore, Manila, Chengdu and Suva, plus integrated operations
in dozens of other countries, provides us with scale, flexibility and business continuity.
We have continued to drive productivity across ANZ and to focus on improving quality in all areas, which has delivered a better customer
experience and has translated into strong, sustainable profit improvements.
Income statement

2014
$m

2013
$m

Movt

Operating income
Operating expenses

80
(429)

215
(390)

-63%
10%

Profit/(Loss) before credit impairment and income tax

(349)

(175)

99%

Credit impairment charge
Profit/(Loss) before income tax
Income tax expense and non-controlling interests
Cash profit/(loss)

35

(19)

large

(314)

(194)

62%

97

48

large

(217)

(146)

49%

24,827

23,7784%

Key performance metrics
Number of employees (FTE)

Key factors affecting the results were:}} Operating income decreased $135 million with higher realised losses from foreign currency hedges (offsetting translation gains elsewherein the Group).
}} Operating expenses increased $39 million due to higher depreciation and amortisation, increased investment in enterprise projects andcreation of a new Global Compliance function.
}} Credit impairment charges decreased $54 million due to release of the economic cycle provision and provisions relating to discontinued
businesses in 2013.
}} The increase in FTEs is largely due to growth in the Group Hubs, increased resources for enterprise projects and the creation of a new
Global Compliance function.

DIRECTORS’ REPORT

25

DIRECTORS’ REPORT (continued)

Risks
The success of the Group’s strategy is underpinned by soundmanagement of its risks. As the Group progresses on its strategic pathof becoming the best connected and most respected bank acrossthe region, the risks faced by the Group will evolve in line with thestrategic direction.
The success of the Group’s strategy is dependent on its ability to
manage the broad range of interrelated risks it is exposed to acrossour expanding geographic footprint.
Risk Appetite
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 sound earnings, which protects ANZ’s franchise and supports
the development of an enterprise-wide risk culture. The frameworkprovides an enforceable risk statement on the amount of risk ANZ is
willing to accept and it supports strategic and core business activities
and customer relationship with the objective of 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; and}} risk is linked to the business by informing, guiding andempowering the business in executing strategy.
ANZ’s risk management is viewed as a core competency and toensure that risks are identified, assessed and managed in an accurate
and timely manner, ANZ has:}} An independent risk management function, with both central andenterprise-wide functions (which typically cover such activities asrisk measurement, reporting and portfolio management), together
with embedded risk managers within the businesses.
}} Developed frameworks to provide structured and disciplined
processes for managing key risks. These frameworks include
articulation of the appetite for these risks, portfolio direction,
policies, structures, limits and discretions.
Material Risks
All the Group’s activities involve, to varying degrees, the analysis,
evaluation, acceptance and management of risks or combinationsof risks. The material risks facing the Group and its approach to
management of those risks are described below:
Capital Adequacy Risk – is the risk of loss arising from ANZ failingto maintain the level of capital required by prudential regulatorsand other key stakeholders (shareholders, debt investors, depositors,
rating agencies) to support ANZ’s consolidated operations andrisk appetite.
Losses include those arising from diminished reputation, a reduction
in investor/counter-party confidence, regulatory non-compliance(e.g. fines and banking license restrictions) and an inability for
ANZ to continue to do business. ANZ pursues an active approachto capital management, which is designed to protect the interestsof depositors, creditors and shareholders.

26

Credit Risk – is the risk of financial loss resulting from a counterparty
failing to fulfill its obligations, or from a decrease in credit quality ofa counterparty resulting in a loss in value. ANZ has a comprehensive
framework to manage credit risk. The framework is top down, being
defined by credit principles and policies. The effectiveness of thecredit 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.
ANZ’s customers could also be impacted by climate change andchanges to laws or regulations, or other policies adopted bygovernments or regulatory authorities, including carbon pricing
and climate change adaptation or mitigation policies. We factor
these risks into our customer evaluations, including in the energy
and extractive industries, primarily through an assessment of ourcustomers’ capacity to deal with climate change and any change
to regulatory environments.
Market Risk – Market Risk stems from ANZ’s trading and balance
sheet activities and is the risk to ANZ’s earnings arising from changes
in interest rates, foreign exchange rates, credit spreads, volatility,
correlations or from fluctuations in bond, commodity or equity prices.
The key market risk factors include:}} Interest rate risk: the potential loss arising from the change in thevalue of a financial instrument due to changes in market interest
rates or their implied volatilities.
}} Currency rate risk: the potential loss arising from the decline in thevalue of a financial instrument due to changes in foreign exchange
rates or their implied volatilities.
}} Credit spread risk: the potential loss arising from a change invalue of an instrument due to a movement of its margin or spread
relative to a benchmark.
}} Commodity risk: the potential loss arising from the decline in
the value of a financial instrument due to changes in commodity
prices, or their implied volatilities.
}} Equity risk: the potential loss arising from a decline in value offinancial instruments due to changes in equity prices or indicesor their implied volatilities.
Liquidity and Funding Risk – is the risk that the Group is unable
to meet its payment obligations as they fall due, including repaying
depositors or maturing wholesale debt, or that the Group has
insufficient capacity to fund increases in assets. The global financial
crisis highlighted the importance of differentiating between stressedand normal market conditions in a name-specific crisis and thedifferent 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 the Group is required to remain
cash flow positive.
Operational Risk – is the risk of loss resulting from inadequate
or failed internal processes, people and systems, or from external
events. This definition includes legal risk and the risk of reputation
loss, or damage arising from inadequate or failed internal processes,
people and systems, but excludes strategic risk. The objective of
operational risk management is to ensure that risks are identified,assessed, measured, evaluated, treated, monitored and reported ina structured environment with appropriate governance oversight.
ANZ does not expect to eliminate all operational risks, but to ensurethat the residual risk exposure is managed as low as reasonably
practical based on a sound risk/ reward analysis in the context of
an international financial institution.

ANZ ANNUAL REPORT 2014

Compliance Risk – is the probability and impact of an event that
results in a failure to act in accordance with laws, regulations,industry standards and codes, internal policies and procedures andprinciples of good governance as applicable to ANZ’s businesses.
ANZ’s Compliance Framework is aligned to key industry and global
standards and benchmarks. It utilises the concept of a ‘risk-based’
approach to manage compliance. This allows the Compliancefunction to support divisions and businesses by taking a standardised
approach to compliance management tasks. This enables ANZ to beconsistent in proactively identifying, assessing, managing, reportingand escalating compliance-related risk exposures while respecting
the specific obligations of each jurisdiction in which we operate.
Reputation Risk – the risk of loss caused by adverse perceptionsof ANZ held by the public, the media, depositors, shareholders,investors, regulators, or rating agencies that directly or indirectly
impact earnings, capital adequacy or value. Reputation Risk arises
as a result of poor control processes over client on-boarding or new
product development or strategies or a result of unexpected risks
crystallising (e.g. credit, market or operational risk). ANZ manages
reputation risk through a robust governance process and controls.
The Management Board is the most senior management committee
for consideration of potential harm to ANZ’s reputation and measures
to protect ANZ’s reputation but some matters are delegated to the
Reputation Risk Committee.

Strategic Risk – Strategic Risks are risks that affect or are createdby an organisation’s business strategy and strategic objectives.
Where the strategy leads to an increase in other Key Material Risks(e.g. Credit Risk, Market Risk, Operational Risk) the risk management
strategies associated with these risks form the primary controls.
Management Board members will identify and assess potential
strategic risks in the course of making decisions about the futureof ANZ. This will include analysis of potential merger and acquisition
activity, exit strategies and the nature of resourcing. In assessmentof strategic risks, Management Board will consider impacts such as
pricing and products; the systems and processes we need to deliveron the proposed strategy, and capital implications. In monitoring
the potential for strategic risk to materialise, ANZ must maintain a
deep understanding of the key markets and jurisdictions in which
we operate. This includes analysis of the economy and outlook,globally and locally; the actions of competitors; and being agile
in our response to new and emerging technology.
Further information on risk management including approach,framework and key areas of focus can be found in the Corporate
Governance section of the Directors’ Report as set out on page 69.
A listing of the principal risks and uncertainties facing the Groupare set out in the Supplementary Information section on pages
197 to 205.

Insurance Risk – is the risk of unexpected losses resulting fromworse than expected claims experience (variation in timing andamount of insurance claims due to incidence or non-incidence ofdeath, sickness, disability or general insurance claims) and includes
inadequate or inappropriate underwriting, claims management,
reserving, insurance concentrations, reinsurance management,
product design and pricing which will expose an insurer to financial
loss and the consequent inability to meet its liabilities. In the life
insurance business, insurance risk arises primarily through mortality(death) and morbidity (illness and injury) and longevity risks.
For general insurance business, insurance risk arises mainly throughweather-related incidents and similar calamities, as well as adverse
variability in home, contents, motor, travel and other insurance claim
amounts. Insurance risk is managed primarily by: product design toprice all applicable risks into contracts; reinsurance to reduce liability
for large individual risks; underwriting to price/reserve for the levelof risk associated with an individual contract; claims management
to admit and pay only genuine claims; insurance experience reviews
to update assumptions and portfolio management to maintain adiversity of individual risks.
Reinsurance Risk – Reinsurance is an agreement in which one insurer(‘the reinsurer’) indemnifies another insurer for all or part of therisk of a policy originally issued and assumed by that other insurer.
Reinsurance is a risk transfer tool between the insurer and reinsurer.
The main risk that arises with reinsurance is counterparty credit
risk. This is the risk that a reinsurer fails to meet their contractual
obligations, i.e. to pay reinsurance claims when due. This risk ismeasured by assigning a counterparty credit rating or probabilityof default. Reinsurance counterparty credit risk is mitigated by
restricting counterparty exposures on the basis of financial strengthand concentration.

DIRECTORS’ REPORT

27

DIRECTORS’ REPORT (continued)
REMUNERATION REPORTContents
1
2
3
4
5
6

Basis of Preparation
Key Management Personnel (KMP)
Role of the Board in Remuneration
HR Committee Activities
Remuneration Strategy and Objectives
The Composition of Remuneration at ANZ
6.1 Fixed Remuneration
6.2 Variable Remuneration
		
6.2.1 Short Term Incentives (STI)		
6.2.2 Long Term Incentives (LTI)
6.3 Other Remuneration Elements
7 Linking Remuneration to Balanced
Scorecard Performance
7.1 ANZ Performance
7.2 STI – Performance and Outcomes

29
29
30
30
31
32
33
33
34
35
36
37
37
38

8

2014 Remuneration
8.1 Non-Executive Directors (NEDs)
8.2 Chief Executive Officer (CEO)8.3 Disclosed Executives
8.4 Remuneration Tables –		CEO and Disclosed Executives
		
Non Statutory Remuneration Disclosure Table		
Statutory Remuneration Disclosure Table
9 Equity 		
9.1 CEO and Disclosed Executives Equity
9.2 NED, CEO and Disclosed
Executives Shareholdings
9.3 Equity Valuations
10 NEDs, CEO and Disclosed Executives
Transactions
10.1 Loan Transactions
10.2 Other Transactions

40
40
42
44
46
46
48
50
50
52
54
55
55
56

Introduction from the Chair of the Human Resources Committee
Dear Shareholder,I am pleased to present our Remuneration Report for the year ending 30 September 2014.
Our remuneration framework is designed to create value for all stakeholders, to differentiate rewards based on performance and in line with
our risk management framework; and to provide competitive rewards to attract, motivate and retain the right people.
2014 was another year of record profits for ANZ and the ANZ Board has assessed the 2014 performance for each category within the balanced
scorecard of measures against annual objectives and progress towards broader long term strategic goals.
Fixed remuneration remained flat for the Chief Executive Officer (CEO) and most Disclosed Executives.
The strong results achieved have been reflected in the short term incentive outcomes received by the CEO and Disclosed Executives.
The long term incentives awarded in 2010 were tested in late 2013. Although ANZ achieved Total Shareholder Return (TSR) of 55.9% and 58.6%
over the three year performance periods for the Disclosed Executives and CEO awards respectively, ANZ’s TSR did not reach the median of thecomparator group. Accordingly, the performance rights did not vest and the CEO and Disclosed Executives received no value from these awards.
These awards have now lapsed. This demonstrates the variable nature of long term incentives.
Non-Executive Director (NED) fees were adjusted very slightly, and the base fee structure was modified from 1 October 2013 to be inclusiveof superannuation contributions.
The Human Resources Committee continues to have a strong focus on the relationship between business performance, risk management andremuneration and regularly reviews the executive remuneration structure to ensure it remains appropriate. No changes were made to the
executive remuneration structure in 2014.
Further detail is provided within the Remuneration Report which we hope you will find informative.

Graeme Liebelt
Chair – Human Resources Committee

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ANZ ANNUAL REPORT 2014

1. Basis of Preparation
The Remuneration Report is designed to provide shareholders with an understanding of ANZ’s remuneration policies and the link between our
remuneration approach and ANZ’s performance, in particular regarding Key Management Personnel (KMP) as defined under the Corporations
Act 2001. Individual outcomes are provided for ANZ’s NEDs, the CEO and Disclosed Executives (current and former).
The Disclosed Executives are defined as those direct reports to the CEO with responsibility for the strategic direction and management of amajor revenue generating Division or who control material revenue and expenses that fall within the definition of KMP.
The Remuneration Report for the Company and the Group for 2014 has been prepared in accordance with section 300A of the Corporations
Act 2001. Information in Table 4: Non Statutory Remuneration Disclosure has been prepared in accordance with the presentation basis set out
in Section 8.4. The information provided in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act
2001, unless indicated otherwise, and forms part of the Directors’ Report.

2. Key Management Personnel (KMP)The KMP disclosed in this year’s report are detailed in Table 1. The movements which occurred during 2014 are summarised as follows:
NEDs
Over the 2014 financial year Mr John Morschel, Mr Gregory Clark, Mr Peter Hay, Mr David Meiklejohn and Ms Alison Watkins retired from the
ANZ Board, and Mr David Gonski, Ms Ilana Atlas and Mr John (JT) Macfarlane joined the ANZ Board.
DISCLOSED EXECUTIVES
Effective the 2014 financial year, the Chief Operating Officer role held by Mr Alistair Currie met the definition of a Disclosed Executive.
His remuneration has been disclosed for the full year.
TABLE 1: KEY MANAGEMENT PERSONNEL
Name

Term as KMP
in 2014

Position

Non-Executive Directors (NEDs)
D Gonski
Chairman – Appointed Chairman 1 May 2014 (Appointed Director 27 February 2014)

Part YearI AtlasDirector – Appointed 24 September 2014

Part YearP Dwyer

Director – Appointed 1 April 2012

Full Year

H Lee

Director – Appointed February 2009

Full Year

G Liebelt

Director – Appointed 1 July 2013

Full YearI Macfarlane

Director – Appointed February 2007

Full Year

J T Macfarlane

Director – Appointed 22 May 2014

Part Year

Non-Executive Directors (NEDs) – Former
J MorschelChairman – Appointed Chairman March 2010 (Appointed Director October 2004), retired 30 April 2014

Part Year

G Clark

Director – Appointed February 2004, retired 18 December 2013

Part Year

P Hay

Director – Appointed November 2008, retired 30 April 2014

Part Year

D Meiklejohn

Director – Appointed October 2004, retired 18 December 2013

Part Year

A Watkins

Director – Appointed November 2008, retired 30 April 2014

Part Year

Chief Executive Officer (CEO)M SmithChief Executive Officer
Disclosed Executives – Current
P Chronican
Chief Executive Officer, Australia

Full Year

A Currie

Chief Operating Officer – Disclosed from 1 October 2013

Full YearS Elliott

Chief Financial Officer

Full YearA Géczy

Chief Executive Officer, International & Institutional Banking – Appointed 16 September 2013

Full Year

D HiscoChief Executive Officer, New Zealand

Full YearG Hodges

Deputy Chief Executive Officer

Full YearJ Phillips

Chief Executive Officer, Global Wealth and Group Managing Director, Marketing, Innovation and Digital

Full Year

N Williams

Chief Risk Officer

Full Year

Full Year

Disclosed Executives – Former
Former Chief Executive Officer, International & Institutional Banking – Concluded in role 30 April 2013,
A Thursby
ceased employment 30 June 2013

DIRECTORS’ REPORT--

29

DIRECTORS’ REPORT (continued)

3. Role of the Board in Remuneration
The Human Resources (HR) Committee is a Committee of the Board. The HR Committee is responsible for:}} reviewing and making recommendations to the Board in relation to remuneration governance, director and senior executive remunerationand senior executive succession;}} specifically making recommendations to the Board on remuneration and succession matters related to the CEO, and individual remuneration
arrangements for other key executives covered by the Group’s Remuneration Policy;}} the design of significant incentive plans (such as the ANZ Employee Reward Scheme and the Institutional Total Incentives PerformancePlan); and}} remuneration structures for senior executives and others specifically covered by the Remuneration Policy.
More details about the role of the HR Committee can be found on the ANZ website.1
The link between remuneration and risk is considered a key requirement by the Board. Committee membership is structured to ensure overlapof representation across the HR Committee and Risk Committee, with three Non-Executive Directors currently on both committees. The HR
Committee has free and unfettered access to risk and financial control personnel, and can also engage independent external advisors as needed.
Throughout the year the HR Committee and management received information from external providers (Aon Hewitt, EY, Hay Group, Herbert
Smith Freehills, Mercer Consulting (Australia) Pty Ltd and PricewaterhouseCoopers). This information related to remuneration market data
and analysis, market practice on the structure and design of incentive programs (both short and long term), legislative requirements andinterpretation of governance and regulatory requirements both in Australia and globally.
The HR Committee did not receive any recommendations from remuneration consultants during the year in relation to the remuneration
arrangements of KMP. ANZ employs in-house remuneration professionals who provide recommendations to the HR Committee/Board, taking
into consideration market information provided by external providers. The Board’s decisions were made independently using the information
provided and having careful regard to ANZ’s strategic objectives and Remuneration Policy and principles.

4. HR Committee Activities
During 2014, the HR Committee met on five occasions, with remuneration matters a standing agenda item on each occasion. The HR Committee
has a strong focus on the relationship between business performance, risk management and remuneration, with the following activities
occurring during the year:}} annual review of the effectiveness of the Remuneration Policy;}} review of key senior executive appointments and terminations;}} involvement of the Risk function in remuneration regulatory and compliance related activities;}} monitoring of regulatory and compliance matters relating to remuneration governance;}} review of Short Term Incentive (STI) and Long Term Incentive (LTI) arrangements;}} review of reward outcomes (fixed, STI and LTI) for key senior executives;}} review of ANZ’s progress in building a culture aligned to its super regional aspirations and employee engagement;}} review of health and safety;}} review of diversity and inclusion; and}} review of succession plans for key senior executives.
1 Go to anz.com > about us > our company > corporate governance > HR Committee Charter.

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ANZ ANNUAL REPORT 2014

5. Remuneration Strategy and Objectives
ANZ’s remuneration strategy, the Group’s Remuneration Policy and our reward frameworks all reflect the importance of sound risk management.
The following principles underpin ANZ’s Remuneration Policy, which is approved by the Board and applied globally across ANZ:}} creating and enhancing value for all ANZ stakeholders;}} emphasising the ‘at risk’ components of total rewards to increase alignment with shareholders and encourage behaviour that supports boththe long term financial soundness and the risk management framework of ANZ, and to deliver superior long term total shareholder returns;}} differentiating rewards in line with ANZ’s culture of rewarding for outperformance and demonstration of values led behaviours; and}} providing a competitive reward proposition to attract, motivate and retain the highest quality individuals in order to deliver ANZ’s businessand growth strategies.
Appropriate risk management is fundamental to the way ANZ operates and is therefore a key element of the way performance is measured andassessed at a Group, Division and individual level. Variable reward outcomes reflect performance against a balanced scorecard of measures, bothfinancial and non financial (including risk).
The core elements of ANZ’s remuneration strategy for the CEO and Disclosed Executives are set out below:
FIGURE 1: REMUNERATION OBJECTIVES

Shareholder
value creation

Emphasis on ‘at risk’components

Reward differentiation todrive outperformance andvalues led behaviours

Attract, motivate
and retain talent

Total target remuneration set byreference to geographic market

Fixed

At RiskFixed remuneration

Short Term Incentive (STI)Long Term Incentive (LTI)

Fixed remuneration is set based on
financial services market relativities reflecting
responsibilities, performance, qualifications,experience and location.

STI targets are linked to the performancetargets of the Group, Division and individual
using a balanced scorecard approach,which considers short term performanceand contribution towards longer term
objectives, and also the demonstrationof values led behaviours.

LTI targets are linked to relative
Total Shareholder Return (TSR)
over the longer term.

Delivered as:

Cash

Part cash and part equity,with the equity deferredfor 1 and 2 years.

Equity deferred for 3 years.

Deferred equity remains
at risk until vesting.

This is tested onceat vesting date.

Deferred equity remains
at risk until vesting.

DIRECTORS’ REPORT

31

DIRECTORS’ REPORT (continued)

6. The Composition of Remuneration at ANZ
The Board aims to find a balance between:}} fixed and at-risk remuneration;}} short term and long term incentives; and}} amounts paid in cash and deferred equity.
Figure 2 provides an overview of the target remuneration mix for the CEO and Disclosed Executives.
FIGURE 2: ANNUAL TOTAL REWARD MIX PERCENTAGE (% BASED ON ‘AT TARGET’ LEVELS OF PERFORMANCE)
Target Reward Mix

At risk
67%

LTI
33%

Deferred
Equity50%

STI deferred
16.5%

At risk63%

Fixed
remuneration
33%

Fixed
33%
CEO

LTI
19%
STI deferred
21%
STI cash23%

STI cash
16.5%

Cash
50%

Deferred
Equity
40%

Cash
60%
Fixed
37%

Fixed
remuneration
37%

Disclosed Executives

The CEO’s target remuneration mix is equally weighted between fixed remuneration, STI and LTI, with approximately half of total target
remuneration payable in cash in the current year and half allocated as equity and deferred over one, two or three years. The deferredremuneration remains at risk until vesting date.
The target remuneration mix for Disclosed Executives is weighted between fixed remuneration (37%), STI (44%) and LTI (19%), withapproximately 60% of total target remuneration payable in cash in the current year and 40% allocated as equity and deferred over one, two or
three years. The deferred remuneration remains at risk until vesting date. The Board has adopted this mix as an effective reward mechanism todrive strong performance and value for the shareholder in both the short and longer term. In line with that, the STI balanced scorecard contains
a combination of short and long term objectives. See Section 7.2, STI – Performance and Outcomes.
ANZ’s STI and LTI deferral arrangements are designed to ensure that the CEO and Disclosed Executives are acting in the best long term interestsof ANZ and its shareholders. Deferring part of their STI and all of their LTI over one to three years every year results in a substantial amount of
their variable remuneration being directly linked to long term shareholder value. For example as at 30 September 2014 the CEO held 97,751
unvested STI deferred shares and 856,320 unvested LTI performance rights, the combined value1 of which was around nine times his fixed
remuneration. Similarly as at 30 September 2014 Disclosed Executives held unvested equity, the value1 of which was around five times theiraverage fixed remuneration. All deferred remuneration is subject to ANZ’s clawback provisions.
1 Value is based on the number of unvested deferred shares and unvested rights held at 30 September 2014 multiplied by the ANZ closing share price as at 30 September 2014.

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ANZ ANNUAL REPORT 2014

The following diagram demonstrates the time horizon associated with STI and LTI awards.
FIGURE 3 : STI AND LTI TIME HORIZON
1 Oct 2013

30 Sep 2014

Nov 2014

Dec 2014

Nov 2015

Nov 2016

50% ofdeferred STI
vests (subject
to Board
discretion)

50% ofdeferred STI
vests (subject
to Board
discretion)

Nov/Dec 2017

AnnualPerformanceandRemuneration
Review

STI
Performance andMeasurement Period

LTI

Oct 2014

STI outcomes
determined andapproved by
the Board

Deferred STI
allocated as
equityCash STI paid

LTI outcomes
determined andapproved by
the Board

Deferred LTI
allocated
as equity(performancerights) toDisclosed
Executives1

CEO grant of
LTI (subject toshareholder
approval)

1 Year

3 Years

1 YearLTI vests(subject toBoard discretionand meeting
performance
hurdles)

1 CRO allocated deferred share rights.

The reward structure for the CEO and Disclosed Executives is detailed below. The only exception is the Chief Risk Officer (CRO) whose
remuneration arrangements have been structured differently to preserve the independence of this role and to minimise any conflicts of interestin carrying out the risk control function across the organisation. The CRO’s role has more limited STI leverage for individual performance andnone (either positive or negative) for Group performance. LTI is delivered as unhurdled deferred share rights, with a three year time based
hurdle, and is therefore not subject to meeting relative TSR performance hurdles, however is still subject to clawback.
6.1 FIXED REMUNERATION
The fixed remuneration amount is expressed as a total dollar amount which can be taken as cash salary, superannuation contributions andother nominated benefits.
ANZ positions fixed remuneration for the CEO and Disclosed Executives against the relevant financial services market (referencing both
domestic and international financial services companies) and takes into consideration role responsibilities, performance, qualifications,experience and location. The financial services market is considered the most relevant comparator as this is the main pool for sourcing talent
and where key talent may be lost.
6.2 VARIABLE REMUNERATION
Variable remuneration forms a significant part of the CEO’s and Disclosed Executives’ potential remuneration, providing at risk components thatare designed to drive performance in the short, medium and long term. The term ‘variable remuneration’ within ANZ covers both the STI and
LTI arrangements.

DIRECTORS’ REPORT

33

DIRECTORS’ REPORT (continued)

6.2.1 Short Term Incentives (STI)The STI provides an annual opportunity for an incentive award. It is assessed against Group, Divisional and individual objectives based on abalanced scorecard of measures and positive demonstration of values led behaviours. Many of the measures relate to contribution towards
medium to longer term performance outcomes aligned to ANZ’s strategic objectives as well as annual goals.
STI ARRANGEMENTS
PurposeThe STI arrangements support ANZ’s strategic objectives by providing rewards that are significantly differentiated on thebasis of achievement against annual performance targets coupled with demonstration of values led behaviours.
ANZ’s Employee Reward Scheme (ANZERS) structure and pool is reviewed by the HR Committee and approved by the
Board. The size of the overall pool is based on an assessment of the balanced scorecard of measures of the Group. This poolis then distributed based on relative performance against a balanced scorecard of quantitative and qualitative measures.

Performance targets

In order to focus on achieving individual, Divisional and Group performance objectives a mix of quantitative andqualitative short, medium and long term measures are assessed. Further detail is provided in Section 7.2, STI –Performance and Outcomes.
Targets are set considering prior year performance, industry standards and ANZ’s strategic objectives. Many of themeasures also focus on targets which are set for the current year in the context of progress towards longer term
goals. The specific targets and features relating to all these measures have not been provided in detail due to theircommercial sensitivity.
For the CEO and Disclosed Executives, the weighting of measures in each individual’s balanced scorecard will vary
to reflect the responsibilities of their role. For example the CEOs of the Australia, New Zealand, Global Wealth andInternational and Institutional Banking divisions and also the Chief Financial Officer (CFO) have a heavier weighting
on financial measures (ranging from 30% to 45%).
The validation of performance and achievements against these objectives at the end of the year, for:}} the CEO involves input from the CRO and CFO on risk management and financial performance respectively,
followed by review and endorsement by the HR Committee, with final outcomes approved by the Board; and}} Disclosed Executives involves a review by the CEO, input on each individual’s risk management from the CRO, input
on each areas’ internal controls from the Group General Manager Global Internal Audit and input on the financial
performance of all key Divisions from the CFO. Preliminary and final review is completed by the HR Committee andfinal outcomes are approved by the Board.
The Board reviews performance outcomes against target for each metric, combined with a judgmental assessmentof the prioritisation and impact of each outcome relative to overall business performance for both the short andlonger term.
This method of assessment to measure performance has been adopted to ensure validation from a risk management
and financial performance perspective.

Rewarding performance The 2014 target STI award level for the CEO represents one third of total target remuneration and for Disclosed
Executives 44% of their total target remuneration. The maximum STI opportunity for the CEO and Disclosed
Executives is up to 200% of the target whereas any weak performer would receive a significantly reduced or no
incentive payment at all.
Mandatory deferral

Mandatory deferral of a portion of the STI places an increased emphasis on having a variable structure that is flexible,
continues to be performance linked, has significant retention elements and aligns the interests of the CEO and
Disclosed Executives to shareholders to deliver against strategic objectives.
The mandatory deferral threshold for STI payments is currently $100,000 (subject to a minimum deferral amountof $25,000) with:}} the first $100,000 of STI paid in cash;}} 50% of STI above $100,000 paid in cash;}} 25% of STI above $100,000 deferred in ANZ equity for one year; and}} 25% of STI above $100,000 deferred in ANZ equity for two years.
The deferred component of bonuses paid in relation to the 2014 year is delivered as ANZ deferred shares or deferredshare rights. Where deferred share rights are granted, for grants made after 1 November 2012, any portion of theaward which vests may be satisfied by a cash equivalent payment rather than shares at the Board’s discretion. At theend of the deferral period, each deferred share right entitles the holder to one ordinary share. Deferred shares are
ordinary shares.
The deferred amounts remain at risk and are subject to clawback until the vesting date.

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ANZ ANNUAL REPORT 2014

6.2.2 Long Term Incentives (LTI)
The LTI provides an annual opportunity for an equity award deferred for three years that aligns a significant portion of overall remuneration toshareholder value over the longer term.
LTI awards remain at risk and subject to clawback until vesting and must meet or exceed a relative TSR performance hurdle.
The HR Committee will determine the appropriate quantum of awards to be allocated by reference to the performance achieved in the financial
year to which the awards relate. A grant is then made after the end of the year to which it relates.
Awards granted in November/December 2013 are subject to TSR performance conditions relative to two comparator groups and are described below.
LTI ARRANGEMENTS (granted after 1 October 2013) – EXCLUDING THE CRO
Type of equity
awardedLTI is delivered to the CEO and Disclosed Executives as performance rights. A performance right is a right to acquire ashare at nil cost, subject to meeting time and performance hurdles. Upon exercise, each performance right entitles the
CEO and Disclosed Executives to one ordinary share.
For grants made after 1 November 2012, any portion of the award which vests may be satisfied by a cash equivalent
payment rather than shares at the Board’s discretion.

Time restrictions

Performance rights awarded to the CEO and Disclosed Executives will be tested against the relevant performance hurdle
at the end of the three year performance period. A three year performance period provides a reasonable period to alignreward with shareholder return and also acts as a vehicle to retain the CEO and Disclosed Executives. If the performancerights do not achieve the required performance hurdle they are forfeited at that time.

Performance hurdle The performance rights are designed to reward the CEO and Disclosed Executives if the Group’s TSR is at or above themedian TSR of the relevant comparator group over a three year period. TSR represents the change in the value of a shareplus the value of reinvested dividends paid. TSR was chosen as the most appropriate comparative measure as it focuses on
the delivery of shareholder value and is a well understood and tested mechanism to measure performance.
The performance rights granted to the Disclosed Executives and CEO in November/December 2013 were split into two
equal tranches with vesting dependent upon the Company’s relative TSR performance against two different comparatorgroups (as detailed below).
Note that grants prior to 1 October 2013 are subject to one performance hurdle only (TSR against the select financial
services comparator group).
Vesting schedule

The proportion of performance rights that become exercisable in each tranche will depend upon the TSR achieved by
ANZ relative to the companies in the relevant comparator group at the end of the three year performance period.
An averaging calculation is used for TSR over a 90 day period for start and end values in order to reduce the impact ofshare price volatility. To ensure an independent TSR measurement, ANZ engages the services of an external organisation(Mercer Consulting (Australia) Pty Ltd) to calculate ANZ’s performance against the TSR hurdles. The level of performancerequired for each level of vesting, and the percentage of vesting associated with each level of performance, are set out
below. The performance rights lapse if the performance condition is not met. There is no re-testing.
If the TSR of the Company compared to the
TSR of the relevant comparator group:

The percentage of performance rights which will vest is:

Does not reach the 50th percentile0%

Reaches or exceeds the 50th percentile but does
not reach the 75th percentile

50%, plus 2% for every one percentile increase above the50th percentile

Reaches or exceeds the 75th percentile

100%

Comparator groups One tranche will be measured against a select financial services comparator group, which currently consists of thefollowing nine companies:}} National Australia Bank Limited}} AMP Limited}} QBE Insurance Group Limited}} ASX Limited}} Suncorp Group Limited}} Commonwealth Bank of Australia Limited}} Westpac Banking Corporation}} Insurance Australia Group Limited}} Macquarie Group Limited
The second tranche will be measured against a comparator group comprising the companies within the S&P/ASX 50 Index
as at 22 November 2013 (the start of the performance period).
Each tranche will be measured independently from the other so one tranche may vest fully or partially but anothertranche may not.
Size of LTI grants

The size of individual LTI grants is determined by reference to the performance and assessed potential of the individual.
Individuals are advised of their LTI award value, which is then split into two equal tranches and each tranche is compared
to a different comparator group as explained above. The total number of performance rights in each tranche is based on
the allocation value (fair value) of a performance right in that tranche as independently valued.
The future value of the grant may range from zero to an undefined amount depending on performance against the hurdle
and the share price at the time of exercise.
Refer to Section 9.3, Equity Valuations for further details on the valuation inputs and grant values.
DIRECTORS’ REPORT

35

DIRECTORS’ REPORT (continued)

LTI ARRANGEMENTS FOR THE CRO
Deferred share rights

The CRO is the only Disclosed Executive to receive LTI deferred share rights, rather than performance rights.
Deferred share rights are subject to a time-based vesting hurdle of three years, during which time they are held in
trust. The value used to determine the number of LTI deferred share rights to be allocated is based on an independentvaluation, as detailed in Section 9.3, Equity Valuations.
For grants made after 1 November 2012, any portion of the award which vests may be satisfied by a cash equivalent
payment rather than shares at the Board’s discretion.

6.3 OTHER REMUNERATION ELEMENTS
Clawback
The Board has on-going and absolute discretion to adjust performance-based components of remuneration (including previously deferred
equity or cash) downwards, or to zero, at any time, including after the grant of such remuneration, where the Board considers such an
adjustment is necessary to protect the financial soundness of ANZ or to meet unexpected or unknown regulatory requirements, or if the Board
subsequently considers that having regard to information which has come to light after the grant of deferred equity/cash, the deferred equity/
cash was not justified.
Prior to any scheduled release of deferred equity/cash, the Board considers whether any downward adjustment should be made. No clawback
was applied to the remuneration of the CEO and Disclosed Executives during 2014.
Hedging and Margin Lending Prohibition
As specified in the Trading in ANZ Securities Policy and in accordance with the Corporations Act 2001, equity allocated under ANZ incentive
schemes must remain at risk until fully vested (in the case of deferred shares) or exercisable (in the case of deferred share rights or performancerights). As such, it is a condition of grant that no schemes are entered into, by an individual or their associated persons, that specifically protects
the unvested value of shares, deferred share rights or performance rights allocated. Doing so would constitute a breach of the grant conditions
and would result in the forfeiture of the relevant shares, deferred share rights or performance rights.
ANZ also prohibits the CEO and Disclosed Executives from providing ANZ securities in connection with a margin loan or similar financing
arrangements which may be subject to a margin call or loan to value ratio breach.
To monitor adherence to this policy, ANZ’s CEO and Disclosed Executives are required to sign an annual declaration stating that they and theirassociated persons have not entered into (and are not currently involved in) any schemes to protect the value of their interests in any ANZ
securities. Based on the 2014 declarations, ANZ can advise that the CEO and Disclosed Executives are fully compliant with this policy.
CEO and Disclosed Executives Shareholding Guidelines
The CEO and Disclosed Executives are expected to accumulate ANZ shares over a five year period, to the value of 200% of their fixed
remuneration and to maintain this shareholding while an executive of ANZ. Shareholdings for this purpose include all vested and allocated(but unvested) equity which is not subject to performance hurdles. Based on equity holdings as at 30 September 2014 and the equity to be
granted on 21 November 2014 as a result of 2014 Performance and Remuneration Review outcomes, the CEO and all Disclosed Executives meetor, if less than five years tenure, are on track to meet their minimum shareholding guidelines requirement.
Cessation of Employment Provisions
The provisions that apply for STI and LTI awards in the case of cessation of employment are detailed in Sections 8.2, Chief Executive Officer (CEO)and 8.3, Disclosed Executives.
Conditions of Grant
The conditions under which STI (deferred shares and deferred share rights) and LTI (performance rights and deferred share rights) are granted
are approved by the Board in accordance with the rules of the ANZ Employee Share Acquisition Plan and/or the ANZ Share Option Plan.

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ANZ ANNUAL REPORT 2014

7. Linking Remuneration to Balanced Scorecard Performance
7.1 ANZ PERFORMANCETABLE 2: ANZ’S FINANCIAL PERFORMANCE 2010 – 2014
2010

2011

2012

2013

2014

Cash/Underlying profit2 (unaudited)

4,501
5,025

5,355
5,652

5,661
5,830

6,310
6,492

7,271
7,117

Statutory profit ($m)1
Cash/Underlying return on equity (ROE) (%) (unaudited)

15.5%

16.2%

15.1%

15.3%

15.4%

Cash/Underlying earnings per share (EPS) (unaudited)

198.7

218.4

218.5

238.3

260.3

Share price at 30 September ($)3

23.68

19.52

24.75

30.78

30.92

Total dividend (cents per share)

126

140

145

164

178

1.9
137%

(12.6)
110%

35.4
117%

31.5
133%

5.9
133%

Total shareholder return (12 month %)Average STI as a % of target4

1 As set out in the Annual Financial Statements, the Group adopted certain new Accounting Standards and in line with the transitional requirements of the Standards the 2013 results havebeen restated.
2 From 1 October 2012, the Group has used cash profit as a measure of performance for ongoing business activities of the Group, enabling shareholders to assess Group and divisional performanceagainst prior periods and against peer institutions. For 2012 to 2014 statutory profit has been adjusted for non-core items to arrive at cash profit. For 2010 and 2011 statutory profit has beenadjusted for non-core items to arrive at underlying profit, which like cash profit is a measure of the ongoing business performance of the Group but used different criteria for adjusting items.
Neither cash profit nor underlying profit are audited; however, the external auditor has informed the Audit Committee that the cash/underlying profit adjustments have been determined on aconsistent basis across the respective periods presented.
3 The opening share price at 1 October 2009 was $24.30.
4 The average STI payments for each year are based on those executives (including the CEO) disclosed in each relevant reporting period.

Figure 4 compares ANZ’s TSR performance against the median TSR and upper quartile TSR of the LTI select financial services (SFS) comparatorgroup and also against the S&P/ASX 50 Index over the 2010 to 2014 measurement period. ANZ’s TSR performance has exceeded the upper
quartile TSR of the LTI SFS comparator group and the ASX 50 index over the five year period to 30 September 2014. Note that this is notconsistent with the outcomes of the most recently tested LTI grants due to the differences in performance period.
FIGURE 4: ANZ 5-YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN PERFORMANCE
250.0%

230.0%

210.0%

190.0%ANZ TSR
Upper Quartile TSR SFSMedian TSR SFS
S&P/ASX 50

150.0%

130.0%

110.0%

90.0%

70.0%

Sep 14

Mar 14

Sep 13

Mar 13

Sep 12

Mar 12

Sep 11

Mar 11

Sep 10Mar 10

50.0%
Sep 09Percentage

170.0%

Performance period

DIRECTORS’ REPORT

37

DIRECTORS’ REPORT (continued)

7.2 STI – PERFORMANCE AND OUTCOMES
ANZ uses a balanced scorecard to measure performance in relation to the Group’s main incentive programs. The scorecard provides a framework
whereby a combination of measures can be applied to ensure a broader long term strategic focus on driving shareholder value as well as a focus
on annual priorities.
The HR Committee considers a balanced scorecard that is aligned to the Group’s long term strategic intent under the themes of High
Performing, Most Respected, Well Managed, Best Connected and Customer Driven, with each of the five categories having broadly equal
weighting. The Committee also takes into account affordability in light of Group performance in approving the pool spend.
The Board has assessed ANZ’s overall 2014 performance as above, on or below target for each category within the balanced scorecard ofmeasures. The Board has given full consideration to the performance of the Group and the Disclosed Executives in determining their rewards.
Overall spend approved by the Board for the main short term incentive pool was below target levels with a range of underlying outcomes forindividuals, in line with ANZ’s objectives of differentiating reward based on performance.
The following provides examples of some of the key measures within each category of the balanced scorecard used in 2014 for assessing
performance for the purpose of determining short term incentive pools.
Category

MeasureHigh Performing

OutcomeOn Target:

Cash profit

A record cash profit after tax of $7,117 million up 9.6% on 2013.

Economic profit1

Economic profit of $2,750 million, 1.1% up year on year.

Return on equity (ROE)

Cash ROE of 15.4%, up 10 basis points (bps) on the prior year as a result of growth in profits(+9.6%) from improved productivity and improved credit environment exceeding the increase incapital (+9.1%). The increase in accounting capital is attributable to foreign exchange impacts on
offshore capital, normal business growth, as well as more conservative regulatory requirements
requiring higher capital levels.

Cash earnings per share Cash EPS of 260.3 cents has improved 9.2% from 2013.
(EPS)
Most Respected

On Target:
Senior leaders asrole models

The overall assessment of Senior Leaders as role models of our values has remained steadyat 71% year on year.

Employee engagement An engaged workforce is regarded as an important driver of sustainable long term performance.
Despite continuing challenging business conditions and significant bank-wide changes over theyear, employee engagement has improved to 73% in 2014 compared to 72% in 2013.
Workforce diversity

38

Workforce diversity is core to delivering on our super regional strategy. The percentage ofmanagement roles filled by women has increased from 38.7% to 39.2% year on year. ANZ iscontinually focused on increasing the diversity of its workforce.

ANZ ANNUAL REPORT 2014

Category

MeasureWell Managed

OutcomeOn Target:

Maintain strong
credit rating

The maintenance of a strong credit rating at AA is fundamental to the ongoing stabilityof the Group.

Core funding ratio (CFR) CFR of 94.7%, up ~150 bps year on year.
Cost to income ratio

Significant productivity improvement in 2014 with the cost to income ratio reducing 80 bps(excluding New Zealand Simplification costs in 2013 and impact of Trustees and SSI sale in 2014)
on the back of tight cost management.

Number of outstanding ANZ Global Internal Audit conducts an ongoing and rigorous review process to identify
internal audit items
weaknesses in procedures and compliance with policies. In 2014 there was an historically low
number of outstanding items.
Best Connected

Slightly Below Target:
Growth in Asia Pacific,
Europe and America(APEA)

Customer Driven

ANZ aspires to be the most respected bank in the Asia Pacific region by using super regional
connectivity to better meet the needs of customers which are increasingly linked to regional
capital, trade and wealth flows. One important measure of the success of the super regional
strategy is the growth in total Network revenues (revenue arising from having a meaningfulbusiness in APEA regardless of whether the revenue is subsequently booked within the region
or in Australia or New Zealand). APEA Network revenue accounts for 23.7% of Group revenue in2014, up 1.7% year on year. APEA Cash NPAT grew 19.9% year on year. While Cash NPAT growthfrom Asia has exceeded target, Cash NPAT growth from other regions within APEA were below
target due to subdued economic conditions and the impact of regulatory changes.
Above Target:

Customer satisfaction(based on externalsurvey outcomes)

ANZ tracks customer satisfaction across its businesses as part of a group of indicators of longer
term performance trends. ANZ aims to achieve top quartile customer satisfaction scores in eachbusiness based on external surveys.
In 2014, customer satisfaction in Australia Retail has improved on prior year and Corporate andCommercial segment maintained a stable customer satisfaction score.
Customer satisfaction in New Zealand has improved across Personal, Small Business and Rural
customer segments.
International and Institutional Banking has achieved #1 ranking in terms of customer satisfaction(Peter Lee Surveys) in Australia and New Zealand.

1 Economic profit is an unaudited risk adjusted profit measure determined by adjusting cash profit for economic credit costs, the benefit of imputation credits and the cost of capital.

DIRECTORS’ REPORT

39

DIRECTORS’ REPORT (continued)

8. 2014 Remuneration
8.1 NON-EXECUTIVE DIRECTORS (NEDS)
Principles underpinning the remuneration policy for NEDs.
Principle

Comment

Aggregate Board and Committee fees arewithin the maximum annual aggregate
limit approved by shareholders

The current aggregate fee pool for NEDs of $4 million was approved by shareholders at the 2012
Annual General Meeting. The annual total of NEDs’ fees, including superannuation contributions,is within this agreed limit. Retirement benefits accrued as at September 2005 are not included
within this limit.

Fees are set by reference to key
considerations

Board and Committee fees are set by reference to a number of relevant considerations including:}} general industry practice and best principles of corporate governance;}} the responsibilities and risks attached to the role of NEDs;}} the time commitment expected of NEDs on Group and Company matters; and}} fees paid to NEDs of comparable companies.
ANZ compares NED fees to a comparator group of Australian listed companies with a similar
size market capitalisation, with particular focus on the major financial services institutions.
This is considered an appropriate group, given similarity in size, nature of work and timecommitment required by NEDs.

The remuneration structure preserves
independence whilst aligning interests of
NEDs and shareholders

So that independence and impartiality is maintained, fees are not linked to the performanceof the Company and NEDs are not eligible to participate in any of the Group’s incentive
arrangements.

Components of NED Remuneration
NEDs receive a base fee for being a Director of the Board, and additional fees for either chairing or being a member of a Board Committee.
The Chairman of the Board does not receive additional fees for service on a Board Committee.
NEDs also receive superannuation contributions in accordance with the current Superannuation Guarantee legislation (up to the Government’sprescribed maximum contributions limit) which satisfies the Company’s statutory superannuation contributions.
From 1 October 2013 the Chairman and NED base fee structure are inclusive of superannuation contributions. This is to enable effective
management of NED fee costs.
Based on an independent assessment of market practice the Board elected to increase the ANZ Chairman fee and NED base fee slightly as
shown below. The Risk Committee Chair fee was also increased from $57,000 to $60,000. All other Committee Chair and Committee Member
fees remained unchanged from 2013. For details of remuneration paid to NEDs for the years 2013 and 2014, refer to Table 3: NED Remunerationfor 2014 and 2013.
Elements

DetailsYear

Fee

Board Chairman Fee

2014
2013

$802,000$792,775(including superannuation)(including superannuation)

Board NED Base Fee

2014
2013

$230,000$227,775(including superannuation)(including superannuation)

Committee Fees

Year

Committee Chair

Audit
Governance
Human Resources
Risk
Technology

2014
2014
2014
2014
2014

$65,000$35,000$55,000$60,000$35,000

Board/Committee fees per annum

Post-employment Benefits

40

Committee Member$32,500$15,000$25,000$30,000$15,000

Superannuation contributions are included above.
The ANZ Directors’ Retirement Scheme was closed effective 30 September 2005. Accrued
entitlements relating to the ANZ Directors’ Retirement Scheme were fixed at 30 September 2005
and NEDs had the option to convert these entitlements into ANZ shares. Such entitlements, either
in ANZ shares or cash, have been transferred to the relevant NEDs on retirement from the ANZ
Board (including interest accrued at the 30 day bank bill rate for cash entitlements). There are no
outstanding entitlements under the ANZ Directors’ Retirement Scheme.

ANZ ANNUAL REPORT 2014

NED Shareholding Guidelines
The NED shareholding guidelines require NEDs to accumulate shares, over a five year period from appointment, to the value of 100%
(200% for the Chairman) of the NED base fee and to maintain this shareholding while a Director of ANZ. NEDs have agreed that where theirholding is below this guideline they will direct a minimum of 25% of their fees each year toward achieving this shareholding.
All NEDs have met or, if appointed within the last five years, are on track to meet their minimum shareholding guidelines requirement.
Refer to Section 9.2, NED, CEO and Disclosed Executives Shareholdings for details relating to the movement in NED shareholdings during
the reporting period.
NED Statutory Remuneration Disclosure
TABLE 3: NED REMUNERATION FOR 2014 AND 2013
Short-Term NED Benefits

Post-Employment

Financial
Year

Fees1
$

Non
monetary
benefits$

Superannuation
guarantee
contributions$

D Gonski4

2014

383,559–

11,837

I Atlas5

2014

3,995

–

380

4,375

P Dwyer2014
2013

320,524
297,500––

18,027
16,796

338,551
314,296

H Lee

2014
2013

296,973
280,000––

18,027
16,796315,000
296,796

G Liebelt6

2014
2013

300,764
70,000––18,027
4,444

318,791
74,444I Macfarlane

2014
2013

319,473314,500––

18,027
16,796

337,500
331,296

J Macfarlane7

2014

103,109–

7,557

110,6662014
2013

453,768
775,000

23,187
5,336

13,331
16,796490,286
797,132

G Clark9

2014
2013

64,402300,000

4,302
–

4,444
16,796

73,148316,796

P Hay102014
2013

176,692
302,500

3,065–

11,138
16,796

190,895
319,296

D Meiklejohn11

2014
2013

68,696
320,000

9,029
1,485

4,444
16,79682,169338,281

A Watkins12

2014
2013

182,446
312,500

3,815–

11,208
16,796

197,469
329,296

Total of all Non-Executive Directors

2014
2013

2,674,401
2,972,000

43,398
6,821

136,447
138,8122,854,246
3,117,633

Total
remuneration2,3$

Current Non-Executive Directors

Former Non-Executive Directors
J Morschel8

395,396

1 Fees are the sum of Board fees and Committee fees, as included in the Annual Report.
2 Long-term benefits and share-based payments are not applicable for the Non-Executive Directors. There were no termination benefits for the Non-Executive Directors in either 2013 or 2014.
3 Amounts disclosed for remuneration of Directors exclude insurance premiums paid by the Group in respect of Directors’ and officers’ liability insurance contracts. The total premium, which cannot
be disclosed because of confidentiality requirements, has not been allocated to the individuals covered by the insurance policy as, based on all available information, the Directors believe that noreasonable basis for such allocation exists.
4 D Gonski commenced as a Non-Executive Director on 27 February 2014 and as Chairman on 1 May 2014 so 2014 remuneration reflects amounts received for the partial service for the 2014 year.
5 I Atlas commenced as a Non-Executive Director on 24 September 2014 so 2014 remuneration reflects amounts received for the partial service for the 2014 year.
6 G Liebelt commenced as a Non-Executive Director on 1 July 2013 so 2013 remuneration reflects amounts received for the partial service for the 2013 year.
7 J Macfarlane commenced as a Non-Executive Director on 22 May 2014 so 2014 remuneration reflects amounts received for the partial service for the 2014 year.
8 J Morschel retired as Chairman on 30 April 2014 so 2014 remuneration reflects amounts received for the partial service for the 2014 year. Non monetary benefits relate to car parking and gifts on
retirement. $90,959 was paid to J Morschel on retirement in relation to his accrued entitlements under the closed ANZ Directors’ Retirement Scheme.
9 G Clark retired as a Non-Executive Director on 18 December 2013 so 2014 remuneration reflects amounts received for the partial service for the 2014 year. Non monetary benefits relate to gifts on
retirement. $123,990 was paid to G Clark on retirement in relation to his accrued entitlements under the closed ANZ Directors’ Retirement Scheme.
10 P Hay retired as a Non-Executive Director on 30 April 2014 so 2014 remuneration reflects amounts received for the partial service for the 2014 year. Non monetary benefits relate to gifts
on retirement.
11 D Meiklejohn retired as a Non-Executive Director on 18 December 2013 so 2014 remuneration reflects amounts received for the partial service for the 2014 year. Non monetary benefits relate to
office space, car parking and gifts on retirement. $96,545 was paid to D Meiklejohn on retirement in relation to his accrued entitlements under the closed ANZ Directors’ Retirement Scheme.
12 A Watkins retired as a Non-Executive Director on 30 April 2014 so 2014 remuneration reflects amounts received for the partial service for the 2014 year. Non monetary benefits relate to gifts
on retirement.

DIRECTORS’ REPORT

41

DIRECTORS’ REPORT (continued)

8.2 CHIEF EXECUTIVE OFFICER (CEO)Actual remuneration provided to the CEO in 2014 is detailed below, with remuneration tables provided in Section 8.4, Remuneration Tables –CEO and Disclosed Executives.
Fixed pay: The CEO’s fixed remuneration remained unchanged at $3.15 million for the year ending 30 September 2014 (with his only increasesince commencement being four years ago, effective 1 October 2010).
Short Term Incentive (STI): The CEO has a target STI opportunity of $3.15 million. The actual amount paid can increase or decrease from thisnumber dependent on his performance as CEO and the performance of the organisation as a whole. Specifically, if, in the Board’s view the CEO
has performed above/below his targets, the Board may exercise its discretion to increase/decrease the STI beyond his target payment.
The Board approved the CEO’s 2014 balanced scorecard annual objectives and his longer term strategic goals at the start of the year andthen assessed his performance against these at the end of the year. The CEO’s STI payment for 2014 was then determined having regard to
his delivery against these objectives including ANZ’s productivity performance and focus on capital efficiency, his demonstration of values
led behaviours, as well as progress achieved in relation to ANZ’s long term strategic goals. The STI payment for 2014 will be $4.0 million with
$2.05 million paid in cash and the balance ($1.95 million) awarded as deferred shares, half deferred for one year and half for two years.
Unvested deferred shares will be forfeited if the CEO resigns. Unvested deferred shares will be retained and released at the vesting date where
the CEO is terminated with notice or where cessation of employment is by mutual agreement, unless the Board determines otherwise.
Long Term Incentive (LTI): At the 2010 Annual General Meeting shareholders approved an LTI grant of performance rights to the CEO with
an award value of $3 million. The performance rights were tested on 17 December 2013 against the TSR performance hurdle relative to acomparator group of select financial services companies. Although ANZ achieved TSR growth of 58.6% over the three year performance period,
ANZ’s TSR did not reach the median of the comparator group. Accordingly, the performance rights did not vest. The performance rights lapsedin full at this time, and the CEO received no value. There is no retesting of this grant.
At the 2013 Annual General Meeting shareholders approved an LTI grant of performance rights to the CEO with an award value equivalent
to 100% of his 2013 fixed pay, being $3.15 million, divided into two equal tranches. The performance condition for each tranche is relative
TSR against a set comparator group, as outlined in Section 6.2.2, Long Term Incentives. Performance is assessed at the end of a three year
performance period commencing 22 November 2013 (with no retesting). The total number of performance rights granted was determined by
splitting the LTI grant value into two equal tranches of $1.575 million each and then dividing these amounts by the allocation value (fair value
at the date of allocation) of each tranche. The face value of the performance rights at the start of the performance period (based on the one
week Volume Weighted Average Price (VWAP) of the Company’s shares traded on the ASX in the week up to, and including, 22 November 2013,of $31.7451) was $6.4 million.
For 2014, it is proposed to grant a LTI with an award value of $3.4 million, subject to shareholder approval at the 2014 Annual General Meeting,reflecting the importance of focusing the CEO on the achievement of longer term strategic objectives and alignment with shareholders
interests. The LTI will be delivered as performance rights split into two equal tranches, each with a separate relative TSR performance hurdle,
as outlined in Section 6.2.2, Long Term Incentives, which is measured independently of the other. The TSR hurdles will be subject to testing after
three years, i.e. November 2017 (with no retesting).
The performance rights will be forfeited if the CEO resigns before they have vested and/or been exercised. The performance rights will be
retained and will vest and become exercisable, subject to the relevant time and performance conditions being satisfied, where the CEO isterminated with notice or where cessation of employment is by mutual agreement.
CEO Equity
Details of deferred shares and rights granted to the CEO during the 2014 year and in prior years which vested, were exercised/sold or which
lapsed/were forfeited during the 2014 year are set out in Section 9.1, CEO and Disclosed Executives Equity.
The movement during the reporting period in shareholdings and rights of the CEO (held directly, indirectly and by related parties) is provided in
Section 9.2, NED, CEO and Disclosed Executives Shareholdings.

42

ANZ ANNUAL REPORT 2014

CEO’s Contract Terms
The following sets out details of the contract terms relating to the CEO. The contract terms are in line with industry practice (based on external
advice on Australian and international peer company benchmarks) and ASX Corporate Governance Principles.
Length of contract

Mr Smith commenced as CEO and Executive Director of ANZ on 1 October 2007 and is on a permanent contract,which is an ongoing employment contract until notice is given by either party.

Notice periods

Mr Smith or ANZ may terminate the employment agreement by providing 12 months’ written notice.

Resignation

On resignation, all unvested STI deferred shares and all unexercised performance rights (or cash equivalent) will
be forfeited.

Termination on noticeby ANZANZ may terminate Mr Smith’s employment by providing 12 months’ written notice or payment in lieu of the notice
period based on fixed remuneration.
On termination on notice by ANZ all unvested STI deferred shares will be released at the original vesting date unlessthe Board determines otherwise; all performance rights (or cash equivalent) which have vested or vest during thenotice period will be retained and become exercisable; all performance rights (or cash equivalent) which have not yet
vested will be retained and will vest and become exercisable subject to the relevant time and performance hurdles
being satisfied.

Death or total andOn death or total and permanent disablement, all unvested STI deferred shares and all performance rights (or cash
permanent disablement equivalent) will vest.
Change of control

In the event of takeover, scheme of arrangement or other change of control event occurring, the performance
condition applying to the performance rights will be tested and the performance rights will vest based on the extent
the performance condition is satisfied. No pro-rata reduction in vesting will occur based on the period of time fromthe date of grant to the date of the change of control event occurring, and vesting will only be determined by theextent to which the performance condition is satisfied.
Any performance rights which vest based on satisfaction of the performance condition will vest at a time (being nolater than the final date on which the change of control event will occur) determined by the Board.
Any performance rights which do not vest will lapse with effect from the date of the change of control event
occurring, unless the Board determines otherwise.
Any unvested STI deferred shares will vest at a time (being no later than the final date on which the change of control
event will occur) determined by the Board.

Termination for serious
misconduct

ANZ may immediately terminate Mr Smith’s employment at any time in the case of serious misconduct, and Mr Smith
will only be entitled to payment of fixed remuneration up to the date of termination.
On termination without notice by ANZ in the event of serious misconduct all STI deferred shares remaining in trust
and performance rights (or cash equivalent) will be forfeited.

Statutory Entitlements

Payment of statutory entitlements of long service leave and annual leave applies in all events of separation.

DIRECTORS’ REPORT

43

DIRECTORS’ REPORT (continued)

8.3 DISCLOSED EXECUTIVES
Actual remuneration provided to the Disclosed Executives in 2014 is summarised below, with remuneration tables provided in Section 8.4,
Remuneration Tables – CEO and Disclosed Executives.
Fixed pay: The annual review of ANZ’s fixed remuneration levels for Disclosed Executives identified that most executives were competitively
positioned within the market and therefore adjustments were only made to three executives (Mr Hisco, Mr Hodges and Mr Williams).
Short Term Incentive (STI): All incentives actually paid in the 2014 financial year related to performance from the 2013 financial year, and all
deferred components are subject to the Board’s discretion to reduce or adjust to zero before vesting.
For the 2014 year, the Board took into consideration overall Company performance against the balanced scorecard of measures, along withindividual performance against set objectives. Overall, the total amount of STI payments to Disclosed Executives for the 2014 year (which
are paid in the 2015 financial year) has increased from 2013, reflecting the improvement in company performance, the continued focus on
productivity and capital efficiency, and progress towards the achievement of longer term targets, demonstrating the link between performanceand variable reward outcomes.
The range in payments to individuals was broad, ranging from on target to well above target.
Long Term Incentive (LTI): LTI performance rights granted to Disclosed Executives in November 2010 were tested in November 2013 against the
TSR performance hurdle relative to a comparator group of select financial services companies. Although ANZ achieved TSR growth of 55.9% over
the three year performance period, ANZ’s TSR did not reach the median of the comparator group. Accordingly, the performance rights did notvest. The performance rights lapsed in full at this time, and the Disclosed Executives received no value. There is no retesting of this grant.
LTI performance rights granted to Disclosed Executives during the 2014 financial year were allocated in November 2013 in two tranches.
Each tranche is subject to meeting the relative TSR performance hurdle of that tranche, measured over a three year performance period
commencing 22 November 2013.
For awards to be allocated in November 2014, the Board elected to grant LTI awards to Disclosed Executives around or above target, reflecting
the importance of focusing Disclosed Executives on the achievement of longer term strategic objectives and alignment with shareholders
interests, and recognising the capabilities of these individuals and the need to retain their expertise over the longer term.
Disclosed Executives Equity
Details of deferred shares and rights granted to the Disclosed Executives during the 2014 year and granted to the Disclosed Executives in prioryears which vested, were exercised/sold or which lapsed/were forfeited during the 2014 year are set out in Section 9.1, CEO and Disclosed
Executives Equity.
The movement in shareholdings and rights of the Disclosed Executives (held directly, indirectly and by related parties) during the reporting
period is provided in Section 9.2, NED, CEO and Disclosed Executives Shareholdings.

44

ANZ ANNUAL REPORT 2014

Disclosed Executives’ Contract Terms
The following sets out details of the contract terms relating to the Disclosed Executives. The contract terms for all Disclosed Executives are
similar, but do on occasion, vary to suit different needs.
Length of contract

Disclosed Executives are on a permanent contract, which is an ongoing employment contract until notice is given byeither party.

Notice periods

In order to terminate the employment arrangements, Disclosed Executives are required to provide the Company withsix months’ written notice. ANZ must provide Disclosed Executives with 12 months’ written notice.

Resignation

On resignation, unless the Board determines otherwise, all unvested deferred shares, all unvested or vested but
unexercised performance rights and all deferred share rights are forfeited.

Termination on noticeby ANZANZ may terminate the Disclosed Executive’s employment by providing 12 months’ written notice or payment
in lieu of the notice period based on fixed remuneration. On termination on notice by ANZ, unless the Board
determines otherwise:}} all unvested deferred shares, performance rights and deferred share rights are forfeited; and}} only performance rights and deferred share rights that are vested may be exercised.

Redundancy

If ANZ terminates employment for reasons of redundancy, a severance payment will be made that is equal to
12 months’ fixed remuneration.
All STI deferred shares and STI deferred share rights remain subject to clawback and are released at the original
vesting date. Performance rights (subject to performance hurdles being met), LTI deferred shares and LTI
deferred share rights are either released in full or on a pro-rata basis, at the discretion of the Board with regard to
the circumstances.

Death or total andOn death or total and permanent disablement all unvested STI deferred shares, all deferred share rights and allpermanent disablement performance rights will vest.
Termination for serious
misconduct

ANZ may immediately terminate the Disclosed Executive’s employment at any time in the case of serious misconduct,
and the employee will only be entitled to payment of fixed remuneration up to the date of termination.
On termination without notice by ANZ in the event of serious misconduct all deferred shares held in trust will be
forfeited and all performance rights and deferred share rights will be forfeited.

Statutory Entitlements

Payment of statutory entitlements of long service leave and annual leave applies in all events of separation.

DIRECTORS’ REPORT

45

DIRECTORS’ REPORT (continued)

8.4 REMUNERATION TABLES – CEO AND DISCLOSED EXECUTIVES
Table 4: Non Statutory Remuneration Disclosure has been prepared to provide shareholders with a view of remuneration structure and how
remuneration was paid or communicated to the CEO and Disclosed Executives for 2013 and 2014. The Board believes presenting informationin this way provides the shareholder with increased clarity and transparency of the CEO and Disclosed Executives’ remuneration, clearly showing
the amounts awarded for each remuneration component (fixed remuneration, STI and LTI) within the financial year. Details of prior year awards
which may have vested in 2013 and 2014 are provided in the footnotes.
Individuals included in table

Fixed pay

Non monetary benefits

Long service leave accrual

NON
STATUTORYREMUNERATIONDISCLOSURE
TABLE

CEO andCurrent Disclosed Executives

Total of cash salary andsuperannuation contributions

Non monetary benefits
which typically consistsof company-funded benefits
and fringe benefits tax
payable on these benefits

Not included

STATUTORYREMUNERATIONDISCLOSURE
TABLE

CEO, Current andFormer Disclosed Executives

Cash salary (including any
reductions made in relation
to the utilisation of ANZ’s
Lifestyle Leave Policy) andsuperannuation contributions

As aboveLong service leaveaccrued during the year

(pro-rated for periodof year as a KMP)

(pro-rated for periodof year as a KMP)

1 Subject to Shareholder approval for the CEO

TABLE 4: N ON STATUTORY REMUNERATIONDISCLOSURE – CEO AND CURRENTDISCLOSED EXECUTIVE REMUNERATION
FOR 2014 AND 2013

Fixed
Remuneration1$

Non monetary
benefits$

Cash$

Deferred as
equity
$

2014
2013

3,150,000
3,150,000

170,019
145,6812,050,000
2,050,000

1,950,000
1,950,000

2014
2013

1,300,000
1,300,000

15,93815,669925,000
1,050,000

825,000
950,000

2014

1,000,000

15,938950,000

850,0002014
2013

1,250,000
1,250,000

20,663
15,6691,300,000
1,300,000

1,200,000
1,200,000

2014
2013

1,250,000
50,000337,718–

900,000–

800,000
–

2014
2013

1,165,493
1,000,000

430,342
411,398

1,150,083
1,050,000

1,050,082
950,0002014
2013

1,050,000
1,000,000

19,166
27,404800,000
675,000

700,000
575,000

2014
2013

1,000,000
1,000,000

5,500
5,500

900,000
700,000

800,000
600,0002014
2013

1,250,000
1,000,000

18,551
248,328950,000
850,000

850,000
750,000

FinancialYear

CEO and Current Disclosed Executives

M Smith3
Chief Executive Officer
P Chronican4
Chief Executive Officer, Australia
A Currie5
Chief Operating Officer
S Elliott6
Chief Financial Officer
A Géczy7
Chief Executive Officer, International & Institutional Banking
D Hisco8
Chief Executive Officer, New Zealand
G Hodges9
Deputy Chief Executive Officer
J Phillips10
Chief Executive Officer, Global Wealth and Group Managing
Director, Marketing, Innovation and Digital
N Williams11
Chief Risk Officer

1 Fixed Remuneration was unchanged year on year for Disclosed Executives, with the exception of D Hisco, G Hodges and N Williams. The difference for A Géczy year on year reflects partial service
as a Disclosed Executive in 2013.
2 The possible range of STI is between 0 and 2 times target STI. The actual STI received is dependent on ANZ and individual performance. Anyone who received less than 100% of target forfeitedthe rest of their STI entitlement. The minimum value is nil and the maximum value is what was actually paid.
3 M Smith – Non monetary benefits include car parking, life insurance and taxation services. In 2014 equity to the value of $2,335,900 vested in respect of previously disclosed deferred STI granted
in November 2011 and November 2012. Deferred LTI which was granted in December 2010 and previously disclosed, lapsed in December 2013. The 2014 LTI relates to the proposed LTI grant,
subject to approval by shareholders at the 2014 Annual General Meeting. LTI of $3,150,000 for FY13 equated to 201,086 performance rights which based on the 1 week VWAP at the start of theperformance period (22 November 2013) had a face value of $6,383,495 as approved by shareholders at the 2013 Annual General Meeting.
4 P Chronican – Non monetary benefits include car parking and taxation services. In 2014 equity to the value of $1,014,170 vested in respect of previously disclosed deferred STI granted
in November 2011 and November 2012. Deferred LTI which was granted in November 2010 and previously disclosed, lapsed in November 2013. LTI of $700,000 for FY13 equated to
48,275 performance rights which based on the 1 week VWAP at the start of the performance period (22 November 2013) had a face value of $1,532,495.
5 A Currie – The Chief Operating Officer role is a Disclosed Executive role for the first time effective 1 October 2013 as it meets the definition of KMP. Non monetary benefits include car parking andtaxation services. In 2014 equity to the value of $933,222 vested in respect of deferred STI granted in November 2011 and November 2012, and equity to the value of $1,082,546 vested in respectof deferred LTI granted in November 2010.
6 S Elliott – Non monetary benefits include car parking and taxation services. In 2014 equity to the value of $952,637 vested in respect of previously disclosed deferred STI granted in
November 2011 and November 2012. Deferred LTI which was granted in November 2010 and previously disclosed, lapsed in November 2013. LTI of $1,000,000 for FY13 equated to
68,965 performance rights which based on the 1 week VWAP at the start of the performance period (22 November 2013) had a face value of $2,189,301.

46

ANZ ANNUAL REPORT 2014

The information provided in Table 4 is non statutory information and differs from the information provided in Table 5: Statutory Remuneration
Disclosure, which has been prepared in accordance with Australian Accounting Standards. A description of the difference between the twotables in relation to the 2014 financial year information is provided below:

Retirement benefits

STI

LTI

Other equity allocations

Not included

STI awarded in Nov 2014
for the 2014 financial year – expressed as a cash value
plus a deferred equity grant valueAward value of
LTI granted in
Nov/Dec1 2014

Employee Share Offer
communicated value granted
in Dec 2013

The equity allocation value multiplied by the number of instruments
granted equals the STI/LTI deferred equity dollar value
Retirement benefit accrued
during the year. This relates
to a retirement allowanceavailable to individuals
employed prior to Nov 1992

Includes cash STI (Nov 2014 element only) and amortised
STI for deferred equity from current and prior year awards
Amortised STI values relate to STI awards made in
Nov 2011, 2012, 2013 and to be granted in Nov 2014

Amortised LTI values relate
to LTI awards made in
Nov/Dec 2010, 2011, 2012
and 2013

Amortised values for equity
awards made in prior years,
excluding STI and LTI awards

Equity is amortised over the vesting period of the award. Refer to footnote 7 of the
Statutory Remuneration Disclosure Table for details of how amortised values are calculated

STI

LTI

Total Remuneration

As % of maximum
opportunity2%

Total (deferred
as equity)$

Received$

Deferred as equity
$

Total
$

127%
127%

63%

3,400,000
3,150,000

5,370,019
5,345,681

5,350,000
5,100,000

10,720,019
10,445,681

1,750,000
2,000,000

112%
128%

56%

700,000
700,000

2,240,938
2,365,669

1,525,000
1,650,000

3,765,938
4,015,669

1,800,000

150%

75%

750,000

1,965,938

1,600,000

3,565,938

2,500,000
2,500,000

167%
167%

83%

800,000
1,000,000

2,570,663
2,565,669

2,000,000
2,200,000

4,570,663
4,765,669

1,700,000
–

113%
–

57%

800,000
625,000

2,487,718
50,0001,600,000
625,000

4,087,718
675,000

2,200,165
2,000,000

157%
167%

79%

699,260
699,200

2,745,918
2,461,398

1,749,342
1,649,200

4,495,260
4,110,598

1,500,000
1,250,000

119%
104%

60%

500,000
500,000

1,869,166
1,702,404

1,200,000
1,075,000

3,069,166
2,777,404

1,700,000
1,300,000

142%
108%

71%

700,000
500,000

1,905,500
1,705,500

1,500,000
1,100,000

3,405,500
2,805,500

1,800,000
1,600,000

120%
133%

80%

750,000
750,000

2,218,551
2,098,328

1,600,000
1,500,000

3,818,551
3,598,328

Total$

As % of target%

4,000,000
4,000,000

7 A Géczy – Commenced in role 16 September 2013 so fixed remuneration reflects amounts received for the partial service for the 2013 year. Non monetary benefits include relocation expenses and car
parking. LTI of $625,000 for FY13 equated to 43,102 performance rights which based on the 1 week VWAP at the start of the performance period (22 November 2013) had a face value of $1,368,277.
8 D Hisco – Effective 2014, D Hisco received a 5% AUD increment and his remuneration was then fixed in NZD using the average exchange rate for FY13. His 2014 remuneration value in the table
represents his NZD remuneration converted to AUD at the average exchange rate for FY14. Non monetary benefits includes expenses related to his relocation to New Zealand, car parking andtaxation services. In 2014 equity to the value of $1,203,589 vested in respect of previously disclosed deferred STI granted in November 2011 and November 2012. Deferred LTI which was granted
in November 2010 and previously disclosed, lapsed in November 2013. LTI of $699,200 for FY13 equated to 48,220 performance rights which based on the 1 week VWAP at the start of theperformance period (22 November 2013) had a face value of $1,530,749. D Hisco was also eligible to receive shares to the value of $800 in relation to the Employee Share Offer in December 2013.
9 G Hodges – Non monetary benefits include car parking and taxation services. In 2014 equity to the value of $733,666 vested in respect of previously disclosed deferred STI granted
in November 2011 and November 2012. Deferred LTI which was granted in November 2010 and previously disclosed, lapsed in November 2013. LTI of $500,000 for FY13 equated to
34,482 performance rights which based on the 1 week VWAP at the start of the performance period (22 November 2013) had a face value of $1,094,635.
10 J Phillips – Non monetary benefits include taxation services. In 2014 equity to the value of $643,058 vested in respect of previously disclosed deferred STI granted in November 2011 andNovember 2012. Deferred LTI which was granted in 2010 and previously disclosed, lapsed in November 2013. LTI of $500,000 for FY13 equated to 34,482 performance rights which basedon the 1 week VWAP at the start of the performance period (22 November 2013) had a face value of $1,094,635.
11 N Williams – Fixed remuneration was increased in October 2013 in light of market competitive remuneration levels for this role, and in recognition of his more seasoned contribution. This has been
the only adjustment to his fixed remuneration since his appointment to the role in December 2011. Non monetary benefits include car parking and taxation services. In 2014 equity to the value of$806,482 vested in respect of deferred STI granted in November 2011 and November 2012 and equity to the value of $676,587 vested in respect of deferred LTI granted in November 2010. LTI of$750,000 for FY13 equated to 27,603 deferred share rights which based on the 1 week VWAP at the start of the performance period (22 November 2013) had a face value of $876,260.

DIRECTORS’ REPORT

47

DIRECTORS’ REPORT (continued)

TABLE 5: STATUTORY REMUNERATION DISCLOSURE – CEO AND DISCLOSED EXECUTIVE REMUNERATION FOR 2014 AND 2013
Short-Term Employee Benefits

Post-Employment

Total cash
incentive3,4$Supercontributions 5$

Retirement
benefit accrued
during year6$

Cash salary1$

Non monetary
benefits2
$

2014
2013
2014
2013
2014

3,150,000
3,150,000
1,189,252
1,191,978879,723

170,019
145,681
15,93815,66915,9382,050,000
2,050,000
925,000
1,050,000
950,000––
110,748
108,022
85,191

–
–
–
–
–

2014
2013
2014
2013

1,143,512
1,146,133
1,143,512
48,942

20,663
15,669337,718–

1,300,000
1,300,000
900,000–

106,488
103,867
106,488
1,058

–
–
–
–

2014
2013
2014
2013
2014
2013

1,165,493
1,000,000
960,550
916,906
914,809916,906

430,342
411,398
19,166
27,4045,500
5,500

1,150,083
1,050,000
800,000
675,000
900,000
700,000––
89,45083,09485,191
83,09461,805
5,436
7,945
5,071
–
–

2014
2013

1,143,512
899,347

18,551
248,328950,000
850,000

106,488
83,09425,251
5,286

2013

937,500

10,130

–

–

–

2014
2013

11,690,363
10,207,712

1,033,835
879,779

9,925,083
7,675,000

690,044462,229

95,001
15,793FinancialYear

CEO and Current Disclosed Executives
M Smith10
Chief Executive Officer
P Chronican
Chief Executive Officer, Australia
A Currie11
Chief Operating Officer
S Elliott
Chief Financial Officer
A Géczy12
Chief Executive Officer, International& Institutional Banking
D Hisco13
Chief Executive Officer, New Zealand
G Hodges
Deputy Chief Executive Officer
J Phillips
Chief Executive Officer, Global Wealthand Group Managing Director,
Marketing, Innovation and Digital
N Williams
Chief Risk Officer

Former Disclosed Executives
A Thursby14
Former Chief Executive Officer,
International & Institutional Banking
Total of all Executive KMPs15

1 Cash salary includes reductions made in relation to the utilisation of ANZ’s Lifestyle Leave Policy, where applicable.
2 Non monetary benefits generally consist of company-funded benefits such as car parking and taxation services. This item also includes costs met by the company in relation to relocation, gifts
received on leaving ANZ for former Disclosed Executives, and life insurance for the CEO. The fringe benefits tax payable on any benefits is also included in this item.
3 The total cash incentive relates to the cash component only, with the relevant amortisation of the STI deferred components included in share-based payments and amortised over the vesting period.
The total STI was approved by the Board on 29 October 2014. 100% of the cash incentive awarded for the 2013 and 2014 years vested to the Disclosed Executive in the applicable financial year.
4 The possible range of STI is between 0 and 2 times target STI. The actual STI received is dependent on ANZ and individual performance. The 2014 STI awarded (cash and equity component) asa percentage of target STI was: M Smith 127% (2013: 127%); P Chronican 112% (2013: 128%); A Currie 150%; S Elliott 167% (2013:167%); A Géczy 113% (2013: n/a); D Hisco 157% (2013: 167%);
G Hodges 119% (2013: 104%); J Phillips 142% (2013: 108%); N Williams 120% (2013: 133%); A Thursby (2013: nil). Anyone who received less than 100% of target forfeited the rest of their STI
entitlement. The minimum value is nil and the maximum value is what was actually paid.
5 For all Australian based Disclosed Executives other than M Smith and A Thursby, the superannuation contribution reflects the Superannuation Guarantee Contribution – individuals may elect totake this contribution as superannuation or a combination of superannuation and cash. As M Smith is and A Thursby was a holder of a long stay visa, their fixed remuneration does not include theSuperannuation Guarantee Contribution, however they are able to elect voluntary superannuation contributions.
6 Accrual relates to Retirement Allowance. As a result of being employed with ANZ prior to November 1992, D Hisco, G Hodges and N Williams are eligible to receive a Retirement Allowance onretirement, retrenchment, death, or resignation for illness, incapacity or domestic reasons. The Retirement Allowance is calculated as follows: three months of preserved notional salary (which is
65% of Fixed Remuneration) plus an additional 3% of notional salary for each year of full time service above 10 years, less the total accrual value of long service leave (including taken and untaken).
7 In accordance with the requirements of AASB 2 Share-based payments, the amortisation value includes a proportion of the fair value (taking into account market-related vesting conditions) of allequity that had not yet fully vested as at the commencement of the financial year. The fair value is determined at grant date and is allocated on a straight-line basis over the relevant vesting period.
The amount included as remuneration is not related to nor indicative of the benefit (if any) that may ultimately be realised should the equity become exercisable.
8 Remuneration amounts disclosed exclude insurance premiums paid by the consolidated entity in respect of directors’ and officers’ liability insurance contracts which cover current and former KMPof the controlled entities. The total premium, which cannot be disclosed because of confidentiality requirements, has not been allocated to the individuals covered by the insurance policy as, basedon all available information, the directors believe that no reasonable basis for such allocation exists.

48

ANZ ANNUAL REPORT 2014

Long-Term
Employee
Benefits

Share-Based Payments7
Total amortisation value of
STI

Other equity
allocations

LTILong service leaveaccrued during
the year$

Shares$

Options andRights$Shares$Rights$Shares$Termination
benefits$

47,07347,28919,525
19,614
14,983

1,893,344
1,719,210
848,607723,368
717,821

–
–
–
–
–

–
–
–
–
195,545

3,133,587
2,991,143
657,940
672,705
463,757

–
–
–
–
–

–
–
–
–
–

10,444,023
10,103,323
3,767,010
3,781,356
3,322,958

18,752
22,03818,938780

1,134,313
796,167
313,878––
16,708
–
–

–
–
–
–

922,786
771,029
178,321
–

–
–
–
–

–
–
–
–

4,646,514
4,171,611
2,998,855
50,78062,03814,06432,355
14,42915,01015,078––611,759
527,240
658,421490,516

790,752
768,790
–
–
–
–

–
–
–
–
–
–

548,048461,622495,131498,760
493,171
480,192

217
–
–
–
–
–

–
–
–
–
–
–

4,208,778
3,711,310
3,016,356
2,747,904
3,072,102
2,691,286

127,499
14,214745,149575,216––

183,979
347,119

413,799
176,435––––

3,714,228
3,199,039–(78,480)––(529,830)–

127,038

466,358

356,173
147,506

6,923,292
4,753,237

790,752
785,498

379,524
347,119

7,306,540
5,522,056

217––
127,038

39,190,824
30,922,967

Grand total
remuneration8, 9$

9 The disclosed amortised value of rights for each KMP as a percentage of Grand Total Remuneration is: M Smith 30%; P Chronican 17%; A Currie 14%; S Elliott 20%; A Géczy 6%; D Hisco 32%;
G Hodges 16%; J Phillips 16%; N Williams 11%.
10 While the CEO is an Executive Director, he has been included in this table with the Disclosed Executives.
11 A Currie’s role is a Disclosed Executive role for the first time in 2014 as it meets the definition of Key Management Personnel.
12 A Géczy was appointed to the CEO, International & Institutional Banking role on 16 September 2013 so remuneration reflects amounts received for the partial service of the 2013 year.
13 D Hisco was eligible in FY14 to receive shares in relation to the Employee Share Offer, which provides a grant of up to $1,000 of ANZ shares in each financial year to eligible employees subject toBoard approval. Refer to Note 45 Employee Share and Option Plans for further details on the Employee Share Offer.
14 A Thursby ceased employment 30 June 2013 and remuneration is to this date.
15 For those Disclosed Executives who were disclosed in both 2013 and 2014, the following are noted:- M Smith – uplift in year-on-year total remuneration, driven mainly by an increase in the amortisation value of equity.
- P Chronican – reduction in year-on-year total remuneration, driven by a combination of factors including cash STI and amortisation value of LTI.
- S Elliott – uplift in year-on-year total remuneration, driven mainly by increases in the amortised value of equity.
- A Géczy – 2013 total remuneration only reflected a partial year as he commenced in role 16 September 2013. Uplift in year-on-year total remuneration due to non monetary benefits and full year
in role in 2014.
- D Hisco – uplift in year-on-year total remuneration, driven by a combination of factors including 5% increase in cash salary, exchange rate movements, cash STI and amortised value of equity.
- G Hodges – uplift in year-on-year remuneration, driven by a combination of factors including increase in cash salary, cash STI and amortised value of equity.
- J Phillips – uplift in year-on-year remuneration, driven by a combination of factors including cash STI and amortised value of equity.
- N Williams – uplift in year-on-year remuneration, driven by a combination of factors including increase in cash salary, cash STI and amortised value of equity.

DIRECTORS’ REPORT

49

DIRECTORS’ REPORT (continued)

9. Equity
All shares underpinning equity awards may be purchased on market, or be newly issued shares or a combination of both. For the 2013 equity
granted to the CEO and Disclosed Executives, all STI deferred shares were purchased on market and for LTI performance rights, the approach tosatisfying awards will be determined closer to the time of vesting.
9.1 CEO AND DISCLOSED EXECUTIVES EQUITY
Details of deferred shares and rights granted to the CEO and Disclosed Executives during the 2014 year, and granted to the CEO and Disclosed
Executives in prior years which vested, were exercised/sold or which lapsed/were forfeited during the 2014 year is set out below.
TABLE 6: CEO AND DISCLOSED EXECUTIVES EQUITY GRANTED, VESTED, EXERCISED/SOLD AND LAPSED/FORFEITED
VestedNameType of equity

Numbergranted1

Lapsed/Forfeited

Value2$ Number

Exercised/Sold

Value2$ NumberUnexer
Vested and -cisable
exercisable
as atValue2 as at 30 Sep 30 Sep
$
20143
2014

Grant
date

First dateDateexercisable of expiry Number%

14-Nov-11
12-Nov-12
22-Nov-13
22-Nov-13
17-Dec-10
18-Dec-13
18-Dec-13
14-Nov-11
12-Nov-12
22-Nov-13
22-Nov-13
12-Nov-10
22-Nov-13
22-Nov-13
14-Nov-11
12-Nov-12
22-Nov-13
22-Nov-13
12-Nov-10
22-Nov-13
22-Nov-13
14-Nov-11
12-Nov-12
22-Nov-13
22-Nov-13
12-Nov-10
22-Nov-13
22-Nov-13
22-Nov-13
22-Nov-13
8-Dec-04
5-Nov-04
31-Oct-08
4-Dec-13
14-Nov-11
12-Nov-12
22-Nov-13
22-Nov-13
12-Nov-10
22-Nov-13
22-Nov-13

14-Nov-13
12-Nov-13
22-Nov-14
22-Nov-15
17-Dec-13
18-Dec-16
18-Dec-16
14-Nov-13
12-Nov-13
22-Nov-14
22-Nov-15
12-Nov-13
22-Nov-16
22-Nov-16
14-Nov-13
12-Nov-13
22-Nov-14
22-Nov-15
12-Nov-13
22-Nov-16
22-Nov-16
14-Nov-13
12-Nov-13
22-Nov-14
22-Nov-15
12-Nov-13
22-Nov-16
22-Nov-16
22-Nov-16
22-Nov-16
8-Dec-07
5-Nov-07
31-Oct-11
4-Dec-16
14-Nov-13
12-Nov-13
22-Nov-14
22-Nov-15
12-Nov-13
22-Nov-16
22-Nov-16

100 1,170,160––– (36,729) 100 1,137,302
100 1,165,740––– (36,334) 100 1,125,071
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– (253,164) 100 (7,742,211)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100 528,450––– (16,587) 100 528,450
100 485,720––– (15,139) 100 485,720
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– (54,347) 100 (1,743,669)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100 528,450––– (16,587) 100 529,951
100 404,772––– (12,616) 100 403,079
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100 1,082,546––– (33,741) 100 1,078,018
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100 304,989––– (9,573) 100 305,855
100 647,648––– (20,186) 100 644,939
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– (45,986) 100 (1,475,415)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– (9,985) 100 329,918––––– (1,320) 100 44,542
–
–
–
–
–
(39) 0.2
1,289
–
–
–
–
–
–
–
–
100 647,317––– (20,318) 100 675,958
100 556,272––– (17,338) 100 556,272
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– (33,444) 100 (1,073,017)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

%

%

CEO and Current Disclosed Executives
M Smith4

STI deferred shares
STI deferred shares
STI deferred shares11
STI deferred shares11
LTI performance rights
LTI performance rights12
LTI performance rights12
P Chronican5 STI deferred shares
STI deferred shares
STI deferred shares11
STI deferred shares11
LTI performance rights
LTI performance rights12
LTI performance rights12
A Currie6
STI deferred shares
STI deferred shares
STI deferred shares11
STI deferred shares11
LTI deferred shares
LTI performance rights12
LTI performance rights12
S Elliott7
STI deferred shares
STI deferred shares
STI deferred shares11
STI deferred shares11
LTI performance rights
LTI performance rights12
LTI performance rights12
A Géczy
LTI performance rights12
LTI performance rights12
D Hisco8
STI deferred shares
LTI deferred shares
LTI deferred shares
Employee share offer
STI deferred share rights
STI deferred share rights
STI deferred share rights11
STI deferred share rights11
LTI performance rights
LTI performance rights12
LTI performance rights1250

36,72936,33430,70930,708253,164
100,832
100,254
16,587
15,13914,961
14,96054,347
25,23423,041
16,587
12,616
10,236
10,23633,741
27,036
24,687
9,573
20,186
18,89818,89745,98636,04932,916
22,53020,572
9,985
1,320
23,28225
20,31817,33815,78016,60833,44425,20523,015––––16-Dec-14
18-Dec-18
18-Dec-18––––
11-Nov-15
21-Nov-18
21-Nov-18–––––
21-Nov-18
21-Nov-18––––
11-Nov-15
21-Nov-18
21-Nov-18
21-Nov-18
21-Nov-18––––
14-Nov-15
12-Nov-15
21-Nov-16
21-Nov-17
11-Nov-15
21-Nov-18
21-Nov-18

36,72936,334–––––
16,587
15,139–––––16,587
12,616––33,741––
9,573
20,186
–
–
–
–
–
–
–
–
–
–
–
20,31817,338
–
–
–
–
–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
23,243
–
–
–
–
–
–
–
–

–
–
30,70930,708–100,832
100,254––
14,961
14,960–25,23423,041––
10,236
10,236–27,036
24,687––
18,89818,897–36,04932,916
22,53020,572–––
25––
15,78016,608–25,20523,015ANZ ANNUAL REPORT 2014

VestedNameType of equity

G Hodges9 STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares11
STI deferred shares11
LTI deferred shares
LTI deferred shares
LTI deferred shares

J Phillips10

N Williams

Numbergranted1

Grant
date

First dateDateexercisable of expiry

2,5548-Nov-00 8-Nov-01
5,159
8-Nov-00 8-Nov-03
3,771 24-Apr-01 24-Apr-04
4,761 23-Oct-02 23-Oct-05
4,503 20-May-03 20-May-06
9,911 12-Nov-10 12-Nov-12
11,848 14-Nov-11 14-Nov-12
11,848 14-Nov-11 14-Nov-13
11,102 12-Nov-12 12-Nov-13
9,055 22-Nov-13 22-Nov-14
9,055 22-Nov-13 22-Nov-15
1,300 24-Apr-01 24-Apr-04
3,800 23-Oct-02 23-Oct-05
6,500 20-May-03 20-May-06

–
–
–
–
–
–
–
–
–
–
–
–
–
–

Number

%

–
–
–
–
–
–
–
–
–
–
–
–
–
–
11,848 100
11,102 100
–
–
–
–
–
–
–
–
–
–

Lapsed/Forfeited

Value2$ Number

%

–
–
–
–
–
–
–
377,469
356,197
–
–
–
–
–

–
–
–
–
–
–
–
–
–
–
–
–
–
–

–
–
–
–
–
–
–
–
–
–
–
–
–
–

Exercised/Sold

Value2$ Number%– (2,554) 100– (5,159) 100– (3,771) 100– (4,761) 100– (4,503) 100– (9,911) 100– (11,848) 100
–
–
–
–
–
–
–
–
–
–
–
–
– (1,300) 100– (3,800) 100– (6,500) 100

Unexer
Vested and -cisable
exercisable
as atValue2 as at 30 Sep 30 Sep
3
$
2014
2014
85,970173,656
126,935
160,259
151,575
333,612398,813––––43,759127,911
218,795

–
–
–
–
–
–
–
11,848
11,102
–
–
–
–
–

–
–
–
–
–
–
–
–
–
9,055
9,055
–
–
–

LTI performance rights

41,80612-Nov-10 12-Nov-13 11-Nov-15––– (41,806) 100 (1,341,304)

–

–

–

–

–

LTI performance rights12

18,02422-Nov-13 22-Nov-16 21-Nov-18

–

–

–

–

–

–

–

18,024

LTI performance rights12

16,45822-Nov-13 22-Nov-16 21-Nov-18

–

–

–

–

–

–

–

–

–

–

16,458

STI deferred shares

9,004

14-Nov-11 14-Nov-13–

9,004 100

286,861

–

–

–

–

–

–

9,004

–

STI deferred shares

11,10212-Nov-12 12-Nov-13–

11,102 100

356,197

–

–

–

–

–

–

11,102–

STI deferred shares119,449

22-Nov-13 22-Nov-14

–

–

–

–

–

–

–

–

–

–

–

9,449

STI deferred shares11

9,448

22-Nov-13 22-Nov-15

–

–

–

–

–

–

–

–

–

–

–

9,448

LTI performance rights

37,62512-Nov-10 12-Nov-13 11-Nov-15––– (37,625) 100 (1,207,161)

–

–

–

–

–

LTI performance rights12

18,02422-Nov-13 22-Nov-16 21-Nov-18

–

–

–

–

–

–

–

18,024–

16,458

–

–

–

–

–

–

LTI performance rights12

16,45822-Nov-13 22-Nov-16 21-Nov-18

–

–

–

–

–

–

–

–

–

STI deferred shares

13,62514-Nov-11 14-Nov-13–

13,625 100

434,083–––(13,625) 100

435,354––

STI deferred shares

11,60712-Nov-12 12-Nov-13–

11,607 100

372,399–––(11,607) 100

370,874––

STI deferred shares11

11,81122-Nov-13 22-Nov-14

–

–

–

–

–

–

–

–

–

–

–

11,811

STI deferred shares11

11,81122-Nov-13 22-Nov-15

–

–

–

–

–

–

–

–

–

–

–

11,811

LTI deferred shares
LTI deferred share rights12

21,08827,60312-Nov-10 12-Nov-13–
22-Nov-13 22-Nov-16 21-Nov-18

21,088 100––

676,587
–

–
–

–
–

–
–

(21,088) 100––

677,209––––27,603

1 Executives, for the purpose of the five highest paid executives disclosures, are defined as Disclosed Executives or other members of Management Board. For the 2014 financial year the fivehighest paid executives include four Disclosed Executives and the Deputy CEO, International & Institutional Banking (G Planté). Rights granted to Disclosed Executives as remuneration in 2014 areincluded above. Rights granted to G Planté as remuneration in 2014 include two tranches of LTI performance rights (Tranche one of 25,234 LTI performance rights and Tranche two of 23,041 LTI
performance rights. Both tranches were granted on 22 Nov 2013, are first exercisable on 22 Nov 2016 subject to meeting performance hurdles and have an expiry date of 21 Nov 2018). No rights
have been granted to the CEO, Disclosed Executives or the five highest paid executives since the end of 2014 up to the signing of the Director’s Report on 5 November 2014.
2 The point in time value of shares and/or performance rights is based on the one day VWAP of the Company’s shares traded on the ASX on the date of vesting, lapsing/forfeiture or exercising/sale/transfer out of trust, multiplied by the number of shares and/or performance rights.
3 The number vested and exercisable is the number of shares, options and rights that remain vested at the end of the reporting period. No shares, options and rights were vested and unexercisable.
4 M Smith – The CEO had a proportion of his STI amount deferred as equity. The Board determined the deferred amount for the CEO. Refer to Table 10 for details of the valuation methodology,
inputs and fair value. The 2013 LTI grant for the CEO was delivered as performance rights. Refer to the section on CEO LTI for further details of the LTI grant and Table 11 for details of the valuation,
inputs and fair value. LTI performance rights granted 17 Dec 2010 lapsed on 17 Dec 2013 and the one day VWAP was $30.5818.
5 P Chronican – LTI performance rights granted 12 Nov 2010 lapsed on 12 Nov 2013 and the one day VWAP was $32.0840.
6 A Currie commenced as KMP from 1 October 2013.
7 S Elliott – LTI performance rights granted 12 Nov 2010 lapsed on 12 Nov 2013 and the one day VWAP was $32.0840.
8 D Hisco – STI deferred share rights granted 14 Nov 2011 were exercised on 04 Apr 2014, the one day VWAP on date of exercise was $33.2689 and the exercise price was $0.00. STI deferred sharerights granted 12 Nov 2012 were exercised on 12 Nov 2013 and the one day VWAP on date of exercise was $32.0840. LTI performance rights granted 12 Nov 2010 lapsed on 12 Nov 2013 and theone day VWAP was $32.0840.
9 G Hodges – LTI performance rights granted 12 Nov 2010 lapsed on 12 Nov 2013 and the one day VWAP was $32.0840.
10 J Phillips – LTI performance rights granted 12 Nov 2010 lapsed on 12 Nov 2013 and the one day VWAP was $32.0840.
11 The Disclosed Executives had a proportion of their STI amount deferred as equity. In 2014 D Hisco received share rights rather than shares due to taxation regulations in New Zealand.
A share right effectively provides a right in the future to acquire a share in ANZ at nil cost to the employee. Refer to the STI arrangements section for further details of the mandatory deferralarrangements for the Disclosed Executives and Table 11 for details of the valuation methodology, inputs and fair value.
12 The 2013 LTI grants for Disclosed Executives were delivered as performance rights excluding for the CRO. Refer to Section 6.2.2, LTI for further details and Table 11 for details of the valuation,
inputs and fair value.

DIRECTORS’ REPORT

51

DIRECTORS’ REPORT (continued)

9.2 NED, CEO AND DISCLOSED EXECUTIVES SHAREHOLDINGS
Details of shares held directly, indirectly or beneficially by each NED, including their related parties, are provided below.
TABLE 7: NED SHAREHOLDINGS (INCLUDING MOVEMENTS DURING THE 2014 YEAR)
Name

Type

Opening balance at
1 Oct 2013

Shares granted
during the year as
remuneration

Received during theyear on exercise of
options or rights

Resulting fromany other changes
during the year1

Closing balance at
30 Sep 20142,3

Current Non-Executive Directors
D Gonski4

Ordinary shares

30,921–––30,921

I Atlas4

Ordinary shares

7,360

–

–

–

7,360

P DwyerOrdinary shares

5,500

–

–

4,500

10,000

H Lee

Directors’ Share Plan
Ordinary shares

2,000
8,000

–
–

–
–

109
–

2,109
8,000

G Liebelt

Ordinary shares
Capital notes
Capital notes 2
Convertible preference shares (CPS1)

9,748
1,500
–
2,500

–
–
–
–

–
–
–
–

–
–
2,500
(2,500)

9,748
1,500
2,500
–

I Macfarlane

Ordinary shares
Capital notes
Convertible preference shares (CPS2)
Convertible preference shares (CPS3)

17,616
1,000
500
1,000

–
–
–
–

–
–
–
–

–
500
–
–

17,616
1,500
500
1,000

J Macfarlane4

Ordinary shares
Capital notes 2

12,284
2,000

–
–

–
–

–
–

12,2842,000

Former Non-Executive Directors
J Morschel4

Directors’ Share Plan
Ordinary shares
Capital notes
Capital notes 2
Convertible preference shares (CPS2)

7,860
15,742
1,000
–
1,000

–
–
–
–
–

–
–
–
–
–

–
–
–
1,000
–

7,860
15,742
1,000
1,000
1,000

G Clark4

Directors’ Share Plan
Ordinary shares

5,479
12,000––––(5,479)5,479–
17,479P Hay4

Directors’ Share Plan
Ordinary shares

3,400
12,664––––(3,400)3,839–
16,503

D Meiklejohn4Ordinary shares

16,198–––16,198A Watkins4

Ordinary shares
Capital notes

20,111
300

–
–

–
–

–
–

20,111300

1 Shares from any other changes during the year include the net result of any shares purchased, sold, or acquired under the Dividend Reinvestment Plan.
2 The following shares (included in the holdings above) were held on behalf of the NEDs (i.e. indirect beneficially held shares) as at 30 September 2014 or for those who concluded as a
Non‑Executive Director during the 2014 financial year, as at retirement date: D Gonski – 30,921, I Atlas – 7,360, P Dwyer – 10,000, H Lee – 2,109, G Liebelt – 13,748, I MacFarlane – 20,616,
J MacFarlane – 12,284, J Morschel – 19,560, G Clark – 12,000, P Hay – 12,685, D Meiklejohn – 13,698, A Watkins – 20,411.
3 There was no change in the balance as at report sign-off date for current Non-Executive Directors.
4 For those who commenced as a Non-Executive Director during the 2014 financial year, the opening balance is as at commencement date. For those that concluded as a Non-Executive Director
during the 2014 financial year, the closing balance is at retirement date.

52

ANZ ANNUAL REPORT 2014

Details of shares held directly, indirectly or beneficially by the CEO and each Disclosed Executive, including their related parties, areprovided below.
TABLE 8: CEO AND DISCLOSED EXECUTIVE SHAREHOLDINGS (INCLUDING MOVEMENTS DURING THE 2014 YEAR)
Name

Type

Opening balance at
1 Oct 2013

Shares granted
during the year as
remuneration

112,154
1,301,048

61,417–––(70,097)(399,180)

103,474
901,868

Received during theResulting from any
year on exercise of other changes duringoptions or rights
the year1

Closing balance at
30 Sep 20142,3

CEO and Current Disclosed Executives
M SmithDeferred shares
Ordinary shares

P Chronican

Deferred shares
Ordinary shares
Convertible preference shares (CPS2)

49,652
116,279
1,499

29,921–––––(32,461)
34,513–

47,112
150,792
1,499

A Currie4

Deferred shares
Ordinary shares

103,087
1,042

20,472–––(64,613)–58,946
1,042

S Elliott

Deferred shares
Ordinary shares

53,692
1,446–

37,795–––––(30,488)(1,404)–60,99942–

D HiscoDeferred shares
Employee Share Offer
Ordinary shares

34,587–20,000–25–––
37,656(11,344)–(656)

23,24325
57,000G Hodges

Deferred shares
Ordinary shares

175,617
136,532

18,110–––(48,689)(40,893)145,038
95,639J Phillips

Deferred shares
Ordinary shares

34,168
9,733

18,897
–

–
–

2,324
–

55,3899,733

N Williams

Deferred shares

83,81323,622–(46,490)

60,945

A Géczy

1 Shares resulting from any other changes during the year include the net result of any shares purchased, forfeited, sold or acquired under the Dividend Reinvestment Plan.
2 The following shares (included in the holdings above) were held on behalf of the CEO and Disclosed Executives (i.e. indirect beneficially held shares) as at 30 September 2014: M Smith – 103,474;
P Chronican – 47,112; A Currie – 58,946; S Elliott – 60,999; D Hisco – 38,243; G Hodges – 187,773; J Phillips – 55,389; N Williams – 60,945.
3 There was no change in the balance as at report sign-off date.
4 Commencing balance is based on holdings as at the date of commencement as a Key Management Personnel (1 October 2013).

DIRECTORS’ REPORT

53

DIRECTORS’ REPORT (continued)

Details of deferred share rights and performance rights held directly, indirectly or beneficially by the CEO and each Disclosed Executive,
including their related parties, are provided below.
TABLE 9: CEO AND DISCLOSED EXECUTIVE RIGHTS HOLDINGS (INCLUDING MOVEMENTS DURING THE 2014 YEAR)

Name

Type

Openingbalance at
1 Oct 2013

Grantedduring theyear asremuneration1

Exercisedduringthe year

Resulting from anyother changes
during the year

Closingbalance as at
30 Sep 20142,3

CEO and Current Disclosed Executives
M SmithLTI performance rights

908,398

201,086–(253,164)

856,320

P Chronican

LTI performance rights

190,305

48,275–(54,347)

184,233

A Currie4

LTI performance rights

73,81851,723––

125,541

S Elliott

LTI performance rights

236,078

68,965–(45,986)

259,057

A Géczy

LTI performance rights–

43,102––

43,102

D HiscoSTI deferred share rights
LTI performance rights

56,038138,026

32,38848,220(37,656)––(33,444)

50,770152,802

G Hodges

LTI performance rights

146,388

34,482–(41,806)

139,064

J Phillips

LTI performance rights

142,20734,482–(37,625)

139,064

N Williams

LTI deferred share rights

29,22527,603––56,8281
2
3
4

Details of options/rights granted as remuneration during 2014 are provided in Table 6.
There was no change in the balance as at report sign-off date.
No options/rights were vested and exerciseable or vested and unexerciseable as at 30 September 2014.
Commencing balance is based on holdings as at the date of commencement as a Key Management Personnel (1 October 2013).

9.3 EQUITY VALUATIONSThis section outlines the valuations used throughout this report in relation to equity grants.
Equity valuation inputs – deferred shares
TABLE 10: EQUITY VALUATION INPUTS – DEFERRED SHARES
RecipientsType

Executives
Executives
Executives
Executives
Executives
Executives
Executives
Executives
CEO and Executives
CEO and Executives
CEO and Executives
CEO and Executives
Executives
Executives
Executives
Executives
Executives
Executives
Executives

STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
STI deferred shares
LTI deferred shares
LTI deferred shares
LTI deferred shares
LTI deferred shares
LTI deferred shares
LTI deferred shares

Grant date

Equity fairvalue1$

Share closing
price at grant$Vesting period(years)08-Nov-00
08-Nov-00
24-Apr-01
23-Oct-02
20-May-03
08-Dec-04
12-Nov-10
14-Nov-11
14-Nov-11
12-Nov-12
22-Nov-13
22-Nov-13
04-Dec-13
24-Apr-01
23-Oct-02
20-May-03
05-Nov-04
31-Oct-08
12-Nov-10

14.53
14.53
13.96
18.05
18.07
19.90
23.32
20.89
20.89
24.57
31.66
31.66
31.60
13.96
18.05
18.07
20.70
17.18
23.32

13.94
13.94
13.32
17.25
17.29
19.90
23.22
20.66
20.66
24.45
31.68
31.68
31.76
13.32
17.25
17.29
20.77
17.36
23.22

1
3
3
3
3
3
2
1
2
1
1
2
3
3
3
3
3
3
3

1 The volume weighted average share price of all ANZ shares sold on the ASX on the date of grant is used to calculate the fair value of shares. No dividends are incorporated into the measurementof the fair value of shares.

54

ANZ ANNUAL REPORT 2014

Equity valuation inputs – rights
ANZ engages external experts to independently value any required deferred share rights and performance rights, taking into account factors
including the performance conditions, share price volatility, life of the instrument, dividend yield and share price at grant date.
The following tables provide details of the valuations of the various equity instruments issued during the year and in prior years for shares andrights where vesting, lapse/forfeiture or exercise/sale has occurred during the year:
TABLE 11: EQUITY VALUATION INPUTS – RIGHTS
Recipients

Type

Grant date

Exercise
price$

Executives
Executives
Executives
Executives
Executives
CEO
Executives
Executives
CEO
CEO
Executives

STI deferred share rights
STI deferred share rights
STI deferred share rights
STI deferred share rights
LTI performance rights
LTI performance rights
LTI performance rights
LTI performance rights
LTI performance rights
LTI performance rights
LTI deferred share rights

14-Nov-11
12-Nov-12
22-Nov-13
22-Nov-13
12-Nov-10
17-Dec-10
22-Nov-13
22-Nov-13
18-Dec-13
18-Dec-13
22-Nov-13

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

Equity
fair
value
$

Share
closing priceat grant$

ANZ
expected
volatility%

Equityterm(years)Vesting
period(years)Expected
life(years)Expected
dividendyield%

Risk freeinterest
rate
%

18.21
23.07
30.10
28.60
11.96
11.85
13.87
15.19
15.62
15.71
27.17

20.66
24.45
31.68
31.68
23.22
23.59
31.68
31.68
30.70
30.70
31.68

25.0
22.5
20.0
20.0
30.0
30.0
20.0
20.0
20.0
20.0
20.0

4
3
3
4
5
4
5
5
5
5
5

2
1
1
2
3
3
3
3
3
3
3

2
1
1
2
3
3
3
3
3
3
3

6.50
6.00
5.25
5.25
5.00
5.00
5.25
5.25
5.50
5.50
5.25

3.65
2.82
2.54
2.75
5.04
5.15
3.13
3.13
2.90
2.90
3.13

10. NEDs, CEO and Disclosed Executives Loan and Other Transactions (non remuneration)
10.1 LOAN TRANSACTIONS
Loans made to the NEDs, the CEO and Disclosed Executives are made in the ordinary course of business on normal commercial terms andconditions no more favourable than those given to other employees or customers, including the term of the loan, security required and theinterest rate.
Details of loans outstanding at the reporting date to NEDs, the CEO and Disclosed Executives including their related parties, where theindividual’s aggregate loan balance exceeded $100,000 at any time during the year, are provided below.
Other than the loans disclosed below no other loans were made, guaranteed or secured by any entity in the Group to the NEDs, the CEO and
Disclosed Executives, including their related parties.
TABLE 12: NED LOAN TRANSACTIONSNameOpening balance at
1 Oct 20131$

Closing balance at
30 Sep 20141$

Interest paid andpayable in thereporting period2$

Highest balancein the reporting
period$6,634,025

6,489,628

383,363

7,255,500

Non-Executive Directors
J Macfarlane
A Watkins (former)
Total

3,600,000

3,600,000

193,4263,600,000

10,234,025

10,089,628

576,789

10,855,500

1 For NEDs who commenced during the 2014 financial year, opening balances are as at date of commencement. For NEDs who retired during the 2014 financial year, closing balances are asat retirement date.
2 Actual interest paid after taking into account offset accounts. The loan balance is shown gross, however the interest paid takes into account the impact of offset accounts.

DIRECTORS’ REPORT

55

DIRECTORS’ REPORT (continued)

TABLE 13: CEO AND DISCLOSED EXECUTIVE LOAN TRANSACTIONSInterest paid andpayable in thereporting period1$

Highest balancein the reporting
period$1,000,000

45,9001,000,000

3,778,488

173,401

5,275,085

1,600,000

21,1822,000,000

8,394,849

110,198

8,394,849

2,039,881

3,438,788

93,6553,472,601

G Hodges

5,094,023

3,189,527

243,253

5,258,545

N Williams

1,581,874

1,668,474

49,207

1,668,474

16,842,469

23,070,126

736,796

27,069,554

Opening balance at
1 Oct 2013$

Closing balance at
30 Sep 2014$

M Smith1,000,000

A Currie

5,126,691

S Elliott

2,000,000

A Géczy–

D HiscoName

CEO and Current Disclosed Executives

Total

1 Actual interest paid after taking into account offset accounts. The loan balance is shown gross, however the interest paid takes into account the impact of offset amounts.

10.2 OTHER TRANSACTIONSAll other transactions of the NEDs, the CEO and Disclosed Executives and their related parties are conducted on normal commercial terms andconditions no more favourable than those given to other employees or customers, and are deemed trivial or domestic in nature.

Signed in accordance with a resolution of the Directors.

David M Gonski, AC

Chairman

5 November 2014

56

Michael R P Smith, OBE
Director

ANZ ANNUAL REPORT 2014

CORPORATE GOVERNANCE
THE FOLLOWING STATEMENT SETS OUT THE GOVERNANCE FRAMEWORK THE BOARD HASADOPTED AT ANZ AS WELL AS HIGHLIGHTS OF THE SUBSTANTIVE WORK UNDERTAKEN BY
THE BOARD AND ITS COMMITTEES DURING THE FINANCIAL YEAR.

2014 Key Areas of Focus and Achievements}} Ongoing monitoring of Management’s progress inconnection with ANZ’s super regional strategy}} Strong focus on key aspects of ANZ’s technology strategy(including infrastructure, system robustness, and cybercrime risk) and ANZ’s productivity strategy (including theongoing development of the Operational Hubs)}} Regular review of the evolving global regulatoryenvironment and the implications in relation to the
management of capital, funding, liquidity and risk

Approach to GovernanceIn relation to corporate governance, ANZ seeks to:}} embrace principles and practices it considers to be best practiceinternationally;}} be an ‘early adopter’, where appropriate, by complying before
a published law or recommendation takes effect; and}} take an active role in discussions of corporate governance bestpractice and associated regulation in Australia and overseas.

Compliance with Corporate Governance Codes
Australia
As a company listed on the ASX, ANZ is required to disclose how
it has applied the Recommendations contained within the ASX
Corporate Governance Council’s Corporate Governance Principles
and Recommendations (ASX Governance Principles) during thefinancial year, explaining any departures from them. ANZ confirms
it has followed the Recommendations of the ASX Corporate
Governance Council during the reporting period.
Full details of the location of the references in this Statement(and elsewhere in this Annual Report) which specifically set out
how ANZ applies each Recommendation of the ASX GovernancePrinciples are contained on anz.com > About us > Our company >Corporate governance.

}} Board succession planning and recruitment including theappointments of Mr D M Gonski as the new Chairman and
Mr J T Macfarlane and Ms I R Atlas as new Non-Executive
Directors, and the retirements of Messrs J P Morschel,
D E Meiklejohn, P A F Hay, Dr G J Clark and Ms A M Watkins}} Consideration and review of ANZ’s Corporate
Sustainability Strategy and Framework and progresson key aspects. ANZ was recognised as a leading bankglobally on the Dow Jones Sustainability Index (DJSI)
for the 13th year in succession

New Zealand
As an overseas listed issuer on the NZX, ANZ is deemed to comply
with the NZX Listing Rules provided that it remains listed on the ASX,
complies with the ASX Listing Rules and provides the NZX with all theinformation and notices that it provides to the ASX. ANZ met theserequirements during the year.
The ASX Governance Principles may differ materially from the NZX’scorporate governance rules and the principles of the NZX’s Corporate
Governance Best Practice Code. More information about thecorporate governance rules and principles of the ASX can be foundat asx.com.au and, in respect of the NZX, at nzx.com.
ANZ has also complied with the Corporate Governance Principlesof the New Zealand Securities Commission (now Financial Markets
Authority) throughout the financial year.
Other jurisdictions
ANZ also monitors best practice developments in corporate
governance across other relevant jurisdictions.
ANZ deregistered from the US Securities Exchange Commission
with effect from October 2007. Despite no longer being required
to comply with United States corporate governance rules, ANZ’s
corporate governance practices continue to have regard to US
corporate governance regulations in relation to the independence of
Directors, the independence of the external auditor and the financial
expertise of the Audit Committee, as described in this Statement.

A new edition of the ASX Governance Principles came into effect for
ANZ’s financial year beginning 1 October 2014. ANZ early adopted
many of the updated requirements prior to them coming into effectand will fully comply with all requirements during 2014/15.
The information in this Statement is current as at 10 October 2014
except where otherwise indicated and has been approved by
ANZ’s Board.

CORPORATE GOVERNANCE

57

CORPORATE GOVERNANCE (continued)

WebsiteFurther details of ANZ’s governance framework are set out at anz.com > About us > Our company > Corporate governance.
This section of ANZ’s website also contains copies of all the Board/Board Committee charters and summaries of many of the documents
and policies mentioned in this Statement, as well as summaries of other ANZ policies of interest to shareholders and stakeholders.
The website is regularly updated to ensure it reflects ANZ’s most recent corporate governance information.

Directors
The following information relates to the Directors in office and sets out their Board Committee memberships and other details at the timeof preparation of this Statement.
MR D M GONSKI, AC, Chairman, Independent Non-Executive Director and Chair of the Governance Committee
BCom, LLB, FAICD(Life), FCPA

Chancellor: University of New South Wales (from 2005).

Chairman since 1 May 2014 and a Non-Executive Director since
February 2014. Mr Gonski is an ex officio member of all Board
Committees including Chair of the Governance Committee.

Former Directorships include
Former Chairman: Guardians of the Future Fund of Australia(2012‑2014), Investec Bank (Australia) Limited (2002-2014), Swiss
Re Life & Health Australia Limited (2011-2014), Investec Holdings
Australia Limited (2002-2014), Ingeus Limited (2009-2014),
National E-Health Transition Authority Ltd (2008-2014), Federal
Government Review Panel of Funding for Schooling (The Gonski
Review) (2011‑2012), Advisory Committee to the NSW Government
Commission of Audit (2011-2012) and ASX Limited (2008-2012,
Director from 2007).

Skills, experience and expertise
Mr Gonski is one of Australia’s most respected business leaders andcompany directors with business experience in Australia and Asia,and a broad range of involvement with the government, educationand community sectors. Mr Gonski served previously as a Director
on the ANZ Board from 2002 to 2007.
Current Directorships
Chairman: Coca-Cola Amatil Limited (from 2001, Director from 1997),
The University of New South Wales Foundation Limited (from 2005,
Director from 1999) and Sydney Theatre Company Ltd (from 2010).
Director/Member: Lowy Institute for International Policy (from 2012),
Australian Philanthropic Services Limited (from 2012), ASIC External
Advisory Panel (from 2013) and Singapore Telecommunications
Limited (from 2013).

Former Director: Investec Property Limited (2005-2014), Infrastructure
NSW (2011-2014), Singapore Airlines Limited (2006-2012) and
Westfield Holdings Limited (1985–2011).
Former Consultant: Morgan Stanley Australia Limited (1997-2012).
Age: 61. Residence: Sydney, Australia.

MR M R P SMITH, OBE, Chief Executive Officer and Executive Director
BSc (Hons) City Lond., Hon LLD Monash
Chief Executive Officer and Executive Director since 1 October 2007.
Skills, experience and expertise
Mr Smith is an international banker with over 30 years experiencein banking operations in Asia, Australia and internationally.
Until June 2007, he was President and Chief Executive Officer, The
Hongkong and Shanghai Banking Corporation Limited, Chairman,
Hang Seng Bank Limited, Global Head of Commercial Banking for the
HSBC Group and Chairman, HSBC Bank Malaysia Berhad. Previously,
Mr Smith was Chief Executive Officer of HSBC Argentina Holdings SA.
Mr Smith joined the HSBC Group in 1978 and during his international
career he has held a wide variety of roles in Commercial, Institutionaland Investment Banking, Planning and Strategy, Operations andGeneral Management.
Current Directorships
Executive Chairman: Chongqing Mayor’s International Economic
Advisory Council (from 2013, Member from 2006).
Director: ANZ Bank New Zealand Limited (from 2007), the Financial
Markets Foundation for Children (from 2008), the Institute of58

International Finance (from 2010), Financial Literacy Australia Limited(from 2012) and the International Monetary Conference (from 2012).
Member: Australian Bankers’ Association Incorporated (from 2007,
Chairman 2011-2013), Business Council of Australia (from 2007),
Asia Business Council (from 2008), Australian Government Financial
Literacy Advisory Board (from 2008) and Shanghai International
Financial Advisory Council (from 2009).
Fellow: The Hong Kong Management Association (from 2005).
Former Directorships include
Former Chairman: HSBC Bank Malaysia Berhad (2004–2007) andHang Seng Bank Limited (2005–2007).
Former Chief Executive Officer and Director: The Hongkong andShanghai Banking Corporation Limited (2004–2007).
Former Director: HSBC Australia Limited (2004–2007), HSBC Finance
Ltd (2006–2007) and HSBC Bank (China) Company Limited (2007).
Former Member: Visa APCEMEA Senior Client Council (2009–2011).
Age: 58. Residence: Melbourne, Australia.

ANZ ANNUAL REPORT 2014

MS I R ATLAS Independent Non-Executive Director
BJuris (Hons), LLB (Hons), LLM
Non-Executive Director since September 2014.
Skills, experience and expertise
Ms Atlas brings a strong financial services background and legal
experience to the Board. She is Chairman of The Bell Shakespeare
Company Limited and a director of Coca-Cola Amatil Limited,
Westfield Corporation Limited and Treasury Corporation of
New South Wales.
Ms Atlas’ last executive role was Group Executive, People, at Westpac,
where she was responsible for human resources, corporate affairs
and sustainability. Prior to that, she was Westpac’s Group Secretary
and General Counsel. Before her 10 years at Westpac, Ms Atlas wasa partner in law firm Mallesons Stephen Jaques (now King & Wood
Mallesons). In addition to her practice in corporate law, she held anumber of management roles in the firm including Executive Partner,
People and Information, and Managing Partner.

Current Directorships
Chairman: The Bell Shakespeare Company Limited (from 2010,
Director from 2004).
Director: Oakridge Wines Pty Limited (from 2007), Coca-Cola Amatil
Limited (from 2011), Human Rights Law Centre Ltd (from 2012),
Treasury Corporation of New South Wales (from 2013), Jawun(from 2014) and Westfield Corporation Limited (from 2014).
Member: Australian Institute of Company Directors’ Corporate
Governance Committee (from 2014).
Former Directorships include
Former Director: Suncorp Group Limited (2011-2014), SuncorpMetway Limited (2011-2014) and Scentre Group Limited (previously
known as Westfield Holdings Limited) (2011-2014).
Age: 60. Residence: Sydney, Australia.

MS P J DWYER Independent Non-Executive Director and Chair of the Audit Committee
BCom, FCA, SF Fin, FAICD
Non-Executive Director since April 2012. Ms Dwyer is a member ofthe Risk Committee and Human Resources Committee.
Skills, experience and expertiseMs Dwyer is an established Non-Executive Director with extensive
financial services experience, and has previously held senior
executive roles in the investment management, corporate financeand accounting industries.
Current Directorships
Chairman: Tabcorp Holdings Limited (from 2011, Director from 2005)
and Healthscope Limited (from 2014).
Director: Lion Pty Ltd (from 2012).

Member: Kirin International Advisory Board (from 2012) and ASIC
External Advisory Panel (from 2013).
Former Directorships include
Former Deputy Chairman: Leighton Holdings Limited (2013-2014,
Director 2012) and Baker IDI Heart and Diabetes Research Institute(2003-2013).
Former Director: Suncorp Group Limited (2007-2012), Foster’sGroup Limited (2011), Astro Japan Property Group Limited(2005‑2011), CCI Investment Management Limited (1999-2011)
and Promina Limited (2002-2007).
Former Member: Australian Government Takeovers Panel (2008‑2014).
Age: 54. Residence: Melbourne, Australia.

MR LEE HSIEN YANG Independent Non-Executive Director and Chair of the Technology Committee
MSc, BA
Non-Executive Director since February 2009. Mr Lee is a memberof the Risk Committee and Human Resources Committee.

Member: Governing Board of Lee Kuan Yew School of Public Policy(from 2005).
Special Adviser: General Atlantic (from 2013).

Skills, experience and expertise
Mr Lee has considerable knowledge of and operating experience inAsia. He has a background in engineering and brings to the Board his
international business and management experience across a wide
range of sectors including telecommunications, food and beverages,
properties, publishing and printing, financial services, education, civil
aviation and land transport.

Consultant: Capital International Inc Advisory Board (from 2007).

Current Directorships
Chairman: The Islamic Bank of Asia Limited (from 2012, Director from2007), Civil Aviation Authority of Singapore (from 2009) and General
Atlantic Singapore Fund Pte Ltd (from 2013).

Former Chief Executive Officer: Singapore Telecommunications
Limited (1995-2007).

President: INSEAD South East Asia Council (from 2013).
Former Directorships include
Former Chairman: Fraser & Neave, Limited (2007-2013).
Former Member: Rolls Royce International Advisory Council(2007‑2013).

Age: 57. Residence: Singapore.

Director: Cluny Lodge Pte Ltd (from 1979), Singapore Exchange
Limited (from 2004), Caldecott Inc. (from 2013), Rolls-Royce Holdingsplc (from 2014) and General Atlantic Singapore Fund FII Pte Ltd(from 2014).
CORPORATE GOVERNANCE

59

CORPORATE GOVERNANCE (continued)

MR G R LIEBELT Independent Non-Executive Director and Chair of the Human Resources Committee
BEc (Hons), FAICD, FTSE, FAIM
Non-Executive Director since July 2013. Mr Liebelt is a member of the
Risk Committee, Governance Committee and Technology Committee.
Skills, experience and expertise
Mr Liebelt has extensive international experience and a strong
record of achievement as a senior executive including in strategy
development and implementation. He brings to the Board his
experience of a 23 year executive career with Orica Limited (including
a period as Chief Executive Officer), a global mining services company
with operations in more than 50 countries.

Deputy Chairman: Melbourne Business School (from 2012, Director
from 2008).
Director: Australian Foundation Investment Company Limited(from 2012) and Carey Baptist Grammar School (from 2012).
Former Directorships include
Former Chief Executive Officer and Managing Director: Orica Limited(2005-2012).
Former Director: Business Council of Australia (2010-2012).
Age: 60. Residence: Melbourne, Australia

Current Directorships
Chairman: The Global Foundation (from 2014, Director from 2006)
and Amcor Limited (from 2013, Director from 2012).
MR I J MACFARLANE, AC, Independent Non-Executive Director and Chair of the Risk Committee
BEc (Hons), MEc, Hon DSc Syd., Hon DSc UNSW, Hon DCom Melb.,
Hon DLitt Macq., Hon LLD Monash
Non-Executive Director since February 2007. Mr Macfarlane is amember of the Governance Committee and Audit Committee.
Skills, experience and expertise
During his 28 year career at the Reserve Bank of Australia including
a 10 year term as Governor, Mr Macfarlane made a significant
contribution to economic policy in Australia and internationally.
He has a deep understanding of financial markets as well as a long
involvement with Asia.
Current Directorships
Director: Lowy Institute for International Policy (from 2004) and
Woolworths Limited (from 2007).

Member: International Advisory Board of Goldman Sachs (from 2007),
International Advisory Board of CHAMP Private Equity (from 2007)
and Council of International Advisors to the China Banking
Regulatory Commission (from 2009).
Former Directorships include
Former Chairman: Payments System Board (1998–2006) andAustralian Council of Financial Regulators (1998-2006).
Former Governor: Reserve Bank of Australia (Member 1992–2006,
Chairman 1996–2006).
Former Director: Leighton Holdings Limited (2007-2013).
Age: 68. Residence: Sydney, Australia.

MR J T MACFARLANE Independent Non-Executive Director
BCom, MCom (Hons)
Non-Executive Director since May 2014. Mr Macfarlane is a member ofthe Audit Committee, Risk Committee and Technology Committee.
Skills, experience and expertise
Mr Macfarlane is one of Australia’s most experienced international
bankers. Most recently he has served as Executive Chairman ofDeutsche Bank Australia and New Zealand and CEO of Deutsche Bank
Australia. Prior to joining Deutsche Bank he was CEO of Bankers Trust
New Zealand. Mr Macfarlane has also worked in the USA, Japan and
PNG, and brings to the Board a depth of banking experience in ANZ’s
key markets in Australia, New Zealand and the Asia Pacific.
Current Directorships
Chairman: AGInvest Holdings Limited (MyFarm Limited) (from 2014).
Director: St. Vincent’s Institute of Medical Research (from 2008),
Craigs Investment Partners Limited (from 2013) and Colmac GroupPty Ltd (from 2014).

60

Former Directorships include
Former Executive Chairman: Deutsche Bank AG, Australia and
New Zealand (2007-2014) and Chief Country Officer, Australia(2011‑2014).
Former Director: Deutsche Australia Limited (2007-2014), Deutsche
Securities Australia Limited (2011-2014) and B.T. Futures New Zealand
Limited (1995-2000).
Former Chief Executive Officer: Deutsche Australia Limited(2011‑2014) and Bankers Trust New Zealand (1998-1999).
Former President: Deutsche Securities Ltd (Japan) and Chief Country
Officer (Japan) (1999-2007).
Former Member: Deutsche Bank AG, Global Markets Executive
Committee, Global Banking Executive Committee and Global
Regional Management Committee (2004-2007) and Co-Chair Asia
Pacific Deutsche Bank AG, Executive Management Committee(2004‑2006, Member 2011-2014).
Age: 54. Residence: Melbourne, Australia.

ANZ ANNUAL REPORT 2014

Corporate Governance Framework

Audit and Financial
GovernanceInternal audit
External audit
Financial controls

BOARD OF DIRECTORSCEOPRINCIPAL BOARD COMMITTEES

AUDITCOMMITTEE

GOVERNANCE
COMMITTEEHUMAN RESOURCESCOMMITTEERISKCOMMITTEETECHNOLOGYCOMMITTEEMANAGEMENT BOARD
KEY MANAGEMENT COMMITTEESCORPORATESUSTAINABILITY &DIVERSITY COMMITTEECREDIT & MARKETRISK COMMITTEEGLOBAL TECHNOLOGY,SERVICES & OPERATIONSRISK MANAGEMENTCOMMITTEEGROUP ASSET &LIABILITY COMMITTEE

CAPITAL MANAGEMENTPOLICY COMMITTEEOPERATIONALRISK EXECUTIVECOMMITTEEGLOBAL MARKETS& LOANS PRODUCTCOMMITTEEREPUTATION RISKCOMMITTEECREDIT RATINGSSYSTEM OVERSIGHT
COMMITTEECORPORATE GOVERNANCE

61

CORPORATE GOVERNANCE (continued)

Board Responsibility and Delegationof Authority
The Board is chaired by an independent Non-Executive Director.
The roles of the Chairman and Chief Executive Officer are separate, andthe Chief Executive Officer is the only Executive Director on the Board.

Role of the Chairman
The Chairman plays an important leadership role and is involved in:}} chairing meetings of the Board and providing effective leadershipto it;}} monitoring the performance of the Board and the mix of skills andeffectiveness of individual contributions;}} being an ex officio member of all principal Board Committees;}} maintaining ongoing dialogue with the Chief Executive Officer andproviding appropriate mentoring and guidance; and}} being a respected ambassador for ANZ, including chairing
meetings of shareholders and dealing with key customer, politicaland regulatory bodies.

Board Charter
The Board Charter sets out the Board’s purpose, powers and specificresponsibilities.
The Board is responsible for:}} charting the direction, strategies and financial objectives for
ANZ and monitoring the implementation of those strategies andfinancial objectives;}} monitoring compliance with regulatory requirements, ethicalstandards and external commitments, and the implementationof related policies; and}} appointing and reviewing the performance of the Chief
Executive Officer.
In addition to the above and any matters expressly required by law tobe approved by the Board, powers specifically reserved for the Board
include approvals of the following (except to the extent delegated by
the Board from time to time):}} the budget and strategic plan, at least annually;}} ANZ’s Remuneration Policy, including various remuneration
matters as detailed in the Charter;}} significant changes to organisational structure;}} the acquisition, establishment, disposal or cessation of any
significant business;}} the issue of any shares, options, equity instruments or other
equity securities;}} where practicable, the substance of any announcements to theAustralian Securities Exchange in relation to matters that have been
the subject of a decision by the Board or any public statements
which reflect significant issues of ANZ policy or strategy; and}} any changes to the discretions delegated from the Board.
Under ANZ’s Constitution, the Board may delegate any of its
powers to Committees of the Board. The roles of the principal Board
Committees are set out on pages 66 to 70. The Charters of the Boardand each of its principal Committees are set out on anz.com in the
Corporate Governance section.

62

Board Meetings
The Board normally meets at least eight times each year, including
a meeting to review in detail the Group’s strategy.
Typically at Board meetings the agenda will, in addition to specificitems for the Board’s consideration, include:}} minutes of the previous meeting, and outstanding issues raised
by Directors at previous meetings;}} the Chief Executive Officer’s report;}} the Chief Financial Officer’s report;}} reports on major projects and current business issues;}} specific business proposals;}} reports from Chairs of Committees which have met shortly prior to
the Board meeting on matters considered at those meetings; and}} the minutes of previous Committee meetings for review.
There are two private sessions held at the end of each Board meeting
which are each chaired by the Chairman of the Board.
The first involves all Directors including the Chief Executive Officer,
and the second involves only the Non-Executive Directors.
The Chief Financial Officer, Group General Counsel and Company
Secretary usually also attend all Board meetings. Members of Senior
Management attend Board meetings when an issue under their areaof responsibility is being considered or as otherwise requested by
the Board.

CEO and Delegation to Management
The Board has delegated to the Chief Executive Officer, and throughthe Chief Executive Officer to other Senior Management, the authority
and responsibility for managing the everyday affairs of ANZ. The Board
monitors Management and its performance on behalf of shareholders.
The Group Discretions Policy details the comprehensive discretions
framework that applies to all employees and contractors of ANZ
and its controlled entities, including when acting at ANZ’s request
in operational roles or as directors for other entities.
The Group Discretions Policy is maintained by the Chief Financial
Officer and reviewed annually by the Audit Committee with theoutcome of this review reported to the Board.
At a Senior Management level, ANZ has a Management Board which
comprises the Chief Executive Officer and ANZ’s most senior executives.
At the time of preparation of this Statement, the following Senior
Management, in addition to the Chief Executive Officer, weremembers of the Management Board: Graham Hodges – Deputy
Chief Executive Officer; Shayne Elliott – Chief Financial Officer;
Phil Chronican – Chief Executive Officer, Australia; Andrew Géczy– Chief Executive Officer, International and Institutional Banking;David Hisco – Chief Executive Officer, New Zealand; Joyce Phillips– Chief Executive Officer, Global Wealth and Group Managing
Director, Marketing, Innovation and Digital; Gilles Planté – Deputy
Chief Executive Officer, International and Institutional Banking;Nigel Williams – Chief Risk Officer; Alistair Currie – Group Chief
Operating Officer; and Susie Babani – Group Chief Human
Resources Officer.
Typically, a sub-group of Management Board meets every week with all
Management Board members meeting each month to discuss businessperformance, review shared initiatives and build collaboration andsynergy across the Group.

ANZ ANNUAL REPORT 2014

Board Composition, Selection and Appointment
The Board strives to achieve an appropriate mix of skills, tenure,experience and diversity among its Directors. Details regarding each
Director in office at the date of this Annual Report can be found on
pages 58 to 60.
The Governance Committee (see page 68) has been delegatedresponsibility to review and make recommendations to the Board
regarding Board composition, and to assist in relation to the Director
nomination process.
The Governance Committee conducts an annual review of the sizeand composition of the Board, to assess whether there is a need forany new Non-Executive Director appointments. This review takes
the following factors into account:}} relevant guidelines/legislative requirements in relation to
Board composition;}} Board membership requirements as articulated in the Board
Charter; and}} other considerations including ANZ’s strategic goals and theimportance of having appropriate diversity within the Board
including in relation to matters such as skills, tenure, experience,
age and gender.
The overarching guiding principle is that the Board’s composition
should reflect an appropriate mix having regard to matters such as:}} specialist skill representation relating to both functions (such asaccounting/finance, law and technology) and industry background(such as banking/financial services, retail and professional services);}} tenure;}} Board experience (amongst the members of the Board, there should
be a significant level of familiarity with formal Board and Governanceprocesses and a considerable period of time previously spent working
at senior level within one or more organisations of significant size);}} age spread;}} diversity in general (including gender diversity); and}} geographic experience.
Other matters for explicit consideration by the Committee
are personal qualities, communication capabilities, ability
and commitment to devote appropriate time to the task, thecomplementary nature of the distinctive contribution each Director
might make, professional reputation and community standing.
Nominations may be provided from time to time by a Board member
to the Chair of the Governance Committee who maintains a list of
nominees to assist the Board in the succession planning process.
Where there is a need for any new appointments, a formal assessmentof nominees will be conducted by the members of the GovernanceCommittee and should be documented by the Committee Chair.
In assessing nominees, the Governance Committee has regard to theprinciples set out above.
Professional intermediaries may be used from time to time where
deemed necessary and appropriate to assist in the process of identifying
and considering potential candidates for Board membership.
If found suitable, potential candidates are recommended to theBoard. The Chairman of the Board is responsible for approachingpotential candidates.
The Committee also reviews and recommends the process forthe election of the Chairman of the Board and reviews succession
planning for the Chairman of the Board, making recommendations
to the Board as appropriate.

Board Skills and Experience
Directors must collectively possess the appropriate skills andexperience to enable the Board to effectively discharge its
responsibilities.
The Board’s current “skills matrix” includes expertise and experiencein banking and financial services, capital markets, insurance, retail/marketing, professional services (including accounting and law),
technology, executive leadership (including care and managementof people), ASX top 50 experience (including experience in CEO
roles and in implementing governance structures within largeorganisations), strategy development, corporate sustainability,
regulatory and government policy, risk management, financial
markets regulation, management of international business
operations, Asia business experience, and community involvement.
Appointment Documentation
Each new Non-Executive Director receives an appointment letteraccompanied by a:}} Directors’ Handbook – the handbook includes information on abroad range of matters relating to the role of a Director, including
details of all applicable policies; and}} Director’s Deed – each Director signs a Deed in a form approvedby shareholders at the 2005 Annual General Meeting which covers
a number of issues including indemnity, directors’ and officers’
liability insurance, the right to obtain independent advice andrequirements concerning confidential information.
Undertaking Induction Training
Every new Director takes part in a formal induction program which
involves the provision of information regarding ANZ’s values andculture, the Group’s governance framework, the Non-Executive
Directors’ Code of Conduct and Ethics, Director related policies,
Board and Committee policies, processes and key issues, financial
management and business operations. Briefings are also provided
by Senior Management about matters concerning their areas of
responsibility.
Meeting Share Qualification
Non-Executive Directors are required to accumulate within five years
of appointment, and thereafter maintain, a holding in ANZ sharesthat is equivalent to at least 100% of a Non-Executive Director’s basefee (and 200% of this fee in the case of the Chairman).
Non-Executive Director Remuneration
Details of the structure of the Non-Executive Directors’ remuneration(which is clearly distinguished from the structure of the remunerationof the Chief Executive Officer and other senior executives) are set out
in the Remuneration Report on pages 40 to 41.
The ANZ Directors’ Retirement Scheme was closed effective
30 September 2005. Accrued entitlements were fixed on that datefor Non-Executive Directors in office at the time who had the option
to convert those entitlements into ANZ shares. Such entitlements,
either in ANZ shares or cash, were carried forward and transferredto the Non-Executive Director on their retirement (includinginterest accrued at the 30 day bank bill rate for cash entitlements).
The remaining three Non-Executive Directors who had entitlements
under the Scheme, namely Messrs Morschel and Meiklejohn and
Dr Clark, retired during the 2014 financial year and received paymentof their entitlements. Further details are set out in the Remuneration
Report. No current Non-Executive Director has any entitlement under
the Scheme.

CORPORATE GOVERNANCE

63

CORPORATE GOVERNANCE (continued)

Election at Next Annual General Meeting
Subject to the provisions of ANZ’s Constitution and the Corporations
Act 2001, the Board may appoint a person as a Non-Executive
Director of ANZ at any time but that person must retire and, if theywish to continue in that role, must seek election by shareholders
at the next Annual General Meeting.
Fit and Proper
ANZ has an effective and robust framework in place to ensure that
individuals appointed to relevant senior positions within the APRA
regulated institutions of the Group have the appropriate fitness andpropriety to properly discharge their prudential responsibilities on
appointment and during the course of their appointment.
The framework, set out in ANZ’s Fit and Proper Policy for APRA
Regulated Institutions, addresses the requirements of APRA’s Fit
and Proper Prudential Standards. It involves assessments being
carried out for each Director, relevant senior executives, and the leadpartner of ANZ’s external auditor prior to a new appointment being
made. These assessments are carried out against a benchmark of
documented competencies which have been prepared for each role,
and also involve attestations being completed by each individual,
as well as the obtaining of evidence of material qualifications andthe carrying out of checks such as criminal record, bankruptcy andregulatory disqualification checks. These assessments are reviewed
thereafter on an annual basis.
The Board has responsibility for assessing the fitness and proprietyof the Company’s Non-Executive Directors. The Human Resources
Committee has primary responsibility for assessing the fitness andpropriety of the Chief Executive Officer and key senior executives,
and the Audit Committee carries out assessments of the fitness andpropriety of the external auditor.
Fit and Proper assessments were successfully carried out in respect ofeach Non-Executive Director, the Chief Executive Officer, key senior
executives and the external auditor during the 2014 financial year.
Director Independence
Under ANZ’s Board Charter, the Board must include a majority of
Non‑Executive Directors who satisfy ANZ’s criteria for independence.
The Board Charter sets out criteria that are considered in orderto determine whether a Non-Executive Director is to be regarded
as independent.
In the 2014 financial year, the Governance Committee conducted
its annual review of the criteria for independence against the ASX
Governance Principles and APRA Prudential Standards, as well as
US director independence requirements.
ANZ’s criteria are more comprehensive than those set in many
jurisdictions including in particular the additional criteria stipulated
specifically for Audit Committee members in the Audit Committee
Charter. Further details of the criteria and review process are set out
in the Corporate Governance section of ANZ’s website.
In summary, a relationship with ANZ is regarded as material if areasonable person in the position of a Non-Executive Director of ANZ
would expect there to be a real and sensible possibility that it would
influence a Director’s mind in:}} making decisions on matters likely to come regularly before theBoard or its Committees;}} objectively assessing information and advice given by
Management;}} setting policy for general application across ANZ; and}} generally carrying out the performance of his or her role as a Director.

64

During 2014, the Board reviewed each Non-Executive Director’s
independence and concluded that the independence criteria weremet by each Non-Executive Director.
Directors’ biographies on pages 58 to 60 and on anz.com highlighttheir major associations outside ANZ.
Conflicts of Interest
Over and above the issue of independence, each Director has acontinuing responsibility to determine whether he or she has apotential or actual conflict of interest in relation to any material
matter which relates to the affairs of ANZ. Such a situation may arise
from external associations, interests or personal relationships.
Under the Directors Disclosure of Interest Protocol and Proceduresfor Handling Conflicts of Interest, a Director may not exercise
any influence over the Board if an actual or potential conflict ofinterest exists.
In such circumstances, unless a majority of other Directors who do
not have an interest in the matter resolve to the contrary, the Director
may not be present for Board deliberations on the subject, and may
not vote on any related Board resolutions. In addition, the Director
may not receive relevant Board papers. These matters, should theyoccur, are recorded in the Board minutes.
All Non-Executive Directors are required to notify the Chairman
before accepting any new outside appointment. The Chairman will
review the proposed new appointment and will consider the issue on
an individual basis and, where applicable, also the issue of more than
one Director serving on the same outside board or other body.
When carrying out the review, the Chairman will consider whether
the proposed new appointment is likely to impair the Director’sability to devote the necessary time and focus to their role as an
ANZ Director and, where it will involve more than one ANZ Director
serving on an outside board or other entity, whether that would
create an unacceptable risk to the effective operation of the ANZ
Board. Non-Executive Directors are not to accept a new outside
appointment until confirmed with the Chairman who will consult
the other Directors as the Chairman deems appropriate. Where the
Chairman proposes to accept a new outside appointment, thelongest serving Non-Executive Director substitutes for the Chairman
for the purpose of this process.
Independent Advice
In order to assist Directors in fulfilling their responsibilities, each
Director has the right (with the prior approval of the Chairman)
to seek independent professional advice regarding his/her
responsibilities, at the expense of ANZ. In addition, the Board andeach principal Committee, at the expense of ANZ, may obtainwhatever professional advice it requires to assist in its work.
Tenure and Retirement
ANZ’s Constitution, consistent with the ASX Listing Rules, provides
that a Non-Executive Director must seek re-election by shareholders
every three years if they wish to continue in their role as a
Non‑Executive Director.
In addition, ANZ’s Board Renewal and Performance Evaluation
Protocol confirms that Non-Executive Directors will retire once they
have served a maximum of three consecutive 3-year terms after firstbeing elected by shareholders, unless invited by the Board to extend
their tenure due to special circumstances.

ANZ ANNUAL REPORT 2014

Continuing Education
ANZ Directors take part in a range of training and continuing
education programs. In addition to a formal induction program(see page 63), Directors also receive regular bulletins designed
to keep them abreast of matters relating to their duties andresponsibilities as Directors.
Each Committee also conducts its own continuing education sessions
from time to time as appropriate. Internal and/or external experts
are engaged to conduct all education sessions. Directors also receive
regular business briefings at Board meetings. These briefings areintended to provide Directors with information on each area of ANZ’sbusiness, in particular regarding performance, key issues, risks andstrategies for growth. In addition, Directors have the opportunity toparticipate in site visits from time to time.
Access in relation to Directors
Management is able to consult Directors as required. Employees haveaccess to the Directors directly or through the Company Secretary.
Shareholders who wish to communicate with the Directors may direct
correspondence to a particular Director, or to the Non-Executive
Directors as a whole.
Directors have unrestricted access to Management and, in addition
to the regular presentations made by Management to Board andBoard Committee meetings, Directors may seek briefings or otheradditional information from Management on specific matters whereappropriate. The Company Secretary also provides advice andsupport to the Directors as required.

Performance Evaluations
Non-Executive Directors
The framework used to evaluate the performance of Non-Executive
Directors is based on the expectation that they are performing
their duties:}} in the interests of shareholders;}} in a manner that recognises the great importance that ANZ placeson the values of honesty, integrity, quality and trust;}} in accordance with the duties and obligations imposed upon themby ANZ’s Constitution, ANZ’s Non-Executive Directors’ Code of
Conduct and Ethics, and the law; and}} having due regard to ANZ’s corporate sustainability objectives, andthe importance of ANZ’s relationships with all its stakeholders andthe communities and environments in which ANZ operates.
The performance criteria also take into account the Non-Executive
Director’s contribution to:}} charting the direction, strategy and financial objectives of ANZ;}} monitoring compliance with regulatory requirements andethical standards;}} monitoring and assessing Management’s performance in achieving
strategies and budgets approved by the Board;}} setting criteria for and evaluating the Chief Executive Officer’s
performance; and}} the regular and continuing review of executive succession planningand executive development activities.

Role of Company Secretary

The performance evaluation process is set out in ANZ’s Board
Renewal and Performance Evaluation Protocol.

The Board is responsible for the appointment of ANZ’s Company
Secretaries. The Board has appointed two Company Secretaries.
The Group General Counsel provides legal advice to the Board
as and when required. He works closely with the Chair of theGovernance Committee and the Company Secretary to develop andmaintain ANZ’s corporate governance principles, and is responsible
to the Board for the Company Secretary’s Office function.

Performance evaluations of the Non-Executive Directors are
conducted in two ways:}} Annual review – on an annual basis, or more frequently if
appropriate, the Chairman has a one-on-one meeting with each
Non-Executive Director specifically addressing the performance
criteria including compliance with the Non-Executive Directors’
Code of Conduct and Ethics. To assist the effectiveness of thesemeetings, the Chairman is provided with objective information
about each Director (e.g. number of meetings attended, Committee
memberships, other current directorships/roles etc) and a guide fordiscussion to ensure consistency. When considering the Director’s
meeting attendance record during the previous year and also theirother roles outside ANZ, the Chairman reviews generally whether
the Director has sufficient time to properly carry out their duties as
an ANZ Director and more specifically whether they are making asufficient time commitment to their role at and outside meetings.
A report on the outcome of these performance evaluations isprovided to the Governance Committee and to the Board; and}} Re-election statement – when nominating for re-election,
Non‑Executive Directors are given the opportunity to submit awritten or oral statement to the Board setting out their reasonsfor seeking re-election. In the Non-Executive Director’s absence,
the Board evaluates any such statement, has regard to theperformance criteria that are used in evaluating the performanceof Non‑Executive Directors, and also considers their capacity
to commit the necessary time to their role as a Director before
deciding whether to endorse the relevant Director’s re-election.

The Company Secretary is responsible for the day-to-day operationsof the Company Secretary’s Office including lodgements with
relevant securities exchanges and other regulators, the administrationof Board and Board Committee meetings (including preparationof meeting minutes), the management of dividend payments andassociated share plans, and oversight of the relationship with ANZ’s
Share Registrar.
Profiles of ANZ’s Company Secretaries can be found in the Directors’
Report on page 9.

CORPORATE GOVERNANCE

65

CORPORATE GOVERNANCE (continued)

Chairman of the Board
ANZ’s Board Renewal and Performance Evaluation Protocol requiresthat an annual review of the performance of the Chairman of theBoard is facilitated by the longest serving Non-Executive Director.
Input is sought from each Director individually on the performanceof the Chairman of the Board against the competencies for the
Chairman’s role approved by the Board.
The longest serving Non-Executive Director collates the input in orderto provide an overview report to the Governance Committee and to
the Board, as well as feedback to the Chairman of the Board.
The Board
On a periodic basis, the performance of the Board is assessed using
an independent external facilitator. The facilitator seeks input fromeach Director and certain members of senior management whencarrying out the assessment.
The assessment is conducted in accordance with broad terms ofreference agreed by the Governance Committee. The results ofsuch assessment are discussed with the Chair of the GovernanceCommittee and, together with any recommendations, are presented
to the Governance Committee and the Board. The last externallyfacilitated review took place in 2011, and it is expected that externallyfacilitated reviews of the Board will occur approximately every three
years. The review process in the intervening years is conductedinternally based on input sought from each Director and also
members of the Management Board, and considers progress against
any recommendations implemented arising from the most recent
externally facilitated review, together with any new issues that may
have arisen.
From time to time, the Governance Committee also considers
assessments by independent bodies regarding the Board andits performance.
Board Committees
Each of the principal Board Committees conducts an annual
Committee performance self-assessment to review performanceusing Guidelines approved by the Governance Committee.
The Guidelines set out that at a minimum, the self-assessments
should review and consider the following:}} the Committee’s performance having regard to its role andresponsibilities as set out in its Charter;}} whether the Committee’s Charter is fit for purpose, or whether any
changes are required; and}} the identification of future topics for training/education of
the Committee.
The outcomes of the performance self-assessments are reported
to the Governance Committee (or to the Board, if there are any
material issues relating to the Governance Committee) for discussion
and noting.

66

Senior Management
Details of how the performance evaluation process is undertakenby the Board in respect of the Chief Executive Officer and otherkey Senior Management, including how financial, customer,
operational and qualitative measures are assessed, are set out in the
Remuneration Report on pages 30 to 39.
Review Processes Undertaken
Director, Board Committee and relevant Senior Management
evaluations in accordance with the above processes have been
undertaken in respect of the 2014 financial year. Given the Chairman’s
recent appointment, the Board did not undertake a separate reviewof the Chairman’s performance in 2014 and instead feedback wassought from Non-Executive Directors as part of the Non-Executive
Director review process. An internal review was conducted in relation
to the Board’s performance as, having regard to the change in thecomposition of the Board during the year, an externally facilitated
Board review was not considered appropriate and instead is expected
to be undertaken in 2015.

Board Committees
As set out on page 62 of this Statement, the Board has the ability
under its Constitution to delegate its powers and responsibilities
to Committees of the Board. This allows the Board to spend
additional and more focused time on specific issues. The Board has
five principal Board Committees: Audit Committee, GovernanceCommittee, Human Resources Committee, Risk Committee andTechnology Committee.
Membership and AttendanceEach of the principal Board Committees is comprised solely of
independent Non-Executive Directors (a minimum of three isrequired), has its own Charter and has the power to initiate any
special investigations it deems necessary. Board Committee
composition is reviewed each year.
The Chairman is an ex-officio member of each principal Board
Committee including Chair of the Governance Committee. The Chief
Executive Officer is invited to attend Board Committee meetings asappropriate. His presence is not automatic, however, and he does notattend where his remuneration is considered or discussed, nor does
he attend the Non-Executive Director private sessions of Committees
unless invited. Non-Executive Directors may attend any meeting of
any Committee.
Each Board Committee may, within the scope of its responsibilities,
have unrestricted access to Management, employees and information
it considers relevant to the carrying out of its responsibilities under
its Charter.
Each Board Committee may require the attendance of any ANZ officer
or employee, or request the attendance of any external party, at
meetings as appropriate.

ANZ ANNUAL REPORT 2014

Meetings
Prior to the commencement of each year, each principal Board
Committee prepares a calendar of business which details the items
to be included on the agenda for each scheduled Committee meetingin the coming year. In addition, any training/education topics thathave been identified as part of the Committee’s annual performanceself-assessment process are also included in the calendar. In advanceof each Board Committee meeting, at least one planning sessionis held by the Committee Chair with relevant internal and external
stakeholders to ensure that all emerging issues are also captured in
the agenda for the forthcoming meeting as appropriate.

Under the Committee Charter, all members of the Audit Committee
must be appropriately financially literate and Committee members
must collectively have the appropriate knowledge, skills andexperience (including industry experience) to effectively discharge
the Committee’s responsibilities. Ms Dwyer (Chair) was determined
to be a ‘financial expert’ under the definition set out in the Audit
Committee Charter. While the Board determined that Ms Dwyer has
the necessary attributes to be a ‘financial expert’ in accordance withthe relevant requirements, it is important to note that this does notgive rise to Ms Dwyer having responsibilities additional to those ofother members of the Audit Committee.

Minutes of Committee meetings are included in the papers for thefollowing Board meeting. In addition, Committee Chairs update
the Board regularly about matters relevant to the Committee’s role,
responsibilities, activities and matters considered, discussed andresolved at Committee meetings. When there is a cross-Committee
item, the Committees will communicate with each other throughtheir Chairs.

The Audit Committee meets with the external auditor and internal
auditor without Management being present. The Chair of the Audit
Committee meets separately and regularly with Global Internal
Audit, the external auditor and Management. The Deputy Chief
Financial Officer is the executive responsible for assisting the Chairof the Committee in connection with the administration and efficient
operation of the Committee.

Audit Committee
The Audit Committee is responsible for providing oversight andindependent review of:}} ANZ’s financial reporting principles and policies, controls andprocedures;}} the effectiveness of ANZ’s internal control and risk management
framework;}} the work of Global Internal Audit which reports directly to the
Chair of the Audit Committee (refer to Global Internal Audit on
page 70 for more information);}} the integrity of ANZ’s financial statements and the independent
audit thereof, and compliance with related legal and regulatory
requirements;}} any due diligence procedures;}} prudential supervision procedures and other regulatory
requirements to the extent relating to financial reporting; and}} reports from major subsidiary audit committees.
The Audit Committee is also responsible for:}} the appointment, annual evaluation and oversight of the external
auditor, including reviewing independence, fitness and propriety
and qualifications;}} compensation of the external auditor;}} where deemed appropriate, endorsing the replacement of theexternal auditor; and}} reviewing the performance and remuneration of the Group General
Manager, Global Internal Audit and making recommendations to
the Board as appropriate.

Substantive areas of focus in the 2014 financial year included:}} Global Internal Audit and External Audit – the Committee approved
the annual plans for Global Internal Audit and External Audit
and kept progress against those plans under regular review.
Adjustments to the Global Internal Audit Plan were made during
the year to accommodate changing circumstances, risk profiles
and business unit requests;}} Assessing significant estimates and judgments in financial reports;}} Accounting and regulatory developments – reports ondevelopments were provided to the Committee outlining relevantchanges and implications for ANZ;}} Financial Reporting Governance Program – the Committeemonitored the financial reporting process and the controls in place
to ensure the integrity of the financial statements;}} Whistleblowing – the Committee received and reviewed
information on disclosures made under ANZ’s Global Whistleblower
Protection Policy; and}} Charter Review – the Committee reviewed and recommended to
the Governance Committee for approval proposed changes to the
Audit Committee Charter.

CORPORATE GOVERNANCE

67

CORPORATE GOVERNANCE (continued)

Governance Committee
The Governance Committee is responsible for:}} identifying and recommending prospective Board members andensuring appropriate succession planning for the position of
Chairman (see page 63);}} ensuring there is a robust and effective process for evaluating theperformance of the Board, Board Committees and Non-Executive
Directors (see pages 65 to 66);}} monitoring the effectiveness of ANZ’s approach to diversity to theextent it relates to Board diversity and reviewing and approving
measurable objectives for achieving gender diversity on the Board(see page 63);}} ensuring an appropriate Board and Board Committee structure isin place;}} reviewing and approving the Charters of each Board Committee
except its own, which is reviewed and approved by the Board;}} reviewing developments in, and approving, corporate governancepolicies and principles applicable to ANZ and to the ANZ
Board; and}} approving corporate sustainability objectives for ANZ, andreviewing progress in achieving them.
The Group General Counsel is the executive responsible for assisting
the Chair of the Committee in connection with the administrationand efficient operation of the Committee.
Substantive areas of focus in the 2014 financial year included:}} Board succession – the Committee assisted the Board in connection
with the process to identify and appoint new Board members to
replace a number of Non-Executive Directors who retired in 2014
(including the Chairman of the Board);}} Diversity – the Committee reviewed progress against themeasurable objective for Board gender diversity set for 2013/2014
and approved a new objective;}} Board governance framework – the Committee conducted its
annual review of the Board’s governance framework and principles
including in relation to Board balance, composition and size, Director
tenure, outside commitments, Board and Committee education,
nomination procedures and the Director independence criteria;}} Performance evaluation processes – the Committee reviewed
existing processes relating to the annual performance reviewsof the Board, Chairman of the Board, Non-Executive Directors
and Board Committees;}} Board and Committee performance evaluations – the Committee
reviewed the major themes arising from the annual Board
performance review process and received a report on the outcomeof the Board Committee review process; and}} Review and approval of Group policies – the Committee reviewed
and, where appropriate, approved amendments to existing Group
policies including the Continuous Disclosure Policy, Board Renewal
and Performance Evaluation Protocol, Fit and Proper Policy
Schedule, and Director Independence Criteria.
Human Resources Committee
The Human Resources Committee assists and makes
recommendations to the Board in relation to remuneration mattersand senior executive succession, including for the Chief Executive
Officer. The Committee also assists the Board by reviewing andapproving certain policies, as well as monitoring performance withrespect to health and safety issues, employee engagement andculture, and diversity and inclusion (excluding Board diversity which
is monitored by the Governance Committee).
The Committee is responsible for reviewing and making
recommendations to the Board on:}} remuneration matters relating to the Chief Executive Officer(details are in the Remuneration Report on pages 28 to 56);}} remuneration matters, including incentive arrangements, for other
Board Appointees (other than the Group General Manager, Global
Internal Audit);}} the design of executive remuneration structures and significant
incentive plans; and}} the Group’s Remuneration Policy.
In addition, the Committee considers and approves the appointmentof Board Appointees (other than the Chief Risk Officer and Group
General Manager, Global Internal Audit which are addressed
separately by the Risk and Audit Committees respectively), approves
clawback processes and outcomes, reviews senior executive
succession plans, and monitors the effectiveness of ANZ’s health andsafety, culture, engagement and diversity and inclusion programs.
The Group Chief Human Resources Officer is the executive
responsible for assisting the Chair of the Committee in connection
with the administration and efficient operation of the Committee.
Substantive areas of focus in the 2014 financial year included:}} Management roles and performance – the Committee reviewed
the performance of the Chief Executive Officer, the Chief Executive
Officer’s direct reports and other key roles, and the succession
plans in place for Management Board and business critical roles;}} Regulatory changes – the Committee monitored regulatory
developments and the implications for ANZ both in Australia
and globally;}} Fitness and propriety – the Committee completed fit and proper
assessments for all existing and new Board Appointees;

ANZ Board Committee Memberships – as at 30 September 2014
Audit

Governance

Human Resources

Risk

Technology

Ms P J Dwyer FE, C

Mr D M Gonski C*

Mr G R Liebelt C

Mr I J Macfarlane C

Mr Lee Hsien Yang C

Mr I J Macfarlane

Mr G R Liebelt

Ms P J Dwyer

Ms P J Dwyer

Mr G R Liebelt

Mr J T Macfarlane

Mr I J Macfarlane

Mr Lee Hsien Yang

Mr Lee Hsien Yang

Mr J T Macfarlane

Mr D M Gonski*

Mr G R Liebelt

Mr D M Gonski*

Mr D M Gonski*

Mr J T Macfarlane
Mr D M Gonski*
C – Chair68

FE – Financial Expert* ex Officio membership

ANZ ANNUAL REPORT 2014}} Remuneration – the Committee conducted an annual review of
remuneration for Non-Executive Directors and also reviewed thecompensation structure for the Chief Executive Officer and Senior
Management. The Committee also agreed with the Board thecontractual arrangements for a number of senior appointments
and departures at Board Appointee level;}} Remuneration Policy – the Committee reviewed ANZ’s Remuneration
Policy to ensure it remains appropriate for its intended purpose;}} Health, Safety, Diversity and Inclusion – the Committee received
reports on health and safety performance and related initiatives,
and reviewed ANZ’s diversity and inclusion strategy andperformance towards stated targets; and}} Employee Engagement and Culture – the Committee reviewed theannual employee engagement results and action plan and also thecultural alignment with ANZ Strategy and Values.
For more details on the activities of the Human Resources Committee,
please refer to the Remuneration Report on pages 28 to 56.
Risk Committee
The Board is principally responsible for approving the Group’s
risk appetite, risk tolerance and related strategies and policies.
This responsibility also extends to the oversight of policy complianceand the effectiveness of ANZ’s risk and compliance management
framework. The Risk Committee assists the Board in relation to theoversight and review of the Group’s risk management principles andpolicies, strategies, appetite, processes and controls. These include
credit, market, liquidity, balance sheet, operational, compliance andreputation risk frameworks.
The Risk Committee also assists the Board by providing an objective
non-executive oversight of the implementation by management of
ANZ’s risk management framework and its related operation and byenabling an institution-wide view of ANZ’s current and future risk
position relative to its risk appetite and capital strength. The Committee

is authorised to approve credit transactions and other related mattersbeyond the approval discretion of Executive Management.
The Chief Risk Officer is the executive responsible for assisting the
Chair of the Committee in connection with the administration andefficient operation of the Committee.
Substantive areas of focus in the 2014 financial year included:}} Regulatory change – the Committee monitored proposed new
regulations, both local and global, including in particular ensuring
adherence to the new APRA Prudential Standard CPS 220 –Risk Management;}} Credit portfolios – the Committee received regular updates on
the quality of ANZ’s credit portfolios and the status of the moresignificant exposures;}} Market, Funding and Liquidity Risk – the Committee received
regular updates on the Group’s exposures and responses tochanges in market conditions;}} Operational Risk – the Committee received regular updates on
the rollout of ANZ’s Operational Risk framework and controls;}} Compliance Risk – the Committee reviewed the increased
investment in Compliance oversight, in particular in Anti-Money
Laundering and Sanctions;}} Business updates – the Committee received updates frombusinesses across the Group.
A risk management and internal control system to manage ANZ’smaterial business risks is in place, and Management reported to theBoard during the year as to the effectiveness of the management of
ANZ’s material business risks. In addition, the Board received assurance
from the Chief Executive Officer and the Chief Financial Officer thatthe declaration provided in accordance with section 295A of the
Corporations Act is founded on a sound system of risk management
and internal control and that the system is operating effectively in allmaterial respects in relation to financial reporting risks.

Directors’ Meetings
The number of Board meetings and meetings of Committees during the year that each Director was eligible to attend, and the numberof meetings attended by each Director were:Board
I R Atlas2

A

B

1

1

Audit
Committee
A

B

GovernanceCommitteeAB

G J Clark3

3

3

P J Dwyer

10

10

6

6

D M Gonski4

6

6

3

3

2

2

5

3

2

2

Human
Resources
Committee
B

A

B

A

B

2

1

3

3

1

1

4

4

8

8

1

2

2

4

4

P A F Hay3

6

6

10

10

G R Liebelt

10

10

I J Macfarlane

10

10

6

6

J T Macfarlane2

4

4

1

1

D E Meiklejohn3

3

3

2

2

J P Morschel4

6

6

5

5

2

2

3

3

M R P Smith

1010

A M Watkins3

6

5

5

5

2

2

3

3

2

4

4

Technology
CommitteeA

Lee Hsien Yang

2

Risk
Committee

Executive
Committee1
A

B

SharesCommittee1

Committeeof the Board1

A

B

A

B

1

1

1

1
4

1
4

2

2

1

1

1

1

3

3

1

1

5

5

8

8

4

4

1

1

5

5

8

7

4

4

2

2

8

8

1

1

3

3

2

2

3

3

1

1

5

5

2

2

1

1

1

1

2

2

6

6

5

5

1

1

Column A – Indicates the number of meetings the Director was eligible to attend.
Column B – Indicates the number of meetings attended. The Chairman is an ex-officio member of the Audit, Governance, Human Resources, Risk and Technology Committees.
With respect to Committee meetings, the table above records attendance of Committee members. Any Director is entitled to attend these meetings and from time to time Directors attend meetingsof Committees of which they are not a member.
1 The meetings of the Executive Committee, Shares Committee and Committee of the Board as referred to in the table above include those conducted by written resolution.
2 Mr J T Macfarlane was appointed to the Board on 22 May 2014 and Ms I R Atlas was appointed to the Board on 24 September 2014.
3 Dr G J Clark and Mr D E Meiklejohn retired from the Board on 18 December 2013. Mr P A F Hay and Ms A M Watkins retired from the Board on 30 April 2014.
4 Mr J P Morschel was an ex officio member of all Board Committees prior to his retirement from the Board on 30 April 2014. Mr D M Gonski commenced as a member of all Board Committees fromhis appointment to the Board on 27 February 2014. When Mr Gonski succeeded Mr Morschel as Chairman of the Board, Mr Gonski’s membership of each Committee continued on an ex officio
basis, including his position as Chair of the Governance Committee.

CORPORATE GOVERNANCE

69

CORPORATE GOVERNANCE (continued)

For further information on how ANZ manages its risks arisingfrom financial instruments, please see the disclosures in relation
to AASB 7 ‘Financial Instruments: Disclosures’ in the notes to thefinancial statements.
For further information on risk management governance and ANZ’s
approach in relation to risk oversight and the management ofmaterial business risks, please see the Corporate Governance sectionof anz.com.
Technology Committee
The Technology Committee assists the Board in the effective
discharge of its responsibilities in relation to technology and related
activities. The Committee is responsible for:}} monitoring that appropriate key technology related controls arein place;}} approving the technology strategy of ANZ;}} making recommendations to the Board regarding and monitoringmaterial technology investments;}} reviewing and monitoring the progress of the strategic plans
for the management and control of technology activities andservices; and}} the approval and monitoring of ANZ’s information and technology
security strategy.
The Group Chief Operating Officer is the executive responsible
for assisting the Chair of the Committee in connection with theadministration and efficient operation of the Committee.
Substantive areas of focus in the 2014 financial year included:}} Operational performance and major projects – the Committee
reviewed reports on operational performance (including service
and systems stability and performance) and monitored theprogress of major projects;}} Strategy – the Committee received updates on the progress of
ANZ’s technology strategy;}} Investment – the Committee reviewed Management’s progress indelivering the business technology investment agenda; and}} Information Security – the Committee monitored the continuing
process of improving information security capability to address
constantly evolving security threats and increasing regulatory
requirements.
Additional Committees
In addition to the five principal Board Committees, the Board hasconstituted an Executive Committee and a Shares Committee, eachconsisting solely of Directors, to assist in carrying out specific tasks.
The Executive Committee has the full power of the Board and isconvened as necessary between regularly scheduled Board meetings
to deal with urgent matters. The Shares Committee has the power
to manage on behalf of the Board the issue of shares and options(including under ANZ’s Employee Share Acquisition Plan and Share
Option Plan). The Board also forms and delegates authority toad-hoc Committees of the Board as and when needed to carry out
specific tasks.

70

Audit and Financial Governance
Global Internal Audit
Global Internal Audit (GIA) is a function independent of Management.
Its role is to provide the Board and Management with an efficient andindependent appraisal of the internal controls established by ANZ’s
first (business) and second (Group and Divisional risk and financefunctions) lines of defence. Operating under a Board approved
Charter, the reporting line for the outcomes of work conducted by
GIA is directly and solely to the Chair of the Audit Committee, witha direct communication line to the Chief Executive Officer and theexternal auditor.
The GIA team includes six General Managers accountable for theprovision of audit services to the respective Divisions for which they are
responsible. The General Managers, together with the Head of Audit
Services and Group General Manager, GIA, form the GIA Leadership
Team. GIA utilises a global audit pool structure, which comprises
individuals with skills in Technology, Credit and Operational audits.
The global team is spread across fifteen locations.
The GIA Plan, according to which GIA operates, is developed andreviewed in line with ANZ’s overall risk appetite and risk management
framework. The Audit Committee approves the Plan, the associatedbudget and any changes thereto.
All audit activities are conducted in accordance with ANZ policies
and values, including ANZ’s Employee Code of Conduct and Ethics, aswell as local and international auditing standards promulgated by theprofessional auditing bodies. A quarterly report is presented by theGroup General Manager, GIA to the Audit Committee, summarisingmajor activities and findings, as well as statistics on issued audit
reports and ratings.
Furthermore, GIA assesses and reports on the effective and timely
resolution of audit issues raised.
External Audit
The external auditor’s role is to provide an independent opinion that
ANZ’s financial reports are true and fair and comply with applicableregulations. The external auditor performs an independent audit inaccordance with Australian Auditing Standards. The Audit Committee
oversees ANZ’s Stakeholder Engagement Model for Relationship with
the External Auditor. Under the Stakeholder Engagement Model,
the Audit Committee is responsible for the appointment (subject to
ratification by shareholders) and also the compensation, retention
and oversight of the external auditor.
The Stakeholder Engagement Model also stipulates that the
Audit Committee:}} pre-approves all audit, audit related and non-audit services onan engagement by engagement basis or pursuant to specificpre approval policies adopted by the Committee;}} regularly reviews the independence of the external auditor; and}} evaluates the effectiveness of the external auditor.
The Stakeholder Engagement Model requires that all services
provided by the external auditor, including the non-audit services
that may be provided by the external auditor, must be in accordancewith the following principles:}} the external auditor should not have a mutual or conflicting
interest with ANZ;}} the external auditor should not audit its own work;}} the external auditor should not function as part of Management or
as an employee; and}} the external auditor should not act as an advocate of ANZ.

ANZ ANNUAL REPORT 2014

The Stakeholder Engagement Model, which sets out in detail thetypes of services the external auditor may and may not provide, canbe found on the Corporate Governance section of anz.com.
Details of the non-audit services provided by the external auditor,
KPMG, during the 2014 financial year, including their dollar value,
together with the statement from the Board as to their satisfaction
with KPMG’s compliance with the related independence requirementsof the Corporations Act 2001, are set out in the Directors’ Reporton page 10. In addition, the auditor has provided an independence
declaration under Section 307C of the Corporations Act 2001.
ANZ requires a two year period before any former partner or
employee of the external auditor is appointed as a Director or senior
executive of ANZ. The lead partner of the external auditor is required
to rotate off the audit after five years and cannot return for a further
five years. Certain other senior audit staff are required to rotate off
after a maximum of seven years. Any appointments of ex-partners or
ex-employees of the external auditor as ANZ finance staff, at senior
manager level or higher, must be pre-approved by the Chair of the
Audit Committee.
Financial Controls
The Audit Committee oversees ANZ’s financial reporting policies andcontrols, the integrity of ANZ’s financial statements, the relationshipwith the external auditor, the work of Global Internal Audit, and theaudit committees of various significant subsidiary companies.
ANZ maintains a financial reporting governance framework which
evaluates the design and tests the operational effectiveness of key
financial reporting controls. In addition, half-yearly certifications
are completed by Senior Management, including senior financeexecutives. These certifications comprise representations andquestions about financial results, disclosures, processes and controls
and are aligned with ANZ’s external obligations.
Any material issues arising from the evaluation and testing arereported to the Audit Committee. This process assists the Chief
Executive Officer and Chief Financial Officer in making certifications
to the Board under the Corporations Act and ASX GovernancePrinciples as referred to in the Directors’ Report on page 10.

Ethical and Responsible Decision-making
Codes of Conduct and Ethics
ANZ has two main Codes of Conduct and Ethics – the Employee
Code and the Non-Executive Directors Code (the Codes). The Codes
provide ANZ employees and Directors with a practical set of guiding
principles to help them make decisions in their day to day work.
The Codes recognise the different responsibilities that Directors haveunder law but enshrine the same values and principles.
The Codes embody honesty, integrity, quality and trust, and
ANZ employees and Directors are required to demonstrate thesebehaviours and comply with the Codes whenever they are identified
as representatives of ANZ.
The principles underlying the Codes are:}} we act in ANZ’s best interests and value ANZ’s reputation;}} we act with honesty and integrity;}} we treat others with respect, value difference and maintain a safe
working environment;}} we identify conflicts of interest and manage them responsibly;}} we respect and maintain privacy and confidentiality;}} we do not make or receive improper payments, benefits or gains;}} we comply with the Codes, the law and ANZ’s policies andprocedures; and}} we immediately report any breaches of the Codes, the law or ANZ
policies and procedures.
The Codes are supported by the following detailed policies thattogether form ANZ’s Conduct and Ethics Policy Framework:}} ANZ Anti-Money Laundering and Counter-Terrorism
Financing Policy;}} ANZ Use of Systems, Equipment and Information Policy;}} ANZ Fraud Policy;}} ANZ Expense Policy;}} ANZ Equal Opportunity, Bullying and Harassment Policy;}} ANZ Health and Safety Policy;}} Conflict of Interest Policy;}} Trading in ANZ Securities Policy;}} Trading in Non-ANZ Securities Policy;}} ANZ Anti-Bribery and Anti-Corruption Policy; and}} ANZ Whistleblower Protection Policy.
Leaders are encouraged to run sessions for new direct reports andensure that they, in turn, brief their teams where required on ANZ’svalues and ethical decision making within the team. The sessions
are designed to build line manager capability, equipping ANZ
leaders and their teams with tools and knowledge to make carefully
considered, values-based and ethical business decisions and to create
team behaviour standards that are in line with the ANZ Values.
Within two months of starting work with ANZ, and thereafter on anannual basis, all ANZ employees are required to complete a training
course that takes each employee through the eight principles of the
Employee Code and a summary of their obligations under each of
the policies in the Conduct and Ethics Policy Framework. Employees
are required to declare that they have read, understand and havecomplied with the principles of the Employee Code, including key
relevant extracts of the policies set out above.

CORPORATE GOVERNANCE

71

CORPORATE GOVERNANCE (continued)

To support the Employee Code, ANZ’s Performance Improvement
and Unacceptable Behaviour Policy sets out the principles ANZ
will apply in determining whether its standards of performance,
behaviour and compliance are met by employees and, where there
is a breach, the consequences that should be applied. Under the
Performance Improvement and Unacceptable Behaviour Policy and
the Global Performance Management Framework, any breach of the
Employee Code that leads to a formal consequence being applied
to an employee (such as a warning) is recorded. Line managers
must take formal consequences into account when determining an
employee’s performance rating and remuneration outcome. A formal
consequence may negatively impact an employee’s performance
rating and remuneration outcomes for the financial year in which
the consequence was recorded.
Directors’ compliance with the Non-Executive Directors Codecontinues to form part of their annual performance review.
Securities Trading
The Trading in ANZ Securities Policy prohibits trading in ANZ
securities by all employees, Directors and contractors who are awareof information that could be reasonably expected to have a material
or significant effect on the price or value of an ANZ security and thatis not generally available.
The Policy specifically prohibits ANZ Directors and certain ‘restrictedpersons’ (which includes senior executives) and their associatesfrom trading in ANZ securities during ‘blackout periods’ as definedin the Policy. The Policy also provides that certain types of tradingare excluded from the operation of the trading restrictions under
the Policy, and for exceptional circumstances where trading may bepermitted during a prohibited period with prior written clearance.
ANZ Directors are required to obtain written approval from the
Chairman in advance before they or their associates trade in ANZ
securities. The Chairman of the Board is required to seek written
approval from the Chair of the Audit Committee. Senior executives
and other restricted persons are also required to obtain written
approval before they, or their associates, trade in ANZ securities.
The Policy also prohibits employees from hedging interests that havebeen granted under any ANZ employee equity plan that are either
unvested or subject to a holding lock.
ANZ Directors and Management Board members are also prohibitedfrom using ANZ securities in connection with a margin loan or similar
financing arrangement which may be subject to a margin call or
loan‑to-value ratio breach.
Whistleblower Protection
The ANZ Global Whistleblower Protection Policy provides a mechanism
by which ANZ employees and contractors can raise concerns regarding
actual or suspected contraventions of ANZ’s ethical and legal standards
without fear of victimisation or disadvantage.
Disclosures may be made under the Policy to Managers, designated
Whistleblower Protection Officers, or via an independently managed
Whistleblower Hotline.

72

Commitment to Shareholders
Shareholders are the owners of ANZ and the approaches described
below are enshrined in ANZ’s Shareholder Charter and the related
document titled Shareholder Communication and Shareholder
Meetings, copies of which can be found on the Corporate
Governance section of anz.com.
Communication
In order to make informed decisions about ANZ, and tocommunicate views to ANZ, it is important for shareholders to havean understanding of ANZ’s business operations, performance andgovernance framework.
ANZ encourages shareholders to take an active interest in ANZ, andseeks to provide shareholders with quality information in a timely
fashion through ANZ’s reporting of results, the Annual Report, theShareholder Review, announcements and briefings to the market,
half yearly newsletters and via its dedicated shareholder site on
anz.com. ANZ strives for transparency in all its business practices,and recognises the impact of quality disclosure on the trust andconfidence of shareholders, the wider investor market and thecommunity. To this end, ANZ, outside of its scheduled results
announcements, issued additional Trading Updates to the market
during the 2014 financial year.
Should shareholders require any information, contact details for
ANZ and its Share Registrar (including postal, telephone and email)are set out in ANZ’s Annual Report, the 2014 Shareholder Review, thehalf yearly shareholder newsletter and the Shareholder Centre sectionof anz.com.
Meetings
To allow as many shareholders as possible to have an opportunity
to attend shareholder meetings, ANZ rotates meetings aroundcapital cities and makes them available to be viewed online using
webcast technology.
Further details on meetings and presentations held throughout thisfinancial year are available on anz.com > About us > Shareholder
centre. Prior to the Annual General Meeting, shareholders are
given the opportunity to submit any questions they have for the
Chairman or Chief Executive Officer to enable key common themes
to be considered.
The external auditor is present at ANZ Annual General Meetings
and available to answer shareholder questions on any matter thatconcerns them in their capacity as auditor.
Directors are also required to attend the Annual General Meeting eachyear, barring unusual circumstances, and be available afterwards tomeet with and answer questions from shareholders.
Shareholders have the right to vote on various resolutions related
to company matters. Shareholders are encouraged to attend andparticipate in meetings but, if shareholders are unable to attend
a meeting, they can submit their proxies via post or electronically.
Where votes are taken on a poll, which is usual ANZ practice,
shareholders are able to cast their votes on a confidential basis.
ANZ appoints an independent party to verify the results, normally
KPMG, which are reported as soon as possible to the ASX and posted
on anz.com.

ANZ ANNUAL REPORT 2014

Continuous Disclosure
ANZ’s practice is to release price sensitive information to the ASX in
a timely manner as required under the ASX Listing Rules and then to
all relevant overseas securities exchanges on which ANZ’s securities
are listed, and to the market and community generally through
ANZ’s media releases, website and other appropriate channels.
Through ANZ’s Continuous Disclosure Policy, ANZ demonstrates
its commitment to achieving best practice in terms of disclosureby acting in accordance with the spirit, intention and purposes of
the applicable regulatory requirements. The Policy reflects relevant
obligations under applicable securities exchange listing rules
and legislation.
For disclosure purposes, price sensitive information is informationthat a reasonable person would expect to have a material effecton the price or value of ANZ’s securities. Designated Disclosure
Officers have responsibility for reviewing proposed disclosures andmaking decisions in relation to what information will be disclosed
to the market, unless the relevant disclosure has been reviewed
and approved by ANZ’s Board. ANZ employees and contractors
must inform a Disclosure Officer of any potentially price sensitive
information concerning ANZ as soon as they become aware of it.
A committee of senior executives (the Continuous Disclosure Review
Sub-Committee) also meets on a regular basis and one of its majortasks is to review the effectiveness of ANZ’s systems and procedures
for achieving compliance with applicable regulatory requirements
in relation to the disclosure of price sensitive information. This
Sub‑Committee reports to the Governance Committee of the Boardon an annual basis.

Corporate Sustainability
ANZ’s Sustainability Framework supports the delivery of its businessstrategy. As ANZ pursues its goal of becoming a ‘super regional’bank, it is recognised that it must be done in a responsible, ethicaland sustainable way. Increasingly, ANZ’s stakeholders – be theycustomers, employees, shareholders or the communities in which
ANZ operates – are focussed on the impacts of ANZ’s operations
and want to understand how ANZ is managing not only its economic
risks, but also its social and environmental risks.
Within ANZ’s Sustainability Framework there are three priority areas,
distinctive to ANZ, and five ‘Licence to Operate’ areas consideredessential to a large company operating in a global market.
ANZ’s three priority areas are:}} Sustainable development – integrating social and environmental
considerations into business decisions, products and services tohelp customers achieve their sustainability ambitions and deliver
long term value for stakeholders.
Supporting ANZ’s Institutional and Commercial clients to manage
their human rights, labour and environmental risks more effectively
benefits customers, strengthens business relationships and reduces
ANZ’s reputational and commercial risk.
}} Diversity and inclusion – building the most diverse and inclusive
workforce of any major bank in the region.
ANZ employees come from more than 200 different cultural
backgrounds. Fostering diversity within the workforce assists
ANZ to innovate, identify new markets, connect with customers
effectively and make more informed decisions for ANZ’s business.

}} Financial inclusion and capability – building the financial
capability of people across the region to promote financial
inclusion and progression of individuals and communities.
Building the money management skills, confidence and savingsof people in the communities in which ANZ operates supportsbusiness aspirations. Customers who feel confident about
managing their money are more likely to choose appropriate
financial products, contributing to a better customer experience.
From the perspective of governments and regulators, good money
management skills complement consumer protection measuresand promote financial self-sufficiency.
ANZ’s Licence to Operate commitments cover customers, employees
and suppliers, as well as the impact on communities and theenvironment as a result of ANZ’s operations.
ANZ’s sustainability performance has been recognised internationallythrough inclusion in a number of independent sustainability indices,
including the Dow Jones Sustainability Index (DJSI). The DJSI assesses
the approach and performance of companies across a broad rangeof criteria such as corporate governance, risk management, codes ofconduct and compliance, environmental management and reporting,products and services, brand management, human resources
practices and policies, stakeholder engagement and community
investment. ANZ has been assessed as the global banking sector
leader six times in the last eight years. In 2014 ANZ again performed
strongly, being assessed as ‘gold class’ with a score above 90 percent,scoring particularly well for risk and brand management, stakeholder
engagement and investment in building financial capability andinclusion in Australia, New Zealand and Asia-Pacific.
ANZ’s governance structure provides oversight of the risks andopportunities arising from its activities. The Corporate Sustainability
and Diversity (CSD) Committee is chaired by the Chief Executive
Officer. It provides strategic leadership on ANZ’s corporate
sustainability agenda and monitors progress and results on aquarterly basis. The CSD Committee reports to the Management
Board, and the Board’s Governance Committee is also updated onprogress. Each year, ANZ sets public sustainability targets and abusiness-wide program of work to respond to its most material issues.
This year ANZ achieved or made good progress against 76% of its
public targets.
Stakeholders are informed of ANZ’s performance against its
Sustainability Framework through a monthly e-bulletin, and annual
and interim Sustainability reports. ANZ uses the Global Reporting
Initiative (GRI) Sustainability Reporting Guidelines for the preparationof its annual Corporate Sustainability Review.
In preparation for the 2014 Corporate Sustainability Review, earlier
this year ANZ undertook a comprehensive materiality assessment
process, which involved conducting workshops and interviews witha diverse range of internal and external stakeholders in Melbourne,
Sydney, Wellington, Auckland, Jakarta, Hong Kong and Suva.
Stakeholders were targeted based on key sector representation,
their relationship with ANZ and their ability to engage productively
on a broad range of sustainability issues facing ANZ in their region.
The results of this process guide the development of both ANZ’ssustainability reporting and 2015 sustainability targets.
Performance against ANZ’s 2014 sustainability targets, as well as
more detailed information on the materiality assessment process
and the Sustainability Framework and approach, is available in the2014 Corporate Sustainability Review, to be published on anz.com
in December 2014.

CORPORATE GOVERNANCE

73

CORPORATE GOVERNANCE (continued)

Diversity and Inclusion at ANZCreating a diverse and inclusive workplace
A vibrant, diverse and inclusive workforce is critical to ANZ’s successas a super regional bank. In order to understand and service its
global customer base, ANZ needs a workforce that reflects themarkets within which it operates. ANZ is deeply committed to
attracting diversity within its workforce and harnessing the varietyof perspectives this brings, enabling ANZ to innovate, respond anddeliver services to its customers.
Diversity at ANZ encompasses gender, ethnicity, culture, language,
education, disability, age, family/relationship status, sexual
orientation, socio-economic background and/or religious beliefs.
It also includes the many ways people differ in terms of their life
experience, education, job function, work experience, ways ofthinking and working, personality, location, marital status and caring
responsibilities. Inclusion refers to the extent to which diversity isvalued, accessed and capitalised on in terms of decision making.
A summary of ANZ’s policy position on Diversity and Inclusion
can be found on anz.com > About us > Our company >Corporate governance.
Leadership, Governance and Accountability
ANZ’s CEO is a member of the Male Champions of Change program
convened by the Australian Sex Discrimination Commissioner in
April 2010. The program encourages and supports male CEOs andDirectors to use their individual and collective influence to ensure
the issues of gender equality and women’s representation inleadership are elevated on the national business agenda.
ANZ’s Human Resources Committee plays an important role inrelation to ANZ’s people strategy, remuneration strategy andapproach to gender balance and diversity. This includes annuallyreviewing progress on gender balance, including women in
management and other diversity priorities (other than gender
diversity matters in connection with the Board, which are theresponsibility of the Governance Committee), and succession
planning. The Human Resources Committee also reviews annual
performance and remuneration outcomes to ensure there is no
systemic bias in related processes.
Management Board sets annual CEO and Group targets for improving
the representation of women in management, and creating a vibrant,
diverse and inclusive workforce. Progress is reviewed monthly by the
CEO and Management Board, and results inform the Group’s bonus
pool and performance outcomes.
The Corporate Sustainability and Diversity (CSD) Committee
is responsible for advising Management Board on corporate
sustainability and diversity, setting diversity and inclusion strategies,
policies and targets and monitoring progress. The CSD Committee
is chaired by ANZ’s CEO and meets four times each year.

ANZ’s progress
Progress on 2014 publicly statedgender balance and diversity goals

ResultImprove employee engagement
to at least 74%

Employee engagement improved
to 73%, up from 72% in 2013

Improve perceptions of ‘valuesbased leadership’ amongst ANZ
employees to at least 73%

Favourable perceptions of ‘valuesbased leadership’ remained steadyyear-on-year at 71%

Increase the representation of
women in management by 1%
and achieve gender balance in
ANZ’s key recruitment, talentand leadership programs

ANZ fell short of this goal,with representation of womenin management increased
from 38.7% to 39.2%. All key
recruitment, talent and leadershipprograms were gender balanced

Employ 230 people through
ANZ’s traineeships, graduate
program and permanent
employment fromdisadvantaged and under
represented groups to enhancediversity and support economic
and social inclusion in ANZ’scommunities

ANZ employed 253 people
from disadvantaged and underrepresented groups. While ANZ
exceeded goals for employmentof people with a disability andrefugee opportunities throughthe Given the Chance program,
ANZ fell short of its Indigenous
recruitment goals

Achieve 80% favourable
perceptions of ‘Involvementand Empowerment’ in ANZ’s
employee survey as a measureof ANZ’s progress in building adiverse and inclusive workforce

Favourable perceptions of‘Involvement and Empowerment’remained steady year-on-year
at 78%

Measuring diversity, inclusion and engagement
In 2014, ANZ conducted its second comprehensive review of its
workforce diversity through the annual employee engagement
survey. The survey revealed that ANZ employees come from morethan 200 different cultural backgrounds, and 45% identify with an
Asian cultural background. Globally, 90% of employees agreed orstrongly agreed that their manager treats them with respect, while
90% agreed or strongly agreed ANZ is creating a workforce that isopen and accepting of individual difference. In 2014, a Diversity andInclusion Index was included in the survey for the first time, withpositive perceptions of diversity and inclusion at ANZ held by 90%
of employees. This index included questions such as “My manager
supports workplace flexibility and my efforts to balance my workand personal life”, and “My immediate manager genuinely supports
equality between women and men”.
Overall employee engagement increased from 72% to 73% this year.
Perceptions of ‘values-based leadership’ amongst ANZ employees
remained steady at 71%, as did perceptions of ‘Involvement andEmpowerment’ which remained high at 78%.

74

ANZ ANNUAL REPORT 2014

Gender Balance at Board, Senior Executive andManagement Levels
ANZ’s Board currently comprises eight Directors; one Executive
Director, the CEO and seven Non-Executive Directors, two ofwhom are women.

ANZ has two women on its Management Board: the CEO Global
Wealth and Group Managing Director Marketing, Innovation and
Digital; and the Group Chief Human Resources Officer. At Senior
Executive and Executive levels 22.5% of leadership positions areheld by women, up from 22.1% the previous year.

Ms Dwyer and Ms Atlas joined the Board as Non-Executive Directors
in April 2012 and September 2014 respectively. Ms Dwyer is Chairof the Audit Committee and a member of the Human Resources
Committee and Risk Committee. Ms Atlas has been appointed asa member of the Audit Committee, Governance Committee andHuman Resources Committee with effect from January 2015.

During 2014, overall representation of women in management has
increased from 38.7% to 39.2%. Improvements in particular occurredat manager level, increasing from 40.6% to 41.1%. While ANZ is
proud of its progress, it is understood that as ANZ increases its superregional footprint, ANZ will face challenges of low employment
growth in the domestic markets of Australia and New Zealand, anddifferent regulatory, social and cultural barriers to female workforce
participation in some of ANZ’s Asian locations. Supply issues also
continue to be a problem in particular business areas such as
Technology. Maintaining the focus on gender balance remains a
key strategy across all of ANZ’s geographies and businesses.

The Board has a tenure policy which limits the period of service of a
Non-Executive Director to three 3-year terms after first being electedby shareholders unless invited by the Board to extend his/her tenure
due to special circumstances. In accordance with this policy, Messrs
Morschel and Meiklejohn and Dr Clark retired during the 2014 financial
year. Pursuant to the succession planning process in connection withthose retirements, Messrs Gonski and Liebelt and Ms Dwyer havebeen appointed to the Board over the course of the last two years.
The objective previously set by the Board in relation to Board gender
diversity was to increase the number of women on the Board over time
as vacancies arose following completion of that succession process.
During 2014 Mr Hay and Ms Watkins also retired from the Board
creating vacancies which were filled by Mr J T Macfarlane and Ms Atlas.
This maintained the number of women on the Board at two.
The Board has now set a new Board gender diversity objective whichis to increase the number of women on the ANZ Board over time as
vacancies and circumstances permit, with the target being to achievea female representation of at least 30% amongst the Non-Executive
Directors on the Board.
Group^

Senior Executives & Executives (Incl. Management Board)

Targets and Progress for Improving Outcomes in
Gender Equality
Annual public targets have been set for women in management
since 2004. Progress and results for 2014 are set out below, defining
each level of Management in relation to the CEO, in line with work
undertaken by the Male Champions of Change initiative to improvethe consistency and detail of reporting on women in management inAustralia. This has been updated this year to more accurately reflect
ANZ’s workforce. For the purposes of reporting on Senior Executive andExecutive roles, these senior roles typically involve leading countries,
large businesses, operations or projects, and/or strategy, policy andgovernance in specific areas for the Group.

2013 Baseline*

2014 Target

22.1%

2014 Actual %of women2014 Actual
numberof women

22.5%

189

CEO-1: ANZ Management Board

18.2%

2

CEO-2: Senior Executive1

25.2%

39

22.0%

148

Senior Manager3

30.6%

30.2%

607

Manager4

40.6%

41.1%

6,950

Total women in Management5

38.7%

39.2%

7,746

Total women in non-Management6

64.6%

64.2%

19,224ANZ Overall

54.5%

54.2%

26,970CEO-3: Executive2

39.7%

2015 Target

40.2%

Notes
* Includes employees on parental leave. Parental leave data is available for Australia, New Zealand and Bangalore employees only. Due to a minor change in reporting boundaries, 2013 baseline
figures reported differ by 0.1% to those reported in ANZ’s 2013 Annual Report.
^ Includes all employees regardless of leave status and includes casuals but not contractors (which are included in FTE).
1 Senior Executive comprises persons holding roles within ANZ designated as Group 1. These roles typically involve leading large businesses, geographies or the strategy, policy and governance ofbusiness areas (excludes Management Board).
2 Executive comprises persons holding roles within ANZ designated as Group 2.
3 Senior Manager comprises persons holding roles within ANZ designated as Group 3.
4 Manager comprises persons holding roles within ANZ designated as Group 4.
5 Total women in Management represents all ANZ Management Board roles and roles within ANZ designated as Group 1 to 4.
6 Non-Management comprises women holding roles within ANZ designated as Group 5 and 6.

CORPORATE GOVERNANCE

75

CORPORATE GOVERNANCE (continued)

Prevention of Sex-Based Harassment and Discrimination
ANZ reviews its Equal Employment Opportunity (EEO) policies andtraining annually to ensure they are up-to-date and proactively
educating employees and their managers on harassment, bullying
and victimisation for sex-based issues. All ANZ employees are
required to complete EEO training on an annual basis, and reported
incidents related to sexual harassment, bullying and victimisation for
sex-based issues are carefully tracked and managed. In 2014, ANZ
added an item to its employee survey asking In my organisation,
sex-based harassment is not tolerated˝, to which 95% of employees
globally strongly agreed or agreed.
Pay Equity
ANZ reports progress in achieving gender pay equity across theorganisation. The gender pay differential between males and females(based on like-for-like job size) continues to be minimal, with further
reductions achieved in 2014. Annual reviews of ANZ’s performanceand remuneration outcomes ensure balance and parity, withperformance assessments (which drive remuneration outcomes)
being equitably applied between males and females.
Recruitment, Progression and Development Practices
ANZ aims to achieve gender balance and diversity in its key
recruitment, talent development and learning programs to ensure
it is building a strong pipeline of men and women leaders for the
future. For example, ANZ’s 2014 graduate intake in Australia and
New Zealand is 49% female, and 25% of the total intake speaks an
Asian language; two graduates have a self-disclosed disability andfour graduates are from an Indigenous background. ANZ’s latest
intake of the Generalist Banker accelerated development programhas 50% women and 70% of all participants speak an Asian language.
Of the participants in the Building Enterprise Talent program, 50%
are women and 60% of all participants have had more than three
years international experience. 50% of participants in the Leadership
Pathway training programs in 2014 were women.
ANZ sets clear targets around gender-balanced recruitment, requiring
100% of all recruitment shortlists to contain at least one female
candidate, and a 50:50 target for all recruitment. In 2013, ANZ’s CEO
and ANZ signed the Panel Pledge – a commitment to ensure thatall panels and speaking engagements in which ANZ participatesare gender balanced. This is supported internally by ANZ’s ‘Notable
Women’ initiative, which aims to provide senior female leaders withthe skills and opportunities to represent ANZ in the media on key
business issues.
Under-represented and disadvantaged groups
ANZ has specific programs focused on Indigenous employment
and traineeships, and providing work placement opportunities forrefugees. During 2014, ANZ provided traineeships or permanent
employment opportunities for 141 Indigenous Australians. ANZ also
participated in The Brotherhood of St Laurence’s Given the Chance
refugee employment program, providing refugees in Australia withskills and experience to enter the workforce. This year 26 refugees
took part in the program. ANZ also continued to progress its
Indigenous Action Plan through the establishment of the ANZ
Reconciliation Network to drive the Indigenous inclusion agenda
across ANZ in Australia. Since 2003, ANZ has employed more than
800 Indigenous Australians.
ANZ’s Accessibility and Inclusion Plan aims to include, attract andvalue customers and employees living with a disability. During 2014,
ANZ exceeded its employment target, employing 86 people with aself-disclosed disability.

76

Parental Leave and Flexible Work Arrangements
ANZ offers flexible work arrangements, breaks from work and othersupport in special circumstances to help balance life priorities withwork and to manage careers. During 2014, ANZ continued to embed
flexible working policies and practices, building awareness of thebusiness and personal benefits of flexibility by profiling male andfemale senior leaders who role model flexible working. The 2014
employee survey showed an increase in the number of employees
working flexibly, and that 84% of employees believe ANZ supports
their efforts to balance their work and personal commitments.
ANZ supports employees throughout their careers. In Australia, ANZ
offers 12 weeks paid parental leave to both female and male employees
if they are the primary care giver. Australian employees also have accessto a $4000 child care allowance upon their return to work, and all
managers are given access to their ANZ laptops while on parental leave
to enable them to stay in touch and ease their transition back to work.
Recognition and Support For Equality and Inclusion
in ANZ’s Communities
ANZ continues to be recognised as an Employer of Choice for Womenby the Australian Government’s Workplace Gender Equality Agency.
In New Zealand, ANZ was recognised in 2013 by the United Nations
Women National Committee for excellence in equal opportunityand non discrimination. ANZ has also been recognised as a Gold
Tier employer by the Australian Workplace Equality Index, ranking
among the top 5 national employers for the inclusion of Lesbian,Gay, Bisexual, Transgender and Intersex employees.
ANZ partners and/or participates in the Male Champions of Change
initiative; Chief Executive Women; and Community Business’s
Diversity and Inclusion in Asia Network. ANZ is a founding memberof the Diversity Council of Australia, the Principal Partner of the
Sydney Gay and Lesbian Mardi Gras, and a member of Pride in
Diversity and the Australian Network on Disability.
Future Goals
ANZ’s ambition is to foster the most diverse workplace in the region;
one which reflects the markets within which it operates, harnesses
the unique talents and capabilities of all ANZ’s people and actively
uses this diversity as a point of competitive advantage in the market.
2015 publicly stated gender balance and diversity goals
Improve employee engagement to 75%
Improve perceptions of ‘values-based leadership’ amongst ANZ
employees to 73%
Increase the representation of women in management by 1%
and achieve gender balance in ANZ’s key recruitment, talent andleadership programs
Increase both the number of people with a self-disclosed disability
and the number of people with a disability recruited throughtraineeships, graduate programs and permanent employment
opportunities by 15% from FY14 year end result
Increase the number of Indigenous Australians recruited throughtraineeships, graduate programs and permanent employment
opportunities by 15% from FY14 year end result
Increase the adoption of flexible working practices in Australia and
NZ to 50% of employees and extend flexibility into two Asian markets

Political Donations
For the year to 30 September 2014, ANZ donated $100,000 to the
Liberal Party of Australia and $80,000 to the Australian Labor Party.

ANZ ANNUAL REPORT 2014

SECTION 2
Financial Statements
Income Statement
Statement of Comprehensive Income
Balance Sheet
Cash Flow Statement
Statement of Changes in Equity

78
78
79
80
81
82

Notes to the Financial Statements
1 Significant Accounting Policies
2 Critical Estimates and Judgements Usedin Applying Accounting Policies
3 Income
4 Expenses
5 Compensation of Auditors
6 Income Tax Expense
7 Dividends
8 Earnings per Ordinary Share
9 Cash
10 Trading Securities
11 Derivative Financial Instruments
12 Available-for-sale Assets
13 Net Loans and Advances
14 Impaired Financial Assets
15 Provision for Credit Impairment
16 Shares in Controlled Entities and Associates
17 Tax Assets
18 Goodwill and Other Intangible Assets
19 Other Assets
20 Premises and Equipment
21 Deposits and Other Borrowings
22 Tax Liabilities
23 Payables and Other Liabilities

84
84
95
97
98
99
100
101
103
103
103
104
110
111
112
112
114
115
116
117
117
118
119
119

24 Provisions
25 Debt issuances
26 Subordinated Debt
27 Share Capital
28 Reserves and Retained Earnings
29 Capital Management
30 Assets Charged as Security for Liabilities andCollateral Accepted as Security for Assets
31 Financial Risk Management
32 Fair Value of Financial Assets and Financial Liabilities
33 Maturity Analysis of Assets and Liabilities
34 Offsetting
35 Segment Analysis
36 Notes to the Cash Flow Statements
37 Controlled Entities
38 Associates
39 Structured Entities
40 Transfers of Financial Assets
41 Fiduciary Activities
42 Commitments
43 Credit Related Commitments, Guarantees,
Contingent Liabilities and Contingent Assets
44 Superannuation and Other Post Employment
Benefit Schemes
45 Employee Share and Option Plans
46 Related Party Disclosures
47 Life Insurance Business48 Changes to Comparatives
49 Events since the End of the Financial Year
Directors’ Declaration and Responsibility Statement
Independent Auditor’s Report

SECTION 2

120
120
121
123
125
126
129
130
151
159
160
162
165
167
168
169
171
172
172
173
176
179
184
185
189
192
193
194

77

FINANCIAL STATEMENTS
INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER

Consolidated

Interest income
Interest expense

Note

20131
$m

2014
$m

20131
$m

3
4

29,524(15,714)28,627(15,869)

25,560(15,550)

25,513(16,149)

13,81012,75810,010

9,364

4

4,189
1,538
517
20,054(8,760)

3,851
1,431
482
18,522(8,257)

5,868
217
–
16,095(6,878)

5,249
203
–
14,816(6,509)15

11,294(986)

10,265(1,188)

9,217
(974)

8,307
(1,132)

Net interest income
Other operating income
Net funds management and insurance income
Share of associates’ profit
Operating income
Operating expenses
Profit before credit impairment and income tax
Credit impairment charge

The Company

2014
$m

3
3
3

Profit before income tax

10,308

9,077

8,243

7,175

(3,025)(2,757)(1,971)(1,788)

Profit for the year

7,283

6,320

6,272

5,387

Comprising:
Profit attributable to non-controlling interests
Profit attributable to shareholders of the Company

12
7,271

10
6,310

–
6,272

–
5,387

267.1
257.0
178

232.7
225.7
164

n/a
n/a
178

n/a
n/a
164

Income tax expense

Earnings per ordinary share (cents)
Basic
DilutedDividend per ordinary share (cents)
1 Comparative amounts have changed. Refer to note 48 for details.
The notes appearing on pages 84 to 192 form an integral part of these financial statements.

78

6

8
8
7

ANZ ANNUAL REPORT 2014

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER

Consolidated

The Company

2014
$m

20131
$m

2014
$m

20131
$m

7,283

6,320

6,272

5,387

43

43

8

(15)

(35)

(63)

(35)

(63)

(11)

(18)

(2)

(3)

10

19

10

19

28

487
37

1,712
–

94
–

234
–

28

134
(47)

13
3

90
(40)

32
4

28

165
(31)
(24)

(186)
–
18

168
8
–

(78)
24
–

(23)
(41)

(7)
52

(14)
(53)

(20)
16

Other comprehensive income net of tax

664

1,586

234

150

Total comprehensive income for the year

7,947

7,906

6,506

5,537

Comprising total comprehensive income attributable to:Non-controlling interests
Shareholders of the Company

16
7,931

15
7,891

–
6,506

–
5,537

Note

Profit for the year
Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Remeasurement gain/(loss) on defined benefit plans
Fair value gain/(loss) attributable to changes in own credit riskof financial liabilities designated at fair value
Income tax on items that will not be reclassified subsequently to profit or loss
Remeasurement gain/(loss) on defined benefit plans
Fair value gain/(loss) attributable to changes in own credit riskof financial liabilities designated at fair value
Items that may be reclassified subsequently to profit or loss
Foreign currency translation reserve
Exchange differences taken to equity
Exchange differences transferred to income statement
Available-for-sale revaluation reserve
Valuation gain/(loss) taken to equity
Transferred to the income statement
Cash flow hedge reserve
Valuation gain/(loss) taken to equity
Transferred to income statement
Share of associates’ other comprehensive income2
Income tax on items that may be reclassified subsequently to profit or loss
Available-for-sale revaluation reserve
Cash flow hedge reserve28, 44

1 Comparative amounts have changed. Refer to note 48 for details.
2 Share of associates’ other comprehensive income is comprised of available-for-sale revaluation reserve loss of $25 million (2013: gain of $18 million), foreign currency translation reserveof nil (2013: loss of $1 million) and cash flow hedge reserve gain of $1 million (2013: gain of $1 million).
The notes appearing on pages 84 to 192 form an integral part of these financial statements.

FINANCIAL STATEMENTS

79

BALANCE SHEET AS AT 30 SEPTEMBER

Consolidated

The Company

2014
$m

20131
$m

2014
$m

20131
$m

32,55920,241
5,459
49,69256,36930,917521,752
1,565
–
–
4,582
38
417
7,950
33,5792,181
4,791

25,27019,225
6,530
41,28845,87828,277483,264
2,106
–
–
4,123
20
725
7,690
32,083
2,164
4,352

30,655
18,1504,873
38,04952,882
26,151
415,066434
99,194
14,870
720
27
778
2,451
–
1,001
2,243

22,798
16,621
5,638
31,46441,011
23,823
383,173990
71,354
14,955
841
18
936
2,124
–
983
2,268

Total assets

772,092

702,995

707,544618,997

Liabilities
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Derivative financial instruments
Due to controlled entities
Current tax liabilities
Deferred tax liabilities
Policy liabilities
External unit holder liabilities (life insurance funds)
Payables and other liabilities
Provisions
Debt issuances
Subordinated debt

10,114
5,599
510,079
52,925–449
120
34,554
3,181
10,984
1,100
80,096
13,6078,695
3,921
466,915
47,509–972
1432,388
3,511
9,059
1,228
70,376
12,8048,189
4,886
423,172
50,474
93,796
301
62
–
–
7,682
695
64,161
12,8707,451
3,531
385,449
41,82764,649
882
12
–
–
6,276
825
56,96812,062

Total liabilities

722,808

657,392

666,288579,932

Net assets

49,28445,603

41,25639,065

Note

AssetsCash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Regulatory deposits
Due from controlled entities
Shares in controlled entities
Investments in associates
Current tax assets
Deferred tax assets
Goodwill and other intangible assets
Investments backing policy liabilities
Premises and equipment
Other assets

9
10
11
12
13
16
16
17
17
18
47
20
19

21
11
22
22
47
23
24
25
26

Shareholders' equity
Ordinary share capitalPreference share capital
Reserves
Retained earnings

27
27
28
28

24,031871(239)
24,544

23,641871(907)
21,93624,280871(215)
16,32023,914871(473)
14,753

Share capital and reserves attributable to shareholders of the Company
Non-controlling interests

27

49,20777

45,541
62

41,256–39,065–49,28445,603

41,25639,065

Total shareholders' equity
1 Comparative amounts have changed. Refer to note 48 for details.
The notes appearing on pages 84 to 192 form an integral part of these financial statements.

80

ANZ ANNUAL REPORT 2014

CASH FLOW STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER

Consolidated

The Company

2014
$m

20131
$m

2014
$m

20131
$m

29,327(14,886)
127
2,704(8,123)(3,207)28,752(16,333)
114
9,616(7,351)(2,494)25,417(14,716)
1,890
3,780
(6,476)(2,615)25,706(16,613)
1,340
9,437
(5,874)(2,043)

7,549
620(5,578)
(471)

6,093
198
(4,983)
(446)

168
–
–
49

152
–
–
51

8,062

13,166

7,497

12,156

1,271(8,600)(35,154)–348
768(30,137)–957(7,131)(29,408)
1,856

237
(736)
(24,119)(3,734)(4,856)
4,625(3,505)
4,341

–
–

–
–

36,592
1,358
1,435
910

27,5413,279
1,391(1,025)31,798
668
1,103
1,417

26,036
3,114
1,205(1,475)(2,419)

3,001

1,260

528

5,643

16,167

8,757

12,684(12,652)
11,136(16,320)
10,224(7,849)6,489(12,944)
8,042

–
251

(2)
81

(21)
249

(484)
25

(370)
(292)

(356)
(1,234)

(248)
86

(354)
(507)

(1,927)(7,607)(1,294)(6,222)

17,156(10,710)

18,895(19,773)

13,102(8,642)

16,658(15,766)

3,258(2,586)(3,827)
4
(500)

1,868
(1,465)(3,226)
30
(425)

3,258
(2,586)(3,843)
4
(500)

1,869
(1,465)(3,239)30(425)

Net cash provided by/(used in) financing activities

2,795(4,096)793(2,338)Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effects of exchange rate changes on cash and cash equivalents

6,511
41,111607

4,464
35,5071,140

8,256
36,279513

4,124
31,419736

48,22941,11145,04836,279Note

Cash flows from operating activities
Interest received
Interest paid
Dividends received
Other operating income received
Other operating expenses paid
Income taxes paid
Net cash flows from funds management and insurance businessPremiums, other income and life investment deposits received
Investment income and policy deposits received
Claims and policyholder liability payments
Commission expense (paid)/received
Cash flows from operating activities before changes in operating assets and liabilities
Changes in operating assets and liabilities arising from cash flow movements:(Increase)/decrease in operating assets
Collateral paid
Trading securities
Loans and advances
Net intra-group loans and advances
Net cash flows from investments backing policyholder liabilities
Purchase of insurance assets
Proceeds from sale/maturity of insurance assets
Increase/(decrease) in operating liabilities:
Deposits and other borrowings
Settlement balances owed by ANZ
Collateral received
Payables and other liabilities
Change in operating assets and liabilities arising from cash flow movements
Net cash provided by operating activities
Cash flows from investing activities
Available-for-sale assets
Purchases
Proceeds from sale or maturity
Controlled entities and associates
Purchased (net of cash acquired)Proceeds from sale (net of cash disposed)
Premises and equipment
Purchases
Other assets

36(a)

36(c)
36(c)

Net cash (used in) by investing activities
Cash flows from financing activities
Debt issuances
Issue proceeds
Redemptions
Subordinated debt
Issue proceeds
Redemptions
Dividends paid
Share capital issues
Share buybacks

Cash and cash equivalents at end of year

36(b)1 Comparative amounts have changed. Refer to note 48 for details.
The notes appearing on pages 84 to 192 form an integral part of these financial statements.

FINANCIAL STATEMENTS

81

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER

Ordinaryshare capital$m

Preference
shares$m

Reserves1$m

Retainedearnings$m

Shareholders’equityattributable
to equity
holders of
the Bank$m

23,070871(2,498)19,72841,171

49

–

–

–

(17)

(17)

–

(17)

23,070871(2,498)19,711

41,15449

41,203

Profit or loss
Other comprehensive income for the year

–
–

–
–

–
1,600

6,310
(19)

6,310
1,581

10
5

6,320
1,586

Total comprehensive income for the year
Transactions with equity holders in theircapacity as equity holders:
Dividends paid
Dividend income on Treasury shares held within
the Group’s life insurance statutory funds
Dividend reinvestment plan
Transactions with non-controlling interests
Other equity movements:
Share-based payments/(exercises)
Treasury shares Global Wealth adjustment
Group share option scheme
Group employee share acquisition scheme
Group share buyback
Transfer of options/rights lapsed

–

–

1,600

6,291

7,891

15

7,906

–

–

–

(4,088)(4,088)(1)(4,089)

–
843
–

–
–
–

–
–
(10)

20
–
–

20
843
(10)

–
–
(1)

20
843
(11)

–
7
30
116
(425)
–

–
–
–
–
–
–

3
–
–
–
–
(2)

–
–
–
–
–
2

3
7
30
116
(425)
–

–
–
–
–
–
–

3
7
30
116
(425)
–

Consolidated

As at 1 October 2012
Restatement
As at 1 October 2012 (restated)

As at 30 September 2013

Non-controllinginterests$m

Totalshareholders’equity$m

41,22023,641871(907)

21,93645,54162

45,603

Profit or loss
Other comprehensive income for the year

–
–

–
–

–
653

7,271
7

7,271
660

12
4

7,283
664

Total comprehensive income for the year
Transactions with equity holders in theircapacity as equity holders:
Dividends paid
Dividend income on Treasury shares held within
the Group’s life insurance statutory funds
Dividend reinvestment plan
Transactions with non-controlling interests
Other equity movements:
Share-based payments/(exercises)
Treasury shares Global Wealth adjustment
Group share option scheme
Group employee share acquisition scheme
Group share buyback
Transfer of options/rights lapsed

–

–

653

7,278

7,931

16

7,947

–

–

–

(4,700)(4,700)(1)(4,701)

–
851
–

–
–
–

–
–
10

22
–
–

22
851
10

–
–
–

22
851
10

–
24
4
11
(500)
–

–
–
–
–
–
–

13
–
–
–
–
(8)

–
–
–
–
–
8

13
24
4
11
(500)
–

–
–
–
–
–
–

13
24
4
11
(500)
–

24,031871(239)

24,54449,20777

49,284As at 30 September 2014

1 Further information on other comprehensive income is disclosed in note 28 to the financial statements.
The notes appearing on pages 84 to 192 form an integral part of these financial statements.

82

ANZ ANNUAL REPORT 2014

The Company

As at 1 October 2012
Restatement
As at 1 October 2012 (restated)
Profit or loss
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with equity holders in theircapacity as equity holders:
Dividends paid
Dividend reinvestment plan
Other equity movements:
Share-based payments/(exercises)
Group share option scheme
Group employee share acquisition scheme
Group share buyback
Transfer of options/rights lapsed
As at 30 September 2013
Profit or loss
Other comprehensive income for the year
Total comprehensive income for the year
Transactions with equity holders in theircapacity as equity holders:
Dividends paid
Dividend reinvestment plan
Other equity movements:
Share-based payments/(exercises)
Group share option scheme
Group employee share acquisition scheme
Group share buyback
Transfer of options/rights lapsed
As at 30 September 2014

Ordinaryshare capital$m

Preference
shares$m

Reserves1$m

Retainedearnings$m

Shareholders’equityattributable
to equity
holders of
the Bank$m

23,350871(686)

13,50837,043

–

–

–

–

–

–

–

–

23,350871(686)

13,50837,043–37,043

–
–
–

–
–
–

–
212
212

5,387
(62)
5,325

5,387
150
5,537

–
–
–

5,387
150
5,537

–
–
843

–
–
–

–
–
–

–
(4,082)––(4,082)
843

–
–
–

–
(4,082)
843

–
30
116
(425)
–

–
–
–
–
–

3
–
–
–
(2)

–
–
–
–
2

3
30
116
(425)
–

–
–
–
–
–

3
30
116
(425)
–

23,914871(473)

14,75339,065–39,065

–
–
–

–
–
–

–
253
253

6,272
(19)
6,253

6,272
234
6,506

–
–
–

6,272
234
6,506

–
851

–
–

–
–

(4,694)–(4,694)851––(4,694)
851

–
4
11
(500)
–

–
–
–
–
–

13
–
–
–
(8)

–
–
–
–
8

13
4
11
(500)
–

–
–
–
–
–

13
4
11
(500)
–

24,280871(215)

16,32041,256–

41,256

Non-controllinginterests$m

Totalshareholders’equity$m

37,043

1 Further information on other comprehensive income is disclosed in note 28 to the financial statements.
The notes appearing on pages 84 to 192 form an integral part of these financial statements.

FINANCIAL STATEMENTS

83

NOTES TO THE FINANCIAL STATEMENTS
1: Significant Accounting Policies
The financial statements of Australia and New Zealand Banking
Group Limited (the Company) and its controlled entities (the Group)for the year ended 30 September 2014 were authorised for issue inaccordance with the resolution of the Directors on 5 November 2014.
The principal accounting policies adopted in the preparation of thesefinancial statements are set out below. These policies have been
consistently applied by the Company and all Group entities for all
years presented in these financial statements.
The Company is incorporated and domiciled in Australia. The
address of the Company’s registered office is ANZ Centre, Level 9,833 Collins Street, Docklands, Victoria, Australia 3008.
The Company and Group are for-profit entities.
A) BASIS OF PREPARATION
i) Statement of compliance
The financial statements of the Company and Group are general purpose
financial statements which have been prepared in accordance withthe relevant provisions of the Banking Act 1959, Australian AccountingStandards (AASs) and other authoritative pronouncements of theAustralian Accounting Standards Board and the Corporations Act 2001.
International Financial Reporting Standards (IFRS) are Standards andInterpretations adopted by the International Accounting Standards Board(IASB). IFRS forms the basis of AASs. The Group’s application of AASs
ensures that the financial statements of the Company and Group comply
with IFRS.
ii) Use of estimates and assumptions
The preparation of these financial statements requires the use ofmanagement judgement, estimates and assumptions that affectreported amounts and the application of accounting policies.
Discussion of the critical accounting treatments, which include
complex or subjective decisions or assessments, are covered in note 2.
Such estimates and judgements are reviewed on an ongoing basis.
iii) Basis of measurement
The financial information has been prepared in accordance with thehistorical cost basis except that the following assets and liabilities arestated at their fair value:}} derivative financial instruments;}} available-for-sale financial assets;}} financial instruments held for trading; and}} assets and liabilities designated at fair value through profit and loss.
In accordance with AASB 1038 Life Insurance Contracts (‘AASB 1038’),
life insurance liabilities are measured using the Margin on
Services model.
In accordance with AASB 119 Employee Benefits (‘AASB 119’),
defined benefit obligations are measured using the Projected Unit
Credit Method.
iv) Changes in Accounting Policy
All new and amended AASs applicable for the first time to the Groupin the year ended 30 September 2014 have been applied to thesefinancial statements effective from their required date of application.
The accounting policies are consistent with those of the previous
financial year except as noted below.

84

AASB 119 Employee Benefits – Revised 2011 (‘AASB 119’)The Group applied the amended AASB 119 from 1 October 2013.
Amendments to AASB 119 resulted mainly in changes to themeasurement of interest cost relating to defined benefit obligations.
Certain additional disclosures have also resulted from applying theamended AASB 119 as provided in note 44.
In accordance with transitional provisions the changes havebeen applied retrospectively, with the net impact of initial
application recognised in retained earnings as at 1 October 2012.
The comparative balances of payables and other liabilities and theassociated deferred tax asset have been restated. Refer to note 48
for further details.
AASB 10 Consolidated Financial Statements (‘AASB 10’)AASB 10 replaced AASB 127 Consolidated and Separate Financial
Statements and Interpretation 112 Consolidation – Special Purpose
Entities to establish revised guidance for consolidation of financial
statements. The Standard provides a revised definition of ‘control’
based on whether the investor is exposed to, or has rights to, variable
returns from its involvement with an investee and has the ability toaffect those returns through its power over the investee. ‘Control’is established as the single basis for consolidation for all entities,
regardless of the nature of the investee.
The Group applied AASB 10 from 1 October 2013 and the initial
application did not materially impact the Group.
AASB 12 Disclosure of Interests in Other Entities (‘AASB 12’)AASB 12 sets out disclosure requirements for the Group’s interestin subsidiaries, associates and structured entities. Adoption of
AASB 12 resulted in revised disclosures for associates as provided
in note 38 and new disclosures for structured entities as set out innote 39. Comparative disclosures for interests in unconsolidated
structured entities are not required in the first year of adoption.
Initial application of AASB 12 had no impact on the financial position
and the results of the Group.
AASB 13 Fair Value Measurement (‘AASB 13’)
The Group applied AASB 13 prospectively from 1 October 2013.
AASB 13 provides a single source of guidance on fair value
measurement for financial and non-financial assets and liabilities.
The Standard does not change when fair value is required to be
applied, but rather provides guidance on how to determine fair value
when fair value measurement is required or permitted. AASB 13
requires additional fair value disclosures which have been provided
in note 32. As comparative information is not required in the firstyear of application, it has only been included where readily available
from prior years. The initial application of AASB 13 did not materially
impact the financial position and results of the Group.
AASB 2013-3 Recoverable Amount Disclosures for Non-Financial
Assets – Amendments to AASB 136 (‘AASB 2013-3’)
At the time of issue of AASB 13, a consequential change was madeto AASB 136 Impairment of Assets requiring additional disclosureson management’s estimate of the fair value of cash generating
units containing goodwill when there has been no impairment.
This change was subsequently identified as broader than intended
and was corrected by AASB 2013-3 which is not mandatorily
applicable to the Group until the year ending 30 September 2015.
Accordingly, the Group has early adopted AASB 2013-3 in thesefinancial statements to obviate the need for one-off disclosure.

ANZ ANNUAL REPORT 2014

1: Significant Accounting Policies (continued)
AASB 9 Financial Instruments (‘AASB 9’)
A revised version of AASB 9 was issued by the Australian AccountingStandards Board in December 2013 which, unless early adopted, iseffective for the Group’s 30 September 2019 financial year-end.
The Group has early adopted, from 1 October 2013, the part of AASB 9
relating to gains and losses attributable to changes in own credit riskof financial liabilities designated as ‘fair value through profit or loss.’Accordingly, such gains and losses that were previously recognisedin the income statement are now presented in other comprehensive
income. There will be no recycling of these gains or losses on disposal.
The current year impact of reclassifying the gain or loss attributable toown credit risk is an increase in other operating income of $35 million,
an increase in income tax expense of $10 million, a decrease in othercomprehensive income of $25 million and an increase in basic anddiluted earnings per ordinary share of 0.9 and 0.9 cents respectively.
There is no impact on the balance sheet. Comparative information
has been restated. Refer to note 48 for further details.
AASB 2012-2 Amendments to Australian Accounting Standards –Disclosures – Offsetting Financial Assets and Financial Liabilities(‘AASB 2012-2’)
AASB 2012-2 amends AASB 7 Financial Instruments: Disclosures(AASB 7) to require additional disclosure of the Group’s use ofenforceable master netting arrangements and their effects, evenwhen financial assets and financial liabilities subject to sucharrangements are not offset on the Balance Sheet. The application of
AASB 2012-2 had no impact on the financial position and the resultsof the Group. The required disclosures have been provided in note 34.
Cash Equivalents
During the year, following the Balance Sheet reclassification, theGroup removed loans and advances with financial institution
counterparties with original maturities of less than 90 days fromthe definition of ‘cash equivalents’ (as presented in the cash flow
statement). These balances now form part of ‘Net Loans andadvances’ in the Balance Sheet and the associated cash inflows/
outflows form part of cash flows from operating activities. The Groupconsiders that this change better reflects the characteristics of thosefinancial instruments.

At times, the determination of control can be judgemental.
Further detail on the judgement involved in assessing control
has been provided in note 2(iii).
The effect of all transactions between entities in the Group has
been eliminated.
Where subsidiaries have been sold or acquired during the year, theiroperating results have been included to the date of disposal or fromthe date of acquisition. When control ceases, the assets and liabilitiesof the subsidiary, any related non-controlling interest and othercomponents of equity are derecognised. Any resulting gain or loss
is recognised in profit or loss and any interest retained in the former
subsidiary is measured at fair value.
In the Company’s financial statements, investments in subsidiaries
are carried at cost less accumulated impairment losses.
viii) Associates
The Group applies the equity method of accounting for associates.
The Group’s share of results of associates is included in the consolidated
income statement. Shares in associates are carried in the consolidatedbalance sheet at cost plus the Group’s share of changes in associates’
post-acquisition net assets less accumulated impairment.
Interests in associates are reviewed for any indication of impairment
at least at each reporting date. Where an indication of impairment
exists the recoverable amount of the associate is determined basedon the higher of the associate’s fair value less costs to sell and its value
in use. A discounted cash flow methodology and other methodologies
such as the capitalisation of earnings methodology are used todetermine the reasonableness of the recoverable amount calculation.
In the Company’s financial statements, investments in associates arecarried at cost less accumulated impairment losses.
ix) Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Group’s
entities are measured using the currency of the primary economic
environment in which the entity operates (the functional currency).

v) Rounding
The Company is an entity of the kind referred to in Australian
Securities and Investments Commission class order 98/100 dated
10 July 1998 (as amended). Consequently, amounts in the financial
statements have been rounded to the nearest million dollars, except
where otherwise indicated.

The consolidated financial statements are presented in Australian
dollars, which is the Company’s functional and presentation currency.

vi) Comparatives
Certain amounts in the comparative information have been reclassified
to conform with current period financial statement presentations.
Refer to note 48 for further details.

Monetary assets and liabilities resulting from foreign currencytransactions are subsequently translated at the spot rate atreporting date.

vii) Principles of consolidation
The consolidated financial statements of the Group comprise thefinancial statements of the Company and all its subsidiaries. An entity,
including a structured entity, is considered a subsidiary of the Group
when it is determined that control over the entity exists. Control isdeemed to exist when the Group is exposed, or has rights, to variable
returns from its involvement with the entity and has the ability
to affect those returns through its power over the entity. Power isassessed by examining existing rights that give the Group the current
ability to direct the relevant activities of the entity.

Foreign currency transactions
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of
the transactions.

Exchange rate differences arising on the settlement of monetary
items or translation differences on monetary items at rates different
to those at which they were initially recognised or included in aprevious financial report, are recognised in the income statementin the period in which they arise.
Translation differences on non-monetary items measured at fair value
through profit or loss, are reported as part of the fair value gain orloss on these items.
Translation differences on non-monetary items measured at fairvalue through equity, such as equities classified as available-for-salefinancial assets, are included in the available-for-sale reserve in equity.
NOTES TO THE FINANCIAL STATEMENTS

85

NOTES TO THE FINANCIAL STATEMENTS (continued)
1: Significant Accounting Policies (continued)
Translation to presentation currency
The results and financial position of all Group entities (none ofwhich has the currency of a hyperinflationary economy) that have afunctional currency different from the Group’s presentation currency
are translated into the Group’s presentation currency as follows:}} assets and liabilities are translated at the rates of exchange rulingat reporting date;}} revenue and expenses are translated at the average exchange
rate for the period, unless this average is not a reasonableapproximation of the rate prevailing on transaction date, in whichcase revenue and expenses are translated at the exchange rateruling at transaction date; and}} all resulting exchange differences are recognised in the foreign
currency translation reserve.
When a foreign operation is disposed, exchange differences arerecognised in the income statement as part of the gain or loss on sale.
Goodwill arising on the acquisition of a foreign operation is treatedas an asset of the foreign operation and translated at the spot rate
at reporting date.
B) INCOME RECOGNITIONv) Gain or loss on sale of assets
The gain or loss on the disposal of assets is determined as thedifference between the carrying amount of the asset at the timeof disposal and the proceeds of disposal, net of incremental disposal
costs. This is recognised as an item of other income in the year
in which the significant risks and rewards of ownership transfer
to the buyer.
C) EXPENSE RECOGNITION
i) Interest expense
Interest expense on financial liabilities measured at amortised costis recognised as it accrues using the effective interest rate method.
ii) Loan origination expenses
Certain loan origination expenses are an integral part of the effective
interest rate of a financial asset measured at amortised cost.
These loan origination expenses include:}} fees and commissions payable to brokers and certain customer
incentive payments in respect of originating lending business; and}} other expenses of originating lending business, such as external
legal costs and valuation fees, provided these are direct andincremental costs related to the issue of a financial asset.

i) Interest income
Interest income is recognised as it accrues using the effective
interest rate method.

Such loan origination expenses are initially recognised as part ofthe cost of acquiring the financial asset and amortised as part of theeffective yield of the financial asset over its expected life using theeffective interest rate method.

The effective interest rate method calculates the amortised cost ofa financial asset or financial liability and allocates the interest income
or interest expense over the expected life of the financial asset or
financial liability so as to achieve a constant yield on the financial
asset or liability.

iii) Share-based compensation expense
The Group has various equity settled share-based compensationplans. These are described in note 45 and comprise the ANZ
Employee Share Acquisition Plan and the ANZ Share Option Plan.

For assets subject to prepayment, expected life is determined on
the basis of the historical behaviour of the particular asset portfolio,
taking into account contractual obligations and prepayment
experience. This is assessed on a regular basis.
ii) Fee and commission income
Fees and commissions received that are integral to the effective
interest rate of a financial asset are recognised using the effective
interest method. For example, loan origination fees, together withrelated direct costs, are deferred and recognised as an adjustment
to the effective interest rate on a loan once drawn.
Fees and commissions that relate to the execution of a significant
act (for example, advisory or arrangement services, placement fees
and underwriting fees) are recognised when the significant act has
been completed.
Fees charged for providing ongoing services (for example,
maintaining and administering existing facilities) are recognised
as income over the period the service is provided.
iii) Dividend income
Dividends are recognised as revenue when the right to receive
payment is established.
iv) Leasing income
Income on finance leases is recognised on a basis that reflects a
constant periodic return on the net investment in the finance lease.

86

ANZ Employee Share Acquisition Plan
The fair value of ANZ ordinary shares granted under the Employee
Share Acquisition Plan is measured at grant date, using the one-day
volume weighted average market price of ANZ shares. The fair value
is expensed on a straight-line basis over the relevant vesting period,
with a corresponding increase in share capital.
ANZ Share Option Plan
The fair value of share options is measured at grant date, using an
option pricing model. The fair value is expensed on a straight‑line
basis over the relevant vesting period. This is recognised asshare‑based compensation expense with a corresponding increasein the share options reserve.
The option pricing model takes into account the exercise price ofthe option, the risk-free interest rate, the expected volatility of ANZ’sordinary share price and other factors. Market vesting conditions aretaken into account in determining the fair value.
A deferred share right or a performance right is a right to acquirea share at nil cost to the employee subject to satisfactorily meetingtime and/or performance hurdles. For equity grants made after
1 November 2012, any portion of the award which vests may
be satisfied by a cash equivalent payment rather than shares at
the Board’s discretion. The fair value of deferred share rights or
performance rights is determined at grant date using an option
pricing model, taking into account market-based performance
conditions. The fair value is expensed over the relevant vesting
period. This is recognised as share-based compensation expensewith a corresponding increase in the share options reserve.

ANZ ANNUAL REPORT 2014

1: Significant Accounting Policies (continued)
Other adjustments
Subsequent to the grant of an equity-based award, the amountrecognised as an expense is reversed when an employee fails tosatisfy the minimum service period specified in the award upon
resignation, termination or notice of dismissal for serious misconduct.
The expense is not reversed where the award does not vest due tothe failure to meet a market-based performance condition.
iv) Lease payments
Leases entered into by the Group as lessee are predominantly
operating leases. Operating lease payments are recognised as an
expense on a straight-line basis over the lease term.
D) INCOME TAXi) Income tax expense
Income tax on earnings for the year comprises current and deferred
tax and is based on the applicable tax law in each jurisdiction. It is
recognised in the income statement as tax expense, except when it
relates to items credited directly to equity, in which case it is recordedin equity, or where it arises from the initial accounting for a businesscombination, in which case it is included in the determinationof goodwill.
ii) Current tax
Current tax is the expected tax payable on taxable income for theyear, based on tax rates (and tax laws) which are enacted at thereporting date, including any adjustment for tax payable in previous
periods. Current tax for current and prior periods is recognised as aliability (or asset) to the extent that it is unpaid (or refundable).
iii) Deferred tax
Deferred tax is accounted for using the comprehensive tax balance
sheet method. It is generated by temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and their tax base.
Deferred tax assets, including those related to the tax effects ofincome tax losses and credits available to be carried forward, arerecognised only to the extent that it is probable that future taxable
profits will be available against which the deductible temporary
differences or unused tax losses and credits can be utilised.
Deferred tax liabilities are recognised for all taxable temporary
differences, other than those relating to taxable temporary
differences arising from goodwill. They are also recognised fortaxable temporary differences arising on investments in controlled
entities, branches, and associates, except where the Group is able
to control the reversal of the temporary differences and it is probablethat temporary differences will not reverse in the foreseeable
future. Deferred tax assets associated with these interests arerecognised only to the extent that it is probable that the temporary
difference will reverse in the foreseeable future and there will be
sufficient taxable profits against which to utilise the benefits of thetemporary difference.
Deferred tax assets and liabilities are measured at the tax rates thatare expected to apply to the period(s) when the asset and liability
giving rise to them are realised or settled, based on tax rates (andtax laws) that have been enacted or substantively enacted by thereporting date. The measurement reflects the tax consequencesthat would follow from the manner in which the Group, at thereporting date, recovers or settles the carrying amount of its assets
and liabilities.

iv) Offsetting
Current and deferred tax assets and liabilities are offset only to theextent that they relate to income taxes imposed by the same taxation
authority, there is a legal right and intention to settle on a net basis
and it is allowed under the tax law of the relevant jurisdiction.
E) ASSETS
FINANCIAL ASSETSi) Financial assets and liabilities at fair value throughprofit or loss
Trading securities are financial instruments acquired principallyfor the purpose of selling in the short-term or which are a part ofa portfolio which is managed for short-term profit-taking. Trading
securities are initially recognised and subsequently measured in thebalance sheet at their fair value.
Derivatives that are not effective accounting hedging instruments arecarried at fair value through profit or loss.
The Group may designate certain financial assets and liabilities asmeasured at fair value through profit or loss in any of the following
circumstances:}} the asset represents investments backing policy liabilities(refer note 1 (I)(iii));}} life investment contract liability (refer note 1 (I)(i));}} doing so eliminates or significantly reduces a measurement
or recognition inconsistency that would otherwise arise frommeasuring assets and liabilities, or recognising the gains or losses
thereon, on different bases;}} a group of financial assets or financial liabilities or both that aremanaged and their performance evaluated on a fair value basis; or}} the financial instrument contains an embedded derivative, unlessthe embedded derivative does not significantly modify the cash
flows or it is clear, with little or no analysis, that it would not be
separately recorded.
Changes in the fair value of these financial instruments arerecognised in the income statement in the period in which theyoccur, except in the case of financial liabilities designated as ‘fairvalue through profit or loss’. For financial liabilities designated as‘fair value through profit or loss’, the amount of fair value gain or loss
attributable to changes in the Group’s own credit risk is recognisedin other comprehensive income (retained earnings). The remaining
amount of fair value gain or loss of the liability is recognised in profit
or loss. Amounts recognised in other comprehensive income are notsubsequently reclassified to profit or loss.
Purchases and sales of trading securities are recognised on trade date.
ii) Derivative financial instruments
Derivative financial instruments are contracts whose value isderived from one or more underlying price, index or other variable.
They include swaps, forward rate agreements, futures, options andcombinations of these instruments.
Derivative financial instruments are entered into for trading purposes(including customer-related reasons), or for hedging purposes where
the derivative instruments are used to hedge the Group’s exposures
to interest rate risk, currency risk, credit risk and other exposuresrelating to non-trading positions.

NOTES TO THE FINANCIAL STATEMENTS87

NOTES TO THE FINANCIAL STATEMENTS (continued)
1: Significant Accounting Policies (continued)
Derivative financial instruments are recognised initially at fair value
with gains or losses from subsequent measurement at fair value
being recognised in the income statement. Valuation adjustments
are integral in determining the fair value of derivatives. This includes
a credit valuation adjustment (CVA) to reflect the credit worthinessof the counterparty and funding valuation adjustment (FVA) toaccount for the funding cost inherent in the portfolio.
Where the derivative is effective as a hedging instrument and isdesignated as such, the timing of the recognition of any resultant
gain or loss in the income statement is dependent on the hedging
designation. These hedging designations and associated accounting
are set out below:
Fair value hedge
Where the Group hedges the fair value of a recognised asset
or liability or firm commitment, changes in the fair value of thederivative designated as a fair value hedge are recognised in
the income statement. Changes in the fair value of the hedged item
attributable to the hedged risk are reflected in adjustments to thecarrying value of the hedged item, which are also recognised in
the income statement.
Hedge accounting is discontinued when the hedge instrument
expires or is sold, terminated, exercised or no longer qualifies forhedge accounting. The resulting adjustment to the carrying amountof the hedged item arising from the hedged risk is amortised to theincome statement over the period to maturity of the hedged item.
If the hedged item is sold or repaid, the unamortised fair value
adjustment is recognised immediately in the income statement.
Cash flow hedge
The Group designates derivatives as cash flow hedges where theinstrument hedges the variability in cash flows of a recognised asset
or liability, a foreign exchange component of a firm commitment
or a highly probable forecast transaction. For qualifying cash flow
hedges, the fair value gain or loss associated with the effective
portion of the cash flow hedge is recognised initially in othercomprehensive income and then recycled to the income statementin the periods when the hedged item will affect profit or loss.
Any ineffective portion is recognised immediately in the income
statement. When the hedging instrument expires, is sold, terminated,or no longer qualifies for hedge accounting, the cumulative
amount deferred in equity remains in the hedging reserve, and is
subsequently transferred to the income statement when the hedged
item is recognised in the income statement.
When a forecast hedged transaction is no longer expected to occur,
the amount deferred in equity is recognised immediately in theincome statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted forsimilarly to cash flow hedges. The gain or loss from remeasuring
the fair value of the hedging instrument relating to the effective
portion of the hedge is deferred in the foreign currency translation
reserve in other comprehensive income and the ineffective portionis recognised immediately in the income statement.
The cumulative gain or loss recognised in other comprehensive
income is recognised in the income statement on the disposal
or partial disposal of the foreign operations.

88

Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair value of derivatives thatare not designated in a hedging relationship but are entered into to
manage the interest rate and foreign exchange risk of the Group arerecognised in the income statement. Under certain circumstances,the component of the fair value change in the derivative which
relates to current period realised and accrued interest is included
in net interest income. The remainder of the fair value movement
is included in other income.
iii) Available-for-sale financial assets
Available-for-sale financial assets comprise non-derivative financial
assets which the Group designates as available-for-sale but which are
not deemed to be held principally for trading purposes, and include
equity investments and debt securities.
They are initially recognised at fair value plus transaction costs.
Subsequent gains or losses arising from changes in fair value areincluded as a separate component of equity in the available-for‑salerevaluation reserve except for interest, dividends and foreignexchange gains and losses on monetary assets, which are recognised
directly in the income statement. When the asset is sold, thecumulative gain or loss relating to the asset is transferred from theavailable-for-sale revaluation reserve to the income statement.
Where there is objective evidence of impairment on anavailable‑for‑sale financial asset, the cumulative loss related tothat asset is removed from equity and recognised in the income
statement, as an impairment expense for debt instruments or as othernon‑interest income for equity instruments. If, in a subsequent period,
the amount of an impairment loss relating to an available‑for‑saledebt instrument decreases and the decrease can be linked objectively
to an event occurring after the impairment event, the loss is reversed
through the income statement through the impairment expense line.
Purchases and sales of available-for-sale financial assets arerecognised on trade date being the date on which the Group
commits to purchase or sell the asset.
iv) Net loans and advances
Net loans and advances are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market.
They arise when the Group provides money to a debtor with nointention of trading the loans and advances. The loans and advances
are initially recognised at fair value plus transaction costs that are
directly attributable to the issue of the loan or advance. They aresubsequently measured at amortised cost using the effective interest
rate method (refer note 1 (B)(i)) unless specifically designated on
initial recognition at fair value through profit or loss.
All loans are graded according to the level of credit risk.
Net loans and advances includes direct finance provided tocustomers such as bank overdrafts, credit cards, term loans, financelease receivables and commercial bills.
Impairment of loans and advances
Loans and advances are reviewed at least at each reporting datefor impairment.

ANZ ANNUAL REPORT 2014

1: Significant Accounting Policies (continued)
Credit impairment provisions are raised for exposures that are known
to be impaired. Exposures are impaired and impairment losses arerecorded if, and only if, there is objective evidence of impairment
as a result of one or more loss events that occurred after the initialrecognition of the loan and prior to the reporting date, and that loss
event, or events, has had an impact on the estimated future cash
flows of the individual loan or the collective portfolio of loans thatcan be reliably estimated.
Impairment is assessed for assets that are individually significant(or on a portfolio basis for small value loans) and then on a collective
basis for those exposures not individually known to be impaired.
Exposures that are assessed collectively are placed in pools of similar
assets with similar risk characteristics. The required provision isestimated on the basis of historical loss experience for assets withcredit risk characteristics similar to those in the collective pool.
The historical loss experience is adjusted based on current observabledata such as changed economic conditions. The provision also takes
account of the impact of inherent risk of large concentrated losses
within the portfolio and an assessment of the economic cycle.
The estimated impairment losses are measured as the difference
between the asset’s carrying amount and the estimated future cash
flows discounted to their present value. As the discount unwinds
during the period between recognition of impairment and recoveryof the cash flow, it is recognised in interest income.
Impairment of capitalised acquisition-related expenses is assessed
through comparing the actual behaviour of the portfolio against
initial expected life assumptions.
The provision for impairment loss (individual and collective) is deductedfrom loans and advances in the balance sheet and the movement for thereporting period is reflected in the income statement.
When a loan is uncollectable, either partially or in full, it is written-off
against the related provision for loan impairment. Unsecured facilities
are normally written-off when they become 180 days past due or
earlier in the event of the customer’s bankruptcy or similar legal
release from the obligation. However, a certain level of recoveries
is expected after the write-off, which is reflected in the amount of theprovision for credit losses. In the case of secured facilities, remainingbalances are written-off after proceeds from the realisation ofcollateral have been received if there is a shortfall.
Where impairment losses recognised in previous periods havesubsequently decreased or no longer exist, such impairment losses
are reversed in the income statement.
A provision is also raised for off-balance sheet items such as loan
commitments that are considered to be onerous.
v) Lease receivables
Contracts to lease assets and hire purchase agreements are classified
as finance leases if they transfer substantially all the risks and rewardsof ownership of the asset to the customer or an unrelated third party.
All other lease contracts are classified as operating leases.
vi) Repurchase agreements
Securities sold under repurchase agreements are retained in thefinancial statements where substantially all the risks and rewardsof ownership remain with the Group. A counterparty liability
is recognised and classified as payables and other liabilities.
The difference between the sale price and the repurchase price is
accrued over the life of the repurchase agreement and charged tointerest expense in the income statement.

Securities purchased under agreements to resell, where the Group
does not acquire the risks and rewards of ownership, are recorded
as receivables in cash or net loans and advances if original maturity
is greater than 90 days. The security is not included in the balance
sheet. Interest income is accrued on the underlying loan amount.
Securities borrowed are not recognised in the balance sheet, unlessthese are sold to third parties, at which point the obligation to
repurchase is recorded as a financial liability at fair value with fairvalue movements included in the income statement.
vii) Derecognition
The Group enters into transactions where it transfers financial assets
recognised on its balance sheet yet retains either all or a portion of
the risks and rewards of the transferred assets. If all, or substantiallyall, of the risks and rewards are retained, the transferred assets are notderecognised from the balance sheet.
In transactions where substantially all the risks and rewards ofownership of a financial asset are neither retained nor transferred,
the Group derecognises the asset if control over the asset is lost.
In transfers where control over the asset is retained, the Group
continues to recognise the asset to the extent of its continuing
involvement, determined by the extent to which it is exposed
to changes in the value of the transferred asset. The rights andobligations retained or created in the transfer are recognised
separately as assets and liabilities as appropriate.
NON-FINANCIAL ASSETSviii) Goodwill
Goodwill represents the excess of the purchase consideration overthe fair value of the identifiable net assets of a controlled entity at
the date of gaining control. Goodwill is recognised as an asset andnot amortised, but assessed for impairment at least annually or more
frequently if there is an indication that the goodwill may be impaired.
This involves using the discounted cash flows or capitalisation of
earnings methodology to determine the expected future benefits ofthe cash-generating units (CGU) to which the goodwill relates. Where
the goodwill balance exceeds the assessed value of expected future
benefits, the difference is charged to the income statement. Any
impairment of goodwill is not subsequently reversed.
ix) Software and computer system costs
Software and computer system costs include costs incurred inacquiring and building software and computer systems (software).
Software is amortised using the straight-line method over its
expected useful life to the Group. The period of amortisation is
between 3 and 5 years, except for certain major core infrastructure
projects where the useful life has been determined to be 7 or 10 years
and has been approved by the Audit Committee. The amortisation
period for software assets is reviewed at least annually. Where theexpected useful life of the asset is different from previous estimates
the amortisation period is changed accordingly.
At each reporting date, software assets are reviewed for impairment
indicators. If any such indication exists, the recoverable amount of
the assets are estimated and compared against the existing carrying
value. Where the existing carrying value exceeds the recoverable
amount, the difference is charged to the income statement.
Costs incurred in planning or evaluating software proposals, or inmaintaining systems after implementation, are not capitalised.

NOTES TO THE FINANCIAL STATEMENTS

89

NOTES TO THE FINANCIAL STATEMENTS (continued)
1: Significant Accounting Policies (continued)x) Acquired portfolio of insurance and investment business
Identifiable intangible assets in respect of acquired portfolios of
insurance and investment business acquired in a business combination
are stated initially at fair value at acquisition date. These are amortisedover the period of expected benefits of between 15 to 23 years.
xi) Deferred acquisition costs
Refer to note 1(I)(vii).
xii) Other intangible assets
Other intangible assets include management fee rights, distribution
relationships and distribution agreements where they are clearly
identifiable, can be reliably measured and where it is probable they
will lead to future economic benefits that the Group can control.
Where, based on historical observation, there is an expectation that,for the foreseeable future, the level of investment in the funds will not
decline significantly and the Group will continue to manage the fund,the management fee right is assessed to have an indefinite life and is
carried at cost less any impairment losses.
Other management fee rights, distribution relationships anddistribution agreements are amortised over the expected useful
lives to the Group using the straight line method. The period ofamortisation is no longer than:Management fee rights
7 years
Aligned advisor relationships
15 years
The amortisation period is reviewed at least at the end of each annual
reporting period and changed if there has been a significant change
in the pattern of expected future benefits from the asset.
xiii) Premises and equipment
Assets other than freehold land are depreciated at rates based upon
their expected useful lives to the Group, using the straight-line
method. The depreciation rates used for each class of asset are:
Buildings
1.5%
Building integrals
10%
Furniture & equipment
10%–20%Computer & office equipment
12.5%–33%
Leasehold improvements are amortised on a straight-line basis overthe shorter of their useful lives or remaining terms of the lease.
The depreciation rate is reviewed at least at the end of each annual
reporting period and changed if there has been a significant change
in the pattern of expected future benefits from the asset.
At each reporting date, the carrying amounts of premises andequipment are reviewed for impairment. If any impairment indicator
exists, the recoverable amount of the assets are estimated andcompared against the existing carrying value. Where the existing
carrying value exceeds the recoverable amount, the difference ischarged to the income statement. If it is not possible to estimate
the recoverable amount of an individual asset, the Group estimates
the recoverable amount of the cash generating unit to which theasset belongs.
A previously recognised impairment loss is reversed if there has beena change in the estimates used to determine the recoverable amount.

90xiv) Borrowing costs
Borrowing costs incurred for the construction of qualifying assets
are capitalised into the cost of the qualifying asset during the periodof time that is required to complete and prepare the asset for its
intended use. The calculation of borrowing costs is based on aninternal measure of the costs associated with the borrowing of funds.
F) LIABILITIESFINANCIAL LIABILITIESi) Deposits and other borrowings
Deposits and other borrowings include certificates of deposit, interest
bearing deposits, debentures and other related interest bearing
financial instruments. Deposits and other borrowings not designatedat fair value through profit or loss on initial recognition are measured
at amortised cost. The interest expense is recognised using theeffective interest rate method.
ii) Financial liabilities at fair value through profit or loss
Refer to note 1(E)(i).
iii) Acceptances
The exposure arising from the acceptance of bills of exchange thatare sold into the market is recognised as a liability. An asset of equalvalue is recognised to reflect the offsetting claim against the drawerof the bill. Bill acceptances generate fee income that is recognised in
the income statement when earned.
iv) Debt issuances and subordinated debt
Debt issuances and subordinated debt are accounted for in thesame way as deposits and other borrowings, except for those debt
securities which are designated as at fair value through profit or loss
on initial recognition.
v) Financial guarantee contracts
Financial guarantee contracts that require the issuer to makespecified payments to reimburse the holder for a loss the holder
incurs because a specified debtor fails to make payments when due,
are initially recognised in the financial statements at fair value on thedate the guarantee was given; typically this is the premium received.
Subsequent to initial recognition, the Group’s liabilities under suchguarantees are measured at the higher of their amortised amountand the best estimate of the expenditure required to settle any
financial obligation arising at the reporting date. These estimates
are determined based on experience of similar transactions and thehistory of past losses.
vi) Derecognition
Financial liabilities are derecognised when the obligation specified
in the contract is discharged, cancelled or expires.
NON-FINANCIAL LIABILITIESvii) Employee benefits
Leave benefits
The liability for long service leave is calculated and accrued for in
respect of all applicable employees (including on-costs) using an
actuarial valuation. The amounts expected to be paid in respect of
employees’ entitlements to annual leave are accrued at expectedsalary rates including on-costs. Expected future payments for longservice leave are discounted using market yields at the reporting dateon a blended rate of national and state government bonds with terms
to maturity that match, as closely as possible, the estimated future
cash outflows.

ANZ ANNUAL REPORT 2014

1: Significant Accounting Policies (continued)
Defined contribution superannuation schemes
The Group operates a number of defined contribution schemes andalso contributes, according to local law, in the various countries inwhich it operates, to government and other plans that have thecharacteristics of defined contribution schemes.
The Group’s contributions to these schemes are recognised as an
expense in the income statement when incurred.
Defined benefit superannuation schemes
The Group operates a small number of defined benefit schemes.
The liability and expense related to providing benefits toemployees under each defined benefit scheme are calculated byindependent actuaries.
A defined benefit liability is recognised to the extent that the present
value of the defined benefit obligation of each scheme, calculatedusing the Projected Unit Credit Method, is greater than the fair valueof each scheme’s assets. Where this calculation results in an asset of
the Group, a defined benefit asset is recognised, which is capped at
the recoverable amount. In each reporting period, the movementsin the net defined benefit liability is treated as follows:}} the net movement relating to the current period’s service cost,
net interest on the net defined benefit liability, past service
costs and other costs (such as the effects of any curtailments
and settlements) is recognised as an operating expense in the
Income Statement;}} remeasurements of the net defined benefit liability, which comprise
actuarial gains and losses and return on scheme assets (excludinginterest income included in net interest), are recognised directly inretained earnings through other comprehensive income; and}} contributions made by the Group are recognised directly against
the net defined benefit position.
viii) Provisions
The Group recognises provisions when there is a present obligation,
the future sacrifice of economic benefits is probable, and the amountof the provision can be measured reliably.
The amount recognised is the best estimate of the consideration
required to settle the present obligation at reporting date, taking
into account the risks and uncertainties surrounding the obligation
at reporting date. Where a provision is measured using the estimatedcash flows required to settle the present obligation, its carrying
amount is the present value of those cash flows.
G) EQUITYi) Ordinary shares
Ordinary shares in the Company are recognised at the amount paid
per ordinary share net of directly attributable issue costs.
ii) Treasury shares
Shares in the Company which are purchased on-market by the
ANZ Employee Share Acquisition Plan or issued by the Company
to the ANZ Employee Share Acquisition Plan are classified astreasury shares (to the extent that they relate to unvested employee
share‑based awards) and are deducted from Capital.

In addition, the life insurance business may also purchase and holdshares in the Company to back policy liabilities in the life insurance
statutory funds. These shares are also classified as treasury shares anddeducted from Capital. These assets, plus any corresponding income
statement fair value movement on the assets and dividend income,are eliminated when the life statutory funds are consolidated into
the Group. The cost of the investment in the shares is deducted from
Capital. However, the corresponding life investment contract andinsurance contract liabilities, and related changes in the liabilities
recognised in the income statement, remain upon consolidation.
Treasury shares are excluded from the weighted average number ofordinary shares used in the earnings per share calculations.
iii) Non-controlling interest
Non-controlling interests represent the share in the net assets ofsubsidiaries attributable to equity interests not owned directly or
indirectly by the Company.
iv) Reserves
Foreign currency translation reserve
As indicated in note 1 (A)(ix), exchange differences arising ontranslation of the assets and liabilities of all Group entities arereflected in the foreign currency translation reserve. Any offsetting
gains or losses on hedging these balances, together with any tax
effect, are also reflected in this reserve. When a foreign operation
is sold, attributable exchange differences are recognised in theincome statement.
Available-for-sale revaluation reserve
This reserve includes changes in the fair value and exchange
differences on the revaluation of available-for-sale financial assets,
net of tax. These changes are transferred to the income statement (inother operating income) when the asset is derecognised. Where theasset is impaired, the changes are transferred to impairment expensein the income statement for debt instruments and in the case of
equity instruments to other income.
Cash flow hedge reserve
This reserve includes the fair value gains and losses associated withthe effective portion of designated cash flow hedging instruments.
The cumulative deferred gain or loss on the hedge is recognised in
the income statement when the hedged transaction impacts theincome statement.
Share option reserve
This reserve includes the amounts which arise on the recognitionof share-based compensation expense (see note 1 (C)(iii)). Amounts
are transferred out of the reserve into share capital when the equity
investments are exercised.
Transactions with non-controlling interests reserve
The transactions with non-controlling interests reserve represents
the impact of transactions with non-controlling shareholders in theircapacity as shareholders.

NOTES TO THE FINANCIAL STATEMENTS

91

NOTES TO THE FINANCIAL STATEMENTS (continued)
1: Significant Accounting Policies (continued)H) PRESENTATION

I) LIFE INSURANCE AND FUNDS MANAGEMENT BUSINESSi) Offsetting of income and expenses
Income and expenses are not offset unless required or permitted
by an accounting standard. This generally arises in the following
circumstances:}} where transaction costs form an integral part of the effective
interest rate of a financial instrument which is measured atamortised cost, these are offset against the interest income
generated by the financial instrument; or}} where gains and losses relating to fair value hedges are assessed as
being effective; or}} where gains and losses arise from a group of similar transactions,such as foreign exchange gains and losses.

The Group conducts its life insurance and funds managementbusiness (the Life Business) in Australia primarily through OnePath
Life Limited, which is registered under the Life Insurance Act 1995
(Life Act) and in New Zealand through OnePath Life (NZ) Limited and
OnePath Insurance Services (NZ) Limited which are licensed underthe Insurance (Prudential Supervision) Act 2010.

ii) Offsetting assets and liabilities
Assets and liabilities are offset and the net amount reported in thebalance sheet only where there is:}} a current enforceable legal right to offset the asset and liability; and}} an intention to settle on a net basis, or to realise the asset andsettle the liability simultaneously.
iii) Cash and cash equivalents
For cash flow statement presentation purposes, cash and cash
equivalents comprise coins, notes, money at call, balances heldwith central banks, liquid settlement balances (readily convertible
to known amounts of cash which are subject to insignificant risk ofchanges in value) and securities purchased under agreements toresell (“reverse repos”) in less than three months.
iv) Segment reporting
An operating segment is a component of the Group that engages
in business activities from which it may earn revenues and incur
expenses, whose operating results are regularly reviewed by the Chief
Executive Officer to make decisions about resources to be allocatedto the segment and assess its performance and for which discrete
information is available. Changes in the internal organisational
structure of the Group can cause the composition of the Group’sreportable segments to change. Where this occurs corresponding
segment information for the previous financial year is restated, unlessthe information is not available and the cost to develop it would
be excessive.

The operations of the Life Business are conducted within separate
statutory funds, as required by the Life Act and are reported inaggregate with the Shareholder’s Fund in the Income Statement,
Statement of Changes in Equity, Balance Sheet and Cash Flow
Statements of the Group. The assets of the Life Business in Australia
are allocated between policyholder and shareholder funds inaccordance with the requirements of the Life Act. Under AASs, thefinancial statements must include all assets, liabilities, revenues,
expenses and equity, irrespective of whether they are designatedas relating to shareholders or policyholders. Accordingly, theconsolidated financial statements include both policyholder(statutory) and shareholders’ funds.
(i) Policy liabilities
Policy liabilities include liabilities arising from life insurance contracts
and life investment contracts.
Life insurance contracts are insurance contracts regulated under
the Life Act and similar contracts issued by entities operating
outside Australia. An insurance contract is a contract under which
an insurer accepts significant insurance risk from another party(the policyholder) by agreeing to compensate the policyholder if a
specified uncertain future event adversely affects the policyholder.
All contracts written by registered life insurers that do not meet thedefinition of an insurance contract are referred to as life investment
contracts. Life investment contract business relates to funds
management products in which the Group issues a contract where
the resulting liability to policyholders is linked to the performanceand value of the assets that back those liabilities.
Whilst the underlying assets are registered in the name of the life
insurer and the policyholder has no direct access to the specificassets, the contractual arrangements are such that the policyholder
bears the risks and rewards of the fund’s underlying assets investment
performance with the exception of capital guaranteed products
where the policyholder is guaranteed a minimum return or asset
value. The Group derives fee income from the administration of theunderlying assets.
Life investment contracts that include a discretionary participation
feature (participating contracts) are accounted for as if they are life
insurance contracts under AASB 1038 Life Insurance Contracts.
Life insurance liabilities
Life insurance liabilities are determined using the ‘Margin on Services’(MoS) model using a projection method. Under the projection
method, the liability is determined as the net present value of the
expected future cash flows, plus planned margins of revenues overexpenses relating to services yet to be provided, discounted using
a risk-free discount rate that reflects the nature, structure and termof the liabilities. Expected future cash flows include premiums,
expenses, redemptions and benefit payments, including bonuses.

92

ANZ ANNUAL REPORT 2014

1: Significant Accounting Policies (continued)
Profits from life insurance contracts are brought to account using
the MoS model in accordance with Actuarial Standard LPS 340
Valuation of Policy Liabilities as issued by APRA under the Life Act
and Professional Standard 3 Determination of Life Insurance Policy
Liabilities as issued by the New Zealand Society of Actuaries. Under
MoS, profit is recognised as premiums are received and services
are provided to policyholders. When premiums are received but
the service has not been provided, the profit is deferred. Losses are
expensed when identified.
Costs associated with the acquisition of policies are recognisedover the period that the policy will generate profits. Costs may only
be deferred, however, to the extent that a contract is expected to
be profitable.
Participating contracts, defined as those contracts that entitle thepolicyholder to participate in the performance and value of certain
assets in addition to the guaranteed benefit, are entitled to sharein the profits that arise from the participating business. This profit
sharing is governed by the Life Act and the life insurance company’s
constitution. The profit sharing entitlement is treated as an expensein the consolidated financial statements. Any benefits which remainpayable at the end of the reporting period are recognised as part oflife insurance liabilities.
Life investment contract liabilities
Life investment contracts consist of two components: a financial
instrument and an investment management service.
The financial instrument component of the life investment
contract liabilities is designated as at fair value through profit orloss. The investment management service component, including
associated acquisition costs, is recognised as revenue in the profit
or loss as services are performed. See note 1 (I)(vii) for the deferral
and amortisation of life investment contract acquisition costs andentry fees.
For life investment contracts, the life investment contract liability
is directly linked to the performance and value of the assets thatback them and is determined as the fair value of those assets aftertax. For fixed income policies the liability is determined as the netpresent value of expected cash flows subject to a minimum of current
surrender value.
(ii) External unit holder liabilities (life insurance funds)
The life insurance business includes controlling interests in managed
funds and the total amounts of each underlying asset, liability,
revenue and expense of the controlled entities are recognised in
the Group’s consolidated financial statements. When a controlled
managed fund is consolidated, the share of the unit holder liability
attributable to the Group is eliminated but amounts due to external
unit holders remain as liabilities in the Group’s consolidatedbalance sheet.
(iii) Investments backing policy liabilities
All investments backing policy liabilities are designated as at fairvalue through profit or loss. All policyholder assets, being thoseassets held within the statutory funds of the life company thatare not segregated and managed under a distinct shareholder
investment mandate are held to back life insurance and life
investment contract liabilities (collectively referred to as policy
liabilities). These investments are designated as at fair value throughprofit or loss.

(iv) Claims
Claims are recognised when the liability to the policyholder under
the policy contract has been established or upon notification of theinsured event depending on the type of claim.
Claims incurred in respect of life investment contracts represent
withdrawals and are recognised as a reduction in life investment
contract liabilities.
Claims incurred that relate to the provision of services and bearing
of insurance risks are treated as expenses and these are recognisedon an accruals basis once the liability to the policyholder has been
established under the terms of the contract.
(v) Revenue
Life insurance premiums
Life insurance premiums earned by providing services and bearing
risks are treated as revenue. For annuity, risk and traditional business,
all premiums are recognised as revenue. Premiums with no due date
are recognised as revenue on a cash received basis. Premiums witha regular due date are recognised as revenue on an accruals basis.
Unpaid premiums are only recognised as revenue during the days ofgrace or where secured by the surrender value of the policy and areincluded as ‘Other assets’ in the balance sheet.
Life investment contract premiums
There is no premium revenue in respect of life investment contracts.
Life investment deposit premiums are recognised as an increase inpolicy liabilities. Amounts received from policyholders in respect oflife investment contracts are recognised as an investment contract
liability where the receipt is in the nature of a deposit, or recognised
as an origination fee with an ongoing investment management fee.
Fees
Fees are charged to policyholders in connection with life insurance
and life investment contracts and are recognised when the service
has been provided. Entry fees from life investment contracts aredeferred and recognised over the average expected life of thecontracts. Deferred entry fees are presented within ‘Other liabilities’in the balance sheet.
(vi) Reinsurance contracts
Reinsurance premiums, commissions and claim settlements, aswell as the reinsurance element of insurance contract liabilities, areaccounted for on the same basis as the underlying direct insurance
contracts for which the reinsurance was purchased.
(vii) Policy acquisition costs
Life insurance contract acquisition costs
Policy acquisition costs are the fixed and variable costs of acquiring
new business. The appointed actuary assesses the value and future
recoverability of these costs in determining policy liabilities. The net
profit impact is presented in the income statement as a change inpolicy liabilities. The deferral is determined as the lesser of actual
costs incurred and the allowance for recovery of these costs from thepremiums or policy charge as appropriate for each business class.
This is subject to an overall limit that future profits are anticipated tocover these costs. Losses arising on acquisition are recognised in theincome statement in the year in which they occur. Amounts which
are deemed recoverable from future premiums or policy charges aredeferred and amortised over the life of the policy.

NOTES TO THE FINANCIAL STATEMENTS

93

NOTES TO THE FINANCIAL STATEMENTS (continued)
1: Significant Accounting Policies (continued)
Life investment contract acquisition costs
Incremental acquisition costs, such as commissions, that are directly
attributable to securing a life investment contract are recognised
as an asset where they can be identified separately and measured
reliably and if it is probable that they will be recovered. Thesedeferred acquisition costs are presented in the balance sheet as anintangible asset and are amortised over the period that they will berecovered from future policy charges average period of seven years.
Any impairment losses arising on deferred acquisition costs
are recognised in the income statement in the period in which
they occur.
(viii) Basis of expense apportionment
All life investment contracts and insurance contracts are categorised
based on individual policy or products. Expenses for these products
are then allocated between acquisition, maintenance, investment
management and other expenses.
Expenses which are directly attributable to an individual policy or
product are allocated directly to a particular expense category, fund,class of business and product line as appropriate. Where expenses
are not directly attributable to an individual policy or product,
they are appropriately apportioned based on detailed expense
analysis having regard to the objective in incurring that expense
and the outcome achieved. The apportionment has been madein accordance with Actuarial Standard LPS 340 Valuation of Policy
Liabilities, issued by the Australian Prudential Regulation Authority,and on an equitable basis to the different classes of business inaccordance with Division 2 of Part 6 of the Life Act.

AASJ) OTHERi) Contingent liabilities
Contingent liabilities acquired in a business combination are
individually measured at fair value at the acquisition date.
At subsequent reporting dates the value of such contingent liabilities
is reassessed based on the estimate of the expenditure required tosettle the contingent liability.
Other contingent liabilities are not recognised in the balance sheet
but disclosed in note 43 unless it is considered remote that the Groupwill be liable to settle the possible obligation.
ii) Earnings per share
The Group presents basic and diluted earnings per share (EPS) datafor its ordinary shares. Basic EPS is calculated by dividing the profit
or loss attributable to ordinary shareholders of the Company by theweighted average number of ordinary shares outstanding during theperiod after eliminating treasury shares.
Diluted EPS is determined by adjusting the profit or loss attributable
to ordinary shareholders and the weighted average number ofordinary shares outstanding for the effect of dilutive ordinary shares.
iii) Accounting Standards not early adopted
The following standards relevant to the Company and/or the Group
were available for early adoption, but have not been applied in thesefinancial statements.

Nature of the impending changes and possible impact on the Company and the Group in period of initial application

Mandatory application
date for the Company
and Group

AASB 2012-3 Amendments This standard adds application guidance to AASB 132 Financial Instruments: Presentation toto Australian Accounting clarify the offsetting criteria for financial assets and financial liabilities as set out in AASB 132 (asStandards – Offsetting
amended by AASB 2012-2).
Financial Assets andThis is not expected to have a material impact on the Company or Group.
Financial Liabilities

1 October 2014

AASB 2013-4 Amendments This standard amends AASB 139 Financial Instruments: Recognition and Measurement to permit
to Australian Accounting the continuation of hedge accounting where a derivative which has been designated as a hedging
Standards – Novation
instrument is novated from one counterparty to a central counterparty as a consequence of newof the Derivatives andlaws or regulations.
Continuation of Hedge
This is not expected to have a material impact on the Company or Group.
Accounting

1 October 201494

ANZ ANNUAL REPORT 2014

1: Significant Accounting Policies (continued)
AAS

AASB 9 Financial
Instruments

Nature of the impending changes and possible impact on the Company and the Group in period of initial application

This standard is being released in phases and once finalised will replace AASB 139 Financial
Instruments: Recognition and Measurement in its entirety. The current version of the standard(reflecting the amendments in Part C of AASB 2013-9 and Part E of AASB 2014-1) addresses
recognition and measurement requirements for financial assets and financial liabilities and generalhedge accounting. Its main features (excluding the ‘own credit requirements’ which the Group has
early adopted in isolation as described in note 1 (A)(iv)) include:}} all financial assets, except for certain equity instruments, will be classified into two categories:– amortised cost, where they generate solely payments of interest and principal and thebusiness model is to collect contractual cash flows that represent principal and interest; or– fair value through profit or loss;}} equity instruments not held for trading purposes will be classified at fair value through profit
or loss except for certain instruments which may be classified at fair value through othercomprehensive income with dividends recognised in profit or loss;}} financial assets which meet the requirements for classification at amortised cost are permitted tobe measured at fair value if this eliminates or significantly reduces an accounting mismatch; and}} hedge accounting requirements which more closely align with risk management activities
undertaken when hedging financial and non-financial risks.

Mandatory application
date for the Company
and Group

1 October 2018

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments, however theAustralian equivalent standard has not yet been issued in Australia by the Australian AccountingStandards Board. The final version of IFRS 9 includes:}} new impairment requirements that introduce an expected credit loss impairment model; and}} limited amendments to the previously released classification and measurement requirements
including the introduction of a fair value through other comprehensive income classification
for financial assets when the business model is to collect contractual cash flows and to sellfinancial assets.
The Group is in the process of assessing the full impact of application of AASB 9 and is not yet able
to estimate the impact on the financial statements.

2: Critical Estimates and Judgements Used in Applying Accounting Policies
The preparation of the financial statements of the Company andGroup involves making estimates and judgements that affect thereported amounts within the financial statements. The estimates andjudgements are continually evaluated and are based on historicalfactors, including expectations of future events, which are believed
to be reasonable under the circumstances. All material changes toaccounting policies and estimates and the application of these policies
and judgements are approved by the Audit Committee of the Board.
A brief explanation of the critical estimates and judgements follows.
i) PROVISIONS FOR CREDIT IMPAIRMENT
The measurement of impairment of loans and advances requires
management’s best estimate of the losses incurred in the loan
portfolio at reporting date.
Individual and collective provisioning involves the use of assumptions
for estimating the amount and timing of expected future cash flows.
The process of estimating the amount and timing of cash flows
involves considerable management judgement. These judgements
are regularly revised to reduce any differences between loss estimatesand actual loss experience.

of model risk. The provision also takes into account management’s
assessment of the impact of large concentrated losses inherent within
the portfolio and the economic cycle.
The use of such judgements and reasonable estimates is consideredby management to be an essential part of the process and does not
impact on the reliability of the provision.
ii) IMPAIRMENT OF NON-LENDING ASSETS
The carrying values of non-lending assets are subject to impairment
assessments at each reporting date. Judgement is required in
identifying the cash-generating units to which goodwill and otherassets are allocated for the purpose of impairment testing.
Impairment testing involves identifying appropriate internal andexternal indicators of impairment and whether these exist at eachreporting date. Where an indication of impairment exists, therecoverable amount of the asset is determined based on the higher of
the assets fair value less costs to sell and its value in use. Judgement
is applied when determining the assumptions supporting therecoverable amount calculations.

The collective provision involves estimates regarding the historicalloss experience for assets with credit characteristics similar to those in
the collective pool. The historical loss experience is adjusted based on
current observable data and events and an assessment of the impact
NOTES TO THE FINANCIAL STATEMENTS

95

NOTES TO THE FINANCIAL STATEMENTS (continued)
2: Critical Estimates and Judgements Used in Applying Accounting Policies (continued)iii) STRUCTURED ENTITIESv) PROVISIONS (OTHER THAN LOAN IMPAIRMENT)The Company assesses, at inception and at each reporting date,whether a structured entity should be consolidated based on theaccounting policy outlined in note 1(A)(vii). Such assessments
are predominantly required for structured finance transactions,securitisation activities, and involvement with investment funds.
When assessing whether the Company controls (and therefore
consolidates) a structured entity, judgement is required about
whether the Company has power over the relevant activities aswell as exposure to variable returns of the structured entity. All
involvement, rights and exposure to returns are considered whenassessing if control exists.

The Group holds provisions for various obligations including
employee entitlements, restructurings and litigation related
claims. The provision for long-service leave is supported by anindependent actuarial report and involves assumptions regarding
employee turnover, future salary growth rates and discount rates.
Other provisions involve judgements regarding the outcome of
future events including estimates of expenditure required to satisfy
such obligations. Where relevant, expert legal advice has beenobtained and, in light of such advice, provisions and or disclosures as
deemed appropriate have been made.

The Company is deemed to have power over an investment fundwhen it preforms the function of Manager/Responsible Entity of thatinvestment fund. Whether the Company controls the investment funddepends on whether it holds that power as principal, or as an agent
for other investors. The Company is considered the principal, andthus controls an investment fund, when it cannot be easily removed
from the position of Manager/Responsible Entity by other investors
and has variable returns through significant aggregate economic
interest in that investment fund. In all other cases the Company isconsidered to be acting in an agency capacity and does not control
the investment fund.

vi) LIFE INSURANCE CONTRACT LIABILITIESiv) FINANCIAL INSTRUMENTS AT FAIR VALUEThe Group’s financial instruments measured at fair value arestated in note 1 (A)(iii). In estimating the fair value of financial
instruments the Group uses quoted market prices in an active market,
wherever possible.
In the event that there is no active market for the instrument, fairvalue is based on present value estimates or other market acceptedvaluation techniques. The valuation models incorporate the impactof bid/ask spreads, counterparty credit spreads and other factors thatmarket participants would consider in determining the fair value.
The selection of appropriate valuation techniques, methodologies
and inputs requires judgement. These are reviewed and updated as
market practice evolves.
The majority of valuation techniques employ only observable
market data. However, for certain financial instruments, the fair value
cannot be determined with reference to current market transactions
or valuation techniques whose variables only include data fromobservable markets. For these financial instruments, the fair value isdetermined using data derived and extrapolated from market data
and tested against historic transactions and observed market trends.
Application of professional judgement is required to analyse the data
available to support each assumption upon which these valuations
are based. Changing the assumptions changes the resulting estimateof fair value.
The majority of outstanding derivative positions are transacted
over-the-counter and therefore need to be valued using valuation
techniques. Included in the determination of the fair value ofderivatives is a credit valuation adjustment (CVA) to reflect the credit
worthiness of the counterparty. This is influenced by the mark-tomarket of the derivative trades and by the movement in the market
cost of credit. Further adjustments are made to account for thefunding costs inherent in the derivative. Judgment is required todetermine the appropriate cost of funding and the future expectedcash flows used in this funding valuation adjustment (FVA).

96

Policy liabilities for life insurance contracts are computed using
statistical or mathematical methods, which are expected to give
approximately the same results as if an individual liability wascalculated for each contract. The computations are made by suitably
qualified personnel on the basis of recognised actuarial methods,
with due regard to relevant actuarial principles and standards.
The methodology takes into account the risks and uncertainties ofthe particular class of life insurance business written. Deferred policy
acquisition costs are connected with the measurement basis of life
insurance liabilities and are equally sensitive to the factors that areconsidered in the liability measurement.
The key factors that affect the estimation of these liabilities andrelated assets are:}} the cost of providing the benefits and administering theseinsurance contracts;}} mortality and morbidity experience on life insurance products,
including enhancements to policyholder benefits;}} discontinuance experience, which affects the Company’s ability
to recover the cost of acquiring new business over the lives of thecontracts; and}} the amounts credited to policyholders’ accounts compared to thereturns on invested assets through asset-liability management andstrategic and tactical asset allocation.
In addition, factors such as regulation, competition, interest
rates, taxes and general economic conditions affect the level ofthese liabilities.
The total value of policy liabilities for life insurance contracts havebeen appropriately calculated in accordance with these principles.
vii) TAXATION
Judgement is required in determining provisions held in respect of
uncertain tax positions. The Group estimates its tax liabilities basedon its understanding of the relevant law in each of the countries inwhich it operates and seeks independent advice where appropriate.

ANZ ANNUAL REPORT 2014

3: IncomeConsolidated

The Company

2014
$m

20131
$m

2014
$m

20131
$m

Interest income
Trading securities
Available-for-sale assets
Loans and advances and acceptances
Other

1,546
627
26,752
599

1,315
532
26,199
581

1,091
500
20,620432

955
433
20,987434

Total external interest income
Controlled entities

29,524–

28,627–22,643
2,917

22,8092,704

Total interest income

29,524

28,62725,56025,513

Interest income is analysed by type of financial asset as follows:
Financial assets not at fair value through profit or loss
Trading securities
Financial assets designated at fair value through profit or loss

27,9491,546
29

27,2981,315
1424,4461,091
23

24,551955
7Other operating income

29,524

28,62725,56025,513Controlled entities

779
2,160
2,939
–

744
2,085
2,829
–

676
1,487
2,163
1,257

659
1,482
2,141
968

Total fee and commission income
Fee and commission expense3

2,939
(424)

2,829
(370)

3,420
(314)

3,109
(279)

i) Fee and commission income
Lending fees2
Non-lending fees and commissions

Net fee and commission income

2,515

2,459

3,106

2,830

ii) Other income
Net foreign exchange earnings
Net (losses)/gains from trading securities and derivatives4
Credit risk on credit intermediation trades
Movement on financial instruments measured at fair value through profit or loss5
Dividends received from controlled entities6
Brokerage income
Loss on divestment/writedown of investment in SSI
Dilution gain on investment in Bank of Tianjin
Insurance settlement
Gain on sale of ANZ Trustees
Profit on liquidation of investment in subsidiaries and branches
Other

1,073
138
(22)
97
–
50
(21)
12
26
125
–
196

844
300
63
58
–
53
(26)
–
–
–
–
100

672
54
(22)
71
1,745
–
25
–
–
115
–
102

648
291
63
84
1,314
–
(21)
–
–
–
18
22

Total other income

1,674

1,392

2,762

2,419

Other operating income

4,189

3,851

5,868

5,249

Net funds management and insurance income
Funds management income
Investment income
Insurance premium income
Commission income/(expense)
ClaimsChanges in policy liabilities
Elimination of treasury share gain

917
2,656
1,314
(471)
(707)
(2,147)
(24)

862
4,135
1,348
(446)
(709)
(3,669)
(90)

122
–
46
49
–
–
–

109
–
43
51
–
–
–

Total net funds management and insurance income

1,538

1,431

217

203

Total other operating income

5,727

5,282

6,085

5,452

Total share of associates’ profit
Total income

517

482

–

–

35,76834,391

31,64530,9651
2
3
4
5Comparative amounts have changed. Refer to note 48 for details.
Lending fees exclude fees treated as part of the effective yield calculation and included in interest income (refer note 1 B(ii)).
Includes interchange fees paid.
Does not include interest income relating to trading securities and derivatives used for balance sheet risk management.
Includes fair value movements (excluding realised and accrued interest) on derivatives not designated as accounting hedges entered into to manage interest rate and foreign exchange risk
on funding instruments, ineffective portions of cash flow hedges, and fair value movements in financial assets and financial liabilities designated at fair value.
6 Dividends received from controlled entities are subject to meeting applicable regulatory and company law requirements, including solvency requirements.

NOTES TO THE FINANCIAL STATEMENTS

97

NOTES TO THE FINANCIAL STATEMENTS (continued)
4: Expenses
Interest expense
Deposits
Borrowing corporations’ debt
Commercial paper
Debt issuances and subordinated debt
Other
Total external interest expense
Controlled entities
Total interest expense
Interest expense is analysed by types of financial liabilities as follows:
Financial liabilities not at fair value through profit or loss
Financial liabilities designated at fair value through profit or loss
Operating expensesi) Personnel
Employee entitlements and taxes
Salaries and wages
Superannuation costs – defined benefit plan
– defined contribution plans
Equity-settled share-based payments
Other
Total personnel expenses (excl. restructuring)ii) Premises
Depreciation of buildings and integrals
Rent
Utilities and other outgoings
Other
Total premises expenses (excl. restructuring)iii) Technology
Data communication
Depreciation
Licences and outsourced services
Rentals and repairs
Software impairment
Other
Total computer expenses (excl. restructuring)iv) OtherAdvertising and public relations
Audit fees and other fees (note 5)
Freight, stationery, postage and telephone
Non-lending losses, frauds and forgeries
Professional fees
Travel and entertainment expenses
Amortisation of other intangible assets
Impairment of other intangible assets
Other
Total other expenses (excl. restructuring)v) Restructuring
Total operating expenses
1 Comparative amounts have changed. Refer to note 48 for details.

98

Consolidated

The Company

2014
$m

20131
$m

2014
$m

20131
$m

11,229
62
436
3,543
444
15,714–

11,462
60
439
3,558
350
15,869
–

8,935
–
241
2,780
359
12,315
3,235

9,588
–
311
2,834
270
13,003
3,146

15,714

15,86915,55016,14915,381
333
15,714

15,391478
15,86915,412
138
15,55015,799350
16,149

278
3,495
10
300
215
790
5,088

264
3,391
15
283
200
752
4,905

209
2,591
4
246
183
590
3,823

196
2,574
6
237
171
592
3,776

200
450
178
62
890

185
435
170
55
845

136
364
118
51
669

133
344
115
39
631

104
550
400
153
15
44
1,266

115
496
335
142
8
26
1,122

64
453
291
126
11
17
962

70
391
255
112
8
3
839

278
19
273
52
239
193
89
28
232
1,403
113
8,760

241
18
263
54
249
187
99
1
188
1,300
85
8,257

208
10
189
39
220
141
8
–
509
1,324
100
6,878

146
9
171
38
187
134
8
1
503
1,197
66
6,509

ANZ ANNUAL REPORT 2014

5: Compensation of Auditors

Consolidated

The Company

2014
$’000

2013
$’000

2014
$’000

2013
$’000

9,031
3,166
630

8,644
2,886
198

5,346
2,444
530

5,327
1,747
130

12,827

11,728

8,320

7,204

Overseas related practices of KPMG Australia
Audit or review of financial reports of the Company or Group entities
Audit-related services2
Non-audit services3

5,396
1,195
4

5,093
993
365

1,227
516
–

1,143
471
222

6,595

6,451

1,743

1,836

Total compensation of auditors

19,422

18,17910,0639,040

KPMG Australia1
Audit or review of financial reports of the Company or Group entities
Audit-related services2
Non-audit services3

1 Inclusive of goods and services tax.
2 For the Group, comprises prudential and regulatory services of $3.217 million (2013: $2.908 million), comfort letters $0.814 million (2013: $0.508 million) and other $0.330 million(2013: $0.463 million). For the Company, comprises prudential and regulatory services of $1.927 million (2013: $1.541 million), comfort letters of $0.585 million (2013: $0.374 million) and other$0.448 million (2013: $0.303 million).
3 The nature of the non-audit services include reviews of compliance with legal and regulatory requirements, benchmarking reviews and a branch optimisation analysis performed during the year.
Further details are provided in the Directors’ Report.

Group Policy allows KPMG Australia or any of its related practices to provide assurance and other audit-related services that, while outside thescope of the statutory audit, are consistent with the role of external auditor. These include regulatory and prudential reviews requested by theCompany’s regulators such as APRA. Any other services that are not audit or audit-related services are non-audit services. Group Policy allows
certain non-audit services to be provided where the service would not contravene auditor independence requirements. KPMG Australia or anyof its related practices may not provide services that are perceived to be in conflict with the role of the external auditor. These include consulting
advice and subcontracting of operational activities normally undertaken by management, and engagements where the auditor may ultimately
be required to express an opinion on its own work.

NOTES TO THE FINANCIAL STATEMENTS

99

NOTES TO THE FINANCIAL STATEMENTS (continued)
6: Income Tax Expense

Consolidated

The Company

2014
$m

20131
$m

2014
$m

20131
$m

Income tax recognised in the income statement
Tax expense/(income) comprises:
Current tax expense/(income)
Adjustments recognised in the current year in relation to the current tax of prior years
Deferred tax expense/(income) relating to the origination and reversal of temporary differences

2,658
1
366

2,679
2
76

1,769
–
202

1,929
2
(143)

Total income tax expense charged in the income statement

3,025

2,757

1,971

1,788

10,308
3,092

9,077
2,723

8,243
2,473

7,175
2,153

(96)
(2)
(155)
–
(11)
5
–
170
–
(50)
71
–
–

(41)
(4)
(144)
8
–
(6)
–
261
(50)
(4)
58
–
(46)

(25)
(570)
–
–
(22)
5
72
–
–
(40)
71
–
7

4
(394)
–
6
–
(6)
27
–
–
–
58
(24)
(38)

3,024

2,755

1,971

1,786

1

2

–

2

Total income tax expense charged in the income statement

3,025

2,757

1,971

1,788

Reconciliation of the prima facie income tax expense on pre-tax profit
with the income tax expense charged in the income statement
Profit before income tax
Prima facie income tax expense at 30%
Tax effect of permanent differences:
Overseas tax rate differential
Rebateable and non-assessable dividends
Profit from associates
Write-down of investment in SSI
Sale of ANZ Trustees and SSI
Offshore Banking Units
Foreign exchange translation of US hybrid loan capital
ANZ Wealth Australia – policyholder income and contributions tax
ANZ Wealth Australia – tax consolidation adjustment
Tax provisions no longer required
Interest on Convertible Instruments
Adjustment between members of the Australian tax-consolidated group
Other
Income tax (over) provided in previous years
Effective tax rate

29.3%

30.4%

23.9%

24.9%

Australia

2,136

2,078

1,811

1,644

Overseas

889

679

160

144

1 Comparative amounts have changed. Refer to note 48 for details.

TAX CONSOLIDATIONThe Company and all its wholly owned Australian resident entities are part of a tax-consolidated group under Australian taxation law.
The Company is the head entity in the tax-consolidated group. Tax expense/income and deferred tax liabilities/assets arising from temporary
differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of thetax‑consolidated group on a ‘group allocation’ basis. Current tax liabilities and assets of the tax consolidated group are recognised by theCompany (as head entity in the tax-consolidated group).
Due to the existence of a tax funding arrangement between the entities in the tax-consolidated group, amounts are recognised as payable
to or receivable by the Company and each member of the tax-consolidated group in relation to the tax contribution amounts paid or payable
between the Company and the other members of the tax‑consolidated group in accordance with the arrangement.
Members of the tax-consolidated group have also entered into a tax sharing agreement that provides for the allocation of income tax liabilities
between the entities should the head entity default on its income tax payment obligations.

100

ANZ ANNUAL REPORT 2014

7: Dividends

Consolidated1

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Ordinary share dividends2
Interim dividend
Final dividend
Bonus option plan adjustment

2,278
2,497
(81)

2,003
2,150
(71)

2,278
2,497
(81)

2,003
2,150
(71)

Dividend on ordinary shares

4,694

4,082

4,694

4,082

1 Excludes dividends paid by subsidiaries of the Group to non-controlling equity holders (2014: $1 million, 2013: $1 million).
2 Dividends are not accrued and are recorded when paid.

A final dividend of 95 cents, fully franked for Australian tax purposes, is proposed to be paid on each eligible fully paid ANZ ordinary shareon 16 December 2014 (2013: final dividend of 91 cents, paid 16 December 2013, fully franked for Australian tax purposes). It is proposedthat New Zealand imputation credits of NZ 12 cents per fully paid ANZ ordinary share will also be attached to the 2014 final dividend(2013: NZ 10 cents). The 2014 interim dividend of 83 cents, paid 1 July 2014, was fully franked for Australian tax purposes (2013: interim dividendof 73 cents, paid 1 July 2013, fully franked for Australian tax purposes). New Zealand imputation credits of NZ 10 cents per fully paid ANZ ordinary
share were attached to the 2014 interim dividend (2013: NZ 9 cents).
The tax rate applicable to the Australian franking credits attached to the 2014 interim dividend and to be attached to the proposed 2014 final
dividend is 30% (2013: 30%).
Dividends paid in cash or satisfied by the issue of shares under the Dividend Reinvestment Plan during the years ended 30 September 2014 and2013 were as follows:
Consolidated

Paid in cash1
Satisfied by share issue2

The Company

2014
$m

2013
$m

2014
$m

2013
$m

3,843
851

3,239
843

3,843
851

3,239
843

4,694

4,082

4,694

4,082

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Preference share dividend3
Euro Trust Securities4

6

6

–

–

Dividend on preference shares

6

6

–

–

2014
$m

2013
$m

982

1,335

1
2
3
4

Refers to cash paid to shareholders who did not elect to participate in the dividend reinvestment plan or the bonus option plan.
Includes shares issued to participating shareholders under the dividend reinvestment plan.
Dividends are not accrued and are recorded when paid.
Refer to note 27 for details.

DIVIDEND FRANKING ACCOUNT
Australian franking credits available for subsequent financial years at a corporate tax rate of 30% (2013: 30%)

The above amounts represent the balances of the franking accounts as at the end of the financial year, adjusted for:}} franking credits that will arise from the payment of income tax payable as at the end of the financial year, and}} franking credits/debits that will arise from the receipt/payment of dividends that have been recognised as tax receivables/payables as at theend of the financial year.
The final dividend for the 2013 financial year utilised $1,070 million of the $1,335 million franking credits available at 30 September 2013
resulting in a balance of $265 million. The final proposed 2014 dividend will utilise the entire balance of $982 million franking credits available at
30 September 2014. Instalment tax payments on account of the 2015 financial year which will be made after 30 September 2014 will generatesufficient franking credits to enable the final 2014 dividend to be fully franked. The extent to which future dividends will be franked will depend
on a number of factors, including the level of profits that will be subject to tax in Australia.
New Zealand imputation credits can be attached to our Australian dividends, but may only be used by our New Zealand resident shareholders.
The amount of available New Zealand imputation credits at the end of the financial year, adjusted for credits that will arise from the payment of
New Zealand income tax payable as at the end of the financial year and New Zealand imputation credits that will arise from dividends receivable
as at the end of the financial year, is NZ$3,492 million (2013: NZ$3,500 million).

NOTES TO THE FINANCIAL STATEMENTS101

NOTES TO THE FINANCIAL STATEMENTS (continued)
7: Dividends (continued)
RESTRICTIONS WHICH LIMIT THE PAYMENT OF DIVIDENDS

DIVIDEND REINVESTMENT PLAN

There are presently no significant restrictions on the payment ofdividends from material controlled entities to the Company. Various
capital adequacy, liquidity, foreign currency controls, statutory
reserve and other prudential and legal requirements must be
observed by certain controlled entities and the impact of theserequirements on the payment of cash dividends is monitored.

During the year ended 30 September 2014, 14,941,125 fully
paid ANZ ordinary shares were issued at $31.83 per share and11,268,833 fully paid ANZ ordinary shares at $33.30 per share toparticipating shareholders under the Dividend Reinvestment Plan
(2013: 19,090,655 fully paid ANZ ordinary shares at $23.64 per share,and 13,535,178 fully paid ANZ ordinary shares at $28.96 per share).
All eligible shareholders can elect to participate in the Dividend
Reinvestment Plan.

There are presently no significant restrictions on the payment ofdividends by the Company, although reductions in shareholders’equity through the payment of cash dividends are monitored having
regard to the following:}} There are regulatory and other legal requirements to maintain aspecified level of capital. Further, APRA has advised that a bankunder its supervision, including the Company, must obtain its
written approval before paying dividends (i) on ordinary shares
which exceed its after tax earnings after taking into account any
payments on more senior capital instruments in the financial year
to which they relate or (ii) where the Company’s Common Equity
Tier 1 capital ratio falls within capital range buffers specified by
APRA from time to time;}} The Corporations Act 2001 (Cth) provides that the Company must
not pay a dividend on any instrument unless (i) it has sufficient net
assets for the payment, (ii) the payment is fair and reasonable to
the Company’s shareholders as a whole, and (iii) the payment does
not materially prejudice the Company’s ability to pay its creditors;}} The terms of the Group’s Euro Trust Securities and ANZ Convertible
Preference Shares also limit the payment of dividends on thesesecurities in certain circumstances. Whilst the terms of the
securities vary, generally the Company may not pay a dividendon these securities if to do so would result in the Company
becoming, or likely to become, insolvent or breaching specified
capital adequacy ratios, if the dividend would exceed its after tax
prudential profits (as defined by APRA from time to time) or if APRA
so directs; and}} If any dividend, interest or redemption payments or other
distributions are not paid on the scheduled payment date, orshares or other qualifying Tier 1 securities are not issued on theapplicable conversion or redemption dates, on the Group’s Euro Trust
Securities, ANZ Convertible Preference Shares or ANZ Capital Notes
in accordance with their terms, the Group may be restricted fromdeclaring or paying any dividends or other distributions on Tier 1
securities including ANZ ordinary shares and preference shares. This
restriction is subject to a number of exceptions.

102

Refer to note 27 for details of the on-market buy-back of ordinary
shares which occurred following the announcement of the 2013
final dividend.
For the 2014 final dividend, no discount will be applied whencalculating the ‘Acquisition Price’ used in determining the numberof fully paid ANZ ordinary shares to be provided under the Dividend
Reinvestment Plan and Bonus Option Plan terms and conditions,and the ‘Pricing Period’ under the Dividend Reinvestment Plan andBonus Option Plan terms and conditions will be the ten trading days
commencing on 14 November 2014 (unless otherwise determined by
the Directors and announced on the ASX).
BONUS OPTION PLAN
The amount paid in dividends during the year has been reduced asa result of certain eligible shareholders participating in the Bonus
Option Plan and foregoing all or part of their right to dividends.
These shareholders were issued fully paid ANZ ordinary shares underthe Bonus Option Plan.
During the year ended 30 September 2014, 2,479,917 fully paid
ANZ ordinary shares were issued under the Bonus Option Plan
(2013: 2,719,008 fully paid ANZ ordinary shares).

ANZ ANNUAL REPORT 2014

8: Earnings per Ordinary Share

Consolidated
2014
$m

2013
$m

Basic earnings per share (cents)

267.1

232.7

Earnings reconciliation ($millions)
Profit for the year
Less: profit attributable to minority interests
Less: preference share dividend paid

7,283
12
6

6,320
10
6

7,265
2,719.7

6,304
2,709.4

Diluted earnings per share (cents)

257.0

225.7

Earnings reconciliation ($millions)
Earnings used in calculating basic earnings per share
Add: US Trust Securities interest expense
Add: ANZ Convertible Preference Shares interest expense
Add: ANZ Capital Notes interest expense

7,265
7
155
81

6,304
31
186
7

Earnings used in calculating diluted earnings per share

Earnings used in calculating basic earnings per share
Weighted average number of ordinary shares (millions)1

7,508

6,528

Weighted average number of ordinary shares (millions)1
Used in calculating basic earnings per share
Add: weighted average number of options/rights potentially convertible to ordinary sharesweighted average number of convertible US Trust Securities at current market prices
weighted average number of ANZ Convertible Preference Sharesweighted average number of ANZ Capital Notes

2,719.7
5.5
6.1
127.5
63.1

2,709.4
5.0
27.5
144.6
5.5

Used in calculating diluted earnings per share

2,921.9

2,892.0

1 Weighted average number of ordinary shares excludes 14.5 million weighted average number of ordinary treasury shares held in ANZEST Pty Ltd (2013: 16.4 million) for the Group employee shareacquisition scheme and 12.5 million weighted average number of ordinary treasury shares held in ANZ Wealth Australia (2013: 12.7 million).

The weighted average number of converted and lapsed options, weighted with reference to the date of conversion or lapse, and included in thecalculation of diluted earnings per share is approximately 0.5 million (2013: approximately 0.6 million).

9: CashConsolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Coins, notes and cash at bankMoney at call, bills receivable and remittances in transit
Securities purchased under agreements to resell in less than three months
Balances with Central Banks

1,487
6
9,851
21,215

1,318
238
10,081
13,633

1,005
1
9,631
20,018914
1
9,792
12,091

Total cash

32,55925,27030,655

22,798

10: Trading Securities

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Commonwealth Securities
Local, semi-government and other government securities
Other securities and equity securities

6,338
18,55924,795

3,445
16,63821,205

6,089
12,23919,721

3,198
11,834
16,432

Total trading securities

49,692

41,28838,04931,464NOTES TO THE FINANCIAL STATEMENTS103

NOTES TO THE FINANCIAL STATEMENTS (continued)
11: Derivative Financial Instruments
Derivative financial instruments are contracts whose value is derived
from one or more underlying variables or indices defined in thecontract, require little or no initial net investment and are settled
at a future date. Derivatives include contracts traded on registeredexchanges and contracts agreed between counterparties. The useof derivatives and their sale to customers as risk management
products is an integral part of the Group’s trading and sales activities.
Derivatives are also used to manage the Group’s own exposure tofluctuations in foreign exchange and interest rates as part of its asset
and liability management activities.
Derivative financial instruments are subject to market and credit risk,
and these risks are managed in a manner consistent with the risks
arising on other financial instruments.
The Group’s objectives and policies on managing risks that arise inconnection with derivatives, including the policies for hedging, areoutlined in note 31.
TYPES OF DERIVATIVE FINANCIAL INSTRUMENTS
The Group transacts principally in foreign exchange, interest rate,commodity and credit derivative contracts. The principal types ofderivative contracts include swaps, forwards, futures and options
contracts and agreements.
Derivatives, except for those that are specifically designated as
effective hedging instruments, are classified as held for trading.
The held for trading classification includes two categories ofderivative financial instruments: those held as trading positions andthose used in the Group’s balance sheet risk management activities.
TRADING POSITIONS
Trading positions arise from both sales to customers and market
making activities. Sales to customers include the structuring andmarketing of derivative products which enable customers to manage
their own risks. Market making activities consist of derivatives enteredinto principally for the purpose of generating profits from short-term
fluctuations in prices or margins. Positions may be traded actively
or held over a period of time to benefit from expected changes inmarket rates.
Trading derivatives are managed within the Group’s market risk
management policies, which are outlined in note 31.

104

Gains or losses, including any current period interest, from thechange in fair value of trading positions are recognised in the income
statement as ‘other income’ in the period in which they occur.
BALANCE SHEET RISK MANAGEMENTThe Group designates balance sheet risk management derivatives
into hedging relationships in order to minimise income statement
volatility. This volatility is created by differences in the timing ofrecognition of gains and losses between the derivative and thehedged item. Hedge accounting is not applied to all balance sheet
risk management positions.
Gains or losses from the change in fair value of balance sheet risk
management derivatives that form part of an effective hedging
relationship are recognised in the income statement based on thehedging relationship. Any ineffectiveness is recognised in the income
statement as ‘other income’ in the period in which it occurs.
Gains or losses, excluding any current period interest, from thechange in fair value of balance sheet risk management positions thatare not designated into hedging relationships are recognised in theincome statement as ‘other income’ in the period in which they occur.
Current period interest is included in interest income and expense.
The tables on the following pages provide an overview of the Group’s
and the Company’s foreign exchange, interest rate, commodity
and credit derivatives. They include all trading and balance sheet
risk management contracts. Notional principal amounts measure
the amount of the underlying physical or financial commodity andrepresent the volume of outstanding transactions. They are not ameasure of the risk associated with a derivative. Further information
on netting of derivative financial instruments is included in note 34
Offsetting. The derivative instruments become favourable (assets)or unfavourable (liabilities) as a result of fluctuations in market rates
relative to the terms of the derivative. Notional amounts of thecontracts are not recorded on the balance sheet.

ANZ ANNUAL REPORT 2014

11: Derivative Financial Instruments (continued)
Fair Value
Trading

Total fair valueof derivatives

Hedging

Consolidated at
30 September 2014

Notional
Principal
Amount$m

Assets Liabilities$m$m

Foreign exchange contracts
Spot and forward contracts
Swap agreements
Options purchased
Options sold

746,023
640,600
105,985
139,062

10,264 (9,324)
19,191 (19,003)
2,079–– (1,923)

–
66
–
–

–
(40)
–
–

–
–
–
–

–
–
–
–

–
–
–
–

(4)
–
–
–

10,264 (9,328)
19,257 (19,043)
2,079–– (1,923)

1,631,670

31,534 (30,250)

66

(40)

–

–

–

(4)

31,600 (30,294)

1,612

(946)

–

–

–

–

–

–

1,612

65,754
2,837,264
128,208
56,57347,8274(10)
19,768 (19,049)
33
(75)
505
–
–
(823)

–
1,808
–
–
–

–
(888)
(14)
–
–

–
765
–
–
–

(1)
(499)
(4)
–
–

–
–
–
–
–

–
–
–
–
–

4
(11)
22,341 (20,436)
33
(93)
505
–
–
(823)

3,135,626

20,310 (19,957)

1,808

(902)

765

(504)

–

–

22,883 (21,363)

Commodity contracts
Derivative contracts
Interest rate contracts
Forward rate agreements
Swap agreements
Futures contracts
Options purchased
Options sold33,886

Fair value

Cash flow

Net investment

Assets Liabilities$m$m

Assets Liabilities$m$m

Assets Liabilities$m$m

Assets Liabilities
$m
$m

(946)

Credit default swaps
Structured credit
derivatives purchased
Other credit derivatives purchased

1,171
17,060

58
162

–
(224)

–
–

–
–

–
–

–
–

–
–

–
–

58
162

–
(224)

Total credit derivatives purchased

18,231

220

(224)

–

–

–

–

–

–

220

(224)

Structured credit derivatives sold
Other credit derivatives sold

1,171
17,359

–
54

(80)
(18)

–
–

–
–

–
–

–
–

–
–

–
–

–
54

(80)
(18)

Total credit derivatives soldTotal

18,530

54

(98)

–

–

–

–

–

–

54

(98)

36,761

274

(322)

–

–

–

–

–

–

274

(322)

53,730 (51,475)

1,874

(942)

765

(504)

–

(4)

4,837,943

56,369 (52,925)

NOTES TO THE FINANCIAL STATEMENTS

105

NOTES TO THE FINANCIAL STATEMENTS (continued)
11: Derivative Financial Instruments (continued)
Fair Value
Trading

Total fair valueof derivatives

Hedging

Consolidated at
30 September 2013

Notional
Principal
Amount1$m

Assets Liabilities$m$m

Foreign exchange contracts
Spot and forward contracts
Swap agreements
Options purchased
Options sold570,615570,809
79,23995,588

7,593 (7,514)
10,276 (12,641)
1,376–– (1,449)

–
76
–
–

–
(10)
–
–

–
–
–
–

–
–
–
–

–
–
–
–

(25)
(41)
–
–

7,593 (7,539)
10,352 (12,692)
1,376–– (1,449)

1,316,251

19,245 (21,604)

76

(10)

–

–

–

(66)

19,321 (21,680)

1,368(1,255)

–

–

–

–

–

–

1,368

85,251
2,250,331
100,849
29,67135,282

3(5)
21,249 (20,735)
452
(459)
1,049
–
– (1,233)

–
1,272
1
–
–

–
(998)
(39)
–
–

–
838
3
–
–

–
(743)
–
–
–

–
–
–
–
–

–
–
–
–
–

3
(5)
23,359 (22,476)
456
(498)
1,049
–
– (1,233)

2,501,384

22,753 (22,432)

1,273(1,037)

841

(743)

–

–

24,867 (24,212)

Commodity contracts
Derivative contracts
Interest rate contracts
Forward rate agreements
Swap agreements
Futures contracts
Options purchased
Options sold

30,206

Fair value

Cash flow

Net investment

Assets Liabilities$m$m

Assets Liabilities$m$m

Assets Liabilities$m$m

Assets Liabilities$m$m(1,255)Credit default swaps
Structured credit
derivatives purchased
Other credit derivatives purchased

4,812
17,837

136
122

–
(143)

–
–

–
–

–
–

–
–

–
–

–
–

136
122

–
(143)

Total credit derivatives purchased

22,649

258

(143)

–

–

–

–

–

–

258

(143)

Structured credit derivatives sold
Other credit derivatives sold

4,812
17,042

–
64

(169)
(50)

–
–

–
–

–
–

–
–

–
–

–
–

–
64

(169)
(50)

Total credit derivatives soldTotal

21,854

64

(219)

–

–

–

–

–

–

64

(219)

44,503

322

(362)

–

–

–

–

–

–

322

(362)

43,688 (45,653)

1,349(1,047)

841

(743)

–

(66)

3,892,344

45,878 (47,509)

1 To align with current period presentation, Notional Principal Amounts are presented gross. Previously, Notional Principal Amounts were presented net where a master netting arrangement
was in place.

106

ANZ ANNUAL REPORT 2014

11: Derivative Financial Instruments (continued)
Fair Value
Trading

Total fair valueof derivatives

Hedging

The Company at
30 September 2014

Notional
Principal
Amount$m

Assets Liabilities$m$m

Foreign exchange contracts
Spot and forward contracts
Swap agreements
Options purchased
Options sold723,896
636,477
104,919
138,285

9,664 (8,880)
18,552 (18,694)
2,061–– (1,915)

–
66
–
–

–
(40)
–
–

–
–
–
–

–
–
–
–

–
–
–
–

(4)
–
–
–

9,664 (8,884)
18,618 (18,734)
2,061–– (1,915)

1,603,577

30,277 (29,489)

66

(40)

–

–

–

(4)

30,343 (29,533)

1,606

(925)

–

–

–

–

–

–

1,606

61,6992,590,629
112,227
55,96947,382

4(10)
17,851 (17,561)
31
(72)
506
–
–
(822)

–
1,587
–
–
–

–
(807)
(14)
–
–

–
680
–
–
–

(1)
(403)
(4)
–
–

–
–
–
–
–

–
–
–
–
–

4
(11)
20,118 (18,771)
31
(90)
506
–
–
(822)

2,867,906

18,392 (18,465)

1,587

(821)

680

(408)

–

–

20,659 (19,694)

Commodity contracts
Derivative contracts
Interest rate contracts
Forward rate agreements
Swap agreements
Futures contracts
Options purchased
Options sold33,486

Fair value

Cash flow

Net investment

Assets Liabilities$m$m

Assets Liabilities$m$m

Assets Liabilities$m$m

Assets Liabilities
$m
$m

(925)

Credit default swaps
Structured credit
derivatives purchased
Other credit derivatives purchased

1,171
17,060

58
162

–
(224)

–
–

–
–

–
–

–
–

–
–

–
–

58
162

–
(224)

Total credit derivatives purchased

18,231

220

(224)

–

–

–

–

–

–

220

(224)

Structured credit derivatives sold
Other credit derivatives sold

1,171
17,359

–
54

(80)
(18)

–
–

–
–

–
–

–
–

–
–

–
–

–
54

(80)
(18)

Total credit derivatives soldTotal

18,530

54

(98)

–

–

–

–

–

–

54

(98)

36,761

274

(322)

–

–

–

–

–

–

274

(322)

50,549 (49,201)

1,653

(861)

680

(408)

–

(4)

4,541,730

52,882 (50,474)

NOTES TO THE FINANCIAL STATEMENTS

107

NOTES TO THE FINANCIAL STATEMENTS (continued)
11: Derivative Financial Instruments (continued)
Fair Value
Trading

Total fair valueof derivatives

Hedging

The Company at
30 September 2013

Notional
Principal
Amount1$m

Assets Liabilities$m$m

Foreign exchange contracts
Spot and forward contracts
Swap agreements
Options purchased
Options sold545,564
527,972
78,75895,237

7,391 (6,803)
9,418 (10,977)
1,370–– (1,427)

–
75
–
–

–
(10)
–
–

–
–
–
–

–
–
–
–

–
–
–
–

(41)
–
–

7,391 (6,803)
9,493 (11,028)
1,370–– (1,427)

1,247,531

18,179 (19,207)

75

(10)

–

–

–

(41)

18,254 (19,258)

1,361(1,253)

–

–

–

–

–

–

1,361

72,816
1,897,806
78,72828,641
34,372

3(4)
17,684 (17,655)
451
(454)
1,047
–
– (1,218)

–
1,127
1
–
–

–
(930)
(39)
–
–

–
758
3
–
–

–
(654)
–
–
–

–
–
–
–
–

–
–
–
–
–

3
(4)
19,569 (19,239)
455
(493)
1,047
–
– (1,218)

2,112,363

19,185 (19,331)

1,128

(969)

761

(654)

–

–

21,074 (20,954)

Commodity contracts
Derivative contracts
Interest rate contracts
Forward rate agreements
Swap agreements
Futures contracts
Options purchased
Options sold

29,652

Fair value

Cash flow

Net investment

Assets Liabilities$m$m

Assets Liabilities$m$m

Assets Liabilities$m$m

Assets Liabilities$m$m(1,253)Credit default swaps
Structured credit
derivatives purchased
Other credit derivatives purchased

4,811
17,838

136
122

–
(143)

–
–

–
–

–
–

–
–

–
–

–
–

136
122

–
(143)

Total credit derivatives purchased

22,649

258

(143)

–

–

–

–

–

–

258

(143)

Structured credit derivatives sold
Other credit derivatives sold

4,811
17,043

–
64

(169)
(50)

–
–

–
–

–
–

–
–

–
–

–
–

–
64

(169)
(50)

Total credit derivatives soldTotal

21,854

64

(219)

–

–

–

–

–

–

64

(219)

44,503

322

(362)

–

–

–

–

–

–

322

(362)

39,047 (40,153)

1,203

(979)

761

(654)

–

(41)

3,434,049

41,011 (41,827)

1 To align with current period presentation, Notional Principal Amounts are presented gross. Previously, Notional Principal Amounts were presented net where a master netting arrangement
was in place.

HEDGING ACCOUNTING
There are three types of hedging accounting relationships: fair value
hedges, cash flow hedges and hedges of a net investment in a foreign
operation. Each type of hedging has specific requirements when
accounting for the fair value changes in the hedging relationship.
For details on the accounting treatment of each type of hedging
relationship refer to note 1.
FAIR VALUE HEDGE ACCOUNTING
The risk being hedged in a fair value hedge is a change in the fairvalue of an asset or liability or unrecognised firm commitment that
may affect the income statement. Changes in fair value might arise
through changes in interest rates or foreign exchange rates. The
Group’s fair value hedges consist principally of interest rate swaps

and cross currency swaps that are used to protect against changes
in the fair value of fixed-rate long-term financial instruments due tomovements in market interest rates and exchange rates.
The application of fair value hedge accounting results in the fair value
adjustment on the hedged item attributable to the hedged risk being
recognised in the income statement at the same time the hedging
instrument impacts the income statement. If hedge relationships nolonger meet the criteria for hedge accounting, hedge accounting is
discontinued. The fair value adjustment to the hedged item continues
to be recognised as part of the carrying amount of the item orgroup of items and is amortised to the income statement as a partof the effective yield over the period to maturity. Where the hedged
item is derecognised from the Group’s balance sheet, the fair value
adjustment is included in the income statement as ‘other income’ asa part of the gain or loss on disposal.
Consolidated

Gain/(loss) arising from fair value hedges
Hedged item
Hedging Instrument

108

The Company

2014
$m

2013
$m

2014
$m

2013
$m

(434)
429

534
(532)

(370)
369

476
(466)

ANZ ANNUAL REPORT 2014

11: Derivative Financial Instruments (continued)
CASH FLOW HEDGE ACCOUNTING
The risk being hedged in a cash flow hedge is the potential variability
in future cash flows that may affect the income statement. Variability
in the future cash flows may result from changes in interest rates or
exchange rates affecting recognised financial assets and liabilities andhighly probable forecast transactions. The Group’s cash flow hedges
consist principally of interest rate swaps, forward rate agreements
and cross currency swaps that are used to protect against exposures
to variability in future cash flows on non-trading assets and liabilities
which bear interest at variable rates or which are expected to berefunded or reinvested in the future. The Group primarily applies
cash flow hedge accounting to its variable rate loan assets, variable
rate liabilities and short-term re-issuances of fixed rate customer andwholesale deposit liabilities. The amounts and timing of future cash
flows, representing both principal and interest flows, are projected

for each portfolio of financial assets and liabilities on the basis of theirforecast repricing profile. This forms the basis for identifying gains
and losses on the effective portions of derivatives designated as cash
flow hedges.
The effective portion of changes in the fair value of derivatives
qualifying and designated as cash flow hedges is recognised
initially in other comprehensive income. These are recognised in theincome statement in the period during which the hedged forecast
transactions take place. The ineffective portion of a designated cash
flow hedge relationship is recognised immediately as other income in
the income statement. The schedule below shows the movements in
the hedging reserve:
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Opening
Item recorded in net interest income
Tax effect on items recorded in net interest income
Valuation gain taken to other comprehensive income
Tax effect on net gain on cash flow hedges

75
(30)
8
165
(49)

208
–
–
(186)
53

51
8
(2)
168
(51)

89
24
(7)
(78)
23

Closing Balance

169

75

174

51

The table below shows the breakdown of the hedging reserve attributable to each type of cash flow hedging relationship:
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Variable rate assets
Variable rate liabilities
Re-issuances of short term fixed rate liabilities

407
(114)
(124)

446
(184)
(187)

433
(119)
(140)

457
(192)
(214)

Total hedging reserve

169

75

174

51

All underlying hedged cash flows are expected to be recognised in
the income statement in the period in which they occur which isanticipated to take place over the next 0–10 years (2013: 0–10 years).
All gains and losses associated with the ineffective portion of thehedging derivatives are recognised immediately as ‘other income’in the income statement. Ineffectiveness recognised in the income
statement in respect of cash flow hedges amounted to a $10 million
gain for the Group (2013: $1 million loss) and a $9 million gain for theCompany (2013: $1 million loss).

HEDGES OF NET INVESTMENTS IN FOREIGN OPERATIONS
In a hedge of a net investment in a foreign operation, the risk being
hedged is the exposure to exchange rate differences arising on
consolidation of foreign operations with a functional currency otherthan the Australian Dollar. Hedging is undertaken using foreignexchange derivative contracts or by financing with borrowings in
the same currency as the applicable foreign functional currency.
Ineffectiveness arising from hedges of net investments in foreign
operations and recognised as ‘other income’ in the income statement
amounted to nil (2013: nil).

NOTES TO THE FINANCIAL STATEMENTS

109

NOTES TO THE FINANCIAL STATEMENTS (continued)
12: Available-for-sale Assets

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

ListedOther government securities
Other securities and equity securities

1,513
9,971

1,197
7,976

688
9,687

422
7,737

Total listed

11,484

9,173

10,375

8,159

Unlisted
Local and semi-government securities
Other government securities
Other securities and equity securities

11,382
2,168
5,883

9,468
5,402
4,234

11,187
184
4,405

8,366
3,893
3,405

Total unlisted

19,433

19,104

15,776

15,664

Total available-for-sale assets

30,91728,277

26,151

23,823

During the year net gains (before tax) recognised in the income statement in respect of available-for-sale assets amounted to $47 million for theGroup (2013: $3 million net loss before tax) and $40 million for the Company (2013: $4 million net loss before tax).
AVAILABLE-FOR-SALE BY MATURITIES AT 30 SEPTEMBER 2014
Less than
3 months$m

Between3 and 12months$m

Between
1 and
5 years$m

Between5 and 10
years
$m

After
10 years$mNomaturity
specified
$m

Total
fair
value
$m

Local and semi-government securities
Other government securities
Other securities and equity securities

2,450
656
523

719
1,822
2,649

3,096
1,203
8,128

3,686
–
1,492

1,431
–
3,019

–
–
43

11,382
3,681
15,854

Total available-for-sale assets

3,629

5,190

12,427

5,178

4,450

43

30,917Less than
3 months$m

Between3 and 12months$m

Between
1 and
5 years$m

Between5 and 10
years
$m

After
10 years$mNomaturity
specified
$m

Total
fair
value
$m

Local and semi-government securities
Other government securities
Other securities and equity securities

1,018
3,604
588

819
1,342
1,376

2,201
1,566
6,948

3,741
78
602

1,689
9
2,632

–
–
64

9,468
6,599
12,210Total available-for-sale assets

5,210

3,537

10,715

4,421

4,330

64

28,277AVAILABLE-FOR-SALE BY MATURITIES AT 30 SEPTEMBER 2013110

ANZ ANNUAL REPORT 2014

13: Net Loans and Advances

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Overdrafts
Credit card outstandings
Term loans – housing
Term loans – non-housing
Hire purchase
Lease receivables
Commercial bills
Other

8,629
11,440271,388
213,324
2,238
1,905
15,027432

8,833
11,247253,277
191,615
2,760
2,056
16,536
494

7,078
9,244
221,576
161,913
1,409
1,190
14,766
4

6,945
9,213
206,711143,2112,010
1,395
16,257125

Total gross loans and advances

524,383

486,818

417,180

385,867(3,933)
(892)
1,043
1,151

(4,354)
(954)
942
812

(3,011)
(657)
837
717

(3,242)
(723)
787
484

Less: Provision for credit impairment (refer to note 15)
Less: Unearned income
Add: Capitalised brokerage/mortgage origination fees1
Add: Customer liability for acceptances
Adjustments to gross loans and advances(2,631)(3,554)(2,114)(2,694)

521,752

483,264

415,066

383,173

Lease receivablesa) Finance lease receivables
Gross finance lease receivables
Less than 1 year
1 to 5 years
Later than 5 years

370
527
387

575
522
430

225
350
63

350
320
202

Less: unearned future finance income on finance leases

(154)

(155)

(98)

(91)

Net investment in finance lease receivables

Net loans and advances

1,130

1,372

540

781

b) Operating lease receivables
Gross operating lease receivables
Less than 1 year
1 to 5 years
Later than 5 years

55
566
–

133
395
1

51
501
–

130
392
1

Total operating lease receivables

621

529

552

523

1,751

1,901

1,092

1,304

332
480
318

535
468
369

206
285
49

335
297
149

Total

1,130

1,372

540

781

Hire purchase receivables
Less than 1 year
1 to 5 years
Later than 5 years

758
1,466
14

907
1,838
15

456
939
14

641
1,354
15

Total

2,238

2,760

1,409

2,010

Net lease receivables
Present value of net investment in finance lease receivables
Less than 1 year
1 to 5 years
Later than 5 years

1 Capitalised brokerage/mortgage origination fees are amortised over the term of the loan.

NOTES TO THE FINANCIAL STATEMENTS

111

NOTES TO THE FINANCIAL STATEMENTS (continued)
14: Impaired Financial Assets
Presented below is a summary of impaired financial assets that are measured on the balance sheet at amortised cost. For these items,
impairment losses are recorded through the provision for credit impairment. This contrasts to financial assets carried on the balance sheet at fairvalue, for which any impairment loss is recognised as a component of the overall fair value.
Detailed information on impaired financial assets is provided in note 31 Financial Risk Management.
Consolidated

Summary of impaired financial assets
Impaired loans
Restructured items1
Non-performing commitments and contingencies2

The Company

2014
$m

2013
$m

2014
$m

2013
$m

2,682
67
140

3,751
341
172

1,923
26
105

2,723
284
149

Gross impaired financial assets
Individual provisions
Impaired loans
Non-performing commitments and contingencies

2,889

4,264

2,054

3,156

(1,130)(46)(1,440)
(27)

(814)
(40)

(1,046)(10)

Net impaired financial assets

1,713

2,797

1,200

2,100

Accruing loans past due 90 days or more3
These amounts are not classified as impaired assets as they are either 90 daysor more past due and well secured, or are portfolio managed facilities that canbe held on a productive basis for up to 180 days past due

1,982

1,818

1,778

1,576

1 Restructured items are facilities in which the original contractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring may consist of reductionof interest, principal or other payments legally due, or an extension in maturity materially beyond those typically offered to new facilities with similar risk.
2 Includes impaired derivative financial instruments.
3 Includes unsecured credit card and personal loans 90 days past due accounts which are retained on a performing basis for up to 180 days past due amounting to $154 million (2013: $151 million)
for the Group and $111 million (2013: $106 million) for the Company.

15: Provision for Credit Impairment

Consolidated

The Company

Credit impairment charge analysis

2014
$m

2013
$m

2014
$m

2013
$m

New and increased provisions
Australia
New Zealand
Asia Pacific, Europe & America

1,292
274
246

1,304
310
275

1,275
16
156

1,304
15
157

Write-backs

1,812
(447)

1,889
(487)

1,447
(253)

1,476
(255)

Recoveries of amounts previously written off

1,365
(224)

1,402
(247)

1,194
(174)

1,221
(194)

Individual credit impairment charge
Impairment on available-for-sale assets
Collective credit impairment charge/(release)

1,141
–
(155)

1,155
3
30

1,020
–
(46)

1,027
3
102

986

1,188

974

1,132

Credit impairment charge

112

ANZ ANNUAL REPORT 2014

15: Provision for Credit Impairment (continued)
MOVEMENT IN PROVISION FOR CREDIT IMPAIRMENT BY FINANCIAL ASSET CLASSNet loans andadvances

Credit related
commitments

Total provision

Consolidated

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Collective provision
Balance at start of year
Adjustment for exchange rate fluctuations and transfers
DisposalCharge/(release) to income statement

2,292
8
–
(156)

2,236
63
–
(7)

595
17
–
1

529
29
–
37

2,887
25
–
(155)

2,765
92
–
30

Total collective provision

2,144

2,292

613

595

2,757

2,887

Individual provision
Balance at start of year
New and increased provisions
Adjustment for exchange rate fluctuations and transfers
Write-backs
Discount unwind
Bad debts written off

1,440 1,729
1,794 1,889
7
62
(447)
(481)
(65)
(102)
(1,599) (1,657)

27
18
1
–
–
–

44 1,467 1,773– 1,812 1,889
(11)
8
51
(6)
(447)
(487)
–
(65)
(102)
– (1,599) (1,657)

Total individual provision

1,130

1,440

46

27

1,176

1,467

Total provision for credit impairment

3,274

3,732

659

622

3,933

4,354

2013
$m

2014
$m

The table below contains a detailed analysis of the movements in individual provision for net loans and advances.
Australia

Internationaland Institutional
Banking

New Zealand

Total

Other1

Consolidated

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

Individual provision
Balance at start of year
New and increased provisions
Adjustment for exchange rate fluctuations and transfers
Write-backs
Discount unwind
Bad debts written off

747
1,114
(2)
(202)
(33)
(994)

716
1,132
–
(229)
(34)
(838)

417
418
7
(79)
(35)
(418)

650
447
22
(70)
(45)
(587)

242
260
2
(163)
3
(157)

348
294
34
(180)
(23)
(231)

34
2
–
(3)
–
(30)

Total individual provision

630

747

310

417

187

242

3

2013
$m

15 1,440 1,729
16 1,794 1,889
6
7
62
(2)
(447)
(481)
–
(65)
(102)
(1) (1,599) (1,657)
34

1,130

1,440

Consolidated

Ratios (as a percentage of total gross loans and advances)
Individual provisionCollective provision
Bad debts written off

2014
%

2013
%

0.22
0.53
0.30

0.30
0.59
0.34

1 Other contains Global Wealth and GTSO and Group Centre.

NOTES TO THE FINANCIAL STATEMENTS

113

NOTES TO THE FINANCIAL STATEMENTS (continued)
15: Provision for Credit Impairment (continued)
Credit related
commitments

Net loans and advances

Total provision

The Company

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Collective provision
Balance at start of year
Adjustment for exchange rate fluctuations and transfers
DisposalCharge/(credit) to income statement

1,729
5
–
(65)

1,728
(55)
–
56

457
12
–
19

410
1
–
46

2,186
17
–
(46)

2,138
(54)
–
102

Total collective provision

1,669

1,729

488

457

2,157

2,186

Individual provision
Balance at start of year
New and increased provisions
Adjustment for exchange rate fluctuations and transfers
Write-backs
Discount unwind
Bad debts written off

1,046
1,417
4
(253)
(60)
(1,340)

1,242
1,476
(51)
(249)
(75)
(1,297)

10
30
–
–
–
–

27
–
(11)
(6)
–
–

1,056
1,447
4
(253)
(60)
(1,340)

1,269
1,476
(62)
(255)
(75)
(1,297)

814

1,046

40

10

854

1,056

2,483

2,775

528

467

3,011

3,242

Total individual provision
Total provision for credit impairment

The Company

Ratios (as a percentage of total gross loans and advances)
Individual provisionCollective provision
Bad debts written off

16: Shares in Controlled Entities and Associates

Consolidated

2014
%

2013
%

0.20
0.52
0.32

0.27
0.57
0.34

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Total shares in controlled entities
Total shares in associates1

–
4,582

–
4,123

14,870720

14,955841

Total shares in controlled entities and associates

4,582

4,123

15,59015,796

1 Investments in associates are accounted for using the equity method of accounting by the Group and are carried at cost by the Company.

DISPOSAL OF CONTROLLED ENTITIESOn 4 July 2014 ANZ Trustees Limited was sold.
Details of aggregate assets and liabilities of material controlled entities disposed of by the Group are as follows:
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Cash consideration received
Less: Balances of disposed cash and cash equivalents

156
11

–
–

156
–

–
–

Net cash consideration received

145

–

156

–

Less: Net assets disposed
Net loans and advances
Premises and equipment
Shares in controlled entities
Other assets, including allocated goodwill
Deposits and other borrowings
Payables and other liabilities
Provisions

–
–
–
2
–
(1)
–

–
–
–
–
–
–
–

–
–
22
–
–
–
–

–
–
–
–
–
–
–

Less: Provisions for warranties, indemnities and direct costs relating to disposal

1
19

–
–

22
19

–
–

Gain on disposal

125

–

115

–

ACQUISITION OF CONTROLLED ENTITIESThere were no material controlled entities acquired during the year ended 30 September 2014 or the year ended 30 September 2013.

114

ANZ ANNUAL REPORT 2014

17: Tax Assets
Consolidated

Australia
Current tax asset
Deferred tax asset
New ZealandCurrent tax asset
Deferred tax asset
Asia Pacific, Europe & America
Current tax asset
Deferred tax asset

The Company

2014
$m

2013
$m

2014
$m

2013
$m

9
280

–
530

9
676

–
815

289

530

685

815

–
–

1
37

–
6

–
6

–

38

6

6

29
137

19
158

18
96

18
115

166

177

114

133

Total current and deferred tax assets

455

745

805

954

Total current tax assets

38

20

27

18

Total deferred tax assets

417

725

778

936

Deferred tax assets recognised in profit and loss
Collective provision for loans and advances
Individual provision for impaired loans and advances
Other provisions
Provision for employee entitlements
Policyholder tax assets
Other

724
292
272
152
–
203

764
359
318
154
67
323

594
236
184
119
–
102

612
279
223
119
–
134

1,643

1,985

1,235

1,367

–
10

20
–

–
10

7
–

Deferred tax assets recognised directly in equity
Defined benefits obligation
Own credit risk of financial liabilities

10

20

10

7

(1,236)(1,280)

(467)

(438)

417

725

778

936

Unused realised tax losses (on revenue account)

5

5

–

–

Total unrecognised deferred tax assets

5

5

–

–

Set-off of deferred tax assets pursuant to set-off provisions1
Net deferred tax assets

Unrecognised deferred tax assets
The following deferred tax assets will only be recognised if:}} assessable income is derived of a nature and an amount sufficient to enable the benefit to be realised;}} the conditions for deductibility imposed by tax legislation are complied with; and}} no changes in tax legislation adversely affect the Group in realising the benefit.

1 Deferred tax assets and liabilities are set-off where they relate to income tax levied by the same taxation authority on either the same taxable entity or different taxable entities within the same
taxable group.

NOTES TO THE FINANCIAL STATEMENTS

115

NOTES TO THE FINANCIAL STATEMENTS (continued)
18: Goodwill and Other Intangible Assets
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Gross carrying amount
Balances at start of the year
Additions through business combinations
Reclassifications2
Impairment/write off expense
Derecognised on disposal
Foreign currency exchange differences

4,499
–
–
–
–
12

4,212
–
–
–
(23)
310

77
–
9
–
–
4

92
–
–
–
(23)
8

Balance at end of year

4,511

4,499

90

77

Balances at start of the year
Software capitalisation during the period
Amortisation expense
Impairment expense/write-offs
Foreign currency exchange differences

2,170
777
(426)
(15)
27

1,762
780
(383)
(8)
19

2,007
683
(368)
(11)
25

1,613
710
(315)
(8)
7

Balance at end of year

2,533

2,170

2,336

2,007

Cost
Accumulated amortisation
Accumulated impairment

5,005(2,263)
(209)

4,258
(1,884)
(204)

4,568
(2,031)
(201)

3,866
(1,663)(196)

Carrying amount

2,533

2,170

2,336

2,007

Balances at start of the year
Amortisation expense
Foreign currency exchange differences

856
(71)
(1)

928
(78)
6

–
–
–

–
–
–

Balance at end of year

784

856

–

–

1,187
(403)

1,187
(331)

–
–

–
–

784

856

–

–

Balances at start of the year
Other additions
Reclassification2
Amortisation expense
Impairment expense
Foreign currency exchange differences

165
3
–
(18)
(28)
–

180
3
–
(21)
(1)
4

40
–
(9)
(8)
–
2

47
–
–
(8)
(1)
2

Balance at end of year

122

165

25

40

Cost
Accumulated amortisation/impairment

227
(105)

272
(107)

68
(43)

74
(34)

Carrying amount

122

165

25

40

Net book value
Balances at start of the year

7,690

7,082

2,124

1,752

Balance at end of year

7,950

7,690

2,451

2,124

Goodwill1

SoftwareAcquired Portfolio of Insurance and Investment Business

Cost
Accumulated amortisation
Carrying amount

Other intangible assets3

Goodwill and other intangible assets

1 Excludes notional goodwill in equity accounted entities.
2 Reclassification from other intangible assets to goodwill.
3 The consolidated other intangibles comprises aligned advisor relationships, distribution agreements and management fee rights, credit card relationships and other intangibles. The company
other intangible assets comprises distribution agreements and management fee rights, credit card relationships and other intangibles.

116

ANZ ANNUAL REPORT 2014

18: Goodwill and Other Intangible Assets (continued)
GOODWILL ALLOCATED TO CASH–GENERATING UNITS
The goodwill balance above largely comprises the goodwill
purchased on acquisition of NBNZ Holdings Limited in December
2003 (included in the New Zealand division) and ANZ Wealth Australia
Limited (formerly OnePath Australia Limited) on 30 November 2009
(included in the Global Wealth division).
The recoverable amount of the CGU to which each goodwill
component is allocated is estimated using a market multiple
approach as representative of the fair value less cost to sell of each
CGU. The price earnings multiples are based on observable multiples
reflecting the businesses and markets in which each CGU operates.
The earnings are based on the current forecast earnings of thedivisions. The aggregate fair value less cost to sell across the Groupis compared to the Group’s market capitalisation to validate theconclusion that goodwill is not impaired.

19: Other Assets

Key assumptions on which management has based its determinationof fair value less cost to sell include assumptions as to the market
multiples being reflective of the segment’s businesses, cost to sellestimates and the ability to achieve forecast earnings. Changes inassumptions upon which the valuation is based could materially
impact the assessment of the recoverable amount of each CGU. As at
30 September 2014, the impairment testing performed did not resultin any material impairment being identified.

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Accrued interest/prepaid discounts
Accrued commissions
Prepaid expenses
Insurance contract liabilities ceded
Outstanding premiums
Defined benefit superannuation plan surplus
Operating leases residual value
Other

1,472
129
356
591
200
47
334
1,662

1,300
134
319
519
315
–
378
1,387

998
75
152
–
–
47
334
637

890
98
140
–
–
–
378
762

Total other assets

4,791

4,352

2,243

2,268

20: Premises and Equipment
Consolidated

Freehold and leasehold land and buildings
At cost1
Depreciation1
Leasehold improvements
At cost1
Depreciation1
Furniture and equipment
At cost1
Depreciation1
Technology equipment
At cost1
Depreciation1
Capital works in progress
At costTotal premises and equipment

The Company

2014
$m

2013
$m

2014
$m

2013
$m

1,193
(315)

1,219
(315)

95
(45)

94
(49)

878

904

50

45

640
(393)

587
(394)

421
(276)

406
(262)

247

193

145

144

1,134
(670)

1,377
(880)

912
(518)

1,077
(639)

464

497

394

438

1,172
(721)

1,342
(951)

850
(485)

998
(693)

451

391

365

305

141

179

47

51

2,181

2,164

1,001

983

1 The current year cost and accumulated depreciation was reduced to remove assets with a nil net book value that are no longer in use. Comparative information was not adjusted.

NOTES TO THE FINANCIAL STATEMENTS

117

NOTES TO THE FINANCIAL STATEMENTS (continued)
20: Premises and Equipment (continued)
Reconciliations of the carrying amounts for each class of premises and equipment are set out below:
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Freehold and leasehold land and buildings
Carrying amount at beginning of year
Additions1
Disposals
Depreciation
Foreign currency exchange difference

904
24
(15)
(38)
3

926
43
(42)
(36)
13

45
12
(2)
(6)
1

608
1
(558)
(9)
3

Carrying amount at end of year

878

904

50

45

Leasehold improvements
Carrying amount at beginning of year
Additions1
Disposals
Depreciation
Foreign currency exchange difference

193
122
(10)
(59)
1

195
48
(7)
(52)
9

144
44
(6)
(39)
2

141
37
(2)
(36)
4

Carrying amount at end of year

247

193

145

144

Furniture and equipment
Carrying amount at beginning of year
Additions1
Disposals2
Depreciation
Foreign currency exchange difference

497
84
(17)
(103)
3

516
84
(14)
(97)
8

438
53
(9)
(91)
3

451
248
(176)
(88)
3

Carrying amount at end of year

464

497

394

438

Technology equipment
Carrying amount at beginning of year
Additions1
Disposals2
Depreciation
Impairment
Foreign currency exchange difference

391
183
(2)
(124)
–
3

349
161
(13)
(113)
(3)
10

305
142
–
(85)
–
3

256
129
(4)
(76)
(3)
3

Carrying amount at end of year

451

391

365

305

Capital works in progress
Carrying amount at beginning of year
Net (transfers)/additions

179
(38)

128
51

51
(4)

78
(27)

Carrying amount at end of year

141

179

47

51

Total premises and equipment

2,181

2,164

1,001

983

1 Includes transfers.
2 On the 31st of December 2012, “the Company” transferred the ownership of all Land and Buildings, Furniture and Equipment and Computer Equipment relating to the premises known as“ANZ Centre” located at 833 Collins Street, Docklands into two fully owned Unit Trusts – ANZ Centre Trust and ANZ Centre Chattels Trust. Land and Buildings were transferred at market valueof $545.1 million. Furniture and Equipment and Computer Equipment were transferred at their written down value of $167.4 million.

21: Deposits and Other Borrowings

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Certificates of deposit
Term Deposits
Other deposits bearing interest and other borrowings
Deposits not bearing interest
Deposits from banks
Commercial Paper
Borrowing corporations' debt1

52,755
192,716
193,459
16,40438,19315,152
1,400

58,276
186,691
166,659
14,44627,241
12,255
1,347

51,634
154,763
160,995
8,688
37,3399,753–

56,453
148,593
138,378
7,574
26,436
8,015–

Deposits and other borrowings

510,079

466,915423,172

385,449

1 Included in this balance is debenture stock of $1 million (September 2013: $19 million) of Esanda Finance Corporation Limited (Esanda), together with accrued interest thereon, which is secured bya trust deed and collateral debentures, giving floating charges upon the undertaking and all the assets of the entity amounting to $43 million (September 2013: $255 million) other than land andbuildings. All controlled entities of Esanda have guaranteed the payment of principal, interest and other monies in relation to all debenture stock and unsecured notes issued by Esanda. The only
loans pledged as collateral are those in Esanda and its subsidiaries. Effective from 18 March 2009, Esanda ceased to write new debentures and since September 2009 stopped writing new loans.
In addition, this balance also includes NZD 1.6 billion (September 2013: NZD 1.5 billion) of secured debenture stock of the consolidated subsidiary UDC Finance Limited (UDC) and the accrued
interest thereon which are secured by a floating charge over all assets of UDC NZD 2.5 billion (September 2013: NZD 2.3 billion).

118

ANZ ANNUAL REPORT 2014

22: Tax Liabilities

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

208
–

811
–

208
–

811
–

208

811

208

811

60
53

–
–

21
–

16
–

113

–

21

16

181
67

161
14

72
62

55
12

248

175

134

67

Total current and deferred income tax liability

569

986

363

894

Total current tax payable

449

972

301

882

Total deferred income tax liabilities

120

14

62

12

Deferred tax liabilities recognised in profit and loss
Acquired portfolio of insurance and investment businessInsurance related deferred acquisition costs
Lease finance
Other

235
124
249
562

258
108
227
583

–
–
41
375

–
–
39
373

1,170

1,176

416

412

73
36
75
2

30
36
52
–

76
–
29
8

21
–
17
–

Australia
Current tax payable
Deferred tax liabilities
New ZealandCurrent tax payable
Deferred tax liabilities
Asia Pacific, Europe & America
Current tax payable
Deferred tax liabilities

Deferred tax liabilities recognised directly in equity
Cash flow hedges
Foreign currency translation reserve
Available-for-sale revaluation reserve
Defined benefits obligation

186

118

113

38

(1,236)(1,280)

(467)

(438)

Net deferred tax liability

120

14

62

12

Unrecognised deferred tax liabilities
The following deferred tax liabilities have not been bought to account as liabilities:
Other unrealised taxable temporary differences2

323

253

45

38

Total unrecognised deferred tax liabilities

323

253

45

38

Set-off of deferred tax liabilities pursuant to set-off provision1

1 Deferred tax assets and liabilities are set-off where they relate to income tax levied by the same taxation authority on either the same taxable entity or different taxable entities within the same
taxable group.
2 Represents additional potential foreign tax costs should all retained earnings in offshore branches and subsidiaries be repatriated.

23: Payables and Other Liabilities

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Creditors
Accrued interest and unearned discounts
Defined benefits plan obligations
Accrued expenses
Securities sold short
Liability for acceptances
Other liabilities

1,335
2,096
39
1,394
3,870
1,151
1,099

1,182
2,135
91
1,517
2,530
812
792

477
1,592
15
1,022
3,556
717
303

431
1,644
29
1,133
2,403
484
152

Total payables and other liabilities

10,984

9,059

7,682

6,276

NOTES TO THE FINANCIAL STATEMENTS

119

NOTES TO THE FINANCIAL STATEMENTS (continued)
24: Provisions
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

526
56
134
384

533
57
155
483

404
48
104
139

403
38
131
253

1,100

1,228

695

825

Restructuring costs and surplus leased space2
Carrying amount at beginning of the year
Provisions made during the year
Payments made during the year
Transfer/release of provision

57
64
(57)
(8)

140
49
(116)
(16)

38
57
(42)
(5)

51
45
(41)
(17)

Carrying amount at the end of the year

56

57

48

38

Non-lending losses, frauds and forgeries
Carrying amount at beginning of the year
Provisions made during the year
Payments made during the year
Transfer/release of provision

155
26
(17)
(30)

163
23
(16)
(15)

131
6
(12)
(21)

139
12
(7)
(13)

Carrying amount at the end of the year

134

155

104

131

Other provisions3
Carrying amount at beginning of the year
Provisions made during the year
Payments made during the year
Transfer/release of provision

483
482
(440)
(141)

365
463
(336)
(9)

253
122
(118)
(118)

151
149
(31)
(16)

Carrying amount at the end of the year

384

483

139

253

Employee entitlements1
Restructuring costs and surplus leased space2
Non-lending losses, frauds and forgeries
Other
Total provisions

1 The aggregate liability for employee entitlements largely comprises provisions for annual leave and long service leave.
2 Restructuring costs and surplus leased space provisions arise from activities related to material changes in the scope of business undertaken by the Group or the manner in which that businessis undertaken and includes termination benefits. Costs relating to on-going activities are not provided for. Provision is made when the Group is demonstrably committed, it is probable that thecosts will be incurred, though their timing is uncertain, and the costs can be reliably estimated.
3 Other provisions comprise various other provisions including loyalty programs, workers’ compensation, make-good provisions on leased premises and contingent liabilities recognised as partof a business combination.

25: Debt Issuances
ANZ utilises a variety of established and flexible funding programmes to issue medium term notes featuring either senior or subordinated debt
status (details of subordinated debt are presented in note 26: Subordinated Debt). All risks associated with originating term funding are closely
managed. Refer to description of ANZ risk management practices in note 31 Financial Risk Management in relation to market risks such as
interest rate and foreign currency risks, as well as liquidity risk.
The table below presents debt issuances by currency of issue which broadly is representative of the investor base location.
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Debt issuances by currency
USD
United States dollars
GBP
Great British pounds
AUD
Australian dollars
NZD
New Zealand dollars
JPY
Japanese yen
EUR
Euro
HKD
Hong Kong dollars
CHF
Swiss francs
CAD
Canadian dollar
NOK
Norwegian krone
SGD
Singapore dollars
TRY
Turkish Lira
ZAR
South African rand
MXN
Mexico Peso
CNH
Chinese yuan

36,549
3,068
7,796
4,683
4,786
15,723
817
3,882
984
609
254
358
147
255
185

33,094
2,711
7,329
2,939
6,681
10,443
1,285
3,460
901
592
259
171
146
190
175

31,682
2,576
7,051
1,647
4,469
11,662
802
1,659
984
609
75
358
147
255
185

28,645
2,277
6,572
488
6,356
7,545
1,201
1,621
901
592
88
171
146
190
175

Total Debt issuances

80,09670,37664,161

56,968120

ANZ ANNUAL REPORT 2014

26: Subordinated Debt
Subordinated debt comprises perpetual and dated securities as follows (net of issue costs):
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

–

812

–

805

–
1,967
1,333

1,081
1,963
1,329

–
1,967
1,333

1,081
1,963
1,329

1,109
1,595

1,106
–

1,109
1,595

1,106
–

6,004

6,291

6,004

6,284

343
744

322
743

343
–

322
–

1,087

1,065

343

322

–
1,246
499
1,501
842
748
750
930

699
1,211
500
1,496
793
749
–
–

–
1,247
500
1,502
843
749
750
932

699
1,214
500
1,500
793
750
–
–

6,516

5,448

6,523

5,456

Total subordinated debt

13,607

12,804

12,87012,062

Subordinated debt by currency
AUD
Australian dollars
NZD
New Zealand dollars
USD
United States dollars
GBP
Great British pounds
EUR
Euro

9,502
744
2,115
–
1,246

8,224
743
1,927
699
1,211

9,505
–
2,118
–
1,247

8,229
–
1,920
699
1,214

13,607

12,804

12,87012,062

Additional Tier 1 capital (perpetual subordinated)
USD
US Trust Securities
ANZ Convertible Preference Shares (ANZ CPS)1AUD
ANZ CPS1AUD
ANZ CPS2AUD
ANZ CPS3
ANZ Capital Notes (ANZ CN)AUD
ANZ CN1AUD
ANZ CN2
Perpetual subordinated notes
USD
300m
floating rate notes
NZD
835m
fixed rate notes2

Dated subordinated notes
GBP
400m
fixed rate notes due 2018
EUR
750m
fixed rate notes due 2019
AUD
500m
floating rate notes due 20223
AUD
1509m
floating rate notes due 20223
USD
750m
fixed rate notes due 20223
AUD
750m
floating rate notes due 20233
AUD
750m
floating rate notes due 20243,4
USD
800m
fixed rate notes due 20244

1 Fully franked preference share dividend payments made during the years ended 30 September 2014 and 30 September 2013 (which are treated as interest expense):
Consolidated
The Company

ANZ CPS1
ANZ CPS2
ANZ CPS3

2014
$m

2013
$m

2014
$m

2013
$m

24
79
53

43
86
59

24
79
53

43
86
59

2 Rate reset on 18 April 2013 to the five year swap rate +2.00% until the call date on 18 April 2018, whereupon if not called, reverts to a floating rate at the three month FRA rate +3.00% andis callable on any interest payment date thereafter.
3 Callable five years prior to maturity.
4 The convertible subordinated notes convert into ANZ ordinary shares at the average market price of ANZ ordinary shares less a 1% discount subject to a maximum conversion number
if ANZ receives a notice of non-viability from APRA.

NOTES TO THE FINANCIAL STATEMENTS

121

NOTES TO THE FINANCIAL STATEMENTS (continued)
26: Subordinated Debt (continued)
Subordinated debt is subordinated in right of payment to the claimsof depositors and other creditors of the Company and its controlled
entities which have issued the notes or preference shares.
As defined by APRA for capital adequacy purposes, ANZ CPS and
ANZ Capital Notes constitute Additional Tier 1 capital and all othersubordinated notes constitute Tier 2 capital.
The ANZ Capital Notes are Basel 3 compliant instruments. APRA has
granted ANZ transitional Basel 3 capital treatment for ANZ CPS2 and
ANZ CPS3 until their first conversion date.
The convertible subordinated notes are Basel 3 compliant instruments.
APRA has granted transitional Basel 3 capital treatment for:}} all other term subordinated notes until their first call date;}} the USD300 million perpetual subordinated notes until the end of
the transitional period (December 2021); and}} the NZD835 million perpetual subordinated notes until the
April 2018 call date.
US TRUST SECURITIESOn 27 November 2003, the Company issued 750,000 non-cumulative
Trust Securities (‘US Trust Securities’) at USD1,000 each raising
USD750 million. US Trust Securities comprised an interest paying
unsecured note and a preference share, which were stapled together
and issued by ANZ Capital Trust II.
ANZ redeemed the US Trust Securities for cash on 16 December 2013.
ANZ CONVERTIBLE PREFERENCE SHARES (ANZ CPS)}} On 30 September 2008, the Company issued 10.8 million
convertible preference shares (‘ANZ CPS1’) at $100 each, raising$1,081 million before issue costs. $627 million ANZ CPS1
were reinvested into ANZ Capital Notes 2 and cancelled on
31 March 2014 and the remaining $454 million ANZ CPS1 werebought back by ANZ for cash and cancelled on 16 June 2014.
}} On 17 December 2009, the Company issued 19.7 million
convertible preference shares (‘ANZ CPS2’) at $100 each, raising$1,969 million before issue costs.
}} On 28 September 2011, the Company issued 13.4 million
convertible preference shares (‘ANZ CPS3’) at $100 each raising$1,340 million before issue costs.
ANZ CPS are fully paid, mandatorily convertible preference shares.
ANZ CPS are listed on the Australian Stock Exchange.
Dividends on ANZ CPS are non-cumulative and are payable quarterly
in arrears in December, March, June and September (ANZ CPS2) andsemi-annually in arrears in March and September (ANZ CPS3) in eachyear and will be franked in line with the franking applied to ANZ
ordinary shares. The dividends will be based on a floating rate equal
to the aggregate of the 90 day bank bill rate plus a 310 basis point
margin (ANZ CPS2) and the 180 day bank bill rate plus 310 basis point
margin (ANZ CPS3), multiplied by one minus the Australian Company
tax rate. Should the dividend not be fully franked, the terms of the
securities provide for a cash gross-up for the amount of the franking
benefit not provided. Dividends are subject to the absolute discretionof the Board of Directors of the Company and certain payment
tests (including APRA requirements and distributable profits being
available). If dividends are not paid on ANZ CPS, the Group may not
pay dividends or distributions, or return capital, on ANZ ordinary
shares or (ANZ CPS2 only) any other share capital or security ranking
equal or junior to the ANZ CPS for a specified period (subject tocertain exceptions).

122

On 15 December 2016 (ANZ CPS2) or 1 September 2019 (ANZ
CPS3) (each a ‘conversion date’), or an earlier date under certain
circumstances, the relevant ANZ CPS will mandatorily convert intoa variable number of ANZ ordinary shares based on the average
market price of ANZ ordinary shares less a 1.0% discount, subject to a
maximum conversion number.
The mandatory conversion to ANZ ordinary shares is howeverdeferred for a specified period if the conversion tests are not met.
In respect of ANZ CPS3 only, if a common equity capital trigger event
occurs the ANZ CPS3 will immediately convert into ANZ ordinary
shares, subject to a maximum conversion number. A common equity
capital trigger event occurs if ANZ’s Common Equity Tier 1 capitalratio is equal to or less than 5.125%.
In respect of ANZ CPS3 only, on 1 September 2017 and eachsubsequent semi annual Dividend Payment Date, subject to receiving
APRA’s prior approval and satisfying certain conditions, the Company
has the right to redeem or convert into ANZ ordinary shares all orsome ANZ CPS3 at its discretion on similar terms as mandatory
conversion on a conversion date.
The ANZ CPS rank equally with each other, the ANZ Capital Notes andthe preference shares issued in connection with the Euro Trust Securities.
Except in limited circumstances, holders of ANZ CPS do not have any
right to vote in general meetings of the Company.
ANZ CAPITAL NOTES}} On 7 August 2013, the Company issued 11.2 million convertible
notes (‘ANZ CN1’) at $100 each, raising $1,120 million before
issue costs.
}} On 31 March 2014, the Company issued 16.1 million convertible
notes (‘ANZ CN2’) at $100 each, raising $1,610 million before
issue costs.
The ANZ Capital Notes are fully paid mandatorily convertible
subordinated perpetual notes. The notes are listed on the Australian
Stock Exchange.
Distributions on the notes are non-cumulative and payablesemi‑annual in arrears in March and September in each year andwill be franked in line with the franking applied to ANZ ordinary
shares. The distributions will be based on a floating rate equal to theaggregate of the 180 day bank bill rate plus a 340 basis point margin(ANZ CN1) and 325 basis point margin (ANZ CN2), multiplied by one
minus the Australian company tax rate. Should the distribution not
be fully-franked, the terms of the notes provide for a cash gross-up
for the amount of the franking benefit not provided. Distributions are
subject to ANZ’s absolute discretion and certain payment conditions
being satisfied (including APRA requirements). If distributions are notpaid on the notes, ANZ may not pay dividends or distributions, or
return capital, on ANZ ordinary shares for a specified period (subject
to certain exceptions).
On 1 September 2023 (ANZ CN1) or 24 March 2024 (ANZ CN2) (eachconversion date), or an earlier date under certain circumstances, therelevant notes will mandatorily convert into a variable number of
ANZ ordinary shares based on the average market price of ordinary
shares less a 1% discount, subject to a maximum conversion number.
The mandatory conversion to ANZ ordinary shares is howeverdeferred for a specified period if the conversion tests are not met.

ANZ ANNUAL REPORT 2014

26: Subordinated Debt (continued)
If a common equity capital trigger event or a non-viability trigger
event occurs the notes will immediately convert into ANZ ordinary
shares, subject to a maximum conversion number. A common equity
capital trigger event occurs if ANZ’s Common Equity Tier 1 capitalratio is equal to or less than 5.125%. A non-viability trigger event
occurs if APRA notifies the Company that, without the conversion or
write-off of certain securities or a public sector injection of capital(or equivalent support), it considers that the Company would
become non-viable.
On 1 September 2021 (ANZ CN1) or 24 March 2022 (ANZ CN2),
subject to receiving APRA’s prior approval and satisfying certain
conditions, the Company has the right to redeem or convert into ANZ
ordinary shares all or some of the notes at its discretion on similarterms as mandatory conversion on a conversion date.
The notes rank equally with each of the ANZ CPS and the preference
shares issued in connection with the Euro Trust Securities. Holdersof the notes do not have any right to vote in general meetings of
the Company.

CONVERTIBLE SUBORDINATED NOTES}} On 19 March 2014, ANZ issued subordinated notes with aminimum denomination of US$200,000 and any integral multipleof US$1,000 above that raising US$800 million before issue costs.
Interest is cumulative and payable semi-annually in arrears in
March and September in each year and is based on a fixed rate of
4.5% per annum.
}} On 25 June 2014, ANZ issued 750,000 subordinated notes at $1,000
each raising $750 million before issue costs. Interest is cumulativeand payable quarterly in arrears in March, June, September andDecember in each year and is based on a floating rate equal to theaggregate of the 90 day bank bill rate plus a 193 basis point margin.
If APRA notifies the Company that, without the conversion or writeoff of certain securities or a public sector injection of capital (orequivalent support), it considers that the Company would become
non-viable, the notes will immediately convert into ANZ ordinary
shares based on the average market price of ANZ ordinary shares less
a 1% discount, subject to a maximum conversion number.

27: Share Capital
The Company
Numbers of issued shares

2014

2013

Ordinary shares each fully paid
Preference shares each fully paid

2,756,627,771
500,000

2,743,655,310
500,000

Total number of issued shares

2,757,127,771

2,744,155,310

ORDINARY SHARES
Ordinary shares have no par value and entitle holders to receive dividends payable to ordinary shareholders and to participate in the proceeds
available to ordinary shareholders on winding up of the Company in proportion to the number of fully paid ordinary shares held.
On a show of hands every holder of fully paid ordinary shares present at a meeting in person or by proxy is entitled to one vote, and upon a poll
one vote for each share held.
The Company
Numbers of issued shares

2014

2013

Balance at start of the year
Bonus option plan1
Dividend reinvestment plan1
Group employee share acquisition scheme2,4Group share option scheme2
Group share buyback3

2,743,655,310
2,479,917
26,209,958–
171,742(15,889,156)

2,717,356,961
2,719,008
32,625,833
4,850,856
1,354,856(15,252,204)

Balance at end of year

2,756,627,771

2,743,655,310

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Ordinary share capital
Balance at start of the year
Dividend reinvestment plan1
Group employee share acquisition scheme2,4
ANZ Wealth Australia Treasury shares5
Group share option scheme2
Group share buyback3

23,641
851
11
24
4
(500)

23,070
843
116
7
30
(425)

23,914
851
11
–
4
(500)

23,350
843
116
–
30
(425)

Balance at end of year

24,031

23,641

24,28023,914

1 Refer to note 7 for details of plan.
2 Refer to note 45 for details of plan.
3 The Company issued 16.2 million ordinary shares under the Dividend Reinvestment Plan and Bonus Option Plan for the 2013 final dividend. Following the announcement of the 2013 final
dividend the Company repurchased $500 million of ordinary shares via an on-market share buy-back resulting in 15.9 million ordinary shares being cancelled.
4 Includes on-market purchase of shares for settlement of amounts due under share-based compensation plans. In addition, nil shares were issued during the year ended 30 September 2014
to the Group’s Employee Share Trust for settlement of amounts due under share-based compensation plans (2013: 4,850,856). As at 30 September 2014, there were 13,754,867 Treasury Shares
outstanding (2013: 15,821,529).
5 ANZ Wealth Australia Limited (AWA) Treasury Shares include shares held in statutory funds as assets backing policyholder liabilities. AWA Treasury Shares outstanding as at 30 September 2014
were 11,761,993 (2013: 12,573,976).

NOTES TO THE FINANCIAL STATEMENTS

123

NOTES TO THE FINANCIAL STATEMENTS (continued)
27: Share Capital (continued)
PREFERENCE SHARESEuro Trust Securities
On 13 December 2004, the Company issued 500,000 Euro Floating
Rate Non-cumulative Trust Securities (‘Euro Trust Securities’) at€1,000 each, raising $871 million net of issue costs. Euro Trust
Securities comprise an interest paying unsecured note and a€1,000 preference share, which are stapled together and issued
as a Euro Trust Security by ANZ Capital Trust III (the Trust).
On, or at any time after, 15 December 2014, subject to satisfying
certain conditions, the Company has the right to buy-backthe securities.
Dividends are not payable on the preference shares while they arestapled to the note, except for the period after 15 December 2014
when the preference share (if not bought back) will pay 100 basis
points in addition to the distributions on the note. Distributions on
Euro Trust Securities are non-cumulative and are payable quarterly
in arrears. The distributions are based upon a floating rate equal
to the three month EURIBOR rate plus a 66 basis point margin up
until 15 December 2014, after which date (if not bought back) the
distribution rate is the three month EURIBOR rate plus a 166 basis
point margin. At each payment date the three month EURIBOR rate
is reset for the next quarter.
Distributions are subject to certain payment tests (i.e. APRA
requirements and distributable profits being available). Distributions
are expected to be payable on 15 March, 15 June, 15 September and
15 December of each year. If distributions are not paid on Euro Trust
Securities, the Group may not pay dividends or distributions, or return
capital on ANZ ordinary shares or any other share capital or security
ranking equal or junior to the preference share component (subject
to certain exceptions).

At any time at ANZ’s discretion or upon the occurrence of certain
other ‘conversion events’, the notes that are represented by therelevant Euro Trust Securities will be automatically assigned toa branch of the Company and the preference shares that are
represented by the relevant Euro Trust Securities will be distributed toinvestors in redemption of such Euro Trust Securities. The distributed
preference shares will immediately become dividend paying andholders will receive non-cumulative dividends equivalent to thescheduled payments in respect of the Euro Trust Securities.
The preference share forming part of the Euro Trust Securities confers
protective voting rights that allow the holder to vote in the Company,in limited circumstances, such as a capital reduction, Company
restructure involving a disposal of the whole of the Company’sbusiness and undertaking, proposals affecting rights attached to thepreference shares, and similar.
On winding up of the Company, the rights of Euro Trust Security
holders will be determined by the preference share componentof the Euro Trust Security. These preference shares rank behind all
depositors and creditors, but ahead of ordinary shareholders.
The preference shares forming each part of each Euro Trust Security
rank equally with each of the ANZ CPS and the ANZ Capital Notes.
Euro Trust Securities currently qualify as Additional Tier 1 Capital as
defined by APRA for capital adequacy purposes. APRA has granted
ANZ Transitional Basel 3 Capital treatment for the Euro Trust Securities
until their first call date on 15 December 2014.

Consolidated

Preference share balance at start of year
– Euro Trust Securities

The Company

2014
$m

2013
$m

2014
$m

2013
$m

871

871

871

871

NON-CONTROLLING INTERESTS
Consolidated
2014
$m

2013
$m

Share capital
Retained earnings

46
31

43
19

Total non-controlling interests

77

62

124

ANZ ANNUAL REPORT 2014

28: Reserves and Retained Earnings
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

(1,125)37483(2,831)
–
1,706

(616)
–
94

(850)
–
234

(605)

(1,125)

(522)

(616)

Balance at beginning of the year
Share-based payments/(exercises)
Transfer of options/rights lapsed to retained earnings2

55
13
(8)

54
3
(2)

55
13
(8)

54
3
(2)

Total share option reserve

60

55

60

55

c) Available-for-sale revaluation reserve
Balance at beginning of the year
Gain/(loss) recognised
Transferred to income statement

121
69
(30)

94
(6)
33

37
62
(26)

21
14
2

Total available-for-sale revaluation reserve

160

121

73

37

d) Cash flow hedge reserve
Balance at beginning of the year
Gains/(loss) recognised
Transferred to income statement

75
117
(23)

208
(133)
–

51
117
6

89
(55)
17

Total hedging reserve

169

75

174

51

e) Transactions with non-controlling interests reserve
Balance at beginning of the year
Transactions with non-controlling interests3

(33)
10

(23)
(10)

–
–

–
–

a) Foreign currency translation reserve
Balance at beginning of the year
Transfer to the income statement
Currency translation adjustments net of hedges
Total foreign currency translation reserveb) Share option reserve1

Total transactions with non-controlling interests reserve

(23)

(33)

–

–

Total reserves

(239)

(907)

(215)

(473)

1 Further information about share-based payments to employees is disclosed in note 45.
2 The transfer of balances from the share option reserve to retained earnings represents items of a distributable nature.
3 The premium in excess of the book value paid by an associate to acquire an additional interest in its controlled entity from the non-controlling shareholder recognised in 2013 was released in2014 as the associate no longer controls that entity.

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

21,9367,271
8
32

19,7116,310
2
25

14,7536,272
8
613,508
5,387
2
(18)

(25)
22
(4,694)
(6)

(44)
20
(4,082)(6)(25)–(4,694)–(44)–(4,082)–Retained earnings at end of year

24,544

21,936

16,32014,753

Total reserves and retained earnings

24,30521,02916,105

14,280Retained earnings
Balance at beginning of the year
Profit attributable to shareholders of the Company
Transfer of options/rights lapsed from share option reserve1,2
Remeasurement gain/(loss) on defined benefit plans after tax
Fair value gain/loss attributable to changes in own credit risk of financial liabilities
designated at fair value
Dividend income on Treasury shares
Ordinary share dividends paid
Preference share dividends paid

1 Further information about share-based payments to employees is disclosed in note 45.
2 The transfer of balances from the share option reserve to retained earnings represents items of a distributable nature.

NOTES TO THE FINANCIAL STATEMENTS

125

NOTES TO THE FINANCIAL STATEMENTS (continued)
29: Capital Management
ANZ pursues an active approach to capital management, which
is designed to protect the interests of depositors, creditors andshareholders. This involves the on-going review and Board approvalof 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) andLevel 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 Statesof America;}} capital levels are aligned with the risks in the business and to meetstrategic and business development plans through ensuring thatavailable capital exceeds the level of Economic Capital required tosupport the Ratings Agency ‘default frequency’ confidence level fora ‘AA’ credit rating category bank. Economic Capital is an internal
estimate of capital levels required to support risk and unexpected
losses above a desired target solvency level;}} capital levels are commensurate with ANZ maintaining its preferred‘AA’ credit rating category for senior long-term unsecured debt
given its risk appetite outlined in its strategic plan; and}} an 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 overa three year time horizon, the outcomes 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 overthe 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 ofcapital against ANZ’s risk profile and risk appetite outlined in theStrategic 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 are sufficient 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 thelevel of additional capital (i.e. the ‘stress capital buffer’) needed
to absorb losses that may be experienced during an economic
downturn; and}} stress testing is integral to strengthening the predictive approach
to risk management and is a key component in managing risks,
asset writing strategies and business strategies. It creates greater
understanding of the impacts on financial performance throughmodelling relationships and sensitivities 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 theBoard’s Risk Committee on a range of scenarios and stress tests.

126

Results are subsequently used to:}} recalibrate ANZ’s management targets for minimum and operating
ranges for its respective classes of capital such that ANZ will havesufficient capital to remain above both Economic Capital andregulatory requirements; and}} identify the level of organic capital generation and hence
determine current and future capital issuance requirements forLevel 1 and Level 2.
From these processes, a Capital Plan is developed and approved by
the Board which identifies the capital issuance requirements, capitalsecurities 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 anddevelopment of business initiatives and strategies. The Board andsenior management are provided with monthly updates of ANZ’scapital position. Any actions required to ensure ongoing prudent
capital management are submitted to the Board for approval.
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 3 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
ADI’s capital adequacy. APRA determines PCRs for Common Equity
Tier 1 (CET1), Tier 1 and Total Capital, with capital as the numerator
and RWAs as the denominator.
To ensure that ADIs are adequately capitalised on both a stand-alone
and group basis, APRA adopts a tiered approach to the measurementof an ADI’s capital adequacy by assessing the ADIs financial strength
at three levels:}} Level 1 – the ADI on a stand-alone basis (i.e. the Company andapproved subsidiaries which are consolidated to form the ADI’s
Extended Licensed Entity);}} Level 2 – the consolidated banking group (i.e. the consolidated
financial group less certain subsidiaries and associates excluded
under the prudential standards); and}} Level 3 – the conglomerate group at the widest level.
ANZ is a Level 1 and Level 2 reporter, and measures capital adequacy
monthly on a Level 1 and Level 2 basis, and is not yet required toreport on a Level 3 basis.
Regulatory capital is divided into Tier 1, carrying the highest capitalelements, 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 lessdeductions 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 formsof regulatory capital. Common Equity Tier 1 capital includes thefollowing 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, are excluded forLevel 2 purposes;

ANZ ANNUAL REPORT 2014

29: Capital Management (continued)}} Retained earnings excludes retained earnings of insurance andfunds 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; and}} Current 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 and unrestricted commitmentof funds, are available to absorb losses, are subordinated to the claimsof depositors and senior creditors in the event of the winding up of
the issuer and provide for fully discretionary capital distributions.
Deductions from the capital base comprise mainly deductions to
the Common Equity Tier 1 component. These deductions are largely
intangible assets, investments in insurance and funds management
entities and associates, capitalised expenses (including loan andorigination 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 havea minimum term of five years at issue date.
Total Capital is the sum of Tier 1 capital and Tier 2 capital.
In addition to the prudential capital oversight that APRA conducts
over the Company and the Group, the Company’s branch operations
and major banking subsidiary operations are overseen by local
regulators such as the Reserve Bank of New Zealand, the US Federal
Reserve, the UK Prudential Regulation Authority, the Monetary
Authority of Singapore, the Hong Kong Monetary Authority and the
China Banking Regulatory Commission who may impose minimum
capitalisation rates on those operations.
Throughout the financial year, the Company and the Group maintainedcompliance with the minimum Common Equity Tier 1, Tier 1 and Total
Capital ratios set by APRA and the US Federal Reserve (as applicable)
as well as applicable capitalisation rates set by regulators in countries
where the Company operates branches and subsidiaries.
REGULATORY DEVELOPMENTS
Financial System Inquiry (FSI)The Federal Government announced on 20 November 2013 theappointment of Mr David Murray AO as head of an inquiry into Australia’s
financial system. On 20 December 2013, the Government announced theterms of reference for the Inquiry saying that “The Inquiry is charged withexamining how the financial system could be positioned to best meet
Australia’s evolving needs and support Australia’s economic growth”.
ANZ made an initial submission to the Inquiry on 31 March 2014.
The Inquiry then released its Interim Report on 15 July 2014 andinvited interested parties to make further submissions relating to
the issues raised in the report. ANZ has been actively engaged incontributing to the Inquiry’s deliberations and provided a second
submission on 26 August 2014. The Inquiry is expected to make its
final report to the Government in November 2014.
Leverage Ratio
In September 2014, APRA released a consultation package fordiscussion on the proposed implementation of the internationallyagreed disclosure framework on leverage ratios. APRA propose
to apply the leverage ratio requirements to Australian authorised
deposit-taking institutions (ADIs) using an internal ratings-based (IRB)
approach to Credit Risk Weighted Assets. Leverage ratio requirements
are included in the Basel Committee on Banking Supervision (BCBS)

Basel 3 capital framework as a supplement to the current risk based
capital requirements and is intended to restrict the build-up ofexcessive leverage in the banking system.
In the draft requirements, APRA has maintained the BCBS calculationof the leverage ratio of Tier 1 Capital expressed as a percentage
of Exposure Measure. However, APRA has not committed to
implementing a minimum leverage ratio requirement at thisstage, pending BCBS’s intention to further analyse and calibrate
the requirements before introducing the leverage ratio as a Pillar 1
requirement in 2018. The current BCBS minimum requirement is 3%.
Public disclosures for Australian IRB ADIs will be included in the first
financial report after 1 January 2015, with subsequent disclosures
published on a quarterly basis. Explanation of key drivers of materialchanges in the ADIs leverage ratios between the previous and current
reporting periods are also required.
APRA will consider submissions to the above proposed requirements(submissions to APRA closed on 31 October 2014) before finalising
the standards for implementation from 1 January 2015.
Domestic Systemically Important Bank (D-SIB) Framework
APRA has released details of its D-SIB framework for implementationin Australia and has classified ANZ and three other major Australianbanks as domestic systemically important banks. As a result the
Capital Conservation Buffer (CCB) applied to the four major Australianbanks will increase by 100 basis points from 1 January 2016, further
strengthening the capital position of Australia D-SIBs. ANZ’s current
capital position is already in excess of APRA’s requirements including
the D-SIB overlay. A significant portion of the 1% CET1 D-SIB
capital build is now complete. The Group is well placed for D-SIB
implementation in January 2016.
Composition of Level 2 ADI Group
APRA provided further clarification to the definition of the Level 2
ADI group, where subsidiary intermediate holding companies are
now considered part of the Level 2 Group.
The above clarification results in the phasing out, over time, of
capital benefits arising from the debt issued by ANZ Wealth Australia
Limited (ANZWA). As at 30 September 2014, ANZWA has $805 million
of debt outstanding which is equivalent to approximately 22 bpsof CET1. APRA has approved transitional arrangements, in line withexisting maturity profile of the debt in June 2015 ($405 million) andMarch 2016 ($400 million). As a result, there is no immediate impact
on ANZ’s capital position and the Group is well placed to mitigate
future transitional impacts through organic capital generation.
Level 3 Conglomerates (Level 3)
In August 2014, APRA announced its planned framework for thesupervision of Conglomerates Group (Level 3) which includes
updated Level 3 capital adequacy standards. These standards will
regulate a bancassurance group such as ANZ as a single economic
entity with minimum capital requirements and additional monitoringof risk exposure levels.
APRA has deferred a decision on the implementation date as well as
the final form of the Level 3 framework until the recommendations of
the FSI and the Government’s response to them have been announced
and considered by APRA. APRA has committed to a minimum transition
period of 12 months for affected institutions to comply with the newrequirements once an implementation date is established.
Based upon current draft of the Level 3 standards covering capital
adequacy, group governance, risk management and risk exposures,
ANZ is not expecting any material impact on its operations.
NOTES TO THE FINANCIAL STATEMENTS

127

NOTES TO THE FINANCIAL STATEMENTS (continued)
29: Capital Management (continued)
CAPITAL ADEQUACY
The table below provides the composition of capital used for regulatory purposes and capital adequacy ratios.
2014
$m

2013
$m

Tier 1
Shareholders' equity and non-controlling interests
Prudential adjustments to shareholders equity

49,284(1,211)45,603(932)

Gross Common Equity Tier 1 Capital
Deductions

48,073(16,297)

44,671(15,892)

Common Equity Tier 1 Capital
Additional Tier 1 capital

31,776
6,825

28,7796,401

Tier 1 capital

38,60135,180Tier 2 capital

7,138

6,190

Total qualifying capital

45,73941,370Capital adequacy ratios
Common Equity Tier 1
Tier 1
Tier 2

8.8%
10.7%
2.0%

8.5%
10.4%
1.8%

Qualifying capital

Total
Risk Weighted Assets

REGULATORY ENVIRONMENT – INSURANCE AND FUNDSMANAGEMENT BUSINESS
Under APRA’s Prudential Standards, life insurance and funds
management activities are de-consolidated for the purposes ofcalculating capital adequacy and excluded from the risk based
capital adequacy framework for the ANZ Level 2 Group. Under
APRA’s Basel 3 framework, investment in these controlled entities
is deducted from CET 1 capital (previously, under Basel 2, only theintangible component of the investment in these controlled entities
was deducted from Tier 1 capital with the balance of the investment
deducted 50% from Tier 1 and 50% from Tier 2 capital). Additionallyany profits from these activities included in ANZ’s results are excluded
from the determination of CET 1 capital to the extent they have notbeen remitted to the Level 2 Group.
ANZ’s insurance companies in Australia are regulated by APRA
on a stand-alone basis. Prudential Standards issued under theLife Insurance Act 1995 and Insurance Act 1973 determine theminimum capital requirements these companies are required tomeet. Life insurance companies in New Zealand are required to meet
minimum capital requirements as determined by the Insurance(Prudential Supervision) Act 2010.

128

12.7%

12.2%

361,529

339,265

Fund managers in Australia are subject to ‘Responsible Entity’regulation by the Australian Securities and Investment Commission(ASIC). The regulatory capital requirements vary depending on
the type of Australian Financial Services Licence or Authorised
Representatives’ Licence held.
APRA supervises approved trustees of superannuation funds and it
introduced new financial requirements which became effective from
1 July 2013.
ANZ’s insurance and funds management companies held assets inexcess of regulatory capital requirements at 30 September 2014.

ANZ ANNUAL REPORT 2014

30: Assets Charged as Security for Liabilities and Collateral Accepted as Security for Assets
ASSETS CHARGED AS SECURITY FOR LIABILITIES 1
The following assets are pledged as collateral:}} Mandatory reserve deposits with local central banks in accordance with statutory requirements. These deposits are not available to financethe Group’s day to day operations.
}} Securities provided as collateral for repurchase transactions. These transactions are governed by standard industry agreements.
}} Debenture undertakings covering the assets of Esanda Finance Corporation Limited (Esanda), and its subsidiaries, and UDC Finance Limited(UDC). The debenture stock of Esanda, and its subsidiaries, and UDC is secured by a trust deed and collateral debentures, giving floating
charges over the undertakings and all the tangible assets of the entity, other than land and buildings (of Esanda only). All controlled entities
of Esanda and UDC have guaranteed the payment of principal, interest and other monies in relation to all debenture stock and unsecured
notes issued by Esanda and UDC respectively. The only loans pledged as collateral are those in Esanda, UDC and their subsidiaries.
}} Specified residential mortgages provided as security for notes and bonds issued to investors as part of ANZ’s covered bond programs.
}} Collateral provided to central banks.
}} Collateral provided to clearing houses.
The carrying amounts of assets pledged as security are as follows:
Consolidated

Regulatory deposits
Securities sold under arrangements to repurchase
Assets pledged as collateral under debenture undertakings
Covered bonds2
Other

The Company

Carrying Amount

Related Liability

Carrying Amount

Related Liability

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

1,565
8,736
2,141
27,241
219

2,106
1,547
2,179
21,770
277

n/a
8,641
1,400
20,561
208

n/a
1,540
1,347
17,639
145

434
8,568
–
20,738
170

990
1,347
–
16,558
258

n/a
8,473
–
20,738
170

n/a
1,341
–
16,558132

COLLATERAL ACCEPTED AS SECURITY FOR ASSETS 1
ANZ has received collateral in relation to reverse repurchase agreements. These transactions are governed by standard industry agreements.
The fair value of collateral received and sold or repledged is as follows:
Consolidated

Collateral received on standard reverse repurchase agreements
Fair value of assets which can be soldFair value of assets sold or repledged

The Company

2014
$m

2013
$m

2014
$m

2013
$m

14,354
4,201

10,164
3,073

13,878
4,090

9,974
3,073

1 Excludes the amounts disclosed as collateral paid and received in the balance sheet that relate to derivative liabilities and derivative assets respectively. The terms and conditions of the collateralagreements are included in the standard Credit Support Annex that forms part of the International Swaps and Derivatives Association Master Agreement.
2 The consolidated related liability represents covered bonds issued to external investors and the related liability for the Company represents the liability to the covered bond structured entities.

NOTES TO THE FINANCIAL STATEMENTS

129

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management
STRATEGY IN USING FINANCIAL INSTRUMENTS
Financial instruments are fundamental to the Group’s business,
constituting the core element of its operations. Accordingly, the risks
associated with financial instruments are a significant componentof the risks faced by the Group. Financial instruments create, modify
or reduce the credit, market (including traded and non-tradedinterest rate and foreign currency related risks) and liquidity risks of
the Group’s balance sheet. These risks, and the Group’s objectives,
policies and processes for managing and measuring such risks are
outlined below.
Credit Risk
Credit risk is the risk of financial loss resulting from the failure of
ANZ’s customers and counterparties to honour or perform fully theterms of a loan or contract. The Group assumes credit risk in a wide
range of lending and other activities in diverse markets and in many
jurisdictions. Credit risks arise not only from traditional lending tocustomers, but also from inter-bank, treasury, international trade andcapital market activities around the world.
The Group has an overall objective of sound growth for appropriate
returns. The credit risk principles of the Group have been set by the
Board and are implemented and monitored within a tiered structureof delegated authority designed to oversee multiple facets of credit
risk, including business writing strategies, credit policies/controls,
portfolio monitoring and risk concentrations.
Credit Risk Management Overview
The credit risk management framework ensures a consistent
approach is applied across the Group in measuring, monitoring andmanaging the credit risk appetite set by the Board.
The Board is assisted and advised by the Board Risk Committee indischarging its duty to oversee credit risk. The Board Risk Committee
sets the credit risk appetite and credit strategies, as well as approving
credit transactions beyond the discretion of executive management.
Responsibility for the oversight and control of the credit risk
framework (including the risk appetite) resides with the Credit andMarket Risk Committee (CMRC), which is an executive management
committee comprising senior risk, business and Group executives,chaired by the Chief Risk Officer (CRO).
Central to the Group’s management of credit risk is the existence ofan independent credit risk management function that is staffed byrisk specialists. Independence is achieved by having all credit risk staff
ultimately report to the CRO, including where they are embedded inbusiness units. The primary responsibility for prudent and profitable
management of credit risk and customer relationships rests with thebusiness units.
The authority to make credit decisions is delegated by the Board
to the CEO who in turn delegates authority 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. Individuals must be suitably skilled and accredited in order
to be granted and retain a credit discretion. Credit discretions arereviewed on an annual basis, and may be varied based on theholder’s performance.

130

The Group has two main approaches to assessing credit risk arisingfrom transactions:}} the larger and more complex credit transactions are assessed on ajudgemental credit basis. Rating models provide a consistent andstructured assessment, with judgement required around the useof out-of-model factors. Credit approval for judgemental lending istypically on a dual approval basis, jointly by the business writer inthe business unit and an independent credit officer; and}} programmed credit assessment typically covers retail and somesmall business lending, and refers to the automated assessment ofcredit 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.
Central and divisional credit risk teams perform key roles in portfolio
management such as the development and validation of credit risk
measurement systems, loan asset quality reporting, stress testing,and the development of credit policies and requirements. Credit
policies and requirements 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 Group’s credit grading system is fundamental to the
management of credit risk, seeking to measure the probability ofdefault (PD), the exposure at default (EAD) and the loss in the eventof default (LGD) for all transactions.
From an operational perspective, the Group’s credit grading system
has two separate and distinct dimensions that:}} measure the PD, which is expressed by a 27-grade Customer Credit
Rating (CCR), reflecting the ability to service and repay debt. Within
the programmed credit assessment sphere, the CCR is typically
expressed as a score which maps back to the PD; and}} measure the LGD, which is expressed by a Security Indicator(SI) ranging from A to G. The SI is calculated by reference to thepercentage of the loan covered by security which can be realised in
the event of default. The security-related SIs are supplemented witha range of other SIs to cover situations where ANZ’s LGD research
indicates certain transaction characteristics have different recovery
outcomes. Within the programmed credit assessment sphere,
exposures are grouped into large homogenous pools – and the
LGD is assigned at the pool level.
The development and regular validation of rating models isundertaken by specialist central risk teams. The outputs from thesemodels drive many day-to-day credit decisions, such as origination,
pricing, approval levels, regulatory capital adequacy, economic
capital allocation and provisioning. The risk grading process includes
monitoring of model-generated results to ensure appropriate
judgement is exercised (such as overrides to take into account any
out-of-model factors).

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
Collateral management
Collateral is used to mitigate credit risk, as the secondary source of
repayment in case the counterparty cannot meet its contractual
repayment obligations.
ANZ credit principles specify to only lend when the counterparty
has the capacity and ability to repay, and the Group sets limits on
the acceptable level of credit risk. Acceptance of credit risk is firstly
based on the counterparty’s assessed capacity to meet contractual
obligations (such as the scheduled repayment of principal
and interest).
In certain cases, such as where the customer risk profile is consideredvery sound or by the nature of the product (for instance, small limit
products such as credit cards), a transaction may not be supported bycollateral. For some products, the collateral provided is fundamental
to its structuring so is not strictly the secondary source of repayment.
For example, lending secured by trade receivables is typically repaidby the collection of those receivables.
The most common types of collateral typically taken by ANZ include:}} charges over cash deposits;}} security over real estate including residential, commercial,industrial or rural property; and}} other security includes charges over business assets, security over
specific plant and equipment, charges over listed shares, bonds or
securities and guarantees and pledges.
Credit policy requirements set out the acceptable types of collateral,
as well as a process by which additional instruments and/or asset
types can be considered for approval. ANZ’s credit risk modelling
approach uses historical internal loss data and other relevant external
data to assist in determining the discount that each type of collateral
would be expected to incur in a forced sale. This discounted value isused in the determination of the SI for LGD purposes.

The Group generally uses Master Agreements with its
counterparties for derivatives activities. Generally, International
Swaps and Derivatives Association (ISDA) Master Agreements will be
used. Under the ISDA Master Agreement, if a default of a counterparty
occurs, all contracts with the counterparty are terminated. They arethen settled on a net basis at market levels current at the timeof default.
In addition to the terms noted above, ANZ’s preferred practice is touse a Credit Support Annex (CSA) to the ISDA Master Agreement.
Under a CSA, open derivative positions with the counterparty are
aggregated and cash collateral (or other forms of eligible collateral) is
exchanged daily. The collateral is provided by the counterparty that isout of the money. Upon termination of the trade, payment is required
only for the final daily mark-to-market movement rather than themark-to-market movement since inception.
Concentrations of credit risk
Concentrations of credit risk arise when a number of customers areengaged in similar business activities or activities within the samegeographic region, or when they have similar risk characteristics
that would cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions.
The Group monitors its portfolios, to identify and assess risk
concentrations. The Group’s strategy is to maintain well-diversified
credit portfolios focused on achieving an acceptable risk-return
balance. Credit risk portfolios are actively monitored and frequently
reviewed to identify, assess and guard against unacceptablerisk concentrations. Concentration analysis will typically include
geography, industry, credit product and risk grade. The Group also
applies single customer counterparty limits to protect against
unacceptably large exposures to single name risk. These limits are
established based on a combination of factors including the natureof counterparty, probability of default and collateral provided.

In the event of customer default, any loan security is usually held as
mortgagee in possession while the Group is actively seeking to realise
it. Therefore the Group does not usually hold any real estate or otherassets acquired through the enforcement of security.

NOTES TO THE FINANCIAL STATEMENTS

131

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
Concentrations of credit risk analysis
Composition of financial instruments that give rise to credit risk by industry:Cash, settlementbalances owed
to ANZ andcollateral paid
Consolidated

Australia
Agriculture, forestry,   fishing and mining
Business services
Construction
Electricity, gas and   water supply
Entertainment, leisure   and tourism
Financial, investment   and insurance
Government and   official institutions
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other
New Zealand
Agriculture, forestry,   fishing and mining
Business services
Construction
Electricity, gas and   water supply
Entertainment, leisure   and tourism
Financial, investment   and insurance
Government and   official institutions
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other

1
2
3
4

Trading securities
and AFS1

Derivatives

Loans
and advances2

Credit related
commitments4

Total

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

21
12
–

1
9
–

21
3
3

3
–
3

225
46
94

268
100
66

13,9705,658
5,688

13,200
5,697
5,161

95
38
38

84
36
33

10,753
3,679
4,353

8,523
3,658
4,092

25,085
9,436
10,17622,079
9,500
9,355

–

–

237

160

692

700

4,000

3,294

27

21

2,895

3,093

7,851

7,268

–

–

1

–

89

115

8,087

7,451

55

47

2,751

2,147

10,9839,760

18,927

13,471

19,11519,19938,387

27,634

14,351

12,723

98

81

7,521

5,937

98,39979,045

135
4
–
–
2
–
183
21

–
47
–
–
3
4
211
129

25,595
1,528
–
48
6
70
7
208

21,054
41
–
10
111
65
3
23

241
1,057
–
433
153
368
702
258

171
541
653
462
7,129
6,982
– 231,807 215,780
540 26,234 24,854
144 10,225 10,586
402
7,386
6,627
439
6,320
5,797
1,061
9,426
8,115

4
48
1,569
178
69
50
42
64

4
44
1,368
157
67
42
36
51

298
7,537
44,95011,774
4,645
3,943
4,867
5,501

329 26,814 22,211
8,132 17,303 15,708
38,496 278,326 255,644
9,764 38,667 35,325
4,205 15,100 15,116
3,206 11,817 10,346
5,738 12,121 12,224
4,754 15,478 14,133

19,305

13,87546,842

40,672

42,745

32,102 350,822 326,920

2,375

2,071 115,467 102,074 577,556 517,714

–
–
–

–
–
–

–
–
–

–
–
–

15
4
–

29
6
–

16,475
1,010
1,085

16,367
844
921

88
5
6

82
4
5

1,831
383
659

1,590
414
447

18,4091,402
1,750

18,068
1,268
1,373

–

–

30

27

317

322

945

682

5

3

1,179

1,321

2,476

2,355

–

–

–

–

22

24

916

918

5

5

219

259

1,162

1,206

1,444

1,429

4,925

4,698

5,627

5,939

865

726

4

5

688

736

13,553

13,533

1,167
–
–
–
–
–
–
–

1,570
–
–
–
–
–
–
–

6,111
22
–
–
–
11
–
61

5,225
26
–
–
–
3
–
41

562
158
–
11
18
28
13
49

221
61
–
15
36
48
12
55

1,120
2,702
56,993
7,464
1,810
1,323
1,233
692

1,113
2,637
53,935
7,072
1,620
1,308
1,149
603

6
14
304
40
10
7
7
4

5
13
270
35
8
6
5
3

665
1,635
10,499
1,354
808
670
1,160
911

861
1,437
9,099
990
627
542
1,185
891

9,631
4,531
67,796
8,869
2,646
2,039
2,413
1,717

8,995
4,174
63,304
8,112
2,291
1,907
2,351
1,593

2,611

2,999

11,16010,020

6,824

6,768

94,63389,895505

449

22,661

20,399 138,394 130,530

Available–for–sale assets.
Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
Mainly comprises regulatory deposits, investments backing policy liabilities and accrued interest.
Credit related commitments comprise undrawn facilities and customer contingent liabilities.

132

Other
financialassets3

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
Concentrations of credit risk analysis (continued):Composition of financial instruments that give rise to credit risk by industry (continued):Cash, settlementbalances owed
to ANZ andcollateral paid
Consolidated

Overseas Markets
Agriculture, forestry,   fishing and mining
Business services
Construction
Electricity, gas and   water supply
Entertainment, leisure   and tourism
Financial, investment   and insurance
Government and   official institutions
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other
Consolidated - aggregate
Agriculture, forestry,
fishing and mining
Business services
Construction
Electricity, gas andwater supply
Entertainment, leisureand tourism
Financial, investment
and insurance
Government andofficial institutions
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other
Gross Total
Individual provision for
credit impairment
Collective provision for
credit impairment
Unearned income
Capitalised brokerage/
mortgage origination
fees
Excluded from analysis
above5

Net Total
1
2
3
4
5

Trading securities
and AFS1

Loans
and advances2

Derivatives

Otherfinancialassets3

Credit related
commitments4

Total

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

1
5
3

–
5
2

10
–
–

–
–
–

137
5
17

179
2
8

4,385
955
623

2,787
892
591

118
26
17

106
34
22

6,883
3,251
3,355

5,498
2,941
2,816

11,534
4,242
4,015

8,570
3,874
3,439

–

–

128

36

57

70

2,732

2,009

74

76

2,595

2,302

5,586

4,493

3

–

–

–

7

5

1,107

1,030

30

39

337

426

1,484

1,500

34,741

31,811

14,717

11,655

5,926

6,047

19,65820,478530

776

10,986

10,601

86,55881,368

4
60
5
1
–
1
28
4

4
37
–
–
1
–
112
861

6,445
204
–
90
42
107
30
797

6,439
81
–
84
8
69
21
421

59
220
–
97
18
31
186
40

30
217
–
92
18
35
101
204

524
16,004
10,070
4,550
1,475
3,796
11,332
2,868

368
13,896
8,558
4,116
1,141
2,825
9,556
2,568

14
432
269
123
40
102
306
77

14
527
324
156
43
107
362
97

869
34,211
7,448
2,117
1,330
1,506
18,7862,257

1,035
26,446
8,188
1,899
1,252
1,883
17,461
1,981

7,915
51,131
17,792
6,978
2,905
5,543
30,6686,043

7,890
41,204
17,070
6,347
2,463
4,919
27,613
6,132

34,856

32,833

22,57018,814

6,800

7,008

80,07970,815

2,158

2,683

95,931

84,729 242,394 216,882

22
17
3

1
14
2

31
3
3

3
–
3

377
55
111

476
108
74

34,8307,623
7,396

32,354
7,433
6,673

301
69
61

272
74
60

19,467
7,313
8,367

15,611
7,013
7,355

55,02815,08015,941

48,717
14,642
14,167

–

–

395

223

1,066

1,092

7,677

5,985

106

100

6,669

6,716

15,913

14,116

3

–

1

–

118

144

10,110

9,399

90

91

3,307

2,832

13,62912,46655,112

46,71138,75735,552

49,94039,62034,87433,927632

862

19,195

17,274 198,510 173,946

1,306
64
5
1
2
1
211
25

1,574
84
–
–
4
4
323
990

38,151
1,754
–
138
48
188
37
1,066

32,718
148
–
94
119
137
24
485

862
1,435
–
541
189
427
901
347

422
2,185
2,134
740 25,835 23,515– 298,870 278,273
647 38,248 36,042
198 13,510 13,347
485 12,505 10,760
552 18,885 16,502
1,320 12,986 11,286

24
494
2,142
341
119
159
355
145

23
584
1,962
348
118
155
403
151

1,832
43,38362,897
15,245
6,783
6,119
24,8138,669

2,225 44,360 39,096
36,015 72,965 61,086
55,783 363,914 336,018
12,653 54,514 49,784
6,084 20,651 19,870
5,631 19,399 17,172
24,384 45,202 42,188
7,626 23,238 21,858

56,772

49,70780,572

69,50656,36945,878 525,534 487,630

5,038

5,203 234,059 207,202 958,344 865,126

–

–

–

–

–

–
56,772–
49,707–80,572–
69,506–56,369

–

–

–

–

–

–
56,772–
49,707–80,572–
69,506

1,487
58,2591,318
51,02537
80,60959
69,565–(1,440)––(2,144) (2,292)
45,878 522,260 483,898

–
5,038

–

(1,130)

(892)

–

(46)

(27)

(1,176)(1,467)–(613)(595) (2,757) (2,887)
5,203 233,400 206,580 954,411 860,772

(954)

–

–

–

–

(892)

(954)

–
56,369–1,043
942
45,878 522,411 483,886

–
5,038

–
–
–
1,043
942
5,203 233,400 206,580 954,562 860,760–
56,369–––45,878 522,411 483,886

33,57938,61732,083–– 35,103 33,460
37,286 233,400 206,580 989,665 894,220

Available-for-sale assets.
Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
Mainly comprises regulatory deposits, investments backing policy liabilities and accrued interest.
Credit related commitments comprise undrawn facilities and customer contingent liabilities.
Comprises bank notes and cash at bank within cash, equity instruments within available-for-sale financial assets and investments relating to the insurance business where the credit risk
is passed onto the policy holder.

NOTES TO THE FINANCIAL STATEMENTS

133

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
Concentrations of credit risk analysis (continued):Composition of financial instruments that give rise to credit risk by industry (continued):Cash, settlementbalances owed
to ANZ andcollateral paid
The Company

Australia
Agriculture, forestry,   fishing and mining
Business services
Construction
Electricity, gas and   water supply
Entertainment, leisure   and tourism
Financial, investment   and insurance5
Government and   official institutions
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other
New Zealand
Agriculture, forestry,   fishing and mining
Business services
Construction
Electricity, gas and   water supply
Entertainment, leisure  and tourism
Financial, investment   and insurance5
Government and   official institutions
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other

1
2
3
4
5

Trading securities
and AFS1

Loans
and advances2

Derivatives

Credit related
commitments4

Total

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

21
12
–

1
9
–

21
3
3

3
–
3

225
46
94

268
100
66

13,854
5,654
5,688

13,018
5,689
5,150

56
23
23

55
24
22

10,525
3,625
4,266

8,517
3,658
4,086

24,702
9,363
10,074

21,862
9,480
9,327

–

–

132

52

692

700

3,988

3,286

16

14

2,836

3,088

7,664

7,140

–

–

1

–

89

115

8,061

7,433

33

32

2,695

2,144

10,8799,724

20,481

13,483

20,57720,00644,62732,913

14,464

12,813

58

55

9,671

6,030 109,878

85,300

135
4
–
–
2
–
183
21

–
47
–
–
3
4
210
129

25,599
1,528
–
48
6
70
7
208

21,055
41
–
10
111
65
3
23

241
1,057
–
433
153
368
702
258

171
539
652
462
7,129
6,960
– 231,114 215,234
540 26,171 24,807
144 10,211 10,571
402
7,386
6,627
439
6,320
5,797
1,061
9,396
8,090

2
29
931
106
41
30
25
38

3
30
916
106
45
28
25
34

292
7,387
44,038
11,535
4,559
3,871
4,770
5,389

329 26,808 22,210
8,132 17,134 15,672
38,437 276,083 254,587
9,749 38,293 35,212
4,204 14,972 15,078
3,206 11,725 10,332
5,738 12,007 12,212
4,746 15,310 14,083

20,85913,88648,203

41,372

48,98537,381 349,975 326,127

1,411

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

9

11

–

–

–

–

–

–

9

11

–
–
–
–
–
–
–
–

–
–
–
–
–
–
–
–

–
–
–
–
–
–
–
–

–
–
–
–
–
–
–
–

–
–
–
–
–
–
–
–

–
–
–
–
–
–
–
–

–
–
8,193
–
–
–
–
–

–
–
8,252
–
–
–
–
–

–
–
–
–
–
–
–
–

–
–
–
–
–
–
–
–

–
–
29
–
–
–
–
–

–
–
48
–
–
–
–
–

–
–
8,222
–
–
–
–
–

–
–
8,300
–
–
–
–
–

–

–

–

–

9

11

8,193

8,252

–

–

29

48

8,231

8,311

Available-for-sale assets.
Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
Mainly comprises regulatory deposits and accrued interest.
Credit related commitments comprise undrawn facilities and customer contingent liabilities.
Includes amounts due from other Group entities.

134

Other
financialassets3

1,389 115,459 102,064 584,892 522,219

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
Concentrations of credit risk analysis (continued):Composition of financial instruments that give rise to credit risk by industry (continued):Cash, settlementbalances owed
to ANZ andcollateral paid
The Company

Overseas Markets
Agriculture, forestry,   fishing and mining
Business services
Construction
Electricity, gas and   water supply
Entertainment, leisure   and tourism
Financial, investment   and insurance5
Government and   official institutions
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other

Individual provision for   credit impairment
Collective provision for   credit impairment
Unearned income
Capitalised brokerage/
mortgage origination
fees

Other
financialassets3

Credit related
commitments4

Total

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

1
2
3

–
3
2

8
–
–

–
–
–

83
3
10

97
1
4

3,829
770
432

2,293
751
398

50
10
6

60
19
10

6,025
2,697
3,147

4,319
2,355
2,731

9,996
3,482
3,598

6,769
3,129
3,145

–

–

83

–

28

31

2,309

1,708

30

44

2,250

1,736

4,700

3,519

–

–

–

–

4

3

874

788

11

20

243

311

1,132

1,122

31,77029,29011,427

9,797

3,455

3,148

16,616

16,246

219

422

9,050

7,841

72,537

66,744

1
21
–
1
–
1
11
3

1
10
–
–
1
–
89
861

3,474
95
–
79
18
93
3
695

3,620
7
–
75
–
62
–
310

36
91
–
54
11
18
73
22

16
89
–
46
10
18
46
110

417
9,597
5,876
3,636
855
3,008
9,366
2,144

226
8,145
5,352
3,439
604
2,223
7,684
2,115

5
125
77
48
11
39
122
28

6
212
139
89
16
58
200
55

820
24,736
3,764
1,726
769
1,036
15,402
1,748

960
20,943
3,829
1,452
692
1,458
14,191
1,541

4,753
34,665
9,717
5,544
1,664
4,195
24,9774,640

4,829
29,406
9,320
5,101
1,323
3,819
22,2104,992

31,81430,257

15,975

13,871

3,888

3,619

59,72951,972781

1,350

73,41364,359 185,600 165,428

1
12
2

29
3
3

3
–
3

308
49
104

365
101
70

17,6836,424
6,120

15,311
6,440
5,548

106
33
29

115
43
32

16,5506,322
7,413

12,836
6,013
6,817

34,698
12,845
13,672

28,631
12,60912,472

–

215

52

720

731

6,297

4,994

46

58

5,086

4,824

12,364

10,659

–

1

–

93

118

8,935

8,221

44

52

2,938

2,455

12,011

10,84642,77332,00429,80348,091

36,07231,08029,059277

477

18,721

13,871 182,424 152,055

1
57
–
–
4
4
299
990

29,073
1,623
–
127
24
163
10
903

24,675
48
–
85
111
127
3
333

277
1,148
–
487
164
386
775
280

187
956
878
551 16,726 15,105– 245,183 228,838
586 29,807 28,246
154 11,066 11,175
420 10,394
8,850
485 15,686 13,481
1,171 11,540 10,205

7
154
1,008
154
52
69
147
66

9
242
1,055
195
61
86
225
89

1,112
32,12347,831
13,261
5,328
4,907
20,172
7,137

1,289 31,561 27,039
29,075 51,799 45,078
42,314 294,022 272,207
11,201 43,837 40,313
4,896 16,636 16,401
4,664 15,920 14,151
19,929 36,984 34,422
6,287 19,950 19,075

52,67344,14364,17855,24352,88241,011 417,897 386,351

2,192

2,739 188,901 166,471 778,723 695,958

–

–

–

–

–

–

–

–

–

–

52,67344,14364,17855,24352,882

–

–

–

–

–

–

–

–

–

–

52,67344,14364,17855,24352,882

Excluded from analysis   above6

1,005

914

22

44

–

Net total

53,67845,05764,20055,28752,882

1
2
3
4
5
6

Loans
and advances2

Derivatives

2014
$m

The Company - aggregate
Agriculture, forestry,   fishing and mining
22
Business services
14
Construction
3
Electricity, gas and   water supply–
Entertainment, leisure   and tourism–
Financial, investment   and insurance5
52,251Government and   official institutions
136
Manufacturing
25
Personal lending–
Property services
1
Retail trade2
Transport and storage
1
Wholesale trade
194
Other
24
Gross Total

Trading securities
and AFS1–(814)(1,046)––(1,669)(1,729)–41,011 415,414 383,576

2,192

–

(657)

(723)

–

837

787

–

41,011 415,594 383,640

2,192

–

–

–

–

–

41,011 415,594

383,640

2,192

–

(40)

(10)

(854)

(1,056)

–

(488)

(457)

(2,157)(2,186)

2,739 188,373 166,004 775,712 692,716
–

–

–

(657)

(723)

–

–

–

837

787

2,739 188,373 166,004 775,892 692,780
–

–

–

1,027

958

2,739 188,373 166,004 776,919 693,738

Available-for-sale assets.
Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
Mainly comprises regulatory deposits and accrued interest.
Credit related commitments comprise undrawn facilities and customer contingent liabilities.
Includes amounts due from other Group entities.
Comprises bank notes and cash at bank within cash and equity instruments within available-for-sale financial assets.

NOTES TO THE FINANCIAL STATEMENTS

135

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
Credit quality
Maximum exposure to credit risk
For financial assets recognised on the balance sheet, the maximum exposure to credit risk is the carrying amount. In certain circumstances, there
may be differences between the carrying amounts reported on the balance sheet and the amounts reported in the tables below. Principally,
these differences arise in respect of financial assets that are subject to risks other than credit risk, such as equity investments which are primarily
subject to market risk, or bank notes and coins. For contingent exposures, the maximum exposure to credit risk is the maximum amount theGroup would have to pay if the instrument is called upon. For undrawn facilities, the maximum exposure to credit risk is the full amount of thecommitted facilities.
The following tables present the maximum exposure to credit risk of on-balance sheet and off-balance sheet financial assets before taking
account of any collateral held or other credit enhancements.
Reported on
Balance Sheet

Maximum exposure
to credit risk

Excluded1

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

On-balance sheet positions
Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments2
Available-for-sale assets

32,55920,241
5,459
49,69256,36930,91725,27019,225
6,530
41,28845,87828,277

1,487
–
–
–
–
37

1,318
–
–
–
–
59

31,072
20,241
5,459
49,69256,36930,88023,952
19,225
6,530
41,28845,87828,218Net loans and advances3– Australia– International and Institutional Banking– New Zealand– Global WealthRegulatory deposits
Investments backing policy liabilities
Other financial assets4

287,513
141,826
86,0636,350
1,565
33,5793,473

272,068
123,467
81,5426,187
2,106
32,083
3,097

–
–
–
–
–
33,579––––––32,083–

287,513
141,826
86,063
6,350
1,565
–
3,473

272,068
123,467
81,542
6,187
2,106
–
3,097

755,606

687,018

35,103

33,460720,503

653,558

193,984
40,075

170,670
36,532––––

193,984
40,075

170,670
36,532

234,059

207,202––

234,059

207,202989,665

894,220

35,103

33,460954,562

860,760

Consolidated

Off-balance sheet positions
Undrawn facilities
Contingent facilities
Total

Reported onbalance Sheet
The Company

On-balance sheet positions
Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments2
Available-for-sale assets
Net loans and advances3
Regulatory deposits
Investments backing policy liabilities
Other financial assets4
Off-balance sheet positions
Undrawn facilities
Contingent facilities
Total

Maximum exposure
to credit risk

Excluded1

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

30,655
18,1504,873
38,04952,882
26,151
415,066
434
–
1,758

22,798
16,621
5,638
31,46441,011
23,823
383,173
990
–
1,749

1,005
–
–
–
–
22
–
–
–
–

914
–
–
–
–
44
–
–
–
–

29,65018,1504,873
38,04952,882
26,129415,066
434
–
1,758

21,884
16,621
5,638
31,46441,011
23,779383,173
990
–
1,749

588,018

527,267

1,027

958

586,991

526,309

153,985
34,916

134,622
31,849––––

153,985
34,916

134,622
31,849188,901

166,471––

188,901

166,471776,919

693,738

1,027

958

775,892

692,780

1 Includes bank notes and coins and cash at bank within cash, equity instruments within available-for-sale financial assets and investments relating to the insurance business where the credit risk
is passed onto the policy holder.
2 Derivative financial instruments are net of credit valuation adjustments.
3 Includes individual and collective provisions for credit impairment held in respect of credit related commitments.
4 Mainly comprises accrued interest.

136

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
Distribution of financial assets by credit quality
The Group has a comprehensive rating system that is used to quantify credit risk. The use of masterscales ensures consistency across exposure
types at the Group, providing a consistent framework for reporting and analysis.
All customers with whom ANZ has a credit relationship, including guarantors, are assigned a Customer Credit Rating (CCR) or score at origination
either by programmed credit assessment or by judgemental assessment. In addition, the CCR or score is reviewed on an ongoing basis to ensure
it accurately reflects the credit risk of the customer and the prevailing economic conditions.
The Group’s risk grade profile therefore changes dynamically through new lending, repayment and/or existing counterparty movements ineither risk or volume.
Restructured items
Restructured items are facilities in which the original contractual terms have been modified for reasons related to the financial difficulties of
the customer. Restructuring may consist of reduction of interest, principal or other payments legally due or an extension in maturity materiallybeyond those typically offered to new facilities with similar risk.

Consolidated

Neither past
due nor
impaired

Past due but not
impaired

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Restructured

Impaired

Total

Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2– Australia– International and Institutional Banking– New Zealand– Global WealthRegulatory deposits
Other financial assets3
Credit related commitments4

31,072
20,241
5,459
49,69256,33230,88023,952
19,225
6,530
41,28845,78628,218

–
–
–
–
–
–

–
–
–
–
–
–

–
–
–
–
–
–

–
–
–
–
25
–

–
–
–
–
37
–

–
–
–
–
67
–

31,072
20,241
5,459
49,69256,36930,88023,952
19,225
6,530
41,28845,87828,218277,497
140,90283,885
6,256
1,565
3,473
233,343

261,888
122,194
79,343
6,071
2,106
3,097
206,502

9,626
623
1,912
91
–
–
–

9,447
443
1,770
103
–
–
–

–
53
14
–
–
–
–

3
300
13
–
–
–
–

607
624
315
6
–
–
57

926
875
495
15
–
–
78

287,730
142,20286,126
6,353
1,565
3,473
233,400

272,264
123,81281,621
6,189
2,106
3,097
206,580

Total

940,597

846,200

12,252

11,763

67

341

1,646

2,456

954,562

860,760

Neither past
due nor
impaired

Past due but not
impaired

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Regulatory deposits
Other financial assets3
Credit related commitments4

29,65018,1504,873
38,04952,845
26,129404,611434
1,758
188,344

21,884
16,621
5,638
31,46440,91923,779371,987
990
1,749
165,932

–
–
–
–
–
–
9,849
–
–
–

–
–
–
–
–
–
9,717
–
–
–

–
–
–
–
–
–
26
–
–
–

–
–
–
–
25
–
259
–
–
–

–
–
–
–
37
–
1,108
–
–
29

–
–
–
–
67
–
1,677
–
–
72

29,65018,1504,873
38,04952,882
26,129415,594
434
1,758
188,373

21,884
16,621
5,638
31,46441,011
23,779383,640990
1,749
166,004

Total

764,843

680,963

9,849

9,717

26

284

1,174

1,816

775,892

692,780

The Company

1
2
3
4

Restructured

Impaired

Total

Derivative financial instruments are net of credit valuation adjustments.
Individual and collective provisions for credit impairment held in respect of credit related commitments have been reallocated to credit related commitments in this table.
Mainly comprises accrued interest.
Credit related commitments comprise undrawn facilities and customer contingent liabilities net of collective and individual provisions.

NOTES TO THE FINANCIAL STATEMENTS

137

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
Credit quality of financial assets neither past due nor impaired
The credit quality of financial assets is managed by the Group using internal CCRs based on their current probability of default. The Group’s
masterscales are mapped to external rating agency scales, to enable wider comparisons.
Internal rating
Strong credit profile

Customers that have demonstrated superior stability in their operating and financial performance over the long-term,
and whose debt servicing capacity is not significantly vulnerable to foreseeable events. This rating broadly corresponds
to ratings ‘Aaa’ to ‘Baa3’ and ‘AAA’ to ‘BBB-’ of Moody’s and Standard & Poor’s respectively.

Satisfactory risk

Customers that have consistently demonstrated sound operational and financial stability over the medium to longterm, even though some may be susceptible to cyclical trends or variability in earnings. This rating broadly corresponds
to ratings ‘Ba2’ to ‘Ba3’ and ‘BB’ to ‘BB-’ of Moody’s and Standard & Poor’s respectively.

Sub-standard but notpast due or impaired

Customers that have demonstrated some operational and financial instability, with variability and uncertainty
in profitability and liquidity projected to continue over the short and possibly medium term. This rating broadly
corresponds to ratings ‘B1’ to ‘Caa’ and ‘B+’ to ‘CCC’ of Moody’s and Standard & Poor’s respectively.

Strong credit profile
Consolidated

Satisfactory risk

Sub-standard
but not pastdue or impaired

Neither past due nor
impaired total

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1– Australia– International and Institutional Banking– New Zealand– Global WealthRegulatory deposits
Other financial assets2
Credit related commitments3

30,907
19,671
5,417
49,37255,39029,31923,951
19,137
6,528
41,28844,46526,923

148
422
42
296
831
1,530

1
77
2
–
1,170
1,280

17
148
–
24
111
31

–
11
–
–
151
15

31,072
20,241
5,459
49,69256,33230,88023,952
19,225
6,530
41,28845,78628,218208,242
114,969
58,167
4,109
1,010
3,104
196,558

194,789
97,25754,693
3,380
1,132
2,757
174,565

55,771
23,87523,857
2,122
509
319
34,42554,603
22,10922,404
2,667
445
289
29,661

13,484
2,058
1,861
25
46
50
2,360

12,496
2,828
2,246
24
529
51
2,276

277,497
140,90283,885
6,256
1,565
3,473
233,343

261,888
122,194
79,343
6,071
2,106
3,097
206,502

Total

776,235

690,865

144,147

134,708

20,215

20,627

940,597

846,200

Strong credit profile

Satisfactory risk

Sub-standard
but not pastdue or impaired

Neither past due nor
impaired total

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1
Regulatory deposits
Other financial assets2
Credit related commitments3

29,612
17,937
4,831
37,92852,741
25,331
313,681300
1,520
162,260

21,884
16,5505,636
31,464
39,697
23,707283,243865
1,531
142,975

38
90
42
98
73
692
75,964118
201
24,159

–
47
2
–
1,077
63
73,966124
182
21,144

–
123
–
23
31
106
14,966
16
37
1,925

–
24
–
–
145
9
14,7781
36
1,813

29,65018,1504,873
38,04952,845
26,129404,611434
1,758
188,344

21,884
16,621
5,638
31,46440,91923,779371,987
990
1,749
165,932

Total

646,141

567,552

101,475

96,605

17,227

16,806

764,843

680,963

The Company

1 Individual and collective provisions for credit impairment held in respect of credit related commitments have been reallocated to credit related commitments in this table.
2 Mainly comprises accrued interest.
3 Credit related commitments comprise undrawn facilities and customer contingent liabilities net of collective and individual provisions.

138

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
Ageing analysis of financial assets that are past due but not impaired
Ageing analysis of past due loans is used by the Group to measure and manage emerging credit risks. Financial assets that are past due but not
impaired include those which are assessed, approved and managed on a portfolio basis within a centralised environment (for example credit
cards and personal loans) that can be held on a productive basis until they are 180 days past due, as well as those which are managed on an
individual basis.
A large portion of retail credit exposures, such as residential mortgages, are generally well secured. That is, the value of associated security
is sufficient to cover amounts outstanding.
Consolidated

The Company

1-5
days
$m

6-29
days
$m

30-59
days
$m

60-89
days
$m

>90
days
$m

Net loans and advances1– Australia– International andInstitutional Banking– New Zealand– Global Wealth

3,082
2,119

4,559
3,701

1,624
1,335

1,005
743

52
893
18

383
442
33

1
287
1

Total

3,082

4,559

1,624

1-5
days
$m

6-29
days
$m

30-59
days
$m

60-89
days
$m

Net loans and advances1– Australia– International andInstitutional Banking– New Zealand– Global Wealth

3,096
2,231

4,416
3,622

1,506
1,295

–
852
13

299
435
60

Total

3,096

4,416

As at 30 Sep 14

Total
$m

1-5
days
$m

6-29
days
$m

30-59
days
$m

60-89
days
$m

>90
days
$m

Total
$m

1,982
1,728

12,252
9,626

2,141
–

3,805
–

1,366
–

759
–

1,778
–

9,849
–

91
136
35

96
154
4

623
1,912
91

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

1,005

1,982

12,252

2,141

3,805

1,366

759

1,778

9,849

>90
days
$m

Total
$m

1-5
days
$m

6-29
days
$m

30-59
days
$m

60-89
days
$m

>90
days
$m

Total
$m

927
745

1,818
1,554

11,763
9,447

2,240
–

3,798
–

1,313
–

790
–

1,576
–

9,717
–

1
209
1

88
83
11

55
191
18

443
1,770
103

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

1,506

927

1,818

11,763

2,240

3,798

1,313

790

1,576

9,717

Consolidated
As at 30 Sep 13

The Company

1 Individual and collective provisions for credit impairment held in respect of credit related commitments have been reallocated to credit related commitments in this table.

Estimated value of collateral for all financial assets

Consolidated

Total value ofcollateral

Credit exposure

Unsecured portion of
credit exposure

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1– Australia– International and Institutional Banking– New Zealand– Global WealthRegulatory deposits
Other financial assets2
Credit related commitments3

13,711
184
–
991
5,599
887

9,357
177
–
1,037
3,921
330

31,072
20,241
5,459
49,69256,36930,88023,952
19,225
6,530
41,28845,87828,21817,361
20,057
5,459
48,701
50,77029,993

14,59519,0486,530
40,251
41,95727,888258,854
46,16280,323
5,415
–
1,308
49,014

242,674
38,55076,328
5,587
–
1,188
36,387287,730
142,20286,126
6,353
1,565
3,473
233,400

272,264
123,81281,621
6,189
2,106
3,097
206,580

28,876
96,040
5,803
938
1,565
2,165
184,386

29,59085,262
5,293
602
2,106
1,909
170,193

Total

462,448415,536

954,562

860,760

492,114445,224

1 Individual and collective provisions for credit impairment held in respect of credit related commitments have been reallocated to credit related commitments in this table.
2 Mainly comprises accrued interest.
3 Credit related commitments comprise undrawn facilities and customer contingent liabilities net of collective and individual provisions.

NOTES TO THE FINANCIAL STATEMENTS

139

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
Estimated value of collateral for all financial assets
Total value ofcollateral

Credit exposure

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1
Regulatory deposits
Other financial assets2
Credit related commitments3

13,349
163
–
660
4,886
778
309,407–930
32,965

9,116
159
–
671
3,531
222
296,253–843
29,63429,65018,1504,873
38,04952,882
26,129415,594
434
1,758
188,373

21,884
16,621
5,638
31,46441,011
23,779383,640990
1,749
166,004

16,301
17,987
4,873
37,38947,99625,351
106,187434
828
155,408

12,76816,462
5,638
30,79337,48023,55787,387990
906
136,370

Total

363,138

340,429775,892

692,780

412,754352,351

The Company

Unsecured portion of
credit exposure

1 Individual and collective provisions for credit impairment held in respect of credit related commitments have been reallocated to credit related commitments in this table.
2 Mainly comprises accrued interest.
3 Credit related commitments comprise undrawn facilities and customer contingent liabilities net of collective and individual provisions.

Financial assets that are individually impaired
Consolidated
Impaired assets
2014
2013
$m
$m

The Company

Individual provisionbalance
2014
2013
$m
$m

Impaired assets
2014
2013
$m
$m

Individual provisionbalance
2014
2013
$m
$m

Australia
Derivative financial instruments
Loans and advances
Credit related commitments1

29
1,632
70

67
2,353
82

–
700
40

–
934
10

29
1,572
70

67
2,260
82

–
671
40

–
896
10

Subtotal

1,731

2,502

740

944

1,671

2,409

711

906

New ZealandDerivative financial instruments
Loans and advances
Credit related commitments1

2
582
33

–
814
23

–
194
6

–
244
17

–
30
–

–
30
–

–
9
–

–
8
–

Subtotal

617

837

200

261

30

30

9

8

Asia Pacific, Europe & America
Derivative financial instruments
Loans and advances
Credit related commitments1

6
468
–

–
584
–

–
236
–

–
262
–

6
321
–

–
433
–

–
134
–

–
142
–

Subtotal

474

584

236

262

327

433

134

142

Aggregate
Derivative financial instruments
Loans and advances
Credit related commitments1

37
2,682
103

67
3,751
105

–
1,130
46

–
1,440
27

35
1,923
70

67
2,723
82

–
814
40

–
1,046
10

Total

2,822

3,923

1,176

1,467

2,028

2,872

854

1,056

1 Credit related commitments comprise undrawn facilities and customer contingent liabilities.

140

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
Market risk (excludes insurance and funds management)
Market risk is the risk to the Group’s earnings arising from changes
in interest rates, currency exchange rates, credit spreads, or fromfluctuations in bond, commodity or equity prices.
Market risk arises when changes in market rates, prices and volatilities
lead to a decline in the value of assets and liabilities, including
financial derivatives. Market risk is generated through both trading
and banking book activities.
ANZ conducts trading operations in interest rates, foreign exchange,commodities and securities.
ANZ has a detailed risk management and control framework to
support its trading and balance sheet activities. The framework
incorporates a risk measurement approach to quantify themagnitude of market risk within trading and balance sheet portfolios.
This approach and related analysis identifies the range of possible
outcomes that can be expected over a given period of time,
establishes the relative likelihood of those outcomes and allocatesan appropriate amount of capital to support these activities.
Group-wide responsibility for the strategies and policies relating to
the management of market risk lies with the Board Risk Committee.
Responsibility for day to day management of both market risks
and compliance with market risk policy is delegated by the Risk
Committee to the Credit and Market Risk Committee (CMRC) and theGroup Asset & Liability Committee (GALCO). The CMRC, chaired by
the Chief Risk Officer, is responsible for the oversight of market risk.
All committees receive regular reporting on the range of trading andbalance sheet market risks that ANZ incurs.
Within overall strategies and policies, the control of market risk
at the Group level is the joint responsibility of Business Units andRisk Management, with the delegation of market risk limits fromthe Board and CMRC allocated to both Risk Management and theBusiness Units.
The management of Risk Management is supported by acomprehensive limit and policy framework to control the amountof risk that the Group will accept. Market risk limits are allocated atvarious levels and are reported and monitored by Market Risk on adaily basis. The detailed limit framework allocates individual limits
to manage and control asset classes (e.g. interest rates, equities), risk
factors (e.g. interest rates, volatilities) and profit and loss limits (tomonitor and manage the performance of the trading portfolios).
Market risk management and control responsibilities
To facilitate the management, measurement and reporting of market
risk, ANZ has grouped market risk into two broad categories:

The principal risk categories monitored are:}} Currency risk is the potential loss arising from the decline in thevalue of a financial instrument due to changes in foreign exchange
rates or their implied volatilities.
}} Interest rate risk is the potential loss arising from the change in thevalue of a financial instrument due to changes in market interest
rates or their implied volatilities.
}} Credit spread risk is the potential loss arising from a change invalue of an instrument due to a movement of its margin or spread
relative to a benchmark.
}} Commodity risk is the potential loss arising from the decline in thevalue of a financial instrument due to changes in commodity prices
or their implied volatilities.
}} Equity risk is the potential loss arising from the decline in the valueof a financial instrument due to changes in equity prices or theirimplied volatilities.
b) Non-traded market risk (or balance sheet risk)This comprises the management of non-traded interest rate risk,
liquidity, and the risk to the Australian dollar denominated valueof the Group’s capital and earnings as a result of foreign exchange
rate movements.
Some instruments do not fall into either category that also expose
ANZ to market risk. These include equity securities classified asavailable-for-sale financial assets.
Value at Risk (VaR) measure
A key measure of market risk is Value at Risk (VaR). VaR is a statisticalestimate of the possible daily loss and is based on historicalmarket movements.
ANZ measures VaR at a 99% confidence interval. This means that
there is a 99% chance that the loss will not exceed the VaR estimate
on any given day.
The Group’s standard VaR approach for both traded and non-tradedrisk is historical simulation. The Group calculates VaR using historicalchanges in market rates, prices and volatilities over the previous
500 business days. Traded and non-traded VaR is calculated using a
one‑day holding period.
It should be noted that because VaR is driven by actual historicalobservations, it is not an estimate of the maximum loss that theGroup could experience from an extreme market event. As a resultof this limitation, the Group utilises a number of other risk measures(e.g. stress testing) and risk sensitivity limits to measure and manage
market risk.

a) Traded market riskThis is the risk of loss from changes in the value of financial
instruments due to movements in price factors for both physical andderivative trading positions. Trading positions arise from transactions
where ANZ acts as principal with customers, financial exchanges orinterbank counterparties.

NOTES TO THE FINANCIAL STATEMENTS

141

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
Traded Market Risk
Below are the aggregate Value at Risk (VaR) exposures at a 99% confidence level covering both physical and derivatives trading positions for the
Bank’s principal trading centres.
30 September 2014

30 September 2013

Consolidated

As at
$m

High foryear$mValue at risk at 99% confidence
Foreign exchangeInterest rate
CreditCommodity
EquityDiversification benefit

11.9
10.4
5.8
2.0
1.3
(18.6)

18.5
16.6
5.8
2.8
2.5
n/a

1.7
3.8
2.7
0.9
0.4
n/a

8.9
8.1
3.8
1.4
1.0
(10.5)

3.0
3.9
4.2
1.6
1.4
(8.5)

12.6
11.6
8.6
4.2
3.4
n/a

2.3
2.8
2.8
1.2
0.6
n/a

5.2
5.8
4.2
2.3
1.6
(10.4)

12.8

22.9

5.5

12.7

5.6

13.6

4.9

8.7

The Company

As at
$m

High foryear$m

Low foryear$mAverage for
year
$m

As at
$m

High foryear$m

Low foryear$mAverage foryear$mValue at risk at 99% confidence
Foreign exchangeInterest rate
CreditCommodity
EquityDiversification benefit

12.0
10.0
6.0
2.0
1.3
(18.9)

18.3
15.4
6.0
2.8
2.5
n/a

1.7
3.8
2.5
0.9
0.4
n/a

8.8
7.7
3.6
1.4
1.0
(10.3)

3.0
3.7
3.8
1.6
1.4
(8.6)

11.5
12.8
8.6
4.2
3.4
n/a

2.3
2.6
2.7
1.2
0.6
n/a

5.2
5.8
4.1
2.3
1.6
(10.4)

12.4

21.0

5.3

12.2

4.9

12.9

4.7

8.6

Low foryear$mAverage for
year
$m

As at
$m

High foryear$m

Low foryear$mAverage foryear$m

30 September 2014

30 September 2013

VaR is calculated separately for foreign exchange, interest rate, credit, commodity and equities and for the Group. The diversification
benefit reflects the historical correlation between these products. Electricity commodities risk is measured under the standard approach forregulatory purposes.
To supplement the VaR methodology, ANZ applies a wide range of stress tests, both on individual portfolios and at a Group level. ANZ‘sstress‑testing regime provides senior management with an assessment of the financial impact of identified extreme events on market risk
exposures of ANZ. Standard stress tests are applied on a daily basis and measure the potential loss arising from applying extreme market
movements to individual and groups of individual price factors. Extraordinary stress tests are applied monthly and measure the potential loss
arising as a result of scenarios generated from major financial market events.

142

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
Non-traded Market Risk (Balance Sheet Risk)
The principal objectives of balance sheet management are to maintain acceptable levels of interest rate and liquidity risk to mitigate thenegative impact of movements in interest rates on the earnings and market value of the Group’s banking book, while ensuring the Group
maintains sufficient liquidity to meet its obligations as they fall due.
Interest rate risk
The objective of balance sheet interest rate risk management is to secure stable and optimal net interest income over both the short(next 12 months) and long-term. Non-traded interest rate risk relates to the potential adverse impact of changes in market interest rates on theGroup’s future net interest income. This risk arises from two principal sources: mismatches between the repricing dates of interest bearing assets
and liabilities; and the investment of capital and other non-interest bearing liabilities in interest bearing assets. Interest rate risk is reported using
various techniques including: VaR and scenario analysis (to a 1% shock).
a) VaR non-traded interest rate risk
The repricing assumptions used to determine the VaR and 1% rate shock have been independently validated. Below are aggregate VaR figures
covering non-traded interest rate risk.
30 September 2014

30 September 2013

Consolidated

As at
Sep 14$m

High foryear
Sep 14$m

Low foryear
Sep 14$m

Avg foryear
Sep 14$m

Value at risk at 99% confidence
Australia
New Zealand
Asia Pacific, Europe & America
Diversification benefit

41.8
8.9
9.1
(13.4)

64.5
11.4
10.6
n/a

39.1
8.9
8.9
n/a

46.4

76.3

43.3

As at
Sep 14$m

High foryear
Sep 14$m

Low foryear
Sep 14
$m

41.8
0.1
8.3
(4.2)

64.5
0.3
10.0
n/a

46.0

71.6

As at
Sep 13$m

High foryear
Sep 13$m

Low foryear
Sep 13$m

Avg foryear
Sep 13
$m

50.1
10.4
9.8
(13.7)

66.3
12.6
9.7
(11.4)

71.8
17.9
11.1
n/a

25.5
10.0
4.2
n/a

49.3
13.2
6.3
(16.1)

56.6

77.2

79.6

27.3

52.7

Avg foryear
Sep 14$m

As at
Sep 13$m

High foryear
Sep 13$m

Low foryear
Sep 13$m

Avg foryear
Sep 13
$m

39.1
0.0
8.3
n/a

50.1
0.1
9.2
(0.9)

66.3
0.2
9.2
(1.8)

71.8
0.6
10.3
n/a

25.5
0.1
3.0
n/a

49.3
0.3
5.3
(3.3)

42.0

58.5

73.9

76.3

26.5

51.6

30 September 2014

The Company

Value at risk at 99% confidence
Australia
New Zealand
Asia Pacific, Europe & America
Diversification benefit

30 September 2013

VaR is calculated separately for the Australia, New Zealand and APEA geographies, as well as for the Group.
To supplement the VaR methodology, ANZ applies a wide range of stress tests, both on individual portfolios and at Group level. ANZ’s stresstesting regime provides senior management with an assessment of the financial impact of identified extreme events on market risk exposuresof ANZ.
b) Scenario Analysis – a 1% shock on the next 12 months’ net interest income
A 1% overnight parallel positive shift in the yield curve is modelled to determine the potential impact on net interest income over the
succeeding 12 months. This is a standard risk measure which assumes the parallel shift is reflected in all wholesale and customer rates.
The figures in the table below indicate the outcome of this risk measure for the current and previous financial years – expressed as a percentageof reported net interest income. The sign indicates the nature of the rate sensitivity with a positive number signifying that a rate increase ispositive for net interest income over the next 12 months.
Consolidated

The Company

2014

2013

2014

2013

Impact of 1% rate shock
As at period end
Maximum exposure
Minimum exposure

0.97%
1.48%
0.74%

1.00%
1.72%
1.00%

1.06%
1.68%
0.68%

1.16%
2.04%
1.16%

Average exposure (in absolute terms)

1.12%

1.29%

1.22%

1.55%

The extent of mismatching between the repricing characteristics and timing of interest bearing assets and liabilities at any point has
implications for future net interest income. On a global basis, the Group quantifies the potential variation in future net interest income as a resultof these repricing mismatches.

NOTES TO THE FINANCIAL STATEMENTS

143

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
Interest rate risk (continued)
The repricing gaps themselves are constructed based on contractual
repricing information. However, for those assets and liabilities where
the contractual term to repricing is not considered to be reflective of
the actual interest rate sensitivity (for example, products priced at theGroup’s discretion), a profile based on historically observed and/or
anticipated rate sensitivity is used. This treatment excludes the effectof basis risk between customer pricing and wholesale market pricing.
Equity securities classified as available-for-sale
The portfolio of financial assets, classified as available-for-sale formeasurement and financial reporting purposes, also contains equity
investment holdings which predominantly comprise investments
held for longer term strategic intentions. These equity investments
are also subject to market risk which is not captured by the VaR
measures for traded and non-traded market risks. Regular reviews
are performed to substantiate valuation of the investments within
the portfolio and the equity investments are regularly reviewed bymanagement for impairment. The fair value of the equity securities
can fluctuate.
The balance of available-for-sale equity securities for the Groupamounts to $37 million (2013: $59 million) and $22 million (2013:$44 million) for the Company. Consequently any variation in value isunlikely to have a material impact on the Group.
Foreign currency risk – structural exposures
The investment of capital in foreign operations, such as branches,
subsidiaries or associates with functional currencies other than theAustralian dollar, exposes the Group to the risk of changes in foreignexchange rates.
The main operating (or functional) currencies of Group entities
are the Australian dollar, the New Zealand dollar and the US dollar,
with a number of overseas undertakings operating in various othercurrencies. The Group presents its consolidated financial statements
in Australian dollars, as the Australian dollar is the dominant currency.
The Group’s consolidated balance sheet is therefore affected byexchange differences between the Australian dollar and functional
currencies of foreign operations. Variations in the value of theseoverseas operations arising as a result of exchange differences arereflected in the foreign currency translation reserve in equity.
The Group routinely monitors this risk and conducts hedging, where
it is expected to add shareholder value, in accordance with approved
policies. The Group’s exposures to structural foreign currency risks
are managed with the primary objective of ensuring, where practical,
that the consolidated capital ratios are neutral to the effect ofchanges in exchange rates.
Selective hedges were in place during the 2014 and 2013 financial
years. For details on the hedging instruments used and effectivenessof hedges of net investments in foreign operations, refer to note 11
to these financial statements. The Group’s economic hedges against
New Zealand Dollar and US Dollar revenue streams are included
within ‘Trading derivatives’ at note 11.

144

Liquidity Risk (Excludes Insurance and Funds Management)
Liquidity risk is the risk that the Group is unable to meet its payment
obligations as they fall due, including repaying depositors or
maturing wholesale debt, or that the Group has insufficient capacity
to fund increases in assets. The timing mismatch of cash flows andthe related liquidity risk is inherent in all banking operations and isclosely monitored by the Group. The Group maintains a portfolioof 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 specific and general market liquidity stress scenarios
such that potential cash flow obligations can be met over the short tomedium term.
The Group’s liquidity and funding risks are governed by a set ofprinciples which are approved by the ANZ Board Risk Committee.
In response to the impact of the global financial crisis, the frameworkhas been reviewed and updated. The following key components
underpin the overall framework:}} Maintaining the ability to meet all payment obligations in theimmediate term;}} Ensuring that the Group has the ability to meet ‘survival horizons’
under a range of ANZ specific and general market liquidity stressscenarios, at the site and Group-wide level, to meet cash flow
obligations over the short to medium term;}} Maintaining strength in the Group’s balance sheet structure toensure long term resilience in the liquidity and funding risk profile;}} Limiting the potential earnings at risk implications associated with
unexpected increases in funding costs or the liquidation of assets
under stress;}} Ensuring the liquidity management framework is compatible withlocal regulatory requirements;}} Preparation of daily liquidity reports and scenario analysis,
quantifying the Group’s positions;}} Targeting a diversified funding base, avoiding undue
concentrations by investor type, maturity, market source andcurrency;}} Holding a portfolio of high quality liquid assets to protect
against adverse funding conditions and to support day-to-day
operations; and}} Establishing detailed contingency plans to cover different liquidity
crisis events.
Management of liquidity and funding risks are overseen by
the GALCO.

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
Scenario Modelling
A key component of the Group’s liquidity management frameworkis scenario modelling. APRA requires ADIs to assess liquidity under
different scenarios, including the ‘going-concern’ and ‘name-crisis’.
‘Going-concern’: reflects the normal behaviour of cash flows in theordinary course of business. APRA requires that the Group must beable to meet all commitments and obligations under a going concern
scenario, within the ADIs normal funding capacity (‘available to fund’limit), over at least the following 30 calendar days. In estimating thefunding requirement, the Group models expected cash flows byreference to historical behaviour and contractual maturity data.
‘Name-crisis’: refers to a potential name-specific liquidity crisis whichmodels the behaviour of cash flows where there is a problem (realor perceived) which may include, but is not limited to, operational
issues, doubts about the solvency of the Group or adverse ratingchanges. Under this scenario the Group may have significant difficultyrolling over or replacing funding. Under a name crisis, APRA requires
the Group to be cash flow positive over a five business day period.
‘Survival horizons’: The Global financial crisis has highlighted theimportance 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 duringmarket stress events. As a result, the Group has enhanced its liquidity
risk scenario modelling, to supplement APRA’s statutory requirements.
The Group has linked its liquidity risk appetite to defined liquidity‘survival horizons’ (i.e. the time period under which ANZ must
maintain a positive cash flow position under a specific scenario or
stress). Under these scenarios, customer and/or wholesale balance
sheet asset/liability flows are stressed. The following stressed
scenarios are modelled:}} Extreme Short Term Crisis Scenario (ESTC): A name-specific stressduring a period of market stress.
}} Short Term Crisis Scenario (NSTC): A name-specific stress during aperiod of normal markets conditions.

}} Global Funding Market Disruption (GFMD): Stressed global
wholesale funding markets leading to a closure of domestic andoffshore markets.
}} Offshore Funding Market Disruption (OFMD): Stressed global
wholesale funding markets leading to a closure of offshore
markets only.
Each of ANZ’s operations is responsible for ensuring its compliancewith all scenarios that are required to be modelled. Additionally, wemeasure, monitor and manage all modelled liquidity scenarios on an
aggregated Group-wide level.
The above represents the current framework, this will be updated
accordingly in 2015 to reflect Basel 3 related changes.
Liquidity Portfolio Management
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 withthe 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 andcontinue 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 Englandand Bank of Japan of $21.8 billion,}} Australian Commonwealth and State Government securities of$8.4 billion and gold & precious metals of $3.0 billion, and,}} cash and other securities to satisfy local country regulatory liquidity
requirements which are not included in the liquid assets below.

Eligible securities
2014
$m

2013
$m

Australia
New ZealandUnited States
United Kingdom
Singapore
Hong KongJapan

31,71011,450
4,296
5,844
2,853
1,166
1,250

27,787
11,095
2,067
5,129
3,106
596
1,359

Prime Liquidity Portfolio (excluding Internal RMBS)Internal RMBS (Australia)
Internal RMBS (New Zealand)

58,56943,5005,089

51,13935,677
3,738

Prime liquidity portfolio (market values1)

Total Prime Portfolio

107,158

90,554

Other Eligible Securities

33,20031,013

Total

140,358

121,567

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

NOTES TO THE FINANCIAL STATEMENTS

145

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
Liquidity Crisis Contingency Planning
The Group maintains APRA-endorsed liquidity crisis contingency
plans defining an approach for analysing and responding to aliquidity threatening event at a country and Group-wide level.
To align with the enhanced liquidity scenario analysis framework,crisis management strategies are assessed against the Group’s crisis
stress scenarios.

Group Funding
ANZ manages its funding profile using a range of funding metrics
and balance sheet disciplines. This approach is designed to ensurethat an appropriate proportion of the Group’s assets are fundedby stable funding sources including core customer deposits,
longer‑dated wholesale funding (with a remaining term exceeding
one year) and equity.

The framework is compliant with APRA’s key liquidity contingency
crisis planning requirements and guidelines and includes:}} The establishment of crisis severity/stress levels;}} Clearly assigned crisis roles and responsibilities;}} Early warning signals indicative of an approaching crisis, andmechanisms to monitor and report these signals;}} Crisis Declaration Assessment processes, and related escalation
triggers set against early warning signals;}} Outlined action plans, and courses of action for altering asset andliability behaviour;}} Procedures for crisis management reporting, and making up cashflow shortfalls;}} Guidelines determining the priority of customer relationships in
the event of liquidity problems; and}} Assigned responsibilities for internal and external communications.

The Group’s global wholesale funding strategy is designed todeliver a sustainable portfolio of wholesale funds that balances
cost efficiency against prudent diversification and duration.

Regulatory Change
The Basel 3 Liquidity changes include the introduction of two
liquidity ratios to measure liquidity risk (the Liquidity Coverage Ratio(LCR) in 2015 and the Net Stable Funding Ratio (NSFR), expected
implementation 2018). A component of the liquidity required under
the new standards will be met via the Committed Liquidity Facility(CLF) from the Reserve Bank of Australia (RBA). The Group remains
well placed to meet these requirements.
The proposed LCR external disclosures will formally begin fromMarch 2015, and are largely as expected and in line with thepreviously released Basel proposals. The LCR will be externallydisclosed from 31st March 2015 reporting date, and for eachsubsequent financial reporting period thereafter. The disclosure willbe the average of the previous quarter rather than a spot LCR, andwill represent the position of the Level 2 entity.
The Basel 3 revised standard on NSFR, released in January 2014, iscurrently undergoing a global review with the expectation of it being
implemented in 2018.

146

Funding plans and performance relative to those plans are reported
regularly to senior management via the Group Asset and Liability
Committee (GALCO). These plans address customer balance sheet
growth and changes in wholesale funding including, targetedfunding volumes, markets, investors, tenors and currencies forsenior, secured, subordinated and hybrid transactions. Plans aresupplemented with a monthly forecasting process which reviews thefunding position to-date in light of market conditions and balance
sheet requirements.
Funding plans are generated through the three-year strategicplanning process and further refined by the annual funding plan andapproved by the Board. Asset and deposit plans are submitted at thebusiness segment level with the wholesale funding requirements
then derived at the geographic level. To the extent that asset growth
exceeds funding generated from customer deposits, additional
wholesale funds are sourced.
Short-term wholesale funding requirements, with a contractual
maturity of less than one year, are managed through Group Treasury
and local Markets operations. Long-term wholesale funding ismanaged and executed through Group Treasury operations inAustralia and New Zealand.
Funding Position 2014
ANZ targets a diversified funding base, avoiding undue concentrations
by investor type, maturity, market source and currency.
$23.9 billion of term wholesale debt (with a remaining term greaterthan one year as at 30 September 2014) was issued during the year.
In addition, $1.6 billion of ANZ Capital Notes were issued.
}} All wholesale funding needs were comfortably met.
}} The weighted average tenor of new term debt was 4.9 years(4.3 years in 2013).
}} The average term debt portfolio costs are slowly reducing however
remain substantially above pre-crisis levels.

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
The following tables show the Group’s funding composition:
2014
$m

2013
$m

Customer deposits and other liabilities1
Australia
International & Institutional Banking
New ZealandGlobal Wealth
GTSO and Group Centre

161,108
182,701
51,36013,844(5,294)

152,371
163,151
46,494
11,569(4,756)

Total customer deposits

403,719

368,829

Funding composition

Other2

14,502

13,158

Total customer deposits and other liabilities (funding)

418,221381,987

Wholesale funding3
Debt issuances4
Subordinated debt
Certificates of deposit (wholesale)Commercial paper
Other wholesale borrowings5

79,291
13,60752,75415,152
42,46069,57012,80458,276
12,25538,813

Total wholesale funding

203,264

191,718

Shareholders equity (excl preference shares)

48,41344,732

Total funding maturity
Total short term wholesale funding6
Long term wholesale funding7– less than 1 year residual maturity– greater than 1 year residual maturity
Total customer deposits and other liabilities (funding)Shareholders’ equity and hybrid debt

14%

15%

3%
12%
63%
8%

3%
12%
62%
8%

Total funding and shareholders’ equity excluding preference share capital

100%

100%

1
2
3
4
5
6
7

Includes term deposits, other deposits and an adjustment recognised in Group Centre to eliminate Global Wealth investments in ANZ deposit products.
Includes interest accruals, payables and other liabilities, provisions and net tax provisions, excluding other liabilities in Global Wealth.
Liability for acceptances have been removed as they do not provide net funding.
Excludes term debt issued externally by Global Wealth.
Includes borrowings from banks, net derivative balances, special purpose vehicles, other borrowings and Euro Trust Securities (preference shares).
RBA open-repo arrangement netted down by exchange settlement account cash balance.
Long term wholesale funding amounts are stated at original hedged exchange rates. Movements due to currency fluctuations in actual amounts borrowed are classified as short termwholesale funding.

NOTES TO THE FINANCIAL STATEMENTS

147

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
Contractual maturity analysis of the Group’s liabilities
The table below analyses the Group and Company’s contractual liabilities, within relevant maturity groupings based on the earliest date on
which the Group or Company may be required to pay. The amounts represent principal and interest cash flows and hence may differ comparedto the amounts reported on the balance sheet.
It should be noted that this is not how the Group manages its liquidity risk. The management of this risk is detailed above.
Contractual maturity analysis of financial liabilities at 30 September:
Consolidated at 30 September 2014

Collateral received
Settlement balances owed by ANZ
Deposits and other borrowings
Deposits from banks
Certificates of deposit
Term deposits
Other deposits interest bearing
Deposits not bearing interest
Commercial paper
Borrowing corporations' debt
Other borrowing
Liability for acceptances
Debt issuances3
Subordinated debt3,4
Policyholder liabilities
External unit holder liabilities (life insurance funds)
Derivative liabilities (trading)5

Less than
3 months1$m

3 to 12months$m

1 to
5 years$m

After
5 years$mNomaturity
specified2
$m

Total
$m

5,599
10,114

–
–

–
–

–
–

–
–

5,599
10,11435,48329,775
139,549
193,220
16,404
5,803
521
260
1,151
4,585
45
34,0383,181
46,831

2,715
9,478
47,877
–
–
9,351
572
–
–
12,268
228
–
–
–

32
14,972
6,919
–
–
–
306
–
–
55,049
6,868
–
–
–

–
100
130
–
–
–
–
–
–
12,989
7,129
–
–
–

–
–
–
–
–
–
–
–
–
–
1,087
516
–
–

38,23054,325
194,475
193,220
16,40415,154
1,399
260
1,151
84,891
15,35734,554
3,181
46,831

Derivative assets and liabilities (balance sheet management)– fundingReceive leg
Pay leg– other balance sheet management
Receive leg
Pay leg(21,655)
21,433(23,313)
23,696(81,464)
80,951(26,370)
24,976––(152,802)
151,056(10,663)
10,691(10,793)
10,994(16,258)
16,337(7,041)
7,270––(44,755)
45,292

Consolidated at 30 September 2013

Less than
3 months1$m

3 to 12months$m

1 to
5 years$m

After
5 years$mNomaturity
specified2
$m

Total
$m

3,921
8,695

–
–

–
–

–
–

–
–

3,921
8,695

25,072
34,310137,218
166,587
14,446
6,021
372
315
812
3,116
1,570
31,703
3,511
39,557

2,161
10,36147,934
–
–
6,246
687
–
–
10,624
1,525
–
–
–

8
15,492
4,601
–
–
–
351
–
–
51,256
7,334
–
–
–

–
–
111
–
–
–
–
–
–
10,858
3,993
–
–
–

–
–
–
–
–
–
–
–
–
–
1,065
685
–
–

27,24160,163
189,864
166,587
14,446
12,267
1,410
315
812
75,854
15,48732,3883,511
39,557(17,475)
18,469(28,736)
30,560(79,312)81,302(23,167)
23,474––(148,690)
153,805(9,127)
9,258(11,791)
11,924(14,640)
14,656(5,645)
5,593––(41,203)
41,431

Collateral received
Settlement balances owed by ANZ
Deposits and other borrowings
Deposits from banks
Certificates of deposit
Term deposits
Other deposits interest bearing
Deposits not bearing interest
Commercial paper
Borrowing corporations' debt
Other borrowing
Liability for acceptances
Debt issuances3
Subordinated debt3,4
Policyholder liabilities
External unit holder liabilities (life insurance funds)
Derivative liabilities (trading)5
Derivative assets and liabilities (balance sheet management)– fundingReceive leg
Pay leg– other balance sheet management
Receive leg
Pay leg
12345Includes at call instruments.
Includes perpetual investments brought in at face value only.
Any callable wholesale debt instruments have been included at their next call date.
Includes instruments that may be settled in cash or in equity, at the option of the Company.
The full mark-to-market of derivative liabilities held for trading purposes has been included in the ‘less than 3 months’ category.

148

ANZ ANNUAL REPORT 2014

31: Financial Risk Management (continued)
The Company at 30 September 2014

Less than
3 months1$m

3 to 12months$m

1 to
5 years$m

After
5 years$mNomaturity
specified2
$m

Total
$m

Collateral received
Settlement balances owed by ANZ
Deposits and other borrowings
Deposits from banks
Certificates of deposit
Term deposits
Other deposits interest bearing
Deposits not bearing interest
Commercial paper
Other borrowing
Liability for acceptances
Debt issuances3
Subordinated debt3,4
Derivative liabilities (trading)5

4,886
8,189
–
34,63728,801
120,289
160,889
8,688
3,669
128
717
2,903
45
45,598

–
–
–
2,715
9,331
32,237
–
–
6,086
–
–
9,671
228
–

–
–
–
21
14,972
3,781
–
–
–
–
–
43,935
6,868
–

–
–
–
–
100
71
–
–
–
–
–
12,447
7,139
–

–
–
–
–
–
–
–
–
–
–
–
–
343
–

4,886
8,189
–
37,37353,204
156,378
160,889
8,688
9,755
128
717
68,956
14,62345,598(14,664)
9,182(15,732)
8,001(65,771)
10,517(25,616)
6,274

–
–

(121,783)
33,974(9,182)
9,227(8,001)
8,174(10,517)
10,573(6,274)
6,503––(33,974)
34,477Less than
3 months1$m

3 to 12months$m

1 to
5 years$m

After
5 years$mNomaturity
specified2
$m

Total
$m

3,532
7,451

–
–

–
–

–
–

–
–

3,532
7,451

24,26532,486117,209138,372
7,574
3,926
208
484
1,613
1,552
35,8902,160
10,331
31,056
–
–
4,097
–
–
9,982
1,504
–

8
15,522
2,301
–
–
–
–
–
40,337
7,334
–

–
–
101
–
–
–
–
–
9,541
3,993
–

–
–
–
–
–
–
–
–
–
322
–

26,43358,339150,667
138,372
7,574
8,023
208
484
61,473
14,70535,890(10,426)
11,234(19,887)
21,073(64,244)
65,310(21,332)
21,643––(115,889)
119,260(7,760)7,857(9,343)
9,464(10,091)
10,161(4,983)
4,948––(32,177)
32,430Derivative assets and liabilities (balance sheet management)– fundingReceive leg
Pay leg– other balance sheet management
Receive leg
Pay leg

The Company at 30 September 2013

Collateral received
Settlement balances owed by ANZ
Deposits and other borrowings
Deposits from banks
Certificates of deposit
Term deposits
Other deposits interest bearing
Deposits not bearing interest
Commercial paper
Other borrowing
Liability for acceptances
Debt issuances3
Subordinated debt3,4
Derivative liabilities (trading)5
Derivative assets and liabilities (balance sheet management)– fundingReceive leg
Pay leg– other balance sheet management
Receive leg
Pay leg
12345Includes at call instruments.
Includes perpetual investments brought in at face value only.
Any callable wholesale debt instruments have been included at their next call date.
Includes instruments that may be settled in cash or in equity, at the option of the Company.
The full mark-to-market of derivative liabilities held for trading purposes has been included in the ‘less than 3 months’ category.

Credit related contingencies
Undrawn facilities and issued guarantees comprise the nominal principal amounts of commitments, contingencies and other undrawn facilities
and represents the maximum liquidity at risk position should all facilities extended be drawn.
The majority of undrawn facilities are subject to customers maintaining specific credit and other requirements or conditions. Many of thesefacilities are expected to be partially used, whereas others may never be required to be drawn upon. As such, the total of the nominal principal
amounts is not necessarily representative of future liquidity risks or future cash requirements.

NOTES TO THE FINANCIAL STATEMENTS

149

NOTES TO THE FINANCIAL STATEMENTS (continued)
31: Financial Risk Management (continued)
The tables below analyse the Group’s and Company’s undrawn facilities and issued guarantees into relevant maturity groupings based on theearliest date on which ANZ may be required to pay.
Consolidated
30 September 2014

Less than
1 year$mMore than
1 year$m

Undrawn facilities
Issued guarantees

193,984
40,075––30 September 2013

Less than
1 year$m

Undrawn facilities
Issued guarantees

170,670
36,532The Company
Total
$m

Less than
1 year$mMore than
1 year
$m

Total
$m

193,984
40,075

153,985
34,916––

153,985
34,916More than
1 year
$m

Total
$m

Less than
1 year$mMore than
1 year
$m

Total
$m

–
–

170,670
36,532

134,622
31,849––134,622
31,849Consolidated

Life insurance risk
Although not a significant contributor to the Group’s balance sheet, theGroup’s insurance businesses give rise to unique risks which are managed
separately from the Group’s banking businesses. The nature of these risks
and the manner in which they are managed is set out in note 47.
Operational risk management
Within ANZ, operational risk is defined as the risk of loss resulting
from inadequate or failed internal processes, people and systems orfrom external events. This definition includes legal risk, and the risk ofreputational loss or damage arising from inadequate or failed internal
processes, people and systems, but excludes strategic risk.
The ANZ Board has delegated its powers to the Risk Committee toapprove the ANZ Operational Risk Framework which is in accordancewith Australian Prudential Standard APS 115 Capital Adequacy:
Advanced Measurement Approaches to Operational Risk. OREC isthe primary senior executive management forum responsible forthe oversight of operational 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 monitors the state of operational risk and compliancemanagement and will instigate any necessary corrective actions.
Key responsibilities of OREC include:}} Ensuring the execution of ANZ’s Operational Risk Measurement
and Management Framework and Compliance Framework}} Ensuring the execution of Board approved Operational Risk andCompliance Policies}} Monitor and approve the treatment plans for Extreme rated risks}} Review material (actual, potential and near miss) operational risk
and compliance events
Membership of OREC comprises senior executives and the committee
is chaired by the Chief Risk Officer.
ANZ’s Operational Risk Measurement and Management Framework(ORMMF) outlines the approach to managing operational risk.
It specifically covers the minimum requirements that divisions/business
units must undertake to identify, assess, measure, monitor, control
and manage operational risk in accordance to the Board approved risk
appetite. ANZ does not expect to eliminate all risks, but to ensure thatthe residual risk exposure is managed as low as reasonably practical
based on a sound risk/reward analysis in the context of an international
financial institution. ANZ’s ORMMF is supported by specific policies andprocedures with the effectiveness of the framework assessed througha series of governance and assurance reviews. This is supplemented byan independent review programme by Internal Audit.

150

The Company

Divisional Risk Committees and Business Unit Risk Forums manage
and maintain oversight of operational and compliance risks
supported by thresholds for escalation and monitoring which
is used to inform and support senior management strategic
business decision making. Day to day management of operationaland compliance risk is the accountability of every employee.
Business Units undertake operational risk activities as part ofthis accountability. Divisional risk personnel provide oversight ofoperational 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, operationalrisk measurement and capital allocations and reporting of operationalrisk issues to executive committees.
Group Compliance has global oversight responsibility for the ANZCompliance Framework, and each division has responsibility forembedding the framework into its business operations, identifying
applicable regulatory compliance obligations, and escalating whenbreaches occur. The Compliance Framework fosters an integrated
approach where staff are responsible and accountable for compliance,
either within their job role, or within their area of influence.
The integration of the Operational Risk Measurement andManagement and Compliance Frameworks, supported by common
policies, procedures and tools allows for a simple and consistent way
to identify, assess, measure and monitor risks across ANZ.
In line with industry practice, ANZ obtains insurance cover fromthird party and captive providers to cover those operational risks
where cost-effective premiums can be obtained. In conducting theirbusiness, Business Units are advised to act as if uninsured and not
to use insurance as a guaranteed mitigation for operational risk.
Business disruption is a critical risk to a bank’s ability to operate,
so ANZ has comprehensive business continuity, recovery andcrisis management plans. The intention of the business continuity
and recovery plans is to ensure critical business functions can be
maintained, or restored in a timely fashion, in the event of material
disruptions arising from internal or external events.
Group Operational Risk is responsible for maintaining ANZ’s
Advanced Measurement Approach (AMA) for operational risk.
Operational risk capital is held to protect depositors and shareholdersof the bank from rare and severe unexpected losses. ANZ maintains
and calculates operational risk capital (including regulatory andeconomic capital), on at least a six monthly basis. The capital iscalculated using scaled external loss data, internal loss data andscenarios as a direct input and risk registers as an indirect input.

ANZ ANNUAL REPORT 2014

32: Fair value of financial assets and financial liabilities
A significant number of financial instruments are carried on the balance sheet at fair value. The following disclosures set out the Group’s fairvalue measurements, the various levels within which fair value measurements are categorised, and the valuation methodologies and techniques
used. The fair value disclosure does not cover those instruments that are not considered financial instruments from an accounting perspective,
such as intangible assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participantsat the measurement date. The determination of the fair value of financial instruments is fundamental to the financial reporting framework as all
financial instruments are recognised initially at fair value and, with the exception of those financial instruments carried at amortised cost, areremeasured at fair value in subsequent periods.
On initial recognition, the best evidence of a financial instrument’s fair value is the transaction price. However, in certain circumstances theinitial fair value may be based on other observable current market transactions in the same instrument, without modification or repackaging,or on a valuation technique whose variables include only data from observable markets. For those financial instruments where the fair value atinitial recognition would be based on unobservable inputs, the difference between the transaction price and the amount determined using avaluation technique (being the day one gain or loss) is not immediately recognised in the income statement.
Subsequent to initial recognition, the fair value of financial instruments measured at fair value is based on quoted market prices, whereavailable. In cases where quoted market prices are not available, fair value is determined using market accepted valuation techniques that
employ observable data. In limited cases where observable market data is not available, the input is estimated based on other observable
market data, historical trends and other factors that may be relevant.
In the tables below, financial instruments have been allocated based on their accounting classification. The significant accounting policies innote 1 describe how the categories of financial assets and financial liabilities are measured and how income and expenses, including fair value
gains and losses, are recognised.
(I) CLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIESThe following tables set out the classification of financial asset and liability categories according to measurement bases together with theircarrying amounts as reported on the balance sheet.
At amortised
cost

Consolidated 30 September 2014

Financial assets
Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Regulatory deposits
Investments backing policy liabilities
Other financial assets

Financial liabilities
Settlement balances owed by ANZ
Collateral received
Derivative financial instruments1
Deposits and other borrowings
Debt issuances
Subordinated debt
Policy liabilities3
External unit holder liabilities (life insurance funds)
Payables and other liabilities

At fair value through profit or loss

Hedging

Available-forsale assets

Total

$m

Designatedon initialrecognition$mHeld fortrading$m

Sub-total
$m

$m

$m

$m

32,55920,241
5,459–––
521,384
1,565
–
3,473

–
–
–
–
–
–
368
–
33,579––––49,69253,730
–
–
–
–
–

–
–
–
49,69253,730–368–
33,579
–

–
–
–
–
2,639
–
–
–
–
–

–
–
–
–
–
30,917––––32,55920,241
5,459
49,69256,36930,917521,752
1,565
33,5793,473

584,681

33,947

103,422

137,369

2,639

30,917755,606

10,114
5,599–
504,585
76,655
13,607
516
–
7,075

–
–
–
5,494
3,441
–
34,0383,181–––
51,475
–
–
–
–
–
3,870

–
–
51,475
5,494
3,441
–
34,038
3,181
3,870

–
–
1,450
–
–
–
–
–
–

n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

10,114
5,599
52,925510,079
80,096
13,60734,554
3,181
10,945618,151

46,15455,345

101,499

1,450

n/a

721,100

1 Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as accounting hedges.
2 Fair value hedging is applied to financial assets within loans and advances. The resulting fair value adjustments mean that the carrying value differs from the amortised cost.
3 Includes life insurance contract liabilities of $516 million (2013: $685 million) measured in accordance with AASB 1038 Life insurance contract liabilities and life investment contract liabilities of$34,038 million (2013: $31,703 million) which have been designated at fair value through profit or loss in terms under AASB 139. None of the fair value is attributable to changes in the credit riskof the life investment contract liabilities.

NOTES TO THE FINANCIAL STATEMENTS

151

NOTES TO THE FINANCIAL STATEMENTS (continued)
32: Fair Value of Financial Assets and Financial Liabilities (continued)
At amortised
cost

Consolidated 30 September 2013

Financial assets
Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Regulatory deposits
Investments backing policy liabilities
Other financial assets

Financial liabilities
Settlement balances owed by ANZ
Collateral received
Derivative financial instruments1
Deposits and other borrowings
Debt issuances
Subordinated debt
Policy liabilities3
External unit holder liabilities (life insurance funds)
Payables and other liabilities

At fair value through profit or loss

Hedging

Available-forsale assets

Total

$m

Designatedon initialrecognition$mHeld fortrading$m

Sub-total
$m

$m

$m

$m

25,27019,225
6,530–––
483,128
2,106
–
3,655

–
–
–
–
–
–
136
–
32,083––––41,28843,688
–
–
–
–
–

–
–
–
41,28843,688–136–
32,083
–

–
–
–
–
2,190
–
–
–
–
–

–
–
–
–
–
28,277––––25,27019,225
6,530
41,28845,87828,277483,264
2,106
32,0833,655

539,91432,21984,976

117,195

2,190

28,277

687,576

8,695
3,291
–
462,675
64,776
12,104
685
–
6,415

–
–
–
4,240
5,600
700
31,7033,511–––
45,653
–
–
–
–
–
2,530

–
–
45,653
4,240
5,600
700
31,703
3,511
2,530

–
–
1,856
–
–
–
–
–
–

n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

8,695
3,291
47,509466,91570,376
12,80432,3883,511
8,945

558,641

45,754

48,18393,937

1,856

n/a

654,434

1 Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as accounting hedges.
2 Fair value hedging is applied to financial assets within loans and advances. The resulting fair value adjustments mean that the carrying value differs from the amortised cost.
3 Includes life insurance contract liabilities of $516 million (2013: $685 million) measured in accordance with AASB 1038 Life insurance contract liabilities and life investment contract liabilities of$34,038 million (2013: $31,703 million) which have been designated at fair value through profit or loss in terms under AASB 139. None of the fair value is attributable to changes in the credit riskof the life investment contract liabilities.

At amortised
cost

The Company 30 September 2014

Financial assets
Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Regulatory deposits
Due from controlled entities
Other financial assets

Financial liabilities
Settlement balances owed by ANZ
Collateral received
Derivative financial instruments1
Deposits and other borrowings
Due to controlled entities
Debt issuances
Subordinated debt
Payables and other liabilities

At fair value through profit or loss

Hedging

Available-forsale assets

Total

$m

Designatedon initialrecognition$mHeld fortrading$m

Sub-total
$m

$m

$m

$m

30,655
18,1504,873–––
414,989434
99,194
1,758

–
–
–
–
–
–
77
–
–
–

–
–
–
38,04950,549
–
–
–
–
–

–
–
–
38,04950,549
–
77
–
–
–

–
–
–
–
2,333
–
–
–
–
–

–
–
–
–
–
26,151––––30,655
18,1504,873
38,04952,882
26,151
415,066434
99,194
1,758

570,053

77

88,59888,6752,333

26,151

687,212

8,189
4,886
–
423,076
93,796
61,531
12,870
4,111

–
–
–
96
–
2,630
–
–

–
–
49,201
–
–
–
–
3,556

–
–
49,201
96
–
2,630
–
3,556

–
–
1,273
–
–
–
–
–

n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

8,189
4,886
50,474423,172
93,79664,161
12,870
7,667

608,459

2,726

52,75755,483

1,273

n/a

665,215

1 Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as accounting hedges.
2 Fair value hedging is applied to financial assets within loans and advances. The resulting fair value adjustments mean that the carrying value differs from the amortised cost.

152

ANZ ANNUAL REPORT 2014

32: Fair Value of Financial Assets and Financial Liabilities (continued)
At amortised
cost

The Company 30 September 2013

Financial assets
Cash
Settlement balances owed to ANZCollateral paid
Trading securities
Derivative financial instruments1
Available-for-sale assets
Net loans and advances2
Regulatory deposits
Due from controlled entities
Other financial assets

Financial liabilities
Settlement balances owed by ANZ
Collateral received
Derivative financial instruments1
Deposits and other borrowings
Due to controlled entities
Debt issuances
Subordinated debt
Payables and other liabilities

At fair value through profit or loss

Hedging

Available-forsale assets

Total

$m

Designatedon initialrecognition$mHeld fortrading$m

Sub-total
$m

$m

$m

$m

22,798
16,621
5,638–––
383,079990
71,354
1,750

–
–
–
–
–
–
94
–
–
–

–
–
–
31,46439,047
–
–
–
–
–

–
–
–
31,46439,047
–
94
–
–
–

–
–
–
–
1,964
–
–
–
–
–

–
–
–
–
–
23,823––––

22,798
16,621
5,638
31,46441,011
23,823
383,173990
71,354
1,750

502,230

94

70,51170,605

1,964

23,823598,622

7,451
3,531
–
385,449
64,64951,36811,362
3,844

–
–
–
–
–
5,600
700
–

–
–
40,153
–
–
–
–
2,403

–
–
40,153
–
–
5,600
700
2,403

–
–
1,674
–
–
–
–
–

n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

7,451
3,531
41,827385,449
64,64956,96812,062
6,247

527,654

6,300

42,55648,856

1,674

n/a

578,184

1 Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as accounting hedges.
2 Fair value hedging is applied to financial assets within loans and advances. The resulting fair value adjustments mean that the carrying value differs from the amortised cost.

(ii) MEASUREMENT OF FAIR VALUEa) Valuation methodologies
ANZ has an established control framework that ensures fair value is either determined or validated by a function independent of the party that
undertakes the transaction. The control framework ensures that all models are calibrated periodically to test that outputs reflect prices fromobservable current market transactions in the same instrument or other available observable market data.
Where quoted market prices are used, prices are independently verified from other sources. For fair values determined using a valuation model,
the control framework may include, as applicable, independent development or validation of valuation models, any inputs to those models,
any adjustments required outside of the valuation model and, where possible, independent validation of model outputs. In this way, continued
appropriateness of the valuations is ensured.
In instances where the Group holds offsetting risk positions, the Group uses the portfolio exemption in AASB 13 to measure the fair value ofsuch groups of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (that is, an asset)
for a particular risk exposure or to transfer a net short position (that is, a liability) for a particular risk exposure.
The Group categorises its fair value measurements on the basis of inputs used in measuring fair value using the fair value hierarchy below:}} Level 1 – Financial instruments that have been valued by reference to unadjusted quoted prices in active markets for identical financial
instruments. This category includes financial instruments valued using quoted yields where available for specific debt securities.
}} Level 2 – Financial instruments that have been valued through valuation techniques incorporating inputs other than quoted prices within
Level 1 that are observable for a similar financial asset or liability, either directly or indirectly.
}} Level 3 – Financial instruments that have been valued using valuation techniques which incorporate significant inputs that are not basedon observable market data (unobservable inputs).

NOTES TO THE FINANCIAL STATEMENTS

153

NOTES TO THE FINANCIAL STATEMENTS (continued)
32: Fair Value of Financial Assets and Financial Liabilities (continued)(b) Valuation techniques and inputs used
In the event that there is no quoted market price for the instrument, fair value is based on valuation techniques. The valuation models
incorporate the impact of bid/ask spreads, counterparty credit spreads, funding costs and other factors that would influence the fair value
determined by market participants.
The majority of valuation techniques employ only observable market data. However, for certain financial instruments the valuation technique
may employ some data (valuation inputs or components) which is not readily observable in the current market. In these cases valuation inputs(or components of the overall value) are derived and extrapolated from other relevant market data and tested against historic transactions andobserved market trends. To the extent that valuation is based on models or inputs that are not observable in the market, the determination offair value can be more subjective, dependent on the significance of the unobservable input to the overall valuation.
The following valuation techniques have been applied to determine the fair values of financial instruments where there is no quoted price forthe instrument:}} For instruments classified as Trading security assets and Securities short sold, Derivative financial assets and liabilities, Available-for-salefinancial assets, and Investments backing policy liabilities, fair value measurements are derived by using modelled valuations techniques(including discounted cash flow models) that incorporate market prices/yields for securities with similar credit risk, maturity and yieldcharacteristics; and/or current market yields for similar instruments.
}} For Net loans and advances, Deposits and other borrowings and Debt issuances, discounted cash flow techniques are used where contractual
future cash flows of the instrument are discounted using discount rates incorporating wholesale market rates or market borrowing rates ofdebt with similar maturities or a yield curve appropriate for the remaining term to maturity.
}} The fair value of external unit holder liabilities (life insurance funds) represents the external unit holder’s share of the net assets of theconsolidated managed funds, which are carried at fair value. The fair value of policy liabilities being liabilities of the insurance businessis directly linked to the performance and value of the assets backing the liabilities. These liabilities are carried at fair value using
observable inputs.
Further details of valuation techniques and significant unobservable inputs used in measuring fair values are described in (iii)(a) below.
There have been no substantial changes in the valuation techniques applied to different classes of financial instruments during the year.
(iii) FINANCIAL ASSETS AND FINANCIAL LIABILITIES THAT ARE MEASURED AT FAIR VALUE IN THE BALANCE SHEETThe table below provides an analysis of financial instruments carried at fair value at reporting date categorised according to the lowest level
input into a valuation model or a valuation component that is significant to the reported fair value. The significance of the input is assessedagainst the reported fair value of the financial instrument and considers various factors specific to the financial instrument. The fair value has
been allocated in full to the category in the fair value hierarchy which most appropriately reflects the determination of the fair value.
Fair value measurements
Quoted market price(Level 1)
Consolidated

Financial assets
Trading securities
Derivative financial instruments
Available-for-sale assets1
Investment backing policy liabilities
Net loans and advances (designated at fair value)

Financial liabilities
Payables and other liabilities2
Derivative financial instruments
Deposits and other borrowings(designated at fair value)
Debt issuances (designated at fair value)
Policy liabilities3
External unit holder liabilities(life insurance funds)
Subordinated debt (designated at fair value)
Total

Using observable inputs(Level 2)

With significant
non–observable inputs(Level 3)

Total

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

45,857472
25,147
18,850–37,645826
23,90021,029–3,835
55,791
5,730
14,184368

3,643
44,852
4,341
10,949
136

–
106
40
545
–

–
200
36
105
–

49,69256,36930,91733,579368

41,28845,87828,27732,083136

90,326

83,40079,90863,921

691

341

170,925

147,662

3,851
376

2,474
803

19
52,44456
46,269

–
105

–
437

3,870
52,9252,530
47,509

–
–
–

–
–
–

5,494
3,441
34,0384,240
5,600
31,703

–
–
–

–
–
–

5,494
3,441
34,0384,240
5,600
31,703

–
–

–
–

3,181
–

3,511
700

–
–

–
–

3,181
–

3,511
700

4,227

3,277

98,617

92,079105

437

102,949

95,793

1 During the period there were transfers from Level 1 to Level 2 of $357 million for the Group following a reassessment of available pricing information causing the classification to be reconsidered
as level 2. During the period there were also transfers from Level 2 to Level 1 of $33 million for the Group following increased trading activity to support the quoted prices. Transfers into and outof Level 1 and Level 2 are deemed to have occurred as of the beginning of the reporting period in which the transfer occurred.
2 Represents securities short sold.
3 Policy liabilities relate to life investment contract liabilities only as these are designated at fair value through profit and loss.

154

ANZ ANNUAL REPORT 2014

32: Fair Value of Financial Assets and Financial Liabilities (continued)
Fair value measurements
Quoted market price(Level 1)
The Company

Financial assets
Trading securities
Derivative financial instruments
Available-for-sale assets1
Net loans and advances (designated at fair value)

Financial liabilities
Payables and other liabilities2
Derivative financial instruments
Deposits and other borrowings (designatedat fair value)
Debt issuances (designated at fair value)
Subordinated debt (designated at fair value)
Total

Using observable inputs(Level 2)

With significant
non–observable inputs(Level 3)

Total

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

34,356
470
22,265–27,939826
20,905–

3,693
52,316
3,864
77

3,525
39,985
2,889
94

–
96
22
–

–
200
29
–

38,04952,882
26,151
77

31,46441,011
23,82394

57,09149,67059,95046,493

118

229

117,159

96,392

3,537
373

2,347
803

19
49,99856
40,587

–
103

–
437

3,556
50,474

2,403
41,827

–
–
–

–
–
–

96
2,630
–

–
5,600
700

–
–
–

–
–
–

96
2,630
–

–
5,600
700

3,910

3,150

52,743

46,943103

437

56,75650,5301 During the period there were transfers from Level 1 to Level 2 of $60 million for the Company following a reassessment of available pricing information causing the classification to bereconsidered as Level 2. There were no transfers from Level 2 to Level 1 for the Company during the period. Transfers into Level 1 and Level 2 are deemed to have occurred as of the beginning of
the reporting period in which the transfer occurred.
2 Represents securities short sold.

(iv) DETAILS OF FAIR VALUE MEASUREMENTS THAT INCORPORATE UNOBSERVABLE MARKET DATA(a) Composition of Level 3 fair value measurements
The following table presents the composition of financial instruments measured at fair value with significant unobservable inputs (Level 3 fairvalue measurements).
Financial assets
Derivatives

Financial liabilities
Investments backing
policy liabilities

Available-for-sale

Derivatives

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Asset backed securities
Illiquid corporate bonds
Structured credit productsManaged funds (suspended)
Alternative assets
Other derivatives

–
–
58
–
–
48

–
–
137
–
–
63

1
12
–
–
27
–

2
11
–
–
23
–

–
–
–
12
533
–

2
–
–
31
72
–

–
–
(80)
–
–
(25)

–
–
(169)
–
–
(268)

Total

106

200

40

36

545

105

(105)

(437)

Consolidated

Financial assets
Derivatives

Financial liabilities
Investments backing
policy liabilities

Available-for-sale

Derivatives

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Asset backed securities
Illiquid corporate bonds
Structured credit productsManaged funds (suspended)
Alternative assets
Other derivatives

–
–
58
–
–
38

–
–
137
–
–
63

–
–
–
–
22
–

–
9
–
–
20
–

n/a
n/a
n/a
n/a
n/a
n/a

n/a
n/a
n/a
n/a
n/a
n/a

–
–
(80)
–
–
(23)

–
–
(169)
–
–
(268)

Total

96

200

22

29

n/a

n/a

(103)

(437)

The Company

Structured credit products comprise the structured credit intermediation trades that the Group entered into from 2004 to 2007 whereby itsold protection using credit default swaps over certain structures, and mitigated risk by purchasing protection via credit default swaps from
US financial guarantors over the same structures. These trades are valued using complex models with certain inputs relating to the reference
assets and derivative counterparties not being observable in the market. Such unobservable inputs include credit spreads and default
probabilities contributing from 17% to 60% of the valuation. The assets underlying the structured credit products are diverse instruments witha wide range of credit spreads and default probabilities relevant to the valuation.

NOTES TO THE FINANCIAL STATEMENTS

155

NOTES TO THE FINANCIAL STATEMENTS (continued)
32: Fair Value of Financial Assets and Financial Liabilities (continued)
The remaining Level 3 balances include Asset backed securities and Illiquid corporate bonds where the effect on fair value of issuer credit cannot bedirectly or indirectly observed in the market; Managed funds (suspended) comprising of fixed income and mortgage investments in managed funds
that are illiquid and are not currently redeemable; Alternative assets that largely comprise investments in trusts which are illiquid and are not currently
redeemable, as well as various investments in unlisted equity securities for which no active market exists; and Other derivatives which include reverse
mortgage swaps where the mortality rate cannot be observed and long dated oil swaps where market data for the full tenor is unobservable.
(b) Movements in Level 3 fair value measurements
The following table sets out movements in Level 3 fair value measurements. Derivatives are categorised on a portfolio basis and classified aseither financial assets or financial liabilities based on whether the closing balance is an unrealised gain or loss. This could be different to the
opening balance.
Financial assets
Derivatives

Financial liabilities
Investments backing
policy liabilities

Available-for-sale

Derivatives

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Opening balance
New purchases
Disposals (sales)
Cash settlements
Transfers:
Transfers into Level 3 category
Transfers out of Level 3 category
Fair value gain/(loss) recorded in otheroperating income in the income statement1
Fair value gain/(loss) recognised in reservesin equity

200
–
(9)
–

335
–
(79)
–

36
4
(12)
–

31
3
(3)
–

105
447
(34)
–

313
11
(183)
–

(437)
–
–
19

(475)
–
–
57

14
(32)

16
–

8
–

4
–

–
(2)

–
–

(13)
254

(7)
–

(67)

(72)

–

–

29

(36)

72

(12)

–

–

4

1

–

–

–

–

Closing balance

106

200

40

36

545

105

(105)

(437)

Consolidated

Financial assets
Derivatives

Financial liabilities
Investments backing
policy liabilities

Available-for-sale

Derivatives

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Opening balance
New purchases
Disposals (sales)
Cash settlements
Transfers:
Transfers into Level 3 category2
Transfers out of Level 3 category2
Fair value gain/(loss) recorded in otheroperating income in the income statement1
Fair value gain/(loss) recognised in reservesin equity

200
–
(9)
–

335
–
(79)
–

29
4
(11)
–

26
–
(2)
–

(475)
–
–
57

16
–

–
–

4
–

n/a
n/a
n/a
n/a
n/a
n/a
n/a

(437)
–
–
19

6
(31)

n/a
n/a
n/a
n/a
n/a
n/a
n/a

(9)
254

(7)
–

(70)

(72)

1

–

n/a

n/a

70

(12)

–

–

(1)

1

n/a

n/a

–

–

Closing balance

96

200

22

29

n/a

n/a

(103)

(437)

The Company

1 Relating to assets and liabilities held at the end of the period.
2 Transfers out of Level 3 relate principally to interest rate swaptions containing multi-callable features. The trade characteristics of the portfolio are such that inputs significant to the valuation are
now observable. The transfers into Level 3 relate principally to interest rate swaps, cross currency swaps and foreign exchange forwards where activity in the market for those transactions has
reduced causing certain significant inputs to now be deemed unobservable. Transfers into and out of Level 3 are deemed to have occurred as of the beginning of the reporting period in which
the transfer occurred.

(c) Sensitivity to Level 3 data inputs
Where valuation techniques use assumptions due to significant data inputs not being directly observed in the market place (Level 3 inputs),changing these assumptions changes the resultant estimate of fair value. The majority of transactions in this category are ‘back-to-back’ innature where ANZ either acts as a financial intermediary or hedges the market risks. Similarly, the valuation of Investments backing policy
liabilities directly impacts the associated life investment contracts they relate to. In these circumstances, changes in the assumptions generally
have minimal impact on the income statement and net assets of ANZ. An exception to this is the ‘back-to-back’ structured credit intermediation
trades which create significant exposure to credit risk.
Principal inputs used in the determination of fair value of financial instruments included in the structured credit portfolio include counterparty
credit spreads, market-quoted CDS prices, recovery rates, default probabilities, correlation curves and other inputs, some of which may not
be directly observable in the market. The potential effect of changing prevailing unobservable inputs to reasonably possible alternative
assumptions for valuing those financial instruments could result in less than a (+/- ) $10 million impact on profit. The ranges of reasonably
possible alternative assumptions are established by application of professional judgement and analysis of the data available to support
each assumption.

156

ANZ ANNUAL REPORT 2014

32: Fair Value of Financial Assets and Financial Liabilities (continued)(d) Deferred fair value gains and losses
Where the fair value of a financial instrument at initial recognition is determined using unobservable data that is significant to the valuation of
the instrument, the difference between the transaction price and the amount determined based on the valuation technique (day one gain orloss) is not immediately recognised in the income statement. Subsequently, the day one gain or loss is recognised in the income statement overthe life of the transaction on a straight line basis or over the period until all inputs become observable.
The table below summarises the aggregate amount of day-one gains not yet recognised in the income statement and amounts which havebeen subsequently recognised.
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Opening balance
Deferral on new transactions
Amounts recognised in income statement during the period

4
1
(2)

4
1
(1)

2
1
(1)

2
0
0

Closing balance

3

4

2

2

The closing balance of unrecognised gains is predominantly related to derivative financial instruments.
(v) ADDITIONAL INFORMATION FOR FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS(a) Financial assets designated at fair value through profit or loss
The category loans and advances includes certain loans designated at fair value through profit or loss in order to eliminate an accounting
mismatch which would arise if the asset were otherwise carried at amortised cost. This mismatch arises as the derivative financial instruments
which were acquired to mitigate interest rate risk of the loan and advances, are measured at fair value through profit or loss. By designating the
economically hedged loans, the movements in the fair value attributable to changes in interest rate risk will also be recognised in the income
statement in the same periods.
At balance date, the credit exposure of the Group on these assets was $368 million (2013: $136 million) and for the Company was $77 million(2013: $94 million). For the Group $195 million (2013: $66 million) and the Company $77 million (2013: $66 million) was mitigated bycollateral held.
The cumulative change in fair value attributable to change in credit risk was, for the Group, a reduction to the assets of $2 million (2013: reduction
to the assets of $2 million). For the Company the cumulative change to the assets was $nil (2013: $nil). The amount recognised in the income
statement attributable to changes in credit risk for the Group was $nil (2013: $2 million gain) and for the Company $nil (2013: $nil).
The change in fair value of the designated financial assets attributable to changes in credit risk has been calculated by determining the change
in credit rating and credit spread implicit in the loans and advances issued by entities with similar credit characteristics.
(b) Financial liabilities designated at fair value through profit or loss
Parts of Subordinated debt, Debt issuances and Deposits and other borrowings have been designated as financial liabilities at fair value throughprofit or loss in order to eliminate an accounting mismatch which would arise if the liabilities were otherwise carried at amortised cost. Thismismatch arises as the derivatives acquired to mitigate interest rate risk within the financial liabilities are measured at fair value through profit
or loss. Policy liabilities are designated at fair value through profit or loss in accordance with AASB 1038. External unitholder liabilities which are
not included in the table below, represent the external unitholder share of the ‘Investments backing policy liabilities’ which are designated at fairvalue through profit or loss.
The table below compares the carrying amount of financial liabilities carried at full fair value, to the contractual amount payable at maturity
and fair value gains and losses recognised during the period on liabilities carried at full fair value that are attributable to changes in ANZ’s own
credit rating.

Consolidated

Carrying amountAmount by which the consideration payable at maturity
is greater/(less) than the carrying value
Cumulative change in liability value attributableto own credit risk:– opening cumulative increase/(decrease)– increase/(decrease) recognised during the year
– closing cumulative increase/(decrease)

Policy liabilities

Deposits and otherborrowings

Debt issuances

Subordinated debt

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

34,03831,703

5,494

4,240

3,441

5,600

–

700

–

–

–

–

(62)

(158)

–

(5)

–
–
–

–
–
–

–
–
–

–
–
–

(13)
47
34

(60)
47
(13)

12
(12)
–

(4)
16
12

NOTES TO THE FINANCIAL STATEMENTS

157

NOTES TO THE FINANCIAL STATEMENTS (continued)
32: Fair Value of Financial Assets and Financial Liabilities (continued)
The Company

Deposits and otherborrowings

Debt issuances

Subordinated debt

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

96

–

2,630

5,600

–

700

–

–

(66)

(158)

–

(5)

–
–
–

–
–
–

(13)
46
33

(60)
47
(13)

12
(12)
–

(4)
16
12

Carrying amountAmount by which the consideration payable at maturity isgreater/(less) than the carrying value
Cumulative change in liability value attributable to own credit risk:– opening cumulative increase/(decrease)– increase/(decrease) recognised during the year
– closing cumulative increase/(decrease)

For each of Subordinated debt, Debt issuances and Deposits and other borrowings, the change in fair value attributable to changes in credit riskhas been determined as the amount of change in fair value that is not attributable to changes in market conditions that give rise to market risks(benchmark interest rate and foreign exchange rates). This approach is deemed appropriate as the changes in fair value arising from factors otherthan changes in own credit risk or changes in observed (benchmark) interest rates and foreign exchange rates are considered to be insignificant.
(vi) FINANCIAL ASSETS AND FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE
The table below reflects the carrying amounts of financial instruments not measured at fair value on the Group’s balance sheet and where thecarrying amount is not considered a close approximation of fair value. The table also provides comparison of the carrying amount of thesefinancial instruments to the Group’s estimate of their fair value. The categorisation of the fair value into the levels within the fair value hierarchy
is determined in accordance with the methodology set out on page(s) 153 (section ii).
Carrying
amountFair value(total)Categorised into fair value hierarchy

Carrying
amountFair value(total)Using
observable
inputs (Level 2)
2014$mWith significant
non-observable
inputs (Level 3)
2014
$m

2013
$m

2013
$m

2014
$m

2014
$m

Quoted market
price (Level 1)2014$m521,384

521,884–

498,545

23,339483,128

483,652

521,384

521,884–

498,545

23,339483,128

483,652

Financial liabilities
Deposits and other borrowings
Debt issuances
Subordinated debt

504,585
76,655
13,607504,760
77,714
13,764–29,893
10,805504,760
47,821
2,959

–
–
–

462,675
64,776
12,104462,91365,635
12,273

Total

594,847

596,238

40,698555,540–

539,555

540,821

Carrying
amountFair value(total)Carrying
amountFair value(total)Consolidated

Financial assets
Net loans and advances

The Company

Financial assets
Net loans and advances

Categorised into fair value hierarchy
Usingobservable
inputs (Level 2)
2014$mWith significant
non-observable
inputs (Level 3)
2014
$m

2013
$m

2013
$m

2014
$m

2014
$m

Quoted market
price (Level 1)2014$m414,989

415,391–

396,264

19,127

383,079

383,575

414,989

415,391–

396,264

19,127

383,079

383,575

Financial liabilities
Deposits and other borrowings
Debt issuances
Subordinated debt

423,076
61,531
12,870423,22262,41913,036–
18,861
10,072423,222
43,558
2,964

–
–
–

385,449
51,36811,362385,635
52,031
11,562

Total

497,477

498,677

28,933

469,744–448,179

449,228

The following sets out the Group’s basis of establishing fair value of financial instruments not measured at fair value on the balance sheet.
The valuation techniques employed are consistent with those used to calculate fair values of financial instruments carried at fair value.
Certain Net loans and advances, Deposits and other borrowings and Debt issuances have been designated at fair value and are therefore
excluded from the tables above.

158

ANZ ANNUAL REPORT 2014

32: Fair Value of Financial Assets and Financial Liabilities (continued)
Net loans and advances
The fair value has been determined through discounting future cash flows.
For Net loans and advances to banks, the fair value is derived by discounting cash flows using prevailing market rates for lending with similar
credit quality.
For Net loans and advances to customers, the fair value is the present value of future cash flows, discounted using a curve which incorporates
changes in wholesale market rates, the Group’s cost of wholesale funding and the customer margin, as appropriate.
Deposits and other borrowings
For interest bearing fixed maturity deposits and other borrowings and acceptances with quoted market prices, market borrowing rates ofinterest for debt with a similar maturity are used to discount contractual cash flows to derive the fair value. The fair value of a deposit liability
without a specified maturity or at call is deemed to be the amount payable on demand at the reporting date. The fair value is not adjusted forany value expected to be derived from retaining the deposit for a future period of time.
Debt issuances and Subordinated debt
The aggregate fair value of Debt issuances and Subordinated debt is calculated based on quoted market prices or observable inputs whereapplicable. For those debt issuances where quoted market prices were not available, a discounted cash flow model using a yield curve
appropriate for the remaining term to maturity of the debt instrument used. The fair value includes the effects of the appropriate credit spreads
applicable to ANZ for that instrument.

33: Maturity Analysis of Assets and Liabilities
The following is an analysis of asset and liability line items in the balance sheet that combine amounts expected to be realised or due to besettled within one year and after more than one year.1
2014

2013

Consolidated

WithinAfter more
one year than one year$m$m

Available-for-sale assets
Net loans and advances
Investments backing policy liabilities

8,819
124,985
28,36122,098396,767
5,218

30,917521,752
33,5798,747
124,747
25,535

19,530 28,277
358,517 483,264
6,548 32,083

Deposits and other borrowings
Policy liabilities2
Debt issuances
Subordinated debt3

488,862
34,554
15,720–21,217–64,376
13,607510,079
34,55480,096
13,607448,206
32,388
10,222
1,893

18,709 466,915– 32,388
60,154 70,376
10,911 12,804

Total
$m

WithinAfter more
one year than one year
$m
$m

Total
$m

1 Excludes asset and liability line items where the entire amount is considered as “within one year”, “after more than one year” or having no specific maturities.
2 Includes $516 million (2013: $685 million) that relates to life insurance contract liabilities.
3 Includes $1,087 million (2013: $1,065 million) that relates to perpetual notes.

NOTES TO THE FINANCIAL STATEMENTS

159

NOTES TO THE FINANCIAL STATEMENTS (continued)
34: Offsetting
The following tables identify financial assets and liabilities which have been offset in the balance sheet (in accordance with AASB 132 – Financial
Instruments: Presentation (AASB 132)) and those which have not been offset in the balance sheet but are subject to enforceable master netting
agreements (or similar arrangements) with our trading counterparties. The effect of over collaterisation has not been taken into account.
A description of the rights of set-off associated with financial assets and financial liabilities subject to master netting agreements or similar,
including the nature of those rights, are described in note 31 – Financial Risk Management: Collateral Management.
Amount subject to master netting agreement or similar
Related amounts not offset in thestatement of financial position

Total amounts
recognised in thebalance sheet1$m

Amounts not
subject to masternetting agreement
or similar
$m

Total
$m

Financial
instruments$mFinancial collateral(received)/pledged$m

Net amount$m

Derivative assets
Reverse repurchase, securities borrowing
and similar agreements2

56,369(5,236)

51,133(41,871)(5,048)4,214

13,384(5,928)

7,456

(20)

(7,436)–

Total financial assets

69,753(11,164)

58,589(41,891)(12,484)

4,214

Derivative liabilities
Repurchase, securities lending
and similar agreements3(52,925)

4,148(48,777)

41,871

4,586(2,320)(8,641)

8,588

(53)

20

33

–

Total financial liabilities(61,566)

12,736(48,830)

41,891

4,619(2,320)Consolidated 30 September 2014

Amount subject to master netting agreement or similar
Related amounts not offset in thestatement of financial position

Total amounts
recognised in thebalance sheet1$m

Amounts not
subject to masternetting agreement
or similar
$m

Total
$m

Financial
instruments$mFinancial collateral(received)/pledged$m

Net amount$m

Derivative assets
Reverse repurchase, securities borrowing
and similar agreements2

45,878(5,936)39,942(34,311)(3,543)

2,088

8,477

(4,105)

4,372

(172)

(4,200)–Total financial assets

54,355(10,041)

44,314(34,483)(7,743)

2,088

Derivative liabilities
Repurchase, securities lending
and similar agreements3(47,509)

4,947(42,562)

34,311

5,702(2,549)(1,540)

1,085

(455)

172

194

(89)

Total financial liabilities(49,049)

6,032(43,017)

34,483

5,896(2,638)

Consolidated 30 September 2013

1 The Group/Company does not have any arrangements that satisfy the conditions of AASB 132 to offset within the balance sheet.
2 Reverse repurchase agreements are presented in the balance sheet within cash if duration is less than 90 days. If maturity is greater than 90 days they are presented in net loans and advances.
3 Repurchase agreements are presented in the balance sheet within payables and other liabilities.

160

ANZ ANNUAL REPORT 2014

34: Offsetting (continued)
Amount subject to master netting agreement or similar
Related amounts not offset in thestatement of financial position

Total amounts
recognised in thebalance sheet1$m

Amounts not
subject to masternetting agreement
or similar
$m

Total
$m

Financial
instruments$mFinancial collateral(received)/pledged$m

Net amount$m

Derivative assets
Reverse repurchase, securities borrowing
and similar agreements2

52,882(4,230)48,652(40,541)(4,458)

3,653

12,907(5,451)

7,456

(20)

(7,436)–

Total financial assets

65,789(9,681)

56,108(40,561)(11,894)

3,653

Derivative liabilities
Repurchase, securities lending
and similar agreements3(50,474)

3,615(46,859)

40,541

4,247(2,071)(8,473)

8,420

(53)

20

33

–

Total financial liabilities(58,947)

12,035(46,912)40,561

4,280(2,071)The Company 30 September 2014

Amount subject to master netting agreement or similar
Related amounts not offset in thestatement of financial position

Total amounts
recognised in thebalance sheet1$m

Amounts not
subject to masternetting agreement
or similar
$m

Total
$m

Financial
instruments$mFinancial collateral(received)/pledged$m

Net amount$m

Derivative assets
Reverse repurchase, securities borrowing
and similar agreements2

41,011(5,013)35,998(30,845)(3,308)

1,845

8,241

(3,869)

4,372

(172)

(4,200)–Total financial assets

49,252(8,882)40,370(31,017)(7,508)

1,845

Derivative liabilities
Repurchase, securities lending
and similar agreements3(41,827)

3,677(38,150)

30,8455,233(2,072)(1,341)

886

(455)

172

194

(89)

Total financial liabilities(43,168)

4,563(38,605)

31,017

5,427(2,161)The Company 30 September 2013

1 The Group/Company does not have any arrangements that satisfy the conditions of AASB 132 to offset within the balance sheet.
2 Reverse repurchase agreements are presented in the balance sheet within cash if duration is less than 90 days. If maturity is greater than 90 days they are presented in net loans and advances.
3 Repurchase agreements are presented in the balance sheet within payables and other liabilities.

NOTES TO THE FINANCIAL STATEMENTS

161

NOTES TO THE FINANCIAL STATEMENTS (continued)
35: Segment Analysis(i) DESCRIPTION OF SEGMENTS
The Group operates on a divisional structure with Australia,
International and Institutional Banking (IIB), New Zealand andGlobal Wealth being the major operating divisions. The IIB and
Global Wealth divisions are coordinated globally. Global Technology,
Services and Operations (GTSO) and Group Centre provide support
to the operating divisions, including technology, operations, sharedservices, property, risk management, financial management, strategy,
marketing, human resources and corporate affairs. The Group Centre
includes Group Treasury and Shareholder Functions.
The segments and product and services categories as reported below
are consistent with internal reporting provided to the chief operating
decision maker, being the Chief Executive Officer.

The primary sources of external revenue across all divisions areinterest income, fee income and trading income. The Australia and
New Zealand divisions derive revenue from products and services
from retail and commercial banking. IIB derives its revenue from retailand institutional products and services as well as partnerships. Global
Wealth derives revenue from funds management, insurance andprivate wealth.
During 2014, Operations, Technology, Property, and certain
enablement functions supporting the operating divisions (including
Human Resources, Risk, Finance and Legal) were transferred fromthe operating divisions to GTSO and Group Centre. Comparative
information has been restated.

(ii) OPERATING SEGMENTS
Transactions between business units across segments within ANZ are conducted on an arms length basis.

Year ended 30 September 2014 ($m)

Australia

InternationalandInstitutional
Banking

External interest income
External interest expense
Adjustment for intersegment interest

16,069(5,159)(3,865)

7,783(2,965)
(832)

5,251
(2,624)
(465)

307
(442)
302

114
(4,538)
4,861

–
14
(1)

29,524(15,714)–

Net interest income
Other external operating income
Share of associates’ profit

7,045
1,180
3

3,986
2,518
511

2,162
348
1

167
1,577
–

437
(359)
2

13
463
–

13,810
5,727
517

New
Zealand

Global Wealth

GTSO andGroup
CentreOther
items1

Group
Total

Segment revenue

8,228

7,015

2,511

1,744

80

476

20,054

Other external expenses
Adjustments for intersegment expenses(1,770)(1,287)(1,978)(1,237)

(657)
(376)

(627)
(399)

(3,728)3,299––(8,760)–Operating expenses(3,057)(3,215)(1,033)(1,026)(429)–(8,760)

Profit before credit impairment and income tax
Credit impairment (charge)/release

5,171
(819)

3,800
(215)

1,478
8

718
2

(349)
35

476
3

11,294(986)

Segment result before tax

4,352

3,585

1,486

720

(314)

479

10,308

Income tax expense
Non-controlling interests(1,304)
–

(882)
(12)

(416)
–

(195)
–

97
–

(325)
–

(3,025)(12)

Profit after income tax attributed to shareholdersof the company

3,048

2,691

1,070

525

(217)

154

7,271

Non-cash expenses
Depreciation and amortisation
Equity-settled share based payment expenses
Credit impairment (charge)/release

(127)
(16)
(819)

(180)
(123)
(215)

(17)
(20)
8

(121)
(8)
2

(391)
(48)
35

(3)
–
3

(839)
(215)
(986)

–
11
290,726
173,105

1,131
4,485
342,880
300,6201,766
389,44373,0781,614
650,46555,444–77(1,262)
120,587

–
–
(160)
(26)

4,511
4,582
772,092
722,808

Financial position
Goodwill
Investments in associates
Total external assets
Total external liabilities

1 In evaluating the performance of the operating segments, certain items are removed from the operating segment result where they are not considered integral to the ongoing performanceof the segment and are evaluated separately. These items are set out in part (iii) of this note (refer pages 206 to 207 for further analysis).

162

ANZ ANNUAL REPORT 2014

35: Segment Analysis (continued)
Year ended 30 September 2013 ($m)

Australia

InternationalandInstitutional
Banking

External interest income
External interest expense
Adjustment for intersegment interest

16,424(5,717)(4,037)

7,384(2,670)(1,045)

4,452(2,137)
(452)

317
(406)
228

50
(4,925)
5,306

–
(14)
–

28,627(15,869)–

Net interest income
Other external operating income
Share of associates’ profit

6,670
1,187
3

3,669
2,434
477

1,863
346
1

139
1,387
–

431
(217)
1

(14)
145
–

12,758
5,282
482

New
Zealand

Global
WealthGTSO andGroup
CentreOther
items1

Group
Total

Segment revenue

7,860

6,580

2,210

1,526

215

131

18,522Other external expenses
Adjustments for intersegment expenses(1,646)(1,321)(1,786)(1,199)

(619)
(341)

(573)
(382)

(3,633)
3,243––(8,257)–

Operating expenses(2,967)(2,985)

(960)

(955)

(390)

–

(8,257)

Profit before credit impairment and income tax
Credit impairment (charge)/release

4,893
(820)

3,595
(317)

1,250
(37)

571
(4)

(175)
(19)

131
9

10,265(1,188)Segment result before tax

4,073

3,278

1,213

567

(194)

140

9,077

Income tax expense
Non-controlling interests(1,215)
–

(836)
(10)

(336)
–

(96)
–

48
–

(322)
–

(2,757)(10)

Profit after income tax attributed to shareholdersof the company

2,858

2,432

877

471

(146)

(182)

6,310

Non-cash expenses
Depreciation and amortisation
Equity-settled share based payment expenses
Credit impairment (charge)/release

(106)
(19)
(820)

(164)
(109)
(317)

(38)
(18)
(37)

(125)
(13)
(4)

(347)
(41)
(19)

–
–
9

(780)
(200)
(1,188)–9274,325
165,768

1,122
4,017
296,122
254,554

1,763
3
84,95764,4791,614
949,01051,253–85(1,227)
121,409

–
–
(192)
(71)

4,499
4,123
702,995
657,392

Financial position
Goodwill
Investments in associates
Total external assets
Total external liabilities

1 In evaluating the performance of the operating segments, certain items are removed from the operating segment result, where they are not considered integral to the ongoing performanceof the segment and are evaluated separately. These items are set out in part (iii) of this note (refer pages 206 to 207 for further analysis).

(iii) OTHER ITEMSThe table below sets out the profit after tax impact of other items.
Profit after tax
Item

Related segment

2014
$m

Treasury shares adjustment
Revaluation of policy liabilities
Economic hedging
Revenue and net investment hedges
Structured credit intermediation trades

Global Wealth
Global WealthInternational and Institutional Banking
GTSO and Group Centre
International and Institutional Banking

(24)
26
72
101
(21)

(84)
(46)
57
(159)
50

154

(182)

Total

NOTES TO THE FINANCIAL STATEMENTS

2013
$m

163

NOTES TO THE FINANCIAL STATEMENTS (continued)
35: Segment Analysis (continued)(iv) EXTERNAL SEGMENT REVENUE BY PRODUCTS AND SERVICES
The table below sets out revenue from external customers for groups of similar products and services. No single customer amounts to greaterthan 10% of the Group’s revenue.
Revenue1

RetailCommercial
WealthInstitutional
Partnerships
Other

2014
$m

2013
$m

7,154
4,390
1,744
5,616
476
674

6,595
4,207
1,526
5,316
427
451

20,054

18,522(v) GEOGRAPHICAL INFORMATION
The following table sets out revenue and non-current assets based on the geographical locations in which the Group operates.
Australia

APEA

New Zealand

Total

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Total external revenue1

12,926

12,510

3,650

3,193

3,478

2,819

20,054

18,522

Non-current assets2

308,768

284,963

42,32633,55972,98966,073424,083

384,595

Consolidated

1 Includes net interest income.
2 Non-current assets referred to are assets that are expected to be recovered more than 12 months after balance date. They do not include financial instruments, deferred tax assets,
post‑employment benefits assets or rights under insurance contracts.

164

ANZ ANNUAL REPORT 2014

36: Notes to the Cash Flow Statementa) Reconciliation of net profit after income tax to net cash provided by/(used in) operating activities
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Operating profit after income tax attributable to shareholders of the Company

7,271

6,310

6,272

5,387

Adjustment to reconcile operating profit after income tax to net cash
provided by/(used in) operating activities
Provision for credit impairment
Depreciation and amortisation(Profit)/loss on sale of businesses(Profit)/loss on sale of premises and equipment
Impairment on available-for-sale assets transferred to profit and loss
Net derivatives/foreign exchange adjustment
Equity settled share-based payments expense1
Other non-cash movements

986
839
(146)
40
–
(1,257)
27
(501)

1,188
780
(20)
2
3
5,814
119
(340)

974
597
(136)
14
–
80
(5)
(148)

1,132
532
(11)
(1)
3
5,620
90
(4)

Net (increase)/decrease in operating assets
Collateral paid
Trading securities
Loans and advances
Investments backing policy liabilities
Net intra-group loans and advancesInterest receivable
Accrued income
Net tax assets

1,271(8,600)(35,154)(1,802)
–
(162)
9
(182)

348
768
(30,137)(3,402)
–
133
(25)
246

957
(7,131)(29,408)
–
1,856
(108)
28
(644)

237
(736)
(24,119)–(3,734)
197
(59)
(273)

Net (decrease)/increase in operating liabilities
Deposits and other borrowings
Settlement balances owed by ANZ
Collateral received
Life insurance contract policy liabilities
Payables and other liabilities
Interest payable
Accrued expenses
Provisions including employee entitlements

36,592
1,358
1,435
2,147
910
828
(136)
(130)

27,541
3,279
1,391
3,669
(1,025)
(464)
(17)
6

31,798
668
1,103
–
1,417
828
(124)
(131)

26,036
3,114
1,205
–
(1,475)
(464)
(74)
81

Total adjustments(1,628)

9,857

2,485

7,297

Net cash provided by/(used in) operating activities

5,643

16,167

8,757

12,684

1 The equity settled share-based payments expense is net of on-market share purchases of $188 million (2013: $81 million) in the Group and the Company used to satisfy the obligation.

NOTES TO THE FINANCIAL STATEMENTS

165

NOTES TO THE FINANCIAL STATEMENTS (continued)
36: Notes to the Cash Flow Statement (continued)b) Reconciliation of cash and cash equivalents
Cash and cash equivalents at the end of the period as shown in the Cash Flow Statement is reflected in the related items in the Balance Sheetas follows:
Consolidated

The Company

2014
$m

20131
$m

2014
$m

20131
$m

Cash
Settlement balances owed to ANZ

32,55915,67025,27015,84130,655
14,393

22,79813,481

Cash and cash equivalents in the Cash Flow Statement

48,22941,11145,04836,2791 Comparative amounts have changed. Refer to note 48 for details.

c) Acquisitions and disposals
Consolidated

Cash (outflows) from acquisitions and investments (net of cash acquired)
Purchases of controlled entities and businesses
Investments in controlled entities
Purchases of interest in associates
Cash inflows from disposals (net of cash disposed)
Disposals of controlled entities
Disposals of associates

The Company

2014
$m

2013
$m

2014
$m

2013
$m

–
–
–

(1)
–
(1)

–
(21)
–

–
(483)
(1)

–

(2)

(21)

(484)

148
103

56
25

156
93

–
25

251

81

249

25

851
81

843
71

851
81

843
71

932

914

932

914

d) Non-cash financing activities
Dividends satisfied by share issue
Dividends satisfied by bonus share issue

166

ANZ ANNUAL REPORT 2014

37: Controlled Entities
Ultimate parent of the Group
Australia and New Zealand Banking Group Limited

All controlled entities are 100% owned unless otherwise noted.
The material controlled entities of the Group are:
ANZ Bank (Lao) Limited1
ANZ Bank (Taiwan) Limited1
ANZ Bank (Vietnam) Limited1
ANZ Capel Court Limited
ANZ Capital Hedging Pty Ltd
ANZ Commodity Trading Pty Ltd
ANZcover Insurance Pty Ltd
ANZ Funds Pty Ltd
ANZ Bank (Europe) Limited1
ANZ Bank (Kiribati) Limited1,2
ANZ Bank (Samoa) Limited1
ANZcover Insurance Pte Ltd1ANZ Holdings (New Zealand) Limited1
		 ANZ Bank New Zealand Limited1
			 ANZ Investment Services (New Zealand) Limited1
			 ANZ New Zealand (Int’l) Limited1
			ANZNZ Covered Bond Trust1
			 ANZ Wealth New Zealand Limited1				 ANZ New Zealand Investments Ltd
				 OnePath Insurance Holdings (NZ) Limited1					OnePath Life (NZ) Limited1
			Arawata Assets Limited1
			UDC Finance Limited1
ANZ International (Hong Kong) Limited1
		 ANZ Asia Limited1
		 ANZ Bank (Vanuatu) Limited3
ANZ International Private Limited1
		 ANZ Singapore Limited1
ANZ Royal Bank (Cambodia) Limited1,2
Votraint No. 1103 Pty Ltd
ANZ Lenders Mortgage Insurance Pty Ltd
ANZ Residential Covered Bond Trust
ANZ Wealth Australia Limited
OnePath Custodians Pty Limited
OnePath Funds Management Limited
OnePath General Insurance Pty Limited
OnePath Life Australia Holdings Pty Limited
		 OnePath Life Limited
Australia and New Zealand Banking Group (PNG) Limited1
Australia and New Zealand Bank (China) Company Limited1
Chongqing Liangping ANZ Rural Bank Company Limited1
Citizens Bancorp
ANZ Guam Inc.4
ANZ Finance Guam, Inc.4
Esanda Finance Corporation Limited
E*TRADE Australia Limited
E*TRADE Australia Securities Limited
PT Bank ANZ Indonesia1,2

Incorporated in

Nature of business

Australia

Banking

Laos
TaiwanVietnam
Australia
Australia
Australia
Australia
Australia
United Kingdom
Kiribati
Samoa
Singapore
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New Zealand
New ZealandHong Kong
Hong Kong
VanuatuSingapore
Singapore
Cambodia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Papua New Guinea
China
China
Guam
Guam
Guam
Australia
Australia
Australia
Indonesia

Banking
Banking
Banking
Securitisation Manager
Hedging
Finance
Captive-Insurance
Holding Company
Banking
Banking
Banking
Captive-Insurance
Holding Company
Banking
Funds Management
FinanceFinance
Holding Company
Funds Management
Holding Company
Insurance
Property Holding Company
Finance
Holding Company
Banking
Banking
Holding Company
Merchant Banking
Banking
Investment
Mortgage Insurance
Finance
Holding Company
TrusteeFunds Management
Insurance
Holding Company
Insurance
Banking
Banking
Banking
Holding Company
Banking
Finance
General FinanceHolding Company
Online Stockbroking
Banking

1 Audited by overseas KPMG firms.
2 Non-controlling interests hold ordinary shares or units in the controlled entities listed above as follows: ANZ Bank (Kiribati) Limited – 150,000 $1 ordinary shares (25%) (2013: 150,000 $1 ordinary
shares (25%)); PT Bank ANZ Indonesia – 16,500 IDR 1 million shares (1%) (2013: 16,500 IDR 1 million shares (1%)); ANZ Royal Bank (Cambodia) Limited – 319,500 USD100 ordinary shares (45%)(2013: 319,500 USD100 ordinary shares (45%)).
3 Audited by Hawkes Law.
4 Audited by Deloitte Guam.

NOTES TO THE FINANCIAL STATEMENTS

167

NOTES TO THE FINANCIAL STATEMENTS (continued)
38: Associates
Significant associates of the Group are as follows:
Carrying amount
2014
$m

2013
$m

AMMB Holdings Berhad1
PT Bank Pan Indonesia2
Shanghai Rural Commercial Bank3
Bank of Tianjin4
Other individually immaterial associates (in aggregate)

1,465
795
1,443
710
169

1,282
692
1,261
601
287

Total carrying value of associates

4,582

4,123

1 AMMB Holdings Berhad (AmBank Group) provides a full suite of banking and insurance products and services in Malaysia and is listed on the Bursa Malaysia. This investment relates directly to theGroup’s Asia Pacific growth strategy.
2 PT Bank Pan Indonesia is a consumer and business bank in Indonesia and is listed on the Jakarta stock exchange. This investment relates directly to the Group’s Asia Pacific growth strategy.
3 Shanghai Rural Commercial Bank is a rural commercial bank in China. This investment relates directly to the Group’s Asia Pacific growth strategy.
4 Bank of Tianjin operates as a commercial bank in China offering products such as deposit accounts and loans. This investment relates directly to the Group’s Asia Pacific growth strategy.
Significant influence is established via representation on the Board of Directors.

a) Financial information on material associates
Set out below is the summarised financial information of each associate that is material to the Group. The summarised financial information
is based on the associates’ IFRS financial information.
AMMB Holdings
BerhadPT Bank Pan
Indonesia

Shanghai Rural
Commercial Bank

Bank of Tianjin

Malaysia

Indonesia

Peoples’ Republicof China

Peoples’ Republicof China

Principal place of business and country of incorporation
Method of measurement in the Group’s balance sheet

Equity method

Equity method

Equity method

Equity method

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

3,356

2,671

688

739

2,331

1,709

1,637

1,269

670
(14)
656

590
(7)
583

238
6
244

226
(6)
220

731
(78)
653

699
102
801

619
(62)
557

526
(2)
524

20

21

20

8

18

(11)

3

–

636

562

224

212

635

812

554

524

Summarised financial position
Total assets1
Total liabilities1

45,09038,591

43,981
38,22016,011
13,776

14,367
12,45785,056
77,63471,75865,30585,68380,62770,99867,572

Total Net assets1
Less: Non–controlling interests of associate

6,499
338

5,761
371

2,235
186

1,909
125

7,422
208

6,453
151

5,056
40

3,426
11

Net assets attributable to owners of associate

6,161

5,390

2,049

1,784

7,214

6,302

5,016

3,416

Reconciliation to carrying amount of Group's interest in associate
Proportion of ownership interest heldby the Group
24%
24%
Carrying amount at the beginning of the year
1,282
1,143
Group's share of total comprehensive income
151
134
Dividends received from associate
(59)
(50)
Group's share of other reserve movements ofassociate and FCTR adjustments
91
55

39%
692
87
–

39%
668
83
–

20%
1,261
127
(24)

20%
959
162
(23)

14%3
601
86
(19)

18%
448
93
(17)

16

(59)

79

163

42

78

Carrying amount at the end of the year

1,465

1,282

795

692

1,443

1,261

710

601

Fair Value of Group's investment in associate2

1,720

1,753

855

542

n/a

n/a

n/a

n/a

Summarised results
Revenue
Profit/(loss)
Other comprehensive income/(loss)
Total comprehensive income
Less: Total comprehensive income attributable
to non–controlling interests
Total comprehensive income attributableto owners of associate

1 Includes fair value adjustments (including goodwill) made by the Group at the time of acquisition and adjustments for any differences in accounting policies.
2 Applicable to those investments in associates where there are published price quotations. Fair Value is based on a price per share and does not include any adjustments for holding size.
3 The Group did not participate in a rights issue in 2014 and as a result the Group’s interest was reduced to 14%.

168

ANZ ANNUAL REPORT 2014

38: Associates (continued)b) Other associates
The following table summarises, in aggregate, the Group’s interest in associates that are considered individually immaterial for separate disclosure.
2014
$m

2013
$m

Group's share of profit/(loss)
Group's share of other comprehensive income

39
2

29
–

Group's share of total comprehensive income

41

29

Carrying amount of Group's interest in associate that are individually immaterial

169

287

39: Structured Entities
A structured entity (‘SE’) is an entity that has been designed so thatvoting or similar rights are not the dominant factor in deciding
who controls the entity, such as when any voting rights relate toadministrative tasks only and the relevant activities are directed bymeans of contractual arrangements. A structured entity often has
some or all of the following features or attributes:}} restricted activities;}} a narrow and well-defined objective;}} insufficient equity to permit the SE to finance its activities without
subordinated financial support; and/or}} financing in the form of multiple contractually linked instruments
to investors that create concentrations of credit or otherrisks (tranches).
SEs are consolidated when control exists in accordance with theaccounting policy disclosed in note 1(A)(vii). In other cases theGroup may have an interest in or sponsor a SE but not consolidate
it. This note provides further details on both consolidated andunconsolidated SEs.
The Group’s involvement with SEs is mainly through securitisation,
covered bond issuances, structured finance arrangements and funds
management activities. SEs may be established either by the Group or
by a third party.
Securitisation
The Group uses SEs to securitise customer loans and advances that it
has originated in order to diversify its sources of funding for liquidity
management. Such securitisation transactions involve transfers to aninternal securitisation (bankruptcy remote) vehicle created for the
purpose of structuring assets that are eligible for repurchase underagreements with the applicable central bank (i.e. Repo eligible).
The internal securitisation SEs are consolidated (refer note 40 for
further details).
The Group also establishes SEs on behalf of its customers to securitise
their loans or receivables. The Group may manage these securitisation
vehicles and/or provide liquidity or other support. Additionally, theGroup may acquire interests in securitisation vehicles set up by third
parties through holding securities issued by such entities. While themajority are unconsolidated, in limited circumstances the Group
consolidates SEs used in securitisation when control exists.
Covered bond issuances
Certain loans and advances have been assigned to bankruptcy
remote SEs to provide security for issuances of debt securities by theGroup. The Group retains control of the SEs and accordingly they are
consolidated (refer note 40 for further details).

Structured finance arrangements
The Group is involved with SEs established in connection with structured
lending transactions to facilitate debt syndication and/or to ring-fencecollateral assets. The Group is also involved with SEs established to own
assets that are leased to customers in structured leasing transactions.
Sometimes, the Group may also manage the SE, hold minor amounts ofcapital or provide risk management products (derivatives). The abilityof the Group to participate in decisions about the relevant activities ofthese SEs varies. In most instances the Group does not control these SEs.
Further, the Group’s involvement typically does not establish more than apassive interest in decisions about the relevant activities and accordingly
is not considered disclosable as discussed in (b) below.
Funds management activities
The Group’s Global Wealth division conducts investment
management and other fiduciary activities as responsible entity,
trustee, custodian or manager for investment funds and trusts,
including superannuation funds and wholesale and retail trusts(collectively ‘Investment Funds’). The Investment Funds are financed
through the issue of puttable units to investors and are consideredby the Group to be SEs. The Group’s exposure to Investment Funds
includes holding units and receiving fees for services. Where theGroup invests in Investment Funds on behalf of policyholders they
are consolidated when control is deemed to exist.
(a) Financial or other support provided to consolidated
structured entities
Pursuant to contractual arrangements, the Group provides financial
support to consolidated SEs as outlined below (these represent
intra‑group transactions which are eliminated on consolidation):}} Securitisation and covered bond issuances:
The Group provides lending facilities, derivatives and commitments
to these SEs and/or holds debt instruments that they have issued.
Refer to note 40 for further details in relation to the Group’s internal
securitisation programmes and covered bond issuances.
}} Structured finance arrangements:
The assets held by these SEs are normally pledged as collateral for
finance provided. Certain consolidated SEs are financed entirely by
the Group while others are financed by syndicated loan facilities inwhich the Group is a participant. The financing provided by the Group
includes lending facilities where the Group’s exposure is limited to theamount of the loan and any undrawn amount. Additionally the Grouphas provided Letters of Support to these consolidated SEs confirmingthat the Group will not demand repayment of the financing provided
for the ensuing 12 month period.
The Group did not provide any non-contractual support to consolidated
SEs during the year.
Other than as disclosed above the Group does not have any current
intention of providing financial or other support.
NOTES TO THE FINANCIAL STATEMENTS

169

NOTES TO THE FINANCIAL STATEMENTS (continued)
39: Structured Entities (continued)(b) Group’s interest in unconsolidated structured entities
An ‘interest’ in an unconsolidated SE is any form of contractual or
non-contractual involvement which exposes the Group to variabilityof returns from the performance of that entity. Such interests include,
but are not limited to, holdings of debt or equity securities, derivatives
that pass-on risks specific to the performance of the structured entity,
lending, loan commitments, financial guarantees and fees from funds
management activities.
For the purpose of disclosing interests in unconsolidated SEs:}} no disclosure has been made where the Group’s involvement
does not establish more than a passive interest, for example,
when the Group’s involvement constitutes a typical customer-

supplier relationship. On this basis, exposures to unconsolidated
SEs that arise from lending, trading and investing activities are notconsidered disclosable interests unless the design of the structured
entity allows the Group to participate in decisions about therelevant activities (i.e. the activities that significantly affect returns).
}} ‘interests’ do not include derivatives intended to expose the Groupto market-risk (rather than performance risk specific to the SE) or
derivatives where the Group creates rather than absorbs variabilityof the unconsolidated SE (e.g. purchase of credit protection under acredit default swap).
The following table sets out the Group’s interests in unconsolidated
SEs together with the maximum exposure to loss that could arise
from such interests.

Interest in unconsolidated structured entities
Securitisation$m

Structured
finance$m

Investment funds
$m

Total
$m

Available-for-sale assets
Investment backing policy liabilities
Loans and advances

3,603
–
4,958

–
–
39

–
227
–

3,603
227
4,997

Total on-balance sheet

8,561

39

227

8,827

Off-balance sheet interests
Commitments (facilities undrawn)

3,520

–

–

3,520

Total off-balance sheet

3,520

–

–

3,520

Maximum exposure to loss

12,08139

227

12,347

Consolidated at 30 September 2014

In addition to the interests above, the Group earned funds management
fees from unconsolidated SEs of $544 million during the year.
The Group’s maximum exposure to loss represents the maximum
possible amount of loss that the Group could incur as a result of its
involvement with unconsolidated SEs, regardless of the probabilityof occurrence, if loss events were to take place. This does not in any
way represent the actual losses expected to be incurred. Instead, themaximum exposure to loss is contingent in nature and may arise for
instance upon the bankruptcy of the securities’ issuer or debtors or if
liquidity facilities or guarantees were to be called upon. Furthermore,
the maximum exposure to loss is stated gross of the effects ofhedging and collateral arrangements entered into to mitigate ANZ’s
exposure to loss.
For each type of interest, maximum exposure to credit loss has been
determined as follows:}} available-for-sale assets and investments backing policy liabilities –carrying amount; and}} loans and advances – carrying amount plus undrawn amount of
any commitments.
Information about the size of the unconsolidated SEs that the Groupis involved with is as follows:}} Securitisation and structured finance: Size is indicated by total
assets which vary by SE with a maximum value of approximately$1.7 billion; and}} Investment funds: Size is indicated by Funds Under Management
which vary by SE with a maximum value of approximately$33 billion.
The Group did not provide any non-contractual support tounconsolidated SEs during the year.
The Group does not have any current intention of providing financial
or other support.

170(c) Sponsored unconsolidated structured entities
The Group also sponsors unconsolidated SEs in which it had no
disclosable interest at 30 September 2014.
For the purposes of this disclosure, the Group considers itself the‘sponsor’ of an unconsolidated SE where it is the primary party
involved in the design and establishment of that SE and:}} where the Group is the major user of that SE; or}} the Group’s name appears in the name of that SE or on its
products; or}} the Group provides implicit or explicit guarantees of that
entity’s performance.
The Group has sponsored the ANZ PIE Fund in New Zealand whichinvests only in deposits with ANZ Bank New Zealand Limited. The
Group does not provide any implicit or explicit guarantees of thecapital value or performance of investments in the ANZ PIE Fund.
There was no income received from nor assets transferred to thisentity during the year.

ANZ ANNUAL REPORT 2014

40: Transfers of Financial Assets
The Group enters into transactions in the normal course of businessby which it transfers financial assets directly to third parties or to SEs.
These transfers may give rise to the full or partial derecognition of
those financial assets.
Group-originated financial assets that do not qualify for
derecognition typically relate to repurchase agreements and loansthat have been transferred under arrangements by which the Groupretains a continuing involvement in the transferred assets. Continuing
involvement may entail retaining the rights to future cash flows
arising from the assets after investors have received their contractual
terms, providing subordinated interests, liquidity support, continuing
to service the underlying asset and entering into derivativetransactions with the SEs. In such instances, the Group continues tobe exposed to risks associated with these transactions.
SECURITISATIONSNet loans and advances include residential mortgages securitised
under the Group’s securitisation programs which are assigned tobankruptcy remote SEs to provide security for obligations payable
on the notes issued by the SEs. This includes mortgages that areheld for potential repurchase agreements (REPOs) with central
banks. The noteholders have full recourse to the pool of residential
mortgages which have been securitised. The Company cannot
otherwise pledge or dispose of the transferred assets.
In some instances the Company is the holder of the securitised notes
and therefore retains the credit risk associated with the securitised
mortgages. In addition, the Company is entitled to any residual
income of the SEs and, where the SEs include interest rate derivatives
that have not been externalised, the interest rate risk is held in the
Company. The Company is therefore deemed to have retained the
majority of the risks and rewards of the residential mortgages andas such continues to recognise the mortgages as financial assets.
The obligations to repay this amount to the SE are recognised as afinancial liability of the Company. As the Group is exposed to variable
returns from its involvement with the SEs and has the ability to affectthose returns through its power over the SE’s activities, they are
consolidated by the Group.
COVERED BONDS
The Group operates various global covered bond programs to raisefunding in the primary markets. Net loans and advances include
residential mortgages assigned to bankruptcy remote SEs associatedwith these covered bond programs to provide security for the
obligations payable on the covered bonds issued by the Group.

The covered bond holders have dual recourse to the issuer and thecover pool of assets. The issuer cannot otherwise pledge or disposeof the transferred assets, however, subject to the documents, it
may repurchase and substitute assets as long as the required coveris maintained.
The Company, as an issuer of covered bonds, is required to maintainthe cover pool at a level sufficient to cover the bond obligations.
Therefore, the majority of the credit risk associated with the underlying
mortgages within the cover pool is retained by the Company. In
addition, the Company is entitled to any residual income of thecovered bond SE and where the SE includes interest rate and foreign
currency derivatives that have not been externalised, the interest
rate and foreign currency risk are held in the Company. The Company
is therefore deemed to have retained the majority of the risks andrewards of the residential mortgages and as such continues torecognise the mortgages as financial assets. The obligation to repay thisamount to the SE is recognised as a financial liability of the Company.
As the Group is exposed to variable returns from its involvement with
the SE and has the ability to affect those returns through its power over
the SE’s activities, it is consolidated by the Group. The external coveredbonds issued are included within debt issuances.
REPURCHASE AGREEMENTS
Securities sold subject to repurchase agreements are considered
to be transferred assets that do not qualify for derecognition whensubstantially all the risks and rewards of ownership remain with theGroup. An associated liability is recognised for the consideration
received from the counterparty.
STRUCTURED FINANCE ARRANGEMENTS
The Company arranges funding for certain customer transactions
through structured leasing arrangements. At times, other financial
institutions participate in the funding of these arrangements.
This participation involves a proportionate transfer of the rights to thelease receivable. The participating banks have recourse to the leased
assets. Circumstances may arise whereby the Company continues tobe exposed to some of the risks of the transferred lease receivablethrough a derivative or other continuing involvement. When thisoccurs, the lease receivable does not get derecognised and theCompany will instead recognise an associated liability representing
its obligations to the participating financial institutions.
The table on the next page sets out the balance of assets transferredthat do not qualify for derecognition, along with the associatedliabilities.

NOTES TO THE FINANCIAL STATEMENTS

171

NOTES TO THE FINANCIAL STATEMENTS (continued)
40: Transfers of Financial Assets (continued)
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Securitisations1,2
Current carrying amount of assets transferred
Carrying amount of associated liabilities

–
–

–
–

67,974
67,974

41,71841,718Covered bonds1,3
Current carrying amount of assets transferred
Carrying amount of associated liabilities3

–
–

–
–

20,73820,73816,55816,558

Repurchase agreements
Current carrying amount of assets transferred
Carrying amount of associated liabilities

8,736
8,641

1,547
1,540

8,568
8,473

1,347
1,341

Structured Finance Arrangements
Current carrying amount of assets transferred
Carrying amount of associated liabilities

169
158

164
162

31
31

32
32

1 The consolidated balances are nil as the Company balances relate to transfers to internal structured entities. The total covered bonds issued by the Group to external investors at
30 September 2014 was $20,561 million (2013: $17,639 million), secured by $27,241 million (2013: $21,770 million) of specified residential mortgages.
2 The securitisation noteholders have recourse only to the pool of residential mortgages which have been securitised. The carrying value of securitised assets and the associated liabilities
approximate their fair value.
3 The associated liability represents the Company’s liability to the covered bond SE. Covered bonds issued by the Company to external investors at 30 September 2014 were $16,969 million(2013: $14,146 million).

41: Fiduciary Activities
Predominantly through the Global Wealth segment, the Group provides fiduciary services to third parties including custody, nominee, trustee,administration and investment management services. This involves the Group holding assets on behalf of third parties and making decisions
regarding the purchase and sale of financial instruments. In circumstances where ANZ is not the beneficial owner or does not control the assets,
they are not recognised in these financial statements.

42: Commitments
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Property capital expenditure
Contracts for outstanding capital expenditure

88

77

68

54

Total capital expenditure commitments for property

88

77

68

54

Lease rentals
Land and buildings
Furniture and equipment

2,163
216

1,633
201

2,345
168

1,918
185

Total lease rental commitments1

2,379

1,834

2,513

2,103

Due within one year
Due later than one year but not later than five years
Due later than five years

475
1,130
774

423
945
466

413
1,103
997

375
981
747

Total lease rental commitments1

2,379

1,834

2,513

2,103

1 Total future minimum sublease payments expected to be received under non-cancellable subleases at 30 September is $90 million (2013: $66 million) for the Group and $78 million(2013: $53 million) for the Company. During the year, sublease payments received amounted to $19 million (2013: $17 million) for the Group and $16 million (2013: $14 million) for theCompany and were netted against rent expense.

172

ANZ ANNUAL REPORT 2014

43: Credit Related Commitments, Guarantees, Contingent Liabilities and Contingent Assets
CREDIT RELATED COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIESCredit related commitments – facilities provided

Consolidated

The Company

Contract
amount2014$m

Contract
amount2013$m

Contract
amount2014$m

Contract
amount2013$m

Undrawn facilities

193,984

170,670

153,985

134,622

Australia
New ZealandOverseas markets

97,781
20,87075,33385,091
18,754
66,825

97,773–56,21285,081–49,541

Total

193,984

170,670

153,985

134,622

Guarantees and contingent liabilities
Details of the estimated maximum amount of guarantees and contingent liabilities that may become payable are disclosed on the following
pages. These guarantees and contingent liabilities relate to transactions that the Group has entered into as principal.
Documentary letters of credit involve the issue of letters of credit guaranteeing payment in favour of an exporter secured against an underlying
shipment of goods or backed by a confirmatory letter of credit from another bank.
Performance related contingencies are liabilities that oblige the Group to make payments to a third party should the customer fail to fulfil the
non-monetary terms of the contract.
To reflect the risk associated with these transactions, they are subjected to the same credit origination, portfolio management and collateralrequirements as customers that apply for loans. The contract amount represents the maximum potential amount that could be lost if thecounterparty fails to meet its financial obligations. As the facilities may expire without being drawn upon, the notional amounts do notnecessarily reflect future cash requirements.
Consolidated

The Company

Contract
amount2014$m

Contract
amount2013$m

Contract
amount2014$m

Contract
amount2013$mFinancial guarantees
Standby letters of credit
Documentary letter of credit
Performance related contingencies
Other

8,202
5,181
3,300
22,840
552

8,223
4,437
3,197
19,960
715

6,699
4,484
2,533
20,774
426

6,713
3,873
2,312
18,242709

Total

40,07536,532

34,916

31,849Australia
New Zealand
Asia Pacific, Europe & America

17,686
1,790
20,59916,983
1,645
17,904

17,686–
17,23016,983–
14,866

Total

40,07536,532

34,916

31,849OTHER CONTINGENT LIABILITIESThe Group also had contingent liabilities as at 30 September 2014 inrespect of the matters outlined below. Where relevant, expert legal
advice has been obtained and, in the light of such advice, provisions
and/or disclosures as deemed appropriate have been made. In someinstances we have not disclosed the estimated financial impact of
the individual items either because it is not practicable to do so or
because such disclosure may prejudice the interests of the Group.
i) Bank fees litigation
Litigation funder Bentham IMF Limited commenced a class action
against ANZ in 2010, followed by a second similar class action in
March 2013. Together the class actions are claimed to be on behalf ofmore than 40,000 ANZ customers.
On 5 February 2014, the Federal Court delivered reasons for judgmentin the second class action. The first class action is in abeyance.
The customers currently involved in these class actions are only partof ANZ’s customer base for credit cards and transaction accounts.
The applicants contended that the relevant exception fees were
unenforceable penalties (at law and in equity) and that various of thefees were also unenforceable under statutory provisions governing

unconscionable conduct, unfair contract terms and unjust transactions.
On the penalties claims, the Court found in ANZ’s favour in relation
to all but one of the fee types that were in issue in the case, namely
honour fees (retail and business), dishonour fees (business), overlimit
and non‑payment fees. The Court found against ANZ in respect of latepayment fees on the basis that they were unenforceable penalties. In
respect of the claims of unconscionable conduct, unfair contract terms
and unjust transactions, the Court found in ANZ’s favour. Both ANZ andthe applicants appealed the Court’s decision. The appeal hearing washeld in August 2014. The appeal court is yet to give a decision. Given thecomplexity of the issues involved, the potential for the parties to seek
further appeals and the possible need for certain issues to be remitted forfurther consideration by the court below, the ultimate implications of theappeal court’s decision (when made) may not be known for some time.
In August 2014, litigation funder Bentham IMF Limited commenced
a separate class action against ANZ for late payment fees charged to
ANZ customers in respect of commercial credit cards and other ANZ
products (at this stage not specified). The action is expressed to apply
to all relevant customers, rather than being limited to those who havesigned up with Bentham IMF Limited. The action is at an early stage
and has been put on hold while the appeal court decision in theearlier class action is outstanding.
NOTES TO THE FINANCIAL STATEMENTS173

NOTES TO THE FINANCIAL STATEMENTS (continued)
43: Credit Related Commitments, Guarantees, Contingent Liabilities and Contingent Assets (continued)
In June 2013, litigation funder Litigation Lending Services (NZ)
commenced a representative action against ANZ for certain fees
charged to New Zealand customers since 2007. There is a risk thatfurther claims could emerge in Australia, New Zealand or elsewhere.
ii) Security recovery actions
Various claims have been made or are anticipated, arising fromsecurity recovery actions taken to resolve impaired assets over recent
years. ANZ will defend these claims and any future claims.
iii) Interbank Deposit Agreement
ANZ has entered into an Interbank Deposit Agreement with the majorbanks in the payment system. This agreement is a payment system
support facility certified by APRA, where the terms are such that if
any bank is experiencing liquidity problems, the other participants
are required to deposit equal amounts of up to $2 billion for a periodof 30 days. At the end of 30 days the deposit holder has the option to
repay the deposit in cash or by way of assignment of mortgages tothe value of the deposit.
iv) Clearing and settlement obligations
In accordance with the clearing and settlement arrangements set out:}} in the Australian Payments Clearing Association Limited’s
Regulations for the Australian Paper Clearing System, the Bulk
Electronic Clearing System, the Consumer Electronic Clearing
System and the High Value Clearing System (HVCS), the Company
has a commitment to comply with rules which could result in abilateral exposure and loss in the event of a failure to settle by amember institution. The exposure arising from these arrangements
is unquantifiable in advance; and}} in the Austraclear System Regulations (Austraclear) and the
CLS Bank International Rules, the Company has a commitment toparticipate in loss-sharing arrangements in the event of a failure
to settle by a member institution. The exposure arising from thesearrangements is unquantifiable in advance.
For HVCS and Austraclear, the obligation arises only in limited
circumstances.
v) D eed of Cross Guarantee in respect of certain
controlled entities
Pursuant to ASIC class order 98/1418 (as amended) dated
13 August 1998, relief was granted to a number of wholly owned
controlled entities from the Corporations Act 2001 requirements for
preparation, audit, and lodgement of individual financial statements
in Australia. The results of these companies are included in the
consolidated Group results.
The entities to which relief was granted are:}} ANZ Properties (Australia) Pty Ltd1}} ANZ Capital Hedging Pty Ltd1}} ANZ Orchard Investments Pty Ltd2}} ANZ Securities (Holdings) Limited3}} ANZ Commodity Trading Pty Ltd4}} ANZ Funds Pty Ltd1}} Votraint No. 1103 Pty Ltd2}} ANZ Nominees Limited5
1 Relief originally granted on 21 August 2001.
2 Removed by Revocation Deed on 25 January 2014 and the company was de-registeredon 4 September 2014.
3 Relief originally granted on 9 September 2003.
4 Relief originally granted on 2 September 2008.
5 Relief originally granted on 11 February 2009.

174

It is a condition of the class order that the Company and each of
the above controlled entities enter into a Deed of Cross Guarantee.
A Deed of Cross Guarantee or subsequent Assumption Deeds
under the class order were executed by them and lodged with theAustralian Securities and Investments Commission. The Deed of Cross
Guarantee is dated 1 March 2006. The effect of the Deed is that theCompany guarantees to each creditor payment in full of any debt in
the event of winding up any of the controlled entities under certain
provisions of the Corporations Act 2001. If a winding up occurs in
any other case, the Company will only be liable in the event thatafter six months any creditor has not been paid in full. The controlled
entities have also given similar guarantees in the event that theCompany is wound up.
vi) Sale of Grindlays businesses
On 31 July 2000, ANZ completed the sale to Standard Chartered
Bank (SCB) of ANZ Grindlays Bank Limited and the private banking
business of ANZ in the United Kingdom and Jersey, together
with ANZ Grindlays (Jersey) Holdings Limited and its subsidiaries,
for USD1.3 billion in cash. ANZ provided warranties and certain
indemnities relating to those businesses and, where it was
anticipated that payments would be likely under the warranties
or indemnities, made provisions to cover the anticipated liability.
The issues below have not impacted adversely the reported results.
All settlements, penalties and costs to date have been covered within
existing provisions.
Foreign Exchange Regulation Act (India)
In 1991 certain amounts were transferred from non-convertible
Indian Rupee accounts maintained with Grindlays in India.
These transactions may not have complied with the provisions of
the Foreign Exchange Regulation Act, 1973. Grindlays, on its own
initiative, brought these transactions to the attention of the Reserve
Bank of India. The Indian authorities served notices on Grindlays andcertain of its officers in India and civil penalties have been imposed
which are the subject of appeals. Criminal prosecutions are pending
and will be defended. The amounts in issue are not material.
Tax Indemnity
ANZ provided an indemnity relating to tax liabilities of Grindlays(and its subsidiaries) and the Jersey Sub-Group to the extent to whichsuch liabilities were not provided for in the Grindlays accounts as at
31 July 2000. Claims have been made under this indemnity, with nomaterial impact on the Group expected.

ANZ ANNUAL REPORT 2014

43: Credit Related Commitments, Guarantees, Contingent Liabilities and Contingent Assets (continued)
The consolidated statement of comprehensive income and consolidated balance sheet of the Company and its wholly owned controlled entities
which have entered into the Deed of Cross Guarantee in the relevant financial years are:Consolidated
2014
$m

20131
$m

Profit before tax
Income tax expense

9,116(1,945)7,255(1,803)

Profit after income tax

7,171

5,452

Foreign exchange differences taken to equity, net of tax
Change in fair value of available-for-sale financial assets, net of tax
Change in fair value of cash flow hedges, net of tax
Actuarial gains/(loss) on defined benefit plans, net of tax

175
34
125
6

310
15
(37)
(17)

Other comprehensive income, net of tax

340

271

Total comprehensive income

7,511

5,723

Retained profits at start of year
Profit after income tax
Ordinary share dividends provided for or paid
Transfer from reserves
Actuarial gains/(loss) on defined benefit plans after tax

16,4997,171(4,694)8
615,145
5,452(4,082)
1(17)

Retained profits at end of year

18,99016,499AssetsCash
Settlement balances owed to ANZCollateral paid
Available-for-sale assets/investment securities
Net loans and advances
Other assets
Premises and equipment

30,655
18,1504,873
26,151
414,349
209,318
1,065

22,798
16,621
5,638
23,823382,689
159,067
1,034

Total assets

704,561

611,670

Liabilities
Settlement balances owed by ANZ
Collateral paid
Deposits and other borrowings
Income tax liability
Payables and other liabilities
Provisions

8,189
4,886
423,172366
234,807
695

7,451
3,532
385,449933
174,415825

Total liabilities

672,115572,605

Net assets

32,44639,065

Shareholders’ equity2

32,44639,065

1 Comparative amounts have changed. Refer to note 48 for details.
2 Shareholders’ equity excludes retained profits and reserves of controlled entities within the class order.

CONTINGENT ASSETS
National Housing BankANZ is pursuing recovery of the proceeds of certain disputed cheques
which were credited to the account of a former Grindlays customer inthe early 1990s.
The disputed cheques were drawn on the National Housing Bank
(NHB) in India. Proceedings between Grindlays and NHB concerning
the proceeds of the cheques were resolved in early 2002.
Recovery is now being pursued from the estate of the Grindlays
customer who received the cheque proceeds. Any amounts recovered
are to be shared between ANZ and NHB.

NOTES TO THE FINANCIAL STATEMENTS

175

NOTES TO THE FINANCIAL STATEMENTS (continued)
44: Superannuation and Post Employment Benefit Obligations
The Group participates in a number of pension, superannuation and post-retirement medical benefit schemes throughout the world. The Groupmay be obliged to contribute to the schemes as a consequence of legislation and/or provisions of the trust deeds. Set out below is a summary ofamounts recognised in these financial statements in respect of the defined benefit sections of these schemes:
Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

Amount recognised in the income statement
Current service cost
Administration costs
Net interest cost
Adjustment for contributions tax

6
1
1
2

7
1
4
3

3
1
–
–

3
1
2
–

Total included in personnel expenses

10

15

4

6

Amounts recognised in other comprehensive income (pre tax)
Remeasurement (gains)/losses incurred during the year and recognised directly in retained earnings

(43)

(43)

(8)

15

Cumulative remeasurement (gains)/losses recognised directly in retained earnings

212

255

217

225

(1,327)
1,335(1,265)
1,174(1,151)
1,183(1,047)
1,018

8

(91)

32

(29)

(39)
47

(91)
–

(15)
47

(29)
–

8

(91)

32

(29)

Defined benefit obligation and scheme assets
Present value of funded defined benefit obligation1
Fair value of scheme assets
Total
As represented in the balance sheet
Net liabilities arising from defined benefit obligations included in payables and other liabilities
Net assets arising from defined benefit obligations included in other assets
Total

1 The Group’s defined benefit obligation relates solely to funded arrangements. The liability relates predominantly to pension payments to retired members or their dependants.
The basis of calculation is set out in note 1 F(vii).

Consolidated

The Company

2014
$m

2013
$m

2014
$m

2013
$m

1,265
6
54
–

1,128
7
45
–

1,047
3
45
–

909
3
38
–

(4)
(7)
33
(10)
–
–
74
(84)
–

(19)
(9)
61
(19)
–
–
128
(57)
–

1
–
35
–
–
–
71
(51)
–

(12)
(9)
86
–
–
–
105
(43)
(30)

Closing defined benefit obligation

1,327

1,265

1,151

1,047

Movements in the fair value of the scheme assets
Opening fair value of scheme assets
Interest income
Return on scheme assets excluding amounts included in interest income
Contributions from the employer
Contributions from scheme participants
Benefits paid
Administrative costs paid
Settlements
Exchange difference on foreign schemes
Transfer of Taiwan liabilities to subsidiary1

1,174
53
55
66
–
(84)
(1)
–
72
–

954
41
57
67
–
(57)
(1)
–
113
–

1,018
45
44
57
–
(51)
(1)
–
71
–

840
36
50
59
–
(43)
(1)
–
99
(22)

Closing fair value of scheme assets2

1,335

1,174

1,183

1,018

Movements in the present value of the defined benefit obligation
Opening defined benefit obligation
Current service cost
Interest cost
Contributions from scheme participantsRemeasurements:
Actuarial (gains)/losses – experience
Actuarial (gains)/losses – change in demographic assumptions
Actuarial (gains)/losses – change in financial assumptions
Actuarial (gains)/losses – change in ESCT
Curtailments
Settlements
Exchange difference on foreign schemes
Benefits paid
Transfer of Taiwan liabilities to subsidiary1

1 During 2013, the assets and liabilities of the Taiwan defined benefit scheme were transferred from the Taiwan branch of the Company to a subsidiary of the Company. There was no gain or loss ontransfer. As a result of this transfer, the assets and liabilities of the Taiwan defined benefit scheme are no longer included in the Company balances.
2 Scheme assets include the following financial instruments issued by the Group: cash and short-term instruments $1.7 million (September 2013: $1.8 million), fixed interest securities $0.4 million(September 2013: $0.7 million) and equities $0.1 million (September 2013: nil).

176

ANZ ANNUAL REPORT 2014

44: Superannuation and Post Employment Benefit Obligations (continued)
Consolidated

The Company

Quoted$m

Unquoted
$m

Value
$m

Quoted$m

Unquoted
$m

Value
$m

Composition of scheme assets
2014
Equities
Debt securities
Pooled investment funds
Property
Cash and equivalents
Other

184
–
240
–
13
9

–
276
612
1
–
–

184
276
852
1
13
9

180
–
153
–
13
8

–
270
558
1
–
–

180
270
711
1
13
8

Total at the end of the year

446

889

1,335

354

829

1,183

2013
Equities
Debt securities
Pooled investment funds
Property
Cash and equivalents
Other

163
–
227
–
13
7

–
230
533
1
–
–

163
230
760
1
13
7

159
–
137
–
13
7

–
225
476
1
–
–

159
225
613
1
13
7

Total at the end of the year

410

764

1,174

316

702

1,018

2014

2013

2014

2013

3.6 – 4.3
2.5 – 3.7

4.0 – 4.6
3.0 – 3.8

3.6 – 4.0
3.7

4.0 – 4.3
3.8

2.2 – 3.2
2.3

2.5 – 3.3
2.4

2.5 – 3.2
2.3

2.5 – 3.3
2.4

22.6 – 28.4
26.3 – 30.5

22.6 – 28.4
26.3 – 30.5

22.6 – 28.4
26.3 – 30.5

22.6 – 28.4
26.3 – 30.5

Consolidated

Actuarial assumptions used to determine the present value of the defined
benefit obligation for the main defined benefit sections
Discount rate (% p.a.)
Future salary increases (% p.a.)
Future pension indexation– In payment (% p.a.)– In deferment (% p.a.)Life expectancy at age 60 for current pensioners– Males (years)– Females (years)

The Company

The weighted average duration of the benefit payments reflected in the defined benefit obligation is 16.2 years (2013: 16.3 years) for
Consolidated and 16.3 years (2013: 16.2 years) for the Company.
Consolidated
Impact on defined
benefit obligationfor 2014

Sensitivity analysis
Changes in actuarial assumptions
0.5% increase in discount rate
0.5% increase in pension indexation
1 year increase to life expectancy

The Company
Impact on defined
benefit obligationfor 2014

Increase/(decrease)%

Increase/(decrease)$m

Increase/(decrease)%

Increase/(decrease)
$m

(7.6)
7.5
2.7

(101)
100
35

(8.2)
8.2
2.7

(94)
94
31

The sensitivity analysis shows the effect of reasonably possible changes in significant assumptions on the value of scheme liabilities.
The sensitivities provided assume that all other assumptions remain unchanged and are not intended to represent changes that are theextremes of possibility. The figure shown is the difference between the recalculated liability figure and that stated in the balance sheet as
detailed above.

NOTES TO THE FINANCIAL STATEMENTS

177

NOTES TO THE FINANCIAL STATEMENTS (continued)
44: Superannuation and Post Employment Benefit Obligations (continued)
GOVERNANCE OF THE SCHEMES AND FUNDING OF THE
DEFINED BENEFIT SECTIONS
The main schemes in which the Group participates operate
under trust law and are managed and administered on behalf ofthe members in accordance with the terms of the relevant trust
deed and rules and all relevant legislation. These schemes have
corporate trustees, which are wholly owned subsidiaries of theGroup. The trustees are the legal owners of the assets which areheld separately from the assets of the Group. The trustees are solely
responsible for setting investment policy and for agreeing funding
requirements with the employer through the triennial actuarial
valuation process.
Employer contributions to the defined benefit sections are
based on recommendations by the schemes’ actuaries. Funding
recommendations are made by the actuaries based on assumptionsof various matters such as future investment performance, interest
rates, salary increases, mortality rates and turnover levels. The funding
methods adopted by the actuaries are intended to ensure that thebenefit entitlements of employees are fully funded by the time they
become payable.
As at the most recent reporting dates of the schemes, the aggregate
deficit of net market value of assets over the value of accrued benefits
on the funding bases was $92 million (2013: $222 million).
In 2014 the Group made a contribution of $66 million(2013: $67 million) to the defined benefit sections of the schemes,
and expects to make a $66 million contribution in the next financial
year. The employer contributions to the defined contribution sectionsof the schemes are included as superannuation costs in personnel
expenses.
The Group has a legal liability to fund deficits in the schemes, but
no legal right to use any surplus in the schemes to further its own
interests. The Group has no present liability to settle deficits with animmediate contribution.
Further details about the funding and contributions for the main
defined benefit sections of the schemes are described below.
}} ANZ Australian Staff Superannuation Scheme
The Pension Section of the ANZ Australian Staff Superannuation
Scheme provides pension benefits to retired members andtheir dependants. This section of the Scheme was closed to newmembers in 1987.
An actuarial valuation, conducted by consulting actuaries Russell
Employee Benefits as at 31 December 2013, showed a deficit of$1.5 million and the actuary recommended that the Group makea contribution to the Pension Section of $1.9 million for the year
to 31 December 2014. The next full actuarial valuation is due to be
conducted as at 31 December 2016.
The Group has no present liability under the Scheme’s Trust Deedto commence contributions or fund the deficit.

178}} ANZ UK Staff Pension Scheme
This Scheme provides pension benefits. From 1 October 2003,
members contribute 5% of salary. The Scheme was closed to
new members on 1 October 2004.
Following a full actuarial valuation as at 31 December 2012, theGroup agreed to make regular contributions at the rate of 26%
of pensionable salaries. These contributions are sufficient to cover
the cost of accruing benefits. To address the deficit, the Groupagreed to continue to pay additional quarterly contributions of
GBP 7.5 million until 2016. These contributions will be reviewed
following the next actuarial valuation which is scheduled to beundertaken as at 31 December 2015.
An interim actuarial valuation, conducted by consulting actuaries
Towers Watson as at 31 December 2013, showed a deficit of
GBP 31 million ($58 million at 30 September 2014 exchange rates)
measured on a funding basis.
The Group has no present liability under the Scheme’s Trust Deedto fund the deficit measured on a funding basis. A contingent
liability may arise in the event that the Scheme was wound up.
If this were to happen, the Trustee would be able to pursue theGroup for additional contributions under the UK Employer Debt
Regulations. The Group intends to continue the Scheme on an
on‑going basis.
}} National Bank Staff Superannuation FundThe defined benefit section of the Fund provides pension benefits
and was closed to new members on 1 October 1991. Members
contribute 5% of salary.
A full actuarial valuation of the National Bank Staff Superannuation
Fund, conducted by consulting actuaries AON Consulting NZ, as at
31 March 2013 showed a deficit of NZD 21 million ($19 million at
30 September 2014 exchange rates). The actuary recommended
that the Group make contributions of 24.8% of salaries plus alump sum contribution of NZD 5 million p.a. (net of employer
superannuation contribution tax) in respect of members of thedefined benefit section.
The Group has no present liability under the Fund’s Trust Deed tofund the deficit measured on a funding basis. A contingent liability
may arise in the event that the Fund was wound up. Under the
Fund’s Trust Deed, if the Fund were wound up, the Group isrequired to pay the Trustees of the Fund an amount sufficient toensure members do not suffer a reduction in benefits to which theywould otherwise be entitled. The Group intends to continue thedefined benefit section of the Fund on an on-going basis.
Amounts were also recognised in the financial statements in respectof other defined benefit arrangements in New Zealand, Taiwan,
Japan, Philippines and the UK.

ANZ ANNUAL REPORT 201445: Employee Share and Option Plans
ANZ operates a number of employee share and option schemes
under the ANZ Employee Share Acquisition Plan and the ANZ Share
Option Plan.
ANZ EMPLOYEE SHARE ACQUISITION PLAN
ANZ Employee Share Acquisition Plan (ESAP) schemes that existed
during the 2013 and 2014 years were the Employee Share Offer, theDeferred Share Plan and the Employee Share Save Scheme (ESSS).
Note the ESSS is an employee salary sacrifice plan and is not captured
as a share based payment expense.
Employee Share Offer
Most permanent employees who have had continuous service forthree years are eligible to participate in the Employee Share Offer
enabling the grant of up to $1,000 of ANZ shares in each financial
year, subject to approval of the Board. At a date approved by the
Board, the shares will be granted to all eligible employees using theone week weighted average price of ANZ shares traded on the ASX
in the week leading up to and including the date of grant.
In Australia and three overseas locations (Cook Islands, Kiribati
and Solomon Islands), ANZ ordinary shares are granted to eligible
employees for nil consideration and vest immediately when granted,
as there is no forfeiture provision. It is a requirement, however, thatshares are held in trust for three years from the date of grant, after
which time they may remain in trust, be transferred to the employee’s
name or sold. Dividends received on the shares are automatically
reinvested into the Dividend Reinvestment Plan.
In New Zealand shares are granted to eligible employees upon
payment of NZD one cent per share.
Shares granted in New Zealand and the remaining overseas locations
under this plan vest subject to the satisfaction of a three year service
period, after which time they may remain in trust, be transferred into
the employee’s name or sold. Unvested shares are forfeited in the eventof resignation or dismissal for serious misconduct. Dividends are either
received as cash or reinvested into the Dividend Reinvestment Plan.
During the 2014 year, 794,855 shares with an issue price of $31.85
were granted under the plan to employees on 4 December 2013(2013 year: 1,450,558 shares with an issue price of $24.44 were
granted on 6 December 2012).
Deferred Share Plan
A Short Term Incentive (STI) mandatory deferral program was
implemented from 2009, with equity deferral relating to half of all
STI amounts above a specified threshold. Prior to 2011, STI deferred
equity could be taken as 100% shares or 50% shares and 50% options.
From 2011, all STI deferred equity is taken as 100% shares. Half
the deferred portion is deferred for one year and half deferred for
two years.
Under the Institutional Total Incentive Performance Plan (TIPP)
mandatory deferral into shares also applies to 60% of total incentive
amounts above a specified threshold, deferred evenly overthree years.
Selected employees may be granted Long Term Incentive (LTI)
deferred shares which vest to the employee three years from the dateof grant.

In exceptional circumstances, deferred shares are granted to certain
employees upon commencement with ANZ to compensate forremuneration forgone from their previous employer. The vesting
period generally aligns with the remaining vesting period of
remuneration forgone, and therefore varies between grants.
Retention deferred shares may also be granted occasionally to highperforming employees who are regarded as a significant retention
risk to ANZ.
Unless the Board decides otherwise, unvested STI, TIPP incentives,
LTI or other deferred shares are forfeited on resignation, termination
on notice or dismissal for serious misconduct. Deferred shares remain
at risk and can be clawed back at any time prior to the vesting date.
The deferred shares may be held in trust beyond the deferral period.
The employee receives dividends on deferred shares while thoseshares are held in trust (cash or Dividend Reinvestment Plan).
Deferred share rights may be granted instead of deferred sharesin some countries to accommodate offshore taxation regulations(refer to Deferred Share Rights section).
The issue price for deferred shares is based on the volume weighted
average price of the shares traded on the ASX in the week leading up
to and including the date of grant.
During the 2014 year, 4,940,721 deferred shares with a weighted
average grant price of $31.79 were granted under the deferred shareplan (2013 year: 6,233,626 shares with a weighted average grant priceof $25.00 were granted).
In accordance with the clawback provisions detailed in Section 6.3,
Other Remuneration Elements of the 2014 Remuneration Report,
no Board discretion was exercised during 2014 to clawback deferredshares under the deferred share plan.
Share Valuations
The fair value of shares granted in the 2014 year under the Employee
Share Offer and the Deferred Share Plan, measured as at the dateof grant of the shares, is $181.8 million based on 5,735,576 sharesat a volume weighted average price of $31.70 (2013 year: fair valueof shares granted was $190.6 million based on 7,684,184 sharesat a weighted average price of $24.81). The volume weighted
average share price of all ANZ shares sold on the ASX on the date of
grant is used to calculate the fair value of shares. No dividends areincorporated into the measurement of the fair value of shares.
ANZ SHARE OPTION PLAN
Selected employees may be granted options/rights, which entitle
them to acquire ordinary fully paid shares in ANZ at a price fixed at
the time the options/rights are granted. Voting and dividend rights
will be attached to the ordinary shares allocated on exercise of theoptions/rights.
Each option/right entitles the holder to one ordinary share subject
to the terms and conditions imposed on grant. The exercise price ofthe options, determined in accordance with the rules of the plan, is
generally based on the weighted average price of the shares tradedon the ASX in the week leading up to and including the date of grant.
For rights, the exercise price is nil.

NOTES TO THE FINANCIAL STATEMENTS

179

NOTES TO THE FINANCIAL STATEMENTS (continued)
45: Employee Share and Option Plans (continued)
The option plan rules set out the entitlements a holder of options/rights has prior to exercise in the event of a bonus issue, pro-rata newissue or reorganisation of ANZ’s share capital. In summary:}} if ANZ has issued bonus shares during the life of an option andprior to the exercise of the option, then when the option is
exercised the option holder is also entitled to be issued such
number of bonus shares as the holder would have been entitled toif the option holder had held the underlying shares at the time of
the bonus issue;}} if ANZ makes a pro-rata offer of securities during the life of an
option and prior to the exercise of the option, the exercise price ofthe option will be adjusted in the manner set out in the ASX Listing
Rules; and}} in respect of rights, if there is a bonus issue or reorganisationof ANZ’s share capital, the number of rights or the number ofunderlying shares may be adjusted so that there is no advantage ordisadvantage to the holder.
Holders otherwise have no other entitlements to participate in any
new issue of ANZ securities prior to exercise of their options/rights.
Holders also have no right to participate in a share issue of a body
corporate other than ANZ (e.g. a subsidiary).
ANZ Share Option Plan schemes expensed in the 2013 and 2014 years
are as follows:
Current Option Plans
Performance Rights Plan (excluding CEO Performance Rights)
Performance rights are granted to selected employees as part of
ANZ’s LTI program. Performance rights provide the right to acquire
ANZ shares at nil cost, subject to a three year vesting period and from
1 October 2013 two Total Shareholder Return (TSR) performance
hurdles (previously one TSR performance hurdle). Further details in
relation to performance rights are detailed in Section 6.2.2, Long Term
Incentives (LTI) in the 2014 Remuneration Report.
For equity grants made after 1 November 2012, any portion of theaward which vests may be satisfied by a cash equivalent payment
rather than shares at the Board’s discretion.
The provisions that apply in the case of cessation of employment
are detailed in Section 8.3, Disclosed Executives in the 2014
Remuneration Report.
During the 2014 year, 1,452,456 performance rights (excluding CEO
performance rights) were granted (2013: 641,728).
CEO Performance Rights
At the 2013 Annual General Meeting shareholders approved an
LTI grant of performance rights to the CEO with an award value
equivalent to 100% of his 2013 fixed pay, being $3.15 million, divided
into two equal tranches. This equated to 100,832 performancerights being allocated for the first tranche and 100,254 performancerights being allocated for the second tranche. Each tranche will be
subject to testing against a separate TSR hurdle after three years,
i.e. December 2016.

180

At the 2010, 2011 and 2012 Annual General Meetings shareholders
approved LTI grants to the CEO equivalent to 100% of his fixed pay
at the time (being $3 million in 2010 and $3.15 million in 2011 and2012). This equated to a total of 253,164 (2010), 326,424 (2011) and
328,810 (2012) performance rights being allocated, which are subject
to testing against a TSR hurdle after three years, i.e. December 2013,2014 and 2015 respectively. The 2010 grant of performance rights
was tested in December 2013. Although ANZ achieved TSR growth of
58.6% over the three year period, ANZ’s TSR did not reach the medianof the comparator group. Accordingly, the performance rights did notvest. The performance rights lapsed in full at this time, and the CEO
received no value. There is no retesting of this grant.
At the 2007 Annual General Meeting shareholders approved an LTI
grant consisting of three tranches of performance rights, each toa maximum value of $3 million. The performance periods for eachtranche began on the date of grant of 19 December 2007 and ended
on the third, fourth and fifth anniversaries respectively (i.e. only one
performance measurement for each tranche). The first two tranches
vested in December 2010 and December 2011 respectively. The third
tranche was tested in December 2012 and 260,642 performancerights vested and were exercised in 2013.
For equity grants made after 1 November 2012, any portion of theaward which vests may be satisfied by a cash equivalent payment
rather than shares at the Board’s discretion.
The provisions that apply in the case of cessation of employment
are detailed in Section 8.2, Chief Executive Officer (CEO) in the 2014
Remuneration Report.
Deferred Share Rights (no performance hurdles)
Deferred share rights provide the right to acquire ANZ shares at nil
cost after a specified vesting period. The fair value of rights is adjusted
for the absence of dividends during the restriction period. Treatmentof rights in respect of cessation relates to the purpose of the grant(refer to Deferred Share Plan section above).
For deferred share rights grants made after 1 November 2012,any portion of the award which vests may be satisfied by a cash
equivalent payment rather than shares at the Board’s discretion.
All share rights were satisfied through a share allocation other than
9,480 deferred share rights where Board discretion was exercised.
During the 2014 year 837,011 deferred share rights (no performance
hurdles) were granted (2013: 1,133,780).
Legacy Option Plans
The following legacy option plans are no longer being offered, butwere expensed in the 2013 and 2014 years.

ANZ ANNUAL REPORT 201445: Employee Share and Option Plans (continued)
Deferred Options (no performance hurdles)
Under the STI deferral program half of all amounts above a specified threshold are provided as deferred equity. Previously deferred equity could
be taken as 100% shares or 50% shares and 50% options. From 2011, all deferred equity is taken as 100% shares (refer to Deferred Share Plan
section above).
Options, deferred share rights and performance rights on issue
As at 5 November 2014, there were five holders of 54,234 options on issue, 1,595 holders of 2,138,198 deferred share rights on issue and
163 holders of 3,226,594 performance rights on issue.
Option Movements
Details of options/rights over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of 2014 andmovements during 2014 follow:

Weighted average exercise priceOpening balance
1 Oct 2013

Options/rights
grantedOptions/rights
forfeited

Options/rights
expiredOptions/rights
exercised

Closing balance
30 Sep 2014

4,870,518$1.07

2,490,553$0.00(785,136)
$0.00

–
–

(1,144,032)$3.43

5,431,903$0.24

The weighted average closing share price during the year ended 30 September 2014 was $32.41 (2013: $27.68).
The weighted average remaining contractual life of options/rights outstanding at 30 September 2014 was 3.1 years (2013: 2.9 years).
The weighted average exercise price of all exercisable options/rights outstanding at 30 September 2014 was $9.73 (2013: $17.53).
A total of 131,793 exercisable options/rights were outstanding at 30 September 2014 (2013: 297,018).
Details of options/rights over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of 2013 andmovements during 2013 are set out below:

Weighted average exercise priceOpening balance
1 Oct 2012

Options/rights
grantedOptions/rights
forfeited

Options/rights
expiredOptions/rights
exercised

Closing balance
30 Sep 2013

5,941,291$6.53

2,104,318$0.00(295,701)$0.35(185,617)$23.48(2,693,773)$10.814,870,518$1.07

No options/rights over ordinary shares have been granted since the end of 2014 up to the signing of the Directors’ Report on 5 November 2014.
Details of shares issued as a result of the exercise of options/rights during 2014 are as follows:
Exercise price$No. of shares issued

Proceeds received$

Exercise price$No. of shares issued

Proceeds received
$

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

2,329
121,459
40,997
1,324
19,5508,450
24,915
2,164
1,628
9,174
7,572
262
11,585
11,682
2,200
654
3,163
232,431
19,081
3,988
1,972
3,115
2,445
6,908
35,47088,186
3,120
3,454
817

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
17.18
22.80
22.80
22.80
22.80
23.71
23.71
23.71
23.71
23.71
23.71
0.00
0.00
0.00
0.00
0.00
0.00

20,62812,269
839
2,123
9,332
9,940
7,491
1,056
768
12,081798
15,804
17,515
3,915
17,512
11,344
16,407
19,85816,562
16,407
19,857
16,561
173,130
35,724726
14,804
396
90

–
–
–
–
–
–
–
–
–
–
–
271,513399,342
89,262399,274
258,643
389,010
470,833
392,685
389,010
470,809392,661
–
–
–
–
–
–

NOTES TO THE FINANCIAL STATEMENTS

181

NOTES TO THE FINANCIAL STATEMENTS (continued)
45: Employee Share and Option Plans (continued)
Details of shares issued as a result of the exercise of options/rights during 2013 are as follows:
Exercise price$No. of shares issued

Proceeds received$

Exercise price$No. of shares issued

Proceeds received
$

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

46,061
3,968
186
5,861
12,820144
404
38,462
174,762
3,701
1,102
11,27767,967
3,841
1,625
2,799
17,03730,85080,146
2,929
22,03918,547
13,98911,524
713
57
788
3,295

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

0.00
0.00
0.00
23.49
17.18
17.18
17.18
17.18
17.18
17.18
22.80
22.80
22.80
22.80
22.80
22.80
23.71
23.71
23.71
23.71
23.71
23.71
0.00
0.00
0.00
0.00
0.00

10,610612
1,536
631,388245,093
90,48390,479
4,076
1,185
1,184
17,071
656
8,792
17,070656
8,791
113,492
4,251
1,225
113,489
4,250
1,225
260,642
225,963
41,08457,726
163,850–––
14,831,304
4,210,698
1,554,498
1,554,429
70,026
20,35820,341
389,219
14,957200,458
389,196
14,957200,435
2,690,895
100,791
29,0452,690,824
100,768
29,045–––––

Details of shares issued as a result of the exercise of options/rights since the end of 2014 up to the signing of the Directors’ Report on
5 November 2014 are as follows:

182

Exercise price$No. of shares issued

Proceeds received$

Exercise price$No. of shares issued

Proceeds received
$

0.00
0.00
0.00

748
182
1,030

–
–
–

0.00
0.00
0.00

1,098
48
18

–
–
–

ANZ ANNUAL REPORT 201445: Employee Share and Option Plans (continued)
In determining the fair value below, the standard market techniques for valuation, including Monte Carlo and/or Black Scholes pricing models,
were applied in accordance with the requirements of AASB 2 Share-based payments. The models take into account early exercise of vested
equity, non-transferability and market based performance hurdles (if any). The significant assumptions used to measure the fair value of
instruments granted during 2014 are contained in the table below:

Type

Number of
Grant date options/rights

Exercise Equity fair
price
value
$
$

Share
closing
price at
grant
$

ANZ
expected
volatility1%

Equityterm(years)Vesting
period(years)Expected
life(years)Expected
dividendyield%

Risk freeinterest
rate%

STI/TIPP deferred share rights 22-Nov-13
22-Nov-13
22-Nov-13
22-Nov-13

39,269192,539
202,523
148,315

0.00
0.00
0.00
0.00

31.68
30.10
28.60
27.17

31.68
31.68
31.68
31.68

n/a
20.0
20.0
20.0

2.4
3
4
5

0.4
1
2
3

0.4
1
2
3

5.80
5.25
5.25
5.25

n/a
2.54
2.75
3.13

LTI deferred share rights

22-Nov-13

149,626

0.00

27.17

31.68

20.0

5

3

3

5.25

3.13

LTI performance rights

22-Nov-13
22-Nov-13
18-Dec-13
18-Dec-13

759,220
693,236
100,832
100,254

0.00
0.00
0.00
0.00

13.87
15.19
15.62
15.71

31.68
31.68
30.70
30.70

20.0
20.0
20.0
20.0

5
5
5
5

3
3
3
3

3
3
3
3

5.25
5.25
5.50
5.50

3.13
3.13
2.90
2.90

Other deferred share rights

22-Nov-13
22-Nov-13
22-Nov-13
22-Nov-13
22-Nov-13
22-Nov-13
22-Nov-13
22-Nov-13
22-Nov-13
4-Dec-1327-Feb-14
27-Feb-14
27-Feb-14
1-Jun-14
1-Jun-14
1-Jun-14
1-Jun-14
1-Jun-14
1-Jun-14
1-Jun-14
1-Jun-14
1-Jun-14
1-Jun-14
20-Aug-14
20-Aug-14
20-Aug-14
20-Aug-14
20-Aug-14

15,530
918
1,438
3,671
983
5,009
1,595
217
1,591
25,710
7,988
6,036
4,809
5,116
994
1,298
3,944
1,049
1,369
1,807
5,190
771
1,934
524
2,328
292
2,457
171

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

31.68
30.50
30.10
29.69
28.98
28.60
28.21
27.53
27.17
27.24
30.47
28.89
27.38
32.64
32.18
31.73
30.93
30.50
30.08
29.32
28.90
28.51
27.40
32.35
31.54
30.66
29.89
29.06

31.68
31.68
31.68
31.68
31.68
31.68
31.68
31.68
31.68
31.76
32.15
32.15
32.15
33.49
33.49
33.49
33.49
33.49
33.49
33.49
33.49
33.49
33.49
33.27
33.27
33.27
33.27
33.27

n/a
20.0
20.0
20.0
20.0
20.0
20.0
20.0
20.0
20.0
20.0
20.0
20.0
17.5
17.5
17.5
17.5
17.5
17.5
17.5
17.5
17.5
17.5
17.5
17.5
17.5
17.5
17.5

2.3
2.7
3
3.3
3.7
4
4.3
4.7
5
3
3
4
5
3
3
3
4
4
4
5
5
5
6
3
3
4
4
5

0.3
0.7
1
1.3
1.7
2
2.3
2.7
3
3
1
2
3
0.5
0.7
1
1.5
1.7
2
2.5
2.7
3
3.7
0.5
1
1.5
2
2.5

0.3
0.7
1
1.3
1.7
2
2.3
2.7
3
3
1
2
3
0.5
0.7
1
1.5
1.7
2
2.5
2.7
3
3.7
0.5
1
1.5
2
2.5

5.80
5.25
5.25
5.25
5.25
5.25
5.25
5.25
5.25
5.25
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50
5.50

n/a
2.54
2.54
2.54
2.75
2.75
2.75
3.13
3.13
3.08
2.44
2.69
2.85
2.54
2.54
2.54
2.63
2.63
2.63
2.74
2.74
2.74
2.92
2.47
2.47
2.54
2.54
2.64

1 Expected volatility represents a measure of the amount by which ANZ’s share price is expected to fluctuate over the life of the rights. The measure of volatility used in the model is the annualised
standard deviation of the continuously compounded rates of return on the historical share price over a defined period of time preceding the date of grant. This historical average annualised
volatility is then used to estimate a reasonable expected volatility over the expected life of the rights.

NOTES TO THE FINANCIAL STATEMENTS183

NOTES TO THE FINANCIAL STATEMENTS (continued)
45: Employee Share and Option Plans (continued)
The significant assumptions used to measure the fair value of instruments granted during 2013 are contained in the table below:

Type

Number of
Grant date options/rights

Exercise Equity fair
price
value
$
$

Share
closing
price at
grant
$

ANZ
expected
volatility1%

Equityterm(years)Vesting
period(years)Expected
life(years)Expected
dividendyield%

Risk freeinterest
rate%

STI deferred share rights

12-Nov-12
12-Nov-12
12-Nov-12
12-Nov-12

54,511
240,751
255,250
28,694

0.00
0.00
0.00
0.00

24.45
23.07
21.76
20.53

24.45
24.45
24.45
24.45

n/a
22.5
22.5
22.5

2.4
3
4
5

0.4
1
2
3

0.4
1
2
3

n/a
6.00
6.00
6.00

n/a
2.82
2.66
2.58

LTI deferred share rights

12-Nov-12

415,056

0.00

20.53

24.45

22.5

5

3

3

6.00

2.58

LTI performance rights

12-Nov-12
19-Dec-12

641,728
328,810

0.00
0.00

10.16
9.58

24.45
24.64

22.5
22.5

5
5

3
3

3
3

6.00
6.00

2.58
2.77

Other deferred share rights

6-Dec-1227-Feb-13
27-Feb-13
20-Aug-13
20-Aug-13
20-Aug-13
20-Aug-13
20-Aug-13
20-Aug-13
12-Nov-12
12-Nov-12

72,05912,941
13,623
9,795
2,392
7,935
2,518
8,735
1,830
3,732
3,958

0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

20.80
26.87
25.53
28.78
28.09
27.34
26.68
25.98
25.35
23.07
21.76

24.72
28.28
28.28
29.56
29.56
29.56
29.56
29.56
29.56
24.45
24.45

22.5
20.0
20.0
20.0
20.0
20.0
20.0
20.0
20.0
22.5
22.5

3
3
4
2.5
3
3.5
4
4.5
5
3
4

3
1
2
0.5
1
1.5
2
2.5
3
1
2

3
1
2
0.5
1
1.5
2
2.5
3
1
2

6.00
5.25
5.25
5.25
5.25
5.25
5.25
5.25
5.25
6.00
6.00

2.63
2.62
2.63
2.38
2.38
2.47
2.47
2.73
2.73
2.82
2.66

1 Expected volatility represents a measure of the amount by which ANZ’s share price is expected to fluctuate over the life of the rights. The measure of volatility used in the model is the annualised
standard deviation of the continuously compounded rates of return on the historical share price over a defined period of time preceding the date of grant. This historical average annualised
volatility is then used to estimate a reasonable expected volatility over the expected life of the rights.

SATISFYING EQUITY AWARDS
All shares underpinning equity awards may be purchased on market, or be newly issued shares or a combination of both.
In relation to equity purchased on market during the 2014 financial year either under the ANZ Employee Share Acquisition Plan and the
ANZ Share Option Plan, or to satisfy options or rights, for all employees 5,909,763 shares were purchased at an average price of $31.93 per share.

46: Related Party Disclosures
A: KEY MANAGEMENT PERSONNEL COMPENSATIONKey Management Personnel (KMP) are defined as directors and those executives that report directly to the CEO with responsibility for the
strategic direction and management of a major revenue generating division or who control material revenue and expenses that fall within thedefinition of KMP. KMP compensation included in the personnel disclosure expenses is as follows:
Consolidated

Short-term benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payments

2014
$000

20131
$000

25,367921
356–
15,40042,044

21,741
617
148
127
11,40834,041

1 Comparative period does not include role of COO who became a KMP on 1 October 2013.

B: KEY MANAGEMENT PERSONNEL LOAN TRANSACTIONS
Loans made to directors of the Company and other KMP of the Group are made in the ordinary course of business on normal commercial terms
and conditions no more favourable than those given to other employees or customers, including the term of the loan, security required andthe interest rate. The aggregate of loans made, guaranteed or secured by any entity in the Group to KMP, including their related parties, wereas follows:
Consolidated

Loans advanced1
Interest charged2
1 Balances are for KMP who were in office as of the balance sheet date.
2 Interest is for all KMP during the period.

184

The Company

2014
$000

2013
$000

2014
$000

2013
$000

29,5601,314

15,316896

20,622849

14,269892

ANZ ANNUAL REPORT 2014

46: Related Party Disclosures (continued)
C: KEY MANAGEMENT PERSONNEL HOLDINGS OF ANZ SECURITIESKMP, including their related parties, held subordinated debt, shares, share rights and options over shares in the Group directly, indirectly or
beneficially as shown below:
Consolidated

Ordinary shares
Subordinated debt

2014
Number1

2013
Number1

3,876,106
10,4994,111,704
10,2991 Balances are for KMP who were in office as of the balance sheet date.

D: OTHER TRANSACTIONS OF KEY MANAGEMENT PERSONNEL AND THEIR RELATED PARTIESAll other transactions with KMP and their related parties are made on terms equivalent to those that prevail in arm’s length transactions.
These transactions generally involve the provision of financial and investment services including services to eligible international assignees
ensuring they are neither financially advantaged nor disadvantaged by their relocation. All such transactions that have occurred with KMP andtheir related parties have been trivial or domestic in nature. In this context, transactions are only disclosed when they are considered of interest
to the users of the financial report in making and evaluating decisions about the allocation of scarce resources.
E: ASSOCIATES
Significant associates are disclosed in note 38. During the course of the financial year the Company and Group conducted transactions with all
associates on terms equivalent to those on an arm’s length basis as shown below:
Consolidated

Amounts receivable from associates
Amounts payable to associates
Interest revenue
Interest expense
Dividend revenue
Costs recovered from associates

The Company

2014
$000

2013
$000

2014
$000

2013
$000

81,193
77,977694
2,378
125,400
1,865

96,62778,265992
1,870
113,874
1,548

80,6282,210
657–
45,935476

95,6542,661
869–
45,828356

There have been no guarantees given or received. No outstanding amounts have been written down or recorded as allowances, as they are
considered fully collectible.
F: SUBSIDIARIES
Significant controlled entities are disclosed in note 37. During the course of the financial year subsidiaries conducted transactions with each other andassociates on terms equivalent to those on an arm’s length basis. As of 30 September 2014, all outstanding amounts are considered fully collectible.
Transactions between the Company and its subsidiaries include the provision of a wide range of banking and other financial facilities. Details ofamounts paid to or received from related parties, in the form of dividends or interest, are set out in note 3 and note 4.
Other intragroup transactions include the provision of management and administrative services, staff training, data processing facilities, transfer
of tax losses, and the leasing of property plant and equipment.

47: Life Insurance Business
The Group conducts its life insurance business through OnePath Life Limited, OnePath Life (NZ) Limited and OnePath Insurance Services (NZ)
Limited. This note is intended to provide disclosures in relation to the life insurance businesses conducted through these controlled entities.
CAPITAL ADEQUACY OF LIFE INSURER
Australian life insurers are required to hold reserves in excess of policy liabilities to support capital requirements under theLife Insurance Act (Life Act).
The life insurance business in New Zealand is not governed by the Life Act as these are foreign domiciled life insurance companies.
These companies are however required to meet similar capital tests.
The summarised capital information below, in respect of capital requirements under the Life Act, has been extracted from the financial
statements prepared by OnePath Life Limited. For detailed capital adequacy information on a statutory fund basis, users of this annual financial
report should refer to the separate financial statements prepared by OnePath Life Limited.
OnePath Life Limited

Capital Base
Prescribed Capital Amount (PCA)
Capital Adequacy Multiple (times)

2014
$m

2013
$m

524
295
1.78

567
294
1.93

NOTES TO THE FINANCIAL STATEMENTS

185

NOTES TO THE FINANCIAL STATEMENTS (continued)
47: Life Insurance Business (continued)
LIFE INSURANCE BUSINESS PROFIT ANALYSIS
Life insurance
contracts

Life investment
contracts

Consolidated

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Net shareholder profit after income tax

235

186

114

152

349

338

Net shareholder profit after income tax is represented by:
Emergence of planned profit margins
Difference between actual and assumed experience(Loss recognition)/reversal of previous losses on groups of related products
Investment earnings on retained profits and capital
Changes in assumptions

181
(21)
–
75
–

181
(51)
1
55
–

87
12
–
15
–

109
9
–
34
–

268
(9)
–
90
–

290
(42)
1
89
–

Net policyholder profit in statutory funds after income tax

16

15

–

–

16

15

Net policyholder profit in statutory funds after income tax is represented by:
Emergence of planned profits
Investment earnings on retained profits and experience profits

12
4

13
2

–
–

–
–

12
4

13
2

INVESTMENTS RELATING TO LIFE INSURANCE BUSINESS
Consolidated
2014
$m

2013
$m

Equity securities
Debt securities
Investments in managed investment schemes
Derivative financial assets/(liability)
Cash and cash equivalents

10,528
6,503
15,954(203)
797

10,901
8,870
11,3789925

Total investments backing policy liabilities designated at fair value through profit or loss1

33,57932,083

1 This includes $3,181 million (2013: $3,511 million) in respect of investments relating to external unit holders. In addition, the investment balance has been reduced by $4,779 million(2013: $3,982 million) in respect of the elimination of intercompany balances and Treasury Shares.

Investments held in statutory funds can only be used to meet the liabilities and expenses of that fund, or to make profit distributions whensolvency and capital adequacy requirements of the Life Act and Insurance (Prudential Supervision) Act 2010 are met. Accordingly, with the
exception of permitted profit distributions, the investments held in the statutory funds are not available for use by other parties of the Group.
INSURANCE POLICY LIABILITIESa) Policy liabilities

Consolidated
2014
$m

2013
$m

6,854
2,024
(10,697)
15

6,312
1,809
(9,426)
13

27
1,655
5

31
1,379
5

Total net life insurance contract liabilities
Unvested policyholder benefits
Liabilities ceded under reinsurance contracts1 (refer note 19)

(117)
42
591

123
43
519

Total life insurance contract liabilities

516

685

Life insurance contract liabilities
Best estimate liabilities
Value of future policy benefits
Value of future expenses
Value of future premium
Value of declared bonuses
Value of future profits
Policyholder bonus
Shareholder profit margin
Business valued by non-projection method

Life investment contract liabilities2,3

34,03831,703

Total policy liabilities

34,55432,388

1 Liabilities ceded under reinsurance contracts are shown as ‘other assets’.
2 Designated at fair value through profit or loss.
3 Life investment contract liabilities that relate to a capital guaranteed element is $1,526 million (2013: $1,671 million). Life investment contract liabilities subject to investment performance
guarantees is $960 million (2013: $1,064 million).

186

ANZ ANNUAL REPORT 2014

47: Life Insurance Business (continued)b) Reconciliation of movements in policy liabilities

Life investment
contracts

Life insurance
contracts

Consolidated

2014
$m

2013
$m

2014
$m

2013
$m

2014
$m

2013
$m

Policy liabilities
Gross liability brought forward
Movements in policy liabilities reflected in the income statement
Deposit premium recognised as a change in life investment contract liabilities
Fees recognised as a change in life investment contract liabilities
Withdrawal recognised as a change in other life investment contract liabilities

31,703
2,388
5,311
(462)
(4,902)

28,763
3,758
3,937
(457)
(4,308)

685
(169)
–
–
–

774
(89)
–
–
–

32,388
2,219
5,311
(462)
(4,902)

29,537
3,679
3,937
(457)
(4,308)Gross policy liabilities closing balance

34,03831,703516

685

34,55432,388

Liabilities ceded under reinsurance1
Balance brought forward
Increase in reinsurance assets reflected in the income statement

–
–

–
–

519
72

509
10

519
72

509
10

Closing balance

–

–

591

519

591

519

34,03831,703(75)

166

33,96331,869Total policy liabilities net of reinsurance asset
1 Liabilities ceded under reinsurance contracts are shown as ‘other assets’.

c) Sensitivity analysis – Life investment contract liabilities
Market risk arises on the Group’s life insurance business in respectof life investment contracts where an element of the liability to thepolicyholder is guaranteed by the Group. The value of the guarantee
is impacted by changes in underlying asset values and interest rates.
As at 30 September 2014, a 10% decline in equity markets would
have decreased profit by $15 million (2013: $7 million) and a 10%
increase would have increased profit by nil (2013: $nil). A 1% increase
in interest rates at 30 September 2014 would have decreased
profit by $9 million (2013: $1 million) and 1% decrease would haveincreased profit by nil (2013: $nil).
METHODS AND ASSUMPTIONS – LIFE INSURANCECONTRACTS
Significant actuarial methods
The effective date of the actuarial report on policy liabilities (which
includes insurance contract liabilities and life investment contract
liabilities) and solvency requirements is 30 September 2014.
In Australia, the actuarial report was prepared by Mr Jaimie Sach FIAA
Appointed Actuary, a fellow of the Institute of Actuaries of Australia.
The actuarial reports indicate Mr Sach is satisfied as to the accuracyof the data upon which policy liabilities have been determined.

The amount of policy liabilities has been determined in accordancewith methods and assumptions disclosed in this financial report andthe requirements of the Life Act, which includes applicable standardsof the APRA.
Policy liabilities have been calculated in accordance with Prudential
Standard LPS 340 Valuation of Policy Liabilities issued by the APRA in
accordance with the requirements of the Life Act. For life insurance
contracts the Standard requires the policy liabilities to be calculated
in a way which allows for the systematic release of planned margins
as services are provided to policyholders.
The profit carriers used to achieve the systematic release of planned
margins are based on the product groups.
Critical assumptions
The valuation of the policy liabilities is dependant on a numberof variables including interest rate, equity prices, future expenses,
mortality, morbidity and inflation. The critical estimates andjudgements used in determining the policy liabilities is set out
in note 2 (vi) on page 96.

In New Zealand, the actuarial report was prepared by Mr Michael
Bartram FIAA FNZSA, a fellow of the Institute of Actuaries of Australia
and a fellow of the New Zealand Society of Actuaries. The amount ofpolicy liabilities has been determined in accordance with Professional
Standard 3: Determination of Life Insurance Policy Liabilities of the
New Zealand Society of Actuaries. The actuarial reports indicate that
Mr Bartram is satisfied as to the accuracy of the data upon which
policy liabilities have been determined.

NOTES TO THE FINANCIAL STATEMENTS187

NOTES TO THE FINANCIAL STATEMENTS (continued)
47: Life Insurance Business (continued)
Sensitivity analysis – life insurance contracts
The Group conducts sensitivity analysis to quantify the exposure of the life insurance contracts to risk of changes in the key underlying variables
such as interest rate, equity prices, mortality, morbidity and inflation. The valuations included in the reported results and the Group’s best
estimate of future performance is calculated using certain assumptions about these variables. The movement in any key variable will impact
the performance and net assets of the Group and as such represents a risk. The table below illustrates how changes in key assumptions would
impact the reported profit, insurance contract policy liabilities and equity at 30 September 2014.
Change invariable

Profit/(loss)
net ofreinsurance

Insurance
contract
liabilities
net ofreinsurance

Equity% change

$m

$m

$m

Market interest rates A change in market interest rates affects the value placed on future cash
flows. This changes profit and shareholder equity.

-1%
+1%

55
(44)

(77)
62

55
(44)

Expense risk

An increase in the level or inflationary growth of expenses over assumed
levels will decrease profit and shareholder equity.

-10%
+10%

–
–

–
–

–
–

Mortality risk

Greater mortality rates would lead to higher levels of claims occurring, increasing
associated claims cost and therefore reducing profit and shareholder equity.

-10%
+10%

(13)
(1)

18
1

(13)
(1)

Morbidity risk

The cost of health-related claims depends on both the incidence ofpolicyholders becoming ill and the duration which they remain ill. Higher
than expected incidence and duration would increase claim costs, reducing
profit and shareholder equity.

-10%
+10%

–
(3)

–
4

–
(3)

Discontinuance risk An increase in discontinuance rates at earlier durations has a negative effectas it affects the ability to recover acquisition expenses and commissions.

-10%
+10%

–
(2)

–
3

–
(2)

Variable

Impact of movement in underlying variable

LIFE INSURANCE RISK
Insurance risk is the risk of loss due to unexpected changes in current
and future insurance claims rates. Insurance risk exposure arises in thelife insurance business as the risk that claims payments are greaterthan expected. In the life insurance business this arises primarily
through mortality (death) or morbidity (illness or injury) risks being
greater than expected.
Insurance risks are controlled through the use of underwriting
procedures and reinsurance arrangements. Controls are also
maintained over claims management practices to assist in the correct
and timely payment of insurance claims. Regular monitoring ofexperience is conducted at a sufficiently detailed level in order to
identify any deviation from expected claim levels.
Financial risks relating to the Group’s life insurance business are
generally monitored and controlled by selecting appropriate assets
to back insurance and life investment contract liabilities. Wherever
possible within regulatory constraints, the Group segregatespolicyholders funds from shareholders funds and sets investment
mandates that are appropriate for each. The assets are regularly
monitored by the Wealth Asset Liability Committee and Wealth
Product Committee to ensure that there are no material asset andliability mismatch issues and other risks, such as liquidity risk andcredit risk, are maintained within acceptable limits.
All financial assets within the life insurance statutory funds directly
support either the Group’s life insurance contracts or life investment
contracts. Market risk arises for the Group on contracts where theliabilities to policyholders are guaranteed. The Group manages thisrisk by the monthly monitoring and rebalancing of assets to policy
liabilities. However, for some contracts the ability to match asset
characteristics with policy obligations is constrained by a numberof factors including regulatory constraints, the lack of suitable
investments as well as by the nature of the policy liabilities themselves.
Market risk also arises from those life investment contracts where theasset management fees earned are directly impacted by the valueof the underlying assets. The Group is exposed to the risk of future
decreased asset management fees as a result of a decline in assets
under management and operational risk associated with the possible
failure to administer life investment contracts in accordance with the
product terms and conditions.

188

Risk strategy
In compliance with contractual and regulatory requirements, astrategy is in place to monitor that the risks underwritten satisfy
policyholders’ risk and reward objectives whilst not adversely
affecting the Group’s ability to pay benefits and claims when due.
The strategy involves the identification of risks by type, impact andlikelihood, the implementation of processes and controls to mitigate
the risks, and continuous monitoring and improvement of theprocedures in place to minimise the chance of an adverse complianceor operational risk event occurring. Included in this strategy are theprocesses and controls over underwriting, claims management andproduct pricing. Capital management is also a key aspect of theGroup’s risk management strategy.
Allocation of capital
The Group’s life insurance businesses are subject to regulatory capitalrequirements which prescribe the amount of capital to be held
depending on the contract liability.
Solvency margin requirements established by APRA are in place toreinforce safeguards for policyholders’ interest, which are primarily theability to meet future claims payments in respect of existing policies.
Methods to limit or transfer insurance risk exposures
Reinsurance – Reinsurance treaties are analysed using a numberof analytical modelling tools to assess the impact on the Group’s
exposure to risk with the objective of achieving the desired choice ofthe type of reinsurance and retention levels.
Underwriting procedures – Strategic underwriting decisions are put
into effect using the underwriting procedures detailed in the Group’s
underwriting manual. Such procedures include limits to delegatedauthorities and signing powers.
Claims management – Strict claims management procedures arein place to assist in the timely and correct payment of claims inaccordance with policy conditions.

ANZ ANNUAL REPORT 2014

48: Changes to comparatives
Certain amounts reported as comparative information have changed
as a result of the adoption of new accounting standards or being
reclassified to conform with current period financial statement
presentations.
The following changes have been made:BALANCE SHEET RECLASSIFICATION
During the period, the classification of the balance sheet has changed
to more consistently reflect the nature of the financial assets andliabilities. Prior to this reclassification, the balance sheet was classified
according to both nature and counterparty. The key changes include:
Assets}} Securities purchased under agreements to resell in less than threemonths previously reported in Liquid assets are now classified as Cash.
}} Money at call, bills receivable and remittances in transit previously
reported in Liquid assets are now classified as either Cash,
Settlement balances owed to ANZ or Net loans and advances
depending on the nature of the asset.
}} Loans to other banks previously reported in Due from otherfinancial institutions are now classified as Net loans and advances.
}} Collateral paid previously reported in Due from other financial
institutions is now classified separately.
}} Issued security settlements previously reported in Other assets are
now classified as Settlement balances owed to ANZ.
Liabilities}} Loans from other banks previously reported in Due to other financial
institutions are now classified as Deposits and other borrowings.
}} Collateral received previously reported in Due to other financial
institutions is now classified separately.
}} Issued security settlements previously reported in Payables and Otherliabilities are now classified as Settlement balances owed by ANZ.

CASH FLOW STATEMENTThe Group restated line items in the cash flow statement to alignwith the revised balance sheet classifications reflected below. In
addition, loans and advances with financial institution counterparties
with original maturities of less than 90 days were removed fromthe definition of ‘cash equivalents’ (as presented in the cash
flow statement). These balances now form part of net loans andadvances in the balance sheet and the associated cash inflows/
outflows form part of cash flows from operating activities. The Groupconsider that this change better reflects the characteristics of thesefinancial instruments.
EMPLOYEE BENEFITS
The adoption of the amendments to AASB 119 Employee Benefits
has resulted in changes to the measurement of the Group’s
defined benefit obligations. This has resulted in a restatement tocomparatives in the Income Statement and Balance Sheet. Refer note
1A(iv) for further details.
BUSINESS TAXES REPORTED IN ASIA
During the year business taxes which were previously reported asa contra to revenue were classified as expenses to better reflect
the nature of the transaction. Comparative information has been
reclassified accordingly.
OWN CREDIT RISK OF FINANCIAL LIABILITIES AT FAIR VALUE
The early application of the own credit requirements in AASB 9
has resulted in the fair value loss attributable to own credit risk offinancial liabilities being reclassified from other operating income
to other comprehensive income. This has resulted in a restatementof the Income Statement and the Statement of Comprehensive
Income with no impact on the Balance Sheet. Refer note 1 A(iv)for further details.
Previously reported

Balance sheet
reclassification

Employee benefits

Currently reported

$m

$m

$m

$m

AssetsLiquid assets
Due from other financial institutions
Cash
Settlement balances owed to ANZCollateral paid
Available-for-sale assets
Net loans and advances
Deferred tax assets
Other assets
All other assets

39,737
22,177–––28,135469,295
721
7,574
135,352(39,737)(22,177)
25,27019,2256,530
142
13,969–(3,222)
–

–
–
–
–
–
–
–
4
–
–

–
–
25,27019,2256,530
28,277483,264
725
4,352
135,352

Total assets

702,991–4

702,995

Liabilities
Due to other financial institutions
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Payables and other liabilities
All other liabilities

36,306––439,674
12,594
168,802(36,306)
8,695
3,921
27,241(3,551)
–

–
–
–
–
16
–

–
8,695
3,921
466,915
9,059
168,802

Consolidated 30 September 2013

Total liabilities

657,376–

16

657,392

Net Assets

45,615–(12)

45,603Retained earnings
All other equity

21,94823,667

–
–

(12)
–

21,936
23,667

Total shareholders’ equity

45,615–(12)

45,603NOTES TO THE FINANCIAL STATEMENTS

189

NOTES TO THE FINANCIAL STATEMENTS (continued)
48: Changes to comparatives (continued)
Previously
reported
Consolidated 2013

Business tax
restatement

Employeebenefits

Own credit risk

Currently
reported

$m

$m

$m

$m

$m

Net interest income
Other operating income

12,758
5,688

–
13

–
–

–
63

12,7585,764

Operating income
Operating expenses

18,446(8,236)

13
(13)

–
(8)

63
–

18,522(8,257)

Profit before credit impairment and income tax
Provision for credit impairment

10,210(1,188)

–
–

(8)
–

63
–

10,265(1,188)

Profit before income tax
Income tax expense/(benefit) and non-controlling interests

9,022(2,750)

–
–

(8)
2

63
(19)

9,077
(2,767)

Profit attributable to shareholders of the Company

6,272

–

(6)

44

6,310

Other comprehensive income net of tax attributable to shareholdersof the Company

1,614

–

11

(44)

1,581

Total comprehensive income attributable toshareholders of the Company

7,886

–

5

–

7,891

Earnings per ordinary share (cents)
Basic
Diluted

231.3
224.4

–
–

(0.2)
(0.2)

1.6
1.5

232.7
225.7

Employeebenefits$m

Currently
reported$mConsolidated 1 October 2012

Previously
reported$m

Balance sheet
reclassification$m

AssetsLiquid assets
Due from other financial institutions
Cash
Settlement balances owed to ANZCollateral paid
Available-for-sale assets
Net loans and advances
Deferred tax assets
Other assets
All other assets

36,578
17,103–––
20,562427,823
785
5,623
133,653(36,578)(17,103)
25,14314,016
6,878
79
8,804
–
(1,239)
–

–
–
–
–
–
–
–
7
–
–

–
–
25,14314,016
6,878
20,641
436,627792
4,384
133,653

Total assets

642,127–

7

642,134

Liabilities
Due to other financial institutions
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Payables and other liabilities
All other liabilities

30,538––397,123
10,109163,137(30,538)
5,416
2,531
23,690(1,099)
–

–
–
–
–
24
–

–
5,416
2,531
420,813
9,034
163,137

Total liabilities

600,907–24

600,931

Net assets
Retained earnings
All other equity

41,22019,72821,492

–
–
–

(17)
(17)
–

41,203
19,711
21,492

Total shareholders' equity

41,220–(17)

41,203190

ANZ ANNUAL REPORT 2014

48: Changes to comparatives (continued)
Previously
reported
The Company 30 September 2013

Balance sheet
reclassification

Employeebenefits

Currently
reported

$m

$m

$m

$m

AssetsLiquid assets
Due from other financial institutions
Cash
Settlement balances owed to ANZCollateral paid
Available-for-sale assets
Net loans and advances
Deferred tax assets
Other assets
All other assets

33,83818,947–––
23,823
372,467
936
5,246
163,740(33,838)(18,947)
22,798
16,621
5,638–
10,706–(2,978)
–

–
–
–
–
–
–
–
–
–
–

–
–
22,798
16,621
5,638
23,823
383,173
936
2,268
163,740

Total assets

618,997––

618,997

Liabilities
Due to other financial institutions
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Payables and other liabilities
All other liabilities

34,149––359,013
9,545
177,225(34,149)
7,451
3,531
26,436(3,269)
–

–
–
–
–
–
–

–
7,451
3,531
385,449
6,276
177,225

Total liabilities

579,932––

579,932

Net Assets
Retained earnings
All other equity

39,065
14,75324,312

–
–
–

–
–
–

39,065
14,75324,312

Total shareholders’ equity

39,065––39,065Previously
reported
The Company 2013

Business tax
restatement

Employeebenefits

Own credit risk

Currently
reported

$m

$m

$m

$m

$m

Net interest income
Other operating income

9,364
5,389

–
–

–
–

–
63

9,364
5,452

Operating income
Operating expenses

14,753(6,505)

–
–

–
(4)

63
–

14,816(6,509)Profit before credit impairment and income tax
Provision for credit impairment

8,248(1,132)

–
–

(4)
–

63
–

8,307
(1,132)

Profit before income tax
Income tax expense/(benefit)

7,116(1,770)

–
–

(4)
1

63
(19)

7,175
(1,788)

Profit attributable to shareholders of the Company

5,346

–

(3)

44

5,387

191

–

3

(44)

150

5,537

–

–

–

5,537

Other comprehensive income net of tax attributable to shareholdersof the Company
Total comprehensive income attributable to shareholders of
the Company

NOTES TO THE FINANCIAL STATEMENTS

191

NOTES TO THE FINANCIAL STATEMENTS (continued)
48: Changes to comparatives (continued)
Previously reported$mBalance sheet
reclassification$m

AssetsLiquid assets
Due from other financial institutions
Cash
Settlement balances owed to ANZCollateral paid
Available-for-sale assets
Net loans and advances
Deferred tax assets
Other assets
All other assets

32,782
14,167–––
17,841350,060
768
3,747
153,642(32,782)(14,167)
10,987
21,783
5,875
–
9,412
–
(1,108)
–

–
–
–
–
–
–
–
–
–
–

–
–
10,987
21,783
5,875
17,841
359,472768
2,639
153,642

The Company 1 October 2012

Employee benefits$mCurrently reported$m

Total assets

573,007––573,007

Liabilities
Due to other financial institutions
Settlement balances owed by ANZ
Collateral received
Deposits and other borrowings
Payables and other liabilities
All other liabilities

28,394––
333,536
7,554
166,480(28,394)
4,337
2,326
22,595
(864)
–

–
–
–
–
–
–

–
4,337
2,326
356,131
6,690
166,480

Total liabilities

535,964––

535,964

Net assets
Retained earnings
All other equity

37,043
13,50823,535

–
–
–

–
–
–

37,043
13,50823,535

Total shareholders' equity

37,043––37,043

Consolidated
2013
Previously
reported
Inflows(Outflows)

Reclassification$m

The Company
2013
Restated
Sep 13
Inflows(Outflows)

Previously
reported
Inflows(Outflows)$m$m

16,167

13,877(7,607)(6,222)

Reclassification

Restated
Sep 13
Inflows(Outflows)(1,193)

12,684$m

Net cash provided by/(used in) operating activities

17,606

Net cash provided by/(used in) investing activities(7,607)

Net cash provided by/(used in) financing activities(4,096)(4,096)(2,338)Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Effects of exchange rate changes on cash and cash equivalents

5,903
41,4501,670(1,439)(5,943)
(530)

4,464
35,5071,140

5,317
36,2681,130(1,193)(4,849)
(394)

4,124
31,419736

Cash and cash equivalents at end of year

49,023(7,912)

41,111

42,715(6,436)36,27949: Events Since the End of the Financial Year
There have been no material events since the end of the financial year.

192(1,439)(6,222)(2,338)ANZ ANNUAL REPORT 2014

DIRECTORS’ DECLARATION AND RESPONSIBILITY STATEMENT
Directors’ Declaration
The Directors of Australia and New Zealand Banking Group Limited declare that:a) in the Directors’ opinion, the financial statements and notes of the Company and the consolidated entity are in accordance with the
Corporations Act 2001, including:i) section 296, that they comply with the Australian Accounting Standards and any further requirements of the Corporations
Regulations 2001; andii) section 297, that they give a true and fair view of the financial position of the Company and of the consolidated entity as at
30 September 2014 and of their performance for the year ended on that date;b) the notes to the financial statements of the Company and the consolidated entity include a statement that the financial statements
and notes of the Company and the consolidated entity comply with International Financial Reporting Standards;c) the Directors have been given the declarations required by section 295A of the Corporations Act 2001;d) in the Directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they
become due and payable; ande) the Company and certain of its wholly owned controlled entities (listed in note 43) have executed a Deed of Cross Guarantee enablingthem to take advantage of the accounting and audit relief offered by class order 98/1418 (as amended), issued by the Australian Securities
and Investments Commission. The nature of the Deed of Cross Guarantee is to guarantee to each creditor payment in full of any debt inaccordance with the terms of the Deed of Cross Guarantee. At the date of this declaration, there are reasonable grounds to believe that theCompany and its controlled entities which executed the Deed of Cross Guarantee are able, as an economic entity, to meet any obligations
or liabilities to which they are, or may become, subject by virtue of the Deed of Cross Guarantee.

Signed in accordance with a resolution of the Directors.

David M Gonski, AC
ChairmanMichael R P Smith, OBE
Director

5 November 2014

Responsibility statement of the Directors in accordance with the Disclosure and Transparency Rule 4.1.12 (3)(b) of theUnited Kingdom Financial Conduct Authority
The Directors of Australia and New Zealand Banking Group Limited confirm to the best of their knowledge that:
The Group’s Annual Report includes:i) a fair review of the development and performance of the business and the position of the Group and the undertakings includedin the consolidation taken as a whole; together withii) a description of the principal risks and uncertainties faced by the Group.
Signed in accordance with a resolution of the Directors.

David M Gonski, AC

ChairmanMichael R P Smith, OBE
Director

5 November 2014

DIRECTORS’ DECLARATION

193

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITEDREPORT ON THE FINANCIAL REPORTINDEPENDENCE

We have audited the accompanying financial report of Australia and
New Zealand Banking Group Limited (the Company), which comprises
the balance sheets as at 30 September 2014, and income statements,
statements of comprehensive income, statements of changes inequity and statements of cash flow for the year ended on that date,notes 1 to 49 comprising a summary of significant accounting policies
and other explanatory information and the directors’ declarationof the Company and the Group comprising the Company and theentities it controlled at the year’s end or from time to time during
the financial year.

In conducting our audit, we have complied with the independence
requirements of the Corporations Act 2001.

DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL REPORTThe directors of the Company are responsible for the preparationof the financial report that gives a true and fair view in accordancewith Australian Accounting Standards and the Corporations
Act 2001 and for such internal control as the directors determine
is necessary to enable the preparation of the financial report thatis free from material misstatement whether due to fraud or error.
In note 1(A)(i), the directors also state, in accordance with Australian
Accounting Standard AASB 101 Presentation of Financial Statements,that the financial statements comply with International Financial
Reporting Standards.
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on the financial reportbased on our audit. We conducted our audit in accordance with
Australian Auditing Standards. These Auditing Standards requirethat we comply with relevant ethical requirements relating toaudit engagements and plan and perform the audit to obtainreasonable assurance whether the financial report is free frommaterial misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial report.
The procedures selected depend on the auditor’s judgement,
including the assessment of the risks of material misstatement of thefinancial report, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to theentity’s preparation of the financial report that gives a true and fairview in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and thereasonableness of accounting estimates made by the directors, as well
as evaluating the overall presentation of the financial report.

AUDITOR’S OPINION
In our opinion:(a) the financial report of Australia and New Zealand Banking
Group Limited is in accordance with the Corporations Act 2001,
including:(i) giving a true and fair view of the Company’s and the Group’s
financial position as at 30 September 2014 and of theirperformance for the year ended on that date; and(ii) complying with Australian Accounting Standards and the
Corporations Regulations 2001.
(b) the financial report also complies with International Financial
Reporting Standards as disclosed in note 1(A)(i).
REPORT ON THE REMUNERATION REPORT
We have audited the remuneration report included in pages 28 to
56 of the directors’ report for the year ended 30 September 2014.
The directors of the Company are responsible for the preparationand presentation of the remuneration report in accordance with
Section 300A of the Corporations Act 2001. Our responsibility is toexpress an opinion on the remuneration report, based on our audit
conducted in accordance with Australian Auditing Standards
AUDITOR’S OPINION
In our opinion, the remuneration report of Australia and New Zealand
Banking Group Limited for the year ended 30 September 2014,
complies with Section 300A of the Corporations Act 2001.

KPMG
MelbourneAndrew Yates
Partner

5 November 2014

We performed the procedures to assess whether in all material
respects the financial report presents fairly, in accordance with
the Corporations Act 2001 and Australian Accounting Standards,
a true and fair view which is consistent with our understandingof the Company’s and the Group’s financial position and of
their performance.
We believe that the audit evidence we have obtained is sufficientand appropriate to provide a basis for our audit opinion.

194

KPMG, an Australian partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”),
a Swiss entity.
Liability limited by a scheme approved under Professional Standards Legislation.

ANZ ANNUAL REPORT 2014

SECTION 3
Five Year Summary

196

Principal Risks and Uncertainties

197

Supplementary Information

206

Shareholder Information

208

Glossary of Financial Terms

214

Alphabetical Index

216

SECTION 3

195

FIVE YEAR SUMMARY
2014
$m

20132
$m

2012
$m

2011
$m

2010
$m

Financial performance1
Net interest income
Other operating income
Operating expenses

13,797
5,781(8,760)12,772
5,619(8,257)

12,1105,738(8,519)11,5005,385(8,023)

10,862
4,920(6,971)

Profit before credit impairment and income tax
Credit impairment charge
Income tax expense
Non-controlling interests

10,818(989)(2,700)(12)

10,134(1,197)(2,435)(10)

9,329(1,258)(2,235)(6)

8,862(1,220)(2,167)(8)

8,811(1,820)(1,960)(6)

Cash/underlying profit1
Adjustments to arrive at statutory profit1

7,117
154

6,492
(182)

5,830
(169)

5,467
(112)

5,025
(524)

Profit attributable to shareholders of the Company

7,271

6,310

5,661

5,355

4,501

Financial position
AssetsNet assets
Common Equity Tier 13
Common Equity Tier 1 – Internationally Comparable Basel 34
Return on average ordinary equity5
Return on average assets
Cost to income ratio (cash/underlying)1

772,092
49,284
8.8%
12.7%
15.8%
1.0%
44.7%

702,995
45,603
8.5%
12.7%
15.0%
0.9%
44.9%

642,127
41,220
8.0%
11.6%
14.6%
0.9%
47.7%

604,21337,954
8.5%
n/a
15.3%
0.9%
47.5%

531,703
34,155
8.0%
n/a
13.9%
0.9%
44.2%

Shareholder value – ordinary shares
Total return to shareholders (share price movement plus dividends)
Market capitalisation
Dividend
Franked portion– interim– final5.9%
85,235
178c
100%
100%

31.5%
84,450
164c
100%
100%

35.4%
67,255
145c
100%
100%

(12.6%)
51,319
140c
100%
100%

1.9%
60,614
126c
100%
100%

$35.07$28.84$30.92$32.09$23.42$30.78$25.12$18.60$24.75$25.96$17.63$19.52$26.23$19.95$23.68267.1c67.4%$14.652,756.6

232.7c71.4%$13.482,743.7

213.4c69.4%$12.22
2,717.4

208.2c68.6%$11.44
2,629.0

178.9c71.6%$10.382,559.7$33.30–$28.96$31.83$20.44$23.64$21.69$19.09$21.32$22.601,220
50,328498,309

1,274
49,866468,343

1,337
48,239438,958

1,381
50,297442,943

1,394
47,099411,692

Share price– high– low– closing

Share information(per fully paid ordinary share)
Earnings per share
Dividend payout ratio
Net tangible assets per ordinary share6
No. of fully paid ordinary shares issued (millions)
Dividend Reinvestment Plan (DRP) issue price– interim– finalOther information
Points of representation7
No. of employees (full time equivalents)8
No. of shareholders9

1 Since 1 October 2012, the Group has used cash profit as a measure of the result of the ongoing business activities of the Group enabling shareholders to assess Group and divisional performanceagainst prior periods and against peer institutions. For 2012 - 2014 statutory profit has been adjusted for non-core items to arrive at cash profit. For 2010 and 2011 statutory profit has beenadjusted for non-core items to arrive at underlying profit, which like cash profit, is a measure of the ongoing business performance of the Group but used somewhat different criteria for the
adjusting items. Neither cash profit nor underlying profit are audited; however, the external auditor has informed the Audit Committee that the adjustments have been determined on aconsistent basis across each period presented.
2 As set out in note 1 of the financial statements the Group adopted certain new Accounting Standards during the year and 2013 comparative information has been restated in line with therequirements of the standards.
3 Calculated in accordance with APRA Basel 3 requirements for 2012-2014. Comparatives for 2010-2011 are calculated on a Basel 2 basis.
4 Previously disclosed International Harmonised capital ratios (Internationally Harmonised Basel 3) have been replaced with Internationally Comparable capital ratios as per the methodology inthe “Australian Bankers’ Association: International comparability of capital ratios of Australia’s major banks” (August 2014) report prepared by PwC Australia. The 2012 and 2013 ratios have been
restated for the change in methodology to Internationally Comparable capital ratios.
5 Average ordinary equity excludes non-controlling interests and preference shares.
6 Equals shareholders’ equity less preference share capital, goodwill, software and other intangible assets divided by the number of ordinary shares.
7 Includes branches, offices, representative offices and agencies.
8 During 2014 the Group migrated onto a single global HR platform. In doing so, the Group revised and standardised the measure of FTE and this resulted in an increase in FTE.
Comparative information has been restated for 2013 only.
9 Excludes employees whose only ANZ shares are held in trust under ANZ employee share schemes.

196

ANZ ANNUAL REPORT 2014

PRINCIPAL RISKS AND UNCERTAINTIES
1. Introduction
The Group’s activities are subject to risks that can adversely
impact its business, operations and financial condition. The risks
and uncertainties described below are not the only ones that theGroup may face. Additional risks and uncertainties that the Groupis unaware of, or that the Group currently deems to be immaterial,
may also become important factors that affect it. If any of the listed
or unlisted risks actually occur, the Group’s business, operations,financial condition, or reputation could be materially and adversely
affected, with the result that the trading price of the Group’s equity
or debt securities could decline, and investors could lose all or partof their investment.

2. Changes in general business and economic
conditions, including disruption in regional
or global credit and capital markets, may
adversely affect the Group’s business,
operations and financial condition
The Group’s financial performance is primarily influenced by the
economic conditions and the level of business activity in the majorcountries and regions in which it operates or trades, i.e. Australia,
New Zealand, the Asia Pacific region, Europe and the United States.
The Group’s business, operations, and financial condition can be
negatively affected by changes in economic and business conditionsin these markets.
The economic and business conditions that prevail in the Group’s
major operating and trading markets are affected by domestic andinternational economic events, political events, natural disasters, andby movements and events that occur in global financial markets.
The global financial crisis saw a sudden and prolonged dislocationin credit and equity capital markets, a contraction in global
economic activity and the creation of many challenges for financial
services institutions worldwide that still persist to some extent inmany regions. Sovereign risk and its potential impact on financial
institutions in Europe and globally subsequently emerged as asignificant risk to the growth prospects of the various regional
economies and the global economy. The impact of the global
financial crisis and its aftermath (such as heightened sovereign risk)
continue to affect regional and global economic activity, confidence
and capital markets. Prudential authorities have implemented andcontinue to implement increased regulations to mitigate the risk ofsuch events recurring, although there can be no assurance that such
regulations will be effective.
The economic effects of the global financial crisis and the European
sovereign debt crisis have been widespread and far-reaching withunfavourable ongoing impacts on retail spending, personal andbusiness credit growth, housing credit, and business and consumer
confidence. While some of these economic factors have since
improved, lasting impacts from the global financial crisis and thesubsequent volatility in financial markets, the European sovereign
debt crisis and the potential for escalation in geopolitical risks
suggest ongoing vulnerability and potential adjustment of consumer
and business behaviour.

A sovereign debt crisis could have serious implications for
the European Union and the Euro which, depending on thecircumstances in which it takes place and the countries andcurrencies affected, could adversely impact the Group’s business
operations and financial condition. Likewise, if one or more
European countries re-introduce national currencies, and the Eurodestabilises, the Group’s business operations could be disrupted
by currency fluctuations and difficulties in hedging against such
fluctuations. A Chinese economy “hard landing” would likely resultin a marked rise in global risk aversion and increased financial market
volatility, driving our cost of funds significantly higher and adversely
affecting the Group’s business operations and financial condition.
The New Zealand economy is also vulnerable to more volatile markets
and deteriorating funding conditions.
Should difficult economic conditions in our markets eventuate,
asset values in the housing, commercial or rural property markets
could decline, unemployment could rise and corporate and personal
incomes could suffer. Also, deterioration in global markets, including
equity, property, currency and other asset markets, could impact theGroup’s customers and the security the Group holds against loans
and other credit exposures, which may impact its ability to recoversome loans and other credit exposures.
All or any of the negative economic and business impacts describedabove could cause a reduction in demand for the Group’s products
and services and/or an increase in loan and other credit defaults
and bad debts, which could adversely affect the Group’s business,
operations, and financial condition.
The Group’s financial performance could also be adversely affected
if it were unable to adapt cost structures, products, pricing or
activities in response to a drop in demand or lower than expected
revenues. Similarly, higher than expected costs (including credit andfunding costs) could be incurred because of adverse changes in theeconomy, general business conditions or the operating environment
in the countries in which it operates.
Other economic and financial factors or events which may adversely
affect the Group’s performance and results include, but are notlimited to, the level of and volatility in foreign exchange rates andinterest rates, changes in inflation and money supply, fluctuations
in both debt and equity capital markets, declining commodity prices
due to, for example, reduced demand in Asia, especially North Asia/
China, and decreasing consumer and business confidence.
Geopolitical instability, such as threats of, potential for, or actual
conflict, occurring around the world, such as the ongoing unrest andconflicts in the Ukraine, North Korea, Syria, Egypt, Afghanistan, Iraq
and elsewhere as well as the current high threat of terrorist activities
may also adversely affect global financial markets, general economic
and business conditions and the Group’s ability to continue operatingor trading in a country, which in turn may adversely affect the Group’sbusiness, operations, and financial condition.
Natural and biological disasters such as, but not restricted to,cyclones, floods, earthquakes and pandemics (e.g. Ebola), and theeconomic and financial market implications of such disasters on
domestic and global conditions can adversely impact the Group’s
ability to continue operating or trading in the country or countries
directly or indirectly affected, which in turn may adversely affect
the Group’s business, operations and financial condition. For more
specific risks in relation to earthquakes, refer to the risk factor No. 20.

PRINCIPAL RISKS AND UNCERTAINTIES197

PRINCIPAL RISKS AND UNCERTAINTIES (continued)
3. Changes in exchange rates may adversely
affect the Group’s business, operations andfinancial condition
Despite the recent decline, the Australian dollar is still higher thanmost conventional estimates of fundamentals would indicate which
illustrates the significance of global economic events to the valueof the Australian dollar relative to other currencies. Consequently
any upward pressure on the Australian or New Zealand dollar would
cause business conditions to deteriorate for certain portions of theAustralian and New Zealand economies, including some agricultural
exports, tourism, manufacturing, retailing subject to internetcompetition, and import-competing producers. The relationshipbetween exchange rates and commodity prices is volatile. In contrast,
a depreciation of the Australian or New Zealand dollars relative
to other currencies would increase the debt service obligations
in Australia or New Zealand dollar terms of unhedged exposures.
Appreciation of the Australian dollar against the New Zealand dollar,
United States dollar and other currencies has a potential negative
earnings translation effect on non-hedged exposures, and futureappreciation could have a greater negative impact on the Group’s
results from its other non-Australian businesses, particularly its
New Zealand and Asian businesses, which are largely based on
non‑Australian dollar revenues. The Group has put in place hedges
to partially mitigate the impact of currency changes, but there canbe no assurance that the Group’s hedges will be sufficient or effective,
and any further appreciation could have an adverse impact upon theGroup’s earnings.

4. Competition may adversely affect the Group’sbusiness, operations and financial condition,
especially in Australia, New Zealand and the
Asian markets in which it operates
The markets in which the Group operates are highly competitiveand could become even more so, particularly in those countries thatare considered to provide higher growth prospects (such as thosein the Asian region) and segments that are in the greatest demand(for example, customer deposits in Australia and New Zealand).
Factors that contribute to competition risk include industry
regulation, mergers and acquisitions, changes in customers’ needs
and preferences, entry of new participants, development of new
distribution and service methods, increased diversification of products
by competitors, and regulatory changes in the rules governing
the operations of banks and non-bank competitors. For example,
changes in the financial services sector in Australia and New Zealandhave made it possible for non-banks to offer products and services
traditionally provided by banks, such as automatic payments
systems, mortgages, and credit cards. In addition, it is possible thatexisting companies from outside of the traditional financial services
sector may seek to obtain banking licences to directly competewith the Group by offering products and services traditionallyprovided by banks. In addition, banks organised in jurisdictions
outside Australia and New Zealand are subject to different levelsof regulation and consequently some may have lower cost structures.
Increasing competition for customers could also potentially leadto a compression in the Group’s net interest margins or increased
advertising and related expenses to attract and retain customers.
Additionally, the Australian Government announced in late 2010 a setof measures with the stated purpose of promoting a competitive andsustainable banking system in Australia. The reforms consisted of a198

variety of actions including, but not limited to, a ban on exit fees for
new home loans, implementation of easier switching processes fordeposits and mortgages customers, empowerment of the AustralianCompetition and Consumer Commission to investigate and prosecuteanti-competitive price signalling, changes in the way fees and interest
are charged on credit cards and reforms which allow Australianbanks, credit unions and building societies to issue covered bonds.
While many of these reforms have been implemented since 2011,and have the potential to change the competitive position of allbanks in Australia, the Group has adapted to these reforms and has
maintained its competitive position. Nevertheless, any regulatory
or behavioural change that occurs in response to these reforms, or
as a result of the current Australian Commonwealth Government
Financial System Inquiry known as the ‘Murray Inquiry’, could havethe effect of limiting or reducing the Group’s revenue earned fromits banking products or operations. These regulatory changes could
also result in higher operating costs. A reduction or limitation inrevenue or an increase in operating costs could adversely affect theGroup’s profitability.
The effect of competitive market conditions, especially in the Group’s
main markets and products, may lead to erosion in the Group’s
market share or margins, and adversely affect the Group’s business,
operations, and financial condition.

5. Changes in monetary policies may adversely
affect the Group’s business, operations andfinancial condition
Central monetary authorities (including the RBA, the RBNZ, theUnited States Federal Reserve and the monetary authorities in the
Asian jurisdictions in which the Group carries out business) set official
interest rates or take other measures to affect the demand for money
and credit in their relevant jurisdictions. In some Asian jurisdictions,currency policy is also used to influence general business conditions
and the demand for money and credit. These policies can significantly
affect the Group’s cost of funds for lending and investing and thereturn that the Group will earn on those loans and investments.
These factors impact the Group’s net interest margin and can affectthe value of financial instruments it holds, such as debt securities andhedging instruments. The policies of the central monetary authorities
can also affect the Group’s borrowers, potentially increasing the riskthat they may fail to repay loans. Changes in such policies are difficult
to predict.

6. Sovereign risk may destabilise global financial
markets adversely affecting all participants,
including the Group
Sovereign risk is the possibility that foreign governments will default
on their debt obligations, increase borrowings, be unable to refinancetheir debts as and when they fall due or nationalise participants intheir economy. Sovereign risk remains in many economies, including
the United States and in Europe. Should one sovereign default, there
could be a cascading effect to other markets and countries, theconsequences of which are difficult to predict and may be similar
to or worse than those experienced during the global financial crisisand subsequent sovereign debt crises. Such events could destabilise
global financial markets adversely affecting all participants, including
the Group.

ANZ ANNUAL REPORT 2014

7. The Group is exposed to liquidity and funding
risk, which may adversely affect its business,
operations and financial condition
Liquidity risk is the risk that the Group is unable to meet its payment
obligations as they fall due (including repaying depositors or
maturing wholesale debt) or that the Group has insufficient capacity
to fund increases in assets. Liquidity risk is inherent in all banking
operations due to the timing mismatch between cash inflows andcash outflows.
Reduced liquidity could lead to an increase in the cost of the Group’s
borrowings and constrain the volume of new lending, which could
adversely affect the Group’s profitability. A deterioration in investor
confidence in the Group could materially impact the Group’s cost of
borrowing, and the Group’s ongoing operations and funding.
The Group raises funding from a variety of sources, including
customer deposits and wholesale funding in Australia and offshore
markets to meet its funding obligations and to maintain or growits business generally. In times of liquidity stress, if there is damage
to market confidence in the Group or if funding inside or outsideof Australia is not available or constrained, the Group’s ability toaccess sources of funding and liquidity may be constrained and it
will be exposed to liquidity risk. In any such cases, the Group may beforced to seek alternative funding. The availability of such alternative
funding, and the terms on which it may be available, will depend on
a variety of factors, including prevailing market conditions and theGroup’s credit ratings. Even if available, the cost of these alternatives
may be more expensive or on unfavourable terms.
Since the advent of the global financial crisis, developments in
the United States and European markets have adversely affected
the liquidity in global capital markets and increased funding costs
compared with the period immediately preceding the global financial
crisis. More recently, the provision of significant amounts of liquidity
by major central banks globally has helped mitigate near term
liquidity concerns, although no assurance can be given that suchliquidity concerns will not return. Future deterioration in market
conditions may limit the Group’s ability to replace maturing liabilities
and access funding in a timely and cost-effective manner necessary
to fund and grow its business.

8. The Group is exposed to the risk that its
credit ratings could change, which could
adversely affect its ability to raise capital andwholesale funding
The Group’s credit ratings have a significant impact on both its access
to, and cost of, capital and wholesale funding. Credit ratings may be
withdrawn, qualified, revised or suspended by credit rating agencies
at any time. The methodologies by which they are determined may
also be revised in response to legal or regulatory changes, market
developments or for any other reason. A downgrade or potential
downgrade to the Group’s credit rating may reduce access to capitaland wholesale debt markets, leading to an increase in funding costs,
as well as affecting the willingness of counterparties to transact
with it.

In addition, the ratings of individual securities (including, but notlimited to, certain Tier 1 capital and Tier 2 capital securities andcovered bonds) issued by the Group (and other banks globally)
could be impacted from time to time by changes in the ratings
methodologies used by rating agencies. In September 2014 ,Moody’s Investors Service released a proposed new bank rating
methodology reflecting insights gained from the global financial
crisis and more recent instances of banking sector distress, as wellas proposed changes in regulatory supervision and approaches tobank resolution and recovery. As a result of the proposed rating
methodology, Moody’s could downgrade the credit ratings of ANZ
and other members of the Group. On 18 September 2014, Standard& Poor’s (S&P) published revised rating criteria for bank hybrid capital
instruments. Among other things, the new criteria incorporates
the assumption of higher risk of loss absorption for bank hybrids.
Following this, on 30 September 2014, S&P announced a one notchrating downgrade to ANZ’s Convertible Preference Shares 2 andEuro Trust Securities issues under the new methodology.
Credit ratings are not a recommendation by the relevant rating
agency to invest in securities offered by the Group.

9. The Group may experience challenges inmanaging its capital base, which could giverise to greater volatility in capital ratios
The Group’s capital base is critical to the management of its
businesses and access to funding. Prudential regulators of the Group
include, but are not limited to, APRA, RBNZ and various regulators inAsia Pacific jurisdictions. The Group is required to maintain adequate
regulatory capital.
Under current regulatory requirements, risk-weighted assets andexpected loan losses increase as a counterparty’s risk grade worsens.
These additional regulatory capital requirements compound any
reduction in capital resulting from lower profits in times of stress.
As a result, greater volatility in capital ratios may arise and may
require the Group to raise additional capital. There can be no
certainty that any additional capital required would be available
or could be raised on reasonable terms.
The Group’s capital ratios may be affected by a number of factors,
such as (i) lower earnings (including lower dividends from its
deconsolidated subsidiaries including its insurance and funds
management businesses and associates), (ii) increased asset growth,(iii) changes in the value of the Australian dollar and/or New Zealanddollar against other currencies in which the Group operates(particularly the United States dollar) that impact risk weighted
assets or the foreign currency translation reserve and (iv) changes
in business strategy (including acquisitions and investments or an
increase in capital intensive businesses).
APRA’s Prudential Standards implementing Basel 3 are now in
effect. Certain other regulators have either implemented or are in
the process of implementing regulations, including Basel 3, whichseek to strengthen, among other things, the liquidity and capitalrequirements of banks, funds management entities and insurance
entities, though there can be no assurance that these regulations
will have their intended effect. Some of these regulations, together
with any risks arising from any regulatory changes, are described in
the risk factor No. 21.

PRINCIPAL RISKS AND UNCERTAINTIES199

PRINCIPAL RISKS AND UNCERTAINTIES (continued)
10. The Group is exposed to credit risk, which
may adversely affect its business, operations
and financial condition
As a financial institution, the Group is exposed to the risks associatedwith extending credit to other parties. Less favourable business or
economic conditions, whether generally or in a specific industry
sector or geographic region, or natural disasters, could cause
customers or counterparties to fail to meet their obligations inaccordance with agreed terms. For example, its customers andcounterparties in the natural resources sector could be adversely
impacted in the event of a prolonged slowdown in the Chinese
economy. Also, its customers and counterparties in the agriculture,
tourism and manufacturing industries have been and may continue
to be adversely impacted by the sustained strength of the Australianand New Zealand dollar relative to other currencies. The Group holds
provisions for credit impairment. The amount of these provisions
is determined by assessing the extent of impairment inherent
within the current lending portfolio, based on current information.
This process, which is critical to the Group’s financial condition
and results, requires difficult, subjective and complex judgments,
including forecasts of how current and future economic conditions
might impair the ability of borrowers to repay their loans. However,if the information upon which the assessment is made proves to beinaccurate or if the Group fails to analyse the information correctly,
the provisions made for credit impairment may be insufficient,which could have a material adverse effect on the Group’s business,
operations and financial condition.
In addition, in assessing whether to extend credit or enter into
other transactions with customers and/or counterparties, the Grouprelies on information provided by or on behalf of customers and/or counterparties, including financial statements and other financial
information. The Group may also rely on representations of customers
as to the accuracy and completeness of that information and, withrespect to financial statements, on reports of independent auditors.
The Group’s financial performance could be negatively impacted
to the extent that it relies on information that is inaccurate ormaterially misleading.

11. An increase in the failure of third parties tohonour their commitments in connection
with the Group’s trading, lending, derivatives
and other activities may adversely affect its
business, operations and financial condition
The Group is exposed to the potential risk of credit-related losses
that can occur as a result of a counterparty being unable or unwillingto honour its contractual obligations. As with any financial services
organisation, the Group assumes counterparty risk in connection
with its lending, trading, derivatives and other businesses where it
relies on the ability of a third party to satisfy its financial obligations
to the Group on a timely basis. The Group is also subject to the riskthat its rights against third parties may not be enforceable in certain
circumstances.
The risk of credit-related losses may also be increased by a numberof factors, including deterioration in the financial condition of theeconomy, a sustained high level of unemployment, a deteriorationof the financial condition of the Group’s counterparties, a reductionin the value of assets the Group holds as collateral, and a reductionin the market value of the counterparty instruments and obligations
it holds.

200

The Group is directly and indirectly exposed to the Australianmining sector and mining-related contractors and industries. Shouldcommodity prices materially decrease due to, for example, reduced
demand in Asia, especially North Asia/China, and/or mining activity,
demand for resources, or corporate investment in the mining sector
suffer material decreases from historical levels, the amount of newlending the Group is able to write may be adversely affected, and theweakening of the sector could be of sufficient magnitude to lead toan increase in lending losses from this sector.
Credit losses can and have resulted in financial services organisations
realising significant losses and in some cases failing altogether.
Should material unexpected credit losses occur to the Group’s credit
exposures, it could have an adverse effect on the Group’s business,
operations and financial condition.

12. Weakening of the real estate markets inAustralia, New Zealand or other markets
where the Group does business may
adversely affect its business, operations
and financial condition
Residential, commercial and rural property lending, together withproperty finance, including real estate development and investment
property finance, constitute important businesses to the Group.
A decrease in property valuations in Australia, New Zealand or othermarkets where it does business could result in a decrease in theamount of new lending the Group is able to write and/or increase
the losses that the Group may experience from existing loans, which,in either case, could materially and adversely impact the Group’s
financial condition and results of operations. A significant slowdown
in the Australian and New Zealand housing markets or in othermarkets where it does business could adversely affect the Group’sbusiness, operations and financial conditions.

13. The Group is exposed to market risk, which
may adversely affect its business, operations
and financial condition
The Group is subject to market risk, which is the risk to the Group’s
earnings arising from changes in interest rates, foreign exchange
rates, credit spreads, equity prices and indices, prices of commodities,
debt securities and other financial contracts, such as derivatives.
Losses arising from these risks may have a material adverse effecton the Group. As the Group conducts business in several different
currencies, its businesses may be affected by a change in currency
exchange rates. Additionally, as the Group’s annual and interim
reports are prepared and stated in Australian dollars, any appreciationin the Australian dollar against other currencies in which theGroup earns revenues (particularly to the New Zealand dollar andUnited States dollar) may adversely affect the reported earnings.
The profitability of the Group’s funds management and insurance
businesses is also affected by changes in investment markets andweaknesses in global securities markets.

ANZ ANNUAL REPORT 201414. The Group is exposed to the risks associatedwith credit intermediation and financial
guarantors, which may adversely affect its
business, operations and financial condition
The Group entered into a series of structured credit intermediation
trades from 2004 to 2007. The Group sold protection using
credit default swaps over these structures and then, to mitigate
risk, purchased protection via credit default swaps over thesame structures from eight United States financial guarantors.
The underlying structures involve credit default swaps over synthetic
collateralised debt obligations, portfolios of external collateralised
loan obligations or specific bonds/floating rate notes.
Being derivatives, both the sold protection and purchased protection
are marked-to-market. Prior to the commencement of the global
financial crisis, movements in valuations of these positions were notsignificant and the credit valuation adjustment (CVA) charge on theprotection bought from the non-collateralised financial guarantors
was minimal.
During and after the global financial crisis, the market value of thestructured credit transactions increased and the financial guarantors
were downgraded. The combined impact of this was to increase the
CVA charge on the purchased protection from financial guarantors.
Since early 2013, the portfolio notional face value has been materiallyreduced through a series of unwinds. The Group expects that thevolatility in the market value, and hence CVA, will continue to persist
given the volatility in credit spreads and USD/AUD rates but at
substantially lower levels.
Credit valuation adjustments are included as part of the Group’s profit
and loss statement, and accordingly, increases in the CVA charge orvolatility in that charge could adversely affect the Group’s profitability.

15. The Group is exposed to Operational Risk,
which may adversely affect its business,
operations and financial condition
Operational Risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events.
This definition includes legal risk, and the risk of loss of reputation
or damage arising from inadequate or failed internal processes,
people and systems, but excludes strategic risk.
Loss from Operational Risk events could adversely affect the Group’s
financial results. Such losses can include fines, penalties, loss ortheft of funds or assets, legal costs, customer compensation, loss ofshareholder value, reputation loss, loss of life or injury to people, andloss of property and/or information.
Operational Risk is typically classified into the risk event type categories
to measure and compare risks on a consistent basis. Examples ofoperational risk events according to category are as follows:}} internal fraud: risk that fraudulent acts are planned, initiated or
executed by employees (permanent, temporary or contractors)
from inside the Group, e.g. a rogue trader;}} external fraud: fraudulent acts or attempts which originate fromoutside the Group, e.g. valueless cheques, counterfeit credit cards,
loan applications in false names, stolen identity, etc;}} employment practices and workplace safety: employee relations,diversity and discrimination, and health and safety risks to theGroup employees;}} clients, products and business practices: risk of market
manipulation, product defects, incorrect advice, money launderingand misuse of customer information;}} business disruption (including systems failures): risk that thegroup’s banking operating systems are disrupted or fail;}} technology risks are key operational risks which fall under
this category;}} damage to physical assets: risk that a natural disaster or terrorist or
vandalism attack damages the Group’s buildings or property; and}} execution, delivery and process management: risk that the Groupexperiences losses as a result of data entry errors, accounting
errors, vendor, supplier or outsource provider errors, or failed
mandatory reporting.
Direct or indirect losses that occur as a result of operational failures,
breakdowns, omissions or unplanned events could adversely affect
the Group’s financial results.

16. Disruption of information technology
systems or failure to successfully implement
new technology systems could significantlyinterrupt the Group’s business, which may
adversely affect its business, operations andfinancial condition
The Group is highly dependent on information systems andtechnology. Therefore, there is a risk that these, or the services theGroup uses or is dependent upon, might fail, including because ofunauthorised access or use.
Most of the Group’s daily operations are computer-based andinformation technology systems are essential to maintaining effective
communications with customers. The exposure to systems risks
includes the complete or partial failure of information technology
systems or data centre infrastructure, the inadequacy of internal andthird-party information technology systems due to, among otherthings, failure to keep pace with industry developments and thecapacity of the existing systems to effectively accommodate growth,prevent unauthorised access and integrate existing and futureacquisitions and alliances.
To manage these risks, the Group has disaster recovery andinformation technology governance in place. However, there canbe no guarantee that the steps the Group is taking in this regard
will be effective and any failure of these systems could result inbusiness interruption, customer dissatisfaction and ultimately lossof customers, financial compensation, damage to reputation and/or a weakening of the Group’s competitive position, which could
adversely impact the Group’s business and have a material adverse
effect on the Group’s financial condition and operations.
In addition, the Group has an ongoing need to update andimplement new information technology systems, in part to assist it
to satisfy regulatory demands, ensure information security, enhancecomputer-based banking services for the Group’s customers andintegrate the various segments of its business. The Group may not
implement these projects effectively or execute them efficiently,
which could lead to increased project costs, delays in the ability
to comply with regulatory requirements, failure of the Group’s
information security controls or a decrease in the Group’s ability
to service its customers.

PRINCIPAL RISKS AND UNCERTAINTIES201

PRINCIPAL RISKS AND UNCERTAINTIES (continued)
17. The Group is exposed to risks associated withinformation security, which may adversely
affect its financial results and reputation
Information security means protecting information and information
systems from unauthorised access, use, disclosure, disruption,
modification, perusal, inspection, recording or destruction. As a bank,the Group handles a considerable amount of personal and confidential
information about its customers and its own internal operations,
including in Australia, New Zealand and India. The Group employsa team of information security experts who are responsible for thedevelopment and implementation of the Group’s Information Security
Policy. The Group also uses third parties to process and manage
information on its behalf, and any failure on their part could adversely
affect its business. The Group is conscious that threats to information
systems are continuously evolving and that cyber threats and risk ofattacks are increasing, and as such the Group may be unable to develop
policies and procedures to adequately address or mitigate such risks.
Accordingly, information about the Group and/or our clients may be
inadvertently accessed, inappropriately distributed or illegally accessedor stolen. The Group may not be able to anticipate or to implement
effective measures to prevent or minimise damage that may be causedby all information security threats, because the techniques used can behighly sophisticated and those perpetuating the attacks may be wellresourced. Any unauthorised access of the Group’s information systems
or unauthorised use of its confidential information could potentiallyresult in disruption of the Group’s operations, breaches of privacy
laws, regulatory sanctions, legal action, and claims for compensation
or erosion to the Group’s competitive market position, which could
adversely affect the Group’s financial position and reputation.

18. The Group is exposed to reputation risk,
which may adversely impact its business,
operations and financial condition
Damage to the Group’s reputation may have wide-ranging impacts,
including adverse effects on the Group’s profitability, capacity and costof sourcing funding, and availability of new business opportunities.
Reputation risk may arise as a result of an external event or theGroup’s own actions, and adversely affect perceptions about
the Group held by the public (including the Group’s customers),
shareholders, investors, regulators or rating agencies. The impact ofa risk event on the Group’s reputation may exceed any direct cost of
the risk event itself and may adversely impact the Group’s business,
operations and financial condition.

19. The unexpected loss of key staff orinadequate management of humanresources may adversely affect the Group’sbusiness, operations and financial condition
The Group’s ability to attract and retain suitably qualified and skilledemployees is an important factor in achieving its strategic objectives.
The Chief Executive Officer and the management team of the Chief
Executive Officer have skills and reputation that are critical to setting
the strategic direction, successful management and growth of theGroup, and whose unexpected loss due to resignation, retirement,
death or illness may adversely affect its operations and financial
condition. If the Group had difficulty retaining or attracting highly
qualified people for important roles, this also could adversely affectits business, operations and financial condition.

202

20. The Group may be exposed to the impactof future climate change, geological events,
plant and animal diseases, and other extrinsic
events which may adversely affect its
business, operations and financial condition
The Group and its customers are exposed to climate related events,
including climate change. These events include severe storms,
drought, fires, cyclones, hurricanes, floods and rising sea levels.
The Group and its customers may also be exposed to other events
such as geological events (including volcanic seismic activity or
tsunamis), plant and animal diseases or a pandemic.
Depending on their severity, events such as these may temporarily
interrupt or restrict the provision of some local or Group services, andmay also adversely affect the Group’s financial condition or collateralposition in relation to credit facilities extended to customers.

21. Regulatory changes or a failure to comply
with regulatory standards, law or policies
may adversely affect the Group’s business,
operations or financial condition
The Group is subject to laws, regulations, policies, standards andcodes of practice (applicable laws) in Australia, New Zealand, theUnited Kingdom, the United States, Hong Kong, Singapore, Japan,
China and each other country in which it has operations, trades orraises funds or in respect of which it has some business connection
and is subject to oversight by regulators in many of these relevant
jurisdictions. In particular, the Group’s banking, funds management
and insurance activities are subject to extensive regulation, mainly
relating to its liquidity levels, capital, solvency, provisioning, andinsurance policy terms and conditions.
Regulations vary in each relevant jurisdiction but generally aredesigned to protect depositors, insured parties, customers with otherbanking products and the banking and insurance system as a whole.
Some relevant jurisdictions do not permit local deposits to be used tofund operations outside of that jurisdiction. If the Group experiences
reduced liquidity, these deposits may not be available to fund theoperations of the Group.
A failure to comply with any applicable laws in any relevant
jurisdiction could result in sanctions by a regulator, the exercise of any
discretionary powers that regulators hold or compensatory action byaffected persons, which may in turn cause substantial damage to theGroup’s reputation. To the extent that regulatory requirements limit
the Group’s operations or flexibility, they could adversely impact theGroup’s results and prospects.
Regulators and other governmental agencies (including revenue
and tax authorities) frequently review applicable laws. Changes
to applicable laws, including changes in interpretation or
implementation of them, could affect the Group in substantial
and unpredictable ways and may even conflict with each other.
These may include increasing required levels of bank liquidity andcapital adequacy, limiting the types of financial services and products
the Group can offer, increasing the ability of non-banks to offer
competing financial services or products and changes to accounting
standards, taxation laws and prudential regulatory requirements.

ANZ ANNUAL REPORT 2014

As a result of the global financial crisis, the Basel Committee released
capital reform packages to strengthen the resilience of the banking
and insurance sectors, including proposals to strengthen capitaland liquidity requirements for the banking sector. APRA released
prudential standards implementing Basel 3 with effect from
1 January 2013. Certain regulators in jurisdictions where the Group
has a presence have also either implemented or are in the processof implementing Basel 3 and equivalent reforms. In addition, theUnited States has passed into law the Dodd-Frank Wall Street Reformand Consumer Protection Act, which significantly affects financial
institutions and financial activities in the United States. There canbe no assurance that any of the foregoing will be effective.
Uncertainty remains as to the final form that some of the proposed
regulatory changes will take in certain jurisdictions outside Australia
and New Zealand in which the Group operates (including theUnited States) and any such changes could adversely affect theGroup’s business, operations and financial condition. The changes maylead the Group to, among other things, change its business mix, incur
additional costs as a result of increased management attention, raise
additional amounts of higher-quality capital (such as ordinary shares,
additional tier 1 Capital or tier 2 capital instruments) or retain capital(through lower dividends), and hold significant levels of additionalliquid assets and undertake further lengthening of the funding base.
The Australian Government recently announced a comprehensive
inquiry into Australia’s financial system. The terms of referenceof this inquiry are wide-ranging, and could result in changes tolaws, regulations, codes of practice or policies, including changes
in interpretation or implementation of laws, regulations, codes ofpractice or policies, which could affect the Group in substantial
and unpredictable ways. The interim report of the AustralianGovernment’s comprehensive inquiry into Australia’s financial
system, known as the “Murray Report” was released on 15 July 2014.
The terms of reference of this inquiry and the content of the interim
report are wide-ranging (including consideration of resolution
powers available to regulators and loss absorbency requirements)
and could result in changes that adversely affect the Group.

22. The Group is exposed to the risk of receiving
significant regulatory fines and sanctionsin the event of breaches of regulation andlaw relating to anti-money laundering,counter‑terrorism financing, sanctions
and market manipulation
Anti-money laundering, counter-terrorist financing, sanctions
compliance and market manipulation have been the subject ofincreasing regulatory change and enforcement in recent years.
The increasingly complicated environment in which the Group
operates across the Asia Pacific region has heightened these
operational and compliance risks. Furthermore, the upward trend
in compliance breaches by global banks and the related fines andsettlement sums means that these risks continue to be an area of
focus for the Group.
The Group maintains appropriate policies, and has invested inprocedures and internal controls aimed to detect, prevent andreport money laundering, terrorist financing, market manipulationand sanctions breaches. The risk of non-compliance remains highgiven the scale and complexity of the Group. A failure to operate arobust program to combat money laundering, bribery and terrorist
financing or to ensure compliance with economic sanctions andmarket conduct norms could have serious legal and reputational

consequences for the Group and its employees. Consequences can
include fines, criminal and civil penalties, civil claims, reputationalharm and limitations on doing business in certain jurisdictions.

23. The Group may face increased tax reporting
compliance costs
In March 2010, the United States enacted Foreign Account Tax
Compliance Act (FATCA) that requires non‑United States banks andother financial institutions to provide information on United Statesaccount holders to the United States Federal tax authority, theInternal Revenue Service (“IRS”). The United States has entered into
Intergovernmental Agreements (IGAs) with a number of jurisdictions(including Australia and New Zealand) which generally require suchjurisdictions to enact legislation or other binding rules pursuant towhich local financial institutions and branches provide such information
to their non-United States local revenue authority to forward to the
IRS. If this information is not provided in a manner and form meetingthe applicable requirements, a non-United States institution may besubjected to penalties and potentially a 30 percent withholding tax
applied to certain amounts paid to it. While such withholding tax
may currently apply to certain payments derived from sources within
the United States, no such withholding tax will be imposed on any
payments derived from sources outside the United States that are
made prior to 1 January 2017, at the earliest. Australia and New Zealandhave each signed an IGA with the United States to implement theiragreement. The Group has made and is expected to make significant
investments in order to comply with the requirements of FATCA andlocal laws implementing an IGA.

24. Unexpected changes to the Group’s
licence to operate in any jurisdiction may
adversely affect its business, operations
and financial condition
The Group is licenced to operate in the various countries, states andterritories. Unexpected changes in the conditions of the licences tooperate by governments, administrations or regulatory agencies
which prohibit or restrict the Group from trading in a mannerthat was previously permitted may adversely impact the Group’s
operations and subsequent financial results.

25. The Group is exposed to insurance risk,
which may adversely affect its business,
operations and financial condition
Insurance risk is the risk of loss due to unexpected changes in current
and future insurance claim rates. In our life insurance business,insurance risk arises primarily through mortality (death) andmorbidity (illness and injury) risks being greater than expected and,in the case of annuity business, should annuitants live longer than
expected. In our general insurance business, insurance risk arises
mainly through weather-related incidents (including floods andbushfires) and other calamities, such as earthquakes, tsunamis andvolcanic activities, as well as adverse variability in home, contents,
motor, travel and other insurance claim amounts. For further details
on climate and geological events, see also the risk factor No. 20.
The Group has exposure to insurance risk in both its life insurance andgeneral insurance business, which may adversely affect its businesses,
operations and financial condition.

PRINCIPAL RISKS AND UNCERTAINTIES203

PRINCIPAL RISKS AND UNCERTAINTIES (continued)
26. The Group may experience reductions in
the valuation of some of its assets, resulting
in fair value adjustments that may have amaterial adverse effect on its earnings

As at 30 September 2014, the Group carried goodwill principally
related to its investments in New Zealand and Australia, intangible
assets principally relating to assets recognised on acquisition ofsubsidiaries, and capitalised software balances and investment inequity accounted associates.

Under Australian Accounting Standards, the Group recognises
the following instruments at fair value with changes in fair value
recognised in earnings:}} derivative financial instruments, including in the case of fairvalue hedging, the fair value adjustment on the underlying
hedged exposure;}} financial instruments held for trading; and}} assets and liabilities designated at fair value through profit and loss.

The Group is required to assess the recoverability of the goodwill
balances on at least an annual basis. For this purpose, the Group uses
either a discounted cash flow or a multiple of earnings calculation.
Changes in the assumptions upon which the calculation is based,
together with expected changes in future cash flows, could materially
impact this assessment, resulting in the potential write-off of a partor all of the goodwill balances.

In addition, the Group recognised available-for-sale financial assets
at fair value with changes in fair value recognised in equity unless theasset is impaired, in which case, the decline in fair value is recognisedin earnings.
Generally, in order to establish the fair value of these instruments,
the Group relies on quoted market prices or, where the market fora financial instrument is not sufficiently active, fair values are basedon present value estimates or other accepted valuation techniques
which incorporate the impact of factors that would influence thefair value as determined by a market participant. The fair valueof these instruments is impacted by changes in market prices orvaluation inputs which could have a material adverse effect on theGroup’s earnings.

27. Changes to accounting policies may
adversely affect the Group’s financial
position or performance
The accounting policies and methods that the Group applies arefundamental to how it records and reports its financial position
and results of operations. Management must exercise judgement
in selecting and applying many of these accounting policies andmethods so that they not only comply with Australian AccountingStandards but they also reflect the most appropriate manner inwhich to record and report on our financial position and resultsof operations. However, these accounting policies may be applied
inaccurately, resulting in a misstatement of our financial position andresults of operations. In addition, the application of new or revised
Australian Accounting Standards could have a material adverse effecton the Group’s financial position and results of operations.
In some cases, management must select an accounting policy or
method from two or more alternatives, any of which might comply
with the generally accepted accounting principles applicable to theGroup and be reasonable under the circumstances, yet might result
in reporting materially different outcomes than would have beenreported under another alternative.

28. The Group may be exposed to the riskof impairment to, goodwill and otherintangible assets that may adversely
affect its business, operations andfinancial condition
In certain circumstances the Group may be exposed to a reductionin the value of non-lending related assets.

204

Capitalised software and other intangible assets (including acquired
portfolio of insurance and investment business and deferredacquisition costs) are assessed for indicators of impairment at least
annually. In the event that an asset is no longer in use, or that the
cash flows generated by the asset do not support the carrying value,
impairment may be recorded, adversely impacting the Group’s
financial condition.
Investments in associates are assessed for indicators of impairment
at least annually. In the event that the equity accounted carrying
value is above the recoverable value, impairment may be recorded,
adversely impacting the Group’s financial condition.

29. Litigation and contingent liabilities may
adversely affect the Group’s business,
operations and financial condition
From time to time, the Group may be subject to material litigation,
regulatory actions, legal or arbitration proceedings and othercontingent liabilities which, if they crystallise, may adversely affect
the Group’s results. A summary of some of those contingent liabilities
is set out below.
BANK FEES LITIGATION
Litigation funder Bentham IMF Limited commenced a class action
against ANZ in 2010, followed by a second similar class action in
March 2013. Together the class actions are claimed to be on behalf ofmore than 40,000 ANZ customers.
On 5 February 2014, the Australian Federal Court delivered reasonsfor judgement in the second class action. The first class action
is in abeyance. The customers currently involved in these classactions are only part of ANZ’s customer base for credit cards andtransaction accounts.
The applicants contended that the relevant exception fees were
unenforceable penalties (at law and in equity) and that variousof the fees were also unenforceable under statutory provisions
governing unconscionable conduct, unfair contract terms and unjusttransactions. On the penalties claims, the Court found in the Group’s
favour in relation to all but one of the fee types that were in issue inthe case, namely honour fees (retail and business), dishonour fees(business), over-limit and non-payment fees. The Court found against
the Group in respect of late payment fees on the basis that they were
unenforceable penalties. In respect of the claims of unconscionableconduct, unfair contract terms and unjust transactions, the Court
found in ANZ’s favour. Both the Group and the applicants haveappealed the Court’s decision. The appeal hearing was held in August
2014. The appeal court is yet to give a decision. Given the complexityof the issues involved, the potential for the parties to seek further
appeals and the possible need for certain issues to be remitted forANZ ANNUAL REPORT 2014

further consideration by the court below, the ultimate implicationsof the appeal court’s decision (when made) may not be known forsome time.
In August 2014, litigation funder Bentham IMF Limited commenced
a separate class action against ANZ for late payment fees charged to
ANZ customers in respect of commercial credit cards and other ANZ
products (at this stage not specified). The action is expressed to apply
to all relevant customers, rather than being limited to those who havesigned up with Bentham IMF Limited. The action is at an early stage
and has been put on hold while the appeal court decision in theearlier class action is outstanding.
In June 2013, litigation funder Litigation Lending Services (NZ)
commenced a representative action against ANZ for certain fees
charged to New Zealand customers since 2007. There is a risk thatfurther claims could emerge in Australia, New Zealand or elsewhere.
SECURITY RECOVERY ACTIONS
Various claims have been made or are anticipated, arising fromsecurity recovery actions taken to resolve impaired assets over recent
years. ANZ will defend these claims and any future claims.
There is a risk that contingent liabilities described in Note 43 may
be larger than anticipated or that additional litigation or othercontingent liabilities may arise.

30. The Group regularly considers acquisitionand divestment opportunities, and there
is a risk that the Group may undertake anacquisition or divestment that could resultin a material adverse effect on its business,
operations and financial condition
The Group regularly examines a range of corporate opportunities,
including material acquisitions and disposals, with a view todetermining whether those opportunities will enhance the Group’s
financial performance and position. Any corporate opportunity thatis pursued could, for a variety of reasons, turn out to have a material
adverse effect on the Group.
The successful implementation of the Group’s corporate strategy,
including its strategy to further expand in the Asia Pacific region,
will depend on a range of factors including potential funding
strategies, and challenges associated with integrating and adding
value to acquired businesses, as well as new regulatory, market andother risks associated with increasing operations outside of Australia
and New Zealand.
There can be no assurance that any acquisition (or divestment)
would have the anticipated positive results, including results relating
to the total cost of integration (or separation), the time required tocomplete the integration (or separation), the amount of longer-term
cost savings, the overall performance of the combined (or remaining)
entity, or an improved price for the Group’s securities. Integration(or separation) of an acquired (or divested) business can be complex
and costly, sometimes including combining (or separating) relevant
accounting and data processing systems, and management
controls, as well as managing relevant relationships with employees,
customers, regulators, counterparties, suppliers and other business
partners. Integration (or separation) efforts could divert management
attention and resources, which could adversely affect the Group’s
operations or results. Additionally, there can be no assurance that
employees, customers, counterparties, suppliers and other business

partners of newly acquired (or retained) businesses will remain
as such post-acquisition (or post-divestment), and the loss of
employees, customers, counterparties, suppliers and other business
partners could adversely affect the Group’s operations or results.
Acquisitions and disposals may also result in business disruptions
that cause the Group to lose customers or cause customers to remove
their business from the Group to competing financial institutions.
It is possible that the integration (or separation) process related toacquisitions (or divestments) could result in the disruption of theGroup’s ongoing businesses or inconsistencies in standards, controls,
procedures and policies that could adversely affect the Group’s ability
to maintain relationships with employees, customers, regulators,
counterparties, suppliers and other business partners, which
could adversely affect the Group’s ability to conduct its businesssuccessfully. The Group’s operating performance, risk profile or capital
structure may also be affected by these corporate opportunities andthere is a risk that any of the Group’s credit ratings may be placed on
credit watch or downgraded if these opportunities are pursued.

31. The Group may be exposed to risks pertaining
to the provision of advice, recommendations
or guidance about financial products
and services in the course of its sales andmarketing activities, which may adversely
affect the Group’s business and operations
Such risks can include:}} the provision of unsuitable or inappropriate advice (e.g.
commensurate with a customer’s objectives and appetite for risk),}} the representation of, or disclosure about, a product or service
which is inaccurate, or does not provide adequate information
about risks and benefits to customers,}} a failure to appropriately manage conflicts of interest withinsales and/or promotion processes (including incentives andremuneration for staff engaged in promotion, sales and/or theprovision of advice), and}} a failure to deliver product features and benefits in accordancewith terms, disclosures, recommendations and/or advice.
Exposure to such risks may increase during periods of declining
investment asset values (such as during a period of economic
downturn or investment market volatility), leading to sub-optimal
performance of investment products and/or portfolios that were
not aligned with the customer’s objectives and risk appetite.
The Group is regulated under various legislative mechanisms in the
countries in which it operates that provide for consumer protection
around advisory, marketing and sales practices. These may include,
but are not limited to, appropriate management of conflicts of interest,
appropriate accreditation standards for staff authorised to provide
advice about financial products and services, disclosure standards,
standards for ensuring adequate assessment of client/ productsuitability, quality assurance activities, adequate record keeping, andprocedures for the management of complaints and disputes.
Inappropriate advice about financial products and services may
result in material litigation (and associated financial costs), regulatory
actions, and/or reputational consequences.

PRINCIPAL RISKS AND UNCERTAINTIES205

SUPPLEMENTARY INFORMATION
1: Exchange Rates
The exchange rates used in the translation of the results and the assets and liabilities of major overseas branches and controlled entities are:2014

Chinese Yuan
Euro
Great British Pound
Indian Rupee
Indonesian Rupiah
Malaysian Ringgit
New Zealand Dollar
Papua New Guinea Kina
United States Dollar

2013

Closing

Average

Closing

Average

5.37870.68950.538353.941
10,659.9
2.8632
1.12192.17170.87525.65470.67790.555256.166
10,787.5
2.97491.09312.23530.9201

5.69760.6896
0.576058.531
10,860.1
3.0334
1.12372.23850.9312

6.13950.75650.636056.1489,861.4
3.0925
1.21322.1472
0.9929

2. Explanation of adjustments between statutory profit and cash profit
NON-IFRS INFORMATIONECONOMIC HEDGING AND REVENUE AND NET INVESTMENT HEDGESThe Group provides additional measures of performance which
are prepared on a basis other than in accordance with accounting
standards. The guidance provided in Australian Securities andInvestments Commission Regulatory Guide 230 has been followed
when presenting this information.

The Group enters into economic hedges to manage its interest rate
and foreign exchange risk. The application of AASB 139: Financial
Instruments – Recognition and Measurement results in fair value gains
and losses being recognised within the income statement. ANZ removes
the mark-to-market adjustments from cash profit as the profit or loss
resulting from the transactions will reverse over time to match with theprofit or loss from the economically hedged item as part of cash profit.
This includes gains and losses arising from:}} approved classes of derivatives not designated in accounting
hedge relationships but which are considered to be economic
hedges, including hedges of NZD and USD revenue; and}} ineffectiveness from designated accounting hedges.

ADJUSTMENTS BETWEEN STATUTORY PROFIT AND CASH PROFIT
Statutory profit has been adjusted to exclude non-core items toarrive at cash profit, and has been provided to assist readers tounderstand the results for the ongoing business activities of theGroup. The adjustments made in arriving at cash profit are included
in statutory profit which is subject to audit within the context of
the Group statutory audit opinion. Cash profit is not audited by theexternal auditor, however, the external auditor has informed the
Audit Committee that the adjustments have been determined ona consistent basis across each period presented.
TREASURY SHARES ADJUSTMENT
ANZ shares held by the Group in the consolidated managed funds
and life business are deemed to be Treasury shares for accounting
purposes. Dividends and realised and unrealised gains andlosses from these shares are reversed as these are not permitted
to be recognised in income for statutory reporting purposes. In
deriving cash profit, these earnings are included to ensure there
is no asymmetrical impact on the Group’s profits because theTreasury shares support policy liabilities which are revalued inderiving income.
REVALUATION OF POLICY LIABILITIESWhen calculating policy liabilities, the projected future cash flows
on insurance contracts are discounted to reflect the present
value of the obligation, with the impact of changes in the market
discount rate each period being reflected in the income statement.
ANZ includes the impact on the remeasurement of the insurance
contract attributable to changes in the market discount rates as an
adjustment to cash profit to remove the volatility attributable tochanges in market interest rates which reverts to zero over the lifeof the insurance contract.

In the table below, funding and lending related swaps are primarily
cross currency interest rate swaps which are being used to convert
the proceeds of foreign currency debt issuances into floating rate
Australian dollar and New Zealand dollar debt. As these swaps do
not qualify for hedge accounting, movements in the fair values
are recorded in the Income Statement. The main drivers of thesefair values are currency basis spreads and the Australian dollar
and New Zealand dollar fluctuation against other major funding
currencies. This category also includes economic hedges of selectstructured finance and specialised leasing transactions that do not
qualify for hedge accounting. The main drivers of these fair value
adjustments are Australian and New Zealand yield curve movements.
For funding and lending related swaps, widening basis spreads frommovements in currency pairs (primarily AUD/USD and USD/EUR),
resulted in gains during the year.
Gains within revenue and net investment hedges were primarily the
result of significant strengthening in the AUD against NZD exchange
rate during the year.
During the period the Group early adopted the part of AASB 9 Financial
Instruments relating to gains and losses attributable to changes in
own credit risk of financial liabilities designated at ‘Fair value throughprofit or loss’. As these gains/losses are now presented in othercomprehensive income rather than statutory profit they no longer form
part of the cash profit adjustments. This was applied retrospectively
and comparative information in the tables below have been restated.
2014
$m

2013
$m

Adjustments to the income statement
Timing differences where IFRS results in asymmetry between the hedge and hedged items
Funding and lending related swaps
Revenue and net investment hedges
Ineffective portion of designated accounting hedges

(103)
(143)
–

(78)
224
(8)

Increase/(decrease) to cash profit before tax

(246)

138

Increase/(decrease) to cash profit after tax

(173)

102

206

ANZ ANNUAL REPORT 2014

2. Explanation of adjustments between statutory profit and cash profit (continued)
As at

Cumulative increase/(decrease) to cash profit pre-tax relating to economic hedging
Timing differences where IFRS results in asymmetry between the hedge and hedged items (before tax)
Funding and lending related swaps
Revenue and net investment hedges
Ineffective portion of designated accounting hedges

CREDIT RISK ON IMPAIRED DERIVATIVES(NIL PROFIT AFTER TAX IMPACT)
Reclassification of a charge to income for credit valuation
adjustments on defaulted and impaired derivative exposures
to provision for credit impairment of $3 million (2013: $9 million).
The reclassification has been made to reflect the manner in which
the defaulted and impaired derivatives are managed.
POLICYHOLDERS TAX GROSS UP (NIL PROFIT AFTERTAX IMPACT)
For statutory reporting purposes policyholder income tax and otherrelated taxes paid on behalf of policyholders are included in net
funds management and insurance income and income tax expense.
The gross up of $242 million (2013: $371 million) has been excluded
from the cash results as it does not reflect the underlying performanceof the business which is assessed on a net of policyholder tax basis.
STRUCTURED CREDIT INTERMEDIATION TRADES
ANZ entered into a series of structured credit intermediation tradeswith US financial guarantors from 2004 to 2007. The underlying
structures involve credit default swaps (CDS) over synthetic
collateralised debt obligations (CDOs), portfolios of external
collateralised loan obligations (CLOs) or specific bonds/floating rate
notes (FRNs). ANZ sold protection using credit default swaps overthese structures and then to mitigate risk, purchased protection
via credit default swaps over the same structures from eight USfinancial guarantors.
Being derivatives, both the sold protection and purchased protection
are measured at fair value and are marked-to-market. Prior to thecommencement of the global financial crisis, movements in valuationsof these positions were not significant and largely offset each other in

2014
$m

2013
$m

575
36
(25)

678
179
(25)

586

832

income. Following the onset of the global financial crisis, the purchased
protection has provided only a partial offset against movements invaluation of the sold protection because:}} one of the counterparties to the purchased protection defaulted
and many of the remaining were downgraded; and}} a credit valuation adjustment is applied to the remaining
counterparties to the purchased protection reflective of changes
to their credit worthiness.
ANZ is actively monitoring this portfolio with a view to reducing theexposures via termination and restructuring of both the bought andsold protection if and when ANZ deems it cost effective relative tothe perceived risk associated with a specific trade or counterparty.
During 2014 ANZ terminated all bought protection positions withthree financial guarantors along with corresponding sold protection
positions for a net loss of $37 million (including termination costs andrelease of CVA). The termination of these trades results in the remaining
exposure being reduced to two financial guarantors.
The bought and sold protection trades are by nature largely offsetting,with the notional amount on the outstanding bought CDSs andoutstanding sold CDSs at 30 September 2014 each amounting to
USD 1.0 billion (2013: USD 4.5 billion). The decrease in notionalbalances of USD 3.5 billion from September 2013 is primarily due tothe termination of trades mentioned above.
The profit and loss impact of credit risk on structured credit derivatives
remains volatile reflecting the impact of market movements in credit
spreads and AUD/USD rates.
The (gain)/loss on structured credit intermediation trades is included
as an adjustment to cash profit as it relates to a legacy non-corebusiness where, unless terminated early, the fair value movements
are expected to reverse to zero in future periods.
2014
$m

2013
$m

Increase/(decrease) to cash profit
Profit before income tax
Income tax expense

22
(1)

(63)
13

Profit after income tax

21

(50)
As at

2014
$m

2013
$m

82

179

Credit valuation adjustment for outstanding transactions
Realised close out and hedge costs

24
373

42
333

Cumulative life to date charges

397

375

Financial impacts on credit intermediation trades
Mark-to-market exposure to financial guarantors
Cumulative costs relating to financial guarantors1

1 The cumulative costs in managing the positions include realised losses relating to restructuring of trades in order to reduce risks and realised losses on termination of sold protection trades.
It also includes foreign exchange hedging losses.

SUPPLEMENTARY INFORMATION

207

SHAREHOLDER INFORMATION
Ordinary Shares
At 10 October 2014, the twenty largest holders of ordinary shares held 1,589,676,701 ordinary shares, equal to 57.67% of the total issued
ordinary capital.
Number of% ofshares shares

Name

1 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED2 J P MORGAN NOMINEES AUSTRALIA LIMITED
3 NATIONAL NOMINEES LIMITED
4 CITICORP NOMINEES PTY LIMITED
5 BNP PARIBAS NOMS PTY LTD <DRP>
6 CITICORP NOMINEES PTY LIMITED <COLONIAL FIRST STATE INV A/C>
7 CITICORP NOMINEES PTY LIMITED <BHP BILLITON ADR HOLDERS A/C>
8 AMP LIFE LIMITED
9 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED <NT-COMNWLTH SUPER CORP A/C>
10 UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD
11 RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED <PI POOLED A/C>
12 ANZEST PTY LTD <DEFERRED SHARE PLAN A/C>
13 ARGO INVESTMENTS LIMITED
14 AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED
15 BNP PARIBAS NOMINEES PTY LTD <AGENCY LENDING DRP A/C>
16 ANZEST PTY LTD <DEA CONTROL A/C>
17 NAVIGATOR AUSTRALIA LTD <MLC INVESTMENT SETT A/C>
18 QUESTOR FINANCIAL SERVICES LIMITED <TPS RF A/C>
19 NULIS NOMINEES (AUSTRALIA) LIMITED <NAVIGATOR MAST PLAN SETT A/C>
20 ANZEST PTY LTD <ESAP SHARE PLAN A/C>

534,183,163 19.38
407,390,609 14.78
288,682,544 10.47
127,392,942 4.62
63,537,871 2.31
30,031,119 1.09
21,848,397 0.79
19,958,652 0.72
12,549,886 0.46
12,039,130 0.44
10,798,936 0.39
9,756,291 0.35
9,406,235 0.34
8,487,710 0.31
8,463,934 0.31
6,602,440 0.24
5,283,664 0.19
4,649,113 0.17
4,470,441 0.16
4,143,624 0.15

Total

1,589,676,701 57.67

DISTRIBUTION OF SHAREHOLDINGSAt 10 October 2014
Range of shares

Number ofholders% ofholders

Number ofshares% ofshares1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
Over 100,000

276,776
180,344
27,933
14,861
438

55.32
36.04
5.58
2.97
0.09

114,671,605
408,353,377
194,446,052
300,848,746
1,738,307,991

4.16
14.81
7.06
10.91
63.06

Total

500,352

100.002,756,627,771

100.00

At 10 October 2014:– there were no persons with a substantial shareholding in the Company;– the average size of holdings of ordinary shares was 5,509 (2013: 5,848) shares; and– there were 9,711 holdings (2013: 8,907 holdings) of less than a marketable parcel (less than $500 in value or 17 shares based on the market price of $31.22 per share), which is less than 1.95%
of the total holdings of ordinary shares.

VOTING RIGHTS OF ORDINARY SHARESThe Constitution provides for votes to be cast as follows:i) on show of hands, one vote for each shareholder; andii) on a poll, one vote for every fully paid ordinary share.
A register of holders of ordinary shares is held at:
452 Johnston Street
Abbotsford
Victoria, Australia(Telephone: +61 3 9415 4010)

208

ANZ ANNUAL REPORT 2014

ANZ Convertible Preference Shares
ANZ CPS2
On 17 December 2009 ANZ issued convertible preference shares (ANZ CPS2) which were offered pursuant to a prospectus dated
18 November 2009.
At 10 October 2014, the twenty largest holders of ANZ CPS2 held 3,517,905 securities, equal to 17.87% of the total issued securities.
Number of% ofsecurities securitiesName

1 UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD
2 NATIONAL NOMINEES LIMITED
3 J P MORGAN NOMINEES AUSTRALIA LIMITED
4 QUESTOR FINANCIAL SERVICES LIMITED <TPS RF A/C>
5 NAVIGATOR AUSTRALIA LTD <MLC INVESTMENT SETT A/C>
6 NULIS NOMINEES (AUSTRALIA) LIMITED <NAVIGATOR MAST PLAN SETT A/C>
7 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
8 AUSTRALIAN EXECUTOR TRUSTEES LIMITED <NO 1 ACCOUNT>
9 NETWEALTH INVESTMENTS LIMITED <WRAP SERVICES A/C>
10 CITICORP NOMINEES PTY LIMITED <COLONIAL FIRST STATE INV A/C>
11 JMB PTY LIMITED
12 AVANTEOS INVESTMENTS LIMITED <ENCIRCLE IMA A/C>
13 RANDAZZO C & G DEVELOPMENTS PTY LTD
14 CITICORP NOMINEES PTY LIMITED <DPSL>
15 CITICORP NOMINEES PTY LIMITED
16 MR PHILIP WILLIAM DOYLE
17 W MITCHELL INVESTMENTS PTY LTD <W MITCHELL SUPER FUND>
18 NETWEALTH INVESTMENTS LIMITED <SUPER SERVICES A/C>
19 RHI HOLDINGS PTY LTD <RONI HUBAY INVESTMENT A/C>
20 DIMBULU PTY LTD
Total

589,134
433,068
384,840
336,535
284,283
230,819
202,417
178,125
111,845
100,859
100,600
81,31478,50071,444
60,10060,00060,00052,02252,00050,000

2.99
2.20
1.96
1.71
1.44
1.17
1.03
0.90
0.57
0.51
0.51
0.41
0.40
0.36
0.31
0.31
0.31
0.27
0.26
0.25

3,517,905

17.87

DISTRIBUTION OF ANZ CPS2 HOLDINGSAt 10 October 2014
Range of securities

Numberof holders% ofholders

Number of
securities% ofsecurities

1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
Over 100,000

29,725
2,193
134
68
11

92.51
6.83
0.42
0.21
0.03

9,273,858
4,580,701
1,040,865
1,839,275
2,952,525

47.11
23.26
5.29
9.34
15.00

Total

32,131100.0019,687,224

100.00

At 10 October 2014 there were 11 holdings (2013: 7 holdings) of less than a marketable parcel (less than $500 in value or 5 securities based on the market price of $100.80 per security), which is lessthan 0.04% of the total holdings of ANZ CPS2.

VOTING RIGHTS OF ANZ CPS2
An ANZ CPS2 holder has the right to vote at a meeting of membersof ANZ in the following circumstances and in no others:i) on any proposal to reduce ANZ’s share capital, other than aresolution to approve a redemption of the ANZ CPS2;ii) on a proposal that affects the rights attached to the ANZ CPS2;
iii) on any resolution to approve the terms of a buy-back agreement,
other than a resolution to approve a redemption of ANZ CPS2;
iv) on a proposal to wind up ANZ;v) on a proposal for the disposal of the whole of ANZ’s property,business and undertaking;vi) on any matter during a winding up of ANZ; andvii) on any matter during a period in which a dividend
remains unpaid.

On a resolution or proposal on which an ANZ CPS2 holder is entitledto vote, the ANZ CPS2 holder has:i) on a show of hands, one vote; andii) on a poll, one vote for each ANZ CPS2 held.
A register of holders of ANZ CPS2 is held at:
452 Johnston Street
Abbotsford
Victoria, Australia(Telephone: +61 3 9415 4010)

SHAREHOLDER INFORMATION

209

SHAREHOLDER INFORMATION (continued)
ANZ CPS3
On 28 September 2011 ANZ issued convertible preference shares (ANZ CPS3) which were offered pursuant to a prospectus dated 31 August 2011.
At 10 October 2014, the twenty largest holders of ANZ CPS3 held 2,308,477 securities, equal to 17.23% of the total issued securities.
Number of% ofsecurities securitiesName

1 UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD
2 NAVIGATOR AUSTRALIA LTD <MLC INVESTMENT SETT A/C>
3 RAKIO PTY LTD <PIEKARSKI GYMPIE A/C>
4 QUESTOR FINANCIAL SERVICES LIMITED <TPS RF A/C>
5 NULIS NOMINEES (AUSTRALIA) LIMITED <NAVIGATOR MAST PLAN SETT A/C>
6 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
7 AUSTRALIAN EXECUTOR TRUSTEES LIMITED <NO 1 ACCOUNT>
8 DIMBULU PTY LTD
9 LONGHURST MANAGEMENT SERVICES PTY LTD
10 MICHAEL COPPEL VENTURES P/L <MICHAEL COPPEL VENTURES A/C>
11 CITICORP NOMINEES PTY LIMITED <COLONIAL FIRST STATE INV A/C>
12 JMB PTY LIMITED
13 NATIONAL NOMINEES LIMITED
14 BNP PARIBAS NOMS PTY LTD <DRP>
15 NETWEALTH INVESTMENTS LIMITED <SUPER SERVICES A/C>
16 EASTCOTE PTY LTD <VAN LIESHOUT FAMILY A/C>
17 MR TERRENCE E PEABODY + MRS MARY G PEABODY <SUPER FUND A/C>
18 RANDAZZO C & G DEVELOPMENTS PTY LTD
19 TANDOM PTY LTD
20 UCA CASH MANAGEMENT FUND LIMITED
Total

568,658
228,254200,000
146,248
142,097
118,792
102,593
85,00083,24680,00075,10170,00054,76253,53550,19150,00050,00050,00050,00050,000

4.25
1.70
1.49
1.09
1.06
0.89
0.77
0.64
0.62
0.60
0.56
0.52
0.41
0.40
0.38
0.37
0.37
0.37
0.37
0.37

2,308,477

17.23

DISTRIBUTION OF ANZ CPS3 HOLDINGSAt 10 October 2014
Range of securities

Numberof holders% ofholders

Number of
securities% ofsecurities

1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
Over 100,000

19,746
1,473
77
62
7

92.42
6.90
0.36
0.29
0.03

6,242,390
3,171,088
615,3881,864,492
1,506,642

46.59
23.66
4.59
13.92
11.24

Total

21,365100.0013,400,000

100.00

At 10 October 2014 there were 4 holdings (2013: 0 holdings) of less than a marketable parcel (less than $500 in value or 5 securities based on the market price of $101.25 per security), which is lessthan 0.02% of the total holdings of ANZ CPS3.

VOTING RIGHTS OF ANZ CPS3
An ANZ CPS3 holder has the right to vote at a meeting of membersof ANZ in the following circumstances and in no others:i) on any proposal to reduce ANZ’s share capital, other than aresolution to approve a redemption of the ANZ CPS3;ii) on a proposal that affects the rights attached to the ANZ CPS3;iii) on any resolution to approve the terms of a buy-back agreement,
other than a resolution to approve a redemption of ANZ CPS3;
iv) on a proposal to wind up ANZ;v) on a proposal for the disposal of the whole of ANZ’s property,business and undertaking;vi) on any matter during a winding-up of ANZ; andvii) on any matter during a period in which a dividend
remains unpaid.

210

On a resolution or proposal on which an ANZ CPS3 holder is entitledto vote, the ANZ CPS3 holder has:i) on a show of hands, one vote; andii) on a poll, one vote for each ANZ CPS3 held.
A register of holders of ANZ CPS3 is held at:
452 Johnston Street
Abbotsford
Victoria, Australia(Telephone: +61 3 9415 4010)

ANZ ANNUAL REPORT 2014

ANZ Capital Notes
ANZ CN1
On 7 August 2013 ANZ issued convertible subordinated perpetual notes (ANZ CN1) which were offered pursuant to a prospectus dated 10 July 2013.
At 10 October 2014 the twenty largest holders of ANZ CN1 held 2,010,553 securities, equal to 17.95% of the total issued securities.
Number of% ofsecurities securitiesName

1 UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD
2 NATIONAL NOMINEES LIMITED
3 NAVIGATOR AUSTRALIA LTD <MLC INVESTMENT SETT A/C>
4 CITICORP NOMINEES PTY LIMITED
5 J P MORGAN NOMINEES AUSTRALIA LIMITED
6 NETWEALTH INVESTMENTS LIMITED <WRAP SERVICES A/C>
7 NULIS NOMINEES (AUSTRALIA) LIMITED <NAVIGATOR MAST PLAN SETT A/C>
8 BNP PARIBAS NOMS PTY LTD <DRP>
9 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
10 SERVCORP HOLDINGS PTY LTD
11 DIMBULU PTY LTD
12 RANDAZZO C & G DEVELOPMENTS PTY LTD
13 SPINETTA PTY LTD
14 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED – A/C 2
15 AUSTRALIAN MASTERS YIELD FUND NO 5 LIMITED
16 ADCO CONSTRUCTIONS PTY LTD
17 THORSEN INVESTMENTS PTY LTD
18 NETWEALTH INVESTMENTS LIMITED <SUPER SERVICES A/C>
19 ADJO INVESTMENTS PTY LTD
20 PEPLON NOMINEES PTY LTD
Total

415,783
277,147
158,046
149,960
141,918
113,839
106,384
85,05078,546
72,81750,00050,00047,50045,67345,41040,00040,00032,73532,40027,345

3.71
2.47
1.41
1.34
1.27
1.02
0.95
0.76
0.70
0.65
0.45
0.45
0.42
0.41
0.40
0.36
0.36
0.29
0.29
0.24

2,010,553

17.95

DISTRIBUTION OF ANZ CN1 HOLDINGSAt 10 October 2014
Range of securities

Numberof holders% ofholders

Number of
securities% ofsecurities

1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
Over 100,000

14,959
1,333
79
43
7

91.10
8.12
0.48
0.26
0.04

5,087,404
2,970,047
639,669
1,139,803
1,363,077

45.42
26.52
5.71
10.18
12.17

Total

16,421100.00

11,200,000

100.00

At 10 October 2014 there were 4 holdings (2013: 0 holdings) of less than a marketable parcel (less than $500 in value or 6 securities based on the market price of $99.99 per security), which is lessthan 0.03% of the total holdings of ANZ CN1.

VOTING RIGHTS OF ANZ CN1
ANZ CN1 do not confer on holders a right to vote at any meetingof members of ANZ.
A register of holders of ANZ CN1 is held at:
452 Johnston Street
Abbotsford
Victoria, Australia(Telephone: +61 3 9415 4010)

SHAREHOLDER INFORMATION211

SHAREHOLDER INFORMATION (continued)
ANZ CN2
On 31 March 2014 ANZ issued convertible subordinated perpetual notes (ANZ CN2) which were offered pursuant to a prospectus dated
19 February 2014.
At 10 October 2014 the twenty largest holders of ANZ CN2 held 2,885,168 securities, equal to 17.92% of the total issued securities.
Number of% ofsecurities securitiesName

1 UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD
2 UCA CASH MANAGEMENT FUND LIMITED
3 J P MORGAN NOMINEES AUSTRALIA LIMITED
4 QUESTOR FINANCIAL SERVICES LIMITED <TPS RF A/C>
5 NATIONAL NOMINEES LIMITED
6 NAVIGATOR AUSTRALIA LTD <MLC INVESTMENT SETT A/C>
7 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
8 BNP PARIBAS NOMS PTY LTD <DRP>
9 BOND STREET CUSTODIANS LIMITED <MPPMIM – V16636 A/C>
10 LIGHTNINGEDGE PTY LTD
11 NETWEALTH INVESTMENTS LIMITED <WRAP SERVICES A/C>
12 NULIS NOMINEES (AUSTRALIA) LIMITED <NAVIGATOR MAST PLAN SETT A/C>
13 JOHN E GILL TRADING PTY LTD
14 RAKIO PTY LTD <PIEKARSKI GYMPIE A/C>
15 AUSTRALIAN EXECUTOR TRUSTEES LIMITED <NO 1 ACCOUNT>
16 PERSHING AUSTRALIA NOMINEES PTY LTD <IMPLEMENTED PORTFOLIOS A/C>
17 AUSTRALIAN MASTERS YIELD FUND NO 5 LIMITED18 BALLARD BAY PTY LTD <BALLARD BAY DISCRETIONARY AC>
19 JMB PTY LIMITED
20 KOLL PTY LTD <NO 1 ACCOUNT>
Total

697,544
309,049
214,393
185,565
183,959
178,575
150,031
141,315
111,089
100,000
90,31977,20972,40560,00059,732
53,98350,00050,00050,00050,000

4.33
1.92
1.33
1.15
1.14
1.11
0.93
0.88
0.69
0.62
0.56
0.48
0.45
0.38
0.37
0.34
0.31
0.31
0.31
0.31

2,885,168

17.92

DISTRIBUTION OF ANZ CN2 HOLDINGSAt 10 October 2014
Range of securities

Numberof holders% ofholders

Number of
securities% ofsecurities

1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
Over 100,000

20,363
1,927
128
76
9

90.49
8.56
0.57
0.34
0.04

6,831,154
4,044,720
1,034,377
2,018,229
2,171,520

42.43
25.12
6.42
12.54
13.49

Total

22,503100.00

16,100,000

100.00

At 10 October 2014 there was 1 holding of less than a marketable parcel (less than $500 in value or 6 securities based on the market price of $99.00 per security), which is less than 0.01% of the total
holdings of ANZ CN2.

VOTING RIGHTS OF ANZ CN2
ANZ CN2 do not confer on holders a right to vote at any meetingof members of ANZ.
A register of holders of ANZ CN2 is held at:
452 Johnston Street
Abbotsford
Victoria, Australia(Telephone: +61 3 9415 4010)

212

ANZ ANNUAL REPORT 2014

Euro Trust Securities

Stock Exchange Listings

On 13 December 2004, the Company issued 500,000 Euro Floating
Rate Non-cumulative Trust Securities (‘Euro Trust Securities’). For moredetails on the Euro Trust Securities refer to page 124.

Australia and New Zealand Banking Group Limited’s ordinary sharesare listed on the Australian Securities Exchange and the New Zealand
Stock Exchange.

The Euro Trust Securities were issued in global form and are registeredin the name of The Bank of New York Depositary (Nominees) Limited
as the sole holder. The fully paid preference shares and unsecured
notes that form part of the Euro Trust Securities are registered in thename of The Bank of New York (as trustee for ANZ Capital Trust III) as
the sole holder.

The Group’s other stock exchange listings include:}} Australian Securities Exchange – ANZ Convertible Preference
Shares (ANZ CPS2 and CPS3), ANZ Capital Notes (CN1 and CN2),
senior debt (including covered bonds) and ANZ SubordinatedNotes [Australia and New Zealand Banking Group Limited];}} Channel Islands Stock Exchange – Subordinated debt [ANZ Jackson
Funding plc];}} London Stock Exchange – Senior (including covered bonds) andsubordinated debt [Australia and New Zealand Banking Group
Limited]; senior (including covered bonds) debt [ANZ New Zealand(Int’l) Limited];}} Luxembourg Stock Exchange – Subordinated debt [Australia
and New Zealand Banking Group Limited]; non-cumulative Trust
Securities (Euro Trust Securities) [ANZ Capital Trust III];}} New Zealand Stock Exchange – Perpetual callable subordinatednotes [ANZ Bank New Zealand Limited]; and}} SIX Swiss Exchange – Senior debt (including covered bonds)[Australia and New Zealand Banking Group Limited and ANZ
New Zealand (Int’l) Limited].

The preference shares forming part of the Euro Trust Securities confer
voting rights in the Company in the following limited circumstances:}} any proposal to reduce the Company’s share capital, other thana resolution to approve a redemption or reduction of capital inconnection with the preference shares;}} on a proposal that affects rights attached to the preference shares;}} any resolution to approve the terms of a share buy-backagreement, other than a resolution to approve a buy-back (otherthan an on market buy-back) of preference shares;}} any proposal for the disposal of the whole of the Company’s
property, business and undertaking;}} on any proposal to wind up the Company and any matter during
the Company’s winding-up; and}} on all matters on which the holders of ANZ ordinary shares areentitled to vote during a special voting period. A “special voting
period” is a period from any dividend payment date where
preference share dividends are not paid in full in respect of theimmediately preceding quarterly dividend period or the 24th
business day after the failure of ANZ Jackson Funding plc to makean interest payment in full on the notes that form part of the Euro
Trust Securities and the Company does not make the payment
pursuant to the relevant guarantee or pay an optional dividend on
the preference shares within a prescribed time period.
On a resolution or proposal on which a preference share holder isentitled to vote, the holder has on a show of hands one vote, and on apoll, one vote per preference share held.
A register of holders of the Euro Trust Securities is held by The Bankof New York Mellon, 101 Barclay Street, Floor 21 West, New York,New York 10286, United States of America (+1 315 414 3635) anda copy is held by ANZ.

Employee Shareholder Information
In order to comply with the requirements of the ANZ Employee Share
Acquisition Plan Rules and the ANZ Share Option Plan Rules, sharesor options must not be issued under these Plans if the aggregate
number of shares and options that remain subject to the Rulesof either Plan exceed 7% of the total number of ANZ shares of allclasses on issue (including preference shares). At 30 September
2014 participants under the following plans/schemes held 1.10%(2013: 1.17%) of the total number of ANZ shares of all classes on issue:}} ANZ Employee Share Acquisition Plan;}} ANZ Employee Share Save Scheme;}} ANZ Share Option Plan; and}} ANZ Directors’ Share Plan.

For more information on the Euro Trust Securities, ANZ Convertible
Preference Shares and ANZ Capital Notes please refer to notes 26 and
27 to the Financial Statements.

American Depositary Receipts
The Group has American Depositary Receipts (ADRs) representing
American Depositary Shares (ADSs) that are traded on theover-the-counter securities market “OTC Pink” electronic platform
operated by OTC Markets Group Inc. in the United States under the
ticker symbol: ANZBY and the CUSIP number: 052528304.
With effect from 23 July 2008, the ADR ratio changed from one ADS
representing five ANZ ordinary shares to one ADS representing one
ANZ ordinary share.
Citibank Shareholder Services is the Depositary for the Company’s
ADR program in the United States. Holders of the Company’s ADRs
should deal directly with Citibank Shareholder Services on all
matters relating to their ADR holdings. Registered Depositary Receipt
shareholders can sell shares, access account balances and transaction
history, find answers to frequently asked questions and download
commonly needed forms. To speak directly to a Citibank Shareholder
Services representative, please call 1-877-CITI-ADR (1-877-248-4237)
if you are calling from within the United States. If you are calling fromoutside the United States, please call 1-781-575-4555. You may also
send an e-mail inquiry to citibank@shareholders-online.com or visit
the website at www.citi.com/adr.

Capital Adequacy
ANZ provides capital information as required under APRA’s Prudential
Standard APS330: Public Disclosure Attachment A. This information
is located in the Regulatory Disclosures section of the ANZ’s website:shareholder.anz.com/pages/regulatory-disclosure.

SHAREHOLDER INFORMATION

213

GLOSSARY
AASs – Australian Accounting Standards.
AASB – Australian Accounting Standards Board. The term “AASB” iscommonly used when identifying AASs issued by the AASB. In doing
so, the term is used together with the AAS number.
ADIs – Authorised Deposit-taking Institutions.
AFS – Available-for-sale financial assets.
APRA – Australian Prudential Regulation Authority.
Australia division
The Australia division comprises the Retail and Corporate andCommercial Banking business units.
}} Retail
Retail is responsible for delivering a full range of banking
services to consumer customers, using capabilities in productmanagement, analytics, customer research, segmentation, strategy
and marketing.
– Home Loans provides housing finance to consumers in Australia
for both owner occupied and investment purposes, as well as
providing housing finance for overseas investors.
– Cards and Payments provides consumer and commercial credit
cards, personal loans and merchant services.
– Deposits provides transaction banking, savings and investment
products, such as term deposits and cash management accounts.
Retail delivers banking solutions to customers across multiple
distribution channels including the Australian branch network,
ANZ Direct, specialist sales channels and digital channels (including
goMoney, Internet Banking, anz.com). The retail distribution
network provides retail and wealth solutions to consumers, as wellas providing small business solutions and meeting the various
cash and cheque handling needs of corporate, commercial andinstitutional customers.
}} Corporate and Commercial Banking (C&CB)– Corporate Banking provides a full range of banking services
including traditional relationship banking and sophisticatedfinancial solutions, primarily to large private companies, smaller
listed companies and multi-national corporation subsidiaries.
– Regional Business Banking provides a full range of banking
services to non-metropolitan commercial and Agri (including
corporate) customers.
– Business Banking provides a full range of banking services, tometropolitan based small to medium sized business clients witha turnover of A$5 million up to A$125 million.
– Small Business Banking provides a full range of banking
services to metropolitan and regional based small businesses
in Australia with a turnover of up to A$5 million and lending
up to A$1 million.
– Esanda provides motor vehicle and equipment finance.
Cash and cash equivalents include coins, notes, money at call,balances held with central banks, liquid settlement balances(readily convertible to known amounts of cash which are subject toinsignificant risk of changes in value) and securities purchased underagreements to resell (“reverse repos”) in less than three months.

214

Cash profit is a measure of profit which is prepared on a basis
other than in accordance with accounting standards. Cash profit
represents a measure of the result of the ongoing business activitiesof the Group, enabling shareholders to assess Group and Divisional
performance against prior periods and against peer institutions.
To calculate cash profit, the Group excludes items from statutory
net profit as noted below. These items are calculated consistently
period on period so as not to discriminate between positive andnegative adjustments.
Gains and losses are adjusted where they are significant, or havethe potential to be significant in any one period, and fall into one ofthree categories:
1. non-core gains and losses included in earnings arising fromchanges in tax, legal, accounting legislation or other non-core
items not associated with the ongoing operations of the Group;
2. treasury shares, revaluation of policy liabilities, economic hedging
impacts and similar accounting items that represent timing
differences that will reverse through earnings in the future; and3. accounting reclassifications between individual line items that do
not impact reported results, such as policyholder tax gross up.
Collective provision is the provision for credit losses that are inherent
in the portfolio but not able to be individually identified. A collective
provision is only recognised when a loss event has occurred. Losses
expected as a result of future events, no matter how likely, are
not recognised.
Covered Bonds are bonds issued by an ADI to external investors
secured against a pool of the ADI’s assets (the cover pool) assigned
to a bankruptcy remote special purpose entity. The primary assets
forming the cover pool are mortgage loans. The mortgages remainon the issuer’s balance sheet. The covered bond holders have dual
recourse to the issuer and the cover pool assets. The mortgages
included in the cover pool cannot be otherwise pledged or disposedof but may be repurchased and substituted in order to maintain thecredit quality of the pool. The Group issues covered bonds as part ofits funding activities.
Credit equivalent represents the calculation of on-balance sheet
equivalents for market related items.
Customer deposits represent term deposits, other deposits bearing
interest, deposits not bearing interest and borrowing corporations
debt excluding securitisation deposits.
Global Wealth
The Global Wealth division comprises Funds Management, Insurance
and Private Wealth business units which provide investment,
superannuation, insurance products and services as well as Private
Banking for customers across Australia, New Zealand and Asia.
}} Private Wealth includes global private banking business which
specialises in assisting individuals and families to manage, growand preserve their wealth.
}} Funds Management includes the Pensions and Investment
business and E*TRADE.
}} Insurance includes Life Insurance, General Insurance and
ANZ Lenders Mortgage Insurance.
}} Corporate and other includes income from invested capital andcash profits from the advice and distribution business.

ANZ ANNUAL REPORT 2014

Global Technology, Services & Operations and Group Centre
GTSO and Group Centre provide support to the operating divisions,
including technology, operations, shared services, property, risk
management, financial management, strategy, marketing, humanresources and corporate affairs. The Group Centre includes Group
Treasury and Shareholder Functions.
IFRS – International Financial Reporting Standards.
Impaired assets are those financial assets where doubt exists as
to whether the full contractual amount will be received in a timely
manner, or where concessional terms have been provided because of
the financial difficulties of the customer. Financial assets are impaired
if there is objective evidence of impairment as a result of a loss eventthat occurred prior to the reporting date, and that loss event has had
an impact, which can be reliably estimated, on the expected future
cash flows of the individual asset or portfolio of assets.
Impaired commitments and contingencies comprise undrawn
facilities and contingent facilities where the customer’s status isdefined as impaired.
Impaired loans comprise drawn facilities where the customer’s status
is defined as impaired.
Individual credit impairment 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 expectedcash flows over the lives of those financial instruments.
International and Institutional Banking
International and Institutional Banking division comprises Global
Products servicing Global Banking and International Banking customers
across three major product sets (Global Transaction Banking, Global
Loans and Global Markets), Retail Asia Pacific focusing on affluent andemerging affluent customers across 21 countries and Asia Partnerships.
}} Global Products
Global Products service Global Banking and International Banking
customers across three product sets:– Global Transaction Banking which provides working capital andliquidity solutions including documentary trade, supply chain
financing, structured trade finance as well as cash management
solutions, deposits, payments and clearing.
– Global Markets provides risk management services to clients
globally on foreign exchange, interest rates, credit, commodities,
debt capital markets and wealth solutions. Markets provide
origination, underwriting, structuring and risk management
services, advice and sale of credit and derivative products.
The business unit also manages the Bank’s interest rate exposure
as well as its liquidity position.
– Global Loans which provides specialised loan structuring andexecution, loan syndication, project and export finance, debt
structuring and acquisition finance, structured asset finance andcorporate advisory.
}} Retail Asia Pacific provides end-to-end financial solutions to
individuals and small businesses including deposits, credit cards,
loans, investments and insurance. Leveraging our distinctive footprint
we enable client’s access to opportunities across the region andconnect them to specialists for their banking needs in each location.
}} Asia Partnerships comprises of strategic partnerships andinvestments across Asia which provide the Bank with local businessand relationship access as well as country and regulatory insights.
Net interest margin is net interest income as a percentage of averageinterest earning assets.

Net loans and advances include gross loans and advances,
acceptances and capitalised brokerage/mortgage origination fees,
less unearned income and provisions for credit impairment.
Net tangible assets equal share capital and reserves attributable
to shareholders of the Group less preference share capital andunamortised intangible assets (including goodwill and software).
New Zealand
The New Zealand division comprises Retail and Commercial
business units.
}} Retail
Retail provides products and services to personal customers via
the branch network, mortgage specialists, the contact centre
and a variety of self service channels (internet banking, phonebanking, ATMs, website and mobile phone banking). Core products
include current and savings accounts, unsecured lending (credit
cards, personal loans and overdrafts) and home loans securedby mortgages over property. Retail distributes insurance andinvestment products on behalf of the Global Wealth segment.
}} Commercial
Commercial provides services to Small Business Banking,Commercial & Agri (CommAgri), and UDC customers. Small
Business Banking services are offered to small enterprises (typicallywith annual revenues of less than NZD 5 million). CommAgri
customers consist of primarily privately owned medium to large
enterprises. Commercial’s relationship with these businesses ranges
from simple banking requirements with revenue from deposit andtransactional facilities, and cash flow lending, to more complex
funding arrangements with revenue sourced from a wider range of
products. UDC is principally involved in the financing and leasing ofplant, vehicles and equipment, mainly for small and medium sizedbusinesses, as well as investment products.
Operating expenses include personnel expenses, premises expenseand other operating expenses (excluding credit impairment charges).
Operating income includes net interest income, net funds
management and insurance income, share of associates’ profit andother operating income.
Regulatory deposits are mandatory reserve deposits lodged withlocal central banks in accordance with statutory requirements.
Return on asset ratio include net intra group assets.
Repo discount is a discount applicable on the repurchase by a central
bank of an eligible security pursuant to a repurchase agreement.
Restructured items comprise facilities in which the originalcontractual terms have been modified for reasons related to thefinancial difficulties of the customer. Restructuring may consist of areduction of interest, principal or other payments legally due, or an
extension in maturity materially beyond those typically offered to
new facilities with similar risk.
Segment revenue includes net interest income, share of associates’
profit and other operating income.
Settlement balances owed to/by ANZ represent financial assets
and/or liabilities which are in the course of being settled. These may
include trade dated assets and liabilities, nostro/vostro accounts andsettlement accounts.
Sub-standard assets are customers that have demonstrated some
operational and financial instability, with variability and uncertainty
in profitability and liquidity projected to continue over the short andpossibly medium term.

GLOSSARY215

ALPHABETICAL INDEX
Assets Charged as Security for Liabilities andCollateral Accepted as Security for Assets
Associates
Available-for-sale Assets
Balance Sheet
Capital Adequacy
Capital Management
Cash
Cash Flow Statement
Chairman’s Report
Chief Executive Officer’s Report
Commitments
Compensation of Auditors
Controlled Entities
Corporate Governance
Credit Related Commitments, Guarantees, Contingent
Liabilities and Contingent Assets
Critical Estimates and Judgements Used in Applying
Accounting Policies
Debt Issuances
Deposits and Other Borrowings
Derivative Financial Instruments
Directors’ Declaration and Responsibility Statement
Directors’ Report
Dividends
Earnings per Ordinary Share
Employee Share and Option Plans
Events Since the End of the Financial Year
Exchange Rates
Expenses
Fair Value of Financial Assets and Financial Liabilities
Fiduciary Activities
Financial Highlights
Financial Statements
Financial Risk Management
Five Year Summary
Glossary

216

129
168
110
80
126
126
103
81
6
7
172
99
167
57
173
95
120
118
104
193
8
101
103
179
192
206
98
151
172
5
78
130
196
214

Goodwill and Other Intangible Assets
Impaired Financial Assets
Income Statements
Income Tax Expense
Income Tax Liabilities
IncomeIndependent Auditor’s Report
Key Management Personnel Disclosures
Life Insurance Business
Maturity Analysis of Assets and Liabilities
Net Loans and Advances
Notes to the Cash Flow Statements
Notes to the Financial Statements
Operating and Financial Review
Other Assets
Payables and Other Liabilities
Premises and Equipment
Principal Risks and Uncertainties
Provision for Credit Impairment
Provisions
Remuneration ReportReserves and Retained Earnings
Transfers of Financial Assets
Segment Analysis
Share Capital
Shareholder Information
Shares in Controlled Entities and Associates
Significant Accounting Policies
Statement of Changes in Equity
Statement of Comprehensive Income
Subordinated Debt
Superannuation and Other Post Employment Benefit Schemes
Supplementary Information
Tax Assets
Trading Securities
Transactions with Other Related Parties

116
112
78
100
119
97
194
184
185
159
111
165
84
12
117
119
117
197
112
120
28
125
171
162
123
208
114
84
82
79
121
176
206
115
103
184

HANDY CONTACTSSHARE REGISTRARREGISTERED OFFICEANZ Centre Melbourne
Level 9, 833 Collins Street
Docklands VIC 3008 Australia
Telephone +61 3 9273 5555
Facsimile +61 3 8542 5252
Company Secretary: John Priestley

AUSTRALIA
Computershare Investor Services Pty Ltd
GPO Box 2975 Melbourne
VIC 3001 Australia
Telephone 1800 11 33 99 (Within Australia)+61 3 9415 4010 (International Callers)
Facsimile +61 3 9473 2500
anzshareregistry@computershare.com.au

INVESTOR RELATIONS
Level 10, 833 Collins Street
Docklands VIC 3008 Australia
Telephone +61 3 8654 7682
Facsimile +61 3 8654 8886
Email: investor.relations@anz.com
Website: shareholder.anz.com
Group General Manager Investor Relations: Jill Craig

NEW ZEALAND
Computershare Investor Services Limited
Private Bag 92119 Auckland 1142
New Zealand
Telephone 0800 174 007
Facsimile +64 9 488 8787
UNITED KINGDOM
Computershare Investor Services plc
The Pavilions
Bridgwater Road Bristol BS99 6ZZ
United Kingdom
Telephone +44 870 702 0000
Facsimile +44 870 703 6101

CORPORATE AFFAIRSLevel 10, 833 Collins Street
Docklands VIC 3008 Australia
Telephone +61 3 8654 3276
Facsimile +61 3 8654 8886
Group General Manager Corporate Affairs: Gerard Brown

IMPORTANT DATES FOR SHAREHOLDERS*
Event

Date

Interim Results Announcement

5 May 2015

Interim Dividend Ex-Date

8 May 2015

Interim Dividend Record Date

12 May 2015

DRP/BOP/Foreign Currency Election Date

13 May 2015

Interim Dividend Payment Date

1 July 2015

Annual Results Announcement

29 October 2015

Final Dividend Ex-Date

6 November 2015

Final Dividend Record Date

10 November 2015

DRP/BOP/Foreign Currency Election Date

11 November 2015

Final Dividend Payment Date

16 December 2015

Annual General Meeting

17 December 2015

* If there are any changes to these dates, the Australian Securities Exchange will
be notified accordingly.

UNITED STATESCitibank Shareholder Services
P.O. Box 43077
Providence, Rhode Island 02940-3077
Callers outside USA: 1-781-575-4555
Callers within USA (toll free): 1-877-248-4237(1-877-CITI-ADR)
Email: citibank@shareholders-online.com
www.citi.com/adr

OUR INTERNATIONAL PRESENCE} Australia} New Zealand} Asia – Cambodia, China, Hong Kong, India, Indonesia,
Japan, Korea, Laos, Malaysia, Myanmar, the Philippines,
Singapore, Taiwan, Thailand, Vietnam} Europe and United Kingdom} Pacific – American Samoa, Cook Islands, Fiji, Guam,
Kiribati, New Caledonia, Papua New Guinea, Samoa,
Solomon Islands, Timor-Leste, Tonga, Vanuatu} Middle East
} United States of America

Australia and New Zealand Banking Group Limited ABN 11 005 357 522