ANZ BANK NEW ZEALAND LIMITEDANNUAL REPORT AND REGISTERED BANK DISCLOSURE STATEMENTFOR THE YEAR ENDED 30 SEPTEMBER 2018
NUMBER 90 | ISSUED NOVEMBER 2018

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTCONTENTS
Annual Report and Glossary of Terms

2

DISCLOSURE STATEMENT

SUPPLEMENTARY INFORMATION

Financial Statements
Consolidated Financial Statements
Notes to the Financial Statements
Registered Bank Disclosures
Directors’ Statement

Bank Financial Strength Dashboard
Other Information

4
8
58
83
84

Independent Auditor’s Report

ANNUAL REPORTFOR THE YEAR ENDED 30 SEPTEMBER 2018
Pursuant to section 211(3) of the Companies Act 1993, the shareholder of the Bank has agreed that the Annual Report of the Banking
Group need not comply with any of the paragraphs (a), and (e) to (j) of subsection (1) and subsection (2) of section 211.
Accordingly, there is no information to be provided in this Annual Report other than the financial statements for the year ended 30
September 2018 and the audit report on those financial statements.
For and on behalf of the Board of Directors:

Rt Hon Sir John Key, GNZM AC
Chair
15 November 2018

David Hisco
Executive Director
15 November 2018

GLOSSARY OF TERMS
In this Registered Bank Disclosure Statement (Disclosure Statement) unless the context otherwise requires:
Bank means ANZ Bank New Zealand Limited.
Banking Group, We or Our means the Bank and all its controlled entities.
Immediate Parent Company means ANZ Holdings (New Zealand) Limited.
Ultimate Parent Bank means Australia and New Zealand Banking Group Limited.
Overseas Banking Group means the worldwide operations of Australia and New Zealand Banking Group Limited including its controlled
entities.
New Zealand business means all business, operations, or undertakings conducted in or from New Zealand identified and treated as if itwere conducted by a company formed and registered in New Zealand.
NZ Branch means the New Zealand business of the Ultimate Parent Bank.
ANZ New Zealand means the New Zealand business of the Overseas Banking Group.
OnePath means OnePath Life (NZ) Limited.
UDC means UDC Finance Limited.
Registered Office is Ground Floor, ANZ Centre, 23-29 Albert Street, Auckland, New Zealand, which is also the Banking Group’s address forservice.
RBNZ means the Reserve Bank of New Zealand.
APRA means the Australian Prudential Regulation Authority.
the Order means the Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014.
Any term or expression which is defined in, or in the manner prescribed by, the Order shall have the meaning given in or prescribed by
the Order.

2

89
92

FINANCIAL
STATEMENTS
In 2018, we have redesigned our Financial
Statements to better communicate our performance
to stakeholders by reducing complexity
and simplifying our financial note disclosures.

Consolidated Financial Statements
Income Statement

4Statement of Comprehensive Income

4

Balance Sheet

5

Cash Flow Statement

6

Statement of Changes in Equity

7

Notes to the Consolidated Financial Statements
Basis of Preparation
1. About our Financial Statements

Financial Instrument Disclosures
8

Financial Performance

15. Financial Risk Management28

16. Fair Value of Financial Assets and Financial Liabilities

40

17. Assets Charged as Security for Liabilities

43

2. Operating Income

10

3. Operating Expenses

12

4. Income Tax

13

5. Dividends

14

Non-Financial Assets

6. Segment Reporting

14

19. Goodwill and Other Intangible Assets

Financial Assets

and Collateral Accepted as Security for Assets
18. Offsetting

44

45

Equity7. Cash and Cash Equivalents

16

20. Shareholders' Equity

47

8. Trading Securities

17

21. Capital Management48

9. Derivative Financial Instruments

18

10. Available-for-sale Assets

21

Consolidation and Presentation

11. Net Loans and Advances

22

22. Controlled Entities

49

12. Provision for Credit Impairment

23

23. Structured Entities

50

24. Transfers of Financial Assets

51

25. Assets and Liabilities Held for Sale

52

Financial Liabilities
13. Deposits and Other Borrowings

25

14. Debt Issuances

26

Other Disclosures
26. Related Party Disclosures

53

27. Commitments and Contingent Liabilities

54

28. Compensation of Auditors

56

3

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTFINANCIAL STATEMENTS
INCOME STATEMENT
For the year ended 30 September
Interest income

NoteInterest expense

2018
NZ$m
6,390

2017
NZ$m
6,198

(3,240)(3,161)

Net interest income

2

3,150

3,037

Other operating income

2

716

604

Net funds management and insurance income

2

405

329

Share of associates' profit

2

5

5

4,276

3,975

3

(1,517)(1,468)

2,759

2,507

(55)

(62)

2,704

2,445

Operating income
Operating expenses
Profit before credit impairment and income tax
Credit impairment charge

12

Profit before income tax
Income tax expense

(751)

(680)

1,953

1,765

For the year ended 30 September

2018
NZ$m

2017
NZ$m

Profit for the year

1,953

1,765

1

15

(27)

(32)

5

12

Profit for the year

4

STATEMENT OF COMPREHENSIVE INCOME

Other comprehensive income
Items that will not be reclassified subsequently to profit or loss
Items that may be reclassified subsequently to profit or loss
Reserve movements:
Unrealised losses recognised directly in equity
Realised losses transferred to the income statement

7

6

Other comprehensive income after tax

(14)

1

Total comprehensive income for the year

1,939

1,766

Income tax attributable to the above items

The notes appearing on pages 8 to 56 form an integral part of these financial statements

4

FINANCIAL STATEMENTS

BALANCE SHEETAs at 30 September
AssetsCash and cash equivalents

Note

2018
NZ$m

2017
NZ$m

7

2,200

2,338

656

536

Settlement balances owed to the Banking Group
Collateral paid

1,919

1,415

Trading securities

8

8,024

7,663

Derivative financial instruments

9

8,086

9,878

Available-for-sale assets

10

6,502

6,360

Net loans and advances

11

126,466

117,627

Assets held for sale

25

897

3,065

-

636

Life insurance contract assets

6

7

3,289

3,275

-

123

Premises and equipment

325

367

Other assets

642

683

Total assets

159,012

153,973

2,161

1,840

845

613

Investments in associates
Goodwill and other intangible assets

19

Investments backing insurance contract liabilities

Liabilities
Settlement balances owed by the Banking Group
Collateral received
Deposits and other borrowings

13

108,008

101,657

Derivative financial instruments

9

8,095

9,826

161

39

Current tax liabilities
Deferred tax liabilities

21

187

334

1,088

Payables and other liabilities

947

1,151

Employee entitlements

120

119

Liabilities held for sale

25

76

66

25,13524,606

Total liabilities

145,903

141,192

Net assets

13,10912,781

11,888

8,888

33

48

Other provisions
Debt issuances

14

EquityShare capital

20

Reserves
Retained earnings

1,188

3,845

Total equity

13,10912,781

For and on behalf of the Board of Directors:

Rt Hon Sir John Key, GNZM AC
Chair
15 November 2018

David Hisco
Executive Director
15 November 2018

The notes appearing on pages 8 to 56 form an integral part of these financial statements

5

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTFINANCIAL STATEMENTS
CASH FLOW STATEMENT
For the year ended 30 September

2018
NZ$m

2017
NZ$m

Profit after income tax

1,953

1,765

Depreciation and amortisation

88

80

Loss on sale of premises and equipment

42

Impairment of goodwill

-

3

1,150

(662)

(22)

88

Adjustments to reconcile to net cash provided by/(used in) operating activities:

Net derivatives/foreign exchange adjustment
Other non-cash movements
Net (increase)/decrease in operating assets:
Collateral paid

(504)

895

Trading securities

(361)

4,316

(5,927)(5,916)

(266)

(27)

5,312

3,630

Settlement balances owed by the Banking Group390

4

Collateral received

232

84

Other liabilities

48

120

Net loans and advances
Other assets
Net increase in operating liabilities:
Deposits and other borrowings

144

2,617

2,097

4,382

Purchases(4,368)(10,803)

Proceeds from sale or maturity

4,246

7,266

3

(49)

(119)

(3,586)

Issue proceeds

3,385

4,922

Redemptions

Total adjustments
Net cash flows provided by operating activities1
Cash flows from investing activities
Available-for-sale assets:2

Other assets
Net cash flows used in investing activities
Cash flows from financing activities
Debt issuances3(3,991)(3,899)Proceeds from issue of ordinary shares

3,000

-

Dividends paid

(4,611)(1,695)

Net cash flows used in financing activities(2,217)(672)

Net increase / (decrease) in cash and cash equivalents

(239)

124

Cash and cash equivalents at beginning of year

2,439

2,315

Cash and cash equivalents at end of year

2,200

2,439

1
2

3

Net cash provided by operating activities includes income taxes paid of NZ$619 million (2017: NZ$605 million).
We have reassessed the composition of operating, investing and financing cash flows. Cash flows from available-for-sale assets were previously included in operating activities, andcomparative amounts have been reclassified.
Movement in debt issuances (Note 14) also includes an NZ$1,365 million increase (2017: NZ$510 million increase) from the effect of foreign exchange rates, a NZ$246 million decrease(2017: NZ$247 million decrease) from changes in fair value hedging instruments and a NZ$16 million increase (2017: NZ$24 million increase) of other changes.

The notes appearing on pages 8 to 56 form an integral part of these financial statements

6

FINANCIAL STATEMENTS

STATEMENT OF CHANGES IN EQUITY

Note

Availablefor-sale
Share revaluation
capitalreserve
NZ$m
NZ$m

Cash flow
hedging
reserve
NZ$m

Retainedearnings
NZ$m

Total
equity
NZ$m

8,888

-

62

3,760

12,710

-

-

-

1,765

1,765

Unrealised gains / (losses) recognised directly in equity

-

7

(39)

-

(32)

Realised losses transferred to the income statement

-

-

12

-

12

Actuarial gain on defined benefit schemes

-

-

-

21

21

Income tax credit / (expense) on items recognised directly in equity

-

(2)

8

(6)

-

Total comprehensive income for the year

-

5

(19)

1,780

1,766

(1,684)(1,684)As at 1 October 2016
Profit or loss

Transactions with Immediate Parent Company in its capacity as owner:
Ordinary dividends paid

5

-

-

-

Preference dividends paid

20

-

-

-

(11)

(11)

-

-

-

(1,695)(1,695)

Transactions with Immediate Parent Company in its capacity as owner

8,888

5

43

3,845

12,781

Profit or loss

-

-

-

1,953

1,953

Unrealised gains / (losses) recognised directly in equity

-

8

(35)

-

(27)

Realised losses transferred to the income statement

-

-

5

-

5

Actuarial gain on defined benefit schemes

-

-

-

2

2

Income tax credit / (expense) on items recognised directly in equity

-

(2)

9

(1)

6

Total comprehensive income for the year

-

6

(21)

1,954

1,939

As at 30 September 2017

Transactions with Immediate Parent Company in its capacity as owner:
Ordinary shares issued

20

3,000

-

-

-

3,000

Ordinary dividends paid

5

-

-

-

(4,600)(4,600)Preference dividends paid

20

-

-

-

(11)

(11)

Transactions with Immediate Parent Company in its capacity as owner

3,000

-

-

(4,611)(1,611)As at 30 September 2018

11,888

11

22

1,188

13,109The notes appearing on pages 8 to 56 form an integral part of these financial statements

7

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
1.

ABOUT OUR FINANCIAL STATEMENTS

These are the financial statements for ANZ Bank New Zealand Limited (the Bank) and its controlled entities (together, the ‘Banking Group’) for the year
ended 30 September 2018. The Bank is incorporated and domiciled in New Zealand. The address of the Bank’s registered office and its principal placeof business is ANZ Centre, 23-29 Albert Street, Auckland, New Zealand.
On 15 November 2018, the Directors resolved to authorise the issue of these financial statements.
In 2018, we reviewed the content and structure of the financial statements with the aim of increasing their relevance to stakeholders. This review has
resulted in a number of changes to the financial statements from previous years, including:• moving disclosures required by the Order to a separate ‘Registered Bank Disclosures’ section of the Disclosure Statement;• information about the Banking Group’s recognition and measurement policies and key judgements and estimates has been relocated and is
now disclosed within the relevant notes to the financial statements;• removing immaterial disclosures; and• aggregating prior year numbers in certain disclosures.
Information in the financial statements is included only to the extent we consider it material and relevant to the understanding of the financial
statements. A disclosure is considered material and relevant if, for example:• the dollar amount is significant in size (quantitative factor);• the dollar amount is significant by nature (qualitative factor);• the user cannot understand the Banking Group’s results without the specific disclosure (qualitative factor);• the information is critical to a user’s understanding of the impact of significant changes in the Banking Group’s business during the period – forexample: business acquisitions or disposals (qualitative factor);• the information relates to an aspect of the Banking Group’s operations that is important to its future performance (qualitative factor); and• the information is required under legislative requirements of the Financial Markets Conduct Act 2013 or by the Banking Group’s principal
regulator, RBNZ.
This section of the financial statements:• outlines the basis upon which the Banking Group’s financial statements have been prepared; and• discusses any new accounting standards or regulations that directly impact financial statement disclosure requirements.

BASIS OF PREPARATION
These financial statements are general purpose (Tier 1) financial statements prepared by a ‘for profit’ entity, in accordance with the requirements of
the Financial Markets Conduct Act 2013. These financial statements comply with:• New Zealand Generally Accepted Accounting Practice, as defined in the Financial Reporting Act 2013;• New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards, as
appropriate for publicly accountable for-profit entities; and• International Financial Reporting Standards (IFRS).
We present the financial statements of the Banking Group in New Zealand dollars, which is the Banking Group’s functional and presentation currency.
We have rounded values to the nearest million dollars (NZ$m), unless otherwise stated.

BASIS OF MEASUREMENT
We have prepared the financial information in accordance with the historical cost basis - except the following assets and liabilities which we havestated at their fair value:• derivative financial instruments;• available-for-sale financial assets;• financial instruments held for trading; and• financial instruments designated at fair value through profit and loss.

BASIS OF CONSOLIDATIONThe consolidated financial statements of the Banking Group comprise the financial statements of the Bank and all its subsidiaries. An entity, including
a structured entity, is considered a subsidiary of the group when we determine that the Bank has control over the entity. Control exists when the
Banking Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns throughits power over the entity. We assess power by examining existing rights that give the Banking Group the current ability to direct the relevant activitiesof the entity. We have eliminated, on consolidation, the effect of all transactions between entities in the Banking Group.

FOREIGN CURRENCY TRANSLATION
TRANSACTIONS AND BALANCES
Foreign currency transactions are translated into the relevant functional currency at the exchange rate prevailing at the date of the transaction. At thereporting date, monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the relevant spot rate.
Any foreign currency translation gains or losses that arise are included in profit or loss in the period they arise.
We measure translation differences on non-monetary items at fair value through profit or loss and report them as part of the fair value gain or loss onthese items. We include any translation differences on non-monetary items classified as available-for-sale financial assets in the available-for-salerevaluation reserve in equity.

8

NOTES TO THE FINANCIAL STATEMENTS

1.

ABOUT OUR FINANCIAL STATEMENTS (continued)

In the process of applying the Banking Group’s accounting policies, management has made a number of judgements and applied
estimates and assumptions about future events. Further information on the key judgements and estimates that we consider
material to the financial statements are contained within the notes to the financial statements.

ACCOUNTING STANDARDS NOT EARLY ADOPTED
A number of new standards, amendments to standards and interpretations have been published but are not mandatory for the financial statements
for the year ended 30 September 2018, and have not been applied by the Banking Group in preparing these financial statements.
The Banking Group has identified three standards where this applies to the Banking Group and further details are set out below.
NZ IFRS 9 Financial Instruments (NZ IFRS 9)NZ IFRS 9 is effective for the Banking Group from 1 October 2018. NZ IFRS 9 stipulates new requirements for the impairment of financial assets,
classification and measurement of financial assets and financial liabilities and general hedge accounting. Details of the key requirements andestimated impacts on the Banking Group are outlined below.
Impairment
NZ IFRS 9 replaces the incurred loss impairment model under NZ IAS 39: Financial Instruments: Recognition and Measurement (NZ IAS 39) with an
expected credit loss (ECL) model incorporating forward looking information. The ECL model will be applied to all financial assets measured atamortised cost, debt instruments measured at fair value through other comprehensive income, lease receivables, certain loan commitments andfinancial guarantees. Under the ECL model, the following three-stage approach is applied to measuring ECL based on credit migration between thestages since origination:• Stage 1: At the origination of a financial asset, a provision equivalent to 12 months ECL is recognised.
• Stage 2: Where there has been a significant increase in credit risk since origination, a provision equivalent to lifetime ECL is recognised.
• Stage 3: Similar to the current NZ IAS 39 requirements for individual impairment provisions, lifetime ECL is recognised for loans where there is
objective evidence of impairment.
Expected credit losses are probability weighted and determined by evaluating a range of possible outcomes, taking into account the time value ofmoney, past events, current conditions and forecasts of future economic conditions.
Classification and measurement
There are three measurement classifications under NZ IFRS 9: Amortised cost, Fair Value through Profit or Loss and Fair Value through Other
Comprehensive Income. Financial assets are classified into these measurement classifications taking into account the business model within which
they are managed, and their contractual cash flow characteristics.
The classification and measurement requirements for financial liabilities under NZ IFRS 9 are largely consistent with NZ IAS 39 with the exception thatfor financial liabilities designated as measured at fair value, gains or losses relating to changes in the entity’s own credit risk are included in othercomprehensive income. This part of the standard was early adopted by the Banking Group on 1 October 2013.
General hedge accounting
NZ IFRS 9 introduces new hedge accounting requirements which more closely align accounting with risk management activities undertaken when
hedging financial and non-financial risks.
NZ IFRS 9 provides the Banking Group with an accounting policy choice to continue to apply the NZ IAS 39 hedge accounting requirements until theInternational Accounting Standards Board’s ongoing project on macro hedge accounting is completed. The Banking Group’s current expectation isthat it will continue to apply the hedge accounting requirements of NZ IAS 39.
Transition to NZ IFRS 9
Other than as noted above under classification and measurement of financial liabilities, NZ IFRS 9 has a date of initial application for the Banking Groupof 1 October 2018. The classification and measurement, and impairment requirements, will be applied retrospectively by adjusting opening retained
earnings at 1 October 2018. The Banking Group does not intend to restate comparatives.
ImpactImpairment
Based on the portfolio of in-scope financial assets held as at 30 September 2018, economic conditions prevailing at that time and management’s
judgements and estimates, the application of NZ IFRS 9 as at 1 October 2018 has resulted in higher aggregate impairment provisions of approximately
NZ$72 million, with an associated decrease in deferred tax liabilities of approximately NZ$20 million. The net impact on total equity is a reduction of
approximately NZ$52 million. These estimates remain subject to change until the Banking Group finalises its financial statements for the year ending
30 September 2019.
Classification and measurement of financial assets
There have been no changes in classification and measurement as a result of the application of the business model and contractual cash flow
characteristics tests.

9

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
1.

ABOUT OUR FINANCIAL STATEMENTS (continued)

NZ IFRS 15 Revenue from Contracts with Customers (NZ IFRS 15)
NZ IFRS 15 is effective for the Banking Group from 1 October 2018 and replaces existing guidance on the recognition of revenue from contracts withcustomers. The standard requires identification of distinct performance obligations within a contract, and allocation of the transaction price of thecontract to those performance obligations. Revenue is then recognised as each performance obligation is satisfied. The standard also provides
guidance on whether an entity is acting as a principal or an agent which impacts the presentation of revenue on a gross or net basis.
The Banking Group has assessed all revenue streams existing at the date of transition to the new standard and determined that the impact of NZIFRS
15 is immaterial given the majority of the Banking Group revenues are outside the scope of the standard. The Banking Group will adopt IFRS 15
retrospectively including restatement of prior period comparatives.
NZ IFRS 16 Leases (NZ IFRS 16)
The final version of NZ IFRS 16 was issued in February 2016 and is not effective for the Banking Group until 1 October 2019. NZ IFRS 16 requires a lessee
to recognise its right to use the underlying leased asset, as a right-of-use asset; and its obligation to make lease payments as a lease liability. NZ IFRS 16
substantially carries forward the lessor accounting requirements in NZ IAS 17 Leases.
The Banking Group is in the process of assessing the impact of the application of NZ IFRS 16 and is not yet able to reasonably estimate the impact on
its financial statements.

2.

OPERATING INCOME

Net Interest income
Interest income by type of financial asset
Financial assets at amortised cost
Trading securities
Available-for-sale assets
Financial assets at fair value through profit or loss
Interest income
Interest expense by type of financial liability
Financial liabilities at amortised cost
Financial liabilities designated at fair value through profit or loss
Interest expense
Net interest income
Other operating income(i) Fee and commission income
Lending and credit facility fees
Non-lending fees and commissions
Fee and commission income
Fee and commission expense
Net fee and commission income(ii) Other income
Net foreign exchange earnings and other financial instruments income
Derivative valuation adjustments
Loss on sale of mortgages to NZ BranchGain on UDC terminated transaction
Insurance proceeds
Other
Other income
Other operating income
Net funds management and insurance income
Net funds management income
Net insurance income
Net funds management and insurance income
Share of associates' profit
Operating income

10

2018
NZ$m

2017
NZ$m

5,986
240
159
5
6,390

5,736
351
106
5
6,198

(3,168)(72)(3,240)3,150(3,023)(138)(3,161)
3,037

32
725
757
(363)
394

35
702
737
(328)
409

237
13
(1)
20
20
33
322
716

129
33
(1)
34
195
604

217
188
405
5
4,276

199
130
329
5
3,975

NOTES TO THE FINANCIAL STATEMENTS

2.

OPERATING INCOME (continued)

RECOGNITION AND MEASUREMENTNET INTEREST INCOME
Interest Income and Expense
We recognise interest income and expense for all financial instruments, including those classified as held for trading, available-for-saleassets or designated at fair value, in profit or loss using the effective interest rate method. This method uses the effective interest rate of afinancial asset or financial liability to calculate amortised cost. The effective interest rate is the rate that discounts the stream of estimatedfuture cash receipts or payments over the expected life of the financial instrument or, when appropriate, a shorter period, to the net
carrying amount of the financial asset or liability. For assets subject to prepayment, we determine their expected life on the basis ofhistorical behaviour of the particular asset portfolio - taking into account contractual obligations and prepayment experience.
OTHER OPERATING INCOME
Fee and Commission Income
We recognise fees or commissions:• that relate to the execution of a significant act (for example, advisory or arrangement services, placement fees and underwriting fees)
when the significant act has been completed; and• charged for providing ongoing services (for example, maintaining and administering existing facilities) as income over the period theservice is provided.
Net Foreign Exchange Earnings and Other Financial Instruments Income
We recognise the following as net foreign exchange earnings and other financial instruments income:• exchange rate differences arising on the settlement of monetary items and translation differences on monetary items translated at rates
different to those at which they were initially recognised;• fair value movements (excluding realised and accrued interest) on derivatives not designated as accounting hedges that we use to
manage interest rate and foreign exchange risk on funding instruments;• the ineffective portions of fair value hedges and cash flow hedges;• fair value movements on financial assets and financial liabilities designated at fair value through profit or loss or held for trading; and• immediately upon sale or repayment of a hedged item, the unamortised fair value adjustments in items designated as fair value hedges
and amounts accumulated in equity related to designated cash flow hedges.
NET FUNDS MANAGEMENT AND INSURANCE INCOME
Net Funds Management Income
We recognise the fees we charge to managed investment schemes and other customers when we have provided the service.
Net Insurance Income
We recognise:• premiums with a regular due date as income on an accruals basis;• claims on an accruals basis once our liability to the policyholder has been confirmed under the terms of the contract; and• change in life insurance contract asset, net of liability for reinsurance, under the Margin of Service (MoS) model.
SHARE OF ASSOCIATES’ PROFITThe equity method is applied to accounting for associates in the consolidated financial statements. Under the equity method, the Banking
Group’s share of the after tax results of associates is included in the Income Statement and the Statement of Comprehensive Income.

11

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
3.

OPERATING EXPENSES

Personnel
Salaries and related costs
Superannuation costs
Other
Personnel expenses
Premises
Leasing and rental costs
Other
Premises expenses
Technology
Licences and outsourced services
Other
Technology expenses
Other
Advertising and public relations
Professional fees
Freight, stationery, postage and telephone
Charges from Ultimate Parent Bank
Other
Other expenses
Operating expenses

2018
NZ$m

2017
NZ$m

820
29
42
891

801
29
26
856

82
71
153

80
73
153

126
99
225

125
93
218

43
45
44
52
64
248
1,517

41
43
45
46
66
241
1,468

RECOGNITION AND MEASUREMENTOPERATING EXPENSES
Operating expenses are recognised as services are provided to the Banking Group over the period in which an asset is consumed or once a
liability is created.
SALARIES AND RELATED COSTS – ANNUAL LEAVE, LONG SERVICE LEAVE AND OTHER EMPLOYEE BENEFITS
Wages and salaries, annual leave, and other employee entitlements expected to be paid or settled within twelve months of employees
rendering service are measured at their nominal amounts using remuneration rates that the Banking Group expects to pay when the liabilities
are settled.
We accrue employee entitlements relating to long service leave using an actuarial calculation. It includes assumptions regarding staff
departures, leave utilisation and future salary increases. The result is then discounted using market yields at the reporting date. The market yields
are determined from a blended rate of high quality corporate bonds with terms to maturity that closely match the estimated future cash
outflows.
If we expect to pay short term cash bonuses, then a liability is recognised when the Banking Group has a present legal or constructive obligation
to pay this amount (as a result of past service provided by the employee) and the obligation can be reliably measured.

12

NOTES TO THE FINANCIAL STATEMENTS

4. INCOME TAX
INCOME TAX EXPENSE
Reconciliation of the prima facie income tax expense on pre-tax profit with the income tax expense recognised in profit or loss:

Profit before income tax
Prima facie income tax expense at 28%
Tax effect of permanent differences:
Imputed and non-assessable dividends
Tax provisions no longer required
Non assessable income and non deductible expenditure
Subtotal
Income tax over provided in previous years
Income tax expense
Current tax expense
Adjustments recognised in the current year in relation to the current tax of previous years
Deferred tax expense/(income) relating to the origination and reversal of temporary differences
Income tax expense
Effective tax rate

2018
NZ$m
2,704
757

2017
NZ$m
2,445
685

(1)
(3)
(1)
752
(1)
751
910
(1)
(158)
751
27.8%

(1)
(5)
2
681
(1)
680
641
(1)
40
680
27.8%

RECOGNITION AND MEASUREMENT
INCOME TAX EXPENSE
Income tax expense comprises both current and deferred taxes and is based on the accounting profit adjusted for differences in the accounting
and tax treatments of income and expenses (that is, taxable income). We recognise tax expense in profit or loss except to the extent to which it
relates to items recognised directly in equity and other comprehensive income, in which case we recognise directly in equity or othercomprehensive income respectively.
CURRENT TAX EXPENSE
Current tax is the tax we expect to pay on taxable income for the year, based on tax rates (and tax laws) which are enacted at the reporting date.
We recognise current tax as a liability (or asset) to the extent that it is unpaid (or refundable).
DEFERRED TAX ASSETS AND LIABILITIESWe account for deferred tax using the balance sheet method. Deferred tax arises because the accounting income is not always the same as thetaxable income. This creates temporary differences, which usually reverse over time. Until they reverse, we recognise a deferred tax asset, or
liability, on the balance sheet. We measure deferred taxes at the tax rates that we expect will apply to the period(s) when the asset is realised, or
the liability settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the reporting date.
We offset current and deferred tax assets and liabilities only to the extent 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.

13

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
5.

DIVIDENDS

ORDINARY SHARE DIVIDENDSDividends
Financial Year 2017
Dividend paid in March 2017
Dividend paid in September 2017
Dividends paid during the year ended 30 September 2017
Financial Year 2018
Dividend paid in March 2018
Dividend paid in April 2018
Dividend paid in April 2018
Dividend paid in September 2018
Dividends paid during the year ended 30 September 2018

Amountper share

Total
Dividend
NZ$m

23.5 cents
26.9 cents

785
899
1,684

23.9 cents
44.8 cents
31.0 cents
12.6 cents

800
1,500
1,500
800
4,600

2018
NZ$m
4,919

2017
NZ$m
4,196

IMPUTATION CREDIT ACCOUNT

Imputation credits available

The imputation credit balance for the Banking Group includes the imputation credit balance in relation to both the New Zealand Resident imputationgroup and other companies in the Banking Group that are not in the New Zealand Resident imputation group. The imputation credit balance
available includes imputation credits that will arise from the payment of the amount of provision for income tax as at the reporting date.

6. SEGMENT REPORTING
OPERATING SEGMENTS
The Banking Group is organised into three major business segments for segment reporting purposes - Retail, Commercial and Institutional. Centralised
back office and corporate functions support these segments. These segments are consistent with internal reporting provided to the chief operating
decision maker, being the Bank’s Chief Executive Officer.
Segment reporting has been updated to reflect minor changes to the Banking Group’s structure. Comparative data has been adjusted to beconsistent with the current year’s segment definitions.
RetailRetail provides a full range of banking and wealth management services to consumer, private banking and small business banking customers. We
deliver our services via our internet and app-based digital solutions and network of branches, mortgage specialists, relationship managers and contact
centres.
Commercial
Commercial provides a full range of banking services including traditional relationship banking and sophisticated financial solutions throughdedicated managers focusing on privately owned medium to large enterprises and the agricultural business segment.
Institutional
The Institutional division services global institutional and corporate customers across three product sets: Transaction Banking, Loans & Specialised
Finance and Markets.
•

Transaction Banking provides working capital and liquidity solutions including documentary trade, supply chain financing as well as cash
management solutions, deposits, payments and clearing.

•

Loans & Specialised Finance provides loan products, loan syndication, specialised loan structuring and execution, project and export finance,
debt structuring and acquisition finance and corporate advisory.

•

Markets provide risk management services on foreign exchange, interest rates, credit, commodities, debt capital markets in addition to
managing the Banking Group’s interest rate exposure and liquidity position.

Other
Other includes treasury and back office support functions, none of which constitutes a separately reportable segment.

14

NOTES TO THE FINANCIAL STATEMENTS

6.

SEGMENT REPORTING (continued)

Operating segment analysis

Year ended 30 September 2018
Interest income
Interest expense
Net interest income
Other operating income
Share of associates' profit
Operating income
Operating expenses
Profit before credit impairment and income tax
Credit impairment (charge) / release
Profit before income tax
Income tax expense
Profit after income tax
Other information
Goodwill1
Net loans and advances
Customer deposits
Year ended 30 September 2017
Interest income
Interest expense
Net interest income
Other operating income
Share of associates' profit
Operating income
Operating expenses
Profit before credit impairment and income tax
Credit impairment (charge) / release
Profit before income tax
Income tax expense
Profit after income tax
Other information
Goodwill1
Net loans and advances1
Customer deposits1
1

Retail Commercial Institutional
NZ$m
NZ$m
NZ$m
3,538
2,139
719
(1,761)(1,169)
(394)
1,777
970
325
680
21
265
5
2,462
991
590
(1,036)
(258)
(182)
1,426
733
408
(50)
41
(46)
1,376
774
362
(384)
(217)
(101)
992
557
261

Other
NZ$m
(6)
84
78
155
233
(41)
192
192
(49)
143

Total
NZ$m
6,390
(3,240)
3,150
1,121
5
4,276
(1,517)
2,759
(55)
2,704
(751)
1,953

1,109
76,84370,2591,052
42,446
16,842

1,069
7,166
16,95411-

3,230
126,466
104,055

3,430(1,727)
1,703
688
5
2,396
(1,005)
1,391
(35)
1,356
(379)
977

2,070
(1,170)
900
21
921
(259)
662
(51)
611
(172)
439

699
(339)
360
302
662
(189)
473
24
497
(140)
357

(1)
75
74
(78)
(4)
(15)
(19)
(19)
11
(8)

6,198
(3,161)
3,037
933
5
3,975
(1,468)
2,507
(62)
2,445
(680)
1,765

1,109
71,942
67,796

1,052
40,963
14,0591,069
7,589
14,97445-

3,230
120,539
96,829Including items reclassified as held for sale.

15

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
6.

SEGMENT REPORTING (continued)

OTHER SEGMENTThe Other segment profit/(loss) after income tax comprises:

Central functions1
Technology and Group Centre
Economic hedges
Revaluation of insurance policies from changes in interest rates
Total
1

7.

2018
NZ$m
15
65
48
15
143

2017
NZ$m
1
59
(43)
(25)
(8)

Central functions’ external revenues for the year ended 30 September 2018 includes the $20 million insurance proceeds (Note 2 Operating Income) that were received from a member of
the Overseas Banking Group.

CASH AND CASH EQUIVALENTS

Coins, notes and cash at bankSecurities purchased under agreements to resell in less than 3 months
Balances with central banks
Settlement balances owed to the Banking Group within 3 months1
Cash and cash equivalents

2018
NZ$m
204
136
1,734
126
2,200

2017
NZ$m
202
360
1,776
2,338

2018
NZ$m
2,200

2017
NZ$m
2,338

2,200

170
(69)
2,439

Reconciliation of cash and cash equivalents to the balance sheet

Cash and cash equivalents per the balance sheet
Amounts included in settlement balances receivable / (payable):
Nostro accounts1
Overdrawn nostro accounts
Cash and cash equivalents as per the cash flow statement
1

16

Settlement balances due within 3 months have been recognised in cash and cash equivalents on the balance sheet from 30 September 2018.

NOTES TO THE FINANCIAL STATEMENTS

8.

TRADING SECURITIES

Government securities
Corporate and financial institution securities
Trading securities

2018
NZ$m
4,696
3,328
8,024

2017
NZ$m
3,299
4,364
7,663

RECOGNITION AND MEASUREMENT
Trading securities are financial instruments we either:• acquire principally for the purpose of selling in the short-term; or• hold as part of a portfolio we manage for short-term profit making.
We recognise purchases and sales of trading securities on trade date:• initially, we measure them at fair value; and• subsequently, we measure them in the balance sheet at their fair value with any revaluation recognised in the profit or loss.

Judgement is required when applying the valuation techniques used to measure the fair value of trading securities not valued using
quoted market prices. Refer to Note 16 Fair Value of Financial Assets and Financial Liabilities for further details.

17

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
9. DERIVATIVE FINANCIAL INSTRUMENTS

Fair value
Derivative financial instruments - held for trading
Derivative financial instruments - designated in hedging relationships
Derivative financial instruments

Assets
2018
NZ$m
7,746
340
8,086

Liabilities
2018
NZ$m
(7,023)(1,072)(8,095)

Assets
2017
NZ$m
9,490
388
9,878

Liabilities
2017
NZ$m
(8,992)(834)(9,826)FEATURES
Derivative financial instruments are contracts:•

whose value is derived from an underlying price index (or other variable) defined in the contract – sometimes the value is derived from morethan one variable;•that require little or no initial net investment; and•that are settled at a future date.

Movements in the price of the underlying variables, which cause the value of the contract to fluctuate, are reflected in the fair value of the derivative.

PURPOSEThe Banking Group’s derivative financial instruments have been categorised as follows:
Trading

Derivatives held in order to:•

Designated in Hedging
Relationships

meet customer needs for managing their own risks.

•manage risk in the Banking Group’s positions that are not part of a designated hedge accounting relationship.

•

undertake market making and positioning activities to generate profits from short-term fluctuations in prices or
margins.

Derivatives designated into hedge accounting relationships in order to minimise profit or loss volatility by matching
movements to underlying positions relating to:•hedges of the Banking Group’s exposures to interest rate risk and currency risk.

•hedges of other exposures relating to non-trading positions.

TYPES
The Banking Group offers and uses four different types of derivative financial instruments:
Forwards

A contract documenting the rate of interest, or the currency exchange rate, to be paid or received on a notional
principal obligation at a future date.

Futures

An exchange traded contract in which the parties agree to buy and sell an asset in the future for a price agreed on
the transaction date, with a net settlement in cash paid on the future date without physical delivery of the asset.

Swaps

A contract in which one party exchanges one series of cash flows for another.

Options

A contract in which the buyer of the contract has the right - but not the obligation - to buy (known as a “call option”)
or to sell (known as a “put option”) an asset or instrument at a set price on a future date. The seller has thecorresponding obligation to fulfil the transaction to sell or buy the asset or instrument if the buyer exercises theoption.

RISKS MANAGED
The Banking Group offers and uses the instruments described above to manage fluctuations in the following market factors:
Foreign Exchange

Currencies at current or determined rates of exchange.

Interest Rate

Fixed or variable interest rates applying to money lent, deposited or borrowed.

Commodity

Soft commodities (that is, agricultural products such as wheat, coffee, cocoa, and sugar) and hard commodities (thatis, mined products such as gold, oil and gas).

CreditCounterparty risk in the event of default.

18

NOTES TO THE FINANCIAL STATEMENTS

9.

DERIVATIVE FINANCIAL INSTRUMENTS (continued)

DERIVATIVE FINANCIAL INSTRUMENTS – HELD FOR TRADINGThe majority of the Banking Group’s derivative financial instruments are held for trading. The fair value of derivative financial instruments held for
trading are:

Fair value
Interest rate contracts
Forward rate agreements
Futures contracts
Swap agreements
Options purchased
Options sold
Total
Foreign exchange contracts
Spot and forward contracts
Swap agreements
Options purchased
Options sold
Total
Commodity contracts and credit default swaps
Derivative financial instruments - held for trading

Assets2018
NZ$m

Liabilities
2018
NZ$m

Assets2017
NZ$m

Liabilities
2017
NZ$m

5
7
4,242
3
4,257

(4)
(10)
(3,920)(1)(3,935)

5
7,062
3
7,070

(24)
(6,335)(1)(6,360)

1,179
2,248
34
2
3,463
26
7,746

(889)
(2,146)(3)(24)(3,062)(26)(7,023)

615
1,773
17
2
2,407
13
9,490

(696)
(1,895)(27)(2,618)(14)(8,992)DERIVATIVE FINANCIAL INSTRUMENTS – DESIGNATED IN HEDGING RELATIONSHIPS
The Banking Group utilises two types of hedge accounting relationships:
Fair value hedge

Cash flow hedge

Objective of thishedgingarrangement

To hedge our exposure to changes to the fair value of arecognised asset or liability or unrecognised firm
commitment caused by interest rate or foreign currency
movements.

To hedge our exposure to variability in cash flows of arecognised asset or liability, a foreign exchange
component of a firm commitment or a highly probable
forecast transaction caused by interest rate, foreign
currency and other price movements.

Recognition ofeffective hedge
portionThe following are recognised in profit or loss at the sametime:
• all changes in the fair value of the underlying item
relating to the hedged risk; and• the change in the fair value of derivatives.

We recognise the effective portion of changes in thefair value of derivatives designated as a cash flow
hedge in the cash flow hedge reserve.

Recognition of ineffective
hedge portion

Recognised immediately in other operating income.

If a hedging instrument
expires, or is sold,terminated, or exercised;or no longer qualifies forhedge accounting

When we recognise the hedged item in profit or loss, werecognise the related unamortised fair value adjustmentin profit or loss. This may occur over time if the hedged
item is amortised to profit or loss as part of the effective
yield over the period to maturity.

Only when we recognise the hedged item in profit orloss is the amount previously deferred in the cash flow
hedge reserve transferred to profit or loss.

Hedged item sold or
repaidWe recognise the unamortised fair value adjustment
immediately in profit or loss.

Amounts accumulated in equity are transferred
immediately to profit or loss.

The fair value of derivative financial instruments designated in hedging relationships are:

Fair value
Interest rate swap agreements
Interest rate swap agreements
Derivative financial instruments - designated in hedging relationships

Hedge
accounting
type
Fair value
Cash flow

Assets
2018
NZ$m
54
286
340

Liabilities
2018
NZ$m
(819)
(253)
(1,072)

Assets
2017
NZ$m
86
302
388

Liabilities
2017
NZ$m
(618)
(216)
(834)

19

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
9.

DERIVATIVE FINANCIAL INSTRUMENTS (continued)

The impact recognised in profit or loss arising from derivative financial instruments designated in hedge accounting relationships, is as follows:

Gain/(loss) recognised in other operating income
Hedged item
Hedging instrument

Hedge
accounting type

2018
NZ$m

2017
NZ$m

Fair value
Fair Value

212
(221)

153
(159)

RECOGNITION AND MEASUREMENT
Recognition

Initially and at each reporting date, we recognise all derivatives at fair value. If the fair value of a derivative is:positive, then we carry it as an asset, but if its value is negative, then we carry it as a liability.
Valuation adjustments are integral in determining the fair value of derivatives. This includes:• a credit valuation adjustment (CVA) to reflect the counterparty risk and/or event of default; and• a funding valuation adjustment (FVA) to account for funding costs and benefits in the derivatives portfolio.

Derecognition ofassets and liabilities

We remove derivative assets from our balance sheet when the contracts expire or we have transferred
substantially all the risks and rewards of ownership. We remove derivative liabilities from our balance sheet
when the Banking Group’s contractual obligations are discharged, cancelled or expired.

Impact on the
Income Statement

How we recognise gains or losses on derivative financial instruments depends on whether the derivative isheld for trading or is designated into a hedging relationship. For derivative financial instruments held for
trading, gains or losses from changes in the fair value are recognised in profit or loss.
For an instrument designated into a hedging relationship the recognition of gains or losses depends on thenature of the item being hedged. Refer to the previous table on page 19 for profit or loss treatment dependingon the hedge type.

Hedge effectivenessTo qualify for hedge accounting a hedge is expected to be highly effective. A hedge is highly effective only if
the following conditions are met:
• the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows
attributable to the hedged risk during the period for which the hedge is designated (prospective
effectiveness); and• the actual results of the hedge are within the range of 80-125% (retrospective effectiveness).
The Banking Group monitors hedge effectiveness on a regular basis but at a minimum at least at eachreporting date.

Judgement is required when we select the valuation techniques used to measure the fair value of derivatives, particularly the selectionof valuation inputs that are not readily observable, and the application of valuation adjustments to certain derivatives. Refer to Note 16
Fair Value of Financial Assets and Financial Liabilities for further details.

20

NOTES TO THE FINANCIAL STATEMENTS

10. AVAILABLE-FOR-SALE ASSETS
2018
Corporate
and financial
Security Government institution
EquityPeriodtype
securities
securities
securities
NZ$m
NZ$m
NZ$m
Less than 3 months
11019
Between 3 and 12 months
616
162
Between 1 and 5 years
3,134
1,831
Greater than 5 years
458
171
No maturity
1
Available-for-sale assets
4,318
2,183
1

Total
NZ$m
129
778
4,965
629
1
6,502

2017
Corporate
and financial
Government
institution
Equitysecurities
securities
securities
NZ$m
NZ$m
NZ$m
277
270
695
158
2,609
1,578
657
115
1
4,238
2,121
1

Total
NZ$m
547
853
4,187
772
1
6,360

RECOGNITION AND MEASUREMENT
Available-for-sale (AFS) assets comprise non-derivative financial assets which we designate as AFS since we do not hold them principally fortrading purposes. They include both equity and debt securities. AFS assets are initially recognised at fair value plus transaction costs and arerevalued at least bi-annually. On revaluation, we include movements in fair value within the available-for-sale revaluation reserve in equity,
except for certain items which are recognised directly in profit or loss, being interest on debt securities, dividends received, foreign exchange on
debt securities and impairment charges.
When we sell the asset, any cumulative gain or loss from the available-for-sale revaluation reserve is recognised in profit or loss.
At each reporting date, we assess whether any AFS assets are impaired. We assess the impairment of any debt securities if an event has occurred
which will have a negative impact on the asset’s estimated cash flows. For equity securities, we assess if there is a significant or prolonged
decline in fair value below cost.
If an AFS asset is impaired, then we remove the cumulative loss related to that asset from the available-for-sale revaluation reserve. We thenrecognise it in profit or loss for:• debt instruments, as a credit impairment expense; and• equity instruments, as a negative impact in other operating income.
We recognise any later reversals of impairment on debt securities in the profit or loss through the credit impairment charge line. However, we
do not make any reversals of impairment for equity securities. To the extent previously impaired equity securities recover in value, gains arerecognised directly in equity.

Judgement is required when we select valuation techniques used to measure the fair value of AFS assets not valued using quoted
market prices, particularly the selection of valuation inputs that are not readily observable. Refer to Note 16 Fair Value of Financial Assets
and Financial Liabilities for further details.

21

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
11. NET LOANS AND ADVANCES
The following table provides details of net loans and advances for the Banking Group:

Note
Overdrafts
Credit cards
Term loans - housing
Term loans - non-housing
Finance lease and hire purchase receivables
Subtotal
Unearned income
Capitalised brokerage/mortgage origination fees
Gross loans and advances (including assets reclassified as held for sale)
Provision for credit impairment
Net loans and advances (including assets reclassified as held for sale)Less: Net loans and advances reclassified as held for sale
Net loans and advances
Residual contractual maturity:- within one year
- after more than one year
Net loans and advances

12
25

2018
NZ$m
905
1,644
78,39544,169
1,791
126,904(239)
313
126,978(512)
126,466
126,466

2017
NZ$m
1,040
1,638
72,52444,227
1,577
121,006(222)
334
121,118(579)
120,539(2,912)
117,627

26,896
99,570126,466

23,79993,828
117,627

The Bank has sold residential mortgages to the NZ Branch with a net carrying value of NZ$2,210 million as at 30 September 2018 (2017: NZ$4,337
million). These assets qualify for derecognition as the Bank does not retain a continuing involvement in the transferred assets.

RECOGNITION AND MEASUREMENT
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are
facilities the Banking Group provides directly to customers or through third party channels.
Loans and advances are initially recognised at fair value plus transaction costs directly attributable to the issue of the loan or advance, which areprimarily brokerage/mortgage origination fees which we amortise over the estimated life of the loan. Subsequently, we then measure loans andadvances at amortised cost using the effective interest rate method, net of any provision for credit impairment.
We classify contracts to lease assets and hire purchase agreements as finance leases if they transfer substantially all the risks and rewards ofownership of the asset to the customer or an unrelated third party.
The Banking Group enters into transactions in which it transfers financial assets that are recognised on its balance sheet. When the Banking
Group retains substantially all of the risks and rewards of the transferred assets, the transferred assets remain on the Banking Group’s balance
sheet, however if substantially all the risks and rewards are transferred, the Banking Group derecognises the asset.
If the risks and rewards are partially retained and control over the asset is lost, then the Banking Group derecognises the asset. If control over theasset is not lost, the Banking Group continues to recognise the asset to the extent of its continuing involvement.
We separately recognise the rights and obligations retained, or created, in the transfer as assets and liabilities as appropriate.

22

NOTES TO THE FINANCIAL STATEMENTS

12. PROVISION FOR CREDIT IMPAIRMENTPROVISION FOR CREDIT IMPAIRMENT – BALANCE SHEET

Provision for credit impairment
Individual provision
Balance at start of year
New and increased provisions
Write-backs
Bad debts written off (excluding recoveries)
Discount unwind
Total individual provisionCollective provision
Balance at start of year
Release to profit or loss
Total collective provision
Total provision for credit impairment

Net loans andadvances
2018
2017
NZ$m
NZ$m

Off-balance sheet credit
related commitments
2018
2017
NZ$m
NZ$m

Total
2018
NZ$m

2017
NZ$m

152
213
(83)
(149)
(3)
130

151
232
(95)
(133)
(3)
152

-

-

152
213
(83)
(149)
(3)
130

151
232
(95)
(133)
(3)
152

343
(32)
311
441

367
(24)
343
495

84
(13)
71
71

104
(20)
84
84

427
(45)
382
512

471
(44)
427
579

2018
NZ$m
213
(83)
(30)
100
(45)
55

2017
NZ$m
232
(95)
(31)
106
(44)
62

CREDIT IMPAIRMENT CHARGE – INCOME STATEMENT
Credit impairment charge
New and increased provisions
Write-backs
Recoveries of amounts previously written-off
Individual credit impairment charge
Collective credit impairment release
Total credit impairment charge

23

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
12. PROVISION FOR CREDIT IMPAIRMENT (continued)

RECOGNITION AND MEASUREMENT
The Banking Group recognises two types of impairment provisions for its loans and advances:• individual provisions for significant assets that are assessed to be impaired; and• collective provisions for portfolios of similar assets that are assessed collectively for impairment.
The accounting treatment for each of them is detailed below:
IndividuallyCollectively

Assessment

If any impaired loans and advances exceed specified
thresholds and an impairment event has been
identified, then we assess the need for a provisionindividually.

To allow for any small value loans and advances where
losses may have been incurred but not yet identified, andindividually significant loans and advances that we do notassess as impaired, we assess them collectively in pools ofassets with similar risk characteristics.

Impairment

Loans and advances are assessed as impaired if wehave objective evidence that we may not recoverprincipal or interest payments (that is, a loss event
has been incurred).

We estimate the provision on the basis of historical loss
experience for assets with similar credit risk characteristics
to others in the respective collective pool. We adjust thehistorical loss experience based on current observabledata – such as: changing economic conditions, the impactof the inherent risk of large concentrated losses within theportfolio and an assessment of the economic cycle.

Measurement

We measure impairment loss as the difference between the asset’s carrying amount and estimated future cash
flows discounted to their present value at the asset’s original effective interest rate. We record the result as an
expense in profit or loss in the period we identify the impairment and recognise a corresponding reduction in the
carrying amount of loans and advances through an offsetting provision.

Uncollectableamounts

If a loan or advance is uncollectable (whether partially or in full), then we write off the balance (and also any related
provision for credit impairment).
We write off unsecured retail facilities at the earlier of the facility becoming 180 days past due, or the customer’sbankruptcy or similar legal release from the obligation to repay the loan or advance. For secured facilities, write offs
occur net of the proceeds determined to be recoverable from the realisation of collateral.

Recoveries

If we recover any cash flows from loans and advances we have previously written off, then we recognise therecovery in profit or loss in the period the cash flows are received.

Off-balance sheet
amounts

Any off-balance sheet items, such as loan commitments, are considered for impairment both on an individual andcollective basis.

When we measure impairment of loans and advances, we use management’s judgement of the extent of losses at reporting date.
IndividuallyCollectively
Key Judgements• estimated future cash flows• business prospects for the customer• realisable value of any collateral• the Banking Group’s position relative to otherclaimants• reliability of customer information• likely cost and duration of recovering loans• estimated future cash flows• historical loss experience of assets with similar risk
characteristics• impact of large concentrated losses inherent in theportfolio• assessment of the economic cycle

We regularly review our key judgements and update them to reflect actual loss experience.

24

NOTES TO THE FINANCIAL STATEMENTS

13. DEPOSITS AND OTHER BORROWINGS
Note
Term deposits
On demand and short term deposits
Deposits not bearing interest
UDC secured investments
Total customer deposits
Certificates of deposit
Commercial paper
Securities sold under repurchase agreements
Deposits from Immediate Parent Company and NZ Branch
Deposits and other borrowings (including liabilities reclassified as held for sale)Less: Deposits and other borrowings reclassified as held for sale
Deposits and other borrowings
Residual contractual maturity:- to be settled within 1 year
- to be settled after 1 year
Deposits and other borrowings
Carried on Balance Sheet at:
Amortised cost
Fair value through profit or loss (designated on initial recognition)
Deposits and other borrowings

17

26
25

2018
NZ$m
51,29841,602
10,224931
104,055
910
2,486
517
40
108,008
108,0082017
NZ$m
45,45741,4518,882
1,039
96,829
1,916
3,721
157
73
102,696(1,039)101,657

103,492
4,516
108,008

97,301
4,356
101,657

105,5222,486
108,008

97,936
3,721
101,657

RECOGNITION AND MEASUREMENT
For deposits and other borrowings that:• are not designated at fair value through profit or loss on initial recognition, we measure them at amortised cost and recognise their interest
expense using the effective interest rate method; and• are managed on a fair value basis, reduce or eliminate an accounting mismatch or contain an embedded derivative, we designate them asfair value through profit or loss.
Refer to Note 16 Fair Value of Financial Assets and Financial Liabilities for details of the split between amortised cost and fair value.
For deposits and other borrowings designated at fair value we recognise the amount of fair value gain or loss attributable to changes in the
Banking Group’s own credit risk in other comprehensive income in retained earnings. Any remaining amount of fair value gain or loss werecognise directly in profit or loss. Once we have recognised an amount in other comprehensive income, we do not later reclassify it to profit or
loss.
Securities sold under repurchase agreements represent a liability to repurchase the financial assets that remain on our balance sheet since therisks and rewards of ownership remain with the Banking Group. Over the life of the repurchase agreement, we recognise the difference
between the sale price and the repurchase price and charge it to interest expense in the Income Statement.

25

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
14. DEBT ISSUANCESThe Banking Group uses a variety of funding programmes to issue unsubordinated debt (including senior debt and covered bonds) and subordinateddebt. The difference between unsubordinated debt and subordinated debt is that holders of unsubordinated debt take priority over holders ofsubordinated debt owed by the relevant issuer and subordinated debt will be repaid by the relevant issuer only after the repayment of claims ofdepositors, other creditors and the senior debt holders.
2018
2017
NZ$m
NZ$m
Senior debt
18,767
16,008Covered bonds
3,929
5,315
21,323
Total unsubordinated debt
22,696
Subordinated debt
- Additional Tier 1 capital
2,438
2,439
- Other
845
3,283
Total subordinated debt
2,439
Total debt issued
25,13524,606TOTAL DEBT ISSUED BY CURRENCY
The table below shows the Banking Group’s issued debt by currency of issue, which broadly represents the debt holders’ base location.

AUD Australian Dollars
EUR Euro
JPY Japanese Yen
NZD New Zealand Dollars
CHF Swiss Francs
USD United States Dollars
Total debt issued
Residual contractual maturity:- to be settled within 1 year
- to be settled after 1 year
Total debt issued

2018
NZ$m
45
6,740
36
6,654
1,658
10,002
25,135

2017
NZ$m
54
6,676
38
7,147
1,672
9,019
24,606

3,835
21,30025,135

4,014
20,592
24,606

Covered bonds are guaranteed by ANZNZ Covered Bond Trust Limited (the Covered Bond Guarantor), solely in its capacity as trustee of ANZNZ
Covered Bond Trust (the Covered Bond Trust). The Covered Bond Trust is a member of the Banking Group, whereas the Covered Bond Guarantor is nota member of the Banking Group.
NZX Regulation has granted the Bank a waiver from NZX Debt Market Listing Rule (Rule) 7.12.1 to the extent that this Rule requires the Bank to releaseto the market details of any acquisition of the Bank’s domestic bonds as a result of its market-making activities or trading on behalf of its clients. The
Bank will notify the NZX if any such domestic bonds are subsequently cancelled. Rule 7.12.1 does not extend to the Bank’s subsidiaries in this context.
The Bank will continue to comply with Rule 7.12.1 in respect of any domestic bonds that are issued, redeemed or purchased by the Bank in any othercapacity.
Senior debt includes a series of bonds quoted on the NZX Debt Market that matures on 22 March 2019 (the Bonds). NZX Regulation has granted the
Bank a waiver from the requirement in Rule 5.2.3 (as modified by NZX Regulation’s Ruling on Rule 5.2.3 issued on 29 September 2015) for the Bonds tobe held by at least 100 members of the public holding at least 25% of the Bonds issued (Spread). The effect of this waiver is that the Bonds may not be
widely held and there may be reduced liquidity in the Bonds. If there is a material reduction in the Spread of the Bonds, the Bank will notify NZX as
appropriate.

SUBORDINATED DEBT
Certain subordinated debt qualifies as regulatory capital for the Banking Group and is classified as Additional Tier 1 (AT1) capital for RBNZ’s capital
adequacy purposes depending on their term and conditions:•

26

AT1 Capital: perpetual capital instruments such as:• ANZ NZ Capital Notes (ANZ NZ CN);
• ANZ NZ Internal Capital Notes 1 (ANZ NZ ICN); and• ANZ NZ Internal Capital Notes 2 (ANZ NZ ICN2).

NOTES TO THE FINANCIAL STATEMENTS

14. DEBT ISSUANCES (continued)
AT1 Capital
AT1 capital notes are fully paid convertible non-cumulative perpetual subordinated notes. The AT1 capital notes rank equally with each other and with
the Bank’s preference shares. Holders of AT1 capital notes do not have any right to vote in general meetings of the Bank.
As at 30 September 2018, ANZ NZ CN carried a BB+ credit rating from S&P Global Ratings.
AT1 capital notes are classified as debt given there are circumstances beyond the Bank’s control where the principal is converted into a variable
number of ordinary shares of the Bank (ANZ NZ ICN and ANZ NZ ICN2) or the Ultimate Parent Bank (ANZ NZ CN).
Interest payments on the AT1 capital notes are non-cumulative and subject to the issuer’s absolute discretion and certain payment conditions(including regulatory requirements).
Where specified, AT1 capital notes provide the Bank with an early redemption or conversion option on a specified date and in certain othercircumstances (such as a tax or regulatory event). This option is subject to RBNZ’s and, in respect of the ANZ NZ CN, APRA’s prior written approval.
Each of the AT1 capital notes will immediately convert into a variable number of ordinary shares of the:• Bank based on the net assets per share in the Bank’s most recently published Disclosure Statement (ANZ NZ ICN and ANZ NZ ICN2); or• Ultimate Parent Bank based on the average market price of the Ultimate Parent Bank’s ordinary shares immediately prior to conversion less a 1%
discount, subject to a maximum conversion number (ANZ NZ CN)
if:• the Banking Group’s, or in the case of the ANZ NZ CN the Overseas Banking Group’s Level 2, common equity tier 1 capital ratio is equal to or lessthan 5.125% - known as a Common Equity Capital Trigger Event; or• RBNZ directs the Bank to convert or write-off the notes or a statutory manager is appointed to the Bank and decides that the Bank must convert
or write-off the notes or, in the case of the ANZ NZ CN, APRA notifies the Ultimate Parent Bank that, without the conversion or write-off of certain
securities or a public injection of capital (or equivalent support), it considers that the Ultimate Parent Bank would become non-viable – known
as a Non-Viability Trigger Event.
Where specified, AT1 capital notes mandatorily convert into a variable number of ordinary shares of the Bank (ANZ NZ ICN and ANZ NZ ICN2) (basedon the net assets per share in the Bank’s most recently published Disclosure Statement) or the Ultimate Parent Bank (ANZ NZ CN) (based on the
average market value of the shares immediately prior to conversion less a 1% discount):• on a specified mandatory conversion date; or• on an earlier date under certain circumstances as set out in the terms.
However, the mandatory conversion is deferred for a specified period if certain conversion tests are not met.
The table below show the key details of the AT1 capital notes on issue at 30 September in both the current and the prior year:
IssuerIssue dateIssue amount
Face value
Interest frequency
Interest rate

ANZ NZ CN
The Bank
31 March 2015
NZ$500 million
NZ$1
Quarterly in arrears
Fixed at 7.2% p.a. until 25
May 2020. Resets in May
2020 to a floating rate: (New
Zealand 3 month Bank billrate + 3.5%)

Issuer's early redemption or conversion option
Mandatory conversion dateCommon equity capital trigger event
Non-viability trigger event
Carrying value as at 30 September 2018 (net of issue costs)

ANZ NZ ICN
The Bank
5 March 2015
NZ$1,003 million
NZ$100Semi-annually in arrears

ANZ NZ ICN2The Bank
15 June 2016
NZ$938 million
NZ$100Semi-annually in arrears

Floating rate: (New Zealand
6 month Bank Bill rate +3.8%)

Floating rate: (New Zealand
6 month Bank Bill rate +6.29%)

25 May 2020

24 March 2023

25 May 2022
Yes
Yes
NZ$498 million

24 March 2025
Yes
Yes
NZ$1,003 million

15 June 2026 and each 5th
anniversary
n/a
Yes
Yes
NZ$938 million

RECOGNITION AND MEASUREMENT
Debt issuances are measured at amortised cost. Where the Banking Group enters into a hedge accounting relationship, the fair value
attributable to the hedge risk is reflected in adjustments to the carrying value of the debt. Interest expense is recognised using the effective
interest rate method.
Subordinated debt with capital-based conversion features (i.e. Common Equity Capital Trigger Event or Non-Viability Trigger Events) areconsidered to contain embedded derivatives that we account for separately at fair value through profit and loss. The embedded derivatives arise
because the amount of shares issued on conversion following any of those trigger events is subject to the maximum conversion number,
however they have no value as of the reporting date given the remote nature of those triggering events.
27

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
15. FINANCIAL RISK MANAGEMENTRISK MANAGEMENT FRAMEWORK AND MODELINTRODUCTION
The use of financial instruments is fundamental to the Banking Group’s businesses of providing banking and other financial services to our customers.
The associated financial risks (primarily credit, market, and liquidity risks) are a significant portion of the Banking Group’s principal risks.
This note details the Banking Group’s financial risk management policies, processes and quantitative disclosures in relation to the key financial risks:
Principal financial risks

Key sections applicable to this risk

Overview• An overview of our Risk Management Framework

Credit risk

•
•
•
•
•

Credit risk overview, management and control responsibilities
Maximum exposure to credit risk
Credit quality
Concentrations of credit risk
Collateral management

•
•
•
•

Market risk overview, management and control responsibilities
Measurement of market risk
Traded and non-traded market risk
Foreign currency risk – structural exposure

•
•
•
•
•

Liquidity risk overview, management and control responsibilities
Key areas of measurement for liquidity risk
Liquidity portfolio management
Funding position
Residual contractual maturity analysis of the Banking Group’s liabilities

Credit risk is the risk of financial loss from a customer, or counterparty,
failing to meet their financial obligations – including the whole andtimely payment of principal, interest, collateral, and other receivables.
Market risk
Market risk is the risk of loss arising from potential adverse changes inthe value of the Banking Group’s assets and liabilities and other trading
positions from fluctuations in market variables. These variables include,
but are not limited to interest rates, foreign exchange, equity prices,
commodity prices, credit spreads, implied volatilities, and asset
correlations.
Liquidity and funding risk
Liquidity risk is the risk that the Banking Group is unable to meet its
payment obligations when they fall due; or does not have theappropriate amount, tenor and composition of funding and liquidity tofund increases in its assets.

OVERVIEWAN OVERVIEW OF OUR RISK MANAGEMENT FRAMEWORKThis overview is provided to aid the users of the financial statements to understand the context of the financial disclosures required under NZ IFRS 7
Financial Instruments: Disclosures.
The Board is responsible for establishing and overseeing the Banking Group’s Risk Management Framework (RMF). The Board has delegated authority
to the Bank’s Board Risk Committee (BRC) to develop and monitor compliance with the Banking Group’s financial risk management policies. The BRC
reports regularly to the Board on its activities.
The Board approves the strategic objectives of the Banking Group including:• the Risk Appetite Statement (RAS), which sets out the Board’s expectations regarding the degree of risk that the Banking Group is prepared toaccept in pursuit of its strategic objectives and business plan; and• the Risk Management Strategy (RMS), which describes the Banking Group’s strategy for managing risks and the key elements of the RMF thatgives effect to this strategy. This includes a description of each material risk, and an overview of how the RMF addresses each risk, with reference
to the relevant policies, standards and procedures. It also includes information on how the Banking Group identifies measures, evaluates,
monitors, reports and controls or mitigates material risks.
The Banking Group, through its training and management standards and procedures, aims to maintain a disciplined and robust control environment
in which all employees understand their roles and obligations. At the Banking Group, risk is everyone’s responsibility.
The Banking Group has an independent risk management function, headed by the Chief Risk Officer who:
• is responsible for overseeing the risk profile and the risk management framework;• can effectively challenge activities and decisions that materially affect the Banking Group’s risk profile; and• has an independent reporting line to the BRC to enable the appropriate escalation of issues of concern.
The Internal Audit Function reports directly to the Bank’s Board Audit Committee (BAC). Internal Audit provides:• an independent evaluation of the Banking Group’s RMF annually and undertakes a comprehensive review every three years;• assurance on the appropriateness, effectiveness and adequacy of the risk management framework, which includes assurance the framework is
operating effectively; and• recommendations to improve the framework and/or work practices to strengthen the effectiveness of day to day operations.

28

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT RISKCREDIT RISK OVERVIEW, MANAGEMENT AND CONTROL RESPONSIBILITIES
Granting credit facilities to customers is one of the Banking Group’s major sources of income. As this activity is also a principal risk, the Banking Group
dedicates considerable resources to its management. The Banking Group assumes credit risk in a wide range of lending and other activities in diverse
markets and in many jurisdictions. Credit risks arise from traditional lending to customers as well as from inter-bank, treasury, trade finance and capital
markets activities around the world.
Our credit risk management framework ensures we apply a consistent approach across the Banking Group when we measure, monitor and manage
the credit risk appetite set by the Board. The Board is assisted and advised by the BRC in discharging its duty to oversee credit risk. The BRC:
• sets the credit risk appetite and credit strategies; and• approves credit transactions beyond the discretion of executive management.
We quantify credit risk through an internal credit rating system (masterscales) to ensure consistency across exposure types and to provide a consistentframework for reporting and analysis. The system uses models and other tools to measure the following for customer exposures:
Probability of Default (PD)Expressed by a Customer Credit Rating (CCR), reflecting the Banking Group’s assessment of a customer’sability to service and repay debt.

Exposure at Default (EAD)

The expected amount of loan outstanding at the time of default.

Loss Given Default (LGD)

Expressed by a Security Indicator (SI) ranging from A to G. The SI is calculated by reference to thepercentage of loan covered by security which the Banking Group can realise if a customer defaults. The
A-G scale is supplemented by a range of other SIs which cover such factors as cash cover and sovereign
backing. For retail and some small business lending, we group exposures into large homogenous pools– and the LGD is assigned at the pool level.

Our specialist credit risk teams develop and validate the Banking Group’s PD and LGD rating models. The outputs from these models drive our day-today credit risk management decisions including origination, pricing, approval levels, regulatory capital adequacy, economic capital allocation, andcredit provisioning.
All customers with whom the Banking Group has a credit relationship are assigned a CCR at origination via either of the following assessment
approaches:
Large and more complex lending

Retail and some small business lending

Rating models provide a consistent and structured assessment, withjudgement required around the use of out-of-model factors. We
handle credit approval on a dual approval basis, jointly with thebusiness writer and an independent credit officer.

Automated assessment of credit applications using a combination ofscoring (application and behavioural), policy rules and external credit
reporting information. If the application does not meet the automatedassessment criteria, then it is referred out for manual assessment.

We use the Banking Group’s internal CCRs to manage the credit quality of financial assets neither past due nor impaired. To enable wider comparisons,the Banking Group’s CCRs are mapped to external rating agency scales as follows:
Internal Rating

The Banking Group Customer Requirements

Moody’s Rating

S&P Global Ratings

Strong credit profile

Demonstrated superior stability in their operating and financial
performance over the long-term, and whose earnings capacity is not
significantly vulnerable to foreseeable events.

Aaa – Baa3

AAA – BBB-

Satisfactory risk

Demonstrated sound operational and financial stability over the
medium to long-term — even though some may be susceptible tocyclical trends or variability in earnings.

Ba1 – B1

BB+ – B+

Sub-standard but notpast due nor impaired

Demonstrated some operational and financial instability, withvariability and uncertainty in profitability and liquidity projected tocontinue over the short and possibly medium term.

B2 – Caa

B - CCC

29

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
15. FINANCIAL RISK MANAGEMENT (continued)
MAXIMUM EXPOSURE TO CREDIT RISKFor 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, thesedifferences arise in respect of financial assets that are subject to risks other than credit risk, such as equity instruments which are primarily subject tomarket risk, or bank notes and coins.
For undrawn facilities, this maximum exposure to credit risk is the full amount of the committed facilities. For contingent exposures, the maximum
exposure to credit risk is the maximum amount the Banking Group would have to pay if the instrument is called upon.
For the purpose of this note, assets presented as assets held for sale in the Balance Sheet have been reallocated to their respective Balance Sheet
categories.
The table below shows our maximum exposure to credit risk of on-balance sheet and off-balance sheet positions before taking account of any
collateral held or other credit enhancements.

ReportedOn-balance sheet positions
Net loans and advances2,3
Other financial assets:
Cash and cash equivalents
Settlement balances owed to the Banking Group
Collateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Other financial assets4
Total other financial assets
Subtotal
Off-balance sheet positions
Undrawn and contingent facilities2,5
Total
1
2
3
4
5

30

Maximum exposure tocredit risk

Excluded1 / Other2

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

126,466

120,539

(71)

(84)

126,537

120,623

2,200
656
1,919
8,024
8,086
6,502
719
28,106
154,572

2,338
536
1,415
7,663
9,878
6,360
744
28,934
149,473

204
204
133

198
198
114

1,996
656
1,919
8,024
8,086
6,502
719
27,902
154,439

2,140
536
1,415
7,663
9,878
6,360
744
28,736
149,359

30,105
184,677

29,377
178,850

71
204

84
198

30,034
184,473

29,293
178,652

Excluded comprises bank notes and coins and cash at bank within cash and cash equivalents.
Other relates to the transfer of individual and collective provisions related to off-balance sheet facilities held in net loans and advances. The provisions are transferred for the purposes ofshowing the maximum exposure to credit risk by relevant facility type in this and the following tables.
Including items reclassified as held for sale.
Other financial assets mainly comprise accrued interest, insurance receivables and acceptances.
Undrawn facilities and contingent facilities include guarantees, letters of credit and performance related contingencies.

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT QUALITY
The table below provides an analysis of the credit quality of the maximum exposure to credit risk split by:• neither past due nor impaired financial assets by credit quality;• past due but not impaired assets by ageing; and• impaired assets presented as gross amounts and net of provision for credit impairment.
Off-balance sheet
credit related
commitments

Loans
and advances

Other financial
assets

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

Neither past due nor impaired
Strong credit profile

92,78381,59527,36828,024

23,47522,922

143,626

132,541

Satisfactory risk

29,33534,283

521

702

6,186

6,016

36,04241,001Sub-standard but not past due or impaired

2,296

2,558

13

10

359

349

2,668

2,917

124,414

118,436

27,902

28,73630,02029,287

182,336

176,459≥ 1 < 30 days

1,420

1,385

-

-

-

-

1,420

1,385

≥ 30 < 60 days

179

290

-

-

-

-

179

290

≥ 60 < 90 days

128

125

-

-

-

-

128

125

≥ 90 days

205

182

-

-

-

-

205

182

1,932

1,982

-

-

-

-

1,932

1,982

321

357

-

-

-

-

321

357

-

-

-

-

14

6

14

6

Gross impaired financial assets

321

357

-

-

14

6

335

363

Individual provisions

(130)

(152)

-

-

-

-

(130)

(152)

Subtotal net impaired

191

205

-

-

14

6

205

211

126,537

120,623

27,902

28,73630,03429,293

184,473

178,652

Subtotal

Total

Past due but not impaired

Subtotal
Impaired
Impaired loans
Non-performing commitments
and contingencies

Total

31

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
15. FINANCIAL RISK MANAGEMENT (continued)
CONCENTRATIONS OF CREDIT RISK
Credit risk becomes concentrated when a number of customers are engaged in similar activities, have similar economic characteristics, or have similar
activities within the same geographic region – therefore, they may be similarly affected by changes in economic or other conditions. The Banking
Group monitors its credit portfolio to manage risk concentration and rebalance the portfolio. The Banking Group also applies single customer
counterparty limits to protect against unacceptably large exposures to one single customer.
Analysis of financial assets by industry sector is based on Australian and New Zealand Standard Industrial Classification (ANZSIC) codes. The significant
categories shown are the level one New Zealand Standard Industry Output Categories (NZSIOC), except that Agriculture is shown separately as
required by the Order.
Composition of financial instruments that give rise to credit risk by industry group are presented below:
Loans
and advances3,4Off-balance sheet
credit related
commitments5

Other financial
assets4

Total

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

17,844
1,379
2,687
1,403
1,713
1,404
3,211
1,222
872
364
31,805

17,686
1,277
2,729
1,602
1,635
1,630
3,058
1,440
903
412
30,697

82
9
284
330
21
63
27
121
5,509
9,654
235

83
5
169
457
18
54
28
69
5,268
8,099
218

1,373
249
1,793
1,576
1,358
1,521
969
783
1,567
1,043
3,461

1,436
240
1,798
1,522
1,119
1,357
1,133
894
1,259
794
3,699

19,299
1,637
4,764
3,309
3,092
2,988
4,207
2,126
7,948
11,06135,501

19,205
1,522
4,696
3,581
2,772
3,041
4,219
2,403
7,430
9,305
34,614

1,165

1,267

9

10

633

619

1,807

1,896

56,8082,569

51,554
2,625

192
167

180
253

11,977
1,663

11,8781,474

68,977
4,399

63,612
4,352

Subtotal
Overseas
Finance and insurance services
Households
All other non-NZ residents

124,446

118,515

16,703

14,911

29,96629,222

171,115

162,648

128
1,512
818

123
1,454
914

11,1095
85

13,126
5
694

139
-

155
-

11,376
1,517
903

13,404
1,459
1,608

Subtotal
Gross subtotal
Provision for credit impairment
Subtotal
Unearned income
Capitalised brokerage / mortgage
origination fees
Maximum exposure to credit risk

2,458
126,904(441)
126,463
(239)

2,491
121,006(495)
120,511(222)

11,19927,902
27,902-

13,82528,73628,736-

139
30,105(71)
30,034-155
29,377(84)
29,293-

13,796
184,911(512)
184,399(239)

16,471
179,119(579)
178,540
(222)

313

334

-

-

-

-

313

334

126,537

120,623

27,902

28,73630,03429,293

184,473

178,652

New Zealand residents
Agriculture
Forestry and fishing, agriculture services
Manufacturing
Electricity, gas, water and waste services
Construction
Wholesale trade
Retail trade and accommodation
Transport, postal and warehousing
Finance and insurance services
Public administration and safety1
Rental, hiring & real estate services
Professional, scientific, technical,
administrative and support services
Households
All other New Zealand residents2

1
2
3
4
5

32

Public administration and safety includes exposures to local government administration and central government administration, defence and public safety.
Other includes exposures to mining, information media and telecommunications, education and training, health care and social assistance and arts, recreation and other services.
Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
Including items classified as held for sale.
Credit related commitments comprise undrawn facilities, customer contingent liabilities and letters of offer.

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
COLLATERAL MANAGEMENT
We use collateral for on and off-balance sheet exposures to mitigate credit risk if a counterparty cannot meet its repayment obligations from its
expected cashflows. For some products, the collateral provided by customers is fundamental to the product’s structuring, so it is not strictly thesecondary source of repayment - for example, lending secured by trade receivables is typically repaid by the collection of those receivables.
The nature of collateral or security held for the relevant classes of financial assets is as follows:
Net loans and advances
Loans – housing and personal

Housing loans are secured by mortgage(s) over property and additional security may take the form ofguarantees and deposits.
Personal lending (including credit cards and overdrafts) is predominantly unsecured. If we takesecurity, then it is restricted to eligible vehicles, motor homes and other assets.

Loans – businessBusiness loans may be secured, partially secured or unsecured. Typically, we take security by way of amortgage over property and/or a charge over the business or other assets.
If appropriate, we may take other security to mitigate the credit risk, for example: guarantees, standby
letters of credit or derivative protection.

Other financial assets
For trading securities, we do not seek collateral directly from the issuer or counterparty. However, theTrading securities, Available-for-saleassets, Derivatives and Other financial collateral may be implicit in the terms of the instrument (for example, with an asset-backed security).
The terms of debt securities may include collateralisation.
assetsFor derivatives, we typically terminate all contracts with the counterparty and settle on a net basis atmarket levels current at the time of a counterparty default under International Swaps and Derivatives
Association (ISDA) Master Agreements.
Our preferred practice is to use a Credit Support Annex (CSA) to the ISDA so that 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 when their position is out of themoney (or provided to the counterparty by the Banking Group when our position is out of the money).
Off-balance sheet positions
Undrawn and contingent liabilities

Collateral for off balance sheet positions is mainly held against undrawn facilities, and they are typically
performance bonds on guarantees. Undrawn facilities that are secured include housing loans securedby mortgages over residential property and business lending secured by commercial real estate and/or
charges over business assets.

The table below shows the estimated value of collateral we hold and the net unsecured portion of credit exposures:
Credit exposure

Total value of collateral

Unsecured portion of
credit exposure

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

2018
NZ$m

2017
NZ$m

Net loans and advances1

126,537

120,623

117,337

110,914

9,200

9,709

Other financial assets

27,902

28,736

2,029

1,617

25,873

27,119Off-balance sheet positions

30,03429,293

15,124

14,526

14,91014,767

Total

184,473

178,652

134,490127,057

49,98351,5951

1Including items reclassified as held for sale.

33

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
15. FINANCIAL RISK MANAGEMENT (continued)
MARKET RISKMARKET RISK OVERVIEW, MANAGEMENT AND CONTROL RESPONSIBILITIESMarket risk stems from the Banking Group’s trading and balance sheet management activities, the impact of changes and correlation between interest
rates, foreign exchange rates, credit spreads and volatility in bond, commodity or equity prices.
The BRC delegates responsibility for day-to-day management of both market risks and compliance with market risk policies to the Bank’s Asset &Liability Committee (ALCO).
Within overall strategies and policies established by the BRC, business units and risk management have joint responsibility for the control of market
risk at the Banking Group level. The Market Risk team (a specialist risk management unit independent of the business) allocates market risk limits at
various levels and monitors and reports on them daily. This detailed framework allocates individual limits to manage and control exposures using risk
factors and profit and loss limits.
Management, measurement and reporting of market risk is undertaken in two broad categories:
Traded Market Risk

Non-Traded Market Risk

Risk of loss from changes in the value of financial instruments due
to movements in price factors for both physical and derivative
trading positions. Principal risk categories monitored are:Risk of loss associated with the management of non-traded interest rate risk,
liquidity risk and foreign exchange exposures. This includes interest rate riskin the banking book. This risk of loss arises from adverse changes in theoverall and relative level of interest rates for different tenors, differences in
the actual versus expected net interest margin, and the potential valuation
risk associated with embedded options in financial instruments and bankproducts.

1. Currency risk – potential loss arising from changes in foreignexchange rates or their implied volatilities.
2. Interest rate risk – potential loss from changes in market
interest rates or their implied volatilities.
3. Credit spread risk – potential loss arising from a movement inmargin or spread relative to a benchmark.
4. Commodity risk – potential loss arising from changes incommodity prices or their implied volatilities.
5. Equity risk – potential loss arising from changes in equity
prices.

MEASUREMENT OF MARKET RISKWe primarily manage and control market risk using Value at Risk (VaR), sensitivity analysis and stress testing.
VaR gauges the Banking Group’s possible daily loss based on historical market movements.
The Banking Group’s VaR approach for both traded and non-traded risk is historical simulation. We use historical changes in market rates, prices andvolatilities over:•the previous 500 business days, to calculate standard VaR, and•a 1-year stressed period, to calculate stressed VaR.

We calculate traded and non-traded VaR using one-day and ten-day holding periods. For stressed VaR, we use a ten-day period. Back testing is used toensure our VaR models remain accurate.
The Banking Group measures VaR at a 99% confidence interval which means there is a 99% chance that a loss will not exceed the VaR on any given
day.

34

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
TRADED AND NON-TRADED MARKET RISK
Traded market risk
The table below shows the traded market risk VaR on a diversified basis by risk categories:

As at
NZ$m
Traded value at risk 99% confidence
Foreign exchange risk
Interest rate risk
Credit spread risk
Diversification benefit1
Total VaR
1.

0.5
1.4
0.5
(1.0)
1.4

30 September 2018
High forLow for
year
year
NZ$m
NZ$m
1.6
3.6
0.8
n/a
4.0

0.2
0.8
0.3
n/a
1.0

Averagefor year
NZ$m

As at
NZ$m

0.7
1.9
0.5
(0.9)
2.2

0.1
3.0
0.6
(0.9)
2.8

30 September 2017High forLow for
year
year
NZ$m
NZ$m
1.2
5.8
0.8
n/a
5.3

Averagefor year
NZ$m

0.1
1.3
0.4
n/a
1.4

0.4
2.5
0.6
(0.9)
2.6

The diversification benefit reflects risks that offset across categories. The high and low VaR figures reported for each factor did not necessarily occur on the same day as the high and low VaR reported for
the Banking Group as a whole. Consequently, a diversification benefit for high and low would not be meaningful and is therefore omitted from the table.

Non-traded market risk
Balance sheet risk management
The principal objectives of balance sheet risk management are to maintain acceptable levels of interest rate and liquidity risk to mitigate the negative
impact of movements in interest rates on the earnings and market value of the Banking Group’s banking book, while ensuring the Banking Group
maintains sufficient liquidity to meet its obligations as they fall due.
Interest rate risk management
Non-traded interest rate risk relates to the potential adverse impact of changes in market interest rates on the Banking Group’s future net interest
income. This risk arises from two principal sources, namely mismatches between the repricing dates of interest bearing assets and liabilities; and theinvestment of capital and other non-interest bearing liabilities in interest bearing assets. Interest rate risk is reported using VaR and scenario analysis(based on the impact of a 1% rate shock). The table below shows VaR figures for non-traded interest rate risk for the Banking Group.

As at
NZ$m
Non-traded value at risk 99% confidence
Total VaR

8.0

30 September 2018
High forLow for
year
year
NZ$m
NZ$m
10.2

6.4

Averagefor year
NZ$m

As at
NZ$m

7.8

8.3

30 September 2017High forLow for
year
year
NZ$m
NZ$m
10.2

Averagefor year
NZ$m

7.3

8.2

We undertake scenario analysis to stress test the impact of extreme events on the Banking Group’s market risk exposures. We model a 1% overnight
parallel positive shift in the yield curve to determine the potential impact on our net interest income over the next 12 months. This is a standard risk
measure which assumes the parallel shift is reflected in all wholesale and customer rates.
The table below shows the outcome of this risk measure for the current and previous financial years, expressed as a percentage of reported net
interest income. A positive number signifies that a rate increase is positive for net interest income over the next 12 months.

Impact of 1% rate shock
As at period end

2018

2017

-0.4%

0.6%

Maximum exposure

0.9%

0.9%

Minimum exposure

-1.2%

-0.3%

Average exposure (in absolute terms)

0.0%

0.4%

FOREIGN CURRENCY RISK – STRUCTURAL EXPOSURES
Where it is considered appropriate, the Banking Group takes out economic hedges against larger foreign exchange denominated revenue streams(primarily Australian Dollar, US Dollar and US Dollar correlated). The primary objective of hedging is to ensure that, if practical, the consolidated capitalratios are neutral to the effect of changes in exchange rates. During the current and prior years, we had selective hedges in place. Further detail on the
Banking Group’s hedging relationships is disclosed in Note 9 Derivative Financial Instruments.

35

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
15. FINANCIAL RISK MANAGEMENT (continued)
LIQUIDITY AND FUNDING RISKLIQUIDITY RISK OVERVIEW, MANAGEMENT AND CONTROL RESPONSIBILITIES
Liquidity risk is the risk that the Banking Group is either:• unable to meet its payment obligations (including repaying depositors or maturing wholesale debt) when they fall due; or• does not have the appropriate amount, tenor and composition of funding and liquidity to support its assets.
Management of liquidity and funding is overseen by ALCO. The Banking Group’s liquidity and funding risks are governed by a set of principles
approved by the Risk Committees of the Bank’s and Ultimate Parent Bank’s Boards and include:• maintaining the ability to meet all payment obligations in the immediate term;• ensuring that the Banking Group has the ability to meet ‘survival horizons’ under Banking Group specific and general market liquidity stressscenarios to meet cash flow obligations over the short to medium term;• maintaining strength in the Banking Group’s balance sheet structure to ensure long term resilience in the liquidity and funding risk profile;• ensuring the liquidity management framework is compatible with local regulatory requirements;• preparing daily liquidity reports and scenario analysis to quantify the Banking Group’s positions;• targeting a diversified funding base to avoid undue concentrations by investor type, maturity, market source and currency;• holding a portfolio of high quality liquid assets to protect against adverse funding conditions and to support day-to-day operations; and• establishing a detailed contingency plan to cover different liquidity crisis events.
KEY AREAS OF MEASUREMENT FOR LIQUIDITY RISKSupervision and regulation
RBNZ requires the Bank to have a comprehensive Board approved liquidity strategy defining: policy, systems and procedures for measuring, assessing,reporting and managing liquidity. This also includes a formal contingency plan for dealing with a liquidity crisis. The Banking Group is required to meet
one week and one month liquidity mismatch ratios and a one year core funding ratio each day.
Scenario modelling
A key component of the Banking Group’s liquidity management framework is scenario modelling.
Potential severe liquidity crisis scenarios which model the behaviour of cash flows where there is a problem (real or perceived) may include, but are
not limited to, operational issues, doubts about the solvency of the Banking Group, or adverse rating changes. Under these scenarios the Banking
Group may have significant difficulty rolling over or replacing funding. The Banking Group’s liquidity policy requires sufficient high quality liquid assets
to be held to meet its liquidity needs for the following 30 calendar days under the modelled scenarios.
As of 30 September 2018 the Banking Group was in compliance with the above scenarios.
Structural balance sheet metrics
The Banking Group’s liquidity management framework also encompasses structural balance sheet metrics such as the RBNZ core funding ratio. These
metrics are designed to limit the amount of funding required to be rolled over within a 1 year timeframe and so interact with the liquidity scenarios tomaintain the Banking Group‘s liquidity position.
Wholesale funding
The Banking Group’s wholesale funding strategy is designed to deliver a sustainable portfolio of wholesale funds that balances cost efficiency whiletargeting diversification by markets, investors, currencies, maturities and funding structures. Short-term wholesale funding requirements, with acontractual maturity of less than one year, are managed through Treasury and Markets operations. Long-term wholesale funding is managed andexecuted through Treasury operations.
The Banking Group also uses maturity concentration limits under the wholesale funding and liquidity management framework. Maturity
concentration limits ensure that the Banking Group is not required to issue large volumes of new wholesale funding within a short time period toreplace maturing wholesale funding. Funding instruments used to meet the wholesale borrowing requirement must be on a pre-established list of
approved products.
Funding capacity and debt issuance planning
The Banking Group adopts a conservative approach to determine its funding capacity. Annually, a funding plan is approved by the Bank’s Board. The
plan is supplemented by regular updates and is linked to the Banking Group’s three year strategic planning cycle.

36

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
LIQUIDITY PORTFOLIO MANAGEMENT
The Banking Group holds a diversified portfolio of cash and high quality highly liquid securities to support liquidity risk management. The size of the
Banking Group’s liquidity portfolio is based on the amount required to meet the requirements of its internal and regulatory liquidity scenario metrics.
Total liquidity portfolio
2018
NZ$m

2017
NZ$m

2,026
179

2,102

Certificates of deposit
Central and local government bonds

7,528

6,609

794

775

Cash and balances with central banks

Government treasury bills

59

50

-

Other bonds

5,493

6,390

Total liquidity portfolio

16,07015,935Reserve Bank bills

Assets held for managing liquidity risk include short term cash held with RBNZ, New Zealand Government securities, securities issued by supranational
agencies, securities issued by highly rated banks and securities issued by State Owned Enterprises, Local Authorities and highly rated NZ domestic
corporates. These assets would be accepted as collateral by RBNZ in repurchase transactions. At 30 September 2018 the Banking Group would be
eligible to enter into repurchase transactions with a value of NZ$14,044 million. The Banking Group also held unencumbered internal residential
mortgage backed securities (RMBS) which would entitle the Banking Group to enter into repurchase transactions with a value of NZ$7,060 million at
30 September 2018.
Liquidity crisis contingency planning
The Banking Group maintains a liquidity crisis contingency plan to define an approach for analysing and responding to a liquidity-threatening eventon a group wide basis. The framework includes:• the establishment of crisis severity/stress levels;• clearly assigned crisis roles and responsibilities;• early warning signals indicative of an approaching crisis, and mechanisms to monitor and report these signals;• outlined action plans, and courses of action for altering asset and liability behaviour;• procedures for crisis management reporting, and covering cash-flow shortfalls; and• assigned responsibilities for internal and external communications.

37

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
15. FINANCIAL RISK MANAGEMENT (continued)
FUNDING POSITION
The Banking Group actively uses balance sheet disciplines to prudently manage the funding mix. The Banking Group employs funding metrics toensure that an appropriate proportion of its assets are funded from stable sources, including customer liabilities, longer-dated wholesale debt (withremaining term exceeding one year) and equity.
Analysis of funding liabilities by industry is based on ANZSIC codes. The significant categories shown are the level one New Zealand Standard Industry
Output Categories (NZSIOC).
2018
2017
Note
NZ$m
NZ$m
Funding composition
Customer deposits1

13

104,055

96,829Debt issuances

25,13524,606

Certificates of deposit and commercial paper

3,396

5,637

557

230

Wholesale funding

Other borrowings
Total wholesale funding

29,08830,473

Total funding

133,143

127,302

Agriculture, forestry and fishing

3,763

3,487

Manufacturing

2,335

2,024

Construction

2,050

1,851

Wholesale trade

1,571

1,433

Retail trade and accommodation

1,484

1,516

Financial and insurance services

10,661

8,996

Rental, hiring and real estate services

2,878

2,596

Professional, scientific, technical, administrative and support services

5,126

5,034

Public administration and safety

1,572

1,261

Arts, recreation and other services

2,027

1,928

Households

56,64053,222Customer deposits by industry - New Zealand residents

All other New Zealand residents

2

3,556

3,483

93,66386,831

9,876

9,461

Customer deposits by industry - overseas
Households
All other non-NZ residents

516

537

10,392

9,998

104,055

96,829New Zealand

8,082

9,134

Overseas

21,006

21,339Total wholesale funding

29,08830,473

Total funding

133,143

127,302

101,745

95,965

Total customer deposits
Wholesale funding (financial and insurance services industry)

Concentrations of funding by geography
New ZealandAustralia

739

796

United States

13,671

13,471

Europe

9,618

9,784

Other countries

7,370

7,286

Total funding

133,143

127,302

1
2

38

Including items reclassified as held for sale.
Other includes mining; electricity, gas, water and waste services; transport, postal and warehousing; information media and telecommunications; education and training; health care andsocial assistance.

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
RESIDUAL CONTRACTUAL MATURITY ANALYSIS OF FINANCIAL OF THE BANKING GROUP’S LIABILITIESThe table below provides residual contractual maturity analysis of financial liabilities at 30 September 2018 within relevant maturity groupings. All
outstanding debt issuances are profiled on the earliest date on which the Banking Group may be required to pay. The amounts represent principal
and interest cash flows – so they may differ from equivalent amounts reported on the balance sheet.
It should be noted that this is not how the Banking Group manages its liquidity risk.

2018
Settlement balances owed by the Banking Group
Collateral received
Deposits and other borrowings

On demand
NZ$mLess than
3 months
NZ$m

3 to 12months
NZ$m

1 to 5
years
NZ$m

After
5 years
NZ$m

Total
NZ$m

1,338

837

-

-

-

2,175

-

845

-

-

-

845

52,01625,70127,008

4,854-

109,579

Derivative financial liabilities (trading)

-

6,147

-

-

-

6,147

Debt issuances

-

930

3,676

17,8104,596

27,012Other financial liabilities1

-

119

7

44

76

246

- gross inflows

-

1,790

2,033

9,080

1,266

14,169- gross outflows-(1,998)(2,218)(9,368)(1,179)(14,763)

On demand
NZ$mLess than
3 months
NZ$m

3 to 12months
NZ$m

1 to 5
years
NZ$m

After
5 years
NZ$m

Total
NZ$m

1

2

Derivative financial instruments(balance sheet management)

2017
Settlement balances owed by the Banking Group
Collateral received
Deposits and other borrowings

1,165

685

-

-

-

1,850

-

613

-

-

-

613

58,287

24,81424,3204,504-

111,925

Derivative financial liabilities (trading)

-

8,057

-

-

-

8,057

Debt issuances

-

1,604

2,950

16,496

5,424

26,474

-

155

6

56

144

361

- gross inflows

-

2,082

2,300

8,128

2,867

15,377- gross outflows-(2,235)(2,433)(8,328)(2,741)(15,737)

1

2

Other financial liabilities

1

Derivative financial instruments(balance sheet management)

1²Including items reclassified as held for sale.
Any callable wholesale debt instruments have been included at their next call date. Refer to Note 14 Debt Issuances for subordinated debt call dates.

At 30 September 2018, NZ$93 million (2017: NZ$88 million) of the Banking Group’s non-credit related commitments and NZ$30,105 million (2017:
NZ$29,377 million) of its credit related commitments and contingent liabilities mature in less than 1 year, based on the earliest date on which the
Banking Group may be required to pay.

39

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIESThe Banking Group carries a significant number of financial instruments on the balance sheet at fair value. The fair value of a financial instrument is theprice that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement
date.
VALUATION OF FINANCIAL INSTRUMENTS
The Banking Group has an established control framework, including an appropriate segregation of duties, to ensure that fair values are accurately
determined, reported and controlled. The framework includes the following features:• products are approved for transacting with external customers and counterparties only where fair values can be appropriately determined;• quoted market prices used to value financial instruments are independently verified with information from external pricing providers;• fair value methodologies and inputs are evaluated and approved by a function independent of the party that undertakes the transaction;• movements in fair values are independently monitored and explained by reference to underlying factors relevant to the fair value; and• valuation adjustments (such as FVA, CVA and bid-offer) are independently validated and monitored.
If the Banking Group holds offsetting risk positions, then the Banking Group uses the portfolio exemption in NZ IFRS 13 Fair Value Measurement (NZ
IFRS 13) to measure the fair value of such groups of financial assets and financial liabilities. We measure the portfolio based on the price that would bereceived to sell a net long position (an asset) for a particular risk exposure, or to transfer a net short position (a liability) for a particular risk exposure.
FAIR VALUE APPROACH AND VALUATION TECHNIQUESWe use valuation techniques to estimate the fair value of financial assets and liabilities for recognition, measurement and disclosure purposes where
no quoted price in an active market exists for that asset or liability. This includes the following:
Asset or Liability

Fair Value Approach

Financial instruments classified as:- Trading securities- Derivative financial assets and liabilities- Available-for-sale assets

Valuation techniques are used that incorporate observable market inputs for financial instrumentswith similar credit risk, maturity and yield characteristics.

Financial instruments classified as:- Net loans and advances- Deposits and other borrowings- Debt issuances

Discounted cash flow techniques in which contractual future cash flows of the instrument are
discounted using discount rates incorporating wholesale market rates, or market borrowing rates,for debt with similar maturities or with a yield curve appropriate for the remaining term to maturity.

CLASSIFICATION OF FINANCIAL ASSETS AND LIABILITIESThe following tables set out the classification of financial asset and liability categories according to measurement bases together with the carrying
amounts as reported on the balance sheet.
2018
2017
At
At
Fair value
amortised
At fair
amortised
At fair
details refer
cost
value
Total
cost
value
Total
to Note
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
Financial assets
Cash and cash equivalents
2,338
2,338
2,200
2,200
Settlement balances owed to the Banking Group
536
536
656
656
Collateral paid
1,415
1,415
1,919
1,919
Trading securities
8
7,663
7,663
8,024
8,024
Derivative financial instruments
9
8,086
8,086
9,878
9,878
Available-for-sale assets
10
6,502
6,502
6,360
6,360
Net loans and advances1
120,539
120,539
126,466
126,466
Other financial assets1
621
123
744
592
127
719
125,449
24,024
149,473
Total
131,833
22,739154,572
Financial liabilities
Settlement balances owed by the Banking Group
1,840
1,840
2,161
2,161
Collateral received
613
613
845
845
Deposits and other borrowings1
13
105,5222,486
108,008
98,975
3,721
102,696
Derivative financial instruments
9
8,095
8,095
9,826
9,826
Debt issuances
24,606
24,60625,13525,135
Other financial liabilities1
608
151
759
576
110
686
126,642
13,698140,340
Total
134,239
10,691
144,930
1

40Including items reclassified as held for sale.

NOTES TO THE FINANCIAL STATEMENTS

16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
FINANCIAL ASSETS AND LIABILITIES CARRIED AT FAIR VALUE ON THE BALANCE SHEETThe Banking Group categorises financial assets and liabilities carried at fair value into a fair value hierarchy as required by NZ IFRS 13 based on theobservability of inputs used to measure fair value:•

Level 1 – valuations based on quoted prices (unadjusted) in active markets for identical financial instruments;•

Level 2 – valuations using inputs other than quoted prices included within Level 1 that are observable for a similar financial asset or liability,
either directly or indirectly; and•Level 3 – valuations using inputs for the assets or liability that are not based on observable market data (unobservable inputs).

The table below summarises the attribution of financial instruments carried at fair value to the fair value hierarchy:

Quoted market price(Level 1)

AssetsTrading securities
Derivative financial instruments
Available-for-sale assets
Investments backing insurance contract liabilities1
Total
Liabilities
Deposits and other borrowings1
Derivative financial instruments
Other financial liabilities
Total
1

Fair value measurements
Using observable
Using unobservable
inputsinputs (Level 3)(Level 2)
2018
2017
2018
2017
NZ$m
NZ$m
NZ$m
NZ$m

2018
NZ$m

2017
NZ$m

6,795
7
6,457
13,259

7,276
5
5,336
12,617

1,229
8,076
44
127
9,476

387
9,870
1,023
123
11,403

3
1
4

10
110
120

24
151
175

2,486
8,084
10,5703,721
9,801
13,522

1
1

Total
2018
NZ$m

2017
NZ$m

3
1
4

8,024
8,086
6,502
127
22,739

7,663
9,878
6,360
123
24,024

1
1

2,486
8,095
110
10,691

3,721
9,826
151
13,698

Including items reclassified as held for sale.

Fair value designation
We designate commercial paper (included in deposits and other borrowings) as fair value through profit or loss where they are managed on a fairvalue basis to align the measurement with how the instruments are managed.

41

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
FINANCIAL ASSETS AND FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE
The following sets out the Banking Group’s basis of estimating fair values of the above financial instruments carried at amortised cost:
Financial Asset and Liability

Fair Value Approach

Net loans and advances to banks

Discounted cash flows using prevailing market rates for loans with similar credit quality.

Net loans and advances to customers

Present value of future cash flows, discounted using a curve that incorporates changes inwholesale market rates, the Banking Group cost of wholesale funding and the customer margin, as
appropriate.

Deposit liability without a specified maturity or
at call

The amount payable on demand at the reporting date. We do not adjust the fair value for any
value we expect the Banking Group to derive from retaining the deposit for a future period.

Interest bearing fixed maturity deposits andother borrowings and acceptances withquoted market rates

Market borrowing rates of interest for debt with a similar maturity are used to discount contractual
cash flows to derive the fair value.

Debt issuances

Calculated based on quoted market prices or observable inputs as applicable. If quoted market
prices are not available, we use a discounted cash flow model using a yield curve appropriate forthe remaining term to maturity of the debt instrument. The fair value reflects adjustments to credit
spreads applicable to the Banking Group for that instrument.

The financial assets and financial liabilities listed in the table below are carried at amortised cost on the Banking Group’s Balance Sheet. While this isthe value at which we expect the assets will be realised and the liabilities settled, the Banking Group provides an estimate of the fair value of thefinancial assets and financial liabilities at balance date in the table below.

Financial assets
Net loans and advances1, 2
Total
Financial liabilities
Deposits and otherborrowings1
Debt issuances
Total
1
2

Carrying amount

Fair value (total)

2018
NZ$m

Categorised into fair value hierarchy
Using observable
With significant nonQuoted market priceinputsobservable inputs(Level 1)(Level 2)(Level 3)
2017
2018
2017
2018
2017
2018
2017
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m

2018
NZ$m

2017
NZ$m

126,466
126,466

120,539
120,539

-

-

131
131

136
136

126,614
126,614

120,452
120,452

126,745
126,745

120,588
120,588

105,522

98,975--105,592

99,030--105,592

99,03025,135
130,657

24,606
123,581

2,533
2,533

2,855
2,855

22,929128,521

22,163
121,193--

25,462131,054

25,018124,048

Including items reclassified as held for sale.
We have reviewed the fair value of Net Loans and advances previously presented as Level 2. In line with broader industry practice Net loans and advances other than Loans to Banks are
now presented as Level 3.

The Banking Group evaluates the material accuracy of the valuations incorporated in the financial statements as they can involve a high degreeof judgement and estimation in determining the carrying values of financial assets and financial liabilities at the balance sheet date.
The majority of valuation models the Banking Group uses employ only observable market data as inputs. However, for certain financial
instruments, we may use data that is not readily observable in current markets. If we use unobservable market data, then we need to exercise
more judgement to determine fair value depending on the significance of the unobservable input to the overall valuation. Generally, wederive unobservable inputs from other relevant market data and compare them to observed transaction prices where available.
When establishing the fair value of a financial instrument using a valuation technique, the Banking Group considers valuation adjustments indetermining the fair value. We may apply adjustments (such as bid/offer spreads, credit valuation adjustments and funding valuation
adjustments – refer Note 9 Derivative Financial Instruments) to the techniques used to reflect the Banking Group’s assessment of factors thatmarket participants would consider in setting fair value.

42

NOTES TO THE FINANCIAL STATEMENTS

17. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS
SECURITY FOR ASSETS
The following disclosure excludes the amounts presented as collateral paid and received in the Balance Sheet that relate to derivative liabilities andderivative assets respectively. The terms and conditions of those collateral agreements are included in the standard Credit Support Annex that forms
part of the International Swaps and Derivatives Association Master Agreement.
ASSETS CHARGED AS SECURITY FOR LIABILITIESAssets charged as security for liabilities include the following types of instruments:•

Securities provided as collateral for repurchase transactions. These transactions are governed by standard industry agreements.

•

UDC Secured Investments are secured by a security interest granted under a trust deed over all of UDC’s present and future assets andundertakings, to Trustees Executors Limited, as supervisor. The assets subject to the security interest comprise mainly loans to UDC's customers
and certain plant and equipment. The security interest secures all amounts payable by UDC on the UDC Secured Investments and all othermonies payable by UDC under the trust deed.

•Specified residential mortgages provided as security for notes and bonds issued to investors as part of the Banking Group’s covered bondprogrammes.

The carrying amounts of assets pledged as security are as follows:

Securities sold under agreements to repurchase1
Assets pledged as collateral for UDC secured investments
Residential mortgages pledged as security for covered bonds
1

2018
NZ$m
517
3,296
10,747

2017
NZ$m
157
2,985
10,595The amounts disclosed as securities sold under arrangements to repurchase include both:•
assets pledged as security which continue to be recognised on the Banking Group’s balance sheet; and•assets repledged, which are included in the disclosure below.

COLLATERAL ACCEPTED AS SECURITY FOR ASSETS
The Banking Group has received collateral associated with various financial instruments. Under certain transactions the Banking Group has the right tosell, or to repledge, the collateral received. These transactions are governed by standard industry agreements.
The fair value of collateral we have received and that we have sold or repledged is as follows:

Fair value of assets which can be sold or repledged
Fair value of assets sold or repledged

2018
NZ$m
139
34

2017
NZ$m
361
218

43

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
18. OFFSETTING
We offset financial assets and financial liabilities in the balance sheet (in accordance with NZ IAS 32 Financial Instruments: Presentation) when there is:••a current legally enforceable right to set off the recognised amounts in all circumstances; andan intention to settle the asset and liability on a net basis, or to realise the asset and settle the liability simultaneously.

If the above conditions are not met, the financial assets and financial liabilities are presented on a gross basis.
The Banking Group does not have any arrangements that satisfy the conditions necessary to offset financial assets and financial liabilities within thebalance sheet. The following table identifies financial assets and financial liabilities which have not been offset but are subject to enforceable masternetting agreements (or similar arrangements) and the related amounts not offset in the balance sheet. We have not taken into account the effect ofover collateralisation.
Amount subject to master netting agreement or similar
Amounts not
subject toTotal amounts
masterFinancialrecognised
nettingcollateralin the agreement or
Financial(received)/
Balance Sheetsimilar
Total
instruments
pledgedNet amount
2018
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
Derivative financial instruments
8,086(1,029)7,057(5,711)(481)
865
Reverse repurchase agreements1
136
136
(136)
Total financial assets
8,222(1,029)7,193(5,711)(617)
865
Derivative financial instruments(8,095)694(7,401)
5,711
563(1,127)2
Repurchase agreements
(517)
(517)
517
Total financial liabilities(8,612)
694(7,918)
5,711
1,080(1,127)
Amount subject to master netting agreement or similar

2017
Derivative financial instruments
Reverse repurchase agreements1
Total financial assets
Derivative financial instruments
Repurchase agreements2
Total financial liabilities
1
2

44

Amounts not
subject toTotal amounts
masterrecognised
nettingin the agreement orBalance Sheetsimilar
NZ$m
NZ$m
9,878
(1,933)360
10,238(1,933)(9,826)
1,386(157)(9,983)
1,386

Reverse repurchase agreements are presented in the Balance Sheet within cash and cash equivalents.
Repurchase agreements are presented in the Balance Sheet within deposits and other borrowings.

Total
NZ$m
7,945
360
8,305
(8,440)(157)(8,597)

Financial
instruments
NZ$m(7,478)(7,478)
7,478
7,478

Financialcollateral(received)/pledged
NZ$m
(245)
(360)
(605)
348
157
505

Net amount
NZ$m
222
222
(614)
(614)

NOTES TO THE FINANCIAL STATEMENTS

19. GOODWILL AND OTHER INTANGIBLE ASSETS
Note
Goodwill
Software
Other intangibles
Goodwill and other intangible assets (including assets reclassified as held for sale)Less: Goodwill and other intangible assets reclassified as held for sale
Goodwill and other intangible assets

25

2018
NZ$m
3,230
53
107
3,390
(101)
3,289

2017
NZ$m
3,230
67
111
3,408
(133)
3,275

GOODWILL ALLOCATED TO CASH-GENERATING UNITS (CGUs)
An annual assessment is made as to whether the current carrying value of goodwill is impaired. For the purposes of impairment testing, goodwill isallocated at the date of acquisition to a CGU. Goodwill is considered to be impaired if the carrying amount of the relevant CGU exceeds its recoverable
amount.
To estimate the recoverable amount of the CGU to which each goodwill component is allocated, we use a value-in-use approach.
VALUE-IN-USE
These calculations use cash flow projections based on a number of financial budgets within each segment approved by management covering athree year period. Cash flow projections are based on a range of readily available economic assumptions including Gross Domestic Product (GDP) andthe Consumer Price Index (CPI). Cash flows beyond the three year period are extrapolated using a 3% growth rate.
These cash flow projections are discounted using a capital asset pricing model. As at 28 February 2018 when the last valuation was prepared, adiscount rate of 11.4% was applied to each cash generating unit. The main variables in the calculation of the discount rate used are the risk free rate,
the beta rate and the market risk premium. The risk free rate is based on the 10 year Government Bond Rate. The beta rate and the market risk
premium are consistent with observable and comparative market rates applied in the regional banking sector. Market observable information is notreadily available at the segment level therefore management performed stress tests for key sensitivities in each segment.
Management believes any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause thecarrying amount of goodwill for any CGU to exceed its recoverable amount.

45

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
19. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

RECOGNITION AND MEASUREMENT
The table below details how we recognise and measure different intangible assets:
Intangible

Goodwill

Software

Other Intangible Assets

Definition

Excess amount the Banking
Group has paid in acquiring abusiness over the fair value lesscosts of disposal of theidentifiable assets and liabilities
acquired.

Purchases of off the shelf software
assets are capitalised as assets.

Acquired portfolios of insurance
and investment business andmanagement fee rights.

Cost less any accumulated
impairment losses.

Initially, measured at cost.

Carrying value

Allocated to the cash
generating unit to which theacquisition relates.

Useful life

Indefinite.
Goodwill is reviewed for
impairment at least annually or
when there is an indication of
impairment.

Depreciation method

Not applicable.

Internal and external costs incurredin building software and computer
systems costing greater than
NZ$20 million are capitalised asassets. Those less than NZ$20
million are expensed in the year inwhich the costs are incurred.
Subsequently, carried at cost lessaccumulated amortisation andimpairment losses.
Costs incurred in planning or
evaluating software proposals or inmaintaining systems after
implementation are not capitalised.

Initially, measured at fair value atacquisition.
Subsequently, carried at fair valueless accumulated amortisation andimpairment losses.

Except for major core
infrastructure, amortised overperiods between 3-5 years.

Acquired portfolios of insurance
and investment business areamortised over 20 years.

Major core infrastructure amortisedover periods between 7 or 10 years.

Management fee rights have an
indefinite life and are reviewed for
impairment at least annually or
when there is an indication of
impairment.

Straight-line method.

Actuarial methods consistent withthe calculation of life insurance
contract assets.

Management judgement is used to assess the recoverable value of goodwill, and other intangible assets, and the useful economic life ofan asset (or if an asset has an indefinite life). We reassess the recoverability of the carrying value at each reporting date.
The carrying amount of goodwill is based on judgements including the basis of assumptions and forecasts used for determining earnings
for CGUs, headroom availability, and sensitivities of the forecasts to reasonably possible changes in assumptions. Goodwill is assessed forindicators of impairment quarterly and tested for impairment annually. The level at which goodwill is allocated, the estimation of future cash
flows and the selection of discount rates or earnings multiples applied requires significant judgement.
At each balance date, software and other intangible assets are assessed for indicators of impairment. In addition, software and intangible
assets not ready for use are tested annually for impairment. In the event that an asset’s carrying amount is determined to be greater than
its recoverable amount, the carrying value of the asset is written down immediately.
In addition, the expected useful life of intangible assets, including software assets, are assessed on an annual basis. The assessment
requires management judgement, and in relation to our software assets, a number of factors can influence the expected economic useful
lives. These factors include changes to business strategy, significant divestments and the underlying pace of technological change.

46

NOTES TO THE FINANCIAL STATEMENTS

20. SHAREHOLDERS' EQUITY
Number of issued shares
2018
2017
Ordinary shares
Ordinary shares at start of year
Ordinary shares issued during the year
Ordinary shares at end of year1
Preference shares
Total share capital
1

3,345,755,498
3,000,000,000
6,345,755,498
300,000,000
6,645,755,498

3,345,755,498
3,345,755,498
300,000,000
3,645,755,498

NZ$ millions
2018
2017
8,588
3,000
11,588300
11,888

8,588
8,588
300
8,888

Includes 650,712 (2017: 650,712) uncalled shares.

Preference shares
The key terms of the preference shares are as follows:
Dividends
Dividends are payable at the discretion of the directors of the Bank and are non-cumulative. The Bank must not resolve to pay any dividend or makeany other distribution on its ordinary shares until the next preference dividend payment date if the dividend on the preference shares is not paid.
Should the Bank elect to pay a dividend, the dividend is based on a floating rate equal to the aggregate of the New Zealand 6 month bank bill rateplus a 325 basis point margin, multiplied by one minus the New Zealand company tax rate, with dividend payments due on 1 March and 1 September
each year.
Redemption features
The preference shares are redeemable, subject to prior written approval of RBNZ, by the Bank providing notice in writing to holders of the preference
shares:• on any date on or after a change to laws or regulations that adversely affects the regulatory capital or tax treatment of the preference shares; or• on any dividend payment date on or after 1 March 2019; or• on any date after 1 March 2019 if the Bank has ceased to be a wholly owned subsidiary of the Ultimate Parent Bank.
The preference shares may be redeemed for nil consideration should a non-viability trigger event occur.
The preference shares qualify as AT1 capital for RBNZ’s capital adequacy purposes.

RECOGNITION AND MEASUREMENT
Ordinary shares

Ordinary shares have no par value. They entitle holders to receive dividends, or proceeds available on winding
up of the Company, in proportion to the number of fully paid ordinary shares held. They are recognised at theamount paid per ordinary share net of directly attributable costs. Every holder of fully paid ordinary sharespresent at a meeting in person, or by proxy, is entitled to:• on a show of hands, one vote; and• on a poll, one vote, for each share held.

Preference shares

All preference shares were issued by the Bank to the Immediate Parent and do not carry any voting rights. The
preference shares are wholly classified as equity instruments as there is no contractual obligation for the Bank
to either deliver cash or another financial instrument or to exchange financial instruments on a potentially
unfavourable basis.
In the event of liquidation, holders of preference shares are entitled to available subscribed capital per share,pari passu with all holders of existing preference shares and ANZ capital notes but in priority to all holders ofordinary shares. They have no entitlement to participate in further distribution of profits or assets.

Reserves:

Cash flow hedge
reserve

Includes fair value gains and losses associated with the effective portion of designated cash flow hedging
instruments, net of deferred taxes to be realised when the position is settled.

Available-for-salereserve

Includes the changes in fair value and exchange differences on our revaluation of available-for-sale financial
assets, net of deferred taxes to be realised upon disposal of the asset.

47

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
21. CAPITAL MANAGEMENTCAPITAL MANAGEMENT STRATEGYThe Banking Group’s core capital objectives are to:• protect the interests of depositors, creditors and shareholders;• ensure the safety and soundness of the Banking Group’s capital position; and• ensure that the capital base supports the Banking Group’s risk appetite, and strategic business objectives, in an efficient and effective manner.
The Board holds ultimate responsibility for ensuring that capital adequacy is maintained. This includes: setting, monitoring and obtaining assurance for
the Banking Group’s Internal Capital Adequacy Assessment Process (ICAAP) policy and framework; standardised risk definitions for all material risks;materiality thresholds; capital adequacy targets; internal economic risk capital principles; and risk appetite.
The Banking Group has minimum and trigger levels for common equity tier 1, tier 1 and total capital that ensure sufficient capital is maintained to:• meet minimum prudential requirements imposed by regulators;• ensure consistency with the Banking Group’s overall risk profile and financial positions, taking into account its strategic focus and business plan;and• support the economic risk capital requirements of the business.
ALCO and its related Capital Management Forum are responsible for developing, implementing and maintaining the Banking Group's ICAAP
framework, including ongoing monitoring, reporting and compliance. The Banking Group’s ICAAP is subject to independent and periodic review
conducted by Internal Audit.
The Banking Group complied with all the regulatory Capital Adequacy requirements during the current and prior years.

REGULATORY ENVIRONMENTAs the Bank is a registered bank in New Zealand, it is primarily regulated by RBNZ under the Reserve Bank of New Zealand Act 1989. The Bank mustcomply with the minimum regulatory capital requirements, capital ratios and specific reporting levels that RBNZ sets. RBNZ requirements are
summarised below:
Regulatory capital definition

Minimum capital ratios

Common Equity Tier 1 (CET1) capital

Comprises ordinary share capital, retained
earnings, and certain accounting reserves. Someamounts (e.g. the value of goodwill) must be
deducted to determine the final value of CET1
capital.

CET1 capital divided by total risk weighted assets
must be at least 4.5%.

Tier 1 capital

CET1 capital plus additional tier 1 instruments,
which comprise high-quality capital and must:• provide a permanent and unrestrictedcommitment of funds;• be freely available to absorb losses; andprovide for fully discretionary capital
distributions.

Tier 1 capital divided by total risk weighted assets
must be at least 6.0%.

Tier 2 capital

Tier 2 instruments include some subordinatedinstruments and accounting reserves that are notincluded in Tier 1 capital. Some amounts are
deducted in determining the value of Tier 2
instruments.

No minimum.

Total capital

Tier 1 plus Tier 2 capital.

Total capital divided by total risk weighted assets
must be at least 8.0%.

Capital buffer

The Capital buffer is actual CET1 capital in excess
of any of the minimum capital requirements
imposed on the Bank.

Capital buffer divided by total risk weighted assets
should be at least 2.5%.

Reporting levels
Solo consolidated

The registered bank plus subsidiaries which are funded exclusively and wholly owned by theregistered bank.

Banking GroupThe registered bank’s consolidated group.

The Bank measures capital adequacy and reports to RBNZ on a Banking Group basis monthly, and measures capital adequacy on a Solo consolidated
basis quarterly. Banking Group and Solo consolidated capital ratios are reported publicly in six-monthly disclosure statements.

48

NOTES TO THE FINANCIAL STATEMENTS

21. CAPITAL MANAGEMENT (continued)
CAPITAL ADEQUACY
The following table provides details of the Banking Group’s capital ratios at 30 September:
Unaudited
Qualifying capital
Tier 1
Shareholder's equity
Preference shares included in Additional Tier 1 capital
Gross Common Equity Tier 1 capital
Deductions
Common Equity Tier 1 capital
Additional tier 1 capital
Tier 1 capital
Tier 2 capital
Total capital
Capital adequacy ratios
Common Equity Tier 1
Tier 1
Tier 2
Total
Buffer ratio
Risk weighted assets

2018
NZ$m

2017
NZ$m

13,109(300)
12,809(3,728)
9,081
2,776
11,857
11,857

12,781(300)
12,481(3,754)
8,727
2,778
11,505234
11,739

11.1%
14.4%
0.0%
14.4%
6.4%
82,147

10.7%
14.1%
0.3%
14.4%
6.2%
81,642

22. CONTROLLED ENTITIESThe following table lists the principal subsidiaries of the Bank. Principal subsidiaries are those that have transactions or balances with parties outside
the Banking Group. All subsidiaries are 100% owned and incorporated in New Zealand.
Nature of business
ANZ Bank New Zealand Limited
Registered bank
ANZ Investment Services (New Zealand) Limited
Funds management
ANZ New Zealand (Int'l) Limited
Finance
ANZ New Zealand Investments Limited
Funds management
ANZ New Zealand Securities Limited
On-line share broker
ANZNZ Covered Bond Trust1
Securitisation entity
Arawata Assets Limited
Property
Karapiro Investments Limited
Asset finance
Kingfisher NZ Trust 2008-11
Securitisation entity
OnePath Life (NZ) Limited
Insurance
UDC Finance Limited
Asset finance1

The Banking Group does not own ANZNZ Covered Bond Trust and Kingfisher NZ Trust 2008-1. Control exists as the Banking Group retains substantially all the risks and rewards of theoperations. Details of the Banking Group’s interest in consolidated structured entities is included in Note 23 Structured Entities.

RECOGNITION AND MEASUREMENT
The Banking Group subsidiaries are those entities it controls through:• being exposed to, or having rights to, variable returns from the entity; and• being able to affect those returns through its power over the entity.
The Banking Group assesses whether it has power over those entities by examining the Banking Group’s existing rights to direct the relevant
activities of the entity.

49

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
23. STRUCTURED ENTITIESA Structured Entity (SE) is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls theentity, such as when any voting rights relate to administrative tasks only and the relevant activities (being those that significantly affect the entity’s
returns) are directed by means of contractual arrangement. A SE 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•financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).

The Banking Group is involved with both consolidated and unconsolidated SEs which may be established by the Banking Group or by a third party.
SEs are classified as subsidiaries and consolidated when control exists. If the Banking Group does not control a SE, then it will not be consolidated (anunconsolidated SE). This note provides information on both consolidated and unconsolidated SEs.
The Banking Group’s involvement with SEs is as follows:Type

Details

Securitisation

The Banking Group uses the Kingfisher NZ Trust 2008-1 (the Kingfisher Trust) to securitise residential mortgages
that it has originated, in order to diversify sources of funding for liquidity management. The Kingfisher Trust is aninternal securitisation (bankruptcy remote) vehicle we created for the purpose of structuring assets that are eligible
for repurchase under agreements with RBNZ (these are known as ‘Repo eligible’).
The Banking Group is exposed to variable returns from its involvement with the Kingfisher Trust and has the ability
to affect those returns through its power over the Kingfisher Trust’s activities. The Kingfisher Trust is therefore
consolidated.
As at 30 September 2018 and 30 September 2017 the Banking Group had not entered into any repurchaseagreements with RBNZ for residential mortgage backed securities issued and therefore no collateral had been
accepted by RBNZ under this facility.
Additionally, the Banking Group may acquire interests in securitisation vehicles set up by third parties throughproviding lending facilities to, or holding securities issued by, such entities.

ANZNZ Covered Bond Trust(the Covered Bond Trust)

Substantially all of the assets of the Covered Bond Trust are made up of certain housing loans and related
securities originated by the Bank which are security for the guarantee by ANZNZ Covered Bond Trust Limited astrustee of the Covered Bond Trust of issuances of covered bonds by the Bank, or its wholly owned subsidiary ANZ
New Zealand (Int’l) Limited, from time to time. The assets of the Covered Bond Trust are not available to creditorsof the Bank, although the Bank (or its liquidator or statutory manager) may have a claim against the residual assetsof the Covered Bond Trust (if any) after all prior ranking creditors of the Covered Bond Trust have been satisfied.
The Banking Group is exposed to variable returns from its involvement with the Covered Bond Trust and has theability to affect those returns through its power over the Covered Bond Trust’s activities. The Covered Bond Trust istherefore consolidated.

Structured financearrangements

The Banking Group is involved with SEs established:• in connection with structured lending transactions to facilitate debt syndication and/or to ring-fencecollateral; and• to own assets that are leased to customers in structured leasing transactions.
The Banking Group may provide risk management products (derivatives) to the SE.
In all instances, the Banking Group does not control these SEs. Further, the Banking Group’s involvement does notestablish more than a passive interest in decisions about the relevant activities of the SE, and accordingly we do
not consider that interest disclosable.

Funds management activities The Banking Group is the scheme manager for a number of Managed Investment Schemes (MIS). These MIS
include the ANZ and OneAnswer branded KiwiSaver, retail and wholesale schemes and the Bonus Bonds Scheme,
and are considered to be SEs.
CONSOLIDATED STRUCTURED ENTITIESFinancial or Other Support Provided to Consolidated Structured Entities
The Bank provides lending facilities, derivatives and commitments to the Kingfisher Trust and the Covered Bond Trust and/or holds debt instrumentsthat they have issued. The Bank did not provide any non-contractual support to consolidated SEs during the year (2017: nil).

50

NOTES TO THE FINANCIAL STATEMENTS

23. STRUCTURED ENTITIES (continued)
UNCONSOLIDATED STRUCTURED ENTITIESThe Banking Group’s Interest in Unconsolidated Structured Entities
An ‘interest’ in an unconsolidated SE is any form of contractual or non-contractual involvement with an SE that exposes the Banking Group tovariability of returns from the performance of that SE. These interests include, but are not limited to: holdings of debt or equity securities; derivatives
that pass on risks specific to the performance of the SE; lending; loan commitments; financial guarantees; and fees from funds management activities.
For the purpose of disclosing interests in unconsolidated SEs:
• no disclosure is made if the Banking Group’s involvement is not more than a passive interest - for example: when the Banking 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 not considered disclosable interests - unless the design of the structured entity allows the Banking Group to
participate in decisions about the relevant activities (being those that significantly affect the entity’s returns).
• ‘interests’ do not include derivatives intended to expose the Banking Group to market risk (rather than performance risk specific to the SE) or
derivatives through which the Banking Group creates, rather than absorbs, variability of the unconsolidated SE (such as purchase of credit
protection under a credit default swap).
The Banking Group earned funds management fees from its MIS of NZ$191 million (2017: NZ$170 million) during the year. Size of these MIS isindicated by Funds Under Management which varies by fund, with a maximum value of approximately NZ$3.3 billion (2017: NZ$3.4 billion).
The Banking Group did not provide any non-contractual support to unconsolidated SEs during the year (2017: nil): nor does it have any current
intention to provide financial or other support to unconsolidated SEs.
SPONSORED UNCONSOLIDATED STRUCTURED ENTITIESThe Banking Group may also sponsor unconsolidated SEs in which it has no disclosable interest.
For the purposes of this disclosure, the Banking Group considers itself the ‘sponsor’ of an unconsolidated SE if it is the primary party involved in thedesign and establishment of that SE and:• the Banking Group is the major user of that SE; or• the Banking Group’s name appears in the name of that SE, or on its products; or• the Banking Group provides implicit or explicit guarantees of that SE’s performance.
The Bank has sponsored the ANZ PIE Fund, which invests only in deposits with the Bank. The Banking Group does not provide any implicit or explicit
guarantees of the capital value or performance of investments in the ANZ PIE Fund. There was no income received from, nor assets transferred to, thisentity during the year.

Significant judgement is required in assessing whether control exists over Structured Entities involved in securitisation activities,
structured finance transactions and investment funds. Judgement is required in relation to the existence of:• power over the relevant activities (being those that significantly affect the entity’s returns); and• exposure to variable returns of that entity.

24. TRANSFERS OF FINANCIAL ASSETSIn the normal course of business the Banking Group enters into transactions where it transfers financial assets directly to third parties. These transfers
may give rise to the Banking Group fully, or partially, derecognising those financial assets - depending on the Banking Group’s exposure to the risks
and rewards or control over the transferred assets. If the Banking Group retains substantially all of the risk and rewards of a transferred asset, thetransfer does not qualify for derecognition and the asset remains on the Banking Group’s balance sheet in its entirety.
Covered bonds
The Banking Group operates a covered bond programme to raise funding. Refer to Note 23 Structured Entities for further details. The covered bonds
issued externally are included within debt issuances.

51

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
24. TRANSFERS OF FINANCIAL ASSETS (continued)
Repurchase agreements
If the Banking Group sells securities subject to repurchase agreements under which substantially all the risks and rewards of ownership remain with
the Banking Group, then those assets are considered to be transferred assets that do not qualify for derecognition. An associated liability is recognised
for the consideration received from the counterparty.
The table below sets out the balance of assets transferred that do not qualify for derecognition, along with the associated liabilities:

Current carrying amount of assets transferred
Carrying amount of associated liabilities

Covered bonds
2018
2017
NZ$m
NZ$m
10,747
10,5953,929
5,315

Repurchase agreements
2018
2017
NZ$m
NZ$m
517
157
517
157

25. ASSETS AND LIABILITIES HELD FOR SALE
UDC
On 11 January 2017, the Bank announced that it had entered into a conditional agreement to sell UDC to HNA Group (HNA). On 21 December 2017,
the Bank announced that it had been informed that the New Zealand Overseas Investment Office had declined HNA's application to acquire UDC andthe agreement with HNA was terminated in January 2018. The assets and liabilities of UDC are no longer classified as held for sale as at 30 September
2018.
OnePath
On 30 May 2018, the Bank announced that it had agreed to sell OnePath to Cigna Corporation and the final regulatory approval was obtained on 29
October 2018. The transaction is subject to closing conditions and the Bank expects it to close in the 2019 financial year.

Net loans and advances
Life insurance contract assets
Goodwill and other intangible assets
Investments backing insurance contract liabilities
Other assets
Total assets held for sale
Deposits and other borrowings
Current tax liabilities
Deferred tax liabilities
Payables and other liabilities
Employee entitlements
Total liabilities held for sale

2018
OnePath
NZ$m
662
101
127
7
897
16
175
143
334

2017
UDC
NZ$m
2,912
133
20
3,065
1,039
24
(9)
33
1
1,088

A significant level of judgement is used by the Banking Group to determine:• whether an asset or group of assets is classified and presented as held for sale or as a discontinued operation; and• the fair value of the assets and liabilities classified as being held for sale.
Any impairment we record is based on the best available evidence of the fair value compared to the carrying value before the impairment.
The final sale price the Banking Group may achieve will depend on a number of factors and may be different to the fair value we estimate
when recording the impairment. We expect that the sales will complete within 12 months after balance date, subject to the relevant
regulatory approvals and customary terms of sale for such assets.

52

NOTES TO THE FINANCIAL STATEMENTS

26. RELATED PARTY DISCLOSURES
Key management personnel
Key management personnel (KMP) are defined as directors and those executives who report directly to the Bank’s Chief Executive Officer withresponsibility for the strategic direction and management of a major revenue generating division or who control material revenue and expenses.
Loans made to directors and other KMP 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 and the interest rate.
All other transactions with KMP and their related parties are made on terms equivalent to those that prevail in arm’s length transactions. Thesetransactions generally involve the provision of financial and investment services. All such transactions that have occurred with KMP and their relatedparties have been trivial or domestic in nature. In this context, transactions are only disclosed when they are considered of interest to the users of thefinancial statements in making and evaluating decisions about the allocation of scarce resources.

Key management personnel compensation
Salaries and short-term employee benefits
Post-employment benefits
Other long-term benefits
Share-based payments
Total
Loans to, and securities held by, key management personnel and their related parties
Loans
Unsubordinated debt
Subordinated debt

2018
NZ$0002017
NZ$00011,677655
38
3,308
15,678

11,430480
60
3,515
15,485

7,226
120

5,102
520
190

Transactions with other related parties
The Bank and Banking Group undertake transactions with the Immediate Parent Company, the Ultimate Parent Bank, other members of the Overseas
Banking Group and associates.
These transactions principally consist of funding and hedging transactions, the provision of other financial and investment services, technology andprocess support, and compensation for share based payments made to Banking Group employees. Transactions with related parties outside of the
Banking Group are conducted on an arm’s length basis and on normal commercial terms.
In addition the Bank undertakes similar transactions with subsidiaries, which are eliminated in the consolidated Banking Group financial statements.
Included within the Bank’s transactions with subsidiaries is the provision of administrative functions to some subsidiaries for which no payments havebeen made.
Transactions with related parties

Ultimate Parent Bank and subsidiaries not part of the Banking GroupInterest income
Interest expense
Fee income
Gain/(loss) on sale of mortgages to the NZ Branch
Other operating income
Operating expenses
Mortgages sold to the NZ Branch
Mortgages repurchased from the NZ Branch
Immediate Parent Company
Interest expense
Ordinary shares issued
Dividends paid
Associates
Direct fee expense
Dividends received
Share of associates' profit

2018
NZ$m

2017
NZ$m

13
138
9
(1)
43
52
302
1,575

32
146
14
(1)
23
46
481
736

1
3,000
4,611

1
1,695

10
6
5

10
5
5

53

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
26. RELATED PARTY DISCLOSURES (continued)
Balances with related parties

Ultimate Parent Bank and subsidiaries not part of the Banking Group
Cash and cash equivalents
Settlement balances owed to the Banking Group
Derivative financial instruments
Other assets
Immediate Parent Company
Derivative financial instruments
Associates
Investments in associates
Total due from related parties
Ultimate Parent Bank and subsidiaries not part of the Banking Group
Settlement balances owed by the Banking Group
Collateral received
Deposits and other borrowings
Derivative financial instruments
Payables and other liabilities
Subordinated debt
Immediate Parent Company
Deposits and other borrowings
Derivative financial instruments
Associates
Payables and other liabilities
Total due to related parties

2018
NZ$m

2017
NZ$m

33
2,431
39

64
111
2,623
42

-

4

6
2,509

7
2,851

125
257
11
2,248
30
1,941

220
198
11
2,486
31
1,951

29
1

62
-

1
4,643

1
4,960

Balances due from / to related parties are unsecured. The Bank has provided guarantees and commitments to related parties as follows:

Financial guarantees provided to the Ultimate Parent Bank
Undrawn credit commitments provided to the Immediate Parent Company

2018
NZ$m
138
250

2017
NZ$m
155
250

2018
NZ$m

2017
NZ$m

7
7

4
4

331
86
8
425
86
224
115
425

370
105
9
484
84
256
144
484

27. COMMITMENTS AND CONTINGENT LIABILITIESPROPERTY RELATED COMMITMENTS

Property capital expenditure
Contracts for outstanding capital expenditure (not later than 1 year)
Total capital expenditure commitments for property
Lease rentals
Land and Buildings
Furniture and equipment
Motor vehicles
Total lease rental commitments
Due within 1 year
Due later than 1 year but not later than 5 years
Due later than 5 years
Total lease rental commitments

54

NOTES TO THE FINANCIAL STATEMENTS

27. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
CREDIT RELATED COMMITMENTS AND CONTINGENCIES

Contract amount of:
Undrawn facilities
Guarantees and letters of credit
Performance related contingencies
Total

2018
NZ$m

2017
NZ$m

27,245
1,531
1,329
30,105

26,7691,010
1,598
29,377

UNDRAWN FACILITIESThe majority of undrawn facilities are subject to customers maintaining specific credit and other requirements or conditions. Many of these facilities
are expected to be only partially used, and others may never be used at all. As such, the total of the nominal principal amounts is not necessarily
representative of future liquidity risks or future cash requirements. Based on the earliest date on which the Banking Group may be required to pay, thetotal undrawn facilities of NZ$27,245 million (2017: NZ$26,769 million) mature within 12 months.
GUARANTEES, LETTERS OF CREDIT AND PERFORMANCE RELATED CONTINGENCIES
Guarantees, letters of credit and performance related contingencies relate to transactions that the Banking Group has entered into as principal –including: guarantees, standby letters of credit and documentary letters of credit.
Documentary letters of credit involve the Banking Group issuing letters of credit guaranteeing payment in favour of an exporter. They are 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 Banking Group to make payments to a third party if the customer fails to fulfil its nonmonetary obligations under the contract.
To reflect the risk associated with these transactions, we apply the same credit origination, portfolio management and collateral requirements that weapply to loans. The contract amount represents the maximum potential amount that we could lose if the counterparty fails to meet its financial
obligations. As the facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. Basedon the earliest date on which the Banking Group may be required to pay, the total guarantees and letters of credit of NZ$1,531 million (2017:
NZ$1,010 million) and total performance related contingencies of NZ$1,329 million (2017: NZ$1,598 million) mature within 12 months.
OTHER CONTINGENT LIABILITIESThere are outstanding court proceedings, claims and possible claims for and against the Banking Group. Where relevant, expert legal advice has beenobtained and, in the light of such advice, provisions and/or disclosures as deemed appropriate have been made. In some instances we have notdisclosed 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 Banking Group.
In recent years there has been an increase in the number of matters on which the Banking Group engages with its regulators. Globally there havebeen significant increases in the nature and scale of regulatory investigations and reviews, enforcement actions (whether by court action or otherwise)
and the quantum of fines issued by regulators and customer claims. The Banking Group also instigates engagement with its regulators. The nature ofthese investigations and reviews can be wide-ranging and, for example, may include a range of matters including responsible lending practices,
product suitability, wealth advice and adequacy of product disclosure documentation. The Banking Group has received various notices and requests
for information from its regulators as part of both industry-wide and Banking Group specific reviews, and has also made disclosures to its regulators at
its own instigation. There may be exposures to customers which are additional to any regulatory exposures. These could include class actions,individual claims or customer remediation or compensation activities. The outcomes and total costs associated with such reviews and possible
exposures remain uncertain.

55

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
28. COMPENSATION OF AUDITORSKPMG New ZealandAudit or review of financial statements1
Audit related services:
Prudential and regulatory services2
Offer documents assurance or review
Other assurance services3
Total audit related services
Total compensation of auditors relating to the Banking GroupFees relating to certain managed funds and not recharged4
Total compensation of auditors
1
2
3
4

2018
NZ$0002017
NZ$000

2,199

2,227

212
104
36
352
2,551

225
146
95
466
2,693

45
2,596

46
2,739

Includes fees for both the audit of the annual financial statements and reviews of interim financial statements.
Includes fees for reviews and controls reports required by regulations.
Includes fees for Trustee reporting, reviews and other agreed upon procedures engagements.
Amounts relate to the ANZ PIE Fund and certain other funds, and include fees for audits of annual financial statements, controls report and other agreed upon procedures engagements.

The Banking Group’s Policy allows KPMG to provide assurance and other audit related services that, while outside the scope of the statutory audit, areconsistent with the role of an external auditor. The Policy allows certain non-audit services to be provided where the service would not contravene
auditor independence requirements. KPMG may not provide services that are perceived to be in conflict with the role of the external auditor or breach
auditor independence. These include consulting advice and subcontracting of operational activities normally undertaken by management, andengagements where the external auditor may ultimately be required to express an opinion on its own work.

56

NOTES TO THE FINANCIAL STATEMENTS

This page has been left blank intentionally

57

REGISTERED BANKDISCLOSURESThis section contains the additional disclosures required by theRegistered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014.

58

Section

Order reference

Page

B1.

General Disclosures

Schedule 2

59

B2.

Additional Financial Disclosures

Schedule 4

68

B3.

Asset Quality

Schedule 7

69

B4.

Capital Adequacy under the Internal Models Based Approach,and Regulatory Liquidity Ratios

Schedule 11

70

B5.

Concentration of Credit Exposures to Individual Counterparties

Schedule 13

75

B6.

Credit Exposures to Connected Parties

Schedule 14

76

B7.

Insurance Business, Securitisation, Funds Management, other Fiduciary Activities,
and marketing and distribution of Insurance Products

Schedule 15

77

B8.

Risk Management Policies

Schedule 17

79

REGISTERED BANK DISCLOSURES

B1. GENERAL DISCLOSURES
Details of ultimate parent bank and ultimate holding company
The ultimate parent bank and ultimate holding company of the Bank is Australia and New Zealand Banking Group Limited (Ultimate Parent Bank). The
address for service of the Ultimate Parent Bank is ANZ Centre, Melbourne, Level 9, 833 Collins Street, Docklands, Victoria 3008, Australia.
Restrictions on the Ultimate Parent Bank’s ability to provide financial support
Effect of APRA’s Prudential Standards
APRA Prudential Standard APS 222 Associations with Related Entities (APS 222) sets minimum requirements for authorised deposit-taking institutions inAustralia (ADIs), including the Ultimate Parent Bank, in relation to the monitoring, management and control of risks which arise from associations withrelated entities and also includes prudential limits on intra-group exposures.
Under APS222, the Ultimate Parent Bank’s ability to provide financial support to the Bank is subject to certain restrictions:• the Ultimate Parent Bank should not undertake any third party dealings with the prime purpose of supporting the business of the Bank.
• the Ultimate Parent Bank must not hold unlimited exposures (i.e. should be limited as to specified time and amount) in the Bank (e.g. notprovide a general guarantee covering any of the Bank’s obligations).
• the Ultimate Parent Bank must not enter into cross-default clauses whereby a default by the Bank on an obligation (whether financial orotherwise) is deemed to trigger a default by the Ultimate Parent Bank on its obligations.
• the level of exposure of the Ultimate Parent Bank’s Level 1 total capital base to the Bank should not exceed: (A) 50% on an individual exposurebasis; or (B) 150% in aggregate (being exposures to all similar regulated entities related to the Ultimate Parent Bank).
In addition, APRA confirmed that by 1 January 2021, no more than 5% of the Ultimate Parent Bank’s Level 1 Tier 1 capital base can comprise nonequity exposures to its New Zealand operations (its New Zealand branch and the Bank) during ordinary times. This limit does not include holdings ofcapital instruments or eligible secured contingent funding support provided to the Bank during times of financial stress.
APRA also confirmed that contingent funding support by the Ultimate Parent Bank to the Bank during times of financial stress must be provided onterms that are acceptable to APRA and that the Ultimate Parent Bank’s exposures to its New Zealand operations must not exceed 50% of the Ultimate
Parent Bank’s Level 1 Tier 1 capital base. At present, only covered bonds meet APRA’s criteria for contingent funding.
In July 2018, APRA released a consultation paper and draft prudential standards on proposed revisions to APS222, which also incorporated changes to
its large exposures framework published in December 2017. APRA’s proposals include revisions to the prudential limits on exposures to related
entities. APRA is proposing to align the capital base used in limit calculations to Level 1 Tier 1 Capital (capital base used in the revised large exposures
framework) and to reduce the individual and aggregate limits of exposures to individual related ADIs. APRA is currently consulting on the proposedchanges, taking into account submissions already received from the Ultimate Parent Bank and the industry. The impact on the Overseas Banking
Group (including ANZ New Zealand) arising from the above consultation will not be known until APRA finalises its review. APRA intends to have therevised APS222 framework implemented by 1 January 2020.
Effect of the Level 3 framework
Under APRA’s Level 3 Conglomerates regulations, the Ultimate Parent Bank must limit its financial and operational exposures to subsidiaries (including
the Bank). These requirements are not expected to place additional restrictions on the Ultimate Parent Bank’s ability to provide financial or operational
support to the Bank.
Other APRA powers
The Ultimate Parent Bank may not provide financial support in breach of the Australian Banking Act 1959 (the Banking Act). Under the Banking Act:
• APRA must exercise its powers and functions for the protection of a bank’s depositors in Australia and for the promotion of financial systemstability in Australia; and• in the event of a bank becoming unable to meet its obligations or suspending payment, the assets of the bank in Australia will be available tomeet that bank’s deposit liabilities in Australia in priority to all other liabilities of the bank.
The requirements of the Banking Act and the exercise by APRA of its powers have the potential to impact the management of the liquidity of the
Bank.
Interest in 5% or more of voting securities of the BankThe Immediate Parent Company holds 100% of the voting securities of the Bank. The Immediate Parent Company has the direct ability to appoint
100% of the directors of the Bank, subject to RBNZ advising that is has no objection to the appointment in accordance with the Bank’s conditions ofregistration. RBNZ also has the power under section 113B of the Reserve Bank of New Zealand Act 1989, after obtaining the consent of the Minister ofFinance, to remove, replace, or appoint directors in certain circumstances.
Priority of creditors’ claims
In the event that the Bank was put into liquidation or ceased to trade, claims of secured creditors and those creditors set out in Schedule 7 of theCompanies Act 1993 would rank ahead of the claims of unsecured creditors. Customer deposits, except UDC Secured Investments, are unsecured andrank equally with other unsecured liabilities of the Bank, and such liabilities rank ahead of any subordinated instruments issued by the Bank.
Guarantees
The Bank has guaranteed the payment of interest and principal of covered bonds issued by its subsidiary ANZ New Zealand (Int’l) Limited. Thisobligation is guaranteed by ANZNZ Covered Bond Trust Limited (the Covered Bond Guarantor), solely in its capacity as trustee of ANZNZ Covered
Bond Trust. The Covered Bond Guarantor’s address for service is Level 9, 34 Shortland Street, Auckland, New Zealand. The Covered Bond Guarantor is
not a member of the Banking Group and has no credit ratings applicable to its long term senior unsecured obligations. The covered bonds have been
assigned a long term rating of Aaa and AAA by Moody’s Investors Service and Fitch Ratings respectively. Refer to page 26 for further details, and topage 43 for the amount of assets of the ANZ Covered Bond Trust pledged as security for covered bonds.
No other material obligations of the Bank are guaranteed as at 15 November 2018.

59

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B1. GENERAL DISCLOSURES (continued)
Directors
Any document or communication may be sent to any Director at the Registered Office. The document or communication should be marked for theattention of that Director.

Rt Hon Sir John Key, GNZM ACDavid Hisco

Antony Carter

PositionIndependent Non-Executive Director
and ChairChief Executive Officer and Director

Independent Non-Executive Director

Occupation

Company Director

Chief Executive Officer New Zealand andGroup Executive

Company Director

Qualifications

BCom, DCom (Honoris Causa)

BBus, MBA

BE (Hons), ME, FNZIMResides

Auckland, New Zealand

Auckland, New Zealand

Auckland, New ZealandNone

Air New Zealand Ltd, Avonhead Mall Ltd,Blues Management Ltd, Fisher & Paykel
Healthcare Corporation Ltd, Fisher &Paykel Healthcare Employee Share
Purchase Trustee Ltd, Fletcher Building
Ltd, Fletcher Building Industries Ltd,Loughborough Investments Ltd,
Modern Merchants Ltd, Strategic
Interchange Ltd, Tetrad Corporation Ltd

Shayne ElliottMichelle JablkoMark Verbiest

Position

Non-Executive Director

Non-Executive Director

Independent Non-Executive Director

Occupation

Chief Executive Officer, Australia and
New Zealand Banking Group Ltd

Chief Financial Officer, Australia and
New Zealand Banking Group Ltd

Company Director

Qualifications

BCom

LLB (Hons), B.Ec (Hons)

LLB, CFInstD

Resides

Melbourne, Australia

Melbourne, Australia

Wanaka, New Zealand

Other company
directorships

Australia and New Zealand Banking
Group Ltd, Financial Markets Foundation
for Children

ANZ Holdings (New Zealand) Ltd

Bear Fund NZ Ltd, Freightways Ltd, Willis
Bond Capital Partners Ltd, Willis Bond
General Partner Ltd, MyCare Ltd,
Meridian Energy Ltd

Other company Air New Zealand Ltd, Australia and New
Zealand Banking Group Ltd, Thirty Eight
directorships
JK LtdJoan Withers
PositionIndependent Non-Executive Director

Occupation

Company Director

Qualifications

MBA, AFInstD

Resides

Auckland, New Zealand

Other company
directorships

Mercury NZ Ltd, On Being Bold Ltd,The Warehouse Group Ltd,The Warehouse Planit Trustees Ltd,The Warehouse Management Trustee
Company Ltd, The Warehouse
Management Trustee Company No.2 Ltd

60

REGISTERED BANK DISCLOSURES

B1. GENERAL DISCLOSURES (continued)
Transactions with Directors
No Director has disclosed that he/she or any immediate relative or professional associate has any dealing with the Banking Group which has been
either entered into on terms other than those which would in the ordinary course of business be given to any other person of like circumstances ormeans or which could otherwise be reasonably likely to influence materially the exercise of the Director’s duties as a Director of the Bank.
Board Audit Committee
There is a board Audit Committee which covers audit matters. The committee comprises four directors, all of whom are independent directors.
Policy of the board of directors for avoiding or dealing with conflicts of interest
In order to ensure that members of the Board are reminded of their disclosure obligations under the Companies Act 1993, the following procedures
are adopted:• at least once in each year, Directors are requested to complete, in terms of section 140(1) of the Companies Act 1993, a disclosure of any
interests which they have with the Bank itself. Directors are reminded at this time of their obligation under the Companies Act 1993 to disclose
promptly any transaction or proposed transaction with the Bank in which they have an interest.
• Directors are also requested to make a general disclosure of their interest in other entities in terms of section 140(2) of the Companies Act 1993.
In addition, they are requested to initiate a review of that disclosure if there are any significant alterations which occur subsequently during theperiod.
In addition to the written disclosures referred to above, Directors disclose relevant interests which they have before discussion of particular business
items.
The Companies Act 1993 allows a Director with an interest in a transaction to participate in discussions and to vote on all matters relating to thatparticular transaction. However, the Board has adopted a guideline whereby a Director with an interest in a transaction should not be present during
any discussions, and should not vote, on any matter pertaining to that particular transaction.
Auditors
KPMG, 18 Viaduct Harbour Avenue, Auckland, New Zealand.
Conditions of registration
The following conditions of registration were applicable as at 30 September 2018, and have applied from 1 January 2018.
The registration of ANZ Bank New Zealand Limited (“the bank”) as a registered bank is subject to the following conditions:
1.

That—
(a)

the Total capital ratio of the banking group is not less than 8%;(b)

the Tier 1 capital ratio of the banking group is not less than 6%;(c)the Common Equity Tier 1 capital ratio of the banking group is not less than 4.5%;(d)the Total capital of the banking group is not less than $30 million;(e)the bank must not include the amount of an Additional Tier 1 capital instrument or Tier 2 capital instrument issued after 1 January 2013 in the calculation of
its capital ratios unless it has received a notice of non-objection to the instrument from the Reserve Bank; and(f)the bank meets the requirements of Part 3 of the Reserve Bank of New Zealand document: “Application requirements for capital recognition or repayment
and notification requirements in respect of capital” (BS16) dated November 2015 in respect of regulatory capital instruments.

For the purposes of this condition of registration, —the scalar referred to in the Reserve Bank of New Zealand document “Capital Adequacy Framework (Internal Models Based Approach)” (BS2B) dated November
2015 is 1.06.
“Total capital ratio”, “Tier 1 capital ratio”, “Common Equity Tier 1 capital ratio”, and “Total capital” must be calculated in accordance with the Reserve Bank of New
Zealand document “Capital Adequacy Framework (Internal Models Based Approach)” (BS2B) dated November 2015;
an Additional Tier 1 capital instrument is an instrument that meets the requirements of subsection 2.13(a) or (c) of the Reserve Bank of New Zealand document“Capital Adequacy Framework (Internal Models Based Approach)” (BS2B) dated November 2015.
a Tier 2 capital instrument is an instrument that meets the requirements of subsection 2.16(a) or (c) of the Reserve Bank of New Zealand document “Capital
Adequacy Framework (Internal Models Based Approach)” (BS2B) dated November 2015.
1A. That—

1B.

(a)

the bank has an internal capital adequacy assessment process (“ICAAP”) that accords with the requirements set out in the document “Guidelines on a bank’s
internal capital adequacy assessment process (‘ICAAP’)” (BS12) dated December 2007;(b)under its ICAAP the bank identifies and measures its “other material risks” defined as all material risks of the banking group that are not explicitly captured in
the calculation of the Common Equity Tier 1 capital ratio, the Tier 1 capital ratio and the Total capital ratio under the requirements set out in the document“Capital Adequacy Framework (Internal Models Based Approach)” (BS2B) dated November 2015; and(c)the bank determines an internal capital allocation for each identified and measured “other material risk”.

That the banking group complies with all requirements set out in the Reserve Bank of New Zealand document “Capital Adequacy Framework (Internal Models
Based Approach)” (BS2B) dated November 2015.

61

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B1. GENERAL DISCLOSURES (continued)
1C.

That, if the buffer ratio of the banking group is 2.5% or less, the bank must:(a)according to the following table, limit the aggregate distributions of the bank’s earnings to the percentage limit to distributions that corresponds to thebanking group’s buffer ratio:

Banking group's
buffer ratio

Percentage limit to
distributions of the
bank's earnings

0% - 0.625%

0%>0.625 - 1.25%

20%>1.25 - 1.875%

40%>1.875% - 2.5%

60%

(b)

prepare a capital plan to restore the banking group’s buffer ratio to above 2.5% within any timeframe determined by the Reserve Bank for restoring the buffer
ratio; and(c)have the capital plan approved by the Reserve Bank.

For the purposes of this condition of registration, —“buffer ratio”, “distributions”, and “earnings” have the same meaning as in Part 3 of the Reserve Bank of New Zealand document: “Capital Adequacy Framework(Internal Models Based Approach)” (BS2B) dated November 2015.
the scalar referred to in the Reserve Bank of New Zealand document “Capital Adequacy Framework (Internal Models Based Approach)” (BS2B) dated November
2015 is 1.06.
2.

That the banking group does not conduct any non-financial activities that in aggregate are material relative to its total activities.
In this condition of registration, the meaning of “material” is based on generally accepted accounting practice.

3.

That the banking group’s insurance business is not greater than 1% of its total consolidated assets.
For the purposes of this condition of registration, the banking group’s insurance business is the sum of the following amounts for entities in the banking group:(a)

if the business of an entity predominantly consists of insurance business and the entity is not a subsidiary of another entity in the banking group whosebusiness predominantly consists of insurance business, the amount of the insurance business to sum is the total consolidated assets of the group headed by
the entity; and(b)

if the entity conducts insurance business and its business does not predominantly consist of insurance business and the entity is not a subsidiary of anotherentity in the banking group whose business predominantly consists of insurance business, the amount of the insurance business to sum is the total liabilities
relating to the entity’s insurance business plus the equity retained by the entity to meet the solvency or financial soundness needs of its insurance business.

In determining the total amount of the banking group’s insurance business(a)all amounts must relate to on balance sheet items only, and must comply with generally accepted accounting practice; and(b)

if products or assets of which an insurance business is comprised also contain a non-insurance component, the whole of such products or assets must be
considered part of the insurance business.

For the purposes of this condition of registration,“insurance business” means the undertaking or assumption of liability as an insurer under a contract of insurance:“insurer” and “contract of insurance” have the same meaning as provided in sections 6 and 7 of the Insurance (Prudential Supervision) Act 2010.
4.

That the aggregate credit exposures (of a non-capital nature and net of any allowances for impairment) of the banking group to all connected persons do not
exceed the rating-contingent limit outlined in the following matrix:
Credit Rating of the bank1

Connected exposure limit(% of the banking group’s Tier 1
capital)AA/Aa2 and above

75

AA-/Aa3

70

A+/A1

60

A/A2

40

A-/A3

30

BBB+/Baa1 and below

15

1This table uses the rating scales of Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. (Fitch Ratings’ scale is identical to Standard & Poor’s)

Within the rating-contingent limit, credit exposures (of a non-capital nature and net of any allowances for impairment) to non-bank connected persons shall not
exceed 15 percent of the banking group’s Tier 1 capital.
For the purposes of this condition of registration, compliance with the rating-contingent connected exposure limit is determined in accordance with the Reserve
Bank of New Zealand document entitled “Connected Exposures Policy” (BS8) dated November 2015.
5.

62

That exposures to connected persons are not on more favourable terms (e.g. as relates to such matters as credit assessment, tenor, interest rates, amortisation
schedules and requirement for collateral) than corresponding exposures to non-connected persons.

REGISTERED BANK DISCLOSURES

B1. GENERAL DISCLOSURES (continued)
6.

That the bank complies with the following corporate governance requirements:(a)the board of the bank must have at least five directors;(b) the majority of the board members must be non-executive directors;(c)at least half of the board members must be independent directors;(d) an alternate director,—(i)for a non-executive director must be non-executive; and(ii)

for an independent director must be independent;(e)

at least half of the independent directors of the bank must be ordinarily resident in New Zealand;(f)the chairperson of the board of the bank must be independent; and(g) the bank’s constitution must not include any provision permitting a director, when exercising powers or performing duties as a director, to act other than inwhat he or she believes is the best interests of the company (i.e. the bank).
For the purposes of this condition of registration, “non-executive” and “independent” have the same meaning as in the Reserve Bank of New Zealand document
entitled “Corporate Governance” (BS14) dated July 2014.
7.

That no appointment of any director, chief executive officer, or executive who reports or is accountable directly to the chief executive officer, is made in respect of
the bank unless:(a)the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee; and(b) the Reserve Bank has advised that it has no objection to that appointment.
8.

That a person must not be appointed as chairperson of the board of the bank unless:(a)the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee; and(b) the Reserve Bank has advised that it has no objection to that appointment.
9.

That the bank has a board audit committee, or other separate board committee covering audit matters, that meets the following requirements:(a)the mandate of the committee must include: ensuring the integrity of the bank’s financial controls, reporting systems and internal audit standards;(b) the committee must have at least three members;(c)every member of the committee must be a non-executive director of the bank;(d) the majority of the members of the committee must be independent; and(e)the chairperson of the committee must be independent and must not be the chairperson of the bank.

For the purposes of this condition of registration, “non-executive” and “independent” have the same meaning as in the Reserve Bank of New Zealand document
entitled “Corporate Governance” (BS14) dated July 2014.
10.

That a substantial proportion of the bank’s business is conducted in and from New Zealand.

11.

That the bank has legal and practical ability to control and execute any business, and any functions relating to any business, of the bank that are carried on by aperson other than the bank, sufficient to achieve, under normal business conditions and in the event of stress or failure of the bank or of a service provider to thebank, the following outcomes:(a)that the bank’s clearing and settlement obligations due on a day can be met on that day;(b) that the bank’s financial risk positions on a day can be identified on that day;(c)that the bank’s financial risk positions can be monitored and managed on the day following any failure and on subsequent days; and(d) that the bank’s existing customers can be given access to payments facilities on the day following any failure and on subsequent days.
This condition ceases to apply in respect of an existing outsourcing arrangement on the earlier of either 1 October 2022 or when the existing outsourcing
arrangement becomes compliant with condition 24, from which point in time condition 24 will apply to that outsourcing arrangement.
For the purposes of this condition of registration:(a)the term “legal and practical ability to control and execute” is explained in the Reserve Bank of New Zealand document entitled “Outsourcing Policy” (BS11)
dated January 2006; and(b) the term “existing outsourcing arrangement” is defined in the Reserve Bank of New Zealand document entitled “Outsourcing Policy (BS11)” dated September
2017.
12.

That:
(a)

the business and affairs of the bank are managed by, or under the direction or supervision of, the board of the bank;(b) the employment contract of the chief executive officer of the bank or person in an equivalent position (together “CEO”) is with the bank, and the terms andconditions of the CEO’s employment agreement are determined by, and any decisions relating to the employment or termination of employment of the CEO
are made by, the board of the bank; and(c)all staff employed by the bank shall have their remuneration determined by (or under the delegated authority of) the board or the CEO of the bank and be
accountable (directly or indirectly) to the CEO of the bank.

63

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B1. GENERAL DISCLOSURES (continued)
13.

That the banking group complies with the following quantitative requirements for liquidity-risk management:(a)the one-week mismatch ratio of the banking group is not less than zero per cent at the end of each business day;(b) the one-month mismatch ratio of the banking group is not less than zero per cent at the end of each business day; and(c)the one-year core funding ratio of the banking group is not less than 75 per cent at the end of each business day.

For the purposes of this condition of registration, the ratios identified must be calculated in accordance with the Reserve Bank of New Zealand documents entitled“Liquidity Policy” (BS13) dated January 2018 and “Liquidity Policy Annex: Liquid Assets” (BS13A) dated December 2011.
14.

That the bank has an internal framework for liquidity risk management that is adequate in the bank’s view for managing the bank’s liquidity risk at a prudent level,
and that, in particular:(a)is clearly documented and communicated to all those in the organisation with responsibility for managing liquidity and liquidity risk;(b) identifies responsibility for approval, oversight and implementation of the framework and policies for liquidity risk management;(c)identifies the principal methods that the bank will use for measuring, monitoring and controlling liquidity risk; and(d) considers the material sources of stress that the bank might face, and prepares the bank to manage stress through a contingency funding plan.
15.

That no more than 10% of total assets may be beneficially owned by a SPV.
For the purposes of this condition, —“total assets” means all assets of the banking group plus any assets held by any SPV that are not included in the banking group’s assets:“SPV” means a person—(a)to whom any member of the banking group has sold, assigned, or otherwise transferred any asset;(b) who has granted, or may grant, a security interest in its assets for the benefit of any holder of any covered bond; and(c)

who carries on no other business except for that necessary or incidental to guarantee the obligations of any member of the banking group under a covered
bond:“covered bond” means a debt security issued by any member of the banking group, for which repayment to holders is guaranteed by a SPV, and investors retain an
unsecured claim on the issuer.
16.

That—
(a)

no member of the banking group may give effect to a qualifying acquisition or business combination that meets the notification threshold, and does notmeet the non-objection threshold, unless:(i)the bank has notified the Reserve Bank in writing of the intended acquisition or business combination and at least 10 working days have passed; and(ii)

at the time of notifying the Reserve Bank of the intended acquisition or business combination, the bank provided the Reserve Bank with the information
required under the Reserve Bank of New Zealand Banking Supervision Handbook document “Significant Acquisitions Policy” (BS15) dated December
2011; and(b) no member of the banking group may give effect to a qualifying acquisition or business combination that meets the non-objection threshold unless:(i)the bank has notified the Reserve Bank in writing of the intended acquisition or business combination;(ii)

at the time of notifying the Reserve Bank of the intended acquisition or business combination, the bank provided the Reserve Bank with the information
required under the Reserve Bank of New Zealand Banking Supervision Handbook document “Significant Acquisitions Policy” (BS15) dated December
2011; and(iii)

the Reserve Bank has given the bank a notice of non-objection to the significant acquisition or business combination.

For the purposes of this condition of registration, “qualifying acquisition or business combination”, “notification threshold” and “non-objection threshold” have thesame meaning as in the Reserve Bank of New Zealand Banking Supervision Handbook document “Significant Acquisitions Policy” (BS15) dated December 2011.
17.

That the bank is pre-positioned for Open Bank Resolution and in accordance with a direction from the Reserve Bank, the bank can—(a)close promptly at any time of the day and on any day of the week and that effective upon the appointment of the statutory manager—(i)

all liabilities are frozen in full; and(ii)

no further access by customers and counterparties to their accounts (deposits, liabilities or other obligations) is possible;(b) apply a de minimis to relevant customer liability accounts;(c)apply a partial freeze to the customer liability account balances;(d) reopen by no later than 9am the next business day following the appointment of a statutory manager and provide customers access to their unfrozen funds;(e)maintain a full freeze on liabilities not pre-positioned for open bank resolution; and(f)reinstate customers’ access to some or all of their residual frozen funds.

For the purposes of this condition of registration, “de minimis”, “partial freeze”, “customer liability account”, and “frozen and unfrozen funds” have the same meaning
as in the Reserve Bank of New Zealand document “Open Bank Resolution (OBR) Pre-positioning Requirements Policy” (BS17) dated September 2013.

64

REGISTERED BANK DISCLOSURES

B1. GENERAL DISCLOSURES (continued)
18.

That the bank has an Implementation Plan that—(a)is up-to-date; and(b) demonstrates that the bank’s prepositioning for Open Bank Resolution meets the requirements set out in the Reserve Bank document: “Open Bank Resolution
Pre-positioning Requirements Policy” (BS17) dated September 2013.
For the purposes of this condition of registration, “Implementation Plan” has the same meaning as in the Reserve Bank of New Zealand document “Open Bank
Resolution (OBR) Pre-positioning Requirements Policy” (BS17) dated September 2013.
19.

That the bank has a compendium of liabilities that—(a)at the product-class level lists all liabilities, indicating which are—(i)pre-positioned for Open Bank Resolution; and(ii)

not pre-positioned for Open Bank Resolution;(b) is agreed to by the Reserve Bank; and(c)if the Reserve Bank’s agreement is conditional, meets the Reserve Bank’s conditions.

For the purposes of this condition of registration, “compendium of liabilities” and “pre-positioned and non pre-positioned liabilities” have the same meaning as in
the Reserve Bank of New Zealand document “Open Bank Resolution (OBR) Pre-positioning Requirements Policy” (BS17) dated September 2013.
20.

That on an annual basis the bank tests all the component parts of its Open Bank Resolution solution that demonstrates the bank’s prepositioning for Open Bank
Resolution as specified in the bank’s Implementation Plan.
For the purposes of this condition of registration, “Implementation Plan” has the same meaning as in the Reserve Bank of New Zealand document “Open Bank
Resolution (OBR) Pre-positioning Requirements Policy” (BS17) dated September 2013.

21.

That, for a loan-to-valuation measurement period, the total of the bank’s qualifying new mortgage lending amount in respect of property-investment residential
loans with a loan-to-valuation ratio of more than 65%, must not exceed 5% of the total of the qualifying new mortgage lending amount in respect of propertyinvestment residential mortgage loans arising in the loan-to-valuation measurement period.

22.

That, for a loan-to-valuation measurement period, the total of the bank’s qualifying new mortgage lending amount in respect of non property-investment
residential loans with a loan-to-valuation ratio of more than 80%, must not exceed 15% of the total of the qualifying new mortgage lending amount in respect of
non property-investment residential mortgage loans arising in the loan-to-valuation measurement period.

23.

That the bank must not make a residential mortgage loan unless the terms and conditions of the loan contract or the terms and conditions for an associatedmortgage require that a borrower obtain the registered bank’s agreement before the borrower can grant to another person a charge over the residential property
used as security for the loan.

24.

That the bank must comply with the Reserve Bank of New Zealand document “Outsourcing Policy” (BS11) dated September 2017.
In these conditions of registration,—“banking group” means ANZ Bank New Zealand Limited (as reporting entity) and all other entities included in the group as defined in section 6(1) of the Financial
Markets Conduct Act 2013 for the purposes of Part 7 of that Act.
“generally accepted accounting practice” has the same meaning as in section 8 of the Financial Reporting Act 2013.
In conditions of registration 21 to 23, —“loan-to-valuation ratio”, “non property-investment residential mortgage loan”, “property-investment residential mortgage loan”, “qualifying new mortgage lending
amount in respect of property-investment residential mortgage loans”, “qualifying new mortgage lending amount in respect of non property-investment
residential mortgage loans” and “residential mortgage loan” have the same meaning as in the Reserve Bank of New Zealand document entitled “Framework for
Restrictions on High-LVR Residential Mortgage Lending” (BS19) dated January 2018:“loan-to-valuation measurement period” means—(a)the six calendar month period ending on the last day of March 2018; and(b)thereafter a period of three calendar months ending on the last day of the third calendar month, the first of which ends on the last day of April 2018.

Non-compliance with conditions of registration
During the year ended 30 September 2018, the Bank sought clarification from RBNZ as to the treatment of commitments jointly held with the
Ultimate Parent Bank in the risk weighted exposures for the Banking Group for capital adequacy purposes. RBNZ subsequently confirmed that thoseparts of the commitments that are not allocated to the Banking Group, but could become allocated to the Banking Group at the customer’s request
should be included in the Banking Group’s calculation of risk weighted exposures. As a result, the Bank had not complied with Condition ofRegistration 1 and Condition of Registration 1B for a period of time. These commitments are included in the Banking Group’s risk weighted exposures
as at 30 September 2018, and the Bank was in full compliance with its Conditions of Registration as at that date. The Banking Group's capital ratios
were not materially affected as a result of the non-compliance. As at 30 September 2018, the Banking Group’s Tier 1 capital ratio decreased by 13 basis
points to 14.4% and it had a NZ$58 million increase in its minimum capital requirement as a result of including these commitments in its risk weighted
exposures. The Bank proactively brought this matter to the attention of RBNZ, who have acknowledged that no further action is warranted on the partof RBNZ.

65

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B1. GENERAL DISCLOSURES (continued)
Pending proceedings or arbitration
A description of any pending legal proceedings or arbitration concerning any member of the Banking Group that may have a material adverse effecton the Bank or the Banking Group is included in Note 27 Commitments and Contingent Liabilities.
Credit rating
As at 15 November 2018 the Bank has three credit ratings, which are applicable to its long-term senior unsecured obligations which are payable in
New Zealand in New Zealand dollars. On 19 June 2017, Moody’s Investors Service downgraded the Bank’s credit rating from Aa3 to A1 and changed
the outlook on the Bank from Negative to Stable.
The Bank’s credit ratings are:Rating Agency
S&P Global Ratings
Fitch Ratings
Moody’s Investors Service
The following table describes the credit rating grades available:

Credit Rating
AAAAA1

Qualification
Outlook Negative
Outlook Stable
Outlook Stable

S&P Global
Ratings

Moody's
Investors
Service

Fitch
Ratings

Ability to repay principal and interest is extremely strong. This is the highest investment category.

AAA

Aaa

AAA

Very strong ability to repay principal and interest.

AA

Aa

AA

Strong ability to repay principal and interest although somewhat susceptible to adverse changes in economic, businessor financial conditions.

A

A

A

Adequate ability to repay principal and interest. More vulnerable to adverse changes.

BBB

Baa

BBB

Significant uncertainties exist which could affect the payment of principal and interest on a timely basis.

BB

Ba

BB

Greater vulnerability and therefore greater likelihood of default.

B

B

B

Likelihood of default now considered high. Timely repayment of principal and interest is dependent on favourable
financial conditions.

CCC

Caa

CCC

Highest risk of default.

CC to CCa to CCC to CD-

RD & DThe following grades display investment grade characteristics:

The following grades have predominantly speculative characteristics:

Obligations currently in default.

Credit ratings from S&P Global Ratings and Fitch Ratings may be modified by the addition of "+" or "-" to show the relative standing within the “AA” to “B” categories. Moody's Investors Service
applies numerical modifiers 1, 2, and 3 to each of the “Aa” to “Caa” classifications, with 1 indicating the higher end and 3 the lower end of the rating category.

66

REGISTERED BANK DISCLOSURES

B1. GENERAL DISCLOSURES (continued)
Historical summary of financial statements

Income Statement
Interest income
Interest expense
Net interest income
Non-interest income
Operating income
Operating expenses
Credit impairment (charge) / release
Profit before income tax
Income tax expense
Profit after income tax

2018
NZ$m
6,390
(3,240)
3,150
1,126
4,276
(1,517)
(55)
2,704
(751)
1,953

2017
NZ$m
6,198
(3,161)
3,037
938
3,975
(1,468)
(62)
2,445
(680)
1,765

2016
NZ$m
6,423
(3,421)
3,002
852
3,854
(1,599)
(150)
2,105
(570)
1,535

2015
NZ$m
6,926
(4,051)
2,875
1,175
4,050
(1,512)
(74)
2,464
(681)
1,783

2014
NZ$m
6,272
(3,529)
2,743
1,085
3,828
(1,489)
16
2,355
(639)
1,716

Dividends paid
Share capital issued(4,611)3,000(1,695)-(1,363)-(1,760)675(2,353)970

159,012321
145,903
13,109

153,973357
141,192
12,781

160,819426
148,109
12,710147,527382
135,074
12,453

128,915
634
117,134
11,781

Balance Sheet
Total assets
Total individually impaired assets
Total liabilities
EquityThe amounts included in this summary have been taken from the audited financial statements of the Banking Group.
Directors’ statements
The Directors' statement is included on page 83.
Auditor’s report
The auditor’s report is included on page 84.
Index
The index to the contents of the Disclosure Statement is included on page 2, and an index to the contents of the Financial Statements is included on
page 3.

67

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B2. ADDITIONAL FINANCIAL DISCLOSURES
Additional information on the balance sheet
2018
NZ$m
145,322
124,625

Total interest earning and discount bearing assets
Total interest and discount bearing liabilities

2017
NZ$m
138,795
119,814Additional information on interest rate sensitivity
The following tables represent the interest rate sensitivity of the Banking Group's assets, liabilities and off balance sheet instruments by showing theperiods in which these instruments may reprice, that is, when interest rates applicable to each asset or liability can be changed.
Total
NZ$m

Up to
3 months
NZ$m

Over 3 to
6 months
NZ$m

Over 6 to
12 months
NZ$m

Over 1 to
2 years
NZ$m

2,200

1,913

-

-

-

-

287

656

-

-

-

-

-

656

Collateral paid
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances1
Other financial assets1
Total financial assets
Liabilities
Settlement balances owed by the Banking
Group

1,919
8,024
8,086
6,502
126,466
719
154,572

1,919
873
338
63,027
62
68,132405
699
10,37055
11,529492
4223,835
8
24,3771,373
1,351
20,83523,559

4,881
4,071
8,771
2
17,725

8,086
1
(372)
592
9,250

2,161

750

-

-

-

-

1,411

Collateral received
Deposits and other borrowings1
Derivative financial instruments
Debt issuances
Other financial liabilities1
Total financial liabilities
Hedging instruments
Interest sensitivity gap

845
108,008
8,095
25,135686
144,930
9,642

845
67,952
3,979
111
73,637
14,6909,185

12,924
3,046
15,9701,522(2,919)12,444757
13,201(14,121)(2,945)

3,043
3,782
6,825
(9,146)
7,588

1,421
13,571
14,992
7,055
9,788

10,224
8,095
575
20,305(11,055)

Note
11

NZ$m
78,395(10)(2,224)
7
76,168
8,232
84,4002018
AssetsCash and cash equivalents
Settlement balances owed to the Banking
Group

1

Over Not bearing
2 years
interest
NZ$m
NZ$m

Including items reclassified as held for sale

Reconciliation of mortgage related amounts
As at 30 September 2018
Term loans - housing1
Less: fair value hedging adjustment
Less: housing loans made to corporate customers
Add: unsettled re-purchases of mortgages from the NZ BranchOn-balance sheet residential mortgage exposures subject to the IRB approach
Add: off-balance sheet residential mortgage exposures subject to the IRB approach
Total residential mortgage exposures subject to the IRB approach (as per LVR analysis)
1

68Term loans – housing includes loans secured over residential property for owner-occupier, residential property investment and business purposes.

B4
B4
B4

REGISTERED BANK DISCLOSURES

B3. ASSET QUALITY
Past due assets

2018
Residential Other retail Non-retailmortgages exposures exposures
NZ$m
NZ$m
NZ$m
Less than 30 days past due
595
186
639
At least 30 days but less than 60 days past due
109
31
39
At least 60 days but less than 90 days past due
105
20
3
At least 90 days past due
152
34
19
Total past due but not impaired
961
271
700

2017
Residential Other retail Non-retail
Total mortgages exposures exposures
NZ$m
NZ$m
NZ$m
NZ$m
1,420
556
187
642
179
85
34
171
128
95
18
12
132
31
19
205
1,932
868
270
844

Total
NZ$m
1,385
290
125
182
1,982

2017
Residential Other retail Non-retail
Total mortgages exposures exposures
NZ$m
NZ$m
NZ$m
NZ$m
57
27
342
357
35
106
430
395
(1)
(82)
(50)
(149)
(60)
(31)
(416)
(282)
321
31
20
306
25
6
121
130

Total
NZ$m
426
571
(133)
(507)
357
152

2017
Residential Other retail Non-retail
Total mortgages exposures exposures
NZ$m
NZ$m
NZ$m
NZ$m
37
6
108
152

Total
NZ$m
151

Movement in individually impaired assets

Balance at beginning of the period
Additions
Amounts written off
Deletions
Balance at end of the period
Individual provision

2018
Residential Other retail Non-retailmortgages exposures exposures
NZ$m
NZ$m
NZ$m
31
20
306
21
107
267
(1)
(77)
(71)
(26)
(25)
(231)
25
25
271
21
11
98

Movement in balances of individual credit impairment allowances

Balance at beginning of the period
Individual credit impairment charge / (release)
New and increased provisions
Write-backs
Recoveries of amounts previously written off
Individual credit impairment charge / (release)
Bad debts written off
Add back recoveries of amounts previously
written off
Discount unwind
Balance at end of the period

2018
Residential Other retail Non-retailmortgages exposures exposures
NZ$m
NZ$m
NZ$m
25
6
121
7
(9)
(2)
(1)

90
(8)
(21)
61
(77)

116
(66)
(9)
41
(71)

213
(83)
(30)
100
(149)

5
(16)
(11)
(1)

94
(12)
(20)
62
(82)

133
(67)
(11)
55
(50)

232
(95)
(31)
106
(133)

-

21

9

30

-

20

11

31

(1)
21

11

(2)
98

(3)
130

25

6

(3)
121

(3)
152

2017
Residential Other retail Non-retail
Total mortgages exposures exposures
NZ$m
NZ$m
NZ$m
NZ$m
78
130
263
427
(3)
(9)
(32)
(45)
75
121
231
382

Total
NZ$m
471
(44)
427

Movement in balances of collective credit impairment allowances
2018
Residential Other retail Non-retailmortgages exposures exposures
NZ$m
NZ$m
NZ$m
Balance at beginning of the period
75
121
231
Charge / (release) to income statement
7
(3)
(49)
Balance at end of the period
82
118
182

Asset quality for financial assets designated at fair value
The Banking Group does not have any loans and advances designated at fair value through profit or loss.
Other asset quality information

Undrawn facilities with impaired customers
Other assets under administration

2018
Residential Other retail Non-retailmortgages exposures exposures
NZ$m
NZ$m
NZ$m
14
7
2
-

2017
Residential Other retail Non-retail
Total mortgages exposures exposures
NZ$m
NZ$m
NZ$m
NZ$m
1
5
14
9
8
2
-

Total
NZ$m
6
10

69

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B4. CAPITAL ADEQUACY UNDER THE INTERNAL MODELS BASED APPROACH, AND REGULATORYLIQUIDITY RATIOS (UNAUDITED)RBNZ Basel III capital ratios

Common equity tier 1 capital
Tier 1 capital
Total capital
Buffer ratio

Banking Group
RBNZ minimum
2018
4.5%
11.1%
6.0%
14.4%
8.0%
14.4%
2.5%
6.4%

2017
10.7%
14.1%
14.4%
6.2%

Bank
(Solo Consolidated)
2018
2017
9.5%
9.5%
13.0%
13.0%
13.0%
13.3%
n/a
n/a

Capital of the Banking GroupAs at 30 September 2018
Tier 1 capital
Common equity tier 1 (CET1) capital
Paid up ordinary shares issued by the Bank
Retained earnings (net of appropriations)
Accumulated other comprehensive income and other disclosed reserves
Less deductions from common equity tier 1 capital
Goodwill and intangible assets, net of associated deferred tax liabilities
Cash flow hedge reserve
Expected losses to the extent greater than total eligible allowances for impairment
Common equity tier 1 capital
Additional tier 1 capitalPreference shares1
NZD 500m ANZ New Zealand Capital Notes (ANZ NZ CN)2
NZD 1,003m ANZ New Zealand Internal Capital Notes (ANZ NZ ICN)2NZD 938m ANZ New Zealand Internal Capital Notes (ANZ NZ ICN2)2
Retained earnings of the Bonus Bonds Scheme 3Less deductions from additional tier 1 capital
Surplus retained earnings of the Bonus Bonds Scheme 3
Additional tier 1 capital
Total tier 1 capital
Tier 2 capital
Total capital1
2
3

As at 30 September 2018
Total credit risk
Operational risk
Market risk
Agri business supervisory adjustment
Total

70

11,5881,188
33(3,381)
(22)
(325)
9,081
300
500
1,003
938
55
(20)
2,776
11,857
11,857

Classified as equity on the balance sheet under NZ Generally Accepted Accounting Practice (NZ GAAP).
Classified as a liability on the balance sheet under NZ GAAP.
Bonus Bonds Scheme is not consolidated on the balance sheet under GAAP but is classified as AT1 capital for capital adequacy purposes as set out in BS2B.

Capital requirements of the Banking Group

1

NZ$m

Risk
weighted
Total exposure or
exposures implied risk
after credit
weightedrisk mitigation
exposure1
NZ$m
NZ$m
185,616
69,019
n/a
6,027
n/a
4,776
n/a
2,325
185,616
82,147The calculation of capital requirements for total credit risk weighted includes a scalar of 1.06 in accordance with the Bank's Conditions of Registration.

Total capitalrequirement
NZ$m
5,521
482
382
186
6,571

REGISTERED BANK DISCLOSURES

B4. CAPITAL ADEQUACY UNDER THE INTERNAL MODELS BASED APPROACH, AND REGULATORYLIQUIDITY RATIOS (UNAUDITED) (continued)
Credit risk subject to the Internal Ratings Based (IRB) approach
IRB credit exposures by exposure class and customer credit rating

As at 30 September 2018
Corporate
0-2
3-4
5
6
7-8
Default
Total corporate exposures
Sovereign0
1-8
Total sovereign exposures
Bank
0
1
2-4
5-8
Total bank exposures
Residential mortgages
0-3
4
5
6
7-8
Default
Total residential mortgages exposures
Other retail
0-2
3-4
5
6
7-8
Default
Total other retail exposures
Total credit risk exposures subject to the IRB approach

Probability Exposure atof default
default%
NZ$m

Exposureweighted
LGD used
for thecapitalcalculation%

ExposureRisk
weighted weighted
risk weight exposure%
NZ$m

Total capitalrequirement
NZ$m

0.06
0.32
0.99
2.27
12.86
100.001.83

5,757
23,866
12,877
4,083
1,606
381
48,570

63
36
33
33
38
45
38

39
40
58
77
157
163
53

2,390
10,119
7,954
3,314
2,666
660
27,103

191
810
636
265
213
53
2,168

0.01
0.02
0.01

11,636680
12,316

5
5
5

1
1
1

160
10
170

13
1
14

0.03
0.03
0.12
4.56
0.04

61
10,323796
411,184

65
57
64
48
58

15
25
41
148
26

10
2,748
347
7
3,112

1
220
28
249

0.20
0.46
0.92
1.98
4.89
100.000.85

24,42434,36021,170
4,504
356
220
85,034

12
18
23
26
27
19
18

5
15
31
60
97
19
19

1,397
5,370
6,963
2,862
364
42
16,998

112
430
557
229
29
3
1,360

0.10
0.27
1.04
2.23
8.11
100.00
2.64
1.14

561
4,848
1,941
1,902
1,649
80
10,981
168,085

77
78
72
71
82
77
76
30

49
55
74
90
128
48
75
31

294
2,805
1,526
1,808
2,230
42
8,705
56,088

24
224
122
145
178
3
696
4,487

Credit risk exposures subject to the IRB approach have been derived in accordance with Capital Adequacy Framework (Internal Models Based Approach)(BS2B) and other relevant correspondence with RBNZ setting out prescribed credit risk estimates.

71

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B4. CAPITAL ADEQUACY UNDER THE INTERNAL MODELS BASED APPROACH, AND REGULATORYLIQUIDITY RATIOS (UNAUDITED) (continued)
IRB credit exposures: On-balance sheet, off-balance sheet and market related contracts

As at 30 September 2018
On-balance sheet exposures
Corporate
SovereignBank
Residential mortgages
Other retail
Total on-balance sheet exposures
Off-balance sheet exposures
Corporate
SovereignBank
Residential mortgages
Other retail
Total off-balance sheet exposures
Market related contracts
Corporate
SovereignBank
Total market related contracts
Total credit risk exposures subject to the IRB approach

Total
exposure or
principal Exposure atamountdefault
NZ$m
NZ$m

Exposureweighted
LGD used
for thecapitalcalculation%

Exposureweighted
risk weight%Riskweighted
exposure
NZ$m

Total capitalrequirement
NZ$m

34,724
12,178
5,907
76,1685,358
134,335

34,604
11,855
5,262
76,391
5,449
133,561

33
5
56
19
73
25

53
1
19
19
93
29

19,298120
1,073
15,761
5,372
41,624

1,543
10
86
1,261
429
3,329

12,154
346
1,787
8,232
5,514
28,033

11,210
313
1,445
8,643
5,532
27,143

48
5
53
16
79
44

48
1
18
14
57
37

5,684
2
272
1,237
3,333
10,528

455
22
99
267
843

87,191
14,642962,075
1,063,908
1,226,276

2,756
148
4,477
7,381
168,085

61
5
61
60
30

73
30
37
50
31

2,121
48
1,767
3,936
56,088

170
4
141
315
4,487

Risk weight
%
100
44

Risk weighted
exposure
NZ$m
1,592
1,592

Total capitalrequirement
NZ$m
127
127

Other IRB credit exposures

As at 30 September 2018
Cash
New Zealand dollar denominated claims on the Crown and RBNZ
Other assets
Total other IRB credit risk exposures

Exposure atdefault
NZ$m
204
1,734
1,502
3,440

Other IRB credit exposures have been calculated in accordance with BS2B.
Additional mortgage information
As required by RBNZ, loan-to-valuation-ratios (LVR) are calculated as the current exposure secured by a residential mortgage divided by the Banking
Group's valuation of the security property at origination of the exposure. Off balance sheet exposures include undrawn and partially drawn residential
mortgage loans as well as commitments to lend. Commitments to lend are formal offers for housing lending which have been accepted by thecustomer.
On-balance Off-balance
sheet
sheet
Total
As at 30 September 2018
NZ$m
NZ$m
NZ$m
LVR range
Does not exceed 60%
37,7895,565
43,354
Exceeds 60% and not 70%
17,267
1,320
18,587
Exceeds 70% and not 80%
17,234
1,035
18,269Does not exceed 80%
72,2907,920
80,210Exceeds 80% and not 90%
2,617
131
2,748
Exceeds 90%
1,261
181
1,442
Total
76,168
8,232
84,40072

REGISTERED BANK DISCLOSURES

B4. CAPITAL ADEQUACY UNDER THE INTERNAL MODELS BASED APPROACH, AND REGULATORYLIQUIDITY RATIOS (UNAUDITED) (continued)
Specialised lending subject to the slotting approach
Risk weight%Riskweighted
exposure
NZ$m

Total capitalrequirement
NZ$m

70
90
115
250
83

3,408
5,472
393
234
9,507

273
438
31
19
761

Exposure Exposure at Average risk
amountdefault
weight
NZ$m
NZ$m
%

Risk
weighted
exposure
NZ$m

Total capitalrequirement
NZ$m

1,135
141
1,276

91
11
102

As at 30 September 2018
On-balance sheet exposures
StrongGood
Satisfactory
Weak
Default
Total on-balance sheet exposures

As at 30 September 2018
Off-balance sheet exposures
Undrawn commitments and other off balance sheet exposures
Market related contracts
Total off-balance sheet exposures

1,484
2,006
3,490

Exposure atdefault
NZ$m
4,594
5,735
322
89
39
10,779

1,302
102
1,404

82
130
86

Specialised lending exposures subject to the slotting approach have been calculated in accordance with BS2B.
The supervisory categories of specialised lending above are associated with specific risk-weights. These categories broadly correspond to thefollowing external credit assessments using S&P Global Ratings' rating scale, Strong: BBB- or better, Good: BB+ or BB, Satisfactory: BB- or B+ and Weak:
B to C-.
Credit risk exposures subject to the standardised approach
Risk weight%Riskweighted
exposure
NZ$m

Total capitalrequirement
NZ$m

76
150
77

105
1
106

8
8

Averagecreditconversion Exposure at Average risk
factordefault
weight
%
NZ$m
%

Risk
weighted
exposure
NZ$m

Total capitalrequirement
NZ$m

As at 30 September 2018
On-balance sheet exposures
Corporates
Default
Total on-balance sheet exposures

As at 30 September 2018
Off-balance sheet exposures
Total off balance sheet exposures subject to the standardised
approachMarket related contracts

Exposureamount
NZ$mExposure atdefault
NZ$m
130
1
131

588

60

352

97

361

29

222,026

1

1,418

4

61

5

Risk weight
%
400

Risk
weighted
exposure
NZ$m
28

Total capitalrequirement
NZ$m
2

Credit exposures subject to the standardised approach have been calculated in accordance with BS2A.
Equity exposures

As at 30 September 2018
All equity holdings not deducted from capital

Exposure atdefault
NZ$m
7

Equity exposures have been calculated in accordance with BS2B.

73

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B4. CAPITAL ADEQUACY UNDER THE INTERNAL MODELS BASED APPROACH, AND REGULATORYLIQUIDITY RATIOS (UNAUDITED) (continued)
Credit risk mitigation
As at 30 September 2018, under the IRB approach, the Banking Group had NZ$912 million of Corporate exposures covered by guarantees where thepresence of the guarantees was judged to reduce the underlying credit risk of the exposures. Information on the total value of exposures covered byfinancial guarantees and eligible financial collateral is not disclosed, as the effect of these guarantees and collateral on the underlying credit risk
exposures is not considered to be material.
Operational risk
The Banking Group uses the Advanced Measurement Approach for determining its regulatory capital requirement for operational risk calculated inaccordance with BS2B. As at 30 September 2018, the Banking Group had an implied risk weighted exposure of NZ$6,027 million for operational risk
and an operational risk capital requirement of NZ$482 million.
Market risk
The aggregate market risk exposures below have been calculated in accordance with BS2B. The peak end-of-day market risk exposures are for the six
months ended 30 September 2018.

As at 30 September 2018
Interest rate risk
Foreign currency risk
Equity risk

Implied risk weighted
exposure
Aggregate capital charge
Period end
Peak Period end
Peak
NZ$m
NZ$m
NZ$m
NZ$m
4,733
5,782
379
463
42
152
3
12
1
1
4,776
382

Capital for other material risks
The Banking Group has an Internal Capital Adequacy Assessment Process (ICAAP) which complies with the requirements of the Bank's Conditions ofRegistration. Under the Banking Group's ICAAP it identifies and measures all "other material risks", which are those material risks that are not explicitly
captured in the calculation of the Banking Group's tier 1 and total capital ratios. The other material risks identified by the Banking Group include
pension risk, insurance risk, strategic equity risk, fixed asset risk, deferred acquisition cost risk, value in-force risk, business retention risk and softwarerisk. The Banking Group's internal capital allocation for these other material risks is NZ$389 million. (2017: NZ$421 million).
Information about Ultimate Parent Bank and Overseas Banking Group
APRA Basel III capital ratios

Common equity tier 1 capital
Tier 1 capital
Total capital

Overseas Banking Group
2018
2017
11.4%
10.6%
13.4%
12.6%
15.2%
14.8%

Ultimate Parent Bank
(Extended Licensed
Entity)
2018
2017
11.6%
10.5%
13.6%
12.7%
15.6%
14.8%

The Ultimate Parent Bank and the Overseas Banking Group are required to hold minimum capital as determined by APRA, which is at least equal tothat specified under the Basel III capital framework.
APRA has authorised the Ultimate Parent Bank and the Overseas Banking Group to use:
• the Advanced Internal Ratings Based (AIRB) methodology for calculation of credit risk weighted assets. There are however small portfolios(mainly retail and local corporates in Asia Pacific) where the Overseas Banking Group applies the standardised approach.
• the Advanced Measurement Approach (AMA) for the operational risk weighted asset equivalent.
The Overseas Banking Group exceeded the minimum capital requirements set by APRA as at 30 September 2018 and for the comparative priorperiods.
The Overseas Banking Group is required to publicly disclose Pillar 3 financial information as at 30 September 2018. The Overseas Banking Group’s Pillar
3 disclosure document for the quarter ended 30 September 2018, in accordance with APS 330: Public Disclosure of Prudential Information, discloses
capital adequacy ratios and other prudential information. This document can be accessed at the website anz.com.

74

REGISTERED BANK DISCLOSURES

B4. CAPITAL ADEQUACY UNDER THE INTERNAL MODELS BASED APPROACH, AND REGULATORYLIQUIDITY RATIOS (UNAUDITED) (continued)
Regulatory liquidity ratios
RBNZ requires banks to hold minimum amounts of liquid assets to help ensure that they are effectively managing their liquidity risks. The mismatch
ratio is a measure of a bank’s liquid assets, adjusted for expected cash inflows and outflows during a 1-month or 1-week period of stress. It is expressed
as a ratio over the bank’s total funding. The Banking Group must maintain its 1-month and 1-week mismatch ratios above zero on a daily basis. The 1month and 1-week mismatch ratios are averaged over the quarter.
RBNZ requires banks to get a minimum amount of funding from stable sources called core funding. The minimum amount of core funding is currently
set at 75% of a bank’s total loans. The Banking Group must maintain its core funding ratio above 75% on a daily basis. This measure of the core funding
ratio is averaged over the quarter.
For the three months ended
Quarterly average 1-week mismatch ratio
Quarterly average 1-month mismatch ratio
Quarterly average core funding ratio

30 Sep 18
5.3%
5.1%
89.5%

30 Jun 18
4.7%
4.5%
89.6%

B5. CONCENTRATIONS OF CREDIT RISK TO INDIVIDUAL COUNTERPARTIESThe Banking Group measures its concentration of credit risk to individual counterparties at the reporting date on the basis of actual exposures. Peakend-of-day aggregate credit exposures are measured on the basis of internal limits that were not materially exceeded between the reporting date forthe previous disclosure statement and the reporting date for the Disclosure Statement.
The exposure information in the table below excludes exposures to:• connected persons (ie other members of the Overseas Banking Group and Directors of the Bank);• the central government or central bank of any country with a long-term credit rating of A- or A3 or above, or its equivalent; and• any supranational or quasi-sovereign agency with a long-term credit rating of A- or A3 or above, or its equivalent.

Exposures to banks
Total number of exposures to banks that are greater than 10% of CET1 capitalwith a long-term credit rating of A- or A3 or above, or its equivalent- 10% to less than 15% of CET1 capital- 15% to less than 20% of CET1 capital- 20% to less than 25% of CET1 capitalwith a long-term credit rating of at least BBB- or Baa3, or its equivalent, and at most BBB+ or Baa1, or its equivalent
Exposures to non-banks
Total number of exposures to non-banks that are greater than 10% of CET1
with a long-term credit rating of A- or A3 or above, or its equivalent- 10% to less than 15% of CET1 capital- 15% to less than 20% of CET1 capitalwith a long-term credit rating of at least BBB- or Baa3, or its equivalent, and at most BBB+ or Baa1, or its equivalent

As at
30 Sep 18

Peak end of
day over 6
months to
30 Sep 18

3
3
3
-

3
3
2
1
-

2
2
1
1
-

2
2
1
1
-

75

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B6. CREDIT EXPOSURES TO CONNECTED PERSONSConnected persons
Amount % of Tier 1
NZ$m
Capital
As at 30 September 2018
Gross amount, before netting
Amount netted
Aggregate credit exposure (on partial bilaterial net basis)
Peak end-of day aggregate credit exposure over the year ended 30 September 2018
Gross amount, before netting
Amount netted
Aggregate credit exposure (on partial bilaterial net basis)Non-bank connected
Amount % of Tier 1
NZ$m
Capital

7,907
5,475
2,432

66.7%
46.2%
20.5%

-

0.0%
0.0%
0.0%

11,196
7,718
3,478

94.4%
65.1%
29.3%

-

0.0%
0.0%
0.0%

Credit exposures to connected persons
The information on credit exposure to connected persons has been derived in accordance with the RBNZ Banking Supervision Handbook document
Connected Exposures Policy (BS8), is net of individual credit impairment allowances and excludes advances to connected persons of a capital nature.
Peak end-of-day aggregate exposure
Peak end-of-day aggregate credit exposure to connected persons as a ratio to tier 1 capital for the full year accounting period is derived bydetermining the maximum end-of-day aggregate amount of credit exposure over the accounting period and then dividing that amount by the
Banking Group’s tier 1 capital as at the reporting date.
Rating contingent limit
The rating-contingent limit that applied to the Banking Group as at 30 September 2018 was 60%. No limit changes have occurred over the year to 30
September 2018. Within the overall rating-contingent limit, there is a sub-limit of 15% of tier 1 capital that applies to the aggregate credit exposure tonon-bank connected persons.
Additional requirements for aggregate credit exposure to connected persons
Aggregate credit exposure to connected persons has been calculated on a partial bilateral net basis. The gross amounts and amounts netted off
under a bilateral netting agreement are included in the table above. There is a limit of 125% of the Banking Group’s tier 1 capital in respect of the grossamount of aggregate credit exposure to connected persons that can be netted off in determining the net exposure.
Aggregate amount of contingent exposures arising from risk lay-off arrangements
NZ$698 million of contingent exposures of the Banking Group to connected persons arose from risk lay-off arrangements in respect of credit
exposures to counterparties (excluding counterparties that are connected persons) as at 30 September 2018.
Aggregate amount of individual credit impairment allowances against credit exposures to connected persons
There were no individual credit impairment allowances provided against credit exposures to connected persons as at 30 September 2018.

76

REGISTERED BANK DISCLOSURES

B7. INSURANCE BUSINESS, SECURITISATION, FUNDS MANAGEMENT, OTHER FIDUCIARY ACTIVITESAND MARKETING AND DISTRIBUTION OF INSURANCE PRODUCTS
Insurance business
The Banking Group conducts insurance business through its subsidiary OnePath. The Banking Group’s aggregate amount of insurance businesscomprises the total consolidated assets of OnePath of NZ$940 million (2017: NZ$921 million), which is 0.6% (2017: 0.6%) of the total consolidated
assets of the Banking Group.
Banking Group’s involvement in securitisation, funds management, other fiduciary activities, and marketing and distribution of insurance
productsa)Banking Group’s involvement in the establishment, marketing, or sponsorship of trust, custodial, funds management, and other fiduciary activities

Activity

Details

Custodial

The Banking Group operates three custodians:• ANZ Custodial Services New Zealand Limited, which is the appointed custodian for private banking’s (ANZ Private)
Discretionary Investment Management Service, Wholesale Investment Services and Trading Service;• ANZ New Zealand Investments Nominees Limited, which is the appointed custodian in respect of direct holdings of
securities by various wholesale customer portfolios managed by ANZ New Zealand Investments Limited (ANZ
Investments); and• ANZ New Zealand Securities Nominees Limited, which is the appointed custodian for the ANZ Securities share and bondtrading service.

Funds
management

The Banking Group provides the following funds management services:• Managed Investment Schemes (MIS): The Banking Group’s subsidiaries ANZ Investments and ANZ Investment Services(New Zealand) Limited (ANZIS) act as manager for a number of managed investment schemes. ANZ Investments holds a
MIS Manager licence, with ANZIS being an authorised body under that licence. ANZ Investments is the issuer andmanager of ANZ and OneAnswer-branded KiwiSaver schemes, retail and wholesale schemes. ANZIS is the issuer andmanager of the Bonus Bonds Scheme and the ANZ PIE Fund.
• Discretionary Investment Management Service (DIMS): The Bank is a licensed DIMS provider. This service is offered to ANZ
Private customers.
• Other investment portfolios: ANZ Investments also manages investment portfolios for a number of schemes where thescheme manager or trustee has outsourced investment management services to ANZ Investments. These schemes are
typically corporate superannuation schemes.

Other fiduciary
activities

ANZ Investments, through its subsidiary OneAnswer Nominees Limited, offers the OneAnswer Portfolio Service. The associatedadministration and custody services are provided by FNZ Limited and FNZ Custodians Limited respectively (together FNZ).
FNZ is not a member or related party of the Banking Group.

b)

Banking Group’s involvement in the origination of securitised assets, and the marketing or servicing of securitisation schemes

The Banking Group originates securitised assets in the form of residential mortgage backed securities held for potential repurchase transactions with
RBNZ, and covered bonds. Refer to Note 23 Structured Entities for further details about these programmes. Other than these activities, the Banking
Group is not involved in the marketing or servicing of securitisation schemes.
c)Banking Group’s involvement in marketing and distribution of insurance products

The Banking Group markets and distributes life insurance products provided by OnePath.
The Banking Group also markets and distributes other personal and business insurance products provided by or arranged through a number of otherinsurance partners. None of these other insurance partners are affiliated insurance entities or affiliated insurance groups.
Arrangements to ensure no adverse impacts arising from the above activities
Arrangements have been put in place to ensure that difficulties arising from the activities in a), b) and c) above would not impact adversely on the
Banking Group. The policies and procedures in place include comprehensive and prominent disclosure of information regarding products, and formal
and regular review of operations and policies by management.

77

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B7. INSURANCE BUSINESS, SECURITISATION, FUNDS MANAGEMENT, OTHER FIDUCIARY ACTIVITES AND
MARKETING AND DISTRIBUTION OF INSURANCE PRODUCTS (continued)
Amounts represented by funds management and securitisation activities

Funds under management:
KiwiSaver1
Bonus Bonds Scheme2
Other managed funds1
ANZ PIE Fund2
Discretionary Investment Management Service (DIMS)3Other investment portfolios1
Total funds under management
Funds under custodial arrangements4
Other funds held or managed subject to fiduciary responsibilities5
Outstanding securitised assets originated by the Banking Group - carrying amount of Covered Bonds
1
2
3
4

5

2018
NZ$m

2017
NZ$m

12,923
3,300
2,261
1,656
7,678
2,847
30,665
7,970
1,270
3,929

11,047
3,405
1,984
1,381
7,193
3,480
28,490
7,951
1,325
5,315

Managed by ANZ New Zealand Investments Limited.
Managed by ANZ Investment Services (New Zealand) Limited.
Managed by the Bank.
Includes NZ$60 million (2017: NZ$370 million) held in custody by ANZ New Zealand Securities Nominees Limited which are not included in funds under management. All other funds heldin custody are included in funds under management.
Not included in funds under management.

Financial services provided to entities conducting the above activities
Financial services provided by any member of the Banking Group to entities that conduct the activities in a) or b) above are provided on arm’s length
terms and conditions and at fair value.
Assets purchased from entities conducting the above activities
Over the year ended 30 September 2018, any assets purchased by any member of the Banking Group from entities that conduct the activities in a), b)or c) above have been purchased on arm’s length terms and conditions and at fair value.
Funding provided to entities in aggregate and individually
The peak end-of day aggregate amount of funding provided to entities that provide services relating to the Banking Group’s involvement in the above
activities over the year ended 30 September 2018 was less than NZ$0.1 million (2017: less than NZ$0.1 million) which was 0.0% (2017: 0.0%) of the
Banking Group’s tier 1 capital and 0.0% (2017: 0.0%) of the total assets of the individual entity.
Method for deriving peak end-of-day amount of funding in aggregate and individually
The peak end-of-day aggregate amount of funding is the maximum end-of-day aggregate amount of funding over the full year accounting period,
divided by the Banking Group’s tier 1 capital as at the balance date, and the total assets as at the balance date of the individual entity to which the
Banking Group has provided funding. Where financial statements for the individual entity are not publicly available, total assets from the publicly
available financial statements of the group of which the entity is a member have been used.

78

REGISTERED BANK DISCLOSURES

B8. RISK MANAGEMENT POLICIESInformation about risk

The success of the Banking Group’s strategy is underpinned by our sound management of the Banking Group’s risks. All of the Banking
Group’s activities involve - to varying degrees - the analysis, evaluation, acceptance and management of risks or combinations of risks.

The material risks facing per the Banking Group’s RMS, and how these risks are managed are summarised below:

Key material risks
Risk Type

Description

Management of Risks

Capital Adequacy
Risk

The risk of loss arising from the Banking Group failing tomaintain the level of capital required by prudential regulatorsand other key stakeholders (shareholders, debt investors,
depositors, rating agencies, etc.) to support the Banking
Group’s consolidated operations and risk appetite.

The Banking Group pursues an active approach to CapitalManagement through ongoing review, and Board
approval, of the level and composition of the Banking
Group’s capital base against key policy objectives.

Compliance Risk

The probability and impact of an event that results in a breachof any of the following that apply to the Banking Group’sbusinesses: laws, regulations, industry standards, codes,
internal policies, internal procedures, or principles of good
governance.

Key features of our Compliance Risk framework include
centralised management of key obligations, and emphasis
on identifying changes in regulations and the businessenvironment, so as to enable us to:• proactively assess emerging compliance risks; and• implement robust reporting and certification
processes.

CreditRisk

The risk of financial loss resulting from:• a counterparty failing to fulfil its obligations; or• a decrease in credit quality of a counterparty resulting ina financial loss.

Our Credit Risk framework is top down, being defined bycredit principles and policies. Credit policies, requirements
and procedures cover all aspects of the credit life cycle for example: transaction structuring, risk grading, initialapproval, ongoing management and problem debt
management, as well as specialist policy topics.

Credit Risk incorporates the risks associated with us lending tocustomers who could be impacted by climate change or bychanges to laws, regulations, or other policies adopted bygovernments or regulatory authorities, including carbon
pricing and climate change adaptation or mitigation policies.
Liquidity andFunding Risk

The risk that the Banking Group is unable to meet its payment
obligations as they fall due, including:• repaying depositors or maturing wholesale debt; or• the Banking Group having insufficient capacity to fundincreases in assets.

Key principles in managing our Liquidity and Funding Risk
include:• maintaining the Banking Group’s ability to meetliquidity ‘survival horizons’ under a range of stressscenarios to meet cash flow obligations over a short
to medium term horizon;• maintaining a strong structural funding profile; and• maintaining a portfolio of high-quality liquid assets
to act as a source of liquidity in times of stress.

79

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B8. RISK MANAGEMENT POLICIES (continued)
Risk Type

Description

Management of Risks

MarketRisk

The risk to the Banking Group’s earnings arising from:• changes in any interest rates, foreign exchange rates,
credit spreads, volatility, and correlations; or• from fluctuations in bond, commodity or equity prices.

Our risk management and control framework for Market
Risk involves us quantifying the magnitude of market risk
within the trading and balance sheet portfolios throughindependent risk measurement. First, we identify therange of possible outcomes, the likely timeframe, and thelikelihood of the outcome occurring. Then we allocate an
appropriate amount of capital to support these activities.

Operational Risk

The risk of loss resulting from inadequate or failed internal
processes, people and systems, or from external events.
Operational Risk:• includes technology risk, cyber risk, legal risk andconduct risk, and damage arising from inadequate or
failed internal processes, people and systems; but• excludes Strategic Risk.

The Banking Group operates a three-lines-of-defence
model to manage Operational Risk, with each line ofdefence having defined roles, responsibilities andescalation paths to support effective two-way
communication and effective management of ouroperational risk. Also, we have ongoing review
mechanisms to ensure our Operational Risk framework
continues to meet organisational needs and regulatory
requirements.

Reputation Risk

The risk of loss that directly or indirectly impacts earnings,
capital adequacy or value, that is caused by:• adverse perceptions of the Banking Group held by anyof customers, the community, shareholders, investors,
regulators, or rating agencies;• conduct risk associated with the Banking Group’s
employees or contractors (or both); or• the social or environmental (or both) impacts of ourlending decisions.

We manage Reputation Risk by maintaining a positive anddynamic culture that:• ensures we act with integrity; and• enables us to build strong and trusted relationships
with customers and clients, with colleagues, andwith the broader society.

The risk that the Banking Group’s business strategy andstrategic objectives may lead to an increase in other key
Material Risks - for example: Credit Risk, Market Risk andOperational Risk.

We consider and manage Strategic Risks through ourannual strategic planning process, managed by the
Executive Committee and approved by the Board. Any
increase to our key Material Risks is managed inaccordance with the risk management practices specified
above.

Strategic Risk

We have well established decision-making frameworks
and policies to ensure our business decisions are guided
by sound social and environmental standards that take
into account Reputation Risk.

Refer to Note 15 Financial Risk Management for the disclosures required under NZ IFRS 7 Financial Instruments: Disclosures.
Capital adequacy
Refer to Note 21 Capital Management for the disclosures required under NZ IAS 1 Presentation of financial statements.
Reviews of the Banking Group’s risk management systems
Refer to Note 15 Financial Risk Management for details of the Internal Audit Function’s reviews of the Banking Group’s RMF. These reviews are notconducted by a party external to the Banking Group or the Ultimate Parent Bank.

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REGISTERED BANK DISCLOSURES

B8. RISK MANAGEMENT POLICIES (continued)
Internal Audit Function of the Banking Group
Refer to Note 15 Financial Risk Management for details of the Internal Audit Function.
The nature and scope of the responsibilities of the Audit Committee responsibilities, to which Internal Audit reports, are to assist the Board of Directors
by providing oversight and review of:• the Banking Group's financial reporting principles and policies, controls, systems and procedures;• the effectiveness of the Banking Group’s internal control and risk management framework;• the work and internal audit standards of Internal Audit which reports directly and solely to the Chair of the Audit Committee. The internalmanagement reporting line for the General Manager, Internal Audit is to the CEO;• the integrity of the Banking Group's financial statements and the independent audit thereof, and the Banking Group’s compliance with legal
and regulatory requirements in relation thereto;• any due diligence procedures;• prudential supervision procedures and other regulatory requirements to the extent relating to financial reporting; and• any other matters referred to it by the Board.
The Audit Committee is also responsible for:• the appointment, annual evaluation and oversight of the external auditor;• annual review of the independence, fitness and propriety, and qualifications of the external auditor;• compensation of the external auditor; and• where deemed appropriate, replacement of the external auditor.
In carrying out its responsibilities and duties, the Audit Committee will aim to seek fair customer outcomes and financial market integrity in its
deliberations.
Measurement of impaired assets
Refer to Note 12 Provision for Credit Impairment and Note 15 Financial Risk Management for details of the Banking Group’s approach to measurementof impaired assets. Further to this, impairment is assessed monthly, with individual allowances for credit impairment also updated monthly andcollective allowances for credit impairment updated quarterly.
Credit risk mitigation
Refer to Note 18 Offsetting for the policies and processes for, and extent of, on balance sheet netting. The same policies and processes apply to offbalance sheet credit related commitments. No off-balance sheet credit related commitments or guarantees meet the criteria for netting.
As an Advanced Internal Ratings Based (AIRB) bank, the Banking Group uses the comprehensive method to measure the mitigating effects ofcollateral.
The Banking Group assesses the integrity and ability of counterparties to meet their contractual financial obligations for repayment. The Banking
Group generally takes collateral security in the form of real property or a security interest in personal property, except for major government, bank andcorporate counterparties of strong financial standing. Longer term consumer finance, in the form of housing loans, is generally secured against realestate while short term revolving consumer credit is generally unsecured.
Additional information about credit risk
Implementation of the advanced internal ratings based approach to credit risk measurement
The Banking Group adheres to the standards of risk grading and risk quantification as set out for Internal Ratings Based (IRB) banks in the RBNZ
document Capital Adequacy Framework (Internal Models Based Approach) (BS2B).
Under this IRB Framework banks use their own measures for calculating the level of credit risk associated with customers and exposures, by way of the
primary components of:• Probability of Default (PD): An estimate of the level of risk of borrower default graded by way of rating models used both at loan origination andfor ongoing monitoring.
• Exposure at Default (EAD): The expected facility exposure at default. Total credit risk-weighted exposures include a scalar of 1.06 in accordancewith the Bank’s Conditions of Registration.
• Loss Given Default (LGD): An estimate of the potential economic loss on a credit exposure, incurred as a consequence of obligor default andexpressed as a percentage of the facility’s EAD. For Retail Mortgage exposures the Bank is required to apply the downturn LGDs according toloan to value (LVR) bands as set out in BS2B. For farm lending exposures the Banking Group is required to adopt RBNZ prescribed downturn LVR
based LGDs, along with a minimum maturity of 2.5 years and the removal of the firm-size adjustment.
For exposures classified under Specialised Lending, the Banking Group uses slotting tables approved by RBNZ rather than internal estimates.
The exceptions to IRB treatment are three minor portfolios where, due to systems constraints, determining these IRB risk estimates is not currently
feasible or appropriate. Risk weights for these exposures are calculated under a separate treatment as set out in the RBNZ document Capital Adequacy
Framework (Standardised Approach) (BS2A).

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ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B8. RISK MANAGEMENT POLICIES (continued)
Classification of Banking Group exposures according to rating approach
Internal ratings based approach
IRB Asset Class
Borrower Type

Rating Approach

SovereignCrown

IRB - Advanced

RBNZ

IRB - Advanced

Any other sovereign and its central bank

IRB - Advanced

Bank

Registered banks

IRB - Advanced

Corporate

Corporation, partnerships or proprietorships that do not fit any other asset classification

IRB - Advanced

Corporate Small to Medium Enterprises ("SME") with turnover of less than NZ$50 million

IRB - Advanced

Retail Mortgages

Individuals' borrowings against residential property

IRB - Advanced

Other Retail

Other lending to individuals (including credit cards)

IRB - Advanced

SME business borrowers

IRB - Advanced

Project finance

IRB - Slotting

Income producing real estate

IRB - Slotting

Corporate sub-class- Specialised lending
EquityIRB

Other assets

All other assets not falling within any of the above classes

Standardised approach
Exposure Class

Exposure Type

Reason for Standardised Approach

Future Treatment

Corporate

Merchant card prepayment exposures

System constraints

Move to IRB

Corporate credit cards

System constraints

Move to IRB

Qualifying Central Counterparty (QCCP)

Required by Basel III

Standardised

Bank

IRB

Additional information about operational risk
Operational risk capital is modelled at a New Zealand geographic level and then distributed and adjusted for the business environment and internal
controls down to the business units using the Risk Scenario Methodology. This methodology ensures that there is sufficient operational risk capital
held as a buffer for rare and severe unexpected operational loss events that may impact the New Zealand business. The Methodology applies a
combination of expert judgement, business unit risk profiles, audit findings, and internal and external loss events to derive a series of business specific
Risk Scenarios that are applied to the capital model. The Risk Scenario approach• assesses the level of the Bank's exposure to specified risk scenarios;• assesses the scope and quality of the Bank's internal control environment, key operational processes and risk mitigants; and• directly links the risk scenarios to operational risk capital.
The Banking Group's operating risk capital is calculated using the Ultimate Parent Bank’s methodology, but with standalone New Zealand inputs toensure there are no diversification benefits.
The Banking Group does not incorporate any insurance mitigation impact into its capital number. Accordingly, there are no insurance related
questions contained within the Risk Scenario Methodology.
Controls surrounding credit risk rating systems
The term “Rating Systems” covers all of the methods, processes, controls, data collection and technology that support the assessment of credit risk, theassignment of internal credit risk ratings and the quantification of associated default and loss estimates.
All material aspects of the Rating Systems and risk estimate processes are governed by the Banking Group’s Risk Committee. Risk grades are an integral
part of reporting to senior management and executives. Management and staff of credit risk functions, in conjunction with the relevant Retail andWholesale Risk Committees, regularly assess the performance of the rating systems, identify any areas for improvement and monitor progress on
previously identified development work needed.
The Banking Group's Rating Systems are governed by a comprehensive framework of controls that operate at the business unit and support centres,
and through central audit and validation processes. All policies, model designs, model reviews, methodologies, validations, responsibilities, systems
and processes supporting the ratings systems are fully documented.
The Banking Group's Retail and Wholesale ratings functions work closely with the Ultimate Parent Bank's risk ratings functions, are independent ofoperational lending activities and are responsible for the ratings strategies and ongoing management of credit risk models within New Zealand. The
annual review of models used across the Banking Group is a function undertaken by the ANZ Decision Model Validation Unit, which is also
independent of credit risk operational functions and is responsible for overseeing the design, implementation and performance of all rating models in
the Banking Group.
The target approach to modelling for the Banking Group is to deploy the model most suitable for the environment. At present this involves anapproach to modelling that combines models developed in New Zealand and models developed by the Ultimate Parent Bank, tested and validated
for use in New Zealand, as appropriate.

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DIRECTORS' STATEMENTDIRECTORS' STATEMENT
As at the date on which this Disclosure Statement is signed, after due enquiry, each Director believes that:•

The Disclosure Statement contains all the information that is required by the Registered Bank Disclosure Statements (New Zealand Incorporated
Registered Banks) Order 2014; and•The Disclosure Statement is not false or misleading.

Over the year ended 30 September 2018, after due enquiry, each Director believes that:•

ANZ Bank New Zealand Limited has complied with all Conditions of Registration that applied during that period except as noted on page 65;•

Credit exposures to connected persons were not contrary to the interests of the Banking Group; and•ANZ Bank New Zealand Limited had systems in place to monitor and control adequately the Banking Group’s material risks, including credit risk,
concentration of credit risk, interest rate risk, currency risk, equity risk, liquidity risk, operational risk and other business risks, and that thosesystems were being properly applied.

This Disclosure Statement is dated, and has been signed by all Directors of the Bank on, 15 November 2018.

Antony Carter

Shayne ElliottDavid Hisco

Michelle Jablko

Rt Hon Sir John Key, GNZM ACMark Verbiest

Joan Withers

83

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORTTO THE SHAREHOLDER OF ANZ BANK NEW ZEALAND LIMITEDREPORT ON THE BANKING GROUP DISCLOSURE STATEMENTOPINION
In our opinion, the accompanying consolidated financial statements of ANZ Bank New Zealand Limited and its subsidiaries (the Banking Group)on pages 4 to 56:••

give a true and fair view of the Banking Group’s financial position as at 30 September 2018 and its financial performance and cash flows forthe year ended on that date; andcomply with New Zealand Generally Accepted Accounting Practice, which in this instance means New Zealand Equivalents to International
Financial Reporting Standards (NZ IFRS) and International Financial Reporting Standards.

In our opinion, the Registered Bank disclosures that are required to be disclosed in accordance with Schedules 4, 7, 13, 14, 15 and 17 of theRegistered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order 2014 (as amended) (the Order) and is included in
section, B2, B3, B5, B6, B7 and B8 of the Disclosure Statement:•••

have been prepared, in all material respects, in accordance with the guidelines issued pursuant to section 78(3) of the Reserve Bank of New
Zealand Act 1989 and any conditions of registration;
are in accordance with the books and records of the Banking Group in all material respects; andfairly states the matters to which it relates in accordance with those schedules.

We have audited the accompanying consolidated financial statements and registered bank disclosures in section B2, B3, B5, B6, B7 and B8 which
comprise:••••the consolidated statement of financial position as at 30 September 2018;
the consolidated income statement, statements of comprehensive income, changes in equity and cash flows for the year then ended;
notes, including a summary of significant accounting policies and other explanatory information; andthe information that is required to be disclosed in accordance with Schedules 4, 7, 13, 14, 15 and 17 of the Order.

BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISA’s (NZ)). We believe that the audit evidence wehave obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of the Banking Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners
issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics forProfessional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA
Code.
Our responsibilities under ISA (NZ) are further described in the Auditor’s Responsibilities for the audit of the consolidated financial statements andregistered bank disclosures in section B2, B3, B5, B6, B7 and B8 section of our report.
Our firm has also provided other services to the Banking Group in relation to review of regulatory returns, internal controls reports, prospectus
assurance or reviews and agreed upon procedures engagements. Subject to certain restrictions, partners and employees of our firm may also deal
with the Banking Group on normal terms within the ordinary course of trading activities of the business of the Banking Group. These matters have not
impaired our independence as auditor of the Banking Group. The firm has no other relationship with, or interest in, the Banking Group.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial
statements in the current period. We summarise below those matters and our key audit procedures to address those matters in order that theshareholder as a body may better understand the process by which we arrived at our audit opinion. Our procedures were undertaken in the context
of and solely for the purpose of our statutory audit opinion on the consolidated financial statements as a whole and we do not express discrete
opinions on separate elements of the consolidated financial statements.
PROVISION FOR CREDIT IMPAIRMENT AND DISCLOSURES FOR THE EXPECTED IMPACT OF NZ IFRS 9 FINANCIAL INSTRUMENTS
The Key Audit Matter
The provision for credit impairment is a key audit matter as the Banking Group has significant credit risk exposure to a large number of counterparties
across a wide range of lending and industries. The value of loans and advances on the balance sheet is significant and there is a high degree ofcomplexity and judgement involved for the Banking Group in estimating individual and collective credit impairment provisions against these loans.
These features resulted in significant audit effort to address the risks around loan recoverability and the determination of related provisions.

84

INDEPENDENT AUDITOR’S REPORTIn preparation for adoption of NZ IFRS 9 Financial Instruments on 1 October 2018, the Banking Group disclosed the expected impact of adoption. Thisadded effort to our audit due to the complexity of the accounting standard and its expected pervasive impact on the industry. We focused on the
Banking Group’s disclosure of the expected impact of measuring expected credit losses (ECLs) on loans and advances and the significant judgement
exercised by the Banking Group. The Banking Group’s models to calculate ECLs are inherently complex, and judgement is applied in determining thecorrect construct of the models. There are also a number of key assumptions made by the Banking Group in applying the accounting standard
requirements to the models, including the selection and input of forward-looking information.
How the matter was addressed in our audit
Our audit procedures for the individual and collective provision for credit impairment and disclosures for the expected impact of NZ IFRS 9 Financial
Instruments applicable on 1 October 2018 included:
Provisions against specific individual loans (individual provision)• Testing the key controls over counterparty risk grading for wholesale loans (larger customer exposures that are monitored individually). We
tested the approval of new lending facilities against the Banking Group’s lending policies, the performance of annual loan assessments, andcontrols over the monitoring of counterparty credit quality. This included testing controls over the identification of exposures showing signs ofstress, either due to internal factors specific to the counterparty or external macroeconomic factors, and testing the timeliness of and theaccuracy of counterparty risk assessments and risk grading against the requirements of the Banking Group’s lending policies;• Performing credit assessments of a sample of wholesale loans managed by the Banking Group’s specialist workout and recovery team assessedas higher risk or impaired, and a sample of other loans, focusing on larger exposures assessed by the Banking Group as showing signs ofdeterioration, or in areas of emerging risk (assessed against external market conditions). We challenged the Banking Group’s risk grading of theloan, their assessment of loan recoverability and the impact on the credit provision. To do this, we reviewed the information on the Banking
Group’s loan file, discussed the case with the loan officer and management, and performed our own assessment of recoverability. This involved
using our understanding of relevant industries and the macroeconomic environment, and comparing assumptions of inputs used by the
Banking Group in recoverability assessments to externally sourced evidence, such as commodity prices, publicly available audited financial
statements, and comparable external valuations of collateral held; and• Evaluating the Banking Group’s oversight of retail loan portfolios (smaller customer exposures not monitored individually), with a focus oncontrols over delinquency statistics monitoring. We tested a sample of provisions held against different loan products, based on theirdelinquency profile, and challenged assumptions made in respect of expected recoveries, primarily from collateral held.
Provisions estimated across loan portfolios (collective provision)• Testing the Banking Group’s processes to validate the models used to calculate collective provisions, and evaluating the Banking Group’s model
methodologies against established market practices and criteria in the accounting standards;• Testing the key controls within IT systems used to calculate the collective provision, specifically those relating to data management and thecompleteness and accuracy of data transfer from underlying source systems to the collective provision models;• Testing the accuracy of key inputs into models by checking a sample of balances to the general ledger and risk ratings to source systems;• Challenging the key assumptions in the models such as emergence periods, probability of default and loss given default for a sample of retail
and wholesale portfolios. We compared modelled estimates against actual losses incurred by the Banking Group; and• Re-performing the calculation of collective provisions, for a sample of retail and wholesale portfolios and using a KPMG-constructed calculation
tool to determine the accuracy of model output.
We also challenged key assumptions in the components of the Banking Group’s collective provision balance held above modelled provision
estimates. This included:•••

Evaluating inputs to the concentration risk and economic cycle provisions by comparing underlying portfolio characteristics to loss experience,current market conditions and specific risks inherent in the Banking Group’s loan portfolios;
Assessing the requirement for other additional provisions by considering model or data deficiencies identified by the Banking Group’s model
validation processes; andAssessing the completeness of additional provisions by checking the consistency of risks identified in the portfolios to their inclusion in the
Banking Group’s assessment.

NZ IFRS 9 Financial Instruments
We assessed the Banking Group’s disclosures for the expected impact of NZ IFRS 9 Financial Instruments which is applicable on 1 October 2018.
Together with KPMG credit risk and economics specialists, our procedures included:
•
•
•
•
•
•

Assessing the Banking Group’s significant accounting policies against the requirements of the accounting standard;
Assessing the Banking Group’s ECL modelling methodology and for a sample of models testing key credit modelling assumptions incorporated
in the ECL models against the requirements of the standard and underlying accounting records;
Assessing forward-looking economic assumptions and the development of economic scenarios against external economic information, and theapplication into the ECL models;Testing data reconciliation controls between the ECL models and source systems;
Testing the accuracy of the modelled calculations by re-performing the ECL calculations on a sample basis;
Assessing the disclosures in the financial statements against the requirements of NZ IFRS.

VALUATION OF FINANCIAL INSTRUMENTS
The Key Audit Matter
Financial instruments held at fair value on the Banking Group’s balance sheet include available-for-sale assets, trading securities, derivative assets andliabilities, investments backing insurance contract liabilities, certain debt securities, and other assets and liabilities designated as measured at fair value
through profit or loss.

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ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORTThe instruments are mainly risk management products sold to customers and used by the Banking Group to manage its own interest rate and foreignexchange risk.
The valuation of financial instruments held at fair value is considered a Key Audit Matter due to:••••

Financial instruments held at fair value are significant (15% of assets and 7% of liabilities);
The significant volume and range of products transacted, increases the risk of inconsistencies in transaction management processes that could
lead to inaccurate valuation;
Determining the fair value of trading securities and derivatives involves a significant level of judgement by the Banking Group, increasing the riskof error, and adding complexity to our audit. The level of judgement increases where internal models, as opposed to quoted market prices, areused to determine fair value of an instrument; andThe valuation of certain derivatives held by the Banking Group is sensitive to inputs including credit risk, funding rates, probabilities of default
and loss given default, and industry practice is evolving as to how the impact of both funding and credit risk is incorporated within the valuationof certain derivative instruments. This increased our audit effort in this area and necessitated the involvement of valuation specialists.

How the matter was addressed in our audit
Our audit procedures for the valuation of financial instruments held at fair value included:
•
•
•
•
•
•

Testing access rights and change management controls for key valuation systems;
Testing interface controls, notably the completeness and accuracy of data transfers between transaction processing systems, key systems used
to generate valuations and any related valuation adjustments, and the Banking Group’s market risk management and finance systems to identify
inconsistencies in transaction management and valuation processes across products;
Testing the governance and approval controls such as management review and approval of the valuation models and approval of new products
against policies and procedures;
Testing the front office management review and approval of the daily financial instrument trading profit and loss reconciliations prepared by the
Banking Group’s independent product control function;
Testing the management review and approval of model construction and validation, aimed at assessing the validity and robustness ofunderlying valuation models; andTesting the Banking Group’s data validation controls, such as those over key inputs in generating the fair value to market data where fair values
were determined by front office teams.

We tested the valuation of financial instruments with both observable and unobservable inputs. Our specific testing involved valuation specialists andincluded:••••Re-performing the valuation of ‘level 1’ and ‘level 2’ available for sale assets and trading securities, which are primarily government, semigovernment and corporate debt securities, by comparing the observable inputs, including quoted prices, to independently sourced market
data;
Using independent models, re-calculating the valuation of a sample of derivative assets and liabilities where the fair value was determined using
observable inputs. This included comparing a sample of observable inputs used in the Banking Group’s derivative valuations to independentlysourced market data, such as interest rates, foreign exchange rates and volatilities;
Where the fair value of derivatives and other financial assets and liabilities were determined using unobservable inputs (‘level 3’ instruments),
challenging the Banking Group’s valuation model by testing the key inputs used to comparable data in the market, including the use of proxy
instruments and available alternatives. We compared the Banking Group’s valuation methodology to industry practice and the criteria in theaccounting standards; andEvaluating the appropriateness of the Banking Group’s valuation methodology for derivative financial instruments, having regard to current andemerging derivative valuation practices across a range of peer institutions and against the required criteria in the accounting standards. We
tested adjustments made to valuations, particularly funding and credit valuation adjustments on un-collateralised derivatives. In particular, for asample of individual counterparties, we tested key inputs to the credit valuation adjustment calculation, including the probability of default,
against observable market data. Where proxies were used, we assessed the proxy against available alternatives across a number of locations.

IT SYSTEMS AND CONTROLSThe Key Audit Matter
As a major New Zealand bank, the Banking Group’s businesses utilise a large number of complex, interdependent Information Technology (IT) systems
to process and record a high volume of transactions. Controls over access and changes to IT systems are critical to the recording of financial
information and the preparation of a financial report which provides a true and fair view of the Banking Group’s financial position and performance.
The IT systems and controls, as they impact the financial recording and reporting of transactions, is a key audit matter and our audit approach could
significantly differ depending on the effective operation of the Banking Group’s IT controls. KPMG IT specialists were used throughout theengagement as a core part of our audit team.
How the matter was addressed in our audit
We tested the control environment for key IT applications (systems) used in processing significant transactions and recording balances in the generalledger. We also tested automated controls embedded within these systems. Our audit procedures included:
•
•
•
•

86

Testing the governance controls used by the Banking Group’s technology teams and third party suppliers to monitor system integrity, by
checking matters impacting the operational integrity of core systems for escalation and action in accordance with the Banking Group’s policies;
Testing the access rights given to staff by checking them to approved records, and inspecting the reports over the granting and removal ofaccess rights. We also looked for evidence of escalation of breaches;
Testing preventative controls designed to enforce segregation of duties between users within particular systems;
Testing the operating effectiveness of automated controls, principally relating to the automated calculation of financial transactions. We tested

INDEPENDENT AUDITOR’S REPORT•

the inputs used within automated calculations to source data and also tested the accuracy of the calculation logic for a sample of transactions
within each identified control; andTesting the operating effectiveness of automated reconciliation controls, both between systems and intra-system. For a sample of identified
breaks, in reconciliations, we checked that these were recorded on exception reports, and subsequently investigated and cleared by the Banking
Group.

OTHER INFORMATIONThe Directors, on behalf of the Banking Group, are responsible for the General Disclosures required to be included in the Banking Group’s DisclosureStatement in accordance with Schedule 2 of the Order (section B1).
Our opinion on the consolidated financial statements does not cover section B1 or the Supplementary Information relating to the Bank Financial
Strength Dashboard and other information included on pages 89-92 (collectively referred to as ‘other information’) and we do not express any form ofassurance conclusion thereon.
In connection with our audit of the consolidated financial statements our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit orotherwise appears materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this otherinformation, we are required to report that fact. We have nothing to report in this regard.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
In accordance with the requirements of clauses 2(1)(d) and 2(1)(e) of Schedule 1 of the Order, we report that:••

we have obtained all the information and explanations we have required; andin our opinion, proper accounting records have been kept by the Banking Group, as far as appears from our examination of those records.

RESPONSIBILITIES OF DIRECTORS FOR THE CONSOLIDATED FINANCIAL STATEMENTS AND REGISTERED BANKDISCLOSURES IN SECTION B2, B3, B5, B6, B7 AND B8The Directors, on behalf of the Banking Group, are responsible for:••••the preparation and fair presentation of the consolidated financial statements in accordance with Clause 24 of the Order, NZ IFRS andInternational Financial Reporting Standards;
the preparation and fair presentation of supplementary information, in accordance with Schedules 4, 7, 13, 14, 15 and 17 of the Order;
implementing necessary internal controls to enable the preparation of consolidated financial statements that are fairly presented and free frommaterial misstatement, whether due to fraud or error; andassessing the ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using thegoing concern basis of accounting unless they either intend to liquidate or to cease operations, or have no realistic alternative but to do so.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS AND
REGISTERED BANK DISCLOSURES IN SECTION B2, B3, B5, B6, B7 AND B8
Our objective is:••

to obtain reasonable assurance about whether the Disclosure Statement, including the consolidated financial statements prepared inaccordance with Clause 24 of the Order, and registered bank disclosures in section B2, B3, B5, B6, B7 and B8, prepared in accordance with
Schedules 4, 7, 13, 14, 15 and 17 of the Order as a whole is free from material misstatement, whether due to fraud or error; andto issue an Independent Auditor’s Report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on
Auditing (New Zealand) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected toinfluence the economic decisions of users taken on the basis of this consolidated financial statements.
A further description of our responsibilities for the audit of these consolidated financial statements is located at the External Reporting Board (XRB)
website at:
http://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-1/
This description forms part of our independent auditor’s report.

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ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORTREVIEW CONCLUSION ON THE REGISTERED BANK DISCLOSURES IN SECTION B4 RELATING TO CAPITALADEQUACY AND REGULATORY LIQUIDITY RATIOS (B4)
Based on our review, nothing has come to our attention that causes us to believe that the information relating to Capital Adequacy andRegulatory Liquidity Ratios, disclosed in section B4 of the Disclosure Statement, is not, in all material respects disclosed in accordance with
Schedule 11 of the Order.
We have reviewed the registered bank disclosures as disclosed in section B4 of the Disclosure Statement for the year ended 30 September 2018.
The registered bank disclosures that is required to be disclosed in accordance with Schedule 11 of the Order.

BASIS FOR CONCLUSION ON THE REGISTERED BANK DISCLOSURES IN SECTION B4
A review of the registered bank disclosures in section B4 in accordance with NZ SRE 2410 Review of Financial Statements Performed by the Independent
Auditor of the Entity (NZ SRE 2410) is a limited assurance engagement. The auditor performs procedures, primarily consisting of making enquiries,
primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. Our responsibilities underthat standard are further described in the Auditor’s Responsibilities for the review of the registered bank disclosures in section B4 of our report.
As the auditor of the Banking Group, NZ SRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial
statements.
RESPONSIBILITIES OF DIRECTORS FOR THE REGISTERED BANK DISCLOSURES IN SECTION B4
The Directors are responsible for the preparation of registered bank disclosures in section B4 that is required to be prepared and disclosed inaccordance with Schedule 11 of the Order and described in section B4 to the Disclosure Statement.
AUDITOR’S RESPONSIBILITIES FOR THE REVIEW OF THE REGISTERED BANK DISCLOSURES IN SECTION B4
Our responsibility is to express a conclusion on the registered bank disclosures in section B4 based on our review. We conducted our review inaccordance with NZ SRE 2410 issued by the New Zealand External Reporting Board. As the auditor of the Banking Group, NZ SRE 2410 requires that wecomply with the ethical requirements relevant to the audit of the annual financial statements, and plan and perform the review to obtain limited
assurance about whether the registered bank disclosures in section B4 is, in all material respects, disclosed in accordance with Schedule 11 of theOrder.
A review of the registered bank disclosures in section B4 in accordance with NZ SRE 2410 is a limited assurance engagement. The auditor performs
procedures, primarily consisting of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analyticaland other review procedures.
The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with International Standards
on Auditing (New Zealand). Accordingly we do not express an audit opinion on the registered bank disclosures in section B4.
USE OF THE INDEPENDENT AUDITOR’S REPORTThis Independent Auditor’s Report is made solely to the shareholder as a body. Our work has been undertaken so that we might state to theshareholder those matters we are required to state to them in the Independent Auditor’s Report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the shareholder as a body for our work, this report, or any of theopinions or conclusions we have formed.
The engagement partner on the audit resulting in this independent auditor's report is Matthew Prichard.
For and on behalf of

KPMG
Auckland
15 November 201888

BANK FINANCIAL
STRENGTH DASHBOARD
This section does not form part of the Disclosure Statement. It contains information in respectof the Banking Group included on the Bank Financial Strength Dashboard (Dashboard)published on RBNZ’s website. There is no requirement for the Directors to review or approve
this information.
Amounts below may differ slightly from those published by RBNZ due to rounding differences.
The tables include reconciliations to amounts included in the Disclosure Statement where there
are classification differences between the financial statements and the Dashboard.

Dashboard
D1.

Credit Ratings

90

D2.

Capital Adequacy

90

D3.

Asset Quality

90

D4.

Profitability / Performance

91

D5.

Financial Position

91

D6.

Liquidity

91

D7.

Large Exposures

91

Other information
Reconciliation of total loans by industry and sector

92

89ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORT

Unaudited

BANK FINANCIAL STRENGTH DASHBOARD
D1. CREDIT RATINGS
As at 30 September 2018

Credit rating

S&P Global

AA-

Fitch

AA-

Moody's

A1

D2. CAPITAL ADEQUACY
Capital ratios

Capital

As at 30 September 2018

As at 30 September 2018

NZ$m

CET1 capital

12,809Total capital ratio

14.4%

CET1 deductions(3,728)

Common equity tier 1 (CET1) capital ratio

11.1%

Net CET1 capital

9,081

14.4%

Total additional tier 1 capital

2,776

Buffer ratio

6.4%

Total tier 1 capital

11,857

Total capital ratio regulatory minimum

8.0%

Total capital

11,857

Tier 1 capital ratio

Risk weighted assets

Classification differences
Default Credit valuation
exposures
adjustments
NZ$m
NZ$m

As at 30 September 2018

DisclosureStatement
NZ$m

Sovereign / quasi-sovereign

170

-

(46)

-

124

-

-

(325)

669

344

Public sector entities

Exposure
categories
NZ$m

Dashboard
NZ$m

Registered banks

3,112

-

(576)

(669)

1,867

Corporates

27,103

(658)

(892)

10,72436,277Retail / Residential mortgages

16,998(42)--

16,956

Other retail

8,705

(42)

-

(8,663)-Specialised lending exposures subject to slotting approach

10,783-(59)(10,724)

-

528

-

-

(528)

-

Problem loans

-

742

-

-

742

Equity holdings

28

-

-

-

28

Exposures subject to standardised approach

Credit risk supervisory adjustment

-

-

-

2,325

2,325

All other assets

1,592

-

1,898

9,191

12,681Credit risk

69,019

-

-

2,325

71,344Market risk

4,776

-

-

-

4,776

Operational risk

6,027

-

-

-

6,027

Agri business supervisory adjustment

2,325

-

-

(2,325)-

Total risk weighted assets

82,147---

82,147

D3. ASSET QUALITY
As at 30 September 2018
Total loans

Housing
NZ$m

Consumer
NZ$mBusiness
NZ$m

Agriculture
NZ$m

All other
NZ$m

Total
NZ$m

75,847

3,574

28,821

17,4271,389

127,058

Impaired loans

35

11

76

154

45

321

Loans 90 days past due but not impaired

151

24

27

3

-

205

Total non-performing loans

186

35

103

157

45

526

Non-performing loans ratio (%)

0.25%

0.98%

0.36%

0.90%

3.24%

0.41%

Individual provisions

8

6

45

35

36

130

Collective provisions

72

64

92

43

111

382

On-balance sheet residential mortgage exposures with LVRs that:
Exceeds 80% and not 90%

3.4%

Exceeds 90%

1.7%

A reconciliation of the amounts in this table to the financial statements is included in the Other Information on page 92.

The Supplementary Information does not form part of the Disclosure Statement

90

BANK FINANCIAL STRENGTH DASHBOARD

D4. PROFITABILITY / PERFORMANCE
Financial statements

Classification differences

For the12 months ended
30 September 2018

Less: For the
9 months ended
30 June 2018

Funds management
income and othercommissions

Dashboard

NZ$m

NZ$m

NZ$m

NZ$m

Interest income

6,390(4,767)-

1,623Interest expense

3,240(2,415)-825

Net interest income

3,150(2,352)-

798

Gains/losses on trading and hedging

250

(158)

-

92

Fee and commission income

394

(300)

69

163

All other income

482

(368)

(69)

45

Operating expenses

1,517(1,121)-396

Impaired asset expense

55

(78)

-

(23)

Profit before tax

2,704(1,979)-725

Tax expense

751

(547)

-

204

Profit after tax

1,953(1,432)-521

Return on assets (%)

1.3%

Return on equity (%)

15.6%

Net interest margin (%)

2.2%

D5. FINANCIAL POSITION

Financialstatements
NZ$m

As at 30 September 2018

Classification differences
Securities
Other bankpurchased underdeposits andagreements
other assets
to re-sell
NZ$m
NZ$m

Subordinateddebt issued to
NZ Branch
NZ$m

Dashboard
NZ$m

Cash and bank deposits1

4,119

40

(136)

-

4,023

Debt securities held2

14,653(78)--

14,575Net loans and advances

126,466---

126,466

Derivatives in an asset position

8,086

-

-

-

8,086

All other assets

5,688

38

136

-

5,862

Total assets
Deposits

159,012---

159,012104,055---

104,055

Debt securities issued3

28,531--(1,941)

26,590

Other borrowings4

1,402

1,336

-

1,941

4,679

Derivatives in a liability position

8,095

-

-

-

8,095

Total liabilities

3,820
145,903(1,336)
-

-

-

2,484
145,903

Equity13,109---13,109All other liabilities

1
2
3
4

Comprises cash and collateral paid
Comprises trading securities, investments backing insurance contract liabilities and available-for-sale assets
Comprises debt issuances plus certificates of deposit and commercial paper from deposits and other borrowings
Comprises collateral received and the remaining items of deposits and other borrowings

D6. LIQUIDITY

D7. LARGE EXPOSURES

3 months to 30 September 2018

As at 30 September 2018

Quarterly average core funding ratio

89.5%

Quarterly average 1-month mismatch ratio

5.1%

Quarterly average 1-week mismatch ratio

5.3%

Top 5 credit exposures to non-bank counterparties
as a ratio of CET1 capital

51.3%

Credit exposures to non-bank counterparties
that are greater than 10% of CET1 capital2

Top 5 credit exposures to banks as a ratio of
CET1 capital

48.4%

Credit exposures to banks that are greater than
10% of CET1 capital

3

The Supplementary Information does not form part of the Disclosure Statement

91

ANZ BANK NEW ZEALAND LIMITED 2018 ANNUAL REPORT

Unaudited

OTHER INFORMATION
Reconciliation of total loans by industry and sector
The financial statements and Dashboard include amounts for total loans which are based on different definitions. The table below reconciles thevarious amounts. This information does not form part of the Disclosure Statement.
Housing loans and residential mortgage definitions
Housing loans comprise loans for owner occupier property use and residential investor property use. Owner occupiers are borrowers who own or arein the process of buying or building the house or flat they will live in as their principal place of residence. An owner can occupy more than one
property e.g. a family home and a holiday home. Only households can have owner occupier property use loans. Investors are entities or persons
borrowing for the purpose of building or purchasing residential property to rent. This includes ‘Mum and dad’ investor loans and any person(s) thathave a separate residential investor property use loan which is not for their normal business purpose.
Residential mortgage exposures used in the loan-to-valuation ratio analysis are based on the definition of residential mortgage loans as defined in the
Banking Supervision Handbook document Capital Adequacy Framework (internal models based approach) (BS2B). This metric is based on a collateraldefinition and may include some other lending that is not defined as Housing lending in the asset quality section of the Dashboard. See the Banking
Supervision Handbook for a more detailed definition.
Consumer
NZ$mBusiness
NZ$m

Agriculture
NZ$m

All other1
NZ$m

Total
NZ$m

As at 30 September 2018

Note

Housing
NZ$m

Total loans per Balance Sheet

11

78,395

n/a

n/a

n/a

48,509126,904

(10)

-

-

-

10

-

Business loans secured by residential property(2,538)

-

-

317

2,221

-

Residential investor property(21,101)--49

21,052

-

-

3,574

-

17,478(21,052)-

54,746

3,574-

17,84450,740126,904

Fair value hedge adjustments

-

-

-

-

(10)

(10)

Unearned income on finance leases

-

-

-

-

(204)

(204)

Fair value hedge adjustment

Other household and agriculture industry loans
Concentration of loans by industry2

15

Deposit components of overdraft productResidential investor property
Business lending
Loans by purpose (RBNZ series S31)
Other business loans secured by residential property
Total loans per Dashboard
1
2

D3

-

-

-

368

368

-

-

(49)

(21,052)---

28,462(51)(28,411)-75,8473,574

28,462

17,744

1,431

127,058

-

-

359

(317)

(42)

-

75,847

3,574

28,821

17,4271,389

127,058

All other in RBNZ series S31 and the Dashboard comprises: Depository and other financial institutions, Central and Local Government, Non-profit institutions serving households.
Household exposures (resident and non-resident) in Note 15 Financial Risk Management (Concentrations of Credit Risk) on page 32 comprise Housing and Consumer.

The Supplementary Information does not form part of the Disclosure Statement

92

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