ANZ BANK NEW ZEALAND LIMITEDANNUAL REPORT AND REGISTERED BANK DISCLOSURE STATEMENTFOR THE YEAR ENDED 30 SEPTEMBER 2019
NUMBER 92 | ISSUED DECEMBER 2019

CONTENTS
Annual Report and Glossary of terms

2

DISCLOSURE STATEMENT
Financial Statements
Consolidated financial statements
Notes to the financial statements
Registered Bank Disclosures
Directors’ Statement

3
4
8
66
98
99

Independent Auditor’s Report

ANNUAL REPORTFOR THE YEAR ENDED 30 SEPTEMBER 2019
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 2019 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
12 December 2019Mark Verbiest
Independent Non-Executive Director
12 December 2019

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

FINANCIAL
STATEMENTS
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

Non-financial assets
8

Financial performance

19. Goodwill and other intangible assets

51

Non-financial liabilities

2. Operating income

10

3. Operating expenses

12

4. Income tax

13

Equity5. Dividends

14

21. Shareholders' equity

55

6. Segment reporting14

22. Capital management

56

Financial assets

20. Other provisions

53

Consolidation and presentation

7. Cash and cash equivalents

16

23. Controlled entities

57

8. Trading securities

17

24. Structured entities

58

9. Derivative financial instruments

18

25. Transfers of financial assets

60

10. Investment securities

22

26. Divestments

60

11. Net loans and advances

23

12. Allowance for expected credit losses

24

Other disclosures
27. Related party disclosures

61

28. Commitments and contingent liabilities

63

13. Deposits and other borrowings

30

29. Compensation of auditors

64

14. Debt issuances

31

30. Events since the end of the financial year

64

Financial liabilities

Financial instrument disclosures
15. Financial risk management33

16. Fair value of financial assets and financial liabilities

46

17. Assets charged as security for liabilities49

and collateral accepted as security for assets
18. Offsetting

50

3ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTFINANCIAL STATEMENTS
INCOME STATEMENT
For the year ended 30 September

NoteInterest income
Interest expense

2019
NZ$m

2018
NZ$m

6,423
(3,179)6,390(3,240)Net interest income

2

3,244

3,150

Other operating income

2

915

972

Net income from insurance business

2

27

149

Share of associates' profit

2

4

5

4,190

4,276

(1,608)(1,517)

2,582

2,759

Operating income
Operating expenses

3

Profit before credit impairment and income tax
Credit impairment charge

12

Profit before income tax

(101)

(55)

2,481

2,704

(662)

(751)

1,819

1,953

For the year ended 30 September

2019
NZ$m

2018
NZ$m

Profit for the year

1,819

1,953

(33)

2

Unrealised losses recognised directly in equity

(31)

(27)

Realised losses transferred to the income statement

14

5

Income tax attributable to the above items

15

6

Other comprehensive income after tax

(35)

(14)

Total comprehensive income for the year

1,784

1,939

Income tax expense
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:

The notes appearing on pages 8 to 64 form an integral part of these financial statements

4

FINANCIAL STATEMENTS

BALANCE SHEETAs at 30 September
AssetsCash and cash equivalents

Note

2019
NZ$m

2018
NZ$m

7

2,363

2,200

Settlement balances receivable
Collateral paid

193

656

2,324

1,919

Trading securities

8

8,942

8,024

Derivative financial instruments

911,666

8,086

Investment securities

10

7,027

6,502

Net loans and advances11

132,525

126,466

Assets held for sale

26

-

897

-

6

Deferred tax assets

4

77

-

Goodwill and other intangible assets

19

1

Investments in associates

3,276

3,289

Premises and equipment

335

325

Other assets

688

642

Total assets

169,416

159,012

1,607

2,161

991

845

Liabilities
Settlement balances payable
Collateral received
Deposits and other borrowings

13

113,427

108,008

Derivative financial instruments

9

11,042

8,095

Current tax liabilities

101

161

Deferred tax liabilities

-

21

-

334

1,159

947

138

120

Liabilities held for sale

26

Payables and other liabilities
Employee entitlements
Other provisions

20

314

76

Debt issuances

14

26,207

25,135

Total liabilities

154,986

145,903

Net assets

14,43013,10911,888

11,88821

33

EquityShare capital

21

Reserves
Retained earnings

2,521

1,188

Total equity

14,43013,1091

On adoption of NZ IFRS 9 Financial Instruments (NZ IFRS 9) on 1 October 2018, the classification and measurement of financial assets were revised. The available-for-sale classification used incomparative periods ceases to exist under NZ IFRS 9 and a new classification of investment securities was introduced. Refer to Note 1 and Note 10 for further details.

For and on behalf of the Board of Directors:

Rt Hon Sir John Key, GNZM AC
Chair
12 December 2019Mark Verbiest
Independent Non-Executive Director
12 December 2019

The notes appearing on pages 8 to 64 form an integral part of these financial statements

5

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTFINANCIAL STATEMENTS
CASH FLOW STATEMENT
For the year ended 30 September

Note

Profit after income tax

2019
NZ$m

2018
NZ$m

1,819

1,953

81

88

Adjustments to reconcile to net cash provided by/(used in) operating activities:
Depreciation and amortisation
Loss on sale and impairment of premises and equipment

10

4

Net derivatives/foreign exchange adjustment

246

1,150

Proceeds from divestments net of intangibles disposed of, classified as investing activities

(646)

-

Other non-cash movements

(130)

(22)

Collateral paid

(405)

(504)

Trading securities

(918)

(361)

Net loans and advances(6,059)(5,927)

Other assets

1,136

(266)

Deposits and other borrowings

5,419

5,312

Settlement balances payable

(554)

390

Collateral received

146

232

Other liabilities

53

48

Total adjustments(1,621)

144

198

2,097

(2,347)(4,368)

1,963

4,246

747

-

Net (increase)/decrease in operating assets:

Net increase/(decrease) in operating liabilities:

Net cash flows from operating activities1
Cash flows from investing activities
Investment securities:
Purchases
Proceeds from sale or maturity
Proceeds from divestments

26

Other assets

(88)

3

Net cash flows from investing activities

275

(119)

Cash flows from financing activities
Debt issuances:2
Issue proceeds

4,010

3,385

Redemptions(3,909)(3,991)-3,000

Dividends paid

(411)

(4,611)

Net cash flows from financing activities(310)(2,217)

Proceeds from issue of ordinary shares

Net change in cash and cash equivalents

163

(239)

Cash and cash equivalents at beginning of year

2,200

2,439

Cash and cash equivalents at end of year

2,363

2,200

1
2

Net cash provided by operating activities includes income taxes paid of NZ$780 million (2018: NZ$619 million).
Movement in debt issuances (Note 14 Debt Issuances) also includes an NZ$418 million increase (2018: NZ$1,365 million increase) from the effect of foreign exchange rates, a NZ$657
million increase (2018: NZ$246 million decrease) from changes in fair value hedging instruments and a NZ$104 million decrease (2018: NZ$16 million increase) of other changes.

The notes appearing on pages 8 to 64 form an integral part of these financial statements

6

FINANCIAL STATEMENTS

STATEMENT OF CHANGES IN EQUITY

NoteInvestment
securities
Share revaluation
capitalreserve
NZ$m
NZ$m

Cash flow
hedging
reserve
NZ$m

Retainedearnings
NZ$m

Total
equity
NZ$m

8,888

5

43

3,845

12,781

-

-

-

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 1 October 2017
Profit or loss

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

21

3,000

-

-

-

3,000

Ordinary dividends paid

5

-

-

-

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

21

-

-

-

(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

13,10911,888

11

22

1,188

13,109As at 1 October 2018
Impact on transition to NZ IFRS 9

1

As at 1 October 2018 (adjusted)

-

-

-

(52)

(52)

11,888

11

22

1,136

13,057

Profit or loss

-

-

-

1,819

1,819

Unrealised losses recognised directly in equity

-

(24)

(7)

-

(31)

Realised losses transferred to the income statement

-

-

14

-

14

Actuarial loss on defined benefit schemes

-

-

-

(33)

(33)

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

-

7

(2)

10

15

Total comprehensive income for the year

-

(17)

5

1,796

1,784

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

5

-

-

-

(400)

(400)

Preference dividends paid

21

-

-

-

(11)

(11)

-

-

-

(411)

(411)

11,888

(6)

27

2,521

14,430Transactions with Immediate Parent Company in its capacity as owner
As at 30 September 2019

The notes appearing on pages 8 to 64 form an integral part of these financial statements

7

ANZ BANK NEW ZEALAND LIMITED 2019 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 2019. 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 12 December 2019, the Directors resolved to authorise the issue of these financial statements.
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 amount is significant in size (quantitative factor);• the information 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); or• 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 the financial statements.

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 (NZ GAAP), 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 for the following assets and liabilities which we havestated at their fair value:• derivative financial instruments;• financial instruments measured at fair value through other comprehensive income (2018: available-for-sale financial assets); and• financial instruments measured 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 investment securities measured at fair value through othercomprehensive income in the investment securities revaluation reserve in equity.

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.

8

NOTES TO THE FINANCIAL STATEMENTS

1.

ABOUT OUR FINANCIAL STATEMENTS (continued)

ACCOUNTING STANDARDS ADOPTED IN THE PERIODNZ IFRS 9 FINANCIAL INSTRUMENTS (NZ IFRS 9)
The Banking Group has applied NZ IFRS 9 from 1 October 2018 (with the exception of the ‘own credit’ requirements relating to financial liabilities
designated as measured at fair value, which were early adopted by the Banking Group effective from 1 October 2013). In addition, the Banking Groupchose to early adopt Prepayment Features with Negative Compensation (Amendment to NZ IFRS 9) effective from 1 October 2018. NZ IFRS 9 provides anaccounting policy choice, which the Banking Group has taken in the current period, to continue to apply the NZ IAS 39 hedge accounting
requirements until the International Accounting Standards Board’s (IASB) ongoing project on macro hedge accounting is completed.
NZ IFRS 9 and Amendment to NZ IFRS 9 stipulate 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 are outlined within the Financial Assets and Financial
Liabilities sections on pages 16 and 29 respectively.
NZ IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS (NZ IFRS 15)
The Banking Group adopted NZ IFRS 15 from 1 October 2018 which resulted in changes in accounting policies and adjustments to amounts
recognised in the consolidated financial statements. The standard requires identification of distinct performance obligations within a contract, andallocation of the transaction price of the contract to those performance obligations. Revenue is then recognised as each performance obligation issatisfied. The standard also provides guidance on whether an entity is acting as a principal or an agent which impacts the presentation of revenue ona 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 NZ IFRS
15 is immaterial given the majority of the Banking Group’s revenues are outside the scope of the standard. The Banking Group has adopted NZ IFRS 15
retrospectively including restatement of prior period comparatives.

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 2019, and have not been applied by the Banking Group in preparing these financial statements.
The Banking Group has identified five standards where this applies to the Banking Group and further details are set out below:
GENERAL HEDGE ACCOUNTINGNZ 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 the IASB’s ongoing project on macro hedge accounting is completed. The Banking Group currently applies thehedge accounting requirements of NZ IAS 39.
NZ IFRS 16 LEASES (NZ IFRS 16)
The Banking Group will adopt NZ IFRS 16 on 1 October 2019 replacing the previous standard NZ IAS 17 Leases (NZ IAS 17). NZ IFRS 16 primarily impacts
the Banking Group’s property and technology leases which were previously classified as operating leases. Under NZ IAS 17, operating leases were notrecognised on the balance sheet and rent payments were expensed over the lease term.
Under NZ IFRS 16, lessees must recognise all leases (except for leases of low value assets and short term leases) on the balance sheet under a single
accounting model. Accordingly, the Banking Group will recognise its right to use an underlying leased asset over the lease term, as a right-of-use(ROU) asset, and its obligation to make lease payments as a lease liability. In the income statement, the Banking Group will recognise depreciation
expense on the ROU asset and interest expense on the lease liability. As a result, lease expenses will be higher in the early periods of a lease and lower
in the later periods of the lease compared to the previous standard where expenses were constant over the lease term. Cumulative expenses over thelife of a lease will not change.
NZ IFRS 16 only has minor impacts on the Banking Group’s lessor arrangements in relation to sale-leaseback transactions which will be implemented
prospectively.
The Banking Group will apply the modified retrospective transition approach whereby initial lease liabilities are recognised based on the present valueof remaining lease payments as of the transition date. The initial ROU asset recognised for certain large commercial and retail leases are measured as if
NZ IFRS 16 had always been applied to the leases. For all other leases, the initial ROU asset is measured as equal to the initial lease liability. Based on
this transition approach, the Banking Group expects to recognise an increase in liabilities of NZ$332 million and an increase in assets of NZ$308
million. This is expected to result in a reduction to opening retained earnings of NZ$17 million and an increase in deferred tax assets of NZ$7 million asof 1 October 2019. Comparative information from prior periods will not be restated.
The implementation of NZ IFRS 16 requires management to make certain key judgements including the determination of lease terms, discount rates
and identifying arrangements that contain a lease. These estimates may be refined as the Banking Group finalises its implementation of the standard
in the first half of the 2020 financial year.
NZ IFRIC INTERPRETATION 23 UNCERTAINTY OVER INCOME TAX TREATMENTS (NZ IFRIC 23)
In August 2017, the External Reporting Board (XRB) issued NZ IFRIC 23. NZ IFRIC 23 clarifies application and recognition and measurement
requirements in NZ IAS 12 Income Taxes when there is uncertainty over income tax treatments. NZ IFRIC 23 will apply to the Banking Group from 1
October 2019, and is not expected to have a material impact on the Banking Group.
REVISED CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTINGIn May 2018, the XRB issued a revised Conceptual Framework for Financial Reporting. The new Framework includes updated definitions and criteria forthe recognition and derecognition of assets and liabilities. Additionally it introduces new concepts on measurement, including factors to consider
when selecting a measurement basis. The revised Conceptual Framework for Financial Reporting will apply to the Banking Group from 1 October 2020
and is not expected to have a material impact on the Banking Group.
9ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
1.

ABOUT OUR FINANCIAL STATEMENTS (continued)

INTEREST RATE BENCHMARK REFORM
Interbank offered rates (IBORs), such as LIBOR are a key reference rate for derivative, loans and securities for global financial markets. In response toconcerns about the transparency and liquidity of IBORs, regulators in a number of jurisdictions across the globe are well advanced in developing
benchmark rates to phase out and replace IBORs, these projects are collectively known as ‘IBOR Reform’. The IASB are considering the financial
reporting implications of IBOR reform which is expected to impact elements of financial instrument accounting, including hedge accounting, loan
modifications, fair value methodologies and disclosures.
The IASB project is split into two phases: Phase 1 deals with pre-placement issues (issues affecting financial reporting in the period before thereplacement of IBORs); and Phase 2 deals with replacement issues (issues affecting financial reporting when existing IBORs are replaced).
In September 2019, the IASB issued a final standard, Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7, which focuses on‘pre-rate replacement issues’ and provides exceptions to specific hedge accounting requirements under IAS 39 and IFRS 9 so that entities will be able
to apply those hedge accounting requirements under an assumption that the interest rate benchmark is not altered as a result of the interest ratebenchmark reform. In October 2019, XRB adopted these amendments in XRB amending standard Interest Rate Benchmark Reform.
Although the Banking Group anticipates the new standard, once adopted, will provide certain relief in relation to hedge accounting requirements, for
30 September 2019 reporting purposes, it has considered the existing portfolio of hedge accounted relationships in light of:• the significant uncertainty surrounding the methods and timing of transition away from IBORs; and• ongoing application and reliance in capital markets on IBORs for financial instrument pricing.
As a result of these factors, the Banking Group has concluded that continuation of hedge accounting relationships for potentially impacted hedge
relationships remains appropriate. The Banking Group is considering the new standard which is effective on 1 October 2020 but may be adopted
earlier.

2.

OPERATING INCOME
Note

Net interest income
Interest income by type of financial asset
Financial assets at amortised cost
Trading securities
Investment securities
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 fees
Non-lending fees
Commissions
Funds management income
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
Loss on sale of mortgages to the NZ BranchGain on UDC terminated transaction
Insurance proceeds
Sale of OnePath
Sale of investment in Paymark Limited (Paymark)
Other
Other income
Other operating income
Net income from insurance business
Share of associates' profit
Operating income
10

26
26

2019
NZ$m

2018
NZ$m

6,062
203
157
1
6,423

5,986
240
159
5
6,390

(3,134)(45)(3,179)3,244(3,168)(72)(3,240)
3,150

33
796
65
257
1,151
(485)
666

32
795
46
250
1,123
(463)
660

117
66
39
27
249
915
27
4
4,190

250
(1)
20
20
23
312
972
149
5
4,276

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, assets measured atfair value through other comprehensive income or designated at fair value through profit or loss in net interest income. For assets held at
amortised cost we use the effective interest rate method to calculate amortised cost. The effective interest rate is the rate that discounts thestream of estimated future 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 of historical behaviour of the particular asset portfolio - taking into account contractual obligations and prepayment experience.
We recognise fees and costs, which form an integral part of the financial instruments (for example, loan origination fees and costs), using
the effective interest rate method. This is presented as part of interest income or expense depending on whether the underlying financial
instrument is a financial asset or financial liability.
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, funds management services) as
income over the period the service 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 that we use to manage interest rate and foreign exchange
risk on funding instruments not designated as accounting hedges;• the ineffective portions of fair value hedges and cash flow hedges;• 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;• fair value movements on financial assets and financial liabilities designated at fair value through profit or loss or held for trading; and• amounts released from the investment securities revaluation reserve in equity when a debt instrument classified as FVOCI is sold.
NET INCOME FROM INSURANCE BUSINESSWe 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 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
3.

OPERATING EXPENSES

Personnel
Salaries and related costs
Superannuation costs
Other
Personnel
Premises
Rent
Other
Premises
Technology
Depreciation and amortisation
Licences and outsourced services
Other
Technology (excluding personnel)
Other
Advertising and public relations
Professional fees
Freight, stationery, postage and communication
Charges from Ultimate Parent Bank
Other
Other
Operating expenses

2019
NZ$m

2018
NZ$m

858
29
35
922

820
29
42
891

81
72
153

82
71
153

48
116
41
205

47
126
52
225

47
64
44
60
113
328
1,608

43
45
44
52
64
248
1,517

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
Sale of OnePath and Paymark
Tax provisions no longer required
Non-assessable income and non-deductible expenditure
Subtotal
Income tax under 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 income relating to the origination and reversal of temporary differences
Income tax expense
Effective tax rate

2019
NZ$m
2,481
695

2018
NZ$m
2,704
757

(1)
(29)
(4)
2
663
(1)
662
740
(1)
(77)
662
26.7%

(1)
(3)
(1)
752
(1)
751
910
(1)
(158)
751
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 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
5.

DIVIDENDS

ORDINARY SHARE DIVIDENDSDividends
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
Financial Year 2019
Dividend paid in March 2019
Dividends paid during the year ended 30 September 2019

Amountper share

Total
dividend
NZ$m

23.9 cents
44.8 cents
31.0 cents
12.6 cents

800
1,500
1,500
800
4,600

6.3 cents

400
400

2019
NZ$m
5,660

2018
NZ$m
4,919

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 REPORTINGDESCRIPTION OF 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.
Comparative data has been adjusted to reflect a change in the methodology for allocating earnings on capital to each segment, and other minor
structure changes. While neutral at the Banking Group level, these changes have impacted net interest income, operating expenses and profit after tax
at the segment level.
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, the agricultural business segment, government and government
related entities.
Institutional
The Institutional division services governments, 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 SEGMENTS
RetailCommercial

Institutional

Other

Total

2019

2018

2019

2018

2019

2018

2019

2018

2019

2018

For the year ended 30 September

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

Net interest income

1,798

1,817

1,057

1,004

344

320

45

9

3,244

3,150

Net fee and commission income- Lending fees

16

16

1

1

16

15

-

-

33

32

- Non-lending fees

714

694

16

19

62

73

4

9

796

795

- Commissions

65

46

-

-

-

-

-

-

65

46

- Funds management fees

257

250

-

-

-

-

-

-

257

250

- Fee and commission expense

(485)

(463)

-

-

-

-

-

-

(485)

(463)

Net fee and commission income

567

543

17

20

78

88

4

9

666

660

Other income

7

6

-

1

172

177

70

128

249

312

Net income from insurance business

19

131

-

-

-

-

8

18

27

149

Share of associates' profits

4

5

-

-

-

-

-

-

4

5

Other operating income

597

685

17

21

250

265

82

155

946

1,126

Operating income

2,395

2,502

1,074

1,025

594

585

127

164

4,190

4,276

Operating expenses(1,078)(1,032)

(274)

(258)

(216)

(182)

(40)

(45)

(1,608)(1,517)

1,317

1,470

800

767

378

403

87

119

2,582

2,759

(47)

(50)

(47)

41

(7)

(46)

-

-

(101)

(55)

Profit before income tax

1,270

1,420

753

808

371

357

87

119

2,481

2,704

Income tax expense

(354)

(396)

(211)

(227)

(104)

(100)

7

(28)

(662)

(751)

Profit after income tax

916

1,024

542

581

267

257

94

91

1,819

1,953

3,160

3,230

Profit before credit impairment and income tax
Credit impairment (charge) / release

Financial position
Goodwill1

1,039

1,109

1,052

1,052

1,069

1,069

-

-

Net loans and advances

81,78976,843

43,46442,446

7,270

7,166

2

11 132,525 126,466

Customer deposits

73,86670,25916,138

16,842

19,232

16,954-- 109,236 104,055

1

Including items reclassified as held for sale.

OTHER SEGMENTThe Other segment profit after income tax comprises:

Central functions1
Technology and Group Centre2,3
Economic hedges
Revaluation of insurance policies from changes in interest rates3
Total
1

2

3

2019
NZ$m
3
215
(43)
(81)
94

2018
NZ$m
8
20
48
15
91

Central functions’ other income for the year ended 30 September 2018 includes the NZ$20 million insurance proceeds (Note 2 Operating Income) that were received from a member of theOverseas Banking Group.
Technology and Group Centre’s other income for the year ended 30 September 2019 includes the NZ$66 million gain on sale of OnePath and the NZ$39 million gain on sale of Paymark(Note 2 Operating Income).
Amounts for the year ended 30 September 2019 include the transfer of NZ$86 million of accumulated after tax gains previously recognised in revaluation of insurance policies fromchanges in interest rates to Technology and Group Centre. These gains were transferred upon the sale of OnePath.

15

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
FINANCIAL ASSETS

CLASSIFICATION AND MEASUREMENT
Financial assets - general
There are three measurement classifications for financial assets under NZ IFRS 9: amortised cost, fair value through profit or loss (FVTPL) and fairvalue through other comprehensive income (FVOCI). Financial assets are classified into these measurement classifications on the basis of two
criteria:• the business model within which the financial asset is managed; and• the contractual cash flow characteristics of the financial asset (specifically whether the contractual cash flows represent solely payments ofprincipal and interest).
The resultant financial asset classifications are as follows:• Amortised cost: financial assets with contractual cash flows that comprise solely payments of principal and interest and which are held in abusiness model whose objective is to collect their cash flows;• FVOCI: financial assets with contractual cash flows that comprise solely payments of principal and interest only and which are held in abusiness model whose objective is to collect their cash flows or to sell the assets; and• FVTPL: any other financial assets not falling into the categories above are measured at FVTPL.
Fair Value Option for Financial Assets
A financial asset may be irrevocably designated at FVTPL on initial recognition when the designation eliminates or significantly reduces anaccounting mismatch that would otherwise arise.
Impact of the transition to NZ IFRS 9 from 1 October 2018
The following table summarises the changes to the measurement classifications on adoption of NZ IFRS 9:
Balance sheet presentation

NZ IAS 39

NZ IFRS 9

Net loans and advances

Loans and receivables

Amortised cost

Investment securities(2018: Available-for-sale assets (AFS))

AFS

FVOCI

1

2

1
2

7.

Refer to Note 12 Allowance for expected credit losses for the change in the carrying amounts on transition to NZ IFRS 9 as at 1 October 2018.
The carrying amounts did not change on transition to NZ IFRS 9 as at 1 October 2018.

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 receivable within 3 months
Cash and cash equivalents

16

2019
NZ$m
192
297
1,448
426
2,363

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

NOTES TO THE FINANCIAL STATEMENTS

8.

TRADING SECURITIES

Government securities
Corporate and financial institution securities
Trading securities

2019
NZ$m
4,354
4,588
8,942

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

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 2019 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

Assets2019
NZ$m
10,734932
11,666

Liabilities
2019
NZ$m
(9,755)(1,287)(11,042)

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

Liabilities
2018
NZ$m
(7,023)(1,072)(8,095)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 that are not in 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 amount at a future date.

Futures

An exchange traded contract in which the parties agree to buy or sell an asset in the future for a price agreed on thetransaction 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

Assets2019
NZ$m

Liabilities
2019
NZ$m

Assets2018
NZ$m

Liabilities
2018
NZ$m

6
10
6,059
3
6,078

(6)
(10)
(4,671)(4,687)

5
7
4,242
3
4,257

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

2,264
2,340
35
1
4,640
16
10,734(1,785)(3,225)(1)(35)(5,046)(22)(9,755)

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

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

DERIVATIVE FINANCIAL INSTRUMENTS – DESIGNATED IN HEDGING RELATIONSHIPS
The Banking Group uses 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 firm commitment or ahighly 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 the derivatives.

We recognise the effective portion of changes in the fairvalue of derivatives designated as a cash flow hedge inthe 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.

As outlined in Note 1, the Banking Group has continued to apply the NZ IAS 39 hedge accounting requirements until the IASB’s ongoing project onmacro hedge accounting is completed. However, new hedge disclosures are required in this period under NZ IFRS 7 Financial Instruments: Disclosures(NZ IFRS 7) which are presented below. The presentation of derivatives information for 2018 has not been amended.

19

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
9.

DERIVATIVE FINANCIAL INSTRUMENTS (continued)

The fair value of derivative financial instruments designated in hedging relationships are:2019

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

2018

NominalamountNZ$mAssets
NZ$m

Liabilities
NZ$m

Assets
NZ$m

Liabilities
NZ$m

25,956

365

(727)

54

(819)

37,73063,686

567
932

(560)
(1,287)

286
340

(253)
(1,072)The maturity profile of the nominal amounts of our hedging instruments held at 30 September 2019 is:Nominal amount
Fair value hedges
Interest rate
Cash flow hedges
Interest rate

Averagerate

Less than 3months
NZ$m

3 to 12months
NZ$m

1 to 5years
NZ$m

After 5
years
NZ$m

Total
NZ$m

Interest rate

1.88%

-

1,860

15,587

8,509

25,956

Interest rate

2.22%

531

3,010

30,561

3,628

37,730The impact of ineffectiveness from our designated hedge relationships by type of hedge relationship and type of risk being hedged are:IneffectivenessChange in valueof hedging
instrument
NZ$m

2019
Fair value hedges1
Interest rate
Cash flow hedges1
Interest rate
1

Hedge ineffectivenessChange in value
recognised in profitof hedged item
and loss
NZ$m
NZ$m

Amount reclassified
from the cash flow
hedge reserve
to profit and loss
NZ$m

459

(464)

(5)

-

(6)

7

1

14

All instruments are held within derivative financial instruments.

Hedge ineffectiveness recognised is classified within other operating income. Reclassification adjustments to the statement of comprehensive income
are recognised within net interest income.
Hedged items in relation to the Banking Group’s fair value hedges for 30 September 2019 are as follows:

Fixed rate loans and advances
Fixed rate debt issuances
Fixed rate investment securities (FVOCI)1
Total
1

Balance sheet
presentation
Net loans and advances
Debt issuances
Investment securities

Hedged risk
Interest rate
Interest rate
Interest rate

Carrying amount
AssetsLiabilities
NZ$m
NZ$m
1,122
(18,784)
6,745
7,867
(18,784)

Accumulated fair value
hedge adjustments on
the hedged item
AssetsLiabilities
NZ$m
NZ$m
(357)
259
259
(357)

The carrying amount of debt instruments at fair value through other comprehensive income does not include the fair value hedge adjustment as the hedged assets are measured at fairvalue. The accounting for the hedge relationship results in a transfer from other comprehensive income to the income statement.

The cumulative amount of fair value hedge adjustments relating to ceased hedge relationships remaining on the balance sheet is less than NZ$0.1
million.
Hedged items in relation to the Banking Group’s cash flow hedges for 30 September 2019 are as follows:

Floating rate loans and advances
Floating rate customer deposits
20

Hedged risk
Interest rate
Interest rate

Cash flow
hedge reserve
Continuing Discontinued
hedgeshedges
NZ$m
NZ$m
516
(1)
(465)
(13)

NOTES TO THE FINANCIAL STATEMENTS

9.

DERIVATIVE FINANCIAL INSTRUMENTS (continued)

The table below details the reconciliation of the cash flow hedge by risk type:Interest rate
NZ$m
22
(7)
14
(2)
27

Balance at 1 October 2018
Fair value losses
Transferred to income statement
Income taxes
Balance at 30 September 20192018 Disclosure

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

Fair value
Fair Value

212
(221)

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 theincome 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.
Sources of hedge ineffectiveness may arise from basis risk and differences in discounting between the hedged
items and the hedging instruments. The hedging instruments are discounted using Overnight Index Swaps
discount curves which are not applied to the hedged items.

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.

21

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
10. INVESTMENT SECURITIES
2019
Corporate
and financial
Security Government
institution
EquityPeriodtype
securities
securities
securities
NZ$m
NZ$m
NZ$m
Less than 3 months
85
80
Between 3 and 12 months
119
307
Between 1 and 5 years
3,263
1,812
Greater than 5 years
1,33426
No maturity
1
Total
4,801
2,225
1
Carried on balance sheet at:
FVOCI1
4,801
2,225
1
Available-for-sale assets1
Total
4,801
2,225
1
1

Total
NZ$m
165
426
5,075
1,360
1
7,027
7,027
7,027

2018
Corporate
and financial
Government institution
Equitysecurities
securities
securities
NZ$m
NZ$m
NZ$m
110
19
616
162
3,134
1,831
458
171
1
4,318
2,183
1
4,318
4,318

2,183
2,183

1
1

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

On adoption of NZ IFRS 9 on 1 October 2018, the classification and measurement of financial assets were revised. The available-for-sale classification used in comparative periods ceases toexist under NZ IFRS 9 and a new classification of investment securities was introduced. Refer to Note 1 for further details.

RECOGNITION AND MEASUREMENT
Policy applicable from 1 October 2018
Investment securities are those financial assets in security form (i.e. transferable debt or equity instruments) that are not held for trading
purposes. By way of exception, bills of exchange (a form of security/transferable instrument) which are used to facilitate the Banking Group’s
customer lending activities are classified as loans and advances (rather than investment securities) to better reflect the substance of thearrangement.
Non-trading equity instruments may be designated at FVOCI on an instrument by instrument basis. If this election is made, gains or losses are
not reclassified from other comprehensive income to profit or loss on disposal of the investment. However, gains or losses may be reclassified
within equity.
Assets disclosed as investment securities are subject to the general classification and measurement policy for financial assets outlined at thecommencement of the Banking Group’s Financial Asset disclosures on page 16.
Policy applicable prior to 1 October 2018
AFS assets comprise non-derivative financial assets which we designate as AFS since we do not hold them principally for trading purposes. They
include both equity and debt securities. AFS assets are initially recognised at fair value plus transaction costs and are revalued at least biannually. 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 andimpairment 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 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 andFinancial Liabilities for further details.
22

NOTES 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
Allowance for expected credit losses
Net loans and advances
Residual contractual maturity:- within one year
- after more than one year
Net loans and advances

12

2019
NZ$m
927
1,569
84,00744,586
1,863
132,952(237)
307
133,022(497)
132,525

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

27,816
104,709132,525

26,896
99,570126,466

The Bank has sold residential mortgages to the NZ Branch with a net carrying value of NZ$739 million as at 30 September 2019 (2018: NZ$2,210
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.
From 1 October 2018, assets disclosed as net loans and advances are subject to the general classification and measurement policy for financial
assets outlined at the commencement of the Banking Group’s Financial Asset disclosures on page 16. Additionally, expected credit losses
associated with loans and advances at amortised cost are recognised and measured in accordance with the accounting policies outlined in
Note 12.

23

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
12. ALLOWANCE FOR EXPECTED CREDIT LOSSESAs described in Note 1, the Banking Group adopted NZ IFRS 9 effective from 1 October 2018 which resulted in the application of an expected credit
loss (ECL) model for measuring impairment of financial assets and amendments to the presentation of credit impairment information for the current
year. Comparative information has not been restated.

ALLOWANCE FOR EXPECTED CREDIT LOSSES – IMPACT OF THE TRANSITION TO NZ IFRS 9
The table below reconciles the closing collective provision for credit impairment for financial assets determined in accordance with NZ IAS 39, andprovisions for loan commitments and financial guarantee contracts in accordance with NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets
as at 30 September 2018, and the opening provisions for credit impairment determined in accordance with NZ IFRS 9 as at 1 October 2018.
Off-balance
sheet credit
Net loans andrelatedadvances commitments
NZ$m
NZ$m

Collective provision reconciliation

Total
NZ$m

As at 30 September 2018
Impact on transition to NZ IFRS 91

311
60

71
12

382
72

As at 1 October 2018

371

83

454

Collective credit impairment charge

29

3

32

As at 30 September 2019

400

86

486

1

The increase in allowance for expected credit losses resulted in an increase in deferred tax assets of NZ$20 million and a decrease in retained earnings of NZ$52 million..

ALLOWANCE FOR EXPECTED CREDIT LOSSES – BALANCE SHEETThe following tables present the movement in the allowance for ECL for the year ended 30 September 2019.

Provision for credit impairment
Individual provision2
Collective provision3
Total provision for credit impairment
1
2
3

Net loans andadvances
30 Sep 19
30 Sep 18
NZ$m
NZ$m
130
97
400
311
497
441

Off-balance sheet credit
related commitments1
30 Sep 19
30 Sep 18
NZ$m
NZ$m
11
86
71
97
71

Total
30 Sep 19
30 Sep 18
NZ$m
NZ$m
130
108
486
382
594
512

Individual and collective provision relating to off-balance sheet credit related commitments is included in provisions from 1 October 2018.
Individual provision comprises Stage 3 ECL assessed individually from 1 October 2018.
Collective provision comprises Stage 1, 2 and 3 ECL assessed collectively from 1 October 2018.

Net loans and advances - at amortised cost
Allowance for ECL is included in net loans and advances.

As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Write-backs
Recoveries of amounts previously written off
Credit impairment charge
Bad debts written-off (excluding recoveries)
Add back recoveries of amounts previously written off
Discount unwind
As at 30 September 2019

Stage 1
NZ$m
160
29
(25)
4
164

Stage 3
Collectively IndividuallyStage 2
assessedassessed
NZ$m
NZ$m
NZ$m
171
40
130
(40)
3
8
63
(1)
121
(48)
(23)
23
2
58
(106)
23
(8)
194
42
97

Total
NZ$m
501
158
(48)
(23)
87
(106)
23
(8)
497

Off-balance sheet credit related commitments - undrawn and contingent facilities
Allowance for ECL is included in other provisions.
As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Credit impairment charge
As at 30 September 2019
24

59
5
(4)
1
60

22
(5)
7
2
24

2
2

11
11
11

83
14
14
97

NOTES TO THE FINANCIAL STATEMENTS

12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)
Explanation of how changes in the gross carrying amounts of gross loans and advances contributed to changes in loss allowance
Overall, loss allowances on gross loans and advances have remained stable at approximately 0.4% of gross loans and advances. Loss allowances haveincreased by NZ$10 million (2%) driven by an increase in the proportion of gross loans and advances in Stage 2 and Stage 3, offset by a net decrease inStage 3 individually assessed exposures as a result of amounts written-off.
2018 Provision for credit impairment disclosure under NZ IAS 39
The below disclosure does not reflect the adoption of NZ IFRS 9 and is prepared under the requirements of the previous NZ IAS 39. All provisions for
credit impairment were recognised in net loans and advances until 30 September 2018.

Provision for credit impairment for the year ended 30 September 2018
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 loansandadvances
NZ$m

Off-balance
sheet credit
relatedcommitments
NZ$m

Total
NZ$m

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

-

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

343
(32)
311
441

84
(13)
71
71

427
(45)
382
512

CREDIT IMPAIRMENT CHARGE – INCOME STATEMENT
Credit impairment charge analysis under NZ IFRS 9.
2019
NZ$m
New and increased provisions- Collectively assessed- Individually assessed
Write-backs
Recoveries of amounts previously written-off
Total credit impairment charge

32
140
(48)
(23)
101

2018 credit impairment charge analysis under NZ IAS 39
The below disclosure does not reflect the adoption of NZ IFRS 9 and is prepared under the requirements of the previous NZ IAS 39.

New and increased provisions
Write-backs
Recoveries of amounts previously written-off
Individual credit impairment charge
Collective credit impairment release
Total credit impairment charge

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

25

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)

RECOGNITION AND MEASUREMENT
Policy applicable from 1 October 2018
EXPECTED CREDIT LOSS IMPAIRMENT MODEL
The measurement of expected credit losses reflects an unbiased, probability weighted prediction which evaluates a range of scenarios andtakes into account the time value of money, past events, current conditions and forecasts of future economic conditions.
Expected credit losses are either measured over 12 months or the expected lifetime of the financial asset, depending on credit deterioration
since origination, according to the following three-stage approach:•••Stage 1: At the origination of a financial asset, and where there has not been a significant increase in credit risk (SICR) since origination,an allowance equivalent to 12 months ECL is recognised reflecting the expected credit losses resulting from default events that are
possible within the next 12 months from the reporting date. For instruments with a remaining maturity of less than 12 months,
expected credit losses are estimated based on default events that are possible over the remaining time to maturity.
Stage 2: Where there has been a significant increase in credit risk since origination, an allowance equivalent to lifetime ECL is recognised
reflecting expected credit losses resulting from all possible default events over the expected life of a financial instrument. If credit risk
were to improve in a subsequent period such that the increase in credit risk since origination is no longer considered significant, theexposure returns to a Stage 1 classification and a 12 month ECL applies.
Stage 3: Where there is objective evidence of impairment, an allowance equivalent to lifetime ECL is recognised.

Expected credit losses are estimated on a collective basis for exposures in Stage 1 and Stage 2, and on either a collective or individual basis
when transferred to Stage 3.
MEASUREMENT OF EXPECTED CREDIT LOSSESECL is calculated as the product of the following credit risk factors at a facility level, discounted to incorporate the time value of money:•••

Probability of default (PD) – the estimate of the likelihood that a borrower will default over a given period;
Exposure at default (EAD) – the expected balance sheet exposure at default taking into account repayments of principal and interest,
expected additional drawdowns and accrued interest; andLoss given default (LGD) – the expected loss in the event of the borrower defaulting, expressed as a percentage of the facility’s EAD,
taking into account direct and indirect recovery costs.

These credit risk factors are adjusted for current and forward looking information through the use of macro-economic variables.
EXPECTED LIFE
When estimating ECL for exposures in Stage 2 and 3, the Banking Group considers the expected lifetime over which it is exposed to credit risk.
For non-retail portfolios, the Banking Group uses the maximum contractual period as the expected lifetime for non-revolving credit facilities.
For non-retail revolving credit facilities, such as corporate lines of credit, the expected life reflects the Banking Group’s contractual right towithdraw a facility as part of a contractually agreed annual review, after taking into account the applicable notice period.
For retail portfolios, the expected lifetime is determined using behavioural term, taking into account expected repayment behaviour andsubstantial modifications.
DEFINITION OF DEFAULT, CREDIT IMPAIRED AND WRITE-OFFS
The definition of default used in measuring expected credit losses is aligned to the definition used for internal credit risk management
purposes across all portfolios. This definition is also in line with the regulatory definition of default. Default occurs when there are indicatorsthat a debtor is unlikely to fully satisfy contractual credit obligations to the Banking Group, or the exposure is 90 days past due.
Financial assets, including those that are well secured, are considered credit impaired for financial reporting purposes when they default.
When there is no realistic probability of recovery, loans are written off against the related impairment allowance on completion of the Banking
Group’s internal processes and when all reasonably expected recoveries have been collected. In subsequent periods, any recoveries ofamounts previously written-off are credited to credit impairment charge in the income statement.
MODIFIED FINANCIAL ASSETS
If the terms of a financial asset are modified or an existing financial asset is replaced with a new one for either credit or commercial reasons, anassessment is made to determine if the changes to the terms of the existing financial asset are considered substantial. This assessment
considers both changes in cash flows arising from the modified terms as well as changes in the overall instrument risk profile; for example,
changes in the principal (credit limit), term, or type of underlying collateral. Where a modification is considered non-substantial, the existing
financial asset is not derecognised and its date of origination continues to be used to determine SICR. Where a modification is considered
substantial, the existing financial asset is derecognised and a new financial asset is recognised at its fair value on the modification date, which
also becomes the date of origination used to determine SICR for this new asset.

26

NOTES TO THE FINANCIAL STATEMENTS

12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)

RECOGNITION AND MEASUREMENTSIGNIFICANT INCREASE IN CREDIT RISKStage 2 assets are those that have experienced a SICR since origination. In determining what constitutes a SICR, the Banking Groupconsiders both qualitative and quantitative information:•

Internal credit rating grade
For the majority of portfolios, the primary indicator of a SICR is a significant deterioration in the internal credit rating grade of a facility
since origination and is measured by application of thresholds.
For non-retail portfolios, a SICR is determined by comparing the Customer Credit Rating (CCR) applicable to a facility at reporting
date to the CCR at origination of that facility. A CCR is assigned to each borrower which reflects the probability of default of theborrower and incorporates both borrower and non-borrower specific information, including forward looking information. CCRs are
subject to review at least annually or more frequently when an event occurs which could affect the credit risk of the customer.
For retail portfolios, a SICR is determined by comparing each facility’s scenario weighted lifetime probability of default at thereporting date to the scenario weighted lifetime probability of default at origination. The scenario weighted lifetime probability ofdefault may increase significantly if:•••

there has been a deterioration in the economic outlook, or an increase in economic uncertainty; orthere has been a deterioration in the customer’s overall credit position, or ability to manage their credit obligations.

Backstop criteria
The Banking Group uses 30 days past due arrears as a backstop criteria for both non-retail and retail portfolios. For retail portfolios
only, facilities are required to demonstrate three to six months of good payment behaviour prior to being allocated back to Stage 1.

FORWARD LOOKING INFORMATION
Forward looking information is incorporated into both our assessment of whether a financial asset has experienced a significant increase incredit risk since its initial recognition and in our estimate of ECL. In applying forward looking information for estimating ECL, the Banking
Group considers four probability-weighted forecast economic scenarios as follows:•

Base case scenario
The base case scenario is our view of the most likely future macro-economic conditions. It reflects management’s assumptions used
for strategic planning and budgeting, and also informs the Banking Group’s Internal Capital Adequacy Assessment Process (ICAAP)
which is the process the Banking Group applies in strategic and capital planning over a 3 year time horizon;•

Upside and Downside scenarios
The upside and downside scenarios are fixed by reference to average economic cycle conditions (that is, they are not based on theeconomic conditions prevailing at balance date) and are based on a combination more optimistic (in the case of the upside) andpessimistic (in the case of the downside) economic events and uncertainty over the long term horizons; and•Severe downside scenario
The severe downside scenario is fixed by reference to average economic cycle conditions and accounts for the potentially severe
impact of less likely extremely adverse economic conditions. It reflects macro-economic conditions of a downturn economic eventwith a probability of occurrence once every 25 years.

The four scenarios are described in terms of macro-economic variables used in the PD, LGD and EAD models (collectively the ECL models)depending on the portfolio and country of the borrower. Examples of the variables include unemployment rates, GDP growth rates, house
price indices, commercial property price indices and consumer price indices.
Probability weighting each scenario is determined by management considering the risks and uncertainties surrounding the base casescenario, as well as specific portfolio considerations where required.
Where applicable, adjustments may be made to account for situations where known or expected risks have not been adequately
addressed in the modelling process.
ECL Sensitivity
The table below illustrates the impact on the Banking Group’s ECL allowance under scenarios where a 100% weighting is applied to both
upside and downside scenarios with all other modelling assumptions remaining constant.
Collective ECL

Impact

NZ$m

NZ$m

100% upside scenario

371

(115)

100% downside scenario

548

62

27

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)

RECOGNITION AND MEASUREMENT
Policy applicable prior to 1 October 2018
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:
Individually28

Collectively

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.

NOTES TO THE FINANCIAL STATEMENTS

12. ALLOWANCE FOR EXPECTED CREDIT LOSSES (continued)

Applicable from 1 October 2018
When estimating the allowance for expected credit losses for loans and advances, we used management’s judgement in respect of thematters outlined below.
Key judgements
Determining when asignificant increasein credit risk has
occurredIn the measurement of ECL, judgement is involved in setting the rules to determine whether there has been
a SICR since initial recognition of a loan, resulting in the financial asset moving from Stage 1 to Stage 2. Thisis a key area of judgement as transition from Stage 1 to Stage 2 increases the ECL calculation from anallowance based on the probability of default in the next 12 months, to an allowance for lifetime expectedcredit losses. Subsequent decreases in credit risk combined with transition from Stage 2 to Stage 1 may
similarly result in significant changes in the ECL allowance.
The setting of precise trigger points requires judgement which may have a material impact upon the size of
the ECL allowance. The Banking Group monitors the effectiveness of SICR criteria on an ongoing basis.

Measuring both 12month and lifetime
credit losses

The PD, LGD, and EAD credit risk parameters used in determining ECL are point-in-time measures reflecting
the relevant forward looking information determined by management. Judgement is involved indetermining which forward-looking information variables are relevant for particular lending portfolios andfor determining each portfolio’s point-in-time sensitivity.
In addition, judgement is required where behavioural characteristics are applied in estimating the lifetime ofa facility to be used in measuring ECL. All other things being equal, an increase in the expected behaviourallife will increase the amount of ECL.

Forecasting forwardlooking scenarios

Our forecast of forward-looking information variables is established from a “base case” or most likely
scenario that is used internally by management for planning and forecasting purposes.
The expected outcomes of key economic drivers for the base case scenario as at 30 September 2019 are as
follows:
New Zealand
GDP growth is forecast to improve modestly over the forecast period, with the unemployment rate
remaining stable. Residential property values are expected to achieve modest levels of growth. Commercial
property prices are expected to grow, however, the growth rate is expected to be modest through theforecast period. The consumer price index is expected to rise modestly.

Probability
weighting of eachscenario

Probability weighting of each scenario is determined by management considering the risks anduncertainties surrounding the base case scenario, as well as specific portfolio considerations where required.

Management
temporaryadjustments

Management temporary adjustments to the ECL allowance are adjustments we use in circumstances where
we judge that our existing inputs, assumptions and model techniques do not capture all the risk factors
relevant to our lending portfolios. Emerging local or global macroeconomic, microeconomic or politicalevents, and natural disasters that are not incorporated into our current parameters, risk ratings, or forwardlooking information are examples of such circumstances.
The use of management temporary adjustments may impact the amount of ECL recognised.

Applicable prior to 1 October 2018
When we measured impairment of loans and advances, we used 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 reviewed our key judgements and updated them to reflect actual loss experience.

29

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
FINANCIAL LIABILITIESCLASSIFICATION AND MEASUREMENT
Financial liabilities
Financial liabilities are measured at amortised cost, or fair value through profit or loss (when they are held for trading). Additionally, financial
liabilities can be designated at FVTPL where:• the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or• a group of financial liabilities are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk
management strategy; or• the financial liability contains one or more embedded derivatives unless:• the embedded derivative does not significantly modify the cash flows that otherwise would be required by the contract; or• the embedded derivative is closely related to the host financial liability.
Where financial liabilities are designated as measured at fair value, gains or losses relating to changes in the entity’s own credit risk are included
in other comprehensive income, except where doing so would create or enlarge an accounting mismatch in profit or loss. This section of thestandard was early adopted by the Banking Group on 1 October 2013.

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
Deposits from banks and securities sold under repurchase agreements
Deposits from Immediate Parent Company and NZ Branch
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

27

2019
NZ$m
54,98442,329
11,795
128
109,236
1,484
2,461
203
43
113,4272018
NZ$m
51,29841,602
10,224931
104,055
910
2,486
517
40
108,008

109,696
3,731
113,427

103,492
4,516
108,008

110,966
2,461
113,427

105,5222,486
108,008

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 as fairvalue 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 we recognise directlyin 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 the risks
and rewards of ownership remain with the Banking Group. Over the life of the repurchase agreement, we recognise the difference between thesale price and the repurchase price and charge it to interest expense in the income statement.

30

NOTES 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.
2019
2018
NZ$m
NZ$m
Senior debt
19,307
18,767
Covered bonds
4,460
3,929
22,696
Total unsubordinated debt
23,767
Subordinated debt (Additional Tier 1 capital)
2,439
2,440
25,135
Total debt issued
26,207TOTAL 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

2019
NZ$m
48
8,200
6,160
1,522
10,277
26,207

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

4,580
21,627
26,207

3,835
21,30025,135

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.

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:•

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).

31

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES 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 2019, ANZ NZ CN carried a BB+ credit rating from S&P Global Ratings. On 24 October 2019, S&P Global Ratings revised the credit
rating on ANZ NZ CN from BB+ to BBB-.
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:
ANZ NZ CN
ANZ NZ ICNANZ NZ ICN2
IssuerThe Bank
The Bank
The Bank
Issue date
31 March 2015
5 March 201515 June 2016
Issue amount
NZ$500 million
NZ$1,003 million
NZ$938 million
Face value
NZ$1
NZ$100
NZ$100Interest frequency
Quarterly in arrears
Semi-annually in arrears
Semi-annually in arrears
Fixed at 7.2% p.a. until 25 May
Floating rate: (New Zealand2020. Resets in May 2020 to a Floating rate: (New Zealand 6
Interest rate
6 month Bank Bill rate +floating rate: (New Zealand 3 month Bank Bill rate + 3.8%)
6.29%)
month Bank bill rate + 3.5%)
15 June 2026 and each 5thIssuer's early redemption or conversion option
25 May 2020
24 March 2023
anniversary
Mandatory conversion date
25 May 2022
24 March 2025
n/aCommon equity capital trigger event
Yes
Yes
Yes
Non-viability trigger event
Yes
Yes
Yes
Carrying value as at 30 September 2019 (net of issue costs)
NZ$499 million
NZ$1,003 million
NZ$938 million

RECOGNITION AND MEASUREMENT
Debt issuances are measured at amortised cost. Where the Banking Group enters into a fair value 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.
32

NOTES 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

The risk of financial loss from:• a counterparty failing to fulfil its obligations; or• a decrease in credit quality of a counterparty resulting in financial loss.
Credit risk incorporates the risks associate with us lending to customers who
could be impacted by climate change or by changes to laws, regulations, orother policies adopted by governments or regulatory authorities, including
carbon pricing and climate change adaptation or mitigation policies.
Market risk
The risk to the Banking Group’s earnings arising from:• changes in any interest rates, foreign exchanges rates, credit spreads,
volatility and correlations; or• fluctuations in bond, commodity or equity prices.
Liquidity and funding risk
The risk that the Banking Group is unable to meet its payment obligations
when they fall due, including:• repaying depositors or maturing wholesale debt; or• the Banking Group having insufficient capacity to fund increases in
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.
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.
Internal Audit Function
Internal Audit is a function independent of management whose role is to provide the Board and management with an effective and independent
appraisal of the internal controls established by management. Operating under a Board approved Charter, the reporting line for the outcomes of work
conducted by Internal Audit is direct to the Chair of the Audit Committee, with a direct communication line to the Chief Executive Officer and theexternal auditor. The Internal Audit Plan is developed using a risk based approach and is reviewed quarterly. The Audit Committee approves the plan.
All audit activities are conducted in accordance with local and international auditing standards, and the results of the activities are reported to the
Audit Committee and management. These results influence the performance assessment of business heads. Furthermore, Internal Audit monitors theremediation of audit issues and reports the current status of any outstanding audits.

33

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES 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, internal capital allocation, and credit
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 CCR to manage the credit quality of financial assets. To enable wider comparisons, the Banking Group’s CCRs are
mapped to external rating agency scales as follows:
Credit quality
description

Internal CCR

The Banking Group customer requirements

Moody’s
RatingS&P Global
Ratings

Strong

CCR 0+ to 4-

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

CCR 5+ to 6-

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+Weak

CCR 7+ to 8=

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

Defaulted

CCR 8- to 10

When doubt arises as to the collectability of a credit facility, thefinancial instrument (or ‘the facility’) is classified as defaulted.

n/a

n/a

34

NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
The Banking Group has adopted NZ IFRS 9 effective from 1 October 2018 which has resulted in changes to the classification and measurement offinancial assets, including the impairment of financial assets. The presentation of credit risk information for 2019 has been amended. Refer to Note 1
for further details on key requirements and impacts of the changes due to the adoption of NZ IFRS 9.
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 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
Other financial assets:
Cash and cash equivalents
Settlement balances receivable
Collateral paid
Trading securities
Derivative financial instruments
Investment securities
Other financial assets3,4
Total other financial assets
Subtotal
Off-balance sheet commitments
Undrawn and contingent facilities2,5
Total
1
2

3
4
5

Maximum exposure tocredit risk

Excluded1 / Other2

2019
NZ$m

2018
NZ$m

2019
NZ$m

2018
NZ$m

2019
NZ$m

2018
NZ$m

132,525

126,466-(71)

132,525

126,537

2,363
193
2,324
8,942
11,666
7,027
622
33,137
165,662

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

192
192
192

204
204
133

2,171
193
2,324
8,942
11,666
7,027
622
32,945
165,470

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

29,253
194,915

30,105
184,677

192

71
204

29,253
194,723

30,034
184,473

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, net of allowance for expected credit losses.

35

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
15. FINANCIAL RISK MANAGEMENT (continued)
CREDIT QUALITY
An analysis of the Banking Group’s credit risk exposure is presented in the following tables based on the Banking Group’s internal rating by stage
without account of the effects of any collateral or other credit enhancements.
Net loans and advances

As at 30 September 2019
StrongSatisfactory
Weak
Defaulted
Subtotal
Allowance for ECL
Net loans and advances at amortised cost
Coverage ratio
Unearned income
Capitalised brokerage/mortgage origination fees
Net carrying amountStage 1
NZ$m
95,58926,402
1,224
123,215(164)
123,051
0.13%

Stage 3
Collectively IndividuallyStage 2
assessedassessed
NZ$m
NZ$m
NZ$m
2,270
4,621
2,117
444
285
9,008
444
285
(194)
(42)
(97)
8,814
402
188
2.15%
9.46%
34.04%

Total
NZ$m
97,85931,023
3,341
729
132,952(497)
132,455
0.37%
(237)
307
132,525

Other financial assets
Total
NZ$m
32,342575
28
32,945As at 30 September 2019
StrongSatisfactory
Weak
Defaulted
Total carrying amountOff-balance sheet commitments - undrawn and contingent facilities

As at 30 September 2019
StrongSatisfactory
Weak
Defaulted
Gross undrawn and contingent facilities subject to ECLAllowance for ECL included in Other provisions (refer to Note 20)
Net undrawn and contingent facilities subject to ECL
Coverage ratio
Net undrawn and contingent facilities

36

Stage 1
NZ$m
23,2964,883
312
28,491(60)
28,431
0.21%

Stage 3
Collectively IndividuallyStage 2
assessedassessed
NZ$m
NZ$m
NZ$m
59
641
137
3
19
837
3
19
(24)
(2)
(11)
813
1
8
2.87%
66.67%
57.89%

Total
NZ$m
23,3555,524
449
22
29,350(97)
29,2530.33%
29,253NOTES TO THE FINANCIAL STATEMENTS

15. FINANCIAL RISK MANAGEMENT (continued)
2018 Credit risk disclosures
The below disclosures do not reflect the adoption of NZ IFRS 9 and have been prepared under the requirements of the previous NZ IAS 39.
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 individually assessed provisions.

As at 30 September 2018

Loans andadvances
NZ$m

Off-balance
Other
sheet
financial credit related
assets commitments
NZ$m
NZ$m

Total
NZ$m

Neither past due nor impaired
Strong credit profile

92,78327,36823,475

143,626

Satisfactory risk

29,335521

6,186

36,042Sub-standard but not past due or impaired

2,296

13

359

2,668

124,414

27,90230,020182,336

Subtotal
Past due but not impaired≥ 1 < 30 days

1,420

-

-

1,420

≥ 30 < 60 days

179

-

-

179

≥ 60 < 90 days

128

-

-

128

≥ 90 days

205

-

-

205

Subtotal

1,932

-

-

1,932

Impaired
Impaired loans

321

-

-

321

-

-

14

14

Gross impaired financial assets

Non-performing commitments and contingencies

321

-

14

335

Individual provisions

(130)

-

-

(130)

Subtotal

191

-

14

205

126,537

27,90230,034

184,473

Total

37

ANZ BANK NEW ZEALAND LIMITED 2019 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

Other financial
assets4

Off-balance sheet
credit related
commitments5

2019
NZ$m

2018
NZ$m

2019
NZ$m

2018
NZ$m

2019
NZ$m

2018
NZ$m

2019
NZ$m

2018
NZ$m

17,855
1,255
2,682
1,414
1,832
1,488
2,956
1,309
816
343
33,34017,844
1,379
2,687
1,403
1,713
1,404
3,211
1,222
872
364
31,805

84
9
378
514
32
94
29
137
6,203
9,723
1,212

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

1,021
225
2,004
1,834
1,039
1,681
961
864
1,627
1,105
3,112

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

18,960
1,489
5,064
3,762
2,903
3,263
3,946
2,310
8,646
11,171
37,664

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

1,126

1,165

11

9

631

633

1,768

1,807

61,5152,537

56,808
2,569

210
242

192
167

11,278
1,847

11,977
1,663

73,003
4,626

68,977
4,399

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

130,468

124,446

18,87816,70329,22929,966

178,575

171,115

148
1,553
783

128
1,512
818

14,0305
32

11,109
5
85

121
-

139
-

14,2991,558
815

11,376
1,517
903

Subtotal
Gross total
Allowance for ECL
Subtotal
Unearned income
Capitalised brokerage / mortgage
origination fees
Maximum exposure to credit risk

2,484
132,952(497)
132,455
(237)

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

14,06732,94532,945-

11,19927,902
27,902-

121
29,350(97)
29,253-

139
30,105(71)
30,034-

16,672
195,247(594)
194,653(237)

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

307

313

-

-

-

-

307

313

132,525

126,537

32,94527,902

29,25330,034

194,723

184,473

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

38

Total

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 reclassified as held for sale.
Off-balance sheet 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. Where there issufficient collateral, an expected credit loss is not recognised. This is largely the case for certain lending products that are secured by corresponding
investment for which margin loans are utilised and for reverse repurchase agreements. For some products, the collateral provided by customers isfundamental to the product’s structuring, so it is not strictly the secondary source of repayment - for example, lending secured by trade receivables istypically repaid by the collection of those receivables. During the period there was no change in our collateral policies.
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
Trading securities, investment
securities, derivatives and otherfinancial assets

For trading securities, we do not seek collateral directly from the issuer or counterparty. However, thecollateral may be implicit in the terms of the instrument (for example, with an asset-backed security).
The terms of debt securities may include collateralisation.
For 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 or 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

2019
NZ$m

2018
NZ$m

2019
NZ$m

2018
NZ$m

Net loans and advances

132,525

126,537

124,249

117,337

8,276

9,200

Other financial assets1

32,94527,902

1,857

2,029

31,08825,873Off-balance sheet positions

29,25330,034

14,152

15,124

15,101

14,910

Total

194,723

184,473

140,258

134,490

54,46549,983

1

2019
NZ$m

2018
NZ$m

Including items reclassified as held for sale.

39

ANZ BANK NEW ZEALAND LIMITED 2019 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 and 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 risk 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.

•

Currency risk – potential loss arising from changes in foreignexchange rates or their implied volatilities.

•

Interest rate risk – potential loss from changes in market
interest rates or their implied volatilities.

•

Credit spread risk – potential loss arising from a movement inmargin or spread relative to a benchmark.

•Commodity risk – potential loss arising from changes incommodity prices or their implied volatilities.

•

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 a one-day holding period. For stressed VaR we use a ten-day period. Back testing is used to ensure ourVaR 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 for the relevant
holding period.

40

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 exchangeInterest rate
CreditDiversification benefit1
Total VaR
1.

0.5
1.4
0.6
(0.7)
1.8

2019
High forLow for
year
year
NZ$m
NZ$m
1.0
2.5
0.7
n/a
2.6

0.2
0.6
0.3
n/a
0.8

Averagefor year
NZ$m

As at
NZ$m

0.5
1.2
0.4
(0.8)
1.3

0.5
1.4
0.5
(1.0)
1.4

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

Averagefor year
NZ$m

0.2
0.8
0.3
n/a
1.0

0.7
1.9
0.5
(0.9)
2.2

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

10.0

2019
High forLow for
year
year
NZ$m
NZ$m
10.0

7.4

Averagefor year
NZ$m

As at
NZ$m

8.4

8.0

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

Averagefor year
NZ$m

6.4

7.8

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.
2019

2018

0.2%

-0.4%

Impact of 1% rate shock
As at period end
Maximum exposure

1.0%

0.9%

Minimum exposure

-0.7%

-1.2%

Average exposure (in absolute terms)

0.3%

0.0%

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.

41

ANZ BANK NEW ZEALAND LIMITED 2019 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 fund increases in 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 2019 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 withtargeting diversification by markets, investors, currencies, maturities and funding structures. Short-term and long-term wholesale funding is managed
and executed by 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.

42

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

Cash and balances with central banks
Certificates of deposit
Central and local government bonds
Government treasury bills
Reserve Bank bills
Other bonds
Total liquidity portfolio

2019
NZ$m
1,734
374
7,922
55
7,256
17,341

2018
NZ$m
2,026
179
7,528
794
50
5,493
16,070Assets 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 New Zealanddomestic corporates. These assets would be accepted as collateral by RBNZ in repurchase transactions. At 30 September 2019 the Banking Groupwould be eligible to enter into repurchase transactions with a value of NZ$15,607 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$7,179
million at 30 September 2019.
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.

43

ANZ BANK NEW ZEALAND LIMITED 2019 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 NZSIOC.
Note

2019
NZ$m

2018
NZ$m

13

109,236

104,055

Debt issuances

26,207

25,135

Certificates of deposit and commercial paper

3,945

3,396

246

557

Total wholesale funding

30,39829,088

Total funding

139,634

133,143

Agriculture, forestry and fishing

3,727

3,763

Manufacturing

2,152

2,335

Construction

2,194

2,050

Wholesale trade

2,020

1,571

Retail trade and accommodation

1,543

1,484

Financial and insurance services

11,458

10,661

Rental, hiring and real estate services

3,210

2,878

Professional, scientific, technical, administrative and support services

5,467

5,126

Public administration and safety

1,479

1,572

Arts, recreation and other services

Funding composition
Customer deposits
Wholesale funding

Other borrowings

Customer deposits by industry - New Zealand residents

1,968

2,027

Households

59,131

56,640All other New Zealand residents1

3,553

3,556

97,902

93,663

Households

10,1189,876

All other non-NZ residents

1,216

516

11,334

10,392

109,236

104,055

Customer deposits by industry - overseas

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

7,799

8,082

Overseas

22,59921,006

Total wholesale funding

30,39829,088

Total funding

139,634

133,143

105,701

101,745775

739

United States

13,844

13,671

Europe11,139

9,618

Other countries

8,175

7,370

Total funding

139,634

133,143

Concentrations of funding by geography
New ZealandAustralia

1

44

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 THE BANKING GROUP’S FINANCIAL LIABILITIESThe table below provides residual contractual maturity analysis of financial liabilities at 30 September 2019 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.
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

Settlement balances payable
Collateral received

1,114

504

-

-

-

1,618

-

991

-

-

-

991

Deposits and other borrowings

54,183

27,18729,476

4,065-

114,911

Derivative financial liabilities (trading)

-

9,530

-

-

-

9,530

Debt issuances1

-

284

4,859

16,925

5,277

27,345

Other financial liabilities

-

148

28

106

108

390

2019

Derivative financial instruments(balance sheet management)- gross inflows

-

842

2,067

8,426

714

12,049- gross outflows

-

(974)

(2,444)(9,084)(723)(13,225)

1,338

837

-

-

-

2,175

2018
Settlement balances payable
Collateral received

-

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 liabilities2

-

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)

Deposits and other borrowings
1

Derivative financial instruments(balance sheet management)12

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

At 30 September 2019, NZ$59 million (2018: NZ$86 million) of the Banking Group’s non-credit related commitments and NZ$29,350 million (2018:
NZ$30,105 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.

45

ANZ BANK NEW ZEALAND LIMITED 2019 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 is the best estimate of 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
The Banking Group has an established control framework, including 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 funding valuation adjustments, credit valuation adjustments and bid-offer adjustments) 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 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 financial liabilities- Investment securities

Valuation techniques are used that incorporate observable market inputs for financial
instruments with 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 are used whereby contractual future cash flows of the
instrument are discounted using wholesale market interest rates, or market borrowing rates
for debt with similar maturities or with a yield curve appropriate for the remaining term tomaturity.

CLASSIFICATION OF FINANCIAL ASSETS AND FINANCIAL LIABILITIESThe following tables set out the classification of financial asset and liability categories according to measurement bases together with the carrying
amounts as reported on the balance sheet.
2019
2018
At
At
amortised
At fair
amortised
At fair
cost
value
Total
cost
value
Total
Note
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
Financial assets
Cash and cash equivalents
2,363
2,363
2,200
2,200
Settlement balances receivable
193
193
656
656
Collateral paid
2,324
2,324
1,919
1,919
Trading securities
8
8,024
8,024
8,942
8,942
Derivative financial instruments
9
8,086
8,086
11,666
11,666
Investment securities
10
6,502
6,502
7,027
7,027
Net loans and advances
126,466
126,466
132,525
132,525
Other financial assets1
592
127
719
622
622
Total
138,027
27,635
165,662
131,833
22,739154,572
Financial liabilities
Settlement balances payable
1,607
1,607
2,161
2,161
Collateral received
845
845
991
991
Deposits and other borrowings
13
105,5222,486
108,008
110,966
2,461
113,427
Derivative financial instruments
9
8,095
8,095
11,042
11,042
Debt issuances
25,13525,135
26,207
26,207
Other financial liabilities1
576
110
686
628
213
841
Total
140,399
13,716
154,115
134,239
10,691
144,930
1

46

Including items reclassified as held for sale.

NOTES TO THE FINANCIAL STATEMENTS

16. FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
FAIR VALUE HIERARCHYThe Banking Group categorises assets and liabilities carried at fair value into a fair value hierarchy as required by NZ IFRS 13 based on the observabilityof inputs used to measure the fair value:•

Level 1 – valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities;•

Level 2 – valuations using inputs other than quoted prices included within Level 1 that are observable for a similar asset or liability, either directly
or indirectly; and•Level 3 – valuations where significant unobservable are used to measure the fair value of the asset or liability.

The following table presents assets and liabilities carried at fair value in accordance with the fair value hierarchy:

2019
NZ$m

2018
NZ$m

Fair value measurements
Using observable
Using unobservable
inputsinputs (Level 3)(Level 2)
2019
2018
2019
2018
NZ$m
NZ$m
NZ$m
NZ$m

8,319
10
7,026
15,355

6,795
7
6,457
13,259623
11,653
12,276

1,229
8,076
44
127
9,476

3
1
4

11
213
224

10
110
120

2,461
11,031
13,492

2,486
8,084
10,570-

Quoted market price(Level 1)

AssetsTrading securities
Derivative financial instruments
Investment securities
Investments backing insurance contract liabilities1
Total
Liabilities
Deposits and other borrowings
Derivative financial instruments
Other financial liabilities
Total
1

Total
2019
NZ$m

2018
NZ$m

3
1
4

8,942
11,666
7,027
27,635

8,024
8,086
6,502
127
22,7391
12,461
11,042
213
13,716

2,486
8,095
110
10,691

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.

47

ANZ BANK NEW ZEALAND LIMITED 2019 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 table sets out the Banking Group’s basis of estimating fair values of the 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’s 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 is thevalue at which we expect the assets will be realised and the liabilities settled, the Banking Group provides an estimate of the fair value of the financial
assets and financial liabilities at balance date in the table below.
Carrying amountFinancial assets
Net loans and advances
Total
Financial liabilities
Deposits and otherborrowings
Debt issuances
Total

Categorised into fair value hierarchy
Using observable
With significant nonQuoted market priceinputsobservable inputs(Level 1)(Level 2)(Level 3)
2019
2018
2019
2018
2019
2018
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m

2019
NZ$m

2018
NZ$m

132,525
132,525

126,466
126,466

-

-

167
167

131
131

132,920
132,920

110,966

105,522--

111,098

105,592

26,207137,173

25,135
130,657

2,848
2,848

2,533
2,533

23,737
134,835

22,929128,521

Fair value (total)

2019
NZ$m

2018
NZ$m

126,614
126,614133,087
133,087

126,745
126,745--

111,098

105,592--

26,585
137,683

25,462131,054

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.

48

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 CSA that forms part of the ISDA
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. UDC announced on 29 July 2019 that it had decided to exercise its right to redeem all UDC
secured investments, and all UDC secured investments were repaid or transferred to deposits in the Bank on 14 October 2019.

•

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

2019
NZ$m
203
3,484
11,600

2018
NZ$m
517
3,296
10,747

The 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

2019
NZ$m
300
81

2018
NZ$m
139
34

49

ANZ BANK NEW ZEALAND LIMITED 2019 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 sheet
similar
Total
instruments
pledgedNet amount
2019
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
NZ$m
Derivative financial instruments
11,666(3,061)
8,605(6,468)(541)
1,596
Reverse repurchase agreements 1
297
297
(297)
Total financial assets
11,963(3,061)
8,902(6,468)(838)
1,596
Derivative financial instruments(11,042)
2,340(8,702)
6,468
858(1,376)2
Repurchase agreements
(203)
(203)
203
Total financial liabilities(11,245)
2,340(8,905)
6,468
1,061(1,376)2018
Derivative financial instruments
Reverse repurchase agreements 1
Total financial assets
Derivative financial instruments
Repurchase agreements 2
Total financial liabilities
1
2

50

8,086
136
8,222
(8,095)(517)(8,612)(1,029)(1,029)694
694

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.

7,057
136
7,193
(7,401)(517)(7,918)(5,711)(5,711)
5,711
5,711

(481)
(136)
(617)
563
517
1,080

865
865
(1,127)(1,127)

NOTES TO THE FINANCIAL STATEMENTS

19. GOODWILL AND OTHER INTANGIBLE ASSETS
Note
Goodwill
Software
Other intangibles:
Management rights (indefinite life)
Acquired portfolios of insurance business
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

26

2019
NZ$m
3,160
40

2018
NZ$m
3,230
53

76
3,276
3,276

76
31
3,390
(101)
3,289

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 GDP and the Consumer Price
Index. Cash flows beyond the three year period are extrapolated using a 2% growth rate.
These cash flow projections are discounted using a capital asset pricing model. As at 28 February 2019 when the last valuation was prepared, adiscount rate of 11.1% 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 a blended yield rate between the 10 year New Zealand government bondrate and the associated 5 year forward 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 not readily 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.

51

ANZ BANK NEW ZEALAND LIMITED 2019 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
business and management 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.

Amortisation
methodNot 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
business are amortised over 20
years.

Major core infrastructure amortisedover periods between 7-10 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.

52

NOTES TO THE FINANCIAL STATEMENTS

20. OTHER PROVISIONSECL allowance on undrawn facilities
Customer remediation
Restructuring costs
Leasehold make good
Other
Total other provisions

Note
12

2019
NZ$m
97
139
25
23
30
314

2018
NZ$m
34
6
12
24
76

Leaseholdmake good
NZ$m
12
15
(4)
23

Other
NZ$m
24
13
(2)
(5)
30

Movements in other provisions

Balance at start of year
New and increased provisions made during the year
Provisions used during the year
Unused amounts reversed during the year
Balance at end of year

Customer Restructuring
remediation
costs
NZ$m
NZ$m
34
6
115
52
(10)
(26)
(7)
139
25

Customer remediation
Customer remediation includes provisions for expected refunds to customers and other counterparties, remediation project costs and related
customer, counterparty and regulatory claims, penalties and litigation outcomes.
Restructuring costs
Provisions for restructuring costs arise from activities related to material changes in the scope of business undertaken by the Banking Group, including
the OnePath separation, or the manner in which that business is undertaken and include employee termination benefits. Costs relating to on-going
activities are not provided for and are expensed as incurred.
Leasehold make good
Provisions associated with leased premises where, at the end of a lease, the Banking Group is required to remove any fixtures and fittings installed in
the leased property. This obligation arises immediately upon installation. Estimated make good costs are added to the leasehold improvement asset(within premises and equipment) upon installation and amortised over the lease term.
Other
Other provisions comprise various other provisions including losses arising from other legal action, operational issues, and warranties and indemnities
provided in connection with various disposals of businesses and assets.

53

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
20. OTHER PROVISIONS (continued)

RECOGNITION AND MEASUREMENT
The Banking Group recognises provisions where there is a present obligation arising from a past event, an outflow of economic resources isprobable, and the amount of the provision can be measured reliably.
The amount recognised is the best estimate of the consideration required to settle the present obligation at reporting date, taking into
account the risks and uncertainties surrounding the timing and amount of the obligation. Where a provision is measured using the estimatedcash flows required to settle the present obligation, its carrying amount is the present value of those cash flows.

The Banking Group holds provisions for various obligations including customer remediation, restructuring costs, leasehold make good andlitigation related claims. These provisions involve judgements regarding the outcome of future events, including estimates of expenditure
required to satisfy such obligations. Where relevant, expert legal advice has been obtained and, in light of such advice, provisions and/or
disclosures as deemed appropriate have been made.
In relation to customer remediation, determining the amount of the provisions, which represent management’s best estimate of the costof settling the identified matters, requires the exercise of significant judgement. It will often be necessary to form a view on a number ofdifferent assumptions, including, the number of impacted customers, the average refund per customer and the associated remediation
costs. Consequently, the appropriateness of the underlying assumptions is reviewed on a regular basis against actual experience and otherrelevant evidence and adjustments are made to the provisions where appropriate.

54

NOTES TO THE FINANCIAL STATEMENTS

21. SHAREHOLDERS' EQUITY
Number of issued shares
2019
2018
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

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

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

NZ$ millions
2019
2018
11,588
11,588300
11,8888,588
3,000
11,588300
11,888

Includes 650,712 (2018: 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; or• on any date 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 Bank, 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 underlying impacts profit and loss.

Investment securities
revaluation reserve

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

55

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
22. 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 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 internal 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.
In April 2019, the Bank informed RBNZ that in the course of a self-review, the Bank discovered that it had not been using an approved model for the
calculation of the operational risk capital requirement since December 2014. RBNZ has required the Banking Group to use the standardised approachto the calculation of its operational risk capital requirement from 31 March 2019.
Throughout the year, the Banking Group maintained compliance with RBNZ’s minimum capital ratios.

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.
56

NOTES TO THE FINANCIAL STATEMENTS

22. 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
Total
Buffer ratio
Risk weighted assets

2019
NZ$m

2018
NZ$m

14,430(300)
14,130(3,684)
10,4462,780
13,226
13,226

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

10.8%
13.6%
13.6%
5.6%
97,070

11.1%
14.4%
14.4%
6.4%
82,147

23. 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 bankPrincipal subsidiaries
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
Non-operating (previously 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
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 24 Structured Entities.

Changes in controlled entities
OnePath was sold to Cigna Corporation on 30 November 2018 (see Note 26 Divestments).

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.

57

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
24. 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).

SEs are classified as subsidiaries and consolidated when control exists. If the Banking Group does not control a SE, then it is not consolidated. 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 2019 and 30 September 2018 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.
These MIS are financed through the issue of units to investors and the Banking Group considers them to be SEs.
The Banking Group’s interests in these MIS is limited to receiving fees for services or providing risk management
products (derivatives). These interests do not create significant exposures to the MIS that would allow the Banking
Group to control the funds. Therefore, these MIS are not consolidated.

58

NOTES TO THE FINANCIAL STATEMENTS

24. STRUCTURED ENTITIES (continued)
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 (2018: nil).
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$198 million (2018: NZ$191 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 (2018: NZ$3.3 billion).
The Banking Group did not provide any non-contractual support to unconsolidated SEs during the year (2018: 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.

59

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
25. 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 24 Structured Entities for further details. The covered bonds
issued externally are included within debt issuances.
Repurchase agreements
When the Banking Group sells securities subject to repurchase agreements under which we retain substantially all the risks and rewards of ownership,then those assets 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
2019
2018
NZ$m
NZ$m
10,747
11,6003,929
4,460

Repurchase agreements
2019
2018
NZ$m
NZ$m
517
203
517
203

26. DIVESTMENTS
OnePath and Paymark
On 30 November 2018, the Banking Group sold OnePath to Cigna Corporation and on 11 January 2019, the Banking Group sold its 25% shareholding
in Paymark to Ingenico Group. The Banking Group recognised net gains on sale of NZ$66 million and NZ$39 million respectively, which are included
in other operating income.
Assets and liabilities sold
NZ$m
Investments backing insurance contract liabilities
Other assets, net of amounts payable to the Bank

101
6

Life insurance contract assets

675

Investments in associates - Paymark

7

Goodwill and other intangible assets

101

Total assets

890

Deposits and other borrowings (deposits with the Bank)(50)

Current tax liabilities

18

Deferred tax liabilities

178

Payables and other liabilities

146

Provisions

2

Total liabilities

294

Net assets sold

596

60

NOTES TO THE FINANCIAL STATEMENTS

27. RELATED PARTY DISCLOSURES
Key management personnel and their related parties
Key management personnel (KMP) are defined as directors and those executives having authority and responsibility for planning, directing andcontrolling the activities of the Banking Group. Executive roles included in KMP are the Bank’s Chief Executive Officer (CEO), all executives reporting
directly to the Bank’s CEO, and the CEO – NZ Branch.
2019
2018
Key management personnel compensation1
NZ$000
NZ$000
Salaries and short-term employee benefits2
11,738
10,827
Post-employment benefits3219
297
Other long-term benefits4
38
39
Termination benefits5
452
2,233
Share-based payments
3,308
2,242
Total
15,63815,7551
2

3
4
5Includes former disclosed KMPs until the end of their employment.
Includes restatement of prior year amount to include items previously characterised as business related expenses that would more appropriately be characterised as non-business related.
Similar items existed in the prior periods between 2010-2017 which would have increased the short-term benefits by less than NZ$0.1m per annum. Prior year amount has also been restatedto include fringe benefit tax paid on short-term benefits, additional fees paid to a director, and the reclassification of annual and long service leave paid on termination to termination benefits.
Includes restatement of prior year amount to reclassify retirement allowances paid on termination to termination benefits.
Comprises long service leave accrued during the year.
Includes payments for accrued annual leave, long service leave and pay in lieu of notice in accordance with contract, payable on cessation. Comparative amounts have been updated toinclude payments of accrued annual and long service leave on termination previously included in salaries and short-term benefits, and payments of retirement allowances on termination
previously included in post-employment benefits.

Transactions and balances with key management personnel and their related parties1
Secured loans and advances
Credit related commitments (undrawn loan facilities)
Interest income
Customer deposits
Payables and other liabilities (share-based payments liability)
1

2019
NZ$m
23
5
1
14
2

2018
NZ$m
19
4
1
18
3

Includes KMP, close family members of KMP and entities that are controlled or jointly controlled by KMP or their close family members, of the Banking Group and its parent companies.
Comparative amounts have been updated for consistency with current period presentation.

Loans made to KMP and their related parties are made in the ordinary course of business on normal commercial terms and conditions no morefavourable than those given to other employees or customers, including the term of the loan, security required and the interest rate. No amounts
have been written off or forgiven, or individually assessed allowances for expected credit losses raised in respect of these balances (2018: nil).
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. In addition to the amounts above:•
Aggregate amounts for each of unsecured loans and advances, interest expense, fee income, insurance premium income, debt issuances andcollectively assessed credit impairment charge and allowance for expected credit losses were less than NZ$1 million for both years presented.
•
KMP and their related parties also hold units in MIS managed by the Banking Group. These holdings include NZ$0.2 million (2018: nil) of units in
the ANZ PIE Fund, which are invested solely in deposits of the Bank. Other transactions and balances in respect of these, and other, MIS holdings
are not disclosed because those MIS are unconsolidated structured entities and not included in the financial statements of the Banking Group.
• A close family member of an executive reporting to the CEO is an employee of the Banking Group and received total compensation of NZ$0.1
million (2018: NZ$0.1 million).
•
Some KMP pay the Banking Group for the use of carparks in premises owned or leased by the Banking Group. These amounts were less than
NZ$0.1 million (2018: less than NZ$0.1 million)
In November 2010, a subsidiary of the Bank, Arawata Assets Limited, purchased a residential property for NZ$7.55 million. The property was leased tothe then CEO of the Bank, Mr David Hisco, as part of a relocation package arrangement.
On 31 March 2017, the property was sold to Mr Hisco’s wife for NZ$6.9 million. At that time, Mr Hisco was the CEO of the Bank and a member of KMP.
The Bank obtained two independent valuations of the property, one of which was not considered for a number of reasons, including that it did notcomply with valuation standards. The Bank then obtained a further independent valuation and the sale price was determined as the midpoint of two
independent valuations, less an amount reflecting part of the estimated sale costs that would have otherwise been incurred.
This transaction was not separately disclosed in the Banking Group’s 2017 financial statements. The Banking Group acknowledges the decision of the
Financial Markets Authority that the Banking Group should have disclosed the March 2017 sale as a related party transaction in its 2017 financial
statements.
Transactions with other members of the Overseas Banking Group and associates
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. Other than noted on the following page,transactions with related parties outside of the Banking Group are conducted on an arm’s length basis and on normal commercial terms.
61

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
27. RELATED PARTY DISCLOSURES (continued)
Transactions
Immediate Parent Company
Interest expense
Ordinary shares issued
Dividends paid
Ultimate Parent Bank and other subsidiaries not part of the Banking GroupInterest income
Interest expense
Fee income
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
Associates
Direct fee expense
Dividends received
Share of associates' profit
Outstanding balances
Ultimate Parent Bank and other subsidiaries not part of the Banking Group
Cash and cash equivalents
Collateral paid
Derivative financial instruments
Other assets
Associates
Investments in associates
Total due from related parties
Immediate Parent Company
Deposits and other borrowings
Derivative financial instruments
Ultimate Parent Bank and subsidiaries not part of the Banking Group
Settlement balances payable
Collateral received
Deposits and other borrowings
Derivative financial instruments
Payables and other liabilities
Debt issuances
Associates
Deposits and other borrowings
Payables and other liabilities
Post-employment benefit plans for the benefit of employees of the Banking Group
Deposits and other borrowings
Total due to related parties

2019
NZ$m

2018
NZ$m

411

1
3,000
4,611

19
135
4
24
60
1,098

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

4
3
4

10
6
5

79
810
3,933
58

33
2,431
39

4,880

6
2,509

33
4

29
1

66
11
4,777
24
1,956

125
257
11
2,248
30
1,945

1
-

1
1

2
6,874

4,648

Balances due from / to other members of the Overseas Banking Group and associates are unsecured. The Bank has provided guarantees andcommitments to, and received guarantees from, these entities as follows. Fees associated with the provision of financial guarantees to/by the Ultimate
Parent Bank may be lower than those for similar transactions with unrelated parties.

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

62

2019
NZ$m
456
114
250
1

2018
NZ$m
698
138
250
1

NOTES TO THE FINANCIAL STATEMENTS

28. COMMITMENTS AND CONTINGENT LIABILITIESCREDIT RELATED COMMITMENTS AND CONTINGENCIES

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

2019
NZ$m

2018
NZ$m

26,6001,248
1,502
29,35027,245
1,531
1,329
30,105

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$26,600 million (2018: NZ$27,245 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$1,248 million (2018:
NZ$1,531 million) and total performance related contingencies of NZ$1,502 million (2018: NZ$1,329 million) mature within 12 months.
PROPERTY 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 Buildings1
Furniture and equipment
Motor vehicles
Total lease rental commitments
Due within 1 year1
Due later than 1 year but not later than 5 years1
Due later than 5 years1
Total lease rental commitments
1

2019
NZ$m

2018
NZ$m

6
6

7
7

279
7
6
292
53
148
91
292

284
86
8
378
79
203
96
378

Comparatives have been restated to exclude costs for services to be paid by and reimbursed to the lessor as required by NZ IAS 17 Leases.

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 prejudiceseriously the interests of the Banking Group in relation to the particular matter.

63

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS
28. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Regulatory and customer exposures
In recent years there has been an increase in the number of matters on which the Banking Group engages with its regulators. There have also beensignificant increases in the nature and scale of regulatory investigations and reviews, civil and criminal enforcement actions (whether by court action
or otherwise), formal and informal inquiries, regulatory supervisory activities and the quantum of fines issued by regulators, particularly against
financial institutions globally. The Banking Group has received various notices and requests for information from its regulators as part of both industrywide and Banking Group-specific reviews, and has also made disclosures to its regulators at its own instigation. The nature of these interactions can bewide ranging and, for example, may include a range of matters including responsible lending practices, product suitability and distribution, interestand fees and the entitlement to charge them, customer remediation, wealth advice, insurance distribution, pricing, competition, conduct in financial
markets and financial transactions, capital market transactions, anti-money laundering and counter-terrorism financing obligations, reporting anddisclosure obligations and product disclosure documentation. 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.
Reviews under section 95 of the Reserve Bank of New Zealand Act 1989 (RBNZ Act)
On 5 July 2019 RBNZ issued a notice under section 95 of the RBNZ Act, requiring the Bank to obtain two external reviews, the first on the Bank’s
compliance with certain aspects of the RBNZ Banking Supervision Handbook document Capital Adequacy Framework (Internal Models Based Approach)(BS2B) and the second on the effectiveness of the Bank’s directors’ attestation and assurance framework. While the director attestation and assurance
framework review has now been completed, and the Bank is committed to implementing the recommendations identified and addressing the issues
raised, the review of compliance with capital adequacy requirements is ongoing. On 11 December 2019 RBNZ issued a further notice under section 95
of the RBNZ Act, requiring the Bank to obtain an external review of the improvements made to the Bank’s directors’ attestation and assurance
framework.
Warranties and indemnities
The Banking Group has provided warranties, indemnities and other commitments in favour of the purchaser in connection with various disposals of
businesses and assets and other transactions, covering a range of matters and risks. It is exposed to potential claims under those warranties,
indemnities and commitments.

29. COMPENSATION OF AUDITORS2019
NZ$0002018
NZ$000

1,852

2,199

1,418
111
53
1,582
3,434

212
104
36
352
2,551

42
3,476

45
2,596

KPMG 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

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 New Zealand to provide assurance and other audit related services that, while outside the scope of thestatutory audit, are consistent 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 New Zealand may not provide services that are perceived to be in conflict with the role ofthe external auditor or breach auditor independence. These include consulting advice and subcontracting of operational activities normally
undertaken by management, and engagements where the external auditor may ultimately be required to express an opinion on its own work.

30. EVENTS SINCE THE END OF THE FINANCIAL YEAR
UDC announced on 29 July 2019 that it had decided to exercise its right to redeem all UDC secured investments, and all UDC secured investments
were repaid or transferred to deposits in the Bank on 14 October 2019.
On 31 October 2019, the Bank announced that it is again exploring a range of strategic options, including divestment, for UDC.
There were no other significant events from 30 September 2019 to the date of signing this Disclosure Statement.

64This page has been left blank intentionally

65

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

66

Section

Order reference

Page

B1.

General disclosures

Schedule 2

67

B2.

Additional financial disclosures

Schedule 4

78

B3.

Asset quality

Schedule 7

79

B4.

Capital adequacy under the internal models based approach,and regulatory liquidity ratios

Schedule 11

85

B5.

Concentration of credit exposures to individual counterparties

Schedule 13

90

B6.

Credit exposures to connected parties

Schedule 14

91

B7.

Insurance business, securitisation, funds management, other fiduciary activities,
and marketing and distribution of insurance products

Schedule 15

92

B8.

Risk management policies

Schedule 17

94

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
The Banking Group is subject to extensive prudential regulation by APRA. APRA’s current or future requirements may have an adverse effect on the
Bank’s business, results of operations, liquidity, capital resources or financial condition.
APRA Prudential Standard APS 222 Associations with Related Entities (APS 222) sets minimum requirements for authorised deposit-taking institutions(ADIs) in Australia, including the Ultimate Parent Bank, in relation to the monitoring, management and control of risks which arise from associations
with related entities and also includes maximum limits on intra-group financial exposures.
Under APS 222, the Ultimate Parent Bank’s ability to provide financial support to the Bank is subject to the following 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 or amount) in the Bank (e.g. not provide
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) triggers or is deemed to trigger a default by the Ultimate Parent Bank on its obligations; and• the level of exposure, net of exposures deducted from capital, of the Ultimate Parent Bank’s Level 1 total capital base to the Bank should notexceed: (A) 50% on an individual exposure basis; or (B) 150% in aggregate (being exposures to all similar regulated ADI equivalent entities
related to the Ultimate Parent Bank).
In August 2019, APRA released an update to APS 222, which is to be effective from 1 January 2021. Changes that affect the quantum and nature of thefinancial support that the Ultimate Parent Bank can provide the Bank are:• change the Level 1 capital base used for setting the exposure limits from total capital to Tier 1 capital; and• reduce the ADI exposure limit to 25% of Level 1 Tier 1, and the aggregate to 75% of Level 1 Tier 1 capital base.
APRA has provided for entity-specific transitional arrangements or flexibility on a case-by-case basis.
Further, in October 2019, APRA released a consultation paper on changes to APS 111 Capital Adequacy (APS 111), which proposes to change the Level
1 capital treatment for Australian ADIs, such as the Ultimate Parent Bank, investing in ADIs (or overseas equivalents such as the Bank) and insurance
subsidiaries. The proposed changes, set for implementation from 1 January 2021, would result in:• the initial investment, up to an amount equal to 10% of the Ultimate Parent Bank’s net Level 1 CET1 capital base, being risk-weighted at 250%;
and• the remainder of the investment being treated as a CET1 capital deduction.
If implemented, these APS 111 changes would reduce the Ultimate Parent Bank’s Level 1 Tier 1 capital base and exposure to the Bank for the purposesof APS 222 reporting. As a result, the Ultimate Parent Bank’s expected exposure to the Bank at 1 January 2021 would be compliant with the revised
APS 222 limits.
In addition, APRA has 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 (including its subsidiaries incorporated in New Zealand, such as the Banking Group and the New
Zealand Branch) during ordinary times. This limit does not include holdings of capital instruments or eligible secured contingent funding support
provided to the Bank during times of financial stress.
APRA has also confirmed that contingent funding support by the Ultimate Parent Bank to the Bank during times of financial stress must be provided
on terms that are acceptable to APRA. At present, only covered bonds meet APRA’s criteria for contingent funding.
Effect of the Level 3 framework
In addition, certain requirements of APRA’s Level 3 framework relating to, among other things, group governance and risk exposures became effective
on 1 July 2017. This framework also requires that the Ultimate Parent Bank must limit its financial and operational exposures to subsidiaries (including
the Bank).
In determining the acceptable level of exposure to a subsidiary, the Board of the Ultimate Parent Bank should have regard to:• the exposures that would be approved for third parties of broadly equivalent credit status;• the potential impact on the Ultimate Parent Bank’s capital and liquidity positions; and• the Ultimate Parent Bank’s ability to continue operating in the event of a failure by 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 are to 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.
67

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B1. GENERAL DISCLOSURES (continued)
Interests 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 31 for further details, and topage 49 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 12 December 2019.
Auditors
KPMG, 18 Viaduct Harbour Avenue, Auckland, New Zealand.
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.
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 has five members. Each member is a non-executive Director, themajority of whom satisfy the criteria for independence.
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 confirm and disclose, in terms of section 140(1) of the Companies Act 1993, 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 confirm and make a general disclosure of their interest in other entities in terms of section 140(2) of theCompanies Act 1993.
In addition to the disclosures referred to above, Directors disclose relevant interests which they have before discussion of particular business items.
Disclosures are entered into the Bank’s Interests Register.
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.

68

REGISTERED BANK DISCLOSURES

B1. GENERAL DISCLOSURES (continued)

Rt Hon Sir John Key, GNZM AC

Antony Carter

Shayne Elliott

PositionIndependent Non-Executive Director
and Chair

Independent Non-Executive Director

Non-Executive Director

Occupation

Company Director

Company Director

Chief Executive Officer, Australia and
New Zealand Banking Group Ltd

Qualifications

BCom, DCom (Honoris Causa)

BE (Hons), ME, MPhil, CFInstD, FNZIM

BComResides

Auckland, New Zealand

Auckland, New Zealand

Melbourne, Australia

Avonhead Mall Ltd, Datacom Group Ltd,
Fisher & Paykel Healthcare Corporation
Ltd, Fisher & Paykel Healthcare Employee
Share Purchase Trustee Ltd,Loughborough Investments Ltd, Modern
Merchants Ltd, Strategic Interchange Ltd,
Tetrad Corporation Ltd, T R Group Ltd,
Vector Ltd

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

Other company Air New Zealand Ltd, Australia and New
Zealand Banking Group Ltd, MTK Capital
directorships
Ltd, Palo Alto Networks Inc, Thirty Eight JK
LtdAlison Gerry

Michelle Jablko

PositionIndependent Non-Executive Director

Non-Executive Director

Occupation

Company Director

Chief Financial Officer, Australia and
New Zealand Banking Group Ltd

Qualifications

BMS (Hons), MAppFin, CFInstD

LLB (Hons), B.Ec (Hons)

Resides

Queenstown, New Zealand

Melbourne, Australia

Other company
directorships

Asteron Life Ltd, Avokaha Ltd, Glendora
Avocados Ltd, Glendora Holdings Ltd,Infratil Ltd, Lindis Crossing Vineyard Ltd,On Being Bold Ltd, Sharesies Ltd,
Sharesies Nominee Ltd, Vero Insurance
New Zealand Ltd, Vero Liability
Insurance Ltd, Wellington International
Airport Ltd

ANZ Holdings (New Zealand) Ltd, Bialik
College Ltd

Mark Verbiest

Joan Withers

PositionIndependent Non-Executive Director

Independent Non-Executive Director

Occupation

Company Director

Company Director

Qualifications

LLB, CFInstD

MBA, CFInstD

Resides

Wanaka, New Zealand

Auckland, New Zealand

Other company
directorships

Bear Fund NZ Ltd, Freightways Ltd,
Meridian Energy Ltd, Willis Bond CapitalPartners Ltd, Willis Bond General PartnerLtd

On Being Bold Ltd, Sky Network
Television Ltd, The Warehouse Group
Ltd, The Warehouse Planit Trustees Ltd,The Warehouse Management Trustee
Company Ltd, The Warehouse
Management Trustee Company No.2 Ltd

69

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B1. GENERAL DISCLOSURES (continued)
Conditions of registration
The following conditions of registration were applicable as at 30 September 2019, and have applied from 30 June 2019.
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, —“supervisory adjustment” referred to in Part 3 of the Reserve Bank of New Zealand document “Capital Adequacy Framework (Internal Models Based Approach)”(BS2B) dated November 2015 is calculated as the scalar times the sum of:(a) the greater of:i. 27.66 percent of the exposure-at-default (EAD) amount of non-defaulted standard residential mortgage loans less the risk-weighted asset amount(without scalar) calculated using the bank’s approved IRB models for non-defaulted standard residential mortgage loans; andii. zero;and(b) the greater of:i. 75.47 percent of the exposure-at-default (EAD) amount of non-defaulted corporate farm lending exposures less the risk-weighted asset amount(without scalar) calculated using the bank’s approved IRB models for non-defaulted corporate farm lending exposures; andii. zero;“standard residential mortgage loan” has the same meaning as in 4.7(a) of the Reserve Bank of New Zealand document “Capital Adequacy Framework (Internal
Models Based Approach)” (BS2B), dated November 2015;“corporate farm lending exposures” has the same meaning as in 4.4(c) 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 and elsewhere in this condition of registration is 1.06;“Total capital ratio”, “Tier 1 capital ratio”, and “Common Equity Tier 1 capital ratio” have the same meaning as in Part 3 of the Reserve Bank of New Zealanddocument “Capital Adequacy Framework (Internal Models Based Approach)” (BS2B) dated November 2015, except that in the formulae for calculating the ratios,
the term “total capital requirement for operational risk” has the same meaning as in Part 9 of the Reserve Bank of New Zealand document “Capital Adequacy
Framework (Standardised Approach)” (BS2A) dated November 2015;“Total capital” has the same meaning as in Part 2 of 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.

1B.

70

That—
(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 bank complies with the minimum requirements set out in the following sections of the Reserve Bank of New Zealand document “Capital Adequacy
Framework (Internal Models Based Approach)” (BS2B) dated November 2015:(a)the model approval requirements in section 1.3A;(b)the compendium requirements in section 1.3B;(c)the minimum requirements for the IRB approach in sections 4.217 to 4.324 (that is, Subpart 4C of BS2B); and(d)the minimum qualitative requirements for using the Advanced Measurement Approach (“AMA”) for operational risk set out in section 8.4(a) and sections 8.5
to 8.14.

REGISTERED 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, except that in the formula for calculating the buffer ratio, the term “total capital requirement for
operational risk” has the same meaning as in Part 9 of the Reserve Bank of New Zealand document “Capital Adequacy Framework (Standardised Approach)” (BS2A)
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% 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.

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.

71

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED 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)72

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.

REGISTERED 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 October 2018.
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.

73

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED 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
mortgage loans with a loan-to-valuation ratio of more than 70%, must not exceed 5% of the total of the qualifying new mortgage lending amount in respect ofproperty-investment 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 mortgage loans with a loan-to-valuation ratio of more than 80%, must not exceed 20% of the total of the qualifying new mortgage lending amount inrespect 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 2019:“loan-to-valuation measurement period” means—(a)the three calendar month period ending on the last day of March 2019; 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 2019.

Changes since 31 March 2019
Effective 15 May 2019, the Bank’s conditions of registration were amended to require the Banking Group’s operational risk capital (ORC) requirement
to be calculated in accordance with BS2A.
Effective 30 June 2019, the Bank’s conditions of registration were amended to include a supervisory adjustment to the Banking Group’s capital
adequacy calculations. This supervisory adjustment introduced minimum pre-scalar risk weightings for residential mortgage exposures and corporate
farm lending exposures.
Non-compliance with conditions of registrationa)Condition of Registration 1B – compliance with BS2B

A number of reviews of the Banking Group’s application of, and compliance with, BS2B have been conducted both internally and by external parties.
These reviews have identified the instances of non-compliance with Condition of Registration 1B on the following page.
The aggregate impact of the matters noted below as at 30 September 2019 was an understatement of risk weighted assets (RWA) of NZ$203 million,
compared to reported RWA of NZ$97,070 million. This net increase in RWA would decrease the Banking Group’s capital ratios by less than 0.03% andwould change the reported CET 1 capital ratio to 10.7% from 10.8%, but is not sufficient to affect the reported tier 1 and total capital ratios.
As at 30 September 2019, the Banking Group’s total regulatory capital of over NZ$13 billion was more than NZ$4 billion (44%) higher than theminimum 10.5% (including buffer) of RWA required.
74

REGISTERED BANK DISCLOSURES

B1. GENERAL DISCLOSURES (continued)
Area

Details

ORC model

In April 2019, the Bank informed RBNZ that in the course of a self-review, the Bank discovered that it had not been using anapproved model for the calculation of the ORC requirement since December 2014.

(reported in March
2019 disclosurestatement)

ORC was calculated for the Bank by the Ultimate Parent Bank. A failure of systems and controls, as well as no verification being
undertaken by the Bank, meant that the Ultimate Parent Bank decommissioned the RBNZ approved model without the Bank
ensuring that it had the necessary regulatory approvals in place to move to a new model. Calculation of the ORC requirement
since December 2014 was based on a previous RBNZ approved ORC model output last run in September 2014, with an
adjustment to reflect the growth of the Banking Group’s business. The Bank accepts that this was not in compliance withcondition of registration 1B.
The adoption of this calculation and decommissioning of the authorised ORC model occurred following development of a
new ORC model in 2015 to be used by the Overseas Banking Group that better reflected the risks in the business. This new
ORC model was approved by APRA in September 2015 and subsequently submitted to RBNZ for approval in June 2016. In
2016, RBNZ suspended approval of capital models and, the new ORC model has not been approved.
The RBNZ decided that the Banking Group’s ORC requirement would be calculated in accordance with BS2A, and the Bank’s
Conditions of Registration were amended to this effect from 15 May 2019. As a result, as at 31 March 2019, the Banking
Group’s ORC requirement increased by NZ$277 million, and its capital ratios decreased by 40 basis points for CET 1 capital and60 basis points for total capital. Restatement of prior period comparatives was not required.

Credit risk models

The Bank has not complied with condition of registration 1B in relation to the implementation of changes to rating models
and processes that were not approved by RBNZ. Affected models and the initial dates of non-compliance are noted below.
Applying the last RBNZ approved methodologies to the affected exposures as at 30 September 2019 would decrease RWA by
NZ$47 million (0.05%) in aggregate, which is not sufficient to affect the reported capital ratios.
• Commercial Property Model Suite (Single Investment, Multi Investment, Hotel Investment, Special Purpose Asset
Investment, Single Residential Development, Commercial Development, Englobo Land Pre Development) - 2011
• Non-Bank Financial Institutions Model Suite (Life Insurance, Non-life Insurance, Insurance Holding Company, Finance
Companies, Financial Services Companies, Real Money Funds) - 2009
• Project and Structured Finance - 2009
• Bank, Country & Sovereigns - 2008
The Bank’s model compendium required under section 1.3B of BS2B is not accurate as it includes unapproved model changes.
The Bank is working with RBNZ on this issue.

Other calculation
matters

Until 31 December 2018, Condition of Registration 1B required compliance with all aspects of BS2B. Effective 1 January 2019,
the Bank’s conditions of registration were amended to refer to specific sections of BS2B only.
Errors were identified in the calculations of risk-weighted assets that meant that the Bank had not complied with Condition ofRegistration 1B from the emergence of the errors, as noted in the table below, until 31 December 2018. The Bank does notconsider that these errors would have materially affected the reported capital ratios. The effect on RWA of each of these errors
as at 30 September 2019 is shown below. The net increase in RWA would change the reported CET 1 capital ratio to 10.7% from
10.8%, but is not sufficient to affect the reported tier 1 and total capital ratios.
Understatement / (overstatement) of RWA
Credit risk - LGD calculated incorrectly for a small number of farm lending exposures1
Credit risk - incorrect EAD factor of 23%, instead of 33%, applied to UDC retail commitments1
Credit risk - exposures incorrectly risk weighted as standardised (100%) rather than advanced (360%)2
Credit risk - asset value correlation multiplier applied using a threshold of A$100m rather than NZ$120m3
Market risk - net interest rate risk for some currency exposures calculated in aggregate rather than individually2
Market risk - modelling of forward interest rate agreements and interest rate futures
Net understatement / (overstatement) of RWA
Reported risk weighted assets
Aggregate error in risk weighted assets (%)
1
2
3

BS2B
ref
4.61A
4.64B
4.136A
7
7

Error
since
2017
2017
2017
2013
2008
2008

30 Sep 19
NZ$m
(1)
2
30
(10)
23
206
250
97,0700.26%

Issue corrected for the calculation of risk-weighted assets at 30 November 2019.
Issue will be corrected for the 31 December 2019 capital adequacy calculation.
Issue will be resolved following the necessary system change.

In addition to the above, in relation to the calculation of market risk capital under part 7 of BS2B:•

A formula error created in October 2010, had a maximum impact in March 2017 that understated the market risk capitalrequirement by $37 million, but did not affect the reported capital ratios. This was corrected as at 30 September 2019.

•

The system that calculates market risk capital allocates small portions of loan principal to incorrect time periods. Thesemovements could be in both directions, depending on the time of month and timing and frequency of payments, andso may result in either an overstatement or an understatement of the market risk capital requirement. The impact can bemodelled on examples of loans but is unable to be quantified with accuracy across the portfolio. The issue, which has
existed since 1999, had been documented and assessed as immaterial, however as a zero materiality threshold is applied,
constituted a breach of condition of registration 1B.
75

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B1. GENERAL DISCLOSURES (continued)b)Condition of Registration 5 - Exposures to connected persons not on more favourable terms (BS8)

From time to time, the Bank provides a guarantee or standby letter of credit to a third party in respect of an obligation of a customers of the Ultimate
Parent Bank. The Ultimate Parent Bank provides a counter-guarantee or standby letter of credit to the Bank, giving the Bank recourse directly to the
Ultimate Parent Bank if the guarantee or standby letter of credit the Bank provides in respect of the customer's obligations is called upon. The Bank
charges the Ultimate Parent Bank a fee for this service. However, through an internal review, the Bank identified that since January 2014 this fee has
been lower than the fee charged for this same service provided to unrelated banks and, as a result, the Bank has not complied with condition ofregistration 5. As at 30 September 2018, the value of the exposure was NZ$698 million, and was NZ$456 million across 246 individual transactions at
30 September 2019. The Bank is currently working to establish a revised pricing methodology for these transactions. The Bank anticipates this will bein place for all new transactions entered into after 31 December 2019.
c)

Condition of Registration 13 - Liquidity ratios (BS13)

During a review, the following matters of non-compliance with BS13 were identified. These errors were not sufficient to affect the reported liquidity
ratios.
•Under BS13, ‘Market Funding’ entities are defined by reference to the 2006 ANZSIC code K62. A sub-code was incorrectly allocated to ‘Non-Market’.
This error had existed since 2017. This error was corrected as at 30 September 2019, and decreased the one week and one month mismatches andcore funding by NZ$2.1 million but did not affect the reported ratios.

•

The Bank calculated the next cash inflow on variable-rate housing loans based on a current wholesale rate plus the existing margin rather thanusing the current interest rate to calculate the inflow. This calculation error has existed since 2010. As at 30 September 2019, the difference led toan understatement of the one week and one month liquidity mismatches by NZ$0.07 million and NZ$2.8 million respectively but did not affectthe reported ratios.

•

The liquidity ratio calculation system and the system of record for certain bond liabilities and certain swaps calculate future cash flows differently.
The difference has been known since 2017. The difference led to an understatement of the one month mismatch by $0.9 million as at 30
September 2019, but did not affect the reported ratio.

d)Condition of Registration 24 – Outsourcing (BS11 dated September 2017)

BS11 requires the Bank to apply specified risk mitigants against each outsourcing arrangement. During the year ended 30 September 2019, the Bank
outsourced two arrangements to the Overseas Banking Group without the required prescribed contractual terms. These arrangements will be
remediated in the year ending 30 September 2020.
BS11 requires the Bank to have a compendium of information about outsourcing arrangements in place by 1 October 2019. In November 2019, theBank informed RBNZ that minor data discrepancies had been identified for certain information entered in the compendium during the year ended 30
September 2019.
Other matters under review
There are several matters under review, including the calculation of the market risk capital requirement (under BS2B) and liquidity ratios (under BS13
and BS13A), where there may be more than one valid interpretation of the respective policy wording or requirement. Where there may be someuncertainty about the interpretation the Bank has applied, where appropriate it will seek further guidance from RBNZ and other parties on thesematters. In the Bank’s current view, the potential impact of the application of other interpretations is immaterial to reported ratios.
Reviews under section 95 of the Reserve Bank of New Zealand Act 1989
On 5 July 2019, the RBNZ gave the Bank notice, under section 95 of the Reserve Bank of New Zealand Act 1989, requiring the Bank to engage anexternal reviewer to provide reports regarding the Bank’s compliance with the RBNZ’s capital adequacy requirements and the effectiveness of theBank’s director attestation and assurance framework. The scope of the director attestation and assurance framework review also included four casestudies covering the ORC breach, mischaracterisation of the former CEO’s expenses, transactions relating to the 2017 sale of a residential property to
the wife of the former CEO, and the 2018 conditions of registration breach relating to the treatment of commitments jointly held with the Ultimate
Parent Bank.
The director attestation and assurance framework review has been completed. The review identified a number of recommendations to improve thedirector attestation and assurance framework. The Bank accepts the findings of the director attestation and assurance framework review and iscommitted to implementing the recommendations identified and addressing the issues raised. On 11 December 2019 RBNZ issued a further noticeunder section 95 of the RBNZ Act, requiring the Bank to obtain an external review of the improvements made to the Bank’s directors’ attestation andassurance framework.
The Bank is continuing to work with the RBNZ and the external reviewer to undertake the review regarding the Bank’s compliance with the RBNZ’scapital adequacy requirements.

76

REGISTERED BANK DISCLOSURES

B1. GENERAL DISCLOSURES (continued)
Other material matters
Outcome of the RBNZ capital review
On 14 December 2018, the RBNZ sought feedback on proposals to reform the amount of regulatory capital required of banks incorporated in New
Zealand. On 5 December 2019, the RBNZ released its final decisions in respect of these proposals.
While the increase in capital remains significant, as a result of the consultation process there have been changes to the capital instruments and thetransition period to the new regime.
The key changes to the RBNZ final capital requirements relative to the consultation paper are:•No change in total Tier 1 capital required for the Banking Group of 16%, however the transition period is longer at seven years.
•
A greater proportion of the increase is in AT1 capital (2.5% compared to the initial proposal of 1.5%), decreasing the amount of CET1 capitalrequired.
• Redeemable preference shares allowable as AT1 capital. It is anticipated that the Bank will be able to refinance existing internal AT1 securities(issued to the Immediate Parent Company) to external counterparties.
Any changes will be implemented gradually, considering the market is competitive for lending. The Banking Group has already started preparing forthe change. Of the Banking Group’s NZ$1.8 billion net profit after tax in for the year ended 30 September 2019, approximately 80% has been retainedin response to the proposals.
Credit rating
As at 12 December 2019 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 9 July 2019, S&P Global Ratings changed the outlook on the Bank from Negative to Stable. On 17 July 2019,
Fitch Ratings changed the outlook on the Bank from Stable to Negative.
The Bank’s credit ratings are:Rating agency
S&P Global Ratings
Fitch Ratings
Moody’s Investors Service

Credit rating
AAAAA1

Qualification
Outlook Stable
Outlook Negative
Outlook Stable

The following table describes the credit rating grades available:
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.

77

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED 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
Profit before income tax
Income tax expense
Profit after income tax
Dividends paid
Share capital issued
Balance sheet
Total assets
Total individually impaired assets
Total impaired assets (i.e. stage 3)
Total liabilities
Equity

2019
NZ$m
6,423
(3,179)
3,244
946
4,190
(1,608)
(101)
2,481
(662)
1,819

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

(411)
-

(4,611)3,000(1,695)-(1,363)-(1,760)675

169,416285
729
154,986
14,430159,012321
n/a
145,903
13,109

153,973357
n/a
141,192
12,781

160,819426
n/a
148,109
12,710147,527382
n/a
135,074
12,453

The amounts included in this summary have been taken from the audited financial statements of the Banking Group.
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 28 Commitments and Contingent Liabilities.
Directors’ statements
The Directors' statement is included on page 98.
Auditor’s report
The auditor’s report is included on page 99.
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.

B2. ADDITIONAL FINANCIAL DISCLOSURES
Additional information on the balance sheet

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

78

2019
NZ$m
153,298
129,4942018
NZ$m
145,322
124,625REGISTERED BANK DISCLOSURES

B2. ADDITIONAL FINANCIAL DISCLOSURES (continued)
Additional 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.

2019
AssetsCash and cash equivalents
Settlement balances receivable
Collateral paid
Trading securities
Derivative financial instruments
Investment securities
Net loans and advances
Other financial assets
Total financial assets
Liabilities
Settlement balances payable
Collateral received
Deposits and other borrowings
Derivative financial instruments
Debt issuances
Other financial liabilities
Total financial liabilities
Hedging instruments
Interest sensitivity gap

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

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

2,363
193
2,324
8,942
11,666
7,027
132,525622
165,662

2,081
2,324
650
256
64,76470,075253
148
10,935
11,336253
247
23,041
23,541

1,624
1,997
24,52228,143

6,162
4,378
9,663
20,203282
193
11,6661(400)
622
12,364

1,607
991
113,427
11,042
26,207841
154,115
11,547451
991
70,5463,499
213
75,700(6,725)(12,350)

16,367
1,486
17,853
11,340
4,823

10,9783,446
14,424
698
9,815

2,221
4,266
6,487
(9,612)
12,044

1,520
13,51015,030
4,299
9,472

1,156
11,795
11,042628
24,621(12,257)

Note
11

B4
B4
B4

NZ$m
84,007(1)(2,109)4
81,901
8,268
90,169Corporate
exposures
NZ$m
182
88
270

Total
NZ$m
382
72
454

217
53
270

371
83
454

Reconciliation of mortgage related amounts
As at 30 September 2019
Term loans - housing1
Less: fair value adjustment on mortgages repurchased from the NZ BranchLess: 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)1Term loans – housing includes loans secured over residential property for owner-occupier, residential property investment and business purposes.

B3. ASSET QUALITY
Collectively assessed loss allowances

Collectively assessed loss allowances - Total
As at 30 September 2018 (NZ IAS 39)
NZ IFRS 9 transition adjustment
As at 1 October 2018 (NZ IFRS 9)
Collectively assessed loss allowances - recognised in:
Net loans and advances
Provisions
As at 1 October 2018 (NZ IFRS 9)

Note
1,12

Residential Other retailmortgages
exposures
NZ$m
NZ$m
82
118
(36)
20
46
138

46
46

108
30
138

79

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B3. ASSET QUALITY (continued)
Movements in components of loss allowance – total
Stage 3
Collectively IndividuallyStage 2
assessedassessed
NZ$m
NZ$m
NZ$m
171
40
130
(40)
3
8
63
(1)
121
(48)
(23)
23
2
58
(106)
23
(8)
194
42
97

Net loans and advances - total
As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Write-backs
Recoveries of amounts previously written off
Credit impairment charge
Bad debts written-off (excluding recoveries)
Add back recoveries of amounts previously written off
Discount unwind
As at 30 September 2019

Stage 1
NZ$m
160
29
(25)
4
164

Total
NZ$m
501
158
(48)
(23)
87
(106)
23
(8)
497

Off-balance sheet credit related commitments - total
As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Credit impairment charge
As at 30 September 2019

59
5
(4)
1
60

22
(5)
7
2
24

2
2

11
11
11

83
14
14
97

Gross loans and advances - total
As at 1 October 2018
Net transfers in to each stage
Amounts drawn from new or existing facilities
Additions
Net transfers out of each stage
Amounts repaid
Deletions
Amounts written off
As at 30 September 2019
Loss allowance as at 30 September 2019

118,878
21,123
21,123(2,372)(14,344)(16,716)
123,285
164

7,448
1,979
687
2,666
(1,106)(1,106)
9,008
194

331
206
35
241
(128)
(128)
444
42

321
203
105
308
(16)
(222)
(238)
(106)
285
97

126,978
2,388
21,95024,338(2,388)(15,800)(18,188)(106)
133,022497

Off-balance sheet credit related commitments - total
As at 1 October 2018
Net transfers in to each stage
Amounts drawn from new or existing facilities
Additions
Net transfers out of each stage
Amounts repaid
Deletions
Amounts written off
As at 30 September 2019
Loss allowance as at 30 September 2019

28,882
38
3,896
3,934
(31)
(4,294)(4,325)28,491
60

1,198
29
78
107
(45)
(423)
(468)
837
24

11
4
1
5
(13)
(13)
3
2

14
14
14
(9)
(9)
19
11

30,105
85
3,975
4,060
(85)
(4,730)(4,815)29,35097

Impacts of changes in gross financial assets on loss allowances - total

Explanation of how changes in the gross carrying amounts of gross loans and advances contributed to changes in loss allowance
Overall, loss allowances on gross loans and advances have remained stable at approximately 0.4% of gross loans and advances. Loss allowances haveincreased by NZ$10 million (2%) driven by an increase in the proportion of gross loans and advances in Stage 2 and Stage 3, offset by a net decrease inStage 3 individually assessed exposures as a result of amounts written-off.

80

REGISTERED BANK DISCLOSURES

B3. ASSET QUALITY (continued)
Movements in components of loss allowance – residential mortgages

Net loans and advances - residential mortgages
As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Write-backs
Recoveries of amounts previously written off
Credit impairment charge / (release)
Bad debts written-off (excluding recoveries)
Add back recoveries of amounts previously written off
Discount unwind
As at 30 September 2019Off-balance sheet credit related commitments - residential mortgages
As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Credit impairment charge
As at 30 September 2019

Stage 1
NZ$m
13
11
(6)
5
18

-

Stage 3
Collectively IndividuallyStage 2
assessedassessed
NZ$m
NZ$m
NZ$m
26
7
21
(10)
(1)
9
5
7
(5)
(1)
5
1
25
12
22

Total
NZ$m
67
15
(5)
10
77

-

-

-

-

Impacts of changes in gross financial assets on loss allowances - residential mortgages
Gross loans and advances - residential mortgages
As at 1 October 2018
Net transfers in to each stage
Amounts drawn from new or existing facilities
Additions
Net transfers out of each stage
Amounts repaid
Deletions
Amounts written off
As at 30 September 2019
Loss allowance as at 30 September 2019

73,992
14,76914,769(1,001)(8,632)(9,633)
79,128
18

1,948
815
360
1,175
(648)
(648)
2,475
25

203
169
22
191
(121)
(121)
273
12

25
25
6
31
(8)
(23)
(31)
25
22

76,1681,009
15,157
16,166(1,009)(9,424)(10,433)
81,901
77

Off-balance sheet credit related commitments - residential mortgages
As at 1 October 2018
Net transfers in to each stage
Amounts drawn from new or existing facilities
Additions
Net transfers out of each stage
Amounts repaid
Deletions
Amounts written off
As at 30 September 2019
Loss allowance as at 30 September 2019

8,206
1,107
1,107
(21)
(1,060)(1,081)
8,232
-

26
21
4
25
(15)
(15)
36
-

-

-

8,232
21
1,111
1,132
(21)
(1,075)(1,096)
8,268-

Explanation of how changes in the gross carrying amounts of residential mortgages contributed to changes in loss allowance
The NZ$10 million (14.9%) increase in loss allowances on residential mortgage exposures is primarily driven by an increase in overall gross carrying
amounts, and an increase in the proportion of Stage 2 and Stage 3 collectively assessed exposures. Overall loss allowances and individually impaired
exposures remain low, reflecting that approximately 95% of on-balance sheet residential mortgage exposures have loan to valuation ratios notexceeding 80% (refer to page 84).

81

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B3. ASSET QUALITY (continued)
Movements in components of loss allowance – other retail exposures

Net loans and advances - other retail exposures
As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Write-backs
Recoveries of amounts previously written off
Credit impairment charge / (release)
Bad debts written-off (excluding recoveries)
Add back recoveries of amounts previously written off
Discount unwind
As at 30 September 2019Off-balance sheet credit related commitments - other retail exposures
As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Credit impairment charge / (release)
As at 30 September 2019

Stage 1
NZ$m
28
13
(15)
(2)
26

18
3
(4)
(1)
17

Stage 3
Collectively IndividuallyStage 2
assessedassessed
NZ$m
NZ$m
NZ$m
55
25
11
(18)
1
4
14
(2)
84
(11)
(20)
(4)
(1)
57
(74)
20
51
24
14

Total
NZ$m
119
81
(11)
(20)
50
(74)
20
115

10
(3)
4
1
11

2
2

-

30
30

Impacts of changes in gross financial assets on loss allowances - other retail exposures
Gross loans and advances - other retail exposures
As at 1 October 2018
Net transfers in to each stage
Amounts drawn from new or existing facilities
Additions
Net transfers out of each stage
Amounts repaid
Deletions
Amounts written off
As at 30 September 2019
Loss allowance as at 30 September 2019

3,288
472
472
(32)
(593)
(625)
3,135
26

315
33
33
(43)
(43)
305
51

48
4
4
(7)
(7)
45
24

25
38
69
107
(6)
(22)
(28)
(74)
30
14

3,676
38
578
616
(38)
(665)
(703)
(74)
3,515
115

Off-balance sheet credit related commitments - other retail exposures
As at 1 October 2018
Net transfers in to each stage
Amounts drawn from new or existing facilities
Additions
Net transfers out of each stage
Amounts repaid
Deletions
Amounts written off
As at 30 September 2019
Loss allowance as at 30 September 2019

4,859
312
312
(10)
(583)
(593)
4,578
17

54
8
8
16
(24)
(24)
46
11

4
2
2
(3)
(3)
3
2

-

4,917
10
320
330
(10)
(610)
(620)
4,627
30

Explanation of how changes in the gross carrying amounts of other retail exposures contributed to changes in loss allowance
Loss allowances have decreased by NZ$4 million (2.7%) reflecting the reduction in gross carrying amounts, offset by a net increase in Stage 3
individually assessed exposures.

82

REGISTERED BANK DISCLOSURES

B3. ASSET QUALITY (continued)
Movements in components of loss allowance – corporate exposures

Net loans and advances - corporate exposures
As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Write-backs
Recoveries of amounts previously written off
Credit impairment charge / (release)
Bad debts written-off (excluding recoveries)
Add back recoveries of amounts previously written off
Discount unwind
As at 30 September 2019Off-balance sheet credit related commitments - corporate exposures
As at 1 October 2018
Transfer between stages
New and increased provisions (net of collective provision releases)
Credit impairment charge
As at 30 September 2019

Stage 1
NZ$m
119
5
(4)
1
120

41
2
2
43

Stage 3
Collectively IndividuallyStage 2
assessedassessed
NZ$m
NZ$m
NZ$m
90
8
98
(12)
2
5
40
(4)
30
(32)
(3)
28
(2)
(32)
3
(8)
118
6
61

Total
NZ$m
315
62
(32)
(3)
27
(32)
3
(8)
305

12
(2)
3
1
13

-

11
11
11

53
14
14
67

Impacts of changes in gross financial assets on loss allowances - corporate exposures
Gross loans and advances - corporate exposures
As at 1 October 2018
Net transfers in to each stage
Amounts drawn from new or existing facilities
Additions
Net transfers out of each stage
Amounts repaid
Deletions
Amounts written off
As at 30 September 2019
Loss allowance as at 30 September 2019

41,5985,882
5,882(1,339)(5,119)(6,458)41,022
120

5,185
1,164
294
1,458
(415)
(415)
6,228
118

80
37
9
46
126
6

271
140
30
170
(2)
(177)
(179)
(32)
230
61

47,134
1,341
6,215
7,556
(1,341)(5,711)(7,052)(32)
47,606305

Off-balance sheet credit related commitments - corporate exposures
As at 1 October 2018
Net transfers in to each stage
Amounts drawn from new or existing facilities
Additions
Net transfers out of each stage
Amounts repaid
Deletions
Amounts written off
As at 30 September 2019
Loss allowance as at 30 September 201915,817
38
2,477
2,515
(2,651)(2,651)
15,681
43

1,118
66
66
(45)
(384)
(429)
755
13

7
2
1
3
(10)
(10)
-

14
14
14
(9)
(9)
19
11

16,956
54
2,544
2,598
(54)
(3,045)(3,099)16,455
67

Explanation of how changes in the gross carrying amounts of corporate exposures contributed to changes in loss allowance
The NZ$4 million (1.1%) increase in loss allowances on corporate exposures was primarily driven by an increase in the proportion of Stage 2
collectively assessed exposures, offset by a net decrease in Stage 3 individually assessed exposures.

83

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B3. ASSET QUALITY (continued)
Past due assets

2019
Residential Other retail Non-retailmortgages exposures exposures
NZ$m
NZ$m
NZ$m
Less than 30 days past due
505
177
413
At least 30 days but less than 60 days past due
141
32
85
At least 60 days but less than 90 days past due
162
18
13
At least 90 days past due
263
30
31
Total past due but not individually impaired
1,071
257
542
Other asset quality information
Undrawn facilities with individually
impaired customers
Other assets under administration

Total
NZ$m
1,095
258
193
324
1,870

2018
Residential Other retail Non-retailmortgages exposures exposures
NZ$m
NZ$m
NZ$m
595
186
639
109
31
39
105
20
3
152
34
19
961
271
700

Total
NZ$m
1,420
179
128
205
1,932

-

-

19

19

-

-

14

14

2

2

-

4

7

2

-

9

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.
2018 Asset quality disclosure under NZ IAS 39
The below disclosure does not reflect the adoption of NZ IFRS 9 and is prepared under the requirements of the previous NZ IAS 39.
Movement in individually impaired assets

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

Residential
mortgages
NZ$m
31
21
(1)
(26)
25
21

2018
Other retail
Non-retail
exposures
exposures
NZ$m
NZ$m
20
306
107
267
(77)
(71)
(25)
(231)
25
271
11
98

Total
NZ$m
357
395
(149)
(282)
321
130

Residential
mortgages
NZ$m
25

2018
Other retail
Non-retail
exposures
exposures
NZ$m
NZ$m
6
121

Total
NZ$m
152

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

7
(9)
(2)
(1)
(1)
21

Movement in balances of collective credit impairment allowances

Balance at beginning of the period
Charge / (release) to income statement
Balance at end of the period

84

Residential
mortgages
NZ$m
75
7
82

90
(8)
(21)
61
(77)
21
11

116
(66)
(9)
41
(71)
9
(2)
98

213
(83)
(30)
100
(149)
30
(3)
130

2018
Other retail
Non-retail
exposures
exposures
NZ$m
NZ$m
121
231
(3)
(49)
118
182

Total
NZ$m
427
(45)
382

REGISTERED 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
2019
4.5%
10.8%
6.0%
13.6%
8.0%
13.6%
2.5%
5.6%

2018
11.1%
14.4%
14.4%
6.4%

Bank
(Solo Consolidated)
2019
2018
9.7%
9.5%
12.6%
13.0%
12.6%
13.0%
n/a
n/a

Capital of the Banking GroupAs at 30 September 2019Tier 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 reserves1
Less deductions from common equity tier 1 capital
Goodwill and intangible assets, net of associated deferred tax liabilities
Deferred tax assets less deferred tax liabilities relating to temporary differences
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 shares2
NZD 500m ANZ New Zealand Capital Notes (ANZ NZ CN)3
NZD 1,003m ANZ New Zealand Internal Capital Notes (ANZ NZ ICN)3NZD 938m ANZ New Zealand Internal Capital Notes (ANZ NZ ICN2)3
Retained earnings of the Bonus Bonds Scheme4Less deductions from additional tier 1 capital
Surplus retained earnings of the Bonus Bonds Scheme4
Additional tier 1 capital
Total tier 1 capital
Tier 2 capital
Total capital
1
2
3
4

NZ$m

21

11,588
2,521
21

21

(3,276)
(107)
(27)
(274)
10,446
21
15
15
15

300
500
1,003
938
59
(20)
2,780
13,226
13,226

Includes the cash flow hedging reserve of NZ$27 million less the investment securities revaluation reserve of NZ$6 million as at 30 September 2019.
Classified as equity on the balance sheet under NZ GAAP.
Classified as a liability on the balance sheet under NZ GAAP.
Bonus Bonds Scheme is not consolidated on the balance sheet under NZ GAAP but is classified as AT1 capital for capital adequacy purposes as set out in BS2B.

Capital requirements of the Banking GroupAs at 30 September 2019
Total credit risk
Operational risk
Market risk
Supervisory adjustment
Total
1

Note

Total
exposures
after credit
risk mitigation
NZ$m
190,765n/an/an/a
190,765

Risk weighted
exposure or
implied risk
weighted Total capital
exposure1 requirement
NZ$m
NZ$m
70,031
5,602
9,720
778
4,788
383
12,531
1,003
97,0707,766

The calculation of capital requirements for total credit risk weighted includes a scalar of 1.06 in accordance with the Bank's Conditions of Registration.

85

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED 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 2019
Corporate
0-2
3-4
5
6
7-8
Default
Total corporate exposures
Sovereign0
1-8
Total sovereign exposures
Bank
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 approach86

Probabilityof default%

Exposure at
Total valuedefault
NZ$m
NZ$m

Exposureweighted
LGD used
for thecapitalcalculation%

Exposureweighted
risk weight%

Risk
Minimum
weighted
capitalassets requirement
NZ$m
NZ$m

0.06
0.32
1.01
2.29
15.25
100.001.93

67,193
41,48913,937
4,764
2,406
317
130,106

5,382
23,774
12,254
4,431
2,045
315
48,201

60
37
33
35
38
44
39

30
42
58
81
165
173
54

1,683
10,555
7,546
3,809
3,580
578
27,751

135
844
604
305
286
46
2,220

0.01
0.01
0.01

24,154
1,182
25,336

12,115
1,161
13,276

5
5
5

1
1
1

188
18
206

15
1
16

0.03
0.12
3.23
0.04

1,084,608
76,1365
1,160,749

9,535
1,102
5
10,642

55
65
39
56

28
38
116
29

2,833
440
6
3,279

227
35
262

0.20
0.46
0.91
1.98
4.80
100.000.94

27,22336,733
21,321
4,245
309
338
90,16927,59136,883
21,423
4,249
309
339
90,794

12
19
23
26
27
19
18

5
15
31
59
94
15
18

1,573
5,884
7,074
2,667
309
55
17,562

126
471
566
213
25
5
1,406

0.10
0.26
1.06
2.25
7.94
100.00
2.64

538
4,607
1,934
1,854
1,487
84
10,504

541
4,689
1,878
1,895
1,525
84
10,612

77
78
71
70
82
76
76

50
55
74
89
127
67
74

284
2,714
1,473
1,786
2,049
59
8,365

23
217
118
143
164
4
669

1.20

1,416,864

173,52529

31

57,163

4,573

REGISTERED BANK DISCLOSURES

B4. CAPITAL ADEQUACY UNDER THE INTERNAL MODELS BASED APPROACH, AND REGULATORYLIQUIDITY RATIOS (UNAUDITED) (continued)
IRB credit exposures include the following undrawn commitments and other off-balance sheet amounts:

As at 30 September 2019
Undrawn commitments and other off-balance sheet amounts excluding market related contracts
Corporate
SovereignBank
Residential mortgages
Other retailMarket related contracts
Corporate
SovereignBank
Residential mortgages
Other retail

Total value
NZ$m

Exposure atdefault
NZ$m

12,224
299
1,444
8,268
5,271

11,561
286
1,180
8,684
5,294

82,694
12,036
1,151,985
-

1,991
179
3,756
-

Additional mortgage information
As required by RBNZ, LVRs 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 wellas commitments to lend. Commitments to lend are formal offers for housing lending which have been accepted by the customer.
On-balance Off-balance
sheet
sheet
NZ$m
NZ$m

As at 30 September 2019
LVR range
Does not exceed 60%
Exceeds 60% and not 70%
Exceeds 70% and not 80%
Does not exceed 80%
Exceeds 80% and not 90%
Exceeds 90%
Total
Specialised lending subject to the slotting approach

As at 30 September 2019On-balance sheet exposures
StrongGood
Satisfactory
Weak
Default

As at 30 September 2019Off-balance sheet exposures
Undrawn commitments and other off-balance sheet exposures

40,753
18,62318,041
77,4173,237
1,247
81,901
Total
exposures
after
credit risk
mitigation
NZ$m

Risk weight
%

5,179
5,713
285
152
12

70
90
115
250
-

Exposure atdefault
NZ$m

Averagerisk weight
%

1,300

93

5,697
1,317
931
7,945
159
164
8,268

Total
NZ$m
46,45019,94018,97285,362
3,396
1,411
90,169Minimum
Risk
Pillar 1
weighted
capitalassets requirement
NZ$m
NZ$m
3,843
5,450
347
402
-

307
436
28
32
-

Minimum
Risk
Pillar 1
weighted
capitalassets requirement
NZ$m
NZ$m
1,285

103

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-.
87

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B4. CAPITAL ADEQUACY UNDER THE INTERNAL MODELS BASED APPROACH, AND REGULATORYLIQUIDITY RATIOS (UNAUDITED) (continued)
Credit risk exposures subject to the standardised approach

Total
exposure
after credit
risk Average risk
mitigation
weight
NZ$m%

As at 30 September 2019On-balance sheet exposures
Cash and gold bullion
Sovereign and central banks
Multilateral development banks and other international organisations
Public sector entities
Banks
Corporate
Residential mortgages
Past due assets
Other assets

As at 30 September 2019Off-balance sheet exposures
Undrawn commitments and other off-balance sheet
exposuresMarket related contracts
Foreign exchange contracts
Interest rate contracts
Other - OTC etc

192
1,448
1,339
1
927

9
150
100

Minimum
Risk
Pillar 1
weighted
capitalexposure requirement
NZ$m
NZ$m
130
1
983

10
79

Total
exposure or
principal
amount
NZ$m

Averagecreditconversion
factor
%

579

68

396

97

405

32

2
261,459
-

n/a
n/a
n/a

296
-

6
-

17
-

1
-

Creditequivalent Average risk
amountweightNZ$m%

Minimum
Risk
Pillar 1
weighted
capitalexposure requirement
NZ$m
NZ$m

Equity exposures

As at 30 September 2019
Equity holdings (not deducted from capital) that are publicly traded
All other equity holdings (not deducted from capital)

Exposure atdefault
NZ$m
1

Risk weight
%
300
400

Minimum
Risk
Pillar 1
weighted
capitalexposure requirement
NZ$m
NZ$m
5
-

Credit risk mitigation
As at 30 September 2019, the Banking Group had NZ$918 million of Corporate exposures covered by guarantees where the presence of theguarantees was judged to reduce the underlying credit risk of the exposures. Information on the total value of exposures covered by financial
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
As required by its conditions of registration, the Banking Group uses the standardised approach to the calculation of its operational risk capitalrequirement. As at 30 September 2019, the Banking Group had an implied risk weighted exposure of NZ$9,720 million for operational risk and an
operational risk capital requirement of NZ$778 million.

88

REGISTERED BANK DISCLOSURES

B4. CAPITAL ADEQUACY UNDER THE INTERNAL MODELS BASED APPROACH, AND REGULATORYLIQUIDITY RATIOS (UNAUDITED) (continued)
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 2019.
Implied risk weighted
exposure
Aggregate capital charge
Period end
Peak Period end
Peak
As at 30 September 2019
NZ$m
NZ$m
NZ$m
NZ$m
Interest rate risk
4,777
6,543
382
523
Foreign currency risk
10
128
1
10
Equity risk
1
1
4,788
383
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, strategic equity risk, fixed asset risk, deferred acquisition cost risk and software risk. The Banking Group's internal capital allocation forthese other material risks is NZ$272 million. (2018: NZ$389 million). Insurance, value in-force and business retention risks are no longer included
following the sale of OnePath.
Information about Ultimate Parent Bank and Overseas Banking Group
APRA Basel III capital ratios

Common equity tier 1 capital
Tier 1 capital
Total capital

Ultimate Parent Bank
Overseas Banking Group (Extended Licensed Entity)
2019
2018
2019
2018
11.4%
11.6%
11.4%
11.4%
13.4%
13.6%
13.2%
13.4%
15.2%
15.6%
15.3%
15.7%

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 AMA for the operational risk weighted asset equivalent.
The Overseas Banking Group exceeded the minimum capital requirements set by APRA as at 30 September 2019 and for the comparative priorperiods.
The Overseas Banking Group is required to publicly disclose Pillar 3 financial information as at 30 September 2019. The Overseas Banking Group’s Pillar
3 disclosure document for the quarter ended 30 September 2019, 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.
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 19
5.5%
5.5%
88.3%

30 Jun 19
4.6%
4.2%
89.1%

89

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B5. CONCENTRATION OF CREDIT EXPOSURES TO INDIVIDUAL COUNTERPARTIESThe Banking Group measures its concentration of credit exposures to individual counterparties at the reporting date on the basis of actual exposures.
Peak end-of-day aggregate credit exposures are measured on the basis of internal limits that were not materially exceeded between the reporting
date for the 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- 25% to less than 30% 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

90

As at
30 Sep 19

Peak end of
day over 6
months to
30 Sep 19

3
3
2
1
-

3
3
2
1
-

4
4
3
1
-

4
4
3
1
-

REGISTERED BANK DISCLOSURES

B6. CREDIT EXPOSURES TO CONNECTED PERSONSConnected persons
Amount % of Tier 1
NZ$m
Capital
As at 30 September 2019
Gross amount, before netting
Amount netted
Aggregate credit exposure (on partial bilaterial net basis)
Peak end-of day aggregate credit exposure over the year ended 30 September 2019
Gross amount, before netting
Amount netted
Aggregate credit exposure (on partial bilaterial net basis)Non-bank connected
Amount % of Tier 1
NZ$m
Capital

9,100
6,604
2,496

68.8%
49.9%
18.9%

<$1m
<$1m

0.0%
0.0%
0.0%

11,007
7,459
3,548

83.2%
56.4%
26.8%

<$1m
<$1m

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 2019 was 60%. No limit changes have occurred over the year to 30
September 2019. 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$456 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 2019.
Loss allowance for credit-impaired credit exposures to connected persons
There were no loss allowances provided against credit exposures to connected persons as at 30 September 2019.

91

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B7. INSURANCE BUSINESS, SECURITISATION, FUNDS MANAGEMENT, OTHER FIDUCIARY ACTIVITIESAND MARKETING AND DISTRIBUTION OF INSURANCE PRODUCTS
Insurance business
The Banking Group previously conducted insurance business through its subsidiary OnePath. OnePath was sold to Cigna Corporaton on 30 November
2018, and as at 30 September 2019, the Banking Group does not conduct any insurance business. As at 30 September 2018, the Banking Group’s
aggregate amount of insurance business comprised the total consolidated assets of OnePath of $NZ940 million, which was 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 two 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; and• 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).

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. ANZ National Staff Superannuation Limited, also a subsidiaryof the Banking Group, is the trustee and manager of the ANZ National Retirement Scheme, which is a restricted
workplace savings scheme.
• 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 24 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, other personal and business insurance products provided by or arranged through a numberof insurance partners. None of these insurance partners are affiliated insurance entities or affiliated insurance groups. Our insurance partners are:•
OnePath for life insurance. OnePath was a subsidiary of the Banking Group until 30 November 2018;•
Vero Insurance New Zealand Limited for house, contents, car and boat insurance;•
AWP Services New Zealand Limited, trading as Allianz Partners, for travel insurance. Policies are underwritten by Allianz Australia Insurance
Limited (incorporated in Australia) trading as Allianz New Zealand;•
Cigna Life Insurance New Zealand Limited for credit card repayment insurance; and•Crombie Lockwood (NZ) Limited is our business insurance broker.
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.

92

REGISTERED BANK DISCLOSURES

B7. INSURANCE BUSINESS, SECURITISATION, FUNDS MANAGEMENT, OTHER FIDUCIARY ACTIVITIESAND 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
DIMS3
Other investment portfolios4
Total funds under management
Funds under custodial arrangements5
Other funds held or managed subject to fiduciary responsibilities6
Outstanding securitised assets originated by the Banking Group - carrying amount of covered bonds
1
2
3
4
5

6

2019
NZ$m

2018
NZ$m

14,781
3,276
2,494
2,131
8,062
3,401
34,145
8,373
1,401
4,460

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

Managed by ANZ Investments.
Managed by ANZIS.
Managed by the Bank.
Comprises portfolios managed by ANZ Investments, and the ANZ National Retirement Scheme managed by ANZ National Staff Superannuation Limited.
Amount for 2018 includes NZ$60 million held in custody by ANZ New Zealand Securities Nominees Limited, which was sold in December 2018, which are not included in funds undermanagement. All other amounts are also 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 2019, 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 2019 was less than NZ$0.1 million (2018: less than NZ$0.1 million) which was 0.0% (2018: 0.0%) of the
Banking Group’s tier 1 capital and 0.0% (2018: 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.

93

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED 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 Board is responsible for establishing and overseeing the Banking Group’s Risk Management Framework. The Board hasdelegated authority to the Bank’s Board Risk Committee (BRC) to develop and monitor compliance with the Banking Group’s risk
management policies. The Committee reports regularly to the Board on its activities.
The key pillars of the Banking Group’s Risk Management Framework include:•

the Risk Appetite Statement (RAS), which clearly and concisely sets out the Board’s expectations regarding the degree of riskthat the Banking Group is prepared to accept in pursuing its strategic objectives and its business plan; and•the Risk Management Statement (RMS), which describes the Banking Group’s strategy for managing risks and a summary of
the key elements of the Risk Management Framework (RMF) that give effect to that strategy. The RMS includes: a descriptionof 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 andthen either controls or mitigates material risks.

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

Key Material Risks
Each key material risk has an associated RAS, and where applicable, measured by appropriate metric(s) and associated tolerance(s) representing the
maximum level of risk appropriate to execute the Banking Group’s strategic agenda. Metrics are prepared and reviewed at least monthly. A risk
appetite dashboard is prepared and reviewed by senior management monthly, and presented to the BRC at each meeting.
Risk Type

Description

Managing the Risk

Strategic
Risk

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 our annual strategicplanning process, managed by the Executive Committee andapproved by the Board. Any increase to our key Material Risks is
managed in accordance with the risk management practices
specified below.

CapitalAdequacy
Risk

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

We pursue an active approach to Capital Management throughongoing review, and Board approval, of the level and composition of
our capital base against key policy objectives.

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
in a financial loss.

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

Credit Risk incorporates the risks associated with us lending
to customers who could be impacted by climate change orby changes to laws, regulations, or other policies adopted
by governments or regulatory authorities, including carbon
pricing and climate change adaptation or mitigation
policies.

The effectiveness of the Credit Risk framework is assessed throughvarious compliance and monitoring processes. These, together withportfolio selection, define and guide the credit process, organisationand staff.

Includes:• concentrations of credit risk;• intra-day credit risk;• credit risk to bank counterparties; and• related party credit risk.
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 andbalance sheet portfolios through independent risk measurement.
First, we identify the range of possible outcomes, the likely
timeframe, and the likelihood of the outcome occurring. Then we
allocate an appropriate amount of capital to support these activities.
The Banking Group’s key tools to measure and manage Market Risk
on a daily basis include value at risk, earnings at risk, interest ratesensitivities, market value loss limits and stress testing.

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REGISTERED BANK DISCLOSURES

B8. RISK MANAGEMENT POLICIES (continued)
Risk Type

Description

Managing the Risk

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 our ability to meet liquidity ‘survival horizons’ undera range of stress scenarios to meet cash flow obligations over ashort to medium term horizon;• maintaining a strong structural funding profile; and• maintaining a portfolio of high-quality liquid assets to act as asource of liquidity in times of stress.

Operational
Risk

The risk of loss and/or non-compliance with laws resulting
from inadequate or failed internal processes, people and/or
systems, or from external events. This definition includes
legal risk, and the risk of reputation loss, or damage arisingfrom inadequate or failed internal processes, people and/or
systems; but excludes Strategic Risk.

We operate a three-lines-of-defence model to manage Operational
Risk, with each line of defence having defined roles, responsibilities
and escalation paths to support effective communication andeffective management of our Operational Risk. Also, we haveongoing review mechanisms to ensure our Operational Risk
framework continues to meet organisational needs and regulatory
requirements.

Compliance Risk
The risk of failure to act in accordance with laws,
regulations, industry standards and codes, internal policies
and procedures and principles of good governance asapplicable to the Banking Group’s businesses.

Key features of how we manage Compliance Risk as part of our
Operational Risk framework include:• centralised management of key obligations, and emphasis on
identifying changes in regulations and the business environment,so as to enable us to proactively assess emerging compliancerisks and implement robust reporting and certification processes.
• recognition of incident management as a separate element toenhance the Banking Group’s ability to identify, manage andreport on incidents/breaches in a timely manner.
• the Whistleblower Protection Policy allowing employees andcontractors to make confidential, anonymous submissions
regarding concerns relating to accounting, internal control,
compliance, audit and other matters.

Conduct and 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 our 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 orenvironmental (or both) impacts of our lending
decisions.

We manage Conduct and Reputation Risk by maintaining a positiveand dynamic culture that:• ensures we act with integrity; and• enables us to build strong and trusted relationships withcustomers and clients, with colleagues, and with the broader
society.
We have well established decision-making frameworks and policies
to ensure our business decisions are guided by sound social andenvironmental standards that take into account Conduct and
Reputation Risk.

Refer to Note 15 Financial Risk Management for the disclosures required under NZ IFRS 7 Financial Instruments: Disclosures.

Other Material Risks
Risks where the maximum level of risk is set as part of the Banking Group’s ICAAP. These risks do not require the same degree of active or transactional
management as the Key Material Risks and are managed and monitored as part of the Banking Group’s business, strategic and capital management
process. For more information about the Banking Group’s ICAAP refer to the section ‘Capital for other material risks’ in Note B4.
PensionRisk

The risk of the value of investments in a defined benefit pension fund being insufficient to meet liabilities resulting in additional
funds being required to match pension liabilities.

Strategic
Equity Risk

The risk of financial loss arising from the unexpected reduction in value of equity investments not held in the trading book.

Fixed Asset
Risk

The risk of financial loss arising from the negative revaluation of fixed assets owned and leased, caused by adverse changes inbusiness and/or economic conditions. Residual Value Risk is included in the definition of Fixed Assets, which is the risk that themarket value of the underlying assets of operating leases may fall below the anticipated residual value.

Deferred
Acquisiton
Risk

The risk of loss arising from the failure of the benefits associated with the acquisition of interest earnings assets to arise due toimpairment, transfer, or prepayment.

SoftwareRisk

The risk of financial loss arising from the unexpected accelerated write down of capitalised software expenditure due to diminishedfuture economic benefits caused by adverse business or economic conditions.

95

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTREGISTERED BANK DISCLOSURES
B8. RISK MANAGEMENT POLICIES (continued)
Capital adequacy
Refer to Note 22 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.
Internal Audit Function of the Banking Group
The Banking Group has an Internal Audit Function, refer to Note 15 Financial Risk Management for details.
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 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 Allowance for Expected Credit Losses and Note 15 Financial Risk Management for details of the Banking Group’s approach tomeasurement of impaired assets. Further to this, impairment is assessed monthly, with individual allowances for credit impairment also updated
monthly and collective 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 AIRB bank, the Banking Group uses the comprehensive method to measure the mitigating effects of collateral.
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 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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REGISTERED 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 lendingStandardised 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 BS2B

Standardised

Required by BS2B

Standardised

Required by BS2B

StandardisedBank
EquityOther assets

All other assets not falling within any of the above classes

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 BRC. 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 and Wholesale 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.

97

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTDIRECTORS' 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 2019, after due enquiry, each Director believes that, except as noted on pages 74 to 76:•

ANZ Bank New Zealand Limited has complied with all Conditions of Registration that applied during that period;•

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, 12 December 2019.

Antony Carter

Shayne Elliott

Alison Gerry

Michelle Jablko

Rt Hon Sir John Key, GNZM ACMark Verbiest

Joan Withers98INDEPENDENT AUDITOR’S REPORTTO THE SHAREHOLDER OF ANZ BANK NEW ZEALAND LIMITEDREPORT ON THE BANKING GROUP DISCLOSURE STATEMENTOPINION
We have audited the accompanying consolidated financial statements and registered bank disclosures of ANZ Bank New Zealand Limited and its
subsidiaries (the Banking Group) in section B2, B3, B5, B6, B7 and B8 which comprise:••••the consolidated balance sheet as at 30 September 2019;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 Registered Bank DisclosureStatements (New Zealand Incorporated Registered Banks) Order 2014 (as amended) (the Order).

In our opinion, the accompanying consolidated financial statements on pages 4 to 64:••

give a true and fair view of the Banking Group’s financial position as at 30 September 2019 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 the Orderand are included in sections 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 state the matters to which they relate in accordance with those schedules.

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.

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’s (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 audit related 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 mattershave not impaired our independence as auditor of the Banking Group. The firm has no other relationship with, or interest in, the Banking Group.
EMPHASIS OF MATTER - NON-COMPLIANCE WITH CERTAIN CONDITIONS OF REGISTRATION
We draw attention to section B1 of the Disclosure Statement, in which the Banking Group discloses that it has identified non-compliance with aspectsof its Conditions of Registration relating to:••••Capital adequacy;
Regulatory liquidity;
Exposures to connected persons; andOutsourcing.

Further details of the matters relating to capital adequacy and regulatory liquidity are described below in our qualified review conclusion on theregistered bank disclosures in section B4 relating to capital adequacy and regulatory liquidity ratios.
Our opinion on the consolidated financial statements and registered bank disclosures in sections B2, B3, B5, B6, B7 and B8 is not modified in respect ofthese matters.

99

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORTKEY 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.
ALLOWANCE FOR EXPECTED CREDIT LOSSESThe Key Audit Matter
NZ IFRS 9 Financial Instruments (NZ IFRS 9) was adopted by the Banking Group on 1 October 2018. The allowance for expected credit losses under NZ
IFRS 9 is a key audit matter due to the significance of the loans and advances balance to the financial statements and the inherent complexity of the
Banking Group’s Expected Credit Loss (ECL) models used to measure ECL allowances. This new and complex accounting standard requires the
Banking Group to recognise ECLs on its loans and advances and off-balance sheet positions. The Banking Group developed new models, which arereliant on data and a number of estimates including impacts of multiple economic scenarios, and other assumptions such as defining a Significant
Increase in Credit Risk (SICR). This involves significant judgement and estimates and forward looking information reflecting potential future economic
events.
NZ IFRS 9 requires the Banking Group to measure ECLs on a forward-looking basis reflecting a range of future economic conditions, including forwardlooking assumptions such as forecast GDP and unemployment levels. Post-model adjustments to the ECL results are also made by the Banking Groupto address known ECL model limitations or emerging trends in the loan portfolios. Significant judgement is required in selecting the economic
scenarios used and the judgemental overlays that the Banking Group applies to the ECL results.
The criteria selected to identify a SICR, such as a decrease in customer credit rating (CCR), are key areas of judgement within the Banking Group’s ECL
methodology as these criteria determine if a forward-looking 12 month or lifetime allowance is recorded.
Separate from the ECL calculation, allowances for individually assessed loans exceeding specific thresholds are individually assessed by the Banking
Group. These specific allowances are established based on the expected future cash repayments and estimated proceeds from the value of thecollateral held by the Banking Group in respect of the loans.
How the matter was addressed in our audit
Our audit procedures for the allowance for ECL and disclosures under NZ IFRS 9 for the year ended 30 September 2019 included assessing the Banking
Group’s significant accounting policies against the requirements of the accounting standard. KPMG Financial Risk Management specialists were usedin ECL audit procedures as a core part of our audit team.
We tested key controls in relation to:
•
•
•
•
•

The Banking Group’s ECL model governance and validation processes;
The Banking Group’s assessment and approval of the forward looking macroeconomic assumptions and scenario weightings through challenge
applied by the Banking Group’s internal governance processes;
Reconciliation of the data used in the ECL calculation process to gross balances recorded within the general ledger as well as source systems;
Counterparty risk grading for non-retail loans (larger customer exposures are monitored individually). We tested the approval of new lending
facilities against the Banking Group’s lending policies, and controls over the monitoring of counterparty credit quality; andThe Banking Group’s oversight of the retail loan portfolios, with a focus on controls over delinquency monitoring.

We also tested relevant General Information Technology Controls (GITCs) over the Key IT applications used by the Banking Group in measuring ECL
allowances, as detailed in the IT systems and Controls key audit matter below.
In addition to controls testing, our procedures included:
•

•
•
•

•
•

100

Performing credit assessments of a sample of non-retail loans controlled 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, assessment of loan recoverability, valuation of security and the impact on the credit allowance. To do this, we reviewed the information on
the Banking Group’s loan file, understood the facts and circumstances of the case with the relationship manager, and performed our own
assessment of recoverability. Exercising our judgement, our procedures included using our understanding of relevant industries and themacroeconomic environment, and comparing data and assumptions used by the Banking Group in recoverability assessments to externallysourced evidence, such as commodity prices and external property sale information;
Obtaining an understanding of the Banking Group’s processes to determine ECL allowances, evaluating the Banking Group’s ECL model
methodologies against established market practices and criteria in the accounting standards;
Assessing the accuracy of the Banking Group’s ECL model predictions by re-performing, for a sample of loans, the calculation of the ECL
allowance and comparing this to the amount recorded by the Banking Group;
Utilising KPMG Economic specialists to challenge the Banking Group’s forward-looking macroeconomic assumptions and scenarios incorporated
in the Banking Group’s ECL models. We compared the Banking Group’s forecast GDP and unemployment rates to relevant publicly available
macro-economic information, and considered other known variables and information obtained through our other audit procedures to identify
contradictory indicators;
Testing the implementation of the Banking Group’s SICR methodology by re-performing the staging calculation for a sample of loans andcomparing our expectation to actual staging applied on an individual account level, taking into consideration movements in CCR; andAssessing the accuracy of the data used in the ECL models by confirming a sample of data fields such as account balance and CCR to relevant
source systems.

INDEPENDENT AUDITOR’S REPORTWe also challenged key assumptions in the components of the Banking Group’s post-model adjustments to the ECL allowance balance. This included:•••

Evaluating underlying data used in concentration risk and economic cycle allowances 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 allowances the Banking Group’s ECL model and data deficiencies identified by the Banking
Group’s ECL model validation processes; andAssessing the completeness of additional allowance overlays by checking the consistency of risks we identified in the portfolios against the
Banking Group’s assessment.

VALUATION OF FINANCIAL INSTRUMENTS
The Key Audit Matter
Financial instruments held at fair value on the Banking Group’s balance sheet include investment securities, trading securities, derivative assets andliabilities, certain deposits and other borrowings, and other assets and liabilities designated as measured at fair value through profit or loss. The
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:••••

Their significant fair value (17% of assets and 9% of liabilities of the Banking Group);
The significant volume and range of products transacted, which increases the risk of errors that could lead to inaccurate valuation;
The significant level of judgement by the Banking Group, increasing the risk of error, and adding complexity to our audit. The level of judgement
increases in the small number of instances where internal models, as opposed to quoted market prices, are used 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. Both funding and credit risk are incorporated within the valuation of certain derivative instruments.

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 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 markets and treasury control;
Testing management’s review and approval of valuation model construction and validation; andTesting the Banking Group’s data validation controls.

We tested the valuation of financial instruments with both observable and unobservable inputs. Our specific testing involved valuation specialists andincluded:•••

Evaluating the appropriateness of the Banking Group’s valuation methodology for derivative financial instruments;
Re-performing the valuation of ‘level 1’ and ‘level 2’ investment securities 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; andUsing independent models to recalculate 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.

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.
How the matter was addressed in our audit
We tested the control environment for key IT applications used in processing significant transactions and recording balances in the general ledger. We
also tested automated controls embedded within these systems which support the effective operation of technology-enabled business processes.
KPMG IT specialists were used throughout the engagement as a core part of our audit team.
Our audit procedures included:••

Assessing the governance and higher-level controls in place across the IT Environment, including the approach to the Banking Group policy
design, review and awareness;
Testing the design and operating effectiveness of controls across the User Access Management Lifecycle, including how users are on-boarded,
reviewed, and removed on a timely basis from critical IT applications and supporting infrastructure. We also looked at how privileged roles andfunctions are managed across each IT Application and the supporting infrastructure;101

ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT••••

Testing the design and operating effectiveness of controls in place over change management, including how changes are initiated,documented, approved, tested and authorised prior to migration into the production environment of critical IT Applications. We also assessed
the appropriateness of users with access to make changes to IT applications across the Banking Group;
Testing the design and operating effectiveness of controls used by the Banking Group’s technology teams to schedule system jobs and monitor
system integrity;
Testing the design and operating effectiveness of controls in place to support Program Development, including the implementation of revised
guidelines per the new ANZ Delivery Framework; andTesting the design and operating effectiveness of automated business process controls including those that enforce segregation of duties
between conflicting roles within IT applications, configurations in place to perform calculations, mappings, and flagging of financial transactions,
automated reconciliation controls, both between systems, and intra-system and data integrity of critical system reporting used for sampling,data analysis and financial reporting across the audit.

PROVISION FOR CUSTOMER REMEDIATIONThe Key Audit Matter
The Banking Group has assessed the need to recognise provisions in relation to certain customer remediation activities arising from both internal andexternal investigations, and reviews. This includes provisions for expected refunds to customers and other counterparties, remediation project costs
and related customer, counterparty and regulatory claims, penalties, and litigation outcomes.
The provision for customer remediation is a key audit matter due to the number of investigations, the quantum of amounts involved and thejudgements required in assessing the Banking Group’s determination of:•••

The existence of a present legal or constructive obligation arising from a past event using the conditions of the event against the criteria in theaccounting standards;
Reliable estimates of the amounts that may be paid arising from investigations, including estimates of related costs; andThe potential for legal proceedings, further investigations, and reviews from its regulators leading to a wider range of estimation outcomes for
us to consider.

How the matter was addressed in our audit
Our audit procedures for customer remediation provisions included:
•
•
•
•
•
•
•
•

Obtaining an understanding of the Banking Group’s processes for identifying and assessing the potential impact of the investigations into
customer remediation payments, related project costs and legal proceedings associated with compliance matters, investigations and reviews
from its regulators;
Enquiring with the Banking Group regarding ongoing legal, and regulatory matters, and investigation into other remediation activities;
Enquiring with external legal counsel;
Reading the minutes and other relevant documentation of the Banking Group’s Board of Directors and various management committees, andattending the Banking Group’s Audit and Risk Committee meetings;
Inspecting correspondence with relevant regulatory bodies;
For a sample of individual matters, assessing the basis for recognition and measurement of a provision and associated costs against therequirements of the accounting standards. We did this by understanding and challenging the provisioning methodologies and underlying
assumptions;
Testing completeness by evaluating all current customer remediation matters identified by the Banking Group and checking these exposuresagainst the criteria for a provision or a contingency in the accounting standards; andEvaluating the related disclosures against the requirements of NZ IFRS.

COMPLETENESS AND ACCURACY OF RELATED PARTY DISCLOSURESThe Key Audit Matter
The Banking Group has significantly increased its focus on related party disclosures. We also reassessed the risk of completeness and accuracy ofrelated party disclosures. We consider the increased risk to primarily arise from transactions with key management personnel and their related parties.
How the matter was addressed in our audit
Our audit procedures for related party disclosures included:
•
•
•
•
•
•
•
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Challenging the Banking Group’s definition of related parties and related party transactions;
Testing the key control over the Banking Group’s process for identifying key management personnel, their related parties and their transactions
and balances;
Ensuring intra-group related party amounts are matched against Overseas Banking Group counterparties;
Testing the completeness of the related parties identified by searching the Directors’ Interests Register and public records to identify companies
controlled by key management personnel or their close family members;
Agreeing a sample of key management personnel compensation, transactions and balances identified by the Banking Group to approval
documents and source systems;
Sample testing the Banking Group’s core bank system to identify undisclosed balances with key management personnel and their relatedparties;
Evaluating the Banking Group’s assertion that key management personnel transactions are on normal commercial terms by testing a sample oftransactions and comparing the terms offered to those offered to other employees or customers; andObtaining evidence over the Banking Group’s assertion that transactions with the Overseas Banking Group are conducted at arm’s length andon normal commercial terms basis.

INDEPENDENT AUDITOR’S REPORTOTHER 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 (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.
DIRECTORS' RESPONSIBILITIES FOR THE CONSOLIDATED FINANCIAL STATEMENTS AND REGISTERED BANKDISCLOSURES IN SECTION B1, 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 2, 4, 7, 13, 14, 15 and 17 of the Order;
implementing necessary internal control 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 ISA’s (NZ) will always detect amaterial 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 the 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.

QUALIFIED REVIEW CONCLUSION ON THE REGISTERED BANK DISCLOSURES IN SECTION B4 RELATING TO
CAPITAL ADEQUACY AND REGULATORY LIQUIDITY RATIOS (SECTION B4)
We have reviewed the registered bank disclosures, as disclosed in section B4 of the Disclosure Statement for the year ended 30 September 2019,
which are required to be disclosed in accordance with Schedule 11 of the Order.
Based on our review, with the exception of the matter described below, nothing has come to our attention that causes us to believe that the
information relating to Capital Adequacy and Regulatory 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.

BASIS FOR QUALIFIED 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’ section of ourreport.
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.

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ANZ BANK NEW ZEALAND LIMITED 2019 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORTAs described in section B1, the Banking Group has identified that it was not compliant with Condition of Registration 1B in relation to the operation ofversions of the following rating models and processes, which were not approved by the Reserve Bank of New Zealand (in some cases since 2008):••••

Commercial property Model Suite (single investment, multi-investment, Hotel Investment, Special Purpose Asset investment, Single Residential
Development, Englobo Land Pre Development);
Non-Bank Financial Institutions Model Suite (Life Insurance, Non-Life Insurance, Insurance Holding Company, Finance Companies, Financial
Services Companies, Real Money Funds);
Project and Structured Finance; andBank, Country and Sovereigns.

The Banking Group has also identified a small number of calculation errors or other matters of non-compliance, which, individually and in aggregate,
have no material impact on the reported ratios.
In these respects, the Capital Adequacy Ratios disclosed in section B4 of the Disclosure Statement have not been disclosed in accordance with
Schedule 11 of the Order.
We have estimated the impact of that non-compliance based on a recalculation of the relevant components of those ratios under the Reserve Bank of
New Zealand’s Standardised Approach for unapproved models, or against the previously approved model where a model had subsequently been
modified without approval. In aggregate, our recalculation indicates a 0.17% reduction in the reported CET1 ratio, and a 0.21% reduction in the Tier 1
Capital, Total Capital and Buffer ratios. 59% of the impact comes from our recalculation of the Bank, Country and Sovereigns exposures using aStandardised Approach. The Banking Group would remain 5.41% above its regulatory minimum Total Capital ratio if those adjustments were made.
The above matters do not affect the Regulatory Liquidity information, which is also disclosed in section B4.
DIRECTORS’ RESPONSIBILITIES FOR THE REGISTERED BANK DISCLOSURES IN SECTION B4
The Directors, on behalf of the Banking Group, are responsible for the preparation of the registered bank disclosures in section B4 of the DisclosureStatement in accordance with Schedule 11 of the Order.
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 ISA’s (NZ). Accordingly
we do not express an audit opinion on the registered bank disclosures in section B4.
USE OF THIS INDEPENDENT AUDITOR’S REPORTThis independent auditor’s report is made solely to the shareholder. Our work has been undertaken so that we might state to the shareholder thosematters 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 for our work, this independent auditor’s report, or any of the opinions or
conclusions we have formed.
The engagement partner on the audit resulting in this independent auditor's report is Matt Prichard.
For and on behalf of

KPMG
Auckland12 December 2019104

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