AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED- ANZ NEW ZEALAND
REGISTERED BANK DISCLOSURE STATEMENTFOR THE YEAR ENDED 30 SEPTEMBER 2017
NUMBER 36 | ISSUED NOVEMBER 2017

Australia and New Zealand Banking Group Limited - ANZ New Zealand

REGISTERED BANK DISCLOSURE STATEMENTFOR THE YEAR ENDED 30 SEPTEMBER 2017

CONTENTS
Glossary of Terms
Consolidated Financial Statements
Income Statement
Statement of Comprehensive Income
Balance Sheet
Cash Flow Statement
Statement of Changes in Equity
Notes to the Financial Statements
Basis of Preparation
1. Significant Accounting Policies
2. Critical Estimates and Judgements Used in
Applying Accounting Policies
Financial Performance
3. Net Interest Income
4. Non Interest Income
5. Operating Expenses
6. Income Tax
7. Segment Analysis
8. Notes to the Cash Flow Statement

2

3
3
4
5
6

7
13

15
15
16
17
18
20

Financial Assets
9. Cash
10. Trading Securities
11. Derivative Financial Instruments
12. Available-for-sale Assets
13. Net Loans and Advances
14. Provision for Credit Impairment

21
21
21
23
23
24

Financial Liabilities
15. Deposits and Other Borrowings
16. Unsubordinated Debt
17. Subordinated Debt

25
25
26

Financial Instrument Disclosures
18. Financial Risk Management
19. Classification of Financial Instruments and Fair Value
Measurements
20. Maturity Analysis of Assets and Liabilities
21. Assets Charged as Security for Liabilities and CollateralAccepted as Security for Assets
22. Offsetting
23. Credit Related Commitments, Guarantees andContingent Liabilities

28
43
45
46
47
48

Non-Financial Assets
24. Goodwill and Other Intangible Assets

48

Equity25. Share Capital and Initial Head Office Account
26. Capital Adequacy

49
50

Consolidation and Presentation
27. Subsidiaries
28. Structured Entities, Transferred Financial Assets,
Fiduciary Activities and Insurance
29. Assets and Liabilities Held for Sale
Other Disclosures
30. Related Party Disclosures
31. Capital Expenditure and Operating Lease
Commitments
32. Compensation of Auditors
33. Concentrations of Credit Risk to IndividualCounterparties
34. Risk Management Framework
35. NZ Branch and Overseas Banking Group
Other Registered Bank Disclosures
Historical Summary of Financial Statements
General Disclosures
Conditions of Registration
Directorate and Auditor

51
52
54

55
57
57
57
58
59

60
61
64
66

Directors’ and New Zealand Chief Executive Officer’s
SStatement

68

Independent Auditor’s Report69Australia and New Zealand Banking Group Limited - ANZ New Zealand

2

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 means the Bank and all its controlled entities.
Immediate Parent Company means ANZ Funds Pty Limited, which is the immediate parent company of 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.
UDC means UDC Finance Limited.
Registered Office is Level 10, 171 Featherston Street, Wellington, New Zealand, which is also ANZ New Zealand’s address for service.
RBNZ means the Reserve Bank of New Zealand.
APRA means the Australian Prudential Regulation Authority.
the Order means the Registered Bank Disclosure Statements (Overseas 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 theOrder.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

3

INCOME STATEMENT
Year toYear to30/09/2016
NZ$m

Note

30/09/2017
NZ$mInterest income

3

6,434

6,770

Interest expense

3

3,356

3,741

3,078

3,029

Net interest income
Net trading gains

4

227

12

Net funds management and insurance income

4

329

414

Other operating income

4

355

401

Share of associates' profit
Operating income
Operating expenses

5

Profit before credit impairment and income tax
Credit impairment charge

14

Profit before income tax
Income tax expense
Profit after income tax

6

5

5

3,994

3,861

1,469

1,600

2,525

2,261

60

147

2,465

2,114

685

572

1,780

1,542

STATEMENT OF COMPREHENSIVE INCOME
Year toYear to30/09/2017

30/09/2016

NZ$m

NZ$m

1,780

1,542

Actuarial gain on defined benefit schemes

21

18

Income tax expense relating to items not reclassified

(6)

(5)

Total items that will not be reclassified to profit or loss

15

13

Unrealised gains / (losses) recognised directly in equity

(32)

91

Realised losses transferred to the income statement

129Income tax credit / (expense) relating to items that may be reclassified

6

(28)

(14)

72

1,781

1,627

Profit after income tax
Items that will not be reclassified to profit or loss

Items that may be reclassified subsequently to profit or loss

Total items that may be reclassified subsequently to profit or loss
Total comprehensive income for the year

The notes to the financial statements form part of and should be read in conjunction with these financial statements.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

4

BALANCE SHEET
Note

30/09/2017
NZ$m

30/09/2016
NZ$m

9

2,338

2,274

AssetsCash
Settlement balances receivable

536

396

Collateral paid

1,415

2,310

7,663

11,979Trading securities

10

Investments backing insurance contract liabilities

123

119

Derivative financial instruments

11

9,749

20,969Available-for-sale assets

12

6,360

2,859

Net loans and advances

13

121,968

120,651

UDC assets held for sale

29

3,065

-

Other assets

683

701

Life insurance contract assets

636

630

7

7

Investments in associates
Premises and equipment

367

387

3,275

3,424

Total assets

158,185

166,706

Interest earning and discount bearing assets

143,141

140,524

Settlement balances payable

1,687

1,554

Collateral received

613

529

Goodwill and other intangible assets

24

Liabilities

Deposits and other borrowings

15

108,013

106,908

Derivative financial instruments

11

9,894

22,398Current tax liabilities

45

22

Deferred tax liabilities

189

147

UDC liabilities held for sale

1,088

-

Payables and other liabilities

29

1,161

1,137

Employee entitlements

119

126

Other provisions

66

80

21,32320,014

Unsubordinated debt

16

Subordinated debt

17

2,674

2,624

Total liabilities (excluding head office account)

146,872

155,539

Net assets (excluding head office account)

11,313

11,167

8,055

8,055

EquityShare capital and initial head office account25

Reserves
Retained earnings

48

62

3,210

3,050

Total equity & head office account

11,313

11,167

Interest and discount bearing liabilities

125,561

123,145

For and on behalf of the Board of Directors:

David Gonski, AC
ChairmanAustralia and New Zealand Banking Group Limited
29 November 2017

Shayne Elliott
Executive Director
Australia and New Zealand Banking Group Limited
29 November 2017

The notes to the financial statements form part of and should be read in conjunction with these financial statements.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

5

CASH FLOW STATEMENT

Note

Year toYear to30/09/2017
NZ$m

30/09/2016
NZ$m

6,463

6,794

Cash flows from operating activities
Interest received
Dividends received
Net funds management and insurance income
Fees and other income received

5

2

344

332

503

624

Interest paid

(3,303)(3,753)Operating expenses paid

(1,330)(1,499)

Income taxes paid

(605)

(641)

Cash flows from operating profits before changes in operating assets and liabilities

2,077

1,859

Net changes in operating assets and liabilities:
Change in settlements receivable

(14)

(19)

Change in collateral paid

895

(381)

Change in trading securities

4,210

164

Change in derivative financial instruments(789)(2,320)Change in available-for-sale assets(3,476)(1,381)

Change in insurance investment assets

(4)

32

Change in loans and advances(4,554)(6,643)

Change in settlements payable

2

(67)

84

(1,158)Change in collateral received
Change in deposits and other borrowings

2,354

8,180

Net changes in operating assets and liabilities(1,292)(3,593)785(1,734)

Net cash flows provided by / (used in) operating activities

8

Cash flows from investing activities
Proceeds from sale of premises and equipment

917

Proceeds from sale of insurance policies-

23

Purchase of intangible assets

(14)

(29)

Purchase of premises and equipment

(44)

(71)

Net cash flows used in investing activities

(49)

(60)

Cash flows from financing activities
Proceeds from issue of unsubordinated debt

4,922

7,380

Redemptions of unsubordinated debt

(3,899)(4,477)

Dividends paid

(1,635)(1,320)Net cash flows provided by / (used in) financing activities

(612)

1,583

Net increase / (decrease) in cash and cash equivalents

124

(211)

Cash and cash equivalents at beginning of the year

2,315

2,526

2,439

2,315

Cash and cash equivalents at end of the year

The notes to the financial statements form part of and should be read in conjunction with these financial statements.

8

Australia and New Zealand Banking Group Limited - ANZ New Zealand

6

STATEMENT OF CHANGES IN EQUITY
Share capitaland initialhead
office account

Availablefor-salerevaluation
reserve

Cash flow
hedging
reserve

Retainedearnings

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

As at 1 October 2015

8,058

-

(10)

2,812

10,860

Profit after income tax

-

-

-

1,542

1,542

Unrealised gains / (losses) recognised directly in equity

-

(2)

93

-

91

Realised losses transferred to the income statement

-

2

7

-

9

Actuarial gain on defined benefit schemes

-

-

-

18

18

Income tax expense on items recognised directly in equity

-

-

(28)

(5)

(33)

Total comprehensive income for the year

-

-

72

1,555

1,627

Note

Total equity

Shares cancelled on amalgamation

25

(3)

-

-

3

-

Ordinary dividend paid

25

-

-

-

(1,320)(1,320)As at 30 September 2016

8,055

-

62

3,050

11,167

Profit after income tax

-

-

-

1,780

1,780

Unrealised gains / (losses) recognised directly in equity

-

7

(39)

-

(32)

Realised losses transferred to the income statement

-

-

12

-

12

Actuarial gain on defined benefit schemes

-

-

-

21

21

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

-

(2)

8

(6)

-

Total comprehensive income for the year

-

5

(19)

1,795

1,781

Ordinary dividend paid
As at 30 September 2017

25

-

-

-

(1,635)(1,635)

8,055

5

43

3,210

11,313The notes to the financial statements form part of and should be read in conjunction with these financial statements.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

7

NOTES TO THE FINANCIAL STATEMENTS
1.

SIGNIFICANT ACCOUNTING POLICIES(A)Basis of preparation(i)Statement of compliance

These financial statements have been prepared in accordance with the requirements of the Financial Markets Conduct Act 2013 and theOrder. ANZ New Zealand’s financial statements are for the Overseas Banking Group’s consolidated New Zealand business, which includes
its subsidiaries and associates.
These financial statements comply with:•New Zealand Generally Accepted Accounting Practice, as defined in the Financial Reporting Act 2013•
New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial ReportingStandards, as appropriate for publicly accountable for-profit entities•
International Financial Reporting Standards (IFRS).
The principal accounting policies adopted in the preparation of these financial statements are set out below.
(ii)

Use of estimates and assumptions

The preparation of these financial statements requires the use of management judgements, estimates and assumptions that affectreported amounts and the application of policies.
Discussion of the critical accounting estimates, which include complex or subjective decisions or assessments, are covered in note 2. Suchestimates are reviewed on an ongoing basis.
(iii) Basis of measurement
The financial information has been prepared in accordance with the historical cost basis except that the following assets and liabilities arestated at their fair value:••••

derivative financial instruments
available-for-sale financial assets
financial instruments held for trading
financial instruments designated at fair value through profit and loss.

(iv) Rounding
The amounts in the financial statements have been rounded to the nearest million dollars, except where otherwise stated.
(v)

Principles of consolidation

Subsidiaries
The consolidated financial statements of ANZ New Zealand comprise the financial statements of the NZ Branch and all the New Zealandbusinesses of all the subsidiaries of the Ultimate Parent Bank. An entity, including a structured entity, is considered a subsidiary of ANZ
New Zealand when it is determined that control over the entity exists. Control is deemed to exist when ANZ New Zealand is exposed, or
has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over theentity. Power is assessed by examining existing rights that give ANZ New Zealand the current ability to direct the relevant activities of theentity.
At times, the determination of control can be judgemental. Further detail on the judgements involved in assessing control has been
provided in note 2.
The effect of all transactions between entities in ANZ New Zealand is eliminated.
Associates
ANZ New Zealand applies the equity method of accounting for associates.
(vi) Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of ANZ New Zealand’s entities are measured using the currency of the primaryeconomic environment in which the entity operates (the functional currency).
ANZ New Zealand’s financial statements are presented in New Zealand dollars, which is ANZ New Zealand’s functional and presentation
currency.
Foreign currency transactions
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of thetransactions.
Monetary assets and liabilities resulting from foreign currency transactions are subsequently translated at the spot rate at reporting date.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

8

NOTES TO THE FINANCIAL STATEMENTS
Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different to those at which
they were initially recognised or included in a previous financial report, are recognised in profit or loss in the period in which they arise.
(B)

Operating income(i)

Net Interest income

Interest income and expense
Interest income and expense is recognised in profit or loss using the effective interest method. This method uses the effective interest rateof a financial asset or financial liability to calculate its amortised cost. The effective interest rate is the rate that discounts the stream ofestimated 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, the expected life is determined on the basis ofhistorical behaviour of the particular asset portfolio – taking into account contractual obligations and prepayment experience.
Fees and costs, which form an integral part of the financial instruments (for example loan origination fees and costs), are recognised using
the effective interest method. This is presented as part of interest income or expense depending on whether the underlying financial
instrument is a financial asset or liability.
(ii)

Fee and commission income

Fees and commissions that relate to the execution of a significant act (for example, advisory or arrangement services, placement fees andunderwriting fees) are recognised when the significant act has been completed.
Fees charged for providing ongoing services (for example, maintaining and administering existing facilities) are recognised as income overthe period the service is provided.
(C)

Income tax(i)Income tax expense

Income tax expense comprises both current and deferred taxes and is based on accounting profit adjusted for differences in theaccounting and tax treatments of income and expenses (that is, taxable income). Tax expense is recognised in profit or loss, except to theextent to which it relates to items recognised directly in equity or other comprehensive income respectively.
(ii)

Current tax expense

Current tax is the tax payable on taxable income for the year, based on tax rates (and tax laws) which are enacted at the reporting date. It
includes any adjustment for tax payable in previous periods. Current tax is recognised as a liability (or asset) to the extent that it is unpaid(or refundable).
(iii) Deferred tax
Deferred tax is accounted for using the balance sheet method. Deferred tax arises because the accounting income is not always the sameas the taxable income. This creates temporary differences, which usually reverse over time. Until they reverse, a deferred tax, or liability, isrecognised on the balance sheet. Deferred taxes are measured at the tax rates that we expect will apply to the period(s) when the asset isrealised, or the liability settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the reporting date.
Current and deferred tax assets and liabilities are offset 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.
(D)

AssetsFinancial assets(i)Financial assets and liabilities at fair value through profit or loss

Trading securities are financial instruments acquired principally for the purpose of selling in the short-term or which are a part of aportfolio which is managed for short-term profit-taking. Purchases and sales of trading securities are recognised on trade date and are
initially designated at fair value through profit and loss, and subsequently measured in the balance sheet at their fair value with any
revaluation recognised in profit and loss.
(ii)

Derivative financial instruments

Derivative financial instruments are contracts whose value is derived from an underlying price index (or other variable) defined in thecontract – sometimes the value is derived from more than 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 variable, which cause the value of the contract to fluctuate, are reflected in thefair value of the derivative.
Derivative financial instruments are entered into for trading purposes (including customer-related reasons) or for hedging purposes(where the derivative instruments are used to hedge ANZ New Zealand’s exposures to interest rate risk, currency risk, price risk, credit risk
and other exposures relating to non-trading positions).
Derivative financial instruments include forwards, futures, swaps and options.
Derivative financial instruments are recognised initially and at each reporting date at fair value. If the fair value of a derivative is: positive,then it is carried as an asset, but if it is negative, then it is carried as a liability. Valuation adjustments are integral in determining the fair

Australia and New Zealand Banking Group Limited - ANZ New Zealand

9

NOTES TO THE FINANCIAL STATEMENTS
value of derivatives. This includes a derivative credit valuation adjustment (CVA) to reflect the counterparty risk and/or event of default;
and a funding valuation adjustment (FVA) to account for the funding cost and benefits in the derivatives’ portfolio.
Where the derivative is effective as a hedging instrument and designated as such, the timing of the recognition of any resultant gain orloss in profit or loss is dependent on the hedging designation. These hedging designations and associated accounting are as follows:
Fair value hedge
Where ANZ New Zealand hedges the fair value of a recognised asset or liability or firm commitment, changes in the fair value of thederivative designated as a fair value hedge are recognised in profit or loss. Changes in the fair value of the hedged item attributable to thehedged risk are reflected in adjustments to the carrying value of the hedged item, which are also recognised in profit or loss.
Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised or no longer qualifies for hedge
accounting. The resulting adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to profit or loss
over the period to maturity of the hedged item.
If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in profit or loss.
Cash flow hedge
ANZ New Zealand designates derivatives as cash flow hedges where the instrument hedges the variability in cash flows of a recognised
asset or liability, a foreign exchange component of a firm commitment, or a highly probable forecast transaction. For qualifying cash flow
hedges, the fair value gain or loss associated with the effective portion of the cash flow hedges is recognised initially in othercomprehensive income and then recycled to profit or loss in the periods when the hedged item will affect profit or loss. Any ineffective
portion is recognised immediately in profit or loss. When the hedging instrument expires, is sold, terminated, exercised, or no longer
qualifies for hedge accounting, the cumulative amount deferred in equity remains in the hedging reserve, and is subsequently transferred
to profit or loss when the hedged item is recognised in profit or loss.
When a forecast hedged transaction is no longer expected to occur, the amount deferred in equity is recognised immediately in profit orloss.
Derecognition of assets and liabilities
Derivative assets are removed from the balance sheet when substantially all of the risks and rewards of ownership have transferred.
Derivative financial liabilities are removed from the balance sheet when ANZ New Zealand’s contractual obligations are discharged,
cancelled or expired.
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair value of derivatives that are not designated in a hedging relationship but are entered into to
manage the interest rate and foreign exchange risk of ANZ New Zealand are recognised in profit or loss. Under certain circumstances, thecomponent of the fair value change in the derivative which relates to current period realised and accrued interest is included in net
interest income. The remainder of the fair value movement is included in other income.
(iii) Available-for-sale assets
Available-for-sale assets comprise non-derivative financial assets which ANZ New Zealand designates as available-for-sale but which are
not deemed to be held principally for trading purposes, and include equity investments and debt securities.
They are initially recognised at fair value plus transaction costs. Subsequent gains or losses arising from changes in fair value are included
as a separate component of equity in the available-for-sale revaluation reserve. When the asset is sold, the cumulative gain or loss from theavailable-for-sale reserve is recognised in profit or loss.
(iv) Net loans and advances
Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
Loans and advances are initially recognised at fair value plus transaction costs directly attributable to the issue of the loan or advance,
which are primarily brokerage/mortgage origination fees. Subsequently, they are measured at amortised cost using the effective interest
method, net of any provision for credit impairment.
ANZ New Zealand classifies contracts to lease assets and hire purchase agreements as finance leases if they transfer substantially all therisks and rewards of ownership of the asset to the customer or an unrelated third party. All other lease contracts are classified as operatingleases.
ANZ New Zealand enters into transactions in which it transfers financial assets that are recognised on its balance sheet. When ANZ New
Zealand retains substantially all of the risks and rewards of the transferred assets, then the transferred assets remain on ANZ New Zealand’sbalance sheet, however if substantially all the risks and rewards are transferred then ANZ New Zealand derecognises the asset.
If the risks and rewards are partially retained and control over the asset is lost, then ANZ New Zealand derecognises the asset. If control
over the asset is not lost, then ANZ New Zealand continues to recognise the asset to the extent of its continuing involvement.
ANZ New Zealand separately recognises the rights and obligations retained, or created, in the transfer as assets and liabilities asappropriate.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

10

NOTES TO THE FINANCIAL STATEMENTS
Impairment of loans and advances
ANZ New Zealand recognises two types of impairment provisions for its loans and advances:••

Individual provisions for significant assets that are assessed to be impaired; andCollective provisions for portfolios of similar assets that are assessed collectively for impairment.

IndividuallyIf any impaired loans and advances exceed thresholds and an impairment event has been identified, then ANZ New Zealand assesses theneed for a provision individually.
Loans and advances are assessed as impaired if ANZ New Zealand has objective evidence that they may not recover principal or interest
payments (that is, a loss event has been incurred) and ANZ New Zealand can reliably measure the impairment.
Collectively
To allow for any small value loans and advances where losses may have been incurred but not yet identified, and individually significant
loans and advances that ANZ New Zealand does not assess as impaired, ANZ New Zealand assesses them collectively in pools of assets
with similar risk characteristics.
ANZ New Zealand estimates the provision on the basis of historical loss experience for assets with credit risk characteristics similar toothers in the respective collective pool. ANZ New Zealand adjusts the historical loss experience based on current observable data, such as:changing economic conditions, the impact of the inherent risk of large concentrated losses within the portfolio and an assessment of theeconomic cycle.
Measurement
ANZ New Zealand measures 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. ANZ New Zealand records the result as an expense in profit
or loss in the period ANZ New Zealand identifies the impairment and recognises a corresponding reduction in the carrying amount ofloans and advances through an offsetting provision.
Uncollectible amounts
If a loan or advance is uncollectible (whether partially or in full), then ANZ New Zealand writes off the balance (and also any related
provision for credit impairment).
ANZ New Zealand writes 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 theproceeds determined to be recoverable from the realisation of collateral.
Recoveries
If ANZ New Zealand recovers any cash flows from loans and advances previously written off, then the recovery is recognised in profit orloss 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 and collective basis.
Non-financial assets(v)

Goodwill

Goodwill represents the excess amount ANZ New Zealand has paid in acquiring a business over the fair value less costs of disposal of theidentifiable assets and liabilities acquired. Goodwill is recognised at cost less any accumulated impairment losses. Goodwill is reviewed for
impairment at least annually or when there is an indication of impairment. This involves using the discounted cash flows methodology todetermine the expected future benefits of the cash generating units to which the acquisition relates. Where the assessment results in the
goodwill balance exceeding the value of expected future benefits, the difference is charged to profit or loss. Any impairment of goodwill is
not subsequently reversed.
(E)

Liabilities

Financial liabilities(i)

Deposits and other borrowings

For deposits and borrowings that are not designated at fair value through profit or loss on initial recognition, ANZ New Zealand measuresthem at amortised cost and recognises their interest expense using the effective interest rate method. When deposits and otherborrowings are managed on a fair value basis, reduce or eliminate an accounting mismatch or contain an embedded derivative, ANZ New
Zealand designates them as fair value through profit or loss.
For deposits and other borrowings designated at fair value ANZ New Zealand recognises the amount of fair value gain or loss attributable
to changes in ANZ New Zealand’s own credit risk in other comprehensive income in retained earnings. Any remaining amount of fair value

Australia and New Zealand Banking Group Limited - ANZ New Zealand

11

NOTES TO THE FINANCIAL STATEMENTS
gain or loss is recognised directly in profit or loss. Once ANZ New Zealand has recognised an amount in other comprehensive income,
ANZ New Zealand does not later reclassify it to profit or loss.
Securities sold under repurchase agreements represent a liability to repurchase the financial assets that remain on ANZ New Zealand’sbalance sheet, since the risks and rewards of ownership remain with ANZ New Zealand. Over the life of the repurchase agreement, ANZ
New Zealand recognises the difference between the sale price and the repurchase price and charges it to interest expense in profit or loss.
(ii)

Unsubordinated debt and subordinated debt

Unsubordinated debt and subordinated debt are measured at amortised cost, except where designated at fair value through profit or loss.
Where ANZ New Zealand enters into a hedge accounting relationship, the fair value attributable to the hedged risks is reflected inadjustments to the carrying value of the debt. Interest expense is recognised using the effective interest rate method.
(F)

Equity(i)

SharesIssued shares are recognised at the amount paid per share net of directly attributable issue costs.
(ii)

Reserves

Available-for-sale revaluation reserve
This reserve includes the changes in fair value and exchange differences on ANZ New Zealand’s revaluation of available-for-sale financial
assets, net of deferred taxes to be realised upon disposal of the asset.
Cash flow hedging reserve
This reserve includes fair value gains and losses associated with the effective portion of designated cash flow hedging instruments, net ofdeferred taxes to be realised when the position is settled.
(G)

Presentation(i)

Offsetting of income and expenses

Income and expenses are not offset unless required or permitted by an accounting standard. This generally arises in either of the following
circumstances:••where transaction costs form an integral part of the effective interest rate of a financial instrument which is measured at amortisedcost, these are offset against the interest income generated by the financial instrument
where gains and losses arise from a group of similar transactions, such as foreign exchange gains and losses.

(ii)

Offsetting of financial assets and liabilities

Assets and liabilities are offset and the net amount reported in the balance sheet only where there is:••a current enforceable legal right to offset the asset and liability
an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

(iii) Segment reporting
Operating segments are distinguishable components of ANZ New Zealand that provide products or services that are subject to risks andrewards that are different to those of other operating segments. ANZ New Zealand operates predominantly in the banking industry within
New Zealand. ANZ New Zealand has very limited exposure to risk associated with operating in different economic environments orpolitical conditions. On this basis no geographical segment information is provided.
(H)

Other

(i)

Contingent liabilities

Contingent liabilities are not recognised in the balance sheet but disclosed in note 23 unless it is considered remote that ANZ New
Zealand will be liable to settle the possible obligation.
(ii)

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 2017, and have not been applied by ANZ New Zealand in preparing these financial
statements.
ANZ New Zealand has identified three standards where this applies to ANZ New Zealand and further details are set out below.
NZ IFRS 9 Financial Instruments (NZ IFRS 9)NZ IFRS 9 was issued in September 2014. When operative, this standard will replace NZ IAS 39 Financial Instruments: Recognition andMeasurement (NZ IAS 39) and includes requirements for impairment, classification and measurement and general hedge accounting.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

12

NOTES TO THE FINANCIAL STATEMENTS
Impairment
NZ IFRS 9 replaces the incurred loss model under NZ IAS 39 with a forward-looking expected loss model. This model will be applied tofinancial assets measured at amortised cost, debt instruments measured at fair value through other comprehensive income, leasereceivables, and certain loan commitments and financial guarantees. Under NZ IFRS 9, a three stage approach is applied to measuring
expected credit losses (ECL) based on credit migration between the stages as follows:•••Stage 1: At initial recognition, a provision equivalent to 12 months ECL is recognised.
Stage 2: Where there has been a significant increase in credit risk since initial recognition, a provision equivalent to full lifetime ECL isrequired.
Stage 3: Similar to the current NZ IAS 39 requirements for individual impairment provisions, lifetime ECL is recognised for loans
where there is objective evidence of impairment.

ECL are probability weighted and determined by evaluating a range of possible outcomes, taking into account the time value of money,
past events, current conditions and forecasts of future economic conditions.
Classification and measurement
There are three measurement classifications under NZ IFRS 9: amortised cost, fair value through profit or loss and, for financial assets, fairvalue through other comprehensive income. Financial assets are classified into these measurement classifications taking into account thebusiness model within which they are managed, and their contractual cash flow characteristics.
The classification and measurement requirements for financial liabilities under NZ IFRS 9 are largely consistent with NZ IAS 39 with the
exception that for financial liabilities 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. This part of the standard was early adopted by ANZ New Zealand from 1 October 2013.
General hedge accounting
NZ IFRS 9 introduces general hedge accounting requirements which more closely align with risk management activities undertaken when
hedging financial and non-financial risks.
Transition and impact
Other than noted above under classification and measurement, NZ IFRS 9 has a date of initial application for ANZ New Zealand of 1
October 2018.
The classification and measurement, and impairment requirements will be applied retrospectively by adjusting the opening balance sheet
at the date of initial application, with no requirements to restate comparative periods. ANZ New Zealand does not intend to restatecomparatives. NZ IFRS 9 provides an accounting policy choice to continue with NZ IAS 39 hedge accounting given the International
Accounting Standards Board’s ongoing project on macro hedge accounting. ANZ New Zealand’s current expectation is that it willcontinue to apply the hedge accounting requirements of NZ IAS 39.
ANZ New Zealand is in the process of assessing the impact of the application of NZ IFRS 9 and is not yet able to reasonably estimate theimpact on its financial statements.
NZ IFRS 15 Revenue from Contracts with Customers (NZ IFRS 15)
NZ IFRS 15 was issued in July 2014. NZ IFRS 15 contains new requirements for the recognition of revenue.
NZ IFRS 15 requires identification of distinct performance obligations within a contract and allocation of the transaction price of thecontract to those performance obligations. Revenue is recognised as each performance obligation is satisfied. Variable amounts ofrevenue can only be recognised if it is highly probable that a significant reversal of the variable amount will not be required in future
periods.
Although a significant proportion of ANZ New Zealand’s revenue is outside the scope of NZ IFRS 15, certain revenue streams are in thescope of the standard. NZ IFRS 15 is not mandatorily effective for ANZ New Zealand until 1 October 2018. ANZ New Zealand is in theprocess of assessing the impact of application of NZ IFRS 15 and is not yet able to reasonably estimate the impact on its financial
statements.
NZ IFRS 15 may be applied under different transition approaches which could impact (a) revenue recognised in future periods and (b) the
opening adjustment to retained earnings at the relevant date of initial application. ANZ New Zealand has not determined which transition
approach it will adopt.
NZ IFRS 16 Leases (NZ IFRS 16)
The final version of NZ IFRS 16 Leases was issued in February 2016 and is not effective for ANZ New Zealand until 1 October 2019. NZ IFRS
16 requires a lessee to recognise its right to use the underlying leased asset, as a right-of-use asset, and obligation to make lease payments
as a lease liability. NZ IFRS 16 substantially carries forward the lessor accounting requirements in NZ IAS 17 Leases.
ANZ New Zealand is in the process of assessing the impact of the application of NZ IFRS 16 and is not yet able to reasonably estimate theimpact on its financial statements.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

13

NOTES TO THE FINANCIAL STATEMENTS
2.

CRITICAL ESTIMATES AND JUDGEMENTS USED IN APPLYING ACCOUNTING POLICIESThere are a number of critical accounting treatments which include complex or subjective judgements and estimates that may affect thereported amounts of assets and liabilities in the financial statements. Estimates and judgements are continually evaluated and are basedon historical experience and other factors, including expectations of future events that are believed to be reasonable under thecircumstances.
An explanation of the judgements and estimates made by ANZ New Zealand, in the process of applying its accounting policies, that havethe most significant effect on the amounts recognised in the financial statements is set out below.
Critical accounting estimates and assumptions
Credit provisioning
The accounting policy relating to measuring the impairment of loans and advances requires ANZ New Zealand to assess impairment atleast at each reporting date. The credit provisions raised (collective and individual) represent management's best estimate of the losses
incurred in the loan portfolio at balance date based on their experienced judgement.
The collective provision is estimated on the basis of historical loss experience for assets with credit characteristics similar to those in thecollective pool. The historical loss experience is adjusted based on current observable data and events and an assessment of the impact ofmodel risk. The provision also takes into account the impact of large concentrated losses within the portfolio and the economic cycle.
The use of such judgements and reasonable estimates is considered by management to be an essential part of the process and does not
impact on the reliability of the provision.
Individual and collective provisioning involves the use of assumptions for estimating the amounts and timing of expected future cash
flows. The process of estimating the amount and timing of cash flows involves considerable management judgement. These judgements
are revised regularly to reduce any differences between loss estimates and actual loss experience.
Refer to note 14 for details of credit impairment provisions.
Critical judgements in applying ANZ New Zealand’s accounting policies
Financial instruments at fair value
ANZ New Zealand’s financial instruments measured at fair value are stated in note 1(A)(iii). In estimating fair value ANZ New Zealand uses,
wherever possible, quoted market prices in an active market for the financial instrument.
In the event that there is no active market for the instrument, fair value is based on present value estimates or other market acceptedvaluation techniques. The valuation models incorporate the impact of bid/ask spread, counterparty credit spreads and other factors thatwould influence the fair value determined by a market participant. The selection of appropriate valuation techniques, methodology andinputs requires judgement. These are reviewed and updated as market practice evolves.
Derivatives and hedging
ANZ New Zealand buys and sells derivatives as part of its trading operations and to hedge its interest rate risk, currency risk, price risk,
credit risk and other exposures relating to non-trading positions.
A hedging instrument is a designated derivative whose fair value or cash flows are expected to offset changes in the fair value or cash
flows of a designated hedged item. A hedged item is an asset, liability, firm commitment or highly probable forecast transaction that: (a)exposes ANZ New Zealand to the risk of changes in fair value or future cash flows; and (b) is designated as being hedged.
Judgement is required in selecting and designating hedging relationships and assessing hedge effectiveness. NZ IAS 39 does not specify asingle method for assessing hedge effectiveness prospectively or retrospectively. ANZ New Zealand adopts the hypothetical derivative
approach to determine hedge effectiveness in line with current risk management strategies. Hedge ineffectiveness can arise for a numberof reasons and whilst a hedge may pass the effectiveness tests above it may not be perfectly effective, leaving some volatility in profit orloss.
The majority of outstanding derivative positions are transacted over-the-counter and therefore need to be valued using valuation
techniques. Included in the determination of the fair value of derivatives is a credit valuation adjustment (CVA) to reflect thecreditworthiness of the counterparty. This is influenced by the mark-to-market of the derivative trades and by the movement in the market
cost of credit. Further adjustments are made to account for the funding costs inherent in the derivative. Judgement is required todetermine the appropriate cost of funding and the future expected cashflows used in this funding valuation adjustment (FVA).
Structured entities
A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding who controls the entity, such as
when voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
Structured entities are generally created to achieve a narrow and well defined objective with restrictions around their ongoing activities
and are often thinly capitalised with a reliance on debt financing for support.
ANZ New Zealand assesses, at inception and periodically, whether a structured entity should be consolidated based on the accounting
policy outlined in note 1. Such assessments are predominantly securitisation activities and involvement with managed funds. WhenAustralia and New Zealand Banking Group Limited - ANZ New Zealand

14

NOTES TO THE FINANCIAL STATEMENTS
assessing whether ANZ New Zealand controls (and therefore consolidates) a structured entity, judgement is required about whether ANZ
New Zealand has power over the relevant activities as well as exposure to variable returns of the structured entity. All involvement, rights
and exposure to returns are considered when assessing if control exists.
ANZ New Zealand is deemed to have power over a managed fund when it performs the function of Manager of that managed fund.
Whether ANZ New Zealand controls the managed fund depends on whether it holds that power as principal, or as an agent for otherinvestors. ANZ New Zealand is considered the principal, and thus controls the managed fund, when it cannot be easily removed from theposition of Manager by other investors and has variable returns through significant aggregate economic interest in that managed fund. In
all other cases ANZ New Zealand is considered to be acting in an agency capacity and does not control the managed fund.
Structured entities are consolidated when control exists. In other cases ANZ New Zealand may simply have an interest in or may sponsor a
structured entity but not consolidate it.
ANZ New Zealand considers itself the sponsor of an unconsolidated structured entity where it is the primary party involved in the designand establishment of that structured entity and where any of the following apply:•
where ANZ New Zealand is the major user of that structured entity•
ANZ New Zealand’s name appears in the name of that structured entity or on its products•
ANZ New Zealand provides implicit or explicit guarantees of that entity’s performance.
Goodwill
Refer to note 24 for details of goodwill held by ANZ New Zealand.
The carrying value of goodwill is subject to an impairment test to ensure that the current carrying value does not exceed its recoverable
value at the balance sheet date. Any excess of carrying value over recoverable amount is taken to profit or loss as an impairment write
down.
Goodwill has been allocated for impairment purposes to the cash generating units at which the goodwill is monitored for internalreporting purposes. Impairment testing of purchased goodwill is performed by comparing the recoverable value of each cash generating
unit with the current carrying amount of its net assets, including goodwill. Judgement is required in identifying the cash-generating units
to which goodwill and other assets are allocated for the purpose of impairment testing.
The recoverable amount is based on value-in-use calculations. These calculations use cash flow projections based on a number of financial
budgets within each segment approved by management covering a three year period. Cash flow projections are based on a range ofreadily available economic assumptions including GDP and CPI. 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 2017 when the last valuation was
prepared, a discount rate of 11.5% was applied to each cash generating unit. The main variables in the calculation of the discount rateused are the risk free rate, the beta rate and the market risk premium. The risk free rate is based on the 10 year Government Bond Rate. The
beta rate and the market risk premium are consistent with observable and comparative market rates applied in the regional banking
sector. Market observable information is 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 notcause ANZ New Zealand’s carrying amount to exceed its recoverable amount.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

15

NOTES TO THE FINANCIAL STATEMENTS
3.

NET INTEREST INCOME
Year toYear to30/09/2017
NZ$m

30/09/2016
NZ$m

351

453

Cash

41

64

Available-for-sale assets

106

64

Net loans and advances

5,911

6,160

Interest income
Financial assets at fair value through profit or loss
Trading securities
Financial assets not at fair value through profit or loss

Other

25

29

6,083

6,317

6,434

6,770

122

226

Deposits and other borrowings

2,347

2,941

Unsubordinated debt

704

386

Subordinated debt

158

154

Other

25

34

3,234

3,515

Total interest expense

3,356

3,741

Net Interest Income

3,078

3,029

Total interest income
Interest expense
Financial liabilities at fair value through profit or loss
Commercial paper
Financial liabilities not at fair value through profit or loss

4.

NON INTEREST INCOME
Year toYear to30/09/2017
NZ$m

30/09/2016
NZ$m

Net gain on foreign exchange trading

176

203

Net gain / (loss) on trading securities

(121)

115

Net gain / (loss) on trading derivatives

172

(306)

Net trading gains

227

12

Net funds management income

199

187

Net insurance income

130

227

Total funds management and insurance income

329

414

Net trading gains

Net funds management and insurance income

Other operating income
Lending and credit facility fee income

35

55

Other fee income

688

656

Total fee income

723

711

Direct fee expense

(328)

(308)

Net fee income

395

403

Net gain / (loss) on financial liabilities designated at fair value

4(5)

Net ineffectiveness on qualifying fair value hedges(6)2

Net loss on derivatives not qualifying for hedge accounting

(60)

(31)

Net cash flow hedge loss transferred to income statement

(12)

(7)

Net loss on available for sale securities transferred to income statement-(2)

Other income

34

41

Total other operating income

355

401

Australia and New Zealand Banking Group Limited - ANZ New Zealand

16

NOTES TO THE FINANCIAL STATEMENTS
5.

OPERATING EXPENSES
Year toYear to30/09/2017
NZ$m

30/09/2016
NZ$m

Salaries and related costs

801

811

Superannuation costs

29

30

Share-based payments expense

15

21

Other

11

32

Total personnel expenses

856

894

Depreciation of premises and equipment

32

32

Leasing and rental costs

80

79

Other

41

41

Total premises expenses

153

152

Depreciation and amortisation

44

111

Licences and outsourced services

125

116

Other

49

58

Total technology expenses

218

285

Advertising and public relations

41

42

Amortisation and impairment of other intangible assets

45

Freight, stationery, postage and telephone

45

48

Goodwill impairment

3-

Professional fees

43

45

Travel and entertainment expenses

26

28

Charges from Ultimate Parent Bank

46

64

Other

34

37

Total other expenses

242

269

Total operating expenses

1,469

1,600

Personnel

Premises

Technology

Other

Australia and New Zealand Banking Group Limited - ANZ New Zealand

17

NOTES TO THE FINANCIAL STATEMENTS
6.

INCOME TAX
Year toYear to30/09/2017

30/09/2016

NZ$m

NZ$m

Reconciliation of the prima facie income tax payable on profit
Profit before income tax

2,465

2,114

Prima facie income tax at 28%

690

591

Imputed and non-assessable dividends

(1)

(1)

Change in tax provisions

(5)

(5)

Non assessable income and non deductible expenditure

2

(11)

Income tax over provided in prior years

(1)

(2)

Total income tax expense

685

572

Effective tax rate (%)

27.8%

27.1%

Current tax

645

582

Deferred tax

40

(10)

Total income tax expense recognised in the income statement

685

572

Imputation credits available

4,196

3,566

Amounts recognised in the income statement

A number of companies within ANZ New Zealand are members of the New Zealand Resident imputation group. The imputation credit
balance for ANZ New Zealand includes the imputation credit balance in relation to both the New Zealand Resident imputation group andother companies within ANZ New Zealand 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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

18

NOTES TO THE FINANCIAL STATEMENTS
7.

SEGMENT ANALYSISANZ New Zealand is organised into three major business segments for segment reporting purposes - Retail, Commercial and Institutional.
Centralised back office and corporate functions support these segments. These segments are consistent with internal reporting provided
to the chief operating decision maker, being the Bank’s Chief Executive Officer.
Segment reporting has been updated to reflect minor changes to ANZ New Zealand’s structure. Comparative data has been adjusted tobe consistent with the current year’s segment definitions.
RetailRetail provides products and services to Retail, Private Banking, and Business Banking customers via the branch network, mortgage
specialists, relationship managers, the contact centre and a variety of self service channels (internet banking, phone banking, ATMs,website and mobile phone banking). Retail and Private Banking customers have personal banking requirements and Business Banking
customers consist primarily of small enterprises with annual revenues of less than NZ$5 million. Core products and services include current
and savings accounts, unsecured lending (credit cards, personal loans and overdrafts), home loans secured by mortgages over property,
investment products, superannuation and insurance services.
Commercial
Commercial provides services to Commercial & Agri (CommAgri) and UDC customers. CommAgri customers consist of primarily privately
owned medium to large enterprises. Commercial’s relationship with these businesses ranges from simple banking requirements withrevenue from deposit and transactional facilities, and cash flow lending, to more complex funding arrangements with revenue sourced
from a wider range of products. UDC is principally involved in the financing and leasing of plant, vehicles and equipment, mainly for small
and medium sized businesses, as well as investment products.
Institutional
Institutional provides financial services through a number of specialised units to large multi-banked corporations, often global, which
require sophisticated product and risk management solutions. Those financial services include loan structuring, foreign exchange andinterest rate products, wholesale money market services and transaction banking.
Other
Other includes treasury and back office support functions, none of which constitutes a separately reportable segment.
Business segment analysis1
RetailCommercial

Institutional

Other

Total

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

External interest income

3,683

2,070

676

5

6,434

External interest expense(1,474)

(302)

(338)

(1,242)(3,356)

Net intersegment interest

(437)

(868)

24

1,281

-

Net interest income

1,772

900

362

44

3,078

Other external operating income

675

21

302

(87)

911

30/09/2017

Share of associates' profit

5

-

-

-

5

Operating income

2,452

921

664

(43)

3,994

Operating expenses

1,005

259

184

21

1,469

Profit before credit impairment and income tax

1,447

662

480

(64)

2,525

33

51

(24)

-

60
2,465

Credit impairment charge / (release)
Profit before income tax

1,414

611

504

(64)

Income tax expense

395

172

142

(24)

685

Profit after income tax

1,019

439

362

(40)

1,780

Other information
Depreciation and amortisation

12

1

-

67

80

Goodwill

1,109

1,052

1,069

-

3,230

Other intangible assets

111

2

-

65

178

Investment in associates

7

-

-

-

7

Total external assets

78,84342,18636,184972

158,185

Total external liabilities

68,416

14,17629,01135,269146,872

Australia and New Zealand Banking Group Limited - ANZ New Zealand

19

NOTES TO THE FINANCIAL STATEMENTS
RetailCommercial

Institutional

Other

Total

30/09/2016

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

External interest income

3,836

2,202

722

10

6,770

External interest expense(1,598)

(333)

(403)

(1,407)(3,741)

Net intersegment interest

(509)

(980)

52

1,437

-

Net interest income

1,729

889

371

40

3,029

Other external operating income

660

19

104

44

827

5

-

-

-

5

Operating income

2,394

908

475

84

3,861

Operating expenses

1,048

256

179

117

1,600

Profit before credit impairment and income tax

1,346

652

296

(33)

2,261

Share of associates' profit

Credit impairment charge

55

72

20

-

147

Profit before income tax

1,291

580

276

(33)

2,114

Income tax expense

350

163

77

(18)

572

Profit after income tax

941

417

199

(15)

1,542

Other information
Depreciation and amortisation

12

1

-

135

148

Goodwill

1,109

1,052

1,072

-

3,233

Other intangible assets

118

3

-

70

191

Investment in associates

7

-

-

-

7

Total external assets

75,244

41,63947,815

2,008

166,706

Total external liabilities

63,607

13,364

41,05837,510155,539

30/09/2017
NZ$m

30/09/2016
NZ$m

1

Intersegment transfers are accounted for and determined on an arm's length or cost recovery basis.

Other segment
The table below sets out the profit/(loss) after tax impact of items included in Other.

Operations and support

1

3

Economic hedges

(50)

(29)

Revaluation of insurance policies from changes in interest rates

(25)

42

Other

34

(31)

Total

(40)

(15)

Australia and New Zealand Banking Group Limited - ANZ New Zealand

20

NOTES TO THE FINANCIAL STATEMENTS
8.

NOTES TO THE CASH FLOW STATEMENT
Year toYear to30/09/2017
NZ$m

30/09/2016
NZ$m

1,780

1,542

Depreciation and amortisation

80

148

Provision for credit impairment

60

147

Reconciliation of profit after income tax to net cash flows provided by / (used in) operating activities
Profit after income tax
Non-cash items:

Deferred fee revenue and expenses

(13)

(7)

Amortisation of capitalised brokerage / mortgage origination fees

171

160

Amortisation of premiums and discounts

89

70

Fair value gains and losses

(153)

31

5

4

(1,292)(3,593)

Loss on disposal and impairment of premises and equipment and intangibles
Deferrals or accruals of past or future operating cash receipts or payments:
Change in net operating assets less liabilities
Change in interest receivable

(14)

29

Change in interest payable

10

(63)

Change in accrued expenses

(2)

(73)

Change in provisions

(20)

15

Change in life insurance policy assets

17

(57)

Change in other receivables and payables

(13)

8

Change in net income tax assets / liabilities

80

(69)

Dividends from associates in excess of share of profits-(3)

Items classified as investing activities:
Proceeds from sale of insurance policies

-

(23)

785

(1,734)30/09/2017
NZ$m

30/09/2016
NZ$m

2,338

2,274

Nostro accounts

170

45

Overdrawn nostro accounts

(69)

(4)

Total cash and cash equivalents

2,439

2,315

Net cash flows provided by / (used in) operating activities

Reconciliation of cash and cash equivalents to the balance sheet
CashAmounts included in settlement balances receivable / (payable):Australia and New Zealand Banking Group Limited - ANZ New Zealand

21

NOTES TO THE FINANCIAL STATEMENTS
9.

CASH
30/09/2017
NZ$m

30/09/2016
NZ$m

Coins, notes and cash at bank

202

193

Securities purchased under agreements to resell

360

229

Balances with central banks

1,776

1,852

Total cash

2,338

2,274

30/09/2017

30/09/2016

10. TRADING SECURITIES

NZ$m

NZ$m

Government securities

3,299

5,953

Corporate and financial institution securities

4,364

6,026

Total trading securities

7,663

11,97911.

DERIVATIVE FINANCIAL INSTRUMENTS

The use of derivatives and their sale to customers as risk management products is an integral part of ANZ New Zealand’s trading activities.
Derivatives are also used to manage ANZ New Zealand’s own exposure to fluctuations in exchange and interest rates as part of its own
asset and liability management activities.
Derivatives are subject to the same types of credit and market risk as other financial instruments and ANZ New Zealand manages theserisks in a consistent manner.
Derivatives, except for those that are specifically designated as effective hedging instruments, are classified as held for trading.
Derivatives held for trading
The held for trading classification includes two categories of derivative instruments: those held as trading positions and those used for
ANZ New Zealand’s balance sheet risk management.
Trading positions
Trading positions consist of both sales to customers and market making activities. Sales to customers include the structuring andmarketing of derivative products to customers which enable them to take or mitigate risks. Market making activities consist of derivatives
entered into principally for the purpose of generating profits from short-term fluctuations in price or margins. Positions may be traded
actively or held over a period of time to benefit from expected changes in market rates.
Balance sheet risk management
ANZ New Zealand designates certain balance sheet risk management derivatives into hedging relationships in order to minimise income
statement volatility. This volatility is created by differences in the timing of recognition of gains and losses between the derivative and thehedged item. Hedge accounting is not applied to all balance sheet risk management positions as some balance sheet risk management
derivatives are classified as held for trading.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

22

NOTES TO THE FINANCIAL STATEMENTS
30/09/2017
Notional
principal
amountNZ$m30/09/2016

Fair values
AssetsLiabilities
NZ$m
NZ$m

Notional
principal
amountNZ$mFair values
AssetsLiabilities
NZ$m
NZ$m

Derivatives held for trading
Foreign exchange derivatives
Spot and forward contracts

105,278605

696

63,473

635

783

Swap agreements

165,909

1,679

1,959

144,501

1,616

3,639

Options purchased

1,301

17

-

2,379

50

2

Options sold

1,268

2

27

2,248

7

77

273,756

2,303

2,682

212,601

2,308

4,501

Interest rate derivatives
Forward rate agreements

33,800--41,507

1

5

Swap agreements

1,049,546

7,037

6,322

1,170,478

17,853

16,992Futures contracts

80,5835

24

78,9883

46

Options purchased

1,928

3

-

2,366

6

-

Options soldCommodity derivatives
Total derivatives held for trading

1,239

-

1

1,603

1

2

1,167,096

7,045

6,347

1,294,942

17,864

17,045

320

13

14

460

33

32

1,441,172

9,361

9,043

1,508,003

20,205

21,57838,911

86635

37,012271

440

38,911

86635

37,012271

440

22,955302

216

18,985493

380

Derivatives in hedging relationships
Fair value hedges
Interest rate swap agreements
Cash flow hedges
Interest rate swap agreements
Total derivatives in hedging relationships
Total derivative financial instruments

61,866388

851

55,997764

820

1,503,038

9,749

9,894

1,564,000

20,96922,398Derivatives in hedging relationships
Fair value hedges
ANZ New Zealand’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of
fixed-rate long-term financial instruments due to movements in market interest rates.
Gain / (loss) on fair value hedges attributable to the hedged risk

30/09/2017

30/09/2016

NZ$m

NZ$m

- hedged item

203

(84)

- hedging instrument

(209)

86

(6)

2

Gain / (loss) arising from fair value hedges:

Net ineffectiveness on qualifying fair value hedges

Cash flow hedges
ANZ New Zealand’s cash flow hedges comprise interest rate swaps that are used to protect against exposures to variability in futureinterest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be refunded or
reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected foreach portfolio of financial assets and liabilities on the basis of their forecast repricing profile. This forms the basis for identifying gains andlosses on the effective portions of derivatives designated as cash flow hedges.
Analysis of the cash flow hedging reserve30/09/2017

30/09/2016

NZ$m

NZ$m

Deferred gain / (loss) attributable to hedges of:
Variable rate loan assets

159

296

Short term re-issuances of fixed rate customer and wholesale deposit liabilities

(116)

(234)

Total cash flow hedging reserve

43

62

All underlying hedged cash flows are expected to be recognised in the income statement in the period in which they occur, which isanticipated to take place over the next ten years (2016: ten years).

Australia and New Zealand Banking Group Limited - ANZ New Zealand

23

NOTES TO THE FINANCIAL STATEMENTS
12. AVAILABLE-FOR-SALE ASSETS
30/09/2017
NZ$m

30/09/2016
NZ$m

Government securities

4,238

1,195

Corporate and financial institution securities

2,121

1,663

Equity and other securities
Total available-for-sale assets

1

1

6,360

2,859

30/09/2017

30/09/2016

13. NET LOANS AND ADVANCES

Note

NZ$m

NZ$m

Overdrafts

1,040

1,133

Credit cards outstanding

1,638

1,663

Term loans - housing

76,87073,330Term loans - non-housing

44,22743,651

Finance lease and hire purchase receivables

1,577

1,324

125,352

121,101

(586)

(632)

Less: Unearned income

(222)

(211)

Add: Capitalised brokerage/mortgage origination fees

336

366

Total gross loans and advances
Less: Provision for credit impairment

14

Add: Customer liability for acceptances1
Net loans and advances (including assets classified as held for sale)Less: UDC net loans and advances held for sale
Net loans and advances
1

Customer liability for acceptances has been recognised in Other assets from 30 September 2017.

29

-

27

124,880

120,651(2,912)-

121,968

120,651

Australia and New Zealand Banking Group Limited - ANZ New Zealand

24

NOTES TO THE FINANCIAL STATEMENTS
14. PROVISION FOR CREDIT IMPAIRMENT
Credit impairment charge / (release)
30/09/2017
Retail Other retailmortgages exposures
NZ$m

New and increased provisions

30/09/2016

Non-retail
exposures

Total

NZ$m

NZ$m

NZ$m

Retail Other retailmortgages exposures

Non-retail
exposures

Total

NZ$m

NZ$m

NZ$m

NZ$m

7

94

133

234

23

110

111

244

Write-backs

(18)

(12)

(67)

(97)

(35)

(18)

(30)

(83)

Recoveries

-

(20)

(11)

(31)

-

(22)

(3)

(25)

(11)

62

55

106

(12)

70

78

136

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

(5)

(9)

(32)

(46)

(2)

3

10

11

Credit impairment charge / (release)

(16)

53

23

60

(14)

73

88

147

Movement in provision for credit impairment
30/09/2017
Retail Other retailmortgages exposures

30/09/2016

Non-retail
exposures

Total

Retail Other retailmortgages exposures

Non-retail
exposures

Total

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

85

130

263

478

87

127

253

467

Collective provision
Balance at beginning of the year
Charge / (release) to income statement

(5)

(9)

(32)

(46)

(2)

3

10

11

Balance at end of the year

80

121

231

432

85

130

263

478
162

Individual provision
Balance at beginning of the year

40

6

108

154

62

9

91

New and increased provisions net of write-backs

(11)

82

66

137

(12)

92

81

161

Bad debts written off

(1)

(82)

(50)

(133)

(6)

(95)

(55)

(156)

Discount unwind1

(1)

-

(3)

(4)

(4)

-

(9)

(13)

Balance at end of the year

27

6

121

154

40

6

108

154

Total provision for credit impairment

107

127

352

586

125

136

371

632

1

The impairment loss on an impaired asset is calculated as the difference between the asset’s carrying amount and the estimated future cash flows discounted to its present
value using the original effective interest rate for the asset. This discount unwinds as interest income over the period the asset is held.

Impaired assets
30/09/2017
Retail Other retailmortgages exposures
NZ$m
NZ$m

30/09/2016

Non-retail
exposures
NZ$m

Total
NZ$m

Retail Other retailmortgages exposures
NZ$m
NZ$m

Non-retail
exposures
NZ$m

Total
NZ$m

Balance at beginning of the year

64

27

342

433

119

32

253

404

Transfers from productive

37

106

430

573

76

129

395

600

Transfers to productive

(20)

(9)

(56)

(85)

(40)

(8)

(7)

(55)

Assets realised or loans repaid

(45)

(22)

(360)

(427)

(85)

(31)

(244)

(360)

Write offs

(1)

(82)

(50)

(133)

(6)

(95)

(55)

(156)

Total impaired assets

35

20

306

361

64

27

342

433

Other assets under administration

9

2

-

11

11

2

-

13

Undrawn facilities with impaired customers

1

-

5

6

-

1

57

58

Australia and New Zealand Banking Group Limited - ANZ New Zealand

25

NOTES TO THE FINANCIAL STATEMENTS
15. DEPOSITS AND OTHER BORROWINGS
30/09/2017
Note

30/09/2016

NZ$m

NZ$m

Term deposits

45,457

39,665On demand and short term deposits

41,45142,323

8,882

7,780

Deposits not bearing interest
UDC secured investments

1,039

1,592

Total customer deposits

96,82991,360

Certificates of deposit

1,916

2,237

Commercial paper

3,721

5,364

Securities sold under repurchase agreements

157

76

Borrowings from Ultimate Parent Bank and Immediate Parent Company

2130

Deposits and other borrowings (including liabilities classified as held for sale)Less: UDC secured investments held for sale

29

Deposits and other borrowings

6,429

7,871

109,052

106,908(1,039)-108,013

106,908

Deposits from customers, except UDC secured investments, are unsecured and rank equally with other unsecured liabilities of ANZ New
Zealand. In the unlikely event that the Bank was put into liquidation or ceased to trade, secured creditors and those creditors set out in
Schedule 7 of the Companies Act 1993 would rank ahead of the claims of unsecured creditors.

16. UNSUBORDINATED DEBT
30/09/2017
Note

Domestic bonds
U.S. medium term notes1
1Euro medium term notes
Covered bonds1

NZ$m

3,900

3,975

9,004

6,883

3,173

2,792

5,325

6,218

21,402

19,868Fair value hedge adjustment

(53)

192

Less: held by the Bank

(26)

(46)

21,32320,014

Total unsubordinated debt issued

Total unsubordinated debt
1

21, 2830/09/2016

NZ$m

This unsubordinated debt is issued by ANZ New Zealand (Int’l) Limited and is guaranteed by the Bank.

Unsubordinated debt, other than covered bonds, is unsecured and ranks equally with other unsecured liabilities of ANZ New Zealand.
NZX Regulation has granted the Bank a waiver from NZX Debt Market Listing Rule (Rule) 7.12.1 to the extent that this Rule requires the
Bank to release to the market details of any acquisition of the Bank’s domestic bonds as a result of its market-making activities or trading
on behalf of its clients. The Bank will notify the NZX if any such domestic bonds are subsequently cancelled. Rule 7.12.1 does not extend to
the Bank’s subsidiaries in this context. The Bank will continue to comply with Rule 7.12.1 in respect of any domestic bonds that are issued,
redeemed or purchased by the Bank in any other capacity.
Domestic bonds includes three series of bonds quoted on the NZX Debt Market which mature on 22 March 2019, 2 September 2021 and 1
September 2023 respectively (the Bonds). NZX Regulation has granted the Bank waivers from the requirement in Rule 5.2.3 (as modified by
NZX Regulation’s Ruling on Rule 5.2.3 issued on 29 September 2015) for the Bonds to be held by at least 100 members of the publicholding at least 25% of the Bonds issued (Spread). The effect of these waivers is that the Bonds may not be widely held and there may be
reduced liquidity in the Bonds. If there is a material reduction in the Spread of the Bonds, the Bank will notify NZX as appropriate.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

26

NOTES TO THE FINANCIAL STATEMENTS
17. SUBORDINATED DEBT
30/09/2017

30/09/2016

NZ$m

NZ$m

AUD 970m ANZ Capital Notes 3 (ANZ CN3)2

1,044

1,005

NZD 500m ANZ New Zealand Capital Notes (ANZ NZ CN)3

497

496

NZD 835m perpetual subordinated bond3

835

835

AUD 10m perpetual subordinated floating rate loan

1010

ANZ Capital Notes

1

Perpetual subordinated debt

Dated subordinated debt
AUD 265m subordinated floating rate loan

288

278

Total subordinated debt

2,674

2,624

1
2
3

These instruments qualify as additional tier 1 capital of the Overseas Banking Group.
These instruments are quoted on the Australian Stock Exchange.
These instruments are quoted on the NZX Debt Market.

Subordinated debt is subordinated in right of payment in the event of liquidation or wind up to the claims of depositors and all creditorsof the relevant issuer or drawer of the debt.
ANZ Capital Notes••

On 5 March 2015, the NZ Branch issued 9.7 million convertible notes (ANZ CN3) at A$100 each, raising A$970 million before issue
costs.
On 31 March 2015, the Bank issued 500 million convertible notes (ANZ NZ CN) at NZ$1 each, raising NZ$500 million before issue
costs.

ANZ Capital Notes (the notes) are fully paid mandatorily convertible non-cumulative perpetual subordinated notes.
As at 30 September 2017 ANZ NZ CN carried a BB+ credit rating from Standard and Poor’s.
The notes are classified as debt given there are circumstances beyond ANZ New Zealand’s control where the principal is converted into avariable number of shares of the Ultimate Parent Bank.
Distributions and interest
Distributions on ANZ CN3 and interest on ANZ NZ CN are recorded as interest expense in the statement of comprehensive income.
Distributions and interest on the notes are non-cumulative and payable as follows:••

ANZ CN3: payable semi-annually in arrears in March and September in each year and will be franked in line with the franking applied
to ordinary shares of the Ultimate Parent Bank. The distributions are based on a floating rate equal to the aggregate of the Australian
6 month bank bill rate plus a 360 basis point margin, multiplied by one minus the Australian company tax rate. Should the
distribution not be fully-franked, the terms of the notes provide for a cash gross-up for the amount of the franking benefit notprovided.
ANZ NZ CN: payable quarterly in arrears in February, May, August and November in each year. The interest rate is fixed at 7.2% perannum until 25 May 2020, and thereafter will be based on a floating rate equal to the aggregate of the New Zealand 3 month bankbill rate plus a 350 basis point margin.

Distributions and interest payments are subject to the Ultimate Parent Bank’s (ANZ CN3) and the Bank’s (ANZ NZ CN) absolute discretionand certain payment conditions being satisfied (including APRA and RBNZ (ANZ NZ CN only) requirements). If distributions or interest are
not paid on the notes, the Ultimate Parent Bank (ANZ CN3) or the Bank (ANZ NZ CN) may not, except in limited circumstances, pay
dividends or undertake a share buy-back or other capital reduction on its ordinary shares until the distributions or interest are next paid.
Conversion features
On 24 March 2025 (ANZ CN3) or 25 May 2022 (ANZ NZ CN) or an earlier date under certain circumstances, the relevant notes will
mandatorily convert into a variable number of ordinary shares of the Ultimate Parent Bank based on the average market price of the
Ultimate Parent Bank’s ordinary shares over a specified period prior to conversion less a 1% discount.
The mandatory conversion will be deferred for a specified period if the conversion tests are not met.
If a common equity capital trigger event, an APRA non-viability trigger event or an RBNZ non-viability trigger event (ANZ NZ CN only)
occurs, some or all of the notes will be required to be immediately converted into ordinary shares of the Ultimate Parent Bank, subject to a
maximum conversion number.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

27

NOTES TO THE FINANCIAL STATEMENTS
A common equity capital trigger event occurs if the:••Overseas Banking Group’s Level 1 (ANZ CN3 only) or Level 2 common equity tier 1 capital ratio is equal to or less than 5.125% orBanking Group’s common equity tier 1 capital ratio is equal to or less than 5.125% (ANZ NZ CN only).

An APRA non-viability trigger event occurs if APRA notifies the Ultimate Parent Bank that, without the conversion or write-off of certain
securities or a public sector injection of capital (or equivalent support), it considers that the Ultimate Parent Bank would become nonviable. An RBNZ non-viability trigger event occurs if the RBNZ directs the Bank to convert or write off the notes or a statutory manager isappointed to the Bank and decides the Bank must convert or write off the notes.
On 25 May 2020 the Bank has the right, subject to satisfying certain conditions, to redeem (subject to receiving RBNZ’s and APRA’s priorapproval), or to convert into ordinary shares of the Ultimate Parent Bank, all or some of the ANZ NZ CN at its discretion on similar terms as
mandatory conversion.
On 24 March 2023 the Ultimate Parent Bank has the right, subject to receiving APRA’s prior approval and satisfying certain conditions, toredeem, or to convert into ordinary shares of the Ultimate Parent Bank, all or some of the ANZ CN3 at its discretion on similar terms as
mandatory conversion.
Rights of holders in event of liquidation
In a liquidation of the Ultimate Parent Bank, ANZ CN3 rank equally with other additional tier 1 capital instruments issued by the Ultimate
Parent Bank. In a liquidation of the Bank, ANZ NZ CN rank equally with the Bank’s other additional tier 1 capital instruments, including
preference shares, and lower than the Bank’s perpetual subordinated debt. Holders of the notes do not have any right to vote in general
meetings of the Ultimate Parent Bank or the Bank.
Perpetual subordinated debt
Perpetual subordinated debt instruments are classified as debt reflecting an assessment of the key terms and conditions of the
instruments, and an assessment of the ability, and likelihood of interest payments being deferred. Certain of these instruments haveinterrelationships that have been considered in this assessment.
NZD 835,000,000 bondThis bond was issued by the Bank on 18 April 2008.
The Bank may elect to redeem the bond on 18 April 2018 (the Call Date) or any interest payment date subsequent to 18 April 2018.
Interest is payable semi-annually in arrears on 18 April and 18 October each year, up to and including the Call Date and then quarterly
thereafter. Should the bond not be called at the Call Date, the Coupon Rate from the Call Date onwards will be based on a floating rateequal to the aggregate of the 3 month bank bill rate plus a 300 basis point margin.
As at 30 September 2017, this bond carried a BBB rating by Standard and Poor's and a Baa1 rating by Moody’s.
The coupon interest on the bond is 5.28% per annum until 18 April 2018.
AUD 10,000,000 loan
This loan was drawn down by the Bank on 27 March 2013 and has no fixed maturity. Interest is payable semi-annually in arrears on 15
March and 15 September each year. The Bank may repay the loan on any interest payment date after the NZD 835,000,000 bond has been
repaid in full.
Coupon interest is based on a floating rate equal to the aggregate of the Australian 6 month bank bill rate plus a 240 basis point margin,
increasing to the Australian 6 month bank bill rate plus a 440 basis point margin from 15 September 2018.
Dated subordinated debt
AUD 265,017,668 loan
This loan was drawn down by ANZ Holdings (New Zealand) Limited on 25 September 2013. The loan matures on 1 September 2023, but
ANZ Holdings (New Zealand) Limited may elect to repay the loan on any interest payment date from 1 September 2018. Interest is
payable semi-annually in arrears on 1 March and 1 September in each year and is based on a floating rate equal to the aggregate of theAustralian 6 month bank bill rate plus a 260 basis point margin.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

28

NOTES TO THE FINANCIAL STATEMENTS
18. FINANCIAL RISK MANAGEMENT
Strategy in using financial instruments
Financial instruments are fundamental to ANZ New Zealand’s business, constituting the core element of its operations. Accordingly, therisks associated with financial instruments are a significant component of the risks faced by ANZ New Zealand. Financial instruments
create, modify or reduce the credit, market and liquidity risks of ANZ New Zealand’s balance sheet. ANZ New Zealand’s overall risk
management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on thefinancial performance of ANZ New Zealand.
The risk management and policy control framework applicable to the entities comprising ANZ New Zealand has been set by the Board
and Risk Committee of the Bank or the Ultimate Parent Bank, as appropriate. Likewise oversight and monitoring of material risk exposuresof ANZ New Zealand is undertaken by the Risk Management functions of the Bank and also the Ultimate Parent Bank. Throughout thisdocument, references to the Risk Management of the operations within the entities comprising ANZ New Zealand, implicitly involves
oversight by both related entities.

Credit risk
Credit risk is the risk of financial loss from counterparties being unable to fulfil their contractual obligations. ANZ New Zealand assumes
credit risk in a wide range of lending and other activities in diverse markets and many jurisdictions. Credit risks arise not only fromtraditional lending to customers, but also from inter-bank, treasury, international trade and capital market activities around the world.
Credit risk incorporates the risks associated with ANZ New Zealand lending to customers who could be impacted by climate change or bychanges to laws, regulations, or other policies adopted by governments or regulatory authorities, including carbon pricing and climatechange adaptation or mitigation policies.
ANZ New Zealand has an overall lending objective of sound growth for appropriate returns. The credit risk objectives of ANZ New Zealandare set by each Board and are implemented and monitored within a tiered structure of delegated authority, designed to oversee multiple
facets of credit risk, including business writing strategies, credit policies/controls, single exposures, portfolio monitoring and risk
concentrations.
Credit risk management
A credit risk management framework is in place across ANZ New Zealand with the aim of ensuring a structured and disciplined approach
is maintained in achieving the objectives set by each Board. The framework focuses on policies, people, skills, controls, risk concentrations
and portfolio balance. It is supported by portfolio analysis and business-writing strategies, which guide lending decisions and identify
segments of the portfolio requiring attention. The effectiveness of the framework is monitored through a series of compliance andreporting processes.
An independent Risk Management function is staffed by risk specialists. In regard to credit risk management, the objective is for Risk
Management to provide robust credit policies, to make independent credit decisions, and to provide strong support to front line staff in
the application of sound credit practices. In addition to providing independent credit assessment on lending decisions, Risk Management
also performs key roles in portfolio management by development and validation of credit risk measurement systems, loan asset quality
reporting, and development of credit standards and policies.
The credit risk management framework is top down. The framework is defined by ANZ New Zealand's credit principles and policies. The
effectiveness of the credit risk management framework is validated through the compliance and monitoring processes.
Risk Management's responsibilities for credit risk policy and management are executed through dedicated departments, which support
the business units. All major business unit credit decisions require approval from both business writers and independent risk personnel.
Credit risk is controlled through a combination of approvals, limits, reviews and monitoring procedures that are carried out on a regularbasis, the frequency of which is dependent upon the level of risk. For the key operating entities within ANZ New Zealand, credit risk policy
and management is executed through the Chief Risk Officer, who is responsible for various dedicated areas within the Risk Management
division. A formal outsourcing agreement provides for credit risk functions to be provided to a number of ANZ New Zealand entities bystaff of the Bank.
Credit risk review function Group Credit Assurance also provides a further independent check mechanism to ensure the quality of credit
decisions. This includes providing independent periodic checks on asset quality and compliance with the agreed standards and policies
across ANZ New Zealand.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

29

NOTES TO THE FINANCIAL STATEMENTSCountry risk management
Some customer credit risks involve country risk, whereby actions or events at a national or international level could disrupt servicing ofcommitments. Country risk arises when payment or discharge of an obligation will, or could, involve the flow of funds from one country toanother or involve transactions in a currency other than the domestic currency of the relevant country.
Country ratings are assigned to each country where ANZ New Zealand incurs country risk and have a direct bearing on ANZ New
Zealand's risk appetite for each country. The country rating is determined through a defined methodology based around external ratings
agencies’ ratings and internal specialist opinion. It is also a key risk consideration in ANZ New Zealand's capital pricing model for crossborder flows.
The recording of country limits provides ANZ New Zealand with a means to identify and control country risk. Country limits ensure that
there is a country-by-country ceiling on exposures that involve country risk. They are recorded by time to maturity and purpose of
exposure, e.g., trade, markets and project finance. Country limits are managed centrally by the Ultimate Parent Bank, through a global
country risk exposure management system managed by a specialist unit within Institutional Risk.
Portfolio stress testing
Stress testing is integral to strengthening the predictive approach to Risk Management and is a key component to managing risk appetiteand business writing strategies. It creates greater understanding of impacts on financial performance through modelling relationships andsensitivities between geographic, industry and business unit exposures under a range of macro economic scenarios.
The Ultimate Parent Bank has a dedicated stress testing team that assists business and risk executives in ANZ New Zealand to model andreport periodically to management and the Board Risk Committee on a range of scenarios and stress tests.
Portfolio analysis and reporting
Credit portfolios are actively monitored at each layer of the risk structure to ensure credit deterioration is quickly detected and mitigatedthrough the implementation of remediation strategies.
Businesses incurring credit risk undertake regular and comprehensive analysis of their credit portfolios. Issue identification and adherence
to performance benchmarks are reported to Risk Management and business executives through a series of reports including monthly‘asset quality’ reporting. This process is undertaken by or overseen by Risk Management ensuring an efficient and independent conduit
exists to identify and communicate emerging credit issues to ANZ New Zealand executives and each Board.
Collateral management
ANZ New Zealand credit principles specify lending only what the counterparty has the capacity and ability to repay and ANZ New Zealandsets limits on the acceptable level of credit risk. Acceptance of credit risk is firstly based on the counterparty’s assessed capacity to meet
contractual obligations (ie interest and capital repayments). Obtaining collateral is only used to mitigate credit risk. Procedures aredesigned to ensure collateral is managed, legally enforceable, conservatively valued and adequately insured where appropriate. ANZ New
Zealand policy sets out the types of acceptable collateral, including:•Cash•
Mortgages over property•
Charges over business assets, eg premises, stock and debtors•
Charges over financial instruments, eg debt securities and equities in support of trading facilities•
Financial guarantees.
In the event of customer default, any loan security is usually held as mortgagee in possession while action is taken to realise it. Therefore
ANZ New Zealand does not usually hold any real estate or other assets acquired through the enforcement of security.
ANZ New Zealand uses International Swaps and Derivatives Association Master Agreements (ISDA) to document derivatives' activities tolimit exposure to credit losses. The credit risk is reduced by a master agreement to the extent that, if an event of default occurs, allcontracts with the counterparty are terminated and settled on a net basis. Further, it is ANZ New Zealand's preferred practice to include all
products covered by the ISDA in the Credit Support Annex (CSA) in order to achieve further credit exposure reduction. Under a CSA,
collateral is passed between the parties, depending on the aggregate mark-to-market (positive or negative) of derivative trades between
the two entities, to mitigate the market contingent counterparty risk inherent in the outstanding positions.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

30

NOTES TO THE FINANCIAL STATEMENTS
Concentrations of credit risk
Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities within the samegeographic region, or when they have similar risk characteristics that would cause their ability to meet contractual obligations to be
similarly affected by changes in economic or other conditions.
ANZ New Zealand monitors its portfolios to identify and assess risk concentrations. Concentration limits are used to guard against large
single customer or correlated credit risks. Risk Management, Business Unit executives and senior management monitor large exposure
concentrations through a monthly list of ANZ New Zealand's top corporate exposures. The ANZ Credit and Market Risk Committee and
Board Risk Committee regularly review a comprehensive list of single customer concentration limits and customers’ adherence to theselimits.
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 isshown separately as required by the Order.
The presentation of these tables has changed from previous periods to align this disclosure with the classifications in the data series S34 –Banks: Assets – Loans by industry published by the RBNZ. This series uses ANZSIC 2006 industry classifications rather than ANZSIC 1996 thatwere previously used. Updated corresponding amounts as at 30 September 2016 have been provided for comparative purposes. The mostsignificant changes to the 30 September 2016 amounts from the previous presentation are:1
2

Industry classification is now shown separately for New Zealand residents and non-New Zealand residents
The reduction in exposures to households, previously described as personal lending, is due to the reclassification of loans secured byrental properties to the relevant customer’s industry, of which the majority are now included in rental, hiring and real estate services.

Cash,
Tradingsettlements securities andreceivable and available-forcollateral paid
sale assets
30/09/2017

Derivative
financial Net loans andadvances3
instruments

Otherfinancial Credit related
assets commitments4

Total

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

Agriculture

-

-

25

17,68958

1,436

19,208Forestry and fishing, agriculture services

-

-

1

1,277

4

240

1,522

Manufacturing

-

14

146

2,730

9

1,798

4,697

Electricity, gas, water and waste services

-

15

437

1,602

5

1,522

3,581

Construction

-

-

13

1,640

5

1,119

2,777

Wholesale trade

-

-

49

1,630

5

1,357

3,041

Retail trade and accommodation

-

1

17

3,065

10

1,133

4,226

Transport, postal and warehousing

-

9

55

1,442

5

894

2,405

2,296

1,709

896

905

338

1,010

7,154

Public administration and safety1

-

7,477

621

412

1

794

9,305

Rental, hiring & real estate services
Professional, scientific, technical, administrativeand support services
Households

-

-

114

31,649104

3,699

35,566

-

1

5

1,290

4

619

1,919

-

-

-

54,765

180

11,87866,823All other New Zealand residents2

-

5

129

2,636

8

1,474

4,252

2,296

9,231

2,508

122,732736

28,973

166,476

New Zealand residents

Finance and insurance services

Overseas
Finance and insurance services

1,795

4,325

7,017

123

-

155

13,415

Households

-

-

-

1,529

5

-

1,534

All other non-NZ residents

-

467

224

968

3

-

1,662

1,795
-

4,792
-

7,241
-

2,620
(502)

8
-

155
(84)

16,611
(586)

-

-

-

(222)

-

-

(222)

-

-

-

336

-

-

336

4,091

14,023

9,749

124,964744

29,044

182,615

Less: Provision for credit impairment
Less: Unearned income
Add: Capitalised brokerage / mortgage
origination fees
Total financial assets

Australia and New Zealand Banking Group Limited - ANZ New Zealand

31

NOTES TO THE FINANCIAL STATEMENTS
Cash,
Tradingsettlements securities andreceivable and available-forcollateral paid
sale assets
30/09/2016

Derivative
financial Net loans andadvances3
instruments

Otherfinancial Credit related
assets commitments4

Total

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

Agriculture

-

-

23

17,77958

1,366

19,226

Forestry and fishing, agriculture services

-

-

21

1,231

4

242

1,498

Manufacturing

-

12

185

3,556

12

2,012

5,777

Electricity, gas, water and waste services

-

21

642

1,298

4

1,255

3,220

Construction

-

-

17

1,584

5

1,030

2,636

Wholesale trade

-

-

23

1,645

5

1,596

3,269

Retail trade and accommodation

-

-

63

3,071

10

1,110

4,254

Transport, postal and warehousing

-

5

91

1,380

5

924

2,405
8,551

New Zealand residents

Finance and insurance services

2,931

2,569

1,011

807

281

952

Public administration and safety1

-

7,028

1,049

352

5

750

9,184

Rental, hiring & real estate services
Professional, scientific, technical, administrativeand support services
Households

-

-

75

29,43996

3,562

33,172

-

-

9

1,173

4

734

1,920

-

-

-

52,514172

11,48664,172All other New Zealand residents2

-

46

244

2,555

8

2,305

5,158

2,931

9,681

3,453

118,384669

29,324

164,442

Overseas
Finance and insurance services

1,856

4,703

17,50495-

183

24,341

Households

-

-

-

1,444

5

-

1,449

All other non-NZ residents

-

454

12

1,205

4

-

1,675

1,856
-

5,157
-

17,516
-

2,744
(528)

9
-

183
(104)

27,465
(632)

-

-

-

(211)

-

-

(211)

-

-

-

366

-

-

366

4,787

14,83820,969120,755678

29,403

191,430

Less: Provision for credit impairment
Less: Unearned income
Add: Capitalised brokerage / mortgage
origination fees
Total financial assets
1
2

3
4

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 otherservices.
Excludes individual and collective provisions for credit impairment held in respect of credit related commitments.
Credit related commitments comprise undrawn facilities, customer contingent liabilities and letters of offer.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

32

NOTES TO THE FINANCIAL STATEMENTS
Maximum exposure to credit risk
The following table presents the maximum exposure to credit risk for on and off balance sheet financial instruments before taking accountof the financial effect of any collateral held or other credit enhancements, unless such collateral meets the offsetting criteria in NZ IAS 32
Financial Instruments: Presentation.
The table also provides a quantification of the value of the financial charges ANZ New Zealand holds over a borrower’s specific asset (orassets) where ANZ New Zealand is able to enforce the collateral in satisfying a debt in the event of the borrower failing to meet its
contractual obligations. For the purposes of this disclosure, where the collateral held is valued at more than the corresponding credit
exposure, the financial effect is capped at the value of the credit exposure. In respect of derivative financial instruments, the assessedcollateral is the amount of cash collateral received and does not include the effect of any netting arrangements under ISDAs.
The assignable value of credit mitigants, such as guarantees and security interests over the assets of a customer’s business, is less certain
and their financial effect has not been quantified for disclosure purposes. Credit exposures shown as not fully secured may benefit fromsuch credit mitigants.
30/09/2017
Maximum
exposure tocredit risk

30/09/2016

Financial
Unsecuredeffect of portion of credit
collateralexposure

Maximum
exposure tocredit risk

Financial
Unsecuredeffect of portion of credit
collateralexposure

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

2,140

360

1,780

2,081

229

1,852

Settlement balances receivable

536

266

270

396

265

131

Collateral paid

1,415

-

1,415

2,310

-

2,310

Trading securities

7,663

-

7,663

11,979-11,979Derivative financial instruments

9,749

613

9,136

20,969529

20,440Available-for-sale assets

6,360

-

6,360

2,859

-

2,859

Net loans and advances

124,964

115,225

9,739

120,755

110,370

10,385On and off-balance sheet positions
Cash

Other financial assets

744

378

366

678

361

317

Credit related commitments

29,044

14,526

14,51829,403

15,193

14,210Total exposure to credit risk

182,615

131,368

51,247

191,430

126,947

64,483Credit quality
A core component of ANZ New Zealand’s credit risk management capability is the risk grading framework used across all major business
units. A set of risk grading principles and policies is supported by a complementary risk grading methodology. Pronouncements by theInternational Basel Committee on Banking Supervision have been encapsulated in these principles and policies, including governance,
validation and modelling requirements.
ANZ New Zealand’s risk grade profile changes dynamically through new counterparty lending and existing counterparty movements ineither risk or volume. All counterparty risk grades are subject to frequent review, including statistical and behavioural reviews in consumer
and small business segments, and individual counterparty reviews in segments with larger single name borrowers.
Impairment and provisioning of financial assets
ANZ New Zealand's policy relating to the recognition and measurement of impaired assets conforms to the RBNZ's guidelines.
Loans are classified as either performing or impaired. Impaired assets are credit exposures where: there is doubt as to whether the fullcontractual amount (including interest) will be received; a material credit obligation is 90 days past due but not well secured; they are
portfolio managed and can be held for up to 180 days past due; or concessional terms have been provided due to the financial difficultiesof the customer.
An exposure is classified as past due but not impaired (less than 90 days) where the value of collateral is sufficient to repay both theprincipal debt and all other potential interest or there is no concern as to the creditworthiness of the counterparty in question.
The past due but not impaired (over 90 days) classification applies where contractual payments are past due by 90 days or more, or where
the facility remains outside of contractual arrangements for 90 or more consecutive days, but ANZ New Zealand believes that impairment
is not appropriate on the basis of the level of security/collateral available, or the facility is portfolio managed.
The provision for credit impairment represents management’s best estimate of the losses incurred in the loan portfolio at balance datebased on its experienced judgement.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

33

NOTES TO THE FINANCIAL STATEMENTS
Distribution of gross loans and advances assets by credit quality
The credit quality of the portfolio of loans and advances is assessed by reference to ANZ New Zealand’s risk grading principles and policies
supported by a complementary risk grading methodology.
30/09/2017

30/09/2016

Retailmortgages

Other retail
exposures

Non-retail
exposures

Total

Retailmortgages

Other retail
exposures

Non-retail
exposures

NZ$m

NZ$m

Total

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

Strong risk rating

63,242

Satisfactory risk rating

9,662

1,330

20,92285,49462,528

1,263

20,29684,087

3,153

21,99534,810

6,842

2,997

22,309Substandard but not past due or impaired

32,148

489

435

1,678

2,602

336

539

1,928

2,803

73,393

4,918

44,595

122,906

69,706

4,799

44,533

119,038

1 to 5 days

391

113

543

1,047

359

125

350

834

6 to 29 days

211

74

99

384

170

73

42

285

1 to 29 days

602

187

642

1,431

529

198

392

1,119

30 to 59 days

100

34

171

305

136

32

62

230

60 to 89 days

114

18

12

144

106

17

6

129

90 days and over

155

31

19

205

103

26

23

152

Total past due but not impaired

971

270

844

2,085

874

273

483

1,630

Total impaired assets

35

20

306

361

64

27

342

433

74,3995,208

45,745

125,352

70,644

5,099

45,358

121,101

Total neither past due nor impaired
Past due but not impaired:

Gross loans and advances

Credit quality of gross loans and advances neither past due nor impaired
The credit quality of financial assets is assessed by ANZ New Zealand using internal ratings which aim to reflect the relative ability ofcounterparties to fulfil, on time, their credit-related obligations, and is based on their current probability of default.
Internal ratings
Strong risk rating - Corporate customers demonstrating superior stability in their operating and financial performance over the long-term,
and whose debt servicing capacity is not significantly vulnerable to foreseeable events. Retail customers with low expected loss. Thisrating band broadly corresponds to ratings “Aaa” to “Ba1” and “AAA” to “BB+” of Moody's Investors Service and Standard & Poor's
respectively.
Satisfactory risk rating - Corporate customers consistently demonstrating sound operational and financial stability over the medium to longterm, even though some may be susceptible to cyclical trends or variability in earnings. Retail customers with moderate expected loss.
This rating band broadly corresponds to ratings “Ba2” to “B1” and “BB” to “B+” of Moody's Investors Service and Standard & Poor's
respectively.
Substandard but not past due or impaired - Corporate customers demonstrating some operational and financial instability, with variability
and uncertainty in profitability and liquidity projected to continue over the short and possibly medium term. Retail customers with higher
expected loss. This rating band broadly corresponds to ratings “B2” to “Caa” and “B” to “CCC” of Moody's Investors Service and Standard &Poor's respectively.
Movements in the rating categories between balance dates are due to both changes in the underlying internal ratings applied tocustomers and to new loans written or loans rolling off.
Credit quality of financial assets that are past due but not impaired
Ageing analysis of past due loans is used by ANZ New Zealand to measure and manage credit quality. Financial assets that are past due
but not impaired include those:•
Assessed, approved and managed on a portfolio basis within a centralised environment (for example, credit cards and personalloans)•
Held on a productive basis until they are 180 days past due•
Managed on an individual basis.
A large portion of retail credit exposures, such as residential mortgages, are generally well secured. That is, the fair value of associatedsecurity is sufficient to ensure that ANZ New Zealand will recover the entire amount owing over the life of the facility and there isreasonable assurance that collection efforts will result in payment of the amounts due in a timely manner.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

34

NOTES TO THE FINANCIAL STATEMENTS
Market risk
Market risk is the risk to ANZ New Zealand’s earnings arising from changes in interest rates, currency exchange rates, credit spreads, orfrom fluctuations in bond, commodity or equity prices. Market risk is generated through both trading activities and the interest rate risk
inherent in the banking book.
ANZ New Zealand conducts trading operations in interest rates, foreign exchange, commodities and debt securities.
ANZ New Zealand has a detailed risk management and control framework to support its trading and balance sheet management
activities. The framework incorporates a risk measurement approach to quantify the magnitude of market risk within trading and balance
sheet portfolios. This approach, and related analysis, identifies the range of possible outcomes that can be expected over a given period oftime, establishes the relative likelihood of those outcomes and allocates an appropriate amount of capital to support these activities.
Market risk management and control responsibilities
The Board Risk Committee has delegated responsibility for the oversight of market risk to the Asset & Liability Committee (ALCO), chairedby the Chief Financial Officer of the Bank. ALCO is required to ensure that market risk exposure across Traded and Non-Traded portfolios
remains within the risk appetite specified by the Board Risk Committee. ALCO receives regular reporting on a range of trading and balance
sheet market risk exposures.
The Risk Management division of ANZ New Zealand, through the Chief Risk Officer, is responsible for the day-to-day oversight of market
risk. This includes the implementation of a comprehensive limit and policy framework to control the amount of risk that the Banking
Group will accept. Market risk limits are allocated at various levels and are reported and monitored on a daily basis. The detailed limit
framework allocates individual limits to manage and control asset classes (e.g., interest rates, foreign exchange), risk factors (e.g., interest
rates, volatilities) and profit and loss limits (to monitor and manage the performance of the trading portfolios).
Additional oversight and monitoring of material risk exposures of ANZ New Zealand is undertaken by the Risk Management functions of
the Ultimate Parent Bank.
Within overall strategies and policies, the control of market risk is the joint responsibility of business units and Risk Management, with thedelegation of market risk limits from the Board Risk Committee to both Risk Management and the business units.
These risks are monitored daily against a comprehensive limit framework that includes Value at Risk, aggregate market position andsensitivity, product and geographic thresholds. To facilitate the management, control, measurement and reporting of market risk, ANZ
New Zealand has grouped market risk into two broad categories:a.

Traded market riskThis is the risk of loss from changes in the value of financial instruments due to movements in price factors for both physical and derivative
trading positions. They arise in trading transactions where ANZ New Zealand acts as principal with clients or with the market. The primaryrisk categories monitored are:•

Currency risk is the potential loss arising from the decline in the value of a financial instrument due to changes in foreign exchange
rates or their implied volatilities.

•

Interest rate risk is the potential loss arising from the change in the value of a financial instrument due to changes in market interest
rates or their implied volatilities.

•

Credit spread risk is the potential loss arising from a change in value of an instrument due to a movement of its margin or spread
relative to a bench mark.

b.

Non-traded market risk (or balance sheet risk)This comprises the management of non-traded interest rate risk, liquidity, and the risk to capital and earnings as a result of movements inmarket rates.
Some instruments do not fall into either category but also expose ANZ New Zealand to market risk. These include equity securities
classified as available-for-sale. Regular reviews are performed to substantiate the valuation of these types of instruments.
In all trading areas ANZ New Zealand has implemented models that calculate Value at Risk (VaR) exposures, monitor risk exposures against
defined limits on a daily basis, and “stress test” trading portfolios.
VaR measure
A key measure of market risk is VaR. VaR is a statistical estimate of the likely daily loss and is based on historical market movements.
The confidence level is such that there is a 99% probability that the loss will not exceed the VaR estimate on any given day. Conversely
there is 1% probability of the decrease in market value exceeding the VaR estimate on any given day.
ANZ New Zealand’s standard VaR approach for both traded and non-traded risk is historical simulation. ANZ New Zealand calculates VaRusing historical changes in market rates and prices over the previous 500 business days. Traded and Non-Traded VaR is calculated using a
one-day holding period.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

35

NOTES TO THE FINANCIAL STATEMENTS
It should be noted that because VaR is driven by actual historical observations, it is not an estimate of the maximum loss that ANZ New
Zealand could experience from an extreme market event. As a result of this limitation, ANZ New Zealand utilises a number of other risk
measures (e.g. stress testing) and associated detailed control limits to measure and manage market risk.
Traded market risks
30/09/2017

30/09/2016

Value at risk at 99% confidenceHigh forLow for
Period end
year
year

Average for
year

Value at risk at 99% confidenceHigh forLow for
Period end
year
year

Average for
year

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

Foreign exchange risk

0.1

1.2

0.1

0.4

0.2

0.9

0.1

0.4

Interest rate risk

3.0

5.8

1.3

2.5

2.1

4.9

1.3

2.6

Credit spread risk

0.6

0.8

0.4

0.6

0.5

0.7

0.3

0.5

Diversification benefit

0.9

n/a

n/a

(0.9)

(0.7)

n/a

n/a

(1.0)

Total VaR

4.6

5.3

1.4

2.6

2.1

4.4

1.3

2.5

Traded market risk VaR is calculated separately for foreign exchange and for interest rate/debt markets businesses as well as for ANZ New
Zealand. The diversification benefit reflects the historical correlation between foreign exchange, interest rate and debt markets.
To supplement the VaR methodology, ANZ New Zealand applies a wide range of stress tests, both on individual portfolios and at ANZ
New Zealand level. ANZ New Zealand's stress-testing regime provides senior management with an assessment of the financial impact ofidentified extreme events on market risk exposures of ANZ New Zealand.
Non-traded market risk (or balance sheet risk)
The principal objectives of balance sheet management are to manage net interest income sensitivity while maintaining acceptable levels
of interest rate and liquidity risk and to manage the market value of ANZ New Zealand’s capital. Liquidity risk is dealt with in the next
section.
Interest rate risk
The objective of balance sheet interest rate risk management is to mitigate the negative impact of movements in wholesale interest rates
on the earnings of ANZ New Zealand's banking book. Non-traded interest rate risk relates to the potential adverse impact to earnings fromchanges in market interest rates. This risk arises from two principal sources: mismatches between the repricing dates of interest bearing
assets and liabilities; and the investment of capital and other non-interest bearing liabilities in interest bearing assets.
As part of normal business activity ANZ New Zealand has additional risks from fixed rate mortgage prepayments and basis risk:•
Prepayment risk is the potential risk to earnings or market value from when a customer prepays all or part of a fixed rate loan andwhere any customer fee charged is not sufficient to offset the loss in value to ANZ New Zealand of this financial asset due tomovements in interest rates and other pricing factors. As far as possible the true economic cost is passed through to customers inline with their terms and conditions and relevant legislation.
•
Basis risk is the potential risk to earnings or market value from differences between customer pricing and wholesale market pricing.
This is managed through active review of product margins.
Non-traded interest rate risk is managed to both value and earnings at risk limits. Interest rate risk is reported using three measures: VaR;
scenario analysis (to a 1% shock); and interest rate sensitivity gap. This treatment excludes the effect of prepayment and basis risk.
a.

Non-traded interest rate risk VaR
Period end

High foryear

Low foryear

Average for
year

NZ$m

NZ$m

NZ$m

NZ$m

8.3

10.2

7.3

8.2

9.7

10.3

7.7

8.9

30/09/2017

Value at risk at 99% confidence
30/09/2016

Value at risk at 99% confidence

Australia and New Zealand Banking Group Limited - ANZ New Zealand

36

NOTES TO THE FINANCIAL STATEMENTSb.

Scenario analysis – a 1% shock on the next 12 months’ net interest income

A 1% overnight parallel positive shift in the yield curve is modelled to determine the potential impact on net interest income over the
succeeding 12 months. This is a standard risk quantification tool.
The figures in the table below indicate the outcome of this risk measure for the current and comparative periods – expressed as apercentage of reported net interest income. The sign indicates the nature of the rate sensitivity with a positive number signifying that arate increase is positive for net interest income over the next 12 months. Conversely, a negative number signifies that a rate increase isnegative for the next 12 months’ net interest income.
30/09/2017

30/09/2016

Period end

0.6%

0.3%

Maximum exposure

0.9%

1.6%

Minimum exposure

-0.3%

-0.3%

Average exposure (in absolute terms)

0.4%

0.7%

Impact of 1% rate shock

The extent of mismatching between the repricing characteristics and timing of interest bearing assets and liabilities at any point has
implications for future net interest income.
Interest rate sensitivity gap
The interest rate sensitivity gap analysis provides information about ANZ New Zealand's exposure to interest rate risk.
Sensitivity to interest rates arises from mismatches in the period to repricing of assets and that of the corresponding liability funding.
These mismatches are managed within policy guidelines for mismatch positions.
The following tables represent the interest rate sensitivity of ANZ New Zealand's assets, liabilities and off balance sheet instruments byshowing the periods in which these instruments may reprice (that is, when interest rates applicable to each asset or liability can bechanged).
The repricing gaps are based upon contractual repricing.

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
2 years
NZ$m

Not bearing
interest
NZ$m

Cash

2,338

2,140

-

-

-

-

198

Settlement balances receivable

536

129

-

-

-

-

407

Collateral paid

1,415

1,415

-

-

-

-

-

Trading securities

7,663

496

268

241

2,025

4,633

-

Derivative financial instruments

9,749

-

-

-

-

-

9,749

30/09/2017

AssetsAvailable-for-sale assets

6,360

713

250

603

1,465

3,328

1

Net loans and advances1

124,880

62,198

8,782

19,941

22,573

11,818(432)

Other financial assets1

744

77

14

29

3

-

621

Total financial assets

153,685

67,1689,314

20,81426,066

19,77910,544

Settlement balances payable

1,687

630

-

-

-

-

1,057

Collateral received

613

613

-

-

-

-

-

1

Deposits and other borrowings

109,052

74,223

12,925

8,051

2,855

2,116

8,882

Derivative financial instruments

9,894

-

-

-

-

-

9,894

Unsubordinated debt

21,323

3,511

1,567

125

3,420

12,700-Subordinated debt

2,674

-

1,342

835

-

497

-

Liabilities

1

Other financial liabilities

768

151

-

-

-

-

617

Total financial liabilities

146,011

79,12815,834

9,011

6,275

15,313

20,450Hedging instruments

-

3,704

(1,990)3,409(5,031)(92)-

Interest sensitivity gap

7,674(8,256)(8,510)15,212

14,7604,374(9,906)

Australia and New Zealand Banking Group Limited - ANZ New Zealand

37

NOTES TO THE FINANCIAL STATEMENTS
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
2 years
NZ$m

Not bearing
interest
NZ$m

Cash

2,274

2,081

-

-

-

-

193

Settlement balances receivable

396

48

-

-

-

-

348

Collateral paid

2,310

2,310

-

-

-

-

-

Trading securities

11,979

1,092

243

308

2,090

8,246

-

Derivative financial instruments

20,969

-

-

-

-

-

20,969Available-for-sale assets

2,859

1,956

149

50

160

543

1

Net loans and advances(478)

30/09/2016

Assets120,651

63,6669,000

19,83919,898

8,726

Other financial assets

678

65

25

17

12

-

559

Total financial assets

162,116

71,218

9,417

20,214

22,16017,515

21,592

Settlement balances payable

1,554

666

-

-

-

-

888

Collateral received

529

529

-

-

-

-

-

Deposits and other borrowings

106,908

73,258

11,988

10,120

2,460

1,302

7,780

Derivative financial instruments

22,398

-

-

-

-

-

22,398

Unsubordinated debt

20,014

4,342

-

1,087

2,843

11,742-

Subordinated debt

2,624

-

1,293

-

835

496

-

Payables and other liabilities

654

51

-

-

9

124

470

154,681

78,846

13,281

11,207

6,147

13,664

31,536

Hedging instruments-

20,128(14,284)

4,412(13,121)2,865-Interest sensitivity gap

7,435

12,500(18,148)

13,419

2,892

6,716

(9,944)

Liabilities

Total financial liabilities

1

Includes UDC items classified as held for sale

Foreign currency related risksThis risk relates to the potential loss arising from the decline in the value of foreign currency positions due to changes in foreign exchange
rates.
For non-traded instruments in foreign currencies, the risk is monitored and is hedged in accordance with policy. Risk arising fromindividual funding and other transactions is actively managed. The total amounts of unmatched foreign currency assets and liabilities, andconsequent foreign currency exposures arising from each class of financial asset and liability, whether recognised or unrecognised, withineach currency are not material.
The net open position in each foreign currency represents the net on-balance sheet assets and liabilities in that foreign currency
aggregated with the net expected future cash flows from off-balance sheet purchases and sales from foreign exchange transactions inthat foreign currency. The amounts are stated in New Zealand dollar equivalents translated using the spot exchange rates as at balance
sheet date.
30/09/2017
NZ$m

30/09/2016
NZ$m

24

26

Net open position
Australian dollar
Euro

-

6

Japanese yen

3(3)

US dollar

13

(5)

Other

2

1

Total net open position

42

25

Australia and New Zealand Banking Group Limited - ANZ New Zealand

38

NOTES TO THE FINANCIAL STATEMENTS
Liquidity risk
Liquidity risk is the risk that ANZ New Zealand is unable to meet its payment obligations as they fall due. The timing mismatch of cash
flows and the related liquidity risk is inherent in all banking operations and is closely monitored by ANZ New Zealand.
ANZ New Zealand’s liquidity and funding risks are governed by a detailed policy framework which is approved by the Risk Committees of
the Bank’s and Ultimate Parent Bank’s Boards. The core objective of ANZ New Zealand’s framework is to manage liquidity to meet
obligations as they fall due, without incurring unacceptable losses.
Central to ANZ New Zealand’s liquidity risk management approach is the establishment of a liquidity risk appetite framework to which
ANZ New Zealand must conform at all times. The risk appetite for liquidity has been set as low, and this objective is achieved by ANZ New
Zealand managing liquidity risks within the boundaries of the following requirements and principles:•
Maintaining the ability to meet all payment obligations in the immediate term.
•
Ensuring the ability to meet “survival horizons” under ANZ New Zealand specific and general market liquidity stress scenarios.
•
Maintaining strength in ANZ New Zealand’s balance sheet structure to ensure long term resilience in ANZ New Zealand’s liquidityand funding risk profile.
•
Limiting the potential earnings at risk associated with unexpected increases in funding costs or the liquidation of assets under stress.
•
Ensuring the liquidity management framework is compatible with regulatory requirements.
•
Daily liquidity reporting and scenario analysis, quantifying ANZ New Zealand’s positions.
•Targeting a diversified funding base, avoiding 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.
•
Establishing detailed contingency plans to cover different liquidity crisis events.
Management of liquidity and funding risks are overseen by ALCO.
Supervision and regulation
The RBNZ requires the Bank to have a comprehensive Board approved liquidity strategy defining: policy, systems and procedures formeasuring, assessing, reporting and managing domestic and foreign currency 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 ANZ New Zealand’s liquidity management framework is scenario modelling.
Potential severe name-specific 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 ANZ New Zealand, or adverse ratingchanges. Under these scenarios ANZ New Zealand may have significant difficulty rolling over or replacing funding. Under the liquidity
policy ANZ New Zealand must have sufficient high quality liquid assets to meet its liquidity needs for the following 30 calendar days underthese scenarios.
As of 30 September 2017 ANZ New Zealand was in compliance with the above scenarios.
Structural balance sheet metrics
ANZ New Zealand’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 withthe liquidity scenarios to maintain ANZ New Zealand‘s liquidity position.
Wholesale funding
ANZ New Zealand’s wholesale funding strategy is designed to deliver a sustainable portfolio of wholesale funds that balances cost
efficiency while targeting diversification by markets, investors, currencies, maturities and funding structures. Short-term wholesale funding
requirements, with a contractual maturity of less than one year, are managed through the Treasury and Markets operations. Long-term
wholesale funding is managed and executed through Treasury operations.
ANZ New Zealand also uses maturity concentration limits under the wholesale funding and liquidity management framework. Maturity
concentration limits ensure that ANZ New Zealand does not become reliant on issuing large volumes of new wholesale funding within ashort time period. 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
ANZ New Zealand 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 ANZ New Zealand’s three year strategic planning cycle.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

39

NOTES TO THE FINANCIAL STATEMENTS
Funding composition
ANZ New Zealand actively uses balance sheet disciplines to prudently manage the funding mix. ANZ New Zealand employs funding
metrics to ensure that an appropriate proportion of its assets are funded from stable sources, including customer liabilities, longer-dated
wholesale debt (with remaining term exceeding one year) and equity.
Analysis of funding liabilities by industry is based on ANZSIC codes. The significant categories shown are the level one New ZealandStandard Industry Output Categories (NZSIOC). The presentation of these tables has changed from previous periods to align this disclosure
with the classifications in the data series S41 – Banks: Liabilities – Deposits by industry published by the RBNZ.
Note

30/09/2017
NZ$m

30/09/2016
NZ$m

15

96,82991,360

Unsubordinated debt

21,32320,014

Subordinated debt

2,674

2,624

Certificates of deposit

1,916

2,237

Commercial paper

3,721

5,364

Other borrowings

6,586

7,947

Funding composition
Customer deposits
Wholesale funding

Total wholesale funding

36,22038,186

Total funding

133,049

129,546

Agriculture, forestry and fishing

3,487

3,334

Manufacturing

2,024

1,978

Construction

1,851

1,598

Wholesale trade

1,433

1,284

Retail trade and accommodation

1,516

1,328

Financial and insurance services

8,996

8,918

Rental, hiring and real estate services

2,596

2,321

Professional, scientific, technical, administrative and support services

5,034

4,958

Public administration and safety

1,261

1,258

Arts, recreation and other services

1,928

1,833

Households

53,22249,492All other New Zealand residents1

3,483

3,040

86,831

81,342Customer deposits by industry - New Zealand residents

Customer deposits by industry - overseas
Households

9,461

8,948

All other non-NZ residents

537

1,070

9,998

10,01896,82991,360

New Zealand

7,120

7,110

Overseas

29,10031,076

Total wholesale funding

36,22038,186

Total funding

133,049

129,546

New Zealand

93,95188,452Australia

7,649

10,163

United States

13,471

12,215

Europe10,692

11,448

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

Concentrations of funding by geography

Other countries

7,286

7,268

Total funding

133,049

129,546

1

Other includes mining; electricity, gas, water and waste services; transport, postal and warehousing; information media and telecommunications; education and training;
health care and social assistance.

Australia and New Zealand Banking Group Limited - ANZ New Zealand40

NOTES TO THE FINANCIAL STATEMENTS
Liquidity portfolio management
ANZ New Zealand holds a diversified portfolio of cash and high quality highly liquid securities to support liquidity risk management. The
size of ANZ New Zealand’s liquidity portfolio is based on the amount required to meet the requirements of its internal and regulatory
liquidity scenario metrics.
Total liquidity portfolio
30/09/2017

Cash and balances with central banks
Certificates of deposit

30/09/2016

NZ$m

NZ$m

2,102

2,068

59

1,124

Government, local body stock and bonds

6,609

6,117

Government treasury bills

775

811

Reserve Bank bills-

100

Other bonds

6,390

6,483

Total liquidity portfolio

15,935

16,703

Assets held for managing liquidity risk include short term cash held with the 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 andhighly rated NZ domestic corporates. These assets would be accepted as collateral by the RBNZ in repurchase transactions. At 30
September 2017 ANZ New Zealand would be eligible to enter into repurchase transactions with a value of NZ$13,832 million. The Banking
Group also held unencumbered internal residential mortgage backed securities (RMBS) which would entitle ANZ New Zealand to enter
into repurchase transactions with a value of NZ$7,297 million at 30 September 2017.
Liquidity crisis contingency planning
ANZ New Zealand maintains liquidity crisis contingency plans defining an approach for analysing and responding to a liquiditythreatening event on 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•
guidelines determining the priority of customer relationships in the event of liquidity problems•
assigned responsibilities for internal and external communications.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

41

NOTES TO THE FINANCIAL STATEMENTS
Contractual maturity analysis of financial assets and liabilities
The following tables present ANZ New Zealand's financial assets and liabilities within relevant contractual maturity groupings, based on
the earliest date on which the NZ Branch or ANZ New Zealand may be required to realise an asset or settle a liability. The amounts
disclosed in the tables represent undiscounted future principal and interest cash flows, except for derivatives held for trading where thefull mark-to-market amount has been included in the less than three months category. As a result, the amounts in the tables below may
differ to the amounts reported on the balance sheet.
The contractual maturity analysis for off-balance sheet commitments and contingent liabilities has been prepared using the earliest date
at which ANZ New Zealand or the NZ Branch can be called upon to pay. The liquidity risk of credit related commitments and contingent
liabilities may be less than the contract amount, and does not necessarily represent future cash requirements as many of these facilities are
expected to be only partially used or to expire unused.
ANZ New Zealand does not manage its liquidity risk on this basis.

Total
NZ$m

At call
NZ$m

Up to
3 months
NZ$m

Over 3 to
12 months
NZ$m

Over 1 to
5 years
NZ$m

Over
5 years
NZ$m

No maturity
specified
NZ$m

2,338

1,974

364

-

-

-

-

Settlement balances receivable

536

185

351

-

-

-

-

Collateral paid

1,415

-

1,415

-

-

-

-

Trading securities

8,226

-

366

804

6,323

733

-

Derivative financial assets (trading)

8,566

-

8,566

-

-

-

-

30/09/2017

Financial assets
Cash

Available-for-sale assets

6,746

-

545

1,013

4,452

735

1

Net loans and advances1

165,713146

16,283

17,72956,47675,079-Other financial assets1

333

-

287

43

3

-

-

Total financial assets

193,873

2,305

28,177

19,58967,25476,547

1

Settlement balances payable

1,697

1,165

532

-

-

-

-

Collateral received

613

-

613

-

-

-

-

118,957

58,28725,31827,148

7,078

1,126

-

7,999

-

7,999

-

-

-

-

Financial liabilities

Deposits and other borrowings1
Derivative financial liabilities (trading)Unsubordinated debt

2

22,783

-

1,593

2,072

15,827

3,291-

Subordinated debt2

3,105

-

15

1,175

669

1,246

-

Other financial liabilities1

394

-

188

6

56

144

-

Total financial liabilities

155,548

59,45236,25830,401

23,6305,807-

Derivative financial instruments used for balance sheet management- gross inflows

19,605

-

2,557

3,286

10,6693,093-- gross outflows(19,652)-(2,739)(3,417)(10,711)(2,785)-

Net financial assets / (liabilities) after balance
sheet management

38,278(57,147)(8,263)(10,943)

43,582

71,0481

Contractual maturity of off-balance sheet commitments and contingent liabilities

Non-credit related commitments

Total

Less than
1 yearBeyond1 year

NZ$m

NZ$m

NZ$m

488

88

400

Credit related commitments

26,52026,520-Contingent liabilities

2,608

2,608

-

Total

29,616

29,216400

1²

Includes UDC items classified as held for sale.
Any callable wholesale debt instruments have been included at their next call date. Refer to note 17 for subordinated debt call dates.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

42

NOTES TO THE FINANCIAL STATEMENTS
Total
NZ$m

At call
NZ$m

Up to
3 months
NZ$m

Over 3 to
12 months
NZ$m

Over 1 to
5 years
NZ$m

Over
5 years
NZ$m

No maturity
specified
NZ$m

Cash

2,274

2,045

229

-

-

-

-

Settlement balances receivable

396

58

338

-

-

-

-

Collateral paid

2,310

-

2,310

-

-

-

-

Trading securities

12,804

-

171

1,136

10,859638-

Derivative financial assets (trading)

19,396-

19,396----

Available-for-sale assets

2,923

-

1,670

283

969

-

1

Net loans and advances

156,693

246

15,532

18,04552,36170,509-30/09/2016

Financial assets

Other financial assets

281

-

228

41

12

-

-

Total financial assets

197,077

2,349

39,874

19,50564,201

71,147

1

Settlement balances payable

1,523

1,111

412

-

-

-

-

Collateral received

529

-

529

-

-

-

-

Deposits and other borrowings

108,532

50,413

21,343

28,341

7,540

895

-

Derivative financial liabilities (trading)

19,328-19,328----

Unsubordinated debt¹

20,983

-

2,363

1,882

13,466

3,272-

Subordinated debt¹

2,733

-

14

43

1,659

1,017

-

Financial liabilities

Other financial liabilities

303

-

72

7

93

131

-

Total financial liabilities

153,931

51,52444,061

30,27322,7585,315-

Derivative financial instruments used for balance sheet management- gross inflows

21,743

-

3,461

3,203

11,2073,872-- gross outflows(22,590)-(4,042)(3,398)(11,460)(3,690)-Net financial assets / (liabilities) after balance
sheet management

42,299(49,175)(4,768)(10,963)

41,19066,014

1

Contractual maturity of off-balance sheet commitments and contingent liabilities
Total

Less than
1 yearBeyond1 year

NZ$m

NZ$m

NZ$m

460

92

368

Credit related commitments

27,046

27,046-

Contingent liabilities

2,461

2,461

-

Total

29,96729,599368

Non-credit related commitments

1

Any callable wholesale debt instruments have been included at their next call date.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

43

NOTES TO THE FINANCIAL STATEMENTS
19. CLASSIFICATION OF FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
At amortisedcost

At fair value throughprofit or loss
Designatedon initial
Held forrecognition
trading

Hedging

Available-forsale assets

Total
carrying
amountFair value

30/09/2017

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

Cash

2,338

-

-

-

-

2,338

2,338

Settlement balances receivable

536

-

-

-

-

536

536

Collateral paid

1,415

-

-

-

-

1,415

1,415

-

-

7,663

-

-

7,663

7,663

Derivative financial instruments

-

-

9,361

388

-

9,749

9,749

Available-for-sale assets

-

-

-

-

6,360

6,360

6,360

124,880

-

-

-

-

124,880

124,930

Other financial assets

621

123

-

-

-

744

744

Total financial assets

129,790123

17,024388

6,360

153,685

153,735

Settlement balances payable

1,687

-

-

-

-

1,687

1,687

Collateral received

613

-

-

-

-

613

613

105,331

3,721

-

-

-

109,052

109,285

Trading securities
1

Net loans and advances2, 3

Deposits and other borrowings3
Derivative financial instruments1

-

-

9,043

851

-

9,894

9,894

Unsubordinated debt2

21,323----

21,32321,517

Subordinated debt

2,674

-

-

-

-

2,674

2,743

Other financial liabilities

617

-

151

-

-

768

768

Total financial liabilities

132,245

3,721

9,194

851

-

146,011

146,507

Cash

2,274

-

-

-

-

2,274

2,274

Settlement balances receivable

396

-

-

-

-

396

396

Collateral paid

2,310

-

-

-

-

2,310

2,310

Trading securities--

11,979--11,97911,979Derivative financial instruments1--

20,205764-

20,96920,969Available-for-sale assets

-

-

-

-

2,859

2,859

2,859
120,931

30/09/2016

2

Net loans and advances

120,651

-

-

-

-

120,651

Other financial assets

559

119

-

-

-

678

678

Total financial assets

126,19011932,184764

2,859

162,116

162,396

1,554

-

-

-

-

1,554

1,554

Settlement balances payable
Collateral received
Deposits and other borrowings
Derivative financial instruments1

529

-

-

-

-

529

529

101,544

5,364

-

-

-

106,908

107,106--

21,578820-

22,39822,398

Unsubordinated debt2

20,014----20,014

20,148Subordinated debt

2,624

-

-

-

-

2,624

2,636

Other financial liabilities

497

-

157

-

-

654

654

Total financial liabilities

126,762

5,364

21,735820-

154,681

155,025

1
2

3

Derivative financial instruments classified as held for trading include derivatives entered into as economic hedges which are not designated as accounting hedges.
Fair value hedging is applied to certain financial assets within loans and advances and certain financial liabilities within unsubordinated debt. The resulting fair value
adjustment means that the carrying value differs from the amortised cost.
Includes UDC items classified as held for sale.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

44

NOTES TO THE FINANCIAL STATEMENTS
Measurement of fair value
Valuation methodologies
ANZ New Zealand has an established control framework that ensures fair value is either determined or validated by a function
independent of the party that undertakes the transaction. The control framework ensures that all models are calibrated periodically to test
that outputs reflect prices from observable current market transactions in the same instrument or other available observable market data.
Where quoted market prices are used, prices are independently verified from other sources. For fair values determined using a valuation
model, the control framework may include, as applicable, independent development or validation of valuation models, any inputs to
those models, any adjustments required outside of the valuation model and, where possible, independent validation of model outputs. In
this way, continued appropriateness of the valuations is ensured.
In instances where ANZ New Zealand holds offsetting risk positions, ANZ New Zealand uses the portfolio exemption in NZ IFRS 13 Fair
Value Measurement to measure the fair value of such groups of financial assets and financial liabilities on the basis of the price that would
be received to sell a net long position (that is, an asset) for a particular risk exposure or to transfer a net short position (that is, a liability) fora particular risk exposure.
ANZ New Zealand categorises its fair value measurements on the basis of inputs used in measuring fair value using the fair value hierarchy
below:•

Level 1 – Financial instruments that have been valued by reference to unadjusted quoted prices in active markets for identicalfinancial instruments. This category includes financial instruments valued using quoted yields where available for specific debt
securities.

•

Level 2 – Financial instruments that have been valued through valuation techniques incorporating inputs other than quoted prices
within Level 1 that are observable for a similar financial asset or liability, either directly or indirectly.

•

Level 3 – Financial instruments that have been valued using valuation techniques which incorporate significant inputs that are notbased on observable market data (unobservable inputs).

Valuation techniques and inputs used
In the event that there is no quoted market price for the instrument, fair value is based on valuation techniques. The valuation models
incorporate the impact of bid/ask spreads, counterparty credit spreads, funding costs and other factors that would influence the fair value
determined by market participants.
The majority of valuation techniques employ only observable market data. However, for certain financial instruments the valuation
technique may employ some data (valuation inputs or components) which is not readily observable in the current market. In these cases
valuation inputs (or components of the overall value) are derived and extrapolated from other relevant market data and tested against
historic transactions and observed market trends. To the extent that valuation is based on models or inputs that are not observable in themarket, the determination of fair value can be more subjective, dependent on the significance of the unobservable input to the overall
valuation.
The following valuation techniques have been applied to determine the fair values of financial instruments where there is no quoted price(level1) for the instrument:•

For instruments classified as trading securities and securities short sold, derivative financial assets and liabilities, available-for-saleassets, and investments backing insurance contract liabilities, fair value measurements are derived by using modelled valuations
techniques (including discounted cash flow models) that incorporate market prices / yields for securities with similar credit risk,
maturity and yield characteristics; and/or current market yields for similar instruments.

•

For net loans and advances, deposits and other borrowings and unsubordinated debt, discounted cash flow techniques are used
where contractual future cash flows of the instrument are discounted using discount rates incorporating wholesale market rates ormarket borrowing rates of debt with similar maturities or a yield curve appropriate for the remaining term to maturity.

There have been no substantial changes in the valuation techniques applied to different classes of financial instruments during the year.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

45

NOTES TO THE FINANCIAL STATEMENTS
Valuation hierarchy for financial assets and financial liabilities measured at fair value in the balance sheet
30/09/2017
Level 1
NZ$m

Level 2
NZ$m

30/09/2016
Level 3
NZ$m

Total
NZ$m

Level 1
NZ$m

Level 2
NZ$m

Level 3
NZ$m

Total
NZ$m

Financial assets
Trading securities
Derivative financial instruments
Available-for-sale assets
Investments backing insurance contract liabilities
Total

7,276

387

-

7,663

11,967

12-

11,979

5

9,741

3

9,749

3

20,9597

20,969

5,336

1,023

1

6,360

1,671

1,187

1

2,859

-

123

-

123

5

114

-

119

12,617

11,274

4

23,895

13,64622,272

835,926

Financial liabilities
Deposits and other borrowings

-

3,721

-

3,721

-

5,364

-

5,364

Derivative financial instruments

24

9,869

1

9,894

46

22,3502

22,398Other financial liabilities

151

-

-

151

157

-

-

157

Total

175

13,5901

13,766

203

27,7142

27,919Valuation hierarchy for financial assets and financial liabilities not measured at fair value¹
30/09/2017

30/09/2016

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

-

121,707

3,223

124,930-

117,553

3,378

120,931

Financial assets
Net loans and advances
Financial liabilities
Deposits and other borrowings-

105,564-

105,564-

101,742-

101,742

Unsubordinated debt

1,487

20,030-21,517

1,629

18,519-20,148Subordinated debt

2,440

303

-

2,743

2,344

292

-

2,636

Total

3,927

125,897-

129,824

3,973

120,553-

124,526

1

Fair values, where the carrying amount is not considered a close approximation of fair value.

20. MATURITY ANALYSIS OF ASSETS AND LIABILITIESThe following is an analysis of asset and liability line items in the balance sheet that combine amounts expected to be realised or due tobe settled within one year and after more than one year.
30/09/2017
within one
after more
year than one year
NZ$m

NZ$m

Total
NZ$m

30/09/2016
within one
after more
year than one year
NZ$m

NZ$m

Total
NZ$m

AssetsInvestments backing insurance contract liabilities

120

3

123

107

12

119

Available-for-sale assets

1,400

4,960

6,360

1,915

944

2,859

Net loans and advances1

29,341

95,539124,880

25,112

95,539120,651

Other assets1

665

38

703

598

103

701

Life insurance contract assets

45

591

636

42

588

630

Deposits and other borrowings1

102,252

6,800

109,052

99,8507,058

106,908

Payables and other liabilities1

1,007

187

1,194

902

235

1,137

34

86

120

29

97

126

Liabilities

Employee entitlements1
Other provisions

66

-

66

79

1

80

Unsubordinated debt

3,169

18,154

21,323

4,009

16,00520,014

Subordinated debt2

1,133

1,541

2,674

-

2,624

2,624

1
2

Includes UDC items classified as held for sale.
Any callable wholesale debt instruments have been included at their next call date.

Australia and New Zealand Banking Group Limited - ANZ New Zealand46

NOTES TO THE FINANCIAL STATEMENTS
21. ASSETS CHARGED AS SECURITY FOR LIABILITIES AND COLLATERAL ACCEPTED AS
SECURITY FOR ASSETS
Assets charged as security for liabilities1
The carrying amounts of assets pledged as security are as follows:
Carrying Amount
30/09/2017
NZ$m

Securities sold under agreements to repurchase

Related Liability

30/09/2016
NZ$m

30/09/2017
NZ$m

30/09/2016
NZ$m

157

77

157

76

Residential mortgages pledged as security for covered bonds

10,595

10,265

5,325

6,218

Assets pledged as collateral for UDC secured investments

2,985

2,665

1,039

1,592

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'scustomers and certain plant and equipment. The security interest secures all amounts payable by UDC on the UDC Secured Investments
and all other monies payable by UDC under the trust deed.
Collateral accepted as security for assets1
ANZ New Zealand has received collateral in relation to reverse repurchase agreements. These transactions are governed by standard
industry agreements.
The fair value of collateral received and sold or repledged is as follows:
30/09/2017
NZ$m

30/09/2016
NZ$m

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

361

231

Fair value of assets sold or repledged

218

141

1

Excludes the amounts disclosed as collateral paid and received in the balance sheet that relate to derivative liabilities and derivative assets respectively. The terms andconditions of the collateral agreements are included in the standard CSA that forms part of the ISDA.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

47

NOTES TO THE FINANCIAL STATEMENTS
22. OFFSETTING
The following information relates to financial assets and liabilities which have not been set off in the balance sheet but for which ANZ New
Zealand has enforceable master netting agreements in place with counterparties. No financial assets and liabilities have been set off in thebalance sheet.
Gross amounts
presented in thebalance sheet
30/09/2017

NZ$m

Related amounts not offset 1
Financial
instruments Cash collateral

Net amounts

NZ$m

NZ$m

NZ$m

61

Financial assets
Collateral paid

409

-

(348)

Trading securities 2

157

(157)

-

-

Derivative financial instruments

7,809(7,411)

(245)

153
73

Financial liabilities
Collateral received

318

-

(245)

Securities sold under agreements to repurchase 3

157

(157)

-

-

Derivative financial instruments

8,380(7,411)

(348)

621

1,405

-

(1,332)

73

77

(76)

-

1

7,442

(7,086)

(333)

23

358

-

(333)

25

30/09/2016

Financial assets
Collateral paid
Trading securities 2
Derivative financial instruments
Financial liabilities
Collateral received
Securities sold under agreements to repurchase
Derivative financial instruments

3

76

(76)

-

-

8,718

(7,086)(1,332)300

ANZ New Zealand enters into derivatives and repurchase and reverse repurchase agreements with various counterparties which are governed by industry standard masternetting agreements. ANZ New Zealand holds and provides cash and securities collateral in respective of derivative transactions covered by these agreements. The right to set
off balances under these master netting agreements or to set off cash and securities collateral only arises in the event of non-payment or default and, as a result, thesearrangements do not qualify for offsetting under NZ IAS 32 Financial Instruments: Presentation.
2
This is the amount of trading securities encumbered through repurchase agreements, see financial assets pledged as collateral table in note 21.
3
Included in deposits and other borrowings, see note 15.
1

Australia and New Zealand Banking Group Limited - ANZ New Zealand48

NOTES TO THE FINANCIAL STATEMENTS
23. CREDIT RELATED COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES
30/09/2017

30/09/2016

NZ$m

NZ$m

26,52027,046

Contract amount of:
Credit related commitments - facilities provided
Undrawn facilities
Guarantees and contingent liabilities
Guarantees and letters of credit

1,010

850

Performance related contingencies

1,598

1,611

Total guarantees and contingent liabilities

2,608

2,461

Total Credit Related Commitments, Guarantees and Contingent Liabilities

29,12829,507

These guarantees and contingent liabilities relate to transactions that ANZ New Zealand has entered into as principal, including
guarantees, standby letters of credit and documentary letters of credit.
Documentary letters of credit involve the issue of letters of credit guaranteeing payment in favour of an exporter secured against anunderlying shipment of goods or backed by a confirmatory letter of credit from another bank.
Performance related contingencies are liabilities that oblige ANZ New Zealand to make payments to a third party should the customer failto fulfil the non-monetary terms of the contract.
To reflect the risk associated with these transactions, they are subjected to the same credit origination, portfolio management andcollateral requirements as customers that apply for loans. The contract amount represents the maximum potential amount that could be
lost 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.
Other contingent liabilities
ANZ New Zealand has other contingent liabilities in respect of actual and possible claims and court proceedings. An assessment of ANZ
New Zealand’s likely loss in respect of these matters has been made on a case-by-case basis and provision made where deemednecessary.

24. GOODWILL AND OTHER INTANGIBLE ASSETS
30/09/2017

30/09/2016

NZ$m

NZ$m

Goodwill

3,230

3,233

Software

67

76

Other intangibles

111

115

3,408

3,424

(133)

-

3,275

3,424

Note

Goodwill and other intangible assets (including assets classified as held for sale)Less: goodwill allocated to UDC and held for sale
Goodwill and other intangible assets

29Australia and New Zealand Banking Group Limited - ANZ New Zealand49

NOTES TO THE FINANCIAL STATEMENTS
25. SHARE CAPITAL AND INITIAL HEAD OFFICE ACCOUNT

Number of issued shares

NZ$ millions

30/09/2017

30/09/2016

30/09/2017

30/09/2016

378,155,112

381,655,112

1,450

1,453

-

(3,500,000)-(3)

Ordinary shares at end of the year

378,155,112

378,155,112

1,450

1,450

Redeemable preference shares

5,504,884,529

5,504,884,529

6,594

6,594

Total share capital
NZ Branch initial head office account5,883,039,641-

5,883,039,641
-

8,044
11

8,044
11

Total share capital & initial head office account5,883,039,641

5,883,039,641

8,055

8,055

Ordinary shares at beginning of the year
Shares cancelled on amalgamation 1

1

The issued share capital of ANZ Securities (NZ) Limited was not issued to a member of ANZ New Zealand and was cancelled on amalgamation with South Pacific MerchantFinance Limited, a subsidiary of the Bank, on 30 September 2016.

Ordinary shares
All ordinary shares share equally in dividends and any proceeds available to ordinary shareholders on winding up. On a show of hands
every member who is present at a meeting in person or by proxy or by representative is entitled to one vote, and upon a poll every
member shall have one vote for each share held.
During the year ended 30 September 2017 ANZ Holdings (New Zealand) Limited (ANZH) paid ordinary dividends of NZ$1,635 million(2016: NZ$1,320 million) to the Immediate Parent Company (equivalent to NZ$4.32 (2016: NZ$3.49) per share).
Redeemable preference shares
All redeemable preference shares (RPS) were issued by ANZH to the Immediate Parent Company. RPS carry no voting rights and are
redeemable by ANZH providing notice in writing to holders of the RPS. Dividends are payable at the discretion of the directors of ANZH
and are non-cumulative.
There are seven classes of RPS, relating to issues in 1988, 2005, 2007, 2008, 2009, 2014 and 2015. ANZH did not pay any dividends on RPS
during the years ended 30 September 2017 and 30 September 2016.
In the event of liquidation, holders of RPS are entitled to available subscribed capital per share, pari passu with all holders of existing RPS
but in priority to all holders of ordinary shares. They have no entitlement to participate in further distribution of profits or assets.
Head office account
The NZ Branch capital comprises the initial head office account only. The head office account is the funds provided by the Ultimate Parent
Bank on the creation of the NZ Branch. It is non-interest bearing and there is no fixed date of repayment.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

50

NOTES TO THE FINANCIAL STATEMENTS
26. CAPITAL ADEQUACY
Capital management policies
ANZ New Zealand’s core capital objectives are to:•Protect the interests of depositors, creditors and shareholders•
Ensure the safety and soundness of ANZ New Zealand’s capital position•
Ensure that the capital base supports ANZ New Zealand’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 ANZ New Zealand’s Internal Capital Adequacy Assessment Process (“ICAAP”) policy and framework; standardised risk
definitions for all material risks; materiality thresholds; capital adequacy targets; internal economic risk capital principles; and risk appetite.
ANZ New Zealand has minimum and trigger levels for common equity tier 1, tier 1 and total capital that ensure sufficient capital ismaintained to:•
Meet minimum prudential requirements imposed by regulators•
Ensure consistency with ANZ New Zealand’s overall risk profile and financial positions, taking into account its strategic focus andbusiness plan•
Support the economic risk capital requirements of the business.
ANZ New Zealand’s Asset & Liability Committee and its related Capital Management Forum are responsible for developing, implementing
and maintaining ANZ New Zealand's ICAAP framework, including ongoing monitoring, reporting and compliance. ANZ New Zealand’s
ICAAP is subject to independent and periodic review conducted by Internal Audit.
ANZ New Zealand has complied with all externally imposed capital requirements to which it is subject during the current and priorperiods.
APRA Basel III capital ratios

Ultimate Parent Bank
(Extended Licensed Entity)

Overseas Banking Group
30/09/2017

30/09/2016

30/09/2017

30/09/2016

Unaudited

Common equity tier 1 capital

10.6%

9.6%

10.5%

9.7%

Tier 1 capital

12.6%

11.8%

12.7%

12.1%

Total capital

14.8%

14.3%

14.8%

14.7%

For calculation of minimum capital requirements under Pillar 1 (Capital Requirements) of the Basel Accord, APRA has accredited theOverseas Banking Group to use the Advanced Internal Ratings Based (AIRB) methodology for calculation of credit risk weighted assets andthe Advanced Measurement Approach (AMA) for the operational risk weighted asset equivalent.
Under prudential regulations, the Overseas Banking Group is required to maintain a Prudential Capital Ratio (PCR) as determined by APRA.
The Overseas Banking Group exceeded the PCR set by APRA as at 30 September 2017 and for the comparative prior periods.
The Overseas Banking Group is required to publicly disclose Pillar 3 financial information as at 30 September 2017. The Overseas Banking
Group’s Pillar 3 disclosure document for the quarter ended 30 September 2017, 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.
Market risk
ANZ New Zealand’s aggregate market risk exposures below have been calculated in accordance with the RBNZ document BS2B. The peak
end-of-day market risk exposures are for the six months ended 30 September 2017.
Implied risk weighted exposure

Notional capital charge

Peak

Period end

Peak

Period end

Peak

Unaudited 30/09/2017

NZ$m

NZ$m

NZ$m

NZ$m

Interest rate risk

4,413

7,241

353

579

6/06/2017

46

152

4

12

20/06/2017

1

1

-

-

30/09/2017

Foreign currency risk
Equity risk

4,460

357

occurred on

Australia and New Zealand Banking Group Limited - ANZ New Zealand51

NOTES TO THE FINANCIAL STATEMENTS
Residential mortgages by loan-to-valuation ratio (LVR)
As required by the RBNZ, LVRs are calculated as the current exposure secured by a residential mortgage divided by ANZ New Zealand'svaluation of the security property at origination of the exposure. Off balance sheet exposures include undrawn and partially drawn
residential mortgage loans as well as commitments to lend. Commitments to lend are formal offers for housing lending which have been
accepted by the customer.
30/09/2017
On-balance
sheet
NZ$m

Off-balance
sheet
NZ$m

Total
NZ$m

Does not exceed 60%

35,235

5,227

40,462

Exceeds 60% and not 70%

16,928

1,346

18,274

Exceeds 70% and not 80%

17,715

1,168

18,883

Does not exceed 80%

69,878

7,741

77,619Exceeds 80% and not 90%

2,985

137

3,122

Exceeds 90%

1,536

188

1,724

Total

74,3998,066

82,465Note

30/09/2017
NZ$m

13

76,870

Unaudited

LVR range

Reconciliation of mortgage related amounts
Unaudited

Term loans - housing
Less: fair value hedging adjustment(49)

Less: housing loans made to corporate customers(2,422)On-balance sheet retail mortgage exposures

18

74,399Add: off-balance sheet retail mortgage exposures

8,066

Total retail mortgage exposures as per LVR analysis

82,465

27. SUBSIDIARIESThe following table lists the principal subsidiaries of ANZ New Zealand. Principal subsidiaries are those that have transactions or balanceswith parties outside ANZ New Zealand. All subsidiaries are 100% owned and incorporated in New Zealand unless stated otherwise.
Principal subsidiaries

Nature of business

Members of the Banking GroupANZ Bank New Zealand Limited

Registered bank

ANZ Investment Services (New Zealand) Limited

Funds management

ANZ New Zealand (Int'l) Limited

Finance

ANZ New Zealand Investments Limited

Funds management

ANZ New Zealand Securities Limited

On-line share broker

ANZNZ Covered Bond Trust1

Securitisation entity

Arawata Assets Limited

Property

Karapiro Investments Limited

Asset finance

Kingfisher NZ Trust 2008-11

Securitisation entity

OnePath Life (NZ) Limited

Insurance

UDC Finance Limited

Asset finance

Other operating members of ANZ New Zealand (together with the NZ Branch, the "Relevant Members")
ANZ Capel Court Limited (New Zealand Branch)2

Securitisation services

ANZ Holdings (New Zealand) Limited

Holding company

1

2

ANZ New Zealand does not own ANZNZ Covered Bond Trust and Kingfisher NZ Trust 2008-1. Control exists as ANZ New Zealand retains substantially all the risks and rewards ofthe operations. Details of ANZ New Zealand’s interest in consolidated structured entities is included in note 28.
Incorporated in Australia and registered in New Zealand as an Overseas ASIC Company.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

52

NOTES TO THE FINANCIAL STATEMENTS
28. STRUCTURED ENTITIES, TRANSFERRED FINANCIAL ASSETS, FIDUCIARY ACTIVITIES AND
INSURANCE
Structured entities
ANZ New Zealand’s involvement with structured entities is mainly through securitisations and its funds management activities, which are
outlined further below. ANZ New Zealand has involvement with structured entities that may be established either by ANZ New Zealand or
by a third party.
Consolidated structured entities
Kingfisher NZ Trust 2008-1 (the Kingfisher Trust)
ANZ New Zealand has established the Kingfisher Trust as an in-house residential mortgage backed securities facility that can issue
securities meeting the RBNZ criteria to use as collateral in repurchase transactions with the RBNZ.
These assets do not qualify for derecognition as the Bank retains substantially all of the risks and rewards of the transferred assets.
As at 30 September 2017 and 30 September 2016 ANZ New Zealand had not entered into any repurchase agreements with the RBNZ for
residential mortgage backed securities and therefore no collateral had been accepted by the RBNZ under this facility.
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 as trustee of the Covered Bond Trust of issuances of coveredbonds 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 creditors of the Bank, although the Bank (or its liquidator or statutory manager) may have a claim against theresidual assets of the Covered Bond Trust (if any) after all prior ranking creditors of the Covered Bond Trust have been satisfied.
ANZ New Zealand continues to recognise the assets of the Covered Bond Trust on its balance sheet as, although they are pledged as
security for covered bonds, the Bank retains substantially all the risks and rewards of ownership.
Unconsolidated securitisations
ANZ New Zealand also has an interest in unconsolidated securitisation entities through the provision of funding facilities or holding bonds
or notes issued by such entities. ANZ New Zealand’s exposure to these entities is not material.
Transferred financial assets
In the normal course of business ANZ New Zealand enters into transactions where it transfers financial assets directly to third parties or to
structured entities. These transfers may give rise to ANZ New Zealand fully, or partially, derecognising those financial assets - depending
on ANZ New Zealand’s exposure to the risks and rewards or control over the transferred assets. If ANZ New Zealand retains substantially allof the risk and rewards of a transferred asset, the transfer does not qualify for derecognition and the asset remains on ANZ New Zealand’sbalance sheet in its entirety.
Assets transferred to the Kingfisher Trust and the Covered Bond Trust
The Bank has purchased securities issued by both the Kingfisher Trust and the Covered Bond Trust in exchange for the transfer of therights to the cash flows associated with the identified residential mortgages. As at 30 September 2017, NZ$20,551 million of assets were
held in the Kingfisher Trust and the Covered Bond Trust (2016: NZ$19,656 million).
Repurchase transactions
Securities sold subject to repurchase agreements are not derecognised when substantially all the risks and rewards of ownership remain
with the Bank. See note 21 for details of securities sold under agreements to repurchase. The amount of trading securities encumberedthrough repurchase agreements is shown in note 22. The carrying amount of the associated liabilities is not materially different to theamount of trading securities subject to the repurchase agreement.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

53

NOTES TO THE FINANCIAL STATEMENTS
Funds management and other fiduciary activities
Funds management
Certain entities that form part of ANZ New Zealand act as trustee and/or manager for a number of unit trusts and investment andsuperannuation funds. ANZ New Zealand provides private banking services to a number of clients, including investment advice andportfolio management. ANZ New Zealand is not responsible for any decline in performance of the underlying assets of the investors due
to market forces.
As funds under management are not controlled by ANZ New Zealand, they are not included in these financial statements. ANZ New
Zealand derives fee and commission income from the sale and management of investment funds and superannuation schemes, unit
trusts and the provision of private banking services to customers. ANZ New Zealand derives commission income from the sale of third
party funds management products.
Some funds under management are invested in products owned or securities issued by ANZ New Zealand and are recorded as liabilities inthe balance sheet. At 30 September 2017, NZ$3,964 million of funds under management were invested in ANZ New Zealand's own
products or securities (2016: NZ$3,698 million).
Custodial services
ANZ New Zealand provides custodial services to customers in respect of assets that are beneficially owned by those customers.
30/09/2017

30/09/2016

NZ$m

NZ$m

Kiwisaver

11,047

9,295

Bonus Bonds Scheme

3,405

3,561

Other managed funds

1,984

1,924

ANZ PIE Fund

1

Discretionary Investment Management Service (DIMS)2

1,381

953

7,193

7,007

Other investment portfolios2

3,480

3,745

Total funds under management

28,49026,485

Funds under custodial arrangements

7,720

7,408

Other funds held or managed subject to fiduciary responsibilities

1,557

1,927

Funds management fee income from structured entities

170

156

1

2

ANZ New Zealand established, and is considered to be the sponsor of, the ANZ PIE Fund. The ANZ PIE Fund invests only in deposits with the Bank. ANZ New Zealand does notreceive a management fee from, and does not have an interest in, the ANZ PIE Fund.
These funds are not structured entities as they are investment portfolios managed on behalf of customers.

Insurance business
ANZ New Zealand conducts insurance business through its subsidiary OnePath Life (NZ) Limited (OnePath Life).
ANZ New Zealand’s aggregate amount of insurance business comprises the total consolidated assets of OnePath Life of NZ$921 million(2016: NZ$926 million), which is 0.6% (2016: 0.6%) of the total consolidated assets of ANZ New Zealand.
Risk management
The Bank and entities that form part of ANZ New Zealand participating in the activities identified above have in place policies andprocedures to ensure that those activities are conducted in an appropriate manner. Should adverse conditions arise, it is considered thatthese policies and procedures will minimise the possibility that these conditions will adversely impact the Bank or ANZ New Zealand. The
policies and procedures include comprehensive and prominent disclosure of information regarding products, and formal and regularreview of operations and policies by management.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

54

NOTES TO THE FINANCIAL STATEMENTS
29. ASSETS AND LIABILITIES HELD FOR SALE
On 11 January 2017, the Bank announced that it had entered into a conditional agreement to sell UDC to HNA Group. The sale is subject
to certain conditions (including regulatory approvals) and ANZ New Zealand is working with HNA Group towards completion of the sale.
The assets and liabilities of UDC are classified as held for sale as at 30 September 2017. The following assets and liabilities of UDC held forsale are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets andfinancial assets which are specifically exempt from this requirement.
30/09/2017
NZ$m

Net loans and advances

2,912

Goodwill

133

Other assets

20

Total UDC assets held for sale

3,065

Deposits and other borrowings

1,039

Payables and other liabilities

33

Current tax liabilities

24

Deferred tax liabilities(9)

Employee entitlements
Total UDC liabilities held for sale

1
1,088

Australia and New Zealand Banking Group Limited - ANZ New Zealand

55

NOTES TO THE FINANCIAL STATEMENTS
30. RELATED PARTY DISCLOSURES
Key management personnel
Key management personnel (KMP) are defined as directors and those executives who report directly to the Bank’s Chief Executive Officer
with responsibility for the strategic direction and management of a major revenue generating division or who control material revenue
and expenses.
Loans made to directors and other KMP are made in the ordinary course of business on normal commercial terms and conditions no morefavourable than those given to other employees or customers, including the term of the loan, security required and the interest rate.
All other transactions with KMP and their related parties are made on terms equivalent to those that prevail in arm’s length transactions.
These transactions generally involve the provision of financial and investment services. All such transactions that have occurred with KMP
and their related parties have been trivial or domestic in nature. In this context, transactions are only disclosed when they are consideredof interest to the users of the financial statements in making and evaluating decisions about the allocation of scarce resources.
Year toYear to30/09/2017
NZ$00030/09/2016
NZ$000Key management personnel compensation
Salaries and short-term employee benefits

11,43011,382

Post-employment benefits

480

280

Other long-term benefits

60

88

Share-based payments expense

3,515

4,123

Total compensation of key management personnel

15,485

15,873Loans to, and securities held by, key management personnel and their related parties
Loans

15,326

16,652

Unsubordinated debt

520

520

Subordinated debt

195

195

Transactions with other related parties
The NZ Branch and ANZ New Zealand undertake transactions with the Immediate Parent Company, the Ultimate Parent Bank, othermembers 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 and process support, and compensation for share based payments made to ANZ New Zealand employees. Transactions withrelated parties outside of ANZ New Zealand are conducted on an arm’s length basis and on normal commercial terms.
In addition the Bank undertakes similar transactions with subsidiaries, which are eliminated in the consolidated ANZ New Zealand financial
statements. Included within the Bank’s transactions with subsidiaries is the provision of administrative functions to some subsidiaries forwhich no payments have been made.
Transactions with related parties

Ultimate Parent Bank and subsidiaries not part of ANZ New ZealandInterest income

Year toYear to30/09/2017
NZ$m

30/09/2016
NZ$m

2

6

Interest expense

225

279

Other operating income

23

19

Operating expenses

46

64

49

57

Direct fee expense

1010Dividends received

5

2

Share of associates' profit

5

5

Immediate Parent Company
Interest expense
Associates

Australia and New Zealand Banking Group Limited - ANZ New Zealand

56

NOTES TO THE FINANCIAL STATEMENTS
Balances with related parties
30/09/2017

30/09/2016

NZ$m

NZ$m

Cash

64

47

Settlement balances receivable

111

31

-

375

2,498

4,335

42

108

Ultimate Parent Bank and subsidiaries not part of ANZ New ZealandCollateral paid
Derivative financial instruments
Other assets
Associates
Investments in associates

7

7

2,722

4,903

Settlement balances payable

67

106

Collateral received

198-

Deposits and other borrowings

4,663

6,105

Derivative financial instruments

2,553

5,302

Payables and other liabilities

36

42

Subordinated debt

299

288

1,766

1,766

4

4

Total due from related parties
Ultimate Parent Bank and subsidiaries not part of ANZ New Zealand

Immediate Parent Company
Deposits and other borrowings
Payables and other liabilities
Associates
Payables and other liabilities

1

1

Total due to related parties

9,587

13,614

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

Financial guarantees provided to the Ultimate Parent Bank

30/09/2017

30/09/2016

NZ$m

NZ$m

155

152

Australia and New Zealand Banking Group Limited - ANZ New Zealand

57

NOTES TO THE FINANCIAL STATEMENTS
31. CAPITAL EXPENDITURE AND OPERATING LEASE COMMITMENTS
30/09/2017
NZ$m

30/09/2016
NZ$m

4

5

Not later than 1 year

84

87

Later than 1 year but not later than 5 years

256

217

Later than 5 years

144

151

Total operating lease commitments

484

455

Total commitments

488

460

Contracts for outstanding capital expenditure
Not later than 1 year
Future minimum lease payments under non-cancellable operating leases

32. COMPENSATION OF AUDITORS
Year toYear to30/09/2017

30/09/2016

NZ$000

NZ$000

2,309

2,301

Prudential and regulatory services2

225

262

Offer documents assurance or review

146

100

Other assurance services3

95

52

Total other services

466

414

Total compensation of auditors relating to ANZ New Zealand

2,775

2,715

Compensation of auditors (KPMG New Zealand)
Audit or review of financial statements1
Other services:

Fees relating to certain managed funds and not recharged4
Total compensation of auditors
1
2
3
4

46

48

2,821

2,763

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 controls reports, comfort letters 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 and audits of summary financial statements forinclusion in offer documents, comfort letters and other agreed upon procedures engagements.

It is ANZ New Zealand’s policy that, subject to the approval of the Ultimate Parent Bank’s Audit Committee, KPMG can provide assurance
and other audit-related services that, while outside the scope of the statutory audit, are consistent with the role of auditor. KPMG may notprovide services that are perceived to be in conflict with the role of auditor. Services that are perceived to be in conflict with the role ofauditor include consulting advice and subcontracting of operational activities normally undertaken by management, and engagements
where the auditor may ultimately be required to express an opinion on its own work.

33. CONCENTRATIONS OF CREDIT RISK TO INDIVIDUAL COUNTERPARTIESANZ New Zealand measures its concentration of credit risk using actual exposures for bank counterparties and limits for non bankcounterparties.
For the three months ended 30 September 2017 there were no individual counterparties (excluding connected parties, governments andbanks with long term credit ratings of A- or above) where ANZ New Zealand’s period end or peak end-of-day credit exposure equalled or
exceeded 10% of the Overseas Banking Group’s equity (as at the end of the period).
This credit exposure information does not include exposures to counterparties if they are booked outside New Zealand.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

58

NOTES TO THE FINANCIAL STATEMENTS
34. RISK MANAGEMENT FRAMEWORKANZ New Zealand recognises the importance of effective risk management to its business success. Management is committed toachieving strong control and a distinctive risk management capability that enables ANZ New Zealand business units to meet theirperformance objectives.
ANZ New Zealand approaches risk through managing the various elements of the system as a whole rather than viewing them as
independent and unrelated parts. The risk management division (Risk Management) is independent of the business, with clear delegations
from the Board of the Ultimate Parent Bank and operates within a comprehensive framework comprising:•
The Boards of the entities making up ANZ New Zealand (the Boards) providing leadership, setting risk appetite/strategy andmonitoring progress•
A strong framework for development and maintenance of ANZ New Zealand-wide risk management policies, procedures andsystems, overseen by an independent team of risk professionals•
The use of sophisticated risk tools, applications and processes to execute the global risk management strategy as it is deemed toapply to each entity across ANZ New Zealand•Business unit level accountability, as the “first line of defence”, for the management of risks in alignment with ANZ New Zealand’s
strategy•
Independent oversight to ensure business unit level compliance with policies, regulations and laws, and to provide regular risk
evaluation and reporting.
ANZ New Zealand manages risk through an approval, delegation and limits structure. Regular reviews of the policies, systems and risk
reports, including the effectiveness of the risk management systems, discussions covering ANZ New Zealand’s response to emerging risk
issues and trends, and that the requisite culture and practices are in place across ANZ New Zealand, are conducted within ANZ New
Zealand and also by the Ultimate Parent Bank. The Boards have responsibility for reviewing all aspects of risk management.
The Boards have ultimate responsibility for overseeing the effective deployment of risk management frameworks, policies and processes
within New Zealand. The Bank’s Risk Committee assists the Boards in this function. The role of the Risk Committee is to assist the Boards inthe effective discharge of its responsibilities for business, market, credit, operational, compliance, liquidity, product and reputational risk
management, and to liaise and consult with the Ultimate Parent Bank Risk Committee as required. Risk Management, via the Chief Risk
Officer, coordinates risk management activities directly between Business Unit risk functions and Ultimate Parent Bank Group Risk
Management functions.
ANZ New Zealand’s risk management policies are essentially the same as the Ultimate Parent Bank, but are tailored where required to suitthe local New Zealand regulatory and business environment.
The Bank’s Audit Committee has responsibility for reviewing for ensuring the integrity of ANZ New Zealand's financial controls, reporting
systems and internal audit standards. It meets at least four times a year and reports directly to the Board of the Bank. All members of theBank’s Audit Committee are non-executive directors.
Financial risk management
Refer to note 18 for detailed disclosures on ANZ New Zealand's financial risk management policies.
Operational Risk
Operational risk is the risk arising from day to day operational activities which may result in direct or indirect loss. These losses may result
from failure to comply with policies, procedures, laws and regulations, from fraud or forgery, from a breakdown in the availability or
integrity of services, systems and information, or damage to ANZ New Zealand’s reputation.
Examples include failure to comply with policy and legislation, human error, natural disasters, fraud and other malicious acts. Where
appropriate, risks are mitigated by insurance.
Risk Management is responsible for establishing ANZ New Zealand’s operational risk framework and associated ANZ New Zealand-wide
policies. Business units are responsible for the identification, analysis, assessment and treatment of operational risks on a day-to-day basis.
Business units have primary responsibility for the identification and management of operational risk with executive oversight provided
through business unit Risk Forums. The Bank’s Operational Risk Executive Committee (OREC) undertakes the governance function throughthe bi-monthly monitoring of operational risk performance across ANZ New Zealand. The Boards and Risk Management conduct effective
oversight through the approval of operational risk policies and frameworks and monitoring key operational risk metrics.
Compliance
ANZ New Zealand conducts its business in accordance with all relevant compliance requirements. In order to assist ANZ New Zealandidentify, manage, monitor and measure its compliance obligations, ANZ New Zealand has a comprehensive compliance framework inplace, which addresses both external (regulatory) and internal compliance.
Risk Management, in conjunction with business unit staff ensure ANZ New Zealand operates within a compliance infrastructure andframework that incorporates new and changing business obligations and processes.
The compliance policies and their supporting framework seek to minimise material risks to ANZ New Zealand’s reputation and value that
could arise from non-compliance with laws, regulations, industry codes and internal standards and policies. Business units have primary
responsibility for the identification and management of compliance. Risk Management provides policy and framework, measurement,Australia and New Zealand Banking Group Limited - ANZ New Zealand

59

NOTES TO THE FINANCIAL STATEMENTS
monitoring and reporting, as well as leadership in areas such as anti-money laundering procedures and matters of prudential compliance.
The Board and the Risk Committee of the Ultimate Parent Bank Board conduct Board and Executive oversight.
Internal Audit
Internal Audit is a function independent of management whose role is to provide the Board and management with an effective andindependent 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 Bank’s Audit Committee, with a direct communicationline to the Chief Executive Officer of the Bank and the external auditor.
The Internal Audit Plan is developed utilising a risk based approach and is refreshed on a quarterly basis. The Bank’s Audit Committee
approves the plan.
All audit activities are conducted in accordance with local and international auditing standards, and the results of the activities arereported to the Audit Committees of the Ultimate Parent Bank and the Bank as appropriate, Risk Committee and management. These
results influence the performance assessment of business heads.
Furthermore, Internal Audit monitors the remediation of audit issues and reports the current status of any outstanding audits.

35. NZ BRANCH AND OVERSEAS BANKING GROUP INFORMATIONNZ Branch Funding
Total liabilities of the NZ Branch less amounts due to related parties
Overseas Banking Group Profitability and Size
Profit for the year ended 30/09/20171
Net profit after tax for the 12 months to 30/09/2017 as a percentage of average total assets
Total assets
Percentage change in total assets in the 12 months to 30/09/2017
1

30/09/2017
NZ$m

1,069
30/09/2017
AUDm

6,421
0.70%
897,326-1.92%Net profit after tax for the year includes AUD 15 million of profit attributable to non-controlling interests.

Overseas Banking Group asset quality
Gross impaired assets

30/09/2017
AUDm

2,384

Gross impaired assets as a percentage of total assets

0.3%

Individual provision

1,136

Individual provision as a percentage of gross impaired assets

47.7%

Collective provision

2,662

Australia and New Zealand Banking Group Limited - ANZ New Zealand

60

HISTORICAL SUMMARY OF FINANCIAL STATEMENTS
Year toYear toYear toYear toYear to30/09/2017

30/09/2016

30/09/2015

30/09/2014

30/09/2013

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

Interest income

6,434

6,770

7,417

6,799

6,461

Interest expense

3,356

3,741

4,537

4,034

3,820

Net interest income

3,078

3,029

2,880

2,765

2,641

Non-interest income

916

832

1,157

1,063

795

Operating income

3,994

3,861

4,037

3,828

3,436

Operating expenses

1,469

1,600

1,513

1,490

1,513

60

147

76

(9)

66

2,465

2,114

2,448

2,347

1,857

Credit impairment charge / (release)
Profit before income tax
Income tax expense

685

572

677

636

488

Profit after income tax

1,780

1,542

1,771

1,711

1,369

Dividends paid

(1,635)(1,320)(1,630)(2,335)

(720)

-

-

665

969

-

Share capital issued

Total impaired assets

As at

As at

As at

As at

As at

30/09/2017

30/09/2016

30/09/2015

30/09/2014

30/09/2013

NZ$m

NZ$m

NZ$m

NZ$m

NZ$m

361

433

404

668

936

Total assets

158,185

166,706

155,530

138,528

129,853

Total liabilities

146,872

155,539

144,670

128,447

120,111Equity & head office account

11,313

11,167

10,86010,081

9,742

The amounts included in this summary have been taken from the audited financial statements of ANZ New Zealand.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

61

GENERAL DISCLOSURES
General Matters
The Disclosure Statement has been issued in accordance with the Order.
The address for service for the Ultimate Parent Bank is ANZ Centre Melbourne, Level 9, 833 Collins Street, Docklands, Victoria 3008,
Australia.
Financial Statements of the Ultimate Parent Bank and Overseas Banking Group
Copies of the most recent publicly available financial statements of the Ultimate Parent Bank and Overseas Banking Group will be
provided immediately, free of charge, to any person requesting a copy where request is made at the Registered Office. The most recent
publicly available financial statements for the Ultimate Parent Bank and Overseas Banking Group can also be accessed at the website
anz.com.

Ranking of local creditors in liquidation
Certain creditors of the Ultimate Parent Bank are given a statutory priority under Australian law. Unsecured creditors of the NZ Branch
could be expected to rank behind such claims.
Specifically, pursuant to section 13A(3) of the Banking Act of the Commonwealth of Australia (the Banking Act), if an Authorised DepositTaking Institution (ADI) (which includes the Ultimate Parent Bank) becomes unable to meet its obligations or suspends payment, theassets of the ADI in Australia are available to meet the ADI's liabilities in the following order:(a) first, the ADI's liabilities (if any) to APRA because of the rights APRA has against the ADI because of section 16AI of the Banking Act(b) second, the ADI's debts (if any) to APRA under section 16AO of the Banking Act(c) third, the ADI's liabilities (if any) in Australia in relation to protected accounts that account-holders keep with the ADI. Broadly, thismeans accounts (including deposit accounts) kept with the Ultimate Parent Bank that are situated in Australia and recorded inAustralian dollars(d) fourth, the ADI’s debts (if any) to the Reserve Bank of Australia(e) fifth, the ADI’s liabilities (if any) under an industry support contract that is certified by APRA under section 11CB of the Banking Act(f)sixth, the ADI's other liabilities in the order of their priority (apart from section 13A(3)).

Unsecured creditors of the NZ Branch could be expected to rank as a creditor pursuant to the sixth paragraph, together with otherunsecured creditors of the Ultimate Parent Bank that do not otherwise have a priority claim under preceding paragraphs.
Section 16(1) and (2) of the Banking Act provide that, despite anything contained in any law relating to the winding-up of companies, but
subject to section 13A(3) of the Banking Act, the debts of an ADI to APRA in respect of APRA's costs (including costs in the nature of
remuneration and expenses) of being in control of the ADI's business, or of having an administrator in control of the ADI's business, are adebt due to APRA and have priority in a winding-up of the ADI over all other unsecured debts.
Section 86 of the Reserve Bank Act 1959 of the Commonwealth of Australia provides that notwithstanding anything contained in any law
relating to the winding-up of companies, but subject to section 13A(3) of the Banking Act, debts due to the Reserve Bank of Australia by
any ADI shall, in a winding-up, have priority over all other debts.
This description of the liabilities which are mandatorily preferred by law is not exhaustive.
These provisions affect all of the unsecured liabilities of the NZ Branch, which as at 30 September 2017, amounted to NZ$1,069m (2016:
NZ$1,146m).

Requirement to hold excess assets over deposit liabilities
Section 13A(4) of the Banking Act states that it is an offence for an ADI not to hold assets (excluding goodwill and any assets or otheramount excluded by the prudential standards for the purposes of that subsection) in Australia of a value that is equal to or greater than
the total amount of its deposit liabilities in Australia, unless APRA has authorised the ADI to hold assets of a lesser value. During the year
ended 30 September 2017, the Ultimate Parent Bank has at all times held assets (excluding goodwill and any assets or other amounts
prescribed by APRA) in Australia of not less than the value of the Ultimate Parent Bank's total deposit liabilities in Australia.

APRA’s powers
The Ultimate Parent Bank is subject to extensive prudential regulation by APRA.
Where APRA considers that an ADI may become unable to meet its obligations or suspends payment (among other circumstances), APRA
can take control of the ADI's business (including by appointment of an ADI statutory manager). APRA also has power to direct the ADI notto make payments in respect of its indebtedness and to compulsorily transfer some or all of the ADI’s assets and liabilities to another ADI
in certain circumstances and to increase its capital in specified circumstances. A counterparty to a contract with an ADI cannot rely solely
on the fact that an ADI statutory manager is in control of the ADI's business or on the making of a direction or compulsory transfer order asa basis for denying any obligations to the ADI or for accelerating any debt under that contract or closing out any transaction relating tothat contract.
The Banking Act requires APRA to exercise its powers and functions for the protection of the depositors of Australian ADIs and for thepromotion of financial system stability in Australia.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

62

GENERAL DISCLOSURESThe requirements of the Banking Act and the exercise by APRA of its powers have the potential to impact the management of the liquidityof ANZ New Zealand.
On 19 October 2017, the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 (the Crisis
Management Bill) was introduced into the Australian Parliament. If passed into law by the Australian Parliament, the Crisis Management Bill
would amend the Banking Act (among other statutes applicable to financial institutions in Australia) and is intended to enhance APRA’s
powers to facilitate resolution of the entities it regulates (and their subsidiaries). Additional powers which are proposed to be given to
APRA under the Crisis Management Bill which could impact the Ultimate Parent Bank include greater oversight, management anddirections powers in relation to the Overseas Banking Group which are currently not regulated by APRA, increased statutory management
powers over regulated entities within the Overseas Banking Group in Australia and changes which are designed to give statutory
recognition to the conversion or write-off of regulatory capital instruments. At this stage, the impact of the Crisis Management Bill, if
passed, is uncertain.

Financial Support
The Ultimate Parent Bank may not provide financial support in breach of the Australian Banking Act 1959 (the Act). Under the Act:••APRA must exercise its powers and functions for the protection of a bank’s depositors in Australia andin the event of a bank becoming unable to meet its obligations or suspending payment, the assets of the bank in Australia will beavailable to meet that bank’s deposit liabilities in Australia in priority to all other liabilities of the bank.

Under APRA’s Prudential Standards, the Ultimate Parent Bank’s ability to provide financial support to the Bank is subject to certain
requirements:••••

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 should not hold unlimited exposures (should be limited as to specified time and amount) in the Bank (e.g.
not provide a general guarantee covering any of the Bank’s obligations).
The Ultimate Parent Bank should not enter into cross-default clauses whereby a default by the Bank on an obligation (whether
financial or otherwise) is deemed to trigger a default by the Ultimate Parent Bank on its obligations.
The level of exposure of the Ultimate Parent Bank’s Level 1 capital base to the Bank should not exceed:• 50% on an individual exposure basis or• 150% in aggregate (being exposures to all similar regulated entities related to the Ultimate Parent Bank).

In addition, APRA has reviewed the level of financial exposures that can be provided to the respective New Zealand banking subsidiaries
and branches (New Zealand operations) of the four Australian parent banks, including the Ultimate Parent Bank.
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 during ordinary times. Exposures in excess of this limit as at 1 January 2016 must be
reduced in equal percentages over the five year transition period and may not increase above the exposures as at 30 June 2015. This limit
does not include holdings of capital instruments or eligible secured contingent funding support provided to the Bank during times offinancial stress.
The Ultimate Parent Bank established a New Zealand branch which was registered on 5 January 2009. The Bank sells, from time-to-time,
residential mortgages into the NZ Branch to provide funding for the Bank’s business. As at 30 September 2017, the NZ Branch held
approximately NZ$4.3 billion of residential mortgages. To satisfy APRA’s requirements described above, the Bank intends to repay thisfunding at approximately NZ$1.6 billion per annum over the transition period ending 31 December 2020.
APRA has also stated 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 and the Ultimate Parent Bank’s exposures to the Bank and its other New Zealandoperations must not exceed 50% of the Ultimate Parent Bank’s Level 1 Tier 1 capital base. At present, only covered bonds meet APRA’s
criteria for contingent funding. On this basis, the Ultimate Parent Bank believes it will be able to continue to provide financial support to
the Bank.
Further, from 1 July 2017, APRA’s Level 3 Conglomerates regulations became effective which limit the financial and operational assistancethe Ultimate Parent Bank can provide the Bank.
In determining the acceptable level of financial and operational exposure to the Bank, the Board of the Ultimate Parent Bank should haveregard to:•••the exposures that would be approved for third parties of broadly equivalent credit status
the impact on the Ultimate Parent Bank’s capital and liquidity position andthe 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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

63

GENERAL DISCLOSURES
Guarantors
No material obligations of the NZ Branch are guaranteed as at 29 November 2017.
ANZNZ Covered Bond Trust
Certain debt securities (Covered Bonds) issued by the Bank’s wholly owned subsidiary, ANZ New Zealand (Int’l) Limited, 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 Guarantor has guaranteed the payment of interest and principal of Covered Bonds with a carrying value as at 30 September
2017 of NZ$5,325 million, pursuant to a guarantee which is secured over a pool of assets. The Covered Bond Guarantor’s address forservice is Level 9, 34 Shortland Street, Auckland, New Zealand. The Covered Bond Guarantor is not a member of the Banking Group andhas no credit ratings applicable to its long term senior unsecured obligations. The Covered Bonds have been assigned a long term ratingof Aaa and AAA by Moody’s Investors Service and Fitch Ratings respectively. Details of the pool of assets that secure this guarantee areprovided in note 28.

Credit Rating Information
As at 29 November 2017 the Ultimate Parent Bank has three credit ratings, which are applicable to its long-term senior unsecured
obligations which are payable in New Zealand in New Zealand dollars. On 19 June 2017, Moody’s Investors Service changed the Ultimate
Parent Bank’s credit rating from Aa2 to Aa3 and changed the outlook from Negative to Stable.
The Ultimate Parent Bank’s credit ratings are:Rating Agency
Standard & Poor’s

Current Credit RatingAA-

Qualification
Outlook Negative

Moody’s Investors Service

Aa3

Outlook Stable

Fitch Ratings

AA-

Outlook Stable

The following table describes the credit rating grades available:

Standard &Poor'sMoody's
Investors
Service

Fitch Ratings

AAA
AA
A

Aaa
Aa
A

AAA
AA
A

BBB

Baa

BBB

BB
B
CCC

Ba
B
Caa

BB
B
CCC

CC to CD

Ca to C-CC to CRD & DThe following grades display investment grade characteristics:
Ability to repay principal and interest is extremely strong. This is the highest investment category.
Very strong ability to repay principal and interest.
Strong ability to repay principal and interest although somewhat susceptible to adverse changes in
economic, business or financial conditions.
Adequate ability to repay principal and interest. More vulnerable to adverse changes.
The following grades have predominantly speculative characteristics:
Significant uncertainties exist which could affect the payment of principal and interest on a timely basis.
Greater vulnerability and therefore greater likelihood of default.
Likelihood of default now considered high. Timely repayment of principal and interest is dependent on
favourable financial conditions.
Highest risk of default.
Obligations currently in default.

Credit ratings from Standard & Poor's 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.

Australia and New Zealand Banking Group Limited - ANZ New Zealand

64

CONDITIONS OF REGISTRATION
Conditions of Registration, applicable as at 30 September 2017. These Conditions of Registration have applied from 1
November 2015.
The registration of Australia and New Zealand Banking Group Limited (the registered bank) in New Zealand is subject to the following
conditions:1.

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.

2.

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 forentities in the banking group:a)

If the business of an entity predominately consists of insurance business and the entity is not a subsidiary of another entity in thebanking group whose business predominantly consists of insurance business, the amount of the insurance business to sum isthe total consolidated assets of the group headed by the entity; andb)

If the entity conducts insurance business and its business does not predominantly consist of insurance business and the entity is
not a subsidiary of another entity in the banking group whose business predominantly consists of insurance business, theamount of the insurance business to sum is the total liabilities relating to the entity’s insurance business plus the equity retainedby 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 businessa)

all amounts must relate to on balance sheet items only, and must comply with generally accepted accounting practice;andb)

if products or assets of which an insurance business is comprised also contain a non-insurance component, the whole ofsuch 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.
3.

That the business of the registered bank in New Zealand does not constitute a predominant proportion of the total business of theregistered bank.

4.

That no appointment to the position of the New Zealand chief executive officer of the registered bank shall be made unless:a)the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee; andb)

the Reserve Bank has advised that it has no objection to that appointment.

5.

That Australia and New Zealand Banking Group Limited complies with the requirements imposed on it by the Australian Prudential
Regulation Authority.

6.

That Australia and New Zealand Banking Group Limited complies with the following minimum capital adequacy requirements, as
administered by the Australian Prudential Regulation Authority:

7.

a)Common Equity Tier 1 capital of the Australia and New Zealand Banking Group Limited is not less than 4.5 percent of risk
weighted exposures;b)

Tier 1 capital of the Australia and New Zealand Banking Group Limited is not less than 6 percent of risk weighted exposures;c)

Total capital of Australia and New Zealand Banking Group Limited is not less than 8 percent of risk weighted exposures.

That the business of the registered bank in New Zealand is restricted to:a)acquiring for fair value, and holding, mortgages originated by ANZ Bank New Zealand Limited; andb)

any other business for which the prior written approval of the Reserve Bank of New Zealand has been obtained; andc)activities that are necessarily incidental to the business specified in paragraphs (a) and (b).

8.

That the value of the mortgages held by the registered bank in New Zealand must not exceed $15 billion in aggregate.

9.

That the registered bank in New Zealand does not incur any liabilities except:a)to the government of New Zealand in respect of taxation and other charges;b)

to other branches or the head office of the registered bank;c)to trade creditors and staff;d)to ANZ Bank New Zealand Bank Limited in respect of activities, other than borrowing, that are necessarily incidental to thebusiness specified in paragraphs (a) and (b) of condition 7; ande)any other liabilities for which the prior written approval of the Reserve Bank has been obtained.

In these conditions of registration:-

Australia and New Zealand Banking Group Limited - ANZ New Zealand

CONDITIONS OF REGISTRATION“banking group” means the New Zealand business of the registered bank and its subsidiaries as required to be reported in groupfinancial statements for the group’s New Zealand business under section 461B(2) of the Financial Markets Conduct Act 2013.
“business of the registered bank in New Zealand” means the New Zealand business of the registered bank as defined in therequirement for financial statements for New Zealand business in section 461B(1) of the Financial Markets Conduct Act 2013.
“generally accepted accounting practice” has the same meaning as in section 8 of the Financial Reporting Act 2013.

65

Australia and New Zealand Banking Group Limited - ANZ New Zealand

66

DIRECTORATE AND AUDITOR
Any document or communication may be sent to any Director
or the Chief Executive Officer – NZ Branch at the Registered
Office. The document or communication should be marked forthe attention of that Director or the Chief Executive Officer.
Directors’ Interests
The Board of the Ultimate Parent Bank has adopted procedures
to ensure that conflicts and potential conflicts of interest
between a Director’s duties to the Ultimate Parent Bank andtheir own interests are avoided or dealt with. Pursuant to theseprocedures:••

each Director should disclose to all Directors any material
personal interest they have in any matter which relates tothe affairs of the Ultimate Parent Bank and any otherinterest which the Director believes is appropriate todisclose in order to avoid an actual conflict of interest or
the perception of a conflict of interest. This disclosure
should be made as soon as practicable after the Director
becomes aware of their interest or the need to make adisclosure.
Director who has an interest of the type referred to in a.
above in a matter that is to be considered at a Directors'
meeting, must not vote on the matter nor be present while
the matter is considered at the meeting, unless a majorityof Directors who do not have such an interest in the matter
agree that the interest should not disqualify such Director
from being present while the matter is being considered
and from voting on the matter. The minutes of themeeting should record the decision taken by the Directors
who do not have an interest in the matter.

Board Members as at 29 November 2017
The names, qualifications, occupation, country of residence andmaterial external directorships of each director of the Ultimate
Parent Bank as at the date this Disclosure Statement was signed
were:

ChairmanDavid Michael Gonski, AC
BCom, LLB, FAICD(Life), FCPA
Company Director
Sydney, Australia
Mr Gonski is an ex-officio member of all Board Committees,
including Chair of the Environment, Sustainability andGovernance Committee.
Chairman: The University of New South Wales Foundation Ltd
Director/Member: Lowy Institute for International Policy, ASIC
External Advisory Panel, Australian Philanthropic Services Ltd,
Advisory Committee for Optus Ltd
Chancellor: University of New South Wales
President: Art Gallery of NSW Trust

Chief Executive Officer – Australia and New Zealand
Banking Group
Shayne Cary Elliott
BCom
Chief Executive Officer and Executive Director
Melbourne, Australia

In addition, Standing Notices about Interests are maintained foreach Director. If the Director's interests change, the Director
shall disclose the change as soon as practicable and an updated
Standing Notice shall be tabled at the next Board meeting andrecorded in the minutes of that meeting.

Director: The Financial Markets Foundation for Children
Member: Australian Banker’s Association, Business Council ofAustralia

Transactions with Directors and the Chief Executive Officer,
NZ Branch

Ilana Rachel Atlas

There are no transactions entered into by any Director, the Chief
Executive Officer – NZ Branch, or any immediate relative or
close business associate of any Director or the Chief Executive
Officer – NZ Branch, with any part of ANZ New Zealand which
has been either entered into on terms other than those which
would in the ordinary course of business be given to any otherperson of like circumstances or means or which could
otherwise be reasonably likely to influence materially theexercise of the Directors' or Chief Executive Officer – NZ Branch
duties in respect of the NZ Branch and ANZ New Zealand.

Non-Executive Directors
BJuris (Hons), LLB (Hons), LLM
Company Director
Sydney, Australia
Ms Atlas is Chair of the Human Resources Committee and amember of the Audit Committee and Environment,
Sustainability and Governance Committee.
External Directorships
Chairman: Coca-Cola Amatil Ltd, Jawun
Director: Human Rights Law Centre Ltd, Westfield Corporation
Ltd, Paul Ramsay Foundation
Member: Panel of Adara Partners
Fellow: Senate of the University of Sydney

Australia and New Zealand Banking Group Limited - ANZ New Zealand

67

DIRECTORATE AND AUDITOR
Paula Jane Dwyer

John Thomas Macfarlane

BCom, FCA, SF Fin, FAICD
Company Director
Melbourne, Australia

BCom, MCom (Hons)
Company Director
Melbourne, Australia

Ms Dwyer is Chair of the Audit Committee and a member of the
Risk Committee and Human Resources Committee.

Mr Macfarlane is a member of the Audit Committee, Risk
Committee and Digital Business and Technology Committee.

External Directorships
Chairman: Tabcorp Holdings Ltd, Healthscope Ltd, Kin Group
Advisory Board
Director: Lion Pty Ltd
Member: Kirin International Advisory Board

External Directorships
Director: St. Vincent’s Institute of Medical Research, Craigs
Investment Partners Ltd, Colmac Group Pty Ltd, AGInvest
Holdings Ltd (MyFarm Ltd), Aikenhead Centre for Medical
Discovery Ltd, Collins Farms Ltd, Collins Farms No 2 Ltd,
Dumbarton Land Company Ltd, Deer Improvement Ltd, The
Kowhais Ltd, Waitakere Mega Centre Ltd, Balmoral Pastoral
Investments Pty Ltd

Jane Halton, AO, PSM
BA (Hons) Psychology, FIML, FIPAA, NAM, Hon. FAAHMS, Hons.
FACHSE, Hon. DLitt (UNSWA)
Company Director
Canberra, Australia
Ms Halton is a member of the Human Resources Committee,
Environment, Sustainability and Governance Committee andDigital Business and Technology Committee.
External Directorships
Chairman: Vault Systems
Director: Clayton Utz
Member: Executive Board of the Institute of Health Metrics and
Evaluation at the University of Washington
Board Member: Coalition for Epidemic Preparedness
Innovations (Norway)
Adjunct Professor: University of Sydney, University of Canberra
Council Member: Australian Strategic Policy Institute
Lee Hsien Yang
MSc, BA
Company Director
Singapore
Mr Lee is Chair of the Digital Business and Technology
Committee and a member of the Risk Committee and Human
Resources Committee.
External Directorships
Chairman: The Islamic Bank of Asia Ltd, Civil Aviation Authorityof Singapore, General Atlantic Singapore Fund Pte Ltd
Director: Cluny Lodge Pte Ltd, Caldecott Inc., Rolls-Royce
Holdings plc, General Atlantic Singapore Fund FII Pte Ltd
Member: Governing Board of Lee Kuan Yew School of Public
PolicySpecial Advisor: General Atlantic
President: INSEAD South East Asia Council
Graeme Richard Liebelt
BEc (Hons), FAICD, FTSE, FAML
Company Director
Melbourne, Australia
Mr Liebelt is Chair of the Risk Committee and a member of the
Audit Committee and Human Resources Committee.
External Directorships
Chairman: Amcor Ltd
Director: Australian Foundation Investment Company Ltd,
Carey Baptist Grammar School, DuluxGroup Ltd

Chief Executive Officer, Australia and New Zealand
Banking Group – New Zealand Branch
Anthony John Bradshaw
BCA, CA
Chief Executive Officer– NZ Branch
Wellington, New ZealandAuditor
KPMG
Chartered Accountants
10 Customhouse Quay
P O Box 996
Wellington, New ZealandAustralia and New Zealand Banking Group Limited - ANZ New Zealand

68

DIRECTORS' AND NEW ZEALAND CHIEF EXECUTIVE OFFICER'S STATEMENT
As at the date on which this Disclosure Statement is signed, after due enquiry, each Director of the Ultimate Parent Bank and the Chief
Executive Officer – NZ Branch believes that:•

The Disclosure Statement contains all the information that is required by the Registered Bank Disclosure Statements (Overseas
Incorporated Registered Banks) Order 2014•

The Disclosure Statement is not false or misleading.

Over the year ended 30 September 2017, after due enquiry, each Director of the Ultimate Parent Bank and the Chief Executive Officer – NZ
Branch believes that:•

The Ultimate Parent Bank has complied with all Conditions of Registration that applied during that period•

The NZ Branch and the Bank had systems in place to monitor and control adequately the material risks of Relevant Members of ANZ
New Zealand including credit risk, concentration of credit risk, interest rate risk, currency risk, equity risk, liquidity risk and otherbusiness risks, and that those systems were being properly applied.

This Disclosure Statement is dated 29 November 2017, and has been signed by the Chairman of the Ultimate Parent Bank, onbehalf of all Directors, and by the Chief Executive Officer – NZ Branch.

David Gonski, AC
Chairman,on behalf of the Directors:
Ilana Atlas
Paula Dwyer
Shayne ElliottDavid Gonski, AC
Jane Halton, AO, PSM
Lee Hsien Yang
Graeme Liebelt
John Macfarlane

Anthony Bradshaw
Chief Executive Officer – NZ Branch

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Independent Auditor’s Report
To the Directors of Australia and New Zealand Banking Group Limited
Report on the ANZ New Zealand Disclosure Statement

OpinionIn our opinion, the accompanying consolidated
financial statements (excluding supplementary
information) of Australia and New Zealand Banking
Group Limited - ANZ New Zealand and its related
entities (ANZ New Zealand) on pages 3 to 59:— give a true and fair view of the financial positionof ANZ New Zealand as at 30 September 2017and of the financial performance and cash flows
for the year ended on that date— comply with New Zealand Generally Accepted

We have audited the accompanying consolidated
financial statements and supplementary information(excluding supplementary information)which
comprise:— the consolidated balance sheet as at 30
September 2017

— the consolidated income statement, statementof comprehensive income, statement ofchanges in equity and statement of cash flows
for the year then ended

Accounting Practice, which in this instancemeans New Zealand Equivalents to International
Financial Reporting Standards (NZ IFRS) andInternational Financial Reporting Standards.

— notes, including a summary of significant

In our opinion, the supplementary information(excluding supplementary information) that isrequired to be disclosed in accordance with
Schedules 4, 7, 10, 11 and 13 of the Registered
Bank Disclosure Statements (Overseas Incorporated
Registered Banks) Order 2014 (as amended) (the“Order”) and is included within the Balance Sheetand notes 14, 18, 28 and 33 of the disclosurestatement:in accordance with Schedules 4, 7, 10, 11 and
13 of the Order.

accounting policies
information

and

other

explanatory— the information that is required to be disclosed— has been prepared, in all material respects, inaccordance with the guidelines issued pursuant
to section 78(3) of the Reserve Bank of New
Zealand Act 1989 and any conditions ofregistration— is in accordance with the books and records of
ANZ New Zealand in all material respects— fairly states the matters to which it relates inaccordance with those schedules.

© 2017 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(“KPMG International”), a Swiss entity.

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Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs (NZ)). We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of ANZ New Zealand in accordance with Professional and Ethical Standard 1 (Revised) Codeof Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and theInternational Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code),and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code.
Our responsibilities under ISAs (NZ) are further described in the Auditor’s Responsibilities for the Audit of theconsolidated financial statements section of our report.
Our firm has also provided other services to ANZ New Zealand 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 ANZ New Zealand on normal terms within theordinary course of trading activities of the business of ANZ New Zealand. These matters have not impaired our
independence as auditor of ANZ New Zealand. The firm has no other relationship with, or interest in, ANZ New
Zealand.

Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of
the consolidated financial statements in the current period. We summarise below those matters and our key audit
procedures to address those matters in order that the Directors as a body may better understand the process bywhich we arrived at our audit opinion. Our procedures were undertaken in the context of and solely for the purposeof 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.
The key audit matter
Provisions for Credit Impairment
The provision for credit impairment is a Key Audit Matter as ANZ New Zealand has significant credit risk
exposure to a large number of counterparties across a wide range of lending and industries. The value of loans
and advances on the balance sheet is significant and there is a high degree of complexity and judgement
involved for ANZ New Zealand in estimating individual and collective credit impairment provisions against theseloans. These features resulted in significant audit effort to address the risks around loan recoverability and thedetermination of related provisions.
How the matter was addressed in our audit
Our audit procedures over the individual and collective provision for credit impairment included:
Provisions against specific individual loans (individual provision)— Testing the key controls over counterparty risk grading for wholesale loans (larger customer exposuresthat are monitored individually). We tested the approval of new lending facilities against ANZ New
Zealand’s lending policies, the performance of annual loan assessments, and controls over the monitoringof counterparty credit quality. This included testing controls over the identification of exposures showing
signs of stress, either due to internal factors specific to the counterparty or external macroeconomic
factors, and testing the timeliness of and the accuracy of counterparty risk assessments and risk grading
against the requirements of ANZ New Zealand’s lending policies

71— Performing credit assessments of a sample of wholesale loans managed by ANZ New Zealand’s specialist
workout and recovery team assessed as higher risk or impaired, and a sample of other loans, focusing onlarger exposures assessed by ANZ New Zealand as showing signs of deterioration, or in areas of emerging
risk (assessed against external market conditions). We challenged ANZ New Zealand’s risk grading of theloan, their assessment of loan recoverability and the impact on the credit provision. To do this, we used
the information on ANZ New Zealand’s loan file, discussed the case with the loan officer and management,
and performed our own assessment of recoverability. This involved using our understanding of relevant
industries and the macroeconomic environment, and comparing assumptions of inputs used by ANZ New
Zealand in recoverability assessments to externally sourced evidence, such as commodity prices, publicly
available audited financial statements, and comparable external valuations of collateral held

— For retail loans (smaller customer exposures not monitored individually), we evaluated ANZ New Zealand’s
oversight of the portfolios, with a focus on controls over delinquency statistics monitoring. We tested thelevel of provisions held against different loan products, on a sample basis, based on the delinquency profileand challenged assumptions made in respect of expected recoveries, primarily from collateral held.
Provisions estimated across loan portfolios (collective provision)— Testing ANZ New Zealand’s processes to validate the models used to calculate collective provisions, andevaluating ANZ New Zealand’s model methodologies against established market practices and criteria in
the accounting standards— Testing the key controls within IT systems used to calculate the collective provision, specifically thoserelating to data management and the completeness and accuracy of data transfer from underlying source
systems to the collective provision models— Testing the accuracy of key inputs into models by checking a sample of balances to the general ledger
and risk ratings to source systems— Challenging the key assumptions in the models such as emergence periods, probability of default and loss
given default for a sample of retail and wholesale portfolios. We compared modelled estimates against
actual losses incurred by ANZ New Zealand— Re-performing, for a sample of retail and wholesale portfolios and using a KPMG-constructed calculation
tool, the calculation of collective provisions to determine the accuracy of model output.
We also challenged key assumptions in the components of ANZ New Zealand’s collective provision balance
held above modelled provision estimates. This included:— Evaluating inputs to the concentration risk and economic cycle provisions by comparing underlying
portfolio characteristics to loss experience, current market conditions and specific risks inherent in ANZ
New Zealand’s loan portfolios— Assessing the requirement for other additional provisions by considering model or data deficiencies
identified by ANZ New Zealand’s model validation processes— Assessing the completeness of additional provisions by checking the consistency of risks identified in theportfolios to their inclusion in ANZ New Zealand’s assessment.

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The key audit matter
Valuation of Financial Instruments
Financial instruments held at fair value on ANZ New Zealand’s balance sheet include available-for-sale-assets,
trading securities, derivative assets and liabilities, investments backing insurance contract liabilities, certain
debt securities, 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 or used by ANZ New Zealand to
manage its own interest rate and foreign exchange risk.
The valuation of financial instruments is considered a Key Audit Matter due to:— Financial instruments held at fair value are significant (16% of assets and 9% of liabilities)— The significant volume and range of products transacted, increases the risk of inconsistencies intransaction management processes that could lead to inaccurate valuation— Determining the fair value of trading securities and derivatives involves a significant level of judgement by
ANZ New Zealand, increasing the risk of error, and adding complexity to our audit. The level of judgement
increases where internal models, as opposed to quoted market prices, are used to determine fair value of
an instrument— The valuation of certain derivatives held by ANZ New Zealand is sensitive to inputs including credit risk,
funding rates, probabilities of default and loss given default, and industry practice is evolving as to how
the impact of both funding and credit risk is incorporated within the valuation of certain derivative
instruments. This increased our audit effort in this area and necessitated the involvement of valuation
specialists.
How the matter was addressed in our audit
Our audit procedures for the valuation of financial instruments held at fair value included:— Testing access rights and change management controls for key valuation systems— Testing interface controls, notably the completeness and accuracy of data transfers between transaction
processing systems, key systems used to generate valuations and any related valuation adjustments, and
ANZ New Zealand’s market risk management and finance systems to identify inconsistencies intransaction management and valuation processes across products— Testing the governance and approval controls such as management review and approval of the valuation
models and approval of new products against policies and procedures— Testing the front office management review and approval of the daily financial instrument trading profit
and loss reconciliations prepared by ANZ New Zealand’s independent product control function— Testing the management review and approval of model construction and validation, aimed at assessing
the validity and robustness of underlying valuation models— Testing ANZ New Zealand’s data validation controls, such as those over key inputs in generating the fairvalue to market data where fair values were determined by front office teams.
We carried out testing over the valuation of financial instruments with both observable and unobservable
inputs. Our specific testing involved valuation specialists and included:— Re-performing the valuation of ‘level 1’ and ‘level 2’ available for sale assets and trading securities, which
are primarily government, semi-government and corporate debt securities, by comparing the observable
inputs, including quoted prices, to independently sourced market data

73

— Using independent models, re-calculating the valuation of a sample of derivative assets and liabilities
where the fair value was determined using observable inputs. This included comparing a sample ofobservable inputs used in ANZ New Zealand’s derivative valuations to independently-sourced market data,such as interest rates, foreign exchange rates and volatilities— Where the fair value of derivatives and other financial assets and liabilities were determined using
unobservable inputs (‘level 3’ instruments), challenging ANZ New Zealand’s valuation model by testing the
key inputs used to comparable data in the market, including the use of proxy instruments and available
alternatives— Evaluating the appropriateness of ANZ New Zealand’s valuation methodology for derivative financial
instruments, having regard to current and emerging derivative valuation practices across a range of peer
institutions and against the required criteria in the accounting standards. We tested adjustments made tovaluations, particularly funding and credit valuation adjustments on un-collateralised derivatives. In
particular, for a sample of individual counterparties, we tested key inputs to the credit valuation adjustment
calculation, including the probability of default, against observable market data. Where proxies were used,
we assessed the proxy against available alternatives across a number of locations.
The key audit matter
IT systems and controls
As a major New Zealand bank, ANZ New Zealand’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 ANZ New Zealand’s financial positionand performance. The IT systems and controls, as they impact the financial recording and reporting oftransactions, is a key audit matter and our audit approach could significantly differ depending on the effective
operation of ANZ New Zealand’s IT controls. KPMG IT specialists were used throughout the engagement as acore part of our audit team.
How the matter was addressed in our audit
We tested the control environment for key IT applications (systems) used in processing significant transactions
and recording balances in the general ledger. We also tested automated controls embedded within thesesystems. Our audit procedures included:— Testing the governance controls used by ANZ New Zealand’s technology teams and third party suppliers
to monitor system integrity, by checking matters impacting the operational integrity of core systems for
escalation and action in accordance with ANZ New Zealand’s policies— Testing the access rights given to staff by checking them to approved records, and inspecting the reports
over the granting and removal of access rights. We also looked for evidence of escalation of breaches— Testing preventative controls designed to enforce segregation of duties between users within particularsystems— Testing the operating effectiveness of automated controls, principally relating to the automated calculationof financial transactions. We tested the inputs used within automated calculations to source data and also
tested the accuracy of the calculation logic for a sample of transactions within each identified control— Testing the operating effectiveness of automated reconciliation controls, both between systems and intrasystem. For a sample of identified breaks, in reconciliations, we checked that these were recorded on
exception reports, and subsequently investigated and cleared by ANZ New Zealand.

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Other Information
The Directors, on behalf of ANZ New Zealand, are responsible for the other information included in the ANZ New
Zealand’s Disclosure Statement. Other information includes the general disclosures required to be included in the
Disclosure Statement in accordance with Schedule 2 of the Order and New Zealand Chief Executive Officer’s
statement. Our opinion on the consolidated financial statements does not cover any other information and we do
not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements our responsibility is to read the otherinformation and, in doing so, consider whether the other information is materially inconsistent with theconsolidated financial statements or our knowledge obtained in the audit or otherwise appears materially
misstated. If, based on the work we have performed, we conclude that there is a material misstatement of thisother information, we are required to report that fact. We have nothing to report in this regard.

Report on other legal and regulatory requirements
In accordance with the requirements of clauses 2(1)(d) and 2(1)(e) of Schedule 1 of the Order, we report that:— we have obtained all the information and explanations we have required— in our opinion, proper accounting records have been kept by ANZ New Zealand, as far as appears from our
examination of those records.

Responsibilities of the Directors for the consolidated financial
statements and supplementary information
The Directors, on behalf of ANZ New Zealand, are responsible for:— the preparation and fair presentation of the consolidated financial statements in accordance with Clause 22 of
the Order, NZ IFRS and International Financial Reporting Standards— the preparation and fair presentation of supplementary information, in accordance with Schedules 2, 4, 7, 10,
11 and 13 of the Order— implementing necessary internal control to enable the preparation of consolidated financial statements thatare fairly presented and free from material misstatement, whether due to fraud or error— assessing the ability to continue as a going concern. This includes disclosing, as applicable, matters related togoing concern and using the going concern basis of accounting unless they either intend to liquidate or tocease operations, or have no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the consolidated financial
statements and supplementary information
Our objective is:— to obtain reasonable assurance about whether the disclosure statement, including the consolidated financial
statements prepared in accordance with Clause 22 of the Order, and supplementary information, in
accordance with Schedules 4, 7, 10, 11 and 13 of the Order as a whole is free from material misstatement,
whether due to fraud or error— to issue an Auditor’s Report that includes our opinion.

75

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordancewith International Standards on Auditing (New Zealand) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis of this consolidated
financial statements.
A further description of our responsibilities for the Audit of these consolidated financial statements is located at
the External Reporting Board (XRB) website at:https://www.xrb.govt.nz/Site/Auditing_Assurance_Standards/Current_Standards/Page1.aspx
This description forms part of our Auditor’s Report.

Review conclusion on the supplementary information relating to Capital
Adequacy
Based on our review, nothing has come to ourattention that causes us to believe that the
supplementary information relating to Capital
Adequacy, disclosed in note 26 to the disclosurestatement, is not, in all material respects:
i. prepared in accordance with the Capital Adequacy
Framework (Standardised Approach) (BS2A)

We have reviewed the supplementary information
relating to Capital Adequacy, as disclosed in note
26 of the disclosure statement for the year ended
30 September 2017. The supplementary
information relating to Capital Adequacy
comprises the information that is required to bedisclosed in accordance with Schedule 9 of theOrder.

ii. disclosed in accordance with Schedule 9 of theOrder.

Basis for conclusion on the supplementary information relating to
Capital Adequacy
A review of the supplementary information relating to Capital Adequacy 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 under that standard are further described in the Auditor’s Responsibilities for the Review of the
supplementary information relating to Capital Adequacy section of our report.
As the auditor of ANZ New Zealand, NZ SRE 2410 requires that we comply with the ethical requirements relevantto the audit of the annual financial statements.

Responsibilities of Directors for the supplementary information relating
to capital adequacy
The Directors are responsible for the preparation of supplementary information relating to Capital Adequacy thatis required to be disclosed under Schedule 9 of the Order and prepared in accordance with the Capital Adequacy
Framework (Standardised Approach) (BS2A) and described in note 26 to the Disclosure Statement.

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Auditor’s Responsibilities for the Review of the supplementary
information relating to capital adequacy
Our responsibility is to express a conclusion on the Capital Adequacy information based on our review. We
conducted our review in accordance with NZ SRE 2410 Review of Financial Statements Performed by the
Independent Auditor of the Entity (NZ SRE 2410) issued by the XRB. As the auditor of ANZ Bank, NZ SRE 2410
requires that we comply with the ethical requirements relevant to the audit of the annual financial statements, andplan and perform the review to obtain limited assurance about whether the capital adequacy information is, in allmaterial respects:— prepared in accordance with ANZ New Zealand’s conditions of registration— disclosed in accordance with Schedule 9 of the Order.
A review of the Capital Adequacy information in accordance with NZ SRE 2410 is a limited assurance engagement.
The auditor performs procedures, primarily consisting of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other review procedures.
The procedures performed in a review are substantially less than those performed in an audit conducted inaccordance with International Standards on Auditing (New Zealand). Accordingly we do not express an audit
opinion on the supplementary information relating to Capital Adequacy disclosures.

Use of this Independent Auditor’s Report
This report is made solely to the shareholder as a body. Our audit work has been undertaken so that we mightstate to the shareholder those matters we are required to state to them in the Independent Auditor’s Report andfor no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the shareholder as a body for our audit work, this report, or any of the opinions we have formed.
The engagement partner on the audit resulting in this independent auditor's report is Graeme Edwards.
For and on behalf of

KPMG
Wellington
29 November 2017