ANZ Basel II Pillar 3 disclosure

September 200909

BASEL IIPILLAR 3

YEAR ENDED 30 SEPTEMBER 2009
APS 330: CAPITAL ADEQUACY &RISK MANAGEMENT IN ANZ

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ANZ Basel II Pillar 3 disclosure

September 2009

Important NoticeThis document has been prepared by Australia & New Zealand Banking Group Ltd (ANZ, or
the Group) to meet its disclosure obligations under the Australian Prudential Regulation
Authority (APRA) APS 330 Capital Adequacy: Public Disclosure of Prudential Information.
This disclosure was prepared as at 30 September 2009. ANZ has a continuous disclosure
policy, under which ANZ will immediately notify the market of any material price sensitive
information concerning the Group, in accordance with legislative and regulatory disclosure
requirements.

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ANZ Basel II Pillar 3 disclosure

September 2009

TABLE OF CONTENTS1
Chapter 1 – Highlights .............................................................................................................. 4
Chapter 2 - Introduction ........................................................................................................... 6
Purpose of this document ................................................................................................. 6
Chapter 3 - Risk appetite and governance ................................................................................... 8
Risk types....................................................................................................................... 8
Risk Appetite Framework .................................................................................................. 8
Risk management governance........................................................................................... 9
Chapter 4 – Group structure and capital adequacy ..................................................................... 11
Table 1

Scope of application .................................................................................. 11

Table 2

Capital Structure ...................................................................................... 12

Table 3

Capital adequacy ...................................................................................... 15

Chapter 5 – Credit risk ........................................................................................................... 20
Summary of Credit risk disclosures ................................................................................ 20
Table 4Credit risk – General disclosures ................................................................. 20

Table 5Credit risk – Disclosures for portfolios subject to the Standardised Approach andsupervisory risk weighting in the IRB approach............................................. 32

Table 6

Credit risk – Disclosures for portfolios subject to IRB approaches.................... 33

Table 7

Credit risk mitigation disclosures ................................................................ 41

Table 8General disclosures for derivatives and counterparty credit risk ...................... 45

Chapter 6 – Securitisation ....................................................................................................... 47
Table 9Securitisation disclosures ........................................................................... 47

Chapter 7 – Market Risk ......................................................................................................... 54
Table 11

Market risk – Internal Models Approach (IMA) .............................................. 54

Table 10Market risk – Standardised Approach .......................................................... 57

Chapter 8 – Operational Risk ................................................................................................... 58
Table 12

Operational Risk ....................................................................................... 58

Chapter 9 – Equities ............................................................................................................... 61
Table 13Equities – disclosures for banking book positions .......................................... 61

Chapter 10 - Interest rate risk in the banking book (IRRBB) ........................................................ 63
Table 14

Interest rate risk in the banking book.......................................................... 63

Chapter 11 – Liquidity risk ...................................................................................................... 66
Appendix - ANZ Bank (Europe) Limited ..................................................................................... 68

1

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

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ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 1 – Highlights2 3
Strong capital position, even with capitalcommitted to RBS assets and the ING JVCapital ratios
11.9%
10.6%
8.2%

7.7%

1.6%

9.5%

1.6%

1.6%

1.8%

1.8%

10.3%

9.0%
5.9%

6.4%

Sep-08Mar-09Core Tier 1

Hybrid Tier 1

7.9%

Sep-09Sep-09 proforma

FSA Sep-09 pro
forma

Provision ratios (Provisions/CRWA)
1.97%
1.58%
1.39%
1.07%
0.83%
1.13%

0.94%

0.73%

Sep 07

Mar 08

Sep 08

Total Provision Bal / Credit RWA

1.31%

1.06%

Mar 09

Capital position has been strengthened via:
• Three ordinary equity raisings totalling$5.7bn:•Institutional Share Placement $2.5bn•
Share Purchase Plan $2.2bn•
Final 2008 DRP underwrite $1.0bn• Organic capital generation of $1.3bn• RWA reduction• Capital position further strengthened post
Sep-09 results with offer of A$1.7bn hybrid
Tier 1 more than offsetting redemption of
US $350m hybrid

Higher provision balances relative to
Credit Risk Weighted Assets (CRWA)• Higher provisions for defaults and portfolio
deterioration• Lower CRWA from EAD contraction andportfolio data review

Sep 09CP Bal / Credit RWA

Impaired Assets and Individual Provisions
4,795• Large Institutional defaults during 1H09
• Coverage (IP Balance / Impaired Assets) of
32% is negatively skewed by large Property
Services exposures in Institutional division

3,887

1,827

Growth in Impaired Assets slowed
significantly during 2H09

1,526

1,341
675

Sep-08Mar-09Impaired Assets

Sep-09Individual Provision Balance2
Capital Ratios: Sep-09 pro forma and FSA Sep-09 pro forma includes adjustment for acquisition of RBS assets and
INGA & ING (NZ) Joint Venture in 2010 financial year.
3
Impaired Assets and Individual Provisions: Impaired Assets excludes Restructured items of $673 million in
September 2009 (March 09: $17 million; September 08: $846 million) and Impaired Derivatives of $127 million in
September 09 (March 09: $254 million; September 08: Nil). By definition, Restructured items and Impaired
Derivatives do not attract Individual Provision.

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ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 1 – Highlights (continued)4Movement in Credit Risk Weighted Assets ($bn)
(9.4)

250.8

(13.7)

6.3

•
•

(4.2)

Sep-08

Sep-08250.8

Credit RWA down by $21bn$229.8bn from Sep 08 driven by:to5.5% reduction in EAD
Ongoing portfolio data review

229.8

Portfolio
growth & mix

Risk
Migration

Portfolio Data
Review

FX Impacts

Sep-09

2.2

6.2

(5.7)

4.3

Mar-09
257.8

(7.8)

(7.9)

Sep-09229.8

NB - HOH changes do not add to YOY due to changes in mix

Mar-09257.8(13.3)

Exposure at Default ($bn)

$bn
700
600

1.0

582.6

555.0

567.8

EAD reduced $30.7bn to $524.3bn over
the year

538.4

524.3

500

•

400
300

•

200
100

•

0
Sep-08Dec-08

Corporate
QRR & Other RetailStandardised

Mar-09Jun-09Bank & Sovereign
Spec ialised Lending

Sep-09Residential Mortgage
Other CRWAs

Average Risk Weights (CRWA/EAD)
120%

Sep-08Mar-09Sep-0996%

100%

Portfolio
average
Risk
Weightdecreased 1.4% to 43.8% over the
year

95%

•

80%

71%

60%

58%

49%

•

40%
20%

18%

12%

Other
CRWAs

Standardised

Specialised
Lending

QRR & Other
RetailBank &
Sovereign

Corporate

Residential
Mortgage

0%4Reduction in Corporate exposures, from
customer portfolio amortisation andbalance sheet restructuring, as well as
portfolio data review
Reclassifications
fromSpecialised
Lending to Corporate
Reduction in Securitisation exposures

Other CRWAs comprise Securitisation, Equities, and Other Asset exposures.

5

Changeinportfolio
mixfromcontraction in Corporate EAD (which
has higher than average Risk Weight)
and growth in Residential Mortgages
Portfolio data review

ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 2 - Introduction
Purpose of this document
This document has been prepared in accordance with the Australian Prudential Regulation Authority(APRA) Australian Prudential Standard (APS) 330 Capital Adequacy: Public Disclosure of Prudential
Information.
APS 330 mandates the release to the investment community and general public of information relating
to capital adequacy and risk management practices. APS 330 has been established to implement
Pillar 3 of the Basel Committee on Banking Supervision’s framework for bank capital adequacy, knownas ‘Basel II’5. In simple terms, Basel II consists of three mutually reinforcing ‘Pillars’:
Pillar 1
Minimum capital requirements

Pillar 2
Supervisory review process

Pillar 3
Market discipline

Minimum capital requirements
for Credit Risk, Operational
Risk, Market Risk and Interest
Rate Risk in the Banking Book

Firm-wide risk oversight,
Internal Capital Adequacy
Assessment Process (ICAAP),
consideration of additional risks,
capital buffers and targets andrisk concentrations, etc

Regular disclosure to themarket of qualitative andquantitative aspects of risk
management, capital adequacy
and underlying risk metrics

Basel II in ANZIn December 2007, ANZ was one of the first banks in the world to receive accreditation for the mostadvanced approaches permitted under Basel II for credit and operational risk, complementing its
existing accreditation for market risk.
APS 330 requires the publication of various levels of information on a quarterly, semi-annual andannual basis. This document is the annual disclosure, which has the most comprehensive
requirements.
In addition to releasing APS 330 for Pillar 3, APRA has a suite of ‘Pillar 1’ prudential standards - ofwhich the following relate to ANZ:•APS 110: Capital Adequacy•

APS 111: Capital Adequacy: Measurement of Capital•

APS 113: Capital Adequacy: Internal Ratings-based Approach to Credit Risk (and, to a limited
extent, APS 112: Capital Adequacy: Standardised Approach to Credit Risk)•

APS 115: Capital Adequacy: Advanced Measurement Approaches to Operational Risk•

APS 116: Capital Adequacy: Market Risk•

APS 117: Capital Adequacy: Interest Rate Risk in the Banking Book•

APS 120: Securitisation•

APS 150: Basel II Transition

In contrast to most jurisdictions, Interest Rate Risk in the Banking Book is included in the Pillar 1
calculation of regulatory capital adequacy under APRA prudential standards, rather than being
addressed as part of the Internal Capital Adequacy Assessment Process of Pillar 2.
Verification of disclosures
These Pillar 3 disclosures have been verified in accordance with Board approved policy, including
ensuring consistency with information contained in ANZ’s Annual Report or in Pillar 1 returns provided
to APRA. This Pillar 3 disclosure is not audited by ANZ’s external auditor.

5
Basel Committee on Banking Supervision, International Convergence of Capital Measurement and CapitalStandards: A Revised Framework, 2004.

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ANZ Basel II Pillar 3 disclosure

September 2009

Comparison to ANZ’s Annual Report
These disclosures have been produced in accordance with regulatory capital adequacy concepts andrules, rather than in accordance with International Financial Reporting Standards. As such, there aredifferences in some common areas of disclosures. These differences are most pronounced in thecredit risk disclosures, for instance:•

The principal method for measuring the amount at risk is Exposure at Default (EAD), which is theestimated amount of exposure likely to be owed on a credit obligation at the time of default.
Under the Advanced Internal Ratings Based (IRB) approach in APS 113, banks are accredited toprovide their own estimates of EAD for all exposures (drawn, commitments or contingents)
reflecting the current balance as well as the likelihood of additional drawings prior to default•

Loss Given Default (LGD) is an estimate of the amount of losses expected in the event of default.
LGD is essentially calculated as the amount at risk (EAD) less expected net recoveries fromrealisation of collateral as well as any post default repayments of principal and interest•

Most credit risk disclosures split ANZ’s portfolio into regulatory asset classes, which traverse
multiple areas of ANZ’s internal divisional and business unit organisational structure.

Unless otherwise stated, all amounts are rounded to AUD millions.

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ANZ Basel II Pillar 3 disclosure

September 2009

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

Credit risk - the risk of financial loss resulting from the failure of ANZ’s customers andcounterparties to honour or perform fully the terms of a loan or contract•

Market risk - the risk to ANZ’s earnings arising from changes in interest rates, currency exchange
rates and credit spreads, or from fluctuations in bond, commodity or equity prices. ANZ has
grouped market risk into two broad categories to facilitate the measurement, reporting andcontrol of market risk:oTraded market risk - the risk of loss from changes in the value of financial instruments due tomovements in price factors for physical and derivative trading positions. Trading positions
arise from transactions where ANZ acts as principal with clients or with the marketoNon-traded market risk (or balance sheet risk) - comprises Interest Rate Risk in the Banking
Book, liquidity, and the risk to the AUD denominated value of ANZ’s capital and earnings due
to foreign exchange rate movements•

Operational risk - the risk of loss resulting from inadequate or failed internal controls or fromexternal events, including legal risk and reputation risk•

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

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

Other key risks faced by ANZ, but which do not directly impact determination of regulatory capital,
include:•Strategic risk - external risks to the viability of a banking institution arising from unexpected
adverse changes in business environment with respect to the economy, political landscape,regulation, technology, social mores, and the actions of competitors•

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

Liquidity risk - the risk that ANZ has insufficient capacity to fund increases in assets, or is unable
to meet its payment obligations as they fall due, including repaying depositors or maturingwholesale debt•

Compliance risk - the risk that ANZ does not conduct its business in accordance with the laws,
regulations and adopted codes of the countries in which it operates

Risk Appetite Framework
ANZ's risk appetite is set by the Board and integrated within ANZ’s strategic objectives. The Risk
Appetite Framework underpins fundamental principles of strong capitalisation, robust balance sheet
and sound earnings, which protects ANZ’s franchise and supports the development of an enterprisewide risk culture.
The framework provides an unambiguous and enforceable risk statement, on the amount of risk ANZ
is willing to accept which management operates within at all times. It supports strategic and corebusiness activities and customer relationships ensuring that:•

only permitted activities are engaged in•

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

risk is expressed quantitatively via limits and tolerances (rather than subjective statements)•

management focus is brought to bear on key and emerging risk issues and mitigating actions•

risk is linked to the business by informing, guiding and empowering the business in executing
strategy.
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ANZ Basel II Pillar 3 disclosure

September 2009

Risk management governance
ANZ’s Board has ultimate responsibility for risk management, and has three key Committees focusedon risks that impact regulatory capital
Risk Committee

Assists the Board of Directors in the effective discharge of the Board’s
responsibilities for business, market, credit, equity and other investment,
financial, operational, liquidity, compliance and reputational risk
management

Audit Committee

In addition to its role reviewing financial reporting principles and policies,
controls and procedures, the Audit Committee also reviews prudential
supervision procedures required by regulatory bodies relating to financial
reporting and oversees the work of Internal Audit.

GovernanceCommittee

Ensures an appropriate Board and Committee structure is in place
Reviews the development of and approves corporate governance policies
and principles applicable to ANZ

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

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

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

balance sheet management activities including management of non-traded market risk.

In all cases this is in accordance with the risk appetite and limits defined by the Board, regulatory
requirements, and international best practice.
GALCO is chaired by ANZ’s Chief Financial Officer (CFO) and meets at least six times per year. GALCO
is supported by specialist committees that cover capital management and non-traded market risk, aswell as regional asset and liability management committees.
Capital Management Policy Committee (CMPC)CMPC is a sub-committee of GALCO, with responsibility for the oversight and control of ANZ’s capitaland portfolio measurement framework, addressing economic and regulatory capital requirements
incorporating Economic Loss Provisioning methodology. CMPC is also responsible for making capitalmanagement and portfolio measurement related recommendations to GALCO.
The Committee’s main objective is to ensure ANZ’s regulatory and economic capital management
activities are aligned with GALCO’s objectives, with focus on:•

Internal Capital Adequacy Assessment Process, aligning capital levels and targets to risk appetiteand policies and processes by which ANZ identifies, measures, monitors and manages risks•

Analysing economic capital in context of changes in material risks, emerging risks and/or
methodology changes•

Stress testing reviews and updates

CMPC is chaired by ANZ’s CFO (or in absence, ANZ’s Chief Risk Officer) and meets six times annually

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ANZ Basel II Pillar 3 disclosure

September 2009

Credit and Market Risk Committee (CMRC)
CMRC is the senior executive management forum responsible for the oversight and control of credit
and traded market risk and, as a delegation from GALCO, non-traded market risk. Its responsibilities
and duties include:•

Oversee the Risk Appetite Framework•

Approve credit and market policy•

Oversee credit and market risk model performance•

Ensure comprehensive credit and market risk control, including handling of emerging issues•

Approve business writing strategies•

Approve credit transactions and provisions within its discretions•

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

Set and oversee market risk limits.

CMRC is chaired by ANZ’s CRO and meets weekly, and is supported by a specialist committee thatcovers credit ratings systems
Credit Ratings System Oversight Committee (CRSOC)
CRSOC provides oversight and control of the internal ratings system for credit risk across ANZ. It
provides governance over ratings models, as well as associated pricing and collections models or tools
including:•Approving the content and design of the rating system, including models and methodology for
Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD)•

Prioritisation, monitoring and approval of model changes, enhancements and re-builds•

Performance monitoring of internal rating system models•

Monitor annual independent validation of use and performance of all models

CRSOC is chaired by Chief Risk Officer (CRO) Australia and meets six times per year.
CMPC and CMRC, and in turn is supported by working groups

It supports

Operational Risk Executive Committee (OREC)OREC is the primary senior executive management forum responsible for the oversight of theoperational risk and the compliance risk control environment. Its main responsibilities and duties
include:•Endorse ANZ’s Operational Risk Framework for approval by Board Risk Committee•

Approve ANZ’s Group Compliance Framework•

Approve Operational Risk policies and Compliance policies•

Monitor operational risk policies and compliance profiles, emerging risks, incidents, trends andremediation, including treatment plans for extreme risks.

OREC is chaired by ANZ’s CRO and meets six times per year
Reputation Risk Committee (RRC)
The purpose of the RRC is to assist ANZ businesses, Risk, Compliance and Legal in partnership toeffectively discharge their responsibility for managing reputation risk in relation to environmental,social, business and regulatory issues.
RRC is chaired by ANZ’s CRO and meets six times per year

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ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 4 – Group structure and capital adequacy
Table 1

Scope of application

Consolidation, capital reporting and measurement
For financial reporting purposes, ANZ consolidates the financial statements of the Company and all its
controlled entities where it is determined that there is a capacity to control. Control means the power
to govern directly or indirectly the financial and operating policies of an entity so as to obtain benefits
from its activities. In relation to special purpose entities, such control is deemed to exist where, in
substance:•

the majority of the residual risks and rewards from the activities of the entity accrue to ANZ; or,•

ANZ controls the entity’s decision making powers so as to obtain the majority of the risks andrewards from the entity’s activities.

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

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

Level 2 – being the consolidated group for financial reporting purposes adjusted to exclude
associates and certain subsidiaries excluded under APS 110 that undertake the following businessactivities:• Insurance businesses (including friendly societies and health funds)• Acting as manager, responsible entity, approved trustee, trustee or similar role in relation to
funds management• Non-financial (commercial) operations• Securitisation special purpose vehicles to which assets have been transferred in accordancewith APRA's requirements as set out in APS 120•

Level 3 - the conglomerate group at the widest level.

ANZ is a Level 1 and Level 2 reporter and measures capital adequacy monthly on a Level 1 and Level
2 basis. ANZ is not required to report on a Level 3 basis.
Investments in entities deconsolidated for prudential purposes are deducted from regulatory capitaland the assets of those entities are excluded from aggregate Risk Weighted Assets (RWA). For Level
2 reporting, all investments in subsidiaries are either eliminated on consolidation or deducted from thecapital base where deconsolidation for prudential purposes is required.
The capital treatment of each material controlled entity of ANZ is as follows:

Name

Deducted from
capital?

Business

Amerika Samoa BankANZ Bank (Vietnam) Limited
ANZ Capel Court Limited
ANZ Capital Hedging Pty Ltd
ANZ Commodity Trading Pty Ltd
ANZcover Insurance Pty Ltd
ANZ Trustees Limited
ANZ Funds Pty Ltd
ANZ Bank (Europe) Limited
ANZ Bank (Kiribati) Limited
ANZ Bank (Samoa) Limited
ANZ Holdings (New Zealand) Limited
ANZ National Bank Limited
ANZ Investment Services (New Zealand) Limited
ANZ National (Int’l) Limited
Awarata Finance Limited
Arawata Trust
Arawata Holdings Limited
Harcourt Corporation Limited
Arawata Trust Company
Endeavour Finance Limited
Tui Endeavour Limited
Private Nominees Limited
UDC Finance Limited
ANZ International (Hong Kong) Limited

No
No
No
No
No
Yes
Yes
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No

Banking
Banking
Investment Banking
Hedging
Finance
Captive-Insurance
Trustee/Nominee
Investment
Banking
Banking
Banking
Holding Company
Banking
Fund Manager
FinanceFinanceFinance
Holding Company
Investment
FinanceFinanceFinance
NomineeFinance
Holding Company

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ANZ Basel II Pillar 3 disclosure

September 2009

Name

Deducted from
capital?

Business

ANZ Asia Limited
ANZ Bank (Vanuatu) Limited
ANZ International Private Limited
ANZ Singapore Limited
ANZ Royal Bank (Cambodia) Limited
LFD Limited
Minerva Holdings Limited
Upspring Limited
Votraint No. 1103 Pty. Ltd
ANZ Lenders Mortgage Insurance Pty Limited
ANZ Nominees Limited
ANZ Orchard Investments Pty Ltd
Australia and New Zealand Banking Group (PNG) Limited
Chongqing Liangping ANZ Rural Bank Company Limited
Citizens Bancorp Inc
Citizens Security Bank (Guam) Inc
Esanda Finance Corporation Limited
ETRADE Australia Limited
Omeros II Trust
PT ANZ Panin BankANZ Vientiane Commercial Bank Limited

No
No
No
No
No
No
No
No
No
Yes
No
No
No
No
No
No
No
No
Yes
No
No

Banking
Banking
Holding Company
Merchant Banking
Banking
Holding Company
Holding Company
Finance
Investment
Mortgage Insurance
Nominee
Holding Company
Banking
Banking
Holding Company
Banking
General Finance
Online Stockbroking
Securitisation
Banking
Banking

Restrictions on Transfers of Capital within ANZANZ operates branches and locally incorporated subsidiaries in many countries. These operations arecapitalised at an appropriate level to cover the risks in the business (in the form of economic capital)
and to meet local prudential requirements. This level of capitalisation may be enhanced to meet local
taxation and operational requirements. Any repatriation of capital from subsidiaries or branches issubject to meeting the requirements of the local prudential regulator and/or the local central bank.
Apart from ANZ’s operations in New Zealand, local country capital requirements do not impose any
material call on ANZ’s capital base. ANZ undertakes banking activities in New Zealand through its
wholly owned subsidiary, ANZ National Bank Limited (ANZ National), which is subject to minimum
capital requirements as set by the Reserve Bank of New Zealand (RBNZ). The RBNZ has adopted theBasel II framework, effective from 1 January 2008, and ANZ National has been accredited to use theadvanced approaches for the calculation of credit and operational risk. The approach closely aligns
the capital required for ANZ National to the level of capital required under ANZ’s methodology.
However, ANZ National maintains a buffer above the minimum capital base required by the RBNZ.
This capital buffer has been calculated via the Internal Capital Adequacy Assessment Process (ICAAP)
undertaken for ANZ National, to ensure ANZ National is appropriately capitalised under stressed
economic scenarios.
ANZ established a licensed banking branch in New Zealand in January 2009. The branch structure
expands the range of funding options available to ANZ’s New Zealand business, but does not impact
the capital requirements of ANZ National.
Capital deficiencies in non-consolidated subsidiaries
The aggregate amount of any under-capitalisation of any non-consolidated subsidiary (or subsidiaries)that is required to be deducted from capital is nil (March 2009 and September 2008: Nil).

Table 2

Capital Structure

APRA’s prudential standards adopt a risk-based capital assessment framework, based on the Basel II
capital measurement standards, in assessing capital adequacy for an ADI. This risk based approachrequires eligible capital to be divided by total RWA, with the resultant ratio being used as a measureof an ADI’s capital adequacy.
APRA determines Prudential Capital Ratios (PCRs) for Tier 1 and Total Capital at both Level 1 andLevel 2 under its prudential capital standards APS 110 – Capital Adequacy and APS 111 – Capital
Adequacy: Measurement of Capital, with RWA calculations predominantly contained in APS 113 –Capital Adequacy: Internal Ratings-based Approach to Credit Risk, APS 115 – Capital Adequacy:
Advanced Measurement Approach to Operational Risk, APS 116 Capital Adequacy: Market Risk and
APS 117 – Capital Adequacy: Interest Rate Risk in the Banking Book.
Regulatory capital is divided into Tier 1, carrying the highest capital elements, and Tier 2, which has
lower capital elements, but still adds to the overall strength of the ADI.
Tier 1 capital is comprised of ‘Fundamental’ capital and ‘Residual’ capital, and ‘Tier 1 deductions’.
Fundamental capital comprises shareholders’ equity adjusted for items which APRA does not allow as
regulatory capital, or classifies as lower forms of regulatory capital.

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ANZ Basel II Pillar 3 disclosure

September 2009

Fundamental capital includes the following significant adjustments:•

Residual Tier 1 capital instrument included within shareholders’ equity•

Reserves exclude the hedging reserve and available-for-sale revaluation reserve, and reserves of
insurance, funds management and securitisation subsidiaries and associates excluded for Level 2
purposes•

Retained earnings excludes retained earnings of insurance, funds management and securitisation
subsidiaries and associates excluded for Level 2 purposes, but includes capitalised deferred fees
forming part of loan yields that meet the criteria set out in the prudential standard•

Current year (net of tax) earnings is after any interim and special dividends paid during thecurrent year and the expected final dividend payment (net of the expected dividend reinvestment
under the Dividend Reinvestment Plan (DRP) and Bonus Option Plan (BOP)) for ordinary shares
and Residual capital instruments, and excludes profits of insurance, funds management andsecuritisation subsidiaries and associates excluded for Level 2 purposes.

Residual capital covers ‘Non-innovative’ and ‘Innovative’ hybrid Tier 1 instruments with limits
restricting the volume that can be counted as Tier 1 capital.
ANZ has on issue two outstanding Non-innovative hybrid Tier 1 capital instruments:•

ANZ Convertible Preference Shares. On 30 September 2008 ANZ issued AUD1,081 million of
convertible preference shares that mandatorily convert into ordinary shares on 16 June 2014,
subject to certain conditions being satisfied. They may convert earlier under certain
circumstances. The distributions are preferred, non-cumulative, based on the quarterly Australian
Bank Bill Rate subject to Directors resolving to pay in their absolute discretion and other payment
tests being satisfied. In a winding-up of ANZ, the instrument will rank equal with other preference
shares, but behind all depositors and creditors and ahead of ordinary shareholders.

•

UK Stapled Securities. On 15 June 2007 ANZ raised GBP450 million of non-cumulative
mandatory convertible stapled securities. On 15 June 2012, or an earlier date under certain
circumstances, the UK Stapled Securities will mandatorily convert into ordinary shares. The
distributions are non-cumulative at a fixed rate of 6.54% payable semi-annually. In a winding-up
of ANZ, the ANZ preference shares forming part of the ANZ Stapled Securities will rank equal withother preference shares, but behind all depositors and creditors and ahead of ordinary
shareholders.

ANZ has on issue two Innovative hybrid Tier 1 capital instruments:•

US Trust Securities. On 27 November 2003, ANZ issued USD1,100 million of loan capital in two
tranches of USD350m with an initial call date of 15 January 2010 at a coupon rate of 4.484%,
and USD750m with an initial call date of 15 December 2013 and a coupon rate of 5.36%. On
these dates ANZ has the discretion to redeem the respective tranche of the US Trust Securities
for cash, subject to APRA approval. If ANZ does not exercise this discretion, the investor isentitled to require ANZ to exchange the US Trust Securities into ordinary shares. The distributions
are non-cumulative payable half yearly in arrears. In a winding-up of ANZ, the ANZ preference
shares forming part of the US Trust Securities will rank equal with other preference shares, butbehind all depositors and creditors and ahead of ordinary shareholders. On the 6 November 2009,
ANZ issued a notice of redemption for cash on the 15 January 2010 as to the USD350m trancheof the US Trust Securities.

•

Euro Trust Securities. On 24 September 2004, ANZ issued EUR500 million of preference sharesraising AUD871m, at the spot rate on the date of issue. Distributions are non-cumulative payable
quarterly in arrears based upon the three month EURIBOR rate plus a margin of 66 basis points
up until 15 December 2014, at which date ANZ has a call right for cash (subject to APRA
approval). After this date, the distribution rate is a rate based on the three month EURIBOR rateplus a margin of 166 basis points. In a winding-up of ANZ, the ANZ preference shares forming
part of the Euro Trust securities will rank equal with other preference shares, but behind all
depositors and creditors and ahead of ordinary shareholders.

For more information on these instruments, refer to the Loan Capital and Share Capital notes (Notes
27 and 28 respectively) in the 2009 ANZ Annual Report.
Tier 1 deductions include amounts deducted solely from Tier 1, mainly intangible assets i.e. goodwill
and capitalised software, capitalised brokerage and borrowing expenses, net deferred tax assets, anddeductions taken 50% from Tier 1 and 50% from Tier 2, which mainly includes the tangible
component of investment in subsidiaries and associates regulated by APRA, or their overseas
equivalent, and the amount of Regulatory Expected Losses (EL) in excess of Eligible Provisions for
Loan Losses (net of tax).
Tier 2 capital is comprised of Upper and Lower Tier 2 capital, less capital deductions taken 50% fromTier 1 and 50% from Tier 2 capital. Upper Tier 2 capital mainly comprises perpetual subordinated debt
instruments, whilst Lower Tier 2 comprises dated subordinated debt instruments which meet therequirements of the prudential standard.

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ANZ Basel II Pillar 3 disclosure

September 2009

ANZ has two instruments that qualify as Upper Tier 2 capital:•

USD300m note issued by ANZ on 30 October 1986 which pays a rate of LIBOR plus 15 basis
points•NZD835m note issued by ANZ National Bank Limited on 17 April 2008 which pays a fixed rate of
9.66% for five years payable semi-annually in arrears. At the first call date of 18 April 2013 theinterest rate resets to the five year swap rate plus 200 basis points.

To qualify as Lower Tier 2 capital, the instrument must have a minimum term of five years and theamount eligible for inclusion in capital is amortised on a straight line basis at a rate of 20% per annum
over the last four years to maturity. For more details on these Lower Tier 2 capital instruments, referto the Subordinated Notes section of the Loan Capital note (Note 27) in the 2009 ANZ Annual Report.
Total Capital is the sum of Tier 1 capital and Tier 2 capital.

The following table summarises ANZ’s Level 2 capital position as at 30 September 2009:
Table 2: Capital Structure6
Regulatory Capital
September 2009$M

March 2009$M

September 2008
$M

Fundamental Tier 1 capital
Paid-up ordinary share capital

19,064Foreign currency translation reserve(1,725)

Share and share option reserve

156

Reserves

14,103(373)
105(1,569)12,566
(816)
107

(268)

(709)

Retained earnings including current year earnings

14,12913,62013,772less : Accumulated retained profits and reserves of insurance, funds management
and securitisation entities and associates
Dividend not provided for(1,010)(1,336)(841)(1,403)(993)(1,511)

391

403

351

421

298

add : Deferred fee revenue including fees deferred as part of loan yields
Accrual for Dividend Reinvestment Plans
Prudential retained earnings
Minority interests
Fundamental Tier 1 capital
Innovative Tier 1 capital

11,9926572

62

30,08825,89924,143

2,122

Non-innovative Tier 1 capital

453

12,528

12,224

3,076

2,847

1,901

2,019

2,095

34,11130,99429,085(2,999)(3,033)(3,064)

Other deductions from Tier 1 capital only

(1,832)(2,414)(1,773)(1,813)50/50 deductions from Tier 1 capital(2,661)(2,604)(1,206)

Total Tier 1 capital deductions(7,492)(8,051)(7,856)

NET TIER 1 CAPITAL

26,61922,943

21,229Upper Tier 2 capital

1,392

1,464

1,377

Lower Tier 2 capital

9,108

9,217

9,195

Gross Tier 2 capital

10,50010,681

10,572Gross Tier 1 capital

Deductions from Tier 1 capital
Goodwill
Intangible component of investments in non-consolidated subsidiaries and other nonLevel 2 entities

Tier 2 capital

Deductions from Tier 2 capital
Upper and lower Tier 2 capital deductions

(28)

(28)

(28)

50/50 deductions from Tier 2 capital(2,661)(2,604)(1,206)

Total Tier 2 capital deductions(2,689)(2,632)(1,234)

NET TIER 2 CAPITAL

7,811

8,049

9,338

TOTAL CAPITAL BASE

34,43030,99230,567

6
Refer following page for breakdown of Other deductions from Tier 1 capital only, 50/50 deductions from Tier 1
capital and Upper Tier 2 capital.

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ANZ Basel II Pillar 3 disclosure

September 2009

Table 2: Capital Structure (continued)7
September 2009

Other Deductions from Tier 1 capital

March 2009

September 2008

$m

$m

$m

Capitalised software and other intangible assets

(897)

(783)

(677)

Capitalised expenses including loan and lease origination fees, capitalised
securitisation establishment costs and costs associated with debt raisings

(602)

(643)

(642)

Applicable deferred tax assets (excluding the component relating to the generalreserve for impairment of financial assets)
Earnings not recognised for prudential purposes

(325)
-

(524)
-

(92)
(117)

Mark-to-market impact of own credit spread

12

Negative Available-for-sale reserve
Total

(358)

(149)

(20)

(106)

(136)

(1,832)(2,414)(1,813)

Deductions taken 50% from Tier 1 and 50% from Tier 2

Gross

50%

Gross

50%

Gross

50%

Investment in ANZ insurance subsidiaries

(321)

(161)

(281)

(141)

(131)

(65)

Investment in funds management entities

(67)

(33)

(66)

(33)

(68)

(34)

(1,474)(737)(1,456)

(728)

(524)

(262)

Investment in joint ventures with ING in Australia and New ZealandInvestment in other Authorised Deposit Taking Institutions and overseas equivalents
Investment in other commercial operations(1,951)
(72)

(976)
(36)

(1,851)
(72)

(925)
(36)

(1,219)
(72)

(610)
(36)

Expected loss in excess of eligible provsions(1,012)(506)(1,017)

(508)

(334)

(167)

Other

(424)

(212)

(465)

(233)

(64)

(32)

Total

(5,321)(2,661)(5,208)(2,604)(2,412)(1,206)

Details of Upper Tier 2 Capital
Eligible component of post acquisition earnings and reserves in associates and joint
ventures
Perpetual subordinated notes

269

271

248

1,026

1,129

1,075

General reserve for impairment of financial assets net of attributable deferred tax
asset
Total

97

64

54

1,392

1,464

1,377

Table 3

Capital adequacy

Capital Management Approach
ANZ pursues an active approach to capital management, which is designed to protect the interests ofdepositors, creditors and shareholders. This involves the ongoing review and Board approval of thelevel and composition of ANZ’s capital base, assessed against the following key policy objectives:•

Regulatory compliance, incorporating compliance with APRA’s PCRs at both Level 1 and Level 28
for Tier 1 and Total Capital, and the US Federal Reserve’s minimum Tier 1 and Total Capital
adequacy requirements via ANZ’s Foreign Holding Company licence in the United States ofAmerica•

Capital levels are aligned with the risks in the business and strategic and business development
plans through ensuring that available capital (i.e. shareholders’ equity including preference shares
and Residual Tier 1 capital) exceeds the level of Economic Capital required to support the Ratings
Agency default frequency confidence level for a AA long term credit rating category bank.
Economic Capital is an internal estimate of capital levels required to support unexpected losses
above a desired target solvency level•

Capital levels are commensurate with ANZ maintaining its preferred AA long term credit rating
category for senior long term unsecured debt given its risk appetite outlined in its strategic plan•

An appropriate balance
management principles.

betweenmaximising

shareholder

returns

andprudent

capitalANZ achieves these objectives through the ICAAP involving detailed strategic and capital planningover a medium term time horizon.

7

Under Basel II, “General reserve for impairment of financial assets net of attributable deferred tax asset” consistsof the surplus of the general reserve for impairment of financial assets net of tax and/or the provisions attributable
to the standardised portfolio.

8
In addition to the prudential capital oversight by APRA, ANZ’s branch operations and major banking subsidiary
operations are overseen by local regulators such as the Reserve Bank of New Zealand, the US Federal Reserve andthe UK Financial Services Authority who may impose minimum capitalisation rates on those operations.

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ANZ Basel II Pillar 3 disclosure

September 2009

Annually, ANZ conducts a detailed strategic planning process over a three-year time horizon, theoutcomes of which are embodied in the Strategic Plan. This process involves forecasting key economic
variables which Divisions use to determine key financial data for their existing business. New strategic
initiatives to be undertaken over the planning period and their financial impact are then determined.
These processes are supported by the following:•

A review of capital ratios, targets, and levels of different classes of capital against ANZ’s risk
profile and risk appetite outlined in the Strategic Plan. ANZ’s capital targets reflect the key policy
objectives above, and the desire to ensure that under specific stressed economic scenarios that
respective capital levels are sufficient to remain above both Economic Capital and PCR
requirements•

Stress tests are performed under different economic conditions to ensure a comprehensive review
of ANZ’s capital position both before and after mitigating actions. The stress tests determine thelevel of additional capital (i.e. the ‘capital buffer’ above Pillar 1 minimum capital) needed toabsorb losses that may be experienced during an economic downturn•

Stress testing is integral to strengthening the predictive approach to risk management and is a
key component in managing risks, business writing strategies and business strategies. It creates
greater understanding of the impacts on financial performance through modelling relationships
and sensitivities between geographic, industry and business unit exposures under a range ofmacro economic scenarios. ANZ has a dedicated stress testing team within Risk Management thatmodels and reports to management and the ANZ Board’s Risk Committee on a range of scenariosand stress tests.

•

Results are subsequently used to:•

Recalibrate ANZ’s management targets for minimum and operating ranges for its respectiveclasses of capital such that ANZ will remain compliant with prudential minimums i.e. APRA’s
PCRs; and•

Identify the level of organic capital generation and hence determine current and future
capital requirements for the Company (Level 1) and the Group (Level 2).

From these processes, a Capital Plan is developed and approved by the Board which identifies organic
capital generations and usages, planned capital issuances and expected capital maturity profiles, andoptions around capital strategies including products, timing and markets under differing market andeconomic conditions.
The Capital Plan is maintained and updated through a monthly review of forecast financial
performance, economic conditions and development of business initiatives and strategies. The Board,
its committees, and senior management are provided with monthly updates of ANZ’s capital position.
Any actions required to ensure ongoing prudent capital management are submitted to the Board forapproval.

Capital Targets
Target ratios are set to be consistent with ANZ’s risk appetite and Economic Capital methodology, plus
an allowance for the impact of relevant stress testing on the capital position. The approach wasdeveloped to ensure capital requirements are manageable and consistent with long term credit ratingsand minimum prudential capital requirements, even during periods of stress.
Throughout the financial year, ANZ maintained compliance with the PCRs at Level 1 and Level 2 set by
APRA for Tier 1 and Total Capital, and by the US Federal Reserve for Level 2, as well as applicable
capitalisation rates set by local regulators in countries where ANZ operates branches and subsidiaries.
ANZ has adopted the Tier 1 capital ratio as its principal capital management target. Since September
2008 ANZ has set a minimum operating Tier 1 target in excess of 7.5%. Given recent difficult
economic and financial market conditions, ANZ has maintained its Tier 1 ratio well above thisminimum target.

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ANZ Basel II Pillar 3 disclosure

September 2009

Table 3: Capital Ratios and Risk Weighted Assets 9 10 11
Risk Weighted Assets
September
2009
$M

March
2009
$M

September
2008$M

Corporate

116,153

136,559

127,365

Sovereign

1,408

1,402

2,079

Bank

5,592

10,374

12,624

Residential Mortgage

36,72535,93233,727

Qualifying revolving retail

6,852

8,900

8,703

Other retail

17,10814,905

14,218183,838

208,072

198,716

24,27225,36230,250

Corporate

13,531

15,594

12,980

Sovereign

-

-

-

13

21

21

Subject to Advanced IRB approachC redit risk weighted assets subject to Advanced IRB approachC redit Risk Specialised Lending exposu res subject to slotting criteria
Subject to Standardised approachBank
Residential Mortgage

411

467

344

13,95516,082

13,345Credit risk weighted assets relating to securitisation exposures

2,658

3,364

4,271

Credit risk weighted assets relating to equity exposures

1,914

1,707

1,146

Other assets

3,174

3,183

3,022

229,811257,770

250,750

C redit risk weighted assets subject to standardised approach

Total credit risk weighted assets
Market risk weighted assets

3,553

5,632

2,609

16,24017,48018,017

2,465

-

4,058

252,069

280,882

275,434

Level 2 Total capital ratio

13.7%

11.0%

11.1%

Level 2 Tier 1 capital ratio

10.6%

8.2%

7.7%

Level 1: Australia and New Zealand Banking Group Limited extended licensed entity Total capital ratio

14.2%

11.5%

11.6%

Operational risk weighted assets
Interest rate risk in the banking book weighted assets
TOTAL RISK WEIGHTED ASSETS
C apital ratios (%)

Level 1: Australia and New Zealand Banking Group Limited extended licensed entity Tier 1 capital ratio

11.6%

9.0%

8.4%

Other signif icant ADI or overseas bank subsidiary: ANZ National Bank Limited Group Total capital ratio

12.7%

12.3%

11.6%

Other signif icant ADI or overseas bank subsidiary: ANZ National Bank Limited Group Tier 1 capital ratio

9.0%

8.7%

8.1%

Total Risk Weighted Assets increased by $5.4 billion in the March 2009 half and reduced by $28.8
billion in the second half, for a net full-year reduction of $23.4 billion.
Exposure volume grew slightly in the first half to March 2009 but reduced significantly in the second
half due to a combination of exchange rate impact, reduced lending asset volumes and large
reductions in exposure to off-balance sheet instruments.
Credit quality deterioration was a key driver of credit Risk Weighted Asset increase in the first half,
however had a limited impact in the second half and was offset by other portfolio changes including aslightly shortened maturity profile and a relative improvement in the portfolio mix of non-loan assets.
Ongoing portfolio data review reduced risk weighted assets in both halves.
Corporate Risk Weighted Assets reduced over the full year as reduced volumes of exposure, due toportfolio amortisation and reduced off-balance sheet volumes mainly in the second half, offset
deterioration in credit quality that occurred mainly in the first half.
Bank Risk Weighted Assets dropped across both halves (mainly in the second) on reduced volumes of
exposure, particularly in off-balance sheet instruments, and continued relative improvement in thequality of the portfolio with an increased proportion of higher-rated counterparties and shortening
maturity profile.
Residential Mortgage Risk Weighted Assets increased over the year mostly through increased
exposure volume, mainly in the first half in Australia, and deterioration in credit quality in New
Zealand.

9
Specialised Lending subject to slotting approach exposures are those where the main servicing and repayment isfrom the asset being financed, and includes specified commercial property development/investment lending, project
finance and object finance.
10

Standardised exposures to all private sector counterparties other than banks and residential mortgages have beenclassified in the Corporate category as they do not meet the requirement for other AIRB asset classes. The maintypes of standardised exposures are business lending and other personal lending.

11
ANZ National Bank Limited’s capital ratios have been calculated in accordance with Reserve Bank of New Zealandprudential standards.

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ANZ Basel II Pillar 3 disclosure

September 2009

Qualifying Revolving Retail and Other Retail Risk Weighted Assets and volumes were stable in the firsthalf and mainly impacted by methodology changes in the second half. Regulatory changes andregular modelling reviews resulted in a reclassification of exposures from Qualifying Revolving Retailto Other Retail and from Other Retail to Corporate. These reclassifications resulted in a moderate netincrease in Risk Weighted Assets overall.
Specialised Lending Risk Weighted Assets decreased in both halves, mainly in the first. The reductionis due partly to reclassifications of exposures to the Corporate asset class and partly to the downgrade
to default of a small number of large exposures.
Securitisation exposure Risk Weighted Assets reduced over both halves, mainly due to volume
reduction from portfolio amortisation and some reclassification of exposures to the Corporate asset
class - partially offset by declines in credit quality.
Market Risk Risk Weighted Assets increased from September 2008 to September 2009 due toincreased VaR from Rates businesses, partially offset by a reduction in Specific Risk Risk Weighted
Assets driven by reduced short and long positions in qualifying bonds with greater than two years tomaturity. Interest Rate Risk in the Banking Book risk weighted assets reduced between September
2008 and September 2009 due to the increase in embedded gains on Investment Term of Capitaloffsetting the increased volatility in repricing and yield curve risk as measured by Value at Risk (VaR).
Operational Risk Risk Weighted Assets reduced by $1.8 billion over the period due to the application ofan updated capital methodology.
APRA has established a regulatory capital floor for AIRB and AMA (Advanced Measurement Approach)banks12 during a transition period starting from the commencement of the AIRB and AMA on 1 January
2008. The regulatory capital floor calculation involves the calculation of RWA and gross capital underboth Basel I and Basel II rules. Reductions in capital may be available, provided that a bank maintains
its prudential capital ratio, subject to a floor of 90% of the transitional regulatory floor calculation.
Since implementation of Basel II, ANZ has operated in excess of the capital floor. APRA has notannounced an end date for the transition period.

Types of exposures in each Basel asset class
The following table details the types of exposures in each Basel asset class.
Basel Asset Class

Typical Types of Exposures

Corporate

Individually rated and managed exposures not covered under other categories– mainly lending and off-balance sheet facilities provided to larger companies,
partnerships and other bodies
Exposures to sovereigns and central banks. Includes direct exposures e.g.
bond holdings and indirect e.g. exposures guaranteed by sovereign Export
Credit Agencies (ECAs)
Exposures to non-Group bank counterparties. Includes bond holdings anddeposits with other banks, trade finance exposures and guarantees provided
by other banks
Retail exposures secured by residential properties – mainly home loans,investment loans & equity manager facilities
Retail managed consumer credit card exposures with customer limits less than
$100K
Retail managed exposures other than mortgage and qualifying revolving –includes personal loans, consumer and small business lending, retail small
business lending
Exposures where the main servicing and repayment is from the asset being
financed. Includes specified commercial property development/investment
lending, project finance and object finance
Lending exposures where IRB models cannot be applied – mainly local
business lending and personal lending in Asia and the Pacific
Exposures to securitisation vehicles – mainly liquidity and funding facilities
provided to third party securitisations and securitisation bond exposures
Holding of third party equities where not consolidated or deducted from
capitalMainly fixed assets and Margin Lending

SovereignBank

Residential
Mortgages
Qualifying Revolving
RetailOther RetailSpecialised Lending
subject to slotting
approachStandardised
Securitisation
EquityOther Assets

12

Refer to Chapter 5 for an explanation of AIRB and Chapter 8 for an explanation of AMA.

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ANZ Basel II Pillar 3 disclosure

September 2009

International Capital Ratio Comparisons
One of the main purposes of the Pillar 3 disclosures is to facilitate comparisons of banks, both within
and across jurisdictions.
International investors should be aware that there are a number of features of APRA’s implementationof Basel II that have the effect of making key capital adequacy ratios appear lower than would be thecase if they were calculated under the rules in other jurisdictions. The following table shows ANZ’sestimation of its Core Tier 1, Tier 1 and Total Capital adequacy ratios under UK rules (set by the
Financial Services Authority (FSA) and under Canadian rules (set by the Office of the Superintendentof Financial Institutions (OSFI)):

ANZ under APRA rules
Capital ratioCore Tier-1**
Tier-1
Total Capital

Targetoperatingrange
6% 6.5%
7.5% 8.0%
10.5%+

ANZ under FSA
rules

ANZ under
OSFI rules

Sep08

Mar09

Sep09

Sep-09proforma*

Sep-09 pro
forma*

Sep-09 pro
forma*

5.9%

6.4%

9.0%

7.9%

10.3%

10.1%

7.7%

8.2%

10.6%

9.5%

11.9%

11.8%

11.1%

11.0%

13.7%

12.4%

14.6%

14.8%

* Includes acquisition of RBS assets and INGJV in 2010 financial year as described in Chapter 9** ‘Core Tier 1’ = Tier 1 excluding Residual Tier 1 instruments

For Tier 1 capital, the major reasons for the differences are that FSA and OSFI:•

Do not require a deduction for accrued dividends (although APRA does give credit for expectedshares to be issued under a dividend reinvestment plan)•

Do not require a Tier 1 deduction for certain capitalised expenses and net deferred tax assets•

Allow the comparison of Expected Loss to Eligible Provisions for Loan Loss to be made on a grossbasis and any excess is then tax effected, whereas APRA require Expected Losses to be compared
to Eligible Provisions for Loan Losses net of tax, and any excess to be taken as a Tier-1 deduction•

Have a more favourable treatment for investments in associates and insurance and funds
management subsidiaries which would include INGJV entities post obtaining full ownership aspresented in the ANZ pro forma and associated FSA and OSFI comparisons.

For RWA, the major reasons for the differences are:•

APRA has set a 20% floor on the downturn LGD for mortgages (as compared with the 10%minimum set by the FSA and OSFI)•FSA and OSFI do not require Interest Rate Risk in the Banking Book to be a Pillar I requirement
so it is excluded from prudential capital adequacy ratios•

Differences in the treatment of specialised property lending, equity and margin lending products.

The Australian Bankers’ Association (ABA) has released a detailed fact sheet13 documenting thedifferences between the Australian and UK rules and the implications for prudential capital ratios.

13

www.bankers.asn.au

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ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 5 – Credit risk
Summary of Credit risk disclosures14 15
September 2009

Risk Weighted Assets$M

Regulatory Credit
Exposure$M

Individual Provisions
Chargefor the year ended$M

Write-offs
for the year ended$M

Corporate

140,425

188,067

1,723

1,118

Sovereign

1,408

28,618

-

-

Bank

5,592

29,44445

27

Residential Mortgage

36,725201,581162

46

Qualifying Revolving Retail

6,852

19,820

229

264
395

Other Retail

17,10828,651

477

Standardised

13,955

14,696114

39

222,065

510,877

2,750

1,889

Total

March 2009
Individual Provisions
ChargeWrite-offs
Regulatory Credit for the 6 month period for the 6 month period
Exposure
ended
ended
$M
$M
$M

Risk Weighted Assets$M
Corporate

161,921217,873

1,030

Sovereign

1,402

21,553

-

451
-

Bank

10,374

48,847

4

30

Residential Mortgage

35,932

195,432

48

14

Qualifying Revolving Retail

8,900

23,604

108

124
148

Other Retail

14,90527,073

218

Standardised

16,082

16,94841

16249,516

551,330

1,449

783

Total

September 2008

Risk Weighted Assets$M

Regulatory Credit
Exposure$M

Individual Provisions
Chargefor the year ended$M

Write-offs
for the year ended$M

Corporate

157,615

225,169

480

160

Sovereign

2,079

9,350

-

-

Bank

12,62450,79945

6

Residential Mortgage

33,727

186,287

40

45

Qualifying Revolving Retail

8,703

23,458

219

270
189

Other Retail

14,21826,708214Standardised

13,345

13,98934

29242,311535,760

1,032

699

Total

Table 4Credit risk – General disclosures

Definition of credit risk
Credit risk is defined as the risk of financial loss resulting from the failure of ANZ’s customers andcounterparties to honour or perform fully the terms of a loan or contract.
Regulatory approval to use the Advanced Internal Ratings-Based approach
ANZ has been given approval by APRA to use the Advanced Internal Ratings-Based approach to credit
risk, under APS 113 Capital Adequacy: Advanced Internal Ratings-Based Approach to Credit Risk.
There are however several small portfolios (mainly retail and local corporates in Asia Pacific) where
ANZ applies the Standardised Approach to credit risk, under APS 112 Capital Adequacy: Standardised
Approach to Credit Risk.

14

Regulatory credit exposure in this table includes Advanced IRB, Specialised Lending and Standardised exposures,
however does not include Securitisation, Equities or Other Assets exposures. Specialised Lending is included in the
Corporate asset class.

15

The Individual Provision charge relates to loans and advances, and does not include impairment on Available-ForSale assets of $20 million in September 2009 (March 2009: $20 million; September 2008: $98 million).

20

ANZ Basel II Pillar 3 disclosure

September 2009

Credit risk management framework and policies
ANZ has a comprehensive framework to manage credit risk and support sound growth for appropriate
returns. The framework is top down, being defined by credit principles and policies. Credit policies
cover all aspects of the credit life cycle such as transaction structuring, risk grading, initial approval,
ongoing management and problem debt management, as well as specialist policy topics. The
effectiveness of the credit risk management framework is assessed through various compliance andmonitoring processes. These, together with portfolio selection, define and guide the credit process,organisation and staff.
Organisation
As described in Chapter 3, the Credit Risk and Market Risk Committee (CMRC) is ANZ’s most senior
executive level credit risk committee. It oversees the Risk Appetite Framework, approves businesswriting strategies and large transactions within its discretion, reviews portfolio metrics, ensurescurrent and emerging risks are being managed effectively and oversees certain risk controls such as
portfolio caps, risk triggers, high level credit policies and single customer concentration tolerance.
An independent risk management function is staffed by risk specialists. The primary responsibility forprudent and profitable management of credit risk assets and customer relationships rests with thebusiness units. Risk provides independent credit assessment on lending decisions, and also performs
key roles in portfolio management such as development and validation of credit risk measurement
systems, loan asset quality reporting, and development of credit standards and policies.
The authority to make credit decisions is delegated by the Board to the CEO who in turn delegatesauthority to the CRO and CMRC. The CRO in turn delegates some of his credit discretion to individuals
as part of a ‘cascade’ of authority from senior to the most junior credit officers. Within ANZ, credit
approval for almost all non-retail lending is made on a ‘dual approval’ basis, jointly by the businesswriter in the Business Unit and the respective independent credit risk officer. For retail lending, highly
automated risk assessment processes mean that sole credit discretions are the norm, with assessors
reviewing the output of decision tools. Individuals must complete appropriate upfront and ongoingaccreditation training in order to be granted and retain a credit discretion, and such discretions arereviewed on an annual basis.
Portfolio direction and performance
The credit risk management framework contains several important portfolio direction and performancetools which enable Risk to play a fundamental role in monitoring the direction and performance of theportfolio. These include:•

Business writing strategies that are prepared by the businesses and set out appetite, planned
portfolio growth, capital usage and risk/return profile, and also identify areas that require
attention to mitigate and improve risk management•

Regular portfolio reviews•

Exposure concentration limits, covering single customers, industries and cross border risk, toensure a diversified portfolio

ANZ uses portfolio monitoring and analysis tools, technologies and techniques to assist with portfolio
risk assessment and management. These assist in:•Monitoring, analysing and reporting ANZ’s credit risk profile and progress in meeting portfolio
objectives•

Calculating and reporting ANZ’s Collective Provision, Economic Capital, Expected Loss, regulatory
RWA and regulatory Expected Loss•

Assessing impact of emerging issues, and conducting ad hoc investigations and analysis•

Validating rating/scoring tools and credit estimates•

Ongoing review and refinement of ANZ's credit risk measurement and policy framework

21

ANZ Basel II Pillar 3 disclosure

September 2009

ReportingCredit risk Management Information Systems, reporting and analysis are managed centrally and at
the divisional and business unit level.
Periodic reporting provides confirmation of the effectiveness of processes, highlights emerging issues
requiring attention and allows monitoring of portfolio trends by all levels of management and theBoard.
Examples of reports include exposure at default, portfolio mix, risk grade profiles and migrations, risk
weighted assets, large exposure reporting, credit watch and control lists, impaired assets andprovisions. Within the Retail segments, monthly reporting packs are prepared that focus on suchaspects as scoring and delinquency/slippage monitoring.
Past due loans
Exposures where a contractual payment has not been met or the customer is outside of contractual
arrangements are deemed past due. Typically, past due facilities include those operating in excess ofapproved arrangements or where scheduled repayments are outstanding.
Basel II definition of default
ANZ uses the standard APRA definition of default, so that a default is considered to have occurred withregard to a particular obligor when either or both of the two following events have taken place:•

ANZ considers that the obligor is unlikely to pay16 its credit obligations to ANZ in full, without
recourse by ANZ to actions such as realising available security•

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

Restructured items
Restructured items are facilities in which the original terms have been modified to provide forconcessions of interest, or principal, or other payments due, or for an extension in maturity for a noncommercial period for reasons related to the financial difficulties of a customer, and are notconsidered impaired. Includes both on and off balance sheet exposures.
Impaired assets
Irrespective of whether a facility is 90 days past due, individually managed facilities are classified as
impaired when there is doubt as to whether the contractual amounts due, including interest and otherpayments, will be met in a timely manner. Impaired assets include a credit valuation adjustment(CVA), which is a market assessment of the credit risk of the relevant counterparties.
Individual Provisions
Individual provisions are assessed for all individually managed impaired assets on a case-by-casebasis taking into consideration factors such as the realisable value of security (or other credit
mitigants), the likely return available upon liquidation or bankruptcy, legal uncertainties, estimatedcosts involved in recovery, the market price of the exposure in secondary markets and the amountand timing of expected receipts and recoveries.
Write offs
Loans are written off against the related provision for impairment when they are assessed as partiallyor fully uncollectable, and after proceeds from the realisation of any collateral have been received.
Where individual provisions recognised in previous periods have subsequently decreased or are nolonger required, such impairment losses are reversed in the current period income statement.
Collective Provisions
As well as holding individual provisions for credit loss, ANZ also holds a collective provision to covercredit losses which have been incurred but have not yet been specifically identified.
Calculation of the collective provision involves placing exposures in pools of similar assets with similarrisk characteristics. The required collective provision is estimated on the basis of historical loss
experience for assets with credit risk characteristics similar to those in the collective pool and includes

16

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

22

ANZ Basel II Pillar 3 disclosure

September 2009

an allowance for inherent risk associated with the design and use of models. The initial calculationfrom historical loss experience may be adjusted based on current observable data such as changed
economic conditions, and to take account of the impact of inherent risk of large concentrated losses
within the portfolio.
The methodology underpinning calculation of collective provision from historical experience ispredominantly based around the product of an exposure’s Probability of Default (PD), Loss Given
Default (LGD) and Exposure at Default (EAD) 17. ANZ uses slightly different PD, LGD and EAD factors
in the calculation of regulatory capital and expected loss (EL), due to the different requirements of
APRA and accounting standards. The key differences are:•

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

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

Essentially these differences reflect the effects of the credit cycle on credit losses. Point in time refers
to losses at any given point in the credit cycle, cycle adjusted refers to adjusting estimates to reflect afull credit cycle and downturn refers to losses at the worst of the cycle and is the most conservative
estimate to use. Regardless of the adjustments, the starting point for all estimates is the output of therating/scoring models and tools to satisfy the in use test18.
Specific Provision and General Reserve for Credit Losses
There is a difference in the split between ANZ’s Individual Provision and Collective Provision foraccounting purposes and the Specific Provision and General Reserve for Credit Losses (GRCL) for
regulatory purposes, due to definitional differences. This difference does not impact total provisions,and essentially relates to the classification of $186 million collectively assessed provisions on defaulted
accounts, as illustrated below:
Specific
Provision
Balance
$m
186
1,526

Collective Provision
Individual Provision
Total Provision for credit impairment

GeneralReserve for
Credit Losses
$m
2,814
-

Total
$m
3,000
1,526
4,526

The disclosures in this document are based on Individual Provision and Collective Provision, for ease ofcomparison with other published results.

17

PD, LGD and EAD are explained in the following section.

18

One of the key criteria for regulatory acceptance of a rating model is that the outputs must be used in a wide
range of ongoing management activities, to demonstrate that the model is used in day to day management of
exposures and not just for regulatory capital calculation.

23

ANZ Basel II Pillar 3 disclosure

September 2009

Table 4(b) part (i): Period end and average regulatory credit exposure19 20
Regulatory Credit Exposure
September 2009$M

March 2009$M

September 2008
$M

Average for year
$M

Corporate

201,598

233,467

238,154219,876

Sovereign

28,61821,5539,350

18,984Bank

29,45948,87650,827

40,143

Residential Mortgage

202,731

196,757

187,263

194,997

Qualifying Revolving Retail

19,82023,60423,45821,639Other Retail

28,651

27,073

26,70827,680510,877

551,330

535,760

523,319

Credit Exposure by Portfolio Type

Total Exposure

Table 4(b) part (ii): Regulatory credit exposure by facility type
Regulatory Credit Exposure
Credit Exposure by Facility TypeAcceptance

September 2009$M
17,850March 2009
$M
19,161

September 2008
$M
18,599Average for year$M18,225

Cash and liquid assets

18,402

19,03918,051

18,227

Contingents liabilities, commitments, and other off-balance sheet

103,557

119,835

125,630

114,594

Creditors & Other Liabilities

378

130

871

625

Derivatives

13,912

29,653

19,186

16,549Due from other financial Institutions

3,207

3,776

9,546

6,377

Investment Securities

14,75814,127

14,927

14,843Loans & Advances

326,272333,093

321,539

323,906

Other assets

432

1,581

315

374

Total deposits & other borrowings

240

199

184

212

Trading Securities

11,86910,736

6,912

9,391

Total Exposures

510,877

551,330

535,760

523,319

Table 4(c): Geographic distribution of regulatory credit exposure21
September 2009
Geographic Distribution
Australia$M
124,405

New Zealand$M
47,940Other$M
29,253

Total$M
201,598

Sovereign

8,445

6,086

14,08728,618Bank

13,3793,102

12,97829,459Residential Mortgage

157,118

44,521

1,092

202,731

Qualifying Revolving Retail

19,820--19,820

Other Retail

21,1887,421

4228,651

344,355

109,070

57,452510,877

Other$M
36,701

Total$M
233,467
21,553

Portfolio Type
Corporate

Total exposures

March 2009
Geographic Distribution
Australia$M
144,689

New Zealand$M
52,077

Sovereign

9,126

4,073

8,354

Bank

26,017

6,893

15,966

48,876

Residential Mortgage

150,352

45,145

1,260

196,757

Qualifying Revolving Retail

19,401

4,203-

23,604

Other Retail22,3114,740

22

27,073371,896

117,13162,303551,330

Other$M
37,009Total$M
238,154

Portfolio Type
Corporate

Total exposures

September 2008
Geographic Distribution
Australia$M
147,647

New Zealand$M
53,498

Sovereign

2,440

3,678

3,232

9,350

Bank

20,425

5,091

25,31150,827

Residential Mortgage

140,769

45,569925

187,263

Qualifying Revolving Retail

19,106

4,352-

23,458Other Retail

21,844

4,864-

26,708352,231

117,052

66,477535,760

Portfolio Type
Corporate

Total exposures

19

In accordance with APS 330, regulatory credit exposure throughout Table 4 includes Advanced IRB, Specialised
Lending and Standardised exposures, however does not include Securitisation, Equities or Other Assets exposures.
Specialised Lending is included within Corporate asset class.
20

Margin Lending exposures of $1,553 million were reclassified during the period from Standardised to Other Assets,
and are therefore excluded from Tables 4(b), 4(c), 4(d), 4(e), 4(i), 5(b), 7(b) and 7(c). Prior period comparatives
have also been restated to reflect this reclassification (March 2009: $1,407 million; September 2008: $1,842
million).

21

Other geography comprises ANZ’s operations in Asia Pacific, Europe and America.

24

ANZ Basel II Pillar 3 disclosure

September 2009

Table 4(d): Industry distribution of regulatory credit exposure22 23
September 2009

Portfolio Type

Agriculture,
Forestry, Fishing Business Services& Mining

Construction

Entertainment,
Leisure & Tourism

Financial,
Investment &Insurance

Government andOfficial
Institutions

Manufacturing

Personal Property Services

Wholesale Trade

Retail Trade

Transport &Storage

Other

Total $M

Corporate

32,481

8,383

5,644

9,375

15,765

1,579

28,552

2,626

37,527

15,773

12,352

9,307

22,234

201,598

Sovereign

34

-

22

-

18,284

9,890

173

-

23

13

-

-

179

28,618

Bank

-

-

58

98

29,054

-

56

-

-

1

-

105

87

29,459Residential Mortgage

-

-

-

-

-

-

-

202,731

-

-

-

-

-

202,731
19,820Qualifying Revolving Retail
Other retail
Total exposures

-

-

-

-

-

-

-

19,820

-

-

-

-

-

2,380

1,661

2,329

772

312

13

851

13,458

887

611

1,864

1,102

2,411

28,651

34,895

10,044

8,053

10,24563,415

11,482

29,632

238,635

38,437

16,398

14,216

10,51424,911

510,877

6.8%

2.0%

1.6%

2.0%

12.4%

2.2%

5.8%

46.7%

7.5%

3.2%

2.8%

2.1%

4.9%

100.0%

Construction$M

Entertainment,
Leisure &Tourism$M

Financial,
Investment &Insurance$M

Government andOfficial
Institutions$M

Manufacturing$M

Personal Property Services$M$M

Wholesale Trade$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

March 2009

Portfolio Type

Agriculture,
Forestry, Fishing Business Services& Mining$M$M

Corporate

37,070

9,086

6,363

10,62823,591

1,896

34,183

2,412

41,987

20,232

13,357

10,501

22,161

233,467

Sovereign

-

-

28

-

13,541

7,360

166

-

36

54

-

-

368

21,553

Bank

2

-

22

121

47,811

-

121

1

89

69

57

86

497

48,876

Residential Mortgage

-

-

-

-

-

-

-

196,757

-

-

-

-

-

196,757

Qualifying Revolving Retail

-

-

-

-

-

-

-

23,604

-

-

-

-

-

23,604

2,621

1,821

2,584

964

339

13

1,045

9,576

1,120

707

2,453

1,228

2,602

27,07339,693

10,907

8,997

11,71385,282

9,269

35,515

232,350

43,232

21,062

15,867

11,81525,628551,330

7.2%

2.0%

1.6%

2.1%

15.5%

1.7%

6.4%

42.1%

7.8%

3.8%

2.9%

2.1%

4.6%

100.0%

Construction$M

Entertainment,
Leisure &Tourism$M

Financial,
Investment &Insurance$M

Government andOfficial
Institutions$M

Manufacturing$M

Personal Property Services$M$M

Wholesale Trade$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M
238,154

Other Retail
Total exposures

September 2008

Portfolio Type

Agriculture,
Forestry, Fishing Business Services& Mining$M$M

Corporate

37,939

9,392

5,879

9,978

28,894

5,563

29,6216,610

41,805

19,604

13,336

9,739

19,794

Sovereign

-

-

-

-

6,101

2,819

161

-

10

46

-

-

213

9,350

Bank

-

4

-

99

50,082

-

11

22

6

44

-

41

518

50,827-

187,263

Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total exposures-

187,263

-

-

-

-

-

-

-

23,458

-

-

-

-

-

2,257

-

1,548

-

2,268

-

758

-

277

-

14

-

832

12,250

923

-

622

-

2,029

-

1,007

-

1,923

26,70840,196

10,944

8,147

10,83585,354

8,396

30,625

229,60342,744

20,316

15,365

10,78722,448535,760

7.5%

2.0%

1.5%

2.0%

15.9%

1.6%

5.7%

42.9%

8.0%

3.8%

2.9%

2.0%

4.2%

100.0%

23,45822

Property Services Industry bucket includes commercial property operators and developers, real estate agents, non-financial asset investors and machinery and equipment hiring and leasing.

23

Other Industry bucket includes Health & Community Services, Education, Communication Services, Electricity, Gas & Water Supply, and Personal & Other Services.

25

ANZ Basel II Pillar 3 disclosure

September 2009

Table 4(e): Residual contractual maturity of regulatory credit exposure24
September 2009

Portfolio Type<= 12 mths
$M

1 ~ 5 years$M>5 years No Maturity Specified
$M
$M

Total
$M

Corporate

87,84690,54722,800405

201,598

Sovereign

9,443

17,4881,687-

28,618Bank

19,767

9,543

149

-

29,459Residential Mortgage

1,897

4,682

170,337

25,815

202,731
19,820Qualifying Revolving Retail
Other Retail
Total exposures

-

-

-

19,82010,354

12,671

5,117

509

28,651

129,307

134,931200,090

46,549510,877>5 years No Maturity Specified
$M
$M

Total
$M

March 2009<= 12 mths
$M

1 ~ 5 years$M

Corporate

97,724

107,140

26,771

1,832

233,467

Sovereign

9,623

10,853

1,077-

21,553Bank

32,89815,199779-

48,876

Residential Mortgage

2,314

4,785

164,238

25,420196,757
23,604

Portfolio Type

Qualifying Revolving Retail
Other Retail
Total exposures

-

-

-

23,604

7,033

12,8906,624

526

27,073

149,592

150,867

199,489

51,382551,330>5 years No Maturity Specified
$M
$M

Total
$M

September 2008<= 12 mths
$M

1 ~ 5 years$M

Corporate

105,989

102,874

26,517

2,774

Sovereign

6,968

1,557

825

-

9,350

Bank

37,23011,6501,929

1850,827

Residential Mortgage

2,103

4,655

155,795

24,710187,263---

23,45823,4586,830

13,4986,232

148

26,708159,120

134,234

191,298

51,108535,760

Portfolio Type

Qualifying Revolving Retail
Other Retail
Total exposures24

238,154“No Maturity Specified” predominately includes credit cards and residential mortgage equity manager accounts.

26

ANZ Basel II Pillar 3 disclosure

September 2009

Table 4(f) part (i): Impaired assets, Past due loans25, Provisions and Write-offs by Industry
sector26 27
September 2009
Charges for individual
provisionfor the year ended$M

Write-offs
for the year ended
$M

55

42

51

114

118

Impairedderivatives$M

Impairedloans/facilities$M

Past dueloans ≥ 90 days
$M

Agriculture, forestry, fishing & mining

-

458

77

Business Services

-

215

41

Construction

-

122

43

43

76

44

Entertainment Leisure & Tourism

-

57

42

27

20

15

Financial, Investment & Insurance

1

958

10

261

544

425

Industry Sector

Individual provisionbalance$M

66

Government & Official Institutions

-

-

-

-

-

-

Manufacturing

6

627

34

230

301

139

-

802

950

357

809

649

118

1,580

159

194

437

263

Retail Trade

-

114

53

53

78

49

Transport & Storage

-

85

31

32

36

24

Wholesale Trade

-

127

139

69

66

16

Other

2

323

18

91

223

148

Total

127

5,468

1,597

1,526

2,750

1,889

Individual provisionbalance$M

Charges for individual
provisionfor the 6 month period
ended
$M

Write-offs
for the 6 month period
ended
$M

Personal
Property Services

March 2009

Impairedderivatives$M

Impairedloans/facilities$M

Agriculture, forestry, fishing & mining

-

114

55

Business Services

-

113

43

82

41

7

Construction

-

114

40

45

45

15

Entertainment Leisure & Tourism

-

50

28

25

15

8

Financial, Investment & Insurance

8

741

133

245

322

228

Government & Official Institutions

-

-

-

-

-

Manufacturing

1

345

35

186

123

6

Personal

-

477

1,036

247

350

278
161

Industry Sector

Property Services

Past dueloans ≥ 90 days
$M

41

23

33

-

244

1,280

81

173

317

Retail Trade

-

130

43

60

45

14

Transport & Storage

-

38

20

15

11

18

Wholesale Trade

-

128

22

60

34

5

Other

1

374

50

162

123

10

Total

254

3,904

1,586

1,341

1,449

783

Charges for individual
provisionfor the year ended$M

Write-offs
for the year ended$M

September 2008

Industry Sector

Agriculture, forestry, fishing & mining

Impairedderivatives$M

Impairedloans/facilities
$M

-

121

Past dueloans ≥ 90 days
$M
39

Individual provisionbalance$M

55

20

Business Services

-

56

23

42

71

36

Construction

-

32

13

12

50

12

Entertainment Leisure & Tourism

-

30

20

18

15

6

Financial, Investment & Insurance

-

601

104

146

189

53

Government & Official Institutions

-

-

-

-

-

6

-

Manufacturing

-

161

19

67

44

44

Personal

-

230

458

127

349

367

Property Services

-

887

73

15

18

Retail Trade

-

37

30

20

7

9

Transport & Storage

-

54

7

24

33

19

Wholesale Trade

-

181

231

64

124

4

92

Other

-

283

43

90

115

43

Total

-

2,673

1,060

675

1,032

699

Impaired loans / facilities at $5.5 billion represents a $2.8 billion increase over 30 September 2008,
driven mainly by increases in Australia and New Zealand. The increase in Australia was predominately
across entities within Institutional Relationships, Corporate Banking and Financial Institution
portfolios.
There was an increase in the Australia Division across most businesses, as thedeteriorating economic environment resulted in higher levels of default, particularly within Esanda,
Business Banking, and Investment and Insurance Products. The New Zealand increase was driven
primarily by customer downgrades in the small business, commercial, agribusiness segments andmortgage portfolios. Overseas increased slightly, mainly in Europe and America.
Past due loans at $1.6 billion represents an increase of $0.5 billion from 30 September 2008. The
increase is principally in Australia and New Zealand due primarily to reduced exit options in Australia
caused by a tightened refinance market, a soft property market and the continued deterioration of the
New Zealand economy.
25

Past due loans ≥ 90 days includes $1,462 million well secured loans (March 2009: $1,440 million; September
2008: $945 million).
26

Impaired derivatives include a credit valuation adjustment (CVA) of $64 million, being a market assessment of thecredit risk of the relevant counterparties (March 2009: $70 million; September 2008: $56 million).

27

Impaired loans / facilities include restructured items of $673 million for customer facilities in which the originalterms have been modified to provide for concessions of interest, or principal, or other payments due, or for an
extension in maturity for a non-commercial period for reasons related to the financial difficulties of a customer, andare not considered impaired. Includes both on and off balance sheet exposures (March 2009: $17 million; September
2008: $846 million).

27

ANZ Basel II Pillar 3 disclosure

September 2009

Individual provision balance at $1.5 billion represents an increase of $0.9 billion since 30 September
2008. The increase is principally in Australia following a large number of downgrades across theportfolio, partially offset by write-offs in personal lending, financial and commercial property
portfolios.
The charge for individual provisions for half year ending 31 March 2009 was $1.4 billion, compared tocharge of $1.0 billion for full year ending 30 September 2008 (first half 2008: $333 million; second
half 2008: $699 million). The charge for the current half was principally in Institutional and Australia
reflecting the current downward global economic cycle and its overall adverse effect on credit quality
and includes two large provisions totalling $330 million within the Institutional division. Retail
portfolios are experiencing rising levels of bankruptcies, liquidations/administrations and customers
falling under hardship policies. This is coupled with lower recovery rates in a tightened debt sales
market and lower resale values impacting Esanda recoveries. The increases in New Zealand occurred
across all segments with higher provisions in the second half, as weaker local economic conditions
impacted exports, household income and spending.

28

ANZ Basel II Pillar 3 disclosure

September 2009

Table 4(f) part (ii): Impaired asset, Past due loans, Provisions and Write-offs by Counterparty

Portfolios subject to IRB
approachCorporate

Sep-09Mar-09127

254

Past dueloans ≥ 90days
$M

ImpairedLoans / Facilities$M

Impaired
Derivatives$M

Charges forindividual
provision$M

Individual
provisionbalance$M

Write-offs$M

Sep-08

Sep-09Mar-09Sep-08

Sep-09Mar-09Sep-08

Sep-09Mar-09Sep-086 months
endingSep-096 months
endingMar-0912 months
endingSep-0912 months
endingSep-086 months
endingSep-096 months
endingMar-0912 months
endingSep-0912 months
endingSep-08

-

4,199

3,164

2,218

496

410

285

932

931

427

693

1,030

1,723

480

667

451

1,118

160

Sovereign

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Bank

-

-

-

98

7

31

-

-

-

44

4

25

41

4

45

45

(3)

30

27

6

Residential Mortgage

-

-

-

425

279

145

805

879

545

189

91

52

114

48

162

40

32

14

46

45

Qualifying revolving retail
Other retail
Total IRB approach

-

-

-

-

-

-

70

77

67

-

-

-

121

108

229

219

140

124

264

-

270

-

-

-

472

348

212

174

181

140

293

269

152

251

226

477

214

247

148

395

189

127

254

-

5,194

3,798

2,606

1,545

1,547

1,037

1,458

1,295

656

1,220

1,416

2,636

998

1,083

767

1,850

670

Portfolios subject toStandardised approach
Corporate

-

-

-

254

101

67

43

39

23

61

45

19

77

33

110

34

22

16

38

29

Sovereign

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Bank

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Residential Mortgage

-

-

-

20

5

-

9

-

-

7

1

-

4

-

4

-

1

-

1

-

Total Standardised approach

-

-

-

274

106

67

52

39

23

68

46

19

81

33

114

34

23

16

39

29

127

254

-

5,468

3,904

2,673

1,597

1,586

1,060

1,526

1,341

675

1,301

1,449

2,750

1,032

1,106

783

1,889

699

Total

29

-

ANZ Basel II Pillar 3 disclosure

September 2009

Table 4(g): Impaired assets, Past due loans28, Provisions and Write-offs by Geography29 30
September 2009
Geographic Region

Impaired derivatives$M

Australia

Impairedloans/facilities$M

Past dueloans ≥ 90 days
$M

Individual
provision balance$M

Collective
provision balance
$M

127

3,907

1,068

1,060

2,001

New Zealand

-

1,001

365

391

660

Other

-

560

164

75

339

Total

127

5,468

1,597

1,526

3,000

Impaired derivatives$M

Impairedloans/facilities$M

Past dueloans ≥ 90 days
$M

Individual
provision balance$M

Collective
provision balance$M

March 2009
Geographic Region
Australia

254

3,157

968

1,072

1,931

New Zealand

-

530

453

224

506

Other

-

217

165

45

305

Total

254

3,904

1,586

1,341

2,742

Impaired derivatives$M

Impairedloans/facilities$M

Individual
provision balance$M

Collective
provision balance$M

Australia

-

2,224

776

516

2,149

New Zealand

-

279

259

111

447

Other

-

170

25

48

225

Total

-

2,673

1,060

675

2,821

September 2008
Geographic Region

Past dueloans ≥ 90 days
$M

Table 4(h): Reconciliation of changes in Provisions

Collective Provision

For the year ended
30 September 2009$M

For the year ended
30 September 2008
$M

Balance at start of period

2,821

1,992

Charge to income statement

235

818

Adjustments for exchange rate fluctuations and other

(56)

11

3,000

2,821

Total Collective Provision
Individual Provisions
Balance at start of period
Charge to income statement for loans and advances
Write-offs

675

270

2,750

1,032

(1,889)(699)

Recoveries of amounts previously written off

85

100

Adjustments for exchange rate fluctuations

(22)

-

Discount Unwind

(73)

(28)

Total Individual Provision

1,526

675

Total Provisions

4,526

3,496

The Collective Provision balance at $3.0 billion represents a increase of $0.2 billion from 30
September 2008 arising from an increase in charges within New Zealand and Overseas partially offset
by decreases in Australia.
The New Zealand charge reflected a rise in unsecured consumer
delinquencies and a weakening risk profile across the portfolio particularly in the Rural business unit.
Unfavourable risk movements were also experienced across the Overseas region. The decrease inAustralia was mainly due to lower Institutional lending and concentration provision releases following
defaults by a number of large customers within Institutional crystallising losses which were provided
for in 2008.

28

Past due loans ≥ 90 days includes $1,462 million well secured loans (March 2009: $1,440 million; September
2008: $945 million).
29

Refer to Page 23 for explanation and reconciliation of accounting Individual and Collective provisions andregulatory Specific provision and General Reserve for Credit Losses.

30

Other geography comprises ANZ’s operations in Asia Pacific, Europe and America.

30

ANZ Basel II Pillar 3 disclosure

September 2009

Table 4(i): Regulatory credit exposures by measurement approach
September 2009$M

March 2009$M

September 2008
$M

Corporate

188,067

217,873

225,169

Sovereign

28,61821,553

9,350

Bank

29,444

48,84750,799Residential Mortgage

201,581

195,432

186,287

Qualifying Revolving Retail

19,82023,60423,458Other Retail

28,651

27,073

26,708496,181534,382

521,771

Advanced IRB

Total Advanced IRB

September 2009$M

March 2009$M

September 2008
$M

Corporate

13,531

15,594

12,985

Sovereign

-

-

-

15

29

28

1,150

1,325

976

-

-

-

Total Standardised

14,696

16,94813,989Total Exposure

510,877

551,330

535,760

Standardised

Bank
Residential Mortgage
Other Retail

31

ANZ Basel II Pillar 3 disclosure

September 2009

Table 5Credit risk – Disclosures for portfolios subject to theStandardised Approach and supervisory risk weighting in the IRB
approach
Use of external rating agencies (External Credit Assessment Institutions)
ANZ has not used external ratings as an input into risk weighting for portfolios under the Standardised
Approach, as these are mainly Retail portfolios and hence are not rated by external rating agencies.

Table 5(b): Regulatory credit exposure by risk bucket 31 32
September
2009$M

Risk weight

March
2009
$M

September
2008$M

Standardised approach exposures
0%

-

-

-

20%

3

3

3

35%

1,130

1,313

971

50%

9

22

23

75%

1

-

-

100%

13,553

15,60912,992

150%

-

1

-

>150%

-

-

-

Capital deductions
Total

-

-

-

14,696

16,94813,989Other assets
0%

-

-

-

20%

1,553

1,407

1,842

35%

-

-

-

50%

-

-

-

75%

-

-

-

100%

2,863

2,902

2,654

150%

-

-

-

>150%

-

-

-

Capital deductions

-

-

-

4,416

4,309

4,496

Total

Specialised Lending exposures subject to supervisory slotting
0%

1,298

852

125

70%

6,560

7,136

9,794

90%

9,770

9,613

9,667

115%

5,943

5,782

6,866

250%

1,621

2,026

2,719

Total

25,192

25,40929,171Equity exposures
Risk weight
300%

1

64

-

400%

478

379

286

Total

479

443

286

Margin Lending exposures of $1,553 million were reclassified during the period from Standardised to Other Assets,
and are therefore excluded from Tables 4(b), 4(c), 4(d), 4(e), 4(i), 5(b), 7(b) and 7(c). Prior period comparatives
have also been restated to reflect this reclassification (March 2009: $1,407 million; September 2008: $1,842
million).
31

32

Standardised exposures to all private sector counterparties (other than banks and residential mortgages) havebeen classified in the Corporate category as they do not meet the requirements for other AIRB asset classes. The
main types of the exposures are Business Lending and Other Personal Lending.

32

ANZ Basel II Pillar 3 disclosure

Table 6

September 2009

Credit risk – Disclosures for portfolios subject to IRB
approaches

Portfolios subject to the AIRB approach
The following table summarises the coverage of ANZ’s AIRB portfolios:
IRB Asset Class

Borrower type

Rating Approach

Sovereign

Central governments
Central banks
Certain multilateral banks

AIRB

Bank

Banks33
In Australia only, other authorised deposit taking
institutions (ADI) incorporated in Australia

AIRB

Corporate

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

AIRB

Specialised Lending

Income Producing Real Estate
Project FinanceObject Finance

AIRB – Supervisory
Slotting34

Residential
Mortgages

Exposures secured by residential property

AIRB

Qualifying Revolving
RetailConsumer credit cards <$100k limit

AIRB

Other Retail

Small business lending
Other lending to consumers

AIRB

EquityOther assets

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

AIRB – fixed risk
weights

In addition, ANZ has applied the Standardised Approach to some portfolio segments (mainly retail andlocal corporates in Asia Pacific) where currently available data does not enable development ofadvanced internal models for PD, LGD and EAD estimates.
ANZ applies its full normal risk measurement and management framework to these segments,
however the credit rating tools may not have received AIRB approval. Standardised segments will be
migrated to AIRB if they reach a volume that generates sufficient data for development of advanced
internal models.
ANZ has not applied the foundation IRB approach to any portfolios.
The ANZ rating system
As an AIRB bank, ANZ’s internal models generate the inputs into regulatory capital adequacy todetermine the risk weighted exposure calculations for both on and off-balance sheet exposures,
including undrawn portions of credit facilities, committed and contingent exposures and expected loss
calculations. ANZ’s internal models are used to generate the three key risk components that serve as
inputs to the IRB approach to credit risk:•

PD is an estimate of the level of the risk of borrower default. Borrower ratings are derived by
way of rating models used both at loan origination and for ongoing monitoring•

EAD is defined as the expected facility exposure at the date of default•

LGD is an estimate of the potential economic loss on a credit exposure, incurred as aconsequence of obligor default and expressed as a percentage of the facility’s EAD. Whenmeasuring economic loss, all relevant factors are taken into account, including material effects ofthe timing of cash flows and material direct and indirect costs associated with collecting on the
exposure, including realisation of collateral.

33

The Bank Basel asset class excludes investment banks.

34

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

33

ANZ Basel II Pillar 3 disclosure

September 2009

Effective maturity is also calculated as an input to the risk weighted exposure calculation for bank,sovereign and corporate Basel asset classes.
ANZ’s rating system has two separate and distinct dimensions that:•

Measure the PD, which is expressed by the Customer Credit Rating (CCR), reflecting the ability toservice and repay debt•

Measure the LGD as expressed by the Security Indicator (SI) ranging from A to G. The SI iscalculated by reference to the percentage of loan covered by tangible security which the Bank canrealise in the event of default. This calculation uses standard ratios to adjust the current market
value of collateral items to allow for historical realisation outcomes. Besides the tangible securityrelated SIs, there is a range of specialised SIs also available, covering such factors as cash cover,mezzanine finance, intra-group guarantees and sovereign backing as ANZ’s LGD research
indicates that these transaction characteristics have different recovery outcomes. ANZ’s LGD also
includes recognition of the legal regimes in different countries, where this has been shown to
influence recovery outcomes.

ANZ’s corporate PD master scale is made up of 27 rating grades. Each level/grade is separately
defined and has a range of default probabilities attached to it. The PD master scale enables ANZ’s
rating system to be mapped to the gradings of external rating agencies, using the PD as a common
element after ensuring that default definitions and other key attributes are aligned. The following
table demonstrates this alignment:
ANZ CCR

Moody’sStandard &Poor’sPD Range

0+ to 1-

Aaa to <Aa3

AAA to <A+

0.00-0.03%

2+ to 3+

A1 to <Baa2

A+ to <BBB

0.03-0.16%

3= to 4=

Baa2 to <Ba1

BBB to <BB+

0.16-0.51%

4- to 6-

Ba1 to <B1

BB+ to <B+

0.51-3.49%

7+ to 8+

B1 to <Caa

B+ to <CCC

3.49-10.09%

8=

Caa

CCC

10.09-99.99%

8-, 9 and 10

Default

Default

100%

In the retail asset classes, most facilities utilise credit rating scores. The scores are calibrated to PD,
so the PD master scale gives ANZ a common language to understand and manage credit risk. For
retail asset class exposures, the LGD dimension is recognised through the process of pooling retail
exposures into homogenous groups.
ANZ also uses two specialised PD master scales for the mapping of sovereign and bank PDs toexternal rating agency ratings.
Use of internal estimates other than for regulatory capital purposes
ANZ’s rating system is a fundamental part of credit management and plays a key role in:•Lending discretions•

Minimum origination standards•

Concentration limits•

Portfolio reporting•

Customer profitability measurement•

Collective provision measurement•

Management of deteriorating customers (where certain CCR/SI combinations trigger increasing
scrutiny)•

Pricing decisions.

PD, LGD and EAD are used in the calculation of economic capital and in the collective provisioning
process. Regulatory and economic capital are calculated from the same data sources and startingfrom the same basis, however there are some differences between the factors used because several
aspects of ANZ’s rating system are adjusted in accordance with APRA requirements for regulatory
capital purposes. The most significant of these adjustments are the use for regulatory capital
purposes of downturn LGDs; the imposition of a 20% LGD floor for exposures secured by Australian34

ANZ Basel II Pillar 3 disclosure

September 2009

residential real estate and the mandatory use of the supervisory slotting approach for project financeand most commercial real estate exposures.
Controls surrounding the ratings system
ANZ’s rating system and credit risk estimates are governed by the Board’s Risk Committee, CMRC andunderpinned by a comprehensive framework of controls that operate throughout the organisation. All
policies, methodologies, model designs, model reviews, validations, responsibilities, systems andprocesses supporting the ratings systems are documented, and subject to audit.
The design, build and implementation of credit rating models resides with a specialist Group-levelteam. The use and performance of credit rating models is monitored by the relevant business andtheir counterparts in Risk, and validated annually by an independent specialist Group-level function.
This design, build, implementation, monitoring and validation is overseen by CRSOC, and informs theneed for new models or recalibration of existing models.
Risk grades are an integral part of reporting to the Board and executives.
Rating process by asset class
Building reliable and accurate rating tools is a challenging process where many factors must bebalanced, such as data availability (external data may be used in some circumstances, where it isrelevant), the size of the segment (the more customers within the segment, the more likely thatstatistically reliable models can be built), and the need to be able to validate the model. Rating tool
approaches include:•

Statistical models producing a PD or a LGD, which are developed from ANZ or external data on
defaults•

Statistical models producing a rating, which involve calibrating ANZ’s models to rating data wheredata on defaults is insufficient for statistical purposes (such as banks)•

Hybrid statistical and expert models producing a rating, which use a mixture of default data andexpert input•

Expert models/processes that produce a rating, including external rating agency replication
models.

Ongoing data collection and testing processes ensure enhanced or new models are introduced as
required to maintain and improve the accuracy and reliability of rating processes.
Regardless of what credit risk rating tool is used, lending staff rating a customer are required toreview the model-generated PD (or CCR) and take into account any out-of-model factors or policy
overlays to decide whether or not to override the model rating. Overrides of a rating model to abetter rating require dual approval with the independent credit risk function. The significance of themodel for risk grading varies with the customer segment: models will dominate risk grading of
homogenous, simple and data-rich segments such as in Retail, however for complex, specialised
business segments expert knowledge and the highly customised nature of transactions will influence
the rating outcome.

35

ANZ Basel II Pillar 3 disclosure

September 2009

The following table summarises the types of internal rating approaches used in ANZ:IRB Asset Class

Borrower type

Rating Approach

Sovereign

Central governments
Central banks
Certain multilateral banks

External rating and expert
judgement

Bank

Banks
In Australia only, other ADIs incorporated inAustralia

Statistically-based models
Review of all relevant andmaterial information including
external ratings

Corporate

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

Mainly statistical models
Some use of expert models andpolicy processes

Specialised Lending

Income Producing Real Estate
Project FinanceObject FinanceSupervisory Slotting35

Residential
Mortgages

Exposures secured by residential property

Statistical models

Qualifying Revolving
RetailConsumer credit cards <$100k limit

Statistical models

Other Retail

Small business lending
Other lending to consumers

Statistical models

For the Retail Basel asset class (Residential Mortgages, Qualifying Revolving Retail and Other Retail
exposures) the large number of relatively homogenous exposures enable the development ofstatistically robust application scoring models for use at origination and behavioural scoring forongoing management. LGD is recognised through the process of pooling retail exposures into
homogenous groups.
Estimation of LGD and EAD
ANZ’s LGD modelling takes into account data on secured recovery, unsecured recovery rates and debt
seniority, geography and internal management costs from several major data sources. Internal data
is used as the basis for LGD estimation in the retail asset class, and is supplemented by external data
for the corporate asset class. Given the scarcity of internal data for Bank and Sovereign Basel asset
classes, LGD modelling for these classes is primarily based on external data.
EAD represents the expected facility exposure at the date of default, including an estimate ofadditional drawings prior to default, as well as post-default drawings that were legally committed toprior to default.

35

Specialised Lending exposures are rated with internal rating tools to produce a PD and LGD. These are used ininternal processes, but not for regulatory capital purposes where the exposures are mapped to Supervisory Slots.

36

ANZ Basel II Pillar 3 disclosure

September 2009

Table 6(d): Non Retail regulatory credit exposure subject to Internal Ratings Based (IRB)
approach36 37
September 2009
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Regulatory credit exposure
Corporate

6,543

28,63448,00565,423

6,622

3,720

3,928

162,875

Sovereign

25,610

1,691

94

1,218

1

1

3

28,618Bank

26,441

1,290

1,026

507

15

26

139

29,444

Total

58,594

31,61549,125

67,148

6,638

3,747

4,070

220,937% of Total

26.5%

14.3%

22.2%

30.4%

3.0%

1.7%

1.8%

100.0%

Corporate

1,769

12,735

15,382

12,580

611

546

201

43,824

Sovereign

437

63

1

20

-

-

-

Bank

256

6

8

5

-

-

-

275

Total

2,462

12,804

15,391

12,605

611

546

201

44,6200.651

Undrawn commitments (included in above)
521

Average Exposure At Default (EAD)
Corporate

0.790

1.467

0.577

0.336

0.514

0.329

Sovereign38.22313.421

8.502

10.884

0.072

0.344

0.179

Bank

9.955

1.101

1.362

0.509

0.374

13.8892.278

Corporate

59.6%

55.6%

47.8%

38.5%

43.6%

43.5%

47.0%

Sovereign

2.5%

4.8%

58.5%

56.7%

39.0%

2.0%

59.0%

Bank

62.0%

64.1%

60.7%

66.0%

58.8%

64.3%

42.0%

Corporate

17.9%

34.0%

55.0%

78.9%

142.7%

203.6%

259.0%

Sovereign

0.4%

1.9%

68.2%

98.4%

154.1%

11.5%

0.0%

Bank

13.4%

19.1%

57.8%

124.9%

195.9%

311.1%

340.9%

AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Regulatory credit exposure
Corporate

9,773

37,42456,43774,769

7,186

3,560

3,315

192,464

Sovereign

18,895

1,278

28

1,291

9

49

3

21,553

Bank

42,172

2,190

3,644

673

25

74

69

48,847

Total

70,84040,89260,10976,733

7,220

3,683

3,387

262,864% of Total

26.9%

15.6%

22.9%

29.2%

2.7%

1.4%

1.3%

100.0%

Corporate

3,395

14,508

16,69016,029

789

537

338

52,286

Sovereign

1,088

101

-

95

1

1

-

1,286

Bank

1,943

85

165

20

-

2

32

2,247

Total

6,426

14,694

16,855

16,144

790

540

370

55,819Corporate

0.887

1.692

0.674

0.364

0.557

0.305

0.909

Sovereign45.530

9.909

1.500

8.842

1.311

48.502

0.257

Bank

17.276

1.639

1.610

0.588

0.450

1.943

11.540

Corporate

60.6%

57.1%

48.6%

39.8%

46.7%

48.3%

45.7%

Sovereign

2.7%

4.8%

5.0%

58.3%

5.1%

2.0%

59.0%

Bank

62.7%

63.4%

64.9%

58.5%

68.1%

65.7%

63.5%

21.1%

34.8%

57.9%

Exposure-weighted average Loss Given Default (LGD) (%)

Exposure-weighted average risk weight (%)

March 2009

Undrawn commitments (included in above)

Average Exposure At Default (EAD)

Exposure-weighted average Loss Given Default (LGD) (%)

Exposure-weighted average risk weight (%)
Corporate

82.7%

167.0%

229.1%

204.2%

Sovereign

0.5%

1.7%

8.4%

98.1%

19.9%

11.0%

0.0%

Bank

16.0%

25.6%

53.6%

108.2%

221.5%

320.3%

162.0%

36

In accordance with APS 330, regulatory credit exposures in Table 6(d) include Advanced IRB; however do notinclude Standardised, Securitisation, Equities or Other Assets exposures. Specialised Lending is excluded from Table
6(d) as it follows the Supervisory Slotting treatment, and a breakdown of risk weightings is provided in Table 5(b).
37

Average Exposure at Default (EAD) is calculated as total EAD divided by the total number of credit risk generating
exposures.

37

ANZ Basel II Pillar 3 disclosure

September 2009

Table 6(d): Non Retail regulatory credit exposure subject to Internal Ratings Based (IRB)
approach (continued)
September 2008
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Regulatory credit exposure
Corporate

17,321

39,76958,27373,003

3,706

2,097

1,829

195,998

Sovereign

6,892

658

2

1,768

26

-

4

9,350

Bank

43,064

3,313

2,083

1,959

244

35

101

50,799Total

67,27743,74060,35876,730

3,976

2,132

1,934

256,147% of Total

26.3%

17.1%

23.6%

30.0%

1.6%

0.8%

0.8%

100.0%

4,738

16,277

529

462

217

53,302

Undrawn commitments (included in above)
Corporate

15,664

15,415

651

125

2

105

-

-

1

Bank

3,342

251

42

61

6

1

85

3,788

Total

8,731

16,65315,70815,581

535

463

303

57,9740.178

Sovereign

884

Average Exposure At Default (EAD)
Corporate

1.436

2.081

0.689

0.315

0.321

Sovereign

16.89014.0080.666

41.118

0.494

-

0.185

Bank

13.896

2.152

2.902

1.555

1.296

0.262

20.1250.701

Corporate

62.1%

58.5%

49.4%

39.5%

40.5%

48.0%

47.7%

Sovereign

3.3%

4.3%

2.0%

58.5%

58.8%

0.0%

59.0%

Bank

62.8%

64.4%

64.8%

56.9%

55.1%

67.6%

64.2%

Corporate

19.6%

37.1%

57.0%

84.3%

135.2%

227.3%

258.1%

Sovereign

0.6%

2.2%

1.6%

110.3%

168.0%

0.0%

710.9%

Bank

17.1%

27.1%

62.4%

119.7%

180.4%

328.6%

160.5%

Exposure-weighted average Loss Given Default (LGD) (%)

Exposure-weighted average risk weight (%)

Table 6(d): Retail regulatory credit exposure subject to Internal Ratings Based (IRB)
approach by risk grade38
ANZ rating system of Retail exposures
In the Retail asset classes, most facilities utilise credit rating scores. The scores are calibrated to PD,
so the PD master scale gives ANZ a common language to understand and discuss credit risk. For
retail asset class exposures, the LGD dimension is recognised through the process of pooling retail
exposures into homogenous groups.
September 2009
0.00% <
0.11%
$M

0.11% <
0.30%
$M

0.30% <
0.51%
$M

0.51% <
3.49%
$M

Residential Mortgage

3,587

120,570

11,016

Qualifying Revolving Retail

10,196249

1,843

Other Retail

1,086

3,415

14,869

3.49% <
10.09%$M

10.09% <100.00 %$M

Default
$M

Total
$M

56,097

5,327

3,574

1,410

201,581

4,598

1,860

921

153

19,8201,757

16,048

5,025

746

574

28,651

124,234

14,61676,743

12,212

5,241

2,137

250,052

5.9%

49.7%

5.8%

30.7%

4.9%

2.1%

0.9%

100.0%

402

12,690

1,191

4,037

235

96

13

18,664

7,983

249

1,233

2,155

604

121

23

12,368Regulatory Credit Exposure

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

452

2,117

1,169

2,388

276

50

5

6,457

8,837

15,056

3,593

8,580

1,115

267

41

37,489Average Exposure At Default (EAD)
Residential Mortgage

0.041

0.191

0.158

0.213

0.168

0.178

0.286

Qualifying Revolving Retail

0.011

0.006

0.010

0.008

0.008

0.007

0.008

Other Retail

0.086

0.010

0.006

0.014

0.011

0.007

0.027

Exposure-weighted average LGD (%)
Residential Mortgage

20.8%

20.1%

20.2%

21.4%

20.3%

20.6%

21.8%

Qualifying Revolving Retail

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

Other Retail

24.8%

56.5%

65.0%

45.5%

44.6%

61.4%

57.1%

Exposure-weighted average risk weight (%)
Residential Mortgage

4.6%

6.9%

14.4%

26.9%

77.9%

113.8%

241.5%

Qualifying Revolving Retail

4.8%

11.3%

13.9%

38.5%

106.9%

206.3%

275.0%

Other Retail

5.8%

26.3%

43.1%

60.2%

70.1%

147.1%

192.3%

38

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

38

ANZ Basel II Pillar 3 disclosure

September 2009

Table 6(d): Retail regulatory credit exposure subject to Internal Ratings Based (IRB)
approach by risk grade (continued)
March 2009
0.00% <
0.11%
$M

0.11% <
0.30%
$M

0.30% <
0.51%
$M

0.51% <
3.49%
$M

3.49% <
10.09%$M

10.09% <100.00 %$M

Default
$M

Total
$M

Residential Mortgage

3,800

113,959

27,27739,008

Qualifying Revolving Retail

10,874

2,141

1,790

5,454

6,161

3,936

1,291

195,432

2,073

1,103

169

Other Retail

1,348

2,642

879

16,49323,604

4,479

702

530

16,022

118,742

29,946

27,073

60,955

12,713

5,741

1,990

246,109

6.5%

48.2%

12.2%

24.8%

5.2%

2.3%

0.8%

100.0%

361

12,454

2,721

2,383

220

101

14

18,254

8,680

1,785

1,214

2,712

704

145

21

15,261

Regulatory Credit Exposure

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

467

651

699

2,025

107

49

9

4,007

9,508

14,890

4,634

7,120

1,031

295

44

37,522Average Exposure At Default (EAD)
Residential Mortgage

0.046

0.185

0.123

0.160

0.167

0.161

0.201

Qualifying Revolving Retail

0.010

0.009

0.009

0.007

0.007

0.006

0.006

Other Retail

0.032

0.023

0.003

0.018

0.011

0.007

0.018

Exposure-weighted average LGD (%)
Residential Mortgage

20.9%

20.1%

21.8%

20.8%

20.4%

20.5%

21.4%

Qualifying Revolving Retail

73.9%

80.0%

73.3%

74.5%

73.7%

73.7%

73.9%

Other Retail

22.2%

18.6%

37.6%

39.6%

43.1%

53.4%

51.7%

Exposure-weighted average risk weight (%)
Residential Mortgage

5.5%

6.7%

14.7%

30.0%

73.2%

111.4%

267.6%

Qualifying Revolving Retail

4.7%

8.5%

13.5%

37.9%

105.4%

205.3%

857.5%

Other Retail

5.2%

9.4%

24.5%

52.7%

67.5%

127.9%

330.5%

0.00% <
0.11%
$M

0.11% <
0.30%
$M

0.30% <
0.51%
$M

0.51% <
3.49%
$M

3.49% <
10.09%$M

10.09% <100.00 %$M

Default
$M

Total
$M

Regulatory Credit Exposure
Residential Mortgage

1,524

110,11325,807

38,639

5,772

3,633

799

186,287

Qualifying Revolving Retail10,556

2,155

2,018

5,439

2,203

947

140

September 2008

Other Retail
Total% of Total

23,458

1,259

2,714

1,425

15,420

4,865

634

391

26,70813,339114,982

29,25059,498

12,840

5,214

1,330

236,453

6%

49%

12%

25%

5%

2%

1%

100%

244

11,218

2,608

2,390

206

93

10

16,769

8,368

1,837

1,392

2,789

766

126

19

15,297

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

409

701

805

1,537

452

48

8

3,960

9,021

13,756

4,805

6,716

1,424

267

37

36,026

Average Exposure At Default (EAD)
Residential Mortgage

0.025

0.177

0.115

0.157

0.163

0.158

0.196

Qualifying Revolving Retail

0.010

0.010

0.008

0.007

0.007

0.006

0.006

Other Retail

0.030

0.023

0.005

0.019

0.010

0.006

0.018

Exposure-weighted average LGD (%)
Residential Mortgage

20.0%

20.1%

21.9%

20.9%

20.6%

20.6%

21.3%

Qualifying Revolving Retail

73.9%

79.4%

74.1%

74.3%

73.7%

73.7%

73.9%

Other Retail

22.4%

19.9%

35.1%

38.0%

46.1%

54.4%

51.6%

Exposure-weighted average risk weight (%)
Residential Mortgage

5.1%

6.9%

14.6%

30.5%

74.6%

112.0%

267.6%

Qualifying Revolving Retail

4.9%

8.4%

13.9%

39.0%

111.4%

207.1%

846.3%

Other Retail

4.2%

9.1%

23.6%

51.2%

72.1%

129.3%

348.8%

39

ANZ Basel II Pillar 3 disclosure

September 2009

Table 6(e): Actual Losses by portfolio type39
Full Year
September 2009
Charges for individual
provision$M

Write-offs$M

Corporate

1,723

1,118

Sovereign

-

-

Bank

45

27

Residential Mortgage

162

46

Qualifying revolving retail

229

264

Basel Asset Class

Other retail
Total Advanced IRB
Standardised
Total Exposure

477

395

2,636

1,850

114

39

2,750

1,889

Half Year
March 2009
Charges for individual
provision$M

Write-offs$M

Corporate

1,030

451

Sovereign

-

-

Bank

4

30

Residential Mortgage

48

14

Qualifying revolving retail

108

124

Basel Asset Class

Other retail
Total Advanced IRB
Standardised
Total Exposure

218

148

1,408

767

41

16

1,449

783

Full Year
September 2008
Basel Asset Class
Corporate
SovereignBank

Charges for individual
provision$M

Write-offs
$M

480

160

-

-

45

6

Residential Mortgage

40

45

Qualifying Revolving Retail

219

270

Other Retail

214

189

Total Advanced IRB

998

670

Standardised
Total Exposure

34

29

1,032

699

Refer to Table 4(f) part (i) for commentary on provisions. Write-offs increased to $1,889 million in2009 compared to $699 million for full year 2008 (first half 2008: $376 million; second half 2008:$323 million). Write-offs in Australia were driven by unsecured portfolios, Commercial Property and
Finance and Insurance. Increases in New Zealand were driven by retail and commercial.

39

Charges for Individual Provision relate to loans and advances, and do not include impairment on available-for-saleof $20 million in September 2009 (March 2009: $20 million; September 2008: $98 million).

40

ANZ Basel II Pillar 3 disclosure

September 2009

Table 6(f): Analysis of actual versus Expected Losses by portfolio type (Advanced AIRB) 40
30 September 2009
Actual losses

30 September 2008
One year Expected Loss (EL) estimates

Write Offs

Charges for
Individual ProvisionInternal model
EL estimate

Regulatory
EL estimate

$m

$m

$m

$m

Corporate

1,118

1,723

687

1,686

Sovereign

-

-

10

10

Bank

27

45

68

91

Residential Mortgage

46

162

58

391

Qualifying Revolving Retail

264

229

330

363

Other Retail

395

477

332

510

1,850

2,636

1,485

3,051

Total Advanced IRB

Regulatory EL and Internal EL shown above represent estimated credit loss from defaults over a one
year period and are computed as the product of PD, LGD and EAD as at 30 September 30 2008. The
actual loss measures are Charges for Individual Provision and Write-offs recorded in ANZ’s financial
statements through during 2009. While these metrics provide some insight into the predictive powerof ANZ's estimations, any comparison has limitations due to definitional differences - eg:
•

•
•
•

Both Regulatory and Internal EL are a measure of expected credit losses for a snapshot of ANZ’scredit exposure at a certain balance sheet date while the Charges for Individual Provisions andWrite-Offs are recorded for a fluctuating credit portfolio over the course of a financial year – andWrite Offs may relate to prior period defaults
The parameters PD, LGD and EAD underlying the Regulatory EL calculation represent through thecycle estimates based on APRA methodology which includes the use of the LGD floor for
Mortgages, slotting approach for project finance, object finance and non diversified real estate
Internal EL is calculated on non-impaired exposures only and uses long run LGD’s rather than
downturn LGD. Regulatory EL includes the Individual Provision balance on defaulted exposures
Charges for Individual Provisions represent an accounting estimate of likely losses on defaulted
exposures, whereas Write-offs are taken when defaulted exposures are assessed as partially or
fully uncollectable after the proceeds from any realisation of collateral have been taken into
account. There is typically a time lag between Charges for Individual Provisions and Write-offs.

Charges for Individual Provision exceeded write-offs in 2009 because many of the defaults thatemerged during the year are still in the workout period where recovery options are being identified
and pursued.

Table 7

Credit risk mitigation disclosures

Main types of collateral taken by ANZ
Collateral is used to mitigate credit risk, as the secondary source of repayment in case thecounterparty cannot meet its contractual repayment obligations41. Types of collateral typically taken
by ANZ include:•

Security over residential, commercial, industrial or rural property•

Fixed and floating charges over business assets•

Security over specific plant and equipment•

Charges over listed shares, bonds or securities•

Charges over cash deposits•

Guarantees and pledges.

In some cases, such as where the customer risk profile is considered very sound (or by the nature of
the product, for instance small limit products such as credit cards), a transaction may not be
supported by collateral.

40

Table 6(f) relates only to Advanced IRB and not Standardised, Equities, Securitisation or Other Assets.

41

For some products, the collateral provided is fundamental to its structuring so is not strictly the secondary sourceof repayment. For example, lending secured by trade receivables is typically repaid by the collection of thosereceivables.

41

ANZ Basel II Pillar 3 disclosure

September 2009

Credit policy sets out the acceptable types of collateral, as well as a process by which additional
instruments and/or asset types can be considered for approval. ANZ’s credit risk modelling areas use
historical internal loss data and other relevant external data to assist in determining acceptable typesof collateral, and the discount that each type would be expected to incur in a forced sale. These
discounts are used to scale the value of collateral items pledged; the discounted value is used indetermining the SI for LGD purposes.
Policies and processes for collateral valuation and management
ANZ has well established policies and processes around collateral valuation and management. The
concepts of legal enforceability, certainty and accurate valuation are central to collateral management.
In order to achieve legal enforceability and certainty, ANZ has standard collateral instruments, andwhere applicable, security interests are registered. The use of collateral management systems also
provides certainty that the collateral has been properly taken, registered and stored.
In order to rely on the valuation of collateral assets, ANZ has developed comprehensive rules aroundacceptable types of valuations (including who may value an asset), the frequency of revaluations andstandard extension ratios for typical asset types. Upon receipt of a new valuation, the information isused to recalculate the SI (or to reassess the adequacy of the provision, in the case of an impaired
asset), thereby ensuring that the exposure has an updated LGD attached to it for risk quantification
purposes.
Guarantee support
Guarantee support for lending proposals are an integral component in transaction structuring for ANZ.
The guarantee of a financially strong party can help improve the Probability of Default of a transaction
through its explicit support of the borrower.
Guarantees that are recognised for risk grading purposes may be provided by parties that include
associated entities, banks, sovereigns or individuals. Credit policy provides threshold parameters todetermine acceptable counterparties in achieving risk grade enhancement of the transaction.
The suitability of the guarantor is determined by risk grading that guarantor. Not all guarantees arerecognised for risk grade enhancement purposes.
Use of credit derivatives for risk mitigation
ANZ uses bought credit derivatives to mitigate credit risk by lowering exposures to reference entities
that generate high concentration risk exposures or to improve risk return performance.
Only certain credit derivatives such as plain vanilla credit default swaps (CDS) are recognised for risk
mitigation purposes in the determination of regulatory capital. A CDS entails the payment by one
party in exchange for credit default protection payment if a credit default event on a reference asset
occurs. Standard, legally enforceable documentation applies.
In addition, for regulatory capital purposes, ANZ only recognises protection using credit derivatives
where they meet several policy and regulatory requirements around the strength of the protection
offered such as being irrevocable.
A CDS may only be transacted with banks, ANZ-related conduits and non-bank financial institutions
that have been credit assessed and approved by a specific specialist credit point. All parties mustmeet minimum credit standards and be allocated a related credit limit.
The use of netting
Netting is a form of credit risk mitigation in that it reduces EAD, essentially by offsetting a customer’s
positive and negative balances with ANZ.
In order to apply on-balance sheet netting, the arrangement must be specifically documented with thecustomer and meet a number of legally enforceable requirements. Reliance on ANZ’s common law
right of set off is not sufficient to be recognised for regulatory capital purposes.
Netting is also used where the credit exposure arises from off balance sheet market relatedtransactions. For close-out netting to be utilised with counterparties, a legally enforceable eligible
netting agreement in an acceptable jurisdiction must be in place. This means that each transaction isaggregated into a single net amount and transactions are netted to arrive at a single overall sum.

42

ANZ Basel II Pillar 3 disclosure

September 2009

Transaction structuring to mitigate credit risk
Besides tangible security, guarantee support and derivatives described above, credit risk mitigation
can also be furthered by prudent transaction structuring and restrictions on the term of loans. For
example, in project finance risk can be mitigated by lending covenants, loan syndication and politicalrisk insurance.
Concentrations of credit risk mitigation
Taking collateral raises the possibility that ANZ may inadvertently increase its risk by becoming
exposed to collateral concentrations. For example, in the same way that an over-exposure to aparticular industry may mean that a bank is more sensitive to the fortunes of that industry, an overexposure to a particular collateral asset type may make ANZ more sensitive to the performance ofthat asset type.
ANZ does not believe that it has any material concentrations of collateral types, given the welldiversified nature of its portfolio and conservative asset extension ratios.
Table 7(b): Credit risk mitigation - collateral42 43 44
September 2009
Total Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M% Coverage

Corporate

13,881

350

-

2.5%

Sovereign

-

-

-

0.0%
0.0%

Standardised

Bank

15

-

-

1,169

19

-

1.6%

-

-

-

0.0%

15,065

369

-

2.4%

Total Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M% Coverage

Corporate

16,072

478

-

3.0%

Sovereign

-

-

-

0.0%
0.0%

Residential Mortgage
Other Retail
Total

March 2009

Standardised

Bank

29

-

-

1,347

22

-

1.6%

-

-

-

0.0%

17,448

500

-

2.9%

Total Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M% Coverage

Corporate

13,466

481

-

3.6%

Sovereign

-

-

-

0.0%
0.0%

Residential Mortgage
Other Retail
Total

September 2008

Standardised

Bank

28

-

-

Residential Mortgage

994

18

-

1.8%

-

-

-

0.0%

14,488

499

-

3.4%

Other Retail
Total

42

In order to show the cover provided by the disclosed mitigants, the exposure amount is prior to the application of
the eligible risk mitigation. Excluding mitigants, the Standardised exposure amount is $14,696 million as of
September 2009 (March 2009: $18,355 million; September 2008: $15,831 million).

43

Eligible Collateral includes cash collateral (cash, certificates deposits and bank bills issued by the lending ADI),
gold bullion and highly rated debt securities.

44

Margin Lending exposures of $1,553 million were reclassified during the period from Standardised to Other Assets,
and are therefore excluded from Tables 4(b), 4(c), 4(d), 4(e), 4(i), 5(b), 7(b) and 7(c). Prior period comparatives
have also been restated to reflect this reclassification (March 2009: $1,407 million; September 2008: $1,842
million).

43

ANZ Basel II Pillar 3 disclosure

September 2009

Table 7(c): Credit risk mitigation – guarantees and credit derivatives45 46
September 2009
Total Exposure$M

Exposures Covered
by Guarantees$M

Exposures Covered by
Credit Derivatives$M

Corporate

190,898

10,809779

6.1%

Sovereign

23,052

24

-

0.1%

Bank

32,959

3,933

-

11.9%

Residential Mortgage

201,581---

Qualifying Revolving Retail

19,820---

Other Retail

28,651---496,960

14,766779

3.1%% Coverage

Advanced IRB

Total
Standardised
Corporate

13,531---

Sovereign

-

-

-

-

Bank
Residential Mortgage
Other Retail

15

-

-

-

1,150

-

-

-

-

-

-

-

14,696---

Total Exposure$M

Exposures Covered
by Guarantees$M

Exposures Covered by
Credit Derivatives$M% Coverage

Corporate

221,174

12,053

1,023

5.9%

Sovereign

18,121

35

-

0.2%

Bank

50,001

1,898

-

3.8%

Residential Mortgage

195,432---

Qualifying Revolving Retail23,604---

Other Retail27,073---

535,405

13,986

1,023

2.8%

Total

March 2009

Advanced IRB

Total
Standardised
Corporate

15,594---

Sovereign

-

-

-

-

Bank
Residential Mortgage
Other Retail
Total

29

-

-

-

1,325

-

-

-

-

-

-

-

16,948

-

-

-

45

Guarantee coverage for Corporate exposures can originate from Corporate, Sovereign or Bank counterparties.
Table 7(c) shows the original exposure amount by asset class prior to the impact of the guarantee. For example, aCorporate exposure guaranteed by a Bank is shown above as a Corporate, however it will appear in other tables inthis Pillar 3 disclosure as a Bank exposure i.e. post the effect of the guarantee.

46

The total exposure amount in Table 7(c) has been grossed up for the mitigant value of Credit Derivatives.

44

ANZ Basel II Pillar 3 disclosure

September 2009

Table 7(c): Credit risk mitigation – guarantees and credit derivatives (continued)
September 2008
Total Exposure$M

Exposures Covered
by Guarantees$M

Exposures Covered by
Credit Derivatives$M

Corporate

227,266

7,720

821

3.8%

Sovereign

8,912

58

-

0.7%

% Coverage

Advanced IRB

Bank

49,961---

Residential Mortgage

186,287---

Qualifying Revolving Retail23,458---Other Retail

26,708---522,592

7,778

821

1.6%

Total
Standardised
Corporate

12,985---

Sovereign

-

-

-

-

Bank

28

-

-

-

Residential Mortgage

976

-

-

-

Other Retail
Total

Table 8

-

-

-

-

13,989---General disclosures for derivatives and counterparty credit
riskDefinition of market-related counterparty credit risk
Market-related credit risk is present in market instruments (derivatives and forward contracts), andcomprises settlement risk (default at the end of the contract) and market replacement risk (default at
any time during the life of the contract). Market-related credit risk requires a different method to
calculate EAD because actual and potential market movements impact ANZ’s exposure or replacement
rate. The markets covered by this treatment include interest rates, foreign exchange, credit default
swaps, equities and commodities.
Market related counterparty credit risk governance
The Market Risk function is responsible for methodology and Credit Risk function is responsible forday-to-day capture of relevant transactions in the counterparty credit risk management system andthe calculation of counterparty credit risk. As described in Chapter 7, Market Risk provides regular
reporting to the CMRC, ANZ’s most senior executive credit and trading risk committee.
Market related counterparty credit risk measurement and reporting
For counterparty credit risk, the general approach is to calculate the exposure as the sum of themark-to-market value of the exposure, plus the sum of the notional principal multiplied by thepotential credit risk exposure (PCRE) for the exposure.
•

The mark-to-market is essentially the current replacement cost of the contract, and can bepositive or negative. Where it is positive, i.e. in the money, ANZ has a credit exposure against
the counterparty; if it is negative i.e. out of the money, the value used in the calculation is zero•

The PCRE factors recognise that prices change over the remaining period to maturity, and thatrisk increases with time. The PCRE factors are mandated for regulatory capital purposes. Forinternal economic capital purposes, more granular PCRE factors, based on observed historic
volatilities are used. The economic capital treatment also takes concentrations into account.

For certain non-standard products where regular PCRE factors do not apply, ANZ uses a specialist
credit system to apply a Monte Carlo simulation to calculate the potential credit exposure. The PCRE
factors are also used by lending officers when establishing customer limits, to ensure that credit
assessment recognises the potential volatility of the transactions. In terms of reporting, counterparty
credit risk is calculated daily and excesses above approved limits are reported to account controllers
and risk officers for action.
Impaired derivatives are subject to a Credit Valuation Adjustment (market assessment of credit risk of
relevant counterparties, as stated in Chapter 5) which obviates the need for an Individual Provision.

45

ANZ Basel II Pillar 3 disclosure

September 2009

Wrong way risk
ANZ’s management of counterparty credit risk also recognises the possibility of wrong way risk
arising. Wrong way risk emerges when a counterparty’s Probability of Default is positively correlatedwith market risk factors. ANZ’s credit policies require consideration of wrong way risk arising on alltransactions, including credit derivatives. These assessments are reviewed as part of independent
credit approval processes.
Counterparty credit risk mitigation
ANZ’s primary tools to mitigate counterparty credit risk are netting, collateral and a rigorous control
system.
Close-out netting agreements reduce the risk of loss by reducing all eligible transactions with a single
counterparty to a single net figure i.e. both in and out of the money positions.
In some transactions, ANZ or the counterparty may be required to lodge collateral. Standard market
documentation governs the amount of collateral required and the re-margining frequency between
counterparties. There is a link between the amount of collateral required and external ratings, as well
as minimum transfer amounts. This means that in the event that ANZ’s or a counterparty’s externalrating was downgraded, ANZ or the counterparty would likely be required to lodge additional
collateral. The amount required to be lodged would depend upon the underlying instruments and thestate of the markets, so would be different at each re-margining interval.
In the event of a downgrading of ANZ’s rating by one notch from AA to AA- at 30 September 2009,
ANZ would not have been required to lodge additional collateral with its counterparties. A downgradeof two notches from AA to A+ would have required lodging of an additional USD 400 million.
The control system, with the system of counterparty limits and independent calculation and reportingof excesses, has been described above.

46

ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 6 – Securitisation
Table 9Securitisation disclosures

Definition of securitisation
A securitisation is a financial structure where the cash flow from a pool of assets is used to service
obligations to at least two different tranches or classes of creditors, typically holders of debt securities,
with each class or tranche reflecting a different degree of credit risk. This stratification of credit riskmeans that one class of creditors is entitled to receive payments from the pool before another class.
Securitisations take many forms, and may be categorised as traditional or synthetic, depending on
legal ownership of the pool of assets:Traditional securitisations involve the legal transfer of ownership of the underlying asset pool intoa Special Purpose Vehicle (SPV), which finances the purchase by issuing debt instruments (notes)
to investors. The assets in the SPV are insulated from the bankruptcy of the seller or servicer of
those assets, and principal and interest are paid to the investors from realisation of or regularcash flows from those assets. The notes are commonly referred to as asset backed securities(ABS), and may take the form of residential mortgage backed securities (RMBS)

Synthetic securitisations also transfer the credit risk of the pool of assets to third parties, howeverlegal ownership of the assets remains with the originator. This transfer of credit risk may beachieved via funded structures (eg: credit-linked notes) or may be unfunded (eg: credit default
swaps, credit derivatives or guarantees).

Regulatory capital approaches used in ANZ’s securitisation activities
For securitisation exposures held in ANZ’s banking book47, ANZ applies an Internal Ratings-Basedapproach (as outlined in APS 120 Capital Adequacy: Securitisation) to determine the regulatory capitalcharge related to banking book securitisation exposures.
For securitisation exposures held in ANZ’s trading book, regulatory capital is calculated under market
risk approaches described in Chapter 7.
Securitisation activities
ANZ is involved in four main types of securitisation activities:


Securitisation of ANZ-originated assets - The securitisation of ANZ-originated assets provides
diversity in the funding base of ANZ and may be traditional or synthetic. Such securitisations
may or may not involve the transfer of credit risk and as such, may or may not provide regulatory
capital reliefSecuritisation of third-party originated assets



Facilities and services provided to securitisations - ANZ provides various facilities tosecuritisations, including: liquidity, funding and credit support as well as services such as
structuring and arranging, conduit management and (via ANZ Capel Court Limited) trust
managementInvestment in securities - ANZ purchases notes issued from securitisation programs for trading or
liquidity purposes.

Governance of securitisation activities
Governance of securitisation activities is overseen by the Board and executive Committees describedin Chapter 3, and managed in accordance with the credit risk and market risk frameworks described in
Chapters 5 and 7.
Many functions within ANZ are involved in securitisation activities, due to the range of activities
undertaken and risks that need to be managed. For origination and structuring, ANZ has a specialist
securitisation team with independent risk personnel overseeing operations. Credit decisions requirejoint risk and business approval.
The securitisation team must be involved in all non-trading
securitisation transactions, which ensures consistent expert treatment.

47

Exposures are classified into either the trading book or the banking book. In general terms, the trading bookconsists of positions in financial instruments and commodities held with trading intent or in order to hedge otherelements of the trading book, and the banking book contains all other exposures. Banking book exposures are
typically held to maturity, in contrast to the shorter term, trading nature of the trading book.

47

ANZ Basel II Pillar 3 disclosure

September 2009

When ANZ is investing in securitisations, the global Markets business manages them as they do any
other part of the trading or liquidity portfolios.
Risk measurement and reporting of securitisation exposures
In accordance with APS 120, ANZ has a hierarchy of approaches that can be used to quantify thecredit risk of securitisation exposures in the banking book. The most common approach used is theInternal Assessment Approach, whereby ANZ uses a rating agency-type methodology which takes into
account historical performance of assets and other (asset-specific) considerations such as
underwriting standards.
The rating derived from the above process is used with a conservative LGD and EAD for economic
capital.
All facilities for securitisation vehicles are reviewed at least annually, including the risk grade. The
reliance on external rating agency ratings and/or methodology means that ANZ must periodicallyreview the methodology to ensure that it remains appropriate.
The type and frequency of reporting for ANZ’s securitisation exposures is a function of the nature ofthose exposures:

Facilities to securitisation vehicles are reported using standard credit reporting systems,
distinguished by appropriate product codes. The regular reporting frequency for most of thesesystems is monthlyIn addition, all exposures to SPVs are reported to the Credit and Market Risk Committee on a sixmonthly basis. Utilisation of liquidity facilities are reported internally on a weekly basis



Investments in securitisations will be reported through the trading book or other investment
reporting systems.

Accounting policies
Many securitisation structures will involve the creation of a securitisation SPV. Any SPV in which ANZ
has involvement is assessed for control under the requirements of AASB Interpretation 112
Consolidation – Special Purpose Entities, which is based on the concepts of risk and rewards. Where
control is determined to exist, the SPV is consolidated into ANZ’s financial statements.
This
assessment is performed regardless of whether the assets are ANZ or third-party originated. Financial
instruments held and issued either from SPVs which are consolidated by ANZ or those held or issued
to a non-consolidated SPV are recognised and valued using the principles of AASB 139 Financial
Instruments: Recognition and Measurement, depending on their nature.
Derecognition of any transferred ANZ originated assets is determined based on the derecognition
principles of AASB 139 using a risks and rewards model. Assets may be fully or partially derecognised
when substantially all the risks and rewards are transferred to the SPV and control of the asset is notretained.
In the case of a synthetic securitisation, any transferred credit exposure is recognised through the fairvalue measurement of the segregated embedded or stand-alone credit derivative established within
the structure.
Use of external rating agencies
ANZ typically uses Standard & Poor’s, Moody's Investor Services and/or Fitch Ratings forsecuritisations. These rating agencies are all used across a variety of asset classes and securitisation
activities.

48

ANZ Basel II Pillar 3 disclosure

September 2009

Table 9(d): Traditional and synthetic securitisation exposures48 49
September 2009
Traditional securitisations

Underlying asset

Regulatory credit
exposure
ANZ originated$M

Residential mortgage

Third party
originated$M

Other Services$M

Facilities provided
$M
1,782

284

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

1,057

Commercial loans

-

-

-

181

Other

-

-

-

4,410

Total

284

-

-

7,430

September 2009
Synthetic securitisations
Underlying asset

Regulatory credit
exposure
ANZ originated$M

Third party
originated$M

Other Services$M

Facilities provided$M

Residential mortgage

-

-

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

1,065

Total

-

-

-

1,065

September 2009
Aggregate of traditional and synthetic
securitisations
Underlying asset

Regulatory credit
exposure
ANZ originated$M

Residential mortgage

Third party
originated$M

Other Services$M

Facilities provided
$M

1,782

284

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

1,057

Commercial loans

-

-

-

181

Other

-

-

-

5,475

Total

284

-

-

8,495

March 2009
Traditional securitisations

Underlying asset

Regulatory credit
exposure
ANZ originated$M

Residential mortgage

Third party
originated$M

Other Services$M

Facilities provided
$M
3,077

326

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

1,371

Commercial loans

-

-

-

554

Other

-

-

-

5,300

Total

326

-

-

10,30248

For the ANZ originated and Third party originated columns the value shown is the current outstanding value of theassets originated. For Facilities provided the value shown is the EAD of facilities extended to securitisation
undertaken by third parties where ANZ does not act as an originator.

49

Total regulatory credit exposure in Table 9(d) varies from that presented in remaining tables by $45 million. This
amount is included in total asset value of ANZ originated securitisations, however is excluded from facilities provided
in Table 9(d) to avoid double counting.

49

ANZ Basel II Pillar 3 disclosure

September 2009

Table 9(d): Traditional and synthetic securitisation exposures (continued)
March 2009
Synthetic securitisations
Underlying asset

Regulatory credit
exposure
ANZ originated$M

Third party
originated$M

Other Services$M

Facilities provided$M

Residential mortgage

-

-

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

2,200

-

-

-

Other

-

-

-

1,409

Total

2,200

-

-

1,409

Commercial loans

March 2009
Aggregate of traditional and synthetic
securitisations
Underlying asset

Regulatory credit
exposure
ANZ originated$M

Residential mortgage

Third party
originated$M

Other Services$M

Facilities provided
$M

3,077

326

-

-

Credit cards and other personal loans

0

-

-

-

Auto and equipment finance

0

-

-

1,371

Commercial loans

2,200

-

-

554

Other

0

-

-

6,709

Total

2,526

-

-

11,711

September 2008
Traditional securitisations

Underlying asset

Regulatory credit
exposure
ANZ originated$M

Residential mortgage

Third party
originated$M

Other Services$M

Facilities provided
$M
3,467

371

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

1,480

Commercial loans

-

-

-

807

Other

-

-

-

6,819

Total

371

-

-

12,573September 2008
Synthetic securitisations

Underlying asset

Regulatory credit
exposure
ANZ originated$M

Third party
originated$M

Other Services$M

Facilities provided$M

Residential mortgage

-

-

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

2,200

-

-

-

Other

-

-

-

1,667

Total

2,200

-

-

1,667

Commercial loans

September 2008
Aggregate of traditional and synthetic
securitisations
Underlying asset

Regulatory credit
exposure
ANZ originated$M

Residential mortgage

Third party
originated$M

Other Services$M

Facilities provided
$M

3,467

371

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

1,480

Commercial loans

2,200

-

-

807

Other

-

-

-

8,486

Total

2,571

-

-

14,24050

ANZ Basel II Pillar 3 disclosure

September 2009

Table 9(e): Impaired and Past due loans relating to ANZ originated securitisations
Value as at 30 September 2009
Underlying asset

ANZ originated$M
284

Residential Mortgage

Impaired$M-

Half Year
Losses recognised$M-

Past due$M
0Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

284

-

-

-

ANZ originated$M
326

Impaired$M-

Value as at 31 March 2009
Underlying asset
Residential Mortgage

Half Year
Losses recognised$M-

Past due$M-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

2,200

-

-

-

Other

-

-

-

-

Total

2,526

-

-

-

Value as at 30 September 2008
Underlying asset

ANZ originated$M
371

Residential Mortgage

Impaired$M-

Half Year
Losses recognised$M-

Past due$M-

Credit cards and other personal loans

0

-

-

-

Auto and equipment finance

0

-

-

-

Commercial loans

2,200

-

-

-

Other

0

-

-

-

Total

2,571

-

-

-

Table 9(f): Securitisation – Regulatory credit exposures by exposure type50
Regulatory credit exposure

Liquidity facilities

September
2009
$M
3,915

March
2009
$M
5,239

September
2008
$M
5,732

Funding facilities

Securitisation exposure type

3,006

4,327

5,792

Underwriting facilities

-

-

-

Lending facilities

-

-

-

59

117

122
2,639

Credit enhancements
Holdings of securities (excluding trading book)

1,561

2,073

Other

-

-

-

Total

8,541

11,756

14,285

Table 9(g): Securitisation – Regulatory credit exposures by risk weight band
September 2009

Securitisation risk weights

March 2009

September 2008

Regulatory credit
exposure$M

Risk weighted
assets$M

Regulatory credit
exposure$M

Risk weighted
assets$M

Regulatory credit
exposure$M

Risk weighted
assets
$M

6,206

627

8,938

1,264

11,569

1,528

225

79

1,009

353

736

257

≤ 25%
>25 ≤ 35%
>35 ≤ 50%

26

13

-

-

137

>50 ≤ 75%

412

309

1

1

1

1

>75 ≤ 100%

1,630

1,630

1,746

1,746

1,644

1,643
778

-

-

-

-

183

42

-

62

-

15

-

8,541

2,658

11,756

3,364

14,2854,271>100 ≤ 650%
1250% (Deduction)
Total

September 2009
Deductions
from Tier 1
Capital$M-

Deductions
from Tier 2
Capital$M-

Credit cards and other personal loans--

Auto and equipment finance-Commercial loans

-

Other
Total

Securitisation exposures deducted from
CapitalResidential Mortgage

64

March 2009

September 2008-

Deductions
from Tier 1
Capital$M-

Deductions
from Tier 2
Capital
$M
-

-

-

-

-

-

-

-

-

-

21

21

42

21

21

42

Total
$M

50

-

Deductions
from Tier 1
Capital$M-

Deductions
from Tier 2
Capital
$M
-

-

-

-

-

-

-

-

-

-

-

-

-

31

31

62

8

8

15

31

31

62

8

8

15

Total
$M

Total
$M
-

Credit enhancement facilities are second loss facilities and benefit from credit enhancement from a third party firstloss provider.

51

ANZ Basel II Pillar 3 disclosure

September 2009

Table 9(h) and 9(i): Security exposures subject to early amortisation or using Standardised
Approach
ANZ does not have any Securitisation exposures subject to early amortisation or using Standardised
Approach.
Table 9(j): Securitisation – Summary of current year’s activity by underlying asset typeand facility51
For the 6 months to 30 September 2009
Original value securitised
ANZ originated$M

Third party originated$M

Recognised gain or loss
on sale$M

Residential mortgage

-

1,773

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

400

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

2,173

-

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities-

Underwriting facilities-

Lending facilities

59

Credit enhancements-

Holdings of securities (excluding trading book)

-

Other

-

Total

59

For the 6 months to 31 March 2009
Original value securitised
ANZ originated$M

Third party originated$M

Recognised gain or loss
on sale$M

Residential mortgage

-

772

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

772

-

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities-

Funding facilities-

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

-

Other

-

Total

-

51
“Third party originated” represents the total original assets of the securitisation, and is not representative of ANZ's
exposure.

52

ANZ Basel II Pillar 3 disclosure

September 2009

Table 9(j): Securitisation – Summary of current year’s activity by underlying asset typeand facility (continued)
For the 6 months to 30 September 2008
Original value securitised
ANZ originated$M

Third party originated$M

Recognised gain or loss
on sale$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

2,041

-

Commercial loans

-

-

-

Other

-

4,833

-

Total

-

6,874

-

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities

335

Funding facilities

2,902

Underwriting facilities-

Lending facilities-

Credit enhancements-

Holdings of securities (excluding trading book)

-

Other

-

Total

3,237

53

ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 7 – Market Risk
Table 11

Market risk – Internal Models Approach (IMA)

Definition and scope of market risk
Market risk is defined as the risk to ANZ’s earnings arising from changes in interest rates, foreignexchange rates and credit spreads, or from fluctuations in bond, commodity or equity prices.
Market risk arises through ANZ’s trading and balance sheet activities. This chapter focuses on market
risk arising from the traded book positions as well as from trading book and banking book positions
that give rise to foreign exchange or commodity risks.
Chapter 10 deals with market risk
management of interest rate in the banking book.

Regulatory approval to use the Internal Models Approach
ANZ has been given approval by APRA to use the Internal Models Approach (IMA) under APS 116
Capital Adequacy: Market Risk for all trading portfolios except for specific interest rate risk, equity
trading and electricity trading. ANZ uses the Standardised Approach to market risk capital for thesethree subsets of market risk.
Governance of market risk
The Board’s Risk Committee oversight of market risk is supported by the Credit and Market Risk
Committee as described in Chapter 3.
The Market Risk function is a specialist risk management unit independent of the business that is
responsible for measuring and monitoring market risk, and has designed and implemented policies
and procedures to ensure that market risk exposures are managed within the appetite and limit
framework set by the Board.
The management of market risk arising from the traded book positions as well as from trading bookand banking book positions that give rise to foreign exchange or commodity risks is described below.
Traded market risk
Management of traded market risk is governed by the Traded Market Risk Management Framework.
Key aspects of this framework include:•

A clear definition of the trading book•

A comprehensive set of market risk policies that promote the proactive identification andcommunication of risk•

A robust Value at Risk (VaR) quantification approach that captures all sources of material market
risk, supplemented by comprehensive stress testing•

A comprehensive market risk limit framework that controls all material market risks•

An independent Market Risk function which actively monitors market risk exposure, compliancewith limits and risk policies, as well as the ongoing effectiveness and appropriateness of the risk
management framework•

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

Measurement of market risk
ANZ’s traded market risk management framework incorporates a risk measurement approach toquantify the magnitude of market risk within trading books. This approach and related analysis
identifies the range of possible outcomes that can be expected over a given period of time andestablishes the relative likelihood of those outcomes.
ANZ’s key tools to measure and manage traded market risk on a daily basis are VaR estimates andsensitivities measures. VaR is calculated using historical changes in market rates and prices over theprevious 500 business days. Traded VaR is calculated at 97.5% confidence interval, one-day holding
period for trading activities and 99% confidence interval, ten-day holding period for the calculation ofregulatory market risk capital. A 97.5% confidence level, one-day holding period VaR means that
there is 97.5% chance that a loss will not exceed the VaR estimate on any given day. A 99%
confidence level, ten-day holding period VaR means that there is 99% chance that a loss will not
exceed the VaR estimate over a period of 10 days, assuming no rebalancing of risk positions. All
material market risk factors and all trading portfolios (with the exception of interest rate risk – specific54

ANZ Basel II Pillar 3 disclosure

September 2009

risk, equities and electricity trading, for which capital is calculated using under the Standardised
Approach described in Table 10 below) are captured within the VaR model.
As VaR is driven by historical observations, it alone is not sufficiently reliable to estimate themaximum loss ANZ could suffer in an extreme market event. To complement VaR analysis, ANZ
therefore also undertakes a wide range of stress tests to the trading portfolio, both on individual
portfolios and at the Group level. Standard stress tests are applied on a daily basis and measure thepotential loss impact arising from applying the largest market movements during the previous sevenyears over specific holding periods. Holding periods used to calculate stress parameters differ andreflect the relative liquidity of each product type.
Plausible severe scenarios are developed with reference to past events impacting traded markets suchas the oil shock in the 1970’s, stock market crash in 1987 and the emergence of global financial crisis
in 2008, as well as possible future events such as a flu pandemic. Potential losses arising as a result of
these scenarios are calculated monthly and reported to the CMRC.
VaR and stress tests are also supplemented by the cumulative loss limits detailed control limits. The
cumulative loss limits ensure that in the event of continued losses from a trading activity, the trading
activity is stopped and senior management reviews the circumstances leading to the losses before
trading is resumed. Where necessary, detailed control limits such as sensitivity or position limits arealso in place to ensure appropriate control is exercised over a specific risk or product.
All VaR models used within ANZ for the purposes of measuring exposure against limits are evaluatedagainst actual and hypothetical profit and loss outcome. Back testing is conducted daily, and outliers
are analysed to understand if the issues are the result of trading decisions, systemic changes inmarket conditions or issues related to the VaR model i.e. historical data or model calibration.
The following table discloses the high, mean and low VaR values over the reporting period and at
period end, and a comparison of VaR estimates with actual gains/losses over the reporting period:
Table 11(d): VaR Values over the reporting period52 53
VaR values over six months ended 30 September 2009
Value at Risk (VaR)

Mean value$M-

Maximum value$M-

Minimum value$M-

Period end$M-Interest Rate

6.6

10.8

2.4

9.6

Foreign exchange

2.1

4.6

0.9

3.5

Commodity

1.4

4.3

0.6

1.2

Credit

1.8

3.2

1.2

2.4

Equities

VaR values over six months ended 31 March 2009
Value at Risk (VaR)

Mean value$M-

Maximum value$M-

Minimum value$M-

Period end$M-Interest Rate

5.5

10.3

2.4

6.6

Foreign exchange

1.7

3.0

0.9

1.5

Commodity

1.0

2.5

0.6

0.9

Credit

1.9

3.2

1.2

2.2

Equities

VaR values over six months ended 30 September 2008
Value at Risk (VaR)
Equities

Mean value$M-

Maximum value$M-

Minimum value$M-

Period end$M
2.8

Interest Rate

1.9

3.6

1.2

Foreign exchange

0.9

2.5

0.4

2.5

Commodity

1.0

1.5

0.4

1.3

Credit

1.0

2.6

0.6

1.2

52

Regulatory VaR is calculated at 97.5% confidence level for a one-day holding period.

53

The Foreign Exchange VaR excludes foreign exchange translation exposures outside of the Trading Book. (NonTrading translation risk includes translation of the net mark-to-market of the structured credit business).

55

ANZ Basel II Pillar 3 disclosure

September 2009

Comparison of VaR estimates to actual gains/losses
Back testing involves the comparison of calculated VaR exposures with profit and loss data to identify
the frequency of incidents when trading losses exceed the calculated VaR. As a probabilistic measureof potential future gains or losses, it is expected that results exceed VaR a proportion of the time. For
APRA backtesting purposes, VaR is calculated at the 99% confidence interval with a one day holding
period. Therefore, over the long-run we would expect one back testing outlier every 100 days.
ANZ uses actual profit and loss data and hypothetical profit and loss data. Hypothetical profit and loss
data is designed to remove the impacts of intraday trading and sales margins. It is calculated as thedifference between the value of the prior day portfolio at prior day closing rates and the value atcurrent day closing rates. Markets Finance calculates actual profit and loss while Market Risk
calculates hypothetical profit and loss.
As at 30 September 2009, based on the prior 250 business days, there were 6 hypothetical and 1
actual genuine negative outliers compared to 20 hypothetical and 4 actual genuine negative outliers
as at 30 September 2008. This decrease in the number of hypothetical and actual genuine negative
outliers is in line with expectations as the historical VaR model now incorporates the market volatility
experienced from August 2007 onwards, while a reduction in market volatility throughout 2009 has
decreased the magnitude of daily actual and hypothetical profit and loss results. Considering this the
VaR model continues to be an appropriate model to use for Market Risk calculations.
Reporting of market risk
Market Risk conducts daily VaR and stress testing and reports the results to Market Risk management,
senior executives and trading management. In the event of breaches, Market Risk will escalate detailsof the breach to the appropriate discretion holder within Market Risk and Group Risk. All breaches arereported to CMRC on a monthly basis.
Market Risk monitors and analyses back testing results on a daily basis and reports quarterly results
to CMRC.
Mitigation of market risk
ANZ’s system of market risk quantification is fundamental to how market risk is mitigated. The
results are compared to established limits and breaches are reported immediately to management
who instruct on the appropriate action in accordance with authorised delegations. All breaches aresubsequently reported to senior executive Risk committees, i.e. CMRC.
ANZ also uses standard market documentation in order to reduce potential exposures by techniquessuch as netting. In the event of a default, netting agreements are designed to reduce amounts owed
to and from counterparties to a single net figure.
The Market Risk group is also an important factor in how ANZ mitigates its market risk. It is a unit
independent of the dealing, processing/settlements operations and manages the day-to-day risk
management function. Market Risk group has presence in all the major dealing operations centres inAustralia, New Zealand, Asia, Europe and America.
Commodities risk
Commodity price risk arises as a result of movement in prices for various commodities. All exposures
to commodity prices are transferred to the trading book and centrally managed by the business andmonitored by the Market Risk function in accordance with the Traded Market Risk Management
Framework.
Foreign exchange risk
Foreign exchange risk arises as a result of movements in relative values of various currencies. It
arises from ANZ’s operating business activities, trading activities and structural foreign exchange
exposures from foreign investments and capital management activities.
Foreign exchange exposures from ANZ’s normal operating business and trading activities are recordedin core multi-currency systems and managed within the trading book in accordance with the Traded
Market Risk Management Framework.
ANZ’s structural foreign exchange exposures are managed in accordance with the policies approved by
the Risk Committee of the Board, with the main objective of ensuring that ANZ’s capital ratio is largely
protected from the changes in foreign exchange. ANZ’s investment in ANZ National Bank in New
Zealand is the main source of the structural foreign exchange exposure.
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ANZ Basel II Pillar 3 disclosure
Table 10

September 2009Market risk – Standardised Approach

ANZ uses the standard model approach to measure market risk capital for interest rate risk – specificrisk54, equity trading and electricity trading risk factors.
ANZ is in dialogue with APRA concerning approval of an internal model for electricity trading, and isbuilding a history of results using an internal equity model in preparation for an application to APRA
for internal model recognition. For interest rate risk – specific risk, ANZ’s internal VaR model capturesgeneral interest rate and credit spread risk for all products, but not the credit spread risk associatedwith individual issuers of interest rate products.
Table 10(b): Market Risk – Standardised Approach55
Capital requirements
Market Risk under standardised approach
Interest rate risk

September 2009
$M
112

March 2009$M
147

September 2008
$M
167

3

3

2

Equity position risk
Foreign exchange risk-

Commodity risk
Total
RWA equivalent

-

-

6

7

6

121

157

175

1,514

1,961

2,187

54

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

55

RWA equivalent is the capital requirement multiplied by 12.5 in accordance with APRA Prudential Standard APS
110.32.

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ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 8 – Operational Risk
Table 12

Operational Risk

Definition of operational risk
Within ANZ, operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and systems, or from external events. This definition includes legal risk, and therisk of reputational loss56, however excludes strategic risk.
Regulatory approval to use the Advanced Measurement Approach
ANZ has been granted approval by APRA to use the Advanced Measurement Approach (AMA) under
APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk. The approved
AMA applies across all of ANZ, and does not comprise partial use.
Operational risk governance and structure
The roles of ANZ Board Risk Committee and the Operational Risk Executive Committee (OREC) aredescribed in Chapter 3.
Group Operational Risk are responsible for exercising governance over operational risk through the
management of the operational risk framework, policy development, framework assurance,
operational risk measurement and capital allocation, fraud strategy and reporting of operational risk
issues to executive committees.
Divisional Risk Committees and Business Unit Risk Forums manage and maintain oversight ofoperational risks supported by thresholds for escalation and monitoring.
Business units are responsible for implementation of the operational risk framework, including theidentification, analysis, assessment and treatment of operational risks on a day-to-day basis.
Divisional Risk personnel provide oversight of operational risk management undertaken in thebusiness units, and are involved in decision making processes concerning all material operational risk
matters.
Operational risk principles
ANZ has developed a comprehensive framework to manage operational risk which includes thefollowing operational risk management principles:•

Operational risk is recognised as a primary risk within ANZ and has a governance structure
responsible for maintaining oversight•

ANZ will create a culture that recognises operational risk as everyone’s responsibility with roles
and responsibilities clearly articulated at all levels in the organisation•

ANZ will create an environment for sound, transparent decision-making that includes a framework
to identify, assess, control and monitor ANZ’s operational risks•

Key decisions within ANZ will be informed by balancing operational risk with reward•

ANZ will continuously monitor the effectiveness and relevance of its framework for managing
operational risk•

ANZ will monitor its exposure to operational risk and changes to its operational risk profile•

ANZ will learn from losses arising from operational risk by identifying and improving theunderlying root cause.

The framework is supported by a comprehensive set of policies and guidelines.
Operational risk management
Given the wide scope of operational risk, a robust operational risk management framework and soundinternal control environment are essential to risk management. The Operational Risk Frameworkprovides the direction for managing operational risk in terms of specifying the accountabilities ofbusiness unit line management and staff, Divisional and Group Corporate Centre Governancefunctions, and the role of Internal Audit in the management of operational risk at ANZ.

56

Regulatory Capital is calculated in accordance with the definition of Operational Risk outlined in APS 115 Capital
Adequacy: Advanced Measurement Approaches to Operational Risk, and therefore excludes reputational risk
considerations.

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ANZ Basel II Pillar 3 disclosure

September 2009

Day-to-day management of operational risk is the responsibility of business unit line management andstaff. This includes:•

Identification of potential risks•

Analysis of identified risks, including assessing the inherent and residual risk after considerationof controls currently in place. This requires analysis of the potential consequences of failing todeal with the risks, the likelihood of the risks being realised and the effectiveness of the key
controls in place to prevent or mitigate the risk•

Evaluation of the risk to determine whether it is within Board approved risk appetite•

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

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

Dedicated Divisional and Group Corporate Centre Risk Governance teams provide a support
monitoring and oversight function for business units, with Internal Audit providing independent
assurance and review.
Operational risk mitigation
In line with industry practice, ANZ obtains insurance cover from third party and captive providers for
those operational risks where cost-effective premiums can be obtained. ANZ’s AMA operational risk
regulatory capital does not utilise insurance mitigation under APS115.
Business disruption is a critical risk to a bank’s ability to operate, so ANZ has comprehensive business
continuity, recovery and crisis management plans. The intention of the business continuity andrecovery plans is to ensure critical business functions can be maintained, or restored in a timely
fashion, in the event of material disruptions arising from internal or external events.
Crisis management planning at Group and country levels supplement business continuity plans in theevent of a broader Group or country crisis. Crisis management plans include crisis team structures,roles, responsibilities and contact lists, and are subject to testing.
Operational risk reporting
ANZ’s operational risk management includes internal loss capture, case management and reporting.
Operational risk and compliance events (including actual losses, near misses and breaches) arerecorded and managed to ensure timely, complete and accurate reporting. Such events are required
to be escalated to the appropriate level (either within the business, to Divisional Risk committee, CROor the OREC) in accordance with established reporting thresholds for risk acceptance, remediation
approval or tracking.
ANZ’s Advanced Measurement Approach
Group Operational Risk is responsible for maintaining ANZ’s Advanced Measurement Approach for
operational risk measurement and capital allocation.
ANZ uses a scenario based methodology to determine its operational risk regulatory capital. Thismethodology incorporates the use of business risk profiles which consider the current businessenvironment and internal control factors over a twelve month time horizon.
Operational risk capital is derived using probability distributions and calculated using Monte Carlosimulations. Operational risk modelling is performed at the division and event type level referred to asa modelling cell. The data inputs are combined for each cell using a loss distribution approach andinclude the following:•

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

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

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

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ANZ Basel II Pillar 3 disclosure

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Capital outcomes include:•

Operational Risk Regulatory Capital to meet the regulatory capital soundness standard based on a
99.9% confidence interval in accordance with APRA Prudential Standard APS 115•

Economic Capital based on a 99.97% confidence interval.

ComplianceGroup Compliance has global oversight responsibility for the ANZ Compliance Framework, and eachdivision has responsibility for embedding the Framework into its business operations, identifying all
regulatory compliance obligations, and escalating when breaches occur. The Compliance Framework
fosters an integrated approach where staff are responsible and accountable for compliance, either
within their job role, or within their area of influence.

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ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 9 – Equities
Table 13Equities – disclosures for banking book positions

Definition and categorisation of equity investments held in the banking book
Equity risk is the potential loss that may be incurred on equity investments in the banking book.
ANZ’s equity exposures in the banking book are primarily categorised as follows:•

Equity investments that are taken for strategic reasons - These transactions represent strategic
business initiatives and include ANZ’s investments in wealth management joint ventures with ING
in Australia and New Zealand57 and partnership arrangements with financial institutions in Asia58.
These investments are undertaken only after extensive analysis and due diligence by Group
Strategic Development, internal specialists and external advisors, where appropriate. Board
approval is required prior to committing to such investments and all regulatory notification
requirements are met. Performance of these investments is monitored by both the owningbusiness unit and Group Strategic Development to ensure that it is within expectations and thevalues of the investments are tested at least annually for impairment•

Equity investments on which capital gains are expected - These transactions are originated andmanaged by dedicated equity finance teams. These transactions represent funding solutions for
known customers of ANZ and are governed by specific policies. ANZ ensures that the investmentin these entities does not constitute a controlling interest in the relevant business•

Equity investments made as the result of a work out of a problem exposure - From time to time,
ANZ will take an equity stake in a customer as part of a work out arrangement for problem
exposures. These investments are made only where there is no other viable option available andform an immaterial part of ANZ’s equity exposures.

Valuation of and accounting for equity investments in the banking book
The accounting treatment of equity investments, other than for joint ventures, depends on whether
ANZ has significant influence over the investee, as described in AASB 128 Investment in Associates.
Where significant influence is assessed, the investment is classified as an Investment in Associates in
the financial statements. ANZ adopts the equity method of accounting for associates and the Group’s
interest in joint venture entities. ANZ’s share of results of associates and joint venture entities is
included in the consolidated income statement. Shares in associates and joint venture entities arestated in the consolidated balance sheet at cost plus ANZ’s share of post acquisition net assets.
Interests in associates and joint ventures are reviewed annually for impairment, using either market
value, or a discounted cash flow methodology to assess value in-use.
In accordance with APS 111 Capital Adequacy: Measurement of Capital, equity accounted earnings
from strategic investments in joint ventures and partnerships are excluded from regulatory capital
until received in the form of a dividend.
Where ANZ does not have significant influence over the investee, the investment is classified as
Available For Sale. The investment is initially recognised at fair value plus transaction costs.
Subsequent gains or losses arising from changes in fair value are included as a separate component ofequity in the available for sale revaluation reserve, with any impairment recognised in the income
statement. When the asset is sold the cumulative gain or loss relating to the asset held in theavailable for sale revaluation reserve is transferred to the income statement.

57

On 25 September 2009 ANZ announced it had reached agreement with ING Groep to acquire ING Groep’s 51%
shareholdings in the ANZ-ING wealth management and life insurance joint ventures in Australia and New Zealand,
taking its ownership interest to 100%. Completion is subject to various conditions and is expected to occur during
the fourth quarter of calendar 2009.
58

In addition to existing partnership arrangements with financial institutions in Asia, ANZ announced on 4 August
2009 it had reached agreement with Royal Bank of Scotland Group plc to acquire selected businesses in Taiwan,
Singapore, Indonesia, Hong Kong, Philippines and Vietnam. Completion in each country is subject to regulatory
approval in each jurisdiction and is expected to occur from late 2009 through 2010.

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ANZ Basel II Pillar 3 disclosure

September 2009

Table 13(b) and 13(c): Equities – Types and nature of Banking Book investments59
Balance sheet value

Equity investments
September 2009
$M
Value of listed (publicly traded) equities

1,697

Fair value

March 2009$M

September 2008
$M

2,042

September 2009
$M

1,993

March 2009
$M

2,199

1,708

September 2008
$M
2,059

Value of unlisted (privately held) equities

3,337

3,140

2,935

3,713

3,628

3,757

Total

5,034

5,182

4,928

5,912

5,336

5,816

Table 13(d) and 13(e): Equities – gains (losses)
Full Year
30 September 2008
$M

Half Year
30 September 2009$M

Half Year
31 March 2009$M

Full Year
30 September 2009
$M

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

(3)

(3)

(6)

159

Total unrealised gains (losses)

18

3

21

(56)

-

-

-

-

Gains (losses) on equity investments

Total unrealised gains (losses) included in Gross Tier 1/Tier 2 capital

Table 13(f): Equities – Capital requirement
September 2009
$M

Risk Weighted Assets

March 2009$M

September 2008
$M

Equity investments subject to a 300% risk weight

2

193

-

Equity investments subject to a 400% risk weight

1,912

1,514

1,146

Total minimum capital requirement by equity asset class

1,914

1,707

1,146

Supervisory provisions

n/a

n/a

n/a

Grandfathering provisions

n/a

n/a

n/a

Aggregate amount of equity investments subject to:59

At 31 March 2009 and 30 September 2009, the market value of listed equities equals the fair value of these
instruments. At 30 September 2008, one listed security had a market value materially different to its fair value. The
intrinsic value of this instrument was considered best represented by the fair value. The market value of this
instrument at 30 September 2008 was $65 million and the fair value was $56 million.

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ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 10 - Interest rate risk in the banking book (IRRBB)
Table 14

Interest rate risk in the banking book

Definition of IRRBBInterest Rate Risk in the Banking Book (IRRBB) relates to the potential adverse impact of changes inmarket interest rates on ANZ’s future net interest income. The risk arises from the following principal
sources:•

Repricing and yield curve risk - the risk to earnings or market value as a result of changes in theoverall level of interest rates and/or the relativity of these rates across the yield curve•

Basis risk - the risk to earnings or market value arising from volatility in the interest margin
applicable to banking book items•

Optionality risk - the risk to earnings or market value arising from the existence of stand-alone orembedded options in banking book items.

Regulatory capital approach
ANZ has received approval to use the Internal Model Approach for the calculation of regulatory capitalfor IRRBB, under APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (Advanced ADIs).
GovernanceAs described in Chapter 3, the Board’s oversight of IRRBB is supported by ANZ Asset & Liability
Committee (GALCO) to manage the strategic position and oversee the interest rate risk arising fromthe discretionary position. The Global Markets business manages non-traded interest rate risk withinearnings and market value limits consistent with ANZ’s risk appetite. Market Risk is the independent
unit responsible for monitoring and measuring IRRBB and has designed and implemented policies andprocedures to ensure that IRRBB exposure is managed within the limit framework set by the Board.
GALCO has delegated responsibility for monthly monitoring of IRRBB to the CMRC.
Management framework
As with other key risks within ANZ, IRRBB is managed under a comprehensive framework. Key
aspects of the measurement and reporting framework which provides the basis for monitoring IRRBB
include:•A comprehensive set of policies that promote the proactive identification and communication ofrisk•

Funds Transfer Pricing (FTP) framework to transfer interest rate risk from business units so it canbe managed by the Global Markets business and monitored by Market Risk•

Quantifying the magnitude of risks and controlling the potential impact that changes in market
interest rates can have on the net interest income and balance sheet fair value of ANZ•

An independent Market Risk function which actively monitors market risk exposure, compliancewith limits and risk policies, as well as the ongoing effectiveness and appropriateness of the risk
management framework•

Regular and effective reporting of IRRBB to Executive Management and the Board.

Measurement of IRRBBANZ uses four principal techniques to quantify IRRBB:•Interest Rate Sensitivity – this is an estimate of the change in economic value of the banking
book due to a 1 basis point move in a specific part of the yield curve•

Earnings-at-Risk (EaR) – this is an estimate of the amount of income that is at risk from interest
rate movements over a given holding period, expressed to a 97.5% or 99% level of statisticalconfidence•

Value-at-Risk (VaR) – this is an estimate of the impact of interest rate changes on the banking
book’s market value, expressed to a 97.5% or 99% level of statistical confidence for a given
holding period•

Stress testing – Standard and extraordinary tests are used to highlight potential risk which may
not be captured by VaR, and how the portfolio might behave under extraordinary circumstances.

The calculations used to quantify IRRBB require assumptions to be made about the repricing term of
exposures that do not have a contractually defined repricing date, such as deposits with no set
maturity dates, and prepayments. Changes to these assumptions require GALCO approval.
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ANZ Basel II Pillar 3 disclosure

September 2009

Where relevant, IRRBB techniques recognise foreign currency effects as all measures are expressed inAustralian dollars.
Basis and optionality risks are measured using Monte Carlo simulation techniques, to generate atheoretical worst outcome at a specified confidence level (typically 99%) less the average outcome.
Embedded losses and gains in the banking book are also calculated. This is calculated as the
economic value of the banking book using wholesale market rates (typically the Interest Rate Swap
curve).
Reporting of IRRBBThe output of ANZ’s VaR and EaR calculations are analysed by Global Market Risk on a daily basis.
Stress tests are calculated monthly and reported to CMRC, GALCO and the Risk Committee of theBoard.
IRRBB regulatory capital is calculated monthly and reported to Group executives.
Details of ANZ’s risk exposures, stress tests and compliance with limits are reported to CMRC on amonthly basis. Reports are also provided to the Board’s Risk Committee at least quarterly.
ANZ’s IRRBB capital requirement
The IRRBB regulatory capital requirement includes a value for repricing and yield curve risk, basis andoptionality risks based on a 99% confidence interval, one year holding period and a six year historical
data set.
Embedded losses also make up the capital requirement and are calculated as the difference between
the book value of banking book items and the current economic value.
Results of standard shock scenario
The Basel II framework sets out a standard shock scenario of a 200 basis point parallel shift change ininterest rates, in order to establish a comparable test across banks.

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ANZ Basel II Pillar 3 disclosure

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The table below shows the results of this test by currency of the exposures outside the trading book.
Table 14(b): Interest rate risk in the banking book (IRRBB)60 61
Change in Economic Value
Standard Shock Scenario Stress Testing: Interest
rate shock applied

30 September 2009$M

31 March 2009
$M

30 September 2008$M

200 basis point parallel increase

(9)

(134)

(66)

200 basis point parallel decrease

16

141

71

200 basis point parallel increase

(76)

(79)

(69)

200 basis point parallel decrease

75

79

67

200 basis point parallel increase

(17)

(22)

(23)

200 basis point parallel decrease

10

20

25

200 basis point parallel increase

(5)

(6)

(5)

200 basis point parallel decrease

2

5

5

200 basis point parallel increase

(17)

(38)

(14)

200 basis point parallel decrease

11

35

15

IRRBB regulatory capital

197

-

325

IRRBB regulatory RWA

2,465

-

4,058

AUD

NZD

USD

GBP

Other

Stress testing methodology
The information provided for ANZ’s IRRBB capital requirement, as determined by its internal model.
The capital requirement includes a value for Repricing & Yield Curve risk based on historical simulation
with a 99% confidence interval, 1 year holding period and a 6 year historical data set. Values for
Optionality and Basis risk are also included and have been determined using Monte Carlo simulation.
Embedded losses also make up the capital requirement and are calculated as the difference between
the book value of banking book items and the current economic value.

60

IRRBB risk weighted assets reduced from September 2008 to September 2009 due to the increase in embedded
gains on Investment Term of Capital offsetting the increased volatility in repricing and yield curve risk as measured
by Value at Risk VaR. The reduction in IRRBB RWA to nil at March 2009 was due to both realisation of prior gains
and an increase in global term yields.

61

Risk Weighted Assets are derived by multiplying total regulatory capital by 12.5

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ANZ Basel II Pillar 3 disclosure

September 2009

Chapter 11 – Liquidity risk
Overview
Liquidity risk is the risk that ANZ has insufficient capacity to fund increases in assets or is unable tomeet its payment obligations as they fall due, including repaying depositors or maturing wholesale
debt. The timing mismatch of cash flows and the related liquidity risk is inherent in all banking
operations and is closely monitored by ANZ.
Governance
The management of ANZ’s liquidity and funding risk is overseen by the ANZ Board’s Risk Committee
and the GALCO, in accordance with ANZ’s liquidity policy framework.
Scenario modelling
The Global Financial Crisis highlighted the importance of differentiating between stressed and normal
market conditions in a name-specific crisis, and the different behaviour that offshore and domestic
wholesale funding markets can exhibit during market stress events. Scenario modelling stresses site
and total bank cashflow projections against multiple ‘survival horizons’. (A ‘Survival Horizon’ is theperiod that ANZ is required to remain cash flow positive under a specific scenario or stress.)
Scenarios modelled are either prudential requirements i.e.: a ‘going-concern’ scenario or ‘name crisis’
scenario; or Board approved events including ‘Name-specific’ stresses and ‘Funding market’ events.
Under these scenarios, customer and wholesale balance sheet asset/liability flows are stressed.
Funding metrics
ANZ actively uses balance sheet disciplines to prudently manage funding requirements. ANZ also
employs funding metrics to ensure that an appropriate proportion of ANZ’s assets are funded by stable
funding sources including core customer deposits, longer-dated wholesale debt (with a remaining term
exceeding one year) and equity. ANZ’s funding profile strengthened further during the financial year
as a result of solid growth in customer deposits and issuance of $25.8 billion of term wholesale debt.
Customer deposits and other funding liabilities increased by 12% to $242.4 billion at 30 September
2009 (55% of total funding) from $215.6 billion (50% of total funding) at 30 September 2008. As aresult, the ANZ’s proportional reliance on short term wholesale funding decreased to 17% from 22%
Wholesale funding
ANZ maintained access to all major wholesale funding markets to meet its borrowing requirement infull. Benchmark term debt issues were executed in AUD, USD, JPY, EUR and CHF. Short-term
wholesale funding markets continue to function effectively, both locally and offshore:•In aggregate during the 2009 Financial Year the ANZ raised $25.8 billion of new term funding(greater than one year at the end of the financial year).

•

The weighted average tenor of new term debt issuance was 3.9 years.

The marginal cost of term funding has declined from the peaks established in early calendar 2009,
however funding costs remain high by historical standards. The weighted average cost of term debt
issuance increased by 69 basis points in 2009 (including the cost of the Government Guarantee) as aresult of market conditions.
ANZ continues to build and maintain strong, long-term relationships with wholesale debt investors.
The ANZ’s wholesale debt issuance program was supported by debt investor meetings held inAustralia, New Zealand, the United States, the United Kingdom, Europe, Asia and the Middle East.
ANZ also undertook the following actions to improve its funding capabilities, specifically:•

Established a licensed banking branch in New Zealand in January 2009. The branch structure
expands the range of funding options available to our New Zealand business; and•Transitioned Esanda Finance Corporation Limited (Esanda) from a wholly owned subsidiary
towards a division of ANZ, including the launch of Esanda Term Deposits.
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ANZ Basel II Pillar 3 disclosure

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Liquidity portfolio
The ANZ holds a diversified portfolio of cash and high-quality, highly-liquid securities that may be soldor pledged to provide same-day liquidity. This portfolio helps protect the ANZ’s liquidity position by
providing cash in a severely stressed environment. All assets held in this portfolio are securities
eligible for repurchase, under agreements with the applicable central bank (repo eligible).
At 30 September 2009 the volume of eligible securities available, post any repurchase (i.e. “repo”)
discounts applied by the applicable central bank, was $60.2 billion. In addition, the liquidity portfolio
provided cover against over one year of offshore wholesale debt maturities.
The Liquidity portfolio is well diversified by counterparty, currency, and tenor. Under the liquidity
policy framework securities purchased must be of a similar or better credit quality to ANZ’s external
long-term or short-term credit ratings and continue to be repo eligible. Currently securities issued byapproximately 84 separate counterparties - comprising bank, government and agency issuers - areheld in the portfolio.
Supplementing the prime liquid asset portfolio the ANZ holds additional cash and liquid asset
balances. Our Markets business also holds secondary sources of liquidity in the form of highly liquid
instruments in its trading portfolios.

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

BIPRU 11.5.4R (4) - Disclosure of the firm’s minimum capital requirements covering position,
foreign exchange, commodity, counterparty and concentration risks•

BIPRU 11.5.12R – Disclosure: Market Risk

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