For personal use only

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED- NEW ZEALAND BRANCHGENERAL DISCLOSURE STATEMENT

For the year ended 30 September 2008
No 1. Issued January 2009

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

1GENERAL DISCLOSURE STATEMENT for the year ended 30 September 2008

For personal use only

Contents

General Disclosures2

Summary of Financial Statements

5

Income Statements

6Statements of Recognised Income and Expense

7

Balance Sheets

8

Cash Flow Statements

9Notes to the Financial Statements

10 - 93

Directorate and Auditors

94

Credit Rating Information

96

Directors’ and New Zealand Chief Executive Officer's Statement

97

Independent Audit Report98

Conditions of Registration

99

Index

100

2

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCHGENERAL DISCLOSURESThis Disclosure Statement has been issued in accordance with the Registered Bank
Disclosure Statement (Full and Half-Year - Overseas Incorporated Registered
Banks) Order 2008 (‘the Order’).

For personal use only

In this Disclosure Statement unless the context otherwise requires:a)“Overseas Banking Group” means the worldwide operations of Australia and
New Zealand Banking Group Limited including its controlled entities;

Section 86 of the Reserve Bank Act provides that notwithstanding anything
contained in any law relating to the winding up of companies, but subject tosection 13A(3) of the Banking Act, debts due to the Reserve Bank of Australia
by any ADI shall, in a winding up, have priority over all other debts other thandebts due to the Commonwealth of Australia.

b)“Overseas Bank” or "Ultimate Parent Bank" means the worldwide operations ofAustralia and New Zealand Banking Group Limited excluding its controlled
entities;

Section 13A(3) affects all of the unsecured deposit liabilities of the NZ Branchwhich as at 30 September 2008 amounted to $nil. (30 September 2007 : $nil).

c)“NZ Banking Group” means the aggregated NZ operations of Australia and
New Zealand Banking Group Limited, including those operations conducted
through the NZ branch and controlled entities of the Overseas Bank registeredin New Zealand;d)"NZ Branch" or "Registered Bank" means the New Zealand operations ofAustralia and New Zealand Banking Group Limited, as conducted through the
NZ Branch;e)

any term or expression which is defined in, or in the manner prescribed by, theRegistered Bank Disclosure Statement (Full and Half-Year - Overseas
Incorporated Registered Banks) Order 2008 shall have the meaning given inor prescribed by that Order.

Requirement to hold excess assets over deposit liabilities
Section 13A(4) of the Banking Act (the "Act") states that it is an offence for an
ADI not to hold assets (other than goodwill) in Australia of a value that is equal toor greater than the total amount of its deposit liabilities in Australia, unless APRA
has authorised the ADI to hold assets of a lesser value. During the twelve
months ended 30 September 2008, the Overseas Bank has at all times held
assets (other than goodwill) in Australia of not less than the value of theOverseas Bank's total deposit liabilities in Australia. The requirements of thissection of the Act have the potential to impact on the management of the liquidityof the NZ Banking Group.

General Matters
The full name of the NZ branch is Australia and New Zealand Banking Group Limited
New Zealand Branch and its address for service is Level 6, NBNZ House, 1 Victoria
Street, Wellington, New Zealand.
The full name of the Overseas Bank is Australia and New Zealand Banking Group
Limited and its address for service is Level 14, 100 Queen Street, Melbourne,
Australia.

Nature of Business
The principal activities of the NZ Banking Group during the period were retail,corporate and rural banking, mortgage lending, asset and general finance,international and investment banking, nominee and custodian services. Life
insurance and funds management activities are carried out through the ING New
Zealand joint venture.

With the sale of Truck Leasing Limited, the NZ Banking Group no longer has
significant operating lease activities.
Ranking of local creditors in liquidation
There are material legislative restrictions in the Overseas Bank's country ofincorporation which subordinate the claims of a class of unsecured creditors of theRegistered Bank on the assets of the Overseas Bank to those of another class of
unsecured creditors of the Overseas Bank, in liquidation of the Overseas Bank.

The Banking Act 1959 of the Commonwealth of Australia (the "Banking Act") gives
priority over Australian assets of the Overseas Bank to Australian depositors if theOverseas Bank is unable to meet its obligations or suspends payment. Accordingly,
New Zealand depositors (together with all other senior unsecured creditors of theOverseas Bank) will rank after Australian depositors of the Overseas Bank in
relation to claims against Australian assets.

Specifically, pursuant to section 13A(3) of the Banking Act, if an Authorised Deposit
Taking Institution (defined in that Act to include a Bank like the Overseas Bank) (an"ADI") becomes unable to meet its obligations or suspends payment, the assets of
the ADI in Australia are to be available to meet the ADI's liabilities in the following
order:
(a)

(b)
(c)
(d)

first, the ADI's liabilities to the Australian Prudential Regulation Authority("APRA") (if any), because of the rights APRA has against the ADI because
APRA has made, or is required to make, payments to depositors under the
Financial Claims Scheme (defined below);second, the ADI's debts to APRA for costs incurred by APRA in administrationof the Financial Claims Scheme in respect of the ADI;
third, in payment of the ADI's deposit liabilities in Australia (other than liabilities
covered under paragraph (a)); andfourth, the ADI's other liabilities (in order of priority apart from section 13A(3)).

Under section 13A(1) of the Banking Act, in certain circumstances APRA may takecontrol of an ADI or appoint an administrator (defined in the Banking Act) to takecontrol of its business. Section 16(1) and (2) of the Banking Act provide that,
despite anything contained in any law relating to the winding up of companies, but
subject to section 13A(3) of the Banking Act, the debts of an ADI to APRA in respectof APRA's costs (including costs in the nature of remuneration and expenses) of
being in control of the ADI's business or of having an administrator in control of the
ADI's business have priority in a winding up of the ADI over all other unsecured
debts.

Guarantees
Material obligations of the Overseas Bank are guaranteed by the Commonwealthof Australia. On 12 October 2008 the Prime Minister of Australia announced theAustralian Government's intention to guarantee deposits of ADI's such as theOverseas Bank and to provide a facility to guarantee term funding for ADIs.
These have been implemented by:(a)in the case of deposits and certain other accounts up to A$1 million, ascheme (The "Financial Claims Scheme") pursuant to the Financial
System Legislation Amendment (Financial Claims Scheme and Other
Measures) Act 2008 of the Commonwealth of Australia (The "Financial
Claims Scheme Act");(b)in the case of wholesale funding, by a Deed of Guarantee executed by theTreasurer (and related scheme rules) (the "Wholesale Funding
Guarantee").

The Financial Claims Scheme applies to the Registered Bank, as it is a foreign
branch of an eligible Australian ADI. The Wholesale Funding Guarantee may
also apply as described below.
Financial Claims Scheme
Under the Financial Claims Scheme (the "scheme") if:· APRA has applied for an ADI to be wound up; and·the responsible Minister makes a declaration that the scheme applies tothat particular ADI
then each account holder of a Protected Account (defined below) with that ADI isentitled to be paid by APRA an amount equal to the balance of the protectedaccount plus accrued interest which has been credited to the account (subject tovarious adjustments and preconditions described in the Financial Claims
Scheme Act). Once the responsible Minister has made a declaration, there areno other material conditions to payment other than the ADI being unable to meetits obligations or suspending payment. The deposit must be for an amount lessthan A$1 million. Deposits for a greater amount are covered by the Wholesale
Funding Guarantee (to the extent that is applicable as described below).
A protected account (a "Protected Account") is:··

accounts or covered financial products (defined below) kept under anagreement between the account holder and the ADI requiring the ADI to
pay the account holder, on demand by the account holder or at a timeagreed by them, the net credit balance of the account at the time of thedemand or the agreed time; andan account prescribed by regulations.

A covered financial product is a financial product declared by the AustralianTreasurer to be a covered financial product. A list is available atwww.treasury.gov.au. The list includes accounts such as saving, call, current,
cheque, debit card, transaction and mortgage offset accounts.

Deposit holders do not have to be Australian residents to obtain the benefit of
the Financial Claims Scheme and it applies to deposits denominated in any
currency.
From 12 October 2011 the Financial Claims Scheme is to apply to Australian
dollar deposits only.
Wholesale Funding Guarantee
The Wholesale Funding Guarantee is a deed governed by the laws of the State
of New South Wales and has been executed by the Australian Treasurer onbehalf of the Australian Government. Australian institutions

3
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCHGENERAL DISCLOSURES (continued)

For personal use only

which are ADIs under the Banking Act, which includes the Overseas Bank, areentitled to apply for the Wholesale Funding Guarantee to apply to deposit accounts
over A$1 million and certain funding liabilities. Foreign banks authorised to carry onbanking business in Australia may also apply to have certain deposits and funding
liabilities held by Australian residents guaranteed by the Australian Government.
The Reserve Bank of Australia administers the Wholesale Funding Guarantee.

Under the Wholesale Funding Guarantee, the Commonwealth of Australia
irrevocably guarantees the payment of liabilities covered by an eligibility certificate
issued by the Australian Government in response to an application made by the ADI,
and irrevocably undertakes that whenever the ADI does not pay a liability on thedate on which it becomes due or payable, it shall, upon a claim by a person to whoma guaranteed liability is owed, and following the expiry of any applicable grace
period, pay the guaranteed liability in accordance with the scheme rules. A claim
must be made in the form provided in the scheme rules. In the case of a liability ofan Australian ADI, such as the Overseas Bank, the claimant need not be a residentof Australia.

In order to have the Wholesale Funding Guarantee apply, an ADI must apply to theReserve Bank of Australia for an eligibility certificate. Fees will also be payable,
calculated by reference to the term and amount of the liabilities guaranteed and thecredit rating of the ADI (as at the date of this document, the fee which will apply to
the Overseas Bank based on its rating by Standard and Poor’s of AA, is 70 basis
points per annum applied in respect of its guaranteed liabilities in accordance with
the Wholesale Funding Guarantee). The fees will be levied on a monthly orquarterly basis depending on the liability. An ADI may apply for an eligibility
certificate in respect of a programme under which it issues debt instruments fromtime to time or on a series-by-series basis.

A person to whom a guaranteed liability is owed may rely on the eligibility certificate
issued by the Australian Government as conclusive evidence that the liability
satisfies the criteria for eligibility to be guaranteed under the Wholesale Funding
Guarantee.
An application must set out details of the liabilities to be guaranteed and beaccompanied by an executed counter indemnity in favour of the AustralianGovernment, external legal opinions in a prescribed from, an executed fee letter anda letter of prudential compliance. Further information with respect to the application
procedure and fees can be found at the Australian Government Guarantee website
at www.guaranteescheme.gov.au.
If the ADI is an Australian ADI (such as the Overseas Bank) or an Australiansubsidiary of a bank incorporated overseas, it may apply for the guarantee to applyto:· Deposit liabilities for amounts over A$1 million: The deposit can be at callor with maturity of up to 60 months in excess of $1 million per customer per
ADI, be in any currency and may pre-date the Wholesale Funding Guarantee.
There are no restrictions on the types of depositors;·

Deposits held in overseas branches: Deposits held in overseas branches ofAustralian-owned ADIs can be covered by the Wholesale Funding Guarantee.
There are no restrictions on the types of depositors;·

Short Term Wholesale Funding Liabilities: The liability (which may be in
any currency) must be a senior and unsecured debt instrument with a maturity
not exceeding 15 months. In addition, the instrument must be “not complex”
and be either a bank bill, a certificate of deposit or transferable deposit, adebenture or commercial paper; and·Term Wholesale Funding Liabilities: The liability (which may be in any
currency) must be a senior and unsecured debt instrument with a maturity notexceeding 60 months but greater than 15 months. The instrument must also
be “not complex” and be either a bond, a note or a debenture.

In the case of all instruments, they may be issued in bearer, registered or
dematerialised form. An instrument will not be granted an eligibility certificate
unless it is “not complex”. The Government has published a list of the featuresthat are likely to be regarded by the Government as “complex”.

If the Australian Government does not perform its obligations under the
Wholesale Funding Guarantee, a beneficiary of the guarantee could sue theCommonwealth of Australia under the Judiciary Act 1903 of Australia. In such a
suit, the rights of parties are as nearly as possible the same as in a suit between
subjects of the Commonwealth of Australia. Jurisdiction to hear claims against
the Commonwealth of Australia in contract is vested in certain Australian courts
under the Judiciary Act 1903 of Australia. If a judgment is obtained against theAustralian Government, no execution or attachment can be issued against theproperty or revenues of the Commonwealth of Australia. However, if any
judgment is given against the Australian Government, the Minister for Finance isobliged to satisfy the judgment out of money legally available, on receipt of acertificate of the judgment issued by an officer of a court in which such judgment
has been obtained.

In order to render money legally available, specific appropriation by legislation
passed by the Parliament of the Commonwealth of Australia would be necessary
before any payment is made, unless the amount involved is such that it could be
paid out of funds available under an existing standing appropriation. The
Australian Government has enacted legislation which appropriates funds fromconsolidated revenue for the purposes of paying claims under the Wholesale
Funding Guarantee. The Wholesale Funding Guarantee does not contain any
submission to the courts of a foreign jurisdiction or any waiver of any immunity
which might be available to the Commonwealth of Australia under the law of any
foreign jurisdiction.

The Wholesale Funding Guarantee is subject to being withdrawn or change,
which may have a negative impact on the availability of funding in the markets inwhich the Overseas Bank operates.
The Australian Government has announced the Wholesale Funding Guarantee
will be reviewed on an ongoing basis and revised if necessary.

The Australian Government shall not be liable to perform its obligations under
the Wholesale Funding Guarantee in respect of liabilities which have beenvaried, amended, waived, released, novated, supplemented, extended orrestated in any material respect without the written consent of the AustralianGovernment.
The Australian Government may also amend the terms of the Wholesale
Funding Guarantee at any time at its discretion, provided that (except insofar as
such amendment is required by law) such amendment does not reduce theAustralian Government obligations to the beneficiaries under the Wholesale
Funding Guarantee in a manner which is prejudicial to the interests of thebeneficiaries in respect of any subsisting liability of the Overseas Bankguaranteed under the Wholesale Funding Guarantee.
As at the date of this document, the Overseas Bank has the following material
obligations guaranteed under the Wholesale Funding Guarantee:
Short term Wholesale Funding Liabilities
Negotiable Certificates of Deposit : A$1,652,491,635
Term Wholesale Funding Liabilities
US$1,250,000,000 3.20% Fixed Rate Notes due 15 December 2011
US$500,000,000 Floating Rate Notes due 17 November 2010
Copies of eligibility certificates are available at www.guaranteescheme.gov.au.

4
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCHGENERAL DISCLOSURES (continued)

For personal use only

The name of the Guarantor and address for service is: The Scheme Administrator,
Australian Government Guarantee Scheme for Large Deposits and Wholesale
Funding, c/- The Secretary, Reserve Bank of Australia, GPO Box 5367, Sydney,
New South Wales 2001, Australia.
Further details of the arrangements, together with relevant legislation, regulations
and other documents setting out the terms and conditions of the current guarantee
arrangements, are available at the Treasury website www.treasury.gov.au,
www.apra.gov.au and www.guaranteescheme.gov.au.

The most recent audited financial statements of the Commonwealth of Australia canbe obtained at the Treasury's Budget website www.budget.gov.au. As at the date ofsigning of the General Disclosure Statement, the following ratings were assigned to
the Commonwealth of Australia's long term, AUD denomination debt: AAA (Standard& Poor's), Aaa (Moody's) and AAA (Fitch). These ratings have remained unchangedin the two preceding years.

New Zealand Guarantee Arrangements
Also on 12 October 2008, the New Zealand Minister of Finance announced a
Deposit Guarantee Scheme (the "Scheme"), under which the Crown guarantees
retails deposits of participating financial institutions until 12 October 2010. The
Registered Bank does not have a guarantee under the Scheme.

Pending Proceedings or Arbitration
Other than disclosed in this Disclosure Statement, there are no pending proceedings
or arbitration that may have a material adverse effect on the NZ Branch or the NZ
Banking Group as at the date of the General Disclosure Statement.

The NZ Banking Group has received amended tax assessments from the New
Zealand Inland Revenue Department (‘IRD’) in respect of its review of certain
structured finance transactions. The NZ Banking Group is confident, based on
independent tax and legal advice obtained, that its tax treatment of thesetti
it d diith th IRD’iti
The Commerce Commission has brought proceedings under the Commerce Act
1986 against Visa, MasterCard and all New Zealand issuers of Visa and MasterCard
credit cards, including the NZ Banking Group. Several major New Zealand retailers
have also issued proceedings. The NZ Banking Group is defending the proceedings.
At this stage any potential liabilities cannot be assessed.

The NZ Banking Group markets and distributes a range of wealth management
products which are managed by ING (NZ) Limited (of which the NZ Banking
Group holds 49%). Trading in the ING Diversified Yield Fund and the ING
Regular Income Fund was suspended on 13 March 2008 by the fund manager,
ING (NZ) Limited, due to the deterioration in liquidity in credit markets. The
matter is being reviewed by both the NZ Banking Group and ING (NZ) Limited
and it is too early to assess the nature or quantum of any potential liability.
Further details on pending proceedings or arbitration are set out in Note 43
Contingent Liabilities and Credit Related Commitments of this General
Disclosure Statement.
The Overseas Banking Group has worldwide contingent liabilities in respect of
actual and potential claims and proceedings, which have not been determined.
An assessment of the Overseas Banking Group's likely loss is made on a caseby-case basis and provisions are made where appropriate. Such contingencies
are disclosed in the Overseas Banking Group's 30 September 2008 Annual
Financial Report.
Other Material Matters
There are no matters relating to the business or affairs of the NZ Branch and the
NZ Banking Group which are not contained elsewhere in the General DisclosureStatement and which would, if disclosed, materially adversely affect the decisionof a person to subscribe for debt securities of which the NZ Branch or any
member of the NZ Banking Group is the issuer.

Supplemental Disclosure Statement
A copy of the most recent Supplemental Disclosure Statement for the year
ended 30 September 2008 can be obtained immediately where request is madewithin normal banking hours at the NZ Branch head office, Level 6, NBNZHouse, 1 Victoria Street, Wellington. It is also available free of charge, on the
NZ Banking Group's websites.
The NZ Banking Group's most recent Supplemental Disclosure Statement
contains a copy of the 2008 Annual Report for the Overseas Banking Group anda copy of the Deed of Guarantee for the Guarantee Scheme.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

5SUMMARY OF FINANCIAL STATEMENTS

NZ Banking GroupNZ IFRS1
AuditedYear to30/09/2007$m

NZ IFRS1, 2
AuditedYear to30/09/2006$m

NZ IFRS1, 2
AuditedYear to30/09/2005$mPrevious
GAAP1
AuditedYear to30/09/2005$mPrevious
GAAP3
AuditedYear to30/09/2004$mContinuing operations
Interest income
Interest expense

9,858
7,829

8,296
6,239

7,195
5,246

6,023
4,325

5,999
4,325

4,533
3,036

Net interest income
Other operating income

2,029
1,126

2,057
864

1,949
801

1,698
794

1,674
851

1,497
758

Operating income
Operating expenses

3,155
1,445

2,921
1,331

2,750
1,323

2,492
1,312

2,525
1,506

2,255
1,269

Profit before provision for credit impairment and income tax
Collective provision charge (credit)
Individual provision charge4

1,710
112
190

1,590
20
54

1,427
(10)
28

1,180
121
-

1,019
122
-

986
133
-

For personal use only

NZ IFRS
AuditedYear to30/09/2008
$m

302

74

18

121

122

133

1,408
418

1,516
551

1,409
463

1,059
318

897
324

853
296

Profit after income tax from continuing operations

990

965

946

741

573

557

Discontinued operations
Profit from discontinued operations (net of income tax)

-

76

5

14

-

-

Provision for credit impairment
Profit before income tax
Income tax expense

Profit after income tax

Retained profits at beginning of the year

Adjustment on adoption of NZ IFRS on 1 October 2004
Adjustment on adoption of NZ IAS 39 on 1 October 2005

990

1,041

951

755

573

557

1,869

1,580

1,350

746

746

264

-

-

60

4
-

-

-

Total available for appropriation
Actuarial (loss) gain on defined benefit schemes after tax
Foreign exchange (loss)/gain on redemption of redeemable preference
sharesInterim ordinary dividends paid

2,859
(23)

2,621
2

2,361
(1)

1,505
4

1,319
-

821
-

(1,169)

(154)
(600)

(780)

41
(200)

41
(200)

(75)

Retained profits at end of the year

1,667

1,869

1,580

1,350

1,160

746

Previous
GAAP3
AuditedYear to30/09/2005$mPrevious
GAAP3
AuditedYear to30/09/2004$m

NZ Banking GroupNZ IFRS
AuditedYear to30/09/2008$m

NZ IFRS1
AuditedYear to30/09/2007$m

NZ IFRS1, 2
AuditedYear to30/09/2006$m

NZ IFRS1, 2
AuditedYear to30/09/2005
$m

333

121

159

220

220

123

Total assets

123,078

107,606

95,92985,491

85,291

74,099Total liabilities

115,951

100,751

89,54379,39079,38069,690

7,127

6,855

6,386

6,101

5,911

4,409

Total impaired assets (on-balance sheet and off-balance sheet)

EquityThe amounts included in this summary for years 2004 to 2007 have been taken from the audited financial statements of the Australia and New Zealand Banking Group
Limited (New Zealand Geographic Activities and Subsidiary Companies in New Zealand).

1

Truck Leasing Limited has been classified as a discontinued operation for the comparative years ending 30 September 2007, 30 September 2006 and 30 September
2005. For further details, refer to Note 10 Discontinued Operations.

2

On 1 October 2005, the NZ Banking Group adopted New Zealand equivalents to International Financial Reporting Standards ('NZ IFRS'). In accordance with NZ IFRS,
comparative information was restated using the new accounting standards from 1 October 2004. As permitted by the transitional provisions set out in NZ IFRS 1: Firsttime Adoption of New Zealand Equivalents to International Financial Reporting Standards, management has elected not to restate comparative information for the
adoption of NZ IAS 32 Financial Instruments: Disclosure and Presentation ('NZ IAS 32') and NZ IAS 39 Financial Instruments: Recognition and Measurement ('NZ IAS39'). Refer to Note 52 Explanation of Transition to NZ IFRS in the 30 September 2006 ANZ National Bank Limited and Subsidiary Companies' General DisclosureStatement for an explanation of the NZ Banking Group's transition to NZ IFRS and the adjustments required to comply with NZ IFRS.

3

On 1 December 2003, the NZ Banking Group acquired all of the shares of NBNZ Holdings Limited ('NBNZ Group'). The results and financial position of NBNZ Group
have been included in the NZ Banking Group since that date. For further details, refer to Note 14 Acquisition of Subsidiaries in the 30 September 2004 ANZ National Bank
Limited and Subsidiary Companies' General Disclosure Statement.

4

The RBNZ's guidelines require the NZ Banking Group to show the individual provision charge to profit as the 'impaired asset expense'. Prior to adopting NZ IFRS on 1
October 2005, under the NZ Banking Group's Bad and Doubtful Debts policy, the required individual provision was not charged to profit, but was transferred from thecollective provision balance. The NZ Banking Group's provision for credit impairment, which represented the expected average annual loss on principal over the economic
cycle for the lending portfolio, was credited to the collective provision. Under NZ IFRS, there is no longer a transfer between the collective and individual provisions.
Further detail on the provision for credit impairment is set out in Note 15 Provision for Credit Impairment.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

6INCOME STATEMENTS for the year ended 30 September 2008

Note

NZ Banking GroupYear toYear to30/09/2008
30/09/2007$m$m

NZ Branch
Year toYear to30/09/2008
30/09/2007
$m
$m

4

9,858

8,296

-

-

Interest expense

5

7,829

6,239

-

-

2,029

2,057

-

-

1,015

840

-

-

For personal use only

Continuing operations
Interest income

Net interest income
Other operating income

4

Share of profit of equity accounted associates
and jointly controlled entities
Operating income
Operating expenses

5

Profit before provision for credit impairment
and income tax
Provision for credit impairment

15

Profit before income tax

Income tax expense

6

Profit after income tax from continuing operations
Discontinued operations
Profit from discontinued operations (net of income tax)
Profit after income tax

10

111

24

-

-

3,155

2,921

-

-

1,445

1,331

-

-

1,710

1,590

-

-

302

74

-

-

1,408

1,516

-

-

418

551

-

-

990

965

-

-

-

76

-

-

990

1,041

-

-

The notes on pages 10 to 93 form part of and should be read in conjunction with these financial statements.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

7STATEMENTS OF RECOGNISED INCOME AND EXPENSE for the year ended 30 September 2008

Note

Available-for-sale revaluation reserve:- Valuation gain (loss) taken to equity- Cumulative gain transferred to the income
statement on sale of financial assets

NZ Banking GroupYear toYear to30/09/2008
30/09/2007$m$m

NZ Branch
Year toYear to30/09/2008
30/09/2007
$m
$m

(1)

-

-

30

-

(3)

-

-

Cash flow hedging reserve:- Valuation (loss) gain taken to equity- Transferred to income statement

11
11

(47)
(37)

78
(35)

-

-

Actuarial (loss) gain on defined benefit schemes

45

(35)

3

-

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

34

(12)

-

Net (expense) income recognised directly in equity

(59)

30

-

-

Profit after income tax

990

1,041

-

-

Total recognised income and expense for the year

931

1,071

-

-

For personal use only

26

The notes on pages 10 to 93 form part of and should be read in conjunction with these financial statements.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

8BALANCE SHEETS as at 30 September 2008Note

For personal use only

AssetsLiquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Due from related entities
Shares in controlled entities, associates
and jointly controlled entities
Current tax assets
Other assets
Deferred tax assets
Premises and equipment
Goodwill and other intangible assets

4,839
5,032
2,624
7,603
109
97,679
1

4,807
3,563
1,877
4,551
48
87,789
-

-

-

16

363
154
1,000
118
242
3,314

206
187
1,045
7
232
3,294

-

-

123,078

107,606

-

-

3,311
77,136
6,472
1,875
190
22,382
1,765
2,820

3,170
70,030
4,935
1,427
165
17,197
1,765
2,062

-

-

115,951

100,751

-

-

7,127

6,855

-

-

5,413
47
1,667

4,903
83
1,869

-

-

7,127

6,855

-

-

17
18
19
20

21
22
11
23
24
25
26
27
28

Total liabilities
Net assets

EquityOrdinary share capital
Reserves
Retained earnings
Total equity

29
30
30

For and on behalf of the Board of Directors:

Director
18 December 2008

NZ Branch
30/9/08 30/09/2007
$m
$m

7
8
9
11
12
13, 14, 15

Total assets
Liabilities
Due to other financial institutions
Deposits and other borrowings
Due to subsidiary companies
Derivative financial instruments
Payables and other liabilities
Deferred tax liabilities
Provisions
Bonds and notes
Term funding
Loan capital

NZ Banking Group
30/9/08 30/09/2007$m$m

Director
18 December 2008

The notes on pages 10 to 93 form part of and should be read in conjunction with these financial statements.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

9CASH FLOW STATEMENTS for the year ended 30 September 20081

Note

NZ Banking GroupYear toYear to30/09/2008
30/09/2007$m$m

NZ Branch
Year toYear to30/09/2008
30/09/2007
$m
$m

9,503
4
1,062
(7,216)(1,313)
(461)

7,879
3
928
(5,665)(1,254)
(453)

-

-

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

1,579

1,438

-

-

Net changes in operating assets and liabilities:(Increase) decrease in due from other financial institutions - term
Increase in trading securities
Increase/(decrease) in derivative financial instruments(Increase) decrease in available-for-sale assets
Increase in loans and advances
Decrease (increase) in due from subsidiary companies
Increase in due to subsidiary companies
Decrease (increase) in other assets(Decrease) increase in due to other financial institutions
Increase in deposits and other borrowings
Increase (decrease) in payables and other liabilities

(630)
(617)
2,160
(36)
(9,522)
28
141
4,618
159

469
(73)
(1,079)312(10,118)
(70)
3,151
6,857
(154)

-

-

(2,120)

733

-

-

2
(48)
(30)
(51)

5
585
17
(8)
(17)
(51)

-

-

(127)

531

-

-

Cash flows from financing activities
Proceeds from bonds and notes
Redemptions of bonds and notes
Proceeds from loan capital
Redemptions of loan capital
Issue of redeemable preference shares
Redemption of redeemable preference shares
Increase in due to subsidiary companies - term
Dividends paid

9,283
(6,453)
835
(100)
510
(1,169)

4,173
(684)
800
(550)
2,349
(2,349)
(600)

-

-

Net cash flows provided by financing activities

2,906

3,139

-

-

Net cash flows used in operating activities
Net cash flows (used in) provided by investing activities
Net cash flows provided by financing activities(2,120)
(127)
2,906

733
531
3,139

-

-

Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year

659
7,131

4,403
2,728

-

-

Cash and cash equivalents at end of the year

7,790

7,131

-

-

Reconciliation of cash and cash equivalents to the balance sheets3
Liquid assets
Due from other financial institutions - less than 90 days
Due to other financial institutions - less than 90 days

4,839
2,951
-

4,807
2,324
-

-

-

7,790

7,131

-

-

For personal use only

Cash flows from operating activities
Interest received
Dividends received
Fees and other income received
Interest paid
Operating expenses paid
Income taxes paid

Net cash flows used in operating activities

Cash flows from investing activities
Proceeds from sale of shares in associates
and jointly controlled entities
Proceeds from sale of subsidiary companies 2
Proceeds from sale of premises and equipment
Purchase of shares in associates and jointly controlled entities
Purchase of shares in subsidiary companies
Purchase of intangible assets
Purchase of premises and equipment

38

10

Net cash flows (used in) provided by investing activities

Total cash and cash equivalents

38

1
The comparative cash flow statements have not been restated for the classification of Truck Leasing Limited (TLL) as a discontinued operation.
For a detailed explanation of the financial impacts of the sale of Truck Leasing Limited refer to Note 10 Discontinued Operations in the
consolidated financial statements for the year ended 30 September 2007.
2
The cash proceeds from the sale of controlled entities includes $438 million relating to the repayment of TLL's unsecured bank borrowings with
UDC Finance Limited ('UDC') by the acquiree.
3
Comparatives for cash and cash equivalents have been restated to remove due to other financial institutions - less than 90 days from thedefinition of cash and cash equivalents. A reconciliation of cash and cash equivalents to the NZ Banking Group's core liquidity portfolio is includedin Note 38 Notes to the Cash Flow Statements. An analysis of the balance sheet items that make up the NZ Banking Group's core liquidity portfolio
is included in Note 32 Financial Risk Management.

The notes on pages 10 to 93 form part of and should be read in conjunction with these financial statements.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH10NOTES TO THE FINANCIAL STATEMENTS

1.

ACCOUNTING POLICIESFor personal use onlyA) BASIS OF PREPARATION
i)

ii)

Statement of compliance
These financial statements have been prepared in accordance with the requirements of the Companies Act 1993, the Financial Reporting Act 1993 and theRegistered Bank Disclosure Statement (Full and Half-Year - Overseas Incorporated Banks) Order 2008 (the ‘Order'). The parent financial statements are for the
New Zealand operations of Australia and New Zealand Banking Group Limited as conducted through the NZ Branch ("the Registered Bank" or "NZ Branch") andthe aggregated financial statements are for the New Zealand operations of Australia and New Zealand Banking Group Limited (the ‘NZ Banking Group’), which
includes the NZ Branch and all New Zealand geographic operations, subsidiaries, associate companies and jointly controlled entities as disclosed in Note 39.

These financial statements have also been prepared in accordance with New Zealand Generally Accepted Accounting Principles. They comply with New Zealandequivalents to International Financial Reporting Standards ('NZ IFRS') and other applicable Financial Reporting Standards, as appropriate for profit-oriented entities.
The financial statements comply with International Financial Reporting Standards (‘IFRS’).
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied by the
NZ Banking Group for all periods presented.
These financial statements were authorised for issue by the Board of Directors on 18 December 2008.
Use of estimates and assumptions
The preparation of the financial statements requires the use of management judgement, estimates and assumptions that affect reported amounts and theapplication of policies. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable.
Actual results may differ from these estimates.
For further discussion on the judgements and estimates made by the NZ Banking Group, in the process of applying its accounting policies, that have the most effecton the amounts recognised in the financial statements refer to Note 2 Critical Estimates and Judgements Used in Applying Accounting Policies. Such estimates will
require review in future periods.

iii)

Basis of measurement
The financial statements have been prepared on a going concern basis in accordance with the historical cost basis except that the following assets and liabilities
are stated at their fair value:zderivative financial instruments, including in the case of fair value hedging, the fair value of any applicable underlying exposure;z
assets treated as available-for-sale;zfinancial instruments held for trading;zassets and liabilities designated at fair value through profit and loss; andzdefined benefit plan assets and liabilities.

iv)

Changes in accounting policies and early adoptions
There have been no material changes in accounting policies or early adoption of NZ IFRS in the preparation or presentation of this financial report.
The NZ Banking Group has adopted NZ IFRS 7: Financial Instruments: Disclosures (‘NZ IFRS 7’) and amendments to NZ IAS 1 Presentation of Financial
Statements - Capital Disclosures from 1 October 2007. Application of these standards has resulted in modified financial disclosures, relating to risks arising fromfinancial instruments and further qualitative disclosures on financial risk and capital management policies, but does not have any impact on reported profits orfinancial position.

The NZ Banking Group has not early adopted NZ IAS 1 : Presentation of Financial Statements (revised) issued in November 2007. This standard is effective forannual accounting periods beginning on or after 1 January 2009 and will not result in recognition or measurement changes in the financial statements.

The NZ Banking Group has not early adopted NZ IFRS 8: Operating Segments issued in December 2006. This standard is effective for annual accounting periods
beginning on or after 1 January 2009. Adoption of this standard will not result in any measurement or recognition changes in the financial statements.

v)

Presentation currency and rounding
The amounts contained in the financial statements are presented in millions of New Zealand dollars, unless otherwise stated.

vi)Comparatives
Certain amounts in the comparative information have been reclassified to conform with current period financial statement presentations.

vii)

Basis of aggregation
These financial statements aggregate the financial statements of the New Zealand geographic activities of Australia and New Zealand Banking Group Limited as
conducted through the NZ Branch (the "NZ Branch") and its controlled entities in New Zealand (the "NZ Banking Group").
Subsidiaries
Where subsidiaries have been sold or acquired during the period, their operating results have been included to the date of disposal or from the date of acquisition.

Control means the power to govern, directly or indirectly, decision making in relation to the financial and operating policies of an entity so as to obtain benefits fromits activities. All the facts of a particular situation are considered when determining whether control exists. Control is usually present when an entity has:zzzz

power over more than one-half of the voting rights of the other entity;
power to govern the financial and operating policies of the other entity;
power to appoint or remove the majority of the members of the board of directors or equivalent governing body;
power to cast the majority of votes at meetings of the board of directors or equivalent governing body of the entity.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH11NOTES TO THE FINANCIAL STATEMENTS (continued)

1.

ACCOUNTING POLICIES (continued)

For personal use only

In addition, potential voting rights that are presently exercisable or convertible are taken into account in determining whether control exists.

viii)

The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired
and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at acquisition date. The excess of the cost of
acquisition over the fair value of the NZ Banking Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than
the fair value of the NZ Banking Group’s share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated on consolidation. Unrealised losses are also
eliminated unless the transaction provides evidence of an impairment of the asset transferred. The accounting policies of the subsidiaries have been changed
where necessary to ensure consistency with the policies adopted by the NZ Banking Group.
Associates and joint ventures
The NZ Banking Group adopts the equity method of accounting for associates and the Group's interest in joint venture entities.
Associates are all entities over which the NZ Banking Group has significant influence but not control, which generally accompany a shareholding of between 20%
and 50% of the voting rights.

Joint ventures are entities over which the NZ Banking Group has joint control. Joint control is the contractually agreed sharing of control and exists only when thestrategic financial and operating decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control.
The NZ Banking Group’s share of the post acquisition results of associates and jointly controlled entities is included in the consolidated income statement and its
share of post-acquisition movements in reserves recognised in reserves. Shares in associates and jointly controlled entities are stated in the consolidated balance
sheet at cost plus the NZ Banking Group’s share of post acquisition net assets. Unrealised gains on transactions between the NZ Banking Group and its
associates and jointly controlled entities are eliminated to the extent of the NZ Banking Group’s interest in the entity. Unrealised losses are also eliminated unlessthe transaction provides evidence of an impairment of the asset transferred. If an associate or jointly controlled entity uses accounting policies other than thoseused by the NZ Banking Group for like transactions and similar events, adjustments are made to conform the associate or jointly controlled entity’s policy to those of
the NZ Banking Group in applying the equity method.
Interests in associates and jointly controlled entities are reviewed at each reporting date for indicators of impairment. Any impairment is recognised in the income
statement.
All significant activities of the NZ Banking Group, with the exception of the ING New Zealand joint venture, are operated through wholly owned entities.

The NZ Banking Group may invest in or establish special purpose entities to enable it to undertake specific types of transactions. Where the NZ Banking Group
controls such vehicles, they are consolidated into the NZ Banking Group’s financial results.
Special purpose and off-balance sheet entities
The NZ Banking Group may invest in or establish special purpose entities (SPEs) to enable it to undertake specific types of transactions. The main types of these
SPEs are securitisation vehicles, structured finance entities, and entities used to sell credit protection.
Where the NZ Banking Group has established SPEs which are controlled by the NZ Banking Group to facilitate transactions undertaken for NZ Banking Grouppurposes, these are consolidated in the NZ Banking Group's financial statements.
The NZ Banking Group does not consolidate SPEs that it does not control. As it can sometimes be difficult to determine whether the NZ Banking Group has control
of an SPE, it makes judgements about its exposure to the risks and rewards, as well as about its ability to make operational decision for the SPE in question.

Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Banking Group’s entities are measured using the currency of the primary economic environment in which
the entity operates (the functional currency). The Banking Group’s financial statements are presented in New Zealand dollars, which is the registered bank's
functional and presentation currency.
Foreign currency transactions
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the date of the transaction. Monetary assets andliabilities resulting from foreign currency transactions are subsequently translated at the spot rate at reporting date.
Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different to those at which they were initially recognised
or included in a previously financial report, are recognised in the income statement in the period in which they arise.
Translation differences on non-monetary items measured at fair value through profit or loss, are reported as part of the fair value gain or loss on these items.
Translation differences on non-monetary items measured at fair value through equity, such as equities classified as available-for-sale financial assets, are includedin the available-for-sale reserve in equity.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH12NOTES TO THE FINANCIAL STATEMENTS (continued)

1.

ACCOUNTING POLICIES (continued)

For personal use onlyB) INCOME RECOGNITION

i)

ii)

Revenue is recognised to the extent that it is probable that economic benefits will flow to the NZ Banking Group and that revenue can be reliably measured.
Interest income
Interest income is recognised in the income statement as it accrues, using the effective interest rate method.
The effective interest method calculates the amortised cost of a financial asset or financial liability and allocates the interest income or interest expense, including
any fees and directly related transaction costs that are an integral part of the effective interest rate, over the expected life of the financial asset or liability. Income
and expense on the financial asset or financial liability is recognised on an effective yield basis in proportion to the amount outstanding over the period to maturity or
repayment.
For assets subject to prepayment, expected life is determined on the basis of the historical behaviour of the particular asset portfolio, taking into account contractual
obligations and prepayment experience assessed on a regular basis.
Fee and commission income
Fees and commissions that are integral to the effective rate of a financial asset or liability are included in the determination of the effective interest rate.

Fees and commissions that relate to the execution of a significant act (for example, advisory services, placement fees and underwriting fees) are recognised when
the significant act has been completed.
Fees charged for providing ongoing services that represent the recoupment of the costs of providing service (for example, maintaining and administering existing
facilities) are recognised as revenue over the period the service is provided.

iii)

Dividend income
Dividends are recognised as revenue when the right to receive payment is established.

iv)

Leasing income
Finance income on finance leases is recognised on a basis that reflects a constant periodic return on the net investment in the finance lease.

v)

Gain or loss on sale of property, plant and equipment
The gain or loss on the disposal of premises and equipment is determined as the difference between the carrying amount of the assets at the time of disposal andthe proceeds of disposal, and is recognised as income in the year for which the significant risks and rewards of ownership are transferred to the buyer.

C) EXPENSE RECOGNITION
Expenses are recognised in the income statement on an accruals basis.

i)Interest expense
Interest expense on financial liabilities measured at amortised cost is recognised in the income statement as it accrues using the effective interest method as
described in note 1(B)(i).

ii)

Loan origination expenses
Certain loan origination expenses are an integral part of the effective interest rate of a financial asset and are measured at amortised cost. These loan origination
expenses include:z
fees and commissions payable to brokers in respect of originating lending business; andzother expenses of originating lending business, such as external legal costs and valuation fees, provided these are direct and incremental costs related tothe issue of a financial asset.
Such loan origination expenses are initially recognised as part of the cost of acquiring the financial asset and amortised as part of the expected yield of the financial
asset over its expected life using the effective interest method.

iii)

Capitalised expenses
Direct external expenses, comprising direct and incremental costs related to the acquisition of interest earning assets, including structured institutional lending,mortgages and finance leases, are initially recognised as part of the cost of acquiring the asset and written off as an adjustment to its expected yield over its
expected life using the effective interest method.

iv)

Share-based compensation expense
The NZ Banking Group participates in various equity settled share-based compensation plans. These are described in note 44 and largely comprise the Employee
Share Acquisition Plan and the ANZ Share Option Plan.
ANZ Ordinary Shares
The fair value of ANZ ordinary shares granted under the Employee Share Acquisition Plan is measured at grant date, using the one-day volume weighted average
market price of ANZ shares. The fair value is expensed immediately when shares vest immediately. Where shares are subject to a vesting period, the NZ Banking
Group initially recognises a net share compensation asset reflecting the fair value of unvested shares issued to employees of the NZ Banking Group. The fair valueof unvested shares is amortised to profit and loss on a straight-line basis over the vesting period (normally three years) as employee services are received.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH13NOTES TO THE FINANCIAL STATEMENTS (continued)

For personal use only

1.

ACCOUNTING POLICIES (continued)
Share Options
The fair value of ANZ share options is measured at grant date, using an option pricing model. The fair value is expensed on a straight-line basis over the relevant
vesting period. This is recognised as an employee compensation expense with a corresponding increase in the share options liability account.

The option pricing model takes into account the exercise price of the option, the risk free interest rate, the expected volatility of the ANZ ordinary share price andother factors. Market vesting conditions are taken into account in estimating the fair value.
Performance Rights
A Performance Right is a right to acquire a share at nil cost to the employee subject to satisfactorily meeting time and performance hurdles. Upon exercise, each
Performance Right entitles the holder to one ordinary share in ANZ. The fair value of Performance Rights is determined at grant date using an option pricing model
taking into account market conditions. The fair value is expensed over the relevant vesting period with a corresponding increase in the share options reserve.
Other adjustments
Subsequent to the grant of an equity-based award, the amount recognised as an expense is adjusted for vesting conditions other than market conditions so that,
ultimately, the amount recognised as an expense is based on the number of equity instruments that eventually vest.

D) INCOME TAXi)

Income tax expense
Income tax on earnings for the period comprises current and deferred tax. It is recognised in the income statement as tax expense, except when it relates to items
credited directly to equity, in which case it is recorded in equity, or where it arises from the initial accounting for a business combination, in which case it is includedin the determination of goodwill.

ii)

Current tax
Current tax is the expected tax payable on taxable income for the period, based on tax rates (and tax laws) which are enacted or substantively enacted by thereporting date and including any adjustment for tax payable in previous periods. Current tax for current and prior periods is recognised as a liability (or asset) to theextent that it is unpaid (or refundable).

iii)

Deferred tax
Deferred tax is accounted for using the comprehensive tax balance sheet method. Deferred tax arises by providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and their tax base.

iv)

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them arerealised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement reflects the tax
consequences that would follow from the manner in which the NZ Banking Group, at the reporting date, expects to recover or settle the carrying amount of its
assets and liabilities.
Deferred tax liabilities are recognised for all taxable temporary differences, other than those in relation to taxable temporary differences arising from goodwill. They
are also recognised for taxable temporary differences arising on investments in controlled entities, branches, associates and joint ventures, except where the NZ
Banking Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets associated with these interests are recognised only to the extent that it is probable that the temporary difference will reverse in the foreseeable
future and there will be sufficient taxable profits against which to utilise the benefits of the temporary difference.

Deferred tax assets, including those related to the tax effects of income tax losses and credits available to be carried forward, are recognised only to the extent that
it is probable that future taxable profits will be available against which the deductible temporary differences or unused tax losses and credits can be utilised.

Deferred tax related to fair value re-measurement of available-for-sale financial assets and cash flow hedges, which are charged or credited directly to equity, isalso charged or credited directly to equity and subsequently recognised in the income statement together with the deferred gain or loss on the related asset or
liability.
Offsetting
Current and deferred tax assets and liabilities are offset only to the extent that they relate to income taxes imposed by the same taxation authority, there is a legal
right and intention to settle on a net basis and it is allowed under the tax law of the relevant jurisdiction.

E) ASSETS
Financial assetsi)Financial assets and liabilities at fair value through profit or loss
Trading securities
Trading securities are financial instruments acquired principally for the purpose of selling in the short-term or which are a part of a portfolio which is managed forshort-term profit-taking. They comprise debt and equity securities and treasury notes purchased with the intent of being actively traded. Trading securities are
initially recognised at fair value on trade date with transaction costs taken to the income statement. Changes in the fair value (gains or losses) of these securities
are recognised in the income statement in the period in which they occur. The assets are derecognised when the rights to receive cash flows have expired, or the
NZ Banking Group has transferred substantially all of the risks and rewards of ownership. Fair value for listed and unlisted securities is determined by the pricedisplayed by a willing buyer in a liquid market at the reporting date. Where a market price in a liquid market is not readily available, the fair value is determined byreference to the market price available for a security with similar credit, maturity and yield characteristics or by using industry standard pricing models.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH14NOTES TO THE FINANCIAL STATEMENTS (continued)

ACCOUNTING POLICIES (continued)ii)

Derivative financial instruments
Derivatives that are neither financial guarantee contracts nor effective hedging instruments are carried at fair value through profit or loss. In addition, certain
financial assets and liabilities are designated and measured at fair value through profit or loss where the following applies:z
doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets and liabilities,
or recognising the gains or losses thereon, on different bases;z
a group of financial assets or financial liabilities or both is managed and its performance evaluated on a fair value basis; orz
the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, withlittle or no analysis, that it would not be separately recorded.

For personal use only

1.

iii)

The designation of a financial asset or liability at fair value through profit or loss is irrevocable. Changes in the fair value (gains or losses) of these financial
instruments are recognised in the income statement in the period in which they occur.
Purchases and sales of trading securities are recognised on trade date.
Derivative financial instruments are contracts whose value is derived from changes in one or more underlying financial instruments or indices. They include swaps,
forward rate agreements, futures, options and combinations of these instruments.
Derivative financial instruments are entered into for trading purposes (including customer-related reasons) or for hedging purposes (where the derivative
instruments are used to hedge the NZ Banking Group’s exposures to interest rate risk, currency risk, price risk, credit risk and other exposures relating to nontrading positions).
Derivative financial instruments are recognised initially at fair value with gains or losses from subsequent measurement at fair value being recognised in the income
statement. Fair values are obtained from quoted prices in active markets (including recent transactions) and valuation techniques including discounted cash flow
models and option pricing models, as appropriate.
Where the derivative financial instrument is designated as, and effective as, a hedging instrument the timing of the recognition of any resultant gain or loss in theincome statement is dependent on the hedging designation. These hedging designations and associated accounting are as follows:
Fair value hedge
Where the NZ Banking Group hedges the change in fair value of a recognised asset or liability or firm commitment, any change in the fair value of derivatives
designated as fair value hedges are recognised in the income statement. Changes in the fair value of the hedged item attributable to the hedged risk are reflectedin adjustments to the carrying value of the hedged item, which are also recognised in the income statement.
Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised or no longer qualifies for hedge accounting. The resulting
adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to the income statement over a period to maturity of the hedged
item. If the hedged item is sold or repaid, the unamortised adjustment is recognised immediately in the income statement.
Cash flow hedge
The NZ Banking Group designates derivatives as cash flow hedges where the instrument hedges the variability in cash flows of a recognised asset or liability, or ahighly probable forecast transaction. The effective portion of changes in the fair value of derivatives qualifying and designated as cash flow hedges are deferred tothe cash flow hedging reserve, which forms part of shareholders’ equity. Any ineffective portion is immediately recognised in the income statement. Amounts
deferred in equity are recognised in the income statement in the period during which the hedged forecast transactions take place. Where the forecast transactionthat is hedged results in the recognition of a non-financial asset or non-financial liability, the gain or loss previously deferred in equity is transferred from equity andincluded in the initial measurement of the cost of the asset or liability.

When the hedge expires, is sold, terminated, exercised, or no longer qualifies for hedge accounting, the cumulative amount deferred in equity remains in the cash
flow hedging reserve, and is subsequently transferred to the income statement when the hedged item is recognised in the income statement.

When a forecast transaction is no longer expected to occur, the amount deferred in equity is immediately recognised in the income statement.
Derivatives that do not qualify for hedge accounting
All gains and losses from changes in the fair value of derivatives that are not designated in a hedging relationship but are entered into to manage the interest rate
and foreign exchange risk are recognised in the income statement. Under certain circumstances, the component of the fair value change in the derivative which
relates to current period realised and accrued interest is included in net interest income. The remainder of the fair value movement is included in other income.

Embedded derivatives
Derivatives embedded in financial instruments or other host contracts are treated as separate derivatives when their economic characteristics and risks are notclosely related to those of the host contracts, and the host contracts are not measured at fair value. The embedded derivative is reported at fair value with changes
in fair value immediately recognised in the income statement.
Set-off arrangements
Fair value gains/losses arising from trading derivatives are not offset against fair value gains/losses on the balance sheet unless a legal right of set-off exists andthere is an intention to settle net.
Available-for-sale assets
Available-for-sale assets comprise non-derivative financial assets which the NZ Banking Group designates as available-for-sale but which are not deemed to beheld principally for trading purposes, and include equity investments, certain loans and advances, and quoted debt securities. They are initially recorded at fair value
plus transaction costs. Subsequent gains or losses arising from changes in fair value are included as a separate component of equity in the ‘available-for-salerevaluation reserve’. When the asset is sold, the cumulative gain or loss relating to the asset is transferred to the income statement.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH15NOTES TO THE FINANCIAL STATEMENTS (continued)

For personal use only

1.

iv)

ACCOUNTING POLICIES (continued)
Where there is objective evidence of impairment, the cumulative loss related to that asset is removed from equity and recognised in the income statement as an
impairment expense for debt instruments or as non-interest income for equity instruments. If, in a subsequent period, the amount of an impairment loss relating to
an available-for-sale asset decreases and the decrease can be linked objectively to an event occurring after the impairment event, the loss previously recognised in
the income statement is reversed through the income statement through the impairment expense line. Impairment losses recognised in the income statement for
an investment in an equity instrument classified as available-for-sale are not reversed through the income statement.

Purchases and sales of available-for-sale financial assets are recognised on the trade date as with all regular way assets, being the date on which the NZ Banking
Group commits to purchase or sell the asset.
Premiums and discounts are included within the calculation of the fair value of the security. Interest is accrued and recognised in accordance with the effective
yield basis.
Net loans and advances
Net loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the NZ
Banking Group has no intention of trading on the loans and advances. The loans and advances are initially recognised at fair value plus transaction costs that are
directly attributable to the issue of the loan or advance. They are subsequently measured at amortised cost using the effective interest method, less any
impairment loss, or when in an effective hedging relationship, changes in the fair value of the hedged item attributable to the hedged risk are reflected inadjustments to the carrying value of the hedged item, and also recognised in the income statement. Loans and advances are derecognised when the rights toreceive cash flows have expired or the NZ Banking Group has transferred substantially all the risks and rewards of ownership.

Net loans and advances include direct finance provided to customers such as bank overdrafts, credit cards, term loans, finance lease receivables and commercial
bills. Overdrafts, credit cards and term loans are carried at amortised cost. Customer financing through redeemable preference shares is included within net loans
and advances. Dividends received on redeemable preference shares are taken to the income statement as part of interest income.

Credit assessment
All loans are graded according to the level of credit risk. Loans are classified as either productive or impaired.
Impaired assets include other impaired assets, restructured assets and assets acquired through the enforcement of security.
Other impaired assets include loans where there is doubt as to full recovery, and loans that have been restructured. An individual provision is raised to cover the
expected loss, where full recovery of principal is doubtful.
Restructured assets are those assets where the counterparty had difficulty complying with the original terms of the contract and the original terms have been
modified to grant the counterparty concessional terms where the yield of the loan is equal to or greater than the NZ Banking Group’s average cost of funds andbelow the yield applicable to a customer of equal credit standing.
Assets acquired through enforcement of security are those assets which are legally owned by the NZ Banking Group as a result of enforcing security, other than
any buildings occupied by the NZ Banking Group.
Cash receipts on other impaired assets are initially applied as a reduction in principal.
A past due asset is any loan where the counterparty has failed to make a payment when contractually due, and which is not an impaired asset. A 90 days past due
asset is any past due asset which has not been operated by the counterparty within its key terms for at least 90 days.
Other assets under administration are any loans, not being impaired or 90 days past due, where the customer is in any form of voluntary or involuntaryadministration, including receivership, liquidation, bankruptcy or statutory management.
Impairment of loans and advances
Loans and advances are reviewed at least at each reporting date for impairment. Credit impairment provisions are raised for exposures that are known to be
impaired. Loans are impaired and impairment losses incurred if there is objective evidence of impairment as a result of one or more loss events that occurred after
the initial recognition of the loan and that loss event (or events) has had a reliably measurable impact on the estimated future cash flows of the individual loan or thecollective portfolio of loans.
Impairment is assessed initially for assets that are individually significant (or on a portfolio basis for small value loans), and then on a collective basis for those
exposures not individually known to be impaired.
For those exposures that are assessed collectively, these are placed in pools of similar assets with similar risk characteristics. The required provision is estimatedon the basis of historical loss experience for assets with credit risk characteristics similar to those in the collective pool. The historical loss experience is adjusted
based on current observable data such as changed economic conditions. The provision also takes account of the impact of inherent risk of large concentrated
losses within the portfolio.
The estimated individual impairment loss is measured as the difference between the asset’s carrying amount and the estimated future cash flows discounted totheir present value at the original effective interest rate. As this discount unwinds during the period between recognition of impairment and recovery of the cash
flow, it is recognised in the income statement. The process of estimating the amount and timing of cash flows involves considerable management judgement.
These judgements are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

The provision for credit impairment (individual and collective) is deducted from loans and advances in the balance sheet and the movement in the provision for thereporting period is reflected in the income statement.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH16NOTES TO THE FINANCIAL STATEMENTS (continued)

For personal use only

1.

v)

vi)

vii)

ACCOUNTING POLICIES (continued)
When a loan is uncollectible, either partially or in full, it is written off against the related provision for loan impairment. Subsequent recoveries of amounts previously
written off are taken to the income statement. Unsecured facilities are normally written-off when they become 180 days past due or earlier in the event of thecustomer's bankruptcy or similar legal release from the obligation. In the case of secured facilities, remaining balances are written-off after proceeds from therealisation of collateral have been received, if the proceeds are insufficient.
Where impairment losses recognised in previous periods have subsequently decreased or no longer exist, such impairments are reversed in the income statement.

A provision is also raised for off balance sheet items such as commitments that are considered to be onerous.
Lease receivables
Finance leases
Contracts to lease assets and hire purchase agreements are classified as finance leases if they transfer substantially all the risks and rewards of ownership of theasset to the customer or an unrelated third party. All other lease contracts are classified as operating leases.
Finance lease receivables include amounts due from lessees in relation to finance leases and hire purchase contracts.
The gross amount of contractual payments regarding lease finance to business customers that have a fixed rate and a fixed term are recorded as gross leasereceivables and the unearned interest component is recognised as income yet to mature.
The finance lease receivables are initially recognised at amounts equal to the present value of the minimum lease payments, plus the present value of any
unguaranteed residual value expected to accrue at the end of the lease term. Finance lease payments are allocated between interest revenue and reduction in thelease receivable over the term of the finance lease, reflecting a constant periodic rate of return on the net investment outstanding in respect of the lease.

Operating leases
Operating lease payments are recognised as an expense on a straight-line basis over the lease term as lessee.
Repurchase agreements
Securities sold under repurchase agreements are retained in the financial statements where substantially all the risks and rewards of ownership remain with the NZ
Banking Group, and a counterparty liability is disclosed under the classifications of due to other financial institutions or payables and other liabilities, depending on
the term of the agreement and the counterparty.
The difference between the sale price and the repurchase price is amortised over the life of the repurchase agreement and charged to interest expense in theincome statement.
Securities purchased under agreements to resell, where the NZ Banking Group does not acquire the risks and rewards of ownership, are recorded as liquid assets,
net loans and advances, or due from other financial institutions, depending on the term of the agreement and the counterparty. The security is not included in thebalance sheet. Interest income is accrued on the underlying loan amount.
Derecognition
The NZ Banking Group enters into transactions where it transfers financial assets recognised on its balance sheet yet retains either all the risks and rewards of thetransferred assets or a portion of them. If all, or substantially all, the risks and rewards are retained, the transferred assets are not derecognised from the balancesheet
In transactions where substantially all the risks and rewards of ownership of a financial asset are neither retained nor transferred, the NZ Banking Groupderecognises the asset if control over the asset is lost. In transfers where control over the asset is retained, the NZ Banking Group continues to recognise theasset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. The rights andobligations retained or created in the transfer are recognised separately as assets and liabilities as appropriate.

Non-financial assetsviii) Goodwill
Goodwill, representing the excess of the purchase consideration over the fair value of the identifiable net assets of a controlled entity at the date of gaining control,
is recognised as an asset. Goodwill has an indefinite life. The carrying value of goodwill is reviewed for impairment at each reporting period and tested for
impairment annually, or more frequently if there is an indication that the goodwill may be impaired. This involves, where required, using discounted cash flow orcapitalisation of earnings methodology to determine the expected future benefits of the cash generating unit to which goodwill has been allocated. Where theassessment results in the current carrying value of goodwill exceeding the value of expected future benefits, the difference is charged to the income statement. Any
impairment writedown of goodwill is not reversed in subsequent periods.

ix)

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Other intangible assets
Other intangible assets include costs incurred in acquiring and building software and computer systems (referred to as software) and an intangible asset relating to
the ING New Zealand Joint Venture acquisition.
Software is amortised using the straight-line method over its expected useful life to the NZ Banking Group. The period of amortisation is between 3 and 5 years,
except for certain core infrastructure projects where the useful life has been determined to be 7 years.
At each reporting date, the software assets and other intangible assets are reviewed for impairment against impairment indicators. If any indication of impairment
exists, the recoverable amount of the assets are estimated and compared against the existing carrying value. Where the existing carrying value exceeds therecoverable amount, the difference is charged to the income statement.
Costs incurred in planning or evaluating software proposals, or in maintaining systems after implementation, are not capitalised.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH17

NOTES TO THE FINANCIAL STATEMENTS (continued)

ACCOUNTING POLICIES (continued)x)Premises and equipment
Premises and equipment are carried at cost less accumulated depreciation and impairment.

For personal use only1.

Borrowing costs incurred for the construction of qualifying assets are capitalised during the period of time that is required to complete and prepare the asset for its
intended use. The calculation of borrowing costs is based on the Group's interest cost of capital.
The gain or loss on the disposal of premises and equipment is determined as the difference between the carrying amount of the assets at the time of disposal andthe proceeds of disposal, and is included in the income statement in the year in which the significant risks and rewards of ownership are transferred to the buyer.

Assets other than freehold land are depreciated at rates based upon their expected useful lives to the NZ Banking Group, using the straight-line method. The
depreciation rates used for each class of asset are:
Buildings
Building integrals
Furniture & equipment
Computer & office equipment
Motor vehicles

1%
10%
10%
12.5% - 33%
20%

Leasehold improvements are amortised on a straight-line basis over the shorter of their useful lives or remaining terms of the lease.
At each reporting date, the carrying amounts of premises and equipment are reviewed for indications of impairment. If any such indication exists, the recoverable
amount of the assets are estimated and compared against the existing carrying value. Where the asset’s existing carrying value exceeds its recoverable amountthe difference is charged to the income statement. If it is not possible to estimate the recoverable amount of an individual asset, the NZ Banking Group estimates
the recoverable amount of the cash generating unit to which the asset belongs.
A previously recognised impairment loss is reversed if there has been a change in the estimates used to determine the asset’s recoverable amount.

F) LIABILITIESFinancial liabilitiesi)
Deposits and other borrowings
Deposits and other borrowings include certificates of deposit, interest bearing deposits, debentures, commercial paper and other related interest bearing financial
instruments. Deposits and other borrowings, excluding commercial paper, are initially recognised at fair value plus transaction costs and subsequently measured atamortised cost. The interest expense is recognised using the effective interest method as explained in Accounting Policy 1 B (i). Commercial paper is designatedat fair value through profit or loss, with fair value movements recorded directly in the income statement, which reflects the basis on which it is managed.

ii)

Bonds, notes and loan capital
Bonds, notes and loan capital are initially recognised at fair value plus transaction costs. They are subsequently measured at amortised cost using the effective
interest method, less any impairment loss, or when in an effective hedging relationship, changes in the fair value of the hedged item attributable to the hedged risk
are reflected in adjustments to the carrying value of the hedged item, and also recognised in the income statement. Interest expense is recognised in the income
statement using the effective interest method.

iii)

Financial guarantee contracts

iv)

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified
debtor fails to make payments when due. Financial guarantees are issued in the ordinary course of business, consisting of letters of credit, guarantees andacceptances. Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given; typically this is the premium
received.
Subsequent to initial recognition, the NZ Banking Group's liabilities under such guarantees are measured at the higher of their amortised amount and the best
estimate of the expenditure required to settle any financial obligation arising at the balance sheet date. These estimates are determined based on experience ofsimilar transactions and history of past losses.
Derecognition
Financial liabilities are derecognised when the obligation specified in the contract is discharged, cancelled or expires.

Non-financial liabilities
vi)
Employee benefits
Leave benefits
The amounts expected to be paid in respect of employees’ entitlements to annual leave are accrued at expected salary rates including on-costs. Expected future
payments for long service leave are discounted using market yields at the reporting date on national government bonds with terms to maturity that match, as closely
as possible, the estimated future cash outflows. Liability for long service leave is calculated and accrued for in respect of all applicable employees using an
actuarial valuation.
Superannuation schemes
The NZ Banking Group operates a number of defined contribution schemes and also contributes, according to local law, in the various countries to which it
operates, to government and other plans that have the characteristics of defined contribution schemes. The NZ Banking Group’s contributions to its defined
contribution cash accumulation scheme are recognised as an expense in the income statement when incurred.
The NZ Banking Group operates two defined benefit superannuation schemes. The liability and expense related to providing benefits to employees under each of
the defined benefit schemes are calculated by independent actuaries. A defined benefit liability is recognised to the extent that the present value of the defined
benefit obligation of each scheme, calculated using the Projected Unit Credit Method, is greater than the fair value of each scheme’s assets. Where this calculation
results in a benefit to the NZ Banking Group, a defined benefit asset is recognised and capped at the recoverable amount. The present value of the defined benefit
obligation is determined by discounting the estimated future outflows by reference to New Zealand 10-year government bond rates.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH18

NOTES TO THE FINANCIAL STATEMENTS (continued)

For personal use only

1.

vii)

ACCOUNTING POLICIES (continued)
In each subsequent reporting period, ongoing movements in the carrying value of the defined benefit liability or asset are treated as follows:
the net movement relating to the current period’s service cost, interest cost, expected return on scheme assets, past service costs and other costs (such•as the effects of any curtailments and settlements), is recognised as an employee expense in the income statement;
movements relating to actuarial gains and losses are recognised directly in retained profits; and•contributions incurred are recognised directly against the net defined benefit position.
•
The assets of the defined benefit and cash accumulation superannuation schemes are held in trust and are not included in these financial statements as the NZ
Banking Group does not have direct or indirect control of these schemes. The benefits under the schemes are provided from contributions by employee members
and by the NZ Banking Group, and from income earned by the assets of the schemes. Members’ contributions are at varying rates. Actuarial valuations are carriedout at minimum of every three years in accordance with the schemes’ Trust Deed and superannuation legislation.

Provisions
The NZ Banking Group recognises provisions when there is a present obligation, the future sacrifice of economic benefits is probable, and the amount of theprovision can be measured reliably. The amount recognised is the best estimate of the consideration required to settle the present obligation at reporting date,taking into account the risks and uncertainties surrounding the obligation at reporting date. Where a provision is measured using the cash flows estimated to settle
the present obligation, its carrying amount is the present value of those cash flows. Any expected third party recoveries are recognised as an asset if it is virtuallycertain that recovery will be received and the amount of the receivable can be measured reliably.

G) EQUITYi)

Reserves
Available-for-sale revaluation reserve
This reserve includes changes in the fair value of available-for-sale financial assets, net of tax. These changes are transferred to the income statement in noninterest income when the asset is either derecognised or impaired.
Cash flow hedging reserve
This reserve includes the fair value gains and losses associated with the effective portion of designated cash flow hedging instruments.

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

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

Statement of cash flows
For cash flow statement presentation purposes the statement of cash flows has been prepared using the direct approach modified by the netting of the certain items
as disclosed below.

iv)

v)

Cash and cash equivalents include liquid assets, amounts due from other financial institutions, trading securities and available-for-sale assets held for the purposeof meeting short-term cash commitments that are readily convertible to cash and subject to insignificant risk of changes in value.
Certain cash flows have been netted in order to provide more meaningful disclosure, as many of the cash flows are received and disbursed on behalf of customers
and reflect the activities of the customers rather than those of the NZ Banking Group. These include customer loans and advances, customer deposits, certificatesof deposit, related party balances and trading securities.
Segment reporting
Business segments are distinguishable components of the NZ Banking Group that provide products or services that are subject to risks and rewards that are
different to those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks
and rewards that are different to those components operating in other economic environments.
Business segments are the NZ Banking Group’s primary reporting segments. For reporting purposes the three major business segments are Retail Banking,Relationship Banking and Institutional. The NZ Banking Group operates in one geographic segment, New Zealand.
Goods and services tax
Revenues, expenses and assets are recognised net of the amount of goods and services tax (‘GST’) except where the amount of GST incurred is not recoverablefrom the Inland Revenue Department (‘IRD’). In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the IRD is included as ‘otherassets’ or ‘other liabilities’ in the balance sheet.
Cash flows are included in the cash flow statement on a net basis. The GST components of cash flows arising from investing and financing activities, which arerecoverable from, or payable to, the IRD are classified as operating cash flows.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH19

NOTES TO THE FINANCIAL STATEMENTS (continued)

1.

ACCOUNTING POLICIES (continued)

For personal use onlyI) OTHER
i)

ii)

iii)

Contingent liabilities
Liabilities are no longer contingent, and are recognised on the balance sheet, when the following requirements are met:
the transaction is probable in that the contingency is likely to occur; and•the contingency can be reasonably estimated.
•
Further disclosure is made within Note 43 Contingent Liabilities and Credit Related Commitments, where the above requirements are not met, but there is apossible obligation that is higher than remote. Specific details are provided together with an estimate of the range or a statement that such an estimate is notpossible.
Securitisation, funds under management and other fiduciary activities
Certain subsidiaries of the NZ Banking Group act as trustees and/or managers for a number of unit trusts and superannuation investment funds. The NZ Banking
Group provides private banking services to customers including portfolio management. The assets of the managed funds and private banking clients are notincluded in these financial statements, as direct or indirect control of the assets is not held by the NZ Banking Group. Commissions and fees earned in respect of
the Banking Group’s funds under management are included in net operating income.
Financial services provided by any member of the NZ Banking Group to discretionary private banking activities or entities conducting funds management, andassets purchased from discretionary private banking activities or entities conducting funds management are on arm’s length terms and conditions, and at fair value.

Securitised assets are derecognised when the right to receive cash flows have expired or the NZ Banking Group has transferred substantially all the risks andrewards of ownership.
Discontinued operations
A discontinued operation is a component of the NZ Banking Group’s business that represents a separate major line of business or geographical area of operations
that has been disposed of or is classified as held for sale, or is a subsidiary that has been disposed of or is classified as held for sale.

When an operation is classified as a discontinued operation the comparative income statement is restated as if the operation had been discontinued from the startof the comparative period.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH20NOTES TO THE FINANCIAL STATEMENTS

2.

CRITICAL ESTIMATES AND JUDGEMENTS USED IN APPLYING ACCOUNTING POLICIES
These financial statements are prepared in accordance with New Zealand Financial Reporting Standards and other authoritative accounting pronouncements.
Notwithstanding the existence of relevant accounting standards, there are a number of critical accounting treatments which include complex or subjective
judgements and estimates that may affect the reported amounts of assets and liabilities in the financial statements. Estimates and judgements are continually
evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under thecircumstances.

For personal use only

An explanation of the judgements and estimates made by the NZ Banking Group in the process of applying its accounting policies, that have the most significant
effect on the amounts recognised in the financial statements are set out below.
Critical accounting estimates and assumptions
Credit provisioning
Provisions for impairment in customer loans and advances are raised by management to cover incurred losses arising from past events. Losses for impairedloans are recognised when there is objective evidence that impairment of a loan or portfolio of loans has occurred. Impairment losses are calculated on
individual loans and on loans assessed collectively. Losses expected from future events, no matter how likely, are not recognised. The amount of theimpairment loss is recognised as an expense in the income statement.
The calculation of impairment provisions includes consideration of all expected cash flows associated with the loan. This includes any expected cash flows fromrealisation of security and interest and takes into account any costs expected to be incurred, including security realisation costs, legal and administration costs.

Individual provisions
An individual provision is raised where there is an expectation of a loss of principal, interest and/or fees and there is objective evidence of impairment.

At each balance date, the NZ Banking Group reviews individually significant loans for evidence of impairment. All relevant information, including the economic
situation, solvency of the customer/guarantor, enforceability of guarantees, current security values and the time value of future cash flows are taken into accountin determining individual provisions. At a minimum, individual provisions are reassessed on a quarterly basis, upon receipt of a significant asset realisation orwhen there is a change in customer circumstances/business strategy.
Collective provisions
A collective provision is calculated for:• Loans subject to individual assessment to cover losses which have been incurred but not yet identified; and• For homogenous portfolios of loans that are not considered individually significant (e.g. retail portfolios such as mortgages, credit cards and some small
business loans).
The collective provision is estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the collective pool.
The historical loss experience is then adjusted for the impact of current observable data.
For individually significant loans, historical loss experience used to calculate the collective provision is determined by taking into account historical information onprobability of default and loss given default by risk grade. The collective provision on homogeneous or portfolio managed exposures is calculated by applying an
expected loss factor to the outstanding drawn and undrawn balances in each loan portfolio. The expected loss factor is determined from internal historical loss
data.
The long-term historical loss experience is reviewed by management and adjustments made to reflect current economic and credit conditions as well as taking
into account such factors as concentration risk in an individual portfolio. In addition, management recognise that a certain level of imprecision exists in any
model used to generate risk grading and provisioning levels. As such an adjustment is applied for model risk.
As at 30 September 2008 for the NZ Banking Group, total provision for credit impairment was $666 million representing 0.68% of total net loans and advances(30/09/2007 $466 million or 0.53%). Of the total provision for 30 September 2008, $534 million represented collective provisions and $132 million represented
individual provisions.
Management regularly reviews and adjusts the estimates and methodologies as improved analysis becomes available. Changes in these assumptions andmethodologies could have a direct impact on the level of provision and impairment charge recorded in the financial statements.
Critical judgements in applying the NZ Banking Group’s accounting policies
Derivatives and hedging
The NZ Banking Group buys and sells derivatives as part of its trading operations and to hedge its interest rate risk, currency risk, price risk, credit risk and otherexposures relating to non-trading positions. The derivative instruments used to hedge the NZ Banking Group’s exposures include:• Swaps• Foreign exchange contracts• Forward rate agreements• Futures• Options, and• Combinations of the above instruments.
The NZ Banking Group enters into derivatives for trading (including transactions entered into on behalf of customers) or for hedging purposes.
Hedging
A hedging instrument is a designated derivative whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designatedhedged item. A hedged item is an asset, liability, firm commitment or highly probable forecast transaction that (a) exposes the NZ Banking Group to the risk ofchanges in fair value or future cash flows and (b) is designated as being hedged.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH21

NOTES TO THE FINANCIAL STATEMENTS
2.

CRITICAL ESTIMATES AND JUDGEMENTS USED IN APPLYING ACCOUNTING POLICIES (continued)

For personal use only

For a relationship to qualify for hedge accounting, the following criteria must be met:
• Designation and Documentation: The hedging relationship must be formally designated and documented at the inception of the hedge.
• Prospective Effectiveness: This is a forward-looking test of whether a hedging relationship is expected to be highly effective in future periods. The hedge
must be expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, consistently with theoriginally documented risk management strategy for that particular hedging relationship for hedge accounting to be achievable.
The effectiveness of the hedge must be capable of being reliably measured, that is, the fair value or cash flows of the hedged item that are attributable to thehedged risk and the fair value of the hedging instrument can be reliably measured. Prospective hedge effectiveness testing is required at least quarterly.
• Retrospective Effectiveness: This is a backward-looking test of whether a hedging relationship has actually been highly effective throughout the reporting
periods for which the hedge was designated (i.e. retrospectively). The actual results of the hedge must be within a range of 80 - 125 per cent.
Hedge accounting is only achieved where both prospective and retrospective effectiveness is achieved.
• External Counterparty: For hedge accounting purposes, only instruments that involve a party external to the NZ Banking Group can be designated as hedging
instruments.

Judgement is required by management in selecting and designating hedging relationships and assessing hedge effectiveness. NZ IAS 39 does not specify asingle method for assessing hedge effectiveness prospectively or retrospectively. The NZ Banking Group adopts the hypothetical derivative approach todetermine hedge effectiveness in line with current risk management strategies. Hedge ineffectiveness can arise for a number of reasons, and whilst a hedge
may pass the effectiveness tests above it may not be perfectly effective, thus creating volatility within the income statement through recognition of thisineffectiveness.
Fair value of derivatives
Derivatives which are entered into as part of the NZ Banking Group’s trading operations and those derivatives which are part of fair value hedges are measured
at fair value, with any changes in fair value recognised in the income statement. Where liquid markets exist, fair value is based on quoted market prices. Where
there is no active market fair value is determined by the use of various valuation techniques including discounted cash flow models and option pricing models.
To the extent possible models use only observable data, however such areas as counterparty risk, volatilities and correlations require management to makejudgements and estimates. Changes in assumptions used in these models and projections of future cash flows could affect the reported fair value of derivative
financial instruments.
Goodwill
The carrying value of goodwill is subject to an impairment test to ensure that the current carrying value does not exceed its recoverable value at the balance
sheet date. Any excess of carrying value over recoverable amount is taken to the income statement as an impairment writedown.
As at 30 September 2008, the balance of goodwill recorded as an asset on the NZ Banking Group’s consolidated balance sheet as a result of acquisitions was$3,262 million (30/09/2007 $3,262 million) of which $3,230 million relates to the acquisition of NBNZ Group in December 2003 (30/09/2007 $3,230 million).

Goodwill is allocated to cash-generating units for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored forinternal management reporting purposes. The cash-generating unit to which goodwill related to the National Bank Group is the NZ Geographic segment being
ANZ National Bank Limited Group.
Impairment testing of purchased goodwill is performed annually, or more frequently where there is an indication that the goodwill may be impaired, by comparing
the recoverable value of the ANZ National Bank Limited Group, being the smallest cash-generating unit to which the goodwill is allocated, with the current
carrying amount of its net assets, including goodwill. The recoverable amount is based on fair value less costs to sell. Where the current carrying value isgreater than the recoverable amount a charge for impairment of goodwill will be recorded in the income statement.
The NZ Banking Group obtained an independent valuation of the ANZ National Bank Limited Group as at 31 August 2008.

In determining the fair value of the NZ Banking Group, independent valuations based on fair value less costs to sell using a capitalisation of earnings approachand a discounted cash flow approach were used.
The results of the independent valuation resulted in a fair value less costs to sell in excess of current carrying value.
In determining an appropriate price multiple under the capitalisation of earnings approach, judgement is applied in assessing comparability of similar companies
or transactions, particularly with respect to the mix of business, geographic location, growth prospects, riskiness of future earnings and size of the overallbusiness.
Changes in the assumptions upon which the valuation is based, together with changes in future cash flows could materially impact the valuation obtained. Basedon this independent valuation, the current carrying value of the NZ Banking Group’s goodwill arising from acquisitions is considered recoverable and no
impairment write-down is required.
Valuation of investment in ING (NZ) Holdings Ltd (ING NZ)
The NZ Banking Group adopts the equity method of accounting for its 49% interest in its jointly controlled entity, ING NZ. As at 30 September 2008, the carrying
value of the NZ Banking Group’s investment in ING NZ was $212 million (30/09/2007 $189 million).
The carrying value of this investment is subject to an impairment test to ensure that the current carrying value does not exceed its recoverable value at thebalance sheet date. Any excess of carrying value over recoverable amount is taken to the income statement as an impairment writedown.
The NZ Banking Group obtained an independent valuation of ING NZ as at 30 September 2008. The valuation was based on a value-in-use methodology using
a discounted cash flow approach. The results of the independent valuation resulted in a value-in-use in excess of the NZ Banking Group's current carrying value.
Based on this independent valuation, the current carrying value of the NZ Banking Group’s investment in ING NZ is considered recoverable and no impairment
write-down is required.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH22NOTES TO THE FINANCIAL STATEMENTS (continued)

3.

RISK MANAGEMENT POLICIESThe NZ Banking Group recognises the importance of effective risk management to its business success. Management is committed to achieving
strong control and a distinctive risk management capability that enables the NZ Banking Group business units to meet their performance objectives.

For personal use only

The NZ Banking Group approaches risk through managing the various elements of the system as a whole rather than viewing them as independentand unrelated parts. The Risk function is independent of the business with clear delegations ultimately from the Board of the Ultimate Parent Bank,and operates within a comprehensive framework comprising:• The Boards of the entities making up the NZ Banking Group ("the Boards") providing leadership, setting risk appetite/strategy and monitoring
progress;• A strong framework for development and maintenance of risk management policies, procedures and systems set by the Boards, overseen by anindependent team of risk professionals;• The use of sophisticated risk tools, applications and processes to execute the global risk management strategies as they are deemed to apply toeach entity across the NZ Banking Group;• Where applicable Business Unit level accountability, as the “first line of defence”, and for the management of risks in alignment with the strategy
set by the relevant Board; and• Independent oversight to ensure each entity across the NZ Banking Group, and the Business Units within those entities, comply with policies,
regulations and laws, and to provide regular risk evaluation and reporting.
The NZ Banking Group manages risk through an approval, delegation and limits structure. Regular reviews of the policies, systems and risk reports,
including the effectiveness of the risk management systems, are conducted within the NZ Banking Group and also by the Ultimate Parent Bank. The
Boards have responsibility for reviewing all aspects of risk management.
The Boards have ultimate responsibility for overseeing the effective deployment of risk management frameworks, policies and processes within New
Zealand.
The risk management process is subject to oversight by the Risk Committee of the Ultimate Parent Bank Board. This includes the review of risk
portfolios and the establishment of prudential policies and controls.
The NZ Banking Group’s risk management policies are essentially the same as the Ultimate Parent Bank, but are tailored where required to suit the
local New Zealand regulatory and business environment.
Financial risk management
Credit risk is the risk of financial loss from counterparties being unable to fulfil their contractual obligations.
Market risk is the risk to the NZ Banking Group's earnings arising from changes in interest rates, currency exchange rates, credit spreads, or fromfluctuations in bond, commodity or equity prices.
Liquidity risk is the risk that the NZ Banking Group has insufficient capacity to fund increases in assets, or is unable to meet its payment obligations
as they fall due, including repaying depositors or maturing wholesale debt.
Refer to Note 32 Financial Risk Management for detailed disclosures on the financial risk management policies the NZ Banking Group adheres
to.
Operational risk
Operational risk is the risk arising from day to day operational activities which may result in direct or indirect loss. These losses may result fromfailure to comply with policies, procedures, laws and regulations, from fraud or forgery, from a breakdown in the availability or integrity of services,
systems and information, or damage to the reputation of entities making up the NZ Banking Group.
Examples include failure to comply with policy and legislation, human error, natural disasters, fraud and other malicious acts. Where appropriate,risks are mitigated by insurance.

Group Risk Management is responsible for establishing the ANZ Group-wide operational risk framework and associated Group-level policies. The
entities across NZ Banking Group are responsible for the implementation of the operational risk framework and associated polices along with theidentification, analysis, assessment and treatment of operational risks on a day-to-day basis as applicable.
Where applicable, a Risk Drivers and Controls (or “Scorecards”) Approach to operational risk measurement is used to measure the operational risk
profile of individual business units, and to allocate operational risk economic capital. This approach gives business managers a strong and clear
incentive to reduce operational risk.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH23

NOTES TO THE FINANCIAL STATEMENTS (continued)

3.

RISK MANAGEMENT POLICIES (continued)

For personal use only

Compliance
The entities within the NZ Banking Group conduct their business in accordance with all relevant compliance requirements. In order to assist the NZ
Banking Group identify, manage, monitor and measure its compliance obligations, a comprehensive regulatory compliance framework is in place,which addresses both external (regulatory) and internal compliance. This is applied according to the requirements of each entity.

Where appropriate, Risk Management, in conjunction with Business Unit staff ensure the key operating entities within the NZ Banking Group operate
within a compliance infrastructure and framework that incorporates new and changing business obligations and processes.
The compliance policies and their supporting framework seeks to minimise material risks to the NZ Banking Group’s reputation and value that could
arise from non-compliance with laws, regulations, industry codes and internal standards and policies. The Board of each entity has primary
responsibility for the identification and management of compliance and may be assisted by Risk Management division providing policy andframework, measurement, monitoring and reporting, as well as leadership in areas such as anti-money laundering procedures and matters ofprudential compliance. The Board and the Risk Committee of the Ultimate Parent Bank Board conduct Board and Executive oversight.

Internal audit
The Overseas Banking Group internal audit function, conducts independent reviews that assist the Board of Directors and management to meet theirstatutory and other obligations.
Internal Audit reports directly to the Chairman of the Overseas Banking Group (the "Group") Audit Committee. Under its Charter, Internal Audit
conducts independent appraisals of:• The continued operation and effectiveness of the internal controls in place to safeguard and monitor all material risks to the NZ Banking Group;••••

Compliance with Board policies and management directives;
Compliance with the requirements of supervisory regulatory authorities;
The economic and efficient management of resources; andThe effectiveness of operations undertaken by the NZ Banking Group.

In planning the audit activities, Internal Audit adopts a risk-based approach that directs and concentrates resources to those areas of greatest
significance, strategic concern and risk to the business. This encompasses reviews of major credit, market, technology and operating risks within
the wider NZ Banking Group. Significant findings are reported quarterly to the Group and ANZ National Bank Limited Audit Committees asappropriate.
The Internal Audit Plan is approved by the Group Audit Committee.
All issues and recommendations reported to management are tracked and monitored internally to ensure completion and agreed actions areundertaken where appropriate.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH24

NOTES TO THE FINANCIAL STATEMENTS (continued)

4.

INCOME

Continuing operations

For personal use onlyInterest income
Financial assets at fair value through profit or loss
Trading securities
Derivative financial instruments

NZ Banking GroupYear toYear to30/09/2008
30/09/2007$m$m

NZ Branch
Year toYear to30/09/2008
30/09/2007
$m
$m

220
507

233
278

-

-

727

511

-

-

Financial assets not at fair value through profit or loss
Liquid assets
Other financial institutions
Available-for-sale assets
Lending on productive loans
Lending on impaired assets (Note 14)
Other

313
321
3
8,472
6
16

345
220
7
7,190
4
19

-

-

9,131

7,785

-

-

Total interest income

9,858

8,296

-

-

646
4
166
45
60
70
(67)
37

594
3
128
2
39
10
22
(2)
35

-

-

15
39

(2)
11

-

-

1,015

840

-

-

Net fee income comprises:
Lending and credit facility fee income
Fee income on trust and other fiduciary activities
Other fee income

134
47
632

109
46
593

-

-

Total fee income

813

748

-

-

Direct fee expense

167

154

-

-

Net fee income

646

594

-

-

Other operating income
Net fee income1
Dividends received
Net gain on foreign exchange trading
Net gain on trading securities
Net gain on trading derivatives
Net gain on available-for-sale assets
Net (loss) gain on hedges not qualifying for hedge accounting
Net ineffectiveness on qualifying fair value hedges
Net cash flow hedge gains transferred to income statement
Net gain (loss) on financial liabilities designated at fairvalue through profit or loss
Other income
Total other operating income

1

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH25

NOTES TO THE FINANCIAL STATEMENTS (continued)

5.

EXPENSES

Continuing operations

For personal use onlyInterest expense
Financial assets at fair value through profit or loss
Commercial paper

NZ Banking GroupYear toYear to30/09/2008
30/09/2007$m$m

NZ Branch
Year toYear to30/09/2008
30/09/2007
$m
$m

997

595

-

-

997

595

-

-

Deposits at amortised cost
Other financial institutions
Deposits and other borrowings
Subsidiary companies
Bonds and notes
Term funding
Loan capital
Other

195
4,397
1,781
159
207
93

206
3,740
1,322
142
157
77

-

-

Total interest expense

7,829

6,239

-

-

724
75

650
67

-

-

37
7
13
38
38
80
82
117
180
54

35
6
12
38
39
72
71
112
181
48

-

-

1,445

1,331

-

-

Operating expenses
Personnel costs
Employee entitlements
Pension costs- Defined contribution schemes- Defined benefit schemes
Share-based payments expense
Building occupancy costs
Depreciation of premises and equipment
Leasing and rental costs
Related parties (Note 46)
Computer expenses
Administrative expenses
Other costs
Total operating expenses

NZ Banking GroupYear toYear to30/09/2008
30/09/2007
$'000
$'000

NZ Branch
Year toYear to30/09/2008
30/09/2007
$'000
$'000

Auditors' remuneration to KPMG comprises:
Audit or review of financial statements
Other audit-related services

1,942
500

1,549
357

-

-

Total auditors' remuneration

2,442

1,906

-

-

It is NZ Banking Group policy that KPMG can provide assurance and other audit-related services that, while outside the scope of thestatutory audit, are consistent with the role of auditor. KPMG may not provide services that are perceived to be in conflict with the role ofauditor. These include consulting advice and subcontracting of operational activities normally undertaken by management, andengagements where the auditor may ultimately be required to express an opinion on its own work. However, non-audit services that are
not perceived to be materially in conflict with the role of auditor may be provided by KPMG subject to the approval of the Ultimate Parent
Bank Audit Committee.
Other audit-related services include services for the audit or review of financial information other than financial reports including
prudential supervision reviews, prospectus reviews, trust audits and other audits required for local regulatory purposes.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH26

NOTES TO THE FINANCIAL STATEMENTS (continued)

6.

INCOME TAX EXPENSENZ Banking GroupYear toYear to30/09/2008
30/09/2007$m$m

NZ Branch
Year toYear to30/09/2008
30/09/2007$m$m

For personal use only

Reconciliation of the prima facie income tax payable on
profit with the income tax expense charged in
the income statement
Continuing operations
Profit before income tax

1,408

1,516

-

-

Prima facie income tax at 33%

465

500

-

-

Rebateable and non-assessable dividends

(10)

(12)

-

-

Non-assessable income/non-deductible expenses

Tax effect of change in domestic tax rate1
Income tax under provided in prior periods
Total income tax expense from continuing operations
Effective tax rate (%)

(36)

34

-

-

419

522

-

-

(1)
-

27
2

-

-

418

551

-

-

29.7%

36.3%

0.0%

0.0%

525

448

-

-

The major components of the income tax expense comprise:Amounts recognised in the income statement
Current income tax charge
Current income tax charge
Adjustments recognised in the current year in relation to
current tax of prior periods
Deferred income tax
Deferred tax (income) expense relating to the origination andreversal of temporary differences

-

2

-

-

(107)

101

-

-

Total income tax expense recognised in income
statement - continuing operations

418

551

-

-

(12)

1

-

-

(4)

11

-

-

Total income tax (credit) expense recognised directly in equity

(16)

12

-

-

Imputation Credit AccountBalance at beginning of the year
Imputation credits attached to dividends received
Taxation paid
Imputation credits attached to dividends paid
Other

831
33
211
(370)
(9)

642
14
371
(196)
-

-

-

Balance at end of the year

696

831

-

-

The following amounts were (credited) charged
directly to equity:
Current income tax
Actuarial (loss) gain on defined benefit schemesDeferred income tax
Net (loss) gain on revaluation of cash flow hedges

The above amounts only include items that give rise to imputation credits that are available for use by the NZ Banking Group.
The companies forming the NZ Banking Group are members of an Imputation Group.

1
In May 2007, legislation was passed to reduce the New Zealand corporate tax rate from 33% to 30%, effective for the 2009 income tax
year. The tax effect shown is the impact on the value of deferred tax assets and liabilities as a result of the reduction in the corporate tax
rate from 1 October 2008.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH27

NOTES TO THE FINANCIAL STATEMENTS (continued)

7.

LIQUID ASSETSNZ Banking Group
30/09/2008
30/09/2007$m$m
Cash and balances with central banks
Securities purchased under agreement to resell
Money at callBills receivable and remittances in transit

3,950
807
82

3,010
197
1,467
133

-

-

Total liquid assets

4,839

4,807

-

-

Included within liquid assets is the following balance:
Overnight balances with central banks

3,779

2,809

-

-

The NZ Banking Group's total core liquidity portfolio held for
managing liquidity risk (Note 32)

8,736

6,168

-

-

Able to be withdrawn without prior notice
Securities purchased under agreement to resell
Security settlements
Certificates of deposit
Term loans and advances

437
304
1,328
2,447
516

952
512
1,634
465

-

-

Total due from other financial institutions

5,032

3,563

-

-

For personal use only
8.

NZ Branch
30/09/2008
30/09/2007$m$m

DUE FROM OTHER FINANCIAL INSTITUTIONSThere are no assets used to secure deposit obligations or assets encumbered through repurchase agreements at 30 September 2008
(30 September 2007 nil).

There is a related party balance with a subsidiary of the Ultimate Parent Bank at 30 September 2008 of $1,328m (30 September 2007 nil)

9.

TRADING SECURITIES
Government, Local Body stock and bonds
Certificates of deposit
Promissory notes
Other bank bonds
Other

252
926
39
1,331
76

144
866
177
638
52

-

-

Total trading securities

2,624

1,877

-

-

97

300

-

-

Included within trading securities is the following balance:
Assets encumbered through repurchase agreements

10.

DISCONTINUED OPERATIONS

On 31 October 2006, UDC Finance Limited sold Truck Leasing Limited to Nikko Principal Investments Australia Limited, a private equity
business of Nikko Cordial Corporation, for consideration of $147 million. A gain of $76 million was realised.
For a detailed explanation of the financial impacts of the sale of TLL refer to Note 10 Discontinued Operations in the NZ geographic
consolidated financial statements for the year ended 30 September 2007.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH28

NOTES TO THE FINANCIAL STATEMENTS (continued)

11. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative instruments are contracts whose value is derived from one or more underlying variables or indices, require little or no initial net investment and aresettled at a future date. Derivatives include contracts traded on registered exchanges and contracts agreed between counterparties, called “Over theCounter” or “OTCs”. The use of derivatives and their sale to customers as risk management products is an integral part of the NZ Banking Group’s trading
activities. Derivatives are also used to manage the NZ Banking Group’s own exposure to fluctuations in exchange and interest rates as part of its asset andliability management activities (i.e. balance sheet risk management).

For personal use only

Derivatives are subject to the same types of credit and market risk as other financial instruments, and the NZ Banking Group manages these risks in aconsistent manner.
Types of derivative instruments
The principal foreign exchange rate contracts used by the NZ Banking Group are forward foreign exchange contracts, currency swaps and currency options.
Forward foreign exchange contracts are agreements to buy or sell a specified quantity of foreign currency on a specified future date at an agreed rate. A
currency swap generally involves the exchange, or notional exchange, of equivalent amounts of two currencies and a commitment to exchange interest
periodically until the principal amounts are re-exchanged on a future date. Currency options provide the buyer with the right, but not the obligation, either topurchase or sell a fixed amount of a currency at a specified rate on or before a future date. As compensation for assuming the option risk, the option writer
generally receives a premium at the start of the option period.
The principal commodity contracts used by the NZ Banking Group are forward commodity contracts and commodity swaps. Forward commodity contracts areagreements for the payment of the difference between a specified commodity price and a fixed rate on a notional volume of the commodity at a future date. A
commodity swap generally involves the exchange of the return on the commodity for a fixed or floating interest payment without the exchange of theunderlying commodity or principal amount.
The principal interest rate contracts used by the NZ Banking Group are forward rate agreements, interest rate futures, interest rate swaps and options.
Forward rate agreements are contracts for the payment of the difference between a specified interest rate and a reference rate on a notional deposit at afuture settlement date. There is no exchange of principal. An interest rate future is an exchange traded contract for the delivery of a standardised amount of a
fixed income security or time deposit at a future date. Interest rate swap transactions generally involve the exchange of fixed and floating interest payment
obligations without the exchange of the underlying principal amounts. Interest rate options provide the buyer with the right but not the obligation either toreceive or pay interest at a specified rate on or before a future date. As compensation for assuming the option risk, the option writer generally receives apremium at the start of the option period.
Equity related contracts are transacted by the NZ Banking Group to offset the equity risk associated with financial instruments priced against various shareindices.
Derivatives, except for those that are specifically designated as effective hedging instruments, are classified as held for trading. The held for tradingclassification includes two categories of derivative instruments: those held as trading positions and those used for the NZ Banking Group’s balance sheet risk
management.
Trading positions
Trading positions consist of both sales to customers and market making activities. Sales to customers include the structuring and marketing of derivative
products to customers which enable them to take or mitigate risks. Market making activities consist of derivatives entered into principally for the purpose ofgenerating profits from short-term fluctuations in price or margins. Positions may be traded actively or held over a period of time to benefit from expectedchanges in market rates.
Gains or losses, including any current period interest, from the change in fair value of trading positions are recognised in the income statement as ‘otheroperating income’ in the period in which they occur.
Balance sheet risk management
The NZ Banking Group designates balance sheet risk management derivatives into hedging relationships in order to minimise income statement volatility.
This volatility is created by differences in the timing of recognition of gains and losses between the derivative and the hedged item. Hedge accounting is notapplied to all balance sheet risk management positions.
Gains or losses from the change in fair value of balance sheet risk management derivatives that form part of an effective hedging relationship are recognisedin the income statement based on the hedging relationship. Any ineffectiveness is recognised in the income statement as ‘other operating income’ in the
period in which it occurs.
Gains or losses, excluding any current period interest, from the change in fair value of balance sheet risk management positions that are not designated into
hedging relationships are recognised in the income statement as ‘other operating income’ in the period in which they occur. Current period interest is
included in interest income and expense.
The following tables provide an overview of the NZ Banking Group’s foreign exchange rate, interest rate and equity derivatives. They include all trading andbalance sheet risk management contracts. Notional principal amounts measure the amount of the underlying financial commodity and represent the volume
of outstanding transactions. They are not a measure of the risk associated with a derivative. The derivative instruments become favourable (assets) or
unfavourable (liabilities) as a result of fluctuations in market rates relative to their terms. The aggregate contractual or notional amount of derivative financial
instruments on hand, the extent to which instruments are favourable or unfavourable, and as a consequence the aggregate fair values of derivative financial
assets and liabilities, can fluctuate significantly from time to time. The fair values of derivative instruments held and notional principal amounts are set out asfollows.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH29

NOTES TO THE FINANCIAL STATEMENTS (continued)

11. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

30/09/2008

For personal use only

Derivatives held for trading
Foreign exchange derivatives
Spot and forward contracts
Swap agreements
Options purchased
Options sold
Collateral received / paid

Commodity derivatives
Swap agreements

Interest rate derivatives
Forward rate agreements
Swap agreements
Futures contracts
Options purchased
Options sold

Equity derivatives
Options purchased

NZ Banking Group
Notional
Principal
Fair values
AmountAssetsLiabilities
$m
$m
$m

NZ Branch
Notional
Principal
Amount$m

Fair values
AssetsLiabilities$m$m

37,91466,759
1,828
1,813
n/a

1,079
3,129
58
(586)

684
1,564
61
(270)

-

-

-

108,314

3,680

2,039

-

-

-

36

4

4

-

-

-

121,966
347,394
20,328
2,158
2,164

22
3,565
15
11
-

17
3,631
6
11

-

-

-

494,010

3,613

3,665

-

-

-

-

-

-

-

-

-

602,360

7,297

5,708

-

-

-

Interest rate derivatives
Swap agreements

12,160

161

142

-

-

-

Total derivatives designated as cash flow hedges

12,160

161

142

-

-

-

58

1

-

-

-

-

Interest rate derivatives
Swap agreements

32,941

144

622

-

-

-

Total derivatives designated as fair value hedges

32,999

145

622

-

-

-

Total derivatives held for hedging

45,159

306

764

-

-

-

Total derivative financial instruments

647,519

7,603

6,472

-

-

-

Total derivatives held for trading
Derivatives held for hedging(a) Designated as cash flow hedges(b) Designated as fair value hedges
Foreign exchange derivatives
Swap agreements

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH30NOTES TO THE FINANCIAL STATEMENTS (continued)
11. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

30/09/2007

For personal use only

Derivatives held for trading
Foreign exchange derivatives
Spot and forward contracts
Swap agreements
Options purchased
Options sold
Collateral received / paid

Interest rate derivatives
Forward rate agreements
Swap agreements
Futures contracts
Options purchased
Options sold

Equity derivatives
Options purchased

NZ Banking Group
Notional
Principal
Fair values
AmountAssetsLiabilities
$m
$m
$m

NZ Branch
Notional
Principal
Amount$m

Fair values
AssetsLiabilities$m$m

37,15548,478
2,890
2,866
-

750
1,441
113
(530)

1,023
1,360
108
(115)

-

-

-

91,389

1,774

2,376

-

-

-

74,574
318,899
17,761
1,703
1,651

3
2,240
4
13
-

4
2,321
34
13

-

-

-

414,588

2,260

2,372

-

-

-

20

20

-

-

-

-

505,997

4,054

4,748

-

-

-

49

2

-

-

-

-

Interest rate derivatives
Swap agreements

12,568

108

50

-

-

-

Total derivatives designated as cash flow hedges

12,617

110

50

-

-

-

Total derivatives held for trading

Derivatives held for hedging(a) Designated as cash flow hedges
Foreign exchange derivatives
Spot and forward contracts(b) Designated as fair value hedges
Foreign exchange derivatives
Swap agreements

74

1

7

-

-

-

Interest rate derivatives
Swap agreements

37,088

386

130

-

-

-

Total derivatives designated as fair value hedges

37,162

387

137

-

-

-

Total derivatives held for hedging

49,779

497

187

-

-

-

Total derivative financial instruments

555,776

4,551

4,935

-

-

-

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH31

NOTES TO THE FINANCIAL STATEMENTS (continued)
11. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
Hedging relationships
The NZ Banking Group has two types of allowable hedging relationships which it enters into: fair value hedges and cash flow hedges. Each has specificrequirements when accounting for the fair value changes in the hedging relationship. For details on the accounting treatment of each type of hedging
relationship refer to Note 1 Accounting Policy E (ii).

For personal use only

Fair value hedges
The risk being hedged in a fair value hedge is a change in the fair value of an asset or liability or unrecognised firm commitment that may affect the income
statement. Changes in fair value might arise through changes in interest rates or foreign exchange rates. The NZ Banking Group’s fair value hedges
principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due tomovements in market interest rates.
The application of fair value hedge accounting results in the fair value adjustment on the hedged item attributable to the hedged risk being recognised in theincome statement at the same time the hedging instrument impacts the income statement. If a hedging relationship is terminated, the fair value adjustment to
the hedged item continues to be recognised as part of the carrying amount of the item or group of items and is amortised to the income statement as a part ofthe effective yield over the period to maturity. Where the hedged item is derecognised from the NZ Banking Group’s balance sheet, the fair value adjustment
is included in the income statement as ‘other operating income’ as a part of the gain or loss on disposal. The table below shows the gain or loss on fair value
hedges by hedging instrument and hedge item attributable to the hedged risk:

NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007$m$m

Gain or (loss) arising from fair value hedges:- hedged item- hedging instrument

661
(728)

(392)
390

-

-

Net ineffectiveness on qualifying fair value hedges

(67)

(2)

-

-

Cash flow hedges
The risk being hedged in a cash flow hedge is the potential volatility in future cash flows that may affect the income statement. Volatility in the future cash
flows may result from changes in interest rates or changes in exchange rates arising from recognised financial assets and liabilities and highly probable
forecast transactions. The NZ Banking Group’s cash flow hedges consist principally of interest rate swaps that are used to protect against exposures tovariability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be refunded or
reinvested in the future. The NZ Banking Group primarily applies cash flow hedge accounting, where necessary, to its variable rate loan assets, variable rate
liabilities and short term re-issuances of fixed rate customer and wholesale deposit liabilities. The amounts and timing of future cash flows, representing bothprincipal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their forecast repricing profile. This forms thebasis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges.

The effective portion of changes in the fair value of derivatives qualifying and designated as cash flow hedges is deferred to the cash flow hedging reserve
which forms part of equity. Amounts deferred in equity are recognised in the income statement in the period during which the hedged forecast transactions
take place and is fully amortised when the hedging relationship matures. The table below shows the movements in the cash flow hedging reserve:

NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007$m$m

Balance at beginning of the year
Transferred to income statement
Tax effect of items transferred to income statement
Valuation (loss) gain taken to equity
Tax effect of net loss (gain) taken to equity

84
(37)
11
(47)
13

52
(35)
12
78
(23)

-

-

Balance at end of the year

24

84

-

-

The mechanics of hedge accounting results in the gain or loss in the cash flow hedging reserve above being released into the income statement at the sametime that the corresponding loss or gain attributable to the hedged item impacts the income statement. It will not necessarily be released to the income
statement uniformly over the period of the hedging relationship as the fair value of the derivative is driven by changes in market rates over the term of the
instrument. As market rates do not always move uniformly across all time periods, a change in market rates may drive more value in one forecast period thananother, which impacts when the hedging reserve is released to the income statement.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH32

NOTES TO THE FINANCIAL STATEMENTS (continued)

11.

DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The table below shows the breakdown of the cash flow hedging reserve attributable to each type of cash flow hedging relationship:

For personal use only

NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007$m$m

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

70
(1)

(19)
69

-

-

(45)

34

-

-

Total cash flow hedging reserve

24

84

-

-

All underlying hedged cash flows are expected to be recognised in the income statement in the period in which they occur which is anticipated to takeplace over the next 0 - 10 years (30/09/2007 0-10 years).
All gains and losses associated with the ineffective portion of the hedging derivatives are recognised immediately as ‘other operating income’ in theincome statement. The ineffectiveness recognised in the income statement in respect of cash flow hedges was nil in the NZ Banking Group (30/09/2007
less than $1 million) and nil in the NZ Branch (30/09/2007 $nil).
There were no transactions where cash flow hedge accounting ceased in the period ended 30 September 2008 as a result of highly probable cash flowsthat were no longer expected to occur (30/09/2007 no transactions).

12.

13.

AVAILABLE-FOR-SALE ASSETS
Government, Local Body stock and bonds
Other debt securities
Equity securities

3
41
65

4
43
1

-

-

Total available-for-sale assets

109

48

-

-

Overdrafts
Credit card outstandings
Term loans - housing
Term loans - non-housing
Finance lease receivables

2,140
1,434
53,35040,583
777

2,012
1,338
49,75135,067752--

Gross loans and advances
Provision for credit impairment (Note 15)

98,284(666)

88,920
(466)

-

-

(346)
353
(55)
109

(290)
(442)
(53)
120

-

-

97,67987,789--NET LOANS AND ADVANCES

Unearned finance income
Fair value hedge adjustment
Deferred fee revenue and expenses
Capitalised brokerage/ mortgage origination fees
Total net loans and advances

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH33

NOTES TO THE FINANCIAL STATEMENTS (continued)

14. IMPAIRED ASSETS, PAST DUE ASSETS AND OTHER ASSETS UNDER ADMINISTRATION
Individually impaired assets

30/09/2008

Retailmortgages$m

NZ Banking Group
Other retail
Corporate
exposures
exposures
$m
$m

Total
$m

Retailmortgages$m

NZ Branch
Other retail
Corporate
exposures
exposures
$m
$m

Total
$m

7
103
(2)
(18)
(7)

20
122
(14)
(98)

88
228
(8)
(86)
(8)

115
453
(10)
(118)
(113)

-

-

-

-

Balance at end of the year

83

30

214

327

-

-

-

-

Balance at beginning of the year
Transfers from productive
Transfers to productive
Assets realised or loans repaid
Write offs

9
3
(5)
-

19
85
(9)
(75)

123
81
(15)
(92)
(9)

151
169
(15)
(106)
(84)

-

-

-

-

Balance at end of the year

7

20

88

115

-

-

-

-

For personal use only

Balance at beginning of the year
Transfers from productive
Transfers to productive
Assets realised or loans repaid
Write offs

30/09/2007

Past due assets (90 days past due assets) 1
Balance at beginning of the year
Transfers to past due assets
Transfers from past due assets

NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007
$m
$m

102
856
(649)

86
360
(344)

-

-

309

102

-

-

Other assets under administration
Balance at beginning of the year
Transfers to other assets under administration
Transfers from other assets under administration

1
-

3
(3)

-

-

Balance at end of the year

1

-

-

-

Undrawn facilities with impaired customers
Balance at beginning of the year
Transfers to (from) undrawn facilities with impaired customers

6
-

8
(2)

-

-

Balance at end of the year

6

6

-

-

Interest foregone on impaired assets
Gross interest receivable on impaired loans
Interest recognised

24
(6)

12
(4)

-

-

Net interest foregone on impaired loans

18

8

-

-

Balance at end of the year

Further analysis of past due assets can be found in Note 32 Financial Risk Management, including an ageing analysis of all past due assets 1 day and over where the counterparty
has failed to make a payment when contractually due.
Other assets under administration and undrawn facilities with impaired customers are predominantly corporate exposures.
There are no undrawn facilities with 90 day past due customers or customers within the other assets under administration category as at 30 September 2008 (30 September 2007
nil).
As at 30 September 2008, the NZ Banking Group did not have any material restructured assets or assets acquired through enforcement of security (30 September 2007 nil).

1
90 day past due assets are not classified as impaired assets as they are either 90 days or more past due and well secured, or are portfolio managed facilities that can be held for up
to 180 days past due.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH34

NOTES TO THE FINANCIAL STATEMENTS (continued)

15. PROVISION FOR CREDIT IMPAIRMENT

30/09/2008

Retailmortgages$m

NZ Banking Group
Other retail
Corporate
exposures
exposures
$m
$m

Total
$m

Retailmortgages$m

NZ Branch
Other retail
Corporate
exposures
exposures
$m
$m

Total
$m

58
23

130
34

234
55

422
112

-

-

-

-

Balance at end of the year

81

164

289

534

-

-

-

-

Individual provision (individually impaired assets)
Balance at beginning of the year
Charge to income statement
Recoveries of amounts previously written off
Bad debts written off
Discount unwind1

4
31
(7)
-

13
80
15
(98)
-

27
79
2
(8)
(6)

44
190
17
(113)
(6)

-

-

-

-

Balance at end of the year

28

10

94

132

-

-

-

-

Total provision for credit impairment

109

174

383

666

-

-

-

-

Collective provision
Balance at beginning of the year
Charge to income statement

51
7

132
(2)

219
15

402
20

-

-

-

-

Balance at end of the year

58

130

234

422

-

-

-

-

Individual provision (individually impaired assets)
Balance at beginning of the year
Charge to income statement
Recoveries of amounts previously written off
Bad debts written off
Discount unwind1

3
1
-

16
55
17
(75)
-

39
(2)
3
(9)
(4)

58
54
20
(84)
(4)

-

-

-

-

Balance at end of the year

4

13

27

44

-

-

-

-

Total provision for credit impairment

62

143

261

466

-

-

-

-

For personal use only

Collective provision
Balance at beginning of the year
Charge to income statement

30/09/2007

Provision movement analysis
NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007$m$m

New and increased provisions
Provision releases

223
(16)

92
(18)

-

-

Recoveries of amounts previously written off

207
(17)

74
(20)

-

-

Individual provision charge
Collective provision charge

190
112

54
20

-

-

Charge to income statement

302

74

-

-

1
The impairment loss on an impaired asset is calculated as the difference between the asset's carrying amount and the estimated future cash flows discounted to their present value.
As this discount unwinds during the period it is recognised as interest income.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH35

NOTES TO THE FINANCIAL STATEMENTS (continued)

16.

SHARES IN CONTROLLED ENTITIES, ASSOCIATES AND JOINTLY CONTROLLED ENTITIESNZ Banking Group
30/09/2008
30/09/2007$m$m
Shares in controlled entities
Unquoted at cost
-

-

-

144

10

-

-

Shares in jointly controlled entities
Unquoted at cost plus equity accounted adjustments

219

196

-

-

Total shares in controlled entities, associates andjointly controlled entities

363

206

-

-

Shares in associates comprise:
Balance at beginning of the year
Acquisitions
Disposals
Fair value adjustment
Share of profit of equity accounted associates 1

10
48
(2)
88

3
8
(1)
-

-

-

Balance at end of the year

144

10

-

-

For personal use only

Shares in associates

NZ Branch
30/09/2008
30/09/2007$m$m

Shares in associates at 30 September 2008 includes goodwill of $57 million (30/09/2007 $8 million) for the NZ Banking Group and $nil million (30/09/2007 $nil) for
the NZ Branch.

Shares in jointly controlled entities comprise:
Balance at beginning of the year
Disposals
Share of profit of equity accounted jointly controlled entities

196
23

174
(2)
24

Balance at end of the year

219

196

Shares in jointly controlled entities at 30 September 2008 includes goodwill of $97 million (30/09/2007 $97 million) for the Group and $nil million (30/09/2007 $nil) for
the NZ Branch.

1
The NZ Banking Group, via its associate, Cards NZ Limited, acquired shares in Visa in March 2008, resulting in an equity accounted profit of $88 million being
recognised on the sale of the shares at fair value by Cards NZ Limited. Visa shares not sold into the initial public offering are held as an available-for-sale asset on
the balance sheet.

17. OTHER ASSETS
Accrued interest and prepaid discounts
Accrued commission
Defined benefit schemes surplus
Share-based payments asset
Prepaid expenses
Security settlements
Other assets

Total other assets

535
20
50
57
85
253

537
12
8
37
30
137
284

-

-

1,000

1,045

-

-

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH36

NOTES TO THE FINANCIAL STATEMENTS (continued)

18.

DEFERRED TAX ASSETSNZ Banking Group
30/09/2008
30/09/2007$m$m
Deferred tax assets
Balance at beginning of the year
Credited (charged) to income statement
Set-off of deferred tax liabilities pursuant to set-off provisions 1

NZ Branch
30/09/2008
30/09/2007
$m
$m

119
(38)
(74)

-

-

Balance at end of the year

118

7

-

-

Deferred tax assets comprise the following temporary differences:
Provision for credit impairment
Deferred fee revenue and expenses
Premises and equipment
SoftwareProvisions and accruals
Derivative financial instruments
Defined benefit schemes
Other

200
3
11
125
3
8
3

140
3
2
32
103
3
11

-

-

353

294

-

-

Set-off of deferred tax liabilities pursuant to set-off provisions 1

(235)

(287)

-

-

Net deferred tax assets

118

7

-

-

The deferred tax credited (charged) to the income statement
comprises the following temporary differences:
Provision for credit impairment
Deferred fee revenue and expenses
Premises and equipment
SoftwareProvisions and accruals
Derivative financial instruments
Defined benefit schemes
Other

60
(2)
(21)
22
8
(8)

(12)
(2)
(2)
4
(6)
(20)

-

-

Total deferred tax credited (charged) to the income statement

59

(38)

-

-

For personal use only

7
59
52

There was no deferred tax asset charged or credited to equity as at 30 September 2008 (30/09/2007 $nil). There were no unrecognised deferred tax assets as at 30
September 2008 (30/09/2007 $nil).

The reduction in the corporate tax rate from 33% to 30% from the 2009 tax year has been taken into account in calculating the value of deferred tax assets as at 30
September 2008 and 30 September 2007.

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

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH37

NOTES TO THE FINANCIAL STATEMENTS (continued)

19.

PREMISES AND EQUIPMENTNZ Banking Group
30/09/2008
30/09/2007
$m
$m
69
(12)

69
(12)

-

-

Total carrying amount

57

57

-

-

Leasehold improvements
At costAccumulated depreciation

98
(75)

97
(73)

-

-

Total carrying amount

23

24

-

-

255
(176)

244
(166)

-

-

79

78

-

-

246
(196)

239
(189)

-

-

Total carrying amount

50

50

-

-

Work in progress

33

23

-

-

Total premises and equipment

242

232

-

-

3,262

3,262

-

-

SoftwareGross carrying amount
Balance at beginning of the year
Additions

68
28

51
17

-

-

Balance at end of the year

96

68

-

-

Accumulated amortisation
Balance at beginning of the year
Amortisation expense1

(39)
(8)

(32)
(7)

-

-

Balance at end of the year

(47)

(39)

-

-

Total software

49

29

-

-

Other intangible assets

3

3

-

-

3,314

3,294

-

-

For personal use only

Freehold and leasehold land and buildings
At costAccumulated depreciation

Furniture and equipment
At costAccumulated depreciation
Total carrying amountComputer and office equipment
At costAccumulated depreciation

20.

NZ Branch
30/09/2008
30/09/2007$m$m

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill
Gross carrying amount
Balance at beginning and end of the year

Total goodwill and other intangible assets

No impairment losses have been recognised against the gross carrying amount of goodwill, software and other intangible assets for the year ended 30 September
2008 (30/09/2007 $nil).
1

21.

Software amortisation expense is included in 'other costs' in the income statement.

DUE TO OTHER FINANCIAL INSTITUTIONS

Australia and New Zealand Banking Group Limited(Ultimate Parent Bank)
Securities sold under agreements to repurchase
Other financial institutions

1,001
97
2,213

1,140
300
1,730

-

-

Total due to other financial institutions

3,311

3,170

-

-

Included within due to other financial institutions is the following balance:
Balances owing to the Ultimate Parent Bank by
ANZ National (Int'l) Limited guaranteed by the Bank

1,001

1,140

-

-

Balances owing to the Ultimate Parent Bank are due within twelve months. Interest is paid at variable bank rates.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH38NOTES TO THE FINANCIAL STATEMENTS (continued)

22.

DEPOSITS AND OTHER BORROWINGSNZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007
$m
$m

5,527
31,26022,085
3,928
1,683

4,447
28,99821,128
4,354
1,786

-

-

Total deposits and other borrowings recognised at amortised cost

64,48360,713--

Fair value through the profit or loss
Commercial paper

12,653

9,317

-

-

Total deposits and other borrowings recognised at fair value

12,653

9,317

-

-

Total deposits and other borrowings

77,13670,030--For personal use only

Amortised cost
Certificates of deposit
Term deposits
Demand deposits bearing interest
Deposits not bearing interest
Secured debenture stock

The principal at maturity of commercial paper at fair value through the profit and loss is $12,755 million (30/09/2007 $9,404 million).
The NZ Banking Group has not defaulted on any principal, interest or redemption amounts on its borrowed funds during the year ended 30 September 2008
(30/09/2007 nil). Deposits from customers are unsecured and rank equally with other unsecured liabilities of the NZ Banking Group. In the unlikely event that acompany in the NZ Banking Group was put into liquidation or ceased to trade, secured creditors and those creditors set out in the Seventh Schedule of theCompanies Act 1993 would rank ahead of the claims of unsecured creditors.

Included within deposits and other borrowings are the following balances:
Commercial paper issued by ANZ National (Int'l) Limited
guaranteed by ANZ National Bank Limited at amortised cost

12,670

9,319

-

-

UDC Finance Limited secured debentures
Carrying value of total tangible assets

2,032

2,065

-

-

Registered secured debenture stock is constituted and secured by a trust deed between UDC Finance Limited and its independent trustee, Trustees Executors
Limited. The trust deed creates floating charges over all the assets, primarily loans and advances, of UDC Finance Limited.

23.

PAYABLES AND OTHER LIABILITIESCreditors
Accrued interest and unearned discounts
Defined benefit schemes deficit
Share-based payments liability
Accrued charges
Security settlements
Equitable assignment of mortgages 1
Other liabilities
Total payables and other liabilities

1

77
991
27
29
216
236
25
274

55
775
20
170
37
32
338

-

-

1,875

1,427

-

-

The ANZ FlexiMortgage Income Trust holds mortgages under an equitable assignment with the subsidiary, ANZ National Bank Limited (the "Bank"). The ANZ
FlexiMortgage Income Trust can at any time require the Bank to repurchase any mortgage. The Bank may also require repurchase in certain circumstances. The
mortgages are included in these financial statements.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH39

NOTES TO THE FINANCIAL STATEMENTS (continued)

24.

DEFERRED TAX LIABILITIESNZ Banking Group
30/09/2008
30/09/2007$m$m
Provision for deferred income tax
Balance at beginning of the year
(Credited) charged to income statement(Credited) charged directly to equity
Set-off of deferred tax liabilities pursuant to set-off provisions 1

NZ Branch
30/09/2008
30/09/2007
$m
$m

63
11
(74)

-

-

-

-

-

-

Deferred tax liabilities comprise the following temporary differences:
Lease financeDefined benefit schemes
Other

90
145

110
2
175

-

-

235

287

-

-

Set-off of deferred tax liabilities pursuant to set-off provisions 1

(235)

(287)

-

-

-

-

-

-

The deferred tax (credited) charged to the income statement
comprises the following temporary differences:
Lease finance
Share compensation
Defined benefit schemes
Other

(20)
(2)
(26)

20
(4)
47

-

-

Total deferred tax (credited) charged to the income statement

(48)

63

-

-

The deferred tax (credited) charged to equity comprises
the following temporary differences:
Cash flow hedges

(4)

11

-

-

Total deferred tax (credited) charged directly to equity

(4)

11

-

-

For personal use only

(48)
(4)
52

Balance at end of the year

Net deferred tax liabilities

The reduction in the corporate tax rate from 33% to 30% from the 2009 tax year has been taken into account in calculating the value of deferred tax liabilities as at 30
September 2008 and 30 September 2007.

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

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH40NOTES TO THE FINANCIAL STATEMENTS (continued)

25.

PROVISIONSNZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007
$m
$m

11

3

-

-

Employee entitlements1
Balance at beginning of the year
New provisions
Provisions utilised

110
62
(55)

107
56
(53)

-

-

Balance at end of the year

117

110

-

-

Personnel restructuring costs2
Balance at beginning of the year
Provisions utilised
New provisions

2
30

9
(7)
-

-

-

Balance at end of the year

32

2

-

-

Redundant assets restructuring costs 2
Balance at beginning of the year
Provisions utilised

2
(1)

5
(3)

-

-

Balance at end of the year

1

2

-

-

Other provisions

29

48

-

-

Total provisions

190

165

-

-

For personal use only

Non-lending losses, frauds and forgeries

1

Employee entitlements
The provision for employee entitlements provides mainly for the cost of employee entitlements to annual leave, long service leave and retirement leave. The majorityof employees utilise their annual leave in the year the entitlement accrues.

2

Personnel restructuring costs and redundant assets restructuring costs
Restructuring cost provisions arise from exit activities relating to material changes in the scope or manner of business undertaken by the NZ Banking Group andincludes termination benefits. Provisions are made when the NZ Banking Group is demonstrably committed, it is probable that the costs will be incurred, though theirtiming is uncertain, and the costs can be reliably estimated. The majority of provisions recognised at 30 September 2008 are expected to be settled over the 2009
financial year, with the exception that provisions for losses arising from rental commitments on leased premises which have become vacant as a result of
restructuring will be settled over the remaining term of the leases.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH41

NOTES TO THE FINANCIAL STATEMENTS (continued)

26.

BONDS AND NOTESNZ Banking Group
30/09/2008
30/09/2007$m$m

For personal use only

Issued by ANZ National Bank Limited
Denomination
Face value ($m)
NZD
150m
fixed rate notes
NZD
50m
floating rate notes
NZD
70m
floating rate notes
NZD
100m
fixed rate notes
NZD
150m
fixed rate notes
NZD
170m
NZD
50m
NZD
175m
Other bonds and notes1

floating rate notes
fixed rate notes
fixed rate notes

Issued by ANZ National (Int'l) Limited
Denomination
Face value ($m)
floating rate notes2
GBP
250m
NZD
150m
fixed rate notes
JPY
9,000mfloating rate notes
GBP
40m
floating rate notes
EUR
100m
floating rate notes
GBP
300m
floating rate notes
HKD
80m
fixed rate notes
fixed rate notes3
USD
27m
USD
120m
floating rate notes
USD
250m
fixed rate notes
USD
750m
floating rate notes
floating rate notes4
USD
170m
floating rate notes4
USD
1,500m

NZD
JPY
EUR
HKD
NZD
HKD
HKD
USD
USD
USD
NZD
EUR
JPY
JPY
USD
USD
JPY
JPY
JPY
HKD
HKD
HKD
USD
NZD
CHF
SGD
USD
AUD
USD
USD
GBP
HKD
HKD
GBP
USD
USD

200m
15,000m
750m
1,000m
150m
300m
280m
750m
250m
300m
20m
300m
17,770m
17,500m
9m
2,000m
8,640m
1,000m6,000m
150m
190m
200m
750m
100m
275m
200m
100m
50m
890m
300m
435m
200m
200m
450m
2,000m250m

fixed rate notes
floating rate notes
floating rate notes
fixed rate notes
floating rate notes
fixed rate notes
fixed rate notes
floating rate notes
floating rate notes
floating rate notes
floating rate notes
floating rate notes
fixed rate notes
floating rate notes
floating rate notes4
floating rate notes5
fixed rate notes
fixed rate notes
floating rate notes
floating rate notes6
floating rate notes7
floating rate notes8
floating rate notes
floating rate notes
floating rate notes
fixed rate notes
floating rate notes
floating rate notes
floating rate notes12
fixed rate notes
floating rate notes
fixed rate notes9
fixed rate notes10
floating rate notes12
fixed rate notes
floating rate notes

Maturity
2009
2009
2010
2010
2011

Interest rate %6.82%
3 month BKBM + 0.30%
3 month BKBM + 0.35%
8.74%
6.80%

2011
2011
2014

3 month BKBM + 0.90%
8.25%
8.80%

Maturity
2007
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2009
2009
2009
2009
2009
2009
2009
2009
2009
2009
2009
2009
2009
2009
2009
2009
2009
2010
2010
2010
2010
2010
2010
2010
2010
2010
2010
2011
2011
2011
2011
2012
2013
2015

Interest rate %3 month LIBOR - 0.01%
6.50%
3 month JPY LIBOR
3 month GBP LIBOR - 0.065%
3 month EURIBOR + 0.02%
3 month GBP LIBOR + 0.01%
3.93%
5.00%
3 month LIBOR - 0.06%
4.265%
3 month LIBOR + 0.07%
1 month LIBOR + 0.01%
1 month LIBOR + 0.01%
9.20%
3 month JPY LIBOR
3 month EURIBOR + 0.12%
4.40%
3 month BKBM + 0.10%
4.93%
4.44%
3 month LIBOR + 0.04%
3 month Prime - 2.9125%
1 month LIBOR + 0.04%
3 month BKBM + 0.05%
3 month EUR LIBOR + 0.15%
0.055%
3 month JPY LIBOR
1 month LIBOR + 0.01%
3 month LIBOR + 0.22%
0.114%
0.01%
3 month JPY LIBOR
6 month HIBOR + 0.60%
6 month HIBOR + 0.60%
6 month HIBOR + 0.60%
3 month LIBOR + 0.11%
3 month BKBM + 0.05%
3 month CHF LIBOR + 0.75%
3.22%
3 month LIBOR + 0.55%
3 month BBSW + 0.61%
3 month LIBOR + 1.03%
5.50%
3 month GBP LIBOR + 0.05%
5.10%
4.90%
6 month GBP LIBOR + 0.08%
6.20%
3 month LIBOR + 0.90%

150
50
70
100
150

150
150

170
50
175
208

261

1,123

561

806
179
254
200
215
1,607
193
150
58
54
1,120
373
448
20
643
254
250
13
2,985
124
14
86
1,120
100
375
209
149
60
1,328
448
1,169
1,210
2,985
373

668
150
103
107
187
802
14
36
158
330
991
1,969
1,403
170
150
51
48
991
330
396
20
561
12
26
32
34
991
100
396
1,069
34
34
1,203
-

19,572

13,566

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH42

NOTES TO THE FINANCIAL STATEMENTS (continued)

26.

NZ Banking Group
30/09/2008
30/09/2007$m$m

BONDS AND NOTES (continued)

Maturity
2008

Interest rate %3 month BKBM-

480

Issued by ANZ Holdings (New Zealand) Limited
Denomination
Face value
floating rate notes13
AUD
1,000mMaturity
2053

Interest rate %BBSW + 1.00% p.a.

-

1,164

Issued by Samson Funding Limited
Denomination
Face value
fixed rate notes14
USD
350m
fixed rate notes14
USD
750m

Maturity
2053
2053

Interest rate %4.484%
5.36%

527
1,160

454
972

For personal use only

Issued by NBNZ Holdings Limited
Denomination
Face value
floating rate notes11
NZD
480m

1,687

1,426

Total bonds and notes

22,382

17,197

Included within bonds and notes is the following related party balance:
Australia and New Zealand Banking Group Limited (Ultimate Parent Bank)

2,538

1,871

Bonds and notes issued by ANZ National (Int'l) Limited are guaranteed by ANZ National Bank Limited.

1
2

Other bonds and notes includes index linked notes, equity linked notes and other fixed rate and fixed term bonds.
These notes were issued to Australia and New Zealand Banking Group Limited.

3

The interest rate payable on these notes is stepped as follows: Year 1 3.00%, Year 2 3.25%, Year 3 3.50%, Year 4 4.25% and Year 5 5.00%. The issuer may electto redeem the notes annually from May 2004. These notes matured in May 2008.
4

The interest rate payable on these notes is stepped as follows: Year 1 1 month LIBOR - 0.02%, Year 2 1 month LIBOR, Year 3 1 month LIBOR + 0.01%, Year 4 1
month LIBOR + 0.02% and Year 5 1 month LIBOR + 0.03%. The investor may elect to extend the maturity of the notes for a year on a monthly basis. These notes
were orginally for USD1.5billion, but between 7 August 2007 and 7 May 2008, investors elected not to extend USD 1,492 million of bonds. This has resulted inthese bonds carrying a fixed maturity as follows: 7 August 2008 USD 89 million; 5 September 2008 USD 1,232 million; 7 October 2008 USD 164 million; 5 December
2008 USD 6 million; 7 May 2009 USD 1 million.
5
The interest rate payable on these notes is stepped as follows: Year 1 3 month LIBOR + 0.22%, Year 2 3 month LIBOR + 0.24% Year 3 3 month LIBOR + 0.26%,
Year 4 3 month LIBOR + 0.28% and Year 5 3 month LIBOR + 0.29%. The investor may elect to extend the maturity of the notes for a year on a 3 monthly basis. On
10 June 2008 and 10 September 2008, investors elected not to extend USD 686 million and USD 525 million of bonds which has resulted in these bonds carrying afixed maturity on 9 April 2009 and 10 July 2009, respectively.
6
The interest rate payable on these notes is stepped as follows: Year 1 3.77%, Years 2 - 5 HIBOR + 0.60%. For each 6 month period after Year 1, there is a
maximum interest rate payable, starting at 3.75% after Year 1 and stepping up 0.25% every 6 months. The issuer has the right to redeem the notes on every semiannual coupon date from 28 April 2006. The issuer exercised their option to call the note on 28 April 2008.
7
The interest rate payable on these notes is stepped as follows: Year 1 3.77%, Years 2 - 5 HIBOR + 0.60%. For each 6 month period after Year 1, there is a
maximum interest rate payable, starting at 3.75% after Year 1 and stepping up 0.25% every 6 months. The issuer has the right to redeem the notes on every semiannual coupon date from 28 April 2006. The issuer exercised their option to call the note on 28 April 2008.
8
The interest rate payable on these notes is stepped as follows: Year 1 HIBOR + 1.26%, Years 2 - 5 HIBOR + 0.60%. For each 6 month period after Year 1, there is a
maximum interest rate payable, starting at 4.00% after Year 1 and stepping up 0.25% every 6 months. The issuer exercised their option to call the note on 26
November 2007.
9
The interest rate payable on these notes is stepped as follows: Year 1 5.10% per annum, Year 2 4.65% per annum, Years 3, 4 and 5 4.40% per annum. The issuer
exercised their option to call the note on 5 December 2007.

10
The interest rate payable on these notes is stepped as follows: Year 1 4.90% per annum, Year 2 4.65% per annum, Years 3, 4 and 5 4.40% per annum. The issuer
exercised their option to call the note on 6 December 2007.
11
These notes can be redeemed by the noteholder giving not less than 30 days notice. The bonds matured in August 2008.
12
These notes were issued to subsidiaries of Australia and New Zealand Banking Group Limited. The issue for USD890m was settled on 1 October 2008.
13
These notes were issued on 23 September 2003 by ANZ Holdings (New Zealand) Limited. The notes were 'stapled' to preference shares issued by Australia and
New Zealand Banking Group Limited (the Ultimate Parent Bank) and could not be traded separately from them. All interest was payable quarterly based on BBSW +1.00% p.a., with interest payments due 15 March, 15 June, 15 September and 15 December. On 15 September 2008, the preference shares were converted toordinary shares and ANZ Holdings (New Zealand) Limited opted to collapse these notes.
14
These notes were issued in two tranches of USD 350,000,000 and USD 750,000,000 by Samson Funding Limited on 26 November 2003 and mature in 2053. The
notes are 'stapled' to preference shares issued by the Ultimate Parent Bank and may not be traded separately from them. They can be repaid on 15 January 2010
(USD 350,000,000,000) and 15 December 2013 (USD 750,000,000,000). Interest is payable half yearly in arrears at a fixed rate of 4.484% p.a. (USD
350,000,000,000) and 5.36% p.a. (USD 750,000,000), with interest payments due 15 June and 15 December.

27.

TERM FUNDING

ANZ Funds Pty Limited

NZ Banking Group
30/09/2008
30/09/2007
$m
$m
1,765

1,765

NZ Branch
30/09/2008
30/09/2007
$m
$m
-

-

ANZ Funds Pty Limited (Related Company)
This New Zealand dollar loan was made on 1 December 2003 and is repayable upon demand being made by the ANZ Funds Pty Limited, where 12 months priorwritten notice is given, unless a shorter notice period is agreed upon. Interest is payable quarterly in arrears based on BKBM + 0.20% p.a., with interest payments
due 1 March, 1 June, 1 September and 1 December. As part of the annual review of terms and conditions of the loan the margin was increased to + 0.32% p.a.,effective from 1 December 2008.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH43

NOTES TO THE FINANCIAL STATEMENTS (continued)

28. LOAN CAPITALNZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007
$m
$m

248
317
222
52
202
1,779

242
309
217
51
197
1,046

-

-

Total loan capital

2,820

2,062

-

-

Included within loan capital is the following related party balance:
Australia and New Zealand Banking Group Limited(Ultimate Parent Bank)

1,041

1,016

-

-

For personal use only

AUD 207,450,000 term subordinated floating rate loan
AUD 265,740,000 perpetual subordinated floating rate loan
AUD 186,100,000 term subordinated floating rate loan
AUD 43,767,507 term subordinated floating rate loan
AUD 169,520,000 term subordinated floating rate loan
NZD subordinated fixed rate bonds

AUD 207,450,000 loan
This loan was drawn down on 31 August 2004 and has an ultimate maturity date of 31 August 2014. ANZ National Bank Limited (the 'Bank') may elect to repay
the loan on 31 August each year commencing from 2009 through to 2013. All interest is payable half yearly in arrears, with interest payments due 28 Februaryand 31 August. Interest is based on BBSW + 0.40% p.a. up until, and including, 31 August 2009 and increases to BBSW + 0.90% p.a. thereafter.
AUD 265,740,000 loan
This loan was drawn down on 27 September 1996 and has no fixed maturity. Interest is payable half yearly in arrears based on BBSW + 0.95% p.a., withinterest payments due 15 March and 15 September.
AUD 186,100,000 loan
This loan was drawn down on 19 April 2005 with an ultimate maturity date of 20 April 2015. The Bank may elect to repay the loan on 19 April each year
commencing from 2010 through to 2015. All interest is payable half yearly in arrears, with interest payments due 19 April and 19 October. Interest is based on
BBSW + 0.32% p.a. to 19 April 2010 and increases to BBSW + 0.82% p.a. thereafter.
AUD 43,767,507 loan
This loan was drawn down on 15 September 2006 with an ultimate maturity date of 15 September 2016. The Bank may elect to repay the loan on 15 September
each year commencing from 2011 through to 2016. All interest is payable half yearly in arrears, with interest payments due 15 March and 15 September.
Interest is based on BBSW + 0.29% p.a. to 15 September 2011 and increases to BBSW + 0.79% p.a. thereafter.

AUD 169,520,000 loan
This loan was drawn down on 17 September 2007 with an ultimate maturity date of 17 September 2017. The Bank may elect to repay the loan on 17 September
each year commencing from 2012 through to 2016. All interest is payable half yearly in arrears, with interest payments due 17 March and 17 September.
Interest is based on BBSW + 0.68% p.a. to 17 September 2012 and increases to BBSW + 1.18% p.a. thereafter.
NZD subordinated fixed rate bonds
The terms and conditions of these fixed rate and fixed term bonds are as follows:
New Zealand Exchange listed bonds
Issue date
15 September 2006
2 March 2007
23 July 2007

Amount $m
350
250
350

Coupon rate
7.16%
7.60%
8.23%

Call date
15 September 2011
2 March 201223 July 2012

Maturity date
15 September 2016
2 March 201723 July 2017

As at 30 September 2008, these bonds carried an AA- rating by Standard & Poor's.
The Bank may elect to redeem the bonds on their call date. If the bonds are not called the Bank will continue to pay interest to maturity at the five year
interest rate swap rate plus 0.75% p.a., 0.76% p.a. and 0.62% p.a. for the 15 September 2006; 2 March 2007 and 23 July 2007 bonds respectively. Interestis payable half yearly in arrears based on the fixed coupon rate.

Perpetual Subordinated Bond
Issue date
18 April 2008

Amount $m
835

Coupon rate
9.66%

1st Call date
18 April 2013

2nd Call date
18 April 2018

The Bank may elect to redeem the bonds on 18 April 2013, 18 April 2018 or any interest payment date subsequent to 18 April 2018. Interest is payable half
yearly in arrears on 18 April and 18 October each year, beginning on 18 October 2008, up to and including the Second Call Date and then quarterly
thereafter. If the bonds are not called at the First Call Date, the coupon rate will reset to the five year interest swap rate plus 2.00%. Should the bonds not
be called at the Second Call Date, the Coupon Rate from the Second Call Date onwards will be set on a quarterly basis to the three month FRA rate plus
3.00%.

As at 30 September 2008, these bonds carried an A+ rating by Standard and Poor's.
Interest may not necessarily be paid on each interest payment date as under the terms of the Bonds, the Bank has a general right and in certain specified
circumstances an obligation, to defer payment of interest on the Bonds.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH44

NOTES TO THE FINANCIAL STATEMENTS (continued)

28.

LOAN CAPITAL (continued)

For personal use only

These bonds are listed on the New Zealand Exchange ('NZX'). The Market Surveillance Panel of the NZX granted the Bank a waiver from the requirements of Listing
Rules 10.4 and 10.5. Rule 10.4 relates to the provision of preliminary announcements of half yearly and annual results to the NZX. Rule 10.5 relates to preparing andproviding a copy of half yearly and annual reports to the NZX. The Bank has been granted a waiver from these rules on the conditions that the Bank's quarterly
General Disclosure Statement ('GDS') is available on the Bank's website, at any branch and at the NZX; that bondholders are advised by letter that copies of the GDS
are available at the above locations; that all bondholders are notified on an ongoing basis, by way of a sentence included on the notification of interest payments, thatthe latest GDS is available for review at the above locations; and that a copy of the GDS is sent to the NZX on an ongoing basis.

Loan capital is subordinated in right of payment in the event of liquidation or wind up to the claims of depositors and all creditors of the Bank.
All subordinated debt qualifies as Lower Level Tier Two Capital for capital adequacy purposes except for the perpetual subordinated debt which qualifies as Upper
Level Tier Two Capital.

29.

ORDINARY SHARE CAPITAL

Issued share capital

NZ Banking Group
30/09/2008
30/09/2007
Number of
Number ofIssued Shares
Issued Shares

NZ Branch
30/09/2008
30/09/2007
Number of
Number ofIssued Shares
Issued Shares

382,238,236

382,238,236--

Redeemable preference shares at beginning of the year
Issue of redeemable preference shares during year
Redemption of redeemable preference shares during year

2,700,066,601
510,000,000-

700,068,601
2,002,000,000(2,002,000)--

Redeemable preference shares at end of the year

3,210,066,601

2,700,066,601--

Issued share capital at end of the year

3,592,304,837

3,082,304,837--

Ordinary shares at beginning and end of the year

Paid in share capital

NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007$m$m

Ordinary shares fully paid at beginning and end of the year

1,453

1,453

-

-

Redeemable preference shares at beginning of the year
Issue of redeemable preference shares during year
Redemption of redeemable preference shares during year

3,450
510
-

3,298
2,349
(2,197)--

Redeemable preference shares at end of the year

3,960

3,450

-

-

Paid in share capital at end of year

5,413

4,903

-

-

Voting rights
At a meeting: on a show of hands or vote by voice every member who is present in person or by proxy or by representative shall have one vote.
On a poll: every member who is present in person or by proxy or by representative shall have one vote for every share of which such member is the holder.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH45NOTES TO THE FINANCIAL STATEMENTS (continued)

30.

RESERVES AND RETAINED EARNINGSNZ Banking Group
30/09/2008
30/09/2007$m$m
Available-for-sale revaluation reserve
Balance at beginning of the year
Valuation gain (loss) recognised after tax
Cumulative gain transferred to the income
statement on sale of financial assets

NZ Branch
30/09/2008
30/09/2007
$m
$m

3
(1)

-

-

-

(3)

-

-

Balance at end of the year

23

(1)

-

-

Cash flow hedging reserve
Balance at beginning of the year
Valuation (loss) gain recognised after tax
Transferred to income statement

84
(34)
(26)

52
55
(23)

-

-

Balance at end of the year

24

84

-

-

Total reserves

47

83

-

-

Retained earnings
Balance at beginning of the year
Profit after income tax

1,869
990

1,580
1,041

-

-

Total available for appropriation
Actuarial (loss) gain on defined benefit schemes after tax
Interim ordinary dividends paid
Foreign exchange loss on redemption of redeemable preference shares
Supplementary dividend
Foreign investor tax credits

2,859
(23)
(1,169)
-

2,621
2
(600)
(154)
(106)
106

-

-

Balance at end of the year

1,667

1,869

-

-

For personal use only

(1)
24

The paid dividend on ordinary shares was $nil per share (30/09/2007 $1.04 per share).

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH46

NOTES TO THE FINANCIAL STATEMENTS (continued)

31. CAPITAL ADEQUACYFor personal use only

OVERSEAS BANKING GROUP CAPITAL ADEQUACY RATIO

Overseas Banking Group
Tier One Capital
Total Capital

30/09/2008
Basel II
7.7%

30/09/2007
Basel I
6.7%

11.1%

10.1%

APRA
minimum
ratios30/09/2008
4.0%
8.0%

Basel II came into force on 1 January 2008. The Overseas Banking Group received accreditation from APRA to apply the Advanced Internal Ratings Based (Advanced IRB)
methodology for credit risk weighted assets and the Advanced Measurement Approach (AMA) for operational risk weighted asset equivalent.
The Overseas Banking Group is required by APRA to hold minimum capital at least equal to that specified under the Advanced IRB methodology. The Overseas Banking
Group exceeded the minimum capital adequacy requirements as specified by APRA as at 30 September 2008.
Further details of the Overseas Banking Group's capital adequacy requirements and credit risk management processes can be found in its 2008 Annual Report. This report
can be accessed at the following website address: www.anz.com.
RISK WEIGHTED CREDIT RISK EXPOSURES
Risk weighted exposures for the NZ Banking Group and NZ Branch have been derived in accordance with the RBNZ document entitled 'Capital Adequacy Framework (Basel I
Approach)' (BS2) dated March 2008.
Total Risk Weighted Exposures of the NZ Banking Group as at 30 September 2008:
Risk weighted
Prinicipal
amount
$m
3,940
297
7,465
668
53,89145,663
11,154On-balance sheet exposures
Cash and short term claims on Government
Long term claims on Government
Claims on banks
Claims on public sector entities
Residential Mortgages
Other
Non risk weighted assets

Risk weight
0%
10%
20%
20%
50%
100%
n/a

123,078

Off-balance sheet exposures
Direct credit substitutes
Commitments with certain drawdown
Transaction related contingent items
Short term, self liquidating trade related contingencies
Other commitments to provide financial services which have an
original maturity of 1 year or more
Other commitments with an original maturity of less than 1 year
or which can be unconditionally cancelled at any time
Market related contracts 1- Foreign exchange- Interest rate
- Equity

1

exposure
$m
30
1,493
134
26,94645,66374,266

Averagecounterparty
risk weight

100%
100%
50%
20%

Creditequivalentamount
$m
2,418
685
545
24

37%
70%
91%
71%

Risk weighted
exposure
$m
899
481
495
17

4,081

50%

2,041

100%

2,041

19,069

0%

-

100%

-

108,372
539,111
36

7,051
5,094
7

22%
23%
57%

1,584
1,159
4

674,980

17,865

Prinicipal
amount
$m
2,418
685
1,090
118

Creditconversion
factorThe credit equivalent amounts for market related contracts are calculated using the current exposure method.

6,680

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH47

NOTES TO THE FINANCIAL STATEMENTS (continued)

31. CAPITAL ADEQUACY (continued)

For personal use only

Total Risk Weighted Exposures of the NZ Banking Group as at 30 September 2007:
Prinicipal
amount
$m
3,793
492
5,160
390
49,51040,318
7,943

On-balance sheet exposures
Cash and short term claims on Government
Long term claims on Government
Claims on banks
Claims on public sector entities
Residential Mortgages
Other
Non risk weighted assets

Risk weight
0%
10%
20%
20%
50%
100%
n/a

107,606

Off-balance sheet exposures
Direct credit substitutes
Commitments with certain drawdown
Transaction related contingent items
Short term, self liquidating trade related contingencies
Other commitments to provide financial services which have an
original maturity of 1 year or more
Other commitments with an original maturity of less than 1 year
or which can be unconditionally cancelled at any time
Market related contracts 1- Foreign exchange- Interest rate
- Equity

1

Risk weighted
exposure
$m
49
1,032
78
24,75540,31866,232

Prinicipal
amountCreditconversion
factorCredit equivalentamountAveragecounterparty risk
weightRisk weighted
exposure

$m
2,461
1,089
398
123

100%
100%
50%
20%

$m
2,461
1,089
199
25

49%
63%
100%
60%

$m
1,206
686
199
15

1,996

50%

998

100%

998

18,755

0%

0

100%

-

91,514464,242
20

4,524
3,984
21

26%
21%
19%

1,176
837
4

580,598

13,301

The credit equivalent amounts for market related contracts are calculated using the current exposure method.

5,121

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH48

NOTES TO THE FINANCIAL STATEMENTS (continued)

31. CAPITAL ADEQUACY (continued)

For personal use only

Total Risk Weighted Exposures of the NZ Branch as at 30 September 2008:
Risk weighted
Prinicipal
amount$m-

On-balance sheet exposures
Cash and short term claims on Government
Long term claims on Government
Claims on banks
Claims on public sector entities
Residential Mortgages
Other
Non risk weighted assets

Risk weight
0%
10%
20%
20%
50%
100%
n/a

-

Off-balance sheet exposures
Direct credit substitutes
Commitments with certain drawdown
Transaction related contingent items
Short term, self liquidating trade related contingencies
Other commitments to provide financial services which have an
original maturity of 1 year or more
Other commitments with an original maturity of less than 1 year
or which can be unconditionally cancelled at any time
Market related contracts 1- Foreign exchange- Interest rate
- Equity

1

exposure$m-

Averagecounterparty
risk weight

100%
100%
50%
20%

Creditequivalentamount
$m
-

0%
0%
0%
0%

Risk weighted
exposure
$m
-

-

50%

-

0%

-

-

0%

-

0%

-

-

-

0%
0%
0%

-

-

-

Prinicipal
amount$m-

Creditconversion
factorThe credit equivalent amounts for market related contracts are calculated using the current exposure method.

-

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH49

NOTES TO THE FINANCIAL STATEMENTS (continued)

31. CAPITAL ADEQUACY (continued)

For personal use only

Total Risk Weighted Exposures of the NZ Branch as at 30 September 2007:

Prinicipal
amount$m-

On-balance sheet exposures
Cash and short term claims on Government
Long term claims on Government
Claims on banks
Claims on public sector entities
Residential Mortgages
Other
Non risk weighted assets

Off-balance sheet exposures
Direct credit substitutes
Commitments with certain drawdown
Transaction related contingent items
Short term, self liquidating trade related contingencies
Other commitments to provide financial services which have an
original maturity of 1 year or more
Other commitments with an original maturity of less than 1 year
or which can be unconditionally cancelled at any time
Market related contracts 1- Foreign exchange- Interest rate
- Equity

1

Creditconversion
factor
100%
100%
50%
20%

Credit equivalentamount
$m
-

-

50%

-

0%

Prinicipal
amount$m-

Risk weight
0%
10%
20%
20%
50%
100%
n/a

Averagecounterparty risk
weightRisk weighted
exposure
$m
-

0%
0%
0%
0%

Risk weighted
exposure
$m
-

-

0%

-

-

0%

-

-

-

0%
0%
0%

-

-

-

-

The credit equivalent amounts for market related contracts are calculated using the current exposure method.

ADDITIONAL MORTGAGE INFORMATION
The following information sets out loan-to value ratios in respect of total residential mortgage loans and is derived in accordance with the definition of loan-to-valuation ratio
specified in RBNZ's document entitled 'Capital Adequacy Framework (The Standardised Approach)' (BS2A) dated November 2007.
Residential mortgages by loan-to-valuation ratio for the NZ Banking Group as at 30 September 2008
ExposureAmount 2$m
LVR range
0% - 80%
80% - 90%
Over 90%

39,1837,486
6,550
53,2192

Loan value includes undrawn commitments where the drawn amount is secured by residential mortgage.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH50NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT

For personal use only

Strategy in using financial instruments
Financial instruments are fundamental to the NZ Banking Group’s business, constituting the core element of its operations. Accordingly, the risks associated with financial
instruments are a significant component of the risks faced by the NZ Banking Group. Financial instruments create, modify or reduce the credit, market (including traded or fairvalue risks and non-traded or interest and foreign currency related risks) and liquidity risks of the NZ Banking Group’s balance sheet. These risks and the NZ Banking Group’s
policies and objectives for managing such risks are outlined below. The NZ Banking Group’s overall risk management programme focuses on the unpredictability of financial
markets and seeks to minimize potential adverse effects on the financial performance of the NZ Banking Group.
CREDIT RISK
Credit risk is the risk of financial loss from counterparties being unable to fulfil their contractual obligations. The NZ Banking Group assumes credit risk in a wide range of lending
and other activities in diverse markets and many jurisdictions. The credit risks arise not only from traditional lending to customers, but also from inter-bank, treasury, international
trade and capital market activities around the world.
The NZ Banking Group has a common overall lending objective of sound growth for appropriate returns. The credit risk objectives of the entities within the NZ Banking Group are
set by each Board and are implemented and monitored within a tiered structure of delegated authority, designed to oversee multiple facets of credit risk. This may include asset
writing strategies, credit policies/controls, single exposures, portfolio monitoring and risk concentrations as appropriate. A credit risk management framework exists to provide a
structured and disciplined process to support those objectives. The integrity of the credit risk function is maintained by independent credit chains and is supported bycomprehensive risk analysis, risk tools, monitoring processes and policies.
CREDIT RISK MANAGEMENT
Where appropriate the Group-wide credit risk management framework is applied to each entity across the NZ Banking Group with the aim of ensuring a structured and disciplined
approach is maintained in achieving the objectives set by each Board. The framework focuses on policies, people, skills, vision, values, controls, risk concentrations and portfolio
balance. Where applicable it is supported by portfolio analysis and asset-writing strategies which guide lending decisions and identify segments of the portfolio requiring attention.
The effectiveness of the framework is monitored through a series of compliance and reporting processes.
An independent Risk Management function, staffed by specialists, assists with credit risk management across each entity as required. In addition to providing independent credit
assessment on lending decisions, Risk Management also performs key roles in portfolio management by development and validation of credit risk measurement systems, loan
asset quality reporting, and development of credit standards and policies.
The credit risk management framework is top down. Where required, the framework is defined firstly by a Board establishing Vision and Values and secondly, by Credit Principles
and Policies. The effectiveness of the credit risk management framework is validated through the compliance and monitoring processes.
Risk Management's responsibilities for credit risk policy and management are executed through dedicated departments, which support the entities and Business Units within the
NZ Banking Group. All major Business Unit credit decisions require approval from both business writers and independent risk personnel.
Credit Risk is controlled through a combination of approvals, limits, reviews and monitoring procedures that are carried out on a regular basis, the frequency of which is dependent
upon the level of risk. For the key operating entities within the NZ Banking Group credit risk policy and management is executed through the Chief Risk Officer who has various
dedicated areas within the Risk Management division. A formal outsourcing agreement provides for credit risk functions to be provided to a number of NZ Banking Group entities
by staff of ANZ National Bank Limited.
The credit risk review function within Internal Audit, either within Australia or New Zealand, also provides a further independent check mechanism to ensure the quality of credit
decisions. This may include providing independent periodic checks on asset quality and compliance with the agreed standards and policies across the NZ Banking Group.

Country risk management
Some customer credit risks involve country risk whereby actions or events at a national or international level could disrupt servicing of commitments. Country risk arises when
payment or discharge of an obligation will, or could, involve the flow of funds from one country to another or involve transactions in a currency other than the domestic currency of
the relevant country.
Country ratings are assigned to each country where the NZ Banking Group incurs country risk and have a direct bearing on the NZ Banking Group's risk appetite for each country.
The country rating is determined through a defined methodology based around external ratings agencies’ ratings and internal specialist opinion. It is also a key risk consideration in
the use of capital pricing model for cross border flows.
The recording of country limits provides the NZ Banking Group with a means to identify and control country risk. Country limits ensure that there is a country by- country ceiling on
exposures that involve country risk. They are recorded by time to maturity and purpose of exposure e.g. trade, markets, project finance. Country limits are managed centrally by theOverseas Bank, through a global country risk exposure management system managed by a specialist unit within Institutional Risk.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH51

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT (continued)
Portfolio stress testing
Stress testing is integral to strengthening the predictive approach to Risk Management and is a key component to managing risk appetite, asset writing strategies and businessstrategies. It creates greater understanding of impacts on financial performance through modelling relationships and sensitivities between geographic, industry and business unit
exposures under a range of macro economic scenarios. Stress testing programmes have been implemented within the key operating business of the NZ Banking Group.

For personal use only

The Overseas Bank has a dedicated stress testing team within Risk Management that assists business and risk executives in the NZ Banking Group to model and reportperiodically to management and the Board on a range of scenarios and stress tests.
Portfolio analysis and reporting
Where appropriate global credit portfolios are analysed by the Board, its Risk Committees and Senior Business Executives. For the key operating entities within the NZ Banking
Group, a central risk reporting department produces credit portfolio analysis which is distributed to senior Risk and Business Executives through monthly, half yearly and ad hoc
reporting, or as set agenda reports to the various Risk Committees. This area provides an independent mechanism to ensure that significant and emerging credit risks areproactively identified and communicated to the overseas Group, Risk and Business Executives, including the respective Board Risk Committees.

Collateral management
ANZ Group-wide credit principles specify to only lend what the counterparty has the capacity and ability to repay. The entities within the NZ Banking Group set limits on theacceptable level of credit risk. Acceptance of credit risk is firstly based on the counterparty’s assessed capacity to meet contractual obligations (i.e. interest and capital
repayments). Obtaining collateral is only used to mitigate credit risk. Procedures are designed to ensure collateral is managed, legally enforceable, conservatively valued andadequately insured. Credit policies for each entity set out the types of acceptable collateral, including:
•
•
•
•
•

cash;
mortgages over property;
charges over business assets, e.g. premises, stock and debtors;
charges over financial instruments, e.g. debt securities and equities in support of trading facilities; andfinancial guarantees.

In the event of customer default, any loan security is usually held as mortgage in possession while action is taken to realise it. Therefore the NZ Banking Group does not usually
hold any real estate or other assets acquired through the enforcement of security.
The key operating entities within the NZ Banking Group use ISDA Master Agreements to document derivatives activities to limit exposure to credit losses. The credit risk is reduced
by a master agreement to the extent that if an event of default occurs, all contracts with the counterparty are terminated and settled on a net basis. Further, it is preferred practice
to include all products covered by the ISDA in the Credit Support Annex (“CSA”), in order to achieve further credit exposure reduction. Under a CSA, collateral is passed between
the parties, depending on the aggregate mark-to-market (positive or negative) of derivative trades between the two entities, to mitigate the market contingent counterparty risk
inherent in the outstanding positions.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH52

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities within the same geographic region, or when they have similarrisk characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.

For personal use only

Where applicable entities within the NZ Banking Group monitor lending portfolios to identify and assess risk concentrations. Concentration limits are used to guard against large
single customer or correlated credit risks. Risk Management, Business Unit Executives and Senior Management monitor large exposure concentrations through a monthly list of
top Corporate exposures. The Credit and Trading Risk Committee (six monthly) and the respective Board Risk Committees (annually) review a comprehensive list of single
customer concentration limits and customers’ adherence to these limits.
Analyses of financial assets by industry sector are based on Australian and New Zealand Standard Industrial Classification (ANZSIC) codes.
Concentrations of credit risk analysis:
The composition of financial instruments, that give rise to credit risk, by industry and geography:
NZ Banking Group
Liquid assets
and due fromother financial

Tradingsecurities
and available

institutions$mfor-sale assets
$m

105
5,105
3,966
209
392
31
23
40

28
2,423
255
8
4
15

74
9
1
7
6,879
277
208
20
13
20
11
84

9,871

2,733

Individual provision for credit impairment
Collective provision for credit impairment-

Fair value hedge adjustment

assets$m

Creditrelatedcommitments 3
$m

Total
$m

17,925
1,201
921
1,051
1,817
642
3,129
54,831
9,271
1,903
1,392
1,849
2,060

163
11
8
10
17
6
29
499
84
17
13
17
19

5,018
559
427
488
843
298
1,452
10,704
4,303
883
646
858
956

23,285
1,780
1,357
1,584
17,084
5,444
5,035
66,034
13,678
3,208
2,106
2,758
3,174

7,603

97,992893

27,435

146,527

-

-

(132)
(534)

-

-

(132)
(534)

-

-

-

(666)
353

-

-

(666)
353

Total financial assets

9,871

2,733

7,603

97,679893

27,435

146,214

Geography
New ZealandOverseas

7,582
2,289

1,229
1,504

1,839
5,764

96,452
1,227

893
-

27,435-

135,430
10,784

Total financial assets

9,871

2,733

7,603

97,679893

27,435

146,21430/09/2008

Industry
Agriculture, forestry, fishing
Business services
Construction
Entertainment, leisure and tourism
Finance and insurance
Government and local authority 1
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other2

1

Derivative
financial

Net loans

Otherfinancial

instruments and advances$m$m

Government and local authority includes exposures to government administration and defence, education and health and community services.
Other includes exposures to electricity, gas and water, communications, and personal services.
3
Includes credit related commitments, contingent liabilities and letters of offer.
2

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH53

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT (continued)
NZ Banking GroupFor personal use only

30/09/2007
Industry
Agriculture, forestry, fishing
Business services
Construction
Entertainment, leisure and tourism
Finance and insurance
Government and local authority 1
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other2Liquid assets
and due fromother financial

Tradingsecurities
and available

institutions$mfor-sale assets
$m

201
21
4,115
3,082
281
441
69
16
144

4
1,577
152
27
28
137

24
10
63
4,039
48
139
52
26
8
142

Derivative
financial

Net loans

Otherfinancialassets$m

Creditrelatedcommitments 3$m

instruments and advances
$m
$m

Total
$m

14,514
1,141
812
958
2,471
1,334
2,809
51,819
7,432
1,556
1,233
1,218
1,400

159
12
9
10
27
16
31
567
81
17
13
13
15

4,059
577
410
484
1,290
673
1,420
9,405
3,756
786
623
616
708

18,957
1,740
1,231
1,540
13,5195,305
4,707
61,791
11,269
2,852
1,992
1,871
2,546

8,370

1,925

4,551

88,697970

24,807

129,320

Individual provision for credit impairment
Collective provision for credit impairment

-

-

-

(44)
(422)

-

-

(44)
(422)

Fair value hedge adjustment

-

-

-

(466)
(442)

-

-

(466)
(442)

Total financial assets

8,370

1,925

4,551

87,789970

24,807

128,412

Geography
New ZealandOverseas

7,108
1,262

1,329
596

1,207
3,344

84,612
3,177

970
-

24,807-

120,033
8,379

Total financial assets

8,370

1,925

4,551

87,789970

24,807

128,412Liquid assets
and due fromother financial

Tradingsecurities
and available

Net loans

Otherfinancial

institutions$mfor-sale assets$m

instruments and advances$m$m

assets$m

Creditrelatedcommitments 3
$m

Total
$m

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Individual provision for credit impairment
Collective provision for credit impairment

-

-

-

-

-

-

-

Fair value hedge adjustment

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

Geography
New ZealandOverseas

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

30/09/2008

Industry
Agriculture, forestry, fishing
Business services
Construction
Entertainment, leisure and tourism
Finance and insurance
Government and local authority 1
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other2

1

NZ Branch
Derivative
financial

Government and local authority includes exposures to government administration and defence, education and health and community services.
Other includes exposures to electricity, gas and water, communications, and personal services.
3
Includes credit related commitments, contingent liabilities and letters of offer.
2

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH54

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT (continued)
NZ Branch
Liquid assets
and due fromother financial

Tradingsecurities
and available

institutions$mfor-sale assets$mIndustry
Agriculture, forestry, fishing
Business services
Construction
Entertainment, leisure and tourism
Finance and insurance
Government and local authority 1
Manufacturing
Personal lending
Property services
Retail trade
Transport and storage
Wholesale trade
Other2

-

-

-

-

-

-

-

-

-

Individual provision for credit impairment
Collective provision for credit impairment

-

-

-

-

-

-

-

Fair value hedge adjustment

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

Geography
New ZealandOverseas

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

For personal use only

30/09/2007

1

Derivative
financial

Net loans

Otherfinancial

instruments and advances
$m
$m

-

assets$m

Creditrelatedcommitments 3
$m

Total
$m

-

-

-

-

Government and local authority includes exposures to government administration and defence, education and health and community services.
2
Other includes exposures to electricity, gas and water, communications, and personal services.
3
Includes credit related commitments, contingent liabilities and letters of offer.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH55

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT (continued)
MAXIMUM EXPOSURE TO CREDIT RISKFor financial assets recognised on the balance sheet, the exposure to credit risk equals their carrying amount. For contingent exposures, the maximum exposure to credit risk
is the maximum amount that the NZ Banking Group would have to pay if the contingent is called upon. For undrawn facilities, the maximum exposure to credit risk is the fullamount of the committed facilities.

For personal use only

The following table presents the maximum exposure to credit risk of balance sheet financial instruments before taking account of any collateral held or other credit
enhancements and after deductions such as provision for credit impairment. The exposure is classified into summarised Basel II asset classes
NZ Banking GroupNZ Branch

Total maximum
Corporate exposure to
exposures 1
credit risk$m$mRetailmortgages$mOther retail
exposures
$m

-

-

4,839
5,032
2,624
7,603

Available-for-sale assets
Net loans and advances
Other financial assets
Credit related commitments

49,514
5,397

5,207
5,307

Total financial assets

54,911

Total maximum
Corporate exposure to
exposures 1 credit risk$m$mRetailmortgages$mOther retail
exposures
$m

4,839
5,032
2,624
7,603

-

-

-

-

109
42,958893
16,731

109
97,679893
27,435----

10,51480,789146,214

-

-

-

-

-

-

4,807
3,563
1,877
4,551

4,807
3,563
1,877
4,551

-

-

-

-

Available-for-sale assets
Net loans and advances
Other financial assets
Credit related commitments

45,944
4,552

4,987
4,853

48
36,858970
15,40248
87,789970
24,807----

Total financial assets

50,496

9,840

68,076

128,412

-

-

-

-

30/09/2008
Exposure to credit risk
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments

30/09/2007

Exposure to credit risk
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments

1

Includes corporate, sovereign and bank

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH56

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)
CREDIT QUALITY
A core component of the NZ Banking Group’s credit risk management capability is the risk grading framework used across all the key operating entities. A set of risk grading
principles and policies are supported by a complementary risk grading methodology. Pronouncements by the International Basel Committee on Banking Supervision havebeen encapsulated in these principles and policies including governance, validation and modelling requirements.

For personal use only

Where applicable, credit risk grade profile changes dynamically through new counterparty lending and/or existing counterparty movements in either risk or volume. All
counterparty risk grades are subject to frequent review, including statistical and behavioural reviews in consumer and small business segments, and individual counterparty
reviews in segments with larger single name borrowers.
Impairment and provisioning of financial assets
Loans are classified as either performing or impaired. Impaired assets are credit exposures where there is doubt as to whether the full contractual amount (including interest)
will be received, and/or where a material credit obligation is 90 days past due but not well secured, or is a portfolio managed facility that can be held for up to 180 days pastdue, or where concessional terms have been provided due to the financial difficulties of the customer. Where applicable the policies relating to impaired assets conform to
RBNZ's guidelines.
In the event where the value of collateral is sufficient to repay both the principal debt and all potential interest and there is no concern as to the creditworthiness of thecounterparty in question, the exposure is then classified as past due but not impaired.
The provision for credit impairment represents management’s best estimate of the losses incurred in the loan portfolio at balance date based on its experienced judgement.

Credit exposures, including loans and advances and off-balance sheet items, such as commitments and guarantees, are reviewed at least at each reporting date for
impairment. Exposures are impaired and impairment losses are recorded if, and only if, there is objective evidence of impairment as a result of one or more loss events that
occurred after the initial recognition of the loan and prior to the reporting date, and that a loss event or events has (or have) had an impact on the estimated future cash flowsof the individual loan or the collective portfolio of loans that can be reliably estimated. When an impairment loss in an individual asset or portfolio of assets is identified, the NZ
Banking Group is recognising that future economic benefits (previously assessed as being available to the entity) are no longer probable.

Where applicable, the NZ Banking Group's methodology for determining the total provision for loan losses establishes both an individual component for assets that are
individually significant (or on a portfolio basis for small value loans) and then a collective component for those exposures not individually known to be impaired. The individual
provision represents the results of analysis of individual loans within the NZ Banking Group's portfolio. The NZ Banking Group reviews its loan portfolios and monitors
adherence to terms, conditions and lending covenants. The reviews undertaken employ a variety of statistical measures and experienced judgement to determine thecontinuing collectability of credit facilities. When objective evidence arises as to the collectability of a credit facility, the exposure is classified and reported as individually
impaired and an individual provision for credit impairment is allocated against it.
Exposures that are assessed collectively are placed into pools of similar assets with similar risk characteristics to be collectively assessed for losses that have been incurred,
but not yet identified. The collective provision is estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the collective
pool. Historical loss experience is determined using loan and portfolio risk gradings, associated default and loss expectancy rates and an assessment of the emergence
period. The historical loss experience may be refined based on current observed default data and through various scenario adjustments.

The collective provision is also reviewed to ensure it is adequate for the term of the portfolio as a whole.
Distribution of gross loans and advances assets by credit quality
The credit quality of the portfolio of loans and advances is assessed by reference to the risk grading principles and policies adopted across the NZ Banking Group wherethese are also supported by a complementary risk grading methodology. The following table presents an analysis of gross loans and advances, prior to deducting the fairvalue hedge adjustment and provision for credit impairment, by summarised Basel II asset class into exposures neither past due nor impaired, past due and impaired.

30/09/2008
Neither past due nor impaired
Past due but not impaired (1 to 89 days)
Past due but not impaired (over 90 days)
Impaired

Retailmortgages$m

NZ Banking Group
Other retail
Corporate
exposures 1
exposures
$m
$m

Total
$m

Retailmortgages$m

NZ Branch
Other retail
Corporate1
exposures exposures
$m
$m

Total
$m

47,520
1,776
244
83

4,912
385
54
30

41,886877
11
214

94,318
3,038
309
327

-

-

-

-

49,623

5,381

42,98897,992----45,268
1,116
57
7

4,730
361
19
20

36,308697
26
8886,306
2,174
102
115

-

-

-

-

46,4485,130

37,11988,697----30/09/2007
Neither past due nor impaired
Past due but not impaired (1 to 89 days)
Past due but not impaired (over 90 days)
Impaired1

Includes corporate, sovereign and bank

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH57

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT (continued)
Credit quality of gross loans and advances neither past due nor impaired
Where applicable, the credit quality of financial assets is assessed by the entities within the NZ Banking Group using internal ratings which aim to reflect the relative ability ofcounterparties to fulfil, on time, their credit-related obligations, and is based on their current probability of default.

For personal use onlyInternal rating
Strong risk rating
Corporate customers demonstrating superior stability in their operating and financial performance over the long-term, and whose debt servicing capacity is not significantly
vulnerable to foreseeable events. Retail customers with low expected loss. This rating band comprises CCR 0+ to CCR 4- which broadly corresponds to ratings "Aaa" to "Ba1"and "AAA" to "BB+" of Moody's Investors Service and Standard & Poor's respectively.
Satisfactory risk rating
Corporate customers consistently demonstrating sound operational and financial stability over the medium to long term, even though some may be susceptible to cyclicaltrends or variability in earnings. Retail customers with moderate expected loss. This rating band comprises CCR 5+ to CCR 6- which broadly corresponds to ratings "Ba2" to“Ba3” and "BB" to “BB-” of Moody's Investors Service and Standard & Poor's respectively.
Weak risk rating but not past due or impaired
Corporate customers demonstrating some operational and financial instability, with variability and uncertainty in profitability and liquidity projected to continue over the shortand possibly medium term. Retail customers with higher expected loss. This rating band comprises CCR 7+ to 8 which broadly corresponds to ratings “B1” to “Caa” and “B+”
to “CCC” of Moody's Investors Service and Standard & Poor's respectively.
Movements in the rating categories between balance dates are due to both changes in the underlying internal ratings applied to customers and to new loans written or loans
rolling off.
The following table presents an analysis of gross loans and advances neither past due nor impaired by the above internal ratings:

30/09/2008
Strong risk rating
Satisfactory risk rating
Weak risk rating but not past due or impaired

Retailmortgages$m

NZ Banking Group
Other retail
Corporate
exposures 1
exposures
$m
$m

Total
$m

Retailmortgages$m

NZ Branch
Other retail
Corporate1
exposures exposures
$m
$m

Total
$m

43,866
3,041
613

1,849
2,800
263

19,827
19,9872,072

65,54225,828
2,948

-

-

-

-

47,5204,912

41,886

94,318----41,385
3,357
526

1,524
2,810
396

17,79017,246
1,272

60,69923,413
2,194

-

-

-

-

45,2684,730

36,30886,306----30/09/2007
Strong risk rating
Satisfactory risk rating
Weak risk rating but not past due or impaired

Credit quality of financial assets that are past due but not impaired

Ageing analysis of past due loans between 1 and 90 days is used to measure and manage the retail portfolio's credit quality within the NZ Banking Group. The remaining
portfolios in these entities are individually managed and therefore, accounts are managed on a daily basis. The following table presents an ageing analysis of past due loansthat are not impaired:30/09/2008

1 to 5 days
6 to 29 days
30 to 59 days
60 to 89 days
90 days or over

Retailmortgages$m

NZ Banking Group
Other retail
Corporate
exposures
exposures
$m
$m

Total
$m

Retailmortgages$m

NZ Branch
Other retail
Corporate
exposures
exposures
$m
$m

Total
$m

544
798
304
130
244

137
155
63
30
54

534
193
106
44
11

1,215
1,146
473
204
309

-

-

-

-

2,020

439

888

3,347

-

-

-

-

366
580
138
32
57

189
125
34
13
19

506
136
35
20
26

1,061
841
207
65
102

-

-

-

-

1,173

380

723

2,276

-

-

-

-

30/09/2007

1 to 5 days
6 to 29 days
30 to 59 days
60 to 89 days
90 days or over1

Includes corporate, sovereign and bank

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH58

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT (continued)
Past due but not impaired (over 90 days)
This classification applies where contractual payments are past due greater than 90 days, or where the facility remains outside of contractual arrangements for greater than
90 consecutive days, but entities within the NZ Banking Group believe that impairment is not appropriate on the basis of the level of security/collateral available, or the facility
is portfolio managed.

For personal use only

A facility, subject to a regular repayment schedule, is classified as 90 days past due when at least 90 calendar days have elapsed since the due date of a contractual payment
has not been met in full and the facility is well secured.
Facilities that do not have a regular repayment schedule are considered 90 days past due when the facility has remained continuously outside of contracted arrangements for
90 or more consecutive days and the facility is well secured.
Well secured is when the fair value of associated security is sufficient to ensure that the NZ Banking Group will recover the entire amount owing over the life of the facility andthere is reasonable assurance that collective efforts will result in payment of the amounts due in a timely manner.
The NZ Banking Group's residential mortgages and corporate exposures are generally well secured. Collateral is generally represented by residential property and businessassets respectively.
Portfolio managed assets 90 days past due but not impaired include financial assets which are homogenous with similar characteristics and are assessed, approved, andcontrolled on a portfolio basis within a centralised environment (for example Credit Cards, Personal Loans, Home Loans). When the financial assets are managed on a
portfolio basis, the assets can be held on a non-impaired basis for up to 180 days.

Credit quality of financial assets that are individually impaired
The key operating entities within the NZ Banking Group regularly review their portfolios and monitors adherence to contractual terms. When doubt arises as to thecollectability of a credit facility, the financial asset is classified and reported as individually impaired and an individual provision is allocated against it. The following table
presents an analysis of individually impaired assets, undrawn facilities with impaired customers and provision for credit impairment by summarised Basel II asset class:

Retailmortgages

30/09/2008

NZ Banking Group
Other retail
Corporate
exposures 1
exposures
$m
$m

Total
$m

Retailmortgages

NZ Branch
Other retail
Corporate1
exposures exposures
$m
$m

Total
$m

Impaired financial assets
Undrawn facilities with impaired customers
Individual provision balance

83
28

30
10

214
6
94

327
6
132

-

-

-

-

Net impaired financial assets

55

20

126

201

-

-

-

-

Collective provision balance

81

164

289

534

-

-

-

-

7
4

20
13

88
6
27

115
6
44

-

-

-

-

30/09/2007

Impaired financial assets
Undrawn facilities with impaired customers
Individual provision balance
Net impaired financial assets

3

7

67

77

-

-

-

-

Collective provision balance

58

130

234

422

-

-

-

-

1

Includes corporate, sovereign and bankSecurity held by the NZ Banking Group in respect of individually impaired financial assets in the analysis above has an estimated fair value of $195 million (30/09/2007 $71
million). In addition, security held in respect of impaired off-balance sheet facilities amounts to $6 million (30/09/2007 $6 million).
Restructured items
The key operating entities within the NZ Banking Group distinguish between facilities renegotiated on a commercial basis, on terms similar to those offered to new clients withsimilar risk, and those restructured on non commercial terms as a result of a client’s inability to meet original contractual obligations.
In the course of restructuring facilities due to financial difficulty, these entities may consider modifying credit terms to include concessions such as a reduction in the principal
amount, a deferral of repayments, and/or an reduction in interest rates or an extension of the maturity date materially beyond those typically offered to new facilities withsimilar risk.
Restructured facilities must demonstrate sound prospects of being able to adhere to the modified contractual terms. Where doubt exists as to the capacity to sustain themodified terms, the facilities remain impaired and an appropriate level of individual provision is held.
There are no material restructured loans held by the NZ Banking Group.
Estimated value of collateral and other charges related to financial assets that are individually impaired
NZ Banking Group
Liquid assets
and due fromother financial
institutions$m

Tradingsecurities
and available
for-sale assets$mCash and securities
Real estate
Other

-

-

-

112
83

-

6

112
89

Total value of collateral

-

-

-

195

-

6

201

Credit exposure

-

-

-

327

-

6

333

Unsecured portion of credit

-

-

-

132

-

-

132

30/09/2008

Derivative
financial
Net loans
instruments and advances
$m
$m

Other
Creditfinancialrelatedassetscommitments
$m
$m

Total
$m

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH59

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT (continued)
NZ Banking Group
Liquid assets
and due fromother financial
institutions$m

Tradingsecurities
and available
for-sale assets$mCash and securities
Real estate
Other

-

-

-

Total value of collateral--

Credit exposure--

Unsecured portion of credit--

Liquid assets
and due fromother financial
institutions$m

Tradingsecurities
and available
for-sale assets
$m

-

-

Total value of collateral-

Credit exposure-

Unsecured portion of credit

For personal use only

30/09/2007

30/09/2008

Derivative
financial
Net loans
instruments and advances
$m
$m

-

6

-

71

-

6

77

-

115

-

6

121

-

44

-

-

44

Other
Creditfinancialrelatedassetscommitments
$m
$m

Total
$m

Derivative
financial
Net loans
instruments and advances
$m
$m

-

-

-

-

-

-

-

Liquid assets
and due fromother financial
institutions$m

Tradingsecurities
and available
for-sale assets
$m

-

-

Total value of collateral-

Credit exposure-

Unsecured portion of credit-

Cash and securities
Real estate
Other

3
74

NZ Branch-

30/09/2007

Total
$m

3
68

-

Cash and securities
Real estate
Other

Other
Creditfinancialrelatedassetscommitments
$m
$m

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Other
Creditfinancialrelatedassetscommitments
$m
$m

Total
$m

NZ Branch
Derivative
financial
Net loans
instruments and advances
$m
$m
-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH60

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)
MARKET RISK
Market risk is the risk to the NZ Banking Group's earnings arising from changes in interest rates, currency exchange rates, credit spreads, or from fluctuations in bond,commodity or equity prices.
Market risk management and control responsibilities

For personal use only

The market risk management and policy control framework applicable to the entities comprising the NZ Banking Group has been set by the Board and Risk Committeeof either ANZ National Bank Limited or the Ultimate Parent Bank, as appropriate. Likewise oversight and monitoring of material Market Risk exposures of the NZ
Banking Group is undertaken by the market risk functions of ANZ National Bank Limited and also the Ultimate Parent Bank. Throughout this document, references tothe risk management of the operations within the entities comprising the NZ Banking Group, implicitly involves oversight by both related entities.
The NZ Banking Group has a detailed market risk management and control framework, to support trading and non-trading activities, which incorporates an independentrisk measurement approach to quantify the magnitude of market risk within the trading and non-trading books. This approach, along with related analysis, identifies therange of possible outcomes that can be expected over a given period of time, and establishes the relative likelihood of those outcomes.
These risks are monitored daily against a comprehensive limit framework that includes Value at Risk (VaR), aggregate market position and sensitivity, product andgeographic thresholds. To facilitate the management, control, measurements and reporting of market risk, the NZ Banking Group has grouped market risk into two
broad categories:a) Traded market riskThis is the risk of loss from changes in the value of financial instruments due to movements in price factors for both physical and derivative trading positions. Theyarise in trading transactions where the NZ Banking Group acts as principal with clients or with the market. The principal risk categories monitored are:• Currency risk is the potential loss arising from the decline in the value of a financial instrument due to changes in foreign exchange rates or their implied volatilities.
• Interest rate risk is the potential loss arising from the change in the value of a financial instrument due to changes in market interest rates or their implied
volatilities.
• Credit spread risk is the potential loss arising from a change in value of an instrument due to a movement of its margin or spread relative to a bench mark.
b) Non-traded market risk (or balance sheet risk)This comprises the management of non-traded interest rate risk, liquidity, and the risk to capital and earnings as a result of foreign exchange rate movements.

Some instruments do not fall into either category that also exposes the NZ Banking Group to market risk. These include equity securities classified as available-for-sale.
Regular reviews are performed to substantiate valuation of the investments within this portfolio.
The Boards of Directors through the Risk Committees have responsibility for oversight of market risk within the NZ Banking Group. Routine management, overall
strategies and policies, and control of market risk exposures at NZ Banking Group level are the responsibilities of the relevant Chief Risk Officer, who work closely with
the Markets business units.
The Traded Market risk function provides specific oversight of each of the main trading areas and is responsible for the establishment of a Value at Risk (VaR)
framework and detailed control limits. In all trading areas the NZ Banking Group has implemented models that calculate VaR exposures, monitor risk exposures against
defined limits on a daily basis, and ‘stress test’ trading portfolios. The Asset and Liability Committees of ANZ National Bank Limited and the Overseas Banking Group
comprise executive management who provide monthly oversight of Market Risk.
The ANZ National Bank Limited Chief Risk Officer is responsible for daily review and oversight of Traded market risk reports via a service level agreement with the
Ultimate Parent Bank. The Chief Risk Officers have the authority for instructing the business to close exposures and withdraw limits where appropriate.
Value at Risk (VaR) measure
A key measure of market risk is Value at Risk. VaR is a statistical estimate of the likely daily loss and is based on historical market movements. VaR calculations andlimits are prepared separately for ANZ National Bank Limited and the NZ Branch.
The confidence level is such that there is 97.5% or 99% probability that the loss will not exceed the VaR estimate on any given day. Conversely there is a 2.5% or 1%
probability of the decrease in market value exceeding the VaR estimate on any given day. The 99% confidence level encompasses a wider range of potential outcomes.

The NZ Banking Group's standard VaR approach for both traded and non-traded risks is historical simulation. The NZ Banking Group calculates VaR using historicalchanges in market rates and prices over the previous 500 business days. Traded and Non-Traded VaR is calculated using a one-day holding period.
It should be noted that because VaR is driven by actual historical observations, it is not an estimate of the maximum loss that the NZ Banking Group could experiencefrom an extreme market event. As a result of this limitation, the NZ Banking Group utilises a number of other risk measures (e.g. stress testing) and associated detailed
control limits to measure and manage market risk.
Traded and non-traded market risks are considered separately below.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH61

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)
Traded market risks
Trading activities are focused on customer trading, distribution and underwriting of a range of securities and derivative instruments. The principal activities include
foreign exchange, interest rate, and debt markets. These activities are managed on a global product basis.
Below are aggregate VaR exposures covering both derivative and non-derivative trading positions for the NZ Banking Group.

Foreign exchangeInterest rate
Credit spread
Diversification benefit

0.2
1.6
0.2
(0.3)

1.3
1.9
0.3
n/a

0.1
0.5
0.1
n/a

0.3
0.9
0.1
(0.5)

0.2
2.7
0.4
(0.6)

1.6
2.7
0.4
n/a

0.2
0.6
0.2
n/a

0.5
1.3
0.2
(0.7)

Total VaR

1.7

2.0

0.3

0.8

2.7

2.8

0.5

1.3

Foreign exchangeInterest rate
Credit spread
Diversification benefit

0.2
0.7
0.2
(0.1)

1.1
1.5
0.2
n/a

0.1
0.5
0.1
n/a

0.4
0.9
0.1
(0.4)

0.3
0.8
0.3
(0.1)

1.3
2.3
0.4
n/a

0.1
0.7
0.1
n/a

0.5
1.3
0.2
(0.5)

Total VaR

1.0

2.0

0.5

1.0

1.3

3.1

0.7

1.5

For personal use only

30/09/2008

NZ Banking Group
Value at risk at 97.5% confidenceHigh forLow forAs atperiodperiod$m$m$m

Average for
period$m

NZ Banking Group
Value at risk at 99% confidenceHigh forLow forAs atperiodperiod$m$m$m

Average for
period$m

30/09/2007

VaR is calculated separately for Foreign Exchange/Commodities and for Interest Rate/Debt Markets businesses as well as for the overall trading activities of eachrelevant entity. The diversification benefit reflects the historical correlation between Foreign Exchange, Commodity, Interest Rate and Debt Markets.
To supplement the VaR methodology, the NZ Banking Group applies a wide range of stress tests, both on individual portfolios and for the overall trading activities ofeach relevant entity within the NZ Banking Group. The NZ Banking Group's stress-testing regime provides senior management with an assessment of the financial
impact of identified extreme events on market risk exposures of the NZ Banking Group.
Non-traded market risks (balance sheet risk)
The principal objectives of balance sheet management are to manage interest income sensitivity while maintaining acceptable levels of interest rate and liquidity risk
and to manage the market value of the NZ Banking Group’s capital. Liquidity risk is dealt with in the next section.
Interest rate risk
The objective of balance sheet interest rate risk management is to secure stable and optimal net interest income over both the short (next 12 months) and long term.
Non-traded interest rate risk relates to the potential adverse impact of changes in market interest rates on the NZ Banking Group’s future net interest income. This riskarises from two principal sources: mismatches between the repricing dates of interest bearing assets and liabilities; and the investment of capital and other non-interest
bearing liabilities in interest bearing assets. Non-traded interest rate risk is managed to both value and earnings at risk limits. Interest rate risk is reported using threemeasures: VaR; scenario analysis (to a 1% shock); and interest rate sensitivity gap.
a) VaR non-traded interest rate risk
Below are aggregate VaR figures covering non-traded interest rate risk.
NZ Banking GroupHigh forLow for

Average for

30/09/2008

As at
$m

period$mperiod$mperiod$m

Value at risk at 97.5% confidence

12.8

13.0

10.4

11.9

10.8

10.8

7.3

8.8

30/09/2007
Value at risk at 97.5% confidence

To supplement the VaR methodology, the NZ Banking Group applies a wide range of stress tests, both on individual portfolios and for the overall trading activities ofeach relevant entity within the NZ Banking Group. The NZ Banking Group's stress-testing regime provides senior management with an assessment of the financial
impact of identified extreme events on market risk exposures of the NZ Banking Group.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH62

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)b) Scenario Analysis – A 1% Shock on the Next 12 Months’ Net Interest Income
A 1% overnight parallel positive shift in the yield curve is modelled to determine the potential impact on net interest income over the succeeding 12 months. This is astandard risk quantification tool.

For personal use only

The figures in the table below indicate the outcome of this risk measure for the current and comparative periods – expressed as a percentage of reported net interest
income. The sign indicates the nature of the rate sensitivity with a positive number signifying that a rate increase is positive for net interest income over the next 12months.

Impact of 1% Rate Shock
As at
Maximum exposure
Minimum exposure
Average exposure (in absolute terms)

NZ Banking Group
30/09/2008
30/09/2007
0.0%
1.8%
0.0%
0.8%

1.4%
2.8%
0.9%
1.9%

The extent of mismatching between the repricing characteristics and timing of interest bearing assets and liabilities at any point has implications for future net interest
income. For relevant entities within the NZ Banking Group, quantification of the potential variation in future net interest income as a result of these repricing mismatches
is performed each month using a static gap model.
The repricing gaps themselves are constructed based on contractual repricing information. However, for those assets and liabilities where the contractual term torepricing is not considered to be reflective of the actual interest rate sensitivity (for example, products priced at the NZ Banking Group’s discretion), a profile based on
historically observed and/or anticipated rate sensitivity is used. This treatment excludes the effect of basis risk between customer pricing and wholesale market pricing.
For example, when wholesale market rates are anticipating an official rate increase the NZ Banking Group does not reprice certain customer business until the first
repricing date after the official rate rise.
The majority of the NZ Banking Group’s non-traded interest exposure exists in New Zealand. A separate balance sheet simulation process supplements the static gap
information. This allows the net interest income outcomes of a number of different scenarios – with different market interest rate environments and future balance sheet
structures – to be identified. This better enables the NZ Banking Group to quantify the interest rate risks associated with the balance sheet and to formulate strategies tomanage current and future risk profiles.
Interest rate sensitivity gap
The interest rate sensitivity gap analysis provides information about the NZ Banking Group's exposure to interest rate risk.
Repricing gaps are based upon contractual repricing information except where the contractual terms are not considered to be reflective of actual interest rate sensitivity,for example, those assets and liabilities priced at the NZ Banking Group's discretion. In such cases, the rate sensitivity is based upon historically observed and/or
anticipated rate sensitivity.
Sensitivity to interest rates arises from mismatches in the period to repricing of assets and that of the corresponding liability funding. These mismatches are managed
within policy guidelines for mismatch positions.
The majority of the NZ Banking Group's loan business is conducted domestically in New Zealand. The majority of retail deposits are also raised in New Zealand but areeither fixed or floating in nature. The mix of repricing maturities in this book is influenced by the underlying financial needs of customers.

The NZ Banking Group's offshore operations are wholesale in nature and are able to minimise interest rate sensitivity through closely matching the maturities of loans
and deposits. Given both the size and nature of this business, the interest rate sensitivity of this balance sheet contributes little to the aggregate risk exposure, which isprimarily a reflection of the positions in New Zealand.
A combination of off-balance sheet instruments and pricing initiatives is used in the management of interest rate risk. For example, where a strong medium to long term
rate view is held, hedging and pricing strategies are used to modify the profile's interest rate sensitivity so that it is positioned to take advantage of the expectedmovement in interest rates. However, such positions are taken within the overall risk limits specified by policy applicable to the relevant NZ Banking Group entity.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH63

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)
The following tables represent the interest rate sensitivity of the NZ Banking Group's assets, liabilities and off balance sheet instruments repricing (that is, when interest
rates applicable to each asset or liability can be changed) in the periods shown.

Total
$m

Less than
3 months$m

3 to 6months$m

AssetsLiquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Other financial assets

4,839
5,032
2,624
7,603
109
97,679
893

4,668
3,080
1,043
30
44,105
-

450
10
6,682
-

Total financial assets

118,779

52,926

7,142

For personal use only

30/09/2008

NZ Banking Group
6 to 12months$m

1 to 5years$mBeyond5 years$m

Not bearing
interest$m

13,308
-

134
1,332
14
33,877
-

239
46
-

171
1,368
7,603
65
(339)
893

13,30835,357

285

9,762

4,299

-

-

-

-

-

4,299

Total assets

123,078

52,926

7,142

13,30835,357285

14,061

Liabilities
Due to other financial institutions
Deposits and other borrowings
Derivative financial instruments
Payables and other financial liabilities
Bonds and notes
Term funding
Loan capital

3,311
77,1366,472
1,499
22,382
1,765
2,820

2,379
54,82794
15,732
1,765
216

114
10,671
472
819

378
6,813
374
-

381
896
60
4,464
1,785

40
1
7
1,295
-

19
3,928
6,472
1,338
45
-

Total financial liabilities

115,385

75,013

12,076

7,565

7,586

1,343

11,802

Non-financial liabilities
Equity

566
7,127

-

-

-

-

-

566
7,127

Total liabilities and equity

Non-financial assets

123,078

75,013

12,076

7,565

7,586

1,343

19,495On-balance sheet interest sensitivity gap
Hedging instruments-(22,087)
18,595(4,934)
5,578

5,743
(6,078)27,771(18,964)(1,058)867(5,433)-

Interest sensitivity gap - net
Interest sensitivity gap - cumulative-(3,492)(3,492)644(2,848)(335)(3,183)

8,807
5,624

(191)
5,433

(5,433)-

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH64

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)

Total
$m

Less than
3 months$m

3 to 6months$m

AssetsLiquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Other financial assets

4,807
3,563
1,877
4,551
48
87,789
970

4,606
2,925
742
34
33,246
-

440
375
4,051
-

Total financial assets

103,605

41,553

Non-financial assets

4,001

Total assets

NZ Banking Group
6 to 12months$m

1 to 5years$mBeyond5 years$m

Not bearing
interest$m

4
11,404
-

174
629
13
39,355
-

127
84
-

201
24
4,551
1
(351)
970

4,866

11,40840,171

211

5,396

-

-

-

-

-

4,001

107,606

41,553

4,866

11,40840,171

211

9,397

Liabilities
Due to other financial institutions
Deposits and other borrowings
Derivative financial instruments
Payables and other financial liabilities
Bonds and notes
Term funding
Loan capital

3,170
70,0304,935
1,107
17,197
1,765
2,062

2,334
49,27616
13,113
1,765
217

216
7,489
77
150
799

189
6,261
1,543
100

16
2,650
1,419
946

377
60
972
-

38
4,354
4,935
954
-

Total financial liabilities

100,266

66,721

8,731

8,093

5,031

1,409

10,281

Non-financial liabilities
Equity

485
6,855

-

-

-

-

-

485
6,855

Total liabilities and equity

107,606

66,721

8,731

8,093

5,031

1,409

17,621On-balance sheet interest sensitivity gap
Hedging instruments-(25,168)
23,742(3,865)
3,514

3,315
2,370

35,140(31,244)(1,198)1,618(8,224)-

Interest sensitivity gap - net
Interest sensitivity gap - cumulative-(1,426)(1,426)(351)(1,777)

5,685
3,908

3,896
7,804

420
8,224

(8,224)
-

Total
$m

Less than
3 months$m

3 to 6months$m

NZ Branch
6 to 12months$m

1 to 5years$mBeyond5 years$m

Not bearing
interest$m

AssetsLiquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Due from subsidiary companies
Other financial assets

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

Non-financial assets

-

-

-

-

-

-

-

Total assets

-

-

-

-

-

-

-

Liabilities
Due to other financial institutions
Deposits and other borrowings
Due to subsidiary companies
Derivative financial instruments
Payables and other financial liabilities
Bonds and notes
Due to parent company
Term funding
Loan capital

-

-

-

-

-

-

-

Total financial liabilities

-

-

-

-

-

-

-

Non-financial liabilities
Equity

-

-

-

-

-

-

-

Total liabilities and equity

-

-

-

-

-

-

-

On-balance sheet interest sensitivity gap

-

-

-

-

-

-

-

Hedging instruments

-

-

-

-

-

-

-

Interest sensitivity gap - net
Interest sensitivity gap - cumulative

-

-

-

-

-

-

-

For personal use only

30/09/2007

30/09/2008

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH65

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)

Total
$m

Less than
3 months$m

3 to 6months$m

NZ Branch
6 to 12months$m

1 to 5years$mBeyond5 years$m

Not bearing
interest$m

AssetsLiquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Due from subsidiary companies
Other financial assets

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

Non-financial assets

-

-

-

-

-

-

-

Total assets

-

-

-

-

-

-

-

Liabilities
Due to other financial institutions
Deposits and other borrowings
Due to subsidiary companies
Derivative financial instruments
Payables and other financial liabilities
Bonds and notes
Due to parent company
Term funding
Loan capital

-

-

-

-

-

-

-

Total financial liabilities

-

-

-

-

-

-

-

Non-financial liabilities
Equity

-

-

-

-

-

-

-

Total liabilities and equity

-

-

-

-

-

-

-

On-balance sheet interest sensitivity gap
Hedging instruments

-

-

-

-

-

-

-

Interest sensitivity gap - net
Interest sensitivity gap - cumulative

-

-

-

-

-

-

-

For personal use only

30/09/2007

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH66

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)
Equity securities classified as available-for-saleMarket risk arises on equity securities classified as available-for-sale. The fair value of these securities as at 30 September 2008 was $65 million (30 September 2007
$1 million) and private equity holdings of $nil included in other assets (30 September 2007 $2 million). Regular reviews are performed to substantiate valuation of theinvestments within the portfolio. The fair value of the equity securities classified as available-for-sale can fluctuate considerably. A 10 per cent reduction in the value ofthe available-for-sale equity securities at 30 September 2008 would have reduced equity by $6.5 million (30 September 2007 $nil).

For personal use only

Foreign currency related risksThis risk relates to the potential loss arising from the decline in the value of foreign currency positions due to changes in foreign exchange rates.
For non-traded instruments in foreign currencies, the risk is monitored and is hedged in accordance with policy. Risk arising from individual funding and othertransactions is actively managed. The total amounts of unmatched foreign currency assets and liabilities and consequent foreign currency exposures, arising from eachclass of financial asset and liability, whether recognised or unrecognised, within each currency are not material.
The net open position in each foreign currency, detailed in the table below, represents the net on-balance sheet assets and liabilities in that foreign currency aggregatedwith the net expected future cash flows from off-balance sheet purchases and sales from foreign exchange transactions in that foreign currency. The amounts are statedin New Zealand dollar equivalents translated using the spot exchange rates as at balance sheet date.

Net open position

NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007$m$m

Australian dollar
Canadian dollar
Euro
Pound sterling
US dollar
Other

9
(2)
9
14
2

(10)
13
(1)
2
2

-

-

Total net open position

32

6

-

-

LIQUIDITY RISK
Liquidity risk is the risk that the NZ Banking Group has insufficient capacity to fund increases in assets, or is unable to meet its payment obligations as they fall due,
including repaying depositors or maturing wholesale debt. Entities within the NZ Banking Group maintain sufficient liquid funds to meet their commitments based on
historical and forecasted cash flow requirements. Liquidity risk is measured through cash flow modelling, with profiles produced for both normal business and short-termcrisis conditions.
The timing mismatch of cash flows and the related liquidity risk is inherent in all banking operations, and may result from internal and/or external events, including: credit
or operational risks, bank-specific events, market disruptions, or systemic shocks. The following outlines the NZ Banking Group’s approach to liquidity and funding risk
management. Principles include:

•
•
•
•
•
•

ensuring the liquidity management framework is compatible with local regulatory requirements;
daily liquidity reporting and scenario analysis, where appropriate, to quantify the positions;monitoring wholesale and customer liability composition;
maintaining a diversified funding base, avoiding undue concentrations by investor type, maturity, market source and currency;
holding a portfolio of high quality liquid assets to protect against adverse funding conditions and to support day-to-day operations; andestablishing detailed contingency plans to cover liquidity crisis events.

Scenario Modelling
A key component of the NZ Banking Group’s liquidity management framework is scenario modelling. Scenario modelling is carried out separately for each entity within
the NZ Banking Group where material. This requires assessing liquidity under at least two specific scenarios for each:1). ‘Normal Business conditions': the normal behaviour of cash flows in the ordinary course of business. The relevant entities must be able to meet all commitments andobligations under a going concern scenario, within their normal funding capacity, over at least the next 30 calendar days. In estimating the funding requirement themodels incorporate expected cash flows by reference to historical behaviour and contractual maturity data.
2). ‘Short term crisis’: refers to a potential name-specific liquidity crisis in which the entities comprising the entity may have significant difficulty rolling over or replacing
liabilities. Each entity needs to be cash flow positive over a 5 business day period under a short term crisis scenario. The models incorporate expected cash flow
behaviour under such a scenario based on the type of customer and their level of sophistication, and the type of asset/ liability.

In addition, a number of other stress tests and liquidity scenarios are modelled over a variety of time horizons, including the impact of credit rating downgrades, andreduced access to wholesale debt in domestic and offshore markets.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH67

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT (continued)
Customer and wholesale funding composition
The NZ Banking Group employs actual cash flow based funding metrics to determine appropriate balance sheet liquidity and funding risk strategies. These metrics areused to measure and manage the proportion of the Group’s external assets which are funded by customer liabilities, wholesale debt, equity and loan capital.

For personal use only

Managing these metrics assists in ensuring that an appropriate proportion of the NZ Banking Group’s assets are funded by either ‘sticky’ customer liabilities; or longterm wholesale debt funding (with a remaining term exceeding 1 year). This approach recognises that long-term wholesale debt and other 'sticky' liabilities havefavourable liquidity characteristics thereby assisting in reducing any adverse impact or volatility caused by short-term funding, and in monitoring the impact of depositgathering strategies.
The table below outlines total NZ Banking Group volumes of customer deposits and wholesale funding.
NZ Banking Group
30/09/2008
30/09/2007$m$m

Funding composition

NZ Branch
30/09/2008
30/09/2007$m$m

Customer deposits 1
New ZealandOverseas

52,1996,757

50,391
5,875--

Total customer deposits

58,95656,266--Wholesale funding
Bonds and notes
Loan capital
Certificates of deposit
Commercial paper
Term funding
Due to other financial institutions

22,382
2,820
5,527
12,6531,765
3,311

17,197
2,062
4,447
9,317
1,765
3,170

-

-

Total wholesale funding

48,45837,958--

Total funding

107,414

94,224--

Concentrations of funding by industry
Households
Agriculture, forestry, fishing and mining
ManufacturingEntertainment, leisure and tourism
Finance and insurance
Retail trade
Wholesale trade
Business and property services
Transport and storage
Construction
Government and local authority
Other2

36,239
4,517
1,465
611
54,545
752
626
4,686
594
722
1,585
1,072

34,234
3,438
1,429
559
45,308
665
590
4,405
582
693
1,366
955

-

-

107,414

94,224--60,66024,178
11,484
11,09257,32013,834
14,1208,950--

107,414

94,224--

Total concentrations of funding by industry

Concentrations of funding by geography
New ZealandUnited States
EuropeOther countries

3

Total concentrations of funding by geography

Analyses of funding liabilities by industry sector are based on Australian and New Zealand Standard Industrial Classification (ANZSIC) codes.

1

Represents: term deposits, other deposits bearing interest, deposits not bearing interest and secured debenture stock.
Other includes exposures to electricity, gas and water, communications, and personal services.
3
Funding of the NZ Banking Group via ANZ National (Int'l) Limited is classified as either from the United States or Europe, as the company conducts overseas funding
activities through its London branch.
2

Wholesale funding
Wholesale funding strategy is designed to deliver a sustainable portfolio of wholesale funds that balances cost efficiency while targeting diversification by markets,
investors, currencies, maturities and funding structures. Short-term wholesale funding requirements, with a contractual maturity of less than one year, are managed
through the Treasury and Markets operations. Long-term wholesale funding is managed and executed through Treasury operations.
The NZ Banking Group also uses maturity concentration limits under the wholesale funding and liquidity management framework. Funding instruments used to meet thewholesale borrowing requirement must be on a pre-established list of approved products.
Funding capacity and debt issuance planning
Under the normal business conditions scenario, borrowing capacity is an estimate of the amount of funding that can be raised in the wholesale markets in normal market
conditions. The NZ Banking Group adopts a conservative approach to determine its funding capacity. Funding capacity limits are determined at the Ultimate Parent
Bank level and allocated to individual sites based on their requirements.
Annually, a Funding Plan is ratified by the NZ Banking Group’s Senior Management. The plan is supplemented by monthly updates, and is linked to the NZ Banking
Group’s three year strategic planning cycle.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH68

NOTES TO THE FINANCIAL STATEMENTS (continued)

32.

FINANCIAL RISK MANAGEMENT (continued)
Liquidity portfolio management
The NZ Banking Group holds a diversified portfolio of cash and high-quality highly-liquid securities to support payment obligations and contingent funding in the event ofa market disruption.
The size of the NZ Banking Group’s liquidity portfolio is based on the amount of liquidity required to meet: day-to-day operational requirements; a potential name crisis;or potential wholesale ‘funding stress’ requirements.

For personal use only

In addition, the ratio of cover provided by the liquidity portfolio to fund both domestic and offshore wholesale debt maturities is monitored.
Supplementing its liquidity position, the NZ Banking Group holds additional cash and liquid asset balances. The Markets business holds secondary sources of liquidity inthe form of highly liquid instruments in its trading portfolios.

Assets held for managing liquidity risk includes short term cash held with the RBNZ or other banks, government securities and other securities that are readily
acceptable in repurchase agreements with the RBNZ and other New Zealand banks, and securities issued by offshore Supranational and highly rated banks.

The NZ Banking Group's core liquidity portfolio held for managing liquidity risk comprises:
NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007$m$m

Cash and balances with central banks
Securities purchased under agreement to resell
Certificates of deposit
Government, Local Body stock and bonds
Other bank bonds

3,779
134
3,343
180
1,300

2,809
346
2,417
1
595

-

-

Total liquidity portfolio

8,736

6,168

-

-

Liquidity crisis contingency planning
The NZ Banking Group maintains liquidity crisis contingency plans defining an approach for analysing and responding to a liquidity threatening event at a Group-widebasis. The framework includes:• the establishment of crisis severity/stress levels;• clearly assigned crisis roles and responsibilities;• early warning signals indicative of an approaching crisis, and mechanisms to monitor and report these signals;• action plans, and courses of action for altering asset and liability behaviour.
• procedures for crisis management reporting, and covering cash-flow shortfalls;• guidelines determining the priority of customer relationships in the event of liquidity problems; and• assigned responsibilities for internal and external communications.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH69

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)
Contractual maturity analysis of financial assets and liabilities
The tables below analyse the NZ Banking Group's financial assets and liabilities, within relevant maturity groupings based on the earliest date on which the NZ Banking
Group may be required to pay. The amounts represent principal and interest cash flows and may differ compared to the amounts reported on the balance sheet.

The management of liquidity risk is detailed on pages 66 to 68. The analysis presented below has been made on an undiscounted basis, but it should be noted that thisis not how the NZ Banking Group manages its liquidity risk.

For personal use only

Contractual maturity analysis for on-balance sheet financial assets and financial liabilities:
Less thanNZ Banking Group
3 to 12

BeyondNo maturity

Value
$m

Total
$m

At call$m

3 months$mmonths$m

1 to 5 years$m

5 years$m

specified$m

AssetsLiquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Other financial assets

4,839
5,032
2,624
7,603
109
97,679
893

4,923
5,173
3,097
7,603
136
163,788
893

4,838
436
-

85
3,640
1,028
11,047893

579
103
18,580
-

518
1,688
32
47,374-278
39
87,120
-

7,603
65
(333)
-

Total financial assets

118,779

185,613

5,274

16,693

19,262

49,61287,437

7,335

Liabilities
Due to other financial institutions
Deposits and other borrowings
Derivative financial instruments
Other financial liabilities
Bonds and notes
Term funding
Loan capital

3,311
77,1366,472
1,499
22,382
1,765
2,820

3,528
79,4976,472
1,499
26,881
1,901
4,502

1,713
26,9467834-

734
33,068
1,432
2,183
51
60

538
18,292
7,511
1,816
178

497
1,189
60
15,160
959

46
2
7
1,904
2,153

6,472
45
1,152

Total financial liabilities

115,385

124,280

28,771

37,52828,335

17,865

4,112

7,669

AssetsLiquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Other financial assets

4,807
3,563
1,877
4,551
48
87,789
970

5,219
3,782
2,169
4,551
53
159,967
970

4,860
961
-

359
1,718
662
34
11,527
970

474
454
3
15,086
-

334
865
15
45,380-295
188
88,324
-

4,551
1
(350)
-

Total financial assets

103,605

176,711

5,821

15,27016,017

46,59488,807

4,202

Liabilities
Due to other financial institutions
Deposits and other borrowings
Derivative financial instruments
Other financial liabilities
Bonds and notes
Term Funding
Loan capital

3,170
70,0304,935
1,107
17,197
1,765
2,062

3,407
72,875
4,935
1,107
20,940
1,901
3,194

1,163
26,073
58
34
-

1,248
28,216
753
953
51
40

449
15,666
97
6,148
1,816
122

128
2,920
32
12,615
647

419
60
1,166
2,076

4,935
165
309

Total financial liabilities

100,266

108,359

27,32831,261

24,29816,342

3,721

5,409

30/09/2008

Carrying

30/09/2007

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH70

NOTES TO THE FINANCIAL STATEMENTS (continued)
32.

FINANCIAL RISK MANAGEMENT (continued)

Carrying

Less thanNZ Branch
3 to 12

BeyondNo maturity

Value
$m

Total
$m

At call$m

3 months$mmonths$m

1 to 5 years$m

5 years$m

specified$m

AssetsLiquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Due from subsidiary companies
Other financial assets

-

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

AssetsLiquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments
Available-for-sale assets
Net loans and advances
Due from subsidiary companies
Other financial assets

-

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

-

Liabilities
Due to other financial institutions
Deposits and other borrowings
Due to subsidiary companies
Derivative financial instruments
Other financial liabilities
Bonds and notes
Due to parent company
Term Funding
Loan capital

-

-

-

-

-

-

-

-

Total financial liabilities

-

-

-

-

-

-

-

-

For personal use only

30/09/2008

Liabilities
Due to other financial institutions
Deposits and other borrowings
Due to subsidiary companies
Derivative financial instruments
Other financial liabilities
Bonds and notes
Due to parent company
Term Funding
Loan capital
Total financial liabilities
30/09/2007

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH71

NOTES TO THE FINANCIAL STATEMENTS (continued)

For personal use only

33.

34.

35.

CONCENTRATIONS OF CREDIT RISK TO INDIVIDUAL COUNTERPARTIESThe NZ Banking Group has no credit exposures, on the basis of limits, to individual counterparties or groups of closely related counterparties (whether bankor non-bank exposures) which equal or exceed 10% of the Overseas Banking Group's equity as at 30 September 2008 or 30 September 2007, or in respectof peak end-of-day aggregate credit exposures for the quarter ended 30 September 2008. The peak end-of-day exposures have been calculated using theOverseas Banking Group equity as at 30 September 2008. These calculations exclude credit exposures to the central government of any country with along term credit rating of A- or A3 or above, or its equivalent.

MARKET RISKRBNZ Market Risk Disclosure
The aggregate market risk exposures below have been calculated in accordance with the Reserve Bank of New Zealand document entitled 'Capital
Adequacy Framework (Standardised Approach)' (BS2A) dated November 2007.
The peak end-of-day market risk exposures for the quarter are measured as a percentage of the Overseas Banking Group's equity as at 30 September
2008.
NZ Banking Group

Implied risk weighted
exposure

Aggregate capital charge

Aggregate capital charge
as a percentage of theOverseas Banking Group's
Equity

As at
$m

Peak
$m

As at
$m

Peak
$m

As at
$m

Peak
$m

3,696
35
64

3,995
160
75

296
3
5

320
13
6

1.1%
0.0%
0.0%

1.2%
0.0%
0.0%

3,776
16
3

4,696
81
3

302
1
0

376
7
0

1.4%
0.0%
0.0%

1.7%
0.0%
0.0%

30/09/2008
Interest rate risk
Foreign currency risk
Equity risk
30/09/2007
Interest rate risk
Foreign currency risk
Equity risk

INTEREST EARNING AND DISCOUNT BEARING ASSETS AND LIABILITIESNZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007$m$m

Interest earning and discount bearing assets

109,017

98,209--Interest and discount bearing liabilities

103,583

89,985--

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH72

NOTES TO THE FINANCIAL STATEMENTS (continued)

36.

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIESAll financial instruments are recognised initially at fair value, which is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction.

For personal use only

The fair value of a financial instrument on initial recognition is normally the transaction price, however, in certain circumstances the initial fair value may
be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation techniquewhose variables include only data from observable markets. For the majority of short-term financial instruments, defined as those which reprice ormature in 90 days or less, with no significant change in credit risk, the fair value was assumed to equate to the carrying amount in the NZ Banking
Group’s balance sheet.
Subsequent to initial recognition, the fair value of financial instruments measured at fair value is based on quoted market prices, where available. In
cases where quoted market prices are not available, fair values are based on present value estimates or other market accepted valuation techniques
which include data from observable markets wherever possible.
The fair values are based on relevant information available as at the respective balance sheet dates. While judgement is used in obtaining the fair valueof financial instruments, there are inherent weaknesses in any estimation technique. Many of the estimates involve uncertainties and matters ofsignificant judgement and changes in underlying assumptions could significantly affect these estimates.
In the tables below, classes of financial assets have been allocated into the following groups: amortised cost, financial assets at fair value through profit
or loss, derivatives in effective hedging relationships and available-for-sale financial assets. Similarly, each class of financial liability has been allocatedinto three groups: amortised cost, financial liabilities at fair value through profit and loss and derivatives in effective hedging relationships.
The significant accounting policies in Note 1 Accounting Policies describe how the categories of financial assets and financial liabilities are measured
and how income and expenses, including fair value gains and losses, are recognised. The carrying amount and fair value of the NZ Banking Group’s
financial assets and financial liabilities are also set out below.
A significant number of financial instruments are carried at fair value in the balance sheet. Additional disclosure of the fair value of those financial
instruments not carried at fair value has been provided below. The fair value disclosure does not cover those instruments that are not consideredfinancial instruments from an accounting perspective such as income tax and intangible assets. The aggregate fair value amounts do not represent theunderlying value of the Group.
FINANCIAL ASSETS
Liquid assets and due from other financial institutions
The carrying values of these financial instruments are considered to approximate their net fair values as they are short-term in nature or are receivable
on demand.
Trading securities
Trading securities are carried at fair value. Fair value is generally based on quoted market prices, broker or dealer price quotations, or prices forsecurities with similar credit risk, maturity and yield characteristics.
Derivative financial instruments
The fair values of derivative financial instruments are determined using market prices and market accepted valuation models as appropriate (including
discounted cash flow models) based on current market yields for similar types of instruments and the maturity of each instrument.
Available-for-sale assets
Fair value is based on quoted market prices or broker or dealer price quotations. If this information is not available, fair value is estimated using quoted
market prices for securities with similar credit, maturity and yield characteristics, or market accepted valuation models as appropriate (including
discounted cash flow models) based on current market yields for similar types of instruments and the maturity of each instrument.
Net loans and advances
The carrying value of loans and advances includes deferred fees and expenses, and is net of provision for credit impairment and income yet to mature.
The estimated fair value of loans and advances is based on the discounted amount of estimated future cash flows and accordingly has not beenadjusted for provision for credit impairment. Estimated contractual cash flows for performing loans are discounted at estimated current bank credit
spreads to determine fair value. For loans with doubt as to collection, expected cash flows (inclusive of the value of security) are discounted using arate, which includes a premium for the uncertainty of the flows.
The difference between estimated fair values for loans and advances and their carrying value reflects changes in interest rates and the credit worthinessof borrowers since loan origination.
Other financial assets
Included in this category are accrued interest and fees receivable. The carrying values of accrued interest and fees receivable are considered toapproximate their net fair values as they are short term in nature or are receivable on demand.
Financial assets designated at fair value through profit or loss
The NZ Banking Group has not reclassified any financial assets previously measured at amortised cost to fair value, or previously measured at fairvalue to amortised cost, during the year ended 30 September 2008 (30 September 2007 nil).

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH73

NOTES TO THE FINANCIAL STATEMENTS (continued)

36.

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)
FINANCIAL LIABILITIESDue to other financial institutions
The carrying values of these financial instruments are considered to approximate their net fair values as they are short-term in nature or are receivable
on demand.

For personal use only

Deposits and other borrowings
The fair value of a deposit liability without a specified maturity or at call is deemed to be the amount payable on demand at the reporting date. The fairvalue is not adjusted for any value expected to be derived from retaining the deposit for a future period of time.
For interest bearing fixed maturity deposits and other borrowings without quoted market prices, market borrowing rates of interest for debt with a similar
maturity are used to discount contractual cash flows.
Bonds and notes, term funding and loan capital
The aggregate fair value of bonds and notes, term funding and loan capital is calculated based on quoted market prices. For those debt issues where
quoted market prices were not available, a discounted cash flow model using a yield curve appropriate for the remaining term to maturity of the debt
instrument is used.
Other financial liabilities
This category includes accrued interest and fees payable for which the carrying amount is considered to approximate the fair value.
Commitments and contingencies
As outlined in Note 43 Contingent Liabilities and Credit Related Commitments, the NZ Banking Group has various credit related commitments. Basedupon the level of fees currently charged for granting such commitments, taking into account maturity and interest rates, together with any changes in thecreditworthiness of counterparties since origination of the commitments, their estimated replacement or net fair value is not material.
Financial liabilities designated at fair value through profit or loss
Certain items included in deposits and other borrowings have been designated as financial liabilities at fair value through profit or loss in order toeliminate an accounting mismatch which would arise if the liabilities were otherwise carried at amortised cost. This mismatch arises where a derivative,
which is required to be measured at fair value through profit or loss, has been acquired to mitigate a financial risk within the financial liability.
Deposits and other borrowings
At balance date, the carrying amount of deposits and other borrowings designated by the NZ Banking Group at fair value through profit or loss was$12,653 million (30/09/2007 $9,317 million). This is $17 million lower (30/09/2007 $2 million lower) than their amortised cost.
The accumulated amount of the change in fair value attributable to changes in credit risk on these liabilities was less than $3 million (30/09/2007 lessthan $1 million). The change in fair value attributable to changes in credit risk has been determined as the amount of change in fair value that is not
attributable to changes in market conditions that give rise to market risks (benchmark interest rate, and foreign exchange rates).

The fair value amounts have not been updated for the purposes of these financial statements since 30 September 2008, and therefore the fair value ofthe financial instruments subsequent to 30 September 2008 may be different from the amounts reported.

74

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCHNOTES TO THE FINANCIAL STATEMENTS (continued)

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)

For personal use only

36.

Carrying amountAt amortised cost
Otherfinancialassets at
Loans andamortisedreceivables
cost
$m
$m

NZ Banking GroupAt fair value
thoughprofit or loss

Hedging

Availablefor-saleassetsSub-total$mHeld fortrading
$m

$m

$m

Total
$m

Financial assets
30/09/2008
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments 1
Available-for-sale assets
Net loans and advances 2
Other financial assets

97,679
-

4,839
2,585
893

4,839
2,585
97,679
893

2,624
7,297
-

306
-

2,447
109
-

4,839
5,032
2,624
7,603
109
97,679893

Total financial assets

97,6798,317

105,996

9,921

306

2,556

118,779

Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments 1
Available-for-sale assets
Net loans and advances 2
Other financial assets

87,789
-

4,807
1,929
966

4,807
1,929
87,789
966

1,877
4,054
-

497
-

1,634
48
2

4,807
3,563
1,877
4,551
48
87,789968

Total financial assets

87,7897,702

95,491

5,931

497

1,684

103,603

30/09/2007

The following table summarises the carrying amounts and fair values of those financial assets not presented in the NZ Banking Group's balance sheet
at their fair value:
NZ Banking Group
30/09/2007
30/09/2008
Carrying
Carrying
amountFair value
amountFair value
$m
$m
$m
$m
Liquid assets
Due from other financial institutions
Net loans and advances 2
Other financial assets

4,839
2,585
97,679
893

4,839
2,585
97,429
893

4,807
1,929
87,789
966

4,807
1,929
87,518966

Total financial assets at amortised cost

105,996

105,746

95,491

95,2201

Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as
accounting hedges.
2
Fair value hedging is applied to financial assets within loans and advances. The resulting fair value adjustment means that the carrying value differsfrom the amortised cost.

75

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCHNOTES TO THE FINANCIAL STATEMENTS (continued)

36.

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)

For personal use only

At amortised cost

Carrying amount$m

NZ Banking GroupAt fair value through profit or loss
Designatedon initial
Held forrecognition
trading
Sub-total$m$m$m

Hedging

$m

Total
$m

Financial liabilities
30/09/2008
Due to other financial institutions
Deposits and other borrowings
Derivative financial instruments 1
Other financial liabilities
Bonds and notes 2
Term funding
Loan capital

3,311
64,483
1,499
22,382
1,765
2,820

12,653-

5,708-

12,653
5,708
-

764
-

3,311
77,1366,472
1,499
22,382
1,765
2,820

Total financial liabilities

96,26012,653

5,708

18,361

764

115,385

Due to other financial institutions
Deposits and other borrowings
Derivative financial instruments 1
Other financial liabilities
Bonds and notes 2
Term Funding
Loan capital

3,170
60,713
1,107
17,197
1,765
2,062

9,317
-

4,748
-

9,317
4,748
-

187
-

3,170
70,0304,935
1,107
17,1971,765
2,062

Total financial liabilities

86,014

9,317

4,748

14,065

187

100,266

30/09/2007

The following table summarises the carrying amounts and fair values of those financial liabilities not presented in the NZ Banking Group's balance sheet
at their fair value:
NZ Banking Group
30/09/2008
30/09/2007
Carrying
Carrying
amountFair value
amountFair value
$m
$m
$m
$m

Due to other financial institutions
Deposits and other borrowings
Other financial liabilities
Bonds and notes 2
Term Funding
Loan capital

3,311
64,483
1,499
22,382
1,765
2,820

3,311
64,532
1,499
21,897
1,764
2,687

3,170
60,713
1,107
17,197
1,765
2,062

3,170
60,676
1,107
17,153
1,765
2,038

Total financial liabilities at amortised cost

96,26095,69086,01485,9091

Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as
accounting hedges.
2
Fair value hedging is applied to financial liabilities within bonds and notes and loan capital. The resulting fair value adjustment means that the carrying
value differs from the amortised cost.

76

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCHNOTES TO THE FINANCIAL STATEMENTS (continued)

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)

For personal use only

36.

Carrying amountFinancial assets
30/09/2008
Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments 1
Available-for-sale assets
Net loans and advances 2

At amortised cost
Otherfinancialassets at
Loans andamortisedreceivables
cost
$m
$m

NZ Branch
At fair value
thoughprofit or loss

Hedging

Sub-total$mHeld fortrading
$m

$m

$m

Total
$m

Availablefor-saleassetsDue from subsidiary companies
Other financial assets

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

Due from subsidiary companies
Other financial assets

-

-

-

-

-

-

-

Total financial assets

-

-

-

-

-

-

-

30/09/2007

Liquid assets
Due from other financial institutions
Trading securities
Derivative financial instruments 1
Available-for-sale assets
Net loans and advances 2

The following table summarises the carrying amounts and fair values of those financial assets not presented in the NZ Branch's balance sheet at theirfair value:
NZ Branch
30/09/2008
30/09/2007
Carrying
Carrying
amountFair value
amountFair value
$m
$m
$m
$m

Due from subsidiary companies
Other financial assets

-

-

-

-

Total financial assets at amortised cost

-

-

-

-

Liquid assets
Due from other financial institutions
Net loans and advances 2

1

Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as
accounting hedges.
2
Fair value hedging is applied to financial assets within loans and advances. The resulting fair value adjustment means that the carrying value differsfrom the amortised cost.

77

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCHNOTES TO THE FINANCIAL STATEMENTS (continued)

36.

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES (continued)

At amortised cost

For personal use only

Carrying amount$m

NZ Branch
At fair value through profit or loss
Designatedon initial
Held forrecognition
trading
Sub-total$m$m$m

Hedging

$m

Total
$m

Financial liabilities
30/09/2008
Due to other financial institutions
Deposits and other borrowings
Due to subsidiary companies
Derivative financial instruments 1
Other financial liabilities
Bonds and notes 2
Term funding
Loan capital

-

-

-

-

-

-

Total financial liabilities

-

-

-

-

-

-

Due to other financial institutions
Deposits and other borrowings
Due to subsidiary companies
Derivative financial instruments 1
Other financial liabilities
Bonds and notes 2
Term Funding
Loan capital

-

-

-

-

-

-

Total financial liabilities

-

-

-

-

-

-

30/09/2007

The following table summarises the carrying amounts and fair values of those financial liabilities not presented in the NZ Branch's balance sheet at theirfair value:
NZ Branch
30/09/2008
30/09/2007
Carrying
Carrying
amountFair value
amountFair value
$m
$m
$m
$m

Due to other financial institutions
Deposits and other borrowings
Due to subsidiary companies
Other financial liabilities
Bonds and notes2
Term Funding
Loan capital

-

-

-

-

Total financial liabilities at amortised cost

-

-

-

-

1

Derivative financial instruments classified as ‘held for trading’ include derivatives entered into as economic hedges which are not designated as
accounting hedges.
2
Fair value hedging is applied to financial liabilities within bonds and notes and loan capital. The resulting fair value adjustment means that the carrying
value differs from the amortised cost.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH78

NOTES TO THE FINANCIAL STATEMENTS (continued)

37.

SEGMENTAL ANALYSIS
For segment reporting purposes, the NZ Banking Group is organised into three major business segments - Retail Banking, Relationship Banking andInstitutional. Centralised back office and corporate functions support these segments.

For personal use only

A summarised description of each business segment is shown below:
Provides banking products and services to individuals and small businesses through separate ANZ and The National Bank branded
Retail Banking
distribution channels and UDC. Personal banking customers have access to a wide range of financial services and products. Small
business banking services are offered to enterprises with annual revenues of less than $5 million. Included in this segment is Private
Banking, a stand-alone business unit, which offers a fully inclusive banking and investment service to high net worth individuals. This
segment also includes profit centres supporting the Retail Banking segment (e.g. Direct Banking and the ING NZ joint venture). UDC isprimarily involved in the financing and leasing of equipment, plant and machinery for small and medium sized businesses.
Relationship Banking

This segment provides services to rural, commercial and corporate customers. A full range of banking products and services areprovided to Rural customers. Corporate and Commercial customers consist of primarily privately owned medium to large businesses
with annual revenues of $2 million and greater. The NZ Banking Group's relationship with these businesses ranges from simple
banking requirements with revenue from deposit and transactional facilities, and cash flow lending, to more complex funding
arrangements with revenue sourced from a wider range of products.

Institutional

Comprises businesses that provide a full range of financial services to the NZ Banking Group's client base. The Institutional business
unit is made up of the following specialised units:• Institutional - provides financial services to large multi-banked corporates, often global, who require sophisticated product andstructuring solutions.

Other• Corporate Finance - provides complex financing and advisory services, structured financial products, leasing, private equity, project,export and leveraged finance.
• Markets - provides foreign exchange and commodity trading and sales-related services, origination, underwriting, structuring, risk
management and sale of credit and derivative products globally.
• Working Capital - provide cash management, trade finance, international payments, clearing and custodian services.
Includes Treasury Funding and back office support functions, none of which constitutes a separately reportable segment. Truck
Leasing Limited (trading as Esanda FleetPartners) is classified as a discontinued operation, and is included in the "Other" segment for2007.

As the composition of segments has changed over time, prior period comparatives have been adjusted to be consistent with the 2008 segment definitions.

Year to 30/09/2008

Retail Banking$m

NZ Banking Group
RelationshipBanking
Institutional
$m
$m

Other
$m

Total
$m

Continuing operations 1, 2External interest income
External interest expense
Net intersegment interest

4,945(2,646)
(984)

3,002
(669)
(1,694)

1,875(1,821)71

36(2,693)
2,607

9,858
(7,829)-Net interest income

1,315

639

125

(50)

2,029

502

79

420

14

1,015

23

-

1

87

111

1,840

718

546

51

3,155

Other external expenses
Net intersegment and related party expenses3

631
357

143
95

90
68

499
(438)

1,363
82

Operating expenses

988

238

158

61

1,445

Profit before provision for credit impairment and income tax

852

480

388

(10)

1,710

Provision for credit impairment

202

85

15

-

302

Profit before income tax

650

395

373

(10)

1,408

Income tax expense

204

131

110

(27)

418

Profit after income tax

446

264

263

17

990

-

-

-

-

-

Profit after income tax

446

264

263

17

990

Non-cash expenses
Depreciation and amortisation

16

-

2

28

46

56,299231
39,431

34,1299,949

27,55064
29,1835,100
68
37,388123,078363
115,951

Other external operating income
Share of profit of equity accounted associates and jointly
controlled entities

Operating income

Discontinued operations
Profit from discontinued operations (net of income tax)

Balance sheet
Total external assets
Share in associates and jointly controlled entities
Total external liabilities
1

Results are equity standardisedIntersegment transfers are accounted for and determined on an arm's length or cost recovery basis
Net intersegment expenses are eliminated at the Overseas Bank level.

2
3

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH79

NOTES TO THE FINANCIAL STATEMENTS (continued)

37.

SEGMENTAL ANALYSIS (continued)

Retail Banking$mYear to 30/09/2007

NZ Banking Group
RelationshipBanking
Institutional
$m
$m

Other
$m

Total
$m

1, 2

4,204
(2,094)
(814)

2,419
(526)
(1,311)

1,668(1,507)7

5(2,112)
2,118

8,296
(6,239)-Net interest income

1,296

582

168

11

2,057

476

66

265

33

840

For personal use only

Continuing operations
External interest income
External interest expense
Net intersegment interest

Other external operating income
Share of profit of equity accounted associates and jointly
controlled entities

22

-

2

-

24

1,794

648

435

44

2,921

Other external expenses
3
Net intersegment and related party expenses

623
348

122
96

73
58

442
(431)

1,260
71

Operating expenses

971

218

131

11

1,331

Profit before provision for credit impairment and income tax

823

430

304

33

1,590

Provision for credit impairment

57

21

(3)

(1)

74

Profit before income tax

766

409

307

34

1,516

Income tax expense

245

136

91

79

551

Profit after income tax

521

273

216

(45)

965

-

-

-

76

76

Profit after income tax

521

273

216

31

1,041

Non-cash expenses
Depreciation and amortisation

14

1

1

39

55

52,614
189
36,78729,488
8,611

21,66515
25,5863,839
2
29,767

107,606
206
100,751

Operating income

Discontinued operations
Profit from discontinued operations (net of income tax)

Balance sheet
Total external assets
Share in associates and jointly controlled entities
Total external liabilities

Geographic segment analysis
The NZ Banking Group operates predominantly in New Zealand. No other geographic segments are reportable secondary segments.
1

Results are equity standardisedIntersegment transfers are accounted for and determined on an arm's length or cost recovery basis.
3
Net intersegment expenses are eliminated at the Overseas Bank level.
2

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH80

NOTES TO THE FINANCIAL STATEMENTS (continued)

38.

NOTES TO THE CASH FLOW STATEMENTS
NZ Banking GroupYear toYear to30/09/2008
30/09/2007$m$m

NZ Branch
Year toYear to30/09/2008
30/09/2007$m$m

For personal use only

Reconciliation of profit after income tax to net cash flows(used in) provided by operating activities
Profit after income tax

990

1,041

-

-

Non-cash items:
Depreciation and amortisation
Provision for credit impairment
Deferred fee revenue and expenses
Share-based payments expense
Amortisation of capitalised brokerage/ mortgage origination fees

47
302
(3)
13
56

55
74
3
12
45

-

-

(3,699)
2
206
(8)
46
25
56
(43)
-

(705)
(94)
242
(1)
28
(9)
46
109
(11)

-

-

(111)
1

(24)
(76)
(2)
-

-

-

(2,120)733--

Deferrals or accruals of past or future operating
cash receipts or payments:
Increase in operating assets and liabilities
Decrease (increase) in interest receivable
Increase in interest payable
Increase in accrued income(Decrease) increase in accrued expenses
Decrease in provisions
Amortisation of premiums and discounts(Increase) decrease in income tax assets(Decrease) increase in income tax liabilities
Items classified as investing/financing:
Share of profit of equity accounted associates andjointly controlled entities
Other adjustments including associates
Gain on disposal of controlled entities
Gain on disposal of associates and jointly controlled entities
Loss (gain) on disposal of premises and equipment
Net cash flows used in operating activities

Reconciliation of core liquidity portfolio to cash and cash equivalents
The NZ Banking Group's core liquidity portfolio held for managing liquidity risk comprises:

Total liquidity portfolio1

Note

32

NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007
$m
$m

8,736

6,168

-

-

Add back items not included in liquidity portfolio:
Liquid assets
Due from other financial institutions - less than 90 days

1,060
1,948

1,874
1,233

-

-

Deduct items not included in cash and cash equivalents:
Trading securities
Available-for-sale assets
Due from other financial institutions - greater than 90 days

(2,376)(1,578)(1,378)
(1)
(765)

-

-

Total cash and cash equivalents

7,790

7,131

-

-

1
Assets held for managing liquidity risk includes short term cash held with the RBNZ or other banks, government securities and other securities that are readily
acceptable in repurchase agreements with the RBNZ and other New Zealand banks and securities issued by offshore Supranational and highly rated banks.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH81

NOTES TO THE FINANCIAL STATEMENTS (continued)

SIGNIFICANT NZ CONTROLLED ENTITIES, ASSOCIATES AND INTERESTS IN JOINTLY CONTROLLED ENTITIES OF ANZ BANKING GROUP LIMITED

Controlled entities
Airlie Investments Limited
Alos Holdings Limited
ANZ Capel Court Limited (New Zealand Branch)
ANZ Capital NZ Limited
ANZ Holdings (New Zealand) Limited
ANZ Investment Services (New Zealand) Limited
ANZ National Bank Limited
ANZ National (Int'l) Limited
ANZ National Staff Superannuation Limited
ANZ Nominees Limited (New Zealand Branch)
ANZ Securities (NZ) Limited
AZMAC Securities (NZ) Nominees Limited
APAC Investments Limited
Arawata Assets Limited
Arawata Capital Limited
Arawata Finance Limited
Arawata Funding Limited
Arawata Holdings Limited
Arawata Securities Limited
Arawata Trust
Arawata Trust Company
BHI Limited
CBC Finance Limited (incorporated in United Kingdom)
Control Nominees Limited
Cortland Finance Limited
Corvine Investments Limited
Culver Finance Limited
Direct Broking Limited
Direct Nominees Limited
EFTPOS New Zealand Limited
Endeavour Finance Limited
Endeavour Securities Limited
ETRADE New Zealand Limited
ETRADE New Zealand Securities Limited
ETRADE New Zealand Securities Nominees Limited
General Finance Custodians Limited
Harcourt Corporation Limited
Harcourt Investments Limited
Karapiro Investments Limited
Marmion Trust
National Bank of New Zealand Custodians Limited
NBNZ Finance Limited
NBNZ Holdings Hong Kong Limited (incorporated in Hong Kong)
NBNZ Holdings Limited
Origin Mortgage Management Services Limited
Origin Mortgage Management Services (2008) Limited
Private Nominees Limited
Radiola Corporation Limited
Rural Growth Fund Limited
Samson Funding Limited
Sefton Finance Limited
South Pacific Merchant Finance Limited
Southpac Corporation Limited
Technical Solutions Limited
Trillium Holdings Limited
Tui Endeavour Limited
Tui Securities Limited
UDC Finance Limited

For personal use only

39.

Ownership
Interest %
100
100
100
100
100
100
100
100
100
100
100
100
65
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

Balance
Date
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
31 December
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 June30 June30 June31 March
30 September
30 September
30 September
31 December
30 September
30 September
31 December
30 September
31 March
31 March
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September
30 September

Nature of business
Investment company
Investment company
Securitisation services company
Investment company
Investment company
Funds management company
Registered bankFinance company
Staff superannuation scheme trustee
Nominee Company
Nominee Company
Nominee Company
Finance company
Property company
Investment company
Investment company
Investment company
Investment company
Finance company
Finance entity
Investment company
Investment company
Finance company
Finance company
Investment company
Investment company
Investment company
On-line share broker
Nominee company
Eftpos service provider
Investment company
Investment company
On-line share broker
Investment company
Nominee company
Mortgage finance
Investment company
Investment company
Non operative
Finance entity
Nominee and custody services
Finance company
Non operative
Finance company
Mortgage financeMortgage financeNominee company
Distribution company
Investment company
Finance company
Investment company
Investment company
Investment company
Software provider
Finance company
Investment company
Investment company
Finance company

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH82

NOTES TO THE FINANCIAL STATEMENTS (continued)

39.

SIGNIFICANT CONTROLLED ENTITIES, ASSOCIATES AND INTERESTS IN JOINTLY CONTROLLED ENTITIES AS AT 30 SEPTEMBER 2008
All controlled entities are incorporated in New Zealand, unless otherwise stated.
The ownership interest percentage may be held either directly or through other controlled entities of the Ultimate Parent Bank.

For personal use only

For all controlled entities, with the exception of General Finance Custodians Limited, Origin Mortgage Management Services Limited and Origin Mortgage Management
Services (2008) Limited, the ownership interest percentage equates to the voting power held. In relation to these companies, control exists through the NZ Banking
Group having 100% of the voting rights.
In relation to Marmion Trust, control exists through the undertaking of the majority of risks and rewards which are variable.
Movements in controlled entities
On 7 November 2007, the NZ Banking Group exited its controlling interest in Amberley Investments (50% ownership).
On 7 November 2007, the NZ Banking Group exited its controlling interest in Endeavour Caterpillar New Zealand Finance Company (50% ownership).
On 3 December 2007, Radiola NZ Limited was incorporated as a subsidiary of the NZ Banking Group, and on 23 May 2008 changed its name to Radiola Corporation
Limited.

On 8 January 2008, the NZ Banking Group exited its controlling interest in Nerine Finance No. 2 (65% ownership).
On 23 January 2008, ANZ Commodity Trading ( New Zealand Branch) was deregistered as an overseas company in New Zealand.
On 5 March 2008, the NZ Banking Group purchased a 100% interest in Technical Solutions Limited.
On 11 April 2008, Pioneer First Limited changed its name to Origin Mortgage Management Services (2008) Limited.
On 17 October 2008, ETRADE New Zealand Limited, ETRADE New Zealand Securities Limited and ETRADE New Zealand Securities Nominees Limited
were deregistered.
Book Value
Voting$m
Interest %Ownership
Interest %Balance
Date

Cards NZ Limited
Electronic Transaction Services Limited
EXCCL Limited (in receivership)
Mondex New Zealand Limited
NZ Poultry Enterprises Limited
UCG Investments Limited
Wyma Engineering (NZ) Limited

86
2
0
0
40
13
3

14
25
81
40
20
38
31

30 September
31 March
30 September
31 December
30 April
31 March
31 March

Total investment in associates

144

Associates

25
25
45
40
20
38
31

Nature of business
Card services
Eftpos settlements
Plastics manufacturing and recycling
Card services
Poultry processor
Rest home operator
Agricultural machinery supplier

All associates are incorporated in New Zealand.
Movements in associates
On 25 February 2008, ANZ Capital NZ Limited acquired a 20% ownership interest in NZ Poultry Enterprises Limited.
From 28 November 2007, ANZ Capital NZ Limited purchased five further tranches of UCG Investments Limited.

Jointly controlled entities
Argenta Limited
BCS Group Limited
ING (NZ) Holdings Limited
JMI Aerospace Limited

Book Value
Voting$m
Interest %
2
24
4
40
212
50
1
33

Total investment in jointly controlled entities

Ownership
Interest %
24
40
49
33

BalanceDate
31 July
30 June31 December
31 March

Nature of business
Manufacture and marketing of animal remedies
Manufacturer of baggage handling systems
Funds management and insurance
Airline maintenance and service provider

219

All jointly controlled entities are incorporated in New Zealand.
The NZ Banking Group has joint control of all these entities due to a combination of control factors, none of which gives either party overall control.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH83

NOTES TO THE FINANCIAL STATEMENTS (continued)

39.

CONTROLLED ENTITIES, ASSOCIATES AND INTERESTS IN JOINTLY CONTROLLED ENTITIES (continued)
The summarised financial information relating to the NZ Banking Group's investment in ING (NZ) Holdings Limited is as follows:
NZ Banking Group
30/09/2007
30/09/2008
$m
$m
78
160

81
160

Total assets

238

241

Life insurance policy liabilities
Other liabilities

(3)
11

22
11

For personal use only

Share of assets and liabilities
Investments
Other assets

833

Net assets

230

208

Share of revenue, expenses and results
Net underwriting result
Other revenue

66
25

49
29

Total revenue

91

78

Expenses

75

56

Profit before income tax

16

22

Income tax expense

6-

Profit after tax

22

22

Share of commitments
Lease commitments

84

Total liabilities

There are no unrecognised losses in respect of any of the NZ Banking Group's jointly controlled entities. The NZ Banking Group's share of the contingent liabilities of
its joint ventures are incurred jointly with other investors. There were no contingent liabilities as at 30 September 2008 (30/09/2007 $nil).

40.

ULTIMATE PARENT BANKThe Ultimate Parent Bank is Australia and New Zealand Banking Group Limited which is incorporated in Australia.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH84

NOTES TO THE FINANCIAL STATEMENTS (continued)
41.

SECURITISATION, FUNDS MANAGEMENT, OTHER FIDUCIARY ACTIVITIES AND THE MARKETING AND DISTRIBUTION OF INSURANCE PRODUCTS
Securitisation
In May 2008 the RBNZ expanded the range of acceptable collateral that banks can pledge and borrow against as part of changes to its liquidity management
arrangement designed to help ensure adequate liquidity for New Zealand financial institutions in the event that global market disruption was to intensify. From 31
July 2008, acceptable collateral includes residential mortgage backed securities ("RMBS") that satisfy RBNZ criteria.
On 10 October 2008, subsequent to balance date, the NZ Banking Group established an in-house RMBS facility that could issue securities meeting the RBNZ
criteria. The NZ Banking Group's financial statements do not change as a result of establishing this facility.
The establishment of this facility increases the NZ Banking Group's contingent funding ability from the RBNZ.

For personal use only

Funds management
Certain subsidiaries of the NZ Banking Group act as trustee and/or manager for a number of unit trusts and investment and superannuation funds. ANZ National
Bank Limited (the "Bank"), provides private banking services to a number of clients, including investment advice and portfolio management. The Group is not
responsible for any decline in performance of the underlying assets of the investors due to market forces.
As funds under management are not owned by the NZ Banking Group, they are not included in these financial statements. The NZ Banking Group derives fee
and/or commission income from the sale and management of investment funds and superannuation bonds, unit trusts and the provision of private banking
services to a number of clients.
Some funds under management are invested in products owned or securities issued by the NZ Banking Group and are recorded as liabilities in the balance sheet.
At 30 September 2008, $2,229 million of funds under management were invested in the NZ Banking Group's own products or securities (30/09/2007 $1,035
million).
Funds management activities conducted by the ING New Zealand joint venture are not included in the funds managed by the NZ Banking Group, as the NZ
Banking Group does not have control of the ING New Zealand joint venture.
The aggregate value of funds managed by the Group at balance date was:NZ Banking Group
30/09/2008
30/09/2007$m$m

Superannuation schemes
Bonus Bonds
Discretionary funds

2,417
3,440

3
2,488
2,045

Totals funds under management

5,857

4,536

On 1 October 2007, the Direct Broking Call Account was registered as a portfolio investment entity (PIE).
On 25 March 2008, the UDC Superbonds Superannuation Scheme managed by UDC Finance Limited was wound up.
On 1 April 2008, the National Bank Call Fund, Private Banking Portfolio Call Fund and National Bank Private Banking Call Fund, all managed by ANZ Investments
Services (New Zealand) Limited, commenced as PIEs. The funds invest in call deposits with the Bank.
On 9 April 2008, the Term Maximiser Fund and Call Maximiser Fund managed by UDC Finance Limited commenced as PIEs. The funds invest in secured
debentures with UDC Finance Limited.
On 1 October 2008, the ANZ Call Fund and ANZ Term Fund, managed by UDC Finance Limited, commenced as PIEs. The funds invest in New Zealand dollar calland term deposits with the Bank.
Custodial services
The NZ Banking Group provides custodial services to customers in respect of assets that are beneficially owned by those customers.
Marketing and distribution of insurance products
The NZ Banking Group markets and distributes a range of insurance products which are underwritten by several insurance companies. These activities aremanaged in association with the ING New Zealand joint venture.
Insurance business
The NZ Banking Group does not conduct any insurance business directly, although the Group holds a 49% share in the ING NZ joint venture which does conduct
insurance business.
Provision of financial services
Financial services provided by the NZ Banking Group to entities which are involved in trust, custodial, funds management and other fiduciary activities, and toaffiliated insurance companies which conduct marketing or distribution of insurance products, or on whose behalf the marketing or distribution of insurance
products are conducted, are provided on arm’s length terms and conditions and at fair value. Any assets purchased from such entities have been purchased on anarm’s length basis and at fair value.
The NZ Banking Group has not provided any funding to entities which conduct any of the following activities: trust, custodial, funds management or other fiduciary
activities established, marketed and/or sponsored by a member of the Group (30/09/2007 $nil).
Risk management
The subsidiaries participating in the activities identified above have in place policies and procedures to ensure that those activities are conducted in an appropriatemanner. Should adverse conditions arise, it is considered that these policies and procedures will minimise the possibility that these conditions will adversely impact
the registered bank. The policies and procedures include comprehensive and prominent disclosure of information regarding products, and formal and regularreview of operations and policies by management and auditors.
In addition, the following measures have been taken to manage any risk to the registered bank of marketing and distributing insurance products:
Investment statements, prospectuses and brochures for insurance products include disclosures that the registered bank nor any member of the NZ Banking
Group does not guarantee the insurer, nor the insurer’s subsidiaries, nor any of the products issued by the insurer or the insurer’s subsidiaries.
Where the insurance products are subject to the Securities Act 1978, investment statements, prospectuses and brochures additionally include disclosures that:• the policies do not represent deposits or other liabilities of the NZ Banking Group;• the policies are subject to investment risk, including possible loss of income and principal; and• the NZ Banking Group does not guarantee the capital value or performance of the policies.
Application forms for insurance products contain acknowledgements to be signed by a purchaser which are consistent with the disclosures for insurance
products noted above.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH85

NOTES TO THE FINANCIAL STATEMENTS (continued)

41.

SECURITISATION, FUNDS MANAGEMENT, OTHER FIDUCIARY ACTIVITIES AND THE MARKETING AND DISTRIBUTION OF INSURANCE PRODUCTS(continued)

For personal use only

In addition, the following measures have been taken to manage any risk to the registered bank of marketing and distributing fund management products:
Prospectuses, investment statements and brochures for funds management products include disclosures:• that the securities do not represent deposits or other liabilities of the NZ Banking Group;• that the securities are subject to investment risk including possible loss of income and principal invested; and• that the NZ Banking Group does not guarantee the capital value or performance of the securities.
Application forms for funds management products contain acknowledgements to be signed by a purchaser which are consistent with the disclosures for funds
management products noted above.

42.

COMMITMENTS
NZ Banking Group
30/09/2008
30/09/2007$m$m

NZ Branch
30/09/2008
30/09/2007$m$m

Capital expenditure
Contracts for outstanding capital expenditure:43.

Premises and equipment
Not later than 1 year

26

15

-

-

Total capital expenditure commitments

26

15

-

-

Lease rentals
Future minimum lease payments under non-cancellable operating leases:
Premises and equipment
Not later than 1 year
Later than 1 year but not later than 5 years
Later than 5 years

86
167
27

85
163
32

-

-

Total lease rental commitments

280

280

-

-

Total commitments

306

295

-

-

CONTINGENT LIABILITIES AND CREDIT RELATED COMMITMENTS

For contingent exposures, the maximum exposure to credit risk is the maximum amount that the NZ Banking Group would have to pay if the contingent is called
upon. For undrawn facilities, the maximum exposure to credit risk is the full amount of the committed facilities.

Credit related commitments

NZ Banking Group
Face or contract value
30/09/2008
30/09/2007$m$m

NZ Branch
Face or contract value
30/09/2008
30/09/2007$m$m

Commitments with certain drawdown due within one year
Commitments to provide financial services

659
23,1501,074
20,751--

Total credit related commitments

23,80921,825--

Contingent liabilities
Financial guarantees
Standby letters of credit
Transaction related contingent items
Trade related contingent liabilities

2,017
401
1,090
118

1,933
528
398
123

-

-

Total contingent liabilities

3,626

2,982

-

-

The NZ Banking Group guarantees the performance of customers by issuing standby letters of credit and guarantees to third parties, including its Ultimate Parent
Bank. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers, therefore these transactions are subjected to thesame credit origination, portfolio management and collateral requirements for customers applying for loans. As the facilities may expire without being drawn upon,
the notional amounts do not necessarily reflect future cash requirements.
The detailed and estimated maximum amount of contingent liabilities that may become payable are set out below.

Contingent tax liability
As previously disclosed, the New Zealand Inland Revenue Department (‘IRD’) is reviewing a number of structured finance transactions as part of an audit of the2000 to 2005 tax years. This is part of an industry-wide review by the IRD of these transactions undertaken in New Zealand.

The NZ Banking Group has received Notices of Proposed Adjustment (the ‘Notices’) in respect of some of these transactions. The Notices are formal advice that
the IRD is proposing to amend tax assessments. The Notices are not tax assessments and do not establish a tax liability but are the first step in a formal disputes
process.
As expected in March 2008 the IRD issued amended tax assessments as a follow up to the Notices in respect of four of these transactions for the 2003 tax year
(prior to that tax year becoming statute-barred). We expect assessments for the 2003 income year for a further two transactions. The IRD has previously issued
tax assessments as a follow up to the Notices in respect of two transactions for the 2000 tax year, four transactions for the 2001 tax year and five transactions in
respect of the 2002 income year (in each case prior to that tax year becoming statute-barred). Proceedings disputing the amended tax assessments with respect
to the 2000 - 2003 tax years have been commenced.
Based on the independent tax and legal advice obtained, the Bank is confident that the tax treatment it has adopted for these transactions and all similartransactions is correct.
The tax adjustments proposed so far by the IRD cover the 2000 to 2005 tax years and imply a maximum potential liability of $224 million ($343 million with interesttax effected).

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH86

NOTES TO THE FINANCIAL STATEMENTS (continued)

43.

CONTINGENT LIABILITIES AND CREDIT RELATED COMMITMENTS (continued)
The IRD is also investigating other transactions undertaken by the NZ Banking Group, which have been subject to the same tax treatment. Should the same
position be taken by the IRD for all years on all these transactions, including those that the Notices cover, the maximum potential liability would be approximately$365 million ($541 million with interest tax effected) as at 30 September 2008.

For personal use only

Of the maximum potential tax liability, it has been estimated that approximately $99 million ($151 million with interest tax effected) is subject to indemnities given by
Lloyds TSB Bank plc under the agreement by which the NZ Banking Group acquired the NBNZ Holdings Limited Group, and which relate to transactions
undertaken by NBNZ Group before December 2003.
This leaves a net potential tax liability as at 30 September 2008 of $266 million ($390 million with interest tax effected).
All of these transactions have now either matured or been terminated.
Commerce Commission
In November 2006, the Commerce Commission brought proceedings under the Commerce Act 1986 against Visa, MasterCard and all New Zealand issuers of
Visa and MasterCard credit cards, including ANZ National Bank Limited. The Commission alleges price fixing and substantially lessening competition in relation to
the setting of credit card interchange fees and is seeking penalties and orders under the Commerce Act.
Subsequently, several major New Zealand retailers have issued proceedings against ANZ National Bank Limited and the other abovementioned defendants
seeking unquantified damages, based on allegations similar to those contained in the Commerce Commission proceedings.
ANZ National Bank Limited (the 'Bank') is defending the proceedings. The Bank has received independent legal advice. The Bank considers it has a strongly
arguable case, but the matter is complex and difficult. At this stage any potential liabilities cannot be assessed with any certainty. A trial has been scheduled for
October 2009.
In addition, the Bank is aware that the Commerce Commission is looking closely at credit contract fees under the Credit Contracts and Consumer Finance Act
2003 (CCCFA). In its 2008-2011 Statement of Intent the Commission stated that:"The Commission is turning more to litigation under the Credit Contracts and Consumer Finance Act to ensure credit contract fees are reasonable anddisclosed. Currently the credit industry is not fully compliant with the legislation and taking more action through the courts will encourage better compliance andclarify any areas of the law that may be uncertain."In particular the Bank is aware that the Commerce Commission is investigating the level of default fees charged on credit cards and the level of currency
conversion charges on overseas transactions using credit cards under the CCCFA. We have also been notified that the Commission may be investigating early
repayment charges on fixed rate mortgages. At this stage the possible outcome of these investigations and any liability or impact on fees cannot be determinedwith any certainty.
ING New Zealand Funds
The ANZ National Bank Limited (the 'Bank') markets and distributes a range of wealth management products which are managed by ING (NZ) Limited (of which the
NZ Banking Group holds 49%).
Trading in the ING Diversified Yield Fund and the ING Regular Income Fund was suspended on 13 March 2008 by the fund manager, ING (NZ) Limited, due to thedeterioration in liquidity in credit markets. On 10 December 2008 ING (NZ) Limited announced these funds would be wound up and a liquidity facility would be
provided to investors to assist with this process.
There has been significant public coverage regarding the closure of these funds and questions have been raised about the involvement of ING and the Bank. In
particular, the Bank has received a number of claims from customers alleging that the Bank, in its capacity as one of the distributors for ING, mis-sold these funds
to some investors. We are investigating these claims. It is too early at this stage to assess the merit of these claims and therefore the nature or quantum of any
potential liability.
Other contingent liabilities
The NZ Banking Group has other contingent liabilities in respect of actual and potential claims and proceedings. An assessment of the NZ Banking Group's likely
loss in respect of these matters has been made on a case-by-case basis and provision made where appropriate. As at 30 September 2008, there were no othercontingent assets or liabilities required to be disclosed (30/09/2007 nil).

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH87

NOTES TO THE FINANCIAL STATEMENTS (continued)

44.

EMPLOYEE SHARE AND OPTION PLANS
The NZ Banking Group participates in the ANZ Employee Share Acquisition Plan and the ANZ Share Option Plan operated by the Overseas Banking Group. Any
shares or options granted under these plans are shares in Australia and New Zealand Banking Group Limited.
The closing market price of one ordinary share of ANZ quoted on the ASX (Australian Stock Exchange) at 30 September 2008 was A$18.75 (30/09/2007 A$29.70).

For personal use only

ANZ EMPLOYEE SHARE ACQUISITION PLAN
The ANZ Employee Share Acquisition Plan includes the A$1,000 Share Plan, the Deferred Share Plan and the Restricted Share Plan.

A$1,000 share plan
Each permanent employee who has had continuous service for one year with the NZ Banking Group is eligible to participate in a scheme enabling the issue of up to
A$1,000 of shares of ANZ in each financial year, subject to the approval of the Ultimate Parent Bank Board. The shares vest subject to satisfaction of a three year
service period but may be forfeited in the event of resignation or termination for serious misconduct. On expiration of that period, an employee may sell the shares,
transfer them into their name, or have them retained in trust. The issue price is based on the one-day volume weighted average price ('VWAP') of the shares tradedon the ASX on the date of issue.
The NZ Banking Group's employees are required to pay NZ 1 cent per share at the time the shares are transferred to them. During the year to 30 September 2008,
267,523 shares with an average issue price of A$27.96 were issued to NZ employees under the A$1,000 Share Plan (30/09/2007 269,025 shares with an average
issue price of A$27.88 were issued).
Deferred share plan
The NZ Banking Group's last issue of shares under this plan was in November 2004. Selected employees were issued deferred shares, which vest subject tosatisfaction of a minimum three year service period from the date of issue. Ordinary shares issued under this plan may be held in trust for up to 10 years, and may
be required to meet performance hurdles before being able to be traded after the restriction period has expired. The issue price is based on the VWAP of the shares
traded on the ASX in the five trading days leading up to and including the date of issue. Unvested shares are forfeited on resignation or dismissal, or if a
performance condition has not been met.
Restricted share plan
Restricted Shares are available to selected employees and are issued under the ANZ Employee Share Acquisition Plan. Selected employees have the option totake some (or all) of their annual cash bonus as Restricted Shares. The shares are held in trust and may not be traded until the conclusion of the one-year
restriction period, after which they may be transferred into the employees name. Until they are transferred into the employees name, they continue to be subject toforfeiture on termination for serious misconduct.

Shares valuations
The fair value of services received in return for shares in the ANZ Employee Share Acquisition Plan are measured by referring to the fair value of ANZ shares
granted. The fair value of shares granted in the current period, measured at the date of grant of the shares, is NZ $8.5 million based on 267,523 shares at aweighted average price of A$27.96 converted at the exchange rate of 0.8809 (30/09/2007 NZ $9 million based on 269,025 shares at a weighted average price of
A$27.88 converted at the exchange rate of 0.8391 were issued).
The average issue price of shares granted and the number of shares that are expected to ultimately vest to the employees at the end of the vesting period are used
to calculate the fair value of shares. No dividends are incorporated into the measurement of the fair value of shares.
ANZ SHARE OPTION PLAN
Selected employees may be granted options, which entitle them to purchase ordinary fully paid shares in ANZ at a price fixed at the time when the options were
issued. Voting and dividend rights will be attached to the unissued ordinary shares when the options have been exercised. Each option entitles a holder to purchaseone ordinary share subject to any terms and conditions imposed on issue. The exercise price of the options (excluding zero-priced options) is determined inaccordance with the rules of the plan, and is based on the weighted average price of the Ultimate Parent Bank's shares traded during the five business days
preceding the date of granting the options.
The main schemes of the ANZ Share Option Plan are as follows:
Current option plans

Performance rights planThis scheme is a long term incentive program available to certain Group employees since November 2005 and grants the right to acquire ANZ shares at nil cost,subject to a three year vesting period and a Total Shareholder Return (TSR) performance hurdle. The proportion of rights that will become exercisable will depend
upon the TSR achieved by ANZ relative to the companies in the comparator group, which consists of selected major financial services companies in the Standard &Poor's and ASX 100 Index. Performance equal to the median TSR of the comparator group will result in half the rights becoming exercisable. Performance above
the median will result in further performance rights becoming exercisable, increasing on a straight line basis until all of the rights become exercisable where ANZ's
TSR is at or above the 75th percentile in the comparator group.
The TSR hurdle will only be tested once at the end of the three-year vesting period. If the rights do not pass the hurdle on testing date, or if they pass the hurdle on
testing date and are not exercised by the end of five years from the grant date, the rights will lapse. In the case of resignation or termination on notice, only rightsthat become exercisable by the end of the notice period may be exercised. A grace period is provided in which to exercise the rights. All other rights will lapse. In thecase of retrenchment or retirement, performance rights will be performance tested at the date of termination and where performance hurdles have been met,
performance rights will be pro-rated and a grace period provided in which to exercise the rights. In case of death or total and permanent disablement, a grace period
is provided in which to exercise all performance rights.
Deferred share rights
This scheme is a short term incentive program available to certain NZ Banking Group employees since November 2004 and grants the right to acquire ANZ sharesat nil cost after a specified vesting period ranging from one to three years. Deferred share rights must be exercised by the seventh anniversary of grant date. In thecase of resignation, only rights that become exercisable by the end of the notice period may be exercised. A grace period is provided in which to exercise the rights.
All other rights will lapse. In the case of termination on notice, retrenchment, retirement, death or total and permanent disablement, a grace period is provided inwhich to exercise all deferred share rights.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH88

NOTES TO THE FINANCIAL STATEMENTS (continued)

44.

EMPLOYEE SHARE AND OPTION PLANS (continued)
Legacy Option Plans

For personal use only

Performance options planThis scheme is a long term incentive program available to certain NZ Banking Group employees. The options can only be exercised after a three year vesting period
and before the seventh anniversary of the grant date. There are no other performance conditions attached to these options. All unexercised options are generally
forfeited on resignation but any options to which the NZ Banking Group employee is entitled will need to be exercised within a specified period of termination. On
retrenchment, entitlements to options will be pro-rated over the three year vesting period. On death or total and permanent disablement, all unvested options will
become available for exercise. No further performance options have been granted to NZ Banking Group employees after November 2005.
Zero-price options (ZPO)A ZPO is a right to acquire an ANZ share at nil cost and is granted to certain employees as part of their employment contracts. The ZPO's have no time based
vesting criteria, so can be exercised at any time during employment and within 6 months of termination of employment. ZPO's must be exercised within two years ofgrant date or they lapse.
Other past option plans which are no longer available to the NZ Banking Group's employees, but continue to be amortised during their appropriate vesting periods
are hurdled options and index linked options (ILOs).
Details of the options over unissued ANZ ordinary shares and their related weighted average exercise prices as at the beginning and end of the period andmovements during the period are set out below:
NZ Banking Group
30/09/2008

30/09/2007

Number ofshares

Weighted
average
exercise price1
A$

Number ofshares

Weighted
average
exercise price 1
A$

Share options at beginning of the year
Share options granted
Share options exercised
Share options forfeited and expired

1,616,716
376,715(130,988)(120,672)

13.93
16.13
12.27

1,668,436
318,921(339,782)(30,859)

17.49
0.00
17.53
19.67

Share options at end of the year

1,741,771

10.86

1,616,716

13.93

Weighted average share price during the year
Range of exercise prices on share options at end of the year
Weighted average remaining contractual life on share options
at end of the year

21.37
0.00-23.49

28.83
0.00 - 23.49

36 months

46 months

Options valuations
The fair value of services received in return for share options are measured by referring to the fair value of ANZ share options granted. The fair value of options
granted in the current period, measured at the date of grant are calculated using one of the following models:(a)Monte-Carlo simulation model utilising the assumptions underlying Black-Scholes. In terms of factoring in early exercise, the model assumes that deferredshare rights and performance rights are exercised as soon as they vest so that the option holder can benefit from the dividends. It assumes that theperformance options are exercised when the share price reaches twice the exercise price; or(b)an adjusted form of the Binomial Option pricing model ("BOM"). In terms of factoring in early exercise, the model assumes that the expected life of vanilla
options is 5 years, performance rights is 4 years and that deferred share rights are exercised immediately to account for lack of marketability.

In addition, both models are designed such that they take into account as appropriate, any performance hurdles and non-transferability of the options.

All options issued in 2008 were valued using the BOM pricing model.
The following inputs are used to measure the fair value of instruments granted during the period. For each instrument, the model used (a or b) is indicated. All prices
are quoted in Australian dollars:

Option type

Performancerights (b)LTI deferredshare rights (b)STI deferredshare rights (b)Performancerights (b)Grant date
Number of Options
Option value
Exercise price (5 day VWAP)
Share price at grant
ANZ expected volatility 2
Option term
Vesting period
Expected life
Expected dividends
Risk free interest rate

29-May-2008
22,633$18.38$nil$21.35n/a
5 years
3 years
2 years
5.00%
n/a

9-Nov-2007
161,011$24.49$nil$27.9515%
5 years
3 years
2 years
4.50%
6.69%

9-Nov-2007
15,758$25.59$nil$27.9515%
5 years
2 years
3 years
4.50%
6.77%

30-Oct-2007
177,313$12.30$nil$29.6915%
5 years
3 years
2 years
4.50%
6.63%

1

Calculation of weighted average exercise prices are affected by performance rights, deferred share rights and ZPO plans which have nil exercise prices.

2

Expected volatility is based on ANZ's historic volatility.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH89

NOTES TO THE FINANCIAL STATEMENTS (continued)

45.

RETIREMENT BENEFIT OBLIGATIONSThe NZ Banking Group has established a number of pension and superannuation schemes. The NZ Banking Group may be obliged to contribute to
the schemes as a consequence of legislation and provision of trust deeds. Legal enforceability is dependent on the terms of the legislation and trust
deeds. The major schemes are:

For personal use only

SchemeScheme type1

ANZ National Bank Staff Superannuation Scheme

1

The National Bank Staff Superannuation Fund

Employee
2

Defined Benefit SchemeorDefined Contribution Scheme
3Defined Benefit SchemeorDefined Contribution Scheme

Contribution levels
Employer

Nil

Balance of cost4

2.5% minimum of salary

7.5% of salary6

5% of salary

Balance of cost5

2.0% minimum of salary

11.2% of salary7

Details of the defined benefit schemes are as follows:
Actuarial valuations are undertaken every six months. The latest valuations were carried out as at 30 September 2008.
NZ Banking Group
30/09/2008
30/09/2007$m$m

The amounts recognised in the balance sheet arising from the NZ Banking Group's
obligation in respect of its defined benefit schemes are determined as follows:
Defined benefit obligation at beginning of the year
Current service cost
Interest cost
Contributions by scheme participants
Actuarial (gains) losses
Benefits paid

181
3
12
1
4
(21)

190
4
12
1
(10)
(16)

Present value of funded defined benefit obligations

179

181

Fair value of scheme assets at beginning of the year
Expected return on scheme assets (net of tax)
Actuarial (losses) gains
Contributions by employer
Contributions by scheme participants
Benefits paid

189
10
(30)
3
1
(21)

196
11
(7)
4
1
(16)

Fair value of scheme assets

152

189

Net defined benefit (liability) asset recognised on balance sheet

(27)

8

The fair value of scheme assets include cash deposits and fixed interest investments of $5 million with the NZ Banking Group as at 30 September
2008 (30/09/2007 $7 million).
The amounts recognised in the income statement in respect of defined benefit schemes are as follows:
Current service cost
Interest cost
Expected return on scheme assets (net of tax)
Contribution withholding tax
Total pension costs recognised in the income statement - defined benefit superannuation schemes

1

3
12
(10)
2

4
12
(11)
1

7

6

These schemes provide for pension benefits and provide for lump sum benefits.

2

Closed to new members on 31 March 1990. Operates to make pension payments to retirees who were members of that section of the scheme or todependents of the members.
3

Closed to new members on 1 October 1991.
30/09/2008: $nil (30/09/2007 $nil).
5
30/09/2008: 22.3% (30/09/2007 22.3%) of members' salaries.
6
30/09/2008: 7.5% (30/09/2007 7.5%) of members' salaries.
7
30/09/2008: 11.2% (30/09/2007 11.2%) of members' salaries.
4

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH90

NOTES TO THE FINANCIAL STATEMENTS (continued)

45.

RETIREMENT BENEFIT OBLIGATIONS (continued)
The actuarial gains and losses recognised directly in equity via the statement of recognised income and expense are as follows:
NZ Banking Group
30/09/2008
30/09/2007
8
(35)

4
3

Balance of actuarial (losses) gains (pre-tax) at end of the year

(27)

7

8

(2)

(19)

5

For personal use only

Actuarial gains (pre-tax) at beginning of the year
Actuarial (loss) gain (pre-tax) incurred during the year

Income tax credit (expense) recognised directly in equity
Balance of actuarial (losses) gains at end of the year (net of tax)

The principal actuarial assumptions used were as follows:
The National Bank
Staff Superannuation Fund
30/09/2008
30/09/2007

ANZ National Bank
Staff Superannuation Scheme
30/09/2008
30/09/2007

Defined benefits calculation
Discount rate (gross of tax)
Future price inflation
Future pension increases
Future salary increases

6.0%
2.5%
2.5%
3.7%

6.5%
2.5%
2.5%
3.7%

6.0%
2.5%
2.5%
n/a

6.5%
2.5%
2.5%
n/a

Scheme assets calculation
Expected return on scheme assets (net of tax)

5.5%

5.5%

4.5%

4.5%

The overall expected return on scheme assets is determined by reference to market expectations, at beginning of the relevant period, of asset
performance applicable to the period over which the defined benefit obligation is to be settled. The overall expected return on scheme assets
reflects an aggregation of the expected returns on the underlying asset classes.

The actual return on scheme assets (net of tax) for The National Bank Staff Superannuation Fund was -9.0% for the year ended 30 September 2008
(30/09/2007 6.5%). The actual return on scheme assets (net of tax) for the ANZ National Bank Staff Superannuation Scheme was -6.0% for the year
ended 30 September 2008 (30/09/2007 6.1%).

The investment return on scheme assets is taxed at 33% (30/09/2007 33%).
The major categories of scheme assets as a percentage of the fair value of scheme plan assets are as follows:

Cash and short term debt instruments
New Zealand fixed interest
Overseas fixed interest
New Zealand equities
Overseas equities
Property

The National Bank
Staff Superannuation Fund
30/09/2008
30/09/2007

ANZ National Bank
Staff Superannuation Scheme
30/09/2008
30/09/2007

19.9%
14.5%
16.1%
9.7%
39.8%
0.0%

15.7%
22.2%
16.5%
8.9%
36.7%
0.0%

17.1%
23.2%
20.8%
9.3%
23.9%
5.7%

13.2%
23.1%
23.3%
7.1%
28.0%
5.3%

100.0%

100.0%

100.0%

100.0%The benchmark weightings of each asset class is determined by the Trustee in conjunction with the investment manager.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH91

NOTES TO THE FINANCIAL STATEMENTS (continued)

45.

RETIREMENT BENEFIT OBLIGATIONS (continued)

For personal use only

Historical summary
Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has
actually occurred in the period) and the effects of changes in actuarial assumptions on valuation date. The history of the schemes' net position andexperience adjustments is as follows:

30/09/2008$m

NZ Banking Group
30/09/2007
30/09/2006$m$m

30/09/2005$m

Defined benefit obligation
Fair value of scheme assets

(179)
152

(181)
189

(190)
196

(187)
195

Net benefit (liability)/asset

(27)

8

6

8

Experience adjustments on scheme liabilities
Experience adjustment on scheme assets

5
(21)

(1)
(7)

3
5

11

Employer contributions
To ensure the defined benefit schemes remain solvent, the schemes' independent actuaries recommend an employer contribution rate to the NZ
Banking Group, annually for The National Bank Staff Superannuation Fund and every three years for the ANZ National Bank Staff Superannuation
Scheme. The funding methods and current contribution rates of the individual schemes are determined in accordance with NZ IAS 19 Employee
Benefits ('NZ IAS 19') for annual periods beginning on or after 1 January 2007.
The National Bank Staff Superannuation Fund deficit was valued at $5.5 million in the most recent actuarial valuation at 1 April 2007 determined inaccordance with NZ IAS 19. The ANZ National Bank Staff Superannuation Scheme surplus was valued at $0.2 million in the most recent actuarial
valuation at 31 Dec 2007 determined in accordance with NZ IAS 19.

The NZ Banking Group contributed $3.1 million (net of contributions withholding tax) to its defined benefit schemes in the period to 30 September
2008 (30/09/2007 $4 million). Employer contributions are taxed at a rate of 33% (30/09/2007 33%).
Contingent liabilities
The National Bank Staff Superannuation Fund
Under the Fund's Trust Deed, if this scheme were wound up, the NZ Banking Group is required to pay the Trustee of the Fund an amount sufficient
to ensure members do not suffer a reduction in benefits to which they would otherwise be entitled.

ANZ National Bank Staff Superannuation Scheme
If the Scheme is wound up then its assets must be cashed up and applied to all members' benefits. If Scheme funds are insufficient to pay all
members' benefits then the NZ Banking Group must pay to the Scheme such amounts as the Scheme Actuary determines are necessary to pay
those benefits.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH92

NOTES TO THE FINANCIAL STATEMENTS (continued)

46.

RELATED PARTY TRANSACTIONSNZ Banking GroupYear toYear to30/09/2008
30/09/2007
$'000
$'000

NZ Branch
Year toYear to30/09/2008
30/09/2007
$'000
$'000

Key management personnel

11,919
786
127
2,665

10,407
315
106
2,144

-

-

Total compensation of key management personnel

15,497

12,972--Loans to key management personnel

7,272

6,202

-

-

Deposits from key management personnel

3,594

2,666

-

-

For personal use only

Key management personnel compensation
Salaries and short-term employee benefits
Post-employment benefits
Other long-term benefits
Share-based payments

Loans made to and deposits held by key management personnel (including personally related parties) are made in the course of ordinary business on normal
commercial terms and conditions no more favourable than those given to other employees or customers. Loans are on terms of repayment that range between
fixed, variable and interest only, all of which have been made in accordance with the NZ Banking Group's lending policies. No provision for credit impairment has
been recognised for loans made to key management personnel (30/09/2007 $nil).
All other transactions with key management personnel (including personally related parties) are conducted on an arm's length basis in the ordinary course ofbusiness and on commercial terms and conditions. These transactions principally consist of the provision of financial and investment services.
Key management personnel is defined as those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly
or indirectly, including directors (whether executive or otherwise).

Transactions with the Ultimate Parent Bank and subsidiaries
Details of amounts provided by/to the Ultimate Parent Bank and subsidiaries of the NZ Banking Group during the ordinary course of business are set out in therelevant notes to these financial statements. No provision for credit impairment has been recognised during the year ended 30 September 2008 (30/09/2007 $nil).

NZ Banking GroupYear toYear to30/09/2008
30/09/2007$m$m

NZ Branch
Year toYear to30/09/2008
30/09/2007$m$m

Interest income- Subsidiary companies- ANZ National Bank Limited- Ultimate Parent Bank

4

4

-

-

Interest expense- Subsidiary companies- ANZ National Bank Limited- Samson Funding Limited- ANZ Funds Pty Ltd- Ultimate Parent Bank

159
193

142
224

-

-

Operating expenses- Subsidiary companies- Ultimate Parent Bank

82

71

-

-

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH93

NOTES TO THE FINANCIAL STATEMENTS (continued)

46.

RELATED PARTY TRANSACTIONS (continued)

For personal use only

Transactions with associates and joint venture entities
During the period the NZ Banking Group conducted transactions with associates and joint venture entities on normal commercial terms and conditions as shown
below:NZ Banking GroupYear toYear to30/09/2008
30/09/2007$m$m

NZ Branch
Year toYear to30/09/2008
30/09/2007$m$m

Amounts receivable- associates- joint venture entities

28
36

14
56

-

-

Amounts payable- associates

85

-

-

-

Interest income- associates- joint venture entities

2
4

1
8

-

-

Commission received from ING NZ joint venture
Costs recovered from ING NZ joint venture

23
1

23
1

-

-

The NZ Banking Group provides general administrative, strategic and governance services to ING (NZ) Limited under a Technical Services Agreement.
The NZ Banking Group provided registry services to the ING NZ joint venture in connection with the business of ING Managed Funds (NZ) Limited until 31
December 2006. The Group provided payroll, tax accounting and compliance services, and premises in connection with and for the purpose of ING Insurance
Services (NZ) Limited and ING Managed Funds (NZ) Limited. All provision of these services ceased from 5 March 2007.
A provision for credit impairment of $5 million is recognised for amounts outstanding from associates as at 30 September 2008 (30/09/2007 $7 million). A credit
impairment loss of $nil million was recovered during the year ended 30 September 2008 (30/09/2007 $1 million charged).

47.

SUBSEQUENT EVENTS
Deposit Guarantee Schemes

ANZ National Bank Limited (the 'Bank') has a guarantee under the New Zealand Deposit Guarantee Scheme ('Crown Guarantee'). The Crown Guarantee isprovided under a Crown Deed of Guarantee entered into by the Bank and the Crown on 14 November 2008. The NZ Branch is not covered by this scheme. Further
information about the Crown Guarantee is available in the General Disclosures section of the ANZ National Bank Limited's most recent General DisclosureStatement and Supplemental Disclosure Statement and on The Treasury website at www.treasury.govt.nz.

On 12 October 2008, the Australian Government announced two guarantee schemes to cover both retail and wholesale deposits and certain term funding of
Authorised Deposit-taking Institutions such as the Overseas Bank. Deposits of the NZ Branch are covered by these schemes. Further information on theseschemes is available in the General Disclosure section of the NZ Branch's General Disclosure Statement and Supplemental Disclosure Statement.
Securitisation

On 10 October 2008, subsequent to balance date, the NZ Banking Group established an in-house residential mortgage-backed securities facility that could issue
securities that can be used as collateral for borrowing from the Reserve Bank of New Zealand. The NZ Banking Group's financial statements do not change as aresult of establishing this facility.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

94

DIRECTORATE AND AUDITORS

Directorate and Auditors

For personal use only

The address to which any document or communication may be sent to any Director or the Chief Executive Officer, NZ Branch is Australia and New Zealand Banking Group
Limited - New Zealand Branch, Level 6, NBNZ House, 1 Victoria Street, Wellington. The document or communication should be marked for the attention of that Director or
the Chief Executive Officer.
Directors’ Interests
The Board of the Overseas Bank has adopted procedures to ensure that conflicts and potential conflicts of interest between the Directors' duty to the Overseas Bank andtheir own interests are avoided or dealt with. Pursuant to these procedures:a)each Director should give notice to the Board of any material personal interest they have in any matter which relates to the affairs of the Overseas Bank and any otherinterest which the Director believes is appropriate to disclose in order to avoid an actual conflict of interest or the perception of a conflict of interest. This disclosure
should be made as soon as practicable after the Director becomes aware of their interest or the need to make a disclosure; andb)a Director who has an interest of the type referred to in a) above in a matter that is to be considered at a Directors' meeting, must not vote on the matter nor bepresent while the matter is considered at the meeting, unless a majority of Directors who do not have such an interest in the matter agree that the interest should notdisqualify such Director from being present while the matter is being considered and from voting on the matter.

In addition, each Director maintains and provides to the Board a standing notice about their interests. If the Director's interests change, the standing notice is updated toreflect the change and is tabled at the next Board meeting and recorded in the minutes of that meeting.
Transactions with Directors and the Chief Executive Officer, NZ Branch
There are no transactions entered into by any Director, the Chief Executive Officer, NZ Branch or any immediate relative or professional associate of any Director or the
Chief Executive Officer, NZ Branch, with the NZ Branch or any member of the NZ Banking Group which has been either entered into on terms other than those which wouldin the ordinary course of business be given to any other person of like circumstances or means or which could otherwise be reasonably likely to influence materially theexercise of the Directors' or Chief Executive Officer, NZ Branch, duties as Director or Chief Executive Officer of the NZ Branch and NZ Banking Group.

Directors as at 18 December 2008
The name, qualifications, occupation, country of residence and external directorships of each director of the Overseas Bank as at the date this General DisclosureStatement was signed were:
Independent Non-Executive Director, Chairman
Charles Barrington Goode, AC
BCom (Hons), MBA, Hon LLD (Melb), Hon LLD (Monash)
Company Director
Melbourne, Australia
External Directorships
Chairman: Australian United Investment Company Limited, Diversified United Investment Limited, Grosvenor Australia Properties Pty Ltd, The Ian Potter Foundation Ltd
Member: International Council of the Asia Society, Asia Society Australasia Centre, AsiaLink Council, The Global Foundation.

Chief Executive Officer - Australia and New Zealand Banking Group Limited
Michael Roger Pearson Smith, OBE
BSc (Hons)
Chief Executive Officer
Melbourne, Australia
External Directorships
Director : The Financial Markets Foundation for Children, ANZ National Bank Limited
Member: Chongqing Mayor's International Economic Advisory Council, Australian Bankers' Association Incorporated, Asia Business Council, Financial Literacy Advisory
Board
Fellow: The Hong Kong Management Association.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

95

DIRECTORATE AND AUDITORS (continued)

Non-Executive Directors
Ian John Macfarlane, AC
BEc (Hons), MEc, Hon DSc (Syd), Hon DSc (UNSW), Hon DCom (Melb),
Hon DLitt (Macq), Hon LLD (Monash)
Company Director
Sydney, Australia

External Directorships
Chairman: GPM Classified Directories

External Directorships
Director: Woolworths Limited, Leighton Holdings Limited, Lowy Institutefor International Policy
Member: International Advisory Board of Goldman Sachs JB Were,
International Advisory Board of CHAMP Private Equity

For personal use only

Dr Gregory John Clark
BSc (Hons), PhD, FAPS, FTSE
Company Director
Based in New York, United States of America but also resides in Sydney,
Australia

Director: Babcock & Brown Capital Limited, KaComm Communications Pty
LimitedJeremy Kitson Ellis
MA, FAICD, Hon FIE AUST, FAus IMM, FTSE, Hon DR ENG (CQU)
Company Director
Melbourne, Australia

David Edward Meiklejohn
BCom, Dip Ed, FCPA, FAICD, FAIM
Company Director
Melbourne, Australia

External Directorships

External Directorships
Chairman: PaperlinX Limited
Director: Coca Cola Amatil Limited, Mirrabooka Investments Limited

Chairman: Landcare Australia Limited, Future Eye Pty Ltd Advisory Board,
Pacific Road Corporate Finance Pty Limited Advisory Board, Earth Resources
Development Council
Director: Future Directions International Pty Limited
Member: The Sentient Group Advisory Council, Anglo American plc's
Australian Advisory Board

President: Melbourne Cricket Club

Margaret Anne Jackson, AC
BEc, MBA, Hon LLD (Monash), FAICD, FCA
Company Director
Melbourne, Australia

John Powell Morschel
DipQS, FAIM
Company Director
Sydney, Australia

External Directorships
Chairman: FlexiGroup Limited, Asia Pacific Business Coalition on HIV/AIDS,
Ponting Foundation
Director: Billabong International Limited, Australian Tissue Engineering Centre
President: Australian Volunteers International.

External Directorships
Director: Singapore Telecommunications Limited, Tenix Group Pty
Limited, Gifford Communications Pty LimitedPeter Algernon Franc Hay
LLB (Melb)
Company Director
Melbourne, Australia

Alison Mary Watkins
BCom, ICAA, FSIA, AICD
Chief Executive Officer - Bennelong Group
Melbourne, Australia

External Directorships
Co-Chairman: Investment Banking Australia, Lazard Carnegie Wylie
Director: Lazard Carnegie Wylie & Co Pty Ltd, Alumina Limited, Landcare
Australia Limited

External Directorships
Director: Woolworths Limited

Chief Executive Officer, Australia and New Zealand Banking Group - New Zealand Branch
Susan Ruth Peterson
BCom, LLB
Chief Executive Officer & Managing Director, NZ Branch
Auckland, New ZealandExternal Directorships
Director: IHC New ZealandAudit Committee
The following were members of the Audit Committee of the Overseas Bank as at 18 December 2008:
D E Meiklejohn
Non-Executive Director

J K Ellis
Non-Executive Director

MA Jackson
Non-Executive Director

C B Goode
Chairman of the Board

AM Watkins
Non-executive Director
Auditors
KPMG
Chartered Accountants
10 Customhouse Quay
PO Box 996
Wellington, New ZealandAUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

96

CREDIT RATING INFORMATION

For personal use only

The Overseas Bank has three current credit ratings, which are applicable to its long-term senior unsecured obligations, including obligations payable in New Zealand in New
Zealand dollars. The credit ratings, which are not subject to any qualifications, are:Standard & Poor’s

AA

Moody’s Investors Service

Aa1

Fitch RatingsAA-

The Standard & Poor’s rating was issued on 22 February 2007. On this date Standard & Poor’s revised the Overseas Bank’s rating to AA from AA-. There have been noother changes in the credit rating issued in the past two years ended 30 September 2008.
The Moody’s Investors Service rating was issued on 4 May 2007. On this date Moody’s Investors Service revised the Overseas Bank’s rating to Aa1 from Aa3. There havebeen no other changes in the credit rating issued in the past two years ended 30 September 2008.
There has been no changes to the credit rating issued by Fitch Ratings in the two years preceeding 30 September 2008.

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

Standard &Poor'sMoody's
Investors
Service

Fitch Ratings

AAA
AA

Aaa
Aa

AAA
AA

A
BBB

A
Baa

A
BBB

BB

Ba

BB

B

B

BB

CCC
CC to CD

Caa
Ca to C-CCC
CC to CRD & D

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

FINANCIAL STATEMENTS OF THE OVERSEAS BANK AND OVERSEAS BANKING GROUP
Copies of the most recent publicly available financial statements of the Overseas Bank and Overseas Banking Group, will be provided immediately, free of charge, to any
person requesting a copy where the request is made at the NZ Branch's head office, Level 6, NBNZ House, 1 Victoria Street, Wellington. The most recent publicly available
financial statements for the Overseas Bank and Overseas Banking Group can also be accessed at the internet address www.anz.com.au

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

97

DIRECTORS' AND NEW ZEALAND CHIEF EXECUTIVE OFFICER'S STATEMENT

Directors’ and New Zealand Chief Executive Officer's Statement

For personal use only

Each Director of the Overseas Bank and the Chief Executive Officer, NZ Branch believes, after due enquiry, that, as at the date on which this Disclosure Statement issigned:(i)

The Disclosure Statement contains all the information that is required by the Registered Bank Disclosure Statement (Full and Half-Year - Overseas Incorporated
Registered Banks) Order 2008;(ii)

The Disclosure Statement is not false or misleading.

Each Director of the Overseas Bank and the Chief Executive Officer, NZ Branch believes, after due enquiry, that, over the twelve months ended 30 September 2008 :(i)

the NZ Banking Group had systems in place to monitor and control adequately the NZ Banking Group’s material risks, including credit risk, concentration of credit
risk, interest rate risk, currency risk, equity risk, liquidity risk, operational risk and other business risks, and that those systems were being properly applied.

This General Disclosure Statement is dated this 18th day of December 2008, and has been signed by all Directors of the Overseas Bank and Ms S RPeterson, Chief Executive Officer, NZ Branch.

C B GoodeS R Peterson

M R P SmithI J Macfarlane

G J Clark

D E Meiklejohn

J K Ellis

J P Morschel

M A Jackson

A M Watkins

P A F Hay

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCHINDEPENDENT AUDIT REPORT for the year ended 30 September 2008

For personal use only

Audit Report to the Directors of Australia and New Zealand Banking Group Limited, New Zealand Branch
We have audited the financial statements on pages 6 to 93 prepared and disclosed in accordance with Clause 22 of the Registered Bank Disclosure Statement (Full and Half-Year– Overseas Incorporated Registered Banks) Order 2008 (the ‘Order’) and the supplementary information prescribed in Schedules 3 to 8 of the Order. The financial statements,and supplementary information, provide information about the past financial performance and cash flows of Australia and New Zealand Banking Group Limited New Zealand
Branch (the 'NZ Branch') and related companies (the ‘NZ Banking Group’) and their financial position as at 30 September 2008. This information is stated in accordance with theaccounting policies set out on pages 10 to 19.

Directors’ responsibilities
The Directors of the NZ Branch are responsible for the preparation and presentation of financial statements which give a true and fair view of the financial position of the NZ
Branch and NZ Banking Group as at 30 September 2008 and their financial performance and cash flows for the year ended on that date.
They are also responsible for the preparation of supplementary information which gives a fair view, in accordance with the Order, of the matters to which it relates; and complies
with Schedules 3 to 8 of the Order.

Auditors’ responsibilities
It is our responsibility to express an independent opinion on the financial statements, including the supplementary information disclosed in accordance with Schedules 4, 6 to 8,
and Clauses 19 and 20 of Schedule 3 of the Order presented to us by the Directors and report our opinion to you in accordance with Clause 19 of the Order.
It is also our responsibility to express an independent opinion on whether the supplementary information relating to credit and market risk exposures and capital adequacy that isrequired to be disclosed under Schedule 5, is in all material respects, prepared in accordance with Capital Adequacy Framework (Basel I Approach) (BS2) and Capital Adequacy
Framework (Standardised Approach) (BS2A) and disclosed in accordance with Schedule 5 and for reporting our findings to you.

Basis of audit opinion
An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also includes assessing:••

the significant estimates and judgments made by the Directors in the preparation of the financial statements and supplementary information; andwhether the accounting policies are appropriate to the NZ Branch’s and NZ Banking Group’s circumstances, consistently applied and adequately disclosed.

We conducted our audit in accordance with New Zealand Auditing Standards. We planned and performed our audit so as to obtain all the information and explanations which we
considered necessary in order to provide us with sufficient evidence to obtain reasonable assurance that the financial statements are free from material misstatements, whether
caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Our firm has also provided other services to the NZ Branch and certain of its related companies in relation to other audit related services. Partners and employees of our firm may
also deal with NZ Banking Group on normal terms within the ordinary course of trading activities of the business of the NZ Banking Group. There are, however, certain restrictions
on borrowings which the partners and employees of our firm can have with the NZ Branch and NZ Banking Group. These matters have not impaired our independence as auditorsof the NZ Branch and NZ Banking Group. The firm has no other relationship with, or interest in, the NZ Branch or any of its related companies.

Unqualified Opinion
We have obtained all the information and explanations we have required.
In our opinion:••

proper accounting records have been kept by the NZ Branch and NZ Banking Group as far as appears from our examination of those records;
the financial statements on pages 6 to 93 (excluding the supplementary information included in Notes 31, 33, 34 and 41):-

comply with New Zealand generally accepted accounting practice; andgive a true and fair view of the balance sheets of the NZ Branch and NZ Banking Group as at 30 September 2008 and the results of their operations and cash flows forthe year ended on that date;•the supplementary information disclosed in Notes 33, 34 and 41 prescribed by Schedules 4, 6 to 8 and Clauses 19 and 20 of Schedule 3 of the Order is fairly stated inaccordance with those Schedules;•

the supplementary information disclosed in Note 31 relating to Capital Adequacy as required by Schedule 5 of the Order, is in all material respects, prepared inaccordance with Capital Adequacy Framework (Basel I Approach) and Capital Adequacy Framework (Standardised Approach) (BS2A), and disclosed in accordancewith Schedule 5 of the Order.

Our audit was completed on 18 December 2008 and our unqualified opinion is expressed as at that date.

Wellington

98

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

99

CONDITIONS OF REGISTRATION

Conditions of Registration, applicable as at date of registration.

For personal use only

The Conditions of Registration imposed on the NZ Branch, which will apply from the date of registration are:1.

That the New Zealand banking group does not conduct any non-financial activities that in aggregate are material relative to its total activities, where the termmaterial is based on generally accepted accounting practice, as defined in the Financial Reporting Act 1993.
That the New Zealand banking group’s insurance business is not greater than 1% of its total consolidated assets. For the purposes of this condition:2.
(i) Insurance business means any business of the nature referred to in section 4 of the Insurance Companies (Ratings and Inspections) Act 1994
(including those to which the Act is disapplied by sections 4(1)(a) and (b) and 9 of that Act), or any business of the nature referred to in section
3(1) of the Life Insurance Act 1908;(ii) In measuring the size of the New Zealand banking group’s insurance business:(a) where insurance business is conducted by any entity whose business predominantly consists of insurance business, the size of that insurance businessshall be:▪ The total consolidated assets of the group headed by that entity;▪ Or if the entity is a subsidiary of another entity whose business predominantly consists of insurance business, the total consolidated
assets of the group headed by the latter entity;(b) otherwise, the size of each insurance business conducted by any entity within the banking group shall equal the total liabilities relating to that insurance

(c)

(d)

business, plus the equity retained by the entity to meet the solvency or financial soundness needs of the insurance business;
the amounts measured in relation to parts (a) and (b) shall be summed and compared to the total consolidated assets of the banking group. All amounts
in parts (a) and (b) shall relate to on balance sheet items only, and shall be determined in accordance with generally accepted accounting practice, as
defined in the Financial Reporting Act 1993;
where products or assets of which an insurance business is comprised also contain a non-insurance component, the whole of such products or assets
shall be considered part of the insurance business.

3.

That the business of the registered bank in New Zealand does not constitute a predominant proportion of the business of the Australia and New Zealand Banking
Group Limited.

4.

That no appointment to the position of the New Zealand chief executive officer of the registered bank shall be made unless:(i) the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee; and(ii) the Reserve Bank has advised that it has no objection to that appointment.

5.

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

6.

That Australia and New Zealand Banking Group Limited complies with the following minimum capital adequacy requirements, as administered by the Australian
Prudential Regulation Authority:- tier one capital of the Australia and New Zealand Banking Group Limited is not less than 4 percent of risk weighted exposures;- capital of Australia and New Zealand Banking Group Limited is not less than 8 percent of risk weighted exposures.

7.

That the business of the registered bank in New Zealand is restricted to:(i) acquiring for fair value, and holding, mortgages originated by ANZ National Bank Limited; and(ii) any other business for which the prior written approval of the Reserve Bank of New Zealand has been obtained; and(iii) activities that are necessarily incidental to the business specified in paragraphs (i) and (ii).

8.

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

9.

That the registered bank in New Zealand may not incur any liabilities except:(i) to the government of New Zealand in respect of taxation and other charges; and(ii) to other branches or the head office of the registered bank; and(iii) to trade creditors and staff; and(iv) to ANZ National Bank Limited in respect of activities, other than borrowing, that are necessarily incidental to the business specified in paragraphs (i) and(v)(ii) of condition 7; andany other liabilities for which the prior written approval of the Reserve Bank has been obtained.

For the purposes of these Conditions of Registration, the term "banking group" means the New Zealand operations of Australia and New Zealand Banking Group
Limited whose business is required to be reported in the financial statements for the group's New Zealand business, prepared in accordance with section 9(2) of the
Financial Reporting Act 1993.

AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED - NEW ZEALAND BRANCH

100

INDEX

Index

For personal use only

General Disclosures
Summary of Financial Statements
Income Statements
Statements of Recognised Income and Expense
Balance Sheets
Cash Flow Statements
1.
Accounting Policies
Critical Estimates and Judgements Used in Applying
2.
Accounting Policies
3.
Risk Management Policies
4.
Income5.
Expenses
6.
Income Tax Expense
7.
Liquid Assets
8.
Due from Other Financial Institutions
9.
Trading Securities
10. Discontinued Operations
11. Derivative Financial Instruments
12. Available-For-Sale Assets
13. Net Loans and Advances
14. Impaired Assets, Past Due Assets and Other Assets
Under Administration
15. Provision for Credit Impairment
16. Shares in Controlled Entities, Associates and Jointly
Controlled Entities
17. Other Assets
18. Deferred Tax Assets
19. Premises and Equipment
20. Goodwill and Other Intangible Assets
21. Due to Other Financial Institutions
22. Deposits and Other Borrowings
23. Payables and Other Liabilities
24. Deferred Tax Liabilities

2
5
6
7
8
9
10
20
22
24
25
26
27
27
27
27
28
32
32
33
34
35
35
36
37
37
37
38
38
39

25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.

Provisions
Bonds and Notes
Term Funding
Loan Capital
Ordinary Share Capital
Reserves and Retained Earnings
Capital Adequacy
Financial Risk Management
Concentrations of Credit Risk
Market Risk
Interest Earning and Discount Bearing Assets and Liabilities
Fair Value of Financial Assets and Financial Liabilities
Segmental Analysis
Notes to the Cash Flow Statements
Controlled Entities, Associates and Interests in Jointly
Controlled Entities
Parent Company and Ultimate Parent Company
Securitisation, Funds Management, Other Fiduciary Activities
and the Marketing and Distribution of Insurance Products

42. Commitments
43. Contingent Liabilities and Credit Related Commitments
44. Employee Share and Option Plans
45. Retirement Benefit Obligations
46. Related Party Transactions
47. Subsequent Events
Directorate and Auditors
Credit Rating Information
Financial Statements of the Overseas Bank and Overseas
Banking Group
Directors' and New Zealand Chief Executive Officer's Statement
Independent Audit Report
Conditions of Registration

40
41
42
43
44
44
46
50
71
71
71
72
78
80
81
83

84
85
85
87
89
92
93
94
96
96
97
98
99