2012
BASEL IIPILLAR 3 DISCLOSURE

YEAR ENDED 30 SEPTEMBER 2012

APS 330: CAPITAL ADEQUACY &RISK MANAGEMENT IN ANZANZ Basel II Pillar 3 disclosure

September 2012

Important NoticeThis document has been prepared by Australia and New Zealand Banking Group Limited (ANZ) tomeet its disclosure obligations under the Australian Prudential Regulation Authority (APRA) ADI
Prudential Standard (APS) 330 Capital Adequacy: Public Disclosure of Prudential Information.
This disclosure was prepared as at 30 September 2012. ANZ has a continuous disclosure policy,
under which ANZ will immediately notify the market of any material price sensitive information
concerning the Group, in accordance with legislative and regulatory disclosure requirements.

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ANZ Basel II Pillar 3 disclosure

September 2012

TABLE OF CONTENTS1
Chapter 1 – Highlights........................................................................................................3
Chapter 2 – Introduction ....................................................................................................5
Purpose of this document .............................................................................................5
Chapter 3 - Risk appetite and governance ............................................................................6
Risk types…… ..............................................................................................................6
Risk appetite framework...............................................................................................6
Risk management governance ......................................................................................7
Chapter 4 – Group structure and capital adequacy .................................................................9
Table 1

Scope of application .....................................................................................9

Table 2

Capital structure ........................................................................................ 12

Table 3

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

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

Table 5Credit risk – Disclosures for portfolios subject to the Standardised approach andsupervisory risk weights in the IRB approach................................................. 36

Table 6

Credit risk – Disclosures for portfolios subject to Advanced IRB approaches ...... 37

Table 7

Credit risk mitigation disclosures.................................................................. 47

Table 8General disclosure for exposures related to counterparty credit risk ................ 52

Chapter 6 – Securitisation exposures ................................................................................. 54
Table 9Banking Book - Securitisation disclosures...................................................... 57
Trading Book - Securitisation disclosures ...................................................... 66

Chapter 7 – Market risk .................................................................................................... 69
Table 11

Market risk – Internal models approach ........................................................ 69

Table 10Market risk – Standard approach ................................................................. 73

Chapter 8 - Operational Risk ............................................................................................. 74
Table 12

Operational risk ........................................................................................ 74

Chapter 9 – Equities ........................................................................................................ 78
Table 13Equities – Disclosures for banking book positions ........................................... 78

Chapter 10 – Interest Rate Risk in the Banking Book............................................................ 80
Table 14

Interest Rate Risk in the Banking Book ......................................................... 80

Chapter 11 – Liquidity risk ................................................................................................ 83
Appendix 1 – Detail of capital structure .............................................................................. 85
Appendix 2 – ANZ Bank (Europe) Limited ........................................................................... 87
Glossary.......... ............................................................................................................... 88

1

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

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ANZ Basel II Pillar 3 disclosure

September 2012

Chapter 1 – Highlights
Capital ratios
Strengthening capital position throughorganic capital generation

11.8%
10.5%

10.9%
10.9%

8.5%

8.5%

Mar 11

10.8%

2.4%

2.0%

1.8%

2.4%

2.0%

11.3%

Sep 11•

Solidorganic
capitalgeneration
underpins strong CET1 position on a YoY
basis.

•

ANZ well capitalised and positioned to
manage transition to Basel III.

•

Decline in Hybrid Tier 1 position HoH wasdriven by buy back and cancellation of
UK stapled securities.

•

Decline in Common Equity Tier 1 position
HoH was driven by increased Operational
Risk RWA following implementation of
Operational Risk model change.

10.0%

8.9%
.

8.8%

Mar 12

Sep 12

Basel IIIfully
harmonised

Hybrid Tier 1
C ommon Equity Tier 1

Exposure at Default ($bn)
$bn
800
700
600

672.0

643.6

624.0

572.6

Growth in EAD of 4.4% HoH to $672bn
as at 30 September 2012

500

•

400
300
200
100
0
Mar 11

Sep 11

C orporate
Residential Mortgage
Specialised LendingStandardised

Mar 12Growth was driven by increases in
Corporate (IIB in Manufacturing andWholesale Trade industry), Residential
Mortgage (across Australia and New
Zealand) and Bank & Sovereign asset
classes

Sep 12

Bank & Sovereign
QRR & Other Retail
Other

Movement in Credit Risk Weighted Assets ($bn)
270
7.2

260

(0.4)

0.2

(2.3)

250.2

254.9

Credit Risk Weighted Assets (CRWA) up
by $4.7bn HoH

250

•
240
230
220
210
200

Mar 12 Growth

Data
FX
Review Impact

Risk

Sep 12

3

Growth in CRWA has been driven byincreases in Corporate (portfolio growth
in
IIB
and
Australia
segment),
Standardised and Bank (growth in Asia)
asset classes, partially offset by Risk
improvement (primarily by reduction in
the tenor).

ANZ Basel II Pillar 3 disclosure

September 2012

Average Risk Weights (CRWA/EAD)

Sep 11120%

Mar 12

Sep-12
93%
94%

100%
88%
80%

Portfolio average risk weight decreased
by 90bps HoH to 38% as at 30
September 2012

58%
60%

54%

•

45%
40%
20%

14%

17%

Standardised

Other

Specialised
Lending

QRR & Other
RetailResidential
Mortgage

Corporate

Bank &
Sovereign0%

Driven by growth in lower risk weighted
asset classes of Bank & Sovereign and
Residential Mortgages during this half.
Reduction in tenor in Corporate asset
class also contributed to the improved
risk weight.

Impaired Assets ($m)
6,221
5,581

5,517

5,343

5,196

5,003

4,671

Impaired Assets haveacross the financial year.
•

4,881

704

700

340

525

Mar 11

Sep 11

Mar 12

Sep 12declined

7%

Gross impaired assets decreased by 2.8%
HoH, driven by the reduction in impairedloans in New Zealand, partially offset by
an increase in restructured items
associated with a few customers in IIB
division.

Impaired Loans/Facilities
Restructured

Provision ratios (Provisions/CRWA)
2.10%

1.96%

1.88%

Provision coverage ratios decreased
1.78%

•

1.36%

Mar 11

1.28%

Sep 11

1.20%

1.08%

Mar 12

Sep 12

Total Provision Balance / C RWA
C ollective Provision Balance / C RWA

4

ANZ remains appropriately provided withthe total provision coverage ratio at
1.78% and the collective provision ratio
at 1.08%.

ANZ Basel II Pillar 3 disclosure

September 2012

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

Pillar 1

Pillar 2

Pillar 3

Minimum capital requirement

Supervisory review process

Market discipline

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

Firm-widerisk
oversight,
Internal
CapitalAdequacy
Assessment Process (ICAAP),
consideration of additional risks,
capital buffers and targets andrisk concentrations, etc

Regulardisclosure
tothemarketofqualitativeandquantitative aspects of risk
management, capital adequacy
and underlying risk metrics

APS 330 requires the publication of various levels of information on a quarterly, semi-annual andannual basis. This document is the annual disclosure, which has the most comprehensive
requirements.
Basel II in ANZIn December 2007, ANZ received accreditation for the most advanced approaches permitted under
Basel II for credit risk and operational risk, complementing its existing accreditation for market risk.
Verification of disclosures
These Pillar 3 disclosures have been verified in accordance with Board approved policy, including
ensuring consistency with information contained in ANZ’s Annual Report and in Pillar 1 returns
provided to APRA. This Pillar 3 disclosure is not audited by ANZ’s external auditor.
Comparison to ANZ’s Annual Report
These disclosures have been produced in accordance with regulatory capital adequacy concepts andrules, rather than in accordance with accounting policies adopted in ANZ’s Annual Report. As such,there are differences in some common areas of disclosures. These differences are most pronounced in
the credit risk disclosures, for instance:•

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

•

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

•

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

Unless otherwise stated, all amounts are rounded to AUD millions.
2

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

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ANZ Basel II Pillar 3 disclosure

September 2012

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

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

•

Market risk - the risk to ANZ’s earnings arising from changes in interest rates, currency exchange
rates and credit spreads, or from fluctuations in bond, commodity or equity prices. ANZ has
grouped market risk into two broad categories to facilitate the measurement, reporting andcontrol of market risk:•

Traded market risk - the risk of loss from changes in the value of financial instruments due tomovements in price factors for physical and derivative trading positions. Trading positions
arise from transactions where ANZ acts as principal with clients or with the market.

•

Non-traded market risk (or balance sheet risk) - comprises Interest Rate Risk in the Banking
Book and the risk to the AUD denominated value of ANZ’s capital and earnings due to foreignexchange rate movements.

•

Operational risk - the risk of loss resulting from inadequate or failed internal controls or fromexternal events, including legal risk but excluding reputation risk3.

•

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

•

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

Other key risks faced by ANZ, but which do not directly impact determination of regulatory capital,
include:•Strategic risk - is defined to be the potential for loss arising from a failure in ANZ’s strategies.
These include strategies designed to address or anticipate changes in the competitive, client,
political or regulatory environments.

•

Business risk - the risk of financial loss due to unexpected movements in volume, profit margin,
and operating expenses (excluding risks elsewhere defined) arising from unexpected changes inthe business environment, customer preferences and/or competitor actions.

•

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

•

Compliance risk - is defined as the probability and impact of an event that results in a failure toact in accordance with laws or codes of conduct applicable to ANZ’s businesses.

•

Reputation risk - is defined as the risk of loss caused by adverse perceptions of ANZ held by the
public, shareholders, investors, regulators, or rating agencies that directly or indirectly impact
earnings, capital adequacy or value.

Risk Appetite Framework
ANZ's risk appetite is set by the Board and integrated within ANZ’s strategic objectives. The risk
appetite framework underpins fundamental principles of strong capitalisation, robust balance sheet
and sound earnings, which protects ANZ’s franchise and supports the development of an enterprisewide risk culture.

3
Regulatory Capital is calculated in accordance with the definition of Operational Risk outlined in APS 115 Capital
Adequacy: Advanced Measurement Approaches to Operational Risk, and therefore excludes reputation risk
considerations.

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ANZ Basel II Pillar 3 disclosure

September 2012

The framework provides an enforceable risk statement, on the amount of risk ANZ is willing to accept.
It supports strategic and core business activities and customer relationships ensuring that:•

Only permitted activities are engaged in.

•

The scale of permitted activities, and subsequent risk profile, does not lead to potential losses or
earnings volatility that exceeds ANZ’s approved risk appetite.

•

Risk is expressed quantitatively via limits and tolerances.

•

Management focus is brought to bear on key and emerging risk issues and mitigating actions.

•

Risk is linked to the business by informing, guiding and empowering the business in executing
strategy.

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

Risk
Committee

Audit
Committee

GovernanceCommittee

Assists the Board in the effective discharge of the Board’s responsibilities forbusiness, market, credit, equity and other investment, financial, operational,
liquidity, compliance and reputation risk management.
In addition to its role reviewing financial reporting principles and policies,
controls and procedures, the Audit Committee also reviews prudential
supervision procedures required by regulatory bodies to the extent relating tofinancial reporting and oversees the work of Global Internal Audit.
Ensures an appropriate Board and Committee structure is in place. Reviews
the development of and approves corporate governance policies and principles
applicable to ANZ.

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

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

•

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

•

Balance sheet management activities including management of non-traded related risks andexposures.

In all cases this is in accordance with ANZ’s risk appetite and limits defined by the Board, regulatory
requirements, and international best practice.
GALCO is chaired by ANZ’s Chief Financial Officer (CFO) and meets at least six times per year. GALCO
is supported by specialist committees that cover capital management and non-traded market risk, aswell as regional asset and liability management committees.

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ANZ Basel II Pillar 3 disclosure

September 2012

Capital Management Policy Committee (CMPC)CMPC is a sub-committee of GALCO, with responsibility for the oversight and control of ANZ’s capitaland portfolio measurement framework, addressing economic and regulatory capital requirements.
CMPC is also responsible for making capital management and portfolio measurement related
recommendations to the Risk Committee and ANZ Board.
The Committee’s main objective is to ensure ANZ’s regulatory and economic capital management
activities are aligned with ANZ and GALCO’s objectives, with focus on:•

Internal Capital Adequacy Assessment Process (ICAAP), aligning capital levels and targets to risk
appetite and policies and processes by which ANZ identifies, measures, monitors and manages
risks.

•

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

•

Stress testing reviews and updates.

CMPC is chaired by ANZ’s CFO (or in absence, ANZ’s Chief Risk Officer (CRO)) and shall normallymeet six times a year.
Credit and Market Risk Committee (CMRC)
CMRC is the senior executive management forum responsible for the oversight and control of credit
and market risk. Its responsibilities and duties include:•

Approve Level 2 credit and market risk management policy, propose Level 1 policy changes to
the Risk Committee.

•

Approve take up of equity interest within its discretion.

•

Ensure comprehensive credit and market risk control.

•

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

•

Set Value at Risk, Earnings at Risk and other limits within discretions.

•

Oversee market risk limits.

•

Assess reputation, tax, environmental and social risks.

CMRC is chaired by ANZ’s CRO and meets as required, and is supported by a specialist committeethat covers credit ratings systems.
Credit Ratings System Oversight Committee (CRSOC)
CRSOC is the senior executive management forum responsible for the oversight and control of theInternal Ratings System for credit risk across ANZ including credit model approvals and performancemonitoring. This delegation is intended to encompass all aspects of model governance including:•Approving the content and design of the rating system, including models and methodology for
Probability of Default (PD), LGD and EAD.

•

Prioritising, monitoring and approval of model changes, enhancements and re-builds.

•

Performance monitoring of internal rating system models.

•Monitor annual independent validation of use and performance of all models.

CRSOC is chaired by the CRO Australia and shall normally meet six times a year. It supports CMPC
and CMRC, and in turn is supported by working groups.
Operational Risk Executive Committee (OREC)OREC is the primary senior executive management forum responsible for oversight of operational risk
and compliance risk expected and unexpected risk profile and the related Control Environment. Its
main responsibilities and duties include:•

Endorse ANZ’s Operational Risk Measurement and Management Framework (ORMMF) for
approval by the Board Risk Committee.

•

Approve ANZ’s Group Compliance Framework.

•

Approve Operational Risk policies and Compliance policies.

•

Approve extreme operational risks treatment plans.

OREC is chaired by ANZ’s CRO and will meet a minimum of four times per year.
Reputation Risk Committee (RRC)
The purpose of the RRC is to assist ANZ businesses, Risk and Compliance, and Legal in partnership toeffectively manage reputation risk in relation to environmental, social, business and regulatory issues
across ANZ.
RRC is chaired by ANZ’s CRO and will meet a minimum five times a year.

8ANZ Basel II Pillar 3 disclosure

September 2012

Chapter 4 – Group structure and capital adequacy
Table 1

Scope of application

Top corporate entity
The top corporate entity in the reporting group is Australia and New Zealand Banking Group Limited.
Capital reporting and measurement
To ensure that an Authorised Deposit-taking Institution (ADI) is adequately capitalised on both astand alone and group basis, APRA adopts a tiered approach to the measurement of an ADI’s capital
adequacy by assessing the ADI’s financial strength at three levels:•

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

•

Level 2 - being the consolidated group for financial reporting purposes adjusted to exclude
associates activities and certain subsidiaries excluded under APS 110 Capital Adequacy that
undertake the following business activities:••

Insurance businesses (including friendly societies and health funds).

•

Acting as manager, responsible entity, approved trustee, trustee or similar role in relation to
funds management.

•

Non-financial (commercial) operations.

•

Securitisation special purpose vehicles to which assets have been transferred in accordancewith APRA's requirements as set out in APS 120: Securitisation.

Level 3 - the consolidated group for financial reporting purposes.

ANZ measures capital adequacy monthly and reports for prudential purposes on a Level 1 and Level 2
basis, however is not required to report on a Level 3 basis. This Pillar 3 report is based on the Level 2
prudential structure.

Level 1

Australia & New
Zealand Banking GroupLtd

Level 2

Level 3

ANZ Bank New Zealand
Ltd
Insurance Business
OnePathOther

Other International
ADI’s

Extended Licence
Entity Subsidiaries

Other Level 2
Subsidiaries
EsandaE-Trade
Other

Other Deconsolidated
Subsidiaries
Trustee / Funds
Management Companies
Other

Refer to Note 38 of ANZ’s 2012 Annual Report for a list of all material subsidiaries and a brief
description of their key activities.

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ANZ Basel II Pillar 3 disclosure

September 2012

Accounting consolidation
The financial statements consolidate the financial statements of the company and all its subsidiaries
where it is determined that there is a capacity to control. Where subsidiaries have been sold or
acquired during the year, their operating results have been included to the date of disposal or fromthe date of acquisition. Control means the power to govern, directly or indirectly, the financial andoperating policies of an entity so as to obtain benefits from its activities. All the facts of a particularsituation are considered when determining whether control exists. Control is usually present when an
entity has:•Power over more than one-half of the voting rights of the other entity; or•Power to govern the financial and operating policies of the other entity; or•Power to appoint or remove the majority of the members of the board of directors or equivalent
governing body; or•Power to cast the majority of votes at meetings of the board of directors or equivalent governing
body of the entity.

In addition, potential voting rights that are presently exercisable or convertible are taken into accountin determining whether control exists.
In relation to special purpose entities, control is deemed to exist where in substance:•

The majority of the residual risks and rewards from their activities accrue to the Group; or•

The Group control decision making powers so as to obtain the majority of the risks and rewards
from their activities.

Refer to Note 1 of ANZ’s 2012 Annual Report for a description of the principal accounting policies
adopted in the preparation of ANZ’s financial report.
Entities excluded from Level 2
Investments in entities deconsolidated from the Level 3 group to determine Level 2 for prudential
purposes are deducted from regulatory capital and the assets of those entities are excluded fromaggregate Risk Weighted Assets (RWA).
The material entities excluded from Level 3 to determine Level 2 are:•Insurance entities
OnePath (AU) Life Limited and OnePath (AU) General Insurance Limited
OnePath (NZ) Insurance Holdings Limited and One Path (NZ) Life Limited
ANZcover Insurance Pty Limited
ANZ Lenders Mortgage Insurance Pty Limited•

Trustee/Fund Manager
OnePath Funds Management Limited and OnePath Custodians Limited
ANZ Trustees Limited

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ANZ Basel II Pillar 3 disclosure

September 2012

Restrictions on Transfers of Capital within ANZANZ operates branches and locally incorporated subsidiaries in many countries. These operations arecapitalised at an appropriate level to cover the risks in the business and to meet local prudential
requirements. This level of capitalisation may be enhanced to meet local taxation and operational
requirements. Any repatriation of capital from subsidiaries or branches is subject to meeting therequirements of the local prudential regulator and/or the local central bank.
Apart from ANZ’s operations in New Zealand, local country capital requirements do not impose any
material call on ANZ’s capital base. ANZ undertakes banking activities in New Zealand principally
through its wholly owned subsidiary, ANZ Bank New Zealand Limited, which is subject to minimum
capital requirements as set by the Reserve Bank of New Zealand (RBNZ). The RBNZ has adopted theBasel II framework, effective from 1 January 2008, and ANZ Bank New Zealand Limited has been
accredited to use the advanced approach for the calculation of credit risk and operational risk. ANZBank New Zealand Limited maintains a buffer above the minimum capital base required by the RBNZ.
This capital buffer has been calculated via the ICAAP undertaken for ANZ Bank New Zealand Limited,
to ensure ANZ Bank New Zealand Limited is appropriately capitalised under stressed economic
scenarios.
Capital deficiencies in non-consolidated subsidiaries
The aggregate amount of any under-capitalisation of any non-consolidated subsidiary (or subsidiaries)that is required to be deducted from capital is nil (March 2012 and September 2011: nil).

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ANZ Basel II Pillar 3 disclosure

Table 2September 2012

Capital structure

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

Residual Tier 1 capital instruments included within shareholders’ equity are excluded.

•

Reserves exclude the Hedging reserve and Available-for-Sale revaluation reserve, and reserves of
insurance, funds management and securitisation subsidiaries and associates excluded for Level 2
purposes.

•

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

•

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

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

4

ANZ Convertible Preference Shares. On 30 September 2008 ANZ issued $1,081 million of
convertible preference shares (CPS1), on 17 December 2009 ANZ issued $1,969 million of
convertible preference shares (CPS2) and on 28 September 2011 ANZ issued $1,340 million of
convertible preference shares (CPS3) that mandatorily convert into ordinary shares on 16 June
2014, 15 December 2016 and 1 September 2019 respectively, subject to certain conditions being
satisfied. They may also convert earlier under certain circumstances and ANZ, subject to APRA’s
approval, has a right to convert CPS3 in its discretion on each semi-annual dividend payment datefrom 1 September 2017. In particular, CPS3 will mandatorily convert into ordinary shares if ANZ’s
Common Equity Capital Ratio4 is equal to or less than 5.125% (or APRA determines that to be thecase). The number of shares issued to a CPS3 holder on conversion following a breach of thatratio is limited to the Maximum Conversion Number of 10.2407 ordinary shares per CPS3
(although the CPS3 terms in respect of the Maximum Conversion Number may be amended once
APRA’s Basel III regulations are finalised). CPS3 may also be redeemed for cash on each semiannual dividend payment date from 1 September 2017, subject to APRA’s approval. The
distributions are preferred, non-cumulative, payable quarterly (in respect of CPS1 and CPS2) andsemi-annually (in respect of CPS3) and based on the 90 day (in respect of CPS1 and CPS2) and180 day (in respect of CPS3) Australian Bank Bill Rate plus a margin of 250 basis points (inrespect of CPS1) and 310 basis points (in respect of CPS2 and CPS3) and are subject to ANZ’s
Directors resolving to pay in their absolute discretion and other payment tests being satisfied. Ina winding-up of ANZ, the convertible preference shares will rank equal with other preference
shares, but behind all depositors and creditors and ahead of ordinary shareholders.

Common Equity Tier 1 is Tier 1 less Residual Tier 1 Capital.

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ANZ Basel II Pillar 3 disclosure

September 2012

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

US Trust Securities. On 27 November 2003, ANZ issued USD750 million of non-cumulative trust
securities with an initial call date of 15 December 2013 and a coupon rate of 5.36%. On 15
December 2013, ANZ has the right to redeem the US Trust Securities for cash, subject to APRA
approval. If ANZ does not exercise this right, holders are entitled to require ANZ to exchange the
US Trust Securities into ordinary shares. The distributions are non-cumulative payable semiannually. In a winding-up of ANZ, the ANZ preference shares forming part of the US Trust
Securities will rank equal with other preference shares, but behind all depositors and creditors
and ahead of ordinary shareholders.

•Euro Trust Securities. On 13 December 2004, ANZ issued EUR500 million of non - cumulative
trust securities raising $871 million, at the spot rate on the date of issue. Distributions are noncumulative payable quarterly based upon the three month EURIBOR rate plus a margin of 66
basis points up until 15 December 2014, at which date ANZ has the right to redeem the Euro
Trust Securities for cash (subject to APRA approval). After this date, the distribution rate is a rate
based on the three month EURIBOR rate plus a margin of 166 basis points. In a winding-up of
ANZ, the ANZ preference shares forming part of the Euro Trust securities will rank equal withother preference shares, but behind all depositors and creditors and ahead of ordinary
shareholders.

For more information on these instruments, refer to the Loan Capital and Share Capital notes (Notes
28 and 29 respectively) in ANZ’s 2012 Annual Report.
Tier 1 deductions include amounts deducted solely from Tier 1, mainly intangible assets i.e. goodwill,value in force as to insurance/investment business portfolios; capitalised software, capitalised
brokerage and borrowing expenses, net deferred tax assets and deductions taken 50% from Tier 1
and 50% from Tier 2, which mainly include the tangible component of investment in other subsidiaries
and investments in associates regulated by APRA, or their overseas equivalent, and the amount of
Expected Losses (EL) in excess of Eligible Provisions for Loan Losses (net of tax).
Tier 2 capital is comprised of Upper and Lower Tier 2 capital, less capital deductions taken 50% fromTier 2 capital. Upper Tier 2 capital mainly comprises perpetual subordinated debt instruments, whilst
Lower Tier 2 comprises dated subordinated debt instruments which have a minimum term of 5 years
at issue date.
ANZ has two instruments that qualify as Upper Tier 2 capital:•

USD300 million note issued by ANZ on 30 October 1986 which pays a rate of 6 month LIBOR plus
15 basis points.

•

NZD835 million note issued by ANZ Bank New Zealand Limited on 17 April 2008 which pays afixed rate of 9.66% (incorporating a margin of 200 basis points) for five years payable semiannually. At the first call date of 18 April 2013, if not called, the interest rate resets to a fixed
rate at the five year swap rate plus 200 basis points. At the second call date of 18 April 2018, if
not called, the interest rate resets to a floating rate at the 3 month Forward Rate Agreement rateplus 300 basis points. The Notes are callable on any interest payment date thereafter.

To qualify as Lower Tier 2 capital, the instrument must have a minimum original term of five years
and the amount eligible for inclusion in capital is amortised on a straight line basis at a rate of 20%
per annum over the last four years to maturity. For more details on these Lower Tier 2 capital
instruments, refer to the Subordinated Notes section of the Loan Capital note (Note 28) in ANZ’s 2012
Annual Report.
Total Capital is the sum of Tier 1 capital and Tier 2 capital.

13

ANZ Basel II Pillar 3 disclosure

Table 2September 2012

Capital structure
Sep 12$M

Mar 12$M

Sep 11$M

Paid-up ordinary share capital

23,20322,396

21,577

Reserves(2,653)(2,673)(2,266)

Retained earnings

16,771

16,507

15,123Tier 1 capital

Non-controlling interest

42

43

41

37,36336,273

34,475Innovative Tier 1 capital

1,587

1,592

1,641

Non-innovative Tier 1 capital

4,390

5,081

5,111

Gross Tier 1 capital

43,34042,946

41,227

Goodwill(3,008)(2,966)(2,968)Other deductions from Tier 1 capital only

(5,017)(4,675)(4,572)50/50 deductions from Tier 1 capital(2,814)(3,217)(3,071)(10,839)(10,858)(10,611)32,501

32,08830,616

Perpetual subordinated notes

953

946

965

General reserve for impairment of financial assets net of attributable
deferred tax asset5

234

230

266

Lower Tier 2 capital

5,728

5,782

5,042

Gross Tier 2 capital

6,915

6,958

6,273

Fundamental Tier 1 capital

Deductions from Tier 1 capital

Net Tier 1 capital

Tier 2 capital
Upper Tier 2 capital

Upper and lower Tier 2 capital deductions

(28)

(28)

(28)

50/50 deductions from Tier 2 capital(2,814)(3,217)(3,071)

Deductions from Tier 2 capital(2,842)(3,245)(3,099)

Net Tier 2 capital

4,073

3,713

3,174

Total capital base36,57435,80133,790Further information on Capital Structure can be found in Appendix 1.

5Under Basel II, “General reserve for impairment of financial assets net of attributable deferred tax asset” consistsof the surplus of the general reserve for impairment of financial assets net of tax and/or the provisions attributable
to the standardised portfolio.

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ANZ Basel II Pillar 3 disclosure

Table 3September 2012

Capital adequacy

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

Regulatory compliance6 such that capital levels exceed APRA’s PCRs both at Level 1 and Level2
for Tier 1 and Total Capital, and the US Federal Reserve’s minimum Tier 1 and Total Capital
adequacy requirements at Level 2 via ANZ’s Foreign Holding Company licence in the United Statesof America.

•

Capital levels are aligned with the risks in the business and to meet strategic and businessdevelopment plans through ensuring that available capital exceeds the level of Economic Capitalrequired to support the Ratings Agency ‘default frequency’ confidence level for a “AA” credit rating
category bank. Economic Capital is an internal estimate of capital levels required to support risk
and unexpected losses above a desired target solvency level.

•

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

•

An appropriate balance
management principles.

betweenmaximising

shareholder

returns

andprudent

capitalANZ achieves these objectives through the ICAAP whereby ANZ conducts detailed strategic and capitalplanning over a medium term time horizon.
Annually, ANZ conducts a detailed strategic planning process over a three-year time horizon. This
process involves forecasting key economic variables which Divisions use to determine key financial
data for their existing business. New strategic initiatives to be undertaken over the planning period
and their financial impact are then determined. These processes are used for the following:•

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

•

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

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

•

Results are subsequently used to:•

Recalibrate ANZ’s management targets for minimum and operating ranges for its respectiveclasses of capital such that ANZ will remain compliant with APRA’s PCRs and the US Federal
Reserve’s minimum Tier 1 and Total Capital requirements.

•

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

From these processes, a capital plan is developed and approved by the Board which identifies thecapital issuance requirements, capital securities maturity profile and options around capital products,
timing and markets to execute the Capital Plan under differing market and economic conditions.
The Capital Plan is maintained and updated through a monthly review of forecast financial
performance, economic conditions and development of business initiatives and strategies. The Boardand senior management are provided with monthly updates of ANZ’s capital position. Any actions
required to ensure ongoing prudent capital management are submitted to the Board for approval.

6

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

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ANZ Basel II Pillar 3 disclosure

September 2012

Capital targets
Target ratios are set to be consistent with ANZ’s risk appetite and Economic Capital methodology, plus
an allowance for the impact of relevant stress testing on the capital position. The approach ensurescapital requirements are manageable and consistent with long term credit ratings and minimum
prudential capital requirements, even during periods of stress.
Throughout the financial year, ANZ maintained compliance with the minimum Tier 1 and Total Capitalratios at Level 1 and Level 2 set by APRA, and the US Federal Reserve for Level 2, as well as
applicable capitalisation rates set by local regulators in countries where ANZ operates branches andsubsidiaries.
ANZ has adopted the Common Equity Tier 1 and Tier 1 capital ratios as its principal capitalmanagement targets at Level 2. Given recent difficult economic and financial market conditions, ANZ
has maintained both ratios well above its minimum target.
Regulatory change
APRA released prudential capital standards in September and November 2012 detailing theimplementation of the majority of Basel III capital reforms in Australia. APRA is adopting the Basel III
reforms with increased capital deductions from Common Equity Tier 1 (CET1) capital; an increase incapitalisation rates, including prescribed minimum capital buffers, tighter requirements aroundadditional Tier 1 and Tier 2 securities; and transitional arrangements for existing Tier 1 and Tier 2
securities that do not conform to the new regulations.
In addition, APRA is proposing an accelerated implementation timetable for the Basel III capitalreforms around minimum capital ratios and deductions effective 1 January 2013. Introduction of all
the prescribed minimum capital buffers will be fully effective 1 January 2016 and the Leverage Ratio
from 1 January 2015.
APRA is still to finalise capital standards on the Basel III reforms dealing with the improvements incapital disclosures; leverage ratio; contingent capital and measures to address systematic and interconnected risks.
Capital Reconciliation
Common Equity
Tier 1 Capital

Tier 1 Capital

Total Capital

APRA September 2012 Basel II

8.8%

10.8%

12.2%

Plus: Dividend not provided for (net of DRP)

0.5%

0.5%

0.5%

Investment in banking associates(0.4%)(0.4%)-

Investment in ANZ insurance entities including OnePath(0.3%)(0.3%)-

Expected losses in excess of eligible provisions7(0.2%)(0.2%)--(0.1%)(0.1%)-(0.2%)(0.4%)

Less: Estimated increase in RWA9

(0.4%)(0.4%)(0.5%)APRA September 2012 Basel III

8.0%

9.7%

11.7%

10% allowance for investments in insurance entities andbanking associates

0.7%

0.7%

0.7%

Up to 5% allowance for deferred tax asset

0.2%

0.2%

0.2%

Other capital items

0.2%

0.2%

0.2%

Mortgage 20% LGD floor and others

0.5%

0.6%

0.6%

IRRBB RWA (APRA Pillar 1 approach)

0.4%

0.4%

0.5%

10.0%

11.8%

13.9%

Less: Tier 2 capital deductions moved to Common Equity Tier 1

Other
Less: 10% reduction of existing hybrid Tier 1 and Tier 2 securities8

Plus: Adjustments to fully align to Basel III

Plus: additional APRA Basel 2 conservative RWA methodologies

International fully harmonised September 2012 Basel III

7
APRA alignment to Basel treatment of Expected Losses in excess of Eligible Provisions, gross of associated deferred
tax asset.
8
From 1 January 2013 transitional treatment for existing securities on issue will apply. The maximum that can be
included in the respective capital base is 90% of the volume of eligible transitional Tier 1 and Tier 2 securities on
issue at 1 January 2013. The cap will reduce by 10 percentage points each year until 1 January 2022.
9

Excludes potential impacts arising from APRA’s yet to be released Basel III liquidity reforms.

16

ANZ Basel II Pillar 3 disclosure

September 2012

International capital ratio comparisons
One of the main purposes of the Pillar 3 disclosures is to facilitate comparisons of banks, both within
and across jurisdictions.
International investors should be aware that there are a number of features of APRA’s implementationof Basel II that have the effect of making key capital adequacy ratios appear lower than would be thecase if they were calculated under the rules in other jurisdictions. The following table shows ANZ’sestimation of its Common Equity Tier 1, Tier 1 and Total Capital adequacy ratios under UK rules (setby the FSA.

As At
Sep 12 FSA

Sep 12

Mar 12

Sep 11

Common Equity Tier 1

11.80%

8.80%

8.90%

8.50%

Tier 113.90%

10.80%

11.30%

10.90%

Tier 2

1.20%

1.40%

1.30%

1.20%

Total capital

15.10%

12.20%

12.60%

12.10%

Risk weighted assets $M

275,957

300,119284,836

279,964

For Tier 1 capital, the major reasons for the differences are that FSA:•Does not require a deduction for accrued dividends (although APRA does give credit for expectedshares to be issued under a dividend reinvestment plan).

•

Does not require a Tier 1 deduction for certain capitalised expenses and net deferred tax assets.

•

Allows the comparison of EL to Eligible Provisions for Loan Loss to be made on a gross basis andany excess is then tax effected, whereas APRA require EL to be compared to Eligible Provisions for
Loan Losses net of tax, and any excess to be taken as 50% Tier 1 deduction and a 50% Tier 2
deduction.

•

Has a more favourable treatment for investments in associates and insurance and funds
management subsidiaries.

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

APRA has set a 20% floor on the downturn LGD for mortgages (as compared with the 10%minimum set by the FSA).

•

FSA does not require IRRBB to be a Pillar I requirement so it is excluded from prudential capital
adequacy ratios.

•

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

The Australian Bankers’ Association (ABA) has released a detailed fact sheet10 documenting thedifferences between the Australian and UK rules and the implications for prudential capital ratios.
Level 3 Conglomerates (Level 3)
APRA has announced that it will proceed with implementing Level 3 Conglomerates Prudential
Standards in 2014, with an update to the March 2010 discussion paper expected in early 2013.
The standards will regulate a bancassurance group such as ANZ as a single economic entity withminimum capital requirements and additional reporting on risk exposure levels. Based on APRA’s
March 2010 Discussion Paper, ANZ is not expecting any material impact on its operations.

10bankers.asn.au

17

ANZ Basel II Pillar 3 disclosure

September 2012

Table 3: Capital Ratios and Risk Weighted Assets 11 12

Sep 12$M

Mar 12$M

Sep 11$M

Corporate

111,796

101,280

106,120

Sovereign

4,088

4,669

4,365

Bank

10,964

10,1959,456

Residential Mortgage

42,95942,68441,041

Risk weighted assets
Subject to Advanced Internal Rating Based (IRB) approach

Qualifying Revolving Retail

7,092

7,610

7,468

Other Retail

21,27720,087

19,240

198,176

186,525

187,690

27,62827,90327,757

Corporate

18,281

24,922

22,484

Residential Mortgage

1,812

1,445

845

Qualifying Revolving Retail

2,028

1,933

2,344

Other Retail

1,165

1,124

1,650

23,28629,42427,323Credit risk weighted assets relating to securitisation exposures

1,170

1,225

1,136

Credit risk weighted assets relating to equity exposures

1,030

1,235

1,399

Other assets

3,585

3,853

3,523

254,875

250,165

248,828

Credit risk weighted assets subject to Advanced IRB approach

Credit risk Specialised Lending exposures subject to slotting approach

Subject to Standardised approach

Credit risk weighted assets subject to Standardised approach

Total credit risk weighted assets
Market risk weighted assets

4,664

4,201

3,046

Operational risk weighted assets

28,12520,005

19,651

Interest rate risk in the banking book (IRRBB) risk weighted assets

12,455

10,4658,439

300,119284,836

279,964

Level 2 Total capital ratio

12.2%

12.6%

12.1%

Level 2 Tier 1 capital ratio

10.8%

11.3%

10.9%

Level 1: Extended licensed entity Total capital ratio

12.7%

12.9%

12.3%

Level 1: Extended licensed entity Tier 1 capital ratio

11.4%

11.8%

11.5%

Total risk weighted assets
Capital ratios (%)

Other significant Authorised Deposit-taking Institution (ADI) or overseas bank subsidiary:
ANZ Bank New Zealand Limited - Total capital ratio

12.5%

13.4%

12.7%

ANZ Bank New Zealand Limited - Tier 1 capital ratio

10.8%

10.9%

10.0%

11

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

12
ANZ Bank New Zealand Limited’s capital ratios have been calculated in accordance with Reserve Bank of New
Zealand prudential standards.

18

ANZ Basel II Pillar 3 disclosure

September 2012

Credit Risk Weighted Assets (CRWA)
Total CRWA increased by $6.0 billion (2.4%) from September 2011 to $254.9 billion. The key impacts
on CRWA were increases of $5.7 billion (5.3%) in IRB Corporate, $2.0 billion (10.6%) in IRB Other
Retail and $1.9 billion (4.7%) in IRB Residential Mortgage asset classes, partially offset by a decreaseof $4.0 billion in the Standardised asset class. Increases in the IRB Corporate asset class were driven
by growth in Institutional assets and the reclassification of certain Institutional customers fromStandardised to IRB Corporate after the introduction of improved models and systems.
This
reclassification was also the main driver for the reduction in the Standardised asset class. The
increase in IRB Other Retail and IRB Residential Mortgages was driven by growth in Australia.
Operational Risk and IRRBB Risk Weighted Assets (RWA)
Operational risk RWA has increased by $8.5 billion (43.1%) to $28.1 billion since September 2011 andincludes operational model risk. IRRBB RWA increased over the year by $4.0 billion (47.6%) to $12.5
billion due to greater repricing and yield curve risk.
Types of exposures in each Basel asset class
The following table details the types of exposures in each Basel asset class:Basel Asset Class

Typical Types of Exposures

Corporate

Individually rated and managed exposures not covered under other categories– mainly lending and off-balance sheet facilities provided to larger companies,
partnerships and other bodies
Exposures to sovereigns and central banks. Includes direct exposures e.g.
bond holdings and indirect e.g. exposures guaranteed by sovereign Export
Credit Agencies (ECAs)
Exposures to non-Group bank counterparties. Includes bond holdings anddeposits with other banks, trade finance exposures and guarantees provided
by other banks
Retail exposures secured by residential properties – mainly home loans,investment loans and equity manager facilities
Retail managed consumer credit card exposures with customer limits less than$100,000
Retail managed exposures other than mortgage and qualifying revolving –includes personal loans, consumer and small business lending, retail small
business lending
Exposures where the main servicing and repayment is from the asset being
financed. Includes specified commercial property development/investment
lending, project finance and object finance
Lending exposures where IRB models cannot be applied – mainly local
business lending and personal lending in Asia and the Pacific
Exposures to securitisation vehicles – mainly liquidity and funding facilities
provided to third party securitisations and securitisation bond exposures
Holding of third party equities where not consolidated or deducted from
capitalMainly fixed assets and margin lending

SovereignBank

Residential
Mortgages
Qualifying Revolving
RetailOther RetailSpecialised LendingStandardised
Securitisation
EquityOther Assets

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ANZ Basel II Pillar 3 disclosure

September 2012

Chapter 5 – Credit risk
Table 4Credit risk – General disclosures

Definition of credit risk
Credit risk is defined as the risk of financial loss resulting from the failure of ANZ’s customers andcounterparties to honour or perform fully the terms of a loan or contract.
Regulatory approval to use the Advanced Internal Ratings-based approach
ANZ has been given approval by APRA to use the Advanced Internal Ratings-based approach to credit
risk, under APS 113. There are however several small portfolios (mainly retail and local corporates in
Asia Pacific) where ANZ applies the Standardised approach to credit risk, under APS 112 Capital
Adequacy: Standardised Approach to Credit Risk.
Credit risk management framework and policies
ANZ has a comprehensive framework to manage credit risk and support sound growth for appropriate
returns. The framework is top down, being defined by credit principles and policies. Credit policies andprocedures cover all aspects of the credit life cycle such as transaction structuring, risk grading, initialapproval, ongoing management and problem debt management, as well as specialist policy topics.
The effectiveness of the credit risk management framework is assessed through various complianceand monitoring processes. These, together with portfolio selection, define and guide the credit
process, organisation and staff.
Organisation
As described in Chapter 3, the CMRC is a senior executive level credit risk committee. The CRSOC
supports the CMRC, by providing group-wide oversight of ANZ’s credit rating system.
The primary responsibility for prudent and profitable management of credit risk assets and customer
relationships rests with the business units. An independent credit risk management function is staffedby risk specialists. Independence is achieved by having all credit risk staff ultimately report to theCRO, even where they are embedded in business units. Risk provides independent credit assessment
and approval on lending decisions, and also performs key roles in portfolio management such as
development and validation of credit risk measurement systems, loan asset quality reporting, anddevelopment of credit policies.
The authority to make credit decisions is delegated by the Board to the CEO who in turn delegatesauthority to the CRO. The CRO in turn delegates some of his credit discretion to individuals as part ofa ‘cascade’ of authority from senior to the most junior credit officers. Within ANZ, credit approval formaterial judgemental lending is made on a ‘dual approval’ basis, jointly by the business writer in thebusiness unit and the respective independent credit risk officer. Individuals must be suitably skilled
and accredited in order to be granted and retain a credit discretion. Credit discretions are reviewed on
an annual basis, and may be varied based on the holder’s performance.
Programmed credit assessment typically covers retail and some small business lending, and refers to
the automated assessment of credit applications using a combination of scoring (application andbehavioural), policy rules and external credit reporting information. Where an application does notmeet the automated assessment criteria it will be referred out for manual assessment, with assessors
considering the decision tool recommendation.

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ANZ Basel II Pillar 3 disclosure

September 2012

Portfolio direction and performance
The credit risk management framework contains several important portfolio direction and performancetools which enable Risk to play a fundamental role in monitoring the direction and performance of theportfolio. These include:•

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

•

Regular portfolio reviews.

•

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

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

•

Calculating and reporting ANZ’s collective provision, economic capital, EL, regulatory RWA andregulatory expected loss.

•

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

•

Validating rating/scoring tools and credit estimates.

•

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

Reporting – overview and definitions
Credit risk management information systems, reporting and analysis are managed centrally and at thedivisional and business unit level.
Periodic reporting provides confirmation of the effectiveness of processes, highlights emerging issues
requiring attention and allows monitoring of portfolio trends by all levels of management and theBoard.
Examples of reports include EAD, portfolio mix, risk grade profiles and migrations, RWAs, large
exposure reporting, credit watch and control lists, impaired assets and provisions. Within the retailsegments, monthly reporting packs are prepared that focus on such aspects as scoring anddelinquency/slippage monitoring.
Past due facilities
Facilities where a contractual payment has not been met or the customer is outside of contractual
arrangements are deemed past due. Past due facilities include those operating in excess of approved
arrangements or where scheduled repayments are outstanding but do not include impaired assets.
Impaired assets
Facilities are classified as impaired when there is doubt as to whether the contractual amounts due,
including interest and other payments, will be met in a timely manner. Impaired assets include
impaired facilities, and impaired derivatives. Impaired derivatives have a credit valuation adjustment(CVA), which is a market assessment of the credit risk of the relevant counterparties.
Restructured items
Restructured items comprise facilities in which the original contractual terms have been modified forreasons related to the financial difficulties of the customer. Restructuring may consist of reduction ofinterest, principal or other payments legally due, or an extension in maturity beyond those typicallyoffered to new facilities with similar risk.
Collective provisions
As well as holding individual provisions for credit loss, ANZ also holds a collective provision to covercredit losses which have been incurred but have not yet been specifically identified.
Calculation of the collective provision involves placing exposures in pools of similar assets with similarrisk characteristics. The required collective provision is estimated on the basis of historical loss
experience for assets with credit risk characteristics similar to those in the collective pool and includes

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ANZ Basel II Pillar 3 disclosure

September 2012

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

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

•

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

Essentially these differences reflect the effects of the credit cycle on credit losses. Point-in-time refers
to losses at any given point in the credit cycle, cycle-adjusted refers to adjusting estimates to reflect afull credit cycle and downturn refers to losses at the worst of the cycle and is the most conservative
estimate to use. Regardless of the adjustments, the starting point for all estimates is the output of therating/scoring models and tools to satisfy the in use test13.
Individual provisions
Individual provisions are assessed on a case-by-case basis for all individually managed impaired
assets taking into consideration factors such as the realisable value of security (or other credit
mitigants), the likely return available upon liquidation or bankruptcy, legal uncertainties, estimatedcosts involved in recovery, the market price of the exposure in secondary markets and the amountand timing of expected receipts and recoveries.
Write-offs
Facilities are written off against the related provision for impairment when they are assessed as
partially or fully uncollectable, and after proceeds from the realisation of any collateral have been
received. Where individual provisions recognised in previous periods have subsequently decreased or
are no longer required, such impairment losses are reversed in the current period income statement.
Basel II definition of default
ANZ uses the standard APRA definition of default, so that a default is considered to have occurred withregard to a particular obligor when either or both of the two following events have taken place:•

ANZ considers that the obligor is unlikely to pay14 its credit obligations to ANZ in full, without
recourse by ANZ to actions such as realising available security.

•

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

Specific provision and general reserve for credit losses
Due to definitional differences, there is a difference in the split between ANZ’s individual provision andcollective provision for accounting purposes and the specific provision and general reserve for credit
losses (GRCL) for regulatory purposes. This does not impact total provisions, and essentially relates tothe classification of collectively assessed provisions on defaulted accounts. The disclosures in thisdocument are based on individual provision and collective provision, for ease of comparison with otherpublished results.

13
One of the key criteria for regulatory acceptance of a rating model is that the outputs must be used in a wide
range of ongoing management activities, to demonstrate that the model is used in day-to-day management of
exposures and not just for regulatory capital calculation.
14

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

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ANZ Basel II Pillar 3 disclosure

September 2012

Table 4(b) part (i): Period end and average Exposure at Default15 16
Sep 12

Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Default
for half year
$M

Corporate

111,796

191,628

183,549

416

320

Sovereign

4,088

63,91460,010--Bank

10,96443,45142,347--

Residential Mortgage

42,959250,839

247,51539

42

Qualifying Revolving Retail

7,092

20,912

21,150133

161

Other Retail

21,277

31,954

31,219148

178

198,176

602,698585,790736

701

27,62831,50531,440123

78

Corporate

18,281

17,933

21,12345

20

Residential Mortgage

1,812

3,775

3,457

6

1

Qualifying Revolving Retail

2,028

2,021

1,973

15

30

Advanced IRB approach

Total Advanced IRB approach

Specialised Lending

Individual
provision
charge forhalf year$M

Write-offs forhalf year$M

Standardised approach

Other Retail
Total Standardised approach

Total

1,165

1,146

1,125

(38)

11

23,28624,87527,67828

62249,090659,078

644,908

887

841

15
Exposure at Default in Table 4 includes Advanced IRB, Specialised Lending and Standardised exposures, however
does not include Securitisation, Equities or Other Assets exposures. Exposure at Default in Table 4 is net of credit
risk mitigation such as guarantees, credit derivatives, netting and financial collateral.
16

Average Exposure at Default for half year is calculated as the simple average of the balances at the start and theend of each six month period.

23

ANZ Basel II Pillar 3 disclosure

September 2012

Mar 12

Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Default
for half year
$M

Corporate

101,280

175,471

174,358

4,669

56,10654,323

236-

178

SovereignBank

10,19541,243

41,776--

Residential Mortgage

42,684244,192

239,537

44

46

Qualifying Revolving Retail

7,610

21,387

21,303

121

146

Advanced IRB approach

Other Retail

Individual
provision
charge forhalf year$M

Write-offs forhalf year$M-

20,08730,48530,024

117

148

186,525

568,884

561,321518

518

27,90331,374

31,147

168

86

Corporate

24,922

24,313

23,579(1)

5

Residential Mortgage

1,445

3,140

2,947

5

1

Qualifying Revolving Retail

1,933

1,924

2,012

25

37

Total Advanced IRB approach

Specialised LendingStandardised approach

Other Retail
Total Standardised approach

Total

1,124

1,103

999

(25)

15

29,42430,48029,537

4

58

243,852

630,738

622,005690

662

Sep 11

Risk Weighted
Assets$M

Exposureat Default$M

Average
Exposureat Default
for half year
$M

Corporate

106,120

173,245

166,079

Individual
provision
charge forhalf year$M
150

Sovereign

4,365

52,54044,759

-

Bank

9,456

42,30838,64132-

Residential Mortgage

41,041

234,882

230,771

41

44

Qualifying Revolving Retail

7,468

21,21921,120130

154

Other Retail

19,24029,56329,051

150

173

187,690553,757

530,421503

522

27,75730,92130,06485

114

Corporate

22,832

22,844

21,997

6

15

Residential Mortgage

1,457

2,754

2,350

8

8

Qualifying Revolving Retail

2,111

2,101

2,052

26

42

923

895

736

(8)

17

27,32328,594

27,13532

82242,770

613,272

587,620620

718

Advanced IRB approach

Total Advanced IRB approach

Specialised Lending

Write-offs forhalf year$M
151-

Standardised approach

Other Retail
Total Standardised approach

Total

24

ANZ Basel II Pillar 3 disclosure

September 2012

Table 4(b) part (ii): Exposure at Default by portfolio typeSep 12
Portfolio TypeCash and liquid assets

$M

$M

$M

Average for halfyear Sep12$M

26,43524,605

15,94525,520Contingents liabilities, commitments, andother off-balance sheet exposures

121,752

120,925

119,456

121,338

Derivatives

27,33925,23029,81526,285Due from other financial institutions

8,721

9,745

12,0539,233

Investment securities

18,116

18,584

21,43818,350Loans, advances and acceptances

426,803410,311

389,619

418,557

839

1,210

2,015

1,024

Trading securities

29,073

20,12822,931

24,601

Total exposures

659,078

630,738

613,272

644,908

Other assets

25

Mar 12

Sep 11

ANZ Basel II Pillar 3 disclosure

September 2012

Table 4(c): Geographic distribution of Exposure at Default

Sep 12

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

116,649

36,65256,260209,561

Sovereign

17,992

9,373

36,54963,914

Bank

20,412

2,860

20,17943,451

Residential Mortgage

203,664

47,178

3,772

254,614

Qualifying Revolving Retail

20,912-

2,021

22,933

Other Retail24,469

7,538

1,093

33,100Specialised Lending

24,394

6,491

620

31,505

Total exposures

428,492

110,092

120,494

659,078

Total
$M

Total
$M

Mar 12

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

112,859

36,78350,142

199,784

Sovereign

11,252

7,336

37,51856,106

Bank

19,914

3,322

18,007

41,243

Residential Mortgage

199,454

44,743

3,135

247,332

Qualifying Revolving Retail

21,387-

1,924

23,311Other Retail23,259

7,287

1,042

31,588Specialised Lending

24,675

6,081

618

31,374

Total exposures

412,800

105,552

112,386

630,738

Total$M

Sep 11

Portfolio Type

Australia$M

New Zealand$M

Asia Pacific,
Europe andAmericas$M

Corporate

112,91236,83946,338196,089

Sovereign

15,728

7,732

29,08052,540Bank21,211

4,852

16,24542,308Residential Mortgage

190,81144,071

2,754

237,636

Qualifying Revolving Retail21,219-2,101

23,320

Other Retail

22,175

7,388

895

30,458Specialised Lending

24,224

5,929

768

30,921

Total exposures

408,280

106,811

98,181

613,272

26

ANZ Basel II Pillar 3 disclosure

September 2012

Table 4(d): Industry distribution of Exposure at Default 17 18 19
Sep 12Agriculture,
Forestry, Fishing& Mining$M

Business
Services$M

Construction$M

Electricity,
Gas & Water
Supply$M

Corporate

34,896

8,511

6,304

8,900

10,517

Sovereign

527

3

98

688

2

Bank

9

48

1

4

Residential Mortgage

-

-

-

-

Portfolio Type

Qualifying Revolving Retail
Other RetailSpecialised Lending
Total exposures% of Total

Entertainment,
Financial,
Leisure & Investment &Tourism
Insurance$M$M

Government
and Official
Institutions$M

Manufacturing$M

Personal$M

Property
Services$M

Wholesale
Trade$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

17,3872,291

36,515

1,468

17,88524,231

13,927

11,56915,160209,561

35,71425,058

367

2

668

57

-

452

278

63,914

4

43,165

-

30

7

2

70

4

46

61

43,451----

254,614

-

-

-

-

-

254,614

-

-

-

-

-

-

-

-

22,933

-

-

-

-

-

22,933

2,822

1,828

2,626

84

903

330

8

923

16,782

856

638

2,046

1,039

2,215

33,100

462

-

-

2,070

137

-

173

241

-

26,350

-

11

1,634

427

31,50538,716

10,3909,029

11,746

11,56396,596

27,53038,076295,806

45,761

24,996

15,98814,74018,141

659,078

5.9%

1.6%

1.4%

1.8%

1.8%

14.6%

4.2%

5.8%

44.8%

6.9%

3.8%

2.4%

2.2%

2.8%

100.0%

17
Property Services includes Commercial property operators, Residential property operators, Retirement village operators/developers, Real estate agents, Non-financial asset investors and Machinery andequipment hiring and leasing.
18

Other industry includes Health & Community Services, Education, Communication Services and Personal & Other Services.

19

Some prior period numbers have been restated due to reclassification.

27

ANZ Basel II Pillar 3 disclosure

September 2012

Mar 12Agriculture,
Forestry, Fishing& Mining$M

Business
Services$M

Construction$M

Electricity,
Gas & Water
Supply$M

Corporate

33,941

8,200

6,102

8,029

10,611

Sovereign

333

1

86

839

2

Bank

12

45

5

2

-

-

-

-

Portfolio Type

Residential Mortgage
Qualifying Revolving Retail
Other RetailSpecialised Lending
Total exposures% of Total

Entertainment,
Financial,
Leisure & Investment &Tourism
Insurance$M$M

Government
and Official
Institutions$M

Manufacturing$M

Personal$M

Property
Services$M

Wholesale
Trade$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

16,872

2,501

34,176

1,220

16,947

22,952

13,8649,550

14,819199,784

32,902

20,140

251

249

520

50

-

419

314

56,106

4

40,884

-

39

55

2

70

3

61

61

41,243----247,332

-

-

-

-

-

247,332

-

-

-

-

-

-

-

-

23,311

-

-

-

-

-

23,311

2,818

1,770

2,537

78

843

318

7

892

15,853

848

630

2,001

1,010

1,983

31,588

287

-

-

1,731

90

-

-

217

-

25,651

-

-

2,980

418

31,37437,391

10,016

8,730

10,67911,55090,976

22,64835,575

288,020

43,96823,702

15,86814,02017,595

630,738

5.9%

1.6%

1.4%

1.7%

1.8%

14.4%

3.6%

5.6%

45.7%

7.0%

3.8%

2.5%

2.2%

2.8%

100.0%

Entertainment,
Financial,
Leisure & Investment &Tourism
Insurance$M$M

Government
and Official
Institutions$M

Manufacturing$M

Personal$M

Property
Services$M

Wholesale
Trade$M

Retail Trade$M

Transport &Storage
$M

Other
$M

Total
$M

Sep 11Agriculture,
Forestry, Fishing& Mining$M

Business
Services$M

Construction$M

Electricity,
Gas & Water
Supply$M

Corporate

33,844

8,160

5,796

7,764

10,08020,3091,724

34,296865

16,272

19,07913,232

9,406

15,262

196,089

Sovereign

85

-

89

632

-

25,272

25,220

223

177

497

28

-

27

290

52,540

Bank

-

-

-

18

-

42,151

-

16

-

42

10

-

42

29

42,308Residential Mortgage

-

-

-

-

-

-

-

-

237,636

-

-

-

-

-

237,636

Portfolio Type

Qualifying Revolving Retail
Other retailSpecialised Lending
Total exposures% of Total

-

-

-

-

-

-

-

-

23,320

-

-

-

-

-

23,320

2,420

1,757

2,490

76

823

307

8

878

15,111

824

638

1,984

1,007

2,135

30,458

309

-

298

2,016

145

186

-

247

6

24,706

-

-

2,724

284

30,921

36,658

9,917

8,673

10,506

11,04888,225

26,95235,660277,115

42,341

19,755

15,216

13,20618,000613,272

6.0%

1.6%

1.4%

1.7%

1.8%

14.4%

4.4%

5.8%

45.2%

6.9%

3.2%

2.5%

2.2%

2.9%

100.0%

28

ANZ Basel II Pillar 3 disclosure

September 2012

Table 4(e): Residual contractual maturity of Exposure at Default 20

Sep 12< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

88,976

99,66020,817

108

209,561

Sovereign

38,97014,977

9,967-

63,914

Bank

25,868

16,644939-

43,451

653

3,549

221,393

29,019254,614

Portfolio Type

Residential Mortgage
Qualifying Revolving Retail

-

-

-

22,93322,933

Other Retail

10,76014,334

8,006-

33,100Specialised Lending

11,175

17,772

2,506

52

31,505

Total exposures

176,402

166,936

263,628

52,112659,078

Mar 12< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

84,454

94,31820,860152

199,784

Sovereign

37,623

14,884

3,599-

56,106

Bank

23,72016,332

1,191-

41,243

Residential Mortgage

2,415

4,727

209,664

30,526247,332

Portfolio Type

Qualifying Revolving Retail

-

-

-

23,311

23,311Other Retail

10,97113,8086,490

319

31,588Specialised Lending

11,003

17,282

3,048

41

31,374

Total exposures

170,186

161,351

244,852

54,349630,738

Sep 11< 12 mths$M

1 - 5 years$M> 5 years$M

No Maturity
Specified
$M

Total
$M

Corporate

89,257

87,175

19,544113

196,089

Sovereign

22,39925,5984,543-

52,540Bank

23,341

18,843124-

42,308Residential Mortgage

2,303

4,586

201,673

29,074

237,636

Portfolio Type

Qualifying Revolving Retail

-

-

-

23,32023,320

Other Retail10,725

13,1236,307

303

30,458Specialised Lending

11,922

15,4073,550

4230,921

Total exposures

159,947

164,732

235,741

52,852

613,27220No Maturity Specified predominately includes credit cards and residential mortgage equity manager accounts.

29

ANZ Basel II Pillar 3 disclosure

September 2012

Table 4(f) part (i): Impaired assets21 22, Past due loans23, Provisions and Write-offs by
Industry sector24
Sep 12

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥
90 days$M

Individual
provisionbalance$M

Individual
provision
charge forhalf year$M

Write-offs
for half
year
$M

-

1,142

229

312

70

54

-

158

41

70

24

47

Construction

-

149

49

66

141

124

Electricity, gas and water supply

2

273

27

5

6

2

Entertainment Leisure & Tourism

-

156

45

41

17

11

Financial, Investment & Insurance

-

210

26

28

(15)

6

Government & Official Institutions

-

-

-

-

-

-

Manufacturing

9

489

26

234

163

105

Personal
Property Services
Retail Trade
Transport & Storage
Wholesale Trade

-

798

970

412

256

359

11

796

133

211

51

73

-

112

85

64

20

16

94

383

19

158

103

7

-

241

29

130

29

21

Other

-

173

34

42

22

16

Total

116

5,080

1,713

1,773

887

841

21
Impaired derivatives is net of credit valuation adjustment (CVA) of $105 million, being a market value based
assessment of the credit risk of the relevant counterparties (March 2012: $74 million; September 2011: $68 million).
22

Impaired loans / facilities include restructured items of $525 million for customer facilities in which the originalcontractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring
may consist of reduction of interest, principal or other payments legally due, or an extension in maturity materiallybeyond those typically offered to new facilities with similar risk (March 2012: $340 million; September 2011: $700
million).
23

Past due loans ≥ 90 days includes $1,475 million well secured loans (March 2012: $1,736 million; September
2011: $1,593 million).

24

Some prior period comparatives have been restated to reflect reclassification between industries.

30

ANZ Basel II Pillar 3 disclosure

September 2012

Mar 12
Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance
$M

-

1,135

195

309

53

21

-

275

26

112

11

19

Construction

-

117

53

49

17

13

Electricity, gas and water supply

-

249

2

2

-

-

Entertainment Leisure & Tourism
Financial, Investment &Insurance
Government & Official Institutions

-

157

35

32

2

8

-

215

23

30

98

79

-

-

-

-

-

-

Manufacturing

1

322

31

177

73

20

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Personal

-

925

1,226

481

264

353

74

927

163

252

137

110

-

83

56

52

14

14

76

376

22

71

44

5

Wholesale Trade

-

260

20

116

(26)

9

Other

-

151

24

31

3

11

Total

151

5,192

1,876

1,714

690

662

Property Services
Retail Trade
Transport & Storage

Sep 11
Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance
$M

-

1,122

174

288

71

17

-

311

29

102

34

18

Construction

-

103

42

49

27

30

Electricity, gas and water supply

-

83

1

2

(24)

-

Entertainment Leisure & Tourism
Financial, Investment &Insurance
Government & Official Institutions

-

198

29

37

(9)

6

-

229

10

40

(17)

14

-

-

-

-

-

-

Manufacturing

-

768

30

132

1

63

Industry Sector
Agriculture, Forestry, Fishing &MiningBusiness Services

Personal

-

1,012

1,296

525

303

397

35

1,031

113

232

124

116

Retail Trade

-

113

44

63

13

16

Transport & Storage

2

88

14

35

11

12

Wholesale Trade

-

300

23

150

71

13

Other

1

185

29

42

15

16

Total

38

5,543

1,834

1,697

620

718

Property Services

31

ANZ Basel II Pillar 3 disclosure

September 2012

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

Sep 12

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance$M

Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Portfolios subject to Advanced IRB approach
Corporate

15

2,461

358

803

416

320

Sovereign

-

-

-

-

-

-

Bank

-

-

-

-

-

-

Residential Mortgage

-

491

898

173

39

42

Qualifying Revolving Retail

-

-

83

1

133

161

Other Retail

-

403

198

210

148

178

Total Advanced IRB approach

15

3,355

1,537

1,187

736

701

Specialised Lending

99

1,373

117

333

123

78

20

Portfolios subject to Standardised approach
Corporate

2

209

30

143

45

Residential Mortgage

-

23

4

14

6

1

Qualifying Revolving Retail

-

65

13

65

15

30

Other Retail

-

55

12

31

(38)

11

Total Standardised approach

2

352

59

253

28

62

116

5,080

1,713

1,773

887

841

Total

32

ANZ Basel II Pillar 3 disclosure

September 2012

Mar 12

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance$M

Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Portfolios subject to Advanced IRB approach
Corporate

66

2,360

331

729

236

178

Sovereign

-

-

-

-

-

-

Bank

-

78

-

50

-

-

Residential Mortgage

-

560

1,041

185

44

46

Qualifying Revolving Retail

-

-

93

-

121

146

Other Retail

-

385

202

216

117

148

Total Advanced IRB approach

66

3,383

1,667

1,180

518

518

Specialised Lending

85

1,475

136

299

168

86

5

Portfolios subject to Standardised approach
Corporate

-

123

23

66

(1)

Residential Mortgage

-

23

5

16

5

1

Qualifying Revolving Retail

-

77

22

75

25

37

Other Retail

-

111

23

78

(25)

15

Total Standardised approach

-

334

73

235

4

58

151

5,192

1,876

1,714

690

662

Total

Sep 11

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans ≥ 90
days
$M

Individual
provisionbalance$M

Individual
provision
charge for
Write-offs
half year for half year
$M
$M

Portfolios subject to Advanced IRB approach
Corporate

25

2,767

206

611

150

151

Sovereign

-

-

-

-

-

-

Bank

-

83

-

53

32

-

Residential Mortgage

-

599

1,150

189

41

44

Qualifying Revolving Retail

-

-

86

-

130

154

Other Retail

-

341

153

210

150

173

Total Advanced IRB approach

25

3,790

1,595

1,063

503

522

Specialised Lending

13

1,106

75

225

85

114

15

Portfolios subject to Standardised approach
Corporate

-

397

120

188

6

Residential Mortgage

-

20

4

15

8

8

Qualifying Revolving Retail

-

91

27

91

26

42

Other Retail

-

139

13

115

(8)

17

Total Standardised approach

-

647

164

409

32

82

38

5,543

1,834

1,697

620

718

Total

33

ANZ Basel II Pillar 3 disclosure

September 2012

Table 4(g): Impaired assets25 26, Past due loans27 and Provisions by Geography

Sep 12

Geographic region
Australia

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance
$M

111

3,335

1,473

1,128

1,788

New Zealand

-

1,157

181

368

496

Asia Pacific, Europe and America

5

588

59

277

481

116

5,080

1,713

1,773

2,765

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Total

Mar 12

Geographic region
Australia

150

3,249

1,570

985

2,025

New Zealand

-

1,320

232

403

503

Asia Pacific, Europe and America

1

623

74

326

466

151

5,192

1,876

1,714

2,994

Impairedderivatives$M

Impairedloans/
facilities$M

Past dueloans≥ 90 days$M

Individual
provisionbalance$M

Collective
provisionbalance$M

Total

Sep 11

Geographic region
Australia

35

3,457

1,523

908

2,147

New Zealand

-

1,421

242

402

528

Asia Pacific, Europe and America

3

665

69

387

501

38

5,543

1,834

1,697

3,176

Total

25
Impaired derivatives is net of credit valuation adjustment (CVA) of $105 million, being a market value based
assessment of the credit risk of the relevant counterparties (March 2012: $74 million; September 2011: $68 million).
26

Impaired loans / facilities include restructured items of $525 million for customer facilities in which the originalcontractual terms have been modified for reasons related to the financial difficulties of the customer. Restructuring
may consist of reduction of interest, principal or other payments legally due, or an extension in maturity materiallybeyond those typically offered to new facilities with similar risk (March 2012: $340 million; September 2011: $700
million).
27

Past due loans ≥ 90 days includes $1,475 million well secured loans (March 2012: $1,736 million; September
2011: $1,593 million).

34

ANZ Basel II Pillar 3 disclosure

September 2012

Table 4(h): Provision for Credit Impairment
Half year
Sep 12$M

Half year
Mar 12$M

Half year
Sep 11$M

Balance at start of period

2,994

3,176

3,177

Charge to income statement

(227)

(152)

(58)

(4)

-

-

2

(30)

57

2,765

2,994

3,176

Balance at start of period

1,714

1,697

1,717

New and increased provisions

1,270

1,023

1,051

Write-backs

(286)

(251)

(322)

Adjustment for exchange rate fluctuations

(5)

(29)

51

Discount unwind

(79)

(64)

(82)

Collective Provision

Disposal
Adjustments for exchange rate fluctuations
Total Collective Provision

Individual Provision

Bad debts written off

(841)

(662)

(718)

Total Individual Provision

1,773

1,714

1,697

Total Provisions for Credit Impairment

4,538

4,708

4,873

Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

334

2,431

2,765

Individual Provision

1,773

-

Specific Provision Balance and General Reserve for Credit Losses28

Sep 12

Total Provision for Credit Impairment

1,773
4,538

Mar 12
Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

312

2,682

2,994

Individual Provision

1,714

-

Total Provision for Credit Impairment

1,714
4,708

Sep 11
Specific Provision
Balance$M

General Reserve for
Credit Losses
$M

Total
$M

Collective Provision

375

2,801

3,176

Individual Provision

1,697

-

Total Provision for Credit Impairment

1,697
4,873

28

Due to definitional differences, there is a variation in the split between ANZ’s Individual Provision and Collective
Provision for accounting purposes and the Specific Provision and General Reserve for Credit Losses (GRCL) for
regulatory purposes. This does not impact total provisions, and essentially relates to the classification of collectively
assessed provisions on defaulted accounts. The disclosures in this document are based on Individual Provision andCollective Provision, for ease of comparison with other published results.

35

ANZ Basel II Pillar 3 disclosure

Table 5September 2012

Credit risk – Disclosures for portfolios subject to theStandardised approach and supervisory risk weights in the
IRB approach

Use of external rating agencies (External Credit Assessment Institutions)
ANZ portfolios under the Standardised approach are mainly Retail portfolios and hence are not rated
by external rating agencies. However, there are a small number of local corporate counterparties thatare externally rated. For these counterparties, external ratings by Standard & Poor’s and Moody’s
Investors Service are used as inputs into the RWA calculation. As described in the section on the ANZ
rating system, ANZ has mapped its master scale to the gradings of these two External Credit
Assessment Institutions (ECAIs).
Table 5(b): Exposure at Default by risk bucket

Risk weightSep 12$M

Standardised approach exposures

Mar 12$M

Sep 11
$M

0%

-

-

-

20%

-

111

4

35%

2,434

2,407

1,939

50%

375

268

61

75%

971

1

68

100%

20,24826,22926,439

150%

847

1,464

84

>150%

-

-

-

Capital deductions

-

-

-

24,87530,48028,594

Total

Other Asset exposures
0%

-

-

-

20%

1,092

1,150

1,431

35%

-

-

-

50%

-

-

-

75%

-

-

-

100%

3,367

3,623

3,237

150%

-

-

-

>150%

-

-

-

Capital deductions

-

-

-

4,459

4,773

4,668

Total

Specialised Lending exposures
0%

1,478

1,528

1,508

70%

9,954

10,43910,22190%

15,102

14,001

13,211

115%

3,970

4,088

4,623

250%

1,001

1,318

1,358

Total

31,50531,37430,921Equity exposures
300%

58

21

1

400%

214

293

349

Total

272

314

350

36

ANZ Basel II Pillar 3 disclosure

Table 6

September 2012

Credit risk – Disclosures for portfolios subject to Advanced
IRB approaches

Portfolios subject to the Advanced IRB (AIRB) approach
The following table summarises the types of borrowers and the rating approach adopted within each of
ANZ’s AIRB portfolios:
IRB Asset Class

Borrower Type

Rating Approach

Corporate

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

AIRB

Sovereign

Central governments
Central banks
Certain multilateral development banks

AIRB

Bank

Banks29
In Australia only, other authorised deposit taking
institutions (ADI) incorporated in Australia

AIRB

Residential
mortgages

Exposures secured by residential property

AIRB

Consumer credit cards <$100,000 limit

AIRB

Other retail

Small business lending
Other lending to consumers

AIRB

Specialised Lending

Income Producing Real Estate30
Project financeObject finance

AIRB – Supervisory
Slotting31

Qualifying
retailrevolving

EquityOther assets

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

AIRB –
weights

fixed

risk

AIRB –
weights

fixed

risk

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

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

•

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

29

The IRB asset classification of investment banks is Corporate, rather than Bank.

30

Since 2009, APRA has agreed that some large, well-diversified commercial property exposures may be treated ascorporate exposures, in line with the original Basel Committee’s definition of Specialised Lending.
31

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

37

ANZ Basel II Pillar 3 disclosure•

September 2012

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

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

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

•

Measure the LGD as expressed by the Security Indicator (SI) ranging from A to G. The SI iscalculated by reference to the percentage of loan covered by security which can be realised in theevent of default. This calculation uses standard ratios to adjust the current market value ofcollateral items to allow for historical realisation outcomes. The security-related SIs aresupplemented with a range of other SIs which cover such factors as cash cover, mezzanine
finance, intra-group guarantees and sovereign backing as ANZ’s LGD research indicates thatthese transaction characteristics have different recovery outcomes. ANZ’s LGD also includes
recognition of the different legal and insolvency regimes in different countries, where this has
been shown to influence recovery outcomes.

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

Moody’sStandard & Poor’s

PD Range

0+ to 1-

Aaa to < A1

AAA to < A+

0.0000 - 0.0346%

2+ to 3+

A1 to < Baa2

A+ to < BBB

0.0347 - 0.1636%

3= to 4=

Baa2 to < Ba1

BBB to < BB+

0.1637 - 0.5108%

4- to 6-

Ba1 to < B1

BB+ to < B+

0.5109 - 3.4872%

7+ to 8+

B1 to < Caa

B+ to < CCC

3.4873 - 10.0928%

8=

Caa

CCC

10.0929 - 99.9999%

8-, 9 and 10

Default

Default

100%

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

•

Minimum origination standards.

•

Concentration limits.

•

Portfolio reporting.

•Customer profitability measurement.

•Collective provision measurement.

•

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

•

Pricing decisions.

PD, LGD and EAD are used in the calculation of economic capital and in the collective provisioning
process. Regulatory and economic capital are calculated from the same data sources and starting fromthe same basis, however there are some differences between the factors used because several
aspects of ANZ’s rating system are adjusted in accordance with APRA requirements for regulatory
capital purposes. The most significant of these adjustments are the use for regulatory capital purposes

38

ANZ Basel II Pillar 3 disclosure

September 2012of downturn LGDs; the imposition of a 20% LGD floor for exposures secured by Australian residential
real estate and the mandatory use of the supervisory slotting approach for project finance and mostcommercial real estate exposures.
Controls surrounding the ratings system
ANZ’s rating system and credit risk estimates are governed by the Board Risk Committee and several
executive management committees, and are underpinned by a comprehensive framework of controlsthat operate throughout ANZ. All policies, methodologies, model designs, model reviews, validations,
responsibilities, systems and processes supporting the ratings systems are documented, and subject
to review by Global Internal Audit.
The design, build and implementation of credit rating models resides with a specialist Group-levelteam. The use (including overrides) and performance of credit rating models is monitored by therelevant business and their counterparts in Risk, and validated regularly by a separate specialist
Group-level function. This cycle of design, build, implementation, monitoring and validation isoverseen by the CRSOC, and informs the need for new models or recalibration of existing models.
Risk grades are an integral part of reporting to the Board and executives.
In addition, the use of the rating system’s outputs in key business unit performance measures inprocesses such as provisioning and the allocation of economic capital ensures that the rating system
receives robust input from the business units, not just the specialist modelling teams.
Rating process by asset class
Building reliable and accurate rating tools requires balancing of many factors including data availability(external data may be used in some circumstances, where it is relevant), the size of the segment (themore customers within the segment, the more likely that statistically reliable models can be built),
and the need to be able to validate the model. Rating tool approaches include:•

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

•

Statistical models producing an internal rating, which involve calibrating ANZ’s models to externalrating data where data on defaults is insufficient for statistical purposes (such as banks).

•

Hybrid statistical and expert models producing an internal rating, which use a mixture of default
data and expert input.

•

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

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

39

ANZ Basel II Pillar 3 disclosure

September 2012

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

Borrower type

Rating Approach

Corporate

Corporations,partnerships
orproprietorships that do not fit into any otherasset class

Mainly statistical models
Some use of expert models andpolicy processes

Sovereign

Central governments
Central banks
Certain multilateral development banks

External rating
judgement

Bank

Banks
In Australia only, other ADIs incorporated inAustralia

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

Residential
Mortgages

Exposures secured by residential property

Statistical models

Qualifying Revolving
RetailConsumer credit cards <$100,000 limit

Statistical models

Other Retail

Small business lending
Other lending to consumers

Statistical models

Specialised Lending

Income Producing Real Estate
Project financeObject financeSupervisory Slotting32

andexpert

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

32

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

40

ANZ Basel II Pillar 3 disclosure

September 2012

Table 6(d): Non Retail Exposure at Default subject to Internal Ratings Based (IRB)
approach33 34 35 36
Sep 12
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Corporate

8,462

41,966

66,48065,730

3,637

1,874

SovereignBank

58,52633,544

1,727
3,665

421
4,880

3,176
1,354

62
6

2
2

100,532

47,35871,781

70,260

3,705

1,878

3,479 298,993

33.6%

15.8%

24.0%

23.5%

1.3%

0.6%

1.2%

100.0%

Undrawn commitments (included in above)
Corporate
3,803
17,247

Default
$M

Total
$M

Exposure at Default

Total% of Total

Sovereign
Bank
Total

3,479 191,628-

63,91443,451

18,026

11,483

398

138

100

51,195

639
98

327
81

42
18

61
14

1

-

-

1,069
212

4,540

17,65518,086

11,558

399

138

100

52,476

Average Exposure at Default
Corporate

0.171

2.671

1.079

0.375

0.560

0.276

1.003

0.600

SovereignBank

54.5447.125

27.858
2.754

8.592
3.011

13.344
1.454

4.776
0.291

0.245
0.076

-

44.416
5.034

46.8%

Exposure-weighted average Loss Given Default (%)
Corporate

56.5%

59.7%

46.8%

38.5%

37.5%

40.4%

37.2%

Sovereign

2.5%

4.8%

29.4%

54.1%

58.9%

55.5%

-

5.4%

Bank

64.5%

65.7%

72.8%

73.5%

62.7%

65.8%

-

65.8%

58.3%

Exposure-weighted average risk weight (%)
Corporate

18.5%

36.1%

52.2%

72.8%

117.1%

179.1%

140.9%

Sovereign

0.5%

1.8%

30.2%

110.7%

207.7%

469.8%

-

6.4%

Bank

14.7%

22.9%

72.9%

118.7%

232.1%

329.9%-

252.3%

33
In accordance with APS 330, EAD in Table 6(d) includes Advanced IRB exposures; however does not include
Specialised Lending, Standardised, Securitisation, Equities or Other Assets exposures. Specialised Lending is
excluded from Table 6(d) as it follows the Supervisory Slotting treatment, and a breakdown of risk weightings isprovided in Table 5(b).
34

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

35

Exposure-weighted average risk weight (%) is calculated as RWA divided by EAD.

36

Some prior period comparatives have been restated.

41

ANZ Basel II Pillar 3 disclosure

September 2012

Mar 12
AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Corporate

7,008

39,391

59,62660,041

4,019

2,396

SovereignBank50,31032,066

1,625
3,592

213
4,186

3,896
1,314

59
6

3
1

Total

89,38444,60864,02565,251

4,084

2,400

3,068 272,820% of Total

32.8%

16.3%

23.5%

23.9%

1.5%

0.9%

1.1%

100.0%

Default
$M

Total
$M

Exposure at Default
2,990 175,471
78

56,106
41,243

Undrawn commitments (included in above)
Corporate

3,462

17,79518,086

10,958

249

298

103

50,951

Sovereign

640

280

31

95

-

-

-

1,046

Bank

575

41

14

9

1

-

-

640

Total

4,677

18,11618,131

11,062

250

298

103

52,637

Average Exposure at Default
Corporate

0.134

2.495

0.918

0.309

0.540

0.360

0.802

0.515

Sovereign36.51026.6383.081

13.767

3.909

0.300

-

30.878

Bank

7.731

4.211

3.047

1.371

0.354

0.080

1.987

5.571

Exposure-weighted average Loss Given Default (%)
Corporate
Sovereign

56.5%
2.6%

59.4%
5.2%

46.1%
21.5%

35.5%
52.9%

39.5%
58.2%

43.1%
50.5%

36.6%
-

45.5%
6.3%

Bank

64.6%

61.2%

72.4%

73.9%

60.4%

69.3%

61.3%

65.4%

Exposure-weighted average risk weight (%)
Corporate
17.9%
36.8%
Sovereign
Bank

52.0%

67.5%

124.5%

196.6%

142.5%

57.7%

0.4%
14.9%

1.9%
21.8%

21.7%
68.6%

109.5%
118.2%

207.7%
208.6%

393.0%
335.0%

161.5%

8.3%
24.7%

AAA
< A+
$M

A+
< BBB
$M

BBB
< BB+
$M

BB+
< B+
$M

B+
< CCC
$M

CCC
$M

Default
$M

Total
$M

Corporate

7,201

40,33056,956

58,128

5,276

1,897

3,457

173,245

SovereignBank

46,01733,733

2,772
2,988

40
4,267

3,343
1,171

366
2

80

2
67

52,54042,308

Total

86,95146,09061,26362,642

5,644

1,977

3,526

268,093

32.4%

17.2%

22.9%

23.4%

2.1%

0.7%

1.3%

100.0%

Undrawn commitments (included in above)
Corporate
2,296
19,103

Sep 11

Exposure at Default% of Total

17,295

10,118

490

196

125

49,623

962
217

208
66

7
80

38
13

2
-

1

-

1,217
377

3,475

19,377

17,382

10,169

492

197

125

51,217

Average Exposure at Default
Corporate
0.527

1.017

0.378

0.218

0.460

0.244

0.797

0.275

Sovereign13.725

6.688

0.728

6.182

16.718

-

0.149

7.610

Bank

0.665

0.857

2.367

1.472

0.051

14.973

1.868

0.615

Sovereign
Bank
Total

Exposure-weighted average Loss Given Default (%)
Corporate
Sovereign

56.9%
2.7%

60.9%
5.3%

48.4%
27.6%

35.8%
55.3%

40.7%
40.7%

46.0%
-

33.6%
54.8%

46.9%
6.4%

Bank

62.4%

64.2%

65.2%

65.3%

35.0%

69.9%

64.2%

62.9%

Exposure-weighted average risk weight (%)
Corporate
15.8%
37.9%

54.7%

70.4%

130.0%

215.7%

193.5%

61.3%

Sovereign

0.4%

1.9%

35.3%

109.1%

124.5%-

724.5%

8.3%

Bank

14.1%

19.3%

59.0%

105.8%

115.0%

326.6%

160.5%

22.4%

42

ANZ Basel II Pillar 3 disclosure

September 2012

Table 6(d): Retail Exposure at Default subject to Advanced Internal Ratings Based (IRB)
approach by risk grade
Sep 120.00%<0.11%$M

0.11%<0.30%$M

0.30%<0.51%
$M

0.51%
3.49%
10.09%<3.49% <10.09% <100.0%
$M
$M
$M

2,392
11,068165,193
121

18,283
1,891

52,735
4,932

747

3,190

1,849

18,362

5,988

904

14,207 168,504

22,02376,02915,1705,184

2,588 303,705

7.3%

25.0%

5.0%

1.7%

0.9%

100.0%

992
1,227

2,909
2,182

179
510

65
114

2
19

22,916
12,878

Default
$M

Total
$M

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total% of Total

4.7%

55.4%

7,404
1,778

3,318
962

1,514 250,839
160
20,912914

31,954

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

882
8,705

17,887
121

659

2,208

1,162

2,457

195

46

5

6,732

10,246

20,216

3,381

7,548

884

225

26

42,526

Residential Mortgage
Qualifying Revolving Retail

0.025
0.011

0.214
0.006

0.141
0.010

0.176
0.009

0.223
0.009

0.242
0.008

0.182
0.009

0.186
0.010

Other Retail

0.007

0.007

0.008

0.015

0.010

0.006

0.022

0.012

Total
Average Exposure at Default

Exposure-weighted average Loss Given Default (%)
Residential Mortgage

16.6%

19.6%

18.6%

22.8%

21.1%

20.0%

24.1%

20.2%

Qualifying Revolving Retail

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

73.2%

Other Retail

57.0%

51.8%

59.1%

43.8%

50.6%

63.9%

58.3%

47.8%

Exposure-weighted average risk weight (%)
Residential Mortgage

4.3%

6.5%

13.5%

31.8%

77.8%

109.4%

225.3%

17.1%

Qualifying Revolving Retail

4.9%

11.4%

14.1%

38.9%

105.8%

206.8%

329.4%

33.9%

Other Retail

14.9%

22.7%

40.0%

57.3%

79.5%

155.2%

254.6%

66.2%

43

ANZ Basel II Pillar 3 disclosure

September 2012

Mar 120.00%< 0.11%$M

0.11%< 0.30%$M

0.30%< 0.51%$M

0.51%
3.49% 10.09%< 3.49% < 10.09% < 100.0%
$M
$M
$M

Default
$M

Total
$M

Residential Mortgage

2,272

156,148

18,49555,199

6,701

3,606

1,771

244,192

Qualifying Revolving Retail

10,951

355

1,872

4,997

1,939

1,104

169

21,387

282

3,410

1,727

17,527

5,713

964

862

30,485

13,505 159,913

22,094

77,723

14,353

5,674

2,802

296,064

7.5%

26.3%

4.8%

1.9%

0.9%

100.0%

1,083
1,195

2,671
2,159

161
516

63
120

2
18

22,285
12,888

Exposure at Default

Other Retail
Total% of Total

4.6%

54.0%

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

815
8,526

Other Retail

17,490
354

200

2,550

950

2,368

280

56

3

6,407

9,541

20,394

3,228

7,198

957

239

23

41,580Residential Mortgage
Qualifying Revolving Retail

0.025
0.011

0.207
0.006

0.138
0.010

0.176
0.009

0.210
0.009

0.240
0.008

0.180
0.008

0.181
0.010

Other Retail

0.023

0.010

0.011

0.014

0.009

0.006

0.020

0.012

Exposure-weighted average Loss Given Default (%)
Residential Mortgage
20.0%
20.0%
21.3%

23.4%

21.3%

20.0%

22.0%

20.9%

Qualifying Revolving Retail
Other Retail

73.2%
50.9%

73.2%
44.5%

73.2%
51.6%

73.2%
65.7%

73.2%
59.1%

73.2%
49.4%

Total
Average Exposure at Default

73.2%
36.7%

73.2%
64.1%

Exposure-weighted average risk weight (%)
Residential Mortgage
Qualifying Revolving Retail

5.1%
4.7%

6.7%
11.1%

15.2%
13.7%

31.9%
38.4%

78.9%
103.6%

108.7%
205.8%

209.4%
351.6%

17.5%
35.6%

Other Retail

9.9%

30.1%

34.5%

57.8%

81.3%

159.2%

247.1%

65.9%

0.00%
< 0.11%$M

0.11%< 0.30%$M

0.30%< 0.51%$M

0.51%
3.49% 10.09%< 3.49% < 10.09% < 100.0%
$M
$M
$M

Default
$M

Total
$M

4,685
10,800152,771319

19,362
1,884

44,367
4,956

1,897
156

234,882
21,219

38

3,669

1,452

17,359

5,429

890

726

29,563

15,523 156,759

22,69866,682

14,533

6,690

2,779

285,664

7.9%

23.3%

5.1%

2.3%

1.0%

100.0%

1,286
1,208

3,296
2,120

291
576

279
114

4
17

23,794
12,727

Sep 11

Exposure at Default
Residential Mortgage
Qualifying Revolving Retail
Other Retail
Total% of Total

5.4%

54.9%

7,035
2,069

4,765
1,035

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

576
8,374

18,062
318

35

2,593

905

2,670

275

67

4

6,548

8,985

20,973

3,398

8,086

1,141

461

25

43,069Average Exposure at Default
Residential Mortgage
0.102

0.223

0.182

0.180

0.187

0.175

0.256

0.193

Qualifying Revolving Retail
Other Retail

0.006
0.010

0.010
0.012

0.009
0.014

0.008
0.009

0.008
0.007

0.008
0.034

0.010
0.012

Total

0.011
0.006

Exposure-weighted average Loss Given Default (%)
Residential Mortgage
Qualifying Revolving Retail

22.9%
73.2%

20.2%
73.2%

21.4%
73.2%

20.7%
73.2%

20.4%
73.2%

20.6%
73.2%

21.3%
73.2%

20.4%
73.2%

Other Retail

72.1%

61.4%

56.0%

44.5%

51.6%

65.2%

57.8%

49.4%

Exposure-weighted average risk weight (%)
Residential Mortgage
5.1%
6.9%

14.6%

27.8%

74.6%

113.2%

238.9%

17.5%

Qualifying Revolving Retail

4.7%

11.1%

13.8%

38.5%

104.8%

205.4%

294.2%

35.2%

Other Retail

18.1%

29.0%

38.3%

58.1%

81.3%

158.4%

236.5%

65.1%

44

ANZ Basel II Pillar 3 disclosure

September 2012

Table 6(e): Actual Losses by portfolio type
Half year Sep 12
Individual provision charge$M

Write-offs$M

Corporate

416

320

Sovereign

-

-

Bank

-

-

Residential Mortgage

39

42

Qualifying Revolving Retail

133

161

Other Retail

148

178

Total Advanced IRB

736

701

Specialised Lending

123

78

Standardised approach

28

62

887

841

Basel Asset Class

Total

Half year Mar 12
Individual provision charge$M

Write-offs$M

Corporate

236

178

Sovereign

-

-

Bank

-

-

Residential Mortgage

44

46

Qualifying Revolving Retail

121

146

Other Retail

117

148

Total Advanced IRB

518

518

Specialised Lending

168

86

Basel Asset Class

Standardised approach
Total

4

58

690

662

Half year Sep 11
Individual provision charge$M

Write-offs$M

Corporate

150

151

Sovereign--

Basel Asset Class

Bank

32

-

Residential Mortgage

41

44

Qualifying Revolving Retail

130

154

Other Retail

150

173

Total Advanced IRB

503

522

Specialised Lending

85

114

Standardised approach

32

82

620

718

Total

45

ANZ Basel II Pillar 3 disclosure

September 2012

Table 6(f): Average estimated vs actual PD, EAD and LGD – Advanced IRB

Average
Estimated PD%
1.43

Average
Actual PD%
1.07

Sep 12Averageestimated toactual EAD
ratio
1.11

0.41

nil

n/a

42.3
n/a

31.1

Sovereign
Bank

0.45

0.09

0.93

44.2

58.2

Specialised Lending

n/a

2.59

1.17

n/a

27.1

Residential Mortgage

0.84

0.82

1.00

20.7

3.9

Qualifying Revolving Retail

2.84

2.18

1.04

73.2

Other Retail

3.33

3.35

1.06

48.1

71.7
44.6

Portfolio Type
Corporate

Average
Estimated
LGD%

Average
Actual LGD%

APS 330 Table 6f compares internal credit risk estimates used in calculating regulatory capital withrealised outcomes by portfolio types averaged from 2009 to 2012 financial years. It covers the PD,
EAD and LGD estimates for the IRB portfolios.
Estimated PD and LGD for Specialised Lending exposures have not been provided, since APRA requires
the use of supervisory slotting for Regulatory EL calculations.
Actual PD, EAD ratio, Estimated LGD and Actual LGD for Sovereign exposures have not been provided,
since there was no Sovereign default observed in ANZ Sovereign exposures for the observation period.
The estimated PD is based on the average of the internally estimated long-run PD’s for obligors thatare not in default at the beginning of each financial year over the four years of observation. The actual
PD is based on the number of defaulted obligors compared to the total number of obligors measured
at the beginning of each financial year over the four years of observation.
The EAD ratio compares internally estimated EAD prior to default to realised EAD for defaulted
obligors over the four years of observation. A ratio greater than 1.0 signifies that on average, theactual defaulted exposures are lower than the estimated exposures at the time of default.
The estimated LGD is the internal estimates of downturn LGD for accounts that defaulted at the
beginning of each year during the observation period. The actual LGD is based on the average realised
losses over the period for the accounts that defaulted at the beginning of each year during theobservation period. For non-retail portfolios, the estimated and actual LGDs are based on accounts
that defaulted in 2009 and 2010 financial years. For retail portfolios, the estimated and actual LGDs
are based on accounts that defaulted in 2009 to 2011 financial years. For non-retail portfolios,defaults occurring in the 2011 and 2012 have been excluded from the analysis, to allow sufficient time
for workout period. Defaults occurring in 2012 have been also excluded for retail portfolios. For nonretail portfolios, actual LGD for defaults where workouts were not finalised have been estimated toapproximate the final actual loss. For the retail portfolios, defaults with non finalised workout havebeen excluded from the analysis.
In assessing the accuracy of the credit risk estimates, it should be noted that the period of analysis
does not cover a full economic cycle.

46

nil

ANZ Basel II Pillar 3 disclosure

Table 7

September 2012

Credit risk mitigation disclosures

Main types of collateral taken by ANZ
Collateral is used to mitigate credit risk, as the secondary source of repayment in case thecounterparty cannot meet its contractual repayment obligations.37 Types of collateral typically taken
by ANZ include:•

Security over residential, commercial, industrial or rural property.

•

Charges over business assets.

•

Security over specific plant and equipment.

•

Charges over listed shares, bonds or securities.

•

Charges over cash deposits.

•

Guarantees and pledges.

In some cases, such as where the customer risk profile is considered very sound or by the nature of
the product (for instance, small limit products such as credit cards), a transaction may not be
supported by collateral.
Credit policy and processes set out the acceptable types of collateral, as well as a process by which
additional instruments and/or asset types can be considered for approval. ANZ’s credit risk modellingteams use historical internal loss data and other relevant external data to assist in determining thediscount that each type would be expected to incur in a forced sale. The discounted value is used in
the determination of a SI for LGD purposes.
Policies and processes for collateral valuation and management
ANZ has well established policies and processes around collateral valuation and management. The
concepts of legal enforceability, certainty and current valuation are central to collateral management.
In order to achieve legal enforceability and certainty, ANZ uses standard collateral instruments or has
specific documentation drawn up by external legal advisers, and where applicable, security interests
are registered. The use of collateral management systems also provides certainty that the collateral
has been properly taken, registered and stored.
In order to rely on the valuation of collateral assets, ANZ has developed comprehensive rules aroundacceptable types of valuations (including who may value an asset), the frequency of revaluations andstandard extension ratios for typical asset types. Upon receipt of a new valuation, the information isused to recalculate the SI (or to reassess the adequacy of the provision, in the case of an impaired
asset), thereby ensuring that the exposure has an updated LGD attached to it for risk quantification
purposes.
Guarantee support
Guarantee support for lending proposals are an integral component in transaction structuring for ANZ.
The guarantee of a financially strong party can help improve the PD of a transaction through its
explicit support of the weaker rated borrower.
Guarantees that are recognised for risk rating purposes may be provided by parties that include
associated entities, banks, sovereigns or individuals. Credit policy provides threshold parameters todetermine acceptable counterparties in achieving risk grade enhancement of the transaction.
The suitability of the guarantor is determined by risk rating that guarantor. Not all guarantees orguarantors are recognised for risk grade enhancement purposes.
Use of credit derivatives for risk mitigation
ANZ uses purchased credit derivatives to mitigate credit risk by lowering exposures to reference
entities that generate high concentration risk exposures or to improve risk return performance.
Only certain credit derivatives such as credit default swaps (CDS) are recognised for risk mitigation
purposes in the determination of regulatory capital. A CDS entails the payment by one party in

37
For some products, the collateral provided is fundamental to its structuring so is not strictly the secondary sourceof repayment. For example, lending secured by trade receivables is typically repaid by the collection of thosereceivables.

47

ANZ Basel II Pillar 3 disclosure

September 2012exchange for credit default protection payment if a credit default event on a reference asset occurs.
Standard, legally enforceable documentation applies.
For regulatory capital purposes, ANZ only recognises protection using credit derivatives where theymeet several policy and regulatory requirements around the strength of the protection offered such as
being irrevocable.
A CDS may only be transacted with banks and non-bank financial institutions that have been credit
assessed and approved by a designated specialist credit officer. All parties must meet minimum credit
standards and be allocated a related credit limit. In the event that the creditworthiness of a credit
protection provider falls below the minimum required to provide effective protection, the protection is
no longer recognised as an effective risk mitigant for regulatory purposes.
The use of netting
Netting is a form of credit risk mitigation in that it reduces EAD, by offsetting a customer’s positive
and negative balances with ANZ.
In order to apply on-balance sheet netting, the arrangement must be specifically documented with thecustomer and meet a number of legally enforceable requirements.
Netting is also used where the credit exposure arises from off-balance sheet market relatedtransactions. For close-out netting to be utilised with counterparties, a legally enforceable eligible
netting agreement in an acceptable jurisdiction must be in place. This means that each transaction isaggregated into a single net amount and transactions are netted to arrive at a single overall sum.
Transaction structuring to mitigate credit risk
Besides collateral, guarantee support and derivatives described above, credit risk mitigation can also
be furthered by prudent transaction structuring. For example, the risk in project finance lending canbe mitigated by lending covenants, loan syndication and political risk insurance.
Concentrations of credit risk mitigation
Taking collateral raises the possibility that ANZ may inadvertently increase its risk by becoming
exposed to collateral concentrations. For example, in the same way that an over-exposure to aparticular industry may mean that a bank is more sensitive to the fortunes of that industry, an overexposure to a particular collateral asset type may make ANZ more sensitive to the performance ofthat asset type.
ANZ does not believe that it has any material concentrations of collateral types, given the welldiversified nature of its portfolio and conservative asset extension ratios.

48

ANZ Basel II Pillar 3 disclosure

September 2012

Table 7(b): Credit risk mitigation on Standardised approach portfolios – collateral38
Sep 12

Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M

Total Exposure
post Credit Risk
Mitigation$M% Coverage

Corporate

18,271

338-

17,933

1.8%

Residential Mortgage

3,776

1

-

3,775

0.0%

Qualifying Revolving Retail

2,021

-

-

2,021

0.0%

Other Retail

1,146

-

-

1,146

0.0%

25,214339-

24,875

1.3%

Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M

Total Exposure
post Credit Risk
Mitigation$M% Coverage

Corporate

25,126813-

24,313

3.2%

Residential Mortgage

3,152

12

-

3,140

0.4%

Qualifying Revolving Retail

1,924

-

-

1,924

0.0%

Other Retail

1,103

-

-

1,103

0.0%

31,305825-

30,480

2.6%

Exposure$M

Eligible Financial
Collateral$M

Other Eligible
Collateral$M

Total Exposure
post Credit Risk
Mitigation$M% Coverage

Corporate

23,666822-

22,844

3.5%

Residential Mortgage

2,798

44

-

2,754

1.6%

Qualifying Revolving Retail

2,101

-

-

2,101

0.0%

896

1

-

895

0.1%

29,461867-

28,594

2.9%

Standardised approach

Total

Mar 12Standardised approach

Total

Sep 11

Standardised approach

Other Retail
Total

38
Eligible Collateral can include cash collateral (cash, certificates deposits and bank bills issued by the lending ADI),
gold bullion and highly rated debt securities

49

ANZ Basel II Pillar 3 disclosure

September 2012

Table 7(c): Credit risk mitigation – guarantees and credit derivatives39

Exposure$M

Exposurescovered by
Guarantees$M

Sep 12
Exposurescovered by
Credit Derivatives$M

Total Exposure
post Credit Risk
Mitigation$M% Coverage

Corporate (incl. Specialised Lending)

226,871

16,259150

223,133

7.2%

Sovereign

54,253

227-

63,9140.4%

Bank49,524

6,417-

43,451

13.0%

Residential Mortgage

250,839--

250,839

0.0%

Qualifying Revolving Retail

20,912--

20,912

0.0%

Other Retail

31,954--

31,954

0.0%

634,353

22,903150

634,203

3.6%

Corporate

17,933--

17,9330.0%

Residential Mortgage

3,775

-

-

3,775

0.0%

Qualifying Revolving Retail

2,021

-

-

2,021

0.0%

Other Retail

1,146

-

-

1,146

0.0%

24,875--24,8750.0%

Exposure$M

Exposurescovered by
Guarantees$M

Mar 12
Exposurescovered by
Credit Derivatives$M

Total Exposure
post Credit Risk
Mitigation$M% Coverage

Corporate (incl. Specialised Lending)

216,383

13,831

206

206,845

6.5%

Sovereign

41,366

213-

56,1060.5%

Bank46,6525,768

241,243

12.4%

Residential Mortgage

244,192--

244,192

0.0%

Qualifying Revolving Retail

21,387--

21,3870.0%

Other Retail30,485--30,4850.0%

600,465

19,812

208

600,258

3.3%

Corporate

24,313--24,3130.0%

Residential Mortgage

3,140

-

-

3,140

0.0%

Qualifying Revolving Retail

1,924

-

-

1,924

0.0%

Other Retail

1,103

-

-

1,103

0.0%

30,480--30,4800.0%

Advanced IRB

Total
Standardised approach

Total

Advanced IRB

Total
Standardised approach

Total

39
Table 7(c) shows the exposure amount by asset class gross and net of the impact of guarantees and credit
derivatives.

50

ANZ Basel II Pillar 3 disclosure

September 2012

Exposure$M

Exposurescovered by
Guarantees$M

Sep 11
Exposurescovered by
Credit Derivatives$M

Total Exposure
post Credit Risk
Mitigation$M% Coverage

Corporate (incl. Specialised Lending)

206,904

14,844126

204,166

7.2%

Sovereign

45,967108-

52,5400.2%

Bank46,2694,336-

42,308

9.4%

Residential Mortgage

234,882--

234,882

0.0%

Qualifying Revolving Retail21,219--21,2190.0%

Other Retail29,563--29,5630.0%

584,804

19,288

126584,678

3.3%

Corporate

22,844--

22,8440.0%

Residential Mortgage

2,754

-

-

2,754

0.0%

Qualifying Revolving Retail

2,101

-

-

2,101

0.0%

895

-

-

895

0.0%

28,594--28,5940.0%

Advanced IRB

Total
Standardised approach

Other Retail
Total

51

ANZ Basel II Pillar 3 disclosure

Table 8September 2012

General disclosures for derivatives and counterparty credit
riskDefinition of counterparty credit risk
Counterparty credit risk in derivative transactions arises from the risk of counterparty default before
settlement date of the derivatives contract and the counterparty will not be able to fulfil present andfuture contractual payments obligations. The amount at risk may change over time as a function of theunderlying market parameters up to the positive value of the contract in favour of ANZ.
Counterparty credit risk is present in market instruments (derivatives and forward contracts), andcomprises:•

Settlement risk, which arises where one party makes payment or delivers value in the expectation
but without certainty that the counterparty will perform the corresponding obligation in a bilateralcontract at settlement date.

•Market replacement risk (pre-settlement risk), which is the risk that a counterparty will default
during the life of a derivative contract and that a loss will be incurred in covering the position.

ANZ transacts market instruments with the following counterparties:•

End users – would typically use over the counter derivative instruments provided by ANZ tomanage price movement risk associated with their core business activity.

•

Professional counterparties – ANZ may hedge price movement risks by entering into transactions
with professional counterparties that conduct two way (buy and sell) business.

Counterparty credit risk requires a different method to calculate exposure at default because actual andpotential market movements impact ANZ’s exposure or replacement cost. The markets covered by thistreatment include the derivative activities associated with interest rates, foreign exchange, CDS,
equities, commodities and repurchase agreement (repo) products.
Counterparty credit risk governance
ANZ’s counterparty credit risk management is governed by its credit principles, policies and procedures.
The Counterparty Credit Risk function is responsible for determining the counterparty credit risk
exposure methodology applied to market instruments, in the framework for counterparty credit limit
management, measurement and reporting.
The counterparty credit risk associated with derivatives transactions is governed by credit limit setting
consistent with all credit exposures to the ANZ Group. Counterparty credit limits are approved by theappropriate credit delegation holders.
Counterparty credit risk measurement and reporting
The general approach is to calculate future exposure as the sum of the mark-to-market value of the
exposure, plus the sum of the notional principal multiplied by the potential credit risk exposure (PCRE)
add-on factor for the remaining period of the transaction.
ANZ measures counterparty credit risk exposure for positive mark-to-market positions i.e. thereplacement cost of an outstanding contract with a counterparty based on its current market value.
PCRE factors recognise that prices may change over the remaining period to maturity, and that risk
decreases as the contract’s remaining term to maturity decreases. In general terms PCRE is calculated
by applying a risk weighting or volatility factor to the face value of the notional principal of individual
trades.
PCRE factors are also used by credit officers to establish credit limits, to ensure the potential volatility ofthe transaction values is recognised. Counterparty credit risk is calculated daily and excesses above
approved limits are reported to account controllers and risk officers for action.

52

ANZ Basel II Pillar 3 disclosure

September 2012

Credit valuation adjustment
Over the life of a derivative instrument, ANZ uses a CVA model to adjust fair value to take into accountthe impact of counterparty credit quality. The methodology calculates the present value of expected
losses over the life of the financial instrument as a function of PD, LGD, expected credit risk exposureand an asset correlation factor.
Impaired derivatives are also subject to a CVA.
Wrong way risk
ANZ’s management of counterparty credit risk also considers the possibility of wrong way risk, which
emerges when PD is adversely correlated with market risk factors. ANZ’s credit policies and independenttransaction evaluation by Credit Risk are central to managing wrong way risk.
Counterparty credit risk mitigation and credit enhancements
ANZ’s primary tools to mitigate counterparty credit risk include:•

A bilateral netting master agreement (e.g. an International Swaps and Derivatives Association ISDA) allowing close-out netting of exposures in a portfolio with offsetting contracts, with a single
net payment with the same legal counterparty.

•

Use of collateral agreements in some transactions based on standard market documentation (i.e.
ISDA master agreement with credit support annex) that governs the amount of collateral required
to be posted or received by ANZ throughout the life of the contract. Some agreements are linked toexternal credit ratings which means in the event of a party’s (ANZ or a counterparty) externalrating being downgraded, it would likely be required to lodge collateral.

•

Use of right to break clauses in master agreement or in trade confirmation to reduce term of longdated derivative trades.

•

Independent limit setting, credit exposure control, monitoring and reporting of excesses against
approved credit limits.

•

Additional termination triggers (close out of exposure) such as credit rating downgrade clauses andchange in ownership clauses being included in documentation.

•

Linking covenants and events of default in existing loan facility agreement to master agreement.

•

Use of credit derivatives to hedge counterparty credit risk exposure.

•

Settlement through Continuous Linked Settlement (CLS) to eliminate settlement risk for foreignexchange transactions with CLS members.

•

Clearing certain derivative transactions through central counterparty clearing houses.

In the event of a downgrading of ANZ’s rating by one notch from AA- to A+, as at 30 September 2012,
ANZ would be required to lodge USD697 million additional collateral with its counterparties. This
represents a small percentage of ANZ's overall liquidity portfolio.

53

ANZ Basel II Pillar 3 disclosure

September 2012

Chapter 6 – Securitisation
Table 9Securitisation disclosures

Definition of securitisation and resecuritisation
A securitisation is a financial structure where the cash flow from a pool of assets is used to service
obligations to at least two different tranches or classes of creditors,40 typically holders of debt
securities, with each class or tranche reflecting a different degree of credit risk. This stratification of
credit risk means that one class of creditors is entitled to receive payments from the pool before
another class. A resecuritisation exposure is a securitisation exposure in which the risk associated withan underlying pool of exposures is tranched and at least one of the underlying exposures is asecuritisation exposure.
Securitisations may be categorised as:••

Traditional securitisations, where legal ownership of the underlying asset pool is transferred into aSpecial Purpose Vehicle (SPV), which finances the purchase by issuing debt instruments (notes)
to investors, with principal and interest paid from realisation of or regular cash flows from theassets. The SPV assets are insulated from bankruptcy of the seller or servicer.
Synthetic securitisations, where credit risk is transferred to a third party but legal ownership of
the underlying assets remain with the originator e.g. by using credit derivatives or guarantees.

Regulatory capital approaches used in ANZ’s securitisation activities
For securitisation exposures held in ANZ’s banking book41, ANZ applies an IRB approach (as outlinedin APS 120) to determine the regulatory capital charge.
Chapter 7 outlines regulatory capital treatment for securitisation exposures held in ANZ’s tradingbook.
Securitisation activities
ANZ’s key securitisation activities are:
•

•
•

•

Securitisation of ANZ originated assets (including self securitisation) – use of securitisation as afunding, liquidity and capital management tool which may or may not involve the transfer ofcredit risk i.e. may or may not provide regulatory capital relief.
Securitisation of third-party originated assets.
Provision of facilities and services to securitisations or resecuritisations (where the underlying
assets may be ANZ or third-party originated) e.g. liquidity, funding derivatives and/or credit
support, structuring and arranging services, conduit management and (via ANZ Capel Court
Limited) trust management services.
Investment in securities - ANZ may purchase notes issued by securitisation programmes.

Similar to other exposures, securitisation exposures are subject to credit, market, operational andlegal risks. Roles and responsibilities are clearly outlined in ANZ’s established risk management
framework of policies and procedures, including:•••Appropriate risk management systems to identify, measure, monitor and manage the risks arisingfrom its involvement in securitisation exposures;
Impact of ANZ’s involvement in securitisation exposures on its risk profile; andHow ANZ ensures that it does not provide any implicit support to its securitisation exposures.

Historically, ANZ utilised a conduit structure to facilitate the securitising of third party originatedassets via the issuance of asset backed commercial paper (ABCP). The conduit is no longer issuing
ABCP due to changes in regulatory and market conditions. Funding is instead provided on third party
originated exposures via warehouse arrangements where such arrangements satisfy ANZ’s credit, due
diligence and other business requirements.

40

APRA’s definition of securitisation includes certain cases where only one tranche or class of creditors is serviced by
the cash flow from the pool of assets.

41

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

54

ANZ Basel II Pillar 3 disclosure

September 2012

ANZ has no affiliated entities that ANZ manages or advises and that invests in securitisation
exposures that ANZ has securitised or in SPV’s that ANZ sponsors.
Governance of securitisation activities
Governance of securitisation activities is overseen by the Board and executive committees describedin Chapter 3, and managed in accordance with the credit risk and market risk frameworks described in
Chapters 5 and 7.
Many functions within ANZ are involved in securitisation activities given the range of activities
undertaken and risks that need to be managed. For origination and structuring, ANZ has a specialist
securitisation team with independent risk personnel overseeing operations. Credit decisions requirejoint risk and business approval. The securitisation team must be involved in all non-trading
securitisation transactions across ANZ, which ensures consistent expert treatment.
When ANZ invests in instruments issued by securitisation programs, the relevant business area
manages these exposures until the securitisation or resecuritisation exposures are repaid in full ortraded.
Risk measurement and reporting of securitisation exposures
In accordance with APS 120, ANZ has a hierarchy of approaches available to quantify the credit risk ofbanking book securitisation exposures. The most common approaches used are the Ratings BasedApproach (specifically utilising the external ratings of ECAI’s) and the Internal Assessment Approach(IAA).
When utilising the IAA, ANZ uses a rating agency-type methodology which specifies certain stressfactors, takes into account historical performance of assets and other (asset-specific) considerations
such as underwriting standards. IAA methodology is applied in accordance with APRA’s requirements
and it forms part of ANZ’s overall securitisation risk-grading framework.
All facilities provided to or investments in securitisation programs (across both the banking andtrading books) undergo initial and ongoing due diligence. This due diligence is completed with input
from the Risk function and includes analysing the structure of the transaction and monitoring of theperformance of the underlying assets of the transaction. In addition, such exposures are formallyreviewed at least annually, including the risk grade.
The type and frequency of reporting on ANZ’s securitisation exposures is as follows:••

Facilities provided to securitisation programs are reported using standard credit reporting
systems, distinguished by appropriate product codes. The regular reporting frequency for most ofthese systems is monthly.
Investments in securitisations are reported through the banking book or the trading book on amonthly basis.

The use and treatment of Credit Risk Mitigation (“CRM”) techniques with respect to securitisation
exposures is assessed on a case-by-case basis in a manner consistent with the bank-wide CRM
methodology.42
Accounting policies
The principal accounting policies governing ANZ’s securitisation activities are outlined in ANZ’s 2012
Annual Report, Notes to the Financial Statements. These include the valuation, derecognition,
consolidation and income recognition principles outlined in Note 1 – Significant Accounting Policies andthe critical judgments applied to these policies outlined in Note 2 – Critical Estimates and Judgments
Used in Applying Accounting Policies. ANZ applies these group accounting policies to its securitisation
activities, as appropriate. The policies as they apply to ANZ’s securitisation activities have not changed
since the prior period. Note 40 – Securitisations and Covered Bonds also provides details about thenature of ANZ’s securitisation activities and certain accounting policies as they specifically apply tothese activities.
Any SPV used in ANZ’s securitisation activities are assessed for control under the requirements of
AASB Interpretation 112 Consolidation – Special Purpose Entities. Where control is determined toexist, the SPV is consolidated into ANZ’s financial statements. Financial instruments held and issued
either by SPVs consolidated by ANZ or those held or issued to a non-consolidated SPV are recognised
and valued using the principles of AASB 139 Financial Instruments: Recognition and Measurement.
42

For example, various types of analysis including quantitative analysis of credit enhancements are performed for
non-externally rated transactions. Factors such as geography, facility / transaction type and ANZ’s role will
determine the applicable CRM techniques to apply.

55

ANZ Basel II Pillar 3 disclosure

September 2012

For synthetic securitisations, any transferred credit exposure is recognised through the fair value
measurement of the segregated embedded or stand-alone credit derivative established within the
structure.
To the extent that ANZ has exposures intended to be securitised, they could reside in either thebanking or trading book.
To the extent that ANZ has entered into contractual arrangements that could require it to provide
financial support for securitised assets e.g. liquidity facilities, these are recognised in accordance withthe accounting policies set out in ANZ’s 2012 Annual Report.
Use of external rating agencies
Where the use of external rating agencies is relevant, ANZ applies the ratings or the rating
methodologies provided by Standard & Poor’s, Moody's Investor Services and/or Fitch Ratings asappropriate.
Significant changes in quantitative information
During the reporting period, securitisation exposures have increased by $300 million, largely due toincrease in investment of securities issued by securitisation programmes. Over this period, nosecuritisation exposures were transferred from the trading book to the banking book, however anumber of facilities within the Banking Book were restructured causing changes on the categorisationof facilities in Table 9(k).

56ANZ Basel II Pillar 3 disclosure

September 2012

Banking Book
Table 9(g): Banking Book: Traditional and synthetic securitisation exposures
Sep 12
Traditional securitisations
ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage-

45,499-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

45,499-ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

Aggregate of traditional and synthetic securitisations
ANZ Originated$M
Underlying asset

ANZ Self Securitised$M

ANZ Sponsored$M

Underlying asset

Synthetic securitisations
Underlying asset

Residential mortgage-

45,499-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

45,499-57

ANZ Basel II Pillar 3 disclosure

September 2012

Mar 12
Traditional securitisations
Underlying asset

ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage

145

33,859-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

145

33,859-ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

Aggregate of traditional and synthetic securitisations
ANZ Originated$M
Underlying asset

ANZ Self Securitised$M

ANZ Sponsored$M

Synthetic securitisations
Underlying asset

Residential mortgage

145

33,859-Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

145

33,859-Sep 11
Traditional securitisations
Underlying asset

ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage

162

36,257479

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

162

36,257479

ANZ Originated$M

ANZ Self Securitised$M

ANZ Sponsored$M

Residential mortgage

-

-

-

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

-

-

-

Aggregate of traditional and synthetic securitisations
ANZ Originated$M
Underlying asset

ANZ Self Securitised$M

ANZ Sponsored$M

Synthetic securitisations
Underlying asset

Residential mortgage

162

36,257479

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

162

36,257479

58

ANZ Basel II Pillar 3 disclosure

September 2012

Table 9(h): Banking Book: Impaired and Past due loans relating to ANZ originatedsecuritisations
Sep 12ANZ Originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

Losses recognised
for the six month
ended
$M

Residential mortgage-

45,499-50-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

-

45,499-50-

Losses recognised
for the six month
ended
$M

Underlying asset

Mar 12

Underlying asset
Residential mortgage

ANZ Originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

145

33,859-115-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

145

33,859-115-

Losses recognised
for the six month
ended
$M

Sep 11

Underlying asset
Residential mortgage

ANZ Originated$M

ANZ Self
Securitised$M

Impaired$M

Past due$M

162

36,257-

110-

Credit cards and other personal loans

-

-

-

-

-

Auto and equipment finance

-

-

-

-

-

Commercial loans

-

-

-

-

-

Other

-

-

-

-

-

Total

162

36,257

-

110

-

59

ANZ Basel II Pillar 3 disclosure

Table 9(i):securitised

September 2012

Banking Book: Total amount of outstanding exposures intended to be

No assets from ANZ's Banking Book were intended to be securitised as at the reporting date.
Table 9(j): Banking Book: Securitisation - Summary of current year's activity by underlying
asset type and facility
Sep 12
Original value securitised

ANZ
Originated$M

ANZ Self
Securitised$M

ANZ
Sponsored$M

Recognised gainor loss
on sale$M

Residential mortgage-

11,640--Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

11,640--

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities

-

-

-

-

Funding facilities

-

-

-

396

Underwriting facilities

-

-

-

-

Lending facilities

-

-

-

-

Credit enhancements

-

-

-

-

Holdings of securities (excluding trading book)

-

-

-

609

Other

-

-

-

-

Total

-

-

-

1,005

Mar 12
Original value securitised

ANZ
Originated$M-

ANZ Self
Securitised
$M
839

ANZ
Sponsored$M-

Recognised gainor loss
on sale$M-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

839

-

-

Securitisation activity by underlying asset type
Residential mortgage

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities

-

-

-

-

Funding facilities

-

-

-

1,269

Underwriting facilities

-

-

-

-

Lending facilities

-

-

-

-

Credit enhancements

-

-

-

-

Holdings of securities (excluding trading book)

-

-

-

1,788

Other

-

-

-

42

Total

-

-

-

3,099

60

ANZ Basel II Pillar 3 disclosure

September 2012

Sep 11
Original value securitised
ANZ
Originated$M

ANZ Self
Securitised$M

ANZ
Sponsored$M

Recognised gainor loss
on sale$M

Residential mortgage

-

6,254

-

-

Credit cards and other personal loans

-

-

-

-

Auto and equipment finance

-

-

-

-

Commercial loans

-

-

-

-

Other

-

-

-

-

Total

-

6,254

-

-

Securitisation activity by underlying asset type

Notional amount$M

Securitisation activity by facility provided
Liquidity facilities

-

-

-

-

Funding facilities

-

-

-

98

Underwriting facilities

-

-

-

-

Lending facilities

-

-

-

-

Credit enhancements

-

-

-

-

Holdings of securities (excluding trading book)

-

-

-

625

Other

-

-

-

-

Total

-

-

-

723

61

ANZ Basel II Pillar 3 disclosure

September 2012

Table 9(k) : Banking Book: Securitisation – Regulatory credit exposures by exposure typeSep 12$M

Mar 12$M

Liquidity facilities

128

1,333

787

Funding facilities

5,007

3,202

2,684

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

2,925

2,689

1,213

Protection provided

-

-

Other

-

-

-

Total

8,060

7,224

4,684

Securitisation exposure type - Off balance sheet

Sep 12$M

Mar 12$M

Sep 11$M

Liquidity facilities

233

704

961

Funding facilities

60

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities (excluding trading book)

-

-

-

Protection provided

-

-

-

Other

-

25

25

Total

293

729

986

Sep 12$M

Mar 12$M

Sep 11$M

Liquidity facilities

361

2,037

1,748

Funding facilities

5,067

3,202

2,684

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

2,925

2,689

1,213

Securitisation exposure type - On balance sheet

Holdings of securities (excluding trading book)Total Securitisation exposure typeHoldings of securities (excluding trading book)Sep 11$M

Protection provided

-

-

-

Other

-

25

25

Total

8,353

7,953

5,670

62

ANZ Basel II Pillar 3 disclosure

September 2012

Table 9(l) part (i): Banking Book: Securitisation - Regulatory credit exposures by risk
weight band

Securitisation
risk weights≤ 25%

Sep 11
Sep 12
Mar 12
Regulatory credit
Risk weighted Regulatory credit
Risk weighted Regulatory credit
Risk weighted
exposure
assetsexposure
assetsexposure
assets
$M
$M
$M
$M
$M
$M
7,610
820
7,048
741
4,588
494

>25 ≤ 35%

-

-

-

-

-

>35 ≤ 50%

80

-

-

-

-

>50 ≤ 75%

154

220

121

162

83

>75 ≤ 100%

108

108

199

199

389

390

>100 ≤ 650%

38

57

45

68

51

89

1250% (Deduction)

160

-

170

-

190

-

8,070

1,065

7,682

1,129

5,380

1,056

Total

Resecuritisation
risk weights
≤ 25%

-

Sep 11
Sep 12
Mar 12
Regulatory credit
Risk weighted Regulatory credit
Risk weighted Regulatory credit
Risk weighted
exposure
assetsexposure
assetsexposure
assets
$M
$M
$M
$M
$M
$M
151
30
153
31
164
11

>25 ≤ 35%

86

30

81

28

87

30

>35 ≤ 50%

-

-

-

-

-

-

>50 ≤ 75%

-

-

-

-

-

-

>75 ≤ 100%

45

45

37

37

39

39

>100 ≤ 650%

-

-

-

-

-

-

1250% (Deduction)

-

-

-

-

-

-

282

105

271

96

290

80

Total

Total Securitisation
risk weights≤ 25%

Sep 11
Sep 12
Mar 12
Regulatory credit
Risk weighted Regulatory credit
Risk weighted Regulatory credit
Risk weighted
exposure
assetsexposure
assetsexposure
assets
$M
$M
$M
$M
$M
$M
7,761
850
7,201
772
4,752
505

>25 ≤ 35%

86

30

81

28

87

>35 ≤ 50%

80

-

-

-

-

>50 ≤ 75%

154

220

121

162

83

>75 ≤ 100%

153

153

236

236

428

429

>100 ≤ 650%

38

57

45

68

51

89

1250% (Deduction)

160

-

170

-

190

-

8,352

1,170

7,953

1,225

5,670

1,136

Total

63

30

ANZ Basel II Pillar 3 disclosure

September 2012

Table 9(l) part (ii): Banking Book: Securitisation - Aggregate securitisation exposures
deducted from CapitalSep 12
Deductions
from Tier I Capital$M
80

Deductions
from Tier II Capital$M
80

Deductions from Total
Capital$M
160

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

80

80

160

Deductions
from Tier I Capital$M

Deductions
from Tier II Capital$M

Deductions from Total
Capital$M

Securitisation exposures deducted from Capital
Residential mortgage

Mar 12

Securitisation exposures deducted from Capital
Residential mortgage

85

85

170

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

85

85

170

Deductions
from Tier I Capital$M

Deductions
from Tier II Capital$M

Deductions from Total
Capital$M

Sep 11

Securitisation exposures deducted from Capital
Residential mortgage

95

95

190

Credit cards and other personal loans

-

-

-

Auto and equipment finance

-

-

-

Commercial loans

-

-

-

Other

-

-

-

Total

95

95

190

Table 9(m): Banking Book: Securitisations subject to early amortisation treatment
ANZ does not have any Securitisations subject to early amortisation treatment or using Standardised
approach.

64

ANZ Basel II Pillar 3 disclosure

September 2012

Table 9(n):Banking Book: Resecuritisation - Aggregate amount of resecuritisation
exposures retained or purchased

Exposuressubject to CRM$M

Sep 12
Exposures not
subject to CRM
$M

Total
$M

Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other

-

92
145
45
-

92
145
45
-

Total

-

282

282

Exposuressubject to CRM$M

Mar 12
Exposures not
subject to CRM
$M

Total
$M

Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other

-

87
146
37
-

87
146
37
-

Total

-

270

270

Exposuressubject to CRM$M

Sep 11
Exposures not
subject to CRM
$M

Total
$M

Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other

-

95
156
39
-

95
156
39
-

Total

-

290

290

Resecuritisation exposures retained or purchased

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Exposures to
Guarantors$M-

Resecuritisation exposures retained or purchased

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Exposures to
Guarantors$M-

Resecuritisation exposures retained or purchased

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Exposures to
Guarantors
$M
-

65

ANZ Basel II Pillar 3 disclosure

September 2012

Trading Book
Table 9(o): Trading Book: Traditional and synthetic securitisation exposures
No assets from ANZ's Trading Book were securitised during the reporting period.
Table 9(p): Trading Book: Total amount of outstanding exposures intended to be securitised
No assets from ANZ's Trading Book were intended to be securitised as at the reporting date.
Table 9(q): Trading Book: Securitisation - Summary of current year's activity by underlying
asset type and facility
No assets from ANZ's Trading Book were securitised during the reporting period.
Table 9(r): Trading Book: Traditional and synthetic securitisation exposures
No assets from ANZ's Trading Book were securitised during the reporting period.

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Table 9(s): Trading Book: Securitisation – Regulatory credit exposures by exposure typeSep 12$M

Mar 12$M

Sep 11$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

10

37

58

Protection provided

-

-

-

Other

-

-

-

Total

10

37

58

Sep 12$M

Mar 12$M

Sep 11$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

-

-

-

Protection provided

-

-

-

Other

-

-

-

Total

-

-

-

Sep 12$M

Mar 12$M

Sep 11$M

Liquidity facilities

-

-

-

Funding facilities

-

-

-

Underwriting facilities

-

-

-

Lending facilities

-

-

-

Credit enhancements

-

-

-

Holdings of securities

10

37

58

Protection provided

-

-

-

Other

-

-

-

Total

10

37

58

Securitisation exposure type - On balance sheet

Securitisation exposure type - Off balance sheet

Total Securitisation exposure type

Table 9(t)(i) & Table 9(u)(i): Trading Book: Aggregate securitisation exposures subject toInternal Models Approach (IMA) and the associated Capital requirements
ANZ does not have any aggregate Securitisation exposures subject to IMA for specific risk.
Table 9(t)(ii) & Table 9(u)(ii): Trading Book: Aggregate securitisation exposures subject to
APS 120 and the associated Capital requirements
ANZ does not have any aggregate Securitisation exposures subject to APS 120 for specific risk.
Table 9(u)(iii): Trading Book: Securitisation - Aggregate securitisation exposures deductedfrom Capital
ANZ does not have any Securitisation exposures deducted from Capital.
Table 9(v): Trading Book: Securitisations subject to early amortisation treatment
ANZ does not have any Securitisation exposures subject to early amortisation or using Standardised
approach.

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Table 9(w): Trading Book: Resecuritisation - Aggregate amount of resecuritisation
exposures retained or purchased

Exposuressubject to CRM$M

Resecuritisation exposures retained or purchased-

Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other
Total

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Sep 12
Exposures not
subject to CRM
$M

Total
$M

-

-

8

8

-

-

8

8

Exposuressubject to CRM$M

Mar 12
Exposures not
subject to CRM
$M

Total
$M

-

-

-

Exposuressubject to CRM$M

Sep 11
Exposures not
subject to CRM
$M

Total
$M

-

-

-

Exposures to
Guarantors$M
8
8

Resecuritisation exposures retained or purchased
Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other
Total

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Exposures to
Guarantors$M-

Resecuritisation exposures retained or purchased
Residential mortgage
Credit cards and other personal loans
Auto and equipment financeCommercial loans
Other
Total

Resecuritisation exposures by credit worthiness of guarantors
Credit Rating Level 1
Credit Rating Level 2
Credit Rating Level 3
Credit Rating Level 4
Credit Rating Level 5 or below
No Guarantor
Total

Exposures to
Guarantors
$M
-

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ANZ Basel II Pillar 3 disclosure

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Chapter 7 – Market risk
Table 11

Market risk – Internal models approach

Definition and scope of market risk
Market risk may stem from ANZ’s trading and balance sheet activities and is the risk to ANZ’s earnings
arising from changes in interest rates, foreign exchange rates and credit spreads, or from fluctuations
in bond, commodity or equity prices.
Market risk management of IRRBB is described in Chapter 10 and therefore excluded from this
Chapter.
Regulatory approval to use the Internal Models Approach
ANZ has been approved by APRA to use the Internal Models Approach (IMA) under APS 116 for all
trading portfolios except for specific interest rate risk, equity specific risk and electricity trading. ANZ
uses the Standardised approach to market risk capital for these subsets.
Governance of market risk
The Board Risk Committee oversight of market risk is supported by the CMRC as described in Chapter
3.
The Market Risk function is a specialist risk management unit independent of the business that is
responsible for:•

Designing and implementing policies and procedures to ensure market risk exposures aremanaged within the appetite and limit framework set by the Board.

•

Measuring and monitoring market risk exposures, and approving counterparty and associatedrisks.

•The ongoing effectiveness and appropriateness of the risk management framework.

Traded market risk
The Traded, Foreign Exchange and Commodity Market Risk Policy and accompanying procedures(together the “TFC Framework”) governs the management of traded market risk and its key
components include:•

A clear definition of the trading book.

•

A comprehensive set
communication of risk.

•

A robust Value at Risk (VaR) quantification approach supplemented by comprehensive stresstesting.

ofrequirements

thatpromotetheproactive

identification•

A comprehensive limit framework that controls all material market risks.

•

An independent Markets Risk function with specific responsibilities.

•

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

andMeasurement of market risk
ANZ’s traded market risk management framework incorporates a risk measurement approach toquantify the magnitude of market risk within trading books. This approach and related analysis
identifies the range of possible outcomes that can be expected over a given period of time andestablishes the relative likelihood of those outcomes.
ANZ’s key tools to measure and manage traded market risk on a daily basis are VaR estimates,
sensitivities measures and stress tests. VaR is calculated using a historical simulation with a 500 day
observation period for standard VaR, and a one-year stressed period for stressed VaR. Traded VaR iscalculated at a 99% confidence level for one and ten-day holding periods for standard VaR, and a tenday holding period for stressed VaR. All material market risk factors and all trading portfolios arecaptured within the VaR model, with the exception of interest rate risk, equity specific risk andelectricity trading, for which capital is calculated using the Standardised approach described in Table
10(b).

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ANZ also undertakes a wide range of stress tests to the Group trading portfolio and to individual
trading portfolios. Standard stress tests are applied daily and measure the potential loss impact
arising from applying the largest market movements during the previous seven years over specificholding periods. Holding periods used to calculate stress parameters differ and reflect the relativeliquidity of each product type.
Results from stress testing on plausible severe scenarios are calculated monthly and potential losses
are reported to the CMRC.
VaR and stress tests are also supplemented by cumulative loss limits and detailed control limits.
Cumulative loss limits ensure that in the event of continued losses from a trading activity, the trading
activity is stopped and senior management reviews before trading is resumed. Where necessary,detailed control limits such as sensitivity or position limits are also in place to ensure appropriate
control is exercised over a specific risk or product.

Comparison of VaR estimates to gains/losses
Back testing involves the comparison of calculated VaR exposures with profit and loss data to identify
the frequency of instances when trading losses exceed the calculated VaR. For APRA backtesting
purposes, VaR is calculated at the 99% confidence interval with a one-day holding period.
Back testing is conducted daily, and outliers are analysed to understand if the issues are the result of
trading decisions, systemic changes in market conditions or issues related to the VaR model i.e.
historical data or model calibration.
ANZ uses actual and hypothetical profit and loss data. Hypothetical data is designed to remove theimpacts of intraday trading and sales margins. It is calculated as the difference between the value ofthe prior day portfolio at prior day closing rates and the value at current day closing rates. Markets
Finance calculates actual profit and loss while Market Risk calculates hypothetical profit and loss.
Total Traded market risk backtesting exceptions were within the APS 116 green zone for the period.
The following table discloses the high, mean and low VaR values over the reporting period and at
period end.

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Table 11(d): Value at Risk (VaR) over the reporting period43 44

Six months ended 30 Sep 12
Mean$M

Maximum$M

Minimum$M

Period end$MForeign Exchange

5.5

10.0

3.5

3.5

Interest Rate

4.6

8.1

2.8

4.5

Credit

4.7

7.5

2.6

4.0

Commodity

2.9

4.2

1.4

1.7

Equity

1.3

2.7

0.7

1.2

Value at Risk (VaR)

Six months ended 31 Mar 12
Mean$M

Maximum$M

Minimum$M

Period end$MForeign Exchange

6.2

8.9

4.3

4.9

Interest Rate

6.1

8.0

4.7

6.4

Credit

4.7

7.2

3.6

5.9

Commodity

3.2

4.7

1.6

3.1

Equity

1.9

4.0

1.1

1.4

Value at Risk (VaR)

Six months ended 30 Sep 11
Mean$M

Maximum$M

Minimum$M

Period end$MForeign Exchange

4.7

10.9

2.4

7.8

Interest Rate

11.1

20.3

5.4

7.0

Credit

7.0

10.5

4.9

4.9

Commodity

3.2

6.4

1.5

2.1

Equity

1.5

3.5

0.8

3.4

Value at Risk (VaR)

43
Regulatory VaR is calculated at 99% confidence level for a one-day holding period. Tables for March 12 andSeptember 11 have been restated using 99% VaR inline with the change to monitoring VaR limits at a 99%
Confidence interval.
44

The Foreign exchange VaR excludes foreign exchange translation exposures outside of the trading book.

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ANZ Basel II Pillar 3 disclosure

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Reporting of market risk
Market Risk reports results of daily VaR and stress testing to senior management in Market Risk and
the Global Markets business. Market Risk will escalate details of any limit breach to the appropriate
discretion holder within Market Risk and to Group Risk expediently, and report to the CMRC monthly.
Market Risk monitors and analyses back testing results daily and reports results to the CMRC
quarterly.
Mitigation of market risk
The Market Risk team’s responsibilities, including the reporting and escalation processes describedabove, is fundamental to how market risk is managed. Market Risk has presence in all the major
dealing operations centres in Australia, New Zealand, Asia, Europe and America.
Commodities risk
Commodity price risk arises as a result of movement in prices of various commodities. All exposures
are transferred to the trading book and centrally managed by the Global Markets business andmonitored by Market Risk in accordance with the TFC framework.
Foreign exchange risk
Foreign exchange risk arises as a result of movements in relative values of various currencies.
Exposures from ANZ’s normal operating business and trading activities are recorded in core multicurrency systems and managed within the trading book in accordance with the TFC framework.
Structural exposures from foreign investments and capital management activities are managed inaccordance with policies approved by the Board Risk Committee, with the main objective of ensuringthat ANZ’s capital ratio is largely protected from changes in foreign exchange. As at 30 September
2012, ANZ’s investment in ANZ Bank New Zealand Limited is the main source of the structural foreignexchange exposure.

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ANZ Basel II Pillar 3 disclosure

Table 10

September 2012

Market risk – Standard approach

ANZ uses the standard model approach to measure market risk capital for interest rate risk – specificrisk45, equity specific risk and electricity trading risk factors. For internal purposes only ANZ also uses
an internal model for electricity.
For interest rate risk – specific risk, ANZ’s internal VaR model captures general interest rate and credit
spread risk for all products, but not the credit spread risk associated with individual issuers of interest
rate products.

Table 10(b): Market risk – Standard approach46

Sep 12$M

Mar 12$M

Sep 11$M

Interest rate risk

110

114

141

Equity position risk

4

4

4

Foreign exchange risk

-

-

-

Commodity risk

3

2

15

117

120

160

1,463

1,500

2,000

Total

Risk Weighted Assets equivalent

45

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

46

RWA equivalent is the capital requirement multiplied by 12.5 in accordance with APS 110.

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Chapter 8 – Operational risk
Table 12

Operational risk

Definition of operational risk
Within ANZ, operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events. This definition includes legal risk, and the riskof reputation loss or damage arising from inadequate or failed internal processes, people and systems,
but excludes strategic risk.
The objective of operational risk management is to ensure that risks are identified, assessed, measured,
evaluated, treated, monitored and reported in a structured environment with appropriate governanceoversight. ANZ does not expect to eliminate all risks, but to ensure that the residual risk exposure ismanaged as low as reasonably practical based on a sound risk/reward analysis in the context of aninternational financial institution.
ANZ has been authorised by APRA to use the advanced measurement approach (AMA) for calculationof operational risk capital requirements under APS 115. This methodology applies across all of ANZ.
Operational risk governance and structure
The three lines of defence are business first line, divisional and group risk functions second line andGlobal Internal Audit the third line. The first and second lines of defence have defined roles,
responsibilities and escalation paths to support effective two way communication and management ofoperational risk at ANZ. There are also on-going review mechanisms in place to ensure the ORMMF andCompliance frameworks continue to meet organisational needs and regulatory requirements.

Responsible area

Key responsibilities••

First line of Business/ •Enablement
defence••
Divisional
Risk

•
•

•
•
•

Second lineof defence•Group Risk

•
•
•
•

•
•
Third line Global
Internal Auditof defence•Primary accountability for the understanding of key risks and related control
environment
Undertake day-to-day management of risks, related decision-making andreporting
Promote a strong risk culture of adhering to thresholds, managing risk exposureand making sustainable risk decisions
Ensure operational risk information is up to date and reflective of the true
operational risk position
Provide independent oversight and guidance to enable consistent application of
the ORMMF
Coordinate, oversight and report on material operational risks and change
initiatives
Contribute to the identification of systemic issues and risk collation across theDivisionIndependent function responsible for overarching risk oversight across the bank
Set Group operational risk appetite statements
Develop and maintain relevant policies and procedures to support consistentexecution and continuing appropriateness of ORMMF
Monitor and report compliance with ORMMF, consider and approve any
exception requests
Source external loss data
Lead scenario analysis and operational risk capital calculation process
Central point of contact with regulators
Provide global insight and commentary on consolidated bank wide view; andidentify group wide exposures and trends
Provide independent and objective assurance to management and ANZ Board
regarding compliance with policy and regulatory requirements
Perform objective assessments across all geographies, Divisions, Lines ofBusiness and processes
Ensure independent review of the adequacy of the ORMMF is undertaken

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ANZ Basel II Pillar 3 disclosure

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Operational risk principles
ANZ has developed a comprehensive framework to manage operational risk and compliance which
includes the following operational risk management principles:
Principle 1:
Risk Governance

ANZ recognises operational risk as a primary risk category and has aneffective and embedded operational risk governance structure. This
includes a dedicated and independent operational risk management
function and an executive committee for oversight of operational risk
across ANZ, supported by organisation wide policies, procedures andsystems.

Principle 2:
Risk Culture

ANZ believes risk management is everyone’s responsibility andencourages a culture of prompt escalation of risk to staff sufficiently senior
to drive resolution. This culture is supported by clearly articulated roles
and responsibilities to ensure effective measurement and management ofoperational risk.

Principle 3:
Risk Appetite andObjective Setting

ANZ’s Board is responsible for the overall operational risk profile andaccordingly has an approved operational risk appetite, including
thresholds for risk assessment and reporting that determines the riskboundaries within which the business must operate to set its strategy.

Principle 4:
Risk and Control
Assessment

ANZ periodically identifies and assesses its exposure to material
operational risk within all existing and new products, processes, projects
and systems, and assesses the key controls in place to manage theserisks.

Principle 5:
Loss and IncidentManagement

ANZ incorporates analysis of loss, incident and control failure into
improving the underlying control environment by defining clearly
articulated risk response strategies. This includes effective contingency
and business continuity plans that enable it to operate on an ongoingbasis and limit losses in the event of severe business disruption.

Principle 6:
Capital Calculation

ANZ holds capital commensurate with its operational risk, and maintains
comprehensive and well documented operational risk capital processes forcalculating its operational risk capital, including monitoring for materialchanges to capital exposure.

Principle 7:
Risk Monitoring andReporting

ANZ maintains a comprehensive and sustainable approach for monitoring
and reporting relevant operational risk data, and monitors materialchanges to operational risk exposure, including Key Risk Indicators (KRIs),
to support the proactive management of operational risk across theGroup.

Principle 8:
AssuranceContinuous
Improvement

ANZ has appropriate review processes to continuously evaluate theeffectiveness and relevance of its operational risk measurement andmanagement processes to meet organisational needs and regulatory
requirements.

andPrinciple 9:
Risk Based Decision
Making

ANZ ensures effective integration of day to day operational risk
management with outputs from the operational risk measurement
processes, to support risk based decision making.

ANZ’s operational risk framework is delivered through:•Level 1 ANZ Board Operational Risk Policy (the Principles) – approved by the Board Risk
Committee, sets the operational risk principles for governing the overall measurement andmanagement of operational risk across ANZ.

•

Level 2 Global Operational Risk Measurement and Management Policy (the Policy) – approved by
the Board Risk Committee, outlines the core standards, roles and responsibilities and minimum

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ANZ Basel II Pillar 3 disclosure

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requirements of the way in which operational risk is measured and managed, in line with Level 1
ANZ Board Operational Risk Policy and APS 115.
•

Level 2A Global Operational Risk Procedures (the Procedures) – owned by Group Operational Risk,
provide the procedures to support the consistent application of Level 1 and Level 2 Global
Operational Risk Policies across ANZ. The procedures are further augmented by tools, templates,
systems and on-going training.

Operational risk management
Risk and Controls are managed as part of business as usual right across the organisation. Risk
management, supported by a strong Risk Culture, ensures all staff are thinking about and managing
risk on a daily basis – “Risk is Everyone’s Responsibility”. However, Senior Management need visibilityof the key risks. These are the risks that if they materialised, would adversely affect the achievementof business objectives, ANZ’s reputation, regulatory compliance or impact key processes (i.e. the risks
that really matter, not all risks) and are typically inherent high and extreme risks.
Day-to-day management of operational risk is the responsibility of business unit line management andstaff. This includes:•

Primary accountability for the understanding of key risks and related control environment.

•

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

•

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

•

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

•

Ensure operational risk information is up to date and reflective of the true operational risk
position.

•

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

•

Promote a strong risk culture of adhering to thresholds, managing risk exposure and making
sustainable risk decisions.

•

Dedicated Divisional and Group Corporate Centre Risk Governance teams play a support,monitoring, oversight and challenge role with Global Internal Audit providing independent
assurance and review.

Operational risk mitigation
In line with industry practice, ANZ obtains insurance to cover those operational risks where costeffective premiums can be obtained. In conducting their business, business units are advised to act as if
uninsured and not to use insurance as a guaranteed mitigant for operational risk. ANZ’s AMA tooperational risk regulatory capital calculation does not utilise insurance as a risk mitigation.
ANZ has business continuity, recovery and crisis management plans. The intention of the business
continuity and recovery plans is to ensure critical business functions can be maintained, or restored in atimely fashion, in the event of material disruptions arising from internal or external events.
Crisis management planning at Group and country levels supplement business continuity plans in theevent of a broader group or country crisis. Crisis management plans include crisis team structures,roles, responsibilities and contact lists, and are subject to testing.
Operational risk reporting
ANZ’s operational risk management includes a system for capturing internal losses, case management
and reporting. Operational risk and compliance events (including actual losses, near misses andbreaches) are recorded and managed to ensure timely, complete and accurate reporting.
The Corporate Centre and business unit risk functions prepare reporting. Given the ANZ Board’s low risk
appetite for operational risk, the reporting thresholds are set relatively low for escalation to OREC.
OREC’s role is to review, and if appropriate, approve the risk mitigation and monitor associated actionplans.

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ANZ Basel II Pillar 3 disclosure

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ANZ’s advanced measurement approach
Group Operational Risk is responsible for maintaining ANZ’s AMA for operational risk measurement
and capital allocation.
Operational risk capital is held to protect depositors and shareholders of the bank from rare andsevere unexpected losses. In order to quantify the overall operational risk profile, ANZ maintains andcalculates operational risk capital (including regulatory and economic capital), on at least a six
monthly basis. The capital is calculated using scaled external loss data, internal loss data andscenarios as a direct input and risk registers as an indirect input.
ANZ typically models capital at a divisional or geographic layer. Once calculated, the capital isallocated to lines of business according to risk exposure (key allocation drivers). Understanding the
make up of the key allocation drivers allows lines of business to consider capital impacts when making
decisions. Accordingly, capital allocations are structured to encourage businesses to effectively
manage their operational risk exposures e.g. improve controls, reduce losses etc.
In the event of an ‘off cycle’ scenario review, a recalculation is performed within the relevant cell of
the model, to judge the sensitivity of the change on capital. The outcomes of the off cycle calculation
are shared with executive management and decisions are made as to whether to adjust capital orincorporate a scenario change in to the next capital update. This ensures that capital levels are
responsive to material changes in risk levels across ANZ.
Capital modelling uses the following expected and unexpected losses as data inputs:•

Minimum of five years of historical internal losses captured and reported in the Bank-wide
Operational Loss Database (BOLD).

•

Relevant external losses, sourced from Algo First Op Data (includes losses >USD1 million) a
recognised industry database. This data is suitably scaled using internally developed rules toensure relevance to ANZ’s size and operations.

•

Scenario analysis, unexpected potential loss estimates for severe but plausible risk events.

ANZ does not use expected loss offsets for the purposes of regulatory capital modelling and does notrecognise the risk-mitigating effect of insurance in determining operational risk capital.
Operational risk modelling is performed at the divisional or geographic level for applicable Basel risk
event types. Operational risk capital is derived using probability distributions and calculated using
Monte Carlo simulations using a mathematical method called a loss distribution approach.
Operational risk modelling is performed by a specialist central function. Operational risk capital isderived using probability distributions and calculated using Monte Carlo simulations at the division andevent type level referred to as a modelling cell. The data inputs are combined for each cell using a loss
distribution approach and include the following:•

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

•

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

•

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

Capital outcomes include:•

Operational risk regulatory capital to meet the regulatory capital soundness standard based on a
99.9% confidence interval in accordance with APS 115.

•

Economic Capital based on a 99.97% confidence interval.

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

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

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

Equity investments that are taken for strategic reasons - These transactions represent strategic
business initiatives and include ANZ’s investments in partnership arrangements with financial
institutions in Asia. These investments are undertaken only after extensive analysis and due
diligence by Group Strategy, internal specialists and external advisors, where appropriate. Board
approval is required prior to committing to any investments over delegated authorities, and all
regulatory notification requirements are met. Performance of these investments is monitored byboth the owning business unit and Group Strategy to ensure that it is within expectations and thevalues of the investments are tested at least annually for impairment.

•

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

•

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

Valuation of and accounting for equity investments in the banking bookIn line with Group Accounting Policy the accounting treatment of equity investments depends onwhether ANZ has significant influence over the investee.
Investments in associates
Where significant influence is assessed, the investment is classified as an Investment in Associate in
the financial statements. ANZ adopts the equity method of accounting for associates. ANZ’s share of
the results of associates is included in the consolidated income statement. The associate investments
are recognised at cost plus ANZ’s share of post acquisition net assets. Interests in associates arereviewed annually for impairment, using either market value, or a discounted cash flow methodology
to assess value in-use.
APRA requires that equity accounted earnings from associates, including strategic investments inpartnerships are excluded from regulatory capital until received in the form of a dividend.
Available-for-Sale Investments
Where ANZ does not have significant influence over the investee, the investment is classified as
Available-for-Sale (AFS). The investment is initially recognised at fair value plus transaction
costs. Changes in the fair value of the investments are recognised in an equity reserve with any
impairment recognised in the income statement. When the asset is sold the cumulative gain or loss
relating to the asset held in the AFS revaluation reserve is transferred to the income statement.

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ANZ Basel II Pillar 3 disclosure

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Table 13(b) and 13(c): Equities – Types and nature of Banking Book investments
Sep 12$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

1,943

2,169

Value of unlisted (privately held) equities

1,694

1,731

Total

3,637

3,900
Mar 12$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

1,876

2,322

Value of unlisted (privately held) equities

2,031

2,067

Total

3,907

4,389
Sep 11$M

Equity investments
Balance sheet value

Fair value

Value of listed (publicly traded) equities

1,985

2,179

Value of unlisted (privately held) equities

1,976

2,011

Total

3,961

4,190

Half Year
Sep 12$M

Half Year
Mar 12$M

Half Year
Sep 11$M

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

233

29

24

Cumulative realised losses from impairment andwritedowns in the reporting period

(4)

(37)

(15)

Table 13(d) and 13(e): Equities – gains (losses)

Realised gains (losses) on equity investments

Gain on dilution of shareholding

10

-

-

239

(8)

9

Half Year
Sep 12

Half Year
Mar 12

Half Year
Sep 11

Unrealised gains (losses) on equity investments

$M

$M

$M

Total unrealised gains (losses)
Reversal of prior period unrealised gains (losses) from
disposals and liquidations in the reporting period
Total unrealised gains (losses) included in Gross
Tier 1/Tier 2 capital

9

71

49

(196)

(5)

-

-

-

-

(187)

66

49

Sep 12$M

Mar 12$M

Sep 11$M

Table 13(f): Equities Risk Weighted Assets

Risk Weighted Assets
Equity investments subject to a 300% risk weight

174

62

3

Equity investments subject to a 400% risk weight

856

1,173

1,396

1,030

1,235

1,399

Total RWA - Equity

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ANZ Basel II Pillar 3 disclosure

September 2012

Chapter 10 – Interest Rate Risk in the Banking Book
Table 14

Interest Rate Risk in the Banking Book

Definition of interest rate risk in the banking bookInterest rate risk in the banking book (IRRBB) relates to the potential adverse impact of changes inmarket interest rates on ANZ’s future net interest income. The risk generally arises from:•

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

•

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

•

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

Regulatory capital approach
ANZ has received approval from APRA to use the IMA for the calculation of regulatory capital for
IRRBB, under APS 117.
Governance
The Board Risk Committee has established a risk appetite for IRRBB and delegated authority to the
GALCO to manage the strategic position (capital investment term) and oversee the interest rate risk
arising from the repricing of asset and liabilities (mismatch risk) in the banking book. GALCO hasdelegated the management of this mismatch risk to the Global Markets business.
Market Risk is the independent function responsible for:•

Designing and implementing policies and procedures to ensure that IRRBB exposure is managed
within the limit framework set by the Board Risk Committee.

•

Monitoring and measuring IRRBB market risk exposure, compliance with limits and policies.

•

Ensuring ongoing effectiveness and appropriateness of the risk management framework.

Management framework
IRRBB is managed under a comprehensive measurement and reporting framework, supported by anindependent Market Risk function. Key components of the framework include:•

A comprehensive set of policies that promote proactive risk identification and communication.

•

Funds Transfer Pricing framework to transfer interest rate risk from business units so it can be
managed by the Global Markets business and monitored by Market Risk.

•

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

•

An independent Market Risk function with specific responsibilities.

•

Regular and effective reporting of IRRBB to executive management and the Board.

Measurement of interest rate risk in the banking book
ANZ uses the following principal techniques to quantify and monitor IRRBB:•Interest Rate Sensitivity - this is an estimate of the change in economic value of the banking bookdue to a 1 basis point move in a specific part of the yield curve.

•

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

•

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

•

Market Value loss limits - this mitigates the potential for embedded losses within the banking
book.

•

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

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The calculations used to quantify IRRBB require assumptions to be made about the repricing term of
exposures that do not have a contractually defined repricing date, such as deposits with no set
maturity dates, and prepayments. Changes to these assumptions require GALCO approval.
Where relevant, IRRBB techniques recognise foreign currency effects as all measures are expressed inAustralian dollars.
Basis and optionality risks are measured using Monte Carlo simulation techniques, to generate atheoretical worst outcome at a specified confidence level (typically 99%) less the average outcome.
Reporting of interest rate risk in the banking bookMarket Risk analyses the output of ANZ’s VaR and EaR calculations daily. Stress tests are calculatedmonthly. Compliance with the risk appetite and limit framework is reported to CMRC, GALCO and theBoard Risk Committee.
IRRBB regulatory capital is calculated monthly.
ANZ’s interest rate risk in the banking book capital requirement
The IRRBB regulatory capital requirements includes a value for repricing and yield curve risk, basis
and optionality risks based on a 99% confidence interval, one year holding period and a six year
historical data set.
Embedded losses also make up the capital requirement and are calculated as the difference between
the book value of banking book items and the current economic value.
Results of standard shock scenario
The Basel II framework sets out a standard shock scenario of a 200 basis point parallel shift change ininterest rates, in order to establish a comparable test across banks.
Table 14(b) that follows shows the results of this test by currency of the exposures outside the trading
book.

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Table 14(b): Interest Rate Risk in the Banking Book
Change in Economic Value
Sep 12$M

Standard Shock Scenario Stress Testing:Interest rate shock applied

Mar 12$M

Sep 11$M

AUD
200 basis point parallel increase

(18)

154

53

200 basis point parallel decrease

20

(158)

(54)

NZD
200 basis point parallel increase

(3)

51

22

200 basis point parallel decrease

(4)

(61)

(25)

200 basis point parallel increase

(1)

9

(30)

200 basis point parallel decrease

8

4

12

200 basis point parallel increase

(6)

(10)

(6)

200 basis point parallel decrease

2

5

3

200 basis point parallel increase

17

19

20

200 basis point parallel decrease

1

(1)

1

USD

GBP

Other

IRRBB regulatory capital
IRRBB regulatory RWA

996

837

675

12,455

10,4658,439

IRRBB stress testing methodology
Stress tests within ANZ include standard and extraordinary tests. These tests are used to highlightpotential risk which may not be captured by VaR, and how the portfolio might behave under
extraordinary circumstances. Standard stress tests include statistically derived scenarios based on
historical yield curve movements. These combine parallel shocks with twists and bends in the curve to
produce a wide range of hypothetical scenarios at high statistical confidence levels, with the single
worst scenario identified and reported. Extraordinary stress tests include interest rate moves from
historical periods of stress as well as stresses to assumptions made about the repricing term of
exposures. The rate move scenarios include daily changes over the stressed periods and the worst
theoretical losses over the selected periods are each reported. Stresses of the repricing term
assumptions investigate scenarios where actual repricing terms are vastly different to those modelled.

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Chapter 11 – Liquidity risk
Overview
Liquidity risk is the risk that ANZ has insufficient capacity to fund increases in assets or is unable tomeet its payment obligations as they fall due, including repaying depositors or maturing wholesale
debt. The timing mismatch of cash flows and the related liquidity risk is inherent in all banking
operations and is closely monitored by ANZ.
Governance
The management of ANZ’s liquidity and funding risk is overseen by the Board Risk Committee and
GALCO, in accordance with ANZ’s liquidity policy framework.
Scenario modelling
The global financial crisis highlighted the importance of differentiating between stressed and normal
market conditions in a name-specific crisis and the different behaviour that offshore and domestic
wholesale funding markets can exhibit during market stress events. ANZ’s short term liquidity
scenario modelling stresses cash flow projections against multiple ‘survival horizons’ over which theGroup is required to remain cash flow positive. In addition, longer term scenarios are also in placethat measure the structural liquidity position of the balance sheet. Scenarios modelled are either
prudential requirements or Board mandated scenarios. Under these scenarios, customer andwholesale balance sheet asset/liability flows are stressed.
Wholesale Funding
ANZ targets a diversified funding base, avoiding undue concentrations by investor type, maturity,
market source and currency. Diversification was further enhanced during the year ended September
2012 with the introduction of a covered bond funding programme.
As at September 2012, the composition of the Group’s funding profile was:•Term wholesale funding with a remaining maturity of more than one year of $68.4 billion (12% of
total funding)•Term wholesale funding with a remaining maturity of one year or less of $25.4 billion (5% of total
funding)•

Short-term wholesale funding (including central bank deposits) of $78.9 billion (14% of total
funding)•

Shareholders equity and hybrids of $46.3 billion (8% of total funding)$25.8 billion of term wholesale debt (with a remaining term greater than one year as at 30 September
2012 was issued during the September 2012 financial year, of which $4.5 billion is pre-funding for the
September 2013 financial year.
ANZ maintained access to all major global wholesale funding markets during 2012.
•

Benchmark term debt issues were completed in AUD, USD, EUR, JPY, CHF, GBP, CNH and NZD.

•

All short-term wholesale funding needs were comfortably met.

•

The weighted average tenor of new term debt issuance remained relatively flat at 4.6 years (4.7
years in 2011).

•

The weighted average cost of new term debt issuance increased further in 2012 as a result ofvolatility in global markets. Conditions improved towards the end of the year, however average
portfolio costs remain substantially above pre-crisis levels and continue to increase as maturing
term wholesale funding is replaced at higher spreads.

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Liquidity portfolio
The Group holds a diversified portfolio of cash and high credit quality securities that may be sold or
pledged to provide same-day liquidity. This portfolio helps protect the Group's liquidity position by
providing cash in a severely stressed environment. All assets held in the prime portfolio are securities
eligible for repurchase under agreements with the applicable central bank (i.e. 'repo eligible').
The liquidity portfolio is well diversified by counterparty, currency and tenor. Under the liquidity policy
framework, securities purchased for ANZ's liquidity portfolio must be of a similar or better credit
quality to ANZ's external long-term or short-term credit ratings and continue to be repo eligible.
Supplementing the prime liquid asset portfolio, the Group holds additional liquidity;•

Central bank deposits with the US Federal Reserve, Bank of England, Bank of Japan and European
Central Bank of $18.0 billion.

•

Australian Commonwealth and State Government securities and gold of $12.6 billion.

•

Cash and other securities to satisfy local country regulatory liquidity requirements.

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Appendix 1 – Detail of capital structure

Fundamental Tier 1 capitalSep 12$M

Mar 12$M

Sep 11$M

Paid-up ordinary share capital

23,20322,396

21,577

Reserves
Foreign currency translation reserve
Share and share option reserve
Transactions with non-controlling interest
reserve
Total reserves
Prudential retained earnings
Retained earnings including current year
earnings(2,831)(2,830)(2,418)

201

180

174

(23)

(23)

(22)

(2,653)(2,673)(2,266)

19,72818,75817,787

Accumulated retained profits and reservesof insurance, funds management andsecuritisation entities and associates(1,653)(1,438)(1,679)Dividend not provided for(2,149)(1,769)(1,999)Deferred fee revenue including fees deferred
as part of loan yields

415

425

414

Accrual for Dividend Reinvestment Plans

430

Total prudential retained earnings

531

600

16,771

16,507

42

43

41

Total

37,36336,273

34,475

Deductions from Tier 1 capitalSep 12$M

Mar 12$M

Sep 11$M

Goodwill(3,008)(2,966)(2,968)Non-controlling interests

15,123

Other deductions from Tier 1 capital
Intangible component of investment in
OnePath Australia and New Zealand(excluding prudential goodwill)(2,074)(2,071)(2,071)

Capitalised software and other intangible
assets(1,746)(1,711)(1,549)

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

(850)

(761)

(688)

Applicable deferred tax assets (excluding
the component relating to the generalreserve for impairment of financial assets)

(301)

(92)

(136)

(44)

(40)

(128)

Mark-to-market impact of own credit spread
Negative Available-for-sale reserve(2)

Total other deductions from Tier 1 capital(5,017)(4,675)(4,572)50/50 deductions from Tier 1 capital
Investment in ANZ insurance subsidiaries

(300)

(300)

(200)

Investment in funds management entities
Investment in OnePath Australia and New
ZealandInvestment in other Authorised Deposittaking Institutions and overseas equivalents

(27)

(27)

(29)

(721)

(922)

(906)

(1,070)(1,118)(1,151)

Expected loss in excess of eligible provisions

(542)

(524)

(475)

Other

(154)

(326)

Total 50/50 deductions from Tier 1 capital
Total deductions from Tier 1 capital

85

(310)

(2,814)(3,217)(3,071)(10,839)(10,858)(10,611)

ANZ Basel II Pillar 3 disclosure

September 2012

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

Sep 12$M

Mar 12$M

Sep 11
$M

(28)

(28)

(28)

50/50 deductions from Tier 2 capital
Investment in ANZ insurance subsidiaries

(300)

(300)

Investment in funds management entities
Investment in OnePath Australia and New
ZealandInvestment in other Authorised Deposit
Taking Institutions and overseas equivalents

(27)

(27)

(29)

(721)

(922)

(906)

(1,070)(1,118)(1,151)

Expected loss in excess of eligible provisions

(542)

(524)

(475)

Other

(154)

(326)

Total 50/50 deductions from Tier 2 capital
Total deductions from Tier 2 capital

86

(200)

(310)

(2,814)(3,217)(3,071)(2,842)(3,245)(3,099)ANZ Basel II Pillar 3 disclosure

September 2012

Appendix 2 – ANZ Bank (Europe) Limited
ANZ Bank (Europe) Limited (ANZBEL) is a 100% owned and controlled subsidiary of ANZ, and isregulated by the Financial Services Authority (FSA). ANZBEL is subject to similar Pillar 3 requirements
as ANZ, under the FSA's Prudential Source Book for Banks, Building Societies and Investment Firms(BIPRU). The FSA has granted ANZBEL a Pillar 3 Disclosure waiver direction, which can be found on
the FSA website: fsa.gov.uk/pubs/waivers/bipru_waivers.pdf.
In line with the FSA waiver direction, ANZBEL will rely on disclosures in this document to satisfy mostof its Pillar 3 disclosure obligations. The following FSA requirements are not mirrored in APS 330 orincluded in this disclosure document, and as such are required by the FSA to be reported on an
individual basis in the annual ANZBEL Statutory Accounts:•

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

•

BIPRU 11.5.12R – Disclosure: Market Risk.

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Glossary
Collective provision (CP)Collective provision is the provision for credit losses that are
inherent in the portfolio but not able to be individually
identified. A collective provision may only be recognised when aloss event has already occurred. Losses expected as a result of
future events, no matter how likely, are not recognised.

Credit Default Swaps (CDS)

A sequence of payments by one party (often called the “Buyer”)
in exchange for an obligation of the other party (often called
the “Seller”) to make a payment to the buyer if a credit default
event occurs in relation to a specified reference entity (andpossibly a specified obligation of that reference entity).

Credit exposure

The aggregate of all claims, commitments and contingent
liabilities arising from on- and off-balance sheet transactions (inthe banking book and trading book) with the counterparty orgroup of related counterparties.

Credit risk

The risk of financial loss resulting from the failure of ANZ’scustomers and counterparties to honour or perform fully theterms of a loan or contract.

Credit Valuation Adjustment (CVA)

Over the life of a derivative instrument, ANZ uses a CVA modelto adjust fair value to take into account the impact ofcounterparty credit quality. The methodology calculates thepresent value of expected losses over the life of the financial
instrument as a function of probability of default, loss given
default, expected credit risk exposure and an asset correlation
factor. Impaired derivatives are also subject to a CVA.

Days past due

The number of days a credit obligation is overdue, commencing
on the date that the arrears or excess occurs and accruing foreach completed calendar day thereafter.

Equity risk

Is the potential loss that may
investments in the banking book.

Expected loss (EL)

Expected loss is determined based on the expected averageannual loss of principal over the economic cycle for the current
risk profile of the lending portfolio.

Exposure at Default (EAD)

Exposure At Default is defined as the expected facility exposure
at the date of default.

Impaired assets (IA)Facilities are classified as impaired when there is doubt as towhether the contractual amounts due, including interest andother payments, will be met in a timely manner. Impaired
assets include impaired facilities, and impaired derivatives.
Impaired derivatives have a credit valuation adjustment (CVA),
which is a market assessment of the credit risk of the relevant
counterparties.

Impaired loans (IL)Impaired loans comprise of drawn facilities
customer’s status is defined as impaired.

Individual provision charge (IPC)

Impaired provision charge is the amount of expected credit
losses on financial instruments assessed for impairment on an
individual basis (as opposed to on a collective basis). It takes
into account expected cash flows over the lives of thosefinancial instruments.

Individual provisions (IP)Individual provisions are assessed on a case-by-case basis for
all individually managed impaired assets taking into
consideration factors such as the realisable value of security (orother credit mitigants), the likely return available uponliquidation or bankruptcy, legal uncertainties, estimated costs
involved in recovery, the market price of the exposure insecondary markets and the amount and timing of expected
receipts and recoveries.

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Loss Given Default (LGD)

Loss Given Default is an estimate of the potential economic loss
on a credit exposure, incurred as a consequence of obligor
default and expressed as a percentage of the facility’s EAD.

Market risk

The risk to ANZ’s earnings arising from changes in interest
rates, currency exchange rates and credit spreads, or fromfluctuations in bond, commodity or equity prices. ANZ has
grouped market risk into two broad categories to facilitate themeasurement, reporting and control of market risk:
Traded market risk - the risk of loss from changes in the valueof financial instruments due to movements in price factors forphysical and derivative trading positions. Trading positions arise
from transactions where ANZ acts as principal with clients orwith the market.
Non-traded market risk (or balance sheet risk) - comprises
interest rate risk in the banking book and the risk to the AUD
denominated value of ANZ’s capital and earnings due to foreignexchange rate movements.

Operational risk

The risk of loss resulting from inadequate or failed internal
controls or from external events, including legal risk but
excluding reputation risk.

Past due facilities

Facilities where a contractual payment has not been met or thecustomer is outside of contractual arrangements are deemed
past due. Past due facilities include those operating in excess ofapproved arrangements or where scheduled repayments areoutstanding but do not include impaired assets.

Probability of Default (PD)Probability of Default is an estimate of the level of the risk ofborrower default.

Recoveries

Payments received and taken to profit for the current period forthe amounts written off in prior financial periods.

Regulatory Expected Loss

Regulatory Expected Loss is a measure of expected credit
losses at the start of the year, whereas write-offs relate to afluctuating portfolio and are recorded throughout the year.

Restructured items

Restructured items comprise facilities in which the originalcontractual terms have been modified for reasons related to thefinancial difficulties of the customer. Restructuring may consistof reduction of interest, principal or other payments legally due,or an extension in maturity materially beyond those typicallyoffered to new facilities with similar risk.

Risk Weighted Assets (RWA)

Assets which are weighted for credit risk according to a set
formula (APS 112/113).

Securitisation risk

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

Write-Offs

Facilities are written off against the related provision for
impairment when they are assessed as partially or fully
uncollectable, and after proceeds from the realisation of any
collateral have been received. Where individual provisions
recognised in previous periods have subsequently decreased or
are no longer required, such impairment losses are reversed in
the current period income statement.

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